Is Novo Nordisk's Rebound for Real--or Just a Head Fake?

Novo Nordisk (NYSE: NVO) has significantly lagged the broader market over the past two years, losing more than 60% of its market value. However, the drugmaker's shares have performed well over the past month. The company's recent first-quarter update, released on May 6, helped push the stock even higher. Can Novo Nordisk sustain this recent momentum?

There are important catalysts ahead

Novo Nordisk's first-quarter results don't look great on the surface. The company's adjusted net sales decreased 10% year over year to 70.1 billion Danish kroner (about $11 billion). Adjusted earnings per share dropped 3% year over year to 6.63 DKK ($1.03). But here's the thing: Novo Nordisk had already projected that its revenue and earnings would decline this year. The surprise in the company's quarterly update was that, although poor financial results were already baked into the stock price, things weren't nearly as bad as the market expected. Novo Nordisk can thank oral Wegovy, which it launched in January, for that. Oral Wegovy has experienced strong adoption, with over two million patients already on the pill.

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Novo Nordisk's recent rebound could continue, provided it can make further headway in the anti-obesity market. The company received approval for a more effective, high-dose formulation of Wegovy, which could help it better compete with Eli Lilly's Zepbound. Novo Nordisk could also earn newer approvals -- while making important clinical progress -- over the past 12 months. The company is awaiting approval for CagriSema, its next-gen anti-obesity and diabetes medicine.

Novo Nordisk's pipeline features such products as Amycretin, an investigational medicine that mimics the action of two gut hormones: GLP-1 and amylin, both of which help control satiety, blood glucose, and other things. Novo Nordisk's pipeline also features UBT251, a medicine that mimics the action of three gut hormones and that posted outstanding phase 2 results in a clinical trial in China. Progress with these programs could jolt the stock over the next 12 months. Meanwhile, Novo Nordisk's shares are trading at 13.6x forward earnings, compared to the average of 16.8x for healthcare stocks.

While the Denmark-based pharmaceutical leader's financial results justify lower valuation multiples, its shares could experience a sustained run as it advances its pipeline, even before newer products allow it to return to solid top-line growth. What does all this mean for investors? Novo Nordisk could perform well over the medium term. Although it has lost the lead in the weight management market, the company's deep pipeline could allow it to capitalize on this fast-growing area more than most other drugmakers. And at recent levels, the stock still looks reasonably valued. In short, Novo Nordisk's rebound may not be just a head fake.

Prosper Junior Bakiny has positions in Eli Lilly and Novo Nordisk. The Motley Fool has positions in and recommends Eli Lilly. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.