Is This Weight Loss Drug Stock a Buy on the Dip?

Shares of Wave Life Sciences (NASDAQ: WVE) recently fell off a cliff after the small-cap biotech reported results from a phase 1 clinical trial of its investigational weight-loss drug, WVE-007. The data did not look great and are unlikely to make the medicine a serious contender -- or anything close to that -- in the rapidly growing market for anti-obesity therapies, or at least that's what the bears would say. However, the results of this trial weren't nearly as bad as the market's reaction suggests. Let's consider why Wave Life Sciences is a far more promising weight loss stock than many believe.

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A potentially differentiated approach

Let's establish one thing first: Fat isn't all created equal. The most dangerous fat for patients who are overweight or obese is visceral fat, which is stored around the abdomen region and wraps around several internal organs. That's the kind that is linked to all sorts of diseases, including diabetes. So, when patients try to lose weight to get healthier and reduce their risk of developing diabetes (or other conditions), shedding visceral fat is what's most important.

However, existing GLP-1 medicines cause meaningful muscle loss, along with visceral fat loss. That's the issue Wave Life Sciences is looking to address. In a phase 1 clinical trial, the company's WVE-007 led to a mere 1% reduction in body weight in six months. At first glance, that looks like a profoundly ineffective weight loss medicine that may not even be worth pursuing in phase 2 and phase 3 clinical trials. However, the reductions in total fat and visceral fat in the study were 5% and 14%, respectively. Waist circumference (whose size typically rises or falls along with visceral fat) also dropped 3%, while lean mass actually increased by 2%.

In other words, WVE-007 could help patients drop pounds where it counts most while allowing them to maintain muscle mass. If the medicine can confirm these results in larger, pivotal clinical trials, it could carve out a niche in the anti-obesity market. Even if other medicines show greater mean weight-loss reductions, Wave Life Sciences would market WVE-007 as a therapy that reduces the most dangerous type of fat.

Now, there is still plenty of work to do before the biotech can even hope to launch this product. It must still pass phase 2 and phase 3 studies. In the meantime, it may run into clinical or regulatory setbacks, a significant risk biotech investors are all too familiar with. Further, Wave Life Sciences currently generates little revenue and is not consistently profitable. In other words, the stock carries above-average risk. That said, the company's shares imploding in response to its recent phase 1 data was arguably an unjustified reaction.

At current levels, investors with a serious appetite for risk might want to consider initiating a small position in the stock and progressively add more if Wave Life Sciences makes progress.

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.