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THRX > SEC Filings for THRX > Form 10-Q on 31-Oct-2012All Recent SEC Filings

Show all filings for THERAVANCE INC

Form 10-Q for THERAVANCE INC


31-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve substantial risks, uncertainties and assumptions. All statements contained herein that are not of historical fact, including, without limitation, statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans, intentions, expectations, goals and objectives, may be forward-looking statements. The words "anticipates," "believes," "designed," "estimates," "expects," "intends," "may," "objective," "plans," "projects," "pursue," "will," "would" and similar expressions (including the negatives thereof) are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions, expectations or objectives disclosed in our forward-looking statements and the assumptions underlying our forward-looking statements may prove incorrect. Therefore, you should not place undue reliance on our forward-looking statements. Actual results or events could materially differ from the plans, intentions, expectations and objectives disclosed in the forward-looking statements that we make. Factors that we believe could cause actual results or events to differ materially from our forward-looking statements include, but are not limited to, those discussed below in "Risk Factors" in Item 1A of Part II and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Item 2 of Part I. All forward-looking statements in this document are based on information available to us as of the date hereof and we assume no obligation to update any such forward-looking statements.

OVERVIEW

Executive Summary

Theravance is a biopharmaceutical company with a pipeline of internally discovered product candidates and strategic collaborations with pharmaceutical companies. We are focused on the discovery, development and commercialization of small molecule medicines across a number of therapeutic areas including respiratory disease, bacterial infections, and central nervous system (CNS)/pain. Our key programs include: Relvar™ or Breo™ (FF/VI), umeclidinium bromide/vilanterol (UMEC/VI) and MABA (Bifunctional Muscarinic Antagonist-Beta2 Agonist), each partnered with GlaxoSmithKline plc (GSK), and our oral Peripheral Mu Opioid Receptor Antagonist program. By leveraging our proprietary insight of multivalency to drug discovery, we are pursuing a best-in-class strategy designed to discover superior medicines in areas of significant unmet medical need.

In the third quarter of 2012, our net loss was $34.7 million, an increase of 13% from $30.6 million in the third quarter of 2011. In the first nine months of 2012, our net income was $12.8 million, a change of $91.1 million from a net loss of $78.3 million in the first nine months of 2011. Net income in the nine months ended September 30, 2012 reflects the recognition of deferred revenue of $125.7 million from our global collaboration arrangement with Astellas Pharma Inc. (Astellas) for the development and commercialization of VIBATIV®. This recognition resulted from Astellas' January 6, 2012 termination of our agreement with them. In the third quarter of 2012, our research and development expenses were $27.0 million, a decrease of 3% from $27.8 million in the third quarter of 2011. In the first nine months of 2012, our research and development expenses were $89.8 million, an increase of 26% from $71.1 million in the first nine months of 2011. Cash, cash equivalents, short-term investments, and long-term marketable securities totaled $362.4 million at September 30, 2012, an increase of $121.5 million from December 31, 2011. The increase was primarily due to net proceeds of $223.0 million received from our private placements of common stock to an affiliate of GSK and $7.3 million received from exercises of employee stock options, partially offset by cash used in operations of $103.3 million.

Programs

Respiratory Programs with GSK

Fluticasone Furoate/Vilanterol (FF/VI)

FF/VI is an investigational once-daily inhaled corticosteroid (ICS)/long-acting beta2 agonist (LABA) combination treatment, comprising fluticasone furoate and vilanterol, for the maintenance treatment of patients with chronic obstructive pulmonary disease (COPD) and patients with asthma. FF/VI is administered by a new dry powder inhaler called Ellipta™. Relvar™ (FF/VI for the European Union (EU) and Japan), Breo™ (FF/VI for the US), and Ellipta™ (for the EU, US and Japan) are proposed brand names and use of these brand names has not yet been approved by any regulatory authority.

In September 2012, GSK and Theravance announced that that the New Drug Application (NDA) for FF/VI for patients with COPD was accepted by the U.S. Food and Drug Administration (FDA) indicating that the application is sufficiently complete to permit a substantive review. The Prescription Drug User Fee Act goal date was confirmed as May 12, 2013. GSK and Theravance also


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reported that the Marketing Authorization Application for FF/VI for COPD and asthma was validated by the European Medicines Agency (EMA). In addition, GSK also submitted a Japanese New Drug Application for FF/VI for patients with COPD and asthma on September 25, 2012.

