Noven Pharmaceuticals (Nasdaq: NOVN) has gotten its share of attention in the Foolish 8, and today we explore the latest chapter in the company's roller coaster ride. Noven is a leader in developing drug patches, primarily for hormone replacement therapy (HRT) for post-menopausal women, an area that has been the source of intense media scrutiny of late.

Noven's wild ride
This stock is wonderfully illustrative of the manic-depressive nature of the stock market. It jumps around like a kangaroo with a sugar rush. I first bought Noven at $8 during a particularly big dip for the stock on no news in April of 2000. The stock took off like a rocket shortly thereafter (also on no particular news), and I sold at $30 on the premise that it was fairly valued at that price. I then watched, stunned, as it climbed all the way to $64 by November, only to drop back to about where I sold it.

The stock was back to under $20 when we featured the company in May of 2001. After running up to almost $40 shortly thereafter, the stock tanked again, dropping to under $15 after the company gave disappointing guidance on an investor conference call in November of 2001. That's when I bought shares for the second time, based on my judgment that, at under $15, the stock was trading at a fairly large discount to my best guess of the company's intrinsic value. At the time, I had Noven worth somewhere between $475 million at the low end and $775 million at the high end. I laid out my analysis behind those numbers late last year.

Heading into 2002, things were looking brighter for the company. In April, the company announced it would file for FDA marketing approval for MethyPatch, a new Ritalin patch product. The company hopes the new patch will be approved sometime in mid-2003, and Wall Street analysts are already projecting peak sales of $50 million to $100 million. With total revenues of $45.9 million in 2001, a successful launch of MethyPatch would be a major catalyst for the stock.

Also in April, Noven announced that Swiss pharmaceutical partner Novartis (NYSE: NVS) had finally launched the company's Vivelle-Dot product in Germany, an indication that last year's sales disappointment in Europe will likely not be repeated in 2002. On June 13, the stock hit a new high for 2002 of $27.48. In early July, management issued a press release announcing it would exceed its prior public earnings guidance of $0.14 to $0.18 per share for the second quarter.

At that point, Noven stock was up almost 50% for the year. At that time, I sold my shares at $26 for two reasons. At $26, the company's market cap was just shy of $600 million and getting toward the high end of my fair value estimate, which is always reason enough to sell. In addition, the stocks of some other companies on my wish list were getting hammered, and I felt there were better values elsewhere.

Blindsided by HRT news
I was lucky to get out when I did. In early July, Noven's stock was blindsided by the news that the National Institutes of Health (NIH) had halted a combination hormone replacement therapy study due to its findings that long-term use of PremPro, an oral combination estrogen/progestin product marketed by Wyeth (NYSE: WYE), increased the risk of cardiovascular disease and breast cancer. Noven's stock dropped 27% to under $15 on the news.

A week later, an article in the July 17 issue of the Journal of the American Medical Association (JAMA) presented data linking long-term estrogen use (using another Wyeth drug, Premarin) to an increased risk of ovarian cancer. The resulting media frenzy on the dangers of HRT dealt a further blow to Noven, driving the stock below $10. I'd kept Noven on my radar and, after looking at the new information and reviewing the new stock price, I recently bought shares at just over $11.

Why buy?
I believe that the recent media storm in the wake of the two recent studies has caused a huge overreaction for Noven's stock. The NIH study found that there was an increased risk of cardiovascular disease and a slight increase in breast cancer in women taking the combination drug PremPro for an average of more than five years.

In trying to determine how this data might affect Noven, it's important to note that Noven's Combi-Combi-Patch patients typically receive treatment for only about four months, and the patch has a much lower dose than that used in the study. In addition, the estrogen formulation used in PremPro is Premarin, which is made from the urine of pregnant mares, while Noven's product uses a natural plant-based estrogen, estradiol.

The study specifically states, "The results do not necessarily apply to lower dosages of these drugs, to other formulations of oral estrogens and progestins, or to estrogens and progestins administered through the transdermal route. It remains possible that transdermal estradiol with progesterone, which more closely mimics the normal physiology and metabolism of endogenous sex hormones, may provide a different risk-benefit profile."

The study's data showed a higher risk of ovarian cancer in women who used Premarin for 10 or more years. Again, patients using Noven's Vivelle and Vivelle-Dot estrogen patches typically do so for less than one year.

Adjusting the valuation
While the recent debate over HRT will likely cause many women to discontinue combination therapy in the short term, and will no doubt result in an abrupt decline in new HRT prescriptions, there may be some unanticipated long-term positive effects for Noven as well. Doctors will likely now give full attention to investigating available alternatives, and Noven's business may actually benefit from a migration away from pills and toward patches.

Noven's second quarter wasn't affected at all, and the stock moved up after the company announced earnings more than doubled to $0.28 per share on strong sales in the U.S. and a successful launch by Novartis in Europe. Management doesn't expect the recent troubles to hit the top line until later this year. I do think that Noven's business will be hurt in the latter half of this year and first half of 2003, and I therefore would estimate Noven's HRT franchise is 25% less valuable today than in November. However, with the company's stock price now about half of what it was then, I think the shares are again a decent value.

Even if my markdown of Noven's HRT franchise turns out to be overly optimistic, I am hopeful that the approval of MethyPatch will bring with it a new catalyst for growth and a new perception of Noven as a transdermal delivery specialist rather than an HRT specialist. In the meantime, I am fully prepared for additional volatility and always ready to sell my shares should the stock recover to within its fair-value range in the short term.

At the time of publication, Zeke Ashton owned shares in Noven Pharmaceuticals. The Motley Fool is investors writing for investors.