Executives
Rick E Winningham – Chairman, President and Chief Executive Officer
Michael W. Aguiar – Chief Financial Officer, Senior Vice President and Head-Investor Relations
Analysts
Steve Byrne – Bank of America Merrill Lynch
Theravance Inc (THRX) Bank of America Merrill Lynch 2014 Health Care Conference Call May 13, 2014 1:00 PM ET
Steve Byrne – Bank of America Merrill Lynch
Good morning, my name is Steve Byrne I cover Biotech stocks at BofA Merrill. It’s a pleasure for me this morning to introduce the Theravance team. We have Rick Winningham, CEO; Michael Aguiar, CFO up here with me. Rick comes from the great State of Illinois not that I’m biased. But Rick had a 15 year career at Bristol and then he has been the CEO of Theravance for almost another 15 years. It’s over to you Rick.
Rick E Winningham
Great, thanks, Steve. And I would like to thank Steve and the Bank of America Merrill Lynch team for inviting us to present here today. It’s an incredibly exciting time for Theravance because of product launches, the separation and I’ll try and cover those relatively quickly in the presentation. So that we can get into a little bit more of a discussion.
No presentation is ever complete without a Safe Harbor slide. So please check that I’ll be making some forward-looking statements and please check our SEC documents that are on file.
Everything that the company did in 2013 positioned us well for everything that’s happening in 2014. 2013 was a terrific year for the company both with this internal pipeline as well as with our collaboration products. 4208 very positive data for our own long-acting muscarinic antagonist delivered in a nebulizer in September. The approval and launch of BREO in multiple markets the approval of VIBATIV for HABP/VABP and reintroduction into the United States of VIBATIV.
The approval for COPD for ANORO in the U.S. in 2013 and now in 2014 in the EU and Canada, and then the separation of course targeting this quarter with the record date as of May 15, which is in just a couple of days.
So a terrific 2013 and early 2014 setting us up for success in 2014 and beyond. So where are we today? Well RELVAR or BREO as everyone knows has been launched in major markets in the United States and selected markets in EU with more to follow as well as Japan. We importantly announced with GSK and planned to file Advair for asthma in the United States, and we have submitted the regulatory application for FDI which is RELVAR or BREO for COPD and asthma in China, which we believe will be an important market long-term.
Turning to ANORO, it’s been approved and launched in the U.S. and Canada, we are couple of weeks into the launch in the U.S., recently we got EU approval, very positive news there and the regulatory application in COPD is under review at Japan a very important market for ANORO because of the predisposition to treat COPD with bronchodilators in Japan.
Behind RELVAR and BREO one of the important parts of the strategy with Theravance over the past 10 years has been to continue to invest in the pipeline by adding the antibiotic for serious Gram-Positive infection, we’ve reintroduced into the U.S. market that we have a very, very small sales group targeting selective key territories in the U.S. We have positive top-line results for a number of programs that have rolled out; I’ve talked about 4208 positive results on with velusetrag or 5-HT4 agonist and gastroparesis that’s partnered with Alfa Wassermann, and then most recently positive data from TD-9855 in fibromyalgia.
If you go back to comments with both Mike and I made in 2013, we said we are going to take the remainder of 2013 and 2014 to invest in the series of programs get them to relatively large Phase II study, such as the end of 2014 and early 2015 we had a data set in which to set up the next series of investment with Theravance. That’s exactly what we’ve done and now we’ve got an exciting portfolio really that need, we need to make capital allocation decisions on in late 2014 in early 2015.
We are in a strong financial position of $430 million at the end of the first quarter and of course by adding to that strong financial position with a recent royalty debt financing. So now we are at the eve of the separation, separating Theravance into two companies. Theravance is Royalty Management Company that will collect a royalties coming in from RELVAR, BREO, ANORO and VI monotherapy and then returning those provided capital returns to shareholders both in the terms of dividend as well as future share repurchases.
Theravance Royalty Management Company should have relatively short path to profitability and have a relatively low expense base, very small expense base and we’re excited about the opportunity to take these royalties that are coming in from GSK, adjust the capital structure of the company and provide capital returns to shareholders. Of course out of Theravance we’re dividending out to our shareholder Theravance, the business of Theravance Biopharma, which is the Theravance discovery development commercialization entity that exists today.
Basically the same team that’s been building this portfolio will move over Theravance Biopharma will continue on our partnered programs again will end up most of it, not all of the leadership team from Theravance will end up over Biopharma after a transition period we got economics from future exciting programs at GSK as well as the internal pipeline.
