Growth stocks can often be volatile investments. Investor excitement about long-term potential can send valuations to sky-high levels. But if growth starts to falter, or operational missteps cause delays, such valuations can quickly come crashing back down to earth.
That’s certainly what investors of Novo Nordisk (NYSE:NVO) have experienced first-hand recently. Over the last 12 months, the once surging pharmaceutical giant has seen almost all of its gains evaporate, with its market cap shrinking by 60% since last September.
What happened? And could investors now be looking at a dirt cheap long-term buying opportunity?
The downfall of Novo Nordisk
As a quick reminder, Novo Nordisk is a global pharmaceuticals business focused on chronic diseases like diabetes and obesity. And in recent years, investors fell in love mainly due to its blockbuster Ozempic and Wegovy GLP-1 weight-loss drugs. So much so that between July 2020 and 2024, the growth stock surged more than 300%.
Yet as excitement wore off and reality set in, the explosive growth potential of the GLP-1 market started to show some cracks.
Challenges in insurance reimbursements limited patient access, resulting in slower penetration within the obesity market. At the same time, rising competition from rivals like Eli Lilly started eroding the group’s market share. And to make things worse, the patents for the active ingredients of Ozempic and Wegovy have started expiring in key markets, allowing generic manufacturers like Hikma Pharmaceuticals to swoop in and undercut everyone.
Combined, these factors led to a massive downward revision of growth expectations, triggering a sharp drop in share price. Obviously, this is bad news. But with the price-to-earnings ratio now sitting at just 14 versus the pharmaceutical industry average of 24, have investors overreacted? And if so, is this growth stock now a potential bargain?
Exploring recovery potential
Despite encountering numerous challenges, Novo Nordisk remains a global leader in the diabetes and obesity treatment sectors. New clinical data is emerging demonstrating cardiovascular benefits of Wegovy, allowing its drug to stand out among rival alternatives.
At the same time, new GLP-1 treatments are currently being developed to overcome the patent expiration problem, including Amycretin, which is approaching phase three trials and is available as a tablet rather than an injectable.
These drug candidates could be the key to reigniting momentum as well as expanding into adjacent treatment areas. And if investors start to see fresh signs of life, a sharp upward correction in Novo Nordisk’s share price could emerge as excitement surrounding the growth stock returns.
That’s why overall, despite the ongoing challenges, Novo Nordisk has a strong development pipeline of new products. And with new management at the helm, combined with a compelling valuation, patient long-term investors may want to consider taking a closer look at this enterprise.
