Viropharma: Failed Bet on Orphan Drug

| About: Shire PLC (SHPG)

Bone marrow and organ transplant patients won't get help from Viropharma's (VPHM) new antiviral drug, maribavir, which failed its phase III trials. As a result VPHM plunged almost 53% yesterday to $5.74 a share. One analyst values it at $4 to $5. Key graphs from Reuters:

Cytomegalovirus is a member of the herpes virus family and is a frequent viral illness after transplants. The company had planned two separate trials for maribavir -- in patients receiving stem cell transplants and in those with solid organ transplants. Failing in the stem cell transplant study means the company might have to do a third late-stage study to get approval even if the second study is successful, pushing the timeline of the drug further away.

Other reports on the disappointing news and more information about VPHM are here. About a year ago, I warned that VPHM was a very speculative stock with bearish charts. Ironically, a couple of weeks ago I picked the stock in a stock picking contest because its charts looked good, and, I figured, if the trials produced good news, I'd have a two- or three-banger. After all, Tony Kent had estimated that maribavir could be worth $400 million to $500 million in new revenues for VPHM.

In the last 12 months, VPHM generated $229.98 million in revenues. Viropharma is very profitable. Its profit margin in the latest 12 months was 38.7%, and its return on equity was 17%. But one of its most important products is about to go generic, which means it really needed to have its new drug succeed. So the outlook for earnings appears rather grim. Fortunately, I didn't buy the stock and don't own it. One reason I don't is that companies that are so vulnerable to bad news from clinical trials often receive disappointing news as VPHM has. This is one reason that orphan drugs like maribavir, which have relatively small markets, are so expensive to develop and to buy.

Stock position: None.