Biotech Values

[DewDiligence]

ViroPharma Is Nothing to Sneeze At

[This rambling but rather comprehensive article is c/o Thomas Kirwin on SI. Until the concluding section, the article seems to softpeddle the likelihood of a near-term generic Vancocin, IMO.]

http://www.rttnews.com/ArticleView.aspx?Id=811877

›29-Dec-2008

Shares of biotech company ViroPharma Inc. (VPHM) appear to be bucking the market downturn, and have gained nearly 55% over the past year. In contrast, the Amex Biotechnology Index (^BTK), the benchmark index for the biotechnology sector, has tumbled 20% during the same time period.

ViroPharma's stock traded as high as $111.62 on March 6, 2000. The disappointing initial trial results of the company's investigational drug Picovir (pleconaril) against viral meningitis and cold, released in April 2000, sent the stock into a tailspin. Since then, it has been a rollercoaster ride for the stock.

In the last twelve months, ViroPharma stock has traded in the range of $7.94 - $15.16. As on December 26, the company had a market cap of $1.02 billion based on the stock's closing price of $13.

Company Overview

ViroPharma, based in the State of Delaware was founded in 1994 by Claude Nash and Mark McKinlay. The company focuses its drug development activities on viral diseases including cytomegalovirus and hepatitis C.

ViroPharma went public on November 19, 1996 offering 2.25 million shares at $7 each. Up till now, the company has been deriving all its sales from its only marketed drug -- Vancocin, which is used to treat deadly bacterial infections. The recent acquisition of Lev Pharmaceuticals Inc. offers an opportunity for ViroPharma to diversify its sales base. With the FDA approving Lev Pharma's Cinryze, a drug to treat hereditary angioedema as recently as October, ViroPharma will no longer be a one-trick pony.

Vancocin - A Financial Lifesaver

ViroPharma, which was counting on its experimental common-cold drug Picovir as a source of revenue, met with disappointment following the FDA's rejection of the drug over safety concerns in June 2002.

In November 2004, ViroPharma acquired the American rights to antibiotic Vancocin from Eli Lilly & Co. (LLY), which had developed the drug, for $116 million. Vancocin is the oral capsule formulation of antibiotic Vancomycin hydrochloride. (Vancomycin is available as a powder for injection and as capsules or solution for oral use).

ViroPharma began marketing its flagship product, Vancocin in 2004. Eli Lilly sells the drug outside of the United States. ViroPharma also pays 35% of the net sales of Vancocin to Eli Lilly.

As of this date, Vancocin is the only FDA-approved product to treat severe Clostridium difficile infection, also referred to as CDI. Clostridium difficile infection is one of the most common and devastating hospital-acquired infections. The bacterial infection occurs when patients are treated with antibiotics for other diseases. A prolonged treatment with antibiotics has a negative impact on beneficial bacteria that live in gastrointestinal tract, making the patients prone to bacterial infection. Closteridium difficile can cause diarrhea, ranging from a mild disturbance to a very severe illness with ulceration and bleeding from the colon. In severe conditions, the bacterium can cause perforation of the intestine leading to peritonitis, which can be fatal.

The Clostridium difficile infection is one of the most serious problems facing the U.S. healthcare system. The most commonly used drug to treat Clostridium difficile infection is the generic antibiotic Metronidazole. However, if the infection is severe, Vancocin is the only approved treatment.

Since its commercialization, sales of Vancocin have had an impressive growth.

The patent covering Vancocin expired long back in 1996. So… why doesn't the drug have an approved generic yet?

Vancocin works by targeting the Clostridium difficile bacterium in the gastrointestinal tract. Because of the complexities in the way the drug works, in order for a generic copy of Vancocin to be approved by the FDA, it has to prove itself to be truly bioequivalent to Vancocin in comparative clinical trials [maybe].

Usually generic drugs do not have to go through clinical trials and they are approved based on the bioequivalence data from the laboratory. No generic drug company has come forward to conduct clinical trials for generic Vancocin to establish the bioequivalence because of the huge expenses involved in conducting clinical trials.

According to experts, "an ineffective generic version of Vancocin will prove fatal because patients treated with ineffective generic Vancocin will have no second chances if it fails".

FDA's Changing Stance

In March 2006, the FDA's Office of Generic Drugs, or OGD revised the standard for the approval of generic copies of Vancocin. The OGD claimed that Vancocin is eligible for a BCS-based (Biopharmaceutics Classification System) biowaiver and that a clinical trial for generic Vancomycin is not necessary if it exhibits rapid dissolution in 'in vitro' test (lab setting). Rapid dissolution in 'in vitro' testing is one of the criteria for granting BCS-based biowaiver.

Since then, speculation has been rife that the FDA might approve a generic Vancocin based on the in vitro dissolution testing. On March 17, 2006, ViroPharma filed its citizen petition, asking the FDA to stay approval of generic Vancocin based solely on in vitro bioequivalence testing.

The BCS, a tool for classifying drugs based upon their aqueous solubility and intestinal permeability, is used by regulatory agencies to grant waivers from in vivo bioavailability and/or bioequivalence studies.

