|Shares Out. (in M):||32||P/E||0||0|
|Market Cap (in $M):||435||P/FCF||0||0|
|Net Debt (in $M):||-350||EBIT||0||0|
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TBPH’s intrinsic value is worth at least 3.75x the current stock price (i.e., $50 vs. a $13.33 stock price today), yet the company trades for little more than cash value. To support the current value you merely need to believe that its non-cash assets are worth $130 million. To put this in perspective, we conservatively estimate that its asset called The Triple is worth over $1 billion alone, as it potentially represents a ~10% royalty on upwards of 40% of a $15 billion worldwide COPD market, plus significant opportunity to expand to asthma, with no associated costs or obligations by TBPH. Plus this drug is not going to be marketed by some little company; the Triple is owned and marketed by GlaxoSmithKline (“GSK”) which has literally referred to it as “the future” of its massive respiratory business. In addition to a deep pipeline of earlier stage assets, TBPH also has 4 other assets (Vibativ, 4208, Velesutrag, and Axelopran) that we think are worth $150+ million each and are basically free options. Vibativ is already on the market and due to success seen with an initial re-launch, TBPH is tripling the size of the sales force to 30, yet the market continues to largely ignore this drug.
This situation presents itself because TBPH falls into the category of being a smaller under-followed spin-off and a misperception that the company’s assets are similar to those at its former parent, Theravance (THRX). Even though THRX and TBPH both still have the name Theravance associated with them, they are entirely different companies.
TBPH is a unique biopharma company with more than $300 million in cash, a full pipeline that could have several important drugs over the next several years including one already on the market, and because of the Triple, it has sizable revenues to come in the future that they don’t need to make additional investments in (as GSK is picking up those costs). Management is strong from both a development perspective, with a history of 3 FDA approved drugs, and a financial perspective, with a number of successful partnerships executed along with the recent split from THRX.
In June 2014 the company split from THRX with the main purpose of highlighting the value of many pipeline/development assets of TBPH that were not being reflected in the value of the combined company as nearly everyone was focusing on THRX’s assets Breo and Anoro. In addition to the decision of the CEO to join the much smaller TBPH after the split, the Board seemed to be stacking the deck in favor of TBPH. In advance of the split, the parent raised $450 million of debt, to remain on the books of the parent, in order to initially fund TBPH with $400 million of net cash. This is in contrast to situations we have seen with countless other companies where the spin-off entity is loaded up with debt for the benefit of the parent. Also as part of the split, TBPH did its own tax inversion-equivalent by re-incorporating in the Cayman Islands, which should translate to earnings from the Triple and their internal products being subject to an extremely low effective tax rate.
Baupost Group and GSK own 19% and 26% of TBPH stock, respectively, and neither has sold any shares since the spin-off.
Description of Assets:
The Triple for COPD and Asthma
The main asset of the company is royalty rights to “the Triple”, which is a combination of three respiratory drugs into a triple therapy. It is generally considered the “holy grail” in the $35 billion worldwide respiratory market for COPD and asthma. More than 40% of total COPD prescription spending in the US is for triple therapy – specifically on the combination of the 3 types of drugs that comprise the Triple, which are generally a LABA + ICS (Advair, Breo, Symbicort, or Dulera) and a LAMA (Spiriva or Incruse). Not only are these drugs often taken at different times during the day, but patients must also carry around two separate inhalers, leading to inconvenience and noncompliance. If you talk with any pulmonologist, they will confirm that it will be a no-brainer to prescribe the Triple, which will be one drug taken only one time per day. This was reinforced in a recent research survey of 60 doctors by Leerink where respondents commented once the Triple is on the market, they plan to put over 40% of their COPD patients on the therapy. In addition, we understand that Triple therapy is estimated to make up 10% of the $20 billion asthma market going forward. Therefore the potential value to TBPH owning 85% of a royalty of 6.5% - 10% (and potentially as high as 20% if GSK decides to also further develop the MABA triple discussed further in the catalyst section below) on 40% of a $15 billion COPD market and 10% of a $20 billion asthma market is enormous. This equates to the potential of $640 - $730 million annual cash profit to TBPH for the both the COPD and Asthma markets and $470 - $600 million for just the COPD market.
GSK’s CEO has not been shy about referring to the Triple as the “portfolio which is going to be the future of the respiratory business”. This means a lot considering that GSK is the dominant leader in the market. Its respiratory portfolio, including leading franchise Advair, represented nearly 25% of GSK’s entire revenues last quarter and is the most frequently discussed part of its business. Therefore, GSK has a large interest in ensuring the success of the Triple.
