Theravance Biopharma, Inc. (TBPH) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon, and welcome to the Theravance Biopharma conference call. At this time, I would like to inform you that this call is being recorded. [Operator Instructions]. And now I would like to turn the call over to Gail Cohen, Corporate Communications. Please go ahead.

Good afternoon, everyone, and thank you for joining us on the call today. As always, I remind you that portions of the following discussion, including responses to questions, contain statements that relate to future events and performance rather than historical facts and constitute forward-looking statements. Our actual results might differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause results to differ materially from our forward-looking statements is described further in this afternoon's press release, Slide 2 and in our SEC filings. As noted on Slide 3, that the tender offer for the convertible notes of Theravance Biopharma referenced in this document has not yet commenced. At the time the tender offer is commenced, the company will file with the SEC a tender offer statement on Schedule TO. Joining me today are Rick Winningham, Chief Executive Officer; and Andrew Hindman, Chief Financial Officer. Now I will hand the call over to Rick.

Thanks, Gail. On Slide 4, today, we announced that we've entered into a definitive agreement with Royalty Pharma to sell Theravance Biopharma's 85% economic interest in the sales-based royalty rights on worldwide net sales of GSK's TRELEGY ELLIPTA for over $1.5 billion in potential total value. We firmly believe this transaction will unlock the strategic value for our interest in TRELEGY upfront, near to medium term as well as the long term, will enable us to deliver a debt-free balance sheet and return capital to shareholders and position Theravance Biopharma for continued value creation with a focus on YUPELRI and ampreloxetine. Immediately after announcing this TRELEGY Royalty transaction, we intend to initiate a multistep process to eliminate all outstanding debt and return capital to shareholders. At the completion of the delevering process, we expect to be well capitalized with a streamlined and debt-free balance sheet. And together with the restructuring announced last year and a close focus on spending, we will have reset the financial profile of Theravance Biopharma. Today's announcement is another step in the successful execution of a plan that we began to implement last September. Beyond delivering strategic value for our economic interest in TRELEGY Royalties in the near, mid and long term, Royalty Pharma will provide up to $40 million in additional capital to accelerate the development of ampreloxetine in a capital-efficient manner. The new capital supports the company in creating value for this potential first-in-class treatment for symptomatic neurogenic orthostatic hypotension, referred to as nOH in patients with multiple systems atrophy, abbreviated sometimes as MSA, a rare neurological condition. At present, MSA patients suffering from symptomatic nOH have no durably effective and safe therapies available to them. We plan to finalize the ampreloxetine clinical study protocol with the FDA in the MSA patient population, so a trial can begin in early 2023. The Theravance team with our partner, Viatris, will continue to drive YUPELRI commercial performance, and we will be operating from a position of financial strength. In total, this transaction with Royalty Pharma will significantly support Theravance's overarching purpose and goals as a biopharmaceutical company focused on delivering medicines that make a difference and creating shareholder value. Now I'll hand it over to Andrew to elaborate on the financial details.

