Foolish Forecast: Getting Indigestion With ViroPharma

Small-cap pharmaceutical ViroPharma (Nasdaq: VPHM) will report Q4 2006 financial results on Feb. 28.

What analysts say:

• Buy, sell, or waffle? Most of the 10 analysts are bullish on ViroPharma, with six saying "buy," three saying "hold," and one saying "sell."
• Revenues. Analysts see revenues in line with the prior year's Q4 total of $40 million.
• Earnings. Profits, though, are expected to decline 83%, to $0.20 per share, as the company had a $45 million tax benefit last year that won't occur in such magnitude again.

What management says:
ViroPharma has just one product in production right now, the antibiotic Vanconin. It has a couple of other drugs in the pipeline, which it either acquired from GlaxoSmithKline (NYSE: GSK) or developed by partnering with Wyeth (NYSE: WYE). But ViroPharma's fortunes hinge on sales of Vanconin, which it purchased from Eli Lilly (NYSE: LLY) in 2004 for nearly $120 million. It's been a good deal for ViroPharma so far: Sales in 2005 were $126 million, and for the first nine months of 2006, they totaled $128.2 million. Management projects another $34 million to $42 million for the fourth quarter. These ViroPharma has achieved these revenue gains primarily through price increases.

What management does:
ViroPharma was able to see a large spike in gross margins last quarter, as it switched its supplier of Vancocin from Eli Lilly to lower-cost OSG Norwich. That should help it maintain or improve its operating margins in the coming year. Going forward, all of ViroPharma's supplies will come from OSG.

Margin	09/05	12/05	03/06	06/06	09/06
Gross	86.6%	86.4%	85.1%	85.2%	87.0%
Operating	63.1%	66.6%	63.3%	62.4%	62.5%
Net	42.4%	85.9%	77.7%	78.0%	71.8%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
At the moment, ViroPharma is in a sweet spot. It's the only drug approved for treatment of enterocolitis, and it commands premium prices for its drug. Yet the Office of Generic Drugs changed its policy on allowing generics to compete against Vancocin, causing a downdraft in ViroPharma's stock price. While no one's entered the market yet, a generic's presence would severely pinch the pharma's revenues. Moreover, considering the negative fallout the FDA has received from the approvals it granted to Merck (NYSE: MRK) and Pfizer (NYSE: PFE) for Vioxx and Celebrex, respectively, it's hard to believe the OGD's change of policy will stand.

Still, the situation also highlights the problems of investing in one-trick ponies. Until it develops new drugs, ViroPharma is at the mercy of how that drug is received. So far, things have been going well for Vancocin, but it won't last. Unless it gets its new anti-infectives in the marketplace soon, ViroPharma should be seen as the risky investment that it is.

Related Foolishness:

• The Long Road Ahead for ViroPharma
• ViroPharma's Generic Discount
• Nothing's Wrong with ViroPharma
• Foolish Fundamentals: Margins

ViroPharma has earned a five-star rating from Motley Fool CAPS, the new investor intelligence community. You can add your voice to the new stock rating service by joining today. It's free!

GlaxoSmithKline and Eli Lilly are Motley Fool Income Investor selections. Pfizer is a Motley Fool Inside Value selection.

Fool contributor Rich Duprey owns shares of Merck, but does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.