Novo Nordisk NVO shares have plunged 17.9% in a week due to poorer-than-expected efficacy data from a late-stage study of its next-generation subcutaneous obesity candidate, CagriSema. Per the data readout from the phase III REDEFINE 1 study, a weight loss of 22.7% was observed in patients treated with CagriSema, which missed NVO’s guidance of 25% weight loss at week 68, provided on the third-quarter earnings conference call.
Novo Nordisk’s failure favors its arch-rival in the obesity market space, Eli Lilly LLY, whose Zepbound (tirzepatide) continues to maintain the best-in-class title for obesity treatment. The highest dose of Zepbound has shown 25% weight loss over a similar duration in a late-stage study compared with 22.7% with CagriSema. Lilly also markets tirzepatide under the brand name, Mounjaro, for type II diabetes (T2D).
Another factor that has likely contributed to the steep decline in NVO’s stock price is the removal of Lilly’s tirzepatide injection products from the FDA’s drug shortage list after the regulatory body determined that LLY’s supply is currently meeting or exceeding demand and will continue to do so in the future. This shift suggests LLY can now meet the demand for obesity medications, potentially capturing a larger U.S. market share and boosting its revenues, while Novo Nordisk’s Ozempic (T2D) and Wegovy (obesity) remain on the list, limiting its sales opportunities. Adding to the setbacks, earlier this month, Lilly announced that Zepbound outperformed Novo Nordisk’s Wegovy (20.2% compared with 13.7%, respectively) in a weight-loss head-to-head study.
In the past six months, shares of Novo Nordisk have plunged 39.6% compared with the industry’s decline of 17.7%. The stock has also underperformed the sector and the S&P 500 during the same time frame, as seen in the chart below. NVO is currently trading below both its 50 and 200-day moving averages.
NVO Stock Underperforms the Industry, Sector & the S&P 500
Image Source: Zacks Investment Research
The steep drop in Novo Nordisk’s stock price in the past six months has left investors wondering whether to buy, sell, or hold the stock. Let’s dig deeper and understand the company’s strengths and weaknesses in greater detail to understand how to play the stock after the price drop.
Semaglutide - NVO’s Growth Engine
NVO’s success in the past few years is underscored by its marketed semaglutide (GLP-1 agonist) 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. Additionally, Ozempic sales are contributing positively to overall revenues. The company is making substantial investments to expand production capacity to address rising demand.
Novo Nordisk's parent company, Novo Holdings, has acquired Catalent, which is set to enhance production capacity for NVO’s semaglutide medicines. Analysts expect this move could resolve the FDA drug shortages for Wegovy and Ozempic. If such a decision is reached, compounding pharmacies will not be able to sell copies of the approved drugs anymore to meet demand, which is currently cutting into Novo Nordisk’s potential 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 metabolic dysfunction-associated steatohepatitis. These efforts could expand the eligible patient base for the drug, pending approval.
Wegovy’s label has been expanded in the United States and the EU to reduce the risk of serious heart problems in obese/overweight adults, which has been boosting its sales. The company is looking to further expand Wegovy’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. Earlier this month, the EMA’s advisory committee adopted a positive opinion recommending the label expansion of Ozempic to treat patients with T2D and chronic kidney disease in the EU. A final decision is expected soon.
Beyond diabetes and obesity, Novo Nordisk is diversifying its portfolio by developing Mim8 for hemophilia A, with plans to submit it for regulatory approval soon. 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 soon. 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 22.23 forward earnings, which is more than 15.64 for the industry.
NVO Stock Valuation
Image Source: Zacks Investment Research
Earnings estimates for 2024 have increased from $3.07 to $3.24 per share over the past 60 days. During the same time frame, Novo Nordisk’s 2025 earnings per share estimates have decreased from $4.18 to $4.01.
NVO Estimate Movement
Image Source: Zacks Investment Research
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
Image Source: Zacks Investment Research
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 recent setback, following the failure of CagriSema to achieve the weight loss target, caused the stock price to slide, we remain confident that NVO is a good stock to retain for long-term investors. Its growing 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. Moreover, the closing of the Catalent deal is a huge win for the company as it is set to significantly boost Ozempic and Wegovy production in 2025. The potential removal of Ozempic and Wegovy from the FDA’s shortage list will also allow the company to claw back its market share. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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 novel 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. Short-term investors may consider selling the stock which will take some time to recover.
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