Thank you, Rick. And turning to Slide 5. As Rick mentioned, we've worked hard to unlock the strategic value of our interest in TRELEGY ELLIPTA for over $1.5 billion in potential total value in three separate deal components with Royalty Pharma: First, the upfront value of a cash payment of approximately $1.1 billion in exchange for all of our units in Theravance Respiratory Company, LLC, representing 85% of our economic interest in the sales-based Royalty rights on worldwide net sales of GSK's TRELEGY ELLIPTA; second, midterm value in the form of potential milestone payments up to an aggregate of $250 million, which will be paid upon the achievement of various TRELEGY revenue thresholds throughout calendar years 2023 through 2026; and thirdly, a retained long-term value in the form of the return to Theravance Biopharma of our 85% interest in the TRELEGY royalties in what we are calling the Outer Year Royalties or OYR, in some of our documentation. The Outer Year Royalties begin in 2029 and will remain until our contractually defined royalty term expires on a country-by-country basis thereafter. We calculate the net present value of these Outer Year Royalties as approximately $200 million derived from GSK, Bloomberg analyst consensus for TRELEGY through 2032 for U.S. sales and through 2034 for ex U.S. sales. This creative transaction structure monetizes our economic interest in TRELEGY royalties and allows Theravance Biopharma to benefit from significant near-term cash value as well as retaining medium and long-term value of TRELEGY royalties, which we expect will continue to benefit from GSK's superb global commercial -- sorry, superb global commercial execution and lead to the continued long -- strong performance of TRELEGY over time. This monetization also removes the uncertainty with the receipt of TRELEGY royalties as the Outer Year Royalties will be paid directly from Royalty Pharma to Theravance Biopharma, removing the role of Innoviva as Manager of TRC LLC. Turning to Slide 6. In addition to the TRELEGY component of the transaction being one of the largest royalty monetizations in biopharmaceutical industry history, as Rick mentioned, Royalty Pharma is investing further in Theravance Biopharma with up to $40 million in exchange for an unsecured royalty interest in ampreloxetine. This consists of a $25 million upfront payment and an additional $15 million payment upon the first regulatory approval of the ampreloxetine by either the FDA or the first of the EMA or all four of Italy, Germany, Spain and France regulatory authorities. In return, Royalty Pharma will receive future royalties of 2.5% on annual global net sales of ampreloxetine up to $500 million and 4.5% on annual global net sales of ampreloxetine over $500 million. We believe that this investment validates the potential event that ampreloxetine can deliver to the MSA patient community for the management of symptomatic nOH. Moving to Slide 7. Theravance Biopharma remains laser-focused on the continued execution of our business transformation. And with the TRELEGY Royalty transaction, we believe we will be able to deliver value to shareholders immediately. Through deleveraging our balance sheet, then returning excess capital to shareholders and finally, focusing on attaining sustainably cash flow positive business operations on the performance of YUPELRI. This transaction is subject to the following limited closing conditions: legality, compliance by the parties with the covenants set forth in the equity purchase and funding agreement and the redemption of the company's nonrecourse TRELEGY notes issued by [indiscernible] (0:09:31) of financing subsidiary of Theravance Biopharma. The transaction is expected to close upon 10 business days after this press release date of today, concurrent with the repayment of the non-recourse TRELEGY notes, approximately $420 million, which includes the 5% redemption premium. We will then initiate a tender offer to retire the approximate $230 million in principle of our 2023 Convertible Senior Notes. With this plan to retire all outstanding debt, we will streamline our balance sheet and then return excess capital to shareholders. We are working with our external financial and legal advisers to finalize details of our capital return program, and we will provide further details in the near future. After all of this, we believe Theravance Biopharma will have an attractive financial profile with an estimated cash balance of approximately $430 million before the capital return program. We now anticipate we will approach breakeven cash flow in the second half of 2022 without the cash flow from our interest in TRELEGY royalties driven by disciplined spending within R&D and the growth of YUPELRI with the potential for significant cash flow generation beyond 2022. Theravance Biopharma remains focused on the key value drivers of our business. At the core, it's YUPELRI, the first and only once-daily nebulized bronchodilator approved for the U.S. for the maintenance -- approved in the U.S. for the maintenance treatment of patients with COPD, which continues to increase its share of the long-acting nebulized COPD market. Sell-side analysts covering Theravance Biopharma, estimate YUPELRI has the potential to generate U.S. peak sales of approximately $400 million annually. We announced at the start of this year, the enrollment of the first patient in the YUPELRI Phase IV PIFR-2 study. The impact of this study is not included in Wall Street sell-side analysts peak sales estimates for YUPELRI. And finally, with respect to ampreloxetine, the Phase III data in the prespecified MSA population showed a clear benefit across multiple clinically meaningful endpoints for the treatment of MSA patients with symptomatic neurogenic orthostatic hypotension. We reported the results in April 2022 and have recently held a Type C meeting with the FDA. Coming out of this meeting, we have aligned on a path to an NDA filing with one additional Phase III clinical study in MSA patients with symptomatic nOH. We expect this additional Phase III study to begin enrolling as early as the first quarter of 2023, and to see efficiencies in both time to enrollment and overall R&D expenses with the $25 million investment by Royalty Pharma funding the majority of these Phase III costs. In parallel to conducting the final Phase III study, we will continue discussions with strategic partners to maximize the global opportunity for ampreloxetine. And with that, I'd like to thank you for all your attention and now hand the call back to the operator for questions.

