Buying a soaring growth stock can be both exciting and risky territory for investors. In the biotech world, all it often takes is news of an approval from the Food and Drug Administration (FDA) or even just promising results from a clinical study that can send a stock skyrocketing.
One of the hottest biotech stocks over the past 12 months has been Viking Therapeutics (VKTX 1.84%). It's up a staggering 885% during that stretch. Can its shares still go higher?
A couple of promising drugs in the pipeline
Viking Therapeutics doesn't have any approved products that generate revenue for the business today. But that hasn't been stopping investors from jumping on the bandwagon, behind a couple of potential blockbuster drugs that could generate billions of dollars for the company in the long run.
VK2809 is in phase 2b trials for the treatment of non-alcoholic steatohepatitis (NASH), an inflammation of the liver. It's a serious condition as there is no medical treatment available to reverse fat buildup, and it can potentially lead to liver cancer. Although it's underdiagnosed, up to 5% of the global population may have NASH.
As a result, there's a big need for a treatment, and VK2809 released positive top-line results from recent trials showing that 85% patients experienced a 30% or more relative reduction in their liver fat.
Another potential catalyst for the business is VK2735, an obesity medication that's entering phase 2 trials this year. Given the excitement surrounding weight-loss treatments this year, including Ozempic, which isn't even approved for weight loss -- the FDA has only granted approval for diabetes -- it's easy to see why investors may be bullish about this type of development.
The Centers for Disease Control and Prevention estimates that more than 40% of U.S. adults are obese. And obesity is linked to many serious conditions, including diabetes, stroke, and heart disease. This, too, is another high-growth opportunity for Viking if it can bring a successful drug to market.
There are plenty of risks as well
Viking Therapeutics is your typical high-risk, high-reward growth stock. If one of its drugs becomes successful and obtains FDA approval, it could easily double or triple in value. If its obesity treatment and NASH drugs were to both obtain approval, then the stock could soar even more.
But the risk is also significant. The drugs would need to make it to phase 3 trials, and then have successful trials there to obtain FDA approval. The probability of success in getting from phase 2 to phase 3 is around 50%, and from phase 3 to approval around 60%.
Another big risk to consider is that these trials get larger and more costly, which means the level of cash burn will accelerate for Viking Therapeutics. Last year, the company's operating activities burned through $48.4 million. With cash and short-term investments totaling $136 million as of the end of March, this is not a concerning level of cash burn, but that could change as the company's trials grow in size. For investors, that means the risk of dilution gets much higher.
Then there's also the risk of growing competition, specifically when it comes to obesity, as there are some big-name companies developing weight-loss drugs. In addition to Novo Nordisk, which has an approved obesity treatment in Wegovy, Eli Lilly and Pfizer also have drugs they're working on.
Viking Therapeutics is a stock most investors should avoid
There's lots of excitement around Viking's stock right now as there's plenty of potential for the business. But without anything to fall back on and expenses that are likely to accelerate in the years ahead, there could be a lot at stake if things don't go as planned; there's nothing like bad news from a clinical trial that can send a biotech stock tanking in a hurry.
It may be tempting to get caught up in the growth opportunities for Viking's stock, and it may not be too late to buy the stock, but investors should be careful not to underestimate the risk that's involved as well. This is an investment that's only suitable for investors with an extremely high risk tolerance.