Recent history has, once again, demonstrated that relatively small biotech companies can see their shares soar significantly on positive developments. Summit Therapeutics' stock is up by more than 2,000% over the past three years, and Abivax, a France-based drugmaker, is up by more than 800% this year following strong clinical data.
Of course, chasing quick gains is not a reliable investing strategy. But some clinical-stage biotechs could deliver superior returns over the long run, provided their master plans come to fruition.
Here are two examples: Viking Therapeutics (VKTX 0.28%) and Recursion Pharmaceuticals (RXRX -4.62%). These biotechs, both of which have outperformed the market this year, could have massive upside potential -- but there's also risk involved.
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1. Viking Therapeutics
Viking Therapeutics is looking to carve out a niche in the rapidly growing weight loss market. Although this field promises to be highly competitive, Viking's leading candidate, VK2735, has shown strong results in phase 2 clinical trials and has now entered late-stage studies. The biotech is also developing an oral version of this candidate, which is currently in phase 2 trials.
Viking's shares could soar on positive phase 3 and phase 2 data for these programs. Let's look at the opportunity ahead. According to some analysts, the anti-obesity market is expected to be worth $150 billion by 2035, up from $15 billion in 2024. If Viking can grab even 5% of this total -- $7.5 billion -- that would be amazing for a company with a current market cap of only $3.7 billion.
It's worth noting that VK2735 has been one of the more promising midstage anti-obesity assets to date. So things are looking somewhat hopeful for the mid-cap biotech, though a lot will depend on upcoming data readouts.
Beyond Viking's work in weight management, the company has another exciting asset in VK2809, a potential therapy for metabolic dysfunction-associated steatohepatitis (MASH). It has completed phase 2 studies and should move on relatively soon. There's a significant need for more MASH therapies, considering that the disease affects millions of people. Yet the U.S. Food and Drug Administration (FDA) just approved the first therapy specifically for it last year.
Investors have sold off Viking Therapeutics' shares in the past year, but the biotech did nothing wrong. It's a case of shareholders taking profits after the stock soared on strong midstage data, coupled with general market volatility. However, between Viking's work in MASH and its anti-obesity efforts, the stock could recover and deliver monster returns in the next five years if it can record consistent clinical and regulatory success.
2. Recursion Pharmaceuticals
Recursion Pharmaceuticals is a drugmaker with a slightly different value proposition: It aims to usher in a paradigm shift in the biotech industry. The process to develop medicines is costly, lengthy, and risky. Even if a new chemical entity performs well in animal models during preclinical testing, unforeseen safety issues can arise once it's used on humans -- or it may simply not be as effective as it was in, say, mice.
Recursion is looking to change that thanks to an operating system (OS) powered by artificial intelligence (AI) that tests compounds against a library of genes, and sends only the most promising to clinical studies. Significantly improving the probability that therapies entering clinical trials ultimately reach the market, while reducing the time it takes for them to progress from preclinical to clinical stages, would lead to substantial cost savings for drugmakers. That's Recursion's plan: If its OS can do what it claims, it will license it out to competitors.
The biotech even scored a major win earlier this year when the FDA announced plans to slowly phase out animal testing in favor of other methods, including AI-based models.
Why, then, isn't the company performing well? Recursion Pharmaceuticals has no products on the market and none in phase 3 studies. In other words, it has yet to prove that its technology actually delivers on its promises. If Recursion can demonstrate the value of its platform, its shares will skyrocket.
However, the stock is a high-risk, high-reward play, so only those with a large appetite for risk should consider it. And even then, it's best to start by initiating a small position in the company.