[Operator Instructions] Our first question will come from David Risinger with SVB Securities.

I wanted to say congratulations on a phenomenal transaction and set of announcements today. I have three questions. First, with respect to ampreloxetine, you had mentioned that $25 million covers most of the Phase III trial cost. But if you could talk about total ampreloxetine spending that you forecast over the next 3-plus years, how much do you plan to invest in aggregate, so we understand how much Royalty Pharma is funding out of that total figure? Second, with respect to returning capital to shareholders, I know that you mentioned that you're going to be providing more detail soon. Obviously, you've indicated you're going to have $430 million in cash net. Could you provide some framework for how much of that you are likely to return to shareholders? And then the next question is with respect to the operating expense outlook, are there any changes to your spending plans for the company?

Yes. Thanks, David. This is Rick, and I'll take a couple of these and then ask Andrew to chime in. Well, the results from the Type C meeting from FDA are relatively recent. We were quite encouraged coming out of that meeting with the overall -- what we believe is the overall sample size that we would expect. Obviously, we're still working through that. But I do think it's quite significant when you look out over the next -- look out over the next couple of years, that $25 million is likely to cover a majority of these Phase III costs that we anticipate and the one Phase III study that's required on top of the database that we already have an MSA. And that's about all the guidance I can provide today. Obviously, we'll be providing perhaps a little bit more guidance as we get into our second quarter call in a month or so and then in quarters beyond that. Operating expense outlook, I mean, we're continuing to take a look at our operating expenses with a focus -- really twofold focus. One of them is driving YUPELRI sales, we'll obviously talk about the second quarter in our upcoming call. But if you follow the new prescriptions, which only really indicate directionally how YUPELRI is going. We've -- business has continued to grow and beginning to come out of what we think is the COVID endemic, I would say. And operating expenses were pretty stable in terms of what we projected for this year and '23 will be what -- we'll certainly address that at the appropriate time. Andrew, do you want to talk for a bit about returning capital?

Sure. And the only other thing I'd add on the OpEx outlook is to reiterate what Rick said is we're not changing R&D or SG&A expense guidance which we've obviously put that out there on our last call. The only incremental change is with respect to -- with this monetization, we will no longer be receiving the 25% of our 85% of the TRELEGY royalties. So -- and that's why we've talked about reaching cash flow positive by the end of this year and then sustainably cash flow positive on the back of YUPELRI in 2023 and beyond. But with respect to the return of capital program, yes, $430 million is what we estimate to be on the balance sheet after the full deleveraging process. And we're actually having a lively debate internally, honestly about how much capital -- how much cash we should keep on the balance sheet in the macro environment that we're operating in, given the needs of ampreloxetine in particular, which we think is a very highly positive NPV program in MSA. And so we're not able to go into further detail or in a position to go into a further granular detail at this point in time. But as Rick alluded to, we'll be coming dialoguing with shareholders and also coming back with a more concrete program once the delevering process is completed.

And an important -- obviously, an important part of that is, in fact, the tender offer for the convertible debt, which will begin after the repayment of the TRELEGY related non-recourse notes and the guidance that we're giving today on remaining cash really takes into an estimate of taxes associated with the transaction as well. But we'll be filling the market in with more information post the conclusion of the tender offer.

Our next question will come from Liisa Bayko with Evercore ISI.

I just wanted to turn to kind of like what you're going to be -- what your strategy will be. You'll have YUPELRI. You mentioned ampreloxetine, obviously, investing that in MSA. You have nezulcitinib. Is there anything else that you're kind of going to be developing? Or how should we think about kind of your R&D efforts going forward?

