As we all know, the weight-loss drug revolution is making a lot of companies rich, and the party's just getting started. Weight-loss drug developers like the Danish biotech Zealand Pharma (OTC: ZLDP.F) are likely to be the next big successes now that major players like Novo Nordisk and Eli Lilly are firmly established in the market.
Here's why this biotech's stock is worth buying sooner rather than later.
Plenty of cash and a strong pipeline makes for an easy pick
Usually, the right time to buy a biotech like Zealand is well before it realizes a windfall from commercializing its first product, but in this case, the scheme is a little bit different. In the first half of 2024, Zealand Pharma reported $7.2 million in revenue. That stems from drug-development collaborations, royalties, and licensing fees for its previously commercialized pharmaceutical assets, rather than from direct sales of its medicines.
Unlike most other biotechs, Zealand's plan is to continue to do research and development (R&D) work to produce new assets that it can license out to bigger players for manufacturing and sales. Then, it'll collect more royalties and milestone payments without needing to invest in building out manufacturing or distribution operations. This business model may somewhat reduce the strength of catalysts like drug approvals (or rejections from regulators) because its upside from commercialized products is more limited than it would normally be for a biotech.
The company focuses on developing anti-obesity medicines, though it also has a pair of rare disease therapies that are currently being evaluated for approval by regulators. Its lead program at the moment is a molecule called survodutide, which is in phase 3 clinical trials and which is being investigated to treat both obesity as well as metabolic-associated steatohepatitis (MASH, formerly known as NASH).
Survodutide is unique because it uses a mechanism of action (the GLP-1 receptor) that partially overlaps with the products on the market made by Eli Lilly and Novo Nordisk, but it also targets the glucagon receptor, which none of the other options do. That means it could potentially find a niche that's not well-served by the extant products.
Importantly, survodutide's phase 2 trial data indicate that it could be especially effective for the most difficult-to-treat symptoms of MASH; 64.5% of patients with moderate-to-severe liver fibrosis in the trial experienced an improvement in their degree of scarring after treatment.
Another program called petrelintide, which is on track to enter phase 2 trials, could be just as impressive for treating obesity. It uses two different mechanisms of action, neither of which are represented among the commercialized weight-loss drugs. So far, data suggest that petrelintide may be more tolerable for patients than the marketed drugs while also causing a greater degree of weight loss, likely mediated by a reduced desire to eat and an increased sense of fullness after eating.
There's little reason to believe that Zealand will struggle to fund the R&D it needs to continue advancing these programs through clinical trials. In the second quarter, it completed a new stock offering to raise just over $1 billion in cash -- a gargantuan haul that the vast majority of biotech companies could never hope to achieve in their wildest dreams, even at advanced stages of the drug-development process.
The advantage of this pile of money is more than just being able to afford its expenses. Having so much cash on hand means that Zealand can afford to be extremely picky when negotiating deals with its big pharma partners during the licensing process. In other words, if a prospective commercialization collaborator is requesting too big a slice of the pie, the biotech can credibly look elsewhere without any pressure since it isn't on the verge of running out of money.
And that should result in inking better deals that generate more earnings than they might otherwise.
The downside risks aren't the same as for other biotechs
Zealand Pharma stock is suitable for buying today, and it isn't as risky as other biotech stocks for a few reasons.
First, it has the cash for plenty of additional R&D work if one of its programs hits a setback or needs to be terminated entirely. Therefore, it will have multiple attempts at getting medicines approved for sale before it needs to worry about raising more funds.
Second, its business model seeks to hand off manufacturing and commercialization costs to big pharma collaborators. That offloads most of the execution risk on those fronts to far more experienced operators that already have the requisite resources and relationships in place.
Third, its pipeline programs largely don't simply copy the approaches used by its larger competitors. It's true that using different mechanisms of action implies some additional risk, as less is known about the possible side effects and potential barriers to efficacy. But it also means that its successful candidates will be differentiated enough to have a chance at winning if they go head to head against the entrenched competition.
In sum, if you're looking for a moderate-risk weight-loss drug stock play that likely still has plenty of upside left, Zealand Pharma is a solid choice, especially if you're usually a bit too squeamish to approach biotech stocks.
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