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Theravance Inc. (NASDAQ:THRX)

Morgan Stanley Global Healthcare Conference

September 12, 2012 9:10 am ET

Executives

Michael Aguiar - Chief Financial Officer, Senior Vice President

Analysts

David Friedman - Morgan Stanley

David Friedman - Morgan Stanley

We will get started here and thanks everyone for joining us. Dave Friedman, one of the biotech analysts here and in terms of disclosures, personal and Morgan Stanley's, you can look on morganstanley.com/researchdisclosures and I am joined by Mike Aguiar, Chief Financial Officer of Theravance and thank you for coming, everyone and thanks for coming, Mike.

We would love for this to be interactive. So if anyone has any questions at any time, please feel free to raise your hand, give a shout out and we will make sure to get your question asked. So, again, thanks for coming and maybe if we can just start. If you can give a couple of minute overview of the company for people who aren’t as familiar.

Michael Aguiar

Sure. Thanks for the introduction here. Theravance is a biotechnology company focused on late stage discovery and development of a variety of medicines. In particular, we have a very substantial relationship with GSK where we have three large respiratory programs and that’s grabbing the lion share of the industry attention today.

So that’s where I spend the vast majority of my time, running through those three programs. As David, mentioned, as we get to Q&A, if there is any other programs that folks have been talking about, we will be more than happy to chat about that. But again, I think the vast majority of the focus today is on our three respiratory programs in collaboration with GSK. So I will spend a few moments talking about those.

The programs are really focused on the treatment of chronic obstructive pulmonary disease or COPD and asthma. The lead program in there is what we call now Relvar/Breo. Relvar is the brand name in Europe. Breo is a proposed brand name in the United States.

It’s a combination of Long-Acting Beta Agonist and an inhaled corticosteroid. So these are similar mechanisms of action to either Advair today or Symbicort. This product is going to be targeted at the treatment of asthma and COPD. That has been submitted in Europe for both asthma and COPD and has been submitted for regulatory review in the United States for COPD.

We expect to have some information coming back on the acceptance of the filings in the U.S. here in the next several weeks. So that is well underway. That data has been previously presented.

The next program behind that is an interesting new product combination which is the combination of a Long-Acting Muscarinic Antagonist or Umeclidinium combined with the Long-Acting Beta Agonist from Relvar/Breo. We call that UMEC/VI and a substantial amount of data is coming up here and some data came out here at ERS here last week that generated a fair amount of discussion that was out there.

This product is for the treatment of COPD and is really targeted at the market that is occupied by tiotropium today. This is about $5 billion market today and has been growing fairly substantially.

The last of the programs is, what we call, our MABA program. This is a single molecule that is both a Muscarinic Antagonist-and a Beta Agonist. It has finished Phase IIb. We are in the process right now of evaluating how to move this forward in the Phase III here as a once-a-day medicine or as a twice-a-day medicine and probably before the end of the year, we will have an update back to investors on that.

So what is particularly interesting about these combinations is this really has the opportunity to provide GSK and Theravance with, what we will consider, the best respiratory suite out there. Really, it will provide the ability to take a patient from the very early stages of the disease all the way through fairly serious stage of disease in a single device.

So for example, I will talk about CPOD here. This is a pretty good example of that. The collaboration is developing single agent medicines. So either a single agent LABA or single agent LAMA that would be delivered in the (inaudible) device and that would be applicable for a patient who had early stage of COPD, as that particular patient continue to progress in their disease and perhaps it wasn’t controlled by a single agent you would be then able to step them up to the combination of LAMA/LABA again in the same exact device.

If the patient continues to progress in their disease and it has been exacerbation you would then again be able to step them up again into therapy to a higher level with Relvar/Breo where you would have an inhaled corticosteroid on board to help control the exasperations and again as the patient continues to progress further we have a number of opportunities for what we consider to be a triple product, either combining MABA with an ICS or potentially combining two different medicines, for example a single agent LAMA with a combination of the Relvar/Breo or potentially if you were be able to combine all three of the medicines in a single device.

So it gives you the ability to take a patient who has severe stages of the disease. So really it would be handle life cycle management for these patients in a manner that no other company out there today really has the ability to do.

So we are feeling quite good about where we are today with these programs and the data that has been generated today. So with that, I will go ahead and turn it back over to David.

Question-and-Answer Session

David Friedman - Morgan Stanley

It's great, thank you. Any questions before I jump in? Maybe if we can just start with one general one, which is your relationship with GSK. The economic structures vary drug to drug. So maybe if you can just review for people what your stake is in each of the programs and how the patterns of approval can impact your stake in the drugs.

