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TBPH - Theravance Biopharma


jawn619
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  • 4 months later...

I think TBPH offers compelling value at current prices, possible 3x-5x and I want to lay out a detailed but easy to understand explanation for why I think so. First why am I qualified to value a biotech? my father worked for big pharma for over 10 years in R&D. While I don't understand the specific chemistry behind a lot of the drugs, I got very interested in the business side of pharmaceuticals, especially after my father literally discovered and patented a drug for the company just to be paid $1 to transfer the rights and not participate in any of the upside of a new discovery. A lot of what I'm going to cover is in written in more detail by the author of the VIC writeup in first post of the thread.

 

10 second pitch

The company has $450m market cap, $325m in cash, leaving an enterprise value of $125m. The company has a full pipeline of drugs and one asset in particular has a conservative valuation of $1 billion dollars.

 

Primer on the biotech industry and how the business works

Biotechs can be separated into two categories. Big pharma like Merck,Phizer,JNJ, Lilly, Roche etc and smaller players who are usually trying to discover new drugs. In a pharmaceutical business, a company spends considerable amount of money researching and developing new drugs. Until they get their drugs approved through phase 1,2, and 3 trials, pharmaceuticals look like cash burning machines. Passing all three phases is not easy and requires considerable resources. What's worse is that there is uncertainty after a drug gets approved, because the company might not have the distribution to sell their newly patented drugs or know exactly how well the drug is going to sell.

 

Big pharma has undergone an interesting shift in the recent 5-10 years. It has become increasingly short term focused, and does not want spend/invest in discovering new drugs. Shareholders want to see steady, consistent profits, and R&D is inherently risky and difficult because no one has found a way to consistently discover new drugs. From an employee scientist's perspective, there is no incentive to try and discover new drugs. You don't get paid more, management can't expect you to discover game changing new drugs, and the field is highly specialized so your job is likely safe. (I mentioned my father discovered a patent that probably made the company millions of dollars but that didn't save him from getting laid off when the company was cutting R&D).

 

That means that the competition for new drugs is FIERCE, and big pharma is serially overpaying to try to acquire drug pipelines. This leads to perverse incentives for the smaller drug discoverers. Management is incentived heavily to spend all their money trying to develop new drugs, in hopes that big pharma will jump in and pay a premium for the approved drugs. (Which they often do).

 

TBPH non cash assets(in order of value)

 

Royalty rights to the closed triple: this is the most important and probably easiest part of their drug pipeline to understand. TBPH gets 85% of THRX's royalty on 6.5-10% of net sales on a drug called the triple. The triple is owned and marketed by GSK and treats COPD, the third leading cause of death in the U.S. Right now patients are taking 2-3 different types of medications several times a day. There's nothing really novel about the triple. By providing all three medicine components in a single inhaler the company hopes to offer more convenient dosing to patients, reduce the risk of exacerbation compared to dual therapy and, as a result, contribute to the improved management of their disease.  40% of what is prescribed for COPD currently consists of the individual pieces of the triple. GSK is heavily incentivized to get this drug to market. GSK, who owns the rest of the 90-93.5% of the triple, need to replace lagging sales of it's current COPD treatments. The company has committed to enrolling 10,000 people in a 52 week phase 3 trial. After the conservative picture of big pharma i painted, the fact that they committed to paying the entire phase 3 costs shows a strong signal that approval is likely for the triple.

What's it worth if it gets approved?: The COPD market is a estimated to be a $16B dollar market, with 40% of it comprising of the individual drugs that make up the triple.

16*.40*.065= around $400M and 16*.40*.10= $640M per year. The actually number will vary of course based on how big the market actually is and how much market share the triple will have but just like how you don't need a scale to determine if someone is fat, the stream of royalty payments looks pretty big in comparison to TBPH's current enterprise value. Using a simple DCF using 15% discount rate and $200M conservative payment, I get a PV of $1.3B, discounting that back a couple of years and you get a value of around $1B. (TBPH also get's another royalty if GSK decides to expand this drug into the asthma market but let's just leave the valuation at $1B).

