Theravance in Neutral Lane – Analyst Blog

We are maintaining our Neutral recommendation on Theravance Inc. (THRX) with a target price of $20.

 

Theravance, founded in 1996 and headquartered in South San Francisco, California, focuses on the discovery, development, and commercialization of small molecule medicines in the US. The company develops medicines for respiratory diseases, bacterial infections, and gastrointestinal motility dysfunction.

 

Theravance’s lead drug Vibativ (telavancin), is an injectable antibiotic which has been approved by the US Food and Drug Administration (FDA) for the treatment of complicated skin and skin structure infections (cSSSI) caused by gram-positive bacteria. Vibativ is marketed and sold by Astellas, while Theravance receives royalties, ranging from high teens to upper twenties depending on sales volume.

 

In July this year, Theravance reported its second quarter 2010 results. The loss per share of 28 cents was wider than the Zacks Consensus Estimate by a cent, but narrower than the year-ago quarter loss by 7 cents. Although Theravance’s second-quarter revenues of $6.3 million increased 14% from the year-earlier period, revenues missed the Zacks Consensus Estimate of $8 million.

 

(Read our full coverage on this earnings report: http://www.zacks.com/stock/news/37486/Theravance+Misses+Zacks+Estimate )

 

We are pleased with the FDA approval of Vibativ for the treatment of cSSSI. Moreover, we believe the Relovair program, which aims at evaluating treatment options for asthma and chronic obstructive pulmonary disease (“COPD”), in collaboration with GlaxoSmithKline (GSK) has the biggest potential in the company’s pipeline. The program aims to replace one of Glaxo’s best selling drugs Advair- a lung treatment. Advair is slated to lose patent exclusivity in 2010 in the US and in 2013 in Europe. Even though there are other high-potential candidates like TD-1211 for opioid-induced constipation, in the company’s pipeline we believe the main potential lies in the Relovair program.

 

However, we were disappointed with the setback suffered by the company regarding the approval of telavancin for the treatment of hospital-acquired pneumonia (HAP). The company received a complete response letter (“CRL”) from the FDA for this indication. The US regulatory authority has asked the company to conduct additional trials. Theravance does not have any plans to conduct additional trials at present and is currently in discussions with the FDA. We believe that further setbacks of a similar nature would weigh heavily on the stock. Telavancin is currently under review in Europe for the treatment of complicated skin and soft tissue infections (“cSSTI”) and HAP. A response from the EU regulatory authorities should be out in the first half of 2011.

 

We also remain concerned about the weak financial position at Theravance. With negative cash flow from operations and a huge debt burden of approximately $172.5 million at the end of the most recent quarter, we believe that the company will have to tap the capital market frequently to raise funds to finance its operations. For example, Theravance raised approximately $93.6 million in March 2010 through a public offering of its common stock. Additional equity financing could lead to significant dilution in the shareholder base. Even though we believe the FDA approval of Vibativ should provide Theravance with some much-needed funds, the fierce competition in the cSSSI market should cause the initial sales ramp to be slow.

 

Given these headwinds, we see limited upside at Theravance from current levels and believe that the company’s current valuation adequately reflects its fairly balanced risk/reward profile.

 

Consequently, we remain Neutral on the stock in the long-run which is supported by a Zacks# 3 Rank (short-term ‘Hold’ recommendation) for the stock. The lack of estimate revisions highlighting the absence of a clear directional pressure on the stock, further supports our long-term Neutral stance on Theravance.