Should You Invest in This Under-the-Radar Weight Loss Stock?

What is the hot, new, exciting and rapidly growing therapeutic area that many drug manufacturers are trying to break into? If you guessed weight loss, you’re right on the money. Therapies in this area such as Eli Lillyof Zepbound and Novo NordiskWegovy generates delicious sales, so it’s no wonder other companies are looking for a piece of the pie. It’s not just prominent industry players: many smaller drugmakers are also making moves.

Terns Pharmaceuticals (TERN -5.84%) is one of them. The clinical-stage drugmaker recently reported positive clinical trial results in this area. Let’s take a deeper look at Terns’ progress and decide whether it’s worth investing in the stock.

Promising results, but it’s still early days

Terns Pharmaceuticals is a small-cap biotech company currently seeking to develop drugs in oncology and obesity care. Oncology has historically been one of the largest, most competitive and most profitable therapeutic areas in the industry. Still, it’s not unheard of for a small drugmaker to carve out a niche in this area, and perhaps the drugmaker can succeed there. But for now, Terns’ obesity efforts are exciting investors.

One of its candidates, TERN-601, a potential once-daily oral GLP-1 drug, recently reported positive results in a phase 1 clinical trial. The trial divided patients into four groups, one of which was the placebo, the other three receiving different doses of TERN-601. The drug led to statistically significant weight loss, particularly in the highest-dose group, which had a mean placebo-adjusted weight loss of 4.9% (or 5.5% unadjusted) in just 28 days . Most adverse drug reactions were mild and generally well tolerated. Terns plans to start a phase 2 study next year.

The company’s shares rose more than 15% following these results. It’s not too surprising.

A high risk, high reward option

There are several things to note — positives and negatives — about the Terns’ obesity candidate. On the plus side, it is a oral The drug GLP-1. Top drugs in this category are usually injected once a week. Some people will opt for the oral version, even if they have to take it daily. However, it hasn’t even started a phase 2 trial yet.

Meanwhile, other companies are also working on oral weight loss drugs, including Novo Nordisk. Earlier this year, the Danish pharmaceutical giant reported positive results for its own oral obesity candidate, amycretin, which led to an average reduction in body weight of 13.1% in a 12-week phase 1 study. We cannot say whether amycretin is more effective than TERN-601 or vice versa. What we can say is that Novo Nordisk has the funds and experience to push its candidates through the development stages faster than its much smaller counterpart.

What does this mean for Terns Pharmaceuticals? The biotech has no products on the market and none in phase 2 trials; it does not generate income and is consistently unprofitable. It ended the second quarter with $225 million in cash and cash equivalents, which it believes can fund operations through 2026.

However, after its Phase 1 success with TERN-601, it will raise more money by taking advantage of the rising stock price and conducting a secondary offering — a classic move that smaller biotechs typically make in these circumstances. It is expected to raise around $150 million in gross revenue.

While this will help expand its cash runway, it won’t make it a more attractive stock. As a company, Terns is in the “proof of concept” phase. Yes, it looks somewhat promising, but a lot could go wrong. And if something goes wrong, investors will be left holding worthless shares.

In short, it is far too early to invest in Terns Pharmaceuticals. Even for investors with an increased risk tolerance, there are far more attractive biotech stocks, including in the weight loss space.