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This High-Flying Stock Just Became a Better Buy

Motley Fool - Thu Oct 31, 4:45AM CDT

If there were a "revelation of the year" award for each industry on the stock market, Viking Therapeutics(NASDAQ: VKTX) would be a leading contender for the biotech sector. The mid-cap drugmaker impressed investors with promising clinical progress in the hottest therapeutic area in the industry: weight loss. Viking has been rewarded. The company's shares are up substantially year to date.

However, recent developments, some of which the company revealed in its latest quarterly update, now make the stock even more attractive. Here's why.

A business, not just a product

Developing novel therapies is expensive and risky. Smaller, clinical-stage biotechs often focus their efforts on a single drug. Madrigal Pharmaceuticals, a company that earned approval for the first therapy for metabolic dysfunction-associated steatohepatitis (MASH), has no other pipeline candidates at this time. However, other clinical-stage biotechs, like Viking Therapeutics, work on several projects. One approach isn't necessarily better than the other. Focusing on a single drug avoids having to spread resources thin.

Having multiple candidates helps mitigate the very real risk that one -- or more -- of them will never reach the market. What sets Viking apart is that its investigational therapies look incredibly promising, which speaks volumes about the company's scientists and management team. By now, biotech observers have likely heard about Viking's VK2735, a potential weight loss drug that hit it out of the park in phase 2 studies. But Viking's MASH candidate, VK2809, also succeeded in phase 2 studies.

Then, there is VK0214, a potential treatment for X-linked adrenoleukodystrophy (ALD) that Viking is working on. X-ALD is a rare, neurodegenerative, progressive condition caused by a gene mutation that disrupts the body's ability to break down long chains of fatty acids, which build up in the brain as a result. There are no approved treatments for X-ALD. Recent phase 1b data for VK0214 showed encouraging safety and reduction in long-chain fatty acids.

VK0214 has received the "orphan drug" designation from the U.S. Food and Drug Administration, something reserved for promising drugs that target very rare diseases. The designation comes with various financial benefits. Viking's exploits don't stop there. The company is working on a pre-clinical candidate, a potential dual amylin and calcitonin agonist.

Amylin is a hormone that helps control blood sugar levels, while calcitonin regulates calcium levels. We are already familiar with the power of dual agonists, or medicines that mimic the function of two different hormones in the body, to treat weight loss or obesity. Eli Lilly's incredibly successful tirzepatide is a dual GLP-1/GIP agonist, as is Viking Therapeutics' VK2735.

Could Viking's new pre-clinical candidate be as impressive? The company reported encouraging weight loss in mice in pre-clinical studies for this new, internally developed product. It's far too early to get excited, but Viking is showing its ability to develop multiple novel drug candidates. So, by purchasing shares of the company, one would be investing in a business, not just a drug.

Funding shouldn't be an issue

One problem that clinical-stage biotechs often run into is funding. Why? Many small drugmakers eventually go out of business without ever launching a single product on the market. It's a risky business, and people to whom smaller drugmakers go to raise cash aren't doing charity; they want their money back plus interest or capital appreciation (or both). The good news is that the more promising a clinical-stage biotech's programs look, the less risky it is, and the easier it is to find funding at attractive terms.

Viking ended the third quarter with $930 million in cash and equivalents. The company should have little trouble accessing more money when it will need to do so to fund the expensive phase 3 studies for VK2735 and VK2809. Now for the all-important question: Is Viking Therapeutics a buy for long-term investors? So long as it remains a clinical-stage company, there will be significant risks involved.

It's impossible to guarantee that the biotech will pass phase 3 studies for its leading candidates or that its early-stage programs will make it all the way to the market. That said, as far as mid-cap, clinical-stage drugmakers go, in my view, it is hard to do a lot better than Viking Therapeutics has done. The company has incredible upside potential. I'd advise even investors with average risk tolerance to seriously consider initiating a small position in the biotech stock.

Should you invest $1,000 in Viking Therapeutics right now?

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.