ViroPharma: Strengthening Financial Profile & Pipeline Indicate Long-Term Upside

Shares of ViroPharma (NASDAQ:VPHM) have been pressured in 2012 (falling over 17% as of December 26), as generic competition for one of its drugs has eaten into sales and profits. And while generic competition is never a welcome sign for pharmaceutical companies, ViroPharma is poised to overcome the issue, due to a strengthening balance sheet, and a promising pipeline. Unless otherwise noted, financial statistics and management commentary used in this article is obtained from one of 3 sources: ViroPharma’s Q3 2012 earnings release, its latest 10-Q filing, or its Q3 2012 earnings call.

Overview & Q3 2012 Results

ViroPharma, based in Exton, Pennsylvania, markets a number of drugs: Cinryze for the treatment of hereditary angioedema (HAE); Vancocin for clostridium difficile; and Buccolam, which is sold in Europe for the treatment of seizures. ViroPharma is also preparing to launch Plenadren in Europe for the treatment of adrenal insufficiency.

In its latest quarter, ViroPhrama posted revenues of $91.004 million, a steep drop from the $142.956 million in sales posted during the third quarter of 2011. The decline was due to generic versions of Vancocin entering the market in 2012. Vancocin sales dropped 95% year-over-year, highlighting the power that generics have in the marketplace. And sales of Cinryze have not yet risen fast enough to overcome the decline in Vancocin sales. During this latest quarter, Cinryze sales rose from $65.4 million in Q3 2012 to $85.3 million. The company posted a GAAP loss of 7 cents per share, but a non-GAAP profit of 10 cents per share, which removes non-cash expenses from the earnings calculation. ViroPharma burned $7,800 in operating cash flow during this quarter, but the company has $143.989 million in net cash & investments on its balance sheet, and I am confident in the company’s ability to quickly return to GAAP profitability and operating cash flow. Continued growth in Cinryze sales and a strong pipeline are setting the stage for a strong 2013.

Cinryze: Expanding the Patient Pool

Cinryze treats hereditary angioedema (HAE), a rare inherited blood disorder that affects between 1 in 10,000 and 1 in 50,000 people in the United States. ViroPharma is forecasting that it will end 2012 with 900 patients in the United States, and the company is working to expand its patient pool even further, says CEO Vincent Milano:

The data points that we provided you in the past continue to remain consistent with roughly 50% of our new patients coming on after having previously tried anabolic steroids and roughly half of the new patients this year have been diagnosed in the last 3 years. Another important data point is that around 30% of our new patients coming on to Cinryze therapy have done so after trying one of the available acute HAE therapies. So in contrast to the theories that the acute HAE therapies would be drawing patients away from prophylaxis, the totality of the data actually suggests that prevention of attack is a preference for many people with HAE.

As the US Hereditary Angioedema Association states on its website, Cinryze is designed to prevent HAE attacks from occurring in the first place, whereas existing treatment options merely serve to treat attacks that have already taken place. That is what sets Cinryze apart in the market among HAE medicines, and recent clinical data has further strengthened Cinryze’s competitive advantage. ViroPharma presented new safety data regarding Cinryze at the American College of Allergy, Asthma, and Immunology’s meeting that showed that increased doses of Cinryze were well-tolerated in patients that were unable to adequately control their HAE with the standard dose of 1000 units every 3 to 4 days (Cinryze is created from human blood, and is therefore dosed in units). ViroPharma studied 20 patients over the course of 3 years, and escalated their Cinryze doses in a step-function, from 1000 units to 2500 units, in increments of 500 if patients continued to have more than 1 angioedema attack each month. A 3-month safety follow-up was conducted after each dosage increase. The safety study concluded that doses of up to 2500 units present no safety issues relative to existing clinical data, and that there were no discontinuations due to adverse events. There were 2 adverse events detected during the study that were determined to be related to Cinryze: a localized blood clot and a muscle spasm, but neither event was deemed serious enough by the investigators to warrant discontinuation of Cinryze. This study will allow ViroPharma to eventually expand its addressable market, as patients that do not respond to the standard dosage of Cinryze will be able to stay on the drug.