GSK has backed up its talk with a massive Phase 3 trial for the Triple in COPD that will involve enrolling 10,000 people over 52 weeks. We expect results to be announced in early 2017, with it hitting the market in late 2017. We doubt GSK would have moved forward with such a massive clinical trial without very high confidence in it being successful. Also, in June 2014 GSK announced positive results for the “open Triple”, which includes the same active ingredients as the (closed) Triple, but used as two separate medicines rather than in one device. This provides more confidence that the closed Triple will be successful.
Assuming a cost of $30,000 per enrollee, we roughly estimate that the trial will cost GSK a whopping $300 million. The best part of this to a TBPH investor is that GSK is picking up the entire cost. In addition, GSK can decide to pursue additional trials to expand the label to asthma and also take another shot on goal with the MABA molecule.
GSK is years ahead of competitors in developing a Triple; no other competitor has all the required once-a-day assets to potentially develop a closed Triple, so it is not even clear if a competitor could develop a Triple even if it wanted to.
Vibativ for Serious Infections
Vibativ is an extremely potent anti-biotic drug that can be thought of as the best and only available option when existing drugs aren’t suitable to treat hospital acquired bacterial pneumonia (“HABP”) and potentially bacteremia, which is a very serious infection in the blood stream. The drug was developed by Theravance and previously sold on the market by the Japanese company Astellas, but largely failed under their leadership for multiple reasons, including their failure to manage supply appropriately. Importantly when Astellas had rights to the drug it was only indicated and marketed for skin infections, which are generally much less life threatening than HABP, and existing generics are more than adequate. Once the product was returned to TBPH, they obtained approval for a new indication in HABP/VABP and reintroduced Vibativ to the market in late 2013.
Mortality for HAP runs in the incredibly high range of 20% - 50% when using the standard therapy today, generic Vancomycin, which should not be used for HAP in a majority of cases, and in particular when the patient has a minimum inhibitory concentration (“MIC”) over one. We believe that Vibativ could be used first in line for the most serious life threatening cases, and 2nd in line after Zyvox which is set to go generic in 2015. Zyvox isn’t suitable for patients 30-35% the time, as it is contra-indicated for people on SSRIs to treat depression and/or people who have the potential to develop bacteremia. As a result there is a large unmet need for Vibativ which had an 82% cure rate in clinical trials for HABP/VABP.
In late 2013 TBPH started selling Vibativ in very limited markets with a limited sales force. Based on strong success in those limited number of territories, management recently announced that the company is expanding its sales force, including medical liaisons, from 10 to 30 people. The market had literally zero expectations for this drug, so this is not a case of management expanding the sales force with the hopes of hitting consensus numbers; instead the expansion seems to be a true belief in the potential for Vibativ.
TBPH’s CEO is a long-time board member of Jazz Pharmaceuticals (JAZZ). This is important because JAZZ’s success has largely been built off of massive price increases for Xyrem, indicated for narcolepsy. Jazz initially began selling Xyrem at low prices in order to gain acceptance in the marketplace. As doctors became educated with Xyrem and comfortable using it, JAZZ substantially hiked the prices up, to the tune of about 40% annually per year over a 7+ year period to a price of $70k per treatment today. We expect that TBPH will have considerable pricing power with Vibativ, which unlike a narcolepsy drug, clearly saves lives. When Vibativ is used there are no other suitable alternatives so pricing power is substantial. All you need to look at is that 10 days of therapy on Vibativ costs ~$3k today, whereas Gilead’s HCV therapy costs $85k. I’m not suggesting that Vibativ can achieve anywhere near Gilead’s level, but it highlights how underpriced Vibativ is and the large potential for price increases. Management has suggested that $400 million in peak sales for Vibativ is possible, though this could prove conservative if TBPH is successful with price increases and expands the label to bacteremia.
We are particularly excited that TBPH recently started a Phase 3 trial in order to expand the label to bacteremia, which would make Vibativ the only branded drug approved for both pneumonia and bacteremia (as both Zyvox and Cubicin work for one but not the other). The Phase 3 bacteremia trial only requires 250 people, so costs will be modest.
