(THRX) Theravance Third Quarter Loss Deteriorates

Theravance Inc.’s (THRX) third quarter 2011 loss per share of 37 cents was wider than the Zacks Consensus loss Estimate of 33 cents as well as the year-ago loss of 29 cents per share. The wider loss was attributable to a lukewarm top-line performance as well as increased research and development (R&D) expenses. Revenue at Theravance though up 21.3% over the prior year to $6.4 million was below the Zacks Consensus Estimate of $7 million.

The Quarter in Detail

Revenues for the quarter primarily consisted of the amortization of deferred revenues received under the company’s collaborations with Astellas Pharma and GlaxoSmithKline plc (GSK). Theravance earned a royalty of $0.8 million on Vibativ sales from Astellas Pharma on net sales of $4.5 million.

Vibativ, Theravance’s only commercialized drug, is an injectable antibiotic which is currently marketed by partner Astellas Pharma in the US for the treatment of complicated skin and skin structure infections (cSSSI). Theravance receives royalties from Astellas ranging from high teens to upper twenties depending on sales volume. Vibativ is under review in the EU for the disease. Vibativ received approval in the EU for the treatment of nosocomial pneumonia (NP) in September 2011, being the first approval for the treatment of NP, which is associated with high mortality rates. Launch plans are under review. In the US, however, Theravance received a complete response letter (CRL) for the NP indication.

General and administrative (G&A) expenses increased 17.9% to $7.8 million during the third quarter due to higher employee costs. Research and development (R&D) expenses shot up 50.3% over the prior-year quarter to $27.8 million primarily due to higher costs for the development of Theravance’s pipeline candidates under the P?MA and MARIN programs.

Under a strategic alliance with GlaxoSmithKline, Theravance licensed the compound GSK961081 under the MABA program. In October this year, Theravance expanded this collaboration whereby Glaxo has been given exclusive rights to develop and commercialize additional preclinical MABA compounds which will progress simultaneously with GSK961081. Theravance received an upfront payment of $1 million and will be entitled to additional royalties and milestones if any MABA compound is successfully developed and commercialized. Glaxo returned full rights to the early stage Central Nervous System (CNS) program MARIN and preclinical cardiovascular program ARNI to Theravance.

2011 Guidance

Theravance retained its previously provided operating expense guidance for 2011 in the range of $105 million to $110 million. Management however expects to incur higher operating expenses in the fourth quarter as mid-stage development of the P?MA program ramps. Operating expenses include R&D and G&A expenses, but exclude stock-based compensation expense.

Our Recommendation

We currently have a Neutral recommendation on Theravance. The stock carries a Zacks #3 Rank (“Hold”) in the short term. We believe that the current earnings report is a non-event for Theravance as investor focus will be glued on the pipeline programs with GlaxoSmithKline.

We believe that Theravance’s lead pipeline programs, Relovair and the LABA/LAMA combination, hold immense potential and could bring significant royalties to the company, if successful. Relovair is a once-daily combination medicine consisting of a LABA, vilanterol (VI), and an inhaled corticosteroid (ICS), fluticasone furoate (FF), being developed in collaboration with Glaxo. The LABA/LAMA or the 719/VI program, in association with GlaxoSmithKline, is a combination of two bronchodilator molecules currently under development – ‘719, a LAMA and VI or vilanterol, a LABA.

Meanwhile, royalties on Vibativ sales provide Theravance with some much-needed funds. On the flip side, the cSSSI market remains fiercely competitive. Though we are encouraged by approval of Vibativ for NP in the EU, we are disappointed with the CRL received in the US for the indication. At the end, though impressed by Theravance’s pipeline, we believe the major trump card for the company is the Relovair collaboration.

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