 

Other Drugs

TD-4208: The company recently partnered with Mylan, where TBPH got paid $15M in cash and $30M equity stake at an average price of $18.92 as well as the potential to earn milestone payments up to $220M. TBPH will pay for developing the drug but will get reimbursed by Mylan. after the drug is developed, the profit split is 35/65 in favor of Mylan. Let's be conservative with our valuation and assign this a value of $200M

 

Vibativ: The only approved drug that TBPH has and is currently ramping up sales in. Management has guided $20M in sales in 2015 and hopefully the sales will ramp from there. Let's conservatively value this at $100M. Management also partnered with a Chinese company to give them full rights to develop it in China for $8M.

 

TD-5108: Pending phase 3 trial and partnered with alfa wasserman. TBPH will develop and wasserman will reimburse a large percentage of the costs. I have no idea what this is worth so let's just value it as 0.

 

Other early stage drugs: Let's value all these at 0 as well.

 

Other notes: I think Theravance biopharma would have already been the target of buyout offers already if Baupost(19% stake) and GSK(30% stake) didn't have blocking position. I think what is likely to happen is that GSK will buy TBPH. How much would you pay from GSK's perspective? Let's say tomorrow GSK buys TBPH for 1.3B(the triple for 1B and cash on hand for 300M) it gets all the other drugs for free. 1.3B is about 3x from today's price of around $13/shr.

 

Risk/considerations: The company has an active R&D department, burning about $120M a year. The way I think about is can management get at least $1 back for each $1 spent on R&D? They have proved to be smart capital allocators, partnering with various other companies to share costs while still retaining some upside for a lot their drugs.

 

Worst Worst case Scenario: The triple doesn't get approved, vibativ doesn't ramp, TD-4208 is worth nothing, other drugs are worth nothing, R&D burns cash, and the company is a goose egg. 

Best Case Scenario: GSK buys them out soon, paying up to $2B for everything, The stock is a 5x from here.

 

The range of outcomes is very wide here, but I think odds are very much in the stock holders favor

 

Other relevant info:

Patent laws are strong in the U.S.,Canada, and Europe, but in India and China they are a joke. Chinese and Indian drugmakers just steal patents and produce cheaper versions of U.S. patented drugs. Management clearly knows that and was able to squeeze out $8M from a Chinese drugmaker who actually wanted to play by the rules. To relate it to something we can all probably understand, In the biotech world U.S. companies are the content developer and Chinese and Indian companies are the pirates/torrenters. Who knows what the future will look like and it's not inconceivable that patients illegally obtain drugs in the future to try save on the soaring costs of healthcare. For example, Gilead's price gouging hep C treatment which costs $80K in the U.S. can be obtained in India for like $12 dollars.

 

TBPH is a spinoff from THRX. It can get confusing but the two are very different companies. The management at THRX loaded it with debt, spunoff TBPH with the $400M in cash and The CEO left THRX to be head of TBPH. This shows that management is well versed in financial engineering(of the good kind) and sees more upside in TBPH as opposed to THRX.

 

Full disclosure:

I do not hold a position with the issuer such as employment, directorship, or consultancy.

I and/or others I advise hold a material investment in the issuer's securities.

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Thanks for the writeup. I agree that the company is materially undervalued. BOA Merrill Lynch lowballs the value of nearly every developmental drug asset the TBPH has and still comes up with nearly 50% upside from the current share price (see attached).

 

Much of the debate here revolves around the NPV of the closed triple. Even many of the closed triple bears (like Merrill) come up with significantly higher values for the company than what Mr. Market currently values it at.

 

Disclosure: Long TBPH.

Merrill_on_TBPH.PNG.c1d85681bdc5f80bc9a5167ece440f81.PNG

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The thing with drug companies is to expect the unexpected.

 

My view of the company is the triple drug will not make any material revenue for a year after it is approved.  It takes awhile no matter how good the drug is or how well known your company is to get doctors to change their ways and be comfortable selling a new drug.  Especially when proven alternatives are available.  It doesn't matter if this drug is leaps and bounds better then what is already on the market it takes awhile to get doctors to change their ways.

 

Regarding the rest of the pipeline.  Everything looks to be in Phase 2.  Expect regulatory issues to occur, delays, and everything else to occur.  When this happens, delays cost a shit load of money.  The regular process to get a drug to market is expensive without any delays.  The way I would look at the 325 m in this case is that it does not exist bc all of it will be used getting those drugs through the pipeline.  Will revenue be coming in from the triple drug enough to cover the development cost of the pipeline in 3 years?  I doubt it.  They will need to Prioritize the pipeline or they will need to raise money in a few years.

