Novo Nordisk (NYSE: NVS) has been one of the best performing stocks since the pandemic, and most recently, NVO stock is up 78% over the past year. The weight loss drugs have been key to that success, but I wonder if all of the upside is already priced in. At a price-to-earnings-to-growth (PEG) ratio of 2.57, I’m not sure the valuation is justified. For now, I’m neutral.
Novo Nordisk and Wegovy
Wegovy and Ozempic, two weight management drugs developed by Novo Nordisk, have significantly changed the company’s prospects. The drugs contain semaglutide, which was originally used to treat diabetes, and have proven to be extremely effective in weight loss.
Wegovy is more effective than Ozempic and can be taken at a slightly higher dosage. Clinical studies have shown that patients taking Wegovy experienced an average weight loss of about 15% during the trial period, making it a breakthrough weight loss drug.
Semaglutide works, experts say, because it makes insulin work better and curbs appetite. This effectiveness has led to strong market demand, especially as obesity rates continue to rise around the world. The expected impact of these drugs on obesity rates has led some analysts to predict worse profits for companies like Smith & Nephew (LSE:SN), which specializes in hip replacement.
Wegovy was first approved by the FDA to treat obesity in June 2021, and over the past three years, its share price has risen by more than 200%, reflecting optimism about the company’s earnings performance and the impact of the weight-loss drugs on the company’s revenues to date. In the first quarter of 2024, Novo said revenues increased by 22% year-on-year. In addition, the Danish company’s Obesity Care business segment recorded 42% growth.
However, the Wegovy gain will not last forever. Novo Nordisk’s semaglutide patent, which covers Wegovy and Ozempic, expires in China in 2026, in Europe (2031) and in the US (2032).
In 2021, a Chinese court invalidated the company’s patent following a lawsuit by a Chinese pharmaceutical company. Novo Nordisk has appealed the decision. At least 15 generic versions of these drugs are being developed in China, 11 of which are in advanced testing. As it stands, Novo Nordisk has only two years to consolidate its position in China.
In addition, Novo Nordisk competes with Eli Lilly (NYSE: LLY) worldwide and in China. Eli Lilly’s diabetes drug tirzepatide was approved in China in May 2024, and its obesity drug Zepbound is currently under review. Wegovy was approved by Chinese authorities in June, and Novo Nordisk is reportedly planning a limited launch in the world’s second-most populous country to avoid disruption in other parts of the world.
Novo Nordisk’s growth expectations
Perhaps not surprisingly, the importance of Wegovy and Ozempic is reflected in the company’s revenue and profit forecasts. While only two analysts forecast the company’s revenue and profits through 2033, we can see the point at which the semaglutide patent expires.
Novo Nordisk’s revenues are forecast to grow from $33.7 billion in 2023 to $41.8 billion in 2024, $50.5 billion in 2025, and then $58.2 billion in 2026. By 2031, revenues will peak at $88.8 billion before falling to $73.7 billion in 2032. Earnings per share (EPS) are expected to grow at a similar pace, rising from $2.70 in 2023 to $3.44 in 2024, then to $4.55 in 2025, and $5.02 in 2026.
Of course, Wegovy is not the company’s only product, and analysts have pointed to a strong and innovative pipeline. BMO Capital recently pointed to the promising development of next-generation assets such as CagriSema, as well as Novo Nordisk’s move to expand production capacity, particularly in its fill-finish operations. The latter, analysts said, would address current supply constraints and support future supply development.
Is Novo Nordisk’s valuation justified?
Novo Nordisk’s earnings are expected to grow at around 16.1% annually over the medium term. That’s impressive for any company, but is that enough to justify the non-GAAP price-to-earnings (P/E) ratio of 41.5?
Personally, I’m a little skeptical. I know that biotech and pharmaceutical companies deserve a higher price due to the long-term demand for healthcare innovation. However, the stock’s price-to-earnings-to-growth (PEG) ratio is currently 2.57. That’s a 41.7% premium to the healthcare sector.
Is Novo Nordisk a buy according to analysts?
On TipRanks, NVO is rated a strong buy as analysts have issued six buy recommendations, one hold recommendation and no sell recommendations over the past three months. The average price target for Novo Nordisk shares is $149.60, implying an upside potential of 4.8%.
The conclusion on Novo Nordisk
Novo Nordisk is currently the dominant player in the weight management and diabetes space. Wegovy and Ozempic appear to have been game-changers for the Danish company – which is now Europe’s largest listed company – and has seen its share price rise by over 200% in the last three years.
However, I am a little concerned that the stock is trading so close to its price target and that its PEG ratio is significantly higher than the sector as a whole. Personally, I am holding off as I believe there are probably clearer examples of undervalued stocks in this sector of the market. The price could be perfect.
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