Novo Nordisk just committed more than $1.1 billion to make the next Ozempic, but is the stock a buy?

By now, almost everyone has heard of Novo Nordiskhis (NGO -2.09%) popular drug for type 2 diabetes, Ozempic. And as many investors appreciate, when a pharmaceutical company knocks out a winning product, it makes sense for it to use the expertise needed to develop the product to produce new drugs that are even better.

On that note, Novo is already moving very aggressively to invent sequels to Ozempic, flexing its financial muscle and cutting collaboration deals with biotechs that might be working on the next big thing. However, this does not mean that he is using his capital effectively or that his attempts will succeed.

So let’s address the question of whether the stock is worth buying in light of its latest investments, as they are undoubtedly a key element of the company’s future.

The long-term strategy is revealed

In mid-September, Novo Nordisk closed a pair of deals totaling more than $1.1 billion in research and development (R&D) costs, payments, referral fees and royalties, with the express purpose of strengthening its pipeline of therapy of cardiometabolic diseases through: – therapeutic modalities still unexplored.

For the uninitiated, cardiometabolic diseases include the likes of type 2 diabetes and obesity, which the company already treats incredibly profitably with its blockbuster drugs Ozempic and Wegovy. These products are a big part of why trailing 12 month net income has grown 75% in the last three years alone to over $13 billion.

But no matter how much money these winning products bring in today, the intellectual property protections that prevent competitors from producing cheap knockoffs won’t last forever. So if it wants to continue to earn revenue from the huge markets for diabetes and weight loss therapies, innovation is the only way to go. And that’s exactly why it’s investing so heavily in these early-stage biotech collaborations.

Building on Novo’s last two collaborations, it is investing heavily in approaches that aim to treat cardiometabolic diseases using gene editing, as well as drug delivery systems for gene editing treatments. This mirrors some similar investments made by its biggest competitor in cardiometabolic drugs, Eli Lilly. It also implies that if efforts to develop a next-generation weight-loss or diabetes treatment are successful, profits could be dramatically higher than those seen with Wegovy and Ozempic.

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

This means that manufacturing it on an industrial scale requires either purchasing or producing in-house sufficient quantities of those components and then adding them together in the correct order through a series of controlled chemical reactions. This process is, relatively speaking, expensive.

But the next-generation approaches Novo is investigating could be much less cumbersome to produce, thanks to recent advances in bioproduction techniques. Take the approach used by one of his new contributors, Korro Bio. His method is to include a piece of synthetic RNA in a lipid nanoparticle (LNP) that acts as a drug delivery system, with the plan being that the ambient cellular machinery in the patient’s body handles most of the key actions needed to transform that piece of RNA in the desired therapeutic effect.

If you don’t understand exactly what’s going on there, don’t worry – the point is that it’s getting cheaper and cheaper to make RNA from a manufacturing standpoint. Plus, once you understand that LNPs are just fancy, man-made bubbles of fat that are really small, it becomes clearer why they also tend to be cheap to make at scale.

Cheaper production costs would be a huge boon for Novo’s stock, especially given the billions of dollars of investment in new manufacturing facilities it continues to make to meet sizzling global demand for semaglutide. And that’s even before we get into the high probability that its genetic drugs could cause fewer side effects than its existing lineup, while also offering greater efficacy and fewer potential drug interactions.

Bottom line, if Novo’s gene medicine offerings 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 is an optimistic factor to see that a big pharma like Novo Nordisk continues to invest in next-generation treatment opportunities. Without doing so, investors should worry that its pipeline would be too weak to continue commercializing blockbuster drugs at a steady pace. It also goes without saying that the company’s previous efforts to compete in cardiometabolic drugs have been wildly successful and make an investment thesis for buying the stock that is still very much alive and well today.

But it’s important to recognize that Novo is choosing to roll the dice with these new therapeutic modalities in particular because it has to take significant risks if it wants to have a chance to continue beating the competition in the future. There’s no guarantee that his new collaborations will yield anything worthwhile. They may not even give clinical-stage programs if things go a little worse than anticipated. Worse, the collaborations could lead to massive late-stage clinical failures after many millions of subsequent investments aimed at closing the deal and creating their available opportunities to commercialize new drugs.

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