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April 22, 2024

Trade Idea: VKTX $63.42 (Viking Therapeutics)

Buy July 19th $85 Calls for $5.00

TI VKTX chart Winning Picks 042224

The weight-loss drug trend is still in its early stages. Over time there will be winners and losers.

Today, the clear winners are NVO and LLY. The market is valuing their weight-loss businesses at around $300Bn to $400Bn each.

The total valuation of this trend is likely not going to stay there as Goldman Sachs projects $100Bn in annual sales by 2030, which is only 6 years away.

It’s also very possible that the leaders in this business can change. Remember, it’s the early innings and there are plenty of discoveries to be made.

Finally, the other big pharma companies are not going to concede defeat in these early innings. Just because it’s been quiet over the last several weeks doesn’t mean the players are sitting on their hands.

I am sure there are active strategic discussions focusing on one thing… becoming a leader in the space or maintaining the leadership position. The stakes are simply too high for anything else to be possible.

VKTX

Viking Therapeutic has a weight-loss drug, VK2735, with good Phase 2 results published on February 27th that pushed the stock up over 130%, from $38 to $90 the next day. (See #1 on Chart)

On the day they released the numbers, there were rumors that Eli Lilly was in hot pursuit offering $40-$50 per share. Apparently, VKTX management didn’t like the indication and decided to publish the results.

To get through Phase 3, VKTX announced a secondary along with the Phase 2 results where they would raise capital to fund Phase 3 trials as well as other drugs they have in the pipeline.

On March 4th, the secondary was oversubscribed and the company raised approximately $632.5mm at an $85 stock price. Translation: Big buyers wanted in. (See #2 on Chart)

The mood turned sour only a few days later when NVO (the leader in the space) made their own announcement.

NVO & The Oral Answer 

So far, the answer to losing weight involves getting the drugs via needles. The “holy grail” for the industry is finding an oral solution that effectively does the same thing.

It’s not easy. PFE had their oral drug fail in Phase 2 trials.

On March 7th, NVO presented positive Phase 1 data for their oral solution. NVO spiked higher and knocked VKTX down sharply over the next two weeks from $91.50 to $60. (See #3 on Chart)

VKTX would not be undone.

On March 26th, VKTX presented positive Phase 1 data on their oral solution after 4 weeks of the trial. The stock jumped from $69 to $89 before closing near $81. Since then, VKTX has steadily declined to $63.50. (See #4 on Chart)

I suspect many who bought in the secondary have given up and sold the stock. From the chart, it appears to be a “controlled” sale i.e. straight line. This alludes to a big LONG-TERM holder buying on the way down.

Options Trades

There’s been upside call buyers popping up over the last month. Someone came in to buy 7,000 VKTX April 19th $100 - $120 Call Spreads a few days before the company announcement on March 26th.

When someone catches the date that well, I pay attention.

The next flow popped up on April 2nd and 8th when someone bought a total of 8,000 VKTX July 19th $85-$115 Call Spreads for ~$6.60. This is likely the same person.

July should get us more information.

The Trade

Remember, barring any major adverse reactions (i.e. heart attacks), the demand for weight-loss drugs is off the charts.

We have two behemoths leading the charge, but other big names like Pfizer, Merck, and Amgen are falling behind rather quickly.

The potential catalyst coming in the next couple months will be VKTX releasing further updates on their oral VK2735 Phase 1 trial. The previous update seemed like a quick response to let Wall Street know they had an oral solution doing well in early trials.

This comment on that Phase 1 data release leads me to believe they will come out with another update soon, beyond the 4 weeks they reported:

“Based on the encouraging weight loss, as well as the safety and tolerability results to date, the company has elected to continue further dose escalation in this study. Viking also plans to initiate a Phase 2 trial of oral VK2735 in patients with obesity in the second half of 2024.”

In addition, as VKTX trades lower, there is always a chance for any one these other big pharma names to make a bold move, or to hear rumors of them sniffing around.

While earnings are due this week and hearing what they have to say is good, the potential big move is not an earnings story. This idea is more of an industry wide chess match between big players vying for position over the next decade.

I like the VKTX July 19th $85 Calls for $5 with stock $63.40. This is lower than the $6.60 that was paid for the spread. I’ll use their Target Stock Price near $115.



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