|Shares Out. (in M):||77||P/E||0.0x||0.0x|
|Market Cap (in $M):||333||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-26||EBIT||0||0|
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VPHM is a classic example of a big negative event causing investors to look in the rear view mirror, rather than forward. VPHM has fallen from $13 to $4, based upon a failed Phase III trial for Miravabir, but the story is really about two APPROVED drugs that they own. The current enterprise value of the company is less than they paid in December for LEVP and it's drug Cinryze. Disappointed investors who owned the stock for Miravabir are now dumping the stock indiscriminately, rather than doing the work to learn Cinryze. There are 3 ways to win (Generic competition for Vancocin could be delayed, the initial Cinryze sales could suprrise to the upside, and Cinryze could get approval for the smaller acute indication on 6/3 when the FDA will reply) on this that could occur this year. Our research leads up to believe that each of the are 50%+ likihoods.
Given the low sentiment around the stock, we have two individual ways to win big (100%+ upside) and could win both (200%+ upside).
How we win:
1) Vancocin could keep patents off the market for a few more years, earning 100-120m in FCF a year growing 15% a year, or
2) Cinryze could just meet LT expectations and Vancocin could go generic at the end of this year, as the street already expects.
On the other hand we have only one way to lose; Vancocin goes generic this year and Cinryze severely disappoints, in which case the downside is limited to ~ 40% on a DCF basis, but there is a good chance they beat the 2009 & 2010 street expectations in even the worst scenarios, so the near term downside is likely overstated by our DCF methodology and could be zero. We think Cinryze sales are progressing well ahead of expectations and this mitigates a lot of downside.
Due to a recent failed drug trial that caught investors by surprise & low disclosure around the recently acquired drug Cinryze, which makes up most of the future value, VPHM is being discounted too severely by the market and is trading with a good margin of safety, numerous free options, low economic sensitivity, and has a savvy management team with a track record of adding value. We think over the next 2-3 quarters VPHM can beat expectations and win back the market's confidence; shifting focus onto the newly acquired drug Cinryze & away from Miravabir.
We think VPHM could be trading for 3.5x 09 earnings, 2x 10', and 1.5x 2011 if they can keep a generic off market till 2012, and if a generic does enter in the Q4 09 and erode Vancocin profitability the earnings stream looks more like 4x 09, 10x 2010 - as we wait for Cinryze sales to ramp, and 3.5 to 3x 2011earnings as Cinryze sales begin to reach full penetration. We are buying VPHM at what they paid for Cinryze and we get the value from Vancocin for free.
Viropharma (VPHM) is a small drug company that generates all of its profits from two drugs: Vancocin & Cinryze. Vancocin is a branded, off-patent but not yet generic, antibiotic that treat infectious diarrhea (CDAD), a life threatening infection for which there is no other effective treatment. Cinryze is a replacement therapy for the orphan disease Hereditary Angiodema, which is a genetic disorder that causes severe swelling of body parts brought on by random, unknown triggers. Cinryze was approved for commercial use in October 2008 and has a 7 year exclusivity on the market under orphan drug designation. It just began selling into the market. VPHM has three other drug compounds: one that recently failed a Phase III trial called Miravabir and will likely be wound down, NTCD in pre-clinical studies for treatment of C dificile, and Antiviral discovery in pre-clinical studies. We ascribe no value to these. Lastly,
Cinryze was purchased from Lev Pharmaceuticals (LEVP.OB), which was written by member Stanley339 in the past. Please refer to this write-up for more background on the drug and disease. It will help explain the meaning of acute and prophylactic markets and the history behind treatment.
Research indicates it could be 2 + years before a generic Vancocin hits market. THIS IS A HIGHLY VARIANT PERCEPTION.
• i. Cost of treatment is about $1,000 for a 10 day course and there is less than 1/3rd re-lapse rate.
• ii. New guidelines by hospitals are recommending using Vancocin as first line treatment to not take chances on relapse etc.
Cinryze potential not appreciated in market due due to complexity and Miravabir miss but we think demand is robust
VPHM mgmt team has a history of value creation:
6 insiders recently bought shares between $4 and $5 in last 2 wks (only $120k to $10k worth)
Potential to reduce cost structure if needed, but not a priority and not expected:
Valuation: Scenario Tree:
Using a DCF methodology and 12% discount. After 7- yr exclusivity Cinryze profit falls to 25% of peak. Per share value:
We and our affiliates are long VPHM. We may buy / sell shares in the future. This is not a recommendation to buy or sell shares. Please do your own research and diligence.
Vancocin doesn't go generic right away, Cinryze data
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