If an unlikely situation occurs where you have to pick only one pharma company to invest $1,000 in over the next few months, Novo Nordisk (NVO +0.59%) should be near the top of the list. Between a slew of new cash-cow medicines for diabetes and weight management, and a credible path to commercializing quite a few more soon, it has a ridiculously sunny future.
So here's why this Danish player is a no-brainer buy.
NYSE: NVO
Key Data Points
Why this stock deserves a spot in your portfolio
Novo Nordisk is worth a purchase with your $1,000 because it's going to be practically printing money for years and years thanks to its wonder drug called semaglutide, which treats type 2 diabetes as well as obesity. You've probably seen advertisements for medicines like Rybelsus, Ozempic, and Wegovy, all of which are based on different formulations of semaglutide. Thanks to those three brands and the company's older medicines, it's the global market leader in the obesity and diabetes care markets. And as a result of increasingly unhealthy modern lifestyles, both those markets are growing, with Novo Nordisk anticipating that it'll continue to capture the majority of the growth.
But that process is just starting, and the benefits of market leadership are only beginning to emerge in the company's financial performance. In 2022, it made more than $7.8 billion in net income, up 21.9% from three years prior. Furthermore, of the estimated 537 million people worldwide with diabetes, only 6.3 million are currently treated with Novo Nordisk's latest therapies, though in total, its portfolio of diabetes medicines treats 35 million. Therefore, it has a gargantuan market to penetrate and a large base of existing patients that may be eligible to switch to its newer treatments, generating more money in the process. Likewise, there are 764 million people living with obesity, and its efforts to penetrate the market are in their (relatively) early days.
Finally, its pipeline is fairly large, and it's currently awaiting regulators to give the final green light for three of its medicines. It's not done developing semaglutide, either, so investors should expect it to commercialize additional candidates in the coming years. Plus, it also has 10 programs in phase 3 clinical trials, which, if approved, could start generating sales within the next three years. In short, maintaining plenty of consistent growth won't be a problem anytime soon.
Know the risks
There's one important near-term risk and one important long-term risk when it comes to Novo Nordisk.
The near-term risk is that its valuation is a bit inflated. At the moment, its price-to-earnings (P/E) multiple is 44.2, which is more than twice the market's average P/E of 21.6. That means it will need to continue to grow at well above the market's average pace to maintain its valuation at the present level, which is a fairly realistic prospect but not guaranteed.
The more important and longer-term risk stems from the fact that semaglutide is a relatively new medicine, first approved by the Food and Drug Administration (FDA) in 2019, so it does not have an extensive history of human use. Its short-term side effects are manageable and well-characterized, but it simply hasn't been in circulation long enough to know much about how it will affect people over the course of years and eventually decades. Plus, as the drug is likely going to be used by many millions of people around the world, there are significant chances of new and rare side effects coming to light. Aside from the chance of generating bad PR, the company could eventually be exposed to lawsuits stemming from people hurt by previously unrecognized side effects.
But that's pretty much always the case when it comes to novel medicines, and there isn't any reason to suspect that semaglutide or any of Novo's other products are especially risky in that regard. So, it shouldn't be considered a barrier to buying the stock, even if you prefer safer investments.
