Shares of biotechnology companies like Viking Therapeutics (NASDAQ: VKTX) have exploded upward by over 300% in the last 12 months, thanks to its phenomenal clinical data from its late-stage weight loss drug program.
The biotech industry is frequently rife with exciting opportunities for the more risk-tolerant investors, and it should come as no surprise that investors who missed the Viking rally may be looking for a similar opportunity within this space that could be just as juicy.
While it's debatable whether the opportunity with Viking is actually in the rearview mirror or merely taking a breather until its next set of clinical catalysts -- and it's probably the latter -- there's another pre-revenue weight loss biotech that's worth paying attention to: Terns Pharmaceuticals (NASDAQ: TERN).
And while there's no definitive guarantee Terns will imitate Viking's recent run, its current conditions feature many of the same ingredients that led to the latter's success. In short, I'd argue that Tern's shares are primed to take off. Let's take a look and make a few illustrative comparisons.
The conditions are ripe for a big run
Whereas Viking Therapeutics saw its shares fly due to favorable phase 2 trial results with its lead candidate, Terns is slightly less mature. Its orally delivered anti-obesity program, TERN-601, just reported some good phase 1 results on Sept. 9, and it plans to advance the candidate into phase 2 sometime in 2025.
In practical terms, investors who buy Terns today are thus exposed to a higher degree of clinical data risk than they would be if they bought shares of Viking, but the upside could be higher too. The phase 1 trial data suggest that TERN-601 is sufficiently safe and its side effects reasonably tolerable for patients. So the next big hurdle will be to demonstrate that its efficacy at weight loss is both sufficient on its own terms and at least as good as the products on the market made by Eli Lilly and Novo Nordisk.
The phase 1 data offers a sneak peek into how the biotech will fare on those fronts. At the highest dose level tested in the trial, the nine patients in the group lost an average of 5.5% of their body weight after 28 days of treatment, or 4.9% on a placebo-adjusted basis.
While it isn't possible to make a scientifically rigorous direct comparison with other drug developers' weight loss programs for a handful of reasons, Terns' data preliminarily suggests that its candidate could be (broadly speaking) competitive with Viking's in terms of the proportion of weight lost per unit of time, and perhaps superior to Eli Lilly's drug Zepbound.
That supports the idea that the market could react very positively to the program advancing through the phases of clinical trials, just like it did with Viking. What's more, Terns might also have an edge over Viking's program in terms of the candidate's tolerability for patients, though a conclusive judgment will need to wait until the business publishes or presents the full results of the trial rather than just a high-level summary.
If the early data on better tolerability are substantiated, it could open a few doors for the biotech that will meaningfully increase its addressable market. In particular, a highly tolerable weight loss pill would be ripe for combining with other medicines made by Terns that could treat multiple conditions at once, or increase the pace of weight loss.
The long-term picture could become even better than it is
Terns is also fairly well-funded, though admittedly it's nowhere near as flush with cash as Viking. As of the second quarter, it reported $225 million in cash, equivalents, and short-term investments, whereas its trailing-12-month research and development (R&D) expenses were only $69.2 million. But considering it had more money in the bank than Viking at the start of 2023, it's clear that with the right mid-stage data, Terns stands to see a cash infusion from issuing new stock.
Of course, that's a risk, as it would dilute the value of existing shareholders. On the other hand, given the market's affection for weight loss stocks at the moment, investors will probably be more likely to interpret a new influx of cash as a bullish factor rather than a bearish one -- once again, assuming that the company's clinical data continues to impress in the key dimensions we've been discussing.
So is Terns stock worth buying today in hopes of it following Viking's trajectory?
While it might not perfectly follow in the larger biotech's footsteps, TERN-601 has the potential to be one of the safer, more tolerable, and more effective weight loss pill candidates remaining alive and well, the stock has a solid case for upside -- and the company won't have any trouble reaching its next set of milestones financing wise.
With all that being said, if you can accept that it's a risky biotech stock without any sales for the next few years, it's worth buying a few shares. At the moment, Terns' future is bright, and it's probably just getting started.
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