INVA - NASDAQ

Michael Aguiar - SVP and CFO Rick Winningham - CEO

Steve Byrne – Bank of America David Friedman – Morgan Stanley Howard Liang – Leerink Ronny Gal - Bernstein Stephen Willey - Stifel

Ladies and gentlemen, good afternoon. At this time I would like to welcome everyone to the Theravance conference call. During the presentation all participants will be in a listen-only mode. A question-and-answer session will follow the company’s formal remarks. (Operator Instructions) Today's conference call is being recorded. And now I’d like to turn the call over to Mike Aguiar, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Good afternoon everyone and thank you for joining us. With me on the call today is Rick Winningham, our Chief Executive Officer. First, Rick will review highlights for the quarter and then I will discuss our financial results. Following our comment we will open up the call for questions. Earlier today Theravance issued a press release announcing recent corporate development and second quarter 2014 financial results. A copy of the press release can be downloaded from our website or you call Investor Relations at 650-238-9640 and we will be happy to assist you. Before we get started, we’d like to remind you that this conference call contains forward-looking statements regarding future events and the future performance of Theravance. Forward-looking statements include anticipated results and other statements regarding Theravance’s goals, expectations, strategies and beliefs. These statements are based upon the information available to the Company today and Theravance assumes no obligation to update these statements as circumstances change. Future events and actual results could differ materially from those projected in the Company’s forward-looking statements. Additional information concerning factors that could cause results to differ materially from our forward-looking statements is described in greater detail in the Company’s Form 10-Q filed with the SEC. I’ll now turn the call over to Rick Winningham, our Chief Executive Officer. Rick.

Thank you, Mike and good afternoon everyone. This has been a very exciting time at Theravance. Since, our last call we completed the separation of Theravance Biopharma from Theravance, Inc made significant progress towards hiring a new leadership team at their event and continue to increase the global commercialization at launch footprint of RELVAR BREO, ELLIPTA which we will refer to in the call as RELVAR or BREO and ANORO ELLIPTA, which we will refer to in the call as ANORO, both programs doing partnership with GSK of course. Looking forward we are very excited about the opportunities available to Theravance and believe that we are well positioned with the circle to oriented business strategy, a strong product portfolio and a healthy cash position. Before I begin with the corporate program update, I’d like to mention that in addition to the earnings release today we issued a press release announcing that our Board of Directors has appointed Mike as President and Chief Executive Officer of Theravance, Inc. effective August 15, and effective immediately as the member of the Theravance Board of Directors. I will remain as Chairman of the Board of Directors at Theravance. I would like to congratulate Mike on his well-deserved appointment as Chief Executive Officer which is a tribute to his ability to successfully lead and execute. I look forward to working with him in my role as Chairman with the goal of building a Company focused on generating returns for our stockholders. Over the last 12 years the Theravance and GSK partnership has worked together to bring two important medicine RELVAR BREO and ANORO to the global respiratory market and we are working on a pipeline of other important potential respiratory medicines still in development. I’d like to extend my gratitude to the Theravance’s GSK teams for their support and dedication and commitment to bringing important medicines to patients in need. Turning now to corporate program updates. The strategy at Theravance is to optimize the value of RELVAR BREO and ANORO, maintain low overall cost structure, reduce our corporate cost of capital and to build a recurring revenue business with the goal of targeting stockholders who seek capital returns from growing dividend payments and potential opportunistic future share repurchases. Today, I am pleased to report that the Board of Directors has approved our first cash dividend of $0.25 per share to be paid on September the 18, 2014 in stockholders of record, as of the close of business on August 28, 2014. RELVAR BREO is our lead respiratory program partnering with GSK for the treatment of patients with COPD or asthma. It is a combination (to heal) [ph] respiratory medicine consisting a vilanterol, long-acting beta2 agonist, or LABA and fluticasone furoate, an inhaled corticosteroid, or ICS, delivered in the ELLIPTA dry powder inhaler. As of July 31, 2014 this medicine has been approved in 46 countries and has been launched in 19 countries of the Americas, Europe and Asia. Total product revenues for RELVAR BREO during the second quarter were approximately 18.2 million with royalties, payable to Theravance to approximately $2.7 million. Theravance and GSK remained optimistic about BREO’s potential and GSK is continuing to work with payers to their ongoing formulary management decision cycle. We are pleased with the progress we have made in these negotiations and the positive trend was increased patient access to our respiratory medicines. Earlier this week, two largest PBMs in the US, Express Scripts and CVS Caremark announced important product updates from these commercial formularies. At CVS BREO was removed from the CVS Caremark formulary exclusion list and will be available at Tier 3 without restriction effective January 1, 2015. Express Scripts, BREO will move from Tier 3 to preferred Tier 2 unrestricted position in the Basic Formulary starting in 2015, but unfortunately has not been included in the National Preferred Formulary. These recent wins represent significant increase in total patients covered for BREO. Our second respiratory program with GSK ANORO is a combination dual bronchodilator medicine for the treatment of COPD although it’s very early in the global launch as of July 31st, it has been approved in 39 countries and has been launched in five countries including the U.S., Canada, and the UK and Germany. Total net revenue for ANORO during the second quarter was approximately $8.2 million with resulting royalties payable to Theravance of approximately $0.5 million. As GSK noted during its call, we believe we are in a good overall position with ANORO and slightly ahead of where with BREO at a similar point in the launch in terms of uptake and reimbursement. In particular, we continue to see improved access to ANORO which is now covered by both Express Scripts and CVS Caremark. At CVS Caremark, ANORO will move from its current Tier 3 non-preferred position to a preferred Tier 2 unrestricted position effective October 1, 2014. At Express Scripts, ANORO will move from its current Tier 3 non-preferred position to a preferred Tier 2 unrestricted position on the National Preferred Formulary and the Basic Formulary effective August 1, 2014. While there is still significant work to be completed on the commercial, operational, and strategic fronts, I am pleased with the progress we are now making. In addition, the successful completion of the separation of Theravance Biopharma from Theravance during the second quarter of 2014 was a major milestone for the Company. We believe we'll create substantial value for our stockholders. I will not turn the conference call over Mike Aguiar, our Chief Financial Officer. Mike?

