ViroPharma, Inc. (VPHM)

Viropharma is a specialty drug company developing novel drugs for the treatment of infectious disease. It’s rare to find a small drug company that is actually turning a profit. After modeling it through 2012 I consider it a speculative buy, with a price target of $13.26 (industry average PE of 12 * the average EPS over the next five years).

Currently VPHM’s revenue comes from Vancocin, an antibiotic used to treat enterocolitis caused by Staphylococcus aureus and antibiotic-associated pseudomembranous colitis caused by Clostridium difficile; these strains are often vancomycin-resistant, meaning Vancocin fills an important niche. VPHM bought Vancocin from LLY for $116M and royalties back in 2004; since then they’ve cranked out over $500M of revenue with the drug - not a bad investment. The bad news is that sales growth from Vancocin has decelerated recently, and this year the company estimates it will sell a little over $220M of it. Also, generic erosion of Vancocin revenue is a threat, and VPHM continues to haggle with the FDA over what tests should be used to test a generic version’s efficacy/safety.

VPHM’s pipeline is small enough that they are pretty easy to understand and model. The company’s fortunes will be decided by two drugs, HCV-796 and Camvia (maribavir). HCV-796 is an orally dosed non-nucleoside inhibitor of HCV that VPHM is developing with Wyeth. While HCV-796 has shown considerable activity, a Phase II dosing trial was stopped in August due to elevated liver enzymes (8% for HCV-796 vs. 1% for control). I think the market was right to hammer VPHM’s stock for this result, as elevated liver enzymes are the number one cause of both drug adverse events and drug application rejections. For this reason I have backed HCV-796 out of my model, assuming it’s dead money. VPHM and WYE have stated they’ll review the safety data and try to find the best path forward for this drug. While there’s an outside shot that changing the dosing/treatment schedule/etc. may get rid of the problem, the odds of this drug ever coming to market, at least for first-line use, are low.

Which means that I think the company’s fortunes for the next few years rest solely on Camvia, a drug being developed for prophylactic treatment of CMV in transplants. CMV infection during transplants is a major risk factor, often leading to any number of potentially fatal clinical manifestations. Current standard treatment is Roche’s Valcyte. Camvia is a member of a class of drugs called benzimidazole ribosides, which inhibit viral DNA assembly and inhibits assembled viral capsids from exiting the nucleus of infected cells. Phase II trials were promising, with Camvia reducing CMV infection incidence in transplant patients with a favorable safety profile to standard treatment. VPHM has two Phase III clinical trials ongoing for Camvia, one for stem-cell transplant (SCT) and one for solid organ transplant (SOT). Assuming the drug continues to perform well and nothing unseemly pops up (granted, that’s a big assumption), VPHM plans to file an application for Camvia in 2009. Camvia is subject to the risks that all drugs in development are subject to (adverse events, inexplicable failure, etc.), but in light of the fact that the drug is targeting a large population of patients with few treatment choices it could prove to be a major revenue generator for a company of VPHM’s size.

VPHM is in good financial shape, a rarety among small drug companies, although this is subject to how the FDA decides to deal with the potential generic threat to Vancocin revenue. They should have enough cash on hand to carry out their Phase III trials, and analysis of their convertible notes issued, call options purchased, warrants issued, and insider buying suggests that management considers the stock to be severely undervalued at current levels and financiers consider it a good speculative investment. Shares outstanding has increased at about 10M/year over the past couple years, meaning that some of the impact of Camvia’s approval would likely be soaked up by share dilution.

One word of warning for anyone considering taking a position in VPHM. Drug companies with small pipelines tend to be extremely sensitive to negative news regarding the drugs in their pipeline, and VPHM has certainly lived up to this trend in the past. If you’ve followed VPHM for any reasonable length of time you already know that when this stock decides to plummet it doesn’t joke around. Most recent investors are familiar with the $13-$8 plummet in August due to the discontinuation of a dosing trial for HCV-796. But if you want to see some real fun, go back to the 2002 chart. VPHM cruised between $15 and $20 through mid-March, when they announced that Picovir (now licensed to SGP), their anti-common cold drug, did reduce the length of colds by a day but had serious side effects. VPHM immediately went to $5.90, then got as low as $0.87 before wrapping up 2002 in the $1.50 range. Anybody who owned VPHM at the time has to laugh when they see writers saying the market “plunged” a whole 2% these days. I guess it’s also worth noting that VPHM is still around, so I guess they can take a punch.