The pharmaceutical industry is chasing what it thinks will be a $35 billion market opportunity: developing effective treatments for non-alcoholic steatohepatitis (NASH). In reality, no one really knows how large the market actually is, or whether treating the small subset of patients aware they have the disease will prove lucrative. But that minor detail hasn't stopped investors from handing out impressive valuations -- and one-day stock price movements -- to companies developing drug candidates aimed at the liver disease.

Viking Therapeutics (NASDAQ:VKTX) is one such company. Its lead drug candidate, VK2809, is widely viewed as one of the more impressive assets in the industry pipeline. It's only in mid-stage clinical trials, but some analysts think it could earn peak annual sales of $2 billion. That's impressive for a company valued at just $550 million today.

Whether or not VK2809 lives up to that lofty annual sales figure, investors will get a pretty good idea if the drug candidate is safe and effective in NASH when phase 2b results are released in the next year or so. Let's take a look at what they might mean.

A question mark drawn on a card that is sitting on a wooden surface.

Image source: Getty Images.

First half recap

Viking Therapeutics harbors five unique drug candidates in its pipeline. Two assets have completed phase 2 clinical trials, but are awaiting partnering activities. Two have yet to begin early-stage trials. That leaves one drug in active development: VK2809. 

The lead drug candidate is being developed as a treatment for non-alcoholic fatty liver disease (NAFLD) and its more severe form, NASH. The two liver diseases are characterized by a buildup of fat in the liver, which causes inflammation and scarring. In a phase 2 trial in NAFLD, 67% of patients taking VK2809 achieved at least a 50% reduction in liver fat after 12 weeks of treatment, while nearly 83% realized a reduction of at least 30%. 

That 30% reduction figure is important, because Viking Therapeutics believes that will be the clinical threshold for treating NASH. It's still early, however, as the business only expects to initiate a phase 2b trial in the more severe liver disease by the end of 2019. But analysts think VK2809 could have a clear path to become a leading treatment, especially after some high-profile failures.

As the level of maturity of the pipeline suggests, there's not much cooking for Viking Therapeutics when it comes to evaluable financial metrics.

Metric

First Half 2019

First Half 2018

Change (YoY)

Revenue

N/A

N/A

N/A

Operating expenses

$16.4 million

$11.7 million

40%

Operating income

($16.4 million)

($11.7 million)

N/A

Net loss

($12.6 million)

($10.2 million)

N/A

Cash flow from operations

($9.6 million)

($10.6 million)

N/A

Data source: SEC filing. YoY = Year over Year.

The business managed to earn $3.8 million in interest income to help offset some of its operating losses, although red ink will continue to pile up as the company's pipeline matures. That's because mid- and late-stage clinical trials involve more patients and take longer than early-stage clinical trials, which makes them much more expensive to conduct.

Management made a point to call attention to the company's $290 million cash balance at the end of June, which should certainly be enough to carry Viking Therapeutics through multiple important clinical milestones.

However, investors weren't so happy with paperwork filed with the U.S. Securities and Exchange Committee the day after Q2 2019 operating results were announced. The SEC filing disclosed that the business had entered into an at-the-market (ATM) agreement with certain financial agents that will allow it to sell up to $75 million in stock from time to time whenever it chooses. The amount is technically part of a larger $450 million registration originally filed in July 2018, of which $175.8 million has been raised through a stock offering in September 2018. The news is simply that management has more flexibility to raise funds against the original registration.  

Nonetheless, investors weren't happy about the prospect of dilution, which caused shares to tumble after the most recent quarterly update. But considering the fact that the company's most advanced clinical asset is only now in mid-stage studies, the business will need to raise considerably more cash between now and the potential market launch of VK2809. The next year will prove crucial. 

A kid looking through a monocular.

Image source: Getty Images.

Looking ahead

All eyes will be on the development of VK2809 in the next year, but it's not the only asset to watch. Here's a list of what investors can expect in the next 12 months:

VK2809: Viking Therapeutics has some paperwork in its future. The current pre-investigational new drug (pre-IND) application submitted to the U.S. Food and Drug Administration is awaiting feedback, but a new IND has to be filed with a different office at the regulator. The company has to file that before initiating its phase 2b trial in NASH, but both are expected to occur in the second half of 2019. 

It will take months to enroll patients, but if the duration of the trial is similar to the trial duration in NAFLD (12 weeks), then it's reasonable to expect that the first data will be available around this time next year or by the second half of 2020. That could prove to be the biggest catalyst yet for the $550 million company. If VK2809 shows statistical significance in liver fat reduction, it could cement its position as one of the most promising NASH drug candidates in the industry ahead of a phase 3 study.

VK0214: The second drug candidate to enter active development will be VK0214, which is being developed as a treatment for X-linked adrenoleukodystrophy (X-ALD). The rare, inherited neurological disorder is characterized by the accumulation of very long-chain fatty acids (VLCFAs) that harm certain brain cells, nerve cells, and the adrenal glands. The drug candidate accelerates the metabolism of VLCFAs.

Viking Therapeutics is wrapping up preclinical work to finish the IND for VK0214. It expects to submit the application to the FDA and begin a phase 1 clinical trial in X-ALD in the first half of 2020. That would give the business two catalysts by this time next year.

A high risk, high reward stock

The investment case for Viking Therapeutics boils down to one question: Will VK2809 live up to the hype in NASH? Sure, the company has plenty of cash on the balance sheet, and soon expects to bring its second pipeline asset into active clinical development. But none of that will matter if the lead drug candidate doesn't maintain its label as a promising potential treatment for fatty liver diseases. 

Investors will likely get a firm answer on the most important question facing the company before the end of 2020. In the meantime, Viking Therapeutics remains a high-risk, high-reward stock.