2023-09-08 10:12:51 ET
Summary
- Theravance Biopharma has pushed into congestion in 2023, backing and filling throughout the year.
- Its YUPELRI label offers targeted bronchodilation for COPD treatment, but isn't yet a long-term compounder.
- Collaboration revenues and YUPELRI sales are increasing, but the sentiment remains neutral and valuation is rich.
- Net-net, rate hold.
Investment Briefing
After rigorously examining the investment prospects of Theravance Biopharma ( TBPH ), it would appear there are a lack of catalysts to see it sell higher, leading to 1) flat sentiment in the stock and 2) rich multiples at its current performance.
The company's YUPELRI label is a noble formulation that offers treatment benefits to those with chronic respiratory disease. However, as readers of this channel will know, I am after long-term capital compounders that are also providing medical breakthroughs to complex disease segments. The combination of these 2 factors is quintessential to any buy rating on our books. These points in mind, I rate TBPH a hold, keeping an eye on its Viatris collaborations for the remainder of FY'23.
Figure 1.
Critical facts underlining hold thesis
Brief overview of YUPELRI and market economics
YUPELRI is a long-acting muscarinic antagonist ("LAMA") bronchodilator indicated in the management of chronic obstructive pulmonary disease ("COPD"). COPD is a chronic respiratory condition, underscored by persistent airflow limitation and breathing difficulties, especially on exertion. It includes the combination of chronic bronchitis and emphysema, often attributed to long-term exposure to irritating gases or, in particular, smoking. The typical management of COPD usually involves a variety of therapeutic interventions, such as pharmacology, pulmonary rehabilitation, lifestyle changes, and so forth.
YUPELRI works by competitively blocking the M3 receptor subtype, often highly expressed in the smooth muscles of the airways smooth muscle. This in turn prevents acetylcholine-induced bronchoconstriction- i.e., airway constriction. Blocking this relaxes the airway's smooth muscle, ultimately increasing airflow. This 1) reduces the labour of breathing, and 2) helps in oxygen delivery across the lung/blood border.
Three critical factors differentiate YUPELRI from conventional COPD treatments:
- Unlike short-acting bronchodilators, it specifically targets muscarinic receptors located in airway smooth muscle, providing highly focused and targeted bronchodilation. Muscarinic receptors can be seen as 'relaxation' sensors.
- YUPELRI's antagonistic action on the muscarinic receptors also interrupts the parasympathetic nervous system's bronchoconstrictive signals, which is distinct from Beta-2-agonists commonly used in COPD treatment that target the sympathetic nervous system. Consider the sympathetic NS as the 'fight or flight' mechanism, aimed at getting us 'fired up'. In contrast, the parasympathetic NS is the 'rest and digest' system, aimed at relaxing us. So, not only does it directly relax the airways from constriction, but it also blocks the nerve signals that would otherwise cause them to constrict in the first place.
- This mechanism of action minimizes side effects related to non-specific receptor interactions. Compared to corticosteroids and other bronchodilators, for instance, this is quite appealing as both of these classes come with a raft of short-term side effects, like trembling, rapid heartbeat, and oral thrush.
In terms of the market opportunity-well, the COPD treatment market has evolved significantly over the years. Traditionally, the primary classes of medications used in COPD management include bronchodilators (drugs that are short-acting and long-acting Beta-2-agonists and anticholinergics) and corticosteroids. Combination inhalers containing both bronchodilators and corticosteroids are also common. This is where YUPELRI's introduction could set it apart. The market was valued at $18.1Bn in FY'22 and is forecast to grow at ~5% geometrically into 2032, hitting ~$29Bn by then.
Q2 FY'23 insights-YUPELRI numbers, capital returns
The company's Q2 numbers do a great deal in setting the bedrock for FY'23 expectations. My takeouts are listed below, and centre around its collab. revenues and YUPELRI numbers.