Michael Aguiar

Sure. There is two economic relationships to talk about with regard to GSK. One is they are substantial shareholders of the company. They own a little over 26% of the company. With regard to this specific economics, again there are three programs here that will have different sets of economics and there is a slight potential change in there just due to the temporal nature of things.

The most likely scenario that we think about today is that Relvar/Breo gets approved first. That would be followed by an approval of LAMA/LABA, just given the current filings of where they are and our expectations around filing timelines, et cetera. In the event that was the case, Relvar/Breo gets a 15% royalty each year on the first $3 billion of revenue which then drops to 5% of revenue above and beyond $3 billion.

The LAMA/LABA program or again the UMEC/VI has a different royalty structure which starts each year at 6.5% has several steps up and it tops out at 10% for all sales above and beyond $2.5 billion.

These are the two programs that again have a temporal relationship. In the event that the approvals are to be reversed, I think this is a relatively unlikely scenario today in the possible exception if we ran into some unknown issue or a substantial issue with regard to Relvar/Breo, but in that case that they were to swap then the UMEC/VI would have the Relvar royalty. So again we have the $3 billion at 15% and dropping to 5% thereafter, but again, in terms of our planning and our guidance internally we felt that’s in a relatively low probability, again, just given the current timelines for those.

Then the last program, again, is our MABA program. It’s a step-up royalty structure, again, for single agent MABA. It ranges between 10% and 20% of sales on the first $3.5 billion per year. So these have upward tier in royalties and then drops to 7.5% for anything above and beyond $3.5 billion.

So these are very substantial royalties and the way we generally think about these three programs going forward in a relatively mature environment is that when we run our strategic planning scenarios we generally think these programs being relatively similar in size. Obviously there are substantial movers that are out there depending upon how the data rolls out but I think our view is that each of these will have a unique in the treatment out there that results in a little more balanced portfolio as opposed to today which is a very LABA/ICS dominated market.

David Friedman - Morgan Stanley

So, maybe, if we can just do one more do one more higher level question which is around the COPD and asthma markets? COPD has more steps along the way in terms of options available to patients. So in terms of the patient stratification, if you can talk about the types and the size in terms of percent of patients that end up on single agent LAMAs or LABAs, although LABA is much less now and then the fraction of patients that end up on LABA/ICS and then the fraction that are on three drugs, oral steroids and beyond. Just to get a sense of these different types of patient markets that you guys are going to be trying to siphon out?

Michael Aguiar

That’s a very interesting question. I think we are in a very dynamic environment today that is changing much just today and it going to change again tomorrow. There was interesting presentation put on at the ERS by (inaudible) where he was looking at the four gold stages and how potentially there are different treatments for each of those and his overall comment was the boundaries between these treatment paradigms that are going be shifting for quite a while.

So today, if you just look at what's out there commercially as a potential marker at how this treatment is being delivered, you have tiotropium which again is about $5 billion product entirely or more or less entirely in COPD and then you have about $12 billion worth of LABA/ICS revenue that is out there. About $8 billion or so from Advair and about $4 billion from Symbicort.

The best data have it roughly speaking that’s about half and half that’s in COPD. So call it about $6 billion worth of treatment out there related to COPD, although that portion is growing a little bit faster. What happens today, you are seeing an increasing prevalence of LAMA containing therapies. So again you are seeing the tiotropium growing a little bit faster as it's making inroads into the COPD market that historically has been principally taken by the LABA/ICS containing regiments.

Really, the fundamental reason for that is, if you really have a patient who is in the early stages of COPD with a primary need is to breathe better, tiotropium is a pretty good bronchodilator. That’s primarily what it is doing,

You don’t need the steroid on board for early stage COPD therapy. Once you have had an exacerbation at that point in time, you are more likely to have future exacerbations. That’s the point of time when it is probably better from a therapeutic perspective to have a steroid on board. So I think that that boundary is going to continue to move around and you are going to see additional pressure on that dynamic when a LABA/LAMA gets on the market.

One of the principle complaints that patients have who are on single agent LAMA today is they still have dyspnea or shortness of breath whereas if you have a dual bronchodilator, you are much more likely to treat a patient and solve that problem for them. So again it wouldn’t surprise me going forward to see additional business in that particular space as these LABA/LAMA come into market.