The reason for our excitement surrounding bacteremia potential is because this will put Vibativ up against
Cubicin, a $1+ billion drug that is owned by Cubist, which is scheduled to be acquired by Merck. In initial trials, Vibativ showed superior cure rates versus Cubicin and the placebo. Cubicin can not be used in people with pneumonia or potential pneumonia, and also shouldn’t be used with people on a statin, so there is an unmet need. The other important thing to know about Cubicin is that a very large percentage of its use is in the outpatient market. Here doctors have a much greater incentive to use branded IV’s over generics as the doctor is paid 6% of the price of the drug for administering it. While it is counter-intuitive, the recent news about Cubicin likely going generic in 2016 looks like a big win for TBPH. Once Cubicin is generic, outpatient doctors will no longer be incented to use it and will therefore look to find another branded drug (i.e. Vibativ) to earn their 6%. TBPH’s Phase 3 bacteremia trial is expected to end in 2017, however off label usage in this space is significant, so we expect that Vibativ could be used before then.
TD-4208 – A Nebulized LAMA for COPD
COPD is an $8 billion market in the United States. Handheld devices such as Advair and Spiriva are the dominant delivery devices used to deliver medicine for COPD. However, 9% of COPD patients on chronic maintenance therapy use a nebulized product instead of a handheld for various reasons such as preference, a more severe disease state, and/or because they are older and find nebulizers easier to use.
With 4208 TBPH hopes to be the first approved LAMA available in a nebulized therapy. In the handheld segment of the respiratory market, LAMAs such as Spiriva are used 61% of the time (with LABA/ICS’s used 57% of the time and the reason that the total is above 100% is because 18% of patients use both as described in the Triple section above). However since Spiriva isn’t soluble, it is not possible to use it in a nebulized format, so a large opportunity exists to pursue an alternative LAMA such as 4208 in the nebulized market, where we think it should obtain at least a 50% share.
There are already two nebulized LABAs on the market and they generate $400 million in annual sales. Both nebulized LABAs must be used twice-daily while 4208 only needs once-a-day dosing. Therefore, we think at least $200 million of peak annual sales for 4208 is very possible, with potential to add to this by expanding use to other areas such as use in the acute care setting, which is not included in the 9% market share estimate.
4208 demonstrated an excellent effectiveness and safety profile in Phase 2 trials so a successful Phase 3 trial looks like it has a high probability. 4208’s potential is not only limited to nebulized therapy. It also has characteristics which support it being an excellent LAMA that could be combined with other handheld respiratory drugs, similar to how GSK’s Anoro is a LAMA combined with a LABA. Another larger respiratory player could choose to partner or buy the rights from TBPH. It seems clear that TBPH is currently searching for a partnership and an announcement could be made in 2015 which would be a nice additional bonus that the sell side does not have in its models.
Velusetrag for Gastroparesis
Gastroparesis is a condition in which the muscles in the stomach work poorly or not at all, which prevents the stomach from emptying properly. There is currently no adequate treatment for nausea and vomiting associated with gastroparesis and hospitalization is often required for moderate-to-severe cases. Studies estimate that between 20 – 50% of diabetics suffer from delayed gastric employing and Parkinson’s patients often get gastroparesis. An estimated 6 – 9 million Americans suffer from gastroparesis. It represents a large unmet medical need as the only approved therapy in the US, metoclopramide (Reglan), has significant CNS toxicities, which labels the drug with black box warning limiting use to 12-weeks, so it is difficult to use long-term. According to Neurogastrx, which has a drug in Phase 1 development, the market for gastroparesis in the US alone is estimated to be over $4B a year with the clear potential for label extension and/or off-label use.
TBPH’s drug for gastroparesis is named Velusetrag (TD-5108). TBPH’s early Velusetrag trials showed that all 3 doses of the drug achieved both the primary endpoint of an increased number of spontaneous bowel movements (“SBM”) per week over baseline compared with placebo, as well as met all key secondary endpoints. The drug was well tolerated at the two lower doses. In Phase II trials the drug from its nearest competitor, Rhythm Pharmaceutics (which Actavis recently acquired the option to buy), didn't appear to have strong results for the primary endpoint of SBM, but was effective with other secondary endpoints (nausea, vomiting, abdominal pain, etc.). TBPH is initiating a large phase IIb study at the end of 2014 with data expected by the end of 2015. What is extra nice about this study is that 90% of the clinical trial costs are being paid for by TBPH’s partner, the private company Alfa Wasserman, which has European rights to the drug (which include a royalty to TBPH from the low-teens to 20%). Outside of Evoke Pharma, which has a Phase 3 study for taking the inadequate existing product on the market, metoclopramide, and putting it into a nasal spray format, TBPH appears to be ahead of competitors, both in terms of the risk/reward benefit and stage of development. If TBPH’s Phase 2 trial succeeds and TBPH can just get a mere fraction of the excitement that was generated for Intercept’s (ICPT) drug for NASH, which on Phase II results rocketed up to market cap high of $9.8 billion (and currently has a $3.0 billion market cap), this drug alone would be a home run.