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Collaboration revenues stretching higher
Collaboration revenue from TBPH's Viatris ( VTRS ) partnership was up 26% YoY and clipped $13.7mm. This figure represents 35% of YUPELRI's net sales, (as reported by VTRS, shared by TBPH on the call). It did these sales on OpEx of ~$22mm in the quarter, down sequentially from the $27mm reported in Q1. Figure 2 shows the collaboration revenues on a consolidated basis. Critically, H1 FY'23 numbers were up 12% on last year. Note, that licensing revenues from H1 '22 are excluded in total revenues from H1 last year.
I'd also point out TBPH's return of capital to shareholders-a point which is likely necessary to offset the downsides in its share price this year. The company repurchased >$80mm worth of its own shares in Q2, bringing the total to $264mm since its inception-c.52% of its current market cap as I write. It has ~$61mm left under authorization , expected to finish by yearend.
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YUPELRI numbers compounding in the right avenues
TBPH booked $55mm under Y UPELRI net sales in Q2, up 12% YoY increase [Figure 3]. The collaboration numbers outlined earlier are key here-VTRS does the heavy lifting in commercialization, getting it out to its deep customer networks (including outpatients and community health centres) whereas TBPH focuses on getting it moved throughout hospitals.
On the last point- YUPELRI 's market share in the hospital setting has reached an all-time high of 15.2%. This tells me it is becoming a preferred choice of LAMA class drugs in inpatient settings. This growth is underscored by an uptick in new accounts account alongside forthcoming system additions.
Figure 3.
As a positive, YUPELRI's total prescriptions and new patient starts do continue to grow. Total scripts were up 7.8% QoQ and 25.9% YoY. Meanwhile, new patient starts increased by 5.6% QoQ and 53% over the last 12 months. Still, management estimate ~60,000 COPD patients are receiving the label as treatment, leaving plenty of headroom for it to reach the estimated 2mm or so patients candidates in the treatment market. Based on these patient economics, it would appear the company has only ~3% share of the profit pool that the COPD pharmaceutical treatment market covers.
Sentiment and valuation
Sentiment in TBPH's equity stock appears flat, and we see this in three primary ways.
One, on the weekly cloud chart below, the stock trades into the cloud and has pushed into congestion for the last 2 years just about. Price action is flat, and it has traded within the cloud for the better part of 12 months now. You'd need it to break the $12.00/share mark to suggest TBPH was catching a reasonable bid at these compressed prices.
Figure 4.
Two, Wall Street analysts have revised their targets down on TBPH's forward sales growth down 2 times in the last 3 months. There's been no corresponding revisions higher. This tells me The Street is eyeing a lower set of numbers from the company out to FY'25, not promising to advocate a buy.
Three, options-generated data shows heavy concentration on the puts ladder around a $10.00-$12.50 strike depth. This is actual capital at risk and suggests investors are positioned to sell TBPH at these marks, with it currently trading <$10/share as I write. Again, this supports a neutral sentiment, and therefore a hold rating in my view.
The stock sells at 8.9x forward sales and this is rich in my view given it is 122% to the sector. Consensus eyes $56mm in top-line sales for FY'23, up 10%, stretching up to $97mm by FY'25. This gets you to 5.2x forward sales, meaning it is expected to rate higher by 1.7x on these multiples. To me, these aren't attractive numbers and are further support of the hold rating.
In short
TBPH's Y UPELRI label is an interesting compound with potentially attractive economics, a little farther down the launch curve in my view. However, with a lack of identifiable catalysts, coupled with flat sentiment and rich multiples, I am neutral on the name until something opens up in any of these 3 areas. Further, the stock has plenty to do in order to sell higher in my eyes, and a combination of 1) macroeconomic factors, and 2) lack of profitability is forcing its investors to accept lower bids across 2023. Net-net, rate hold.
For further details see:
Theravance Biopharma: YUPELRI Numbers Don't Substantiate 9x Forward Sales, Rate Hold