As a reminder and we announced this few weeks ago the dividend that the separation will be taxable to shareholder. So the dividend to Theravance Biopharma will be taxable, we’ll get into the exact treatment of that I think in the Q&A. We expect the record date is May 15, we expect to be completed with the separation and operating as two independent companies on June 2. The businesses will be well capitalized both Theravance Biopharma as well as Theravance Royalty Management Company.
Theravance Royalty Management Company starting with about $434 million of cash from the royalty debt deal, less than a milestone payments that we might have had to make since that time. Lean staffing, I’ve already addressed and we announced last week, our intention to initiated cash dividend in the third quarter of $0.25 per share per quarter, with the intention of growing that dividend over time. Very exciting portfolio of respiratory products partnered with GSK that two of the three and the two largest programs already on in multiple markets commercially.
This is a brief overview I am not going to spend any time on this slide. This is a brief overview of where the products have got approved in terms of RELVAR, BREO, and ANORO and where they have been launched. This is a significant opportunity in the respiratory space that products long-acting bronchodilators have been consistent growers over time, driven by the underlining growth of chronic obstructive pulmonary disease.
The years of smoking in the developed countries as well as the development countries really create a market condition, unfortunately where this disease is going to continue to grow over the next several years. With global sales it’s really a LABA/ICS, a bit LABA/ICS centric market today. Today these products are Advair and Symbicort, and that’s the market segment where BREO is targeting. In the respiratory market, why would you treat patients with COPD with LABA/ICS, because they are at risk or have already had an exacerbation is that worsening of COPD. And they need both the bronchodilation of a long-acting beta agonist plus the inflammation control that comes from an inhaled corticosteroid.
The next market is the LAMA long-acting muscarinic antagonist market really dominated the day by Spiriva. Well what product is targeting that particular segment with ANORO. ANORO was a dual bronchodilator of LAMA and LABA. We’ve had three studies read out, statistically significant improvement in bronchodilation versus Spiriva. So we are very excited to get ANORO on the market and targeting the LAMA market and more broadly the market that requires bronchodilators is the primary segment of treatment. And I’ll come back to how that might look in a moment.
Importantly with both ANORO and BREO, RELVAR, we are bringing an advantage of dose frequency, taking our product with both RELVAR or BREO taking that product at twice a day Advair, Symbicort market to once a day or once a day BREO market. And in this study that’s been published, you see that you get greater compliance which turns into lower healthcare cost by less frequent dosing. And there is not a product on the market today that contains a once a day long-acting beta agonist, and once a day long-acting muscarinic antagonist outside of ANORO. There is only a drug that contains a once a day long-acting muscarinic antagonist in that’s Spiriva.
So as we look at the future of COPD and really this is the basis for the economics of Royalty Management Company as well as the asthma business. But in COPD, you can see here unfortunately every patient goes from A to B to C to D. Every single patient diagnosed with chronic obstructive pulmonary disease. It’s a progressive disease. The airway function gets worse over time and interestingly here in the B Box, the best bronchodilator potentially at one time might have been Spiriva but today with the data that we have in ANORO, we’re very excited about being able to bring ANORO to these patients who require additional bronchodilation. In addition if you move up to C which is more serious disease perhaps some of these patients have had exacerbation. Some of them have it, if they’ve had an exacerbation and that’s where BREO, RELVAR come in if they haven’t that’s where the best bronchodilator comes in.
And then moving over to D, its probably the LABA/ICS therapy plus a good Bronchodilator or triple therapy to control exacerbations and provide maximum improvement in airway function.
Our portfolio was designed to really play in each of these particular segments from single mechanism to dual mechanism to and the future triple mechanism therapy both in an open triple strategy with BREO plus umeclidinium monotherapy. But later of the diamond program of UMEC, VI, and FF as well as MABA/ICS.
So we feel very – overall we’re very well positioned to be successful in assisting physicians and treating patients with chronic obstructive pulmonary disease and all of this platform is built around one inhaler the ELLIPTA whether its RELVAR/BREO, whether it’s ANORO, whether it’s the potential triple therapies or MABA or BREO plus umeclidinium monotherapy and the open triple, all the platform is built around a single inhaler’s no need for the physician to nurse the patient to learn and how to use different inhalers and the patient satisfaction numbers with the BREO and ELLIPTA are very, very good of the ELLIPTA device are very good.
So why is this important to Theravance going forward well it’s important because the significance for the royalties in this – coming off with significance for the as a market segments 15% on RELVAR, BREO on the first $3 billion of sales. ANORO upward tiering of 6.5% to 10% on worldwide net sales, we got a few outstanding milestones that will have to pay and then that will be the end of the cash contribution to these products and then it’s just royalties coming in. On the strategic alliance – the strategic alliance that MABA royalties were 10% to 20% on single agent and 70% of that royalty rate on combination products.
