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Is Viking Therapeutics, Inc. a Buy?

Keith Speights, The Motley Fool

Viking Therapeutics, Inc. (NASDAQ: VKTX) is losing money like it's going out of style. The biotech's total revenue this year matches its total revenue last year -- zip, zero, nada. At best, Viking is still several years away from even possibly winning approval for its first drug.

So if you ask me whether or not Viking Therapeutics stock is a buy, my answer is an enthusiastic... "yes."

That's my answer, at least, for aggressive investors. Despite all of the negatives that I ticked off for Viking, I really like this stock as a speculative play. 

Red question mark on top of $100 bills

Image source: Getty Images.

Similar drugs, very different valuations

The biggest reason why I think so highly of Viking Therapeutics' prospects is that I also think highly of Madrigal Pharmaceuticals' (NASDAQ: MDGL) prospects. In May, Madrigal announced really good results from a phase 2 clinical study of its lead candidate MGL-3196 in treating non-alcoholic steatohepatitis (NASH).

MGL-3196 met its primary endpoint of a statistically significant reduction of liver fat. Researchers use the probability value, or p-value, to determine whether a result was statistically significant. A p-value of less than 0.05 is the standard threshold they seek. MGL-3196 achieved a p-value of less than 0.0001. As icing on the cake, the drug also hit all of the study's key secondary endpoints. And it did all of this with a pretty good safety profile. 

What does all of this have to do with Viking? The biotech also has a pipeline candidate, VK2809, that's still in a phase 2 clinical study targeting treatment of non-alcoholic fatty liver disease (NAFLD) and elevated LDL cholesterol. NASH, by the way, is a serious type of NAFLD. Here's the important thing to know: Both MGL-3196 and VK2809 are thyroid hormone receptor (THR) beta-selective agonists.

Now, it's possible that Viking's drug won't be as effective as Madrigal's. However, I think there's a pretty good chance that VK2809 will be successful in its phase 2 study. We won't know for sure, though, until Viking announces the results from the study later this year.

In the meantime, Madrigal claims a market cap of $3.7 billion compared to Viking's market cap of around $640 million. The difference in the two biotechs' valuations is big primarily because of the possibility that VK2809's results will be disappointing. But if Viking reports positive results for the drug in a few months, the gap between its market cap and Madrigal's will narrow significantly. 

An attractive acquisition target

In June, I listed Madrigal and Viking as the two top takeover targets in the NASH space. I still think both biotechs are likely to be on the radar screens for bigger players.

I'm actually rooting for Gilead Sciences (NASDAQ: GILD) to buy either Madrigal or Viking and for Pfizer (NYSE: PFE) to scoop up whichever one Gilead doesn't acquire. Why? I own positions in both Gilead and Pfizer and would love to see them succeed in the NASH market.

Gilead would be a great suitor for Viking for a couple of reasons. First, the big biotech is already a leader in NASH with three candidates in its pipeline. Based on what I've read and heard from scientists who are experts in NASH, I suspect that combination therapies will be most effective in treating the disease. Adding a THR beta-selective agonist in the mix with its ASK-1 inhibitor, ACC inhibitor, and FXR agonist could be just the ticket for Gilead to become a major winner in the NASH market.

The second reason I think Gilead is an ideal company to buy Viking is that it has plenty of money to spend. As of the end of June, Gilead claimed $31.7 billion in cash, cash equivalents, and marketable securities. It could buy Viking with its spare change.

Pfizer isn't quite as far along as Gilead is. The big pharma company has a couple of NASH candidates in phase 2 testing with another experimental drug in phase 1. None of these drugs have the same mechanism of action as VK2809, so Viking's drug could be a good addition to Pfizer's pipeline. Pfizer isn't hurting for cash to spend on a small acquisition, either, with the company reporting $13.4 billion in cash, cash equivalents, and short-term investments as of the end of June.      

Adding it all up

As I pointed out, there are plenty of reasons to avoid Viking Therapeutics stock. However, I think the risk-reward proposition for the stock looks pretty good.

All Viking needs is successful results in its phase 2 study of VK2809. Based on historical data, there's a 45% probability that a metabolic drug in phase 2 testing will have positive results and advance to a phase 3 clinical study. I think the previous results for Madrigal's similar drug gives VK2809 even better odds than that. 

If I'm right and Viking announces solid phase 2 results in a few months, the biotech's share price will soar. And I suspect that one or more big players looking to pick up a promising NASH candidate will come calling. Aggressive investors should like those prospects.

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Keith Speights owns shares of Gilead Sciences and Pfizer. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has a disclosure policy.