Is Merck the Next Big Weight-Loss Stock?

Watch out, Eli Lilly and Novo Nordisk. Merck (NYSE: MRK) is hungrily looking to take a bite out of the weight-loss drugs market.

Amidst an evolving field of competitors, the big pharma is committing a hearty chunk of cash in hopes of becoming a contender. But will that be enough to make it into the next great weight-loss stock? Let's investigate.

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This new move makes for a trend

Merck on Dec. 16 said it had just inked a license agreement with a Chinese biopharma company called Hansoh Pharma that could presage its merits as a weight-loss stock in the coming years.

Per the terms of that deal, Merck will get the exclusive worldwide rights to develop and then sell HS-10535, a preclinical-stage candidate that could potentially be useful for treating a few high-profile cardiometabolic disorders, including obesity and perhaps type 2 diabetes. Merck paid Hansoh Pharma $112 million in cash upfront for the asset, and it committed to funding as much as $1.9 billion in development milestone payments, as well as to paying royalties if the candidate is eventually commercialized.

So, why is the candidate worth such a large potential outlay? HS-10535 is formulated as a pill that works using the same mechanism of action as Novo Nordisk's injectable diabetes drug Ozempic, but it could have one huge advantage.

Ozempic is a peptide, meaning that it's a modestly complex molecule composed of a chain of smaller components called amino acids. In contrast, HS-10535 is a small molecule drug, which, as the name implies, means that it's a relatively simple molecule in the big scheme of things. Small molecules are nearly always much cheaper to produce than peptides, as they have fewer components.

Considering Novo Nordisk's recent habit of investing billions and billions into its manufacturing facilities to produce more Ozempic, as well as sibling medicines like its drug Wegovy for treating obesity, if Merck's weight loss candidate is easier to make, it could disrupt the competitive landscape significantly. Merck would be on the hook for less capital expenditure for setting up its manufacturing facilities in the first place, and then it could also undercut Novo Nordisk with a lower-priced medicine, thereby dramatically increasing the chances of it securing a decent market share. Those advantages would still hold true if HS-10535 turns out to be slightly less potent than Ozempic or Wegovy for its intended purposes.

And that's why Merck could credibly become the next big weight-loss stock.

Keep your expectations restrained for now

Before you rush to go buy shares of Merck, appreciate two things about its prospects of becoming a heavyweight in weight loss.

First, it will take years of additional research and development (R&D) work before the new candidate has a chance to be approved for sale, assuming it ever is. For investors, most of the time, preclinical programs are rarely worth getting excited about because of the many hurdles they need to overcome before commercialization, and HS-10535 is no exception.

Second, Merck is a gargantuan company. Its trailing-12-month (TTM) revenue is $63.1 billion, and by the time the new candidate might be approved, that sum will almost certainly be significantly larger. If HS-10535 ultimately becomes a blockbuster drug that brings in more than $1 billion per year -- which is much more than most medicines ever produce during their peak sales period -- it probably wouldn't move the needle enough for the stock to go up by much. And that's before even testing the relatively safe assumptions about the molecule being inexpensive to produce relative to Ozempic.

So, Merck is far from guaranteed to be the next leading weight-loss stock, and until it can show some convincing clinical-stage data about its latest candidate, there's not much reason to buy the stock for its weight-loss programs specifically. Barring any more strategic plays to set it up for entering the market, which could very well occur soon, check back in 18 months.

Should you invest $1,000 in Merck right now?

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