So very exciting – this has taken the long time to get to where we are we began this partnership with GSK in December of 2002 and complemented it in 2004. And now we are to standpoint of being able to help many, many patients globally with the products coming out of this partnership. Royalty Management Company the catalyst distribution of the Biopharma shares to our shareholders via stock dividend and the trading of two stocks of Theravance Royalty Management Company and Biopharma.
RELVAR, ELLIPTA will continue to launch in multiple markets over the reminder of 2014, ANORO approval and then in multiple markets as well as further launches across the EU. And then the initiation third quarter of the dividend strategy at Royalty Management Company.
And so with that, that was a quick tour through Theravance, the Royalty Management Company primarily. Now I’m going to go back over and sit down and address some questions.
Question-and-Answer Session
Steve Byrne – Bank of America Merrill Lynch
Let me just open it up. Here we go, when you draw the line in the sand post-spin on valuing Biopharma, how do you assess the gain? And what if Royalty Management Company is not profitable this year. What are the tax implications of that?
Michael W. Aguiar
Thanks, Steve. Let me kind of cover the whole tax topic as well as I can. And I think I’ll probably get your piece in there.
Taxes related to the separation are relatively simple and I talk to sort of three large means here, first of all this is a taxable distributions Rick had mentioned meaning the dividend itself is going to be taxable to share holders. And in a particular, this is not unusual for many of these transactions, one relatively recent example PDLI and Facet of another taxable transaction. So it’s not unusual to these types of transaction are taxable.
Number two, I’m going to walk through an example of what the taxes might look like in this example. Lot’s of assumption test we made in particular what the market cap of Biopharma potentially would be. I’d just like to say I have no input on that, but the market is going to accept the number, so while I’m going to make up a number here, that the market is actually going to set the price. And that will be the predominant input into there.
And I think what you will see and my example anyway the taxes are not extensive that would be potentially paid. And then the last piece which is I think really critical more or less in a taxable transaction it’s principally a timing issue as opposed to an absolute value of taxes paid. So while I certainly I always have the immediate reaction of taxable is worst than tax free that they actual answer is that it really not generally a big difference other than timing issues.
So I’d like to back in and I’m going to talk about number two just for a moment here, which is what is a potential tax impact on this given some assumptions. And I think the output of this will be that it’s not significant. So for example I’ll make up a couple of numbers here, our stock today is trading in the neighborhood of $26 a share, if you were to assume a one for one dividend rate which is not what we are doing. We are doing a 3.5 to 1, but this 1 to 1 just we could follow the math a little simpler.
And if we were to assume that the initial trading value of Biopharma within the $700 million range or so something like that which I’ve had a number of investors say that seems reasonable to them but of course it could be higher or lower than that number. So in the example of about a $700 million market cap that implies somewhere in the neighborhood of a $6 initial trading price for Theravance Biopharma again assuming this 1 to 1 range.
In that particular example the taxable gain at the Theravance level would be $700 million growth value minus the tax basis, the tax basis is going to around $400 million, so there is about $300 million gain, there would be recognizes a potential dividend so then as we get translated down to a per share basis. So in that example of the $6 that I gave you 37 so that would be taxable at a dividend rate.
Dividend rate is the highest rate in the U.S. is 23.8%, so if you had just to take $6 and 23.8% you are going to come up with something in the neighborhood of $0.60 a share give or take. So $0.60 a share of taxes you would pay off of the combination value of the $6 example that I gave you for the price of the Theravance Biopharma. And then if finance 101 where to hold that would imply that the remainder. So, Theravance Inc. was trading at that point at $20, so $0.60 off of $26 you are in 2% to 3% overall tax rate.
So relatively minor in the scheme of things and again as I had mentioned generally speaking tax free versus taxable is just a timing issue as opposed to an absolute value. So overall I think we are pretty comfortable, we don’t think that this is going to be a hit-or-miss burden, burden. Again, it could be that the stock trades up significantly or traded down, so my example could potentially be significantly wrong unless, of course we’ll see a tax advisor because I’m not a tax advisor on this, but overall we don’t think it’s particularly a big deal.
Unidentified Analyst
Would you mind touching on that $300 million gain again with the corporate level tax on that, if any?