Axelopran for OIC (Opioid-Induced Constipation)
For the 11+ million patients in the US taking prescription opioids for chronic pain, constipation is one of the most common and bothersome side effects, degrading quality of life. It affects up to 80% of patients on opioid therapy and persists for the duration of therapy. Over the counter laxatives only work 29% of these patients leading to a large unmet need. TBPH’s recent investor presentation noted 7.3M patients reporting constipation due to opioids, 4.7M as candidates for Axelopran and 3.2M showing strong interest in trying a new prescription product. As a result, the potential market size should easily exceed $1 billion.
While the market potential in this class represents another large addressable market for TBPH, there are many competitors who are also pursuing development of OIC drugs, including a number that are expected to hit the market prior to TBPH’s drug. What TBPH has going for it is that based on Phase II results, they clearly have the most effective drug in development with the potential to be best in class. To put this in perspective, Movantik, which will be marketed by AstraZeneca and Nektar, and was FDA approved in September 2014, had a measly 15% difference versus the placebo in clinical trials, with just 44% of respondents having at least 3 SBMs per week. In contrast, in Phase 2 trials for Axelopran, using 60% of the dose of Movantik, Axelopran showed a 31% improvement versus placebo and had 70% of respondents having a least 3 SBMs per week.
In addition to Axelopran being another promising asset for TBPH, it is also a good example of how management approaches drug development. Even through earlier trials had showed that Axelopran had the superior effectiveness noted above, TBPH was not pursuing further development of this asset due to concerns about the FDA requiring cardiovascular safety studies prior to approval, which created uncertainty in terms of both timing and expenses. As a result management waited to see how the FDA would approach the approval of competitor drugs. Once Movantik was FDA approved in September without the requirement of cardiovascular safety studies, Management put Axelopran back in play.
Further, at the recent investor day, TBPH signaled that its intention is to partner with another player to fund development costs. This makes sense because TBPH has developed a proprietary spray-coating formation which would allow for Axelopran to be co-formulated in a fixed-dose combination with an opioid, so that patients on opioids would not have to take a separate pill to address the OIC side effects. This could be very attractive for a company seeking to distinguish its opioid drug versus other branded drugs and generics.
Other pipeline Assets
TBPH is committed to ongoing R&D and regularly announces drugs for new uses with the potential to be best in class.
TBPH recently demonstrated proof of concept for a potential best-in-class NS5A inhibitor for HCV. They also have promising pre-clinical data for congestive heart failure, severe asthma, and ulcerative colitis.
Expected cash on January1, 2015 - $300M
Triple assets - $1,000M
Vibativ - $200M
4208 - $200M
Velusetrag - $150M
Axelopran - $150M
Other Assets- $50M
TBPH portion of P3 Triple costs to be paid by GSK - $30M ($300M x 10%)
TBPH portion of P2 Gastroparesis costs to be paid by Alfa Wasserman - $12M ($20M x 60%)
Total Value - $2,100M
Shares outstanding – 41.8M*
Price - $50 per share
*There are currently 32.2 million shares outstanding. While this may not be needed if Vibativ sales outperform and the company succeeds in establishing more partnerships, we assume a modest capital raise / share dilution to get to 41.8 million shares. This would bridge the gap until we expect positive cash flow in 2018.
While this valuation looks very high relative to today’s market cap of $435 million, soon after the split from THRX, TBPH traded up towards $36 with a market cap of $1.2 billion, which started to validate the thesis that the market would have to start giving some value to TBPH’s assets post the split. However, since then, despite almost all positive news out of TPBH, the stock price has gradually collapsed towards the $13 range in line with it being a classic unloved spin-off and a misconception about it being related to THRX. At today’s stock level, the risk/reward clearly looks to be in favor of holding the stock.
The Bear Thesis
While the company was initially funded with a substantial amount of cash, the company has an active R&D function and continues to spend money on development programs, including identifying new assets. At the current burn rate and without a successful partnership, the company could run out of cash in late 2016 / early 2017.
