Theravance Narrows Its Losses

| About: Innoviva, Inc. (INVA)

Theravance, Inc. (THRX) reported 1Q09 results on April 22, 2009.

Revenue increased 70% to $9.5 million for the quarter compared to $5.6 million in the same period last year. The increase was primarily due to the recognition of the remaining deferred revenue of the LAMA program since the program has been returned to the company from GlaxoSmithKline plc (NYSE:GSK). In our model we had projected higher revenue with the expectation of FDA approval of Telavancin, which now seems to be possible during 2Q or 3Q 2009.

Net loss for the first quarter was at $19.2 million ($0.31 per share) compared to $29.8 million ($0.49 per share) for the corresponding period last year, an improvement of 35%. This was possible due to the increase in revenue along with y-o-y decline of 27% in R&D expenses.

The company incurred restructuring charges totaling $1.3 million in the first quarter of 2009. The charges resulted primarily from a loss recognized on the sublease of excess space in one of the company’s premises as well as costs related to a reduction in employees in April 2008.

Cash, cash equivalents and marketable securities totaled $178.9 million as of March 31, 2009 -- a decrease of $21.7 million from the previous quarter. The decrease was primarily due to cash used in operations.

With the cost saving restructuring initiated in April 2008, coupled with top-line growth, net loss will continue to narrow in the coming quarters. The success of Telavancin and other pipeline candidates will determine how fast the company can turn to profitability.

Two indications for Telavancin are expected to be approved in 2009. However, competition remains a chief concern.

Theravance has no products on the market so far. The company submitted two new drug applications (NDAs) of its lead program Telavancin to the FDA for the treatment of complicated skin and skin structure infections (cSSSI), and for the treatment of hospital acquired pneumonia (HAP).

Telavancin received a favorable opinion from the FDA’s advisory committee for the treatment of complicated skin and skin structure infections (cSSSI) in November 2008. In February 2009, Theravance received a complete response letter from the FDA seeking detailed information related to the treatment of cSSSI. The letter requires a Risk Evaluation and Mitigation Strategy (REMS), data on patients with certain renal risk factors from the cSSSI and HAP studies, revision to the draft label and a customary safety update.

The company submitted its response in March. The FDA has not yet established a revised Prescription Drugs User Fee Act (PDUFA) action date. We expect Telavancin to be approved for the treatment of cSSSI in the middle of 2009.

In late January 2009, Theravance submitted a New Drug Application (NDA) to the FDA for Telavancin for the proposed indication to treat nosocomial pneumonia (hospital-acquired pneumonia, HAP) caused by Gram-positive bacteria such as methicillin-resistant Staphylococcus aureus (MRSA). In April 2009, the FDA accepted the NDA and decided for a standard ten-month review of Telavancin resulting in PDUFA date of November 26, 2009. The NDA filing triggers a milestone payment of $10 million from the company’s partner, Astellas Pharma Inc.

Although the company is approaching commercialization, we remain concerned about the competition in the field of bacterial infections. Not only will Telavancin have to compete with marketed branded products such as ViroPharma’s (VPHM) Vancocin, Cubist Pharmaceutical’s (CBST) Cubicin, Pfizer’s (NYSE:PFE) Zyvox and Wyeth’s (WYE) Tygacil, but the drug will also have to fight off competition from generic versions of Vancomycin and other drugs in clinical development like Pfizer’s Dalbavancin (second approvable letter issued in December 2007) and Johnson & Johnson’s (NYSE:JNJ) Ceftobiprole (approvable letter issued in the U.S. in March 2008; filing under review in Europe, Australia, Canada and other countries). Additionally, one or more of these drugs will compete with Telavancin in the HAP setting as well.

We have a neutral weight on Theravance with a price target of $16.5.