To really understand a stock, you have to get down and dirty, break out your pencil, and really weigh the risk-versus-reward potential of the company you're following. I propose we take a closer look at the good and the bad at ViroPharma (Nasdaq: VPHM) to see whether the stock is a good value or a potential money pit.

The good
It's not often that a small biotechnology company transforms itself into a successful marketer of multiple drugs, but that's precisely what ViroPharma has done. Its primary revenue producer is Vancocin, which is used to treat a specific gastrointestinal disorder. Cinryze, its newest drug, purchased in the Lev Pharmaceuticals buyout, is used to treat hereditary angioedema.

Fancy words aside, here's what you need to know: Gross margins on these drugs have been high, Cinryze sales have blasted past expectations thus far, and the balance sheet is very strong, with nearly $4 per share in net cash. In addition, ViroPharma was able to pass along a Vancocin price increase to consumers, a move that significantly added to the company's bottom line.  

The bad
Generic competition for Vancocin is readying itself at ViroPharma's doorstep. The blockbuster drug lost its patent protection last year, and the FDA has paved the way for generics to eat into ViroPharma's market share. No amount of price increases will counter the negative impact that generics -- which could come from the likes of Eli Lilly (NYSE: LLY) and Teva Pharmaceutical (Nasdaq: TEVA), among others -- could have on ViroPharma's bottom line.

Possibly more disturbing is the complete response letter ViroPharma received from the FDA in October that limits its proposed production expansion of Cinryze. If you couple limited production on Cinryze with potentially falling sales from generic competition for Vancocin, you can clearly see the potential for a problem.

Let's also not forget that despite purchasing Lev Pharmaceuticals in October 2008, ViroPharma is required to make an $87.5 million milestone payment to Lev shareholders when Cinryze sales reach a cumulative total of $600 million. That payout will effectively reduce its current cash position by 20%.

The takeaway
For years I was in the camp that cheered on ViroPharma as the undervalued biotech that could, but now I'm seriously worried about its future growth prospects. Generic Vancocin sales could cut into ViroPharma's profits substantially, and production problems might stymie any momentum Cinryze had been gaining. ViroPharma is expecting a double-digit revenue decline next year and is trading at a hefty 32 times forward 2011 earnings. Those numbers seem a bit frothy and have led me to believe that ViroPharma might be better left alone at these levels.

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Fool contributor Sean Williams owns no shares in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Fool owns shares of Teva Pharmaceutical. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.