Biotech Values

[DewDiligence]

Barron’s Blasts ARXT Again

http://online.barrons.com/article/SB117167296113111837.html

>>
To hear some tell it, Adams Respiratory Therapeutics (ARXT) investors may have a bit more to worry about than the approaching end of cold-and-flu season -- a potential generic version of Adams' popular mucus thinner Mucinex.

Adams has grown rapidly since it launched Mucinex, supported by its Mr. Mucus cartoon spokes-blob. Sales were $61 million in fiscal 2004 and are projected to hit $400 million in the year ending this June. Its shares, at 41.22, are up 142% since Adams' July 2005 initial public offering, and have gained 11% since Barron's ran a bearish feature on the stock last year.

More recently, the shares have had a rougher go, having dropped 9% since Feb. 6 following an earnings report that showed slippage in profit margins. But an application accepted by the Food and Drug Administration for a generic version of Mucinex by Pharmaceutical Holdings, Mutual Pharmaceutical and United Research Laboratories has remained largely off the Street's radar screens.

Adams arrived at its patent by shrewdly taking a cheap compound that had been on the market for decades, testing it and gaining FDA approval and exclusivity. The rather routine challenge came Aug. 6. Adams, as is typical in such cases, sued the applicants in Federal District Court in Philadelphia to enforce its patent, gaining the requisite 30-month stay on any competing generic version.

Yet, according to the challengers, Adams itself admitted to them on Jan. 10 that it had mistakenly sued in the name of a legal entity that didn't technically hold the patent. The challengers on Jan. 19 filed a motion to dismiss the lawsuit.

Short sellers betting against Adams shares say Adams may have to re-file the lawsuit. That would negate the 30-month prohibition on generic challengers, as a 45-day window for opposing their application would have passed.

An Adams spokeswoman noted that the filings are public, that Adams has a chance to answer the motion and that the company has vowed not to argue the case in public. She maintained that the over-the-counter Mucinex franchise is durable and can grow through any future competition.

Maybe so. But a high-expectation stock with a multiple at 24 times fiscal 2007 earnings that sank 9% on a margin shortfall might not easily absorb the "headline risk" of a legal threat to its largest product.
<<