Theravance: A $1.5 Billion Company With An $8 Billion Product

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Relovair, a drug developed by Theravance (THRX) and partner, GlaxoSmithKline (NYSE:GSK), is positioned as a successor to Advair - a global GSK franchise worth $8 billion per year whose U.S. patent expired in 2010. Like Advair, Relovair is used in the treatment of asthma and chronic obstructive pulmonary disease or COPD. Combined, asthma and COPD treatments are worth $49.6 billion dollars in the G7 countries - the United States, Canada, France, Germany, Italy, Japan, and United Kingdom - and projected to hit $56.5 billion in 2019.

The recently released Phase III data for Relovair, or "Super Advair" as some would call it, has, for the most part, disappointed many analysts and investors. However, Theravance and GlaxoSmithKline are confident enough in that same set of data that they are seeking regulatory approval for Relovair in the treatment of COPD in the United States and COPD and asthma in Europe. For asthma, in the United States, GlaxoSmithKline is in discussion with the FDA regarding the approval requirements of Relovair for this indication. The companies will urge the FDA to review all of the data as the scope of the trials were rather large, complex, and convoluted in disease states that are equally difficult to assess.

Relovair Is "Superior" To Advair

The results from the pivotal Phase III trials were mixed, with the biggest setback being the inability of Relovair to demonstrate superiority against Advair. The share price of Theravance have lagged ever since, as investors are now reevaluating the Relovair franchise. However, contrary to current sentiment, Relovair is superior to, and will live up to the earlier expectations to replace, Advair when non-inferiority data and dosing are considered.

In the non-pivotal 12-week COPD and 24-week asthma studies of Relovair once daily compared to Advair twice daily, Relovair did not meet the predefined threshold for superiority, but most importantly, there were no statistical differences between Relovair and Advair. From the results, one can deduce that the data generated from the two studies showed that Relovair, when compared to Advair, demonstrated non-inferiority to the $8 billion inhaler.

Often times, in clinical trials, when a novel treatment goes head-to-head against a highly efficacious and current standard-of-care treatment, superiority is difficult to prove. For example, as written here, Trius Therapeutics (TSRX) had a difficult time demonstrating superiority of their lead compound, tedizolid, over Zyvox from Pfizer (NYSE:PFE) because of its high efficacy rate in eradicating gram-positive bacteria in acute bacterial skin and skin structure infections. As in the case of Relovair, tedizolid's non-inferiority data is most likely enough to garner FDA approval and prove to be superior when convenience, dosing, and other advantages are accounted for.

Like Trius, investors in Theravance expected and wanted superiority, which will probably never happen in the clinical setting. However, it is important to realize that a compound that does not show superiority can still be FDA approved and go on to demonstrate superiority in a setting that really matters - in the "real world" and outside of the highly controlled clinical trial environment. Sometimes what takes place in a clinical trial setting is not reflective of what happens in "real life" where the environment is less orchestrated. For this reason, GlaxoSmithKline is starting clinical work to study patient outcomes of Relovair in the real world. Not only will the study ultimately prove that Relovair is a better product, but it will also encourage premium pricing.

Proving superiority in a "real life" setting for Relovair will not be difficult. The once daily dosing of Relovair versus the twice daily dosing of Advair is understated and offers substantial advantages as compliance becomes less of an issue. It is well known that adherence to treatments in patients with respiratory diseases such as asthma is suboptimal.

In a report by Aidan A. Long, MD, it has been speculated that over half of patients with asthma are not compliant with therapy. A large percentage of these patients simply forget to take their medications and/or use their inhalers. This simple act of forgetting can have devastating consequences, as it can lead to exacerbations, hospitalizations, and deaths in COPD and asthma patients. The economic impact of non-compliance is great.

The cost burden of disease for asthma and COPD currently exceeds $50 billion in the United States. Making asthma and COPD medications more convenient and simplifying dosing will have a tremendous impact in improving compliance. Decreasing the number of doses per day is even more important in the case of Advair, as patients need to rinse out their mouths after each dose to minimize oral thrush - a fungal infection of the mouth and throat. This is a slight inconvenience, but serves as additional impedance for some to be compliant with their regimen. The once-daily dosing schedule of Relovair will make it easier for patients to adhere to their treatment.

The cases of fatal pneumonia in the trials have been overstated, as it is important to realize the patient population that Relovair is being used in. Asthma and COPD patients are a higher-risk group when it comes to respiratory infections, and the consequences are often more severe. COPD patients have a hard time clearing their lungs of bacteria and are more susceptible to contracting pneumonia. Furthermore, it is well documented that the risk of pneumonia are increased in COPD patients using inhaled corticosteroids such as fluticasone, one of the components in Relovair. This risk is seen with any inhaled corticosteroid, not just fluticasone.

Upper respiratory infections and pneumonia are not isolated to COPD patients using inhaled corticosteroids and corticosteroid combinations (long acting beta agonist/corticosteroid). These are documented side effects in all users of inhalers, such as Flovent, Symbicort by AstraZeneca (NYSE:AZN), and Advair, but the consequences are more dire for those with respiratory disorders. Although unfortunate, cases of fatal pneumonia should not be unexpected in these patient populations.

Follow The Money

With a 19 percent stake in Theravance, GlaxoSmithKline - a company with significant capital, analytical, and scientific resources - believes in this product and their collaboration. Seth Klarman, legendary investor and founder of Baupost Group LLC, has accumulated over 16 percent or 14.2 million shares of Theravance. With over 11.4 million shares, FMR LLC owns over 13 percent of the company.

GlaxoSmithKline has made additional purchases to add to their 19 percent stake. In November 2011, GSK purchased 58,411 shares at $22.23 per share for a total of $1.3 million. Unfazed by the Phase III results and still confident in Theravance, GlaxoSmithKline purchased 88,468 shares at $18.12 per share for a total of $1.6 million in February after the release of the Phase III data.

With an $8 billion drug, rich partnership with GlaxoSmithKline, significant institutional ownership, strong pipeline, and a Hepatitis C compound in late-stage discovery, maybe investors should warm up again to the idea of a GSK buyout.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: All information is provided for informational purposes only and does not serve as investment advice or an offer of management services. There is no guarantee that the information is accurate. All information is subject to change, amendment, and correction without any notice. Any mention of current and past results does not indicate any future expectations or results. All investments are associated with risks and loss of money. Consult with a professional tax, accounting, legal, and/or investment advisor before making any investment decision.

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