 

Not saying this is a bad company but their is a reason biotechs have a history of kicking people in the balls.  It's a very tough business to be in. 

 

Also not all of these drugs are going to be successful.  How much resources will be spent on a drug that will fail a trail? 

 

While you do have 1 approved drug the expected revenue (for the year) covers the cost of development for 1qtr for 1drug.  The problem most biotechs run into is they spread themselves thin trying to support multiple drugs when they really don't have the resources to do that.  One day they wake up broke all because they didn't want to focus their effort.

 

Biotechs are heavily shorted bc the odds are in their favor that a company will fail bc the approval process is so difficult for smaller companies to succeed.  Even when they do get a drug approved it's no guarantee that demand will show up for the drug.  And ramping up production is a whole other can of worms. 

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The thing with drug companies is to expect the unexpected.

 

My view of the company is the triple drug will not make any material revenue for a year after it is approved.  It takes awhile no matter how good the drug is or how well known your company is to get doctors to change their ways and be comfortable selling a new drug.  Especially when proven alternatives are available.  It doesn't matter if this drug is leaps and bounds better then what is already on the market it takes awhile to get doctors to change their ways.

 

Regarding the rest of the pipeline.  Everything looks to be in Phase 2.  Expect regulatory issues to occur, delays, and everything else to occur.  When this happens, delays cost a shit load of money.  The regular process to get a drug to market is expensive without any delays.  The way I would look at the 325 m in this case is that it does not exist bc all of it will be used getting those drugs through the pipeline.  Will revenue be coming in from the triple drug enough to cover the development cost of the pipeline in 3 years?  I doubt it.  They will need to Prioritize the pipeline or they will need to raise money in a few years.

 

Not saying this is a bad company but their is a reason biotechs have a history of kicking people in the balls.  It's a very tough business to be in. 

 

Also not all of these drugs are going to be successful.  How much resources will be spent on a drug that will fail a trail? 

 

While you do have 1 approved drug the expected revenue (for the year) covers the cost of development for 1qtr for 1drug.  The problem most biotechs run into is they spread themselves thin trying to support multiple drugs when they really don't have the resources to do that.  One day they wake up broke all because they didn't want to focus their effort.

 

About the triple. It is not really a new drug trying to compete with old drugs. Imagine if you were taking vitamin d, vitamin c, and fish oil 2 to 3 times a day at different times. Now along comes the multivitamin, which you only take once a day, and the multivitamin is made by the same people who make the vitamin d, vitamin c, and fish oil, with all the distribution and resources to make the launch successful. GSK is the market leader in the space, and has referred to the triple as "the future". Maybe it's not ethical to repackage these three drugs into one and call it a new drug, but it doesn't take much to believe that it can gain some market share.

 

Biotechs are heavily shorted bc the odds are in their favor that a company will fail bc the approval process is so difficult for smaller companies to succeed.  Even when they do get a drug approved it's no guarantee that demand will show up for the drug.  And ramping up production is a whole other can of worms.

 

I agree that biotechs as a whole are probably an area to stay away from. I'm not long any other biotechs because the gap in valuation and market value is just too high. This one particular name seems different(famous last words). Almost all of the drugs that I mentioned.... the triple, 4208, TD-5108, TBPH partnered with other companies that have committed to paying for all or most of the costs for development.

 

For example, for the triple, there are no costs associated to TBPH because GSK is paying for everything. Mylan picks up all the costs to get 4208 to approval(paying up to $200M to TBPH) and then the company shares the costs after. TD-5108 is similar with alfa wasserman. Then they also have an approved drug that may or may not be worth anything ramping up sales. Also I'm a little reluctant to value $325M of cash at 0. I'm more comfortable with a company that has cash that is burning it than a company that has future cash that they haven't earned.

 

While I know there are a lot of moving parts here, but I think there is considerable value and we should look more into the specifics of this company instead of generalizing about biotechs as a whole.

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With all do respect I've looked at it and while they have partnered with a couple of drugs it doesn't nearly cover all of the pipeline they are working on. 

