Time to Bet on This Biotech Spinoff?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

There hasn't been a dull moment for investors of Theravance (UNKNOWN: THRX.DL  ) since the company submitted an NDA for COPD/asthma drug BREO before the Food and Drug Administration in 2012. In March 2013, ahead of the vote by the FDA's advisory committee, there were speculations of a possible takeover by partner GlaxoSmithKline (NYSE: GSK  ) on expectations of a positive outcome.

In April 2013 came the announcement that the company's board had approved the separation of its two businesses into two publicly traded companies. The announcement served to prop up the share price despite unfavorable Q1 2013 results, largely weighed down by a positive one-time item last year. 

A spinoff is usually a positive as separation of two disparate assets normally unlocks hidden value in the company. It happens with large companies as well as mid-cap entities. We saw this happen when Abbott Laboratories spun off its biotech wing into an independent company, AbbVie. More recently, Elan spun off its drug discovery business in December 2012. It may not be entirely due to the spinoff but from separation to-date the stock of spun-out Prothena appreciated 180% while Elan, which was bought by Perrigo is up, 54%.

In the case of Theravance, it is to be split into two companies with different business models. One company will manage royalty income and commercial responsibilities of partnerships -- the collaboration with GlaxoSmithKline in regard to development of COPD drugs -- so as to provide a steady return to investors and the other is to be a focused drug discovery company. 

LAMA candidate TD-4208
On Sept. 4, Theravance announced that its long-acting muscarinic antagonist, or LAMA, candidate TD-4208 met primary and secondary endpoints in a phase 2 study, treating patients with moderate to severe COPD. 

Asthma and COPD have similar symptoms as they both cause inflammation that limits airflow. The causes are different; asthma is a reversible temporary allergic reaction, and COPD is irreversible due to a combination of lung tissue breaking down. Children with severe cases of asthma are much more likely to develop COPD later in life.

In May, Theravance and GlaxoSmithKline entered the once-daily COPD market when the FDA approved Breo Ellipta. 

LAMA/LABA: Potential and competition
The global market for COPD/asthma treatments was worth $25 billion in 2010 and is expected to grow to $27 billion by 2017.

Long-acting bronchodilators such as LAMA and LABA (long-acting β2-agonist) and combinations of the two have brought about a dramatic change in management of COPD and changed the way the medical industry looks at the disease.  In July 2013, Ultibro Breezhaler from Novartis  (NYSE: NVS  ) became the first in class of fixed-dose, once-daily LAMA/LABA combination to be recommended for approval by the European regulator for sale in Europe. 

The challenge posed by LAMA/LABAs has forced makers of traditional COPD/asthma treatments such as Symbicort of AstraZeneca (NYSE: AZN  ) to shift focus. The British pharmaceutical giant acquired a respiratory specialist company, Pearl Therapeutics in June 2013, apparently for maintaining its position in the COPD market. 

My take
Theravance presently has two triggers -- the spinoff and the positive results of TD-4208. Vibativ, for treatment of hospital-acquired and ventilator-associated bacterial pneumonia and other infections, is the company's only marketed product. The recently approved Breo Ellipta is a partnered product.

Even though revenue has been non-existent over the last 12 months, the company has a comfortable cash position with $443 million in the bank. With a cash burn of approximately $130 million in 2012, it has adequate reserves to last for three years.

Apart from its respiratory candidates, the company's pipeline comprises of three other drugs in mid-stage trials -- one each for bacterial infection, opioid induced constipation, and gastrointestinal dysfunction.

If the company is split into two, the new company that retains the royalty portfolio may be able to provide good consistent returns, but there is little or no scope for growth without further approvals. The company that retains the drug discovery arm of Theravance is totally dependent on future outcome of experimental drugs, all of which are in early- to mid-stage development and difficult to assign any real value.

Tired of watching your stocks creep up year after year at a glacial pace? Motley Fool co-founder David Gardner, founder of the No. 1 growth stock newsletter in the world, has developed a unique strategy for uncovering truly wealth-changing stock picks. And he wants to share it, along with a few of his favorite growth stock superstars, WITH YOU! It's a special 100% FREE report called "6 Picks for Ultimate Growth." So stop settling for index-hugging gains... and click HERE for instant access to a whole new game plan of stock picks to help power your portfolio.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2634459, ~/Articles/ArticleHandler.aspx, 9/29/2016 9:42:58 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,339.24 110.94 0.00%
S&P 500 2,169.42 -1.95 -0.09%
NASD 5,318.55 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/28/2016 4:02 PM
AZN $33.82 Up +0.21 +0.00%
AstraZeneca CAPS Rating: ****
GSK $43.67 Up +0.35 +0.00%
GlaxoSmithKline CAPS Rating: ***
NVS $81.22 Up +0.34 +0.00%
Novartis CAPS Rating: ****
THRX.DL $0.00 Down +0.00 +0.00%
Theravance CAPS Rating: **