Novo Nordisk (NYSE: NVO) just made a partnership play worth $600 million with a small biotech called NanoVation that might just change the stock's trajectory for many years to come. On Sept. 18, the pair signed a deal that could eventually pave the way for Novo to make a next-gen medicine that it hopes will one-up Ozempic, its best-selling drug for type 2 diabetes.
Competitors like Eli Lilly (NYSE: LLY) are likely to be caught out of position by this move. But it won't pay off immediately, and there's a fair amount of risk involved. Let's dive in and analyze what all of this means for the stock, and when it'll matter the most.
There's a lot to unpack here
NanoVation's expertise is in lipid nanoparticles (LNPs), which it engineers to circulate in the body for long periods. LNPs are a drug delivery technology that essentially encapsulates a few molecules of a drug into a very tiny bubble of fat such that the active ingredient of the medicine can survive the trip through the patient's body until it gets to where it needs to go for its desired therapeutic effect to be the most efficient. Then, the fat bubble disburses its cargo and gets recycled, and the drug (ideally) helps the patient.
LNPs, while relatively new, are a workhorse technology, and they're used most famously by Moderna to deliver its coronavirus vaccine. In that context, the LNP's cargo isn't molecules of a medicine like aspirin, but rather nucleic acids, specifically messenger RNA (mRNA). And that's roughly the same payload that Novo Nordisk is interested in delivering with the help of NanoVation.
Per the terms of their collaboration agreement, the pair will be working together on two currently active programs, and five additional physiological targets that could become full programs at a later date. The two programs are intended for a pair of rare diseases that weren't disclosed, whereas the targets are slated for cardiometabolic disease indications -- most likely type 2 diabetes and obesity, based on Novo's current pipeline.
Importantly, the mechanism of action described for the projects in the agreement is gene editing. Therefore the approach is to use NanoVation's LNPs to carry a gene editor as the active ingredient, which implies a slew of financially impactful factors I'll get to shortly.
This deal opens up the possibility of a very lucrative future
At the moment, Novo's rights under the agreement only enable it to use NanoVation's LNPs for the two programs, but that could change in the future. In exchange, it'll pay some of the biotech's research and development (R&D) bills, and offer it as much as $600 million in royalties, milestone payments, up-front payments, and other fees. It'll take multiple years for any of the projects or programs involved to pan out, and it might even be a few years before anything even enters early-stage clinical trials.
So why should investors care about any of this right now?
In short, Novo has been spending a lot of cash lately to gamble on developing genetic editing medicines for cardiometabolic indications with the help of biotechs, and this latest deal shows its intent even more clearly. On Sept. 16, it penned a very similar deal with Korro Bio worth $530 million. The takeaway is that its next-gen replacements for its blockbuster drugs Ozempic (for type 2 diabetes) and Wegovy (which treats obesity) may be gene-editing therapies rather than peptide therapies.
For investors with a long time horizon for holding their shares, that could be very good news.
One of the problems with peptide-based drugs that Novo and its chief competitor, Eli Lilly, struggle with is that they're relatively expensive to produce, thereby necessitating many billions of dollars of investment into manufacturing facilities to meet demand. And while the molecules used in gene-editing therapies like those covered in the collaboration agreement aren't exactly free to assemble and encapsulate into an LNP, comparatively speaking, they have the potential to be vastly cheaper on a manufacturing basis, even if they're often more expensive to develop.
So if these collaborations yield at least one of the medicines that the company is looking for, it'll have a product that might be more effective for patients, and which requires less capital investment as well as a lower ongoing cost of goods sold (COGS) to make and sell at the same scale. There's also a possibility that the medicines will be more tolerable for patients. All of that will generate value, which will likely trickle back to investors in the form of higher share prices, and perhaps higher dividends and share buybacks.
In other words, while the agreement with NanoVation isn't a distinct reason to buy the stock today because of how early-stage the programs involved are, it's still a factor that supports the bull thesis for Novo Nordisk stock over the long term.
Should you invest $1,000 in Novo Nordisk right now?
Before you buy stock in Novo Nordisk, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Novo Nordisk wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $740,704!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of September 23, 2024
Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends Moderna and Novo Nordisk. The Motley Fool has a disclosure policy.
