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Theravance Inc.’s (THRX - Analyst Report) first quarter 2011 loss per share of 28 cents was in line with the Zacks Consensus Estimate but narrower than the year-ago loss of 35 cents per share. Earnings improvement was driven by better top-line performance.

Revenue at Theravance increased 10% over the prior year to $6.3 million due to higher royalty revenue from Vibativ sales in the reported quarter. Revenue was however below the Zacks Consensus Revenue 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 - Analyst Report). Theravance earned a royalty of $0.6 million on Vibativ sales from Astellas Pharma on net sales of $3.5 million.

Vibativ is marketed by 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 regulatory review in the EU for the treatment of nosocomial pneumonia and cSSSI.

General and administrative (G&A) expenses increased 11.0% to $7.2 million during the first quarter due to higher employee costs, while research and development (R&D) expenses remained almost flat at $20.5 million.

Pipeline Update

Theravance has an agreement with GlaxoSmithKline for the development and commercialization of its pipeline candidate Relovair. Relovair is a once-daily inhaled corticosteroid and a long-acting beta2 agonist combination medicine.

Theravance announced that the phase IIIa program for Relovair, being studied for the treatment of asthma and chronic obstructive pulmonary diseases (COPD), has already enrolled over 10,000 patients of the 11,000 targeted. Enrollment is expected to be completed by the end of this year. The entire COPD program is expected to be completed by the end of 2011 and the asthma study is expected to get over in early 2012.

In February 2011, the companies announced initiation of a large phase IIIb outcomes study with Relovair, which will evaluate survival benefit over placebo in 16,000 moderate COPD patients with a history of or at risk of cardiovascular disease.

GlaxoSmithKline has also initiated four phase IIIb studies in addition to the outcomes study. Three of these studies will evaluate the 24-hour pulmonary function profile of Relovair once daily versus GlaxoSmithKline’s Advair twice daily in patients with COPD. The fourth study will evaluate the effect of Relovair once-daily on arterial wall stiffness compared with placebo and vilanterol (the long-acting beta2 agonist in Relovair) in patients with COPD.

The results from either these or outcomes studies are not expected to form a part of the initial New Drug Application (NDA)/Marketing Authorization Application.

In February 2011, Theravance’s partner GlaxoSmithKline announced initiation of a phase III program (consisting of seven studies) for 719/VI, a combination of two bronchodilator molecules currently under development - ‘719, a long-acting muscarinic antagonist (LAMA) and vilanterol, a long-acting beta2 agonist (LABA).

The LAMA/LABA combination is being studied for the treatment of patients with COPD. The study will target the patient population which is currently being served by Pfizer’s (PFE - Analyst Report) Spiriva, a single bronchodilator medicine. All the seven studies are currently enrolling patients.

Theravance is entitled to receive royalties on sales of both Relovair and LABA/LAMA without any cost obligations. The revenue generated following the approval of either program will ultimately lead the company to profitability.

Theravance is also studying TD-1211, under the PμMA program, in patients with opioid-induced constipation. Theravance plans to move the candidate into phase II trials in mid 2011.

2011 Guidance

Theravanve retained its previously provided operating expense guidance for 2011 in the range of $105 million to $110 million. 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 which is supported by a Zacks #3 Rank (short-term Hold rating). We believe royalties on Vibativ sales provides Theravance with some much-needed funds. Moreover, we anticipate that the Relovair and the LABA/LAMA combination programs hold immense potential and could bring significant royalties to the company, if successful. Furthermore, the company’s collaboration agreement with Astellas Pharma will fetch royalties on global sales of Vibativ. However, the cSSSI market remains fiercely competitive. We are also disappointed with the regulatory setback suffered by Vibativ for the treatment of hospital-acquired pneumonia (HAP). Although Theravance’s pipeline is quite impressive, we believe the main potential lies with the Relovair collaboration.

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