Is This Weight Loss Drug Stock a Buy After a New Approval?

Eli Lilly and Novo Nordisk aren't the only drugmakers in the weight-loss market, though they are the leaders and attract most of the attention from investors and analysts interested in this growing field. Another, smaller company, Rhythm Pharmaceuticals (NASDAQ: RYTM), markets an anti-obesity medicine that recently earned a label expansion from U.S. regulators. What do recent developments mean for this biotech's prospects?

Image source: Getty Images.

Will AI create the world's first trillionaire? Our team just released a report on the one little-known company, called an "Indispensable Monopoly" providing the critical technology Nvidia and Intel both need. Continue »

Rhythm Pharmaceuticals' expanding market

Rhythm Pharmaceuticals develops medicines to treat obesity caused by rare conditions. The company's Imcivree has been approved for chronic weight management in patients with certain protein deficiencies that lead to weight gain since 2020. Imcivree is Rhythm Pharmaceuticals' only product on the market right now, and its sales are growing at a good clip. In 2025, the biotech's total revenue came in at $189.8 million, up almost 46% compared to the previous fiscal year.

Here's the good news: On March 19, Rhythm Pharmaceuticals announced that the U.S. Food and Drug Administration (FDA) had granted Imcivree approval for patients with acquired hypothalamic obesity. This significantly expands the company's addressable market, adding 10,000 patients in the U.S. alone -- whereas Imcivree's previous indications only allowed it to target a total of 7,500 people in the country.

There are significant risks to consider

Despite Imcivree now having earned a new indication -- where it is the only FDA-approved medicine -- its target market remains pretty small. It should represent a minuscule corner of the overall weight-loss market, and not a particularly lucrative one. Further, Rhythm Pharmaceuticals still runs the risk of significant clinical setbacks. In fact, a few days before announcing Imcivree's label expansion, the company released data from a phase 3 clinical trial of the medicine for the treatment of obesity in patients with certain genetic conditions.

Unfortunately, Imcivree failed to hit its primary endpoint in the study. Clinical failures are never a good thing for a biotech company, but this was an especially meaningful setback for Rhythm Pharmaceuticals, since an approval across these new indications -- which is now uncertain -- would bring an additional 29,000 U.S. patients into its target market, thereby significantly increasing it. True, Rhythm Pharmaceuticals has several other pipeline candidates, including bivamelagon, an investigational oral therapy being tested in patients with acquired hypothalamic obesity.

This could be an upgrade over Imcivree -- which is administered by subcutaneous injection -- in this niche. However, given its small target market, recent setback, the risk of additional clinical failures, regulatory roadblocks, and the fact that it is consistently unprofitable and unlikely to post a profit anytime soon, Rhythm Pharmaceuticals looks far too risky. There are better companies to consider to capitalize on the growing weight-loss drug market, even for risk-tolerant investors.

Prosper Junior Bakiny has positions in Eli Lilly and Novo Nordisk. The Motley Fool has positions in and recommends Rhythm Pharmaceuticals. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.