Umeclidinium Bromide/Vilanterol (UMEC/VI)

UMEC/VI is a once-daily investigational medicine, combining a long-acting muscarinic antagonist (LAMA) umeclidinium bromide (UMEC), and a LABA, VI, for the maintenance treatment of patients with COPD. UMEC/VI is administered by the Ellipta™ dry powder inhaler.

In August 2012, GSK and Theravance announced the completion of the Phase 3 program involving approximately 6,000 patients with COPD. The pivotal program for UMEC/VI includes two 24-week efficacy studies that compared the combination UMEC/VI, its components and placebo, two 24-week active comparator studies that compared the combination with tiotropium, a widely prescribed maintenance bronchodilator for COPD, and a 52-week safety study. Two non-pivotal 12-week crossover exercise studies will also be included in the registrational package. These studies support GSK's plans to commence global regulatory submissions for UMEC/VI from the end of 2012.

Inhaled Bifunctional Muscarinic Antagonist-Beta2 Agonist (MABA)

GSK961081 ('081) is an investigational, single molecule bifunctional bronchodilator with both muscarinic antagonist and beta2 receptor agonist activities. The results from the Phase 2b study and a number of non-clinical studies will inform the selection of the most appropriate dose and dosing interval for '081 and progression to Phase 3.

Central Nervous System (CNS)/Pain Program

Oral Peripheral Mu Opioid Receptor Antagonist - TD-1211

TD-1211 is an investigational once-daily, orally administered, peripherally selective, multivalent inhibitor of the mu opioid receptor designed with a goal of alleviating gastrointestinal side effects of opioid therapy without affecting analgesia. In July 2012, Theravance announced positive topline results from the Phase 2b Study 0084, the key study in the Phase 2b program evaluating TD-1211 as potential treatment for chronic, non-cancer pain patients with opioid-induced constipation. The Phase 2b program consists of three studies (0074, 0076 and 0084) designed to evaluate doses and dosing regimens for Phase 3. The results support progression into Phase 3 development.

Monoamine Reuptake Inhibitor - TD-9855

TD-9855 is an investigational norepinephrine and serotonin reuptake inhibitor for the treatment of central nervous system conditions such as Attention-Deficit/Hyperactivity Disorder (ADHD) and chronic pain. TD-9855 is being evaluated in an ongoing Phase 2 safety and efficacy study in adults with ADHD. In addition, Theravance plans to initiate a Phase 2 study with TD-9855 in patients with fibromyalgia in the next few months.

Collaboration Arrangements

GSK

LABA collaboration

In November 2002, we entered into our LABA collaboration with GSK to develop and commercialize once-daily LABA products for the treatment of COPD and asthma. For the treatment of COPD, the collaboration is developing two combination products:
FF/VI, an investigational once-daily combination medicine consisting of a LABA, VI, and an ICS, fluticasone furoate (FF) and umeclidinium bromide/vilanterol (UMEC/VI), a once-daily investigational medicine combining a LAMA, UMEC, with a LABA, VI. For the treatment of asthma, the collaboration is developing FF/VI. The FF/VI program is aimed at developing a once-daily combination LABA/ICS to succeed GSK's Advair®/Seretide™ (salmeterol and fluticasone as a combination) franchise, which had reported 2011 sales of approximately $8.1 billion, and to compete with Symbicort® (formoterol and budesonide as a combination), which had reported 2011 sales of approximately $3.1 billion. UMEC/VI, which is also a combination product, is targeted as an


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alternative treatment option to Spiriva® (tiotropium), a once-daily, single-mechanism bronchodilator, which had reported 2011 sales of approximately $4.2 billion.

In the event that a product containing VI is successfully developed and commercialized, we will be obligated to make milestone payments to GSK which could total as much as $220.0 million if both a single-agent and a combination product or two different combination products are launched in multiple regions of the world. These potential milestone payments could be payable to GSK within the next two years. We are entitled to annual royalties from GSK of 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion. Sales of single-agent LABA medicines and combination medicines would be combined for the purposes of this royalty calculation. For other products combined with a LABA from the LABA collaboration, such as UMEC/VI, royalties are upward tiering and range from the mid-single digits to 10%. However, if GSK is not selling a LABA/ICS combination product at the time that the first other LABA combination is launched, then the royalties described above for the LABA/ICS combination medicine would be applicable.

