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Novo Nordisk NVO shares have lost 25.1% in the past three months compared with the industry’s decline of 17.7%. The company has also underperformed the sector and the S&P 500 during the same time frame, as seen in the chart below. The stock is currently trading below both its 50 and 200-day moving averages.

NVO Stock Underperforms the Industry, Sector & the S&P 500

Novo Nordisk's stock price primarily dipped due to disappointing third-quarter results announced earlier this month. NVO missed estimates for both earnings and revenues. This was mainly because Diabetes and Obesity care sales failed to meet investor expectations. Subsequently, management lowered its expectations for both sales and operating profit growth.

The company is struggling to meet the heavy demand for its semaglutide (GLP-1 agonist) drugs, particularly Ozempic (for type II diabetes or T2D) and Wegovy (for weight management), in the United States as well as international markets. Eli Lilly LLY, whose tirzepatide medicines, diabetes drug Mounjaro and weight loss medicine, Zepbound, are primary competitors to NVO’s semaglutide drugs has been far more successful in increasing the production capacity of its drugs.

In September, U.S. Senator Bernie Sanders criticized Novo Nordisk for charging high prices for its semaglutide medicines in the United States compared to countries like Canada, Denmark and Germany, which also contributed to the stock price drop.

However, the company’s strong fundamentals and the untapped nature of the obesity market make us believe that the setback is temporary. Long-term investors are advised not to be spooked by the current declining trend of the stock price as strong demand for Ozempic and Wegovy, coupled with NVO’s efforts to expand the drugs’ indications, exhibit significant potential in the future. Shares of Novo Nordisk have surged more than 260% in the past five years over the past five years. Total revenues jumped 90.3% on a reported basis, while the net profit margin consistently exceeded 31%, reaching a five-year high of 36% in 2023.

Semaglutide has been the key driver of Novo Nordisk’s growth in the past few years.

Let’s dig deeper and understand the company’s strengths and weaknesses in greater detail to understand how to play the stock after the recent price drop.

Semaglutide - NVO’s Growth Engine

Novo Nordisk enjoys around 54% value market share in the GLP-1 segment, primarily on the back of its semaglutide medicines.

Wegovy is a significant contributor to Novo Nordisk's revenues. Despite supply challenges limiting the company’s ability to meet investor sales expectations, Wegovy continues to show strong prescription growth, driving higher revenues and profits. The company is making substantial investments to expand production capacity to address rising demand. Additionally, Ozempic sales are contributing positively to overall revenues.

However, several companies like Amgen AMGN and Viking Therapeutics VKTX are making rapid progress in the development of GLP-1-based candidates in their clinical pipeline. These can pose strong competition to NVO in the future.

NVO’s Diversification Plans to Treat Other Indications

Novo Nordisk is actively exploring additional uses for semaglutide, including evaluating Wegovy for heart failure in diabetes and obesity patients, and Ozempic as a treatment for T2D and chronic kidney disease. The company is also studying semaglutide for nonalcoholic steatohepatitis. These efforts could expand the eligible patient base for the drug, pending approval.

Wegovy’s label was expanded in the United States in March 2024 to reduce the risk of serious heart problems in obese/overweight adults, which has been boosting its sales. The drug’s label was also recently expanded in the EU for the same indication. The company is also looking to expand the drug’s label to treat patients with obesity-related heart failure with preserved ejection fraction in the EU and U.S. markets. Additionally, a late-stage cardiovascular outcomes study, evaluating oral semaglutide (Rybelsus) as an adjunct to the standard of care for the prevention of serious heart problems in T2D patients, recently met its primary endpoint.

Beyond diabetes and obesity, Novo Nordisk is diversifying its portfolio by developing Mim8 for hemophilia A, with plans to submit it for regulatory approval by the end of 2024. The company also recently received a positive opinion from the advisory committee of the regulatory body in the EU, recommending the approval of Alhemo (concizumab) for haemophilia A or B with inhibitors. A final decision is expected by 2024-end. Alhemo is not approved in the United States.

NVO’s Premium Valuation, Mixed Estimates Movement

Novo Nordisk is trading at a premium to the industry, as seen in the chart below. Going by the price/earnings ratio, the company’s shares currently trade at 26.01 forward earnings, which is more than 16.35 for the industry.

NVO Stock Valuation

Earnings estimates for 2024 have increased from $3 to $3.24 per share over the past 30 days. During the same time frame, Novo Nordisk’s 2025 earnings estimates have decreased from $4.14 to $4.03 per share.

NVO Estimate Movement

The stock’s return on equity on a trailing 12-month basis is 86.32%, which is higher than 31.88% for the large drugmaker industry, as seen in the chart below.

NVO Return on Equity

Stay Invested in NVO Stock?

Novo Nordisk, currently carrying a Zacks Rank #3 (Hold), has boosted shareholder value in the past five years. Although the poor financial performance in the third quarter caused the stock price to slide, we remain confident that NVO is a good stock to retain. Its growing market share and profit margins suggest that the company has the potential for further growth in the years to come, primarily driven by increased sales of Wegovy and Ozempic. Though not as successful as its arch-rival, Lilly, yet, NVO is heavily investing in manufacturing to meet the rising demand for Wegovy.

Furthermore, the company is looking to expand the indications for Wegovy, Ozempic and Rybelsus to increase patient eligibility, which, if approved, would further boost revenues. Novo Nordisk is also developing new obesity treatments to stay competitive, especially in the U.S. market, which holds significant growth potential.

Thus, we can conclude that the temporary decline in the stock price should not bother long-term investors. In fact, such opportunities make for a lucrative entry point for potential new long-term investors. Investors who already own the stock should continue to hold it for long-term gains.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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