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Viropharma (VPHM)
... the success of Vancocin / oral vancomycin

12.02.05 - So I recently went long on Viropharma…you know…the vote with your money type. As you may already know, Viropharma nearly went bankrupt on the failure of its cold vaccine to gain FDA approval. Shares cratered to $1. It essentially downsized it's HQ building in Eagleview (Exton, Pa). Then it had the fortune to fall upon a drug which was losing its patent rights -> oral vancomycin or Vancocin.



Let me tell you a bit about vancomycin. There are two forms. IV and oral. The IV form is a fantastic antibiotic for gram positive bacteria, especially for staph aureus. In fact, with the growing prevalence of MRSA (methicillin resistant staph aureus), IV vancomycin is being used in increasing frequency. However, IV vancomycin has poor GI (gastrointestinal) penetration. It is unable to kill off clostridium difficile (c. diff) in the gut.

What is the significance of c. diff? It is normally present in your gut, but in small quantities. Other bacteria colonize your gut in far greater numbers. However, when you take antibiotics, these antibiotics selectively kill of these other bacteria, leaving c. diff in greater quantity. What are the culprit antibiotics. Traditionally it has been clindamycin. But these days, any antibiotic can cause C. diff. And the class of fluoroquinolones (including Cipro, Levaquin, Avelox), has been particularly implicated. So much so that the University of Pittsburgh Medical Center requires special approval before physicians can prescribe these antibiotics in the inpatient setting. What happens when c. diff predominates? Diarrhea like you wouldn’t believe.

First line treatment for c. diff colitis is the generic antibiotic metronidazole (or Flagyl). However, when it fails or if the patient is intolerant, the second line treatment is oral Vancomycin or Vancocin. Although it has lost patent protection, no other company has been able to replicate it. And even if they could replicate it, showing efficacy is not all that simple, because the drugs effect takes place in the gut, and not in your blood stream. So you cannot just measure serum levels of vancomycin to find out if you have reached efficacy. This puts additional burden on generic drug companies to come up with a way to prove that their copy of vancomycin is as effective as the name brand version.

So Viropharma stumbled upon Eli Lily’s Vancocin, which was for sale, and licensed the drug for US sales. Viropharma paid more than it’s market cap at the time for rights to the drug. And it was a bet that paid off for shareholders and the company’s survival. Shares which were barely north of $1, soared as high as $24 between December and November. The company is quite profitable and has raised prices for vancomycin 3 times, a few of which were near 25%.

Share prices have been hit twice in the past month. The first drop of nearly 20% occurred on news that a generic drug company may be pursuing a generic version of vancomycin. The second drop happened on the announcement that Viropharma would sell 7 million shares to raise more money. Share plummeted from $24 to (in the end) $15.50. However, prices have rebounded fast to a close of $18.61 today. Goldman Sachs is the lead brokerage in the share offering.

In early November, Viropharma reported 3rd quarter net income of $18.7 million, or 31 cents per diluted share. For the same period last year, the company reported a $3.3 million loss, or 13 cents per diluted share. Revenue was $35.8 million compared to $398,000. For the first three quarters of 2005, ViroPharma’s net income was $41 million, or 77 cents per share, compared to a $25.3 million — or 95 cents per share — loss for the same period last year. Revenue for the first three quarters was $91.6 million in 2005 compared to $3.9 million for the same period last year.

Given the exclusivity and projected increased use of oral vancomycin, I am a buyer of Viropharma (VPHM), and am currently a long term holder. Although the new shares will dilute current shareholders, the company will be able to raise more than $100 million for future use including development of new drugs.

Plus, look at this week’s New England Journal of Medicine (Dec 8, 2005) for 2 articles dealing specifically with the development of more toxic / resistant strains of C. diff. It’s sure to spark even more investor interest in Viropharma as the news spreads.

 


 

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