ViroPharma came to know of the new bioequivalence standard for generic Vancocin through a report issued by a trading firm Infinium Capital. [This is the most bizarre element of the whole story, IMO.] Though ViroPharma eventually received verbal confirmation from the OGD about the change in standards, the FDA refused to supply ViroPharma with copies of FDA's correspondence with Infinium or anyone else related to the revised standards.

In its SEC filing dated May 31, 2006, ViroPharma stated that a press agency conducted an email interview with the FDA, in which the FDA sent an email to the press agency on March 17, 2006 stating that "[OGD] has recently revised the bioequivalence recommendations for oral Vancomycin from a clinical trial with bioequivalence endpoints to an in vitro method involving dissolution testing." [Emphasis added—I assume this sentence has a clerical error.]

After ViroPharma's request to the FDA for records relating to the regulatory agency's decision on the bioequivalence standards for generic copies of Vancocin went unanswered, the company appealed to the Department of Health and Human Services, or HHS in November 2007. This time too, the HHS acknowledged receipt of ViroPharma's administrative appeal, but never responded.

[On] December 15, 2008, the FDA revealed its draft guidance for establishing bioequivalence to Vancocin. Under the proposed draft guidance, apart from dissolution testing in a lab setting, a generic version of Vancocin should significantly contain the same inactive ingredients (Qualitative sameness - Q1) in substantially the same quantities (Quantitative sameness - Q2 ) as branded Vancocin.

According to the FDA's new guidance, if the generic versions do not have 'qualitative sameness' and 'quantitative sameness' as that of Vancocin, they need to prove their 'bioequivalence to Vancocin' in comparative clinical trials. The proposed draft guidance is open for public comment.

Meanwhile, on December 18, ViroPharma filed a suit against the Department of Health and Human Services and the FDA under the Freedom of Information Act, seeking administrative records related to the FDA's decision in March 2006 revised bioequivalence standard for generic Vancocin. The company has also requested the FDA for the administrative record relating to the regulatory agency's Vancocin bioequivalence guidance of December 15, 2008.

Thomas Doyle, ViroPharma's vice president, strategic initiatives is of the view that the FDA's Vancocin bioequivalence guidance of December 15, 2008, represents a deviation from the proposed OGD's (Office of Generic Drugs) March 2006 guidance.

How? All along, the OGD has asserted that Vancocin capsules are highly soluble and rapidly dissolving, and hence eligible for a BCS-based biowaiver. However, according to ViroPharma, Vancocin is not a BCS drug. The information released by the FDA as recently as December 15, also confirms that Vancocin is not rapidly dissolving. The confirmation was based on a Vancocin dissolution study completed by the FDA in February 2008.

With the new study not supporting OGD's March 2006 bioequivalence approach, the FDA has now proposed that a generic copy of Vancocin does not need to demonstrate rapid dissolution and that it requires "comparable" dissolution and Q1/Q2 sameness with respect to inactive ingredients.

The draft guidance has a 60 day public comment period to review. So a clear picture about generic competition for Vancocin will emerge once the draft guidance is finalized.

Last year, Vancocin's sales totaled $203.7 million, up 22% over 2006. For the first nine months of 2008, the drug raked in sales of $182.3 million, reflecting an increase of 17% from the comparable year-ago period. For full year of 2008, ViroPharma expects Vancocin sales to range between $235 million and $245 million. Analysts estimate sales of $233.3 million.

Shedding The One-Trick Pony Image

Seeking to diversify its sales base, in July 2008, ViroPharma agreed to acquire Lev Pharmaceuticals for $442.9 million. Under the terms of the agreement, ViroPharma paid $2.25 in cash plus $0.50 in stock for each Lev share. The purchase price represented a premium of 49% over Lev's share price prior to the deal announcement. On achievement of certain regulatory and commercial milestones, Lev shareholders will also receive an additional $1.00 per share. Including the additional payments, the deal has a potential value of $617.5 million.

Lev Pharmaceuticals is a little-known drug company, which was trading on the Over the Counter Bulletin Board Exchange when the deal was announced. Following the announcement of the deal on July 15, ViroPharma stock fell 15% to $10.62 as investors felt the acquisition was pricey and bid down the stock.

However, the acquisition seems to be paying off for ViroPharma. In October, the FDA approved Lev Pharma's Cinryze as a prophylactic (preventive) treatment for hereditary angioedema, or HAE, a rare and potentially life-threatening genetic disease. Lev Pharma had sought FDA approval of Cinryze, both as prophylactic and acute treatments of HAE attack. But the FDA approved Cinryze only as a prophylactic treatment and sought additional data to approve the drug in acute treatment of HAE.

Cinryze is the first product to be approved in the U.S. for HAE, which affects about 6,000 to 10,000 Americans. HAE is characterized by rapid swelling of the hands, feet, limbs, face, intestinal tract or airway.

