Novo Nordisk Trades at 10 Times Earnings While Buying Back Billions in Stock. Is This the Bottom?

Shares of Novo Nordisk (NYSE: NVO) have declined roughly 70% from their 2024 high. The stock is now below its level in mid-2021, when it first introduced the Wegovy GLP-1 weight-loss shot to the market. This massive decline has left Novo Nordisk trading with a price-to-earnings ratio of roughly 10x, compared to a five-year average of nearly 24x.

If you are a long-term investor, you may want to follow the company's lead and buy shares of Novo Nordisk. Here's why the future is likely to be brighter than the recent past.

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Novo Nordisk: Mistakes were made

Wall Street is worried about Novo Nordisk for a very good reason. Despite being the first pharmaceutical maker to bring a GLP-1 weight-loss drug to market, it quickly fell behind competitor Eli Lilly (NYSE: LLY) after it introduced its own GLP-1 drugs. There are two big problems here.

First, Eli Lilly's GLP-1 weight-loss drugs proved more effective than Novo Nordisk's. So doctors prescribed them more often. Second, Novo Nordisk struggled to keep up with demand, allowing generic competition to enter the U.S. market early. So even when Novo Nordisk's drug was in use, it didn't necessarily generate revenue for Novo Nordisk.

On the first point, the weight-loss market is huge. So there is likely to be room for more than one successful competitor. And it isn't so bad to be number two in a growing market. On the second point, Novo Nordisk appears to have learned its lesson on the supply side. That is notable today, because the drug maker was also the first to market with a pill version of a GLP-1 drug. It doesn't plan to allow generics in early this time around.

Novo Nordisk has a new focus

The pill version of its GLP-1 drug is important because it is part of a shift from selling a small amount of a high-cost drug to selling a large amount of a low-cost drug. Basically, Novo Nordisk is looking at the size of the weight-loss market and shifting to a volume-driven model. That's hurting financial results right now, but if demand is as great as expected, volume could easily offset the impact of lower prices.

That said, the healthcare sector is research-driven, and competition is fierce, but Novo Nordisk has a proven track record of innovation. In fact, it is currently working on new GLP-1 drugs, and management has high hopes for success. It could regain the lead in this emerging drug category, but being number two isn't actually all that bad. After all, PepsiCo (NASDAQ: PEP) has been second to Coca-Cola (NYSE: KO) for decades and generated plenty of profits for its shareholders.

Meanwhile, Novo Nordisk has initiated a $2.2 billion stock repurchase program. It has already begun putting that money to work, suggesting that the board of directors sees value in the shares today. Given Novo Nordisk's valuation and the fact that its share price is below its level before it began selling its GLP-1 weight-loss drugs, it seems investors may be throwing the baby out with the bathwater right now.

You need to think long-term with Novo Nordisk

The problem is that the transition to a volume-based model that Novo Nordisk has undertaken will take a little while to play out. However, given the valuation, long-term investors will likely be well rewarded if they buy this innovative drugmaker while others are fearful. Meanwhile, while you wait for a business upturn to take hold, you can focus on collecting the stock's well-above-market 4.6% yield. That yield, for reference, is supported by a solid payout ratio of 33%, which itself suggests the negative view of the business may be a bit overdone.

Reuben Gregg Brewer has positions in PepsiCo. The Motley Fool has positions in and recommends Eli Lilly and Novo Nordisk. The Motley Fool has a disclosure policy.