: Thank you, Rick. Before I discuss the results for the quarter, I would like to say how proud I am to work with Theravance over the past nine years. During this time we’ve brought important new medicines for patients such as VIBATIV for patients suffering from resistant gram-positive infections and ANORO and BREO for patients with COPD or asthma. We implemented a unique separation strategy, creating two independent companies with different strategies, goals, and objectives. Additionally, we’ve developed an exceptionally talented finance organization. There will be a significant asset to Theravance Biopharma and its shareholders. I look forward to my role at Theravance into building a royalty base company focus and generating stockholder return. I will not turn to the financials. During the second quarter, Theravance completed the separation and spinoff of Theravance Biopharma from Theravance Inc. The financial impact of this is reflected as discontinued operations accounting which makes a number of adjusting entries to both current and prior periods. These entries remove certain but not all expenses associated with activities of Theravance Biopharma and we clarify them below the line in the income statement. As a result, there will be limited comparability between Q2 financials and our previously reported results and our future operating results. Royalty revenues earned for RELVAR BREO and ANORO for the quarter ended June 30, 2014, were $3.3 million. This was partially offset by amortization of approval and launch milestones that Theravance has paid to GSK of $2.6 million. I would like to remind everyone that this amortization is a noncash reduction of net royalties and that actual royalties received will be higher than recorded GAAP net royalty revenues. Total research and development expenses for the second quarter of 2014 were $2.1 million compared with $2.4 million for the same period last year. This decrease was primarily due to lower external research and development costs partially offset by higher stock compensation expense related to the achievement of certain performance conditions under a performance based long-term retention and incentive program awarded to certain employees in 2011. General and administrative expenses for the second quarter were $8.6 million compared to $5.8 million for the same period last year. This increase was primarily due to higher stock and cash compensation expense related to the previously discussed 2011 incentive program. Total general and administrative stock-based compensation expenses for the second quarter of 2014 were $3.1 million compared with $2 million for the same period last year. Cash, cash equivalents, short-term investments, marketable securities and restricted cash totaled $383.1 million as of June 30, 2014, a decrease of approximately $137.4 million from December 31, 2013. This decrease was primarily due to the initial cash contribution to Theravance Biopharma, registration and launch-related payments to GSK of $100 million and cash used in operations of $105 million. These outflows were partially offset by net proceeds of $434.7 million from the issuance of our non-recourse notes due 2029 and net proceeds of $23.8 million received from issuances of our common stock. Looking forward Theravance’s in a period of transition to the end of the year due to the separation related activities. During this time we will incurring a number of incremental costs such as overlap of management positions, hiring expenses new implementation activities and other transition cost and as the results we will not be providing expense guidance for the remain of 2014 at this time. Now I’d like to turn the call back to Rick for final closing comments.

