2023-04-04 07:56:37 ET
Summary
- Following positive data for its obesity drug (VK2735), Viking Therapeutics shares rallied aggressively.
- In Q2, Viking is poised to release its Phase 2b (VOYAGE) trial data of VK2809 for non-alcoholic steatohepatitis.
- Operating at an inflection point, both the stock momentum and fundamentals are rising rapidly.
Nothing is worth doing unless it is worth doing right . - Phillip Fischer (Warren Buffett's second mentor)
As you can see, investing in clinical-stage biotech is the most exciting and highly profitable even during a bear market. Provided that you can forecast upcoming clinical data reports and FDA approval. Else, betting on a company with upcoming failed data can cause you to lose over 50% of your position when the catalyst unfolds. On that note, I want to introduce you to a new stock that we've been discussing and forecasting inside our Private Investing Community in prior weeks, i.e., Viking Therapeutics ( VKTX ).
As you know, Viking shares recently rallied over 60% in a single trading session due to its positive early obesity data. Though Viking executed a public offering to raise capital after the said event, the momentum still continues. After all, there is another bigger catalyst on the horizon. Specifically, there is an upcoming VK2809 data release for the silent yet deadly liver condition coined non-alcoholic steatohepatitis (i.e., NASH). In this research, I'll feature a fundamental analysis of Viking while being laser beam focused on catalysts unlocking.
Figure 1: Viking chart
About The Company
As usual, I'll present a brief corporate overview for new investors. If you are familiar with the firm, I recommend that you skip to the next section. Based in San Diego, California, Viking Therapeutics is focused on the development and commercialization of medicines to treat metabolic and endocrine disorders.
Viewing the pipeline below, you can see that the lead drug is VK2809. Designed to treat NASH, VK2809 is being assessed in a Phase 2b clinical investigation. As such, fruitful development here can add substantial value to Viking. While other molecules like VK2735 can add further value, your best bet is with VK2809.
Figure 2: Therapeutic pipeline
NASH - A Monopoly Market
To appreciate the potential of Viking as an investment, you should go over NASH's underlying science/medicine. On the advanced spectrum of non-alcoholic fatty liver disease (NAFLD), NASH is a serious and silent liver condition that is characterized by fat building up in the liver. Over time, that causes inflammation, liver scarring (fibrosis), and cirrhosis. Ultimately, the liver loses its normal architecture and thereby becomes non-functional.
As you can see, NASH tends to occur with other co-morbid conditions, including obesity, Type 2 diabetes, and metabolic syndrome. Due to our increasingly sedentary lifestyle coupled with fast foods, you can bet there is a high prevalence of NASH. As a ramification, you can imagine that the global NASH market would reach $180B in the foreseeable future.
Asides from therapeutic lifestyle changes, there are currently no FDA-approved medicines for this silent killer. A liver transplant is the only viable solution. Provided that you can find a match, the wait can be quite lengthy. Even with a transplant, the immunosuppressants that patients take would subject them to deadly opportunistic infections. Putting all that together, you can see there is a huge demand for a therapeutic solution for NASH.
VKTX2809 for NASH
From my prior research on NASH , you can appreciate that the liver is a unique organ for being the only one that can self-regenerate. That is to say, if you cut off part of the liver, it'll regrow the missing part. As you can see, the culprit of NASH is the accumulation of fats which hampers the liver's regenerative ability. By boosting the fat-burning ability of the liver through beta-thyroid agonism, you can tilt the balance to allow the liver to reverse the fibrosis course. And, that's exactly what Viking's drug is designed to do.
Figure 3: Beta thyroid agonist's role in NAFLD
Targeting the liver's beta thyroid activity, VK2809 burns excessive liver fats which ultimately allows the liver to heal itself. When self-healing is kicked into high gear, liver fibrosis is reversed. Now, VK2809 is a "pro-drug" which I believe creates more complexity than needed.
For the drug to become active, it'd have to be metabolized by the liver enzyme (CYP3A4) in the liver. Once activated, VK2809 does its work in reducing liver fat with minimal toxicity due to the high selectivity for its target, i.e., the liver. Similar drugs (i.e, Resmitirom) of Madrigal Pharmaceuticals ( MDGL ) validated this mechanism of action. The concern here is the potential CYP3A " down-regulation " which can reduce VK2809 efficacy with long-term use.
Figure 4: VK2809 mechanism of action
Supporting Clinical Data
As you know, all sound science and medicine would be meaningless unless VK2809 can demonstrate clinical efficacy. Below, you can see that this drug posted robust liver fat reduction at 12 weeks into treatment. The responses range as high as 59.7% compared to the 9.4% liver fat reduction for the placebo arm.
Importantly, as the dosage increases, you can see a stronger magnitude of response which indicates a "dose-response" relationship. As you can appreciate, a "dose-response" relationship is strong evidence of efficacy.