Michael W. Aguiar
Yes, thanks for question. So it would be similar, there is a tax at the corporate level it something we’ve assumed all along. In this example will be the same tax, we believe in this example that would be covered entirely by our net operating losses, so there will be no cash out the door at that particular point in time. So we’ve assumed that all along, we’re going to have somewhere neighborhood of $1.4 or so of NOLs when the transition actually is affected. So at that point in time it’s likely, again in this particular example that we still have more than $1 billion worth of NOLs available at that time in point. Again if you turned out Biopharma traded up significantly that could be a different number, but it will be similar to the calculation you go through.
Unidentified Analyst
Could you maybe just touching on the Advair generic 2016, all the scenarios that you guys are envisioning, maybe from a case to a more reasonable case?
Michael W. Aguiar
Okay, so whether I can talk about all the scenarios or not I’m sure that I don’t have time to talk about all the scenarios, but I think as you look at our BREO program what we’ve attempted to do is really work to develop a better products in the existing twice a day medicines. And I’m going to get to the 2016, 2017, 2018 time period and the foundation of that really is the Salford Lung studies that really hopefully we’ll show that the dose frequency just as I said there that the dose frequency is important and reduces overall healthcare cost. And I think secondly, as the SUMMIT study that reads out 2016 on mortality and patients with COPD with cardiovascular risk factors that we’re conducting with BREO.
I think those enabled BREO have a substantially different economic benefit to the system, but just pure compliance based on history would seem that the compliance benefit will carry through reduction and exacerbation, then if you look at a cost of sudden worsening of COPD that the cost of that exacerbation to the health system far out ways any drug cost. So that sort of the background in which that’s happened. Now generic I don’t know generics for Advair is going to happen. I think was it 2016, 2017, 2018 I don’t know. I do know that it’s relatively long path, despite the draft guidance, from where we’re today to actually getting generic on the market, some clinical studies have to be done, it’s not that simple to be able to manufacture the devices in the formulation at some point in time, there will be a few that show up. I don’t expected to be like a tablet market or an injectable market relative to market entry. And I think importantly for Theravance and for GSK the focus is on BREO, and the focus is on BREO and making it as successful as possible with the existing data that we have as well as new data that will come in over time and complimenting that with the rest of the portfolio.
Unidentified Analyst
(Question Inaudible)
Michael W. Aguiar
Again, I really have no idea what the generic pricing would be because I think it’s dependent on how many competitors in the landscape.
Unidentified Analyst
[Question Inaudible].
Rick E Winningham
That’s the difference – the difference between a traditional generic price drop on an inhaler. I think its quite significant meaning that the price drop for inhale drugs is likely to be much less than what a pill or an injectable has. Because there are inherent barriers to entry with the device into the market that sophistication of the device. So it’s not going to be you don’t have 65,000 manufactures of tablets like you have today of a product, its just not that type of a market, its quite different. And I think there are products that have been multi-source or generic for quite some time in the inhalation market and they are still delivering fairly respectable sales, whether you look at Albuterol or some of the versions of Combivent. So, again, I think the key is the value proportion of BREO. And when generics show up, if they show up in the United States in any meaningful way, having the data package behind BREO that allows us to differentiate from any twice-a-day product.
Unidentified Analyst
Thanks. Can you just update us and remind us of the time lines on the triple therapy, the – royalty treatment of that to GSK? And assuming that is approved to some point is there going to be an option to be able to fold that triple product into the royalty company further down the line because it would just sit with the rest of the portfolio?
Rick E Winningham
Yes, that’s a good question, Graham. So the royalty rates on the triple or the same as ANORO, so its 6.5% to 10% the way those royalties as they coming in or split 15% of the total royalty package stays with Royalty Management Company 85% of the total economics go to Theravance Biopharma. So the rationale for that is that Theravance Royalty Management Company are the managers of the agreements with GSK. Therefore that provides an important long-term tail value to Royalty Management Company. Its also the case of any new product MABA, MABA/ICS, the closed triple. The future economic are split 85%, 15%, 85% going to the Biopharma, 15% going Royalty Management, Mike.
Michael W. Aguiar
Yes, Rick hit it on the head. There is not an option to put the triple into the Royalty Company. So that being said I think its pretty important to consider that more likely than not as you look forward. They’re going to be very significant homes for each of these compounds that are there that are relatively distinct from each other. So four example is more likely than not I would gives that the triple slots in at the more severe into the spectrum probably as opposed to say first line therapy, you look at something like BREO probably finds a home where patients are at risk or have had an exacerbation. That’s probably a little more typical there. And then you look at something like ANORO where the principle benefit is on bronchodilation. That potentially could be slotted in a little bit early in the paradigm. So I don’t think actually there is going to be that much competition among the three. And there will be distinct homes for each of these products looking forward. So while there could be some movement in between this, the three its, not that the triple is going to go all the way down to first-line therapy probably or that ANORO is all the way from day one to the last monotherapy for patients. So I think there will be pretty distinct homes for each of these compounds.
