Opportunity from Novo disappointment

Danish drug companies have a reputation for punching above their weight thanks to their ability to find and exploit lucrative niches, and Novo is arguably the finest example of this. Novo's specialisation in the insulin/diabetes market gives it a clear lead over other big pharma companies that largely abandoned the human insulin sector years ago. This has allowed Novo to take a 27 per cent per cent share of the fast-growing global diabetes care market. The superior growth characteristics this gives the company, along with its additional listing in London under the 0MD0 ticker, has given it an unusually committed following among UK-based investors that makes it worthy of further investigation even for those not usually tempted by overseas shares.

There are significant demographic trends that explain why the global diabetes market is growing far more than any other medicine class, more than doubling in value over the last decade. Mostly this is to do with rising levels of obesity. Around a third of adults in the US are classifed as clinically obese, according to the Centres for Disease Control (CDC) and this is an increasing problem in the developing world as diets become richer in dairy and meat products.

This trend has helped Novo achieve double-digit sales growth in each of the past 10 years and an average annual sales growth rate of 13 per cent over the period. And management remains optimistic. Novo predicts that future sales growth in countries such as China will top 15 per cent for the next five to 10 years, only slightly behind the 15 to 20 per cent growth expected from the US. What's more, management is standing behind medium-term targets of 15 per cent annual operating profits growth, even though 2014 growth guidance has recently been downgraded to high single digits.

The guidance downgrade is one of a number of recent disappointments that has caused a substantial errosion in Novo's traditional premium rating. The big set back in 2013 was news that the US launch of its long-lasting insulin treatment, Tresiba, would be delayed until 2017 after the Food and Drug Administration (FDA) asked for more heart safety information. Brokers had seen Tresiba as key to sustaining growth rates and about half of its predicted $2.8bn 2017 sales were supposed to have come from the US. However, Tresiba is already approved in a number of other important markets and a raft of rollouts are scheduled for 2014, and US approval remains on the cards.

The other major weight on Novo shares have been fears about increased competition. Of particular note are ongoing comparative trials between Novo's fast-growing, market-leading type 2 diabetes drug Victoza and Eli Lilly's challenger drug dulaglutide. However, most of Novo's main competitors have severe structural weaknesses - Eli Lilly is about to hit a patent cliff, while Sanofi has diversified into so many areas it is in danger of diluting its research effort. And for now Victoza is the clear market leader amongst so called GLP-1 class medicines and management believes this fast-growing area of diabetes care can significantly increase its share of the US market in coming years from the current level of 8.5 per cent. To this end, Novo has hired around 400 new sales reps in the US to drive expected double-digit growth rates.

Novo boasts a strong late stage drug development pipeline which holds promise for coming years. It is also investing DKK20bn (£2.5bn) on developing an insulin pill - a holy grail in diabetes care - between now and 2020. It's estimated the potential pill market could be worth DKK100bn (£12.5bn) annually.