3 (Bad) Reasons to Avoid or Sell Novo Nordisk Stock

There are quite a few good reasons for buying Novo Nordisk (NVO 0.84%) stock. Between its hit type 2 diabetes drug Ozempic (raking in sales so fast that the company can't produce it fast enough) and its drug development pipeline that's packed with additional opportunities for growth, it's no surprise why its shares are up 82% in the last 12 months.

But, like all hot stocks, there are plenty of bad arguments about why it's worth buying or selling. Let's analyze three of the most common lackluster arguments for why you should avoid or sell this stock so that you'll get a better sense of which factors actually matter and why.

1. It's at the peak of the hype cycle

One weak reason to avoid Novo Nordisk stock is that it's at the height of the Ozempic hype cycle at the moment. People who buy it now will thus be missing out on the upside of the run-up, yet still exposed to the (inevitable, in the view of critics) collapse when Ozempic sales eventually fade. But this argument misses the fact that Ozempic's reign has barely just begun.

Ozempic was first approved by the Food and Drug Administration (FDA) to treat type 2 diabetes in December 2017. Since then, its approved indications have only expanded. Numerous research and development (R&D) efforts are underway to get it approved for even more conditions and niches within diabetes. For example, the drug Wegovy, which is indicated for weight loss and which uses the same active ingredient as Ozempic, was approved in mid-2021. And there will doubtlessly be other similar successes over the coming years.

Wall Street analysts are expecting Novo Nordisk to bring in nearly $44 billion in total sales for its fiscal 2025, whereas its annual sales in 2022 were just over $25 billion. However, those estimates may not sufficiently account for the revenue from newly secured indications. All of this is to say that we probably aren't even at the peak of the hype cycle yet as there is a significant amount of additional growth to capture with Ozempic alone, never mind anything else in the company's portfolio. 

2. Competitors will one-up its best-selling medicines

In terms of the competition facing Ozempic, Eli Lilly's (LLY 1.19%) drug, Mounjaro, is the biggest threat. In a head-to-head clinical trial comparing the pair, Mounjaro helped patients attain slightly better control of their type 2 diabetes symptoms while also losing significantly more weight, all with a roughly similar burden and prevalence of side effects. Detractors might say that these results ultimately doom Ozempic's market share, which could soon damage Novo's stock price, thereby justifying a sale. After all, why would doctors prescribe an inferior medicine?

But markets for pharmaceuticals rarely work that way. Once patients are taking a given drug and seeing success in getting their symptoms reduced or their health goals met, both they and their doctors are typically loath to switch to a newer competing medicine without a highly compelling reason. And given that neither Ozempic nor Mounjaro are available as generics and that the medicines need to be taken on an ongoing basis in order to maintain their beneficial effects, there are few catalysts for switching. 

Plus, at the moment, Ozempic is approved for indications that Mounjaro isn't, like controlling cardiovascular disease risk in patients with type 2 diabetes. It could soon gain other additional indications to expand its market size. For example, it's being investigated in a phase 3 clinical trial for its utility in treating Alzheimer's disease. It might take years for Mounjaro to make its way into those markets, if it ever does. 

In other words, rumors of Ozempic's imminent demise as a driver of revenue growth for Novo Nordisk are exaggerated. Don't let them convince you to sell this stock.

3. Its valuation is too high

This stock is quite pricey. Its price-to-earnings (P/E) multiple is 45, which puts it at far above the market's average P/E of 25. But there's more than one reason that a stock's valuation can be high, and in comparison to the pharmaceutical industry's average P/E of 38, Novo's expensiveness is far from being a deal breaker.

In short, if earnings were falling or if the P/E were twice as high as the industry's average, the valuation would indeed be a valid reason to avoid the stock as it would mean investors would be paying way too much in exchange for minimal growth prospects. In this case, the opposite is true; earnings are growing, and they'll probably continue to grow at a moderately fast clip for the next few years. Investors are bidding up the share price because they expect that growth to make the company worth more in the future than it is today.

Selling the stock would mean missing out on that growth, and avoiding a purchase would mean the same. Therefore, don't let the valuation of Novo Nordisk's stock dissuade you from an investment. This is a situation where the quality of the asset is very likely to prove worthy of the price tag.