Now, with that being said, there are several products that out there. In Europe you have Novartis compound, you have the GSK-Theravance compound that are coming. Both of these are probably going to be in a similar regulatory timeframe. They are both going to be once-a-day in Europe.

In the United States, the GSK-Theravance program is several years ahead, that’s our best guess, than where Novartis is and it is unlikely that Novartis will come into U.S. with a once-a-day compound. Our view is that is more likely to be a twice-a-day compound. So in the U.S., I think we are extremely well positioned relative to where the competition is.

David Friedman - Morgan Stanley

So, maybe, if we can just jump into Relvar/Breo. You guys have a lot of data presented at the recent ERS conference. Maybe if you can help people pick out one or two most important takeaways that you guys take from the large data package, both for COPD and for asthma that you believe are the most differentiated aspect of the drug that is most likely to separate it out from the competitive landscape.

Michael Aguiar

I think as you look at what we are trying to do here, if you step back a few years ago, the goal of the program originally was simply to create a replacement for Advair. Advair is a twice-a-day LABA/ICS. The goal of the collaboration was to create a once-a-day replacement for it.

When we originally set up the collaboration, the goal was to deliver Advair once-a-day and we felt that it was a gigantic product. Since then we have been looking at a variety of other areas where there is going to be potential differentiation out there but let me focus on the once-a-day.

Once-a-day is a very important component of this and without a doubt it is probably not as well understood. The big issue with twice-a-day medicine remains compliance. Compliance is a very important of overall treatment success for patients with either asthma or COPD.

Some of the studies that I have seen have shown overall compliance rates of twice-a-day medicines are in the neighborhood of about 30% range. So we kept it in the 32%, 34%, 36% compliance rate which has generally as we both know is a relatively low overall compliance rate.

Unfortunately for patients, there is a high correlation between compliance and outcome. As you look from a twice-a-day medicine to a once-a-day, there is a recent paper written by Toi, as the author TOI, where they were showing somewhere in the neighborhood of eight percentage point increase in the rates of compliance. You are going from mid-30s to mid-40s and what that resulted in overall the savings to the healthcare system.

So the additional cost of the medicine were more than offset by the reduced cost associated with patient hospitalization exacerbations et cetera. So this is a big deal.

Again, I am going to go back and talk about what Dr. Neil said where he said, the biggest issue he has with his patients is compliance. Once-a-day is very important here. So that’s really the big thrust in terms of this and that in and of itself is going to be a big time effect.

Now we are looking at number of other things. We have done head-to-head studies versus (inaudible) for example we had two head-to-head studies. One of the studies showed FEV1 so FEV1 so broncho dialysis priority. One showed either with the broncho dilation. If you actually look at that graph however, for the first 12 hours there was a very clear separation where Relvar/Breo looked better and then the second 12 hours where the patient was asleep, they looked fairly similar. So there are clearly some numeric transform in the right direction.

Another big thing we are doing right now which is currently underway is we are running a large study called the Salford Lung Study. This is a quite interesting study being conducted in the U.K. health system where we are looking at compliance rates and health care costs.

Again, that will provide some additional benefits. The final piece is looking at outcomes. We have a very large study that is underway looking at mortality. Any one of these to be successful, it would be not only the once-a-day benefit but other pieces going in.

With regard to asthma, probably the single biggest piece of data that we are extremely excited about was the exacerbation study. This is a 2,000 patient, prospectively designed study to show that the addition of a Beta Agonist in inhaled corticosteroid reduces rates of exacerbation in patients with asthma.

Now this flies right against the beliefs of certain segments of the FDA where potentially adding a LABA to a steroid increases the risk to the patient and we actually show that consistent with some of our views that adding a LABA to an ICS reduces overall rates of exacerbation, increases time to exacerbation, et cetera. So this is the largest study to have been done like this to date on a prospective basis.

So we think the overall package for Relvar/Breo is strong. We are quite excited about getting that under review here and as I mentioned in the submissions, in the late June, early July time frame.

David Friedman - Morgan Stanley

And then, in the U.S., the filing was exclusively right now for COPD. Is there anything that you can update us in terms of asthma in the U.S. and the nature of the discussions that you guys and GSK have been having with the FDA about that?

Michael Aguiar

Sure. We have been saying for quite a while, in the U.S., in particular, that their prime focus was on COPD and that application in that. The reason for that has been that there has been a level of regulatory discourse in the FDA regarding the use of LABAs for the treatment of asthma.

