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Tickers in this Article: THRX, GSK
Theravance Inc. (THRX) reported second-quarter 2012 loss of 42 cents per share, slightly narrower than the Zacks Consensus Estimate of a loss of 44 cents but wider than the year-ago loss of 31 cents per share. The wider year-over-year loss was attributable to lower revenues. Revenues plummeted 77.6% to $1.4 million in the second quarter of 2012 compared with the year-ago quarter, and also missing the Zacks Consensus Estimate of $2 million. Revenues were hurt by the termination of Theravance's global deal with Astellas for Vibativ.

We remind investors that Astellas decided to call off its collaboration agreement with Theravance, inked in 2005, in January 2012. With Astellas pulling out, supplies in the US have been hit. Theravance was dependent on a single supplier for Vibativ. Unless this issue is resolved, Vibativ supplies will continue to dwindle.

Following the termination of the deal with Astellas, the Committee for Medicinal Products for Human Use (CHMP) recommended that the marketing approval granted to Vibativ for the nosocomial pneumonia (NP) indication in September 2011, will be withdrawn due to manufacturing issues. This will affect the top line since Vibativ is Theravance's sole marketed product. Management stated that if the issue is not solved promptly, the restoration of normal supplies for Vibativ could stretch for a period of 1-2 years.

Vibativ is an injectable antibiotic, which is Theravance's sole marketed product. The drug is used for treating adults suffering from complicated skin and skin structure infections, resulting from susceptible gram-positive bacteria, including both methicillin-resistant and methicillin-susceptible strains of staphylococcus aureus. Theravance is exploring options regarding future Vibativ sales, which also includes finding a new partner for the company.

Research & development (R&D) expenses were up 29.6% to $29.5 million in the second quarter of 2012. The company's efforts to develop its pipeline coupled with higher costs related to employees pushed up the R&D expenses. General & administrative (G&A) expenses for the reported quarter increased 4.7% to $7.6 million. Higher external and employee-related costs were primarily responsible for increased G&A costs.

Outlook

The company expects adjusted operating expenses to be at the higher end of the range of $120 million to $130 million in 2012. We note that the guidance excludes stock-based compensation.

Our Recommendation

Currently, we are Neutral on Theravance. Our long-term stance is in line with the Zacks #3 Rank (short-term Hold rating) carried by the company. Though we are concerned regarding the challenges currently faced by Theravance relating to Vibativ's supplies following the termination of the deal with Astellas, we are impressed by Theravance's pipeline.

In particular, we are positive on Theravance's collaborations with GlaxoSmithKline (GSK) for respiratory candidates, which include FF/VI (proposed brand names: Breo in the US and Relvar in the EU, formerly known as Relovair), LAMA/LABA (UMEC/VI) and MABA (GSK961081). FF/VI, currently under regulatory review, will be positioned as a replacement for Advair on approval. Advair is one of Glaxo's highest revenue earners with 2011 sales exceeding £5 billion.

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