January 11, 2008

Stock of the week: ViroPharma

ViroPharma (VPHM) has had a big week with its stock climbing 20% after the company announced better-than-anticipated guidance for 2008 sales of its bacterial infection drug Vancocin. The company expects that 2007 sales of Vancocin were in the guided range of $202-208 million and that 2008 sales will fall in the range of $210-235 million. This guidance greatly out-paces what analysts were projecting. Consensus 2008 estimates had ViroPharma with $182 million in sales.

Analysts, for a couple of years now, have feared generic competition to Vancocin, which could eliminate 50% of the product's sales in the first year of an available generic. However, a generic form of Vancocin is not available yet, and it appears from ViroPharma's guidance that it does not feel one will be available this year.

However, that does not mean the threat of generic competition is gone. A generic form of Vancocin will be available at some point, and investors need to look beyond Vancocin to see if ViroPharma is a viable investment choice.

VPHM is a small ($700 million market cap), but highly profitable biotech. The company has a clean balance sheet; approximately $6 per share in cash and short-term investments; and has strong operating cash flows ($121 million in the trailing twelve months). These traits could give ViroPharma some room to seek acquisitions or partnerships. Or could make VPHM a strong buyout candidate.

For VPHM to be a buyout candidate, or for it to be a viable investment choice, we must look further and into the pipeline. ViroPharma currently has four projects that it or its partners are working on. However, I'm only accounting for one of those projects becoming financially viable at this point.

ViroPharma and Wyeth decided to discontinue Phase II dosing for HCV-796, a Hepatitis C drug because of safety concerns in August. The companies continue to pursue ways to use the drug, but I'm not counting on anything. VPHM also has a compound that could treat C. difficile-associated disease (CDAD), but it has not moved into human trials yet.

Lastly, I'm not accounting for pleconaril, a nasal spray to treat the common cold, which is being developed by Schering-Plough (SGP). Pleconaril has been a part of ViroPharma since the 1990s. The company filed an NDA for an oral form of the drug in 2001, but it was rejected by the FDA. SGP licensed the drug in 2003, and has been working on the nasal form since. ViroPharma is due to potentially receive another $65 million from SGP, as well as royalties if the drug makes it to market. However, the clinical trial process has been slow. The drug is currently in Phase II. And when I looked on Clinicaltrials.gov, it showed that a Phase II trial had been completed, but neither company has said anything about it. I would be willing to think that data from that trial should be expected sometime soon, but I have no definite time-table for that announcement. So, until we do hear something from that trial, I'm not going to account for pleconaril in ViroPharma's future earnings.

With all that said, ViroPharma does have one very promising drug, that could earn more in peak sales than Vancocin. Camvia (maribavir) is in Phase III trials for the treatment of cytomegalovirus (CMV). The company projects that a market is available for peak sales of $500 million. That would provide significant growth for VPHM. The company says it is on track for a 2009 NDA. Using my rNPV template, I feel that Camvia is worth $4.37 currently to the company. It would be worth around $8 to the company if Phase III trials are successful.

As I see it, there are two wildcards that are holding me back from calling ViroPharma a strong buy. First, what will happen with generic Vancocin. If the company can continue to get the FDA to hold back allowing a generic Vancocin, the drug should continue to grow its sales and I feel is worth at least $10 per share, which is slightly above the current trading price alone. However, if generic competition gets in as early as next year, I feel that Vancocin is only worth $5 going forward and the stock is probably fairly valued, at best. The second wildcard that I'm looking at is pleconaril. If Schering gets this drug moving, it has the potential to be a blockbuster, and ViroPharma would reap those benefits. However, there is currently no telling if that will happen, we'll just have to keep our eye out for news.

To conclude, I like ViroPharma. It is a good company, with a couple of good products. However, there is a lot of uncertainty here in 2008 and its long-term picture is a little blurry. My opinion is that this is a buy for the long-term, but I think a lot is riding on the Phase III trials of Camvia. Camvia should be able to replace Vancocin and keep the company growing for its shareholders. Although, this stock could really go places if the two wildcards fall into place for VPHM.


Disclosure: I have no position in any of the stocks mentioned.

7 comments:

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