Now, interestingly the last couple of LABAs that have come in front of the FDA have been approved, so there is a difference between the rhetoric and the actual results of the FDA. So I think if you look at the actions versus the rhetoric there is a difference there. However, that being said, we wanted to make sure that there is really nothing standing in the way of COPD.

So we slow down the asthma filing. Now there was a second piece of information we talked about which was up until recently we really had no regulatory guidance from the FDA, what they wanted for an asthma program. So the asthma program that we ran was largely designed in accordance with European standards.

At ERS, we did mention that we are about to start an additional asthma study. We described that it was really to round out the filing package. Today, I think we have a pretty good view of what the regulatory path is in the U.S. for the treatment of asthma.

So this is actually terrifically good news. There were some competitors out there who said there was no path in this through the U.S. for the treatment of asthma which is just right out wrong as far we are concerned today. We have had the discussions and there is a path today. So we haven’t made the final decisions regarding the actual filing strategy, meaning the timing when we are going to file that but I think we are feeling quite good about where we are all vis-à-vis the asthma.

David Friedman - Morgan Stanley

Can you discuss at all any of the details of either what the trial needs to be design wise or if not that, at least what the goals of the trial are?

Michael Aguiar

Sure. The posting is going to be on the clinical trial relatively soon. So I am going to keep my discussion at a very high level. What we want to really do in, at this date, is have at least two doses of a steroid. That’s really the treatment paradigm today for the treatment of asthma in the U.S.

You start with a lower dose, gives us the ability to dose up. We did not run a single study in the asthma program where we are looking at bulk of the doses. So what we are going to compare is the dose of the steroids or one dose of steroid with two doses of Relvar, one at the lower dose and one at the higher dose. So again getting all of that in one particular study as opposed to the way the (inaudible) program is on today where we had multiple studies that were comparing the doses.

So it's really combining all of those into one program but I will say this is not a giant extremely long, 12-months treatment or something like that study. This is a relatively small study. It will be clear in a relatively short period of time.

David Friedman - Morgan Stanley

Any questions on this program? So maybe we can jump into the LAMA/LABA programs. You guys have top line data and we have seen some dose ranging for the LAMA, I guess, we have seen dose ranging for the LABA as well. Maybe if you could just talk about again the one or two things you took away from the top line data release and maybe touch on some of the discussion around the LAMA dosing that came out of ERS?

Michael Aguiar

Sure. Let me start with the top level, I would like to just back up the ERS because there are some important steps that came out of here with regard to overall messaging then I will get right into the heart of the dosing question.

The dosing issue has been unbelievably a topic of discussion and there is really so much smoke running around this that it is a little surprising. Now, that being said, ERS, there were three very loud messages that came out of this.

Number one is that, LAMA containing measurements are going to be more important tomorrow. That is quite clear.

Number two, exacerbations are important. You have got to control exacerbation. You actually, when you have an exacerbation that they slope and the decline of lung function changes over time, the importance of controlling that is going to be very important. That includes, in the asthma treatment, there were some interesting data that came out on the treatment of asthmatic for LAMAs that really has the ability to potentially in the future change some of the treatment paradigms out there and then all of that points to this last piece that I talked about very early which is triples.

Triple combinations. So a LABA plus a LAMA plus and ICS, that potentially could be the biggest product that we have out there, when you look at (inaudible) in asthma and COPD. So LAMAs are very important going forward.

With that I would like to shift gears and talk about dose. There is an amazing amount of discussion around how the FDA abuses and there is a misnomer there is out there and it is by a lot of people called minimally effective dose. Trying to describe how the FDA looks at dosing.

I am not exactly sure where that comes from. You can look back on a lot of different places. If you look at the FDA documents that have been out, probably the most recent and appropriate document to look at is the aclidinium briefing document. In there they did not use the term minimally effective dose.

They used the most appropriate and efficacious as their discussion there and in fact in that particular briefing document, they talk about how a lower dose, even though it is statistically significant is not clinically effective.

So this is really where we have been talking about our dosing for a long time. I use the term optimal dose. The FDA use the term most appropriate and efficacious. So I really think the term minimally effective dose is a misnomer and not that correct.

That being said, we presented the data out here where we think we have identified two doses that are both very good at 52.5 and 125. These doses fall above the ED50, as ED50 has a dosing point above roughly speaking half the patients will not receive the benefit, half of the patients will.

I will call that a coin flip. A coin flip is not generally a good therapeutic index if you are a doctor where you flip a coin and your patient may or may not get the clinically effective benefit. So you want to be above the ED50.

