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ViroPharma, a Value Play in Biotech



August 14, 2007 – Comments (0)

8/13/2007 by Dr. Thomas Li 

ViroPharma and its partner Wyeth stopped the phase II trial of their hepatitis C drug HCV-796 last Friday after the observation of liver toxicity in the triple combo trial with pegylated interferon and ribavirin. The market cap of ViroPharma shrank to 600 million with share price at 8.7. A question every investor asking is what is the real value of the company.

I believe the value of ViroPharma is from four parts: Vancocin, the pipeline (Maribavir and HCV-79), the cash, and the management team.

Vancocin will face generic competition sooner or later. It is possible the competition will arrive around middle of next year. So I’d like to assign revenue $100 million for the second half of 2007, $150 million for 2008, $120 million for 2009, $100 million for 2011 to 2013. Using a discount rate at 10%. That gives us $570 million. Consider the 10% cost, The value of Vancocin is about $500 million. That is in the worst case scenario. Given Akorn and its Indian partner’s record, I would not be surprised that the generic competition will come much later than 2008.

Let’s cut the analysis of the pipeline short. To be conservative, Maribavir, a PIII drug for the treatment of cytomegalovirus disease, is worth $150-250 million by the Wall Street’s standard. HCV-796, though encountered a serious issue, still has some value as it is quite potent against HCV and the liver toxicity could come from drug-drug interaction with Ribavirin. Let’s don’t assign any value to HCV-796 at this moment, the total value from the pipeline is still $200 million at the least.

Cash value is $260 million by the end of second quarter in 2007.

I follow around 100 biotech companies. ViroPharma’s management team is one of the best and the most successful one in the biotech industry with a market cap under 1 billion dollars. They made brilliant decision by acquiring Vancocin, issuing secondary and convertible at right time and good term, and turning around the company at a difficult time. De Rosen’s team is worth $10 million and I believe they will make right decisions in the future.

To summer it up, the value of ViroPharma is around $950 million. The market cap is only $600 million. How could that happen?

Because the market is not efficient. There are a few factors which scare the investors and suppress the stock price:

I.    The uncertainty of US stock market due to the sub-prime/mortgage crisis.

II.   The uncertainty of OGD decision on Vancocin generic competition.

III.  The uncertainty of the clinical trial results of its pipeline.

Time will solve the efficiency issue. ViroPharma will be where its value is. And it wouldn’t take too long.

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