Novo Nordisk and Nvidia Just Partnered on AI. Is the Stock a Buy?

On March 18, Novo Nordisk (NVO 0.04%) and Nvidia (NVDA -0.61%) announced a major new collaboration, an artificial intelligence (AI) project that’s already making waves in biopharma. In short, Nvidia is going to be building the pharma company a brand-new piece of hardware that could help it realize its ambitions of highly targeted and efficient drug discovery.

But many companies make claims about AI, and it’s probable that many AI plays will be whiffs. So is Novo Nordisk stock still an appealing purchase, or is it going to strike out despite teaming up with the chip making giant?

Supercomputers could provide an edge in drug development

The Novo Nordisk Foundation, a Danish group that owns a controlling stake in Novo Nordisk, is in the process of paying roughly $90 million to Nvidia so that the chipmaker can create a new supercomputing center in Denmark. Denmark’s public Export and Investment Fund is contributing another $15 million, and the expectation is that the facility will be used by academic researchers as well as for commercial research and development (R&D) work. The plan is to perform pioneering biopharma R&D using AI, and perhaps eventually quantum computing.

The supercomputer called Gefion at the heart of the endeavor will be among the world’s most capable. The partnership is an opportunity both for Nvidia to show off the power of its technology, and for Novo Nordisk to show off its forward thinking in the sphere of drug development. The favorable press generated by the announcement might bump up the already-high share prices of both businesses, too.

Overall, this partnership should be slightly bullish for Novo Nordisk stock, but it’s not as though the company just invented sliced bread. Applying copious amounts of computing power to drug development is nothing new, though it’s possible that working the AI angle will be significant this time around and such efforts will yield actual functional medicines.

So take care to separate the hype about AI and supercomputing from the reality. At its very best, this new collaboration may lead to incremental improvements in metrics like drug efficacy, clinical-trial failure rates, and preclinical-candidate screening efficiency.

When might this investment pay off?

The supercomputing center should be in full swing by early 2025, with pilot projects starting sometime this year. Let’s assume that between Nvidia’s AI platform and the underlying hardware, Novo Nordisk is able to produce a superior-quality therapy candidate of some kind, moving far faster than average through preclinical work as well as clinical trials. If so, the company could have an exceptional new product hitting the market within the next five or six years. Depending on the indication the candidate targets, billions of dollars in revenue could result.

But that’s a fairly unrealistic best-case scenario, and Novo Nordisk has a lot more happening to bolster the top line between now and then anyway. In particular, its medicines for type 2 diabetes and obesity — Ozempic and Wegovy, respectively — will be among the biggest cash cows ever to be invented by the pharma industry. Since mid-2021, when the FDA approved Wegovy for sale, the company’s trailing-12-month (TTM) sales have risen by 69%, reaching $33.7 billion.

And there’s little to indicate that Wegovy’s growth is going to slow down soon. On March 8, the Food and Drug Administration (FDA) approved it for use in reducing the risk of cardiovascular problems in obese or overweight people. That’ll enable it to reach an even larger market than before. And Novo Nordisk is selling the drug so rapidly that it’s making multibillion-dollar investments in manufacturing capacity just to try to prevent shortages due to popular demand.

In the near term, management doesn’t expect that its efforts to expand supply can produce enough doses to completely meet demand. Plus, the company is working on a handful of potential successor drugs in late-stage clinical trials already, not to mention additional expansions of the approved indications.

Of course, this setup looks great for the future of its share price. Novo Nordisk’s stock is very much one that’s worth buying, though the latest supercomputing and AI developments have little to do with what the company can do right now.

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.

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