Cashing In on Noven's Drug Patch

The leading percentage gainer on the Nasdaq (it's up almost 40% today) is drug-patch company NovenPharmaceuticals (NASDAQ:NOVN). The stock is reacting to news after Friday's close that a Food and Drug Administration advisory committee has recommended approval of the company's patch for treating attention deficit hyperactivity disorder, or ADHD, in children.

The company's stock needs a patch for ADHD. Look at this five-day chart and you can see it has been a roller-coaster ride for Noven shareholders. Last Thursday, the stock fell 17.3% when the FDA posted briefing documents on its website that said the side effects for Noven's patch were more pronounced than the same drug in pill form.

On Friday, trading in the company's stock was halted all day while the FDA advisory panel reviewed the new drug application. After the market closed, it was announced that the committee had unanimously voted that the product was effective and safe. The committee also unanimously recommended post-marketing surveillance or studies, or both.

The panel's recommendation is not binding on the FDA. In fact, the FDA rejected an earlier version of this drug patch in April 2003. Of concern now is if the FDA will require wording that the pill version of the drug should be tried first and the drug patch only as an alternative if pills are unacceptable.

If the FDA approves the drug, Noven would receive a $50 million payment from Shire Pharmaceuticals (NASDAQ:SHPGY), the global licensee for the ADHD patch. Besides being $2.12 a share in cash, that's a lot of money for a profitable company that registered just $12.2 million in revenue last quarter. Noven also stands to receive up to $75 million in additional payment if Shire reaches predefined sales targets.

Noven Pharmaceuticals is not an unknown name to Motley Fool readers: It was a Stocks 2003 recommendation.

For now, investors might be put off by the company's lofty valuation of 55 times trailing earnings. But Noven is expected to grow earnings by 34% a year and already has net cash (cash minus debt) of $83 million. That growth rate, a rock-solid balance sheet, solid technology, and a product pipeline that includes partners like Aventis (NYSE:SNY), Novartis (NYSE:NVS), Endo (NASDAQ:ENDP), and Procter & Gamble (NYSE:PG) should give investors a high level of comfort.

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Fool contributor W.D. Crotty does not own any shares in the companies mentioned. Click here to see The Motley Fool's disclosure policy.