Here's Why Investors Are Betting Against These 2 Biotech Stocks

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Shares of Viking Therapeutics (NASDAQ: VKTX) and TherapeuticsMD (NASDAQ: TXMD) packed on some nice gains in 2019, and their success has attracted lots of short-sellers. These intrepid investors come out ahead when stocks fall, which is a lot more dangerous than it sounds.

Prices can only fall to zero, while misguided enthusiasm is unlimited. Being correct doesn't help if that enthusiasm outlives your ability to remain solvent, and most rookie short-sellers are quickly transferred to desks with less responsibility.

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You might not agree with their conclusions, but it's usually a good idea to understand why so many fund managers are willing to stick their necks out to bet against biotech stocks that look pretty good on the surface.

TherapeuticsMD: Women's health

As of March 26, 2019, 37.6% of TherapeuticsMD shares available for trading, or the company's float, were sold short. Short-sellers essentially borrow and sell shares with the intent of repurchasing them at a lower price. At the stock's average daily trading volume, it would take 26 days to unwind all of the short positions.

TherapeuticsMD stock bounces around a lot because investors still aren't sure about the future of the company's women's health products. In 2018, the Food and Drug Administration (FDA) issued approvals for three of the company's hormonal therapies, Imvexxy for vulvovaginal atrophy associated with menopause, Bijuva for hot flashes, and Annovera, a patient-controlled, surgery-free contraceptive that prevents pregnancy for an entire year.

Before these treatments earned approval, the company earned all its revenue by selling branded and generic versions of prenatal vitamins. With so many new products to sell, it might seem like success for TherapeuticsMD is a foregone conclusion. Unfortunately, vitamin sales have been sliding, and the company's new drug launches haven't gotten off the ground yet.

Annual prenatal vitamin sales peaked at $20.1 million in 2015, and in 2018, they fell 10% compared to the previous year, to just $15 million. TherapeuticsMD relied on vitamin sales for 93% of its revenue last year, which means its new products need to succeed just to keep the top line from sliding.

Sales of Imvexxy, Bijuva, and Annovera reached just $1.1 million last year, despite earning FDA approvals. The company's expanded its sales force to market these products, which drove total operating expenses to $144 million last year.

After losing $132 million in 2018, TherapeuticsMD finished December with just $162 million in cash. If sales of new products don't reach expectations in 2019, the company will have to ask investors for another handout, and the stock's recent $1.2 billion market cap could implode as a result.

Viking Therapeutics: Populations may vary

In 2018, Viking Therapeutics thrilled investors with clinical trial data for VK2809, an experimental tablet that activates a thyroid hormone receptor known to help lower cholesterol, and only that receptor. Specificity is important from a safety perspective because activating a very similar receptor can lead to symptoms of hyperthyroidism.

Viking licensed VK2809 from Ligand Pharmaceuticals thinking it could be a great new cholesterol-lowering therapy for patients who also have liver cells holding on to more lipids than necessary, or non-alcoholic fatty liver disease (NAFLD). During a 45-patient phase 2 study, people given VK2809 had significantly lower cholesterol, and that wasn't the only highlight.

Viking Therapeutics stock soared last year because investigators noticed 90.9% of patients given VK2809 achieved liver fat reductions of 30% or greater compared to just 8.9% of the placebo group. Also, the average reduction was 59.7%, compared to baseline measurements taken 12 weeks earlier.

Around a third of Americans have NAFLD, and an estimated 20 million have progressed to a state of chronic inflammation, or non-alcoholic steatohepatitis (NASH). There aren't any treatments for NASH, and it's quickly becoming the leading reason people need a new liver.

It stands to reason that a treatment capable of lowering liver fat content should also stop inflammation, and Viking plans to begin a study with actual NASH patients in the second half of the year. A whopping 45.1% of Viking's float is sold short because there's a chance the results won't be much more impressive than another new drug candidate that works the same way.

Not long before Viking thrilled the crowd, Madrigal Pharmaceuticals (NASDAQ: MDGL) shares spiked because its thyroid hormone receptor agonist, MGL-3196, helped 60% of NASH patients achieve liver fat reductions of 30% or better compared to 18.4% of the placebo group.

While it looks like Viking's drug wiped the floor with Madrigal's, confident short-sellers are betting VK2809 won't look much better than MGL-3196 in the long run. That's because Madrigal's results come from a much larger study with biopsy-proven NASH patients that are much harder to treat than the 45 NAFLD patients enrolled in Viking's phase 2 trial.

Don't try this at home

Just because plenty of short-sellers are confident that TherapeuticsMD and Viking Therapeutics are on the way down, following them could be disastrous to your portfolio. At the moment, Viking's market cap is a sprightly $751 million and it could rise to several times its value if investors begin believing it can overcome Madrigal's lead on the development timeline.

TherapeuticsMD may be marketing the same hormones that women have been using for decades, but that doesn't mean its products can't produce significant sales. It's tempting to follow the crowd, but you're probably much better off looking for businesses you expect to succeed.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.