Novo Nordisk (NYSE:NVO) has been one of the top-performing stocks since the pandemic, and more recently, NVO stock has surged 78% in the past year. Its weight loss drugs have been key to this success, but I’m wondering whether all the upside has been priced in. With a price-to-earnings-to-growth (PEG) ratio of 2.57x, I’m not sure the valuation is justified. For now, I’m neutral.
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Novo Nordisk and Wegovy
Wegovy and Ozempic, weight management drugs developed by Novo Nordisk, have significantly transformed the company’s outlook. Containing semaglutide, originally used in diabetes treatment, the drugs have shown exceptional efficacy in helping individuals achieve weight loss.
Wegovy is more effective than Ozempic and can be taken with a slightly higher dosing. Clinical trials revealed that patients using Wegovy experienced an average weight loss of around 15% during the trial period, making it a game-changer for weight loss medication.
Semaglutide works, according to experts, because it allows insulin to work better and depresses appetite. This efficacy has translated into strong market demand, particularly as obesity rates continue to rise globally. The anticipated impact of these drugs on obesity rates has led some analysts to project poorer earnings 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, the share price has surged more than 200%. This reflects the optimism about the company’s earnings trajectory and the impact of the weight loss drugs on the company’s revenues to date. In Q1 of 2024, Novo said that sales were up 22% year-over-year. Moreover, the Danish company’s Obesity Care business segment saw growth of 42%
However, the Wegovy gravy train won’t last forever. Novo Nordisk’s semaglutide patent, covering Wegovy and Ozempic, will expire in China in 2026, in Europe (2031), and in the U.S. (2032).
In 2021, a Chinese court invalidated its patent following a challenge from a Chinese pharmaceutical company. Novo Nordisk has appealed the decision. At least 15 generic versions of these drugs are being developed in China, with 11 in late-stage trials. As it stands, Novo Nordisk only has two years to cement its position in China.
Additionally, Novo Nordisk faces competition from Eli Lilly (NYSE:LLY) globally and in China. Eli Lilly’s diabetes drug, tirzepatide, was approved in China in May 2024, and its obesity drug, Zepbound, is 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 in order to prevent disruption elsewhere in the world.
Novo Nordisk’s Growth Expectations
Perhaps unsurprisingly, the importance of Wegovy and Ozempic is reflected in the revenue and earnings forecast for the firm. While only two analysts are forecasting the company’s revenue and earnings through to 2033, we can see the moment when the semaglutide patent expires.
According to forecasts, Novo Nordisk’s revenues are expected 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. Moving through to 2031, revenues peak at $88.8 billion before falling to $73.7 billion in 2032. Predictably, earnings per share (EPS) are expected to grow at a similar pace, rising from $2.70 in 2023 to $3.44 in 2024, and then $4.55 in 2025 and $5.02 in 2026.
Of course, Wegovy isn’t 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 like CagriSema, as well as Novo Nordisk’s move to expand manufacturing capacity, particularly in fill-finish operations. The latter, the analysts noted, would address current supply constraints and aid future supply developments.
Is Novo Nordisk’s Valuation Justified?
Novo Nordisk’s earnings are expected to grow around 16.1% annually throughout the medium term. This is really impressive for any company. However, is it enough to justify the non-GAAP forward price-to-earnings (P/E) ratio of 41.5x?
Personally, I’m a little skeptical. I appreciate that biotech and pharma companies deserve to trade at higher multiples because of the long-term demand for innovation in healthcare. However, the stock’s price-to-earnings-to-growth (PEG) ratio currently sits at 2.57x. That’s a 41.7% premium to the healthcare sector.
Is Novo Nordisk a Buy, According to Analysts?
On TipRanks, NVO comes in as a Strong Buy based on six Buys, one Hold, and zero Sell ratings assigned by analysts in the past three months. The average Novo Nordisk stock price target is $149.60, implying 4.8% upside potential.
The Bottom Line 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-changing for the Danish firm — which is now Europe’s largest listed company — delivering more than 200% share price growth over the last three years.
However, I’m a little concerned that the stock is trading so close to its share price target and that its PEG ratio is at a significant premium to the sector as a whole. Personally, I’m keeping my powder dry, as I believe there are probably clearer examples of undervalued stocks in this sector of the market. It might be priced for perfection.
