Down 19% in 1 Day, Is Novo Nordisk Stock Still a Buy?

Amidst a race with its competitors to produce the next smash-hit weight loss drug, Novo Nordisk's (NYSE: NVO) stock crashed by 19% on Dec. 20, after the company reported results from a late-stage clinical trial that it framed as a success.

So what's the real story here? Did the trial actually flop, or is the market getting it totally wrong? The answer to both those questions is, "No." Let's explore what's going on in more detail so that you'll know how it affects your plans for the stock.

This new information makes the company look a lot less appealing to invest in

On Dec. 20, the bull thesis for Novo Nordisk stock took a massive hit. In terms of its financial performance, Novo Nordisk's bread and butter are its therapies for type 2 diabetes (Ozempic) and obesity (Wegovy); both are the same molecule, semaglutide, which works by targeting a cellular receptor called GLP-1.

Globally, Novo Nordisk holds 65% of the market for GLP-1 medicines by volume, which is a big part of the reason that it was able to generate trailing-12-month operating income of $17.2 billion.

In a phase 3 clinical trial investigating the usefulness of its anti-obesity drug candidate CagriSema, after being injected weekly for 68 weeks, patients lost 22.7% of their weight on average. In the treatment group, 40.4% of patients lost at least 25% of their total mass. These results were slightly worse than the company had originally anticipated.

In contrast, per a different phase 3 study investigating a competing weight loss drug, Eli Lilly's (NYSE: LLY) Zepbound, patients treated with the highest dose lost 20.9% of their body weight on average over 72 weeks of treatment. See the problem? Novo Nordisk's newer candidate, which hasn't even been submitted for approval yet, is barely an improvement over its competitor's blockbuster drug on the market today.

The company's ability to produce the next generation of weight loss medicines building on the success of Wegovy is now deeply in question. Moving forward with CagriSema based on this data would likely result in disaster for shareholders.

It gets worse

While the CagriSema program is far from Novo Nordisk's only candidate for treating obesity or diabetes, it's the only late-stage program that could be submitted for approval sometime in the latter half of next year.

Another phase 3 trial, testing the candidate in a population of patients with type 2 diabetes who are either obese or overweight, is expected to report its results sometime in the first half of 2025. If that trial generates better data, it'll mean that the CagriSema program could still find a sizable niche in the market if it gets approved.

But even then, the situation wouldn't favor Novo Nordisk, especially not in the all-important competitive fight against Eli Lilly's products. Aside from the major issue of CagriSema's efficacy being similar to that of Lilly's Zepbound, it's also much more challenging to manufacture, which would make Novo Nordisk hard-pressed to grow its earnings by commercializing the medicine.

That's because CagriSema is made of one molecule of semaglutide, and one of a different molecule called cagrilintide. Both semaglutide and cagrilintide are significantly more complex to make than common medicines like aspirin or ibuprofen; this implies that any drug made using both molecules would put upward pressure on the company's cost of goods sold (COGS). Critically, Lilly's Zepbound is a molecule called tirzepatide, and its ease of manufacturing is approximately equal to that of semaglutide.

So to make CagriSema, Novo Nordisk would need to begin a manufacturing process that's (broadly speaking) twice as complicated as Eli Lilly's -- only to have Lilly's competing medicine perform roughly as well with half as much effort invested. If that proposition sounds incredibly bad, it's because you understand the dilemma.

This business will adapt

Yet all things considered, Novo Nordisk is a stock that's probably worth buying on this dip. As mentioned, CagriSema isn't its only program for weight loss. Nor is the market for weight loss drugs its only target. Furthermore, the second ongoing phase 3 trial could clarify the candidate's efficacy; it might also give management something else positive to discuss, like perhaps lower discontinuation rates due to side effects. And its sales of Wegovy aren't going to be affected, so it'll still have a very productive cash cow on its hands.

With that being said, there's now a high chance that Lilly will eventually succeed in securing a larger market share in cardiometabolic medicines. So if you do decide to buy Novo Nordisk stock while it's on sale, understand that its competitive prospects are much dimmer in the medium term than they were previously. Think twice before betting the house.