Large sales potential for Theravance products
If we look at just the respiratory segment, which is partnered with GlaxoSmithKline plc (ADR) (NYSE:GSK) and now Elan Corporation, plc (ADR) (NYSE:ELN), Theravance Inc (NASDAQ:THRX) now has one FDA approved product and another near approval. The company’s FDA approved product, BREO ELLIPTA, is entering the massive COPD market. It’s reported that this market was $11 billion in 2012 for medications taken twice a day. BREO ELLIPTA will benefit from this market, with peak sales expectations of $4 billion.
The other drug ANORO ELLIPTA will also be used for COPD. The difference is that this drug is taken once daily and is a $4.6 billion market for the once daily Tiotropium. It is estimated that peak sales for this product will exceed $1 billion, and should be near $1.5 billion. However, it is not yet approved, although it has completed studies and is currently awaiting an approval.
How is the revenue split?
When a small biopharmaceutical company has a potential blockbuster product, they almost always partner with a larger company that has more resources to launch. As a result, it cuts the costs associated with marketing, sales, development, and operations. It allows the company to focus solely on the development of other products. In the case of Theravance Inc (NASDAQ:THRX), four total with GlaxoSmithKline plc (ADR) (NYSE:GSK) and a large pipeline for its “new business.”
With GlaxoSmithKline plc (ADR) (NYSE:GSK), Theravance Inc (NASDAQ:THRX) got a fair deal. The company will receive royalties of 15% for global sales up to $3 billion and then 5% on all sales following $3 billion for BREO ELLIPTA. For ANORO ELLIPTA the royalties are upward tiering and range from mid-single digits to 10%.
It is projected that within three years sales of BREO ELLIPTA could reach $1.5 billion, which should then move Theravance into the 5% royalty rate. If we use a 30% growth rate for the following three years then total sales should see more than $9 billion in the first six years after launch. If ANORO ELLIPTA follows a similar pattern of reaching half of its peak sales within three years ($700 million) and continues with the same growth rate (30%), then it could produce total sales of $4 billion in its first six years.
If my estimates are near correct, which are consistent with analysts, then Theravance Inc (NASDAQ:THRX) should receive $1 billion in royalties during the first six years after launch (by 2020). If peak sales are reached for both products then the company would receive annual royalties of $300 million after the six year period. While the company does have two Phase 2 candidates, those products are still far from approval and should not be incorporated into future revenue. Therefore, when we look at Theravance’s deal with Elan Corporation, plc (ADR) (NYSE:ELN), longs should be satisfied.