2004 Strategic Alliance

In March 2004, we entered into our strategic alliance with GSK. Under this alliance, GSK received an option to license exclusive development and commercialization rights to product candidates from certain of our discovery programs on pre-determined terms and on an exclusive, worldwide basis. Upon GSK's decision to license a program, GSK is responsible for funding all future development, manufacturing and commercialization activities for product candidates in that program. In addition, GSK is obligated to use diligent efforts to develop and commercialize product candidates from any program that it licenses. If the program is successfully advanced through development by GSK, we are entitled to receive clinical, regulatory and commercial milestone payments and royalties on any sales of medicines developed from the program. If GSK chooses not to license a program, we retain all rights to the program and may continue the program alone or with a third party.

In 2005, GSK licensed our MABA program for the treatment of COPD, and in October 2011, we and GSK expanded the MABA program by adding six additional Theravance-discovered preclinical MABA compounds (the "Additional MABAs"). GSK's development, commercialization, milestone and royalty obligations under the strategic alliance remain the same with respect to '081, the lead compound in the MABA program. GSK is obligated to use diligent efforts to develop and commercialize at least one MABA within the MABA program, but may terminate progression of any or all Additional MABAs at any time and return them to us, at which point we may develop and commercialize such Additional MABAs alone or with a third party. Both GSK and we have agreed not to conduct any MABA clinical studies outside of the strategic alliance so long as GSK is in possession of the Additional MABAs. If a single-agent MABA medicine containing '081 is successfully developed and commercialized, we are entitled to receive royalties from GSK of between 10% and 20% of annual global net sales up to $3.5 billion, and 7.5% for all annual global net sales above $3.5 billion. If a MABA medicine containing '081 is commercialized only as a combination product, such as a MABA/ICS, the royalty rate is 70% of the rate applicable to sales of the single-agent MABA medicine. For single-agent MABA medicines containing an Additional MABA, we are entitled to receive royalties from GSK of between 10% and 15% of annual global net sales up to $3.5 billion, and 10% for all annual global net sales above $3.5 billion. For combination products containing an Additional MABA, such as a MABA/ICS, the royalty rate is 50% of the rate applicable to sales of the single-agent MABA medicine. If a MABA medicine containing '081 is successfully developed and commercialized in multiple regions of the world, we could earn total milestone payments of up to $125.0 million for a single-agent medicine and of up to $250.0 million for both a single-agent and a combination medicine. If a MABA medicine containing an Additional MABA is successfully developed and commercialized in multiple regions of the world, we could earn total milestone payments of up to $129.0 million.

In connection with the expansion of the MABA program, GSK relinquished its option right on our MonoAmine Reuptake Inhibitor (MARIN) program and Angiotensin Receptor-NEP Inhibitor (ARNI) program. GSK has no further option rights on any of our research or development programs under the strategic alliance.

Purchases of Common Stock under our Governance Agreement and Common Stock Purchase Agreements with GSK

On May 16, 2012, we issued and Glaxo Group Limited, an affiliate of GSK, purchased 10,000,000 shares of our common stock at a price of $21.2887 per share, for a total investment of $212,887,000.

In addition, in 2012, Glaxo Group Limited, pursuant to its periodic "top-up" rights under our governance agreement with GSK dated June 4, 2004, as amended, purchased shares of our common stock as follows:

                                          Aggregate
                      Common Stock         Amounts
                    Shares Purchased    (in millions)
Purchase dates
February 14, 2012             88,468   $           1.6
August 3, 2012               316,334   $           8.9


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GSK Upfront License Fees, Milestone Payments and Revenue



Revenue recognized from GSK under the LABA collaboration and strategic alliance
agreements was as follows:



                                            Three Months Ended       Nine Months Ended
                                              September 30,            September 30,
(in millions)                               2012         2011        2012         2011
GSK Collaborations
LABA collaboration                        $     0.9    $     1.3   $     2.7    $     3.8
Strategic alliance agreement                      -          0.5           -          1.9
Strategic alliance-MABA program license         0.5          0.6         1.6          1.6
Total revenue                             $     1.4    $     2.4   $     4.3    $     7.3

Astellas

License, Development and Commercialization Agreement with Astellas

In November 2005, we entered into a global collaboration arrangement with Astellas for the development and commercialization of VIBATIV®. On January 6, 2012, Astellas exercised its right to terminate this agreement. The rights previously granted to Astellas ceased upon termination of the agreement and Astellas stopped all promotional sales efforts. Pursuant to the terms of the agreement, Astellas is entitled to a ten-year, 2% royalty on future net sales of VIBATIV®. In March 2012, we entered into a series of purchase agreements with Astellas for the purchase of VIBATIV® active pharmaceutical ingredient and other raw materials of up to $6.2 million and VIBATIV® finished goods inventory of up to $4.2 million, which inventory remains subject to release. As of September 30, 2012, we had purchased $4.3 million of active pharmaceutical ingredient and other raw materials pursuant to these purchase agreements.

