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Theravance, Inc. (THRX) recently announced that it has completed its public offering of $287.5 million convertible subordinated notes, due in 2023, including $37.5 million of notes sold to underwriters to cover the over-allotment options.

Pertaining to the public offering, Theravance entered into privately-negotiated capped call option transactions. The total cost associated with the capped call options was $36.8 million. These options are expected to bring down the potential dilution upon conversion of the notes if the market price of Theravance’s shares, measured under the terms of the capped call transactions, exceeds the strike price of the transactions. The strike price initially corresponds to the conversion price of the notes. Moreover, it is subject to customary anti-dilution adjustments.

The anti-dilutive effect of the transactions will be limited in the event of the market price of Theravance’s shares exceeding $38.00. We note that $38.00 per share is the initial cap price of the capped call transactions.

Theravance intends to utilize the net proceeds from the offering to make milestone payments to pharma major GlaxoSmithKline (GSK - Analyst Report) in the event of any of its pipeline candidates, being developed in collaboration with the latter, gaining approval. Theravance also intends to use the net proceeds to pay for the cost of entering into the capped call option transactions.

We are positive on Theravance’s pipeline programs in collaboration with Glaxo. Earlier in the month, the companies announced the submission of a marketing application to the European Medicines Agency (EMA) for their pipeline candidate UMEC/VI (proposed trade name: Anoro). The companies are looking to get the candidate approved in the EU as a maintenance bronchodilator therapy (once daily) to relieve symptoms in adults suffering from chronic obstructive pulmonary disease (COPD).

Glaxo/Theravance are also seeking US approval of the candidate for the COPD indication. UMEC/VI is a combination of a long-acting muscarinic antagonist/LAMA (GSK573719 or umeclidinium bromide/UMEC) and a long-acting beta2 agonist/LABA (vilanterol/VI). We note that Glaxo along with Theravance is also developing other COPD candidates including Breo (proposed brand name Relvar in the EU, formerly known as Relovair) and MABA (GSK961081).

Theravance carries a Zacks Rank #3 (Hold). We have a similar stance on Glaxo. Large-cap pharma companies that currently look better-positioned include Sanofi (SNY - Analyst Report) and Novartis (NVS - Snapshot Report). Both the companies carry a Zacks Rank #2 (Buy).

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