Experiencing a 18% decline within a day, is Viking Therapeutics' stock under potential threat due to Merck?
The weight-loss biotech Viking Therapeutics (VKTX dropping by 3.38%) saw its shares take a significant hit on Dec. 18, plummeting by 18% due to an action taken by pharmaceutical giant Merck (MRK losing 1.33%).
Given that Viking hasn't managed to get any of its products approved for sale yet, is this a sign of impending doom or just a rough patch in the road?
The worries are exaggerated, yet not unfounded
Let's delve into the details to understand why Merck's move led to such a severe drop in Viking's share price.
Merck announced a licensing agreement with a Chinese biotech company, enabling it to develop and potentially commercialize the latter's oral weight-loss prospect, HS-10535. The agreement involved a cash payment of $112 million and potential milestone payments totaling $1.9 billion, as well as royalties on sales if approved for market release.
At present, HS-10535 is undergoing preclinical testing. Merck would only agree to this licensing deal if the preclinical results suggested a strong likelihood of meeting the safety and efficacy requirements for human clinical trials.
It's highly probable that HS-10535 will progress into clinical trials once regulatory approval is granted.
As it stands, it's straightforward to see why investors panicked and sold off Viking's shares. The arrival of a major competitor in the developing anti-obesity drug market isn't a promising sign for smaller entities yet to establish themselves as financially independent businesses.
Viking has $930.4 million in cash, equivalents, and short-term investments at its disposal, which should sustain its operations for some time at its current spending rate. However, Merck's ability to generate revenue from the sales of its numerous commercialized medications allows it to withstand clinical-stage failures for an extended period if necessary.
Merck's resources in manufacturing, marketing, distribution, and other commercialization activities are likely to be far more extensive than Viking's. Additionally, Merck's wealth of experience in execution provides it with a significant advantage.
Viking's weight-loss medication, VK2735, is being tested in both injectable and oral formats. The oral format is currently in the planning stages for phase 2 trials, whereas the injectable version is on the brink of entering phase 3 trials following successful phase 2 results.
Assuming Merck swiftly transitions into clinical trials, its candidate will likely be just a phase behind the oral formulation of VK2735, its main competitor if both medications eventually win regulatory approval.
Given this scenario, Viking's oral candidate might have a year or so on the market before confronting Merck's competitor. This should provide enough time for it to secure a considerable market share, considering that VK2735's current clinical data suggests it will likely be more effective at promoting weight loss than competing drugs produced by Eli Lilly and Novo Nordisk. As the anti-obesity drug market is still growing and isn't yet saturated, the presence of these competitors is relatively insignificant.
For a biotech without any revenue, a single year on the market could easily propel VK2735 into blockbuster status, generating over $1 billion in sales within 12 months and generating significant growth for shareholders.
Even if Viking's oral formulation eventually encounters a decline in market share due to a drug from Merck, the injectable formulation of VK2735 could hit the market earlier if its concluding trials go as planned.
Thus, there's little reason to believe that Viking is facing an imminent downfall. It still has an opportunity to thrive, even if it now has a formidable opponent lurking in the wings.
This presents a good opportunity to buy at a discount
Taking everything into account, Viking Therapeutics is not in crisis at this moment. The market's reaction to Merck's announcement assumes the best-case scenario for HS-10535's clinical trials and a mediocre performance from VK2735. If you're interested in acquiring shares at a discount, now is an ideal time to do so. Within a few quarters, the company will report preliminary data from its mid- and late-stage clinical trials again, reigniting investor interest, provided the results are positive. A setback in the clinical process won't spell the end for the company, and Merck may itself hit a bump in the road sooner rather than later.
Despite Merck's move, Viking still has a substantial amount of cash to fund its operations. The arrival of a competitor in the anti-obesity drug market might be challenging, but Viking's oral formulation of VK2735, with promising clinical data, could potentially reach blockbuster status if approved. This situation presents a potential opportunity for investors to buy Viking's shares at a discount.
