Pharmaceutical stocks on the cusp of launching a blockbuster drug can reward investors who have the stomach to handle their shares' wild swings. Over the last few quarters, Theravance (THRX) has looked increasingly likely to win FDA approval for a new drug that could treat a big, lucrative market.
COPD, or chronic obstructive pulmonary disease, was an $11 billion market in 2012 for medicines that have a dosage of twice a day. The market for Muscarinic Antagonist Tiotropium, which may be taken once-a-day, is 4.6 billion. Theravance can benefit by tapping into this huge and potentially profitable patient population. The company makes a long-acting drug, known alternately as Relvar or Breo, that can work in tandem with other inhaled medicines. On May 12 of this year, Theravance and its partner GlaxoSmithKline (GSK) will be presenting its dataset for the Prescription Drug User Fee Act. This step plays a part of the role in expediting the drug approval process.
In advance of this important date, Theravance shares recently rallied on speculation that GSK might acquire it. Shares pulled back somewhat, but the more likely reason for the rise was the low valuation relative to potential future revenue.
In the last quarter, Theravance and GSK received validation by the EMA (European Medicines Agency) for their marketing authorization application for ANORO. ANORO is a drug that combines a long-acting beta agonist, a long-acting muscarinic antagonist., both of which are bronchodilators.
Potential Post-approval Risks
Investors shouldn't assume that an FDA approval will guarantee gains for Theravance shares. Anyone watching Vivus (VVUS) or Arena (ARNA) likely knows the risks involved in launching a drug to market. Even after both companies gained FDA approval for their respective obesity drugs, they still face operational risks that could hurt their shares.
Lingering safety concerns have plagued Vivus's Qsymia, forcing Vivus to launch aggressive promotions to boost sales. Those free trials and rebates may have contributed to Vivus's reported $0.56-per-share loss in its most recent quarter, which missed earnings estimates by $0.12 per share. Shares of Vivus dropped even further as fear grew that it might have to lower Qsymia's price by as much as 70%.
Investors have worried that Qsymia price cuts could also hurt Arena's Belviq drug when it launches. But Arena has direct control of its sales force, which leaves it better-positioned for a successful initial launch. The competitive advantage for being closer to a specialized sales force was detailed in a previous analysis. Though Arena will be getting $66.5 million in milestone payments from its partner Eisai in 2013, investors should still expect the company's costs to remain high relative to its revenue. This is due partly Research & Development costs this year expected to land between $70 million and $78 million. Despite higher costs, Arena is well-capitalized to fund its research activities.
The partnership between Glaxo and Theravance remains fruitful, so much so that investors speculated that GSK will buy Theravance for over $50. Operationally, investors should expect the partnership between the two companies to be fruitful. Revenue growth over the next few years will be driven by drugs that treat respiratory ailments. Theravance has a pipeline for single, dual, and triple mechanism therapies. This broadens the type of patients who can be treated for asthma and COPD.
In the fourth quarter, Theravance lost $0.33 per share on revenue of $5.79 million. For the year, the company increased cash by $102.8 million, while R&D expenses were consistent at $117.9 million, up slightly from $103.6 million from the previous year.
Theravance expects non-GAAP operating expenses to be between $125 million and $135 million. Additional milestone payments to GSK may be due this year. If terms of the LABA (Long-Acting Beta 2 Agonist) agreement are met, Theravance will need to pay as much as $140 million.
For the first $3 billion in sales, Theravance owes royalties of 15% for Relvar, Breo, and VI monotherapy. The royalty rate decreases to 5% for revenues more than $3 billion.
Theravance has $343.7 million in cash, cash equivalents, and marketable securities. Additional share sales could increase the cash balance but could dilute existing shareholders. In January 2013, a $244 million notes offering pushed Theravance shares to around $20.
Theravance could remain range-bound in the short-term, with support at above $20. Another rally could be restrained due to the possibility of additional financing activities that would dilute shareholders. A year from now, the story could favor the bulls. Theravance has products that will eventually be marketed, and the upside is favorable for patient shareholders. Drugs that may be administered once-a-day provide Theravance and GSK with a competitive advantage. FEV1, which is in Phase 2, further broadens the drug pipeline for the companies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.