Share price as of Friday's close:

$11.17

Share price now:

$15.81

Change:

41.5%

Volume:

7.6 million shares, daily average 378,700 shares

Last time this high:

Sept. 20, 2005

52-week high:

$19.20

52-week low:

$10.44

Forward P/E before announcement:

26.6

Forward P/E after announcement:

37.6

PERHAPS REGULATORS WERE

just having trouble focusing.

In a surprise reversal, an advisory panel for the Food and Drug Administration late Friday recommended approval of Noven Pharmaceuticals' treatment for attention deficit hyperactivity disorder, or ADHD. The decision came just a day after documents critical of the drug authored by the lead drug reviewer on the panel were posted on the FDA's web site. Shares of Miami-based Noven, which were halted on Friday, surged 42% to $15.81 in Monday trading. The price spike more than made up for the 17% drubbing the stock took on Thursday.

"We are still in disbelief," wrote Jefferies & Co. analyst David Windley on Monday. "Given Noven's regulatory track record and one already issued nonapproval on this product, we were disappointed but not totally surprised by the reviewer's Thursday recommendation of 'not approvable.' With months spent reviewing the data and strong safety concerns expressed in the pages of supporting documentation, we didn't foresee a reversal of that decision, certainly not 24 hours later and with no new information." (Windley doesn't own shares of Noven Pharmaceuticals; Jefferies & Co. doesn't have an investment-banking relationship with the company.)

Late Friday, Noven announced that the FDA's Psychopharmacologic Drugs Advisory Committee voted unanimously in favor of the safety and effectiveness of its Daytrana-brand methylphenidate transdermal system, a once-a-day skin patch used to treat ADHD in children ages six to 12 years old. Methylphenidate is already sold in pill form by Novartis under the brand name Ritalin. An amended new drug application for Daytrana is currently pending before the FDA. Regulators are expected to make a final decision by Dec. 28. ADHD affects about 2.3 million school-aged children, or about 5% of that population.

The panel of experts also recommended that the package carry certain warnings, that the FDA require post-marketing surveillance to study the product and that oral ADHD products be tried prior to using the skin patch. It rejected a proposal, by an 11-1 vote, that it be limited solely to patients who can't use the oral products. The FDA usually follows the recommendations of its advisory panels, though it isn't required to do so.

The news shocked Wall Street. In documents written Nov. 7 Robert Levin, the panel's lead drug reviewer, criticized the Daytrana patch. Citing side effects such as weight loss, insomnia and anorexia, Levin recommended the agency reject the product. The documents were made public on the FDA's web site Thursday. But on Friday Levin offered a more upbeat assessment based on additional data that he had reviewed after writing the initial opinion.

Noven's effort to bring Daytrana to market has produced erratic results over the past five years. Its first Phase III trial failed. After a second Phase III trial succeeded in 2002 the company submitted Daytrana for approval. Less than a month before the expected FDA action letter, Noven signed a deal with Shire Pharmaceuticals, securing upfront payments and milestones worth up to $150 million. In April 2003 the FDA stunned both companies by issuing a "not approvable" action letter. Over the next three years Noven spent nearly $20 million to refine the product to the FDA's satisfaction. Levin's document suggested Daytrana's journey would end miserably.

"Hearing nearly 40 minutes of details that mirrored his published concerns, it was even more surprising to hear Dr. Levin's cursory, and sometimes tentative explanation that he was reversing his opinion and recommending approval," wrote Ken Trbovich, an analyst at RBC Capital Markets, in a Monday report. "Dr. Levin's new opinion apparently came to him in the past three weeks, despite the fact that he had nearly five months to contemplate and prepare his formal published opinion against approval. His support for approval was so feebly presented, and devoid of specifics, that the panel later asked him to clarify his position and explain why he had decided to reverse his earlier published opinion." (Trbovich doesn't own shares of Noven Pharmaceuticals; RBC Capital Markets doesn't have an investment-banking relationship with the company.)

Phone calls to Noven, Levin and the FDA weren't returned, but a spokesman for Shire, the marketer of the ADHD patch, downplayed the drama surrounding the panel's decision.

"It's not unusual for the FDA to post documents 24 hours prior to an advisory committee meeting to apprise people of what the situation is," says Matthew Cabrey, a spokesman for Shire. "About 8:30 a.m. Friday morning, Levin takes the podium. Toward the end of the presentation he says, 'It's important to note I've changed my mind, and I think the patch is approvable, even though the post on the web site suggests I don't support approval.' We were very pleased." Cabrey said if the patch is approved this month, it could be on the market in the first quarter next year.

Investors who followed the recent advice of Oppenheimer analyst Scott Henry cashed in nicely on Noven's yo-yoing shares. After Thursday's plunge to $11.17, Henry recommended that investors buy. Even after Monday's run-up, he said the market wasn't fully appreciating the patch technology.

"The company is earnings and cash-flow positive due to a strong base business of post-menopausal hormone patches," wrote Henry on Monday. "We reiterate our Buy rating and $18 price target. Our price target assumes a 60% probability of Daytrana approval. That figure appears conservative given the panel's decisions, although we believe conservatism is warranted given the history of this product. We would be more aggressively buying shares below the $15 level." (Henry doesn't own shares of Noven Pharmaceuticals; Oppenheimer doesn't have an investment-banking relationship with the company.)

Noven currently sells skin patches that release the hormones estrogen and progestogen under the brand names Vivelle, Vivelle-Dot and CombiPatch. For the third quarter the company posted a net loss of $1.4 million, or six cents a share, reversing a profit of $2.6 million, or 11 cents, in the year-ago quarter. Excluding an inventory charge and related tax effects, Noven posted third-quarter operating earnings of $4.7 million, or 19 cents a share, topping Wall Street's expectation of 13 cents a share. Net revenues jumped 21% to $12.2 million. The company has no debt.

Quote:
"We now think that the most likely outcome for Daytrana on its Dec. 28 FDA action date is an outright approval," wrote Deutsche Bank Securities analyst David Steinberg on Monday. "Given the efficacy of the product, the fact that parents overwhelmingly like the flexibility of Daytrana, and Shire's status as the leading marketer of ADHD products, we are maintaining our Daytrana peak sales estimate of $200 million, but expect the initial ramp to be a bit slower in year one of launch. Therefore, we now estimate 2006 and 2007 end-market sales of $35 million and $90 million, respectively, with earnings per share of 84 cents, down from 95 cents, and $1.24, down from $1.30." (Steinberg doesn't own shares of Noven Pharmaceuticals; Deutsche Bank Securities has an investment-banking relationship with Shire.)