This small-cap stock has a promising GLP-1 drug that could rival weight loss treatments from Novo Nordisk and Eli Lilly

Goldman Sachs projects that the anti-obesity market will be worth up to $100 billion by the end of the decade. It is currently dominated by a few big names Eli Lilly and Novo Nordisk, but that may change drastically in the future. The best-selling treatments for glucagon-like peptide-1 (GLP-1) weight loss today are injections, but companies are working on pills that may be more attractive to patients, especially if they need to take them long-term. .

One stock that investors will want to keep a close eye on is Terns Pharmaceuticals (TERN 9.14%). Its stock has risen recently on some positive clinical trial results and could have a possible drug vying for market share in the fast-growing anti-obesity market.

Early test results show reason for optimism

On September 9, California-based Terns Pharmaceuticals reported that its once-daily GLP-1 pill, TERN-601, was well tolerated in a recent 28-day clinical trial. The mean placebo-adjusted weight loss among participants was 4.9% when they took the highest dose (740 mg). And more than two-thirds of the people involved in the study lost more than 5% of their body weight.

The results are promising when we consider that rival Viking therapeutics‘ (VKTX 1.09%) the oral drug VK2735 achieved a placebo-adjusted weight loss of up to 3.3% over a 28-day period in a recent study. It’s worth noting, however, that the highest dose in that study was much lower at 40 mg. However, investors will still be bullish on these types of comparisons, as Viking Therapeutics has a market cap of $7.4 billion, which is around 10 times what is Terns worth today.

In early studies, oral weight-loss drugs from Eli Lilly and Novo Nordisk showed they could help patients lose more than 13 percent, but this was over much longer periods of time, ranging from 36 to 68 weeks.

Terns says it will continue with Phase 2 trials of its weight-loss drug next year.

Investors should prepare for volatility with Terns stock

Terns shares have rallied on recent results, and the healthcare stock is now up about 40% this year. But in recent days, the stock has given back some gains after announcing a $150 million offering. It is not unusual for a stock to use a rally to help raise cash later, as a higher share price will mean fewer shares are issued (or less stock dilution) to raise the necessary capital.

As Terns spends more money developing its diet pill, investors should expect more deals ahead to help its cash flow needs. In the past 12 months, the company has consumed just under $79 million in its day-to-day operating activities.

Losses and cash burn will continue for the foreseeable future as Terns does not have an approved product in its portfolio. Even if the upcoming clinical trials are encouraging, the need for ongoing stock offerings makes it likely to be a bumpy road for investors holding Terns stock.

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 is still far too early in the process to be confident that the diet pill will hit the market. There will always be risk when it comes to biotech stocks, but the key is to minimize it. Right now, while Terns’ valuation is low, investors should remember that the field is getting crowded in the anti-obesity market, and competition could be fierce going forward. By the time Terns comes to market (assuming it’s successful), other more effective weight loss treatments may emerge.

This is a high-risk, high-reward type of investment. If you can afford to make a modest investment in the stock, knowing that you can suffer significant losses if TERN-601 fails and you are comfortable with that risk, then this may be an investment worth considering given how significant could be the advantage for the Terns. . But for most investors, I would suggest taking a wait-and-see approach to stocks as there is still a lot of risk and uncertainty involved in this investment.