Paying a high premium for Novo Nordisk stock may be justifiable based on the company’s significant growth opportunities.
Novo Nordisk (NVO -8.37%) is a big name in diabetes care and weight loss. And that’s the primary reason people invest in the business today: the lucrative opportunities it has in those areas of healthcare.
But the company’s drugs have the potential to help people with even more conditions. That’s why, although some investors might see it as expensive, I think the stock may be undervalued. There’s still room for Novo Nordisk’s business to grow much bigger.
GLP-1 drugs to help with Alzheimer’s?
Glucagon-like peptide-1 (GLP-1) drugs have been demonstrating in clinical trials that they can help with a variety of conditions. And by reducing cravings, the drugs may provide brain-related benefits as well. One particularly promising opportunity is in treating people with Alzheimer’s disease and other types of dementia.
What’s encouraging for investors is that it isn’t the company’s flagship products Ozempic and Wegovy that have been demonstrating positive results — its other products that have been showing promise. A study from Imperial College, London, which involved over 200 people with mild Alzheimer’s disease, showed that liraglutide — the active ingredient in Victoza and Saxenda — may reduce cognitive decline by up to 18% after a year of treatment.
Novo Nordisk already has a trial ongoing to test the effectiveness of semaglutide — the active ingredient in Ozempic and Wegovy — in treating Alzheimer’s. But if the company had multiple drugs (especially outside of just its top sellers) with promising growth opportunities, that could help attract even more bullishness to this already scorching-hot stock; in the past five years, shares of Novo Nordisk have risen by more than 400%.
Novo Nordisk could use catalysts besides Ozempic and Wegovy
There’s a lot of excitement around Ozempic and Wegovy, but if Novo Nordisk has other drugs that can grow its sales, they could make it easier to justify paying a high premium for the healthcare stock. Last year, it was mainly Ozempic and Wegovy that were responsible for Novo Nordisk’s top-line growth. Insulin revenue declined by 9%, and sales of Victoza and Saxenda fell by 30% and 4% respectively. If those products can get going and generate strong growth numbers, they could make Novo Nordisk a much better and safer investment to hang on to.
Currently, the stock trades at around 40 times its trailing earnings. For Novo Nordisk to be able to maintain such a high premium, it will need to convince investors that it’s a solid growth stock to own. Enhancing its growth prospects beyond just a couple of products is certainly one way to do that.
Is Novo Nordisk stock a buy?
Novo Nordisk is a leading company in both weight loss and diabetes care. If Victoza and Saxenda can give the business a boost, that will be great news for investors. But it could take years before we learn whether those drugs could be possible treatment options for Alzheimer’s; the only trial the company has ongoing right now involving Alzheimer’s is for semaglutide, not liraglutide.
It’s a risky proposition to invest in a stock based on the assumption of future approvals or label expansions. It would be a nice bonus if liraglutide obtains approval as a possible treatment for Alzheimer’s. But for now, the primary reason to buy shares of Novo Nordisk is its opportunities in weight loss and diabetes care, which may already be promising enough to justify the stock’s valuation.
Alzheimer’s disease is a condition that Novo Nordisk’s products may one day help treat. And that possibility underscores why you may not want to put too much emphasis on earnings or other valuation multiples when deciding whether to invest in the stock: There’s still so much potential out there for Novo Nordisk beyond weight loss and diabetes care.
Even though it may seem expensive today, Novo Nordisk’s stock may look like a bargain in the future.