By Ivan Deryugin
Since our last report on ViroPharma (VPHM), shares of the Exton, Pennsylvania,-based company have risen by just under 11%. While positive returns are always welcome, ViroPharma has noticeably underperformed the NASDAQ Biotechnology Index, which has risen by over 17% in the same time frame. VPHM's lagging performance stems from concerns regarding generic competition to Cinryze, ViroPharma's treatment for hereditary angioedema (HAE). Given what happened to Vancocin, ViroPharma's drug for the treatment of clostridium difficile when generic versions launched, these concerns are understandable. But, we believe that ViroPharma's past isn't likely to repeat. Cinryze has multiple barriers to generic competition, and ViroPharma is making meaningful progress in commercializing its other drugs, as well as in moving its pipeline through the development process. At just over $25, shares of ViroPharma offer ample upside for long-term investors.
Q4 Review And 2013 Guidance: Highlighting ViroPharma's Progress, Reminding Investors of the Impact of Generics
For Q4 2012, ViroPharma posted earnings of 10 cents per share on revenues of $106.49 million. While ViroPharma missed consensus earnings estimates by 2 cents, it beat on revenues by $3.44 million. Sales of Cinryze grew by 45% in Q4 2012, driven by continued demand. However, total revenues of $106.49 million fell by 26.85% from the year-ago quarter, due to a 93.57% plunge in sales of Vancocin, to just $5 million. Generic versions of Vancocin launched in 2012, and the impact is clearly visible. Pro forma EPS at ViroPharma fell from $2.09 in 2011 to $0.64 in 2012, as revenues fell by 21.39%. However, we expect that ViroPharma's past will remain its past, not its future. For 2013, the company is forecasting $462.5 million in revenue at the midpoint of guidance, representing consolidated revenue growth of 8.08%. Sales of Cinryze in North America are set to reach $395 million at the midpoint of guidance, representing growth of 20.76% relative to the $327.1 million in Cinryze sales that ViroPharma saw in 2012. And despite a sharp fall in revenues and income, ViroPharma remained cash flow positive in 2012 and ended the year with $246.856 million in cash and investments, and debt of $161.793 million (more on ViroPharma's finances later).
In Q4 2012, ViroPharma continued to execute on its commercialization goals, particularly in meeting its projection of $600 million in peak North American Cinryze sales. ViroPharma is working to launch Cinryze in Europe, and has secured reimbursement in Italy, France, Germany and the United Kingdom. CEO Vincent Milano has pledged that by Q3 2013, Cinryze will be available in the 5 largest European markets. The European Union currently contributes less than 2% of total Cinryze sales, and presents a meaningful opportunity for the company. Attitudes in Europe have shifted favorably towards Cinryze in recent years. ViroPharma COO Daniel Soland noted on ViroPharma's Q4 call that several years ago virtually no physicians were believed there was a place for C1 esterase inhibitors such as Cinryze. Now, physicians are saying that as many as 10% of their patients should be on drugs such as Cinryze.
The trend in opinion regarding HAE in Europe favors Cinryze, and as ViroPharma continues its investments in its salesforce and awareness initiatives, opinion regarding Cinryze is likely to become more positive. In Europe, 30-60% of HAE patients are treated via prevention strategies. But, aside from Cinryze, the only HAE prophylactic treatments that are available are androgens and tranexamic acid, treatments that are not suitable for all patients and that have a number of side effects, such as increased cardiovascular risks, voice changes, and prostate cancer, and the possibility of these side effects can increase alongside dosages.
Despite continued macroeconomic stress in Europe, ViroPharma has not shied away from the continent, and 2013 will likely see a number of catalysts for the company. ViroPharma is in the process of finalizing reimbursement for Buccolam (for the treatment of seizures) in France and Spain, and by the 2nd half of the year, Buccolam should be available in all 5 key European markets. ViroPharma is in the process of rolling out Plenadren (for the treatment of adrenal insufficiency) in Europe. The drug was launched in 4 countries before the end of the year, and its launch in Italy and Spain is underway. The company is capturing additional data to support reimbursement in a variety of other European Union territories, with CEO Vincent Milano forecasting a substantial number of negotiations to take place in the second half of this year. Mr. Milano believes that for these negations, a 2014 launch is more likely. That being said, 2013 will be a year of growth for Plenadren and Buccolam, even if it is back-end loaded. Consensus forecasts for 2013 call for ViroPharma to post just 8 cents in EPS for the first 2 quarters of 2013, but then call for a combined 19 cents in the last 2 quarters of the year.
