Nearly a year ago, Viking Therapeutics (NASDAQ:VKTX) became the darling of biotech investors. Shares skyrocketed in September 2018, after Viking announced positive results from a phase 2 clinical study of experimental drug VK2809. 

Since then, though, it's been mainly downhill for Viking. Once-giddy investors realized that there's still a long way to go before VK2809 could reach the market. But is Viking Therapeutics a smart stock to buy now for investors with a long-term perspective?

Red question mark on top of a pile of $100 bills

Image source: Getty Images.

Viking's potential

The drug that fired up investors last year remains a key reason to like Viking's prospects. After announcing encouraging results from a phase 2 study of VK2809 last year, Viking followed up with additional data at the annual meeting of the European Association for the Study of the Liver (EASL) earlier this year. 

Perhaps the most impressive finding for VK2809 is that even doses as low as 5 mg per day help significantly reduce liver fat. Around two-thirds of patients receiving VK2809 achieved at least a 50% reduction in liver fat after 12 weeks of treatment. Nearly 83% of patients saw a reduction in liver fat of at least 30%. 

Viking's initial phase 2 study of VK2809 focused on nonalcoholic fatty liver disease (NAFLD) and hypercholesterolemia (high cholesterol). But the really lucrative target for the drug is in treating a specific type of NAFLD -- nonalcoholic steatohepatitis (NASH). NASH doesn't have any approved drugs on the market yet. Some industry observers think that the NASH treatment market could be a $35 billion annual opportunity. With big money at stake, Viking is moving forward with a phase 2b clinical study evaluating VK2809 in NASH this year. 

VK2809 isn't the only candidate in the biotech's pipeline, though. Viking hopes to begin a phase 1 study in the first half of 2020 evaluating VK0214 in treating X-linked adrenoleukodystrophy (X-ALD), a genetic disease that affects the nervous system and adrenal glands. Results from preclinical studies of the experimental drug have been encouraging.

In addition, Viking has a couple of other pipeline programs. VK5211 achieved positive results in a phase 2 study focused on helping patients recover from hip fracture. VK0612 is in phase 2 development for treating type 2 diabetes.

Viking's risks

Viking Therapeutics' market cap stands at over $500 million. Investors clearly are betting that the company's experimental drugs will achieve some level of success. However, that success isn't guaranteed.

VK2809 is still only in phase 2 development. Based on historical data, the odds of a liver disease drug in phase 2 clinical testing going on to win FDA approval is only 1-in-4. I suspect that the probability is somewhat better for VK2809 since it has already delivered positive results from the phase 2 study in NAFLD and hypercholesterolemia. Still, though, there remains a significant chance that the drug could flop in clinical studies.

The odds for VK0214 are even steeper. Fewer than 10% of drugs in phase 1 development ultimately obtain FDA approval.

It's also important to note that Viking is behind one of its rivals that has a similar experimental NASH drug. Madrigal Pharmaceuticals (NASDAQ:MDGL) has already initiated a phase 3 study of its NASH drug, MGL-3196 (also known as resmetirom.) Like VK2809, MGL-3196 works by activating the beta receptor in the thyroid hormone.

To buy or not to buy?

Yes, Viking Therapeutics is a high-risk stock. But it could also deliver high rewards if VK2809 proves to be successful in clinical testing. Is Viking a smart stock to buy? It depends.

Conservative investors should stay away from clinical-stage biotech stocks like Viking. They're simply too risky. On the other hand, I think that aggressive investors could find plenty to like about Viking Therapeutics.

My view is that Viking could be a top acquisition candidate in the not-too-distant future. Several big drugmakers are also developing NASH drugs. Many if not all of them are also looking at the potential for combinations of different drugs in treating the disease. 

In one sense, there's an advantage for Viking being behind Madrigal in its development. If MGL-3196 is successful, I suspect that many investors (and big pharma companies) will bet that VK2809 will be successful, too, making both biotechs top buyout targets for these large drugmakers. I think Viking is a high-risk stock that could pay off nicely over the long run.