Should You Forget Novo Nordisk and Buy This Magnificent High-Yield Drug Stock Instead?

Shares of Novo Nordisk (NYSE: NVO) surged after the company introduced its GLP-1 weight loss drugs to the market. Investors correctly recognized the desirability of a weight loss drug, but, as often happens, the excitement on Wall Street overstated the opportunity. At this point, the stock has lost over two-thirds of its value since mid-2024.

Could high-yield Pfizer (NYSE: PFE) be a better investment opportunity?

The nature of the drug industry

Finding new drug candidates is hard and expensive. Developing and testing a promising candidate is hard and expensive. Navigating the regulatory process to bring a promising candidate to market is hard and expensive. Throughout the entire process, companies are in a race with other pharmaceutical companies to be the first to market with novel treatments.

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However, simply being first in a space doesn't guarantee a win. Drugs are unique, and sometimes drugs that basically have the same purpose have very different side effects, use conditions, costs, and outcomes. This is why Novo Nordisk being first to market with a GLP-1 weight loss drug wasn't enough.

Eli Lilly's (NYSE: LLY) weight loss drug tirzepatide is the big winner right now, with sales of Zepbound rising 185% year over year in the third quarter, and sales of Mounjaro (technically approved only for treating type 2 diabetes) increasing 109%. By comparison, Novo Nordisk reported 12% sales growth in its obesity treatment and diabetes care operations for Q3. Sure, the obesity side of that rose 37%, but it still pales in comparison to what's going on at Lilly.

It's little wonder that Eli Lilly's stock is soaring, while Novo Nordisk's shares are retreating from the emotionally driven peak they saw in 2024. If you're looking at Novo Nordisk as a turnaround story, however, you might want to broaden your search to an even more contrarian opportunity: Pfizer.

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They will all survive, but Pfizer is making giant moves

Eli Lilly, Novo Nordisk, and Pfizer are all highly respected drug companies. It's highly likely that each of these industry giants survives in the long term. However, Pfizer is currently facing more pressure to get its business back on track. That's translating into aggressive action.

Pfizer's stock rallied during the early portion of the coronavirus pandemic because of its COVID-19 vaccine and its treatment medication. Sales have slowed dramatically in that space as the world learned to live with the illness.

Meanwhile, Pfizer's internal GLP-1 candidate was unsuccessful. And, to add insult to injury, the company is facing the expiration of some key drug patents in the next couple of years. That's likely to lead to a patent cliff as generic competition to its branded drugs begins to emerge. None of these things is really unusual for a drug company, but Pfizer still has a lot on its plate right now.

Pfizer's most notable response has been to bulk up in the GLP-1 space. The board of directors approved the acquisition of Metsera, which has a strong weight-loss pipeline. And the company inked a deal to distribute a GLP-1 drug candidate from a Chinese company, if that candidate works out. Pfizer clearly plans to get back on track, no matter what it takes.

However, the real draw with Pfizer over Novo Nordisk is based on valuation. Although both companies have similar price-to-earnings multiples, Pfizer's ratios of price to sales, price to book value, and price to forward earnings are all notably lower. Investors seem to have lower expectations for the company, which could make it a better contrarian play than Novo Nordisk.

The key to the story, however, can be found in the success of Eli Lilly. Pfizer may seem like an also-ran today, but being a leader in the pharma sector doesn't guarantee long-term success. Pfizer could easily come from behind and surprise Wall Street with new drugs. In fact, if history is any guide, it will eventually do just that.

The big caveat with Pfizer

You might look at Pfizer's hefty 6.8% dividend yield and think of it as a dividend stock. That yield comes with a dividend payout ratio of over 100%, though, so it's probably best to regard Pfizer as a turnaround play. If reliable dividends are what you're after, Novo Nordisk's 3.6% yield and 35% payout ratio will probably be the better choice.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.