Who Stands to Lose the Most From This Biotech Breakup?

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Shares of ViroPharma (NASDAQ: VPHM) and Halozyme Therapeutics (NASDAQ: HALO) dropped in tandem on August 1, after ViroPharma discontinued a Phase II study of administering its flagship drug, Cinryze, subcutaneously with Halozyme’s recombinant human enzyme technology. ViroPharma shares declined nearly 7% after the announcement, but Halozyme plunged almost 14%, due to ViroPharma’s statement that it would pursue similar studies for subcutaneous injection by using other products, which raised concerns about the reliability of Halozyme’s core technology.

What this means for ViroPharma

ViroPharma’s key drug is Cinryze, which generated 76% of the company’s revenue in 2012. Cinryze is used for the treatment of hereditary angioedema (HAE), a rare inherited blood disorder characterized by the swelling of the face, extremities, genitals, intestine and respiratory system. This debilitating, episodic condition can cause vomiting and intestinal spasms when the gastrointestinal tract swells, and become life-threatening when it affects the airways. HAE affects an estimated to affect one in every 10,000 to 50,000 people.

Due to the unpredictable nature of HAE, a subcutaneous treatment, which can be administered more quickly than its currently available intravenous one, could increase Cinryze’s revenue substantially by reaching more patients. Due to the rarity of HAE, Cinryze is an orphan drug, which gives it a legal monopoly until 2015 without the need for patent protection.

ViroPharma also produces Plenadren, another orphan drug used to treat adrenal insufficiency, Buccolam for pediatric seizures, and Vancocin for clostridium difficile-associated diarrhea. ViroPharma is also working on Phase II studies of its pipeline candidate maribavir as a first line treatment of cytomegalovirus viremia (CMV). However, these other treatments have taken a backseat to Cinryze and its trials with Halozyme for now.

Therefore investors were disappointed when ViroPharma’s trial with Halozyme, which used its recombinant human enzyme rHuPH20 to deliver Cinryze subcutaneously to patients, was discontinued after several patients developed antibodies against the enzyme. Although ViroPharma stated that the antibodies were not associated with “any adverse effects and are of unknown clinical significance”, it’s clear that the company doesn’t want to take any more chances of patients rejecting the treatment.

ViroPharma’s solid second quarter

On the same day that it ended the trial with Halozyme, ViroPharma reported solid second quarter earnings. The company earned $0.15 per share, up from the loss of $0.06 per share it reported in the prior year quarter. Revenue rose 9.6% year-on-year to $104 million. Earnings were in line with analyst estimates although revenue was slightly lower than expected.

Global sales of Cinryze came in at $95 million - up 23% from the previous year and comprising 91.3% of the company’s top line. Cinryze is one of the world’s most expensive drugs, and costs $350,000 per year for each patient.

What this means for Halozyme

Halozyme Therapeutics, on the other hand, is a much more speculative company than ViroPharma. Halozyme creates human enzymes that can modify the extracellular matrix and be used in diabetes treatments, oncology and dermatology. The company’s core products are all based on rHuPH20, the recombinant human enzyme that was rejected by ViroPharma. Halozyme has one PDA approved product - Hylenex, which improves the absorption and dispersion of subcutaneously injected drugs. Hylenex has a wide variety of applications in anesthesia, insulin injections and cancer treatments. Halozyme is still unprofitable, although its revenue has risen 564% over the past five years.

However, most investors are focused on Halozyme’s clinical development pipeline, which includes collaborations with Pfizer (NYSE: PFE), Roche (NASDAQOTH: RHHBY) and Baxter International (NYSE: BAX). Last December, Pfizer announced a partnership with Halozyme to create and market products combining Pfizer’s proprietary biologics with Halozyme’s Enhanze (rHuPH20) technology. Pfizer’s continuing partnership with Halozyme is often cited as evidence that the industry still has faith in Halozyme’s enzyme technology.

With Roche, Halozyme used rHuPH20 to create a subcutaneous formulation of Herceptin (Herceptin SC), Roche’s HER2-positive breast cancer treatment. Roche’s Phase III study showed that the subcutaneous treatment could significantly decrease the time needed for an injection. A regular IV infusion of Herceptin generally takes 30 to 90 minutes, whereas the subcutaneous one only takes two to five minutes. That significant development recently earned the positive recommendation from the European Medicines Agency’s Committee for Medicinal Products for Human Use (CHMP).

HyQvia, a replacement therapy for adults with immunodeficiencies, was created through Halozyme’s collaboration with Baxter International. It can be used to treat patients with myeloma, leukemia and common variable immunodeficiency. HyQvia boosts the patients’ immune systems through subcutaneous injections taken every three to four weeks. The European Commission approved HyQvia in May, although the drug was rejected in the United States last year, on grounds that non-neutralizing antibodies could affect fertility, development and reproduction.

The Foolish Bottom Line

It’s not hard to see which company stands to lose more with the dissolution of the collaboration between ViroPharma and Halozyme. Whereas ViroPharma only loses the possibility of more revenue stacked on top of its already robust Cinryze sales, Halozyme stands to lose it all if other companies start voicing concerns about rHuPH20, on which its whole business depends on.

ViroPharma and Halozyme investors will probably remember that the Cinryze study was already temporarily halted once, last September, after the FDA voiced concerns about antibody levels in patients. The end of the collaboration, along with the FDA’s rejection of HyQvia, show that Halozyme’s business could be on shaky ground if Pfizer and Roche also start to express similar doubts. Meanwhile, I believe that ViroPharma will continue to grow as demand for Cinryze continues rising unopposed, although it will need to bring some new drugs to the market before Cinryze’s orphan drug designation expires in two years.

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