Bears believe that management is destroying value by pursuing R&D programs unlikely to generate returns. They fail to see that the burn could be mitigated by a ramp in Vibativ revenues and that TBPH is likely to partner with other companies to bear a significant portion of development program costs. Theravance has demonstrated partnership success in the past (with GSK and Alfa Wasserman both funding over 90% of Triple and Gastroparesis development costs), yet the market is not giving Management credit for this.
Even though TBPH is now a separate company from THRX, bears also tend to believe that TBPH’s respiratory assets, the Triple and 4208, will succumb to the same fate as THRX’s Breo and Anoro, which have substantially underperformed in their initial launches as a result of a slow uptake of insurance coverage and aggressive competitors, including fears about generics in the future.
We feel that competitive worries about the Triple are highly overstated. Whereas Breo’s main appeal is that it is once-a-day Advair instead of twice-a-day, the Triple furthers this but also combining two drugs into one. It will be a no-brainer for doctors to prescribe the Triple instead of two or three separate medicines. Pushback from insurance companies should be limited because the Triple can be priced to save payers money since it will be one drug instead of two, including the branded drug Spiriva, which has Orange books patents lasting to 2027, including a patent on the delivery device through 2021. Even when generic Spiriva and generic Advair reach the market, the branded Triple could be priced competitively as due to a very complex manufacturing process, Spiriva and Advair generics are expected to be much higher priced than typical generics. Finally, if clinical trials for the Triple demonstrate that it results in superior patient outcomes, which we believe is likely given that compliance should be much better, then any debate about generic Advair and Spiriva would be made moot.
4208 will compete in a completely different area of the respiratory market than Breo and Anoro, with entirely different competitors, so it is not an apples to apples comparison.
Vibativ is not given any credit by bears since it was on the market previously with a different market focus. Critics have also pointed to safety concerns about Vibativ, which comes with a warning label. However, considering that Vibativ is now being used for much more serious infections and saving lives, physicians view safety risk in a different context because it is a life or death situation.
With regards to the other assets, most bears don’t have any opinion on them as they don’t pay any attention to them.
We view 2017 as the major year for TBPH, as we could see a read out of Triple Phase 3 results in early 2017, as well as Phase 3 bacteremia results for Vibativ and 4208. However, we expect that the market will start recognizing the value of these assets before then.
We believe the stock is a strong buy right now not only because the valuation is bordering on ridiculously low levels, but also because there are a number of other catalysts that could happen within the next 12 months that support holding the stock now. Catalysts within a one-year time frame are:
A MABA Triple trial initiated by GSK - The MABA is another asset owned by GSK that TBPH has the rights to. It is one drug compound that has characteristics of both a LABA and a LAMA and can be thought of as a simpler and superior version to THRX’s Anoro. By adding an ICS (steroid) to the MABA, the combination would effectively have all the assets of the triple and give GSK another shot on goal. MABA royalties to TBPH are higher than for the Triple combination discussed above. If GSK commits another ~$300 million to a similarly sized Phase 3 trial, it would equate to GSK investing $600 million on two Phase 3 Triple trials and makes it even harder to ignore GSK’s commitment and optimism for the Triple.
A potential acquisition - With so many pharma companies desperate to have R&D pipelines, the company would make a very attractive acquisition candidate. After adjusting for cash, they would be buying everything I have mentioned in this write-up for $150 million. They could divest a large portion of new development R&D at TBPH and it would be a home-run acquisition. We believe one reason this hasn’t happened is because GSK and Baupost together essentially have a blocking position and would not want to sell the company below intrinsic value, so GSK becomes the most logical acquirer.
Partnership Announcements – At the recent investor day, management expressed confidence in at least one partnership deal being announced during 2015, with the potential for more. None of this is baked in the company’s guidance or cash burn.
Phase 2 results for gastroparesis – As mentioned above, with successful Phase 2 results announced towards the end of 2015, this could be a home run for TBPH as they could have the first drug approved in a large market with an unmet need.
Vibativ sales performance – Expectations are low and if this outperforms as noted above, it could go a long way towards mitigating concerns about TBPH’s cash burn.
More sell-side initiations – With regards to the sell-side, TBPH has been a victim of its own wealth. Normally sell-side firms would be circling a biotech company like this, with the hopes of winning valuable investment banking business for equity raises, etc. However, since TBPH has been rich with cash essentially earmarked to develop internally developed assets, there are unlikely to be near-term investment banking revenues. We still expect sell-side firms to initiate, but expect it to be a gradual process. As more firms pick up coverage, it will attract additional attention to the company and how undervalued it is.
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