We are maintaining our Neutral recommendation on Theravance Inc. (THRX) with a target price of $27.
Theravance founded in 1996 and headquartered in South San Francisco, California focuses on the discovery, development and commercialization of small molecule medicines. 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 royalty percentages ranging from high teens to upper twenties, depending on sales volume.
In October this year, Theravance reported its third quarter 2010 results. The loss per share of 29 cents was wider than the Zacks Consensus Estimate by 2 cents, but narrower than the year-ago quarter loss by 6 cents. Revenue at Theravance decreased 3.9% to $5.3 million and missed the Zacks Consensus Estimate of $7 million.
(Read our full coverage on this earnings report: Theravance Loss Wider Than Expected)
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.
Moreover, the recently announced encouraging proof-of-concept result on TD-1211 from a mid-stage study is a further boost to the company’s pipeline. The study evaluated the candidate’s effectiveness, tolerability and safety in patients with opioid-induced constipation. However, we continue to believe that the main potential lies in the Relovair program.
Meanwhile, 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 cSSSI and HAP.
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.
Even though we believe the FDA approval of Vibativ should provide Theravance with some much-needed funds, the fierce competition in the cSSSI market could 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. Moreover, even though we have lowered our 2011 loss per share estimates in view of the encouraging proof-of-concept results of TD-1211 in addition to the promising Relovair program, we prefer to remain on the sidelines until there is more visibility on the pipeline development at Theravance. Consequently, we continue to maintain our long-term ‘Neutral’ stance on the stock.