Warning: This Skyrocketing Stock Has a Hidden Risk

Viking Therapeutics(NASDAQ: VKTX) stock is up an eye-popping 860% over the last three years, with the lion’s share of those gains occurring in the last few months. The biotech’s pursuit of treatments for metabolic illnesses like obesity shows no sign of slowing down. If its flagship weight loss program’s performance holds up in the upcoming late-stage trials, it could commercialize its first weight loss drug relatively soon, potentially raking in billions of dollars.

But despite the fairly high probability of this company’s future success, there is (at least) one notable risk to be aware of now. Let’s zoom in on what’s going on to put it into the proper context.

Success in one market may dampen success in another

Viking is determined to capture a portion of the galaxy-sized market for weight loss therapies. In the U.S., this market — which includes many products and services that aren’t prescription drugs — was worth nearly $90 billion in 2023, per Marketdata.​

For a company with no revenue, controlling even a minuscule slice of that market would lead to tremendous growth. And phase 2 clinical trial data of its candidate for treating obesity, VK2735, has shown it be almost certainly sufficiently safe and effective enough to accomplish that control.

There’s also little reason to doubt that Viking’s financial resources will be sufficient to move its program to the market. On March 4, it closed a stock offering worth approximately $632 million, and in 2023 its total expenses were only $101 million.

That sure doesn’t sound like a very risky setup for a biotech stock. But that’s because the hidden risk lies over the horizon, perhaps long past when its lead program could be commercialized. So let’s assume for a moment that VK2735 will not have any trouble in replicating the results from phase 2, and that the regulators at the U.S. Food and Drug Administration (FDA) grant their approval to sell the drug.

Its next tasks would be to advance its other pipeline programs, including an oral formulation of VK2735, also for obesity and currently in phase 1. Then there is VK2809, a therapy aimed at metabolic dysfunction-associated steatohepatitis (MASH, formerly known as NASH). As many as 15 million people in the U.S. have MASH, and only one approved therapy is on the market and was just launched in March.

VK2809 is currently in phase 2b clinical trials — but if it reaches the market, it may actually struggle in the long term. That’s because obesity is the biggest risk factor for developing MASH. With Viking and others like Novo Nordisk and Eli Lilly commercializing powerful anti-obesity drugs over the coming years, there is a real possibility that the growing market for MASH medicines will do a U-turn and start shrinking.

Such an outcome would result in the research and development (R&D) investments made into VK2809 being very hard to recoup at a minimum, and that’s a significant risk.

This risk will take plenty of time to play out

The time frame for this risk to harm the company is likely on the order of 10 years. A lot depends on how much of a public health benefit the widespread adoption of anti-obesity medicines ultimately becomes. If vulnerable populations do not persistently seek treatment, on average, they will still develop MASH at the same rate as before. Also, the issue isn’t entirely in Viking’s hands; its competitors in big pharma could well sell their own therapies.

Importantly, that means there’s still a window of opportunity to buy the stock without needing to worry excessively about this risk occurring. Remember, Viking doesn’t need to be the obesity market’s biggest winner for its shareholders to win — it just needs to stake out some turf, which the large market size will facilitate. So don’t be shy about buying a few shares. The odds are good that the big hidden risk will stay nascent for long enough to capture significant growth.

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

Warning: This Skyrocketing Stock Has a Hidden Risk was originally published by The Motley Fool