 

Due to how much cash is coming into the company right now from actual revenue I would reconsider not treating the 325m as 0.  Once they start burning cash due to a setback (which occurs with every company) the short interest will sure have it as one of their bullet points. 

 

One other suggestion since someone has posted references to analyst opinions and price targets on here.  Those companies are the same companies that will be used when capital is raised.  They have a financial benefit to make this sound more rosy then it really is.

 

Could someone come in and buy them out?  Of course, but that should not even be considered when looking at a drug company.  Do they have something that treats a disease in a way that is 300X's better then the competitor?  Or do they have something that is the only cure for a condition for a verifiable market of decent size (that is sized properly).  These are the important questions that should be considered. 

 

Also keep in mind that for every drug you do get approved there will be a lawsuit regarding the patents as the generic manufactures will try to get into the game then.

 

I have no dog in this fight but just giving you some insight from what I have learned over the years regarding drug companies.

 

 

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A couple other things to keep in mind your one short article on Seeking Alpha whether valid or not from the stock being hammered due to the skittish nature of people investing in biotechs.  A short position now this and will use this fear against people to make a profitable trade.  I have even seen them file a complaint with the FDA for why a drug should not be approved (with the most craptastic reasoning behind it) just b/c the leak of the challenge would tank the stock.

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With all do respect I've looked at it and while they have partnered with a couple of drugs it doesn't nearly cover all of the pipeline they are working on. 

 

Due to how much cash is coming into the company right now from actual revenue I would reconsider not treating the 325m as 0.  Once they start burning cash due to a setback (which occurs with every company) the short interest will sure have it as one of their bullet points. 

 

One other suggestion since someone has posted references to analyst opinions and price targets on here.  Those companies are the same companies that will be used when capital is raised.  They have a financial benefit to make this sound more rosy then it really is.

 

Could someone come in and buy them out?  Of course, but that should not even be considered when looking at a drug company.  Do they have something that treats a disease in a way that is 300X's better then the competitor?  Or do they have something that is the only cure for a condition for a verifiable market of decent size (that is sized properly).  These are the important questions that should be considered. 

 

Also keep in mind that for every drug you do get approved there will be a lawsuit regarding the patents as the generic manufactures will try to get into the game then.

 

I have no dog in this fight but just giving you some insight from what I have learned over the years regarding drug companies.

 

I appreciate your thoughts and any that might give a better picture of what might happen. I'm just trying to buy something where I get more than what I pay. This seems like one of those situations, even with all the uncertainties. It could very well turn out that this dollar that I bought for .50 isn't really a dollar, but I haven't seen a lot in the fundamentals(lol drug company fundamentals). This isn't the typical good company trading at low multiple of earnings, but I think it's a gem hidden in place where not a lot of people will look.

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With all do respect I've looked at it and while they have partnered with a couple of drugs it doesn't nearly cover all of the pipeline they are working on. 

 

Due to how much cash is coming into the company right now from actual revenue I would reconsider not treating the 325m as 0.  Once they start burning cash due to a setback (which occurs with every company) the short interest will sure have it as one of their bullet points. 

 

One other suggestion since someone has posted references to analyst opinions and price targets on here.  Those companies are the same companies that will be used when capital is raised.  They have a financial benefit to make this sound more rosy then it really is.

 

Could someone come in and buy them out?  Of course, but that should not even be considered when looking at a drug company.  Do they have something that treats a disease in a way that is 300X's better then the competitor?  Or do they have something that is the only cure for a condition for a verifiable market of decent size (that is sized properly).  These are the important questions that should be considered. 

 

Also keep in mind that for every drug you do get approved there will be a lawsuit regarding the patents as the generic manufactures will try to get into the game then.

 

I have no dog in this fight but just giving you some insight from what I have learned over the years regarding drug companies.

 

One correction is that the company actually had only $275M in cash at the end of Q1 2015.

 

I 100% agree with you that TBPH is going to burn through cash like Elizabeth Taylor used to burn through husbands, but I still don't think it is correct to treat the cash as having zero value. Is the company better off having the cash than not having it? Presumably the answer is yes, so the cash clearly has some value.

