The FDA Just Approved a New Use for Wegovy, and Novo Nordisk Stock is Climbing. Here's What Investors Need to Know

Key Points

• Wegovy is now the second medicine approved in the U.S. for a disease that affects millions.

• Novo Nordisk has several other factors working in its favor, including strong results and a solid pipeline.

• The company looks attractively valued following its underperformance over the past 12 months.

• 10 stocks we like better than Novo Nordisk ›

The past 12 months haven't been great for Novo Nordisk (NYSE: NVO). Its shares peaked last year and have been in a downward spiral due to unimpressive financial results, clinical setbacks, and mounting competition in its core areas of expertise.

However, Novo Nordisk is looking to bounce back. Recent regulatory progress could be a positive step in that direction. Here's what investors need to know.

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Another important approval

On Friday, Novo Nordisk announced that the U.S. Food and Drug Administration (FDA) had approved Wegovy for the treatment of metabolic dysfunction-associated steatohepatitis (MASH). Wegovy has become a household name, famous for helping people manage their weight, but this new indication could be a significant development. Here's why.

MASH is a disease characterized by the accumulation of fat in the liver, leading to inflammation. According to some estimates, 22 million adults in the U.S. have MASH, although fewer, about 9 million, have clinically meaningful liver disease.

That's not an insignificant number, and one might think that, given this large addressable market, there are many approved therapies for MASH. But that's not the case. Developing effective treatments has proven to be surprisingly challenging. Last year, the FDA approved the first therapy specifically for MASH.

Image source: Getty Images.

Now, Wegovy has become the first GLP-1 medicine to earn that indication. Although there are other treatments in development, Wegovy could carve out a decent market for itself in MASH, especially since it posted phase 3 results comparable to those of its only competitor on the market (for now): Rezdiffra, marketed by Madrigal Pharmaceuticals. Novo Nordisk is a significantly larger company with more funds, a larger marketing budget, and a larger sales team than its smaller peer.

What will be the demand for Wegovy in MASH be? We can gather some clues from Rezdiffra's launch, which is going extremely well. About a year after it hit the market, Rezdiffra generated $212.8 million in revenue in the second quarter -- that's impressive and points to a massive demand for the medicine. Yet, Madrigal has barely scratched the surface of the addressable market. As of June 30, it had treated just over 23,000 patients.

Wegovy's launch in MASH should be even smoother since it isn't starting from scratch -- it's already been on the market for several years. In my view, this new indication could add over $1 billion in sales to Wegovy's total within the next few years, especially because it's also being considered for approval for MASH in Japan and the European Union.

It's also worth pointing out another development that helped jolt Novo Nordisk's stock price. The company is partnering with GoodRx to offer Ozempic at a reduced cost for patients who pay out of pocket. This move should help it deal with some companies that sell compounded versions of Ozempic for less.

Is Novo Nordisk's stock a buy?

Wegovy could earn yet another important label expansion by next year, although in a different version. Earlier this year, Novo Nordisk requested approval for an oral formulation of the medicine for weight loss. That could also move the needle for the pharmaceutical giant. An oral version would be faster and cheaper to produce, easier to transport, and thus more cost-effective to manufacture at scale. The previous shortages Wegovy dealt with would be far less likely to occur with an oral formulation.

Notably, it would mark yet another breakthrough for Novo Nordisk. There is currently no oral GLP-1 medication approved for weight loss -- the drugmaker's own Rybelsus, an oral GLP-1 product, is indicated only for diabetes.

Meanwhile, Novo Nordisk's financial results remain strong. In the first half of the year, net sales grew by 16% year over year to 154.9 billion Danish kroner ($24.2 billion), while net profit of 55.5 billion DKK ($8.7 billion) rose 22% compared to the year-ago period.

Furthermore, Novo Nordisk has an attractive pipeline. CagriSema, a next-generation GLP-1 therapy whose phase 3 results were strong (if not as strong as the market had hoped), appears poised to become a blockbuster. Some analysts predict that it will generate $15.2 billion in revenue by 2030.

Elsewhere, Novo Nordisk's amycretin, another investigational weight loss therapy, recently started phase 3 studies in both oral and subcutaneous formulations. Despite recent clinical setbacks, Novo Nordisk's pipeline should earn some significant wins in the next few years, particularly since the company has been strengthening it through licensing deals.

Lastly, Novo Nordisk stock looks reasonably valued. The company is trading at 13.5 times forward earnings, compared to an average price-to-earnings ratio of 16.5 for the healthcare industry. At current levels, the stock could deliver superior returns to investors who initiate positions today.

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