Description

Quick Summary: Theravance Biopharma (TBPH) is a busted biotech trading at a material discount to NAV. Unlike most biotechs that are cheap on a “hard asset value” basis, TBPH monetized significant royalty assets, cut over 65% of R&D and SG&A, and repurchased 35% of its shares outstanding in the past 2 years. The company today is trading at ~50% of NAV. It has net cash ($2/share), various sales-based contingent payment receivables and royalties ($7-9/share), a 35% stake in a COPD drug called Yupelri that is generating ~$0.65 / share of annual FCF to TBPH, a stage 3 orphan drug called Ampreloxetine, and most importantly, shareholder-oriented board members.

Investment Themes:

• Busted Biotech: In the summer of 2021, three of TBPH’s phase 2 and phase 3 programs failed to meet their clinical trial endpoints, causing the stock price to fall by 55%. The company decided to cut costs by 65% and focus on maximizing the value of its core respiratory assets: a royalty interest in Trelegy and a 35% stake in Yupelri. In July 2022 they sold their Trelegy royalty interest to Royalty Pharma and used the net proceeds to pay down debt and repurchase shares. Two of the largest holders of TBPH joined the board in 2023 which should ensure that the company stays focused on maximizing shareholder return.

• Contingent Payment Receivables: TBPH is entitled to several contingent payments streams, namely 1) near term Trelegy milestone payments, 2) outer year Trelegy royalties, and 3) Yupelri milestone payments.

1. Near Term Trelegy Milestones:
   As part of TBPH’s sale of their Trelegy royalty interest to Royalty Pharma, in addition to the upfront cash consideration, TBPH received the right to milestone payments based on Trelegy’s annual sales from 2023 to 2026. The remaining milestones are triggered as follows:

a.  2024: “Tier 1”: if Trelegy sales are greater than $2,863mm but less than $3,213mm: TBPH receives $25mm. “Tier 2”: If greater than $3,213mm: $50mm

b.  2025: “Tier 1”: if Trelegy sales are greater than $3,063mm but less than $3,413mm: TBPH receives $25mm. “Tier 2”: If greater than $3,413mm: $50mm

c.  2026: “Tier 1”: if Trelegy sales are greater than $3,163mm but less than $3,513mm: TBPH receives $50mm. “Tier 2”: If greater than $3,513mm: $100mm

Trelegy is the first once-daily combination treatment of corticosteroid plus two bronchodilators for COPD treatment. It was launched in 2017 and has grown to an almost $3bn franchise; it is GSK’s second largest drug. Triple therapy has a higher compliance rate and has consequently taken market share from other COPD treatments (e.g. Anoro, Breo, Advair). Sellside analysts covering GSK expect Trelegy’s sales to grow at a ~12% CAGR until 2026, which would translate to an undiscounted 2024-2026 milestone payment of $175-200mm to TBPH ($140-160mm NPV’ed at a 10% discount rate or ~$3.00-3.40/share).

2.  Long Term Trelegy Royalties:
   TBPH’s sale to Royalty Pharma only entitled Royalty Pharma to the economics of TBPH’s Trelegy royalty stream until July 1, 2029 for ex-US royalties and Jan 1, 2031 for US royalties. After this date, the value of subsequent Trelegy royalties accrue to TBPH. Note that TBPH’s royalty agreement with GSK expires 15 years after commercialization in each market (commercial launch of Nov 2017 in the US and 2018-2019 in most international markets). Based on SS projections for Trelegy sales, the outer year royalties are worth ~$168mm ($3.50/share) NPV’ed at a 10% discount rate.

3. Yupelri Milestone Payments:
   TBPH is eligible to receive up to $150mm in milestone payments from Viatris based on Yupelri’s sales in the US, $10mm upon receiving EU regulatory approval, $45mm upon successful development of combination products, and $52mm based on various development and sales milestones in China. The first US sales-based milestone payment of $25mm (based on $250mm of annual sales) seems very achievable. Yupelri’s LTM US sales are already $230mm and Yupelri has grown at a ~10-15% annual CAGR over the past few years.
   

• Potential Yupelri Monetization: Yupelri is a nebulized once-daily antagonist for COPD that is marketed by Viatris. TBPH owns a 35% stake in Yupelri. Key leading indicators such as new patient starts and hospital market share show continuous strong performance and growth. Yupelri is one of a small handful of growing products for Viatris, as most of its portfolio is facing market share and pricing pressure from a growing number of generic competitors. Viatris is currently trading 7.5x EBITDA (including SBC and restructuring). Conservatively valuing TBPH’s stake in Yupelri at Viatris’ consolidated valuation, this asset would be worth ~$5/share to TBPH. However, given TBPH’s low double digit growth rate and ~15 years of remaining patent life, it is probably worth closer to 10-15x EBITDA or $7-10/share.

