1 Beaten-Down Stock That Could Soar by the End of the Year

Key Points

• Viking's leading weight management candidate is being investigated in two formulations.

• The stock could soar later this year, provided the oral version aces phase 2 studies.

• Viking Therapeutics is somewhat risky, but it also has significant upside potential.

• 10 stocks we like better than Viking Therapeutics ›

Some smaller drugmakers choose to develop medicines for diseases for which there are no therapeutic options. This allows them to avoid direct competition from larger pharmaceutical companies.

That's not exactly the strategy Viking Therapeutics (NASDAQ: VKTX) chose. The mid-cap biotech is working on weight loss therapies, an increasingly competitive market dominated by Eli Lilly (NYSE: LLY) and Novo Nordisk, as well as numerous other well-established players in the industry seeking to enter the space.

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Going up against these giants is no small challenge, but Viking is, so far, holding its own. And if it can play its cards right, its stock could soar by the end of the year and go on to generate strong returns from then on out. Here's more on Viking Therapeutics.

Image source: Getty Images.

Eli Lilly's setback creates an opportunity

Viking Therapeutics' shares soared last year following the release of strong phase 2 data for its subcutaneous weight management candidate, VK2735. The stock has declined significantly since that milestone, although it's not due to anything Viking did wrong. Broader market volatility, combined with long-term shareholders taking some profits, is likely responsible for the stock's 40% drop over the trailing-12-month period.

VK2735 is currently in phase 3 studies, but Viking is also developing an oral version of the medicine, which is in phase 2 clinical trials. There is a race to develop a highly effective oral GLP-1 anti-obesity therapy, since the current market leaders are administered via subcutaneous injection. If Viking Therapeutics' oral candidate can impress in mid-stage studies, the stock could soar.

That's especially the case since Eli Lilly's investigational oral GLP-1 medicine, orforglipron, failed to perform as well as expected in a phase 3 study in obese or overweight patients who didn't have diabetes. Orforglipron led to a mean weight loss of 12.4% in a 72-week study, which wasn't as impressive as the market wanted. This result paled in comparison to Lilly's injectable Zepbound, which led to an average weight loss of 20.2% in a phase 3 study.

Viking Therapeutics' shares jumped on the pharmaceutical giant's bad news, but there's plenty of upside left if its oral weight loss candidate meets Wall Street's expectations.

It's best to start small

Eli Lilly is perceived as the leader in the weight management market. The company's continued dominance in this field was likely somewhat baked into investor expectations, requiring it to deliver outstanding clinical trial results to justify its share price. Viking is a much smaller drugmaker than Lilly, so the market will likely have lower expectations for its data readouts for VK2735.

Viking also has several other exciting candidates. The company is working on a drug called VK2809, a potential therapy for metabolic dysfunction-associated steatohepatitis (MASH), which produced solid results in phase 2 studies. There is a vast unmet need in MASH, considering several million people have the disease, yet the U.S. Food and Drug Administration has approved just a single medication for it.

Elsewhere, Viking has a next-gen anti-obesity candidate that could soon start human clinical trials. The company has a lot going on, and if VK2735-related developments remain strong through the end of the year, the stock could soar.

However, Viking -- like any clinical-stage biotech company -- is a somewhat risky bet. On the one hand, it has generated strong mid-stage data for two separate medicines that address high unmet needs. Its leading candidate, VK2735, has the potential to become a blockbuster; that's impressive. Even so, the stock will plummet if VK2735 encounters clinical setbacks.

So, should you buy shares? In my view, it depends on your level of risk tolerance. Risk-averse investors should look elsewhere. If you're comfortable with a bit of volatility, you should seriously consider the stock; however, it would be wise to start by initiating a small position. If the data from the ongoing phase 2 study for oral VK2735 is good, it might be worth adding even more shares thereafter.

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