Mixed Emotions on ViroPharma

ViroPharma: One-Trick Pony or Thoroughbred?

We have been long-time bulls on ViroPharma, Inc. (VPHM - Analyst Report), but the loss of maribavir hurts. The economic value of Vancocin is rapidly approaching an end. At this point, it is not a question of “if” generics will arrive; it is a question of “when” they will arrive. Obviously the later the better, but with maribavir now gone, one thing is certain -- ViroPharma’s future is now tied solely to Cinryze.

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.

And, if the FDA approves the drug on June 3, 2009 for acute use, it will become the only available option for acute patients as well. Thanks to the orphan drug designation, approval for the acute indication locks-up the entire C1-esterase inhibitor market and means that Cinryze will most likely dominate the HAE landscape. That turns a $250 million pony into a $500+ million thoroughbred rather quickly.

But Cinryze will not carry the same sort of profitability that Vancocin did. Vancocin had 95%+ gross margins and was being effectively promoted by little to no 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. We forecast sales in 2009 will be around $50 million, although until management provides better guidance on the uptake, we are admittedly flying blind with respect to our forecasting.

Still, however, it will not be until 2012 until Cinryze posts sales above $232 million. In 2007 the company posted GAAP EPS of $1.21 per share. We do not forecast that level of profitability until 2014 or beyond. This means that ViroPharma’s most profitable days are behind them.

Management held $245 million in cash at the end of the first quarter. However, ViroPharma 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 based on the acute approval. The company also has $205 million in convertible debt due in 2017.

Given management’s need to maintain at least $150 million in cash reserves, we do not expect another Lev-like acquisition anytime soon. Thus, the key question remains: Is ViroPharma a one-trick pony, or one-trick thoroughbred? At this time it is too early to tell.

Our sum-of-parts analysis yields a fair-value of $7 per share. We would be buyers of the stock at $4 based on the upside that Cinryze represents. In the meantime our rating is Hold.