Goldman Sachs projects that the anti-obesity market will be worth as much as $100 billion by the end of the decade. It's currently dominated by a few big names in Eli Lilly and Novo Nordisk, but that can change drastically in the future. The best-selling glucagon-like peptide-1 (GLP-1) weight-loss treatments today are injections, but companies are working on pills which could be more attractive to patients, especially if they need to take them on a long-term basis.
One stock that investors will want to keep a close eye on is Terns Pharmaceuticals (NASDAQ: TERN). Its shares recently jumped on some positive clinical-trial results, and it could have a possible drug which fights for market share in the fast-growing, anti-obesity market.
Early-trial results show reason for optimism
On Sept. 9, California-based Terns Pharmaceuticals reported that its once-daily GLP-1 pill, TERN-601, was well tolerated in a recent clinical trial which lasted 28 days. The placebo-adjusted mean weight loss among participants was 4.9% when taking the highest dosage (740mg). And more than two-thirds of people involved in the trial lost over 5% of their body weight.
The results are promising when considering that rival Viking Therapeutics' (NASDAQ: VKTX) oral drug VK2735 achieved a placebo-adjusted weight loss of up to 3.3% over a 28-day period in a recent trial. It is notable, however, that the highest dosage in that trial was much smaller at 40mg. Investors, however, will still likely be bullish on those types of comparisons as Viking Theraputics has a market cap of $7.4 billion, which is around 10 times what Terns is worth today.
In early-stage trials, oral weight-loss drugs from Eli Lilly and Novo Nordisk have shown that they can help patients achieve more than 13% weight loss, but that has been over much longer time frames, ranging between 36 to 68 weeks.
Terns says that it will move forward with phase 2 trials of its weight-loss drug next year.
Investors should brace for volatility with Terns stock
Shares of Terns have been rallying on the recent results, and the healthcare stock is now up around 40% this year. But in recent days, the stock has given back some gains after announcing a $150 million offering. It isn't unusual for a stock to use a rally to help raise cash afterwards, since a higher stock price will mean issuing fewer shares (or, have a lower stock dilution) to raise the required capital.
As Terns spends more money on developing its weight-loss pill, investors should expect that there will be more offerings ahead to help with its cash-flow needs. In the trailing 12 months, the company has burned through just under $79 million from its day-to-day operating activities.
Losses and cash burn are going to continue for the foreseeable future as Terns does not have an approved product in its portfolio. Even if future clinical trials are encouraging, the need for ongoing stock offerings makes it probable that it will be a bumpy path forward for investors who own shares of Terns.
Should you invest in Terns Pharmaceuticals today?
The early trial of TERN-601 is encouraging, but I wouldn't buy shares of the stock just yet. It's still far too early in the process to be confident that the weight-loss pill will come to market. There's always going to be a risk when it comes to biotech stocks, but the key is to minimize it. Right now, while Terns' valuation is low, investors need to remember that the field is getting crowded in the anti-obesity market, and competition could be fierce in the future. By the time that Terns' drug comes to market (assuming that it is successful), there may be other, more effective weight-loss treatments which emerge.
This is a high-risk, high-reward type of investment. If you can afford to make a modestly sized investment in the stock, knowing that you can incur significant losses if TERN-601 fails and are comfortable with that risk, then this may be an investment worth considering given how significant the upside could be for Terns. But for most investors, I'd suggest taking a wait-and-see approach with the stock, as there's still a lot of risk and uncertainty involved with this investment.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.
