VPHM: 1-Trick Thoroughbred?

ViroPharma - One-Trick Pony or One-Trick Thoroughbred?

We have been long-time bulls on ViroPharma, Inc. (VPHM). Over the past year, ViroPharma's stock had been reacting well to the uptick in Vancocin sales, and the Citizen's Petition strategy to delay a generic alternative has worked beautifully to maintain an exclusive market in 2007 and 2008.

Paramount to our investment thesis was that the continued strong sales in Vancocin would allow for management to fully develop the next wave of products, including HCV-796 and maribavir, as well as in-license new candidates such as Cinryze. With HCV-796 and now maribavir gone, and generic Vancocin most likely coming in mid-2009, too many questions remain for us to recommend the shares.

It is our belief that ViroPharma will become a one-trick pony, Cinryze, by the start of 2010. That's not necessarily a bad thing if that pony turns out to be a thoroughbred. Some of the things that could make Cinryze a thoroughbred include rapid uptake by the 200+ clinical trial patients and women and children actively seeking treatment options.

Plus, Cinryze is the only viable treatment option for patients seeking prophylactic therapy. Finally, approval for the acute indication in June 2009 locks-up the entire C1-esterase inhibitor market and means that Cinryze will most likely dominate the HAE landscape. That turns a $250 million product into a $500 million product based on one FDA regulatory decision.

But Cinryze will not carry the same sort of profitability that Vancocin did. Vancocin had 95%+ gross margins and was being effectively promoted by a very limited sales force. Sales totaled $232 million in 2008. Cinryze is a very different product. The product has only a 65% gross margin and will require heavy promotion and safety monitoring, along with the added costs of REMS and Cinryze Solution registry.

Sales in 2009 will only be around $40 million. In fact, unless all the pieces fall into place (DX-88 rejected, Cinryze approved for acute use), it may not be until 2013 that Cinryze posts sales above $232 million. This means that ViroPharma's most profitable days are behind them.

Management still holds $276 million in cash, but could owe future potential milestones to Lev shareholders in the order of $175 million. The first $87.5 million payment could be due in June 2009. The company also has $250 million in convertible debt due in 2016. Given management's need to maintain at least $200 million in cash reserves, we do not expect another Lev-like acquisition anytime soon.

That leads us to the key investment question: Is ViroPharma a one-trick pony, or one-trick thoroughbred? At this time it is too early to tell, and we do not feel comfortable recommending the shares until visibility improves.

Read the full analyst report on VPHM

Read the full analyst report on VPHM