ViroPharma Inc., - VPHM

ViroPharma (VPHM) is a profitable biotech company that engages in the development and commercialization of products that address serious diseases. It markets and sells Vancocin capsules for the treatment of antibiotic-associated pseudomembranous colitis; and HCl, the oral capsule formulation of vancomycin hydrochloride in the United States and its territories. The company’s product pipeline includes Maribavir, a Phase 2 product for the treatment of cytomegalovirus infection; HCV-796, a Phase 1b product for hepatitis C virus infection; and Intranasal pleconaril, a Phase 2 product candidate for common cold and asthma exacerbations. It serves pharmacies, hospitals, clinics, and other facilities licensed to dispense prescription medications. The company was incorporated in 1994 and is based in Exton, Pennsylvania.

The company has been under severe selling pressure for a while thanks to a lack of response from the FDA and question marks surrounding this company’s portfolio of products and on what they are planning to do with their healthy $200+M cash balance but mainly thanks to FDA approvals around their $200M drug Vancocin (though even with such approval, the generic versions will hit the market prior to 2009). The shares of VPHM say a healthy bounce after they announced Positive Phase 2 results demonstrating that Maribavir significantly reduces CMV reactivation in late March but even that bounce was certainly short lived as VPHM slowly drifted back to the $11 levels a month after that positive announcement.

But then came the killer. ViroPharma announced their quarterly results pre-market today and the stock plummeted on extremely disappointing earnings. First-quarter profit plunged 53 percent and missed Wall Street's expectations. Net income shrunk to $8.2 million, or 12 cents per share in the first quarter, from $17.4 million, or 36 cents per share, a year ago. The decline was due to a lack of license fee revenue in the latest quarter and a $5.5 million tax expense the company did not have last year. Revenue rose 8 percent to $29.4 million from $27.2 million last year. The vast majority of the recent revenue -- $29.2 million -- was from sales of the antibiotic Vancocin – the drug facing threats of generic competition.

As one of top posters in StockArena.com summarized today (edited):

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Today was a big miss for sure. I have stayed with ViroPharma because I felt the management was making all the right decisions and felt the market was not giving the company enough credit for their performance and potential.

Today was a wakeup call. I knew that the income taxes were coming but the impact is pretty brutal when you see the year to year comparisons. I think the company has done a good job of analyzing why sales were off. I think the reason for wholesalers may have been that ViroPharma raised prices but modestly which probably lead wholesalers to not worry so much about future price increases. Last year the price increases were aggressive and wholesalers probably felt they were behind the eight ball and they were rewarded for ordering aggressively to benefit from having Vancocin in inventory when prices increased. The blowup over some future generic threat may have also given wholesalers the confidence that ViroPharma would not raise prices aggressively – since the talk was that this generic policy by the FDA was due to them being irritated that ViroPharma was "taking advantage" of the c.dificile epidemic to raise prices.

The bottom line is that with prescriptions written up 39%, this inventory adjustment can't go on forever and Vancocin should return to sales growth in Q2 and onwards.

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To summarize, ViroPharma has a couple of drugs moving nicely thru their trials and have mentioned they have good cash levels and are narrowing their search for a second or third contributor to current drug sales. With the 20+% haircut in VPHM prices today, I believe VPHM presents a compelling value purchase in the sub $10 levels. Maybe TheStreet.com Stocks Under $10 gang should give ViroPharma a very serious look.


Disclosure: I currently have a long equity position in VPHM and have elected to maintain is through this drop. I do not plan to add on to this position as of now as I have a pretty full position in this company but fully plan to hold my current position. I had also previously written naked Puts with a strike of $10 and a May expiry for a premium of $.45 which are currently trading at $1.15 with about a buck in intrinsic value given the stock is trading close to $9. Unless VPHM recovers to over $9.55 by the May Options expiry date, I will be rolling these naked Puts out to June or August with the same strike price.

Last Updated: May 4^th 2006

SeekingAlpha: This blog also appears in the Biotech Stocks Blog of SeekingAlpha at http://biotechstockblog.com/article/10123