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25 April 2014

Summary company financials ($m)


Year end December FY2011 FY2012 FY2013 FY2014
Price ($) 26.80 Revenue 24.5 135.8 4.8 87.1
Market cap ($m) 2,745.0 1.2% 453.8% -96.5% 1730.2%
Enterprise value ($m) 2,533.3 EBITDA -102.2 -5.7 -161.4 34.1
-416.8% -4.2% -3392.2% 39.1%
Free float 73% Net income -115.3 -18.5 -170.7 -161.7
Net debt (cash) -68.3 -76.0 -177.6 -211.7
EV/Sales 71.19 13.63 718.46 29.09
EV/EBITDA -17.1 -326.2 -21.2 74.3
PE -15.7 -109.0 -21.4 -17.0
Theravance Inc.
Revenue growth
EBITDA margin
Theravance Inc is a biopharmaceutical company with a pipeline of internally discovered product candidates and strategic collaborations with
pharmaceutical companies. The company's main partnership is with GlaxoSmithKline (GSK) who also own 27% of Theravance equity.
Theravance has a $2.5bn Enterprise Value but little current revenue nor earnings to show for it. Current launches of respiratory drugs
however may generate royalty streams for Theravance at estimated $600m a year.

Theravance's respiratory portfolio of inhaled medicines, to be marketed by GSK, has the potential to be most comprehensive in the industry
serving wide range of patients with chronic obstructive pulmonary disease (COPD) and asthma who have different needs and different
severities of disease with single-mechanism, dual-mechanism and potentially triple-mechanism therapy.

Within this respiratory portfolio, in 2013 Theravance achieved FDA approval for Anoro Ellipta, a long-acting dual bronco dilator for treatment
of COPD. The drug is being launched in Q1 2014 and will the only available once-a-day treatment for COPD. The addressable global market
size for the treatment is $8bn and in this market the extant competitors are both twice a day, single broncho dilator drugs GSKs Advair and
Pfizers Spiriva. Due to its superior once-a-day requirement, Anoro should reach high global market shares. Anoro will be marketed by GSK
and Theravance will receive a 6.5-10% royalty scale.

Theravance also achieved in 2013 FDA approval for Breo, which is a single bronco dilator and steroid combination for the treatment of
athsma. Breo was launched late 2013 and, like Anoro, will be the only once-a-day treatment in a market currently dominated by twice-a-day
drugs including GSKs Advair and AstraZenecas Symbicort. The addressable global market size for the treatment is $15bn, the drug will also
be marketed by GSK, and Theravance will receive a 15% royalty rate.

Whilst Anoro and Breo may be considered to be first-in-class new drugs launching onto a combined $27 billion global target market, with a c.
10% blended royalty rate to Theravance, for conservatism we assume a base case $600m for the combined annual royalties to Theravance
from these drugs. Theravance has a $2.5bn enterprise value.

On this basis alone the investment in Theravance may be considered. However, the valuation also attributes little or no value Theravances
pipeline of additional drugs in development, perhaps unfairly given Theravance's track record . Pipeline highlights include:
- A once-a-day Long-Acting Muscarinic Antagonist (LAMA) nebulizer for COPD. Currently there are no comparable once-a day nebulized LAMA
products available in the market or in development for the treatment of COPD patients. Theravances product in this category TD-4208 is
currently at Phase IIb. The patient set for the drug is 5-10% of the COPD market, and is complimentary to the GSK Theravance collaboration
COPD products.
- A dual serotonin and norepinephrine reuptake inhibitor (SNRI) for the treatment of chronic pain. Theravance sees a significant opportunity
for their product that provides pain relief without the serotonergic side-effects in current SNRI medications such as Cymbalta. TD-9855 is
currently being evaluated in an ongoing Phase II study with results expected during the first half of 2014.
- Other drugs in development of note include two Phase II stage candidates for gut intestinal mobility. Candidate TD-5108 for patients with
either diabetic or idiopathic gastro paresis, and candidate TD-8954, for patients who require rapid restoration of upper and lower gut
intestinal motility.

Several market datapoints are also of note with regard to the Theravance valuation:
* Over the last 12 months, GSK has increased its stake in Theravance by $135m, paying between $34.62 and $37.65 a share. The mid point of
these transactions, $36.14, is a 35% premium to Theravance's current share price of $26.80.
* GSK management on conference calls and in discussions with investors note that GSK's total respiratory sales is $7.4bn, and $5.4bn of this
is Advair (which is moving to generic). Whilst they do not give individual guidance for Anoro and Breo, they do guide that they expect with
the launch of these drugs they expect their entire respiratory portfolio still to grow revenues. This implies c. $6bn sales target for Anoro and
Breo, which at 10% blended royalty rate would support our base case of a $600m per annum royalty stream to Theravance.
* During Theravance's March 11 2014 conference call, CFO Michael Aguiar stated that the spin off plans started as far back as 2006-7, when
the "overall company valuation at that time" had "zero at best" in it for the Theravance pipeline portfolio. Theravance's share price in 2006-7
ranged from $20.50 to $35.00 a share (mid point $27.75), compared to the $26.80 share price today.
* In 2013 -- Elan bid, ultimately unsuccessfully, $1bn to buy the rights to 21% of the royalties from Theravance's respiratory drug portfolio.
The proposed transaction valued the portfolio at $4.76bn, a 90% premium to Theravance's current EV of $2.5bn, and did not include any
rights to Theravance's pipeline drugs in development.

Theravance has announced it is to separate its businesses into two independent, publicly traded companies in Q2 2014. The first company,
Theravance Biopharma, will own the pipeline drugs in development, whilst the second company, Theravance Inc, will have the rights to the
royalties to the recently launched respiratory drugs. The separation of the group may help investors focus on the value of its constitutent
parts. We also believe that post spin-off, GSK should logically acquire the royalty co, as this will then allow GSK to fully consolidate its
respiratory drug platform into one entity. However, we obviously have no insight into GSK's thinking on this.

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