While Cinryze sales are growing in the United States, ViroPharma is not standing still in its efforts to grow international sales. European sales of Cinryze were around $1 million in Q3 2012, and CEO Vincent Milano admitted on the company’s call that the European market is a “tough” one to break into:

We launched Cinryze in Europe in the U.K. and in Germany in the beginning of the year, and it's been a pretty tough but steady add of patients here from the beginning. There's been a significant change in physician and patient attitude over the last 2 years and I think that's probably due to the success that we've had in the United States. If you went 2 or 3 years ago back to Europe, you'd have learned that there wasn't a whole lot of interest in prophylaxis [Cinryze is a prophylaxis, or preventative, therapy]. But I think the benefits that the patients have realized in the U.S, and I think the thought leaders from the U.S. being at the same meetings as the Europeans, has started to change that attitude. And also, please remember that we had intended to launch Cinryze in France, Spain and Italy in September. And in those 3 countries, launch has been put back due to the overall economic situation and our ability to gain reimbursement. We do plan to be able to launch in France and in Spain before the end of the year, and it's likely that Italy will get launched some time in the beginning of 2013.

ViroPharma is working to expand awareness of the benefits of Cinryze relative to existing treatment options for HAE in Europe, and 2012 is not representative of Cinryze’s full potential in Europe. The company’s launch in France, Spain, and Italy has been delayed due to the macroeconomic situation in Europe, which has slowed down the setting of reimbursement rates, hence patients are reluctant to spend the money for this costly treatment. But, sales should be seen in France and Spain from the fourth quarter, and Italian sales should start in Q1 2013, as the company likely expects to gain some reimbursement traction in those markets. ViroPharma is also looking to expand the use of Cinryze here in the United States, and it is attempting to do so via a far more convenient dosing mechanism.

Cinryze is currently administered intravenously, and while it is approved for home infusion, intravenous dosing is inconvenient and cumbersome. ViroPharma, in partnership with Halozyme Therapeutics (NASDAQ:HALO) is studying the safety and efficacy of Cinryze when administered subcutaneously using Halozyme’s Enhanze technology [a proprietary deliver system using recombinant human hyaluronidase enzyme (rHuPH20)], which was licensed to ViroPharma in May 2011. ViroPharma and Halozyme began a Phase IIb trial of subcutaneous Cinryze on December 19. The companies will monitor 40 patients over the course of either one or two 8-week treatment sequences. The trial will have 2 dosing options: 1,000 units of Cinryze with 24,000 units of rHuPH20, or 2,000 units of Cinryze with 48,000 units of rHuPH20. In earlier Phase II trials, patients who took Cinryze subcutaneously had no HAE attacks during the trial, and mild to moderate reactions at injection sites were the most common adverse events reported. According to ViroPharma, the addition of rHuPH20 “resulted in mean C1 INH functional concentrations greater than or equal to 0.4U/mL for 92 percent of the 72 hour post dosing period as compared to 73 percent for 1000U IV.” NO C1 INH antibodies were detected in a 30-day post-treatment follow-up after the last doses of Cinryze were administered. Earlier in 2012, there were some safety concerns with this trial, as the FDA ordered ViroPharma and Halozyme to stop clinical trials while it investigated safety signals related to rHuPH20 antibodies in another company’s clinical trial program. But the FDA lifted its clinical hold in September when it was determined that these safety issues applied only to that other clinical program, and were not “transferrable” to the clinical trials being conducted by ViroPharma and Halozyme. ViroPharma and Halozyme signed their license agreement in May 2011, in which Halozyme granted ViroPharma an exclusive, worldwide license to use Enhanze in combination with Cinryze. ViroPharma paid Halozyme $9 million for the license in May 2011, and paid another $3 million in Q4 2011 when their Phase II program was initiated. Total milestone payments to Halzoyme could reach $41 million for Cinryze ($30 million for 3 other indications), and Halozyme will receive a 10% royalty on any future sales of subcutaneous Cinryze. In its 10-Q filing, ViroPharma also stated: “Additionally, we will pay an annual maintenance fee of $1 million to Halozyme until specified events have occurred.” I view these terms as acceptable, given that subcutaneous dosing of Cinryze will further strengthen the drug’s position in the market.