In addition, beginning July 1, 2012, we are responsible to fund governmental rebate and governmental chargeback claims for Astellas-labeled product sales. As a result of the termination of the VIBATIV® collaboration agreement, we recorded a liability of $150,000. At September 30, 2012, $130,000 is reflected in deferred revenue, non-current and $20,000 is reflected in accounts payable.

Through January 6, 2012, we had received $191.0 million in upfront license, milestone and other fees from Astellas. We previously recorded these payments as deferred revenue and amortized them ratably over the estimated performance period (development and commercialization period). As a result of the termination of the VIBATIV® collaboration agreement, the development and commercialization period ended on January 6, 2012. As such, we recognized into revenue $125.8 million of deferred revenue related to Astellas in the first quarter of 2012, and we are no longer eligible to receive any further milestone payments from Astellas.

Net revenue recognized under this collaboration agreement was as follows:

                                         Three Months Ended              Nine Months Ended
                                            September 30,                  September 30,
(in millions)                           2012             2011           2012           2011
Recognition of deferred revenue     $          -     $          -    $     125.8    $        -
Amortization of deferred revenue               -              3.2              -           9.7
Royalties from net sales of
VIBATIV®                                       -              0.8              -           2.1
Proceeds from VIBATIV® delivered
to Astellas                                    -                -              -           1.2
Cost of VIBATIV® delivered to
Astellas                                       -                -              -          (1.2 )
Astellas-labeled product sales
allowance                                      -                -           (0.1 )           -
Total net revenue                   $          -     $        4.0    $     125.7    $     11.8

VIBATIV®

VIBATIV® (telavancin) is a bactericidal, once-daily injectable antibiotic developed by us for the treatment of Gram-positive infections. The FDA has approved VIBATIV® for the treatment of complicated skin and skin structure infections (cSSSI) caused by susceptible Gram-positive bacteria including both methicillin-resistant (MRSA) and methicillin-susceptible strains of Staphylococcus aureus in adult patients. VIBATIV® is also approved in Canada for the treatment of cSSSI in adult patients. In September 2011, the


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European Commission granted marketing authorization for VIBATIV® for the treatment of adults with nosocomial pneumonia, including ventilator-associated pneumonia, known or suspected to be caused by MRSA when other alternatives are not suitable. However, in May 2012, the European Commission suspended this marketing authorization because the single-source drug product supplier did not meet the Good Manufacturing Practice (GMP) requirements for the manufacture of VIBATIV®. In September 2012, we received notice that the FDA's Anti-Infective Drugs Advisory Committee (AIDAC) plans to discuss the NDA for VIBATIV® for nosocomial pneumonia (NP) at a meeting on November 29, 2012.

We are evaluating global commercialization alternatives for VIBATIV® either with partners or alone.

Due to manufacturing issues at the single-source supplier of VIBATIV® drug product, VIBATIV® is currently subject to critical product shortages and regional supply outages in the U.S. In May 2012, we entered into a Technology Transfer and Supply Agreement with Hospira Worldwide, Inc. (Hospira) and technology transfer activities are in process. We must obtain regulatory approval for VIBATIV® drug product that will be manufactured at Hospira's facility before any such product may be sold, and this regulatory approval process could extend through mid-2013.

Critical Accounting Policies and the Use of Estimates

As of the date of the filing of this quarterly report, we believe there have been no material changes or additions to our critical accounting policies and estimates during the nine months ended September 30, 2012 compared to those discussed in our 2011 Annual Report on Form 10-K filed on February 27, 2012, except as follows:

Inventories are stated at the lower of cost or market value. Cost is determined using an average cost basis. Inventories include VIBATIV® active pharmaceutical ingredient and other raw materials of $4.3 million and work-in-process of $0.8 million at September 30, 2012. VIBATIV® is a U.S. Food and Drug Administration (FDA) approved drug. If information becomes available that suggests the inventories may not be realizable, we may be required to expense a portion or all of the capitalized inventory costs.

