Is the next Novo Nordisk also coming out of Denmark?

Danish biotech company Zealand Pharma is an 'R&D shop' focused on developing new drugs, including promising weight loss compounds in the pipeline. Zealand Pharma differs from most other companies, where earnings often take centre stage.

However, the company has modest revenue and has been loss-making for the majority of its existence. Although they generate modest revenue from licence agreements, R&D costs are significant. In the first half of the year, Zealand Pharma generated a loss of 521 million kr. (c. 83 million USD), of which approximately 400 million kr. (c. 60 million USD) is related to R&D costs. However, for a company like Zealand Pharma, increasing R&D costs can be a positive indicator that progress is being made in the later and more costly phases of the R&D pipeline.

Investors are particularly interested in the development of the company's obesity drug. This is in light of the massive success of Novo Nordisk (CSE:NOVOb)'s Wegovy and Eli Lilly (NYSE:LLY)'s Zepbound. Zealand Pharma's most progressed obesity drug, Survodutide, developed in partnership with German Boehringer Ingelheim, targets the GLP-1 receptor like Wegovy.

Although Survodutide is in Phase 3 and on the fast track for approval, it is not expected to be launched on the market until 2027 at the earliest. This depends on continued positive trial data, and there is some risk that it may not achieve final approval even in Phase 3.

However, Zealand Pharma's success does not rest on this one obesity drug alone. They have a total of 10 projects in the clinical R&D pipeline, including three more obesity drugs in development in phases 1 and 2. In particular, Petrelintide, which is entering phase 2 and is an alternative to the first-generation GLP-1 therapy, has shown promising results. It has the potential to be the next generation of more effective obesity drugs. However, it requires patience from investors as the wait and uncertainty for these earlier-stage projects are even greater.

With a recent capital raise of almost 7 billion kr. (c. 1.1 billion USD) and a cash balance of nearly 10 billion kr. (c. 1.5 billion USD), Zealand Pharma's current cash-burn rate could see it operating at a loss for many more years until its R&D portfolio generates revenue.

Although there are no guarantees that Zealand Pharma's obesity drug will be a success, investors are showing great interest. The share price has risen c. 145% this year alone. The potential could also be huge if Zealand Pharma receives final approval to compete with Wegovy and Zepbound. Wegovy currently has annual sales of over 40 billion kr. (c. 6 billion USD), and the investment bank Goldman Sachs (NYSE:GS) expects the obesity market to reach 130 billion USD by 2030. In this light, Zealand Pharma's 61 billion kr. (c. 9.2 billion USD) market capitalisation isn't that dramatic.

As an investor, it's important to be aware of the risks of investing in an 'R&D shop'. The company's value is not based on current earnings but rather on the potential future earnings, which depend on the success of individual R&D projects. Investing in the next blockbuster drug can be an exciting opportunity, but as a retail investor, we can also be cautious about over-allocating to a stock that has this inherent risk.

eToro Nordic Market Analyst, Jakob Westh Christensen