Unidentified Analyst
And what’s your best guess on getting timing get to market and triple and MABA/ICS and do you have a particular preference between the GSK tends to talk about the triple, its doesn’t talk a lot about MABA?
Michael W. Aguiar
Yes, so I don’t have any guidance and I’m going to give right now with regard to the initiation beyond what GSK said here recently, which was that they expect to move the triple into Phase 3 here relatively soon. I’m totally agonistic where it is the closed triple you know Diamond or whether it ultimately is MABA plus FF. My only prejudice is I want one to make it to the finish line because the triple market it pretty significant. So we are extremely happy that the closed triple moving forward. And we are working through what is called Phase 3 enabling work with MABA plus costeroid right now. And in the same process, we’re transitioning from the discus over the ELLIPTA device, which would then put us on a common platform all the way through. So I would stay tuned on this, but we’re in extremely good position today.
Rick E Winningham
Yes, I think in the short-term Mike’s right. The diagnostic between triple and MABA, but long-term I think we are not because MABA is more of a platform it’s much easier to build things off of MABA adding second drug technically, but a third pharmacology or another drug in a fourth pharmacology will always be easier to build that on top of MABA. That it will be off of another base where you got a combination of two drugs. So short-term relatively agnostic long-term no because that MABA is a platform not really a product.
Unidentified Analyst
And then last one for me, just the BREO launch has been somewhat underwhelming so far. And from where you are sitting, do you feel that the reasons for that all well explained to the markets and do you still feel comfortable with the trajectory coverage, et cetera
Rick E Winningham
So, I’ll make a couple of comments and kick it back to Mike. I think that the progress that has been made in managed care from the beginning of the year until today has been quite significant in the United States. This 70% number in Medicare Part D, 50% of the commercials from Medicare Part D at the beginning of the year and operating definition of zero. So to go from up to 70% I think that’s significant progress. Now we’ve got DTC going in the United States we’ve got ANORO that’s being large. So I think it’s going to add some activation energy with BREO. And you have seen the prescriptions on a week by week basis pickup in last four week. So Mike and I came out year-ago and said BREO expect sort of a flat launch because you got to get through reimbursement you’ve got to get DTC, it’s a new primary care launch you’re going to win payor by payor, physician by physician that’s the way this is going to win. And then once you start winning I think that the success feeds on itself a bit. And I think that’s a little bit of where we are right now. So Mike?
Michael W. Aguiar
Yes, I completely agree with Rick. The good news was our guidance was correct. The bad news is I always like to beat my guidance. So, unfortunately we didn’t beat our guidance. So I think what really matters to me from a long-term perspective is that the product deliver on what it was projected to do. And answer is yes it does, Theravance has done a fair amount of primary market research and what we hear back from the doctors and the patients is the product absolutely delivers on its promise. The devices is great. The patients enjoy it quite a bit. It works very well. So long-term this hasn’t changed our view one iota. We haven’t changed our long-term forecast here nor have we any diminished confidence in where these programs are going. So, while I would love to have beaten my guidance, we were largely on time with our guidance.
Unidentified Analyst
Could you just maybe talk about the Novartis commentary? It sounds like they’re stepping away from the US launch of the LABA/LAMA, certainly Novartis’ only launch. Can you talk about the impact that has on switching patients to LABA/LAMA and if they go in with a partner whether or not you’d be scared by a head to head of twice a day Novartis product versus yours?
Rick E Winningham
I don’t want to make any specific comments on where Novartis is other than we haven’t expected them to come to the market as a once a day compound for quite while, our view was even before they had chatted with the FDA, they’re going to have a tough time with [vicoperalade] (ph), too, and they’ve got a once a day compound. So we’ve actually — Theravance does not view them as a likely once a day competitor in the U.S., in the Europe of course they’re all ready I think Europe will be more competitive. In that space, you probably have Novartis and GSK Theravance and then probably eventually BI. In the U.S. it just a little bit difference. I wouldn’t go too far on that, whatever Novartis may do when they are head to head or whatever that’s up to them, but I think we feel very confident around ANORO and our positioning and timing relative to other folks as well as the overall product offering.
Steve Byrne – Bank of America Merrill Lynch
Okay, we are out of time. Thank you, both.
Rick E. Winningham
Thank you.
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