Is Novo Nordisk Stock a Buy?

For years, Denmark-based Novo Nordisk (NYSE: NVO) was a fairly traditional develop-and-market pharmaceutical company that escaped notice by many investors. Though listed on American stock exchanges, it didn't distinguish itself much in the vast sea that is the domestic biotech and pharmaceutical sectors.

This changed dramatically in 2021 when the company's Wegovy won U.S. Food and Drug Administration (FDA) approval for weight loss. Obesity is a problem in the United States and elsewhere, and Wegovy offers a solution. But popularity breeds competition, and the drug isn't the only weight-loss player in the game now.

So, should you still consider buying shares of this drugmaker?

Here comes the competition

Wegovy enjoyed being the ruler of the obesity market until November 2023, when Eli Lilly's (NYSE: LLY) Zepbound -- essentially a repackaged version of Lilly's successful Mounjaro diabetes treatment, much as Wegovy was a rebranding of Ozempic -- was approved for obesity by the FDA.

Since then, boosted by Zepbound, Eli Lilly's stock has zoomed 43% higher, eclipsing the 27% rise in the S&P 500 index. Unfortunately for Novo Nordisk investors, shares of the Danish pharmaceutical have dived by 36% across that stretch of time.

We can't only blame Lilly for this. Given the massive demand for relatively simple weight-loss treatments -- an easier means of slimming than an intensive routine of diet and exercise -- numerous companies have been hard at work pushing such medications through their pipeline.

To single out one that has a better-than-average chance: Clinical-stage biotech Viking Therapeutics (NASDAQ: VKTX) has a GLP-1-based candidate, VK2735, that outperformed in a phase 2 clinical trial and should soon graduate to a wider phase 3 study. The drug is sure to be a contender if it does well and wins approval, not least because it could end up being a monthly injection instead of a weekly one like Wegovy and Zepbound.

On top of that, Viking is developing an oral form of the medication. That would give it an additional leg up on the currently approved drugs, as both are administered by injection.

Anticipating a monster rise

In these early stages, it's tough to guess which company or companies will lead the pack in weight loss down the road. It's easy to imagine Novo Nordisk losing share against the very well-capitalized and prominent Eli Lilly. We can also envision it taking a punch or two from an approved oral version of Viking's VK2735; it's far easier for patients to swallow a pill once a month than jab themselves weekly.

Here's the catch, though -- in a way, it almost doesn't matter. Nearly every analyst estimate for both the U.S. and global obesity drug markets anticipates skyrocketing growth. And as we've seen with other hot products in various industries, a rising tide can raise many boats.

One of the numerous bullish projections was in a joint report from Morningstar and PitchBook, published last September. The two companies believe sales for such treatments could hit $200 billion by 2031. Compare that to the combined 2024 sales of Novo Nordisk and Eli Lilly's obesity drugs -- $14.8 billion -- and you're looking at a market primed and ready to explode.

Even if a wave of new obesity drugs crashes onto the scene -- Morningstar and Pitchbook are expecting no less than 16 product approvals by 2029 -- that's still a massive pie. If the worst-case scenario occurs and Novo Nordisk's market share slims at Wegovy-like rates, there will still be much more of an addressable market to be shared.

Besides, Wegovy has the kind of high brand recognition ignited by intense word of mouth; unless it's totally eclipsed by a much more effective, low-maintenance competitor, it should continue to be a presence. Remember, too, that the drug has high brand value due to that first-mover advantage and sheer popularity. That makes it hard for even a powerful competitor with a highly effective product to entirely crush it.

Meanwhile, Novo Nordisk has been working to innovate its semaglutide treatments. It recently came to light that the company is developing an oral form of Ozempic, Wegovy's sibling medication, which is FDA-approved for diabetes.

One stock that probably won't stay cheap

With Wegovy in its portfolio, Novo Nordisk is a very good bet to continue being a winner. As it's currently considered something of an underdog, with its stock priced accordingly, it's also trading at what I feel is a discount. I think it won't stay that way, and believe it's a fine candidate for a buy.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Novo Nordisk and Viking Therapeutics. The Motley Fool has a disclosure policy.