Risk-Reward Balanced at Theravance - Analyst Blog

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We have maintained our Neutral recommendation on Theravance, Inc. ( THRX ) with a target price of $24.00 per share following appraisal of third quarter 2011 financial results.

Theravance's 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 20.8% over the prior year to $6.4 million was below the Zacks Consensus Estimate of $7 million.

Theravance has active collaborations with GlaxoSmithKline ( GSK ) for the Relovair, LAMA/LABA (also called 719/VI) and MABA programs. The Relovair program holds the biggest potential in the company's pipeline, which aims to replace one of Glaxo's best selling drugs, Advair. It is being developed for the treatment of chronic obstructive pulmonary diseases (COPD) and asthma.

The LAMA/LABA combination is also being developed for the treatment of COPD. Under the MABA collaboration, Theravance is making rapid progress with GSK961081, which could be another important option for the treatment of COPD. In October 2011, Theravance expanded this collaboration whereby Glaxo has been given exclusive rights to develop and commercialize six additional preclinical MABA compounds (discovered by Theravance) which will progress simultaneously with GSK961081.

If successful, this portfolio of respiratory products could put Theravance in a very competitive position. Theravance is entitled to receive royalties on sales of drugs developed from the Relovair, LABA/LAMA, and MABA studies without any added cost obligations. We believe the revenue generated following the approval of any of the programs will ultimately lead the company to profitability.

Theravance, on its own, has a deep pipeline consisting of candidates like TD-5108 (chronic constipation), TD-4208 (COPD), and TD-1211 (opioid-induced constipation), which could drive future revenues. Theravance, the sole owner of all these promising programs, is on the lookout of collaborative partners for the development and commercialization of the compounds. With these compounds progressing well and steadily reporting positive data, partnering discussions around these programs could materialize faster. Overall, we believe that 2012 will be an important year for the company due to significant clinical catalysts.

Theravance's only commercialized drug, Vibativ (telavancin), 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) caused by gram-positive bacteria, including resistant pathogens such as methicillin-resistant staphylococcus aureus (MRSA). Theravance receives royalties from Astellas ranging from high teens to upper twenties depending on sales volume. Vibativ is also marketed in Canada for cSSSI and is under review in the EU for the disease.

Apart from cSSSI, Vibativ was also studied for hospital-acquired pneumonia ( HAP ) or nosocomial pneumonia ( NP ). Vibativ received approval in the EU for NP in September 2011. This marks the first approval for the treatment of NP, which is associated with high mortality rates. It is also approved in Norway and Switzerland for NP. Launch plans are under review. In the US, however, Theravance received a complete response letter ( CRL ) for the NP indication stating certain shortcomings related to its studies. Though we are encouraged by the approval of Vibativ for NP in the EU, we are disappointed with the CRL received in the US for the indication. We, therefore, prefer to remain on the sidelines on the stock.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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