Cinryze: Addressing Competitive Concerns
Given the effects that the destruction of its Vancocin franchise had on ViroPharma, many investors are understandably nervous about the potential for generic competition to Cinryze, with many thinking that the company cannot survive the destruction of a 2nd franchise. However, Cinryze is a far different drug than Vancocin, and there are multiple barriers to generic competition.
- Exclusivity: Cinryze is protected by its orphan drug exclusivity until October 2015, giving ViroPharma more than 2 years of "worry-free" sales, which will fortify the company's balance sheet and give it time to expand sales of Plenadren and Buccolam, as well as invest in its pipeline.
- Affordable Care Act: The Affordable Care Act overhauled many parts of America's healthcare system, and it included changes to drug development as well. The law grants biologics 12 years of data exclusivity after securing FDA approval, meaning that Cinryze's clinical data is protected until October 2020. What this means is that potential competitors who wish to develop generic versions of Cinryze cannot simply base their approval filings on Cinryze's data. They will have to recreate their own clinical trials.
- Higher approval standards: When Cinryze was first approved in 2008, the drug represented a solution to the unmet medical need (one of the factors behind giving it orphan drug status) of a prophylactic approach to treating HAE. In 2013, that unmet medical need no longer exists, and the bar for approving alternative treatments is higher. The company was told by the FDA that the hurdles for approving its subcutaneous formulation of Cinryze would be higher than the current intravenous formulation. Any subcutaneous formulation of a C1 inhibitor is unlikely to enter the market until 2016 or 2017, making the threat of direct competition to ViroPharma's own plans for developing a subcutaneous version of Cinryze less of a threat than it appears on the surface.
It is true that Cinryze is not the only treatment option within the broader HAE market. Shire's (SHPG) Firazyr (icatibant injection), Dyax's (DYAX) Kalbitor (ecallantide), and CSL Behring's Berinert (C1 inhibitor) are all designed to treat HAE attacks. However, there is a crucial difference between Cinryze and these therapies: Cinryze is the only approved prophylactic HAE drug. These 4 therapies are all designed to treat acute episodes of HAE, and while Kalbitor and Firazyr are subcutaneous drugs, Kalbitor is not approved for in-home injection, and must be administered by a medical professional (Cinryze is approved for both professional and in-home injection). The benefits of utilizing Cinryze versus an acute treatment option increase proportionally alongside the frequency and severity of HAE attacks that a patient has. While it is true that Cinryze is not the only treatment option for HAE, it is the only prophylactic option approved, and ViroPharma is working on securing approval for Cinryze in subcutaneous form. As we noted in our prior report, ViroPharma has partnered with Halozyme Therapeutics (HALO) to utilize Halozyme's Enhanze technology in delivering Cinryze subcutaneously. Phase IIb trials began in December 2012. In addition, in January ViroPharma released clinical data from its study of Cinryze in pediatric HAE patients. The study found that children (ages 2-17) in the routing prophylaxis study had almost 2x less HAE attacks (7 attacks in the control arm relative to 13 in the placebo arm) when taking Cinryze relative to placebo. Within the open-label extension of the study, the median number of HAE attacks per patient per month fell to 0.39, versus a rate of 3 attacks per month prior to enrollment. Within the prophylactic study, 1 patient out of 4 total patients experienced an adverse event related to Cinryze, and in the open-label prophylactic study, 2 patients out of 23 experienced adverse events determined to be related to Cinryze. Safety data in the acute arms of the study was also positive, with no adverse events reported in the acute study, and no events related to Cinryze reported in the open-label acute study (9 out of 24 patients experienced adverse events). However, no patient discontinued treatment due to adverse events, and the efficacy of Cinryze within the prophylactic arm was consistent with its published efficacy data in the broader HAE patient population.
Other Pipeline Assets: Continuing Incremental Progress
While the continued growth of Cinryze, as well as progress in commercializing Buccolam and Plenadren in Europe, will be the key drivers for ViroPharma in 2013, the company should see incremental progress on its pipeline as well. ViroPharma expects to move VP20629 (for the treatment of Friedreich's Ataxia (FA)) into Phase II trials within the 2nd half of the year, and plans on filing for orphan drug status once Phase II data is available. The company also expects to have full Phase II data for VP20621 (for the treatment of Clostridium difficile in patients that have been previously treated for the disease but relapsed) this year. Data for maribavir, designed to treat CMV infections, will also be available in 2013. ViroPharma will begin studies of recombinant formulations of Cinryze, and the company is likely to provide more color on this program on its Q1 2013 earnings call. However, ViroPharma announced in early March that the FDA has told the company that the data it used to secure approval of Plenadren in Europe will not be enough for approval in the United States, and that additional Phase III trials will be needed. ViroPharma is currently in discussions about designing a Phase III study, and details should materialize in Q1 2013 earnings call. As we noted in our last report on ViroPharma, 2013 is a year of both commercial and pipeline investment. ViroPharma is making meaningful progress in expanding its business both here in the United States and in Europe, while continuing to invest in its pipeline.