•  Ampreloxetine: TBPH is in the final stretch of Ampreloxetine’s phase 3 clinical trial with top line data release targeted for 2025. Ampreloxetine treats neurogenic orthostatic hypotension (nOH): a drop in blood pressure that occurs when standing up due to an inadequate release of norepinephrine. Ampreloxetine is specifically targeting nOH that is caused by a rare neurodegenerative disorder called multiple system atrophy (MSA). There are no effective treatments for nOH today, as alternatives are either burdened with serious side effects (e.g. Fludrocortisone causes myocardial fibrosis and congestive heart failure or Midodrine causes hypertension) or are limited in efficacy and convenience (e.g. Midodrine and Droxidopa have modest efficacy for MSA and require 3x/day dosing). Average annual treatment costs of recently approved orphan drugs are north of $200,000 / patient (including Droxidopa, a less efficacious and riskier alternative to Ampreloxetine). There are ~40,000 MSA patients with nOH in the US, which translates to a potential TAM of ~$8bn. I think more realistically Ampreloxetine could do $200-400mm of sales (assuming ~8% penetration and ~$75,000-125,000 wholesale cost).

•  Excess Corporate Cost: TBPH used to have 8 drugs in the clinic and over $300mm of annual R&D and corporate costs. However, the company today is very different: operating a single phase 3 clinical trial for Ampreloxetine and owning a minority share of one commercialized drug alongside various royalty and financial investments. Despite the limited operations, the company is still spending $65-70mm of SG&A, of which $15mm is in corporate stock-based compensation and $10mm cash corporate expenses. Liquidating the company would be highly accretive given its lack of scale. At an 8x multiple, eliminating corporate expense would translate to value creation of almost 50% of the current share price. I think the presence of Weiss and Irenic representatives on the board will be particularly important in keeping the company lean.

Valuation: In my base case, I assume TBPH hits the Tier 1 Trelegy milestone in 2024 and the Tier 2 milestones in 2025 and 2026. For the outer year royalties, I project Trelegy sales in-line with GSK’s sellside consensus. For Yupelri, I assume 13x $32mm 2024E EBIT. I give TBPH credit for $50mm of Yupelri milestones which comprised of: $25mm for hitting $250mm US sales (estimated in either 2024 or 2025) and another $25mm of probability adjusted value for the $500mm US sales and Chinese regulatory approval milestones. I assume risk adjusted peak sales of Ampreloxetine of $100mm (i.e. my low case $200mm of peak sales * 50% probability of success). Valuing Ampreloxetine at 4x risk adjusted 2030 sales discounted at a 10% rate, net of ~$60mm of remaining trial costs, yields ~$165mm of net value. I assume a full corporate burden of $20mm at 8x.

In my low case, I assume only the Tier 1 milestones are achieved for Trelegy, which implies Trelegy sales growth moderating from ~15-25% today to mid-single digit growth rate. For my base case, I haircut my estimate of the Trelegy outer year royalty value by 50%, value Yupelri at 8x EBITDA, and assume Yupelri only hits the $250mm US sales milestone. I assume Ampreloxetine fails and has negative value (the ~ $60mm of remaining trial costs).

In the high case I value Yupelri at 15x EBITDA. I assume Ampreloxetine is worth 6x sales on 2030 sales of ~$300mm (8% penetration or 3,200 patients at ~$94k ASP).

Note my analysis assumes minimal tax drag as TBPH has $450mm of net NOLs, capital loss carryforward, and other tax assets. In addition, they have paid $118mm of tax on the sale of their Trelegy royalties, which should increase the tax basis on their Trelegy contingent payments.

Risks:

• Yupelri Recent Weakness: Yupelri’s recent performance has been slightly disappointing with moderating growth. Management blames seasonality and disruption from the Change Healthcare cyber-attack.

• Trelegy Outer Year Generic Risk: Trelegy’s last patent in the US is set to expire in mid-2031, a few months after the royalty reverts back to TBPH (in Jan 2031). Developing a generic combination device like Trelegy is not straightforward. For example, the first generic competitor to Advair didn’t launch until more than three years after Advair’s patent exclusivity ran out. I expect there to be material (but declining) sales of Trelegy post patent expiration.

• Ampreloxetine Approval Risk: TBPH has experienced two phase 3 trial failures with Ampreloxetine to date. The current phase 3 trial is based on an MSA subgroup analysis of a past trial failure with a different endpoint. While I am generally very skeptical of data mined subgroup analyses from clinical trials, I believe there is a legitimate reason why Ampreloxetine should work in MSA. First, the nature of Ampreloxetine as a norepinephrine reuptake blocker fits with the pathophysiology of MSA. MSA patients have intact sub peripheral nerves and their system still produces norepinephrine, while in the two other subgroups of the prior trial, this was not the case (Parkinsons and pure autonomic failure (“PAF”)). Since the norepinephrine production is already impaired to begin with in Parkinsons and PAF patients, a reuptake blocker such as Ampreloxetine should not be as helpful. Secondly, I think the two failed studies were designed primarily for MSA, while the Parkinson and PAF subgroups were extra arms of the trial (that the company included to try to target a much larger TAM). Although the MSA population in the US is only 50,000 compared to the Parkinsons and PAF population of 1 million+, MSA was ~30% of the patient population in the prior study. Most importantly, the company has done a Type-C meeting with FDA and the FDA has agreed that the prior two studies could be used as supportive data for the registrational filing and have agreed on the endpoint for approval.

Catalyst

- Continued strong performance of Trelegy and Yupelri triggering the payment of sales milestones

- Ampreloxetine top line data in 2025