Is Novo Nordisk Stock a Buy?

It hasn’t been a great period for investors in Novo Nordisk (NVO 0.66%) despite its ongoing status as one of the pharmaceutical industry’s apex competitors in the field of cardiometabolic drugs. Its shares are down by more than 20% in the last 12 months, and, given a few new competitive developments, the next 12 months might not see much in the way of relief for shareholders unless there’s an upset of some kind.

But it’s a mistake to write off this behemoth due to a weak year. Let’s investigate what’s going on and whether the stock is still worth buying for a long-term hold.

The bull thesis isn’t what it used to be

Novo is currently in a golden age of growth. Over the last five years, its trailing-12-month revenue grew by 109%, reaching $39.3 billion, thanks to its portfolio of potent drugs for cardiometabolic illnesses like diabetes and obesity.

For the company to continue to grow at the same pace it has been recently, its blockbuster drugs, specifically its weight loss drug Wegovy, need to continue to retain a sizable share of the market. As of the third quarter, it claimed to have a 73% share of the global market for anti-obesity medicines, though that sum includes its older drugs as well as Wegovy.

There’s more than one way it could try to guarantee its hold on the market moving forward. Spending on additional research and development (R&D) programs to offer new formulations and expand the drug’s total addressable market, offering customers coupons or better pricing terms depending on their insurance and ability to pay, and expanding its manufacturing facilities to ensure that Wegovy is in better supply than competing products are all avenues that Novo is pursuing already. And, if it were possible, it could also run new clinical trials directly comparing the safety and efficacy of its product against the medicines made by key competitors like Eli Lilly, (LLY 1.67%), which makes a newer weight loss drug called Zepbound.

But that would only make sense to do if management were confident that Wegovy is actually more effective than the other product. As of Dec. 4, there’s no reason for it to be that confident, as Lilly took the initiative to run a direct comparison study, and the preliminary results do not appear to favor Novo Nordisk whatsoever.

Per the partial data released from that phase 3b clinical trial, over 72 weeks of once-weekly treatment with either Zepbound or Wegovy, patients taking Zepbound lost 20.2% of their weight on average, whereas patients taking Wegovy lost just 13.7% on average. Lilly’s drug also performed better on all five of the secondary endpoints in the study, which examined factors like waist circumference, among others. Side effect burdens were similar to earlier clinical trials for both medicines.

There’s no way to interpret these results as being positive for Novo Nordisk.

One of its best-selling drugs is unambiguously not as effective at its intended purpose as a rival’s. And that’s a new reason to be much more cautious if you’re thinking of investing in its stock, even when appreciating the fact that it has many other drug segments that are unaffected, and many other promising programs cooking in its pipeline.

It isn’t all bad

It’s true that Novo needs Wegovy to continue to perform strongly for its top line to do the same. But — and this is a critical point — it can and will continue to make billions from sales of Wegovy even if Zepbound is better in most respects.

The reason for this is simple: Eli Lilly can barely manufacture enough of its drug to meet demand, and it was in a state of shortage for most of this year and last year. It’s still investing billions in spinning up new manufacturing facilities to ensure that supply capacity stops being a constraint on growth. What’s more, Novo Nordisk is in exactly the same position with Wegovy, so its investments in manufacturing haven’t stopped either.

At least for the moment, regardless of efficacy, there is a colossal amount of demand for weight loss medications. The amount of supply is becoming more proportional to the amount of demand. But even if 100% of patients on Wegovy suddenly asked their doctors to switch to Zepbound to get a faster rate of weight loss, they couldn’t, as there simply isn’t enough supply for that.

In other words, for now, Novo Nordisk will probably not even need to fight any harder than it was before to retain its market share with Wegovy despite the new study.

The implication of the above is that there is still plenty of growth on the way, so there’s still a solid investment thesis for buying the stock, so long as you don’t concentrate too much of your portfolio into it. Understand that its long-term performance is no longer assured, even if it isn’t facing a bearish outlook either.

Just appreciate that eventually the competitive landscape will shift, and, assuming that none of Novo’s pipeline programs seeking to make even better weight loss medicines pan out, it’ll then face some serious pressure.