For ADHD, Focus on Shire, Not New River

The opportunity has already run for one, while the other's diverse exposure still holds potential.
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This column was originally published on RealMoney on Oct. 31 at 12:11 p.m. EST. It's being republished as a bonus for TheStreet.com readers.

Beginning with an approvable letter from the Food and Drug Administration for ADHD treatment NRP-104 on Oct. 6, shares of

New River Pharmaceuticals

(NRPH)

have had a meteoric rise. The shares further benefited from the market's realization of a significant improvement in its profit-sharing potential with marketing partner

Shire Pharmaceuticals

(SHPGY)

.

This effectively lowered the risk associated with the approaching scheduling decision from the Drug Enforcement Administration for NRP-104, as higher profits are now likely to come through regardless of this ruling, which is expected in early 2007.

The news of generous terms from Shire, with includes a better than 50/50 profit split, also has embedded New River shares with a takeover premium. Shire has been rumored to be interested in an outright acquisition of New River in order to retain a larger portion of the profits from this NRP-104 collaboration. As of Friday's close, New River shares had gained an astonishing 97% in October. On Tuesday, the stock was trading down 31 cents, to $50.71.

Despite the stock's impressive momentum, much of the opportunity appears to already have played out for New River at this juncture. A Shire takeover offer is unlikely in the near term, as Shire has been able to maintain its leading Adderall XR franchise and add several new treatments in this category. Indeed, Shire provides a more diverse and lower risk investment opportunity in the ADHD segment.

Although New River's prospects have certainly improved, the immediate fortune of the stock continues to rely on execution and regulatory issues for NRP-104. The company still needs to gain the FDA's final blessing for NRP-104 and a competitive controlled substance classification from the DEA.

Although a less restrictive scheduling decision from the DEA will provide NRP-104 with a marketing advantage, I don't see much further upside for the stock following recent gains. In addition, New River shares now have to live up to the blockbuster expectations for NRP-104, reflected in its valuation.

The main test for the stock will be the early 2007 market launch of NRP-104 by Shire. It will be challenging to meet the increasingly optimistic early market expectations for this product. I believe that the drug will eventually become a big seller, but Shire also has sealed a deal with

Barr Labs

(BRL)

that keeps generic versions of its Adderall XR franchise at bay until 2009. The Adderall XR franchise grew a solid 25% in the third quarter. As a result, Shire can pursue a gradual product rollout for NRP-104, while continuing to enjoy the benefits from its established and more profitable Adderall XR franchise. This may cause some disappointment around the early launch expectations for NRP-104.

This puts New River shares at risk of encountering a similar fate to

Noven Pharmaceuticals

(NOVN) - Get Report

. In June, Noven launched a new ADHD patch with Shire, known as Daytrana. The shares of Noven enjoyed good gains from this approval and product launch, but Daytrana seems to have hit a roadblock during its first quarter on the market.

Many investors had expected a strong initial quarter for Daytrana, particularly since the September back-to-school season is the most popular time of the year for ADHD drugs. Last Friday, Shire's third-quarter results showed modest market penetration and a less-than-expected $9.9 million in quarterly sales for Daytrana. I expect shares of Noven, which is less diversified than Shire, will have further difficulties moving higher, particularly with excitement now surrounding the broader based NRP-104 market launch.

Therefore, the best play in this space is the lower-risk opportunity with Shire Pharmaceuticals. The company has successfully handled the pressure to extend its core ADHD franchise, through several product collaborations and the patent settlement with Barr. In addition, the company has two additional ADHD products in late-stage development, SPD503 and SPD465. Shire also has the opportunity to get the most out of its highly profitable Adderall XR franchise until the generic deal with Barr kicks in by 2009.

I'm sure that Shire wants NRP-104 to be a success, but its immediate penetration would benefit the company less than continued gains in its Adderal XR franchise. Because Shire controls the marketing of both drugs, I expect the penetration of NRP-104 to be more gradual than many anticipate. Shire's profit motive should be the major driver of its marketing strategy in this space.

Shire also has come a long way in broadening its own product portfolio. The company faced a lot of skepticism following its acquisition of TKT in 2005. This integration has progressed and the company is now launching Elaprase for Hunter's syndrome from this deal. The company also issued an upbeat earnings report on Friday with an increase in the full-year revenue guidance to the low- to mid-teens level. Earnings gains may be more modest with a ramp-up in promotional spending behind several new product launches in upcoming quarters.

Overall, I believe Shire's management has taken a well calculated and diversified approach in solidifying its position in the ADHD market. Its segment dominance and a broadened product portfolio provides Shire with the best opportunity for continued gains in the ADHD space.

At the time of publication, Michael Latwis had no positions in any of the stocks mentioned, although positions may change at any time.

Michael Latwis has directed health care content at TheStreet.com Professional Products. He also has worked at Barclays Wealth management division and was previously associated with Lazard Freres and Fiduciary Trust. Latwis covered companies in the pharmaceutical and specialty pharmaceutical sectors as well as biotech, medical technology, healthcare services, retail and media stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Latwis appreciates your feedback;

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