FRX Forest Road Acquisition Corp

We have maintained our Neutral recommendation on Theravance, Inc. (THRX) with a target price of $21.00 per share following the announcement of second quarter 2011 financial results.

Theravance’s second quarter 2011 loss per share of 31 cents was wider than the Zacks Consensus Estimate of a loss of 26 cents as well as the year-ago loss of 28 cents per share. The wider loss was attributable to a flat top-line performance as well as increased research and development (R&D) expenses.

Revenue at Theravance was almost flat over the prior year at $6.4 million due to light royalty revenue from Vibativ sales in the reported quarter. Revenue was also much below the Zacks Consensus Estimate of $9 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.

If successful, this portfolio of respiratory products could put Theravance in a very competitive position. Theravance is entitled to receive royalties on sales of drugs developed from the Relovair, LABA/LAMA, and MABA studies without any added cost obligations. We believe the revenue generated following the approval of any of the programs will ultimately lead the company to profitability.

Theravance, on its own, has a deep pipeline consisting of candidates like TD-5108 (chronic constipation), TD-1792 (cSSSI), and TD-1211 (opioid-induced constipation), which could drive future revenues. Theravance, the sole owner of all these promising programs, is on the lookout of collaborative partners for the development and commercialization of the 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. We believe the royalties on Vibativ sales provide Theravance with some much-needed funds.

Vibativ is also being studied for hospital-acquired pneumonia (HAP) or nosocomial pneumonia (NP). Though the antibiotic has not been approved for NP in either Canada or the US, the drug received a positive opinion from the Committee for Medicinal Products for Human Use (CHMP), in the EU, for the NP indication in late May 2011.

If approved, this will be the first approval for the treatment of NP, which is associated with high mortality rates. In the US, Theravance received a complete response letter (CRL) for NP with the FDA requesting for additional data.

The company is currently in discussions with the FDA and has no plans to conduct additional studies. Though we are encouraged by the positive CHMP opinion, we are disappointed with the CRL received in the US.

In addition, we are concerned about competition from other drugs targeting gram-positive bacterial infections. Vibativ is competing with ViroPharma’s (VPHM) Vancocin, Cubist Pharmaceutical’s (CBST) Cubicin, Pfizer’s (PFE) Xyvox and Tygacil and Forest Laboratories’ (FRX) Teflaro. Consequently, we apprehend that Vibativ’s initial sales ramp would be slow. We, therefore, prefer to remain on the sidelines on the stock.

 
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