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Theravance Kept at Neutral

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We have maintained our Neutral recommendation on Theravance, Inc. with a target price of $20.00 per share. Our long-term recommendation is in line with the Zacks #3 Rank carried by the stock in the short-run.

In April 2012, Theravance reported its first quarter 2012 results. The company earned $0.93 per share in the quarter as opposed to the year-ago loss of $0.28 per share. Earnings were boosted by higher revenues. Revenues jumped to $127.1 million in the first quarter of 2012 as opposed to $6.3 million recorded in the year-ago quarter. Revenues handsomely beat the Zacks Consensus Estimate of $110 million.

Revenues during the quarter were boosted by the recognition of $125.7 million as deferred revenue following the termination of Theravance’s deal with Japanese company Astellas Pharma regarding Vibativ (telavancin). Astellas decided to call off the collaboration agreement, inked in 2005, in January 2012. Theravance is evaluating options regarding future Vibativ sales including finding a new partner.

Vibativ, an injectable antibiotic, is Theravance’s sole marketed product. It was approved by the US Food and Drug Administration (FDA) in September 2009 for treating adults suffering from complicated skin and skin structure infections

Theravance has active collaborations with GlaxoSmithKline (GSK - Free Report) 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. Relovair is being developed for the treatment of chronic obstructive pulmonary diseases (COPD) and asthma. Glaxo recently increased its holding in Theravance to 26.8% from 18.3%. The increased holding Glaxo reflects its confidence in the Relovair program.

We believe that the Relovair and the LABA/LAMA combination programscould bring significant royalties to the company once commercialized.

However, we are disappointed by the termination of Theravance’s deal with Astellas for Vibativ. Moreover, in February 2012, the Committee for Medicinal Products for Human Use (CHMP) recommended that the marketing approval received by Theravance in 2011 from the EU for nosocomial pneumonia (NP) be withdrawn due to manufacturing issues following the termination of the Astellas deal. Theravance has received a complete response letter (CRL) for the NP indication in the US.

In view of these challenges, we see limited upside potential for the stock from current levels

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