Simply because a inventory has wonderful progress prospects does not imply it is best to ignore its valuation.
A enterprise can look to be in strong form however nonetheless not essentially be an excellent funding general. A very good instance of that’s Viking Therapeutics (VKTX -0.15%). The corporate has been doing numerous issues nicely currently, and there is numerous hope and optimism across the enterprise.
However all that will not be sufficient of a cause to put money into Viking Therapeutics. Whereas the inventory might look nice to some traders proper now, here is why it isn’t value shopping for.
The GLP-1 market might get crowded
The bullish case round Viking’s inventory has to do with a promising drug it has in improvement, which traders are hopeful might generate billions in income for the enterprise in the long term. VK2735 is a glucagon-like peptide 1 (GLP-1) receptor agonist which has proven in scientific trials that it could assist individuals lose as a lot as 15% of their physique weight, on common. And the capsule model has additionally been attaining promising ends in early trials.
However even when the drug obtains approval in a number of years and involves market, the GLP-1 weight-loss market may very well be crowded by then. Not solely are there large names resembling Eli Lilly and Novo Nordisk to deal with, which have already got permitted weight-loss medicine resembling Zepbound and Wegovy, however different notable healthcare firms are additionally vying for a bit of the market:
- Amgen might have one of many extra promising medicine on the market, which might pose the most important threat for Eli Lilly and Novo Nordisk. That is as a result of Amgen’s drug, MariTide, might solely should be taken month-to-month (as a substitute of weekly, which is the case for a lot of of those remedies) whereas nonetheless attaining comparable outcomes.
- Roche not too long ago unveiled encouraging outcomes from a trial involving its GLP-1 drug, CT-338. It helped sufferers lose 18.8% of their weight in comparison with a placebo. It was a phase-one trial however an encouraging one nonetheless.
- AstraZeneca has proven curiosity within the house as nicely. Final yr, it agreed to pay as much as $2 billion to license an experimental weight-loss drug from Eccogene, a Chinese language-based firm. The drug might have fewer unintended effects than different GLP-1 remedies.
That is nonetheless only a small pattern of the variety of firms Viking might have to battle with for market share within the GLP-1 market sooner or later. If it will get an permitted product to market, that will be an excellent improvement for the enterprise, and it seems like it might be on monitor for that. However that does not imply it’s going to generate billions in income for the corporate straight away.
Viking’s valuation is simply too wealthy
It could be one factor if Viking was a small-cap inventory with numerous upside, however Viking’s already nicely above that threshold — its market cap is north of $6 billion. For a corporation with no income, many traders appear to already be pricing in numerous progress into the enterprise. It was solely a yr in the past that the inventory was value lower than $2 billion.
The hype round its GLP-1 drug has despatched the healthcare inventory hovering. And that implies that if it falters or traders grow to be much less optimistic about VK2735’s progress prospects, shares of Viking might shortly come underneath strain.
The inventory’s volatility is prone to proceed
There’s additionally the priority about Viking’s brief curiosity, which is how many individuals are betting towards the corporate and anticipating it to fail. Quick curiosity, as a share of float, stays excessive at round 15%. And if the corporate offers traders with any extra causes to be skeptical and anxious in regards to the enterprise, that brief curiosity might rise and put downward strain on the inventory.
VKTX % of Float Quick knowledge by YCharts.
On the flip aspect, if the corporate posts sturdy outcomes from scientific trials, there may very well be a brief squeeze which sends its shares skyrocketing. Both means, the inventory seems like a bet proper now and is prone to stay extraordinarily unstable given its excessive price ticket and the expectations which are baked into its valuation.
Viking Therapeutics is a extremely speculative funding
Making an attempt to foretell the winners of a hotly contested GLP-1 drug market isn’t any straightforward process. Viking’s drug might dominate or it might get misplaced within the mixture of a boatload of different GLP-1 weight-loss medicine. It is too early to inform which medicine will be capable of compete with Wegovy and Zepbound. Viking nonetheless has an unproven enterprise with no income, and its losses will proceed to build up till that modifications.
Traders who purchase Viking’s inventory at its present ranges are successfully betting on the success of its GLP-1 drug, and that is a extremely dangerous place to take because the inventory might have numerous room to fall if the drug fails to acquire approval or if different merchandise look extra promising.
That is why that is an funding which is barely appropriate for traders with a high-risk tolerance and who’re OK with the likelihood that they might incur vital losses. Different traders are higher off staying away from the inventory.
David Jagielski has no place in any of the shares talked about. The Motley Idiot has no place in any of the shares talked about. The Motley Idiot has a disclosure coverage.
