Time to Bet on This Biotech Spinoff?

There hasn't been a dull moment for investors of Theravance (NASDAQ: THRX  ) 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. 

Spinoff
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.

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