Call it a case of actual and collateral damage.

That's the story of Strattera, an

Eli Lilly

(LLY) - Get Report

drug for attention deficit hyperactivity disorder, or ADHD, that started with a flourish but has languished recently.

Part of the problem was caused by a tougher label, issued in mid-December, after the Food and Drug Administration told Lilly to acknowledge the risk of potential liver injury.

But part of the problem appears linked to the fallout from

Canada's suspending sales in February of another ADHD drug, Adderall XR, even though the FDA hasn't changed its view on this

Shire Pharmaceuticals

(SHPGY)

product and even though the Shire drug is different from Strattera.

Canada said it was investigating the Shire drug due to 20 sudden deaths among children and adults worldwide between 1999 and 2003. The FDA says it "does not feel that any immediate changes are warranted in the FDA labeling or approved use of this drug" based on Canada health regulators' comments and the "FDA's own knowledge and assessment of the reports received by the agency."

Adderall XR, an extended release version of Adderall, also made by Shire, is approved in the U.S. for treating ADHD in adults and youngsters 6 years and older. Adderall is approved for pediatric patients with ADHD. Strattera is approved in the U.S. for treating ADHD in adults and in children 6 and older.

Strattera Starts to Struggle

Strattera "got off to a great start when we launched in 2003," Charles E. Golden, Lilly's chief financial officer, told attendees at a recent health care conference sponsored by Citigroup Smith Barney in Washington, D.C. "The second stage of Strattera's life cycle has been tougher."

Golden says Canada's suspending of Adderall XR and Lilly's issuance of a revised label for Strattera "has added fuel to the fire in the sensitive arena of drug safety and children." As a result, the growth rate for all of the drugs in the ADHD category in the U.S. has declined from a 17% annual rate to 9%, he says.

That's a tough pill for Lilly to swallow because it is trying to distinguish Strattera from other ADHD drugs such as Concerta from

Johnson & Johnson

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and Ritalin, sold as a brand-name drug by

Novartis

(NVS) - Get Report

and as a generic by several companies. Adderall, Ritalin and Concerta are stimulants; Strattera isn't.

"To compete against the stimulants, we're stressing that Strattera has a unique mechanism of action that provides continuous symptom relief without concerns about abuse potential and diversion," Golden says. His company recently launched a new direct-to-consumer advertising campaign to remind patients to be aware of symptoms and to seek treatment. That theme, he adds, "will largely drive growth in this market."

However, growth has stalled. After the FDA warning came out, Strattera prescriptions "stabilized at a lower level," says Albert L. Rauch, of A.G. Edwards, in a recent research report to clients. He says changes in ADHD market share often occur after school vacations "when patients are cycling back into therapy." Prescriptions should dip during holidays and rebound during the school year, but Strattera "did not recover as strongly" as Adderall XR and Concerta, says Rauch.

According to data from IMS Health, Rauch says total Strattera prescriptions were off 5% for the 12 weeks ended March 25, whereas Adderall XR prescriptions were up 5.1% and Concerta prescriptions up 5.6%. Strattera remains a distant third place among brand-name drugs for ADHD in the U.S., in both total prescriptions and new prescriptions.

Rauch, who has a buy rating on Lilly, says the reduced prescriptions are "the likely result" of the new label, which was issued after reports of two cases of liver injury among two patients who had been treated with Strattera for several months. More than 2 million patients have received the drug.

Although both patients recovered, Rauch notes that the warning alerts doctors that severe liver injury could lead to liver failure, the need for a transplant or death. (He doesn't own shares; his firm doesn't have an investment banking relationship.)

Viewed another way, Strattera has been weakening since last summer. Using IMS Health data, Citigroup Smith Barney looked at new prescriptions written each month and found they fell every month from August 2004 through February 2005. New Strattera prescriptions written for January and February 2005 were lower, respectively, than new prescriptions written for the same months in 2004.

Lower sales growth predictions for Strattera as well for some bigger drugs, such as the antipsychotic Zyprexa and the Humalog insulin for diabetes, prompted Citigroup Smith Barney analyst George Grofik to trim earnings estimates for 2005, 2006 and 2007. He has a hold rating on the stock. He doesn't own shares; his firm has had an investment banking relationship in the last 12 months.

Lilly needs a strong performance by Strattera to help drive the company, as new drugs reach the market and experimental drugs reach FDA reviewers. Last year, Strattera produced $667 million in sales and grew 80% over 2003. Strattera was the sixth best-selling Lilly drug last year, accounting for about 5% of corporate sales. Zyprexa, with $4.4 billion in sales, continued to dominate with 32% of corporate revenue.