New River Shares Hint of Dutch Tulips

Investors have propelled it higher, but the frenzy over its ADHD drug seems overdone.
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A funny thing happened on the way to New River Pharmaceuticals' (NRPH) 82% two-day rise this week: Investors didn't seem to notice that there was no mention of abuse-resistant properties with NRP104, a New River drug that received an approvable letter from the Food and Drug Administration on Friday.

In fact, the stock's rapid rise has left some staring at the stock quote in disbelief. Dr. Harry Tracy, president of biotech consulting firm NI Research, calls the recent move "a spectacular bubble. It's the Dutch tulips of ADHD drugs." Tracy's characterization refers to the enormous price increases of tulips in 17th century Holland, a surge that ended with a crash.

According to its corporate Web site, New River "is a specialty pharmaceutical company developing novel pharmaceuticals that are generational improvements of widely prescribed drugs in large and growing markets." But what New River is known for is the development of drugs that are more difficult to abuse. NRP104 is a re-engineered version of partner



Adderall XR. The difference is an amino acid that makes the treatment for attention-deficit hyperactivity disorder (ADHD) more difficult to abuse.

In data released in July, New River claimed NRP104 did not produce euphoric effects, while those receiving d-amphetamine did report significant stimulant-like responses.

New River is also working on similar formulations for opioid-based pain killers. Versions of Vicodin or OxyContin that are less prone to abuse might be very attractive to prescribing physicians.

But it's quite possible that New River will not be allowed to make those claims with NRP104.

The FDA is recommending that the Drug Enforcement Agency (DEA) classify NRP104 as a Schedule II drug -- meaning it will be tightly controlled, because the agency considers the drug a narcotic. New River and Shire were hoping for a Schedule III or IV, which would allow patients to get a six-month supply rather than needing to see their doctor and obtain a prescription for a refill every month.

Despite this important issue, the bulls have been celebrating like the Detroit Tigers. Merrill Lynch's David Munno is one of the most vocal supporters of the stock on the Street. On Monday, Munno curiously penned a note for clients titled, "Best Case for PDUFA", despite the fact that a best case would have been a recommendation for a Schedule III or IV designation.

Nevertheless, it certainly is good news that the FDA is not requiring any additional trials before recommending approval. Munno also correctly suggests that with approval, the Street should begin to give New River credit for its pipeline.

On Tuesday -- after New River closed the previous day north of $42, up from $26.21 the previous Friday -- Munno raised his price target to $65 from $47, describing his target as conservative. The higher price target is due to a larger profit-share calculation and a value of at least $7 for NRP290, the opioid compound. Munno, to his credit, initiated coverage on New River in July of last year when the stock was trading in the midteens. Merrill Lynch managed an offering for New River in the past 12 months. Munno declined to comment for this story.

Partnership Details Revealed

For the first time, New River and Shire disclosed the details of the partnership agreement. New River is not entitled to any milestone payments if NRP104 is classified as a Schedule II. A looser scheduling could result in milestones of up to $300 million, depending on when the designation is made.

A key component of the agreement is that Shire is "obligated to give NRP104 marketing and promotional priority over its other oral ADHD stimulants

should NRP104's label contain a claim that it has decreased potential for abuse or overdose protection

" (emphasis added).

But if NRP104 is classified as a Schedule II, Shire has no incentive to put any marketing resources behind NRP104 -- a drug for which it would have to give up at least 25% of U.S. profits in the first two years and at least 50% in the following years. Merrill Lynch's Munno believes the profit share will be in the 41%-43% range in the first two years and 65%-67% afterward.

The two companies don't have time to waste. Generic Adderall could enter the market in 2009. Shire would like to convert as many patients to NRP104 as possible, if it would protect its franchise. Hypothetically, patients and physicians would be less likely to switch to generics if they see a benefit from NRP104 over Adderall XR.

But if NRP104's label does not mention abuse resistance, there is no added benefit to NRP104 over Adderall XR or presumably a generic alternative. Dr. Russell Scheffer, director of child and adolescent psychiatry at Children's Hospital of Wisconsin, states, "NRP104 will be another player among Schedule II ADHD drugs. But there is no real advantage."

Shire also has the option of terminating the agreement with New River up to 30 days following approval if NRP104 does not receive a favorable scheduling (III or IV). Despite the out clause, Shire is unlikely to head for the exits, even if it decided not to market the drug aggressively. The last thing it would want is to make the drug available to a competitor.

New River originally planned to launch NRP104 in January but has now said its target is the second quarter of 2007. It is believed the company is pushing out its launch date so it can negotiate with the FDA in order to obtain a favorable ruling. A quicker launch with a Schedule II would not be as meaningful as a later start date with a more favorable scheduling. New River did not make executives available for comment.

There's a chance that the DEA could ignore the FDA's recommendation, but it's not likely that the agency will take a more relaxed stance when it comes to amphetamines. NI Research's Tracy says he has never shorted or recommended a short of a biotech stock, "But if we were to do so, this is where we'd begin." He believes New River's price "is so detached from reality. There's some euphoria in the fantasy that the DEA will change."

The euphoria that New River aims to prevent in patients apparently doesn't extend to investors.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;

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