Novo Nordisk a star amid stodgy pharmaceuticals

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The large-cap pharmaceuticals like Pfizer, Merck and GlaxoSmithKline have gone backwards this year, with the industry beset by the familiar worries over copycat competition, paltry pipelines of new drugs and price pressures across the globe.

The Danish drugmaker isn't quite as big as Pfizer but it's no minnow either, with a market capitalization approaching $39 billion, annual revenue of nearly $10 billion and 29,000 employees.

The core of the Novo Nordisk story is a pretty simple one: as American (and global) waistlines are expanding, more people are developing diabetes, and the industry so far has had a hard time copying Novo Nordisk's insulin products.

Insulin is a naturally produced hormone that helps cells absorb glucose from the blood; Novo Nordisk makes human and synthetic insulin for people whose bodies either don't produce it at all or don't make enough of it.

Sales of diabetes-care products at Novo Nordisk improved 11% in the first quarter, and the company says it's capturing 82% of the market share growth in these segments. The company says it has 51% of the total insulin market and 45% of the market for "modern insulin," which is a synthetic way of making the hormone.

The company also has strong hopes for Victoza, a once-daily diabetes treatment which uniquely isn't associated with weight gain and was launched in February. See full story.

Jeffery Holford, an analyst at Jefferies & Co, recently authored a note identifying five reasons to add more Novo Nordisk shares.

He cited the continued strength of Victoza, the potential for a insulin product in late-stage trials called Degludec, a likely "flop" for Bydureon made by Eli Lilly /quotes/comstock/13*!lly/quotes/nls/lly (LLY 33.90, -0.11, -0.32%) and Amylin Pharmaceuticals /quotes/comstock/15*!amln/quotes/nls/amln (AMLN 17.05, -0.08, -0.45%) , the ongoing short squeeze due to both investor demand as well as the company buyback program, and historically cheap valuation as reasons to buy the company.

But some say the advance in shares of Novo Nordisk has gotten out of hand.

Pierre-Yves Gauthier, the founding partner of research firm AlphaValue in Paris, noted that the company is trading on 21.8 times 2010 earnings estimates, according to data from FactSet. The European health sector trades on 10.6 times earnings, and components of the NYSE Arca Pharmaceutical trades at 9.8 times earnings.

"In valuation terms it's striking. It's twice the premium of [other] pharmas," he said.

"Yes, the market seems to be paying for the recurring aspect of their earnings, and competition is pretty limited, but when we have a quick look it becomes seriously expensive."

Gauthier said it's more likely that Novo Nordisk's price-to-earnings ratio will fall closer to the rivals, rather than the rivals rising to Novo Nordisk's rating.

Gauthier also noted the strength more generally for Danish health stocks, with Novozymes and Coloplast also sporting impressive gains, though H. Lundbeck has been sluggish this year.

Michael Leacock, an analyst at the Royal Bank of Scotland, is concerned that the core franchise of insulin may see threat by 2012 from what are called biosimilars -- basically, the biotech equivalent of generic drugs.

India's Biocon has biosimilar insulin under development, and potential quick followers could include Wockhardt, Bioton and Merck & Co. /quotes/comstock/13*!mrk/quotes/nls/mrk (MRK 32.73, -0.05, -0.15%) , Leacock says.

Based on what happened when biosimilar anemia treating products were introduced in Germany, with a 30% drop in price and a 50% volume share lost by the branded product, Leacock says U.S. and European sales of human insulin could fall 25% in both 2013 and 2014.