Theravance Inc.’s (THRX) second quarter 2011 loss per share of 31 cents was wider than the Zacks Consensus Estimate of a loss of 26 cents as well as the year-ago loss of 28 cents per share. The wider loss was attributable to a flat top-line performance as well as increased research and development (R&D) expenses. Revenue at Theravance was almost flat over the prior year at $6.4 million due to light royalty revenue from Vibativ sales in the reported quarter. Revenue was also much below the Zacks Consensus Estimate of $9 million.
The Quarter in Detail
Revenues for the quarter primarily consisted of the amortization of deferred revenues received under the company’s collaborations with Astellas Pharma and GlaxoSmithKline plc (GSK). Theravance earned a royalty of $0.7 million on Vibativ sales from Astellas Pharma on net sales of $3.9 million. Vibativ is marketed by Astellas Pharma in the US for the treatment of complicated skin and skin structure infections (cSSSI). Theravance receives royalties from Astellas ranging from high teens to upper twenties depending on sales volume. Vibativ is under review in the EU for the treatment of nosocomial pneumonia and cSSSI.
General and administrative (G&A) expenses increased 3.0% to $7.2 million during the second quarter due to higher employee costs. Research and development (R&D) expenses shot up 22% over the prior-year quarter to $22.8 million primarily due to higher costs for the development of Theravance’s pipeline candidate TD-1211.
Pipeline and Product Update
In May this year, Theravance announced that the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) gave a positive opinion recommending approval of Vibativ for the treatment of nosocomial pneumonia (NP) caused by methicillin-resistant staphylococcus aureus (MRSA). The antibiotic has not been approved for NP in either Canada or the US. If approved, this will be the first approval for the treatment of NP, which is associated with high mortality rates.
Theravance has an agreement with GlaxoSmithKline for the development and commercialization of its pipeline candidate Relovair. Relovair is a once-daily combination medicine consisting of a LABA, vilanterol (VI), and an inhaled corticosteroid (ICS), fluticasone furoate (FF).
Theravance announced that the phase IIIa program for Relovair, being studied for the treatment of asthma and chronic obstructive pulmonary diseases (COPD), has already enrolled the targeted 11,000 patients. Top-line data from the entire COPD program is expected in early 2012 and from the asthma program in the first half of 2012.
In June 2011, the companies presented encouraging data from two pivotal six-month efficacy and safety late stage trials of Relovair in COPD, which supported the continuation of development of the candidate for the indication. Regulatory applications for Relovair across the globe will be based on data from the above mentioned studies along with data from two larger 12-month exacerbation studies. These exacerbation studies, which are evaluating over 3000 patients, will provide a better understanding of the efficacy of Relovair compared with VI and FF on reduction of exacerbations and improvement in lung function.
For COPD, the company is also developing ‘719/VI in collaboration with GlaxoSmithKline, which is a combination of two bronchodilator molecules currently under development – ‘719, a LAMA and VI or vilanterol, a LABA. Additionally, under a strategic alliance with GlaxoSmithKline, Theravance licensed a compound (GSK961081) under the MABA program. Data from mid-stage trials of both the pipeline candidates are expected to be presented at the European Respiratory Society Annual Congress (ERS) in September this year.
Theravance is entitled to receive royalties on sales of Relovair, LABA/LAMA, and MABA without any cost obligations. The revenue generated following the approval of either program will ultimately lead the company to profitability.
2011 Guidance
Theravance retained its previously provided operating expense guidance for 2011 in the range of $105 million to $110 million. Management however hopes to incur operating expenses on the lower end of the range. Operating expenses include R&D and G&A expenses, but exclude stock-based compensation expense.
Our Recommendation
We currently have a Neutral recommendation on Theravance. The stock however carries a Zacks #4 Rank (“Sell”) in the short term. We believe that current earnings reports are a non-event for Theravance as investor focus will be glued on the pipeline programs with GlaxoSmithKline.
We anticipate that the Relovair and the LABA/LAMA combination studies hold immense potential and could bring significant royalties to the company, if successful. Furthermore, royalties on Vibativ sales provide Theravance with some much-needed funds. However, the cSSSI market remains fiercely competitive. Though we are encouraged by the positive CHMP opinion for Vibativ for NP, we are disappointed with the complete response letter (CRL) received in the US for the indication. Although Theravance’s pipeline is quite impressive, we believe the main potential lies with the Relovair collaboration.