The ED50, in our modeling and in our actual presentation is in the neighborhood of the 30 microgram range. We are proposing the dosing to 52.5 and 125 for this to bring it substantially above the ED50 but is below the EMAC. So right in the sweet spot. If you can do this from an AE perspective, that’s where you want to be. We are quite comfortable with our overall AE profile.

So we have two doses, a 52.5 and 125. We have not made the final decision of whether we file one, the other or both. We are confident. GSK is confident, Theravance is confident that we have the right dose there.

If you think about the dose, I really wouldn’t get stuck on one particular data point. There has been a lot of discussion, well if you look at data point axis, there is just one particular data point, in general people look at is trough FEV1. Somehow that gives insight into the entire totality of the data.

Another interesting phrase that came out of the aclidinium briefing document and again, this shouldn’t be a surprise, the FDA says, they reviewed the totality of the data. There are really five things we think about when we are looking at dosing.

We look at trough FEV1, we look at AUC. So this is bronchodilation over time. You look at things like where are you on, what I am going to call the responder, like the ED50 or the EE max range. AE is, and in secondary things like rescue medication and there are clear differences in all of these between these doses.

So again, I would just say, GSK and Theravance are quite confident we have the right dose on these and today are pretty comfortable we are not going to be pushed to a lower dose.

David Friedman - Morgan Stanley

The ED50 and EE max data, does that come from testing serial cohorts and assessing response rates or how exactly is that type of data generated?

Michael Aguiar

When you look at the ED50, this is modeling data. What you are doing is taking sort of the compilation of the data that has been generated to-date and the data that generates as this program is fairly extensive. We have run a large number of patients through and you are looking at the actuals and then that goes into a mathematical formula to predict where you would you would come out.

As you look at the posters that we have presented at ERS, there you will see two lines and you will see a line that is the mathematical estimate of what you were going to see and then the actuals and they are largely the similar. So the good news is that our modeling largely mirrors what we saw.

So again there is kind of two components to this and if you think about the data where you can see the data point with the confidence interlope around there these points, of course they are mean. So roughly speaking this is not exact middle point where the number of patients above and below are the same but this is a mean, so roughly speaking 50% will be above and 50% below that particular number.

So again coming out with a number in our modeling of 37 micrograms which is substantially above the 52.5. So again, at that point in time, you would be giving a coin flip whether the patient has a clinically meaningful response to the medicine or not.

David Friedman - Morgan Stanley

So just to be clear though, in that poster that you guys presented, the means and the medians were similar?

Michael Aguiar

They were similar. Again, I am not going to say they are the same data points. When you eyeball them, they are slightly different but as you look at the charts they are largely the same.

David Friedman - Morgan Stanley

Then maybe just from the top line that you guys, because as you put out four top line studies, what did you zero in on when you saw that is the most important thing and then as we get to see more of the data in the coming six or 12 months, what are the things that people should be looking out for as highlighting the key benefits of the LAMA/LABA versus the components as well as (inaudible).

Michael Aguiar

The four studies that David is referring to there were two six months testing the efficacies study. So in these studies you are looking at each of the components of LAMA/LABA, placebo and the combination. What we showed in those studies was the components and the combination were all better than placebo. We believe we satisfy things like the combination rule for example. That is really the purpose of the six month study, so success on that.

The other two studies we are looking at versus comparative to tiotropium. I think you can infer where we are targeting this product by the comparative we chose in here. So in those studies again we show better bronchodilation versus tiotropium. I think we are feeling quite good about the data today.

There were three other studies that recently came out that are either required or supplementary to it. There were two exercise studies and a long term safety study. When we top line, we just said, they were supportive of filing, while there is a relative low risk study.

From the safety perspective, we didn’t see anything in the Phase III program of note. So we felt quite good about that. There was really nothing come out of that 12 month study to talk about.

So I think overall we are feeling quite good about where we are with this program. We are feeling extremely good about our portfolio. Again, nobody today, from a competitive perspective has the possibility of having this single agent, the combination agent, the LABA/ICS combo to potentially triple in a single device that can provide this kind of life cycle management.

When you think about Europe versus the U.S., in Europe we certainly have Novartis coming in the U.S. There really is nobody coming with a once-a-day LAM/LABA, nobody coming with a once-a-day LABA/ICS and so I think like our competitive position is extremely good.

David Friedman - Morgan Stanley

Any audience questions before we wrap up? No? All right, well, thank you very much for coming and thanks everyone for joining us.

Michael Aguiar

Thank you.

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