Should You Buy the Dip on This High-Flying Stock?

It's been an excellent year for Viking Therapeutics (NASDAQ: VKTX), a mid-cap biotech company. Thanks to impressive mid-stage clinical results, its stock skyrocketed in February. And although it's down from the all-time highs it hit earlier this year, it remains one of the better performers in the industry over the past 12 months.

However, Viking's shares recently dropped massively -- by more than 10% -- in one day. And the stock is down 24% in the past month. What exactly caused this recent decline? Should investors take the opportunity to initiate a position? Let's find out.

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Potential competition from a leading drugmaker

Viking Therapeutics' leading candidate, VK2735, is a potential GLP-1 weight loss medicine. It reported excellent results in a phase 2 study. The company also has an oral formulation of VK2735, which is still in phase 1 clinical trials. Viking's oral version of its promising weight loss medicine could be particularly attractive since current GLP-1 options are administered via injection. So far, so good.

But on Dec. 18, pharmaceutical giant Merck (NYSE: MRK) announced its intentions to dip its toes into the fast-growing anti-obesity field. It penned an agreement with Hansoh Pharma, a China-based pharmaceutical company, to develop HS-10535, a pre-clinical oral GLP-1 weight loss candidate. Merck will obtain the exclusive license to develop this medicine and make a $112 million upfront payment to Hansoh Pharma; the latter will also be eligible for milestone payments and royalties, depending on the candidate's performance.

The news of a drugmaker as prominent as Merck entering the weight loss market was apparently too much for some of Viking's shareholders, leading to the massive correction in the stock.

Is Viking Therapeutics stock still attractive?

Merck's HS-10535 is still in pre-clinical testing -- not mid-stage, or even in early clinical studies. It will be years before it gets anywhere close to commercialization.

Meanwhile, VK2735 and another of Viking's candidates -- VK2809, a potential medicine for metabolic dysfunction-associated steatohepatitis -- are on the verge of kicking off phase 3 (late-stage) studies. Both delivered strong results in mid-stage trials. That doesn't guarantee success in phase 3 studies, but neither do encouraging pre-clinical results.

Perhaps investors think HS-10535 is a potential competitor for Viking's oral formulation of VK2735, which is undergoing phase 1 studies. But even there, the mid-cap biotech is ahead of the game. A more apt comparison would be between HS-10535 and Viking's own (still unnamed) pre-clinical weight loss program -- a dual amylin and calcitonin receptor agonist. Amylin is a hormone that helps regulate blood sugar levels, while calcitonin regulates calcium levels.

We're now familiar with the power of dual agonists to treat weight loss. VK2735 is a dual GLP-1 and GIP receptor agonist, as is Eli Lilly's famous drug Zepbound. Viking's pre-clinical dual amylin/calcitonin program showed promise in rats and mice. We don't know how well HS-10535 has performed yet, but it seems unlikely that Merck would dish out $112 million without a good reason.

Having to deal with one more fierce competitor in the weight loss arena will be a bit of a challenge for Viking Therapeutics. That said, very few drugmakers of any size have shown the kind of progress in developing weight loss medicines that Viking has. In my view, these recent developments do little to change the company's prospects.

It's true that Viking will remain somewhat risky as long as it doesn't have a single product on the market. That comes with the territory when investing in clinical-stage biotech stocks. Still, for those who already were willing to handle this level of risk, not much has changed because of Merck's announcement. Viking Therapeutics is still one of the better biotech companies of its stature to invest in, so the recent dip does represent an opportunity.

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck. The Motley Fool recommends Viking Therapeutics. The Motley Fool has a disclosure policy.