The idea that people could take a miracle drug to lose weight has been a foundation for scams going back decades. However, that's no longer the case. Pharmaceutical company Novo Nordisk (NVO +1.23%), traditionally an insulin manufacturer, has developed two products that help people lose weight. These products have gone viral in the United States, and have analysts racing to raise Novo Nordisk's forward-looking growth estimates.
But the shares are already up nearly 70% over the past 12 months. So let's crunch the numbers to help determine whether Novo Nordisk's success can last, and whether there's still an upside in the stock.
NYSE: NVO
Key Data Points
A needle-based weight-loss sensation
Novo Nordisk built its business on diabetes, introducing slow-acting insulin in 1936. Today, it's one of a handful of manufacturers that produce insulin.
In 2017, the company took a major step forward in the diabetes industry by bringing Ozempic to market. Ozempic is approved to treat type 2 diabetes. It's a glucagon-like peptide-1 (GLP-1) receptor agonist taken in shot form, and mimics a hormone in your brain that tells you you're full and slows digestion. Ozempic technically isn't approved for weight loss, though it's reportedly become popular with celebrities for its ability to help with that goal.
Novo Nordisk followed Ozempic up with Wegovy in 2021; it's the same base drug, but approved for weight loss and management. Wegovy's launch has triggered rapid growth for Novo Nordisk, which is essentially selling the product as fast as it can produce it.
NVO Revenue (Quarterly YoY Growth) data by YCharts.
Sales for Novo Nordisk's obesity care product group grew by 157% year over year through the first half of 2023, primarily driven by demand in the U.S. Of course, America has an obesity rate of 36%, and 69% of the population is at least overweight. Considering the country's 332 million people, that's a huge market.
Growth could continue for years
The weight-loss market could drive sustained growth for Novo Nordisk. Analysts have estimated that Ozempic and Wegovy will essentially double the company's earnings growth rate, which has a lot to do with why the stock has risen so much over the past year.
NVO EPS LT Growth Estimates data by YCharts.
A lucrative market attracts competition, and Novo Nordisk is seeing that play out. Eli Lilly has developed a similar drug called Mounjaro, which has been approved to treat type 2 diabetes and is angling for weight-loss approval. Novo Nordisk CEO Lars Jorgensen recently commented that the upside in the U.S. for weight-loss drugs is so significant that he expects his company to thrive despite competition.
Is the stock a buy?
The company's stock shot higher after recent news that semaglutide, the base drug for Ozempic and Wegovy, can cut the risk of heart disease by 20% in obese and overweight individuals. Unfortunately, that price spike complicates the valuation for prospective investors.
The company trades at a forward price-to-earnings ratio (P/E) of nearly 36, using analyst estimates for 2023 earnings. While earnings growth should become more substantial, that's still a PEG ratio of 1.8, implying the stock isn't cheap -- even as the company grows earnings at 20% annually.
Investors could slowly add to their positions over time, since nobody knows what stock prices will do in the short term. Buy gradually so that you're not jumping in with both feet at the wrong time, and hope that a future dip will allow you to load up at a better valuation.
