What GSK's Q3 Results Mean For Theravance

Today, GSK (NYSE:GSK) published its Q3 report with important facts relating to the drugs partnered with Theravance (NASDAQ:THRX) and Theravance Biopharma (NASDAQ:TBPH). As far as THRX’ drugs Breo (called Relvar in Europe and Japan) and Anoro are concerned, according to GSK’s overview global NBRx (new-to-brand prescriptions) in the quarter for Breo and Advair combined were ~4% (all healthcare practitioners) and ~11% (pulmonologists only). Breo is estimated to have ~1.4% market share. This compares to ~1% market share for Breo in Q2/14 and a combined NBRx share of ~4.5% (all HCP) and ~11.5% (pulmonologists) in the past quarter. The decline shown by the last data set must be interpreted together with the sharp decline of Advair’s sales in the past three quarters (-14%) and should therefore indicate strongly growing share of Breo. Breo delivered sales of GBP29 million over the last three quarters.

Global NBRx in the quarter for Anoro were ~4% (all HCP) and ~10% (pulmonologists). Anoro is now estimated to have ~1% market share. This compares to 0.6% market share for Anoro in Q2/14 and a combined NBRx share of ~3.7% (all HCP) and ~9.5% (pulmonologists) in the past quarter. Hence, even Anoro has been growing its share. The drug delivered sales of GBP6 million over the last three quarters. In the US, the drug was launched only in April, whereas Breo was launched in Q4/2013.

The difference between all prescriptions (which analysts focus on) and new-to-brand prescriptions (which GSK says they should focus on) lies in the particular nature of the COPD market. In fact, only about 12% of patients are “dynamic”, i.e. could or would switch drugs, as most patients are used to their drug and inhalation device and would not want to change. This means that a new drug’s uptake is probably best measured by its success among this small 12% group and not by its overall market share – that is impossible to grow at high rates, especially at the beginning.

According to GSK’s CEO Andrew Witty, the respiratory segment will return to growth only in 2016:

Now we now have greater visibility and we would expect as we go forward to see our volumes in the US begin to recover. But over the short run we’ll continue to see that price pressure. So we wouldn’t expect to come back to growth in our Respiratory business globally until 2016, so as we go through this ’14/’15 period. Now that’s key though, because the Respiratory business is critical to the future of GSK. We’ve been market leaders for 40 years. And with the new portfolio of medicines we have, in addition to the residual businesses which we will have, I think, going far into the future, we’re very confident that we can remain market leader and, as I’ve said, move back to growth from 2016.

As I already pointed out in the first paragraph, this lack of growth will be a mix of lost Advair sales and growing Breo+Anoro sales. Hence GSK foresees its new drugs to more than compensate Advair’s lost sales in 2016 with Breo+Anoro and probably minor contributions from other respiratory drugs. Presuming that Advair will lose another 14% of sales in 2015 and 2016 each, this corresponds to a indirect projection of combined Breo and Anoro sales growth in 2016 of at least about GBP330-380 million, depending on how large the contribution from other new products will be. Based on this figure, I would estimate GSK’s internal total 2016 sales forecast for the two drugs combined to be GBP500-600 million. At this level, THRX would be entitled to royalties of about GBP50-70 million, depending on the exact Breo/Anoro proportion (which have different royalty structures). While this might seem a disappointing outlook at first sight, we have to take into account GBP50-70 million (~$100 million) revenue would really be just the beginning. During today’s conference call GSK explicitly guided to a respiratory business that will be larger than what is was when the current transition started – a significant projection indeed.

Witty also once again underscored his portfolio approach to new product launches:

And that’s really what we’re trying to build now in Respiratory as we move forward to transition from Advair and the existing products into Breo and Anoro and some of the other pipeline products that we have behind. And that’s really the approach that we’ve taken across our new products, to build into portfolios that will give us more balance in those launches as we go forward.

This rhymes to the following excerpt from the Q4/13 earnings call:

I would say, and I make no apology for saying something I was saying in 2008, and I remember Graham Parry asking me this question at our year-end results in ’08 or ’09, I am going to reiterate what I said then: our strategy has never, repeat never, been to replace Advair one-for-one. Our strategy has been to succeed Advair with a portfolio of respiratory products. I described today, we now have two already approved; we have a total of potentially nine, so seven more in the wings. Of those seven the six which are respiratory most of the molecules are now already approved in one form or another and the device they are coming in is already approved. The risk discharge from the inhaled portion of the next wave of respiratory products is significantly reduced.

That portfolio is what will build the continued leadership of GSK in respiratory. We have never had a goal and a dependency to create one product to replace Advair. You are much better at the maths than me. If you have nine products what each of them has to do to in fact cumulatively be remarkably successful; you can see immediately why this strategy has great appeal to me. It diversifies our risk profile; it gives us many opportunities.

[…] Time will show that the Breo proposition is appealing and, as we build coverage, we will demonstrate that through performance. Anoro is the first of the truly new types of products and hopefully, as we go through the next two or three years, you will see those two supplemented by up to seven more.

I have written several times in my articles on THRX and TBPH that GSK’s respiratory strategy won’t be to replace Advair with another blockbuster, but will focus on building a whole range of products around the Ellipta inhaler. Only in this way GSK will be able to profit from enormous competitive advantages. Yet, the implementation will take some time and cost some sales before the new portfolio is up and running and Advair’s lost market share will be gained back. However, the portfolio is by far the most complete in the industry and far ahead of GSK’s competitors when it comes to effectiveness, appeal to both patients and doctors and obviously completeness. So in my opinion the question is not if, but only when GSK’s respiratory segment as a whole will start growing again – with the Theravance drugs taking the lion’s share of the growth.

Looking more specifically into the quarterly results for Anoro and Breo might be a futile exercise, but as many analysts will make a great deal of it, I will write my own 2 cents on the subject as well. It actually is probably an absolutely futile exercise, as current sales figures are obscured by heavy sampling, a launch in its early stages with still incomplete payer coverage, and even internal competition between Advair and Breo. Breo could easily receive a label expansion for the US in about 1 year, enlarging its target market beyond the sole COPD patients (as is already the case in Europe and Japan). Furthermore, the appeal of the GSK respiratory portfolio will become stronger with every addition to it. That’s why THRX is a mid- to long-term and TBPH a long-term play and investors will need to be patient.

All in all, as far as THRX is concerned, there was no significant change resulting from today’s earnings report. Just as in Q2, GSK does not anticipate a generic Advair to arrive within 2016. Q3 sales of Anoro and Breo continue to be significantly behind consensus estimates, but Breo’s launch performance is among the best primary care launches in this year. Basically, GSK is telling investors again to wait for growth to kick in later, as payer coverage is extended and sampling reduces (the conference call mentioned specifically that Anoro samples delivered during the quarter were 20,000). After all, launches in multiple countries have just happened a few months or even just weeks ago.

A short note for TBPH investors: In the call, the Q3 report and the video there was little noteworthy related specifically to Theravance Biopharma, except for a few optimistic words on the world’s first triple combination therapy for COPD that is currently in Phase 3.