Novo Nordisk Just Committed More Than $1.1 Billion to Make the Next Ozempic, but Is the Stock a Buy?

By now, pretty much everyone has heard of Novo Nordisk's (NYSE: NVO) widely popular drug for type 2 diabetes, Ozempic. And, as many investors appreciate, when a pharma company mints a winning product, it's only logical for it to leverage the expertise required to develop the product into making new medicines that are even better.

On that note, Novo is already moving very aggressively to invent sequels to Ozempic by flexing its financial might and cutting collaboration agreements with biotechs that might be working on the next big thing. Yet, this doesn't imply that it's using its capital efficiently or that its attempts will succeed.

So, let's address the question of whether the stock is worth purchasing in light of its latest investments, as they're doubtlessly a key element of the company's future.

The long-term strategy is revealing itself

In mid-September, Novo Nordisk inked a pair of deals worth a total of more than $1.1 billion in research and development (R&D) costs, payments, milestone fees, and royalties, with the explicit aim of bolstering its cardiometabolic disease therapy pipeline via as-yet-unexplored therapeutic modalities.

For the uninitiated, cardiometabolic illnesses include those like type 2 diabetes and obesity, which the company is already treating incredibly profitably with its blockbuster drugs Ozempic and Wegovy. Those products are a big part of the reason why its trailing-12-month net income rose by 75% over the last three years alone, reaching more than $13 billion.

But no matter how much money those winning products are bringing in today, the intellectual property protections that prevent competitors from manufacturing cheap copycats won't last forever. So if it wants to keep raking in revenue from the gargantuan markets for diabetes and weight loss therapies, innovation is the only way forward. And that's exactly why it's investing so much in these collaborations with early-stage biotechs.

Based on Novo's latest two collaborations, it's investing heavily in approaches that seek to treat cardiometabolic illnesses using gene editing, as well as in drug delivery systems for gene-editing treatments. That mirrors some similar investments made by its biggest competitor in cardiometabolic drugs, Eli Lilly. It also implies that if those efforts to develop a next-gen weight loss or diabetes treatment are successful, it could see dramatically higher returns than it is seeing with Wegovy and Ozempic.

In short, the molecule that Ozempic and Wegovy are based on is called semaglutide. Technically speaking, semaglutide is a peptide, which means that it's a modestly complex biological molecule comprised of a chain of many smaller components (amino acids).

That means manufacturing it at industrial scale requires either purchasing or internally producing sufficient quantities of those components, and then adding them together in the proper order via a series of controlled chemical reactions. This process is, relatively speaking, expensive.

But the next-gen approaches Novo is investigating could be much less cumbersome to produce as a result of recent advances in biomanufacturing techniques. Take the approach used by one of its new collaborators, Korro Bio. Its method is to enclose a piece of synthetic RNA into a lipid nanoparticle (LNP) which acts as a drug delivery system, with the plan being for ambient cellular machinery within the patient's body to handle most of the key actions necessary to turn that piece of RNA into the desired therapeutic effect.

If you don't understand exactly what's going on there, don't worry -- the point is that it's becoming increasingly cheap to produce RNA from a manufacturing standpoint. Plus, once you appreciate that LNPs are just fancy man-made fat bubbles that are really tiny, it becomes clearer why they also tend to be inexpensive to make at scale.

Cheaper manufacturing costs would be a huge boon to Novo's stock, especially considering the billions of dollars of investment in new manufacturing facilities that it's continuing to make to serve the white-hot global demand for semaglutide. And that's before even getting into the high probability that its genetic medicines could cause fewer side effects than its existing lineup while also offering higher efficacy and fewer potential drug interactions.

In sum, if Novo's bids in genetic medicine succeed here, it should pave the way for many more years of moderate growth.

Optimism is appropriate, but don't put the horse before the cart

It's a bullish factor to see a big pharma like Novo Nordisk continue to invest in opportunities for next-gen treatments. Without doing so, investors would need to fret that its pipeline would be too weak to continue commercializing hit medicines at a steady clip. It also goes without saying that the company's prior efforts to compete in cardiometabolic medicines have been extremely successful, and they constitute an investment thesis for buying the stock that's still very alive and well today.

But it's important to recognize that Novo is choosing to roll the dice with these new therapeutic modalities specifically because it needs to take on significant risks if it wants to have a shot at continuing to win the competition in the future. There is no guarantee that its new collaborations will yield anything useful at all. They may not even yield clinical-stage programs if things go just a little bit more poorly than anticipated. Worse, the collaborations could lead to massive late-stage clinical failures after many millions of follow-on investment intended to seal the deal and tee up its available opportunities to commercialize new drugs.

So these new investments are not necessarily reasons to buy the stock although it's still certainly worth a purchase for other reasons. Once the projects covered by the collaborations are a bit more mature, it's very possible that they'll become discrete reasons to support a purchase, but they're simply too sketchy for now, as there aren't even many details to evaluate.

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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.