Eli Lilly and Novo Nordisk Can't Treat This Form of Obesity. Billionaire Stanley Druckenmiller Is Betting Rhythm Pharmaceuticals Can

Eli Lilly (NYSE: LLY) and Novo Nordisk (NYSE: NVO) are currently the leaders in the weight loss market. Their medicines have proved highly effective and generate billions in annual sales. However, drugs such as Wegovy and Zepbound are intended to treat patients with common forms of obesity. A little-known biotech, Rhythm Pharmaceuticals (NASDAQ: RYTM), has developed medicines for rare forms of obesity caused by genetic disorders or by damage to brain regions that control hunger.

This is a niche neither Eli Lilly nor Novo Nordisk targets, and it could make Rhythm Pharmaceuticals successful. Rhythm Pharmaceuticals got a major vote of confidence when, in the second quarter, Duquesne Family Office, an investment management firm founded by the billionaire Stanley Druckenmiller, initiated a position in the stock. Should investors do the same?

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Targeting a very niche market

Rhythm Pharmaceuticals only has one approved product on the market: Imcivree. This medicine has earned important indications. It was first approved in the U.S. in 2020 for chronic weight management in patients with certain protein deficiencies. For instance, it targets people with POMC (proopiomelanocortin) deficiency. This protein normally controls appetite -- among other things -- and helps manage hunger and, by extension, how much people eat. Those with a POMC deficiency may experience constant hunger, keep eating, and gain weight as a result.

Rhythm Pharmaceuticals' Imcivree helps control that. But these protein deficiencies are rare, as is Bardet-Biedl syndrome, a genetic condition that can cause weight gain, which Imcivree was also approved to treat in 2022. The biotech company estimated a potential target market of up to 7,500 patients in the U.S. and Europe across these two indications. That's why Rhythm Pharmaceuticals' latest label expansion for Imcivree was important.

The medicine earned approval in March for chronic weight management in patients with acquired hypothalamic obesity (HO), a condition characterized by weight gain caused by damage to the brain region that controls hunger. This is still a fairly rare condition, but it affects between about 25,000 and 28,000 patients in the U.S., Europe, and Japan, according to Rhythm Pharmaceuticals. So, this new indication has more than quadrupled the biotech's addressable market. Rhythm Pharmaceuticals isn't generating particularly impressive revenue, but it is growing at a good clip.

In the second quarter, the company's revenue was $71.3 million, up 47% year over year. Things should improve as Rhythm Pharmaceuticals makes headway in the market that the latest indication for Imcivree has opened.

Is the stock a buy?

Imcivree's next potential label expansion could be even more important. Rhythm Pharmaceuticals reported positive phase 2 results in patients with Prader-Willi syndrome, a rare genetic condition that leads to constant hunger and obesity. Rhythm Pharmaceuticals estimates that there are 20,000 patients in the U.S. with Prader-Willi syndrome, and roughly 400,000 worldwide. Imcivree won't earn approval in this indication for a few years, but if it does, it will significantly improve the company's financial results.

The drugmaker is also developing other medicines, including bivamegalon, a potential oral treatment for acquired HO. Since Imcivree is administered via subcutaneous injection, an oral option would be attractive to those patients who don't like needles. As we have seen with Eli Lilly's and Novo Nordisk's launches of their respective oral GLP-1 weight-loss treatments, there is a reasonably substantial market opportunity here.

However, does all of that make Rhythm Pharmaceuticals stock a buy? On the one hand, the company is making significant headway in corners of the weight loss market that most pharmaceutical giants likely won't target. Rhythm Pharmaceuticals' addressable opportunity may not be as large as it would be if it tried to challenge the likes of Eli Lilly and Novo Nordisk directly, by launching drugs designed to treat common obesity. But that also means the company has less competition.

It may remain a big fish in a small pond, generating consistent revenue and earnings. However, the stock does face significant risks. Beyond potential clinical and regulatory setbacks, increased competition in Rhythm Pharmaceuticals' relatively small target market would significantly harm its prospects. That makes the stock fairly risky. It accounts for a tiny percentage -- less than 1% -- of Duquesne Family Office's portfolio.

Interested investors should take the same approach: Open a small position in the stock and perhaps add more as it makes more clinical and commercial progress.

Prosper Junior Bakiny has positions in Eli Lilly and Novo Nordisk. The Motley Fool has positions in and recommends Eli Lilly, Novo Nordisk, and Rhythm Pharmaceuticals. The Motley Fool has a disclosure policy.