Unless you've been living under a rock, you've probably heard of Novo Nordisk's (NVO 3.19%) blockbuster weight-loss drug Ozempic. And if the enthusiasm continues, the company could be making money from it (and similar follow-on therapies) for many years to come. That very narrative is a big part of the reason why Novo's stock is pricey at the moment. But it's worth buying anyway. Here's why.
You'll need to pay a lot to own its shares
The biggest stumbling block for investors considering Novo Nordisk stock is its valuation. Its price-to-earnings (P/E) multiple is 40, whereas the average P/E for the pharmaceutical industry is 23. The implied question here is whether Novo will be able to grow its earnings close to twice as fast as the average of its competitors.
If it can, it's a point in favor of purchasing it since it's often necessary to pay a premium for quality. On the other hand, if the valuation reflects more hype than sound fundamentals, the market could dump the stock after a few bad earnings reports. So does its growth trajectory warrant its valuation?
Over the last three years, its quarterly net income grew year over year at an average pace of 13% annually, and it currently has trailing-12-month net income of $8.5 billion. That's not bad, but it's not exactly snappy, either. Moving forward, its pace will be determined by the sales of Ozempic, Wegovy, and Rybelsus, as well as any successor medicines that also target the diabetes and weight-loss segments via the same therapeutic molecule (semaglutide) or the same biological mechanism (GLP-1) as those three.
Demand for its GLP-1 therapies rose by 50% in the first quarter compared to a year prior. Furthermore, Novo has six more phase 3 clinical trials that could expand its addressable market with semaglutide even further to include conditions like Alzheimer's disease and nonalcoholic steatohepatitis (NASH) by testing it in different formulations and in combination with different drugs. And with demand for Ozempic and its siblings trending upward even after rising 60% in the last two years, there's reason to believe that more earnings are on the way, and soon.
Don't wait for it to get any cheaper
The most likely course for Novo Nordisk over the next five years or so is to see its stock rise alongside its earnings. While it's true that much of the positive narrative surrounding the company is centered on its GLP-1 therapies like Ozempic, the next generation of medicines targeting the same conditions is probably going to sustain growth at a decent pace. That suggests it's worth buying despite its current valuation. The presence of competitors like Eli Lilly could eventually create pressure on earnings, but there is no indication that it'll happen anytime soon.
The cherry on top for this stock is that the risks are somewhat limited. It's theoretically possible that some problem with one of the company's star-performing medicines will cause its shares to tumble. It's also possible that competitors will cause problems if they have a more effective product in Novo's key markets. But those risks are part and parcel for big pharma businesses, and they seldom lead to wiping out shareholders.
So if you're in the market for a quickly expanding company that's going to be packing on earnings a bit faster than average for the next handful of years, this one is a good choice. The valuation isn't so bloated as to pose a serious risk, and paying a bit more per share today won't matter if they've multiplied in value faster than elsewhere down the line.
