Sometimes it pays to team up. That's what Novo Nordisk (NYSE: NVO) and Ginkgo Bioworks (NYSE: DNA) decided to do April 10 when they launched a new manufacturing collaboration that could benefit both companies. Details about the financial terms of their team-up are scarce, but there are at least a few reasons why shareholders should be optimistic.
Here's what's going on, and some points to consider if you're pondering an investment in either business right now.
Massive manufacturing needs will require novel manufacturing solutions
The new strategic partnership between Novo Nordisk and Ginkgo will cover five years, and it builds upon an earlier and much smaller collaboration program.
This time, the focus will be on manufacturing therapies for chronic diseases, including drugs that are competing in core segments for Novo Nordisk, like diabetes and obesity medications. The pair will also work together on advancing unspecified early-stage programs, as well as on generalizable manufacturing technologies that could help with the mass production of other types of drugs in Novo's product portfolio.
It's easy to see why the two businesses make natural teammates. Ginkgo's specialty is in creating bespoke biomanufacturing solutions for customers who need complicated molecules or even microorganisms at industrial scale. While it hasn't become operationally profitable on the basis of providing that service to its clients yet, it may one day be able to realize economies of scale in manufacturing that enable it to make more money than it spends.
Picking up a big contract from a major pharma player will probably give it the opportunity to scale up further in the near term, potentially speeding up its long march toward profitability along the way.
On the other side, Novo's blockbuster diabetes drug Ozempic, as well as its soon-to-be-blockbuster drug Wegovy, are both in such high demand that they're in a state of shortage in the U.S. The two drugs are a big part of the reason why the company's quarterly revenue rose some 77% over the last three years, arriving at $9.5 billion in the most recent quarter.
And with ongoing research and development (R&D) activity revealing additional benefits of both products, the level of demand is likely to increase over time rather than decrease. That explains why the company is still looking for more help with manufacturing even after making significant investments in expanding its capacity throughout this year and last year, including an outlay of $2.3 billion in November. The more it can output, the more sales it'll make, and it'll have a lower chance of losing business to powerful and direct competitors like Eli Lilly.
It's not known whether Ginkgo will be involved in helping to produce more Ozempic or its sibling medications like Wegovy, but at least some clues point in that direction. After all, which other obesity and diabetes medications in Novo Nordisk's portfolio are in short supply because of their popularity? It's unlikely that its older obesity therapy Saxenda or its myriad number of insulin products would be very lucrative to scale up in comparison to making more Ozempic or Wegovy.
Buying one of these stocks is a risky move right now
The new arrangement is decidedly bullish for both Novo Nordisk and Ginkgo Bioworks stock, and it represents a tailwind moving forward. But investors should tread carefully if they plan to buy shares immediately if they're eyeing Ginkgo.
While Novo Nordisk is strongly profitable and has a long growth runway thanks to its hit medicines, Ginkgo is a small biotech that hasn't yet proven its core platform can provide the low-cost biological manufacturing services it envisions itself as delivering. Nor has it proven that its manufacturing services are appealing enough to potential clients to drive revenue growth. In the fourth quarter, despite having more active manufacturing programs and more customers than ever before, it reported $27 million in revenue, 49% less than the same period a year prior.
It's a risky play, as it might not ever be able to grow enough to reach the scale it needs to realize the efficiencies management hopes for, and those efficiencies might not actually be attainable. So it might make sense to wait and see if the collaboration with Novo Nordisk is a step along the road to clarifying that uncertainty before investing.
In contrast, Novo Nordisk stock is ready to buy today. It has blockbuster products, and cutting deals to increase its output capacity is quite bullish to say the least.
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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.
