Viking Therapeutics (NASDAQ:VKTX), a small-cap pre-revenue biotech, saw its shares jump by an eye-catching 19.2% in response to its third-quarter earnings report, released ahead of the opening bell on Tuesday.  

Can this clinical-stage drugmaker keep rolling higher, or should shareholders take this opportunity to jump ship? After all, Viking's shares have been one of the worst performing biotech stocks over the past 12 months, and there's no guarantee that it will hold yesterday's gains on a forward-looking basis. Let's break down the biotech's Q3 earnings report to consider whether investors should stay the course. 

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Image source: Getty Images.

Viking's strengths and weaknesses

In the earnings release, the company gave investors three reasons to think its shares might be able to rebound from their dreadful showing in 2019: 

  1. CEO Brian Lian noted that the biotech's closely watched beta thyroid agonist VK2809 has now completed the necessary toxicity studies required for long-term dosing in humans.
  2. These toxicity studies, in turn, reportedly paved the way for an investigational new drug filing for VK2809's long-awaited phase 2b biopsy-confirmed nonalcoholic steatohepatitis (NASH) study. 
  3. Viking exited the third quarter with a healthy $290 million in cash and cash equivalents. That amount should be more than sufficient to see VK2809 through its next stage of development -- and perhaps well into the start of a pivotal-stage trial.

Despite these bright spots, there are some serious concerns regarding Viking's long-term outlook. First off, the biotech is now well behind the leaders in the NASH space. VK2809's phase 2b NASH study was widely expected to kick off before the end of 2019. Now this seminal trial might not start enrolling patients until 2020, putting a top-line data readout (assuming a full 12-month trial design) off until 2021.

That's important, because Intercept Pharmaceuticals already has its lead NASH candidate, Ocaliva, under review with the Food and Drug Administration. Moreover, Allergan, Gilead Sciences, Madrigal Pharmaceuticals and several other companies may all end up beating VK2809 to market by a few years at this rate. The long and short of it is that Viking's slow pace of development might mean that VK2809 enters the market when combo therapies are the status quo for NASH. That would be a major blow to Viking's underlying value proposition.

Another sore spot is that Viking's management hasn't provided much insight into the development of its other lead candidate, VK5211, this whole year. In 2018, this midstage drug candidate was a core component of Viking's value proposition, but it has faded almost entirely from view in 2019. 

Should investors give Viking a pass?

The NASH landscape was always going to be a tough nut to crack because of the high level of competition. VK2809, in turn, needed to be within the first four drugs to market to carve out a profitable niche within the monotherapy arena. It's now unclear if Viking can achieve this all-important development goal. As such, Viking's shares aren't a particularly strong buy even though VK2809 could be a potential game-changer for NASH. Investors might want to look elsewhere for more compelling growth opportunities.