Better Safe Than Sorry at Theravance

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Preferring to play it safe ahead of an advisory-panel hearing whose outcome is far from certain, Theravance (Nasdaq: THRX) is bulking up its balance sheet with a potentially dilutive convertible-notes offering of up to $172.5 million.

The announcement comes about three weeks after Theravance said the FDA is planning a hearing for its lead drug, antibiotic treatment Telavancin. That event is set to take place Feb. 27 as part of a two-day advisory-committee session. A potential Johnson & Johnson (NYSE: JNJ) antibiotic compound will be reviewed on the second day.

Shares of Theravance have struggled ever since the FDA issued an approvable letter for Telavancin back in October. But Theravance isn't the only company hitting resistance on drugs of this kind. The FDA just issued new draft guidelines for the approval of new antibacterial drugs, and it appears to be stalling on approving all new antibiotics that have come up for review recently. For example, in late December, Pfizer (NYSE: PFE) also received an approvable letter for its antibiotic treatment dalbavancin.

Bad news for these new antibiotics is good news for drugmakers whose compounds have been approved. The delays for Pfizer, Theravance, and potentially J&J mean less competition for drugmakers such as Cubist Pharmaceuticals (Nasdaq: CBST) and ViroPharma (Nasdaq: VPHM), who have antibiotics on the market already.

Theravance ended the third quarter last year with $167 million in cash and short-term investments, so it was going to have to raise more cash sometime this year. If Theravance had been expecting a positive advisory-panel hearing next month, it could have held off on financing until after the panel meeting and raised cash on easier terms than it could today. But with the FDA being as unpredictable as it is, it's anybody's guess what approval recommendations will come out of the advisory panel. Theravance knows that. It was smart to raise cash now, rather than on much worse terms if the advisory-panel hearing doesn't go its way.