Financials: Continuing the Buyback Debate
On ViroPharma's Q4 earrings call, the issue of buybacks once again took center stage. Many observers expect that because of the erosion of the company's Vancocin franchise, ViroPharma would be hoarding cash. ViroPharma spent over $180 million on share buybacks in 2012, up from around $170 million in 2011. This has brought ViroPharma's balance of cash and investments down from $459.83 million at the end of 2011 to $246.856 million at the end of 2012. Analysts once again pressed ViroPharma's executives about whether or not this is truly the best way to deploy capital, with the underlying suggestion being that ViroPharma should acquire new pipeline assets. Milano responded to these concerns by noting that ViroPharma continues to actively look at new assets to determine whether or not they are valuable enough to license and/or acquire. However, he also noted that ViroPharma's "screen" for new assets takes into account the need for positive operating cash flow and earnings, and that while the company is looking at new assets, those assets would have to be superior to what ViroPharma currently has in its pipeline to have the company consider the addition. Milano further stated, "And with our current share price where it is, we're always looking at sort of the return of investing in our stock. So I have to say that we have an authorization outstanding for $200 million, and it's still one of the things that we look at on a daily basis." While it is certainly true that ViroPharma could utilize this capital to acquire new assets, the issue is not as material as it seems. ViroPharma isn't suffering from a shortage of pipeline assets, nor does its pipeline depend solely on Cinryze. ViroPharma pipeline assets move across a variety of indications, and despite spending close to $200 million on buybacks in 2012, this has not slowed the pace of ViroPharma's clinical development, as the company will see multiple clinical data readouts in 2013.
The question of pipeline assets vs. buybacks isn't the only element to the debate over ViroPharma's capital use. With $161.973 million in debt, the company's net cash position stands at just $84.883 million, a level that some analysts see as too low. Milano said on the subject, "The more sincere answer to your question (from Piper Jaffray analyst Edward Tenthoff regarding optimal cash balances) is that we do have a threshold in our minds that we would never want to go below. I don't know that it's good for us to share that exact number, but we do have a model in our head..." However, as in the debate of buybacks vs. pipeline assets, the debate over ViroPharma's optimal cash balances is somewhat overblown. ViroPharma's debt is in the form of convertible notes due March 2017, giving the company 4 years until the debt is due (the notes can be converted into shares of ViroPharma at a price of $18.87 per share after December 15, 2016). And assuming that ViroPharma is able to execute on its commercialization goals, the company should have cash balances that are meaningfully higher by the time this debt is due. Consensus forecasts call for ViroPharma's EPS to climb to $2.19 in 2016, above its record $2.09 in 2011. And the buybacks that ViroPharma has undertaken have produced meaningful results. Over the past year, ViroPharma's share count has fallen from 70,726,378 to 65,208,957, a decrease of 7.8%. When the buybacks are combined with those from 2011, ViroPharma has repurchased over 16% of its outstanding shares in the past 2 years alone. If ViroPharma's buybacks were imperiling either its R&D efforts or its financial viability (as measured by its cash balances), then they certainly need to be halted. But so far, neither scenario seems to be playing out. ViroPharma continues to actively invest in its pipeline, and the company has made clear that it has a level of cash it will not dip below. And with income (and operating cash flow) set to rebound meaningfully in the near-term, ViroPharma will be able to continue what is a fairly aggressive buyback pace, one that has produced tangible results.
Near $25, shares of ViroPharma have room to climb (for investors who put stock in the value of consensus price targets, the average price target for ViroPharma currently stands at $33.75, implying upside of over 34% from current levels) as the company continues to expand the market for its existing products and invests in its pipeline. A buyback program that has reduced the company's share count by over 16% in 2 years is a clear benefit. While the ViroPharma "story" will take some time to play out, it's a story that investors should consider, as the company is seeing progress on a number of fronts, progress that has yet to materialize in its stock price.
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