Being an orphan drug, Cinryze will get seven years of marketing exclusivity. Cowen and Co. analyst Rachel McMinn estimates Cinryze to cost $3,400 per dose, or about $350,000 per year. [McMinn has made some calls in the past few years that seemed odd when made but turned out to be accurate.] Susquehanna analysts project annual sales of Cinryze to peak at about $127 million. According to analysts, an HAE drug approved as a prophylactic treatment brings in more revenue per patient, compared to an acute treatment setting.

ViroPharma, which has acquired Lev Pharma, has sought an expanded label indication for Cinryze for acute treatment of HAE. However, in the market for acute treatment of HAE, Cinryze has a number of possible contenders like CSL Behring's Berinert, Dyax Corp's DX-88 and Jerini AG's Firazyr [and possibly Pharming’s Rhucin].

While CSL Behring's Berinert is already under review by the FDA, Dyax Corp. completed the submission of Biologics License Application for DX-88 on September 24. DX-88 is expected to be approved by the FDA for acute HAE around mid-2009. The German company Jerini was issued a not approvable letter for Firazyr in April by the FDA.

However, for the prevention of HAE, ViroPharma's Cinryze remains the only FDA-approved drug till date.

Product Pipeline

The most promising candidate in ViroPharma's pipeline is Camvia (maribavir), a Phase 3 antiviral compound for the prevention of CMV (cytomegalovirus) disease in stem cell and solid organ transplant patients. ViroPharma expects to file a New Drug Application for Camvia with the FDA next year.

ViroPharma acquired worldwide rights (excluding Japan) to Camvia from GlaxoSmithKline in August 2003 for an up-front cash payment of $3.5 million, and will make additional milestone payments upon regulatory clearance.

The approved drugs for CMV disease, which are currently in the market carry black box warnings and have associated toxicities. Roche's Valganciclovir, the market leader for prevention of CMV disease, is associated with serious adverse effects and the drug's labeling carries a black box warning. In phase III trials, ViroPharma's Camvia has been found to be safe and well tolerated.

Camvia was granted orphan drug status in February 2007. According to ViroPharma, peak global sales of Camvia could be between $400 million and $500 million annually. The patents covering Camvia expire in 2015.

The Drugs That Never Made It To Market

Picovir

After data from clinical trials that evaluated Picovir (pleconaril) against meningitis proved unimpressive, ViroPharma began testing the drug for respiratory infections. But those results also turned out negative. It was only then that ViroPharma started trying Picovir against common cold. The compound used in Picovir was licensed by ViroPharma from Sanofi-Synthelabo, known as Sanofi-Aventis since 2004.

According to ViroPharma, Picovir in clinical trials, shortened the duration of cold to 6.3 days from 7.3 days. The company submitted its new drug application for Picovir in July 2001. However, in June 2002, an FDA panel unanimously rejected the drug, saying the potential risks far outweighed the small beneficial effect.

After Picovir was rejected by the FDA, ViroPharma re-licensed the drug to Schering Plough in 2003. Schering Plough is developing pleconaril in an intranasal formulation for common cold and asthma exacerbations and the drug has completed phase II trials.

HCV-796

HCV-796, a drug co-developed by Wyeth and ViroPharma was in a phase II trial when the companies abandoned the development of the drug in April 2008 due to safety concerns. [HCV-796 was a non-nucleoside polymerase inhibitor, the same drug “class” as GS9190 from GILD, ANA598 from ANDS, and IDX375 friom IDIX.] In August 2007, the companies halted the trial as some patients treated with HCV-796 developed elevated liver enzymes, indicating liver damage.

Financials

The company has been profitable since 2005. Prior to the 2004 acquisition of Vancocin, the company incurred losses.

Net income for the third-quarter ended September 30, 2008 increased to $27.07 million or $0.33 per share from $21.28 million or $0.26 per share in the year-ago quarter. Quarterly revenue climbed to $65.9 million, up from $50.9 million in the comparable quarter a year before. Thus far, the company has posted 15 consecutive quarters of positive cash flow and profitability.

Free cash flow at the end of the recent third quarter was $75.53 million. Net debt at the end of the quarter was $250 million.

Upward Revision Of Estimates

Analysts are bullish on the company's earnings growth prospects and over the last 90 days, they have revised their estimates for 2008 by 10 cents to $0.99 per share.

Closing Thoughts

The threat of generic competition has continued to remain an overhang on ViroPharma, ever since the Office of Generic Drugs revealed the revised bioequivalence standard for generic Vancocin in 2006. The FDA's recent proposed draft guidance for establishing bioequivalence to Vancocin only strengthens the generic risk.

In addition to generic competition, Vancocin also faces a threat from Optimer Pharmaceuticals' (OPTR) OPT-80, which is currently under late-stage testing. In a phase III study, OPT-80 was found to have higher cure and lower relapse rates than Vancocin in the treatment of Closteridium difficile infection.

But that said, unlike in the past, ViroPharma has new sources of revenue to offset decline in Vancocin sales. The long-term growth potential of the company now rests on the success of Cinryze, which was recently approved by the FDA, and Camvia, which is expected to reach the market around 2010 or early 2011.‹