RESULTS OF OPERATIONS

Revenue

Revenue, as compared to the prior year periods, was as follows:

Three Months Ended Nine Months Ended September 30, Change September 30, Change (in millions, except percentages) 2012 2011 $ % 2012 2011 $ % Revenue $ 1.4 $ 6.4 $ (5.0 ) (78 )% $ 130.0 $ 19.2 $ 110.8 577 %

We recognized revenue from the amortization of upfront license fees and milestone payments related to our GSK LABA collaboration and strategic alliance agreements and, during the nine month period ended September 30, 2012, from our Astellas telavancin collaboration, which was terminated on January 6, 2012. In addition, we recognized revenue related to our Astellas telavancin collaboration from royalties from net sales of VIBATIV® and from the impact of VIBATIV® inventory transfers or dispositions.

Revenue decreased 78% to $1.4 million in the third quarter of 2012 from the comparable period in 2011. Revenue increased 577% to $130.0 million in the first nine months of 2012 from the comparable period in 2011. The decrease in the three months ended September 30, 2012 and the increase in the first nine months of 2012 reflects the accelerated recognition of deferred revenue of $125.7 million from our global collaboration arrangement with Astellas for the development and commercialization of VIBATIV® in the first quarter of 2012. This accelerated recognition was the result of the termination of the Astellas agreement on January 6, 2012.

Upfront license fees and milestone payments received from GSK under the LABA collaboration and strategic alliance agreements and from Astellas under the telavancin collaboration were as follows:

                                               Through September 30, 2012
                                             Upfront
                                           License and     Milestone
(in millions)                              Other Fees       Payments     Total
GSK Collaborations
LABA collaboration(1)                     $        10.0    $     50.0   $  60.0
Strategic alliance agreement                       20.0             -      20.0
Strategic alliance-LAMA license(2)                  5.0           3.0       8.0
Strategic alliance-MABA program license             6.0          16.0      22.0
Astellas License agreement(3)                      70.0         121.0     191.0
Total                                     $       111.0    $    190.0   $ 301.0



(1) We do not expect to be eligible for any additional milestones under this collaboration.

(2) In August 2004, GSK exercised its right to license our LAMA program pursuant to the terms of the strategic alliance. In 2009, GSK returned the program to us.

(3) This agreement was terminated on January 6, 2012.


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Upfront fees and certain milestone payments received from GSK have been deferred and are being amortized ratably into revenue over the estimated performance period. Future revenue will include the ongoing amortization of upfront and milestone payments earned. We periodically review and, if necessary, revise the estimated periods of our performance pursuant to these contracts.

Research & Development



Research and development expenses, as compared to the prior year periods, were
as follows:



                                       Three Months Ended                             Nine Months Ended
                                         September 30,              Change              September 30,             Change
(in millions, except percentages)      2012          2011         $        %           2012         2011        $        %
Employee-related                    $      9.0    $      8.7   $   0.3        3 %   $     28.7    $   25.5   $   3.2       13 %
External-related                           8.8           9.5      (0.7 )     (7 )%        32.9        17.9      15.0       84 %
Stock-based compensation                   3.3           3.5      (0.2 )     (6 )%        10.3        10.0       0.3        3 %
Facilities, depreciation and
other allocated                            5.9           6.1      (0.2 )     (3 )%        17.9        17.7       0.2        1 %
Total expenses                      $     27.0    $     27.8   $  (0.8 )     (3 )%  $     89.8    $   71.1   $  18.7       26 %

R&D expenses decreased 3% to $27.0 million in the third quarter of 2012 from the comparable period in 2011. This decrease was primarily due to lower external expenses resulting from the completion of Phase 2 clinical activities related to TD-1211; partially offset by higher external expenses related to MARIN Phase 2 studies and preparation for the FDA advisory committee meeting concerning the VIBATIV® NDA for nosocomial pneumonia scheduled for November 2012. R&D expenses increased 26% to $89.8 million in the first nine months of 2012 from the comparable period in 2011. This increase was primarily due to Phase 2 clinical costs related to our program for opioid-induced constipation with TD-1211, costs associated with our preclinical and late-stage discovery programs and higher employee-related expenses.

We anticipate R&D expenses for 2012 to increase relative to 2011. R&D expenses in 2012 will be driven largely by higher employee-related expenses, costs associated with our continued development efforts in our program for . . .

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