 

I also agree that analysts are inherently bullish for structural reasons. I posted the Merrill analysis not because I agreed with it, but just to illustrate that even an analysis that is very bearish on what many consider TBPH's most valuable asset (the closed triple royalty) STILL comes up with a price roughly 50% higher than the current share price.

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  • 1 month later...

Q2 Results out.

 

Company still has $250M of cash on balance sheet. Ex-Cash, company is valued at $150M. You are buying pipeline of 6 Phase 3 trials to be completed in the next two years for $150M.

 

Vibativ sales have run into issues, and i don't like how the company issuing new shares.

 

I was also on the conference calls and there were literally 0 questions from analysts so that's a good sign.

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  • 7 months later...

GSK filed a 13D on 3/24. Previously GSK has filed 13Gs. I did a case study of IDIX where something similar happened prior to IDIX getting bought out. I believe there is a high probability GSK makes an offer for TBPH eventually.

 

P.S. another interesting fact. The management teams stock based comp is 4x their normal cash salary and has options that don't start to be worth anything until $23 dollars.

 

What's the quote again? never think about anything when you should be thinking about incentives?

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Jawn, have you also taken a look at INVA (previously it was calledTHRX)?

 

Yes I have looked at it. TBPH is a spin-off of THRX. THRX is a royalty company whose main asset are royalties from GSK's respiratory drugs. I thought THRX was unattractive relative to TBPH because

 

1. The parent took out debt and gave the cash to TBPH for the spinoff

2. The CEO left THRX to be CEO of TBPH

3. The respiratory drugs THRX collects royalties from will likely be cannibalized by GSK's triple therapy.

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Jawn, have you also taken a look at INVA (previously it was calledTHRX)?

 

Yes I have looked at it. TBPH is a spin-off of THRX. THRX is a royalty company whose main asset are royalties from GSK's respiratory drugs. I thought THRX was unattractive relative to TBPH because

 

1. The parent took out debt and gave the cash to TBPH for the spinoff

2. The CEO left THRX to be CEO of TBPH

3. The respiratory drugs THRX collects royalties from will likely be cannibalized by GSK's triple therapy.

 

I agree with some of Jawn's statements. As a practicing pulmonologist, I think triple drug therapy will largely cannibalize Anoro revenues. Breo may be less affected by it. The only potential upside is that triple drug therapy may be such a game changer that the volume of triple drug Rx is greater than the combined sum of all prior platforms.  In such an event, INVA still benefits.  There are other drug companies working on triple drug Rx ( like Novartis presented at recent meetings ) and there will be a huge first mover advantage followed by the one that can contract best with insurance companies.

 

The headwind for all drug companies will be the presidential election . It appears almost everyone is going to take a tougher stand on drug pricing.

 

 

 

 

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GSK's closed triple royalties will go 85% to TBPH and 15% to INVA.  My guess is that given their relationship etc., INVA will buy out or increase that royalty stake from TBPH.

 

I don't think that's likely. THRX doesn't have the cash to buy it out. Also I don't think THRX will be able to increase the royalty stake without stealing from TBPH's shareholders.

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GSK's closed triple royalties will go 85% to TBPH and 15% to INVA.  My guess is that given their relationship etc., INVA will buy out or increase that royalty stake from TBPH.

 

I don't think that's likely. THRX doesn't have the cash to buy it out. Also I don't think THRX will be able to increase the royalty stake without stealing from TBPH's shareholders.

 

I am still wondering why Baupost has larger position in THRX than in TBPH. I guess there is a possibility that Klarman is not done building his position in TBPH.

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INVA(THRX) just posted it's first profitable quarter ever at end of 2015. They received ~$70 million in royalty revenues, and they are also buying back shares. There is a chance GSK buys the remaining portion of INVA they don't own instead of continuing to pay royalties.

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GSK's closed triple royalties will go 85% to TBPH and 15% to INVA.  My guess is that given their relationship etc., INVA will buy out or increase that royalty stake from TBPH.

 

I don't think that's likely. THRX doesn't have the cash to buy it out. Also I don't think THRX will be able to increase the royalty stake without stealing from TBPH's shareholders.

 

Baupost owned THRX before the spinoff. they actually added slightly to their TBPH stake and reduced their THRX stake.

I am still wondering why Baupost has larger position in THRX than in TBPH. I guess there is a possibility that Klarman is not done building his position in TBPH.

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