Certain healthcare stocks, including Novo Nordisk, might return to favor as the market shoulders its way past concerns over tariffs and drug pricing, HSBC said.
Analyst Rajesh Kumar upgraded shares of Novo Nordisk to Buy from Hold, citing an "improved competitive position in the next generation portfolio." The call came as the bank listed the pharma stocks it sees as best positioned to play a recovery in the sector.
The Danish maker of the blockbuster diabetes and obesity drugs Ozempic and Wegovy is a "fallen angel" -- a former market darling that has fallen out of favor but is due to turn a corner, Kumar said.
The company has several new drugs in various stages of clinical testing, including CagriSema, a drug that has previously disappointed investors.
Novo shares have fallen about 60% since their peak in mid-2024. The stock now trades at just under 14 times the earnings per share the company is expected to bring in over the next year, a level Kumar sees as an attractive entry point.
"Given the growth potential, management cost actions, as well as competitive positioning, the valuation leaves ample margin of safety," the analyst said. He raised his price target for the company's Copenhagen-listed shares to 445 Danish kroner from 355 kroner, reflecting a potential gain of more than 20%.
The analyst kept a Hold rating on Novo's rival Eli Lilly, the maker of Mounjaro and Zepbound, though he increased his target price to $800 from $700, partly because he expects higher peak sales for its experimental weight-loss pill orforglipron.
On Wall Street, Lilly has been widely seen as having the stronger pipeline of new drugs. It has been considered a safer bet because while the Indiana company has solid revenue streams from other drugs, Novo is more of a pure play in weight-loss and diabetes medicines.
However, with the approval for a version of Wegovy that can be taken orally, rather than via injection, potentially around the corner, the outlook may be improving for Novo. A handful of trial results in the coming months might help as well.
Drug stocks in general have gotten a boost in recent days.
The threat of pharmaceutical tariffs appeared to ease significantly last week, when President Donald Trump said that a 100% levy would only apply to branded or patented drugs from companies that weren't building manufacturing plants in the U.S. Many global drugmakers already have U.S. manufacturing facilities under way.
Jefferies analysts called it the "light at the end of the Trump tunnel for pharma."
Earlier this week, pharma stocks had their best day in months after Pfizer and the president unveiled a deal in which Pfizer will offer drugs directly to consumers at lower prices via a government website, among other concessions on pricing. The agreement appeared unlikely to mean financial damage for the company and raised hope that drug manufacturers could reach similar deals.
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