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Viking Therapeutics Is Great. Here's Why You Shouldn't Buy It.

Motley Fool - Mon Apr 8, 4:55AM CDT

Viking Therapeutics(NASDAQ: VKTX) has shown its strengths from a potential product perspective and an investment perspective in recent times. The company reported excellent data from clinical trials of two formulations of its leading weight loss drug candidate. In fact, after the first data report in late February, the stock surged 120% in just one trading session. It has maintained much of that gain in the weeks that followed, and today is up by almost 100% since the report.

The treatment area Viking is targeting is one with high demand and solid growth prospects. Demand for already-commercialized weight loss drugs of the same class as Viking's candidate has consistently surpassed supply, prompting companies to increase their manufacturing capacities. And the weight loss drug market may reach sales of $100 billion annually by 2030, according to a forecast from Goldman Sachs Research.

So it's fair to say Viking is looking pretty great right now. But here's why you shouldn't buy the stock.

An investor looks at something on a laptop in a home office.

Image source: Getty Images.

Weight loss drugs

First, let's take a closer look at Viking and the market it aims to address. Viking specializes in developing treatments for metabolic and endocrine disorders, and its two most advanced programs -- candidates for weight loss and non-alcoholic steatohepatitis (NASH) -- are in phase 2 studies. The one that's caught investors' attention lately is the weight loss candidate, VK-2735.

This candidate works in the same way as two drugs that already are commercialized by pharma giant Eli Lilly: Mounjaro and Zepbound. Both are formulations of the molecule tirzepatide, which acts on two hormones that play roles in controlling blood sugar levels and appetite.

Another drug, Novo Nordisk's semaglutide -- which it markets as Ozempic, Wegovy, and Rybelsus -- works similarly, but only acts on one of these digestive hormones.

This class of drugs has become popular because it has helped many worldwide -- from people you may know to celebrities like Oprah Winfrey -- shed pounds. As I mentioned earlier, demand has been so high that Eli Lilly and Novo Nordisk have had to expand their manufacturing capacities in an effort to keep up with it.

Based on the current high levels of demand and forecast for it to grow, even though Viking faces big pharma competition in this indication, it still could carve out a healthy market share and potentially score a win with VK-2735.

But here's why you shouldn't buy Viking stock right now. First, even though the company has reported excellent results from its phase 2 trial of VK-2735 in injectable format and its phase 1 trial of VK-2735 in an oral tablet formulation, the drug's road to commercialization remains long.

Eli Lilly and Novo Nordisk are staying ahead

Meanwhile, Eli Lilly and Novo Nordisk continue to win over more and more patients -- and both companies are testing other weight loss candidates in late-stage trials that could prove to be even better than their current treatments. For example, Eli Lilly is testing a candidate in phase 3 right now -- retatrutide -- that targets not just two but three hormones involved in digestion -- and results so far suggest this could make for a more efficacious drug. And both companies are investigating oral weight loss drugs in phase 3 trials, too.

It's also important to remember that Eli Lilly and Novo Nordisk possess vast commercial infrastructures, which may help these pharma companies stay in the lead.

So, even if all goes smoothly for Viking, by the time it launches a drug, Eli Lilly and Novo Nordisk already may have launched even better ones -- and these companies have the experience and strength to manufacture and commercialize treatments at a large scale.

The weight loss market could support many players, so even in this case, Viking could generate revenue, and that's positive. But, considering some of the challenges ahead, I think the stock has become expensive after its recent rapid run-up in price.

Of course, it's possible a larger player may acquire Viking, and a buyout bid could mean profits even for investors who scoop up shares at current levels. But that's a risky bet, so it's best left to aggressive investors. For most others, I would recommend remaining on the sidelines for now.

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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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