I think one of this year’s stock market favourites is due a breather. Here’s why

Danish pharma giant Novo Nordisk (NYSE:NVO) has been on an absolute tear in 2024. The shares have rocketed over 40% in the past year, making it one of the hottest tickets in the stock market. The company has set investors’ pulses racing with its blockbuster weight loss drugs Wegovy and Ozempic, which have shown they’re potentially the real deal.

But after such a stellar run, I reckon the shares might need to loosen their belt a notch. Here’s why I’m not rushing to gobble up any of the shares at current prices.

Bloated valuation?

The shares now sport a price-to-earnings (P/E) ratio of around 46 times, which is decidedly chunkier than the average P/E of about 15 times for its peers. The stock’s price-to-sales (P/S) ratio of 15.7 times is also tipping the scales. These multiples suggest the market has already baked in a hefty serving of future growth. This makes me nervous after such a healthy rally, since any disappointment or mistakes could lead to a major decline.

So while recent performance has been nothing short of mouth-watering, with earnings bulking up by 33.7% over the past year, keeping up this pace might be a tall order. Analysts are expecting earnings growth to slim down to about 14% annually over the coming years. That’s still a healthy figure, but perhaps not enough to justify the premium price tag.

Supply and regulatory challenges

Another limit to near-term growth is supply constraints for its popular GLP-1 drugs. While this overwhelming demand is certainly a nice problem to have, it has forced management to put launches in some international markets on the backburner.

Sorting out these production bottlenecks will take time and a healthy injection of capital. Meanwhile, competitors like Eli Lilly are racing to bring new weight loss wonder drugs to the table, potentially taking a bite out of the first-mover advantage.

As obesity and diabetes treatments gain more users, they’re also attracting more attention from regulators. Across the pond, Medicare is gearing up to start haggling over prices, which could hit profit margins in a major market.

There are also ongoing studies poking and prodding at potential side effects of GLP-1 drugs. While the medications have proven to be safe in clinical trials, any whiff of safety concerns could put a major dampener on the party.

Another concern is that some insiders have been cashing in their chips recently. The company’s books show an employee representative director offloaded about £1.1m worth of stock in mid-August. While insider sales don’t mean the sky is falling, they’re worth chewing over when they happen after such a hearty run-up.

One to watch

Despite these potential near-term hiccups, I reckon the firm’s long-term outlook remains as tasty as ever. The global obesity epidemic isn’t stopping any time soon, and Novo Nordisk is sitting pretty as a leader in this expanding field. The company also has a full plate of new drug candidates in the pipeline that could fuel future growth.

However, given the rich valuation and possible speed bumps ahead, I suspect the shares might struggle to keep up their recent Usain Bolt impression in the coming months. So while Novo Nordisk might be due a breather in the stock market, I think it remains a top-notch business that deserves a spot on any savvy Fool’s watchlist.