Should You Invest in This Under-the-Radar Weight Loss Stock?

The weight loss market has become one of the hottest areas in the pharmaceutical industry. Investors looking to capitalize on it may consider stocks like Eli Lilly and Novo Nordisk, which are currently leaders.

Though that approach is fine, it might also be worth considering smaller, little-known corporations whose clinical work could pay off in the coming years. The advantage of opting for smaller companies is that they may have even more upside than the more established ones. On the other hand, they also come with significantly more risks.

With that in mind, let's consider a small-cap biotech that recently made some noise in the weight loss space: Vanda Pharmaceuticals (NASDAQ: VNDA). The company's recent developments put it on the map for some biotech investors, but is the stock a buy?

Vanda's strong phase 2 results

Vanda Pharmaceuticals' strategy in the weight-loss market is somewhat unconventional. The company's leading candidate in this space is called tradipitant, but it isn't being developed to help patients lose weight. Instead, it could be used as an adjunct therapy to help mitigate some of the main side effects of GLP-1 medicines, such as nausea and vomiting.

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Although GLP-1 therapies have proven effective in helping patients shed weight, gastrointestinal side effects remain relatively common, not only for approved medicines but also for some of the leading mid- and late-stage candidates. GLP-1 sales continue to grow rapidly, though, suggesting that patients are willing to make the trade-off: rapid weight loss in exchange for possible adverse reactions. But what if they didn't have to?

That's what Vanda is betting on. Its tradipitant recently posted solid phase 2 results. Only 17 out of 58 patients treated with tradipitant and Wegovy in the trial experienced vomiting, compared to 35 out of 58 in those taking Wegovy and a placebo. These results sent the stock price soaring. Vanda Pharmaceuticals plans to initiate a phase 3 study for tradipitant in this indication early next year.

What is tradipitant's commercial opportunity?

It's worth noting that Vanda previously submitted an application to the U.S. Food and Drug Administration (FDA) for tradipitant in the treatment of gastroparesis. This stomach condition affects digestion and causes a range of symptoms, including cramps, pain, and vomiting. However, the FDA issued a complete response letter, stating that Vanda Pharmaceuticals did not sufficiently demonstrate efficacy, and regulators want more studies to confirm it.

The medicine is also under review for approval in treating motion sickness, with a possible approval coming down in about a month. Yet the market is more excited about the medicine's potential as an adjunct therapy for GLP-1 medicines, considering the rapid growth in that area. However, several problems need to be considered here.

First, the usual: This was a phase 2 clinical trial, albeit a successful one. So far, the data is encouraging, but anything could happen in the upcoming phase 3 studies. Second, even if tradipitant passes late-stage trials, could the company encounter the same regulatory roadblocks it has before? Maybe not, but that's also worth considering.

Third, let's assume tradipitant reaches the market in this indication. It would likely encounter several challenges. Many insurance companies don't cover GLP-1 medications for weight management unless the patient meets specific criteria, such as having a high body mass index (BMI), although insurers are more likely to cover them for type 2 diabetes.

Even if coverage is uniform across diabetes and obesity, though, will third-party payers agree to foot the bill for a medicine that only mitigates the side effects of GLP-1s? And how many patients would be willing to pay for that out of pocket?

I believe the answer is that the market for tradipitant will be relatively small and restricted to patients who have been prescribed a GLP-1 drug, have insurance coverage for it, and suffer from severe adverse reactions. But even for these individuals, other options may become available soon. Several weight loss medications are in development, some of which aim to minimize side effects while maintaining competitive efficacy.

That's why this candidate's market opportunity looks fairly unimpressive.

Is Vanda stock worth investing in?

Given Vanda's market value of only $291 million, though, the company doesn't need success in a massive market to see its shares soar. Is tradipitant's opportunity, coupled with the company's several approved products and pipeline candidates, enough to make the stock attractive? This is, after all, a company that projects total revenue of $210 million to $250 million for the full year 2025, along with a cash balance between $280 million and $320 million.

That might suggest Vanda is undervalued, especially as it's awaiting approval not only for tradipitant in motion sickness but also for Bysanti, one of its approved therapies, in bipolar disorder. The problem, however, is that Vanda's approved candidates have limited commercial opportunities, as do its pipeline programs. The stock is incredibly risky, and shares could plummet if the company encounters further clinical or regulatory setbacks.

And its recent strong phase 2 results aren't enough to change that situation. Investors seeking to capitalize on the rapidly growing weight loss market should look elsewhere.

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