Other Drugs and the Pipeline: Expanding ViroPharma’s Addressable Market

ViroPharma recently launched Plenadren in Europe, and the drug is now available in Germany, Denmark, Norway, and the United Kingdom, and ViroPharma is making progress on launching in Spain and Italy. On the company’s Q3 call, CEO Vincent Milano said that physicians in Europe have started to prescribe the drug to patients. The company is engaged in discussions with the FDA regarding commercializing Plenadren in the United States and expects to provide an update in early 2013 regarding its plans. Buccolam was also launched in Europe during Q3 2012, and sales totaled $1.2 million in the quarter. ViroPharma is working to expand the market for Buccolam as well. I expect that the company will provide much more detail regarding its progress in Europe when it reports Q4 2012 results in early 2013.

ViroPharma focuses on rare diseases, such as HAE, and while such a focus can be highly profitable, it is also dependent on securing FDA (or EMA) approval for new indications for existing drugs, as well as developing new therapies altogether. ViroPharma is making progress on both fronts.

The company has seven different pipeline programs (inclusive of the subcutaneous dosing of Cinryze discussed earlier). VP20621, which ViroPharma acquired in 2006, is the company’s drug for the treatment of recurrent C. difficile. A Phase II trial was begun in May 2011, and the company projects that full Phase II data will be available in 2013. VP20629 is licensed from Intellect Neurosciences for the treatment of Friedreich’s Ataxia (FA), a rare neurodegenerative disease that affects about 1 in 50,000 people. Symptoms of FA include heart disease, speech problems, and gait disturbance. It is estimated that there are 6,000 FA patients here in the United States. Phase I data for VP20629 showed that the drug was well-tolerated at all dose levels, and ViroPharma is set to initiate a Phase II trial in the second half of 2013, and the company plans to file for orphan drug status once Phase II data is available. ViroPharma will pay Intellect Neurosciences up to $120 million in milestones, as well as a tiered royalty rate (with a cap in the “mid-teens”), if VP20629 is approved and commercialized. ViroPharma is also working to expand the use of Cinryze into transplant medicine. The company is studying Cinryze’s effects on treating Antibody Mediated Rejection (AMR) and Delayed Graft Function (DGF). Some transplant patients have antibodies that, when combined with donor specific antibodies, destroy the transplanted organ via AMR. DGF occurs during the organ preservation process. CEO Vincent Milano expects further data on these organ transplant indications in 2013.

ViroPharma’s last pipeline asset is oral budesonide, which it has rights to via an options agreement with Meritage Pharmaceuticals. In December 2011, the two companies signed an agreement under which ViroPharma can acquire Meritage for $69.9 million once final Phase II data for oral budesonide is available. In its latest 10-Q filing, ViroPharma states that it made a $5 million milestone payment (there will be up to $175 million in milestone payments) and that Meritage is continuing the development of oral budesonide, and that it continues to hold the option to acquire Meritage for $69.9 million.

Guidance, Financials, and Capital Structure

ViroPharma ended Q3 2012 with $143.989 million in net cash & investments, and although it swung to a GAAP loss, as well as a slight operating cash burn in this quarter, I believe that Q3 2012 will be the low-point for ViroPharma in terms of earnings. Vancocin sales fell 95% in the quarter, and ViroPharma’s total sales fell by 36.34%, even as its expenses rose by 2.93%. But, ViroPharma was able to keep its operating loss to $4.173 million. Cinryze sales have ample room to grow, whereas it is difficult for Vancocin sales to fall much further. ViroPharma guided for full-year revenues to come in between $425-$435 million, and with sales for the first 9 months of 2012 coming in at $321.444 million, that implies that Q4 sales will be $108.556 million, based on the midpoint of ViroPharma’s guidance. Assuming that ViroPharma can keep its expenses under control, the company should return to GAAP profitability in Q4, as well as positive operating cash flow.