Yes. Thanks, Liisa. Yes, that's really the focus. I'd say desist with the sort of the platform of inhaled JAK inhibitors, but certainly coming out of the Type C meeting with the FDA on ampreloxetine that was quite encouraging to us in being able to walk out with what we believe is quite a modest Phase III program for specialty neuro asset like ampreloxetine. And as Andrew highlighted in his comments, we do think YUPELRI has got a significant growth potential ahead of it. And we're again seeing growth in the second quarter that's encouraging, and we should continue to see that over the second half of the year as well as into 2023. So those are really the key assets for the company and our focus going forward.

The only thing, Liisa, I would add is after we do reset the balance sheet and determine the degree of the capital return program, we are looking for -- especially in this environment for opportunities to in-license or acquire products that are complementary to YUPELRI and/or ampreloxetine as we own 100% of the rights to ampreloxetine globally, and it has a very focused commercial footprint. So we'll be looking for ways to add alpha to our business model and business plan through very carefully refined business or corporate development strategy as well.

I would take that Andrew's comment as something to occur over time for us. And so thanks for the question, Liisa.

Can I ask one more?

Yes.

Okay. On YUPELRI, if I recall correctly, and I'm trying to put my notes here to see, but you had -- you did do some restructuring, and I think you adjusted kind of your sales footprint there for your YUPELRI contribution to the hospital side. Are you going to be sort of reinvesting in that now that YUPELRI is maybe taking more of a front seat? Or how should we think about your investment in YUPELRI?

Yes. No. I think where we've landed here with the sales footprint -- sales force footprint that we have is really excellent in the short term, at least quite complementary to the work that Viatris is doing in the field. We have in this year added a number of formularies that -- to the YUPELRI portfolio across the United States. And our field force, although small, is really doing an excellent job in getting YUPELRI on formulary, getting it implemented into the institution, many times in networks of institutions and then getting -- working with Viatris to ensure discharge of COPD patients on YUPELRI when they leave the hospital. So I'd say the outlook for the commercial footprint and the sales organization is pretty stable.

Our next question will come from Douglas Tsao with H.C. Wainwright.

Maybe just as a follow-up to Andrew your comment around business development for some assets complementary YUPELRI and ampreloxetine. Presumably, would YUPELRI be the priority just given the fact that it is already on the market, and you would obviously have some amount of time for ampreloxetine? And then just as a follow-up, just in terms of the Phase III for ampreloxetine, obviously, it's going to be a smaller study. It is going to be sort of a subset of nOH patients in terms of the MSA population. How long do you think it would be to recruit those and you obviously have sites and some experience too?

Yes, Doug, on the ampreloxetine, I think we're still fleshing out the study in terms of sample size with comments coming out of the Type C meeting with FDA. But I think when we get the study started, we'll be able to provide a much better definition of when we expect the study to fully accrue. I think that there are several factors that are going to positively affect the study. #1 is the data actually from 170 with the MSA composite score showing such a significant benefit for patients with MSA. The other -- obviously, the significance of that improvement in MSA -- in the nOH composite score will yield to that smaller sample size. So we should be able to focus on a relatively limited number of centers in order to achieve our accrual objectives. But I think it's quite encouraging that we're making the statement here that the $25 million that we're getting from Royalty Pharma should cover a majority of the Phase III cost for ampreloxetine, we should be able to accrue to that study relatively rapidly. Andrew?

Yes. And to your question about business development or corporate development, I'm not going to go into any greater detail than just highlighting that it could be a third component to our strategy beyond focusing on maximizing the value of YUPELRI. And then ampreloxetine has tremendous value, and we are really excited that Royalty Pharma sees what we see in that. So clearly, the focus will be on generating value from those 2 programs that are -- obviously, YUPELRI, we have a great collaboration with the interest in the U.S. We received royalties ex U.S., china is the next major market that we'll be receiving cash flow from. And ampreloxetine is really -- I believe that, that has a tremendous amount of potential upside for the company's business model. So whether or not we would do strategic transactions in the future that would complement YUPELRI or ampreloxetine, you'll see it in a press release in the future, but we're not going to go into greater detail now. And to Rick's point earlier, the BD corp piece will be over time. I don't want us to get out over our skis on that in the short term.

Our next question will come from Joseph Stringer with Needham & Co.

