Some Shying Away From Shire as New Hyperactivity Remedies Emerge

Competition threatens the British drugmaker's supremacy in a controversial market.
Author:
Publish date:

New competition is starting to make some investors feel a little twitchy about

Shire Pharmaceuticals

(SHPGY)

.

Downer
Shire plunging in last month

The Anglo-U.S. drugmaker has had a great ride in recent years on the back of Adderall, a drug for hyperactivity in children. This year the brand rose to the top slot in a growing $700 million U.S. market for treating the controversial school-age disorder, commanding about 33% of that market.

But Adderall is now facing its biggest threat ever, in the form of competition from

Alza

(AZA)

and

Johnson & Johnson

(JNJ) - Get Report

. And investors worry that Shire isn't moving fast enough to lessen its dependence on Adderall, whose sales grew 63% in the latest quarter from a year ago, now accounting for 45% of its $137.8 million in sales.

Short-sellers say they're looking to jack up short positions in the stock, which even after a recent slide is trading at a hefty 40 times forecast 2001 earnings of $1.37. That gives the company, which reported 1999 revenue of $401 million, a market cap of $2.7 billion. Shire rose $2, or 3.9%, to $53.38 Friday.

New Challenge

Shire's new nemesis is Concerta, a new variable-release formulation of an existing hyperactivity treatment called methylphenidate. Since Concerta was launched in August, it has surged to take 9.3% of the market, according to

IMS Health

, which compiles such statistics. That's caused Adderall sales, which have grown steadily since 1996, to flatten for the first time ever.

Concerta and Adderall both compete in the arguable market of feeding powerful stimulants to children who have been diagnosed with attention deficit hyperactivity disorder, or ADHD. While critics deplore the growing use of drugs to treat ADHD and even cast doubt on the condition's existence, doctors say the stimulants seem to slow hyperactive children down and help them gain control of their impulses. That's why the market continues to grow.

It wouldn't be the first time a company suffered from relying too heavily on one drug in the fast-changing market for ADHD. British drugmaker

Medeva

, for instance, sold out to fellow U.K. drugmaker

Celltech

last year after it suffered steep declines in sales and profits from new competition.

Climbing
Shire since ADR listing

For years, Medeva sold the standard form of methylphenidate as a generic drug, while

Novartis

(NVS) - Get Report

sold the branded version as Ritalin. Then several other companies, including the Britain's

Johnson Matthey

, finally cleared the U.S.'s stringent

Food and Drug Administration

requirements to market the controlled substance, and Medeva went down.

Now it's Concerta's turn to clean up and it's not wasting any time. Approved just in time for the school year, Concerta has slammed other producers of methylphenidate, causing the market share for methylphenidate -- excluding Concerta -- to drop 7.6 percentage points since August to 45.6% of the market, according to IMS.

The Generic Threat

Now some investors suspect that Adderall also could face competition not only from Concerta, but from generic versions of Adderall, which is composed of four off-patent amphetamines. Analysts say a generic company would simply have to prove to the FDA that its drug is bioequivalent to Adderall.

It isn't publicly known if any generic drugmaker is working on a version of Adderall, because they tend to keep their projects secret, but making a generic Adderall may not pose a difficult technical challenge. Shire says Adderall isn't under patent protection, but it says manufacturing it requires "certain technical information which we believe is only available to us and certain of our suppliers," according to regulatory filings.

At a time when generic drugmakers are getting more aggressive in clawing market share from branded drugmakers, one short-seller says Shire could be a sitting duck. "As soon as a generic is filed, they are toast," says the New York-area short-seller. "It's a huge risk for a company that's basically a one-product company with a

40-times-earnings multiple."

Shire bulls say the situation isn't as dire as that, but they acknowledge the drugmaker, based in Andover, England, is facing challenges.

The Other Stuff

The bulls are pinning their hopes on Reminyl, a new Alzheimer's disease drug from Shire to be sold by Johnson & Johnson when it wins approval in the U.S., as expected in coming months. The FDA gave the drug preliminary approval in August.

Tim Anderson, analyst with

Prudential Vector Securities

, forecasts Reminyl will take off to generate 2002 sales of $150 million, on which Shire is expected to get 12% to 15% royalties. That, he said, will do much to offset competition to Adderall, as will lesser products in Shire's portfolio.

"There will always be room for Adderall, but Concerta will take the bulk of new prescriptions," says Anderson, who has an accumulate rating on Shire and whose firm does no underwriting for the company. "I like the other products, however."

And Shire, perhaps recognizing its dependence on the current version of Adderall, filed recently for FDA clearance for a once-a-day version of the drug to compete with Concerta. Shire also has been on an acquisition binge, with the biggest being the all-stock purchase of New Jersey-based

Roberts Pharmaceutical

last December.

"While the ADHD market remains an important therapeutic focus for Shire, a key element of our strategy is to create a broadly based specialty pharmaceuticals group," Shire said in September. "We are well on track to achieving our objectives."