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Jazz Pharmaceuticals plc – Ordinary Shares (JAZZ), Novartis AG (ADR) (NVS): Don’t Let Your Attention Defect

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Ineffective drugs being sold for billions in global sales. According to an article in the Wall Street Journal, a study in Quebec on 4,000 students (gathering data for each student over an average of 11 years) showed that boys who had Attention Deficit Hyperactivity Disorder, or ADHD, who took ADHD medication actually did worse than other kids with similar symptoms who didn’t take medication. For girls with ADHD, they reported more emotional problems than those with ADHD who didn’t take medication.

Jazz Pharmaceuticals plc - Ordinary Shares (NASDAQ:JAZZ)

This news doesn’t bode well for Novartis AG (ADR) (NYSE:NVS), which sells Ritalin to treat ADHD and ADD and had $554 million in sales with 1% revenue growth in 2012. If Ritalin is shown not to be effective, then there will be a strong drag on Novartis’ top line which could constrict growth prospects for the next few years.

While Novartis AG (ADR) (NYSE:NVS) did have $56.67 billion in sales in 2012, for a company expected to grow that to only $57.2 billion in 2013 a sharp drop in Ritalin sales could slow growth to a standstill (from 1% growth). Novartis AG (ADR) (NYSE:NVS) is expected to grow its EPS by 5-7% in 2013 which could compensate for the lack of top line growth, but ultimately you need top line growth to grow the company.

Smaller players with bigger stakes

Shire PLC (ADR) (NASDAQ:SHPG) is a pharmaceutical company with 2012 sales of $4.68 billion. $1.78 billion of those sales came from drugs that treat ADHD, which are Vyvanse, Adderall XR, Intuniv, and Equasym. Vyvanse had 2012 sales of $1.03 billion and is by far its biggest drug. If this study is true and those drugs aren’t as effective as people think they are, then Shire PLC (ADR) (NASDAQ:SHPG) could be in for a rude awakening.

Due to generic competition from the likes of Teva, profits at Shire PLC (ADR) (NASDAQ:SHPG) fell from $865 million in 2011 to $745 million in 2012. Shire PLC (ADR) (NASDAQ:SHPG), by far, will get hit the hardest if this study turns out to be correct.

Now I’m not saying I’m a doctor and that I have all the answers, all I’m saying is that as investors we have to watch out for big changes if the perception of efficacy in the pharmaceutical world. Maybe the Quebec study is wrong and Shire PLC (ADR) (NASDAQ:SHPG) will keep on chugging by, or maybe not.

The study also estimated that 15-20% of all ADHD drugs sold are used by those without a prescription – patients are selling them or giving the drugs away. When I was in school I saw plenty of this happen, and I personally would estimate that number to be higher, but the point is still the same. If parents crack down on their kids selling or giving their medication away then sales will definitely get hit, regardless of how effective those drugs are.

Not good enough

Shire PLC (ADR) (NASDAQ:SHPG) has plenty of headwinds ahead of it for its second best selling drug, Adderall XR. Adderall XR sales were down 19% in 2012 due to generic competition to $429 million. On the plus side, sales of Shire’s best selling drug Vyvanse were up 15% in its latest quarter to $298 million. An investment in Shire is largely banking on the continued success of Vyvanse which can compensate for the drop off in Adderall XR sales.

Shire also has seen strong growth in Lialda/Mezavant (up 12% to $101 million), Vpriv (up 14% to $82 million), Intuniv (up 13% to $78 million) and Firazyr (up 112% to $42 million). Sales of some of its other drugs were pretty disappointing but growth from Vyvanse balanced out the quarter.

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