Viropharma: Opportunistic Investors Could Still Jump On The Bandwagon

| About: Shire PLC (SHPG)

Shares of Viropharma (VPHM) saw a massive jump toward the upside halfway through Friday's trading session.

Reports hit the newswires that the company has hired investment banks after the company received unsolicited interest by European drug companies looking to shore up their future drug pipelines.

If rumors turn out to be true, shareholders might see much further upside given the potential for synergies and premium valuations in a hot market for biopharmaceutical merger and acquisitions. Note that shares are quite risky at this point in time, as a denial of rumors could easily send shares 15% to 20% lower.

Given the seriousness of the rumors, opportunistic investors might still jump on the bandwagon in a high risky investment.

Friday's News

Viropharma has hired Goldman Sachs (NYSE:GS) after the drug producer has received unsolicited offers from Sanofi (NYSE:SNY) and Shire PLC (NASDAQ:SHPG), according to a Bloomberg report.

According to the report an auction of the company is among the possibilities. No possible deal values or price tags have been announced.

Second Quarter Results

On the 1th of August, Viropharma reported its second quarter results. The company generated quarterly revenues of $103.7 million, up 9.6% on the year before.

The company reported a net profit of $0.6 million, compared to a loss of $5.8 million in the comparable period last year.

Viropharma's sales and sales growth has entirely been driven by the growth of Cinryze. Net sales of the product in the US rose by 22% to $91 million. In reality demand was even higher, as demand totaled $96 million, as wholesale inventories fell by $5 million. In comparison, first quarter demand adjusted for inventory swings came in at $91 million.

Overall revenue growth was depressed as sales from Vancocin fell by 75% to $4.0 million.


Cinryze is meant to treat HAE, which is a rare genetic disorder with life threatening implications. Swellings in hands, feet, face or airways are caused by a genetic defect which controls the C1 Inhibitor blood protein.

According to the US Hereditary Angiodema Association, there are between 6,500 and 10,000 patients suffering from HAE in the US alone. Note that the company just crossed the 1,000 patient mark, which almost generates a $100 million in quarterly revenues. This means that the treatment by Cinryze cost some $400,000 per patient per annum.

These very high costs for medication might increasingly become under scrutiny as healthcare costs keep increasing and putting a strain on the fiscal budget.

Cinryze is FDA approved in the US and Europe for routine prevention of HAE attacks. Interesting enough, some 80% of patients actually administer the drug themselves.


On the back of the performance in the first half of 2013, Viropharma expects full year revenues to come in between $440 and $465 million. US Cinryze sales are expected to come in between $390 and $400 million.

Annual research and development, as well as selling, general and administrative expenses, are seen between $240 and $260 million.


Viropharma ended the second quarter with $258.5 million in cash, equivalents and short-term investments. Total debt stood at $166.2 million, for a net cash position of $92.3 million.

Revenues for the first six months of the year came in at $210.9 million, down 8.5% on the year before. The company turned a $14.2 million profit into a $63.4 million loss on the back of a $105.7 million impairment charge in the first quarter.

Factoring gains of 28%, with shares exchanging hands at $39 per share, the market values Viropharma at $2.6 billion. This values operating assets of the firm at around $2.5 billion. As such, operating assets are valued at 5.5 times annual revenues.

Viropharma does not pay a dividend at the moment.

Some Historical Perspective

Shares of Viropharma have seen their fair share of volatility, but have resulted in large returns for long-term shareholders.

Shares rose from lows of $2 in 2005 to highs of $20 later that year, only to slowly lose ground to lows of $4 in 2009. From that point in time, shares have steadily gained ground as Friday's news sent shares to fresh all-time highs of $39.

Between the calendar year of 2009 and 2012, Viropharma has increased its annual revenues by a cumulative 38% to $428 million.

Investment Thesis

Viropharma has reported a steady increase in revenues for quite some time now, driven by the successful Cinryze treatment. Management has previously communicated that it sees revenues from Cinryze to increase to some $800 million by 2020, which means that revenues will roughly double from current levels.

Given the very low cost of production, positive operating leverage on selling, general and administrative expenses, as well as research and development expenses, can be a huge boost to future earnings. Besides the current success of Cinryze, potential suitors are also interested in Viropharma's rich pipeline.

Sanofi has expertise in treatments of rare diseases after it acquired Genzyme in 2010 for almost $20 billion. Shire is no stranger to rare diseases as it focuses on Fabry disease.

Other investment banks are already making their calculations on what all of this news might imply for shareholders. According to Deutsche Bank analysts, a deal by an acquirer which has a sales force for hereditary angioedema drugs could result in synergies which would justify a $52 price tag.

Deal activity in the biotechnology and biopharmaceutical industry has picked up. As recently as August, Amgen (NASDAQ:AMGN) announced the $10.4 billion acquisition of Onyx Pharmaceuticals (NASDAQ:ONXX).

To be honest, Friday's move might just be the start of a larger move upwards. The expected sales growth of Cinryze, the great opportunities for synergies, the full pipeline and relative modest market capitalization could easily spark a bidding war among suitors. With two rumored parties mentioned in the report, and a relative modest sales valuation, an eventual deal might take place indeed north of $50 per share.

For opportunistic investors it might still be early enough to jump on the bandwagon. Note that this is a high risk proposition as shares rose almost 30% on the back of these rumors. If a deal does not materialize, a short-term pullback could be severe. While I don't see shares pulling back all the way to $30, which are the pre-rumor levels as speculative investors will push up the price, a correction toward the mid-thirties could easily materialize.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.