FRX Forest Road Acquisition Corp

We are maintaining our Neutral recommendation on Theravance, Inc. (THRX) with a target price of $25.00 after the company's fourth quarter and fiscal year 2010 financial results.

Theravance’s fourth quarter 2010 loss per share of 25 cents was narrower than both the Zacks Consensus Estimate for a loss of 28 cents and the year-ago loss of 35 cents per share. The earnings improvement was driven by a better top-line performance and lower research and development costs.

Revenue at Theravance increased more than 80% over the prior year to $6.9 million. Revenue was also slightly above the Zacks Consensus Revenue Estimate of $6 million.

Theravance has active collaborations with GlaxoSmithKline (GSK) 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. It is being developed for the treatment of chronic obstructive pulmonary diseases (COPD) and asthma.

The LAMA/LABA combination is also being developed for the treatment of COPD. Under the MABA collaboration, Theravance is making rapid progress with GSK961081, which could be another important option for the treatment of COPD. This portfolio of respiratory products could put Theravance in a very competitive position if successful.

Theravance is entitled to receive royalties on sales of Relovair, LABA/LAMA, and MABA without any cost obligations. We believe the revenue generated following the approval of any of the programs will ultimately lead the company to profitability.

On its own, Theravance has a deep pipeline consisting of candidates like TD-5108 (chronic constipation), TD-1792 (cSSSI), and TD-1211 (opioid-induced constipation), which could boost future revenues. All these programs are solely owned by Theravance and it is looking for collaboration partners for the development and commercialization of these compounds.

Theravance’s lead drug, Vibativ (telavancin), is an injectable antibiotic approved for the treatment of complicated skin and skin structure infections (cSSSI) caused by gram-positive bacteria, including resistant pathogens such as methicillin-resistant staphylococcus aureus (MRSA). Vibativ is being marketed and sold by Astellas, while Theravance receives royalties, ranging from high teens to upper twenties depending on sales volume. The US Food and Drug Administration (FDA) approval to market Vibativ is a significant achievement for the company and will provide Theravance with much-needed funds.

Vibativ is also being studied for hospital-acquired pneumonia (HAP) or nosocomial pneumonia (NP). However, Theravance received a complete response letter (CRL) for the NP indication from the FDA requesting for additional data. The company is currently in discussions with the FDA and has no plans to conduct additional studies. We are disappointed with this regulatory setback suffered by Vibativ for the treatment of HAP.

In addition, we are concerned about competition from other drugs targeting gram-positive bacterial infections. Vibativ is competing with products like ViroPharma’s(VPHM) Vancocin, Cubist Pharmaceutical’s (CBST) Cubicin, and Pfizer’s (PFE) Xyvox and Tygacil. Additionally, the October 2010 approval of Forest Laboratories’ (FRX) Teflaro has intensified the competition for Vibativ. Consequently, we apprehend that Vibativ’s initial sales ramp would be slow.

 
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