Prediction: After a Tough Summer for Healthcare Stocks, These 2 Companies Can Make a Comeback

Key Points

• Novo Nordisk's valuation seems attractive relative to its financial results and prospects.

• Viking Therapeutics' recent sell-off was unjustified, making the stock a bargain right now.

• 10 stocks we like better than Novo Nordisk ›

It's been a tough year for healthcare stocks. The broader industry has underperformed the market this year, at least as judged by major healthcare-focused exchange-traded funds, such as the Vanguard Health Care ETF.

Over the summer, some notable healthcare stocks experienced significant declines. The list includes Novo Nordisk (NYSE: NVO) and Viking Therapeutics (NASDAQ: VKTX). Both companies have substantially lagged behind the market year-to-date, but despite their issues, they appear to be good picks right now. Here is why.

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1. Novo Nordisk

Novo Nordisk's shares dropped recently after the company reported second-quarter financial results that fell short of analyst projections, but its issues predate this episode. Over the past 18 months, the Denmark-based drugmaker has faced clinical setbacks and has been falling behind its biggest competitor in the diabetes and weight loss markets: Eli Lilly.

However, the sell-off may have gone a bit too far. Novo Nordisk is trading at 13 times forward earnings estimates, lower than the healthcare industry's average of 16.6. And this is for a company that tends to grow its revenue and earnings faster than similarly sized peers.

NVO Revenue (Quarterly YoY Growth) data by YCharts

Aside from Eli Lilly, Novo Nordisk has outperformed other pharmaceutical giants in the top-line growth category in recent years and continues to do so.

Furthermore, recent clinical and regulatory developments should also help it recover. Wegovy was approved to treat metabolic dysfunction-associated steatohepatitis (MASH), becoming only the second medicine to receive approval in the U.S. for this indication, and the first in the GLP-1 category. An oral version of Wegovy could also soon receive approval for weight management.

Novo Nordisk's amycretin, a next-generation GLP-1 medicine, is currently in phase 3 studies, with both oral and injectable formulations. And the company's CagriSema, which reported solid phase 3 data that fell short of market expectations, should still go on to be a success. According to some projections, it could generate $15.2 billion in revenue by 2030.

Lastly, Novo Nordisk has enhanced its pipeline over the past year through licensing deals and acquisitions. At least some of its pipeline programs should yield positive results. The company's shares look attractive at current levels, given its still excellent prospects in what may be the fastest-growing therapeutic area in the industry.

2. Viking Therapeutics

Viking Therapeutics is a mid-cap biotech also developing weight management medicine. Although VK2735 performed well in mid-stage studies last year, sending the stock soaring, the company's stock has been declining since then. Recently, an oral version of VK2735 failed phase 2 studies. Or at least, that's what the market reaction might suggest. There is more to the story, though. Yes, oral VK2735 had high rates of discontinuation due to gastrointestinal-related adverse reactions; however, there are ways to mitigate this.

The highest dose of the medicine had the highest discontinuation rates, but it also resulted in an average weight loss of 12.2% in just 13 weeks. By comparison, Eli Lilly's orforglipron induced a mean 12.4% weight loss in a similar patient population in 72 weeks.

Lower doses of Viking's oral VK2735 still look commercially viable if measured against orforglipron over 72 weeks. Even the medicine's highest dose is still in play. The company could achieve lower rates of adverse reactions by slowly increasing the dosage.

In other words, the market may have overreacted, creating an attractive entry point for opportunistic investors. That's especially the case once you look at the rest of the company's pipeline: an ongoing phase 3 study for subcutaneous VK2735 and an investigational therapy for MASH, VK2809, which could soon enter late-stage clinical trials.

Viking Therapeutics is a clinical-stage biotech. That makes the stock somewhat risky. But the company might have substantial upside potential. Investors with an above-average tolerance for risk should strongly consider the stock.

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Prosper Junior Bakiny has positions in Eli Lilly, Johnson & Johnson, Novo Nordisk, and Viking Therapeutics. The Motley Fool has positions in and recommends Bristol Myers Squibb and Merck. The Motley Fool recommends Johnson & Johnson, Novo Nordisk, and Viking Therapeutics. The Motley Fool has a disclosure policy.