Viking Therapeutics (VKTX 7.92%) is up 881% in the last 12 months thanks to its ongoing development of a pair of therapies to treat obesity and metabolic disorders like diabetes. As you may have heard, Novo Nordisk's successful drugs Ozempic, Rybelsus, and Wegovy are indicated for those same conditions -- and that's helped power Viking's shares toward the Moon.
But is there substance to the hype, and could it be possible for this biotech to turn some of its recent fame into long-lived returns for its shareholders, especially those who buy in right now? It's definitely possible that more progress is possible, but there are a few notable risks investors should know about -- so let's check them out.
No shortage of catalysts over the coming years
Viking Therapeutics has four clinical-stage programs, all of which are in early-stage clinical trials. Its lead program in phase 2 trials aims to treat non-alcoholic steatohepatitis (NASH), and it just reported a slew of very positive results, with more updates to come in early 2024. But the star of the show at the moment, and the reason its stock is flying, is likely its program to treat obesity, which should enter its phase 2 trials imminently.
In animal models of obesity, Viking's anti-obesity drug called VK2735 appeared to be more effective for weight loss than Novo Nordisk's molecule semaglutide, which is the basis for its drugs Ozempic, Wegovy, and Rybelsus. Of course, there's absolutely no guarantee that those results will hold up in future clinical trials in humans, but preliminary clinical trial data are somewhat positive so far. If they hold up in later-stage trials, the company will have a major edge in stealing market share from the pharma giant. And per its phase 1 results with people, the candidate could be easier to tolerate than Novo Nordisk's drugs too.
What's more, people who buy the stock soon could get the full benefit of both Novo Nordisk's continued hype surrounding semaglutide as well as a long calendar of potentially positive clinical trial readouts for VK2735 over the next few years. Then, if the medicine gets approved for sale, they'd see even more growth as Viking secured its market share. While the path forward is fraught with plenty of opportunities for VK2735 to underperform, the upside is undeniably enormous, which the market's bidding up of its shares over the last year supports.
Valuation is a significant risk, as is competition
There are two arguments against buying Viking Therapeutics stock right now, starting with its frothy valuation.
Its price-to-book ratio is 17.6, which is dramatically higher than the biotech industry's average of 7.5. Remember, this company has no revenue from sales of medicines, and it won't have any for years, at a minimum, if it ever does. With a valuation that's so inflated because of Novo Nordisk's success, there are quite a few different events that could cause trouble.
Flubbing a clinical trial or getting rebuffed by regulators would be the most significant. But a mishap in Viking's court isn't even necessary to send its shares tumbling given its present heights and its recent run-up. Hypothetically speaking, if anti-obesity medicines on the market turned out to be less safe or effective than initially thought, there would doubtlessly be negative spillover to Viking.
There is also the risk of established competitors entrenching themselves firmly in the markets. Businesses like Novo Nordisk, Eli Lilly, Pfizer, and others are going to have massive advantages in securing and retaining market share relative to Viking. They're simply much larger and far more experienced in the commercialization process, and they all will have a very long head start as their products are either already on the market or well on their way.
So it is very important for investors to understand that to pay off in the long term, Viking needs to prove that its medicines have an edge -- and they might not actually have one. In light of that, it's impossible to avoid the conclusion that the stock is quite a risky purchase, especially when considering the company has no recurring revenue. And there's not necessarily much in the way to look forward to in terms of de-risking events. Remember, its pipeline features early- to mid-stage programs only -- there's nothing on the verge of commercialization.
Therefore, it's probably best to avoid buying shares of Viking Therapeutics at the moment. The company could well succeed and make its shareholders even richer than it already has, but the chances of a collapse are very real and not in ways that management can easily mitigate.
