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We are maintaining our Neutral recommendation on Theravance (THRX - Analyst Report) with a target price of $28.00. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

Theravance suffered a loss of $0.42 per share in the second quarter 2012. The loss, slightly narrower than the Zacks Consensus loss Estimate of $0.44, was wider than the year-ago loss of $0.31 per share. The wider year-over-year loss was attributable to lower revenues.

Revenues plummeted 77.6% to $1.4 million in the second quarter of 2012. Revenues were hurt by the termination of Theravance’s global deal with Astellas for Vibativ.

Astellas called off its collaboration agreement with Theravance, inked in 2005, in January 2012. With Astellas pulling out, supplies in the US have been hit and will continue to dwindle unless this issue is resolved.

Following the termination of the deal with Astellas, the Committee for Medicinal Products for Human Use (CHMP) recommended that the marketing approval granted to Vibativ for the nosocomial pneumonia (NP) indication in September 2011, will be withdrawn due to manufacturing issues.

This will affect the top line since Vibativ is Theravance’s sole marketed product. Management stated that if the issue is not solved promptly, the restoration of normal supply for Vibativ could stretch for a period of 1-2 years.

Vibativ, an injectable antibiotic, is used for treating adults suffering from complicated skin and skin structure infections, resulting from susceptible gram-positive bacteria, including both methicillin-resistant and methicillin-susceptible strains of staphylococcus aureus. Theravance is exploring options regarding future Vibativ sales, which also include finding a new partner for the product.

Even though Vibativ is currently facing supply-related issues due to the pull out of Astellas, we continue to believe that Vibativ holds significant potential. Success in finding an established partner for marketing Vibativ should result in sales of the drug picking up.

We are positive on Theravance’s collaborations with GlaxoSmithKline (GSK - Analyst Report) for respiratory candidates (FF/VI, LAMA/LABA and MABA) and Alfa Wassermann for the gastrointestinal motility dysfunction candidate (velusetrag/TD-5108). FF/VI, which aims to replace one of Glaxo’s best-selling drugs Advair, holds the biggest potential in Theravance’s pipeline. FF/VI being developed for the treatment of asthma and COPD, is a combination of fluticasone furoate (FF) and vilanterol (VI), administered using a dry powder inhaler called Ellipta.

Glaxo and Theravance are seeking approval for FF/VI in the US and the EU for COPD. In the EU, a regulatory application for the asthma indication was also submitted in July 2012. The regulatory applications for both COPD and asthma in the EU have been validated by the European Medicines Agency (EMA).

The FDA is expected to render its final decision on the candidate by May 12, 2013 for chronic obstructive pulmonary disease. In May 2012, Glaxo announced that it has increased its holding in Theravance to 26.8% from 18.3%. The increased holding reflects Glaxo’s confidence in FF/VI.

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