Key Points

• Novo Nordisk needs new products to better compete with Eli Lilly in the weight loss market.

• Zenagamtide is one of its promising candidates and could, eventually, generate over $1 billion in annual sales.

• Novo Nordisk's deep pipeline makes it likely to remain a leader in this space over the medium term.

• 10 stocks we like better than Novo Nordisk ›

Novo Nordisk's (NYSE:NVO) semaglutide, sold under the brand names Wegovy and Ozempic, is one of the world's best-selling compounds. Not that this has allowed the company to perform in line with broader equities over the past two years. The pharmaceutical giant has lost a little over 60% of its value over this period. Can Novo Nordisk bounce back?

That largely depends on the company's ongoing clinical development, and one of its candidates in particular, zenagamtide, looks highly promising. Novo is developing zenagamtide for obesity and diabetes. Could this be the next billion-dollar medicine for the Denmark-based drugmaker in its core therapeutic area?

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Why zenagamtide's progress is worth monitoring

Novo Nordisk lost market share in its core therapeutic area to its biggest rival, Eli Lilly (NYSE:LLY). Also, competition from other pharmaceutical giants should intensify in this space in the coming years. Novo Nordisk still generates most of its revenue from its GLP-1 portfolio, and its pipeline is concentrated in diabetes and obesity, although it also has candidates in other areas, including rare blood diseases. So, Novo Nordisk has a lot riding on clinical and regulatory progress for its leading weight-loss candidates, including zenagamtide.

This medicine mimics the actions of the gut hormones GLP-1 and amylin, both of which help regulate blood sugar and appetite. The dual hormonal pathway approach has proved highly successful with Eli Lilly's Zepbound, a dual GLP-1 and GIP agonist, which is currently the market leader in weight loss. Of course, that doesn't mean zenagamtide will also be successful, but so far the data point to the medicine potentially being highly effective. In a Phase 1b/2a study, zenagamtide led to a weight loss of up to 24.3% in 36 weeks.

Patients taking a placebo lost as much as 1.1% of their body weight in the study. By the standards of approved anti-obesity medicines, those are excellent results. True, it's too early to celebrate. This was a fairly small early-stage trial with 125 participants. In larger clinical trials, zenagamtide's performance might not be as strong. We should know that within the next couple of years. Zenagamtide is undergoing Phase 3 studies. Provided the results are impressive (the market will likely expect at least mid-20% weight loss), Novo Nordisk's shares could soar.

Can Novo catch up to its biggest competitor?

If zenagamtide meets market expectations, it will likely generate well over $1 billion in annual sales. Here are three reasons why. First, it will prove much more effective than Wegovy and, arguably, even more so than Novo Nordisk's CagriSema, which could soon earn approval. CagriSema beat Wegovy in a head-to-head obesity clinical trial, but it fell short of the 25% average weight loss that management was hoping for. If zenagamtide can succeed where even CagriSema failed, it might become Novo Nordisk's biggest growth driver.

Second, zenagamtide will help Novo better compete with Eli Lilly's Zepbound, which has also proven more effective than CagriSema in a head-to-head Phase 3 obesity study. Perhaps zenagamtide will come closer to, or even exceed, Zepbound's average weight-loss numbers. Third, zenagamtide is also being developed in an oral formulation.

Novo's oral Wegovy has proved popular since its launch in January, helping the company expand its market presence. A more effective weight loss pill could help Novo stay ahead of Eli Lilly in the oral anti-obesity niche.

That said, Novo's zenagamtide could fall short in its ongoing late-stage trials. That will likely sink the company's stock. It's worth noting that the Denmark-based drugmaker has several other exciting pipeline candidates. And it likely has the funds to acquire or license more from smaller drugmakers. So, even a failure with zenagamtide won't mean the end of its ambitions in this market. Still, zenagamtide is important to Novo's prospects.

With that said, should investors purchase Novo's stock right now? After losing significant market share, the company has massive upside if it can develop several newer and better weight loss drugs, and it boasts a deep pipeline that could allow it to significantly rejuvenate its approved lineup over the next five years. That's why, even with the risk of clinical setbacks, the stock is worth serious consideration, especially at current levels and for investors willing to hold onto its shares for a while.

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Prosper Junior Bakiny has positions in Eli Lilly and Novo Nordisk. The Motley Fool has positions in and recommends Eli Lilly and Novo Nordisk. The Motley Fool has a disclosure policy.