GLP-1 weight-loss drugs burst onto the scene when Novo Nordisk (NVO -2.61%) introduced Wegovy to the world. There was so much demand that the drug maker couldn’t keep up. That shows the opportunity that this new class of weight-loss drugs offers, but it also explains why Novo Nordisk, while first to market, isn’t the industry leader today. That title goes to Eli Lilly (LLY -2.21%).
After a massive decline of over 66% from its 2024 high, traditional valuation metrics suggest Novo Nordisk’s stock is cheap. However, the bigger question you need to consider is the pharmaceutical company’s ability to compete against Eli Lilly’s now-dominant GLP-1 drugs. Here’s a quick look at what you need to know about Novo Nordisk before you buy it.
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There is always a competitor looking to knock you off your perch
Two of the most important things to understand about the pharmaceutical sector are that it is intensely competitive and driven by innovation. Just because a company has a blockbuster drug doesn’t mean it has a lock on a medical condition. There’s also the small issue of patent protection, which is time-limited for new drugs. So, even in the best-case scenario, a drug maker can only expect to generate outsize profits from a successful drug for a short period.
That’s the backdrop within which you have to view Novo Nordisk. Yes, it was the first company to market with a GLP-1 weight-loss drug, but it quickly lost its lead to Eli Lilly. That’s a big reason why investor sentiment has turned against Novo Nordisk. But Wall Street has a habit of going too far. This is where traditional valuation metrics come in for Novo Nordisk.
The stock’s price-to-sales ratio is 4x as of this writing compared to a five-year average of 8.6x. Its price-to-earnings ratio is 11.6x compared to a five-year average of 25.1x. And its price-to-book ratio is 6.1x versus a longer-term average of 16.4x. By comparison, using the valuation metric that most investors lean on, the average drug maker’s P/E is 26.5x.
Today’s Change
(-2.61%) $-1.22
Current Price
$45.38
Key Data Points
Market Cap
$156BMarket cap calculated using publicly traded shares outstanding only. Does not include unlisted, private, or dual-class non-traded shares. Implied market cap may vary.
Day’s Range
$45.27 – $45.91
52wk Range
$35.12 – $64.16
Volume
5M
Avg Vol
12M
Gross Margin
80.65%
Dividend Yield
3.86%
From this perspective, Novo Nordisk does, in fact, look attractively priced. Value-focused investors would probably find it interesting. But add in a 3.7% dividend yield and a payout ratio below 40%, and the story could be attractive for dividend lovers, too.
Can Novo Nordisk get back in the game?
The problem here is that Novo Nordisk is in the middle of a transition period. First, the company is attempting to use its new GLP-1 pill to regain share in the GLP-1 weight-loss space. The Wegovy pill is seeing strong early success, but it remains unclear whether it will be enough to improve Novo Nordisk’s competitive position against industry leader Eli Lilly, which has also recently introduced a GLP-1 pill.
Today’s Change
(-2.21%) $-25.34
Current Price
$1,124.02
Key Data Points
Market Cap
$1.1TMarket cap calculated using publicly traded shares outstanding only. Does not include unlisted, private, or dual-class non-traded shares. Implied market cap may vary.
Day’s Range
$1113.55 – $1134.53
52wk Range
$712.05 – $1292.65
Volume
967.2K
Avg Vol
2.9M
Gross Margin
83.40%
Dividend Yield
0.58%
Second, Novo Nordisk is attempting to change to a volume-driven model. That has meant lowering prices on its GLP-1 drugs in an effort to get more customers to use them. In the short term, this has resulted in weakness in revenue and earnings. As with the company’s new pill, it is unclear whether a focus on volume will work out as hoped. In other words, there remains a significant amount of uncertainty.
Is Novo Nordisk worth buying?
Value investors and dividend investors should probably take a deep dive into Novo Nordisk. There is a lot of uncertainty right now as the company, effectively, attempts to turn its business around in the GLP-1 space. However, it is a well-respected drugmaker offering innovative products in a niche health area (weight loss) with significant long-term potential. Even if it doesn’t unseat Eli Lilly from its GLP-1 lead, Novo Nordisk should still be able to generate significant revenues and earnings, and support an attractive yield. Given its valuation, the risk/reward balance is probably leaning toward reward right now. In other words, Novo Nordisk is, indeed, too cheap to ignore.