Oct. 11 (Bloomberg) -- Novo Nordisk A/S, the world's largest insulin maker, must grab sales from Eli Lilly & Co.'s Byetta, the fastest-growing treatment in the $21 billion diabetes market, to sustain growth.

Novo Nordisk's strategy relies on the regulatory approval it will seek next year for liraglutide, which like Byetta increases patients' insulin production and helps reduce weight. Liraglutide's advantage as a daily treatment compared with the twice-a-day injection for Byetta may be short-lived as Lilly is testing a once-weekly version.

Chief Executive Officer Lars Rebien Soerensen says Novo Nordisk needs liraglutide to increase profit after 2009 when cost-cutting benefits and a shift to newer modified insulins level off. Byetta sales rose 54 percent in the second quarter and doctors say a once-a-week injection will do even better. Analysts recommend investors hold off buying shares of Bagsvaerd, Denmark-based Novo Nordisk until more data on Lilly's improved Byetta are released by the end of this year.

``At these levels, it's way too expensive,'' said Tim Race, a London-based analyst at ING Financial Markets who has a ``sell'' rating on the shares. If long-acting Byetta's effectiveness ``is absolutely stunning, then Novo Nordisk has got a problem.''

Of 34 analysts following Novo Nordisk, 14 have ``hold'' ratings and five say sell because the price is too high. Shareholders are paying 22.7 times earnings for Novo Nordisk, more than the 17.7 average price-to-earnings ratio of the Bloomberg Europe Pharmaceutical Index.

Liraglutide Boost

Investors buy a drugmaker's shares based on the potential of its products under development and often several years from reaching the market. Liraglutide's early trial results have helped push Novo Nordisk stock up about 34 percent this year.

``While we continue to believe Novo Nordisk is a quality company that deserves to trade at a premium, we see an unattractive risk-reward ration at current levels,'' Citigroup Global Markets analyst Kevin Wilson said in a Sept. 27 note to clients. The stock closed at 636 kroner that day. The shares fell 13 kroner, or 2.1 percent, to 617 kroner in Copenhagen today, the biggest drop in almost a month.

The shares also have benefited from safety concerns about GlaxoSmithKline Plc's best-selling Avandia diabetes treatment, which was linked to a higher risk of heart attacks earlier this year. The shares' gain contrasts with a 6.3 percent decline in the 13-member pharmaceutical index.

The Rebound

The company's shares have tripled since losing half their value five years ago. That's when the introduction of Sanofi- Aventis SA's Lantus diabetes treatment seized sales and Novo Nordisk dropped development of a treatment for the disease.

Lilly fell 5 cents to $58.35 at 4:02 p.m. in New York Stock Exchange composite trading and has gained 12 percent this year.

In August, Novo Nordisk reported that the second-quarter profit margin, or profit after the cost of goods as a percentage of sales, rose to 77.7 percent, boosted by shifting some production to lower-cost countries Brazil and China and selling more insulin analogues, or genetically modified human insulins. The margin increase probably will top out at about 80 percent in two years, Soerensen said in a Sept. 28 interview at the company's headquarters.

``It would be very hard to drive it further,'' Soerensen said. ``It would take a successful liraglutide.''

Peak sales for liraglutide or the weekly Byetta may surpass $3 billion a year if one is demonstrably better, analysts said. Both treatments mimic a naturally occurring hormone the gut produces to signal to the pancreas to produce insulin when blood sugar levels rise. In diabetes, sugar collects in patients' blood rather than being absorbed by muscle and fat cells, leading to kidney failure, blindness, heart disease, amputation and death.

Rising Demands

The number of diabetics will rise 54 percent to nearly one out of every 13 adults worldwide by 2025, the International Diabetes Federation forecast last year.

Lilly, based in Indianapolis, and co-marketer Amylin Pharmaceuticals Inc. of San Diego won U.S. regulatory approval for twice-daily Byetta in 2005 and in Europe a year later.

Results from a 30-week study on the long-lasting Byetta will be released before the end of the year. An earlier clinical trial showed the drug lowered blood sugar levels by 1.7 percentage points to 6.8 percent with a 2 milligram-dose, Amylin said last year. Patients also lost 3.8 kilograms (8.4 pounds) when taking the medicine.

Weekly Results

Weekly Byetta has performed better than the twice-daily version in studies so far, Lilly spokeswoman Derin Denham said.

``We're seeing greater efficacy with regard to glycemic control compared to Byetta and we're see some interesting results with regard to weight loss,'' she said in an Oct. 4 telephone interview. She declined to comment on how it compared with liraglutide, citing the lack of head-to-head trials.

Novo Nordisk will present the last of five studies of once- daily liraglutide early next year. Trial results so far indicate the drug lowers the sugar levels by 1.5 to 2 percentage points and patients shed 2.5 to 4 kilograms of weight. Longer-lasting versions are further behind, with the company just completing testing in animals.

The Byetta and liraglutide results being released aren't likely to show significant differences between the two treatments, said Philip Home, a professor of diabetes medicine at Newcastle University in the U.K., in an Oct. 3 interview. Studies comparing the two directly to each other are needed to determine which is better, he said.

Fewer Shots

Diabetics would prefer fewer shots so liraglutide probably needs to show more benefits than the weekly Byetta to gain customers, said Brian Bourdot, analyst at Deutsche Bank. ``Longer-acting formulations must be a potential threat to liraglutide but we don't know to what extent,'' he said.

Needle size may be an advantage for Novo Nordisk. The needle for liraglutide is smaller than the industry average, while Lilly's using a more standard one for Byetta.

Byetta's advantage of having the twice-daily version on the market already probably won't be significant because Novo Nordisk is a strong brand name among diabetics and doctors, Bourdot said.

Liraglutide is part of Novo Nordisk's strategy of shifting more sales to higher-margin products including growth hormones, blood-clotting drugs and designer insulin drugs called analogues. Together, these now make up more than half of the company's revenue.

``People think yes, Novo Nordisk is improving the gross margin with the switch from human insulin to analogues, but that will end,'' Poul La Cour, analyst at Kaupthing, said in a telephone interview from Copenhagen. He rates the share a ``buy.'' ``But if they're successful with liraglutide, that'll continue for at least another five years.''

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at fschwartzkop@bloomberg.net

Last Updated: October 11, 2007 16:22 EDT