ViroPharma stands out in the biotechnology industry because it is actively buying back stock, a rarity for most companies in the sector. While it is normal for companies such as Amgen or Celgene to be buying back stock, companies of ViroPharma’s size are not usually active repurchasers. In the first 9 months of 2012, ViroPharma spent $151.985 million on share buybacks, which retired 5.8 million shares of stock (the company currently has 65,208,904 shares outstanding). On the company’s earnings call, analysts pressed ViroPharma’s executives about why the company is buying back stock when those funds can be used to acquire new pipeline assets. CEO Vincent Milano responded:

The strategy [regarding capital deployment] remains consistent, we constantly evaluate business development opportunities, versus internal opportunities, versus the opportunity to further improve our capital structure with buyback. So I would say that today, our strategy remains the same as it has been. We'll continue to consider all of those things and deploy the capital at the times we see fit, that way we see fit. So nothing's changed. Maybe more specifically on the business development question, we have a very robust pipeline. As I think we had a chance to at least share a reasonable portion of that with the investment community on the 21st of September. So we're not necessarily thinking only about filling the pipeline, we're still interested in other commercial products, specifically in the United States would be good. As you know, our team in Europe is extremely busy launching 3 products. But we're not exclusively looking one way or the other. We're actually continuing to look at it all.

ViroPharma is looking at all options when it comes to capital deployment, and once the company’s operating cash flow rebounds as Cinryze and its other drugs continue to grow, the company will have increased flexibility to deploy capital. And it seems that ViroPharma’s buybacks have not impacted its ability to invest in the pipeline, which is moving forward through clinical development. That, however, failed to impress analysts. Cowen & Company analyst Phil Nadeau asked CEO Vincent Milano why the company is buying back stock if, “It doesn't seem like for the next couple of years your stock's going to be valued on an EPS basis; It's more on top line growth.” Nadeau sees little reason to spend money to buy back stock if the market does not care about EPS, but rather how quickly ViroPharma can grow its sales and completely mitigate the effects of generic Vancocin, and he believes that more cash on the balance sheet allows for even greater “flexibility” in acquiring promising clinical programs. In my view, however, ViroPharma’s buyback program is neither positive nor negative, at least at this point in its corporate life cycle. While ViroPharma may be temporarily unprofitable as it transitions through its commercialized drugs (and invests millions into launching them), the company has reduced its share count by 6.57% since the end of the third quarter of 2011, and that will position the company well in terms of EPS when it returns to profitability. And these buybacks have not imperiled the company’s balance sheet. ViroPharma ended the quarter with $303.622 million in cash & investments, and its $159.633 million in debt (consisting of convertible notes) is due in March 2017, giving the company ample time to fortify its balance sheet. It is true that ViroPharma’s profitability has declined on a year-over-year basis. For the first 9 months of 2011, the company posted pro forma EPS of $1.49, and just $0.57 in pro forma EPS for the first 9 months of 2012. 2012 has clearly been a transition year for the company as it invests in launching multiple new products across the world and absorbs the fallout from the launch of generic Vancocin. 2013 and the years beyond are what matter.

Conclusions

For ViroPharma, 2012 has been a transitional period, but the company is well-positioned for 2013 and beyond. It has a solid cash position, and it has the ability to invest in its existing pipeline programs, as well as acquire new assets. The company has a clear pathway to return to profitability, and investors who add to or initiate positions in ViroPharma are likely to be rewarded for their conviction in the years to come. The company is set to release a good deal of clinical trial data in 2013, which, combined with growth in the sales of Cinryze, as well as other drugs, is likely to cause its stock price to rise. The average analyst price target for shares of ViroPharma is currently $34.98, which implies upside of 54.3% based on the company’s closing share price of $22.67 on December 26, 2012. Investors stand to see a solid return even if shares rally to just $30. ViroPharma’s best days are ahead of it, something that is not reflected in its current share price.