Congratulations on the deal. We had a clarifying question on ampreloxetine. Andrew, you mentioned -- and correct me if I'm wrong, that you seem to be open to potentially partnering or potentially out-licensing ampreloxetine. I'm just curious if I heard that correctly. And if so, what factors would determine whether or not you sort of kept that program in-house and had some BD activity around that or whether you would partner of the program?

Yes. I mean obviously, the investment here by Royalty Pharma which, again, is an unsecured commitment of capital in exchange for future royalties. That really addresses the capital needs by and large, for ampreloxetine in the clinic and getting it to -- largely getting it to NDA. Obviously, the MSA patients do not only exist in the United States. There's a significant population of MSA patients that exist in Europe. And so in Andrew's comments, he highlighted maximizing the global opportunity for ampreloxetine, I think that that's certainly a second place we look to maximize opportunity. Is there opportunity for us with some sort of relationship in the U.S. that could facilitate, uptake and so forth, there may, in fact, be. But I think what we're focused on right now with ampreloxetine is, in fact, the design of a very efficient study to get this product to MSA patients as fast as possible because as I mentioned, they do not have a durable, safe, effective treatment that treats their nOH.

Our next question will come from Tazeen Ahmad with Bank of America.

Congrats on the deal. A lot of my questions have been asked, but maybe to nuance a little bit. What made you decide that this was the right deal to be doing at this time? And what do you think the most obvious advantage for the company will be in the nearer term? Is it that you have the ability to have more freedom to focus on other parts of your pipeline now? Or is it a pull-forward of plans that you already had in place that maybe you were constrained with in the past for financial reasons for pursuing?

No. I think the significance of the deal for Theravance is that it allows us to capture a significant amount of value for the asset that we had in rights to the TRELEGY royalties and to capture that value at $1.1 billion upfront, keeping the midterm value capture intact for us with $250 million in milestones and then long-term value capture with the Outer Year Royalties, which we estimate based on consensus to be worth approximately $200 million. The upfront cash payment allows us to delever and eliminate the TRELEGY royalty notes will facilitate the tender offer for the convertible debt and leave us in a terrific capitalized position to return capital to shareholders. We've already taken significant action to take expenses out of our business and we're not changing our expense guidance here for 2022. And the focus of the company is going to be remaining on growing YUPELRI and now with the capital provided by Royalty Pharma progressing ampreloxetine into a final step towards registration for MSA patients. So that's really -- Tazeen, thanks for the question. That's really the rationale behind the transaction and why to do the transaction now.

The only thing I would add, Tazeen, the only thing I would add is we've been pretty transparent with the streets getting a lot of questions on why don't you monetize TRELEGY over the course of the last, say, 18 months. And we believe that we have struck the balance on optimizing value. We ran a competitive process. RP did distinguish itself, not only on the quantum of -- and the structuring around TRELEGY, but also on ampreloxetine. So we're really happy with the outcome here.

Okay. And then maybe just one question. In terms of the size of your R&D organization, just can you remind us what portion of the company is focused directly in R&D at this time? And do you have plans to add people, scientists to the company?

No. I think our plans for any additions are quite limited. The R&D organization broadly, I don't know it takes up maybe 50% of our -- 40%, 50% of our headcount, including the medical group and the support to YUPELRI. So that's -- we've got a terrifically talented R&D group that just finished really preparing and then executing an excellent meeting with the FDA, and we look to capitalize on the people -- with the people that we've got. And I think any significant additions will be relatively minor.

It appears we have no further questions on the phone. I'd now like to turn the conference back to Mr. Winningham. Please go ahead, sir.

I'd just like to thank you for joining us today. We're terrifically pleased with the outcome of the transaction. We believe that this does, in fact, create value for shareholders and will enable us to create greater value in the future for both shareholders and patients. And as Andrew mentioned, optimize both the near-term cash flow of $1.1 billion coming in plus the investment in ampreloxetine, the midterm value that we're able to capture through milestones and the longer-term value through Outer Year Royalty. So I thank everybody for joining us to share in this announcement. Please have a great day.

This concludes today's conference call. We thank you for your participation. You may now disconnect.