There is a long-running health crisis impacting the modern world. According to the World Health Organization, one in eight people worldwide were living with obesity as of 2022. Obesity causes various chronic diseases and conditions, including type 2 diabetes. An estimated 830 million people have diabetes, with type 2 being the most common.
Pharmaceutical giant Novo Nordisk (NVO -0.65%) built its business on insulin and has emerged as a leading innovator in GLP-1 agonists, relatively new drugs that treat obesity and type 2 diabetes by slowing digestion and reducing appetite. Researchers believe the GLP-1 agonist market could triple over the next decade to over $150 billion.
Should investors buy Novo Nordisk stock? Here is what to know.
Patients can't get enough of Novo Nordisk's GLP-1 agonists, which has created headaches for the company
The rampant success of GLP-1 agonists has been a windfall for Novo Nordisk. The company's trailing-12-month sales have almost doubled (up 81%) over the past three years, though this has come with growing pains.
Novo Nordisk's proprietary active drug is semaglutide, used in its flagship GLP-1 agonists -- Ozempic for type 2 diabetes and Wegovy for obesity. Management estimates it controls 63% of the global GLP-1 agonist market, up from 58% three years ago. Two companies, Novo Nordisk and arch-rival Eli Lilly, currently own 97% of the market for GLP-1 agonists.
The immense demand for Ozempic and Wegovy has also strained supply. Novo Nordisk hasn't been able to add manufacturing capacity fast enough. The U.S. Food and Drug Administration declared a national shortage of semaglutide in 2022, and it only recently came off the shortage list.
The shortage opened loopholes for telehealth companies to produce compounded generic versions. Compounders are currently in a post-shortage grace period, though some companies may try to continue selling personalized doses. Novo Nordisk may need to sue (and win) to remove these personalized compounded versions from the market.
Novo Nordisk trades at nearly its lowest price in a year
As big of an opportunity as GLP-1 agonists are, the market has cooled on Novo Nordisk. The shortage created headaches for the company, and the immense growth in GLP-1 agonists has attracted competition. Novo Nordisk, Eli Lilly, and other companies, including Pfizer, are developing drugs for the next wave of GLP-1 agonists. Upcoming drugs could include oral doses. If clinically effective, a successful oral treatment could theoretically threaten injected incumbents such as Ozempic and Wegovy. Most people would probably prefer a pill to a needle.
Indeed, the stakes are high. Novo Nordisk recently suffered a setback with CagriSema, its next-generation injectable drug in testing to treat both obesity and type 2 diabetes. The drug hit its primary goal in Phase III trials but wasn't as effective as hoped. Patients achieved 15.7% weight loss over 68 weeks, falling short of the 25% management hoped for.
The stock dropped on the news, but investors shouldn't overreact to these results. It is vital that CagriSema passed its primary goal, deeming the trial a success. While competitors are developing GLP-1 agonists, the trials for pharmaceutical drugs are rigorous. Most drugs fail. Additionally, many variables, such as efficacy and side effects, influence which drugs patients use.
Novo Nordisk is a market leader in diabetes and obesity. It's the company's specialty. Investors should think twice about betting against Novo Nordisk until firm data proves the company is ceding market share.
Is Novo Nordisk a buy?
NYSE: NVO
Key Data Points
The negative sentiment and recent market volatility have placed Novo Nordisk on the bargain rack.
Today, the stock trades at a price-to-earnings (P/E) ratio of 23, its lowest valuation in five years. Meanwhile, analysts estimate Novo Nordisk will grow earnings by an average of 24% annually over the long term. That's a PEG ratio of only 1.0, signaling compelling value in Novo Nordisk. I'm generally comfortable buying high-quality stocks at PEG ratios up to 2.0 to 2.5.
The core patents for semaglutide expire next year, but secondary patents that protect other aspects surrounding the drug could keep generic semaglutide out of the U.S. market until the early 2030s. New competitors could make their way through trials and into the market over the next five years, but Novo Nordisk's lucrative share of the GLP-1 agonist market seems intact for now, to say the least.
Therefore, I think buying Novo Nordisk stock at these prices will prove wise in hindsight.
