Down 44%, Should You Buy the Dip on Viking Therapeutics?

Viking Therapeutics (NASDAQ: VKTX) soared to the forefront almost two years ago when it announced data on an investigational drug to serve an area of high need: weight loss. The biotech's candidate met the goals of its phase 2 trial, bringing it a step closer to entering this market that analysts say may approach $100 billion by the end of this decade.

Viking's stock surged more than 100% in one trading session after announcing its clinical trial progress and as investors speculated that it would be the next to challenge weight loss market leaders Novo Nordisk and Eli Lilly -- or be acquired by a company eager to get into this lucrative space.

Since, though, the stock progressively has lost those gains, and over the past year, it's declined 44%. Meanwhile, Viking's weight loss program -- the injectable I mentioned above and an oral version -- continues to deliver promising results, keeping the company on track to commercialization. Does this make Viking a buy on the dip? Let's find out.

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GLP-1 drugs

Viking's candidates are part of classes of drugs that have everyone talking these days -- GLP-1 agonists and dual GIP/GLP-1 receptor agonists. These drugs interact with hormonal pathways involved in the control of appetite and the management of blood sugar levels.

Today's commercialized products, from Novo Nordisk's semaglutide to Lilly's tirzepatide, originally were developed for type 2 diabetes but since have shown themselves to excel -- in clinical trials and then in the real world -- as a weight loss treatment too. So, these current drugs are approved under one name for type 2 diabetes and another name for weight management -- in the case of Lilly, these are Mounjaro and Zepbound, respectively.

Viking is developing VK2735, its dual GIP/GLP-1 receptor agonist, in injectable form -- like current marketed weight treatments -- and it's also working on an oral version. The former is involved in a phase 3 trial right now and the latter is in phase 2.

It's difficult to directly compare VK2735's performance to today's commercialized products since trial parameters and the real-world context don't offer us an "apples to apples" sort of view. But the candidate's performance so far has been promising: In the phase 2 study, participants achieved average weight loss of as much as 14.7% after 13 weeks of dosing. And in the phase 2 dosing trial of the oral candidate, weight loss averaged up to 12.2% after 13 weeks.

Potential rivals for today's weight loss drugs

If the candidates continue to maintain similar numbers in their current trials, they could represent potential rivals for today's market leaders. And considering the injectable candidate is involved in a phase 3 trial right now, it could reach the finish line within the next few years. Meanwhile, another reason to be optimistic about Viking is the potential for this company to receive an interesting acquisition offer or partnership. Bigger pharma players, eager to get in on the booming weight loss space, could snap up smaller players -- and this has happened recently. For example, Pfizer last month announced its intention to buy biotech Metsera for its pipeline of investigational obesity products.

Of course, Viking does come with some risks. Like all biotech players that haven't yet commercialized a drug, any disappointment in the clinical trial stage could severely hurt stock performance. Also, if and when Viking's weight loss candidate reaches the market, it will face competition -- and today's big pharma competitors have the first-to-market advantage as well as resources like production and sales experience and a recently expanded manufacturing footprint.

Room for more than one winner

That said, I'm not too worried about competition due to the high demand in this market -- there is enough need for these treatments to support growth at more than one or two drugmakers. Novo Nordisk and Lilly last year both saw their products on drug shortage lists until they significantly ramped up production.

Now, let's get back to our question: Is Viking a buy on the dip? As mentioned, Viking faces some risks, so it may not be the best choice for a cautious investor -- in this case, a solid pharma company might make a better buy. But for investors who can tolerate some risk, now, with the shares down more than 40%, is a great time to get in on Viking and hold -- in just a few years from now, it could become a successful player in the billion-dollar weight loss market, and the stock price could soar.

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