Novo Nordisk's 52% Plunge: Is the Company Fumbling Its Leadership in the $150 Billion Weight Loss Market?

Nothing attracts competition like the opportunity for profits, and the weight loss drug market has become arguably the healthcare industry's hottest opportunity in recent memory. Novo Nordisk (NYSE: NVO) has enjoyed tremendous success with semaglutide, the proprietary drug in Ozempic and Wegovy.

However, competition is picking up with multiple next-generation drugs working through clinical testing.

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The market is worried about Novo Nordisk's grip on the weight loss market, evidenced by the stock plummeting over 52% from its mid-2024 high. Does Wall Street have it wrong, or is Novo Nordisk fumbling a generational growth opportunity?

Here is what you need to know.

Image source: Getty Images.

The competition is heating up in the weight loss market

Research by Morgan Stanley estimates the weight loss market could grow from roughly $15 billion last year to approximately $150 billion by 2035. GLP-1 agonists are currently the drug of choice, which slow digestion and suppress the patient's appetite.

Novo Nordisk has an estimated 62% market share of the GLP-1 agonist market, with archrival Eli Lilly accounting for another 35%. Investors are looking ahead to next-generation drugs that could deliver better results with fewer side effects. That includes next-generation injectable treatments and pill-form drugs, which most patients probably prefer to a needle.

Novo Nordisk hopes to receive regulatory approval to market and sell its semaglutide weight loss drug Wegovy in pill form by year-end. Meanwhile, CagriSema, currently in phase 3 clinical trials, is the company's next-generation injectable drug. However, it has struggled to stand out from existing treatments in late-stage clinical tests.

Will these products maintain Novo Nordisk's weight loss leadership? It's hard to tell.

Eli Lilly's orforglipron has performed well in its initial phase 3 clinical testing. It's an oral pill and the first small-molecule GLP-1 agonist to pass a phase 3 study, which is potentially significant because small-molecule drugs are generally easier and cheaper to manufacture.

There are dozens of weight loss drugs in various development stages across the industry, so competition is coming.

Don't assume Novo Nordisk will lose its crown

Novo Nordisk's competitors were never going to stand and watch it dominate a $150 billion opportunity, but that doesn't necessarily mean Novo Nordisk will lose its crown.

Investors have grown afraid of competition, but the drug development process is extremely daunting. Far more drugs fail the regulatory process than reach the market. Pfizer, a fellow pharmaceutical heavyweight, had hopes to crack the weight loss market with its oral GLP-1 agonist danuglipron, but it abandoned development in April after it potentially caused a liver injury in a patient during clinical tests.

Several factors ultimately decide which treatments patients choose, including efficacy, price, and side effects. In other words, it's probably unfair to conclude what will happen until these new and upcoming drugs have been on the market for a while.

Novo Nordisk and Eli Lilly may continue to dominate market share, though they could trade blows, and the balance between them could shift.

The stock's slide mitigates a lot of risk

Still, investors and the market have assumed that Novo Nordisk will ultimately cede market share. Analysts have dramatically lowered their long-term earnings growth estimates for Novo Nordisk. But here is the good news -- the stock already reflects these lower expectations.

Data by YCharts.

Novo Nordisk trades at a price-to-earnings (P/E) ratio of 20 today, down from roughly 50 over the summer. Even if the market is correct and Novo Nordisk grows by an average of 14% annually, today's valuation is still attractive for that growth. That wouldn't be the case at 50 times earnings, but its current PEG ratio of 1.4 is an attractive price tag for an industry leader in a high-growth industry like this.

There are always risks in the pharmaceutical business. Novo Nordisk could suffer an unexpected setback or drug failure, or a competitive drug could be so good that it tilts the balance of the weight loss market away from Novo Nordisk.

Still, Novo Nordisk is a proven industry leader and probably deserves some more faith until proven otherwise. Barring a worst-case scenario, the stock has a good shot to work out well for long-term investors from these discounted prices.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.