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

Key Points

• Rhythm Pharmaceuticals' lone approved product currently generates minimal sales.

• However, recent clinical progress could help change that in the coming years.

• The biotech is a little risky, but it currently has little competition in its niche.

• 10 stocks we like better than Rhythm Pharmaceuticals ›

If you're interested in capitalizing on the rapidly growing weight management market, you might naturally consider investing in Eli Lilly and Novo Nordisk. That's not a bad strategy since these two are the undisputed leaders in the field. However, other, little-known companies might have more upside potential than these giants, provided they can capture a decent share of the anti-obesity market.

That brings us to Rhythm Pharmaceuticals (NASDAQ: RYTM), a mid-cap biotech making noise in this space -- or more precisely, a subfield of the larger weight loss market. The drugmaker recently reported encouraging results that sent its share price soaring. Is this an attractive stock to buy amid these developments? Let's find out.

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Strong clinical progress

Rhythm Pharmaceuticals develops medicines for rare disorders that cause weight gain. The company's only approved product is Imcivree. It's indicated for chronic weight management for people with obesity due to various genetic conditions, including one called proopiomelanocortin (POMC) deficiency.

Imcivree isn't generating much revenue right now. In the first quarter, Rhythm's top line came in at $32.7 million, a 26% year-over-year increase. However, recent clinical progress could improve things.

First, Rhythm reported positive phase 3 results for setmelanotide (the active ingredient in Imcivree) in patients with acquired hypothalamic obesity, a condition in which weight gain results from damage to the hypothalamus. During the study, setmelanotide induced robust weight loss among patients.

The company plans to submit applications for a label expansion in this area to regulatory authorities in the U.S. and Europe in the third quarter. That will boost Rhythm's addressable market. It currently estimates there are at most 7,500 patients who suffer from the obesity-related genetic conditions for which Imcivree is already approved as a treatment. However, there are between 5,000 and 10,000 patients with hypothalamic obesity in these regions.

The disease comes in two forms, acquired and congenital, and setmelanotide's recent phase 3 study targeted the former. Rhythm estimates that between 12% and 40% of patients suffer from the congenital version. With approval for setmelanotide in acquired hypothalamic obesity, Rhythm Pharmaceuticals could potentially add between 3,000 and 8,800 patients to its target market.

Second, on July 9, Rhythm announced positive phase 2 results for bivamelagon in patients with acquired hypothalamic obesity. Here's the difference between bivamelagon and setmelanotide: While the latter is administered via subcutaneous injection once daily, the former is an oral medication. Bivamelagon's results are what sent Rhythm Pharmaceuticals' stock price soaring, since an oral option could attract even more patients.

Should you buy the stock?

Rhythm's therapies target individuals with specific conditions -- genetic or acquired -- that cause weight gain. Although that means the company's medicines may not be suitable for most patients with obesity, it also grants it a specialized market with little competition. There is currently no approved treatment specifically for hypothalamic obesity, for instance. Setmelanotide could become the first, perhaps soon followed by bivamelagon.

Furthermore, Rhythm will target other indications. Setmelanotide is undergoing a phase 3 study; if successful, that would grant it access to a market of approximately 29,000 additional patients, far exceeding its current addressable population. Rhythm also has another early-stage candidate that could pursue other indications. The company's future appears promising, but it also presents some risks to consider.

Rhythm's market capitalization is $6 billion, and this for a company that generates very little revenue. Smaller biotechs are judged more by the potential of their leading candidates. Bivamelagon and setmelanotide's prospects justify this valuation, but only if they hit the mark in their upcoming clinical trials. In the event of clinical or regulatory setbacks, Rhythm Pharmaceuticals' shares could plummet. That's the risk that comes with investing in smaller biotech stocks.

That said, Rhythm Pharmaceuticals appears more attractive than many similarly sized peers, many of which lack a single product on the market and generate no revenue. Given the company's recent clinical progress and ability to target rare conditions with limited treatment options, you may find it worthwhile to initiate a small position in the stock today, at least if you have above-average risk tolerance.

Doing so might lead to superior returns over the next five years if Rhythm Pharmaceuticals makes excellent progress with its agenda.

Should you invest $1,000 in Rhythm Pharmaceuticals right now?

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