Big pharma is looking to fatten profits with buyouts of weight-loss drug companies

 Even if they're not acquired, these small companies are developing promising obesity and diabetes treatments

A couple of big-picture trends in biotech could add up to a nice investment opportunity. First, corporate buyouts are back in style. Second, weight-loss drugs and the companies behind them are in high demand among consumers and investors.

The upshot: Smaller weight-loss drug companies are in the buyout sights of the big players. This trend ramped up in 2023, when biotech saw 32 M&A deals. That was 122% above the 2015-2019 average, according to analysts in the biotech research group at Jefferies. Big pharma did a record 22 deals worth $1 billion or more last year, Jefferies says.

"We believe the trend will continue in 2024, albeit with a focus on smaller, early-stage deals," says Jefferies biotech analyst Michael Yee. Big pharma is also in buyout mode to deal with patent rolloffs and government price controls on blockbuster drugs, kicking in under the U.S. Inflation Reduction Act.

Smaller companies developing obesity drugs could be priority targets, given the insatiable interest in glucagon-like peptide 1 (GLP-1) weight-loss drugs like Novo Nordisk's (DK:NOVO.B) (NVO) Ozempic and Wegovy. "We don't think pharma's enthusiasm for obesity and diabetes is dying down," Yee says. "There is an increasingly fierce competition in the space as most pharma want to be part of the $50 billion to $100 billion market."

Giants in the category such as Novo Nordisk and Eli Lilly (LLY) may well continue to build their weight-loss franchises by buying companies with alternative therapies - and also drugs that enhance their own GLP-1 therapies. Lilly, for example, bought Versanis Bio last year to gain access to a drug called bimagrumab, which may help preserve muscle mass in people using its GLP-1 drug. Muscle loss is one of the downsides of GLP-1 drugs.

Other big players in the weight-loss space, including Amgen (AMGN), Sanofi (SNY), Pfizer (PFE) and AstraZeneca (AZN) also might be joining the hunt.

Popular weight-loss drugs like Ozempic work by activating GLP-1 receptors. This helps lower blood sugar levels by boosting insulin and suppressing appetite. That's why they help treat diabetes and obesity.

Here are four smaller companies in the weight-loss space that look like attractive buyout candidates. Even if they aren't acquired, they each have promising weight-loss therapies that could propel their stocks higher. I'm putting the first two on this list. Yee at Jefferies suggests the last two.

1. Viking Therapeutics (VKTX): Viking Therapeutics (VKTX) has developed a weight-loss therapy with a twist. Code named VK2735, this therapy activates the GLP-1 receptor, just like the most popular weight-loss drugs on the market.

Here's the twist. Research show that GLP-1 drugs work better with the simultaneous activation of the glucose-dependent insulinotropic peptide (GIP) receptor. VK2735 activates both the GLP-1 and GIP receptors. Viking is developing VK2735 as a therapy for obesity and several other metabolic disorders. The company is working on both injectable and pill forms of this drug in two separate trails.

A Phase I safety trial of the injectable form of this drug found patients lost 13% of weight after 13 weeks. The injectable form of the therapy is now in Phase II trials. A Phase I safety trial of the pill version found that patients shed 5% of their body weight in a month. This one is slated for Phase II trials for use against obesity in the second half of 2024.

Viking also is developing a therapy to treat a fatty liver disease called nonalcoholic steatohepatitis (NASH), which is linked to obesity. Code named VK2809, this therapy may treat NASH by reducing liver fat, improving cholesterol and lipoprotein levels, and reducing LDL (low-density lipoprotein) cholesterol, sometimes called the "bad" cholesterol.

2. Structure Therapeutics (GPCR): The popular GLP-1 weight-loss drugs typically have to be injected. That doesn't seem to faze patients. But let's face it, a pill would be more convenient. That's what Structure Therapeutics (GPCR) is trying to develop. Pills offer another advantage: they are easy to make. This would address supply shortages of the injectable weight-loss drugs, which are trickier to produce.

Structure Therapeutics has two pills for weight loss in clinical trials. Both are GLP-1 drugs. The company is testing one, code named GSBR-1290, for use against obesity and diabetes. It's in Phase II trials. The company plans to publish data from its obesity trial late in the second quarter, which could be a catalyst for the stock. Structure Therapeutics is testing another drug, called ANPA-0073, for use in combination with GLP-1 drugs. It may help spare muscle loss, a problem with GLP-1 therapies. It also has several GLP-1 drug candidates in pre-clinical studies.

3. Scholar Rock (SRRK): A big problem with the GLP-1 obesity drugs is that about 30% of weight loss comes from the loss of muscle, Yee says. If patients go off these miracle weight-loss drugs, they don't regain the muscle.

So, it would be great to have a weight-loss drug that doesn't cut muscle mass. Several companies are developing therapies to help that happen. These therapies seem to work by reducing myostatin, a protein that inhibits muscle growth. Eli Lilly is the leader here. But Scholar Rock is in the game.

Scholar Rock has developed an antibody that acts as a myostatin inhibitor, called apitegromab. Code named SRK-439, the antibody will be tested in use alongside a GLP-1 drug. Scholar Rock's Phase II data won't be out until mid-2025, but there could be a catalyst for Scholar Rock this summer, says Yee. That's when Lilly should reveal some Phase II data on its own myostatin inhibitor, called bimagrumab. Positive results could boost Scholar Rock shares, Yee adds.

Scholar Rock is also testing its apitegromab for use against spinal muscular atrophy. Phase III trial data will read out in the fourth quarter.

4. Ventyx Biosciences (VTYX): Though it is at a very early stage, this smallcap biotech company has a weight-loss therapy that may work just as well as GLP-1 therapies without many of the side effects. Importantly, patients might not regain weight after they go off this drug, called VTX3232, according to early data.

Researchers think this potential obesity treatment works by suppressing a part of the body's immune system which can malfunction and cause too much inflammation. The drug works by suppressing NLRP3 inflammasomes. These are protein complexes programmed to spark an immune-system response to pathogens.

When this system goes berserk it can cause excess inflammation. Researchers think this could contribute to weight gain by causing inflammation in the hypothalamus, a part of the brain that regulates hunger. Reducing this inflammation may treat obesity.

Ventyx hopes to launch an obesity trial in the second half of the year. Investors wouldn't see data until 2025. But the stock could see a catalyst in May. That's when a private company called NodThera will release clinical-trial data on its own NLRP3 inhibitor called NT-0796. NodThera claims that early data from animal tests show NT-0796 is just as effective as Novo Nordisk's Wegovy. Confirmation of this from clinical trials could boost Ventyx shares, Yee says.

https://www.morningstar.com/news/marketwatch/20240420310/big-pharma-is-looking-to-fatten-profits-with-buyouts-of-weight-loss-drug-companies-here-are-4-candidates