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Source: GlaxoSmithKline. 

U.K.-based pharmaceutical giant GlaxoSmithKline (NYSE:GSK) finds itself in quite the pickle. While many of its large pharmaceutical peers have dealt with their patent cliffs and are now on slow upwards sales trajectories, Glaxo looks ready to dive headfirst into the abyss.

GlaxoSmithKline bets big on its next-generation respiratory products
GlaxoSmithKline's lead product is Advair, which is known as Seretide in overseas markets. It's an inhalable long-term maintenance treatment designed for patients with COPD and asthma, and it lost its patent protection a few years ago.

However, there is no generic version on pharmacy shelves because it took the Food and Drug Administration until late 2013 to lay out what protocol would need to be met for a generic version of Advair to be approved in the United States. With generic developers hard at work, it's only a matter of time before a generic version of the inhaled drug hits the U.S. market and Glaxo's revenue takes a dive. Per GlaxoSmithKline's management, the roughly $6 billion in sales Advair/Seretide produced last year is expected to shrink to $3 billion by 2020. And keep in mind that this was once an $8 billion-plus therapy.

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Source: GlaxoSmithKline.

GlaxoSmithKline's answer? Four new long-term inhaled maintenance therapies that it developed in collaboration with Theravance (NASDAQ:THRX) for patients with COPD and asthma. These therapies are Breo Ellipta, Anoro Ellipta, Incruse Ellipta and Arnuity Ellipta. According to GlaxoSmithKline's management team, these therapies, along with other components of its pipeline, will be the cornerstone of its strategy to generate almost $10 billion in product revenue by 2020, completely replacing its lost Advair revenue and then some!  

In some respects, GlaxoSmithKline and Theravance have been marching right along. All four of their next-generation long-lasting treatments were approved by the FDA, offering hope that a successful product launch would set both companies up for long-term success. However, neither the product launches nor the recent SUMMIT study appears poised to make life easy for either company.

Glaxo and Theravance tumble following SUMMIT
The bigger issue (at least for Theravance) is the failure of Breo Ellipta in the SUMMIT study. The SUMMIT trial examined Breo in COPD patients with limited airflow and either a history or increased risk of cardiovascular disease to determine if the inhaled medication could lead to a reduced risk of death. The study was a critical look at Breo to determine if it offered a potential cardiovascular advantage over its peers, thus providing the differentiation needed to boost sales.

Including the nearly 16,500 trial patients around the world, the study showed a non-statistically significant trend of a 12.2% lower risk of death for the cohort taking Breo, although the p-value was fairly high (p=0.137), implying chance could have played a role as well. Long story short, at least as far as the SUMMIT study goes, taking Breo does not definitively extend the lives of its patients.

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Source: Centers for Disease Control and Prevention.

This news isn't good for GlaxoSmithKline, which clearly needs to find a way to replace expected lost revenue from Advair. But at least GlaxoSmithKline has a somewhat diversified portfolio of products, including one of the largest vaccine portfolios around the world, to rely on for revenue.

Theravance, though, doesn't have that luxury because it has no other FDA-approved therapies beyond its COPD and asthma collaboration with GlaxoSmithKline. Both companies were counting on positive results from SUMMIT (and so were Wall Street analysts, for that matter) to help drive prescription growth in Breo, which until recently had been rather sluggish due to its higher price point compared to prior-generation therapies and a reluctance on the part of insurers to extend coverage to Breo, especially in the EU. But the failure especially stings Theravance and its non-diversified product portfolio.

And yet there's even more to Theravance's worries than disappointing Breo prescription growth. The company also took out a $450 million loan, which it's been using to pay shareholders a $0.25 per quarter dividend and to fund general corporate activities. Theravance's management team had believed that its share of revenue from Breo and the other aforementioned respiratory products from its Glaxo collaboration would be more than enough to fund its generous dividend payment and still leave room to spare. Suffice it to say, this hasn't worked out thus far.

Despite netting $10.7 million in royalty revenue in Q2 2015 and a $5.1 million profit from operations, Theravance actually wound up losing $7.8 million once its $13 million in quarterly interest payments were accounted for. Over the last two quarters Theravance's cash, cash equivalents, and marketable securities have tumbled $54 million to $229.3 million, compared to well in excess of $700 million in debt. 

Poor launches are also a big problem
However, we can't blame everything on SUMMIT. Breo and Anoro haven't sold well from the get-go, although a campaign to obtain more encompassing insurer coverage for Breo and educate physicians about their respiratory choices has helped Breo's sales significantly in each of the past two quarters.

Still, with physicians likely locked into regimens that have worked for years (and often include Advair/Seretide or Spiriva), older therapies offering a markedly lower price than the partners' next-generation COPD and asthma drugs, and Breo not presenting a statistically significant survival benefit in COPD patients who have or are at a high risk for cardiovascular disease, it could be difficult for Breo or any of GlaxoSmithKline's and Theravance's newly-launched products to gain traction.

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Source: GlaxoSmithKline via Flickr.

Does this mean Breo, Anoro, Incruse and Arnuity are doomed? Not necessarily, but it certainly means that turning these next-generation therapies into blockbusters just got a whole lot tougher.

Without Breo offering a survival benefit, Glaxo could be forced to get more aggressive with its marketing tactics in the U.S. and EU. It also doesn't help that Glaxo had to cut pricing on Advair just to keep it competitive for the time being.

Can GlaxoSmithKline and Theravance succeed?
The big question you likely have on your mind is whether or not GlaxoSmithKline and Theravance can succeed over the long run. And there I see diverging paths.

Profit Loss
Source: Pixabay.

GlaxoSmithKline's premier cash flow and diversity afford it time to ease patients and physicians into Breo and its other next-generation respiratory products. If Glaxo needs to, it can also boost its marketing efforts and get aggressive. GlaxoSmithKline could see some level of repercussions in its stock price if new product launches limp out of the gate rather than rocket, and if survival studies fail to hit their mark. However, the company's survival is not in danger, and it'll likely remain healthfully profitable for the foreseeable future.

Theravance seriously has me concerned, though. We're more than two years into Breo's launch, and the company is still losing money. Not only that, but it's also deeply in debt after financing its dividend with money it didn't have. Even if Breo continues to show signs of improvement, I struggle to see how Theravance is going to make a dent in its enormous debt levels anytime soon. In my opinion, Theravance is a company you're best off avoiding.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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