ViroPharma's (NASDAQ: VPHM) revenues increased from $94.64 million in second quarter of the previous fiscal year to $103.71 million in the second quarter of 2013, driven mostly by the success of the company's Cinryze (a treatment for hereditary angioedema).  

Apart from Cinryze, other factors that would further boost the company's earnings going forward include its ability to maintain the number of patients currently on therapy, increasing enrollment, and the company's rich product pipeline. However, with the company presently rumored to be an acquisition target, investors are watching more than just the company's pipeline and quarterly results.

ViroPharma and the health care sector at large
There has been a flurry of acquisitions in the health care sector recently, with the trend more significant in the biotech and pharma industries. With the need to replace drugs and devices whose patents are near expiration or already expired, a good number of top pharma and biotech companies are buying up smaller companies with high potential. A good example is the most recent acquisition of Onyx Pharmaceuticals by Amgen in August, in a deal valued around $10.4 billion. The main target was Onyx's oncology treatment portfolio.

Recent research by Bloomberg has also shown that acquisitions worth approximately $70 billion have been carried out in these two industries in the past year, with a 14% increase in acquisitions in comparison to the same period a year ago. Now ViroPharma is in the picture and the news of its impending acquisition led to the company's shares surging approximately 28% on Sept. 13.

ViroPharma is a small-cap drug manufacturing company that targets rare diseases. Two of its most popular drugs are Cinryze and Vancocin. Although the emergence of generic Vancocin in the market led to a decline in sales, ViroPharma looks to Cinryze and other pipeline drugs to boost revenues. The company's market cap increased from $2 billion to $2.5 billion with news of the possible acquisition.

How it all started
According to an article from Bloomberg, ViroPharma hired Goldman Sachs to advise it after the company became the center of attention from two European pharma giants, Sanofi (SNY -2.27%) and Shire (NASDAQ: SHPG). There are signs that these two giants are looking for opportunities to replace or increase their various companies' future drug pipelines. Sanofi, for instance, after its acquisition of Genzyme in 2011, now focuses on treatments for rare diseases just like ViroPharma does. The same thing can be said about Shire as it offers treatments for hereditary angioedema and Fabry disease.

A closer look at the opportunity 
In terms of competition regarding its most valuable asset, Cinryze, ViroPharma has nothing to worry about. Presently, the treatment maintains approximately 60% of the hereditary angioedema, or HAE, market share. The remaining percentage is being shared by its competitors which include Dyax's Kalbitor, a small-protein-inhibiting plasma kallikrein that is approved for treating acute attacks of HAE in the U.S., and Shire's Firazyr, which is approved for treating acute HAE in the U.S. and EU.

One of the major reasons why Cinryze remains the dominant HAE treatment in the market is that it is the only prophylaxis drug without the negative side effects associated with most traditional preventative therapies. Being preventative in composition, a good number of patients also prefer the treatment since it enables them to reduce the number of HAE attacks they experience.

Some of ViroPharma's already-approved treatments that are expected to further drive the company's growth going forward include Buccolam, a treatment for pediatric epilepsy. This treatment was acquired by ViroPharma in May 2010, and by early 2012 it was launched in EU with revenues expected to peak at approximately $50 million. Another driver is the treatment for adrenal insufficiency, Plenadren, which is already approved in the EU with 10 years of orphan drug exclusivity to ViroPharma. According to ViroPharma's management, this treatment equates to $150 million to $350 million revenues in EU. Management goes further to add that with these three products (Cinryze, Buccolam, and Plenadren), the company is looking at annual revenues of $300 million to $500 million in EU. While the company has other drugs in its pipeline, this should be the focus for investors going forward.

We now bring Sanofi into the picture. With its current strategy of focusing on treatments for rare diseases, there is every possibility that the company's management would want to position in treatment of hereditary angioedema.

Bottom line
Currently valued by Mr. Market at $2.5 billion with a rare disease treatment and other viable treatments in its pipeline, investing in ViroPharma now is very risky considering that the company's shares rose approximately 28% with the news of its rumored buyout. If a deal never materializes, the pullback could be significant. Based on this, despite ViroPharma's growth opportunities, I think investors should tread very carefully.