September 11, 2011 4:45 pm

Novo Nordisk

Unlike gold or the Swiss franc, Novo has clear upside

The decision to build a grandiose new corporate headquarters is too often an indicator that crisis is ahead; look at Time Warner or the European Central Bank. So it may not be entirely coincidental that Novo Nordisk’s decision last month to build a shiny new pad for its top brass coincided with investors dumping the stock. Since July, shares in the Danish diabetes specialist have underperformed the FTSEurofirst 300 pharmaceutical index by 10 per cent.

There are some industrial reasons for concern, notably competition in the diabetes treatment market. Eli Lilly’s Humalog has gained market share and the US company could soon launch Bydureon in new markets. Eli Lilly and GlaxoSmithKline also have other drugs in late-stage development.

Novo, however, remains far and away the market leader in insulin treatments. It has a net cash position and an operating margin one-fifth higher than its peers, on Bloomberg data. That gives investors a rare degree of stability. So even at 19 times this year’s expected earnings – almost double the multiple of other large drugmakers – the share price drop appears overdone.

Indeed, investors might think of the stock as an alternative to the few remaining havens. Unlike gold or the Swiss franc, Novo has clear upside – the number of people with obesity-related type 2 diabetes is forecast to rise by half in the next 20 years. And the risk of even more short-term downside appears small at Novo. The same cannot be said for gold or the franc.

Part of the reason for the recent rout in Novo’s shares could be that fund managers have allocated money away from equities. As the largest stock on the Copenhagen Stock Exchange, Novo is particularly exposed. But those who sold to seek stability elsewhere may have thrown out the baby with the bathwater.

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