Novo Nordisk’s NVO shares gained 8.5% on Friday after the company announced positive top-line data from an early to mid-stage study of its investigational candidate, amycretin, in overweight/obese patients. The study met its primary safety endpoint as amycretin demonstrated a safety profile consistent with incretin-based therapies. Superior dose-dependent weight loss was also observed upon treatment with the candidate over 36 weeks compared to placebo.

However, this is likely to be a short-term win for the company as amycretin is only in the early stages of development. We note that clinical development involves a high degree of risk. Clinching a nod for the pipeline candidates has become more difficult due to the tough regulatory environment. Additionally, several other factors have significantly contributed to the decline of the stock recently.

Last month, Novo Nordisk’s shares plunged after it failed to meet the efficacy guidance for another investigational obesity candidate, CagriSema. The candidate demonstrated a weight loss of 22.7% in treated patients over 68 weeks, lower than the guided weight loss of 25%. The failure favored Novo Nordisk’s arch-rival, Eli Lilly LLY, in the obesity market space 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. Lilly also markets tirzepatide under the brand name, Mounjaro, for type II diabetes (T2D).

In the past six months, shares of Novo Nordisk have plunged 31.7% compared with the industry’s decline of 13%. 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.

NVO’s Growth Prospects for Semaglutide at Risk

NVO’s success in the past few years is underscored by its marketed semaglutide (GLP-1 agonist) medicines, marketed as Ozempic pre-filled pen and Rybelsus oral tablet for T2D and as Wegovy injection for weight management.

Wegovy is a significant contributor to Novo Nordisk's revenues. Despite supply challenges limiting the company’s ability to meet investor sales expectations, Wegovy has shown 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.

However, Medicare has selected NVO’s semaglutide medicines for the second round of price negotiations in 2025. For continued coverage of its semaglutide medicines under Medicare, Novo Nordisk has until Feb. 28, 2025, to decide if it will participate in negotiations or pay a large tax on U.S. sales of the drugs. Either way, a decline in the company's profit margins is anticipated in the future. This is a huge blow for the company.

Moreover, Lilly’s tirzepatide injection products have been removed from the FDA’s drug shortage list. 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 and Wegovy remain on the list, limiting its sales opportunities. Adding to the setbacks, Lilly’s Zepbound had earlier outperformed Novo Nordisk’s Wegovy (20.2% compared with 13.7%, respectively) in a weight-loss head-to-head study. This could result in a change in patient preference from Wegovy to Zepbound, again leading to a loss of market share.

Several other 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 Label Expansion Plans to Boost Demand

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 (CKD). 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. A regulatory filing seeking the label expansion of Ozempic to treat patients with T2D and CKD is currently under review in the EU.

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. Alhemo (concizumab) recently received approval in the EU for treating haemophilia A or B with inhibitors. Alhemo is not approved in the United States.

NVO’s Premium Valuation, Declining 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 22.73 forward earnings, which is more than 16 for the industry.

NVO Stock Valuation

Image Source: Zacks Investment Research

Earnings estimates for 2024 have decreased from $3.26 to $3.13 per share over the past 60 days. During the same time frame, Novo Nordisk’s 2025 earnings per share estimates have decreased from $4.10 to $3.79.

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

How to Play NVO Stock

Given Novo Nordisk's recent challenges, short-term investors may want to consider selling this Zacks Rank #4 (Sell) stock. Rising competition in the obesity market, coupled with Medicare's push for price reductions, has put pressure on NVO’s growth prospects. Additionally, supply constraints for its semaglutide medicines have exacerbated the situation. While the company has been making significant investments to increase production, it has yet to match the success achieved by Lilly. You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term investors who already own the stock should consider holding onto it, as the promising amycretin data announced last week could signal the beginning of more positive updates, potentially driving the stock price higher and creating significant value in the future. Additionally, the company is working to expand the indications for Wegovy, Ozempic, and Rybelsus, aiming to increase patient eligibility—a move that, if approved, could further boost revenues. Novo Nordisk is also developing innovative obesity treatments to maintain its competitiveness, particularly in the U.S. market, which offers substantial long-term growth potential. The recent decline in the stock price over the past six months presents an attractive entry point for new long-term investors.

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