Looking for stocks with explosive growth potential? The biotech industry is an excellent place to start. Small drugmakers often see their shares skyrocket following positive clinical or regulatory developments. However, these companies also tend to have substantial downside, which is why it's essential to think twice -- and consider the pros and cons -- before even thinking about investing.
Let's look at two mid-cap biotechs that could see their shares soar this year: Madrigal Pharmaceuticals (MDGL -0.54%) and Viking Therapeutics (VKTX 7.92%). Are these stocks worth a second look for investors focused on the long term?
1. Madrigal Pharmaceuticals
Madrigal Pharmaceuticals' market capitalization is just $4.4 billion. However, the diminutive biotech is beating some of its much larger peers in a potentially lucrative market. Madrigal is on the verge of earning approval for a treatment for nonalcoholic steatohepatitis (NASH) in the U.S. Patients with NASH accumulate dangerous levels of fat in the liver, which leads to scarring and many other complications.
Analysts predict that the market for drugs for this illness could be worth $108 billion by 2030. Last year, Madrigal submitted an application for its candidate, resmetirom, to the U.S. Food and Drug Administration (FDA) for review. The agency should decide by mid-March. An approval could send Madrigal Pharmaceuticals' shares through the roof.
Being first to market will be an advantage for Madrigal Pharmaceuticals, especially as it doesn't have the funds, connections in the healthcare industry, and an extensive network of sales reps that can rival that of much bigger drugmakers. Some analysts estimate that resmetirom will generate as much as $2.2 billion in sales by 2028. That's not bad for a company that currently makes no money and is consistently unprofitable.
But does that make Madrigal Pharmaceuticals a buy? On the one hand, the biotech has demonstrated its innovative capabilities. Being able to develop a breakthrough medicine and get close to approval, where many others with more funds and more experience navigating the biotech industry have failed, is nothing to sneeze at. However, there is still plenty of uncertainty with Madrigal Pharmaceuticals.
If by some chance the approval of resmetirom is delayed because of some unforeseen problem (such as manufacturing or labeling issues), the stock will drop like a rock. And with a market cap twice its projected 2028 revenue for resmetirom, perhaps some investors are getting ahead of themselves. It may be worth adding a small position in this stock, at least for investors comfortable with high levels of risk and volatility. Be advised, though: The journey might be long and rocky.
2. Viking Therapeutics
Viking Therapeutics is also developing treatments for NASH, as well as for obesity, which is thought to be one of the leading risk factors for the former. The company's VK2735 is a potential dual GLP-1 and GIP receptor agonist in phase 2 clinical trials. Here's why that could be a big deal. GLP-1 agonists are designed to help patients control their blood sugar levels, as are GIP agonists, but these categories of medication use different mechanisms.
There is only one dual GLP-1/GIP medicine on the market, and it is none other than Eli Lilly's Mounjaro, which some have projected could become the best-selling therapy in the history of the industry. If Viking's VK2735 ends up proving effective, the company could carve out a small niche for itself in the rapidly growing weight loss market.
The biotech's leading NASH candidate is called VK2809. It is currently undergoing phase 2 studies. Viking Therapeutics expects several readouts in the first half of the year for both candidates. Positive results could be the catalysts that move Viking's stock in the right direction. Does that make Viking Therapeutics a buy? Unfortunately, it is too early for long-term investors to get in on this stock.
Although the drugmaker looks highly promising, none of its candidates is currently in a phase 3 study. That means there is still too much that could go wrong for Viking. However, keeping a close eye on this company and watching how things unfold is definitely worth it. Viking Therapeutics' prospects could look much brighter in a year or two.
