Theravance Inc (THRX) Looks to Reward Shareholders by Splitting Into Two Distinct Companies

Page 1 of 2

Theravance Inc (NASDAQ:THRX)California-based Theravance Inc (NASDAQ:THRX)’s announcement that it would split into two distinct companies has drawn a sharply positive reaction from investors.

As part of the split, the pharmaceutical company looks poised to turn its current drug-marketing joint venture with London-based GlaxoSmithKline plc (ADR) (NYSE:GSK) into an independent firm. Meanwhile, it will create a development-focused biopharmaceutical company out of its existing R&D division. Whereas the first firm could generate long-term annual revenue of more than $4 billion through sales of pre-approved drugs, the R&D firm will be limited only by its ability to develop successful compounds and treatments.

Theravance Inc (NASDAQ:THRX) is not currently profitable, and the company has recently posted a worrying decline in R&D expenditures. As such, this split should not be construed as a slam-dunk deal. Indeed, the development-focused firm could easily turn out to be a disaster in the making. At the same time, there may be tremendous opportunity for profit in both companies. Investors who believe that Theravance has some promising drugs in its pipeline would do well to investigate this deal further.

At this point, Theravance Inc (NASDAQ:THRX) primarily concerns itself with finding, developing and commercializing various biopharmaceutical compounds for use in a variety of medical applications. The company has a number of compounds in varying stages of development and approval, including an adult ADHD treatment in Phase II clinical trials and several respiratory treatments that may be commercialized within the next two years. Some of the company’s most promising drugs and compounds have been developed in partnership with GlaxoSmithKline plc (ADR) (NYSE:GSK), a multinational pharmaceutical company with a market capitalization of over $120 billion. GlaxoSmithKline’s most recognizable commercial drugs and compounds include the NicoDerm smoking cessation aid, the Polident denture adhesive and the Tums over-the-counter antacid.

Financial Comparison with Competitors

It goes without saying that these two companies are very different. Although they have few direct competitors in common, it might be instructive to compare them to a company that has some experience with R&D spin-offs, PDL BioPharma Inc. (NASDAQ:PDLI).

Compared to GlaxoSmithKline, PDL BioPharma Inc. (NASDAQ:PDLI) and Theravance both have anemic market capitalizations. In 2012, PDL earned almost $212 million on revenue of about $374.5 million. ROA for PDL was 79% and grew its revenue by 18%. By contrast, Theravance Inc (NASDAQ:THRX) posted a loss of $140.5 million on paltry revenue. It is hoped that the upcoming split will boost Theravance’s revenues dramatically. For its part, GlaxoSmithKline plc (ADR) (NYSE:GSK) earned $6.8 billion on $42.2 billion gross revenue in 2012. PDL BioPharma Inc. (NASDAQ:PDLI) is up 22% in the last year and Theravance is up 63%.

Although Theravance Inc (NASDAQ:THRX) has adequate cash reserves of nearly $560 million, it also has debts of about $460 million. PDL has a cash balance of $148.9 million to complement a debt load of about $310 million, and heavily indebted GlaxoSmithKline finds itself with about $6.3 billion in cash on hand to around $31.1 billion in debt.

The Split’s Components: One Safe, One Risky?

Due to the very different business models to which each split component will inhere, industry observers believe that Theravance Inc (NASDAQ:THRX) is trying to distance its risky R&D division from its more predictable biopharmaceutical partnership. With an infusion of cash from GlaxoSmithKline, this latter component will have several opportunities to create and market a big-name drug that could return capital to the company’s shareholders in a big way. Indeed, a key FDA approval milestone recently made this outcome significantly more likely. If final approval for the partnership’s COPD medicine comes through, it could turn into the company’s first successful compound.

Page 1 of 2