Theravance Loss Wider Than Expected - Analyst Blog

Theravance Inc.'s (THRX) third quarter 2010 loss per share of $0.29 was $0.02 wider than the Zacks Consensus Estimate, but narrower than the year-ago quarter loss of $0.35.

Revenue at Theravance decreased 3.9% to $5.3 million. Revenue also missed the Zacks Consensus Revenue Estimate of $7 million.

Revenues for the quarter primarily consisted of the amortization of deferred revenues received under its collaborations with Astellas and GlaxoSmithKline plc (GSK). This was partially offset by the write-off of $0.82 million Vibativ (telavancin) inventory that is no longer realizable. Theravance earned a royalty of $0.42 million on Vibativ from Astellas Pharma on net sales of $2.3 million. Vibativ is indicated for the treatment of complicated skin and skin structure infections (cSSSI).

Operating expenses slipped 5.4% to $25.2 million. General and administrative (G&A) expenses decreased 6.4% to $6.6 million during the third quarter, while research and development (R&D) expenses decreased 5.1% to $18.5 million. The reduction was primarily attributable to lower external costs from the new drug discovery programs and facilities costs.

Outlook

For 2010, Theravance expects operating expenses at the higher end of the guidance range of $80 million to $85 million. Operating expenses include R&D and G&A expenses, but exclude stock-based compensation expense.

Our Take & Recommendation

We are pleased with the approval of Vibativ for the treatment of cSSSI. The drug was launched in the US during the fourth quarter of 2009 and is currently under regulatory review in Europe. A response from the EU regulatory authorities should be out in the first half of 2011.

We believe the Relovair program, which aims at evaluating treatment options for asthma and chronic obstructive pulmonary disease (COPD), in collaboration with GlaxoSmithKline 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. Even though there are other high-potential candidates like TD-1211 for opioid-induced constipation, in the company's pipeline we believe the main potential lies in the Relovair program.

However, 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 from the US Food and Drug Administration (FDA) for this indication.

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.

For example, Theravance raised approximately $93.6 million in March 2010 through a public offering of its common stock. Additional equity financing could lead to significant dilution in the shareholder base.

Even though we believe the FDA approval of Vibativ should provide Theravance with some much-needed funds, the fierce competition in the cSSSI market should 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.

Consequently, we remain Neutral on the stock in the long-run which is supported by a Zacks # 3 Rank (short-term Hold recommendation) for the stock. The lack of estimate revisions highlighting the absence of a clear directional pressure on the stock further supports our long-term Neutral stance on Theravance.