Surprisingly, the last couple of months have been a touch harder than anticipated for Novo Nordisk (NYSE: NVO). While it's still raking in cash from sales of its medications for type 2 diabetes and weight loss, it also hit a trio of bumps in the road. Is its stock still a buy, or is its momentum finally starting to peter out?
When it rains, it pours
The company's earnings update for the first half of 2024 and a few of its recent filings mention three recent setbacks. These are related to Novo Nordisk's research and development (R&D) activities and to its regulatory submissions.
First, it canceled a program in phase 1 clinical trials that sought to treat metabolic-associated steatohepatitis (MASH, formerly known as NASH). The candidate was formulated for administration once per month, and was designed to use two different mechanisms of action to deliver more therapeutic effects than would be possible with only one. As the trial was halted rather than finished, it's probable that investigators didn't see a tolerable safety profile, nor any preliminary efficacy data to write home about.
The company still has a mix of other programs in clinical trials that could enable it to enter the market for MASH therapies, some of which are in late-stage testing. But those programs only use one mechanism of action, so they may not be as effective as the therapy produced by Madrigal Pharmaceuticals, the only competitor in the space thus far.
Second, Novo Nordisk also received a rebuff from regulators at the Food and Drug Administration (FDA) after its commercialization application for the once-weekly type 1 diabetes therapy called insulin icodec. In short, the regulators need the company to address issues with the proposed manufacturing process for the drug before they'll allow it to be marketed. Such hiccups happen frequently enough, but management thinks it won't be able to respond to the FDA's comments this year, which will delay the medicine's launch for a good while.
Last but not least, there was another regulatory issue with Novo Nordisk's hit weight loss medication Wegovy. In the second quarter, the drug brought in more than $1.7 billion in sales, up by 55% compared to a year prior, so it's a critical driver of growth. Though the company sought to get the medicine's approved set of indications expanded to treat heart failure, regulators felt that it needed to submit more data, as the clinical trials included in the application paperwork were on the smaller side.
Now management's target for resubmitting its application will be sometime in 2025, when a different clinical trial investigating Wegovy will conclude. That means direct competitors like Eli Lilly could get an expanded indication for their competing medicine first.
This company still has plenty of lucrative opportunities in play
Don't lose sight of the big picture. Despite this smattering of bad news, there's little reason to believe that Novo Nordisk's stock is worth selling right now.
In Q2, the company continued to grow quickly while remaining profitable. Demand for Wegovy is still so intense in the U.S. that the drug is in a state of shortage, despite considerable ongoing investments in expanding manufacturing output. Wegovy is still being investigated for a slew of additional indications, so the ultimate addressable market size is still likely to expand.
Novo Nordisk's pipeline is packed with so many late-stage programs that an early-stage failure in MASH means little. Likewise, needing to gather more data about Wegovy to appease regulators won't prevent the stock from gaining value in the long term. Nor will regulators' concerns about the insulin icodec application derail the program's probable approval in the future.
Thus, the company will almost certainly succeed in getting an approval to move insulin icodec to the market next year. The same is true for the Wegovy heart-failure indication. In other words, more growth is on the way. And that would remain true even if, against all odds, Novo Nordisk totally failed at both those objectives next year. It simply has too many different irons in the fire to struggle if a couple of them don't pan out.
The investment thesis for buying Novo Nordisk stock is still strong -- and it's still worth buying today and holding over the long term.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
