Viking Therapeutics (VKTX 7.92%) has emerged this year as a formidable contender in the increasingly popular anti-obesity market. While it doesn't have an approved drug fighting for market share just yet, investors are incredibly bullish on the prospects for VK2735, which has been demonstrating encouraging results in clinical trials.
That excitement, however, has pushed the stock up to all-time highs this year. And with Viking at a market capitalization now of more than $9 billion, investors are paying a hefty premium for a business that still isn't generating any revenue. Is it too late to invest in Viking Therapeutics stock, or could it still be a good buy today?
Why Viking's valuation may still go higher
For healthcare companies without any revenue or strong financials to rely on, inevitably, much of the hype and excitement surrounding the stock is going to come down to how encouraging the company's pipeline is, or how strong the clinical trial numbers are.
Last week, for example, the stock got a boost as clinical trial data for the pill version of VK2735 (which has been demonstrating effectiveness as an injectable drug) showed that patients taking the drug at its highest dosage lost up to 3.3% (placebo-adjusted rate) of their body weight after 28 days.
This was an early phase 1 trial, so it's far too early to read too much into these results. As trials progress into later stages and involve more participants, investors will get a better idea of just how much potential the drug may have. But even those encouraging early-stage trial results were enough to give the stock a more than 20% boost in share price the day the news was released.
It's a prime example of how that optimism can work to Viking's advantage. Even though it may be multiple years before revenue starts to flow through to the business, optimism over the clinical trials can drive the stock significantly higher.
While some investors may be expecting these results to eventually pave the way for long-term growth for the business, others may be wondering if these encouraging trial results may lead to a possible acquisition down the road.
Why Viking Therapeutics' stock may struggle
Still, there are multiple challenges in Viking's future that could limit the stock's potential upside, especially at its pricey valuation. The first is that while its drug candidate is generating some encouraging results, unless it can show efficacy and safety in phase 3 trials, it's still be too early to read too much into the results. A lot can change as trials get bigger and involve more people.
Plus, larger trials will cost more money. And with Viking not generating any revenue, dilution is inevitable. The company can try to keep costs down, but at this stage the priority is getting an approved drug to market and then, assuming it's successful, rolling it out to other markets. It can be a long, tough road for the company to reach a point where it doesn't need to issue shares to fund its operations. And in the meantime, investors may see the share count rise and the stock price fall.
Then there's the issue of competition. Many companies are developing weight loss drugs, and they would be foolish not to do so given that the anti-obesity market could be worth a staggering $100 billion by the end of the decade. And there are so many big names out there. It's not just Eli Lilly and Novo Nordisk. Amgen, Pfizer, and even a smaller Danish biotech you may not have heard of, Zealand Pharma, may all have weight loss drugs that could compete with Viking in the future.
Although Viking's trial results are encouraging, investors should brace for what could end up being a hotly contested market in weight loss drugs. And this means that while the latest news of Viking's strong trial results boosted its share price, the reverse may happen if and when Zealand, Amgen, or Pfizer release positive trial data of their own.
Should you buy Viking Therapeutics stock?
Viking Therapeutics is a promising healthcare stock, and there could be a lot of upside, especially if a larger pharma company decides to buy it out for its pipeline. But given the stock's high valuation, I think it may be too late to invest in the business right now. There's so much future growth priced in that it may not take much for the stock to fall from these heights.
While Viking could still prove to be a good long-term buy, it is also a high-risk investment. For most investors, it may be best to take a wait-and-see approach with the stock.
