Welcome back to the Biotech-Stock Mailbag. This week, I'll tackle questions on Viropharma (VPHM - Get Report), Indevus Pharmaceuticals (IDEV), ArQule (ARQL - Get Report) and (briefly) Northfield Laboratories (NFLD).
James "Jimmy" T. writes: "Can you please give your perspective on Viropharma and Nastech Pharmaceuticals (NSTK)? Of the two, it looks like Viropharma is way undervalued and in the case of Nastech, it is way overpriced compared to sales."
I'm going to focus on Viropharma and leave Nastech for another Mailbag, mainly because Viropharma was dealt a big blow to its drug pipeline Friday.Dosing of the company's hepatitis C drug HCV-796 was stopped after patients in an ongoing phase II study developed liver toxicity. Viropharma and its partner Wyeth (WYE) have not permanently shelved the HCV-796 yet, but a drug that causes liver toxicity, especially in hepatitis C patients, is an extremely serious problem. It's unfortunate because HCV-796 appears to have a strong antiviral effect against the hepatitis C virus, but I have a hard time envisioning a scenario where HCV-796 survives this setback. When Jimmy emailed me his question, HCV-796 was still a viable and promising drug in Viropharma's pipeline. In fact, I wrote this column on Thursday, so I had to revise it when the HCV-796 news hit Friday. I can understand how Jimmy viewed Viropharma as undervalued prior to this recent setback. Second-quarter earnings easily topped Wall Street estimates and the company raised 2007 sales guidance for Vancocin, its treatment for gastrointestinal tract infections. At Thursday's closing price of $10.22, Viropharma was trading at a price-to-earnings ratio of just 12 times estimated 2008 earnings, or 4 times estimated 2008 sales. Cheap, right? Well, not exactly. The reason that investors were discounting Viropharma's valuation is because of worries that Vancocin would face generic competition next year. Vancocin gross margins are in the 90%-plus range and because of that the drug generates a good amount of cash flow for Viropharma. That's great, but if a cheaper generic version of Vancocin is launched, Viropharma's operating business takes a big hit. You can see that playing out in the current analyst estimates: They have Viropharma earning $1.17 per share this year but only 86 cents per share in 2008.