Figure 5: VK2809 early data
You can also assess efficacy by viewing the percentage of patients who enjoyed at least over 30% liver fat reduction. On this front, there is no clear-cut dose-response relationship yet the overall response is a remarkable 87.9%.
Figure 6: Percentage of patients with significant fat reduction
As you can see, I focus heavily on liver fat reduction for short-term treatment (i.e., 12 weeks or less). After all, it's the first direct variable in ascertaining whether the fibrosis would be reversed for longer-term trials. If the drug can't clear significant fat, the chances of it reducing fibrosis in an advanced trial would be extremely low. As you saw, VK2809 substantially lowered liver fat in the 12-week treatment. As such, it's a promising sign going into longer clinical studies.
Interestingly, Viking is advancing VK2809 in Phase 2 (VOYAGE) trial for the 12-month duration. Efficacy and safety data will be available in Q2 this year. If data turns out positive, it can move the needles on your stock.
Recent Obesity Franchise Development
Though of lesser importance, Viking recently posted positive data for its obesity segment. In the Phase 1 study, patients were randomized to receive various VK2735 doses and a placebo. By regulating sugar and lipid metabolism, VK2735 can promote weight loss and improve the patient's diabetes.
Figure 7: VK2735 Mechanism of action
Viewing the figure below, you can see that the observed weight reduction over 28 days registered as 8.2kg (i.e., a - 6.0% placebo-adjusted) reduction from baseline. There is also an overall dose-response relationship that indicates efficacy. However, when you assess the weight reduction for the 7.5mg vs 10mg, you can see that the efficacy is actually reduced. As such, the optimized dosage would the that 7.5mg.
Figure 8: Weight reduction following 28 days of treatment
On the efficacy spectrum, this is similar to competing obesity drugs which post an average of roughly 10% body weight reduction relative to placebo. Perhaps, the market's recent exuberance is related to the drug's overall good safety profile. It's also possible that the rally could be in anticipation of the NASH results. As you know, I viewed Viking's NASH franchise as much more valuable than its obesity drug.
Financial Assessment
Just as you would get an annual physical for your well-being, it's important to check the financial health of your stock. For instance, your health is affected by "blood flow" as your stock's viability is dependent on the "cash flow." With that in mind, I'll assess the 4Q 2022 earnings report for the period that ended on December 31.
Like other clinical-stage biotech companies, Vikings has yet to procure any revenues. At this point in its growth cycle, it would be most appropriate to discuss other financial metrics. That being said, the research and development (R&D) for the respective periods registered at $16.1M and $9.8M. I viewed the 64.2% R&D increase positively because the money invested today can turn into blockbuster profits tomorrow. After all, you have to plant a tree to enjoy its fruits.
Additionally, there were $18.9M ($0.26 per share) net losses compared to $12.7M ($0.16 per share) decline for the same comparison. On a per-share basis, the bottom line is depreciated by 62.5%. As you can see, the higher investment into R&D cuts into the bottom line.
Figure 9: Key financial metrics
About the balance sheet, there were $155M in cash, equivalents, and investments. On top of the $250M recently raised, the total cash position is now $405M. Against the $20.2M quarterly OpEx, there should be adequate capital to fund operations beyond the next four to five years. Simply put, the cash position is extremely robust relative to the burn rate.
While on the balance sheet, you should check to see if Viking is a "serial diluter." After all, a company that is serially diluted will render your investment essentially worthless. Given that the shares outstanding increased from 78.0M to 93.7M (76.5M + 17.2M shares recently raise), my math revealed a 20.1% annual dilution. At this rate, Viking easily cleared my 30% cut-off for a profitable investment.
Potential Risks
Since investment research is an imperfect science, there are always risks associated with your stock regardless of its fundamental strengths. More importantly, the risks are "growth-cycle dependent." At this point in its life cycle, the main concern for Viking is whether VK2809 can clear its Phase 2 trial for NASH in Q2. Prolonged treatment of roughly 1 year might cause CYP3A "down-regulation" which can potentially reduce the efficacy observed.
Given the critical importance of Vk2809 in passing its study, a negative trial result here can cause the stock to collapse. Moreover, there is a high risk that future obesity development won't bear fruit.
Concluding Remarks
In all, I issued a highly speculative buy recommendation on Viking with a 4.4/5 stars rating. While Viking's recent obesity data catapult the shares to a new high, the most promising franchise is NASH. Previous data show that VK2809 is a promising NASH drug. By ramping the liver's biological furnace to burn off excess fat, VK2809 has demonstrated robust liver fat reduction. In doing so, it allows the liver's self-regenerative capability to kick into high gear.
If CYP24 downregulation doesn't become a big issue, you can expect VK2809 to clear its upcoming VOYAGE trial with flying colors. Though I am not optimistic about VK2735, I just don't like obesity drugs based on what I observed over the years. However, it might deliver surprisingly advanced results in the future.
For further details see:
Viking Therapeutics: A Promising NASH Diversification Play