Thank you, Mike. 2104 has been a productive year for Theravance and we’ll remain optimistic about the future. In particular we are well capitalized to have a strong product portfolio, a commitment to return in capital to stockholders and believe that there are significant strategic opportunities for a publicly traded company focused on managing a pharmaceutical royalty portfolio. And now I’d like to turn the call over to the conference facilitator and open the call for questions.

Yes. I don’t want to get too deep into the discussion around the negotiations and [indiscernible] I make a comment or two on that as well. But I would say that, we’ve had a view here for a while that that particular channel is going to be a little more challenging going forward and if you were to go back and look at what happened last year with Advair for example, I think a great example that it’s a little bit tougher channel. All that being said, I think we are pleased with where we are overall we’ve added a very significant number of patients covered under both RELVAR as our BREO handed ANORO here, so I think we’re feeling good. I would have loved to be on national formulary with BREO as well, but I think overall we’re feeling very good about it. So Rick, I don’t know if you have a 9common achievement) [ph] like that on that.

Yes. That’s a great question, Steve. We haven’t provided a whole lot more detail about what the total phase 3 program is going to look like for the closed triple, but you are definitely on the right path which is there is more than just this one study that’s out there today. So I would say stay tuned on this the big day is underway right now as a principal endpoint of exacerbation, so clearly lung function is another place that we have a level of interest in. So again I would just say stay tuned, but the program will definitely be bigger than the ones the single study at 30 day.

: We did not enter into the decision to initiative a dividend lightly. We sit here today and are quite comfortable with the level of dividend relative to our cash that we have in the bank today. Our expectations around future growth and I think we feel pretty comfortable about where we’re overall from a dividend perspective and the ability to not only maintain it but to grow as going forward. We haven’t actually given a lot guidance as you know regarding the sales trajectory other than early last year we were talking to the street about this product having an initial shallow launch trajectory and that rent really was from a couple of perspectives. Number one it’s a primary care product it takes a while to give the education to doctors, and number two, DDC takes a while to get in place, and then number three reimbursement is a big piece I think as everybody on the street knows. And at that particular point in time, I think we didn’t have enough insight into where the PDM channel was going and can be little bit tougher. So that was probably an early miss on our part of that channel being a little more difficult than we had initially thought, but we’re sitting here today on the back of some pretty important win at CVS Caremark and Express Scripts that I think moves this along with that towards where we’re going.

: An answer to your question, we don’t have any formal revenue guidance at this point in time other than we had made all the progress to-date that I think we need from an overall perspective and we will continue to work with GSK on other aspects of the launch, but I don’t today have a particular level of concern over the dividend overtime.

Thank you. Our next question comes from Brian Skorney of Robert W. Baird. Your question please?

This is Morgan in for Brian. I was just wondering if you could characterize the formulary changes for example, what sort of growth to net adjustments should we assume, what sort of access will be enabled and how you’re positioned relative to competitors? Thanks.

: I don’t really want to get into a tremendous amount of detail about pricing growth to net all of that. I think the most important news coming out here today is just the absolute number of patients we’ve added and we are pretty pleased with that. Going back to comment I was making a minute ago to David, this particular channel was a little bit tougher than we had anticipated and I think we were coming in there in a very competitive position this time. But I certainly don’t want to get too far outside of the description that GSK gave where they were here at that last call where there is a level of pricing pressure that’s happening in the channel today. But I think overall we’re just quite pleased with the significant addition of lives that we’ve added this week.

Thank you. Our next question comes from Tyler Van Buren of Cowen and Company. Your line is open.

I just had a couple of more follow-up questions with respect to the improved formulary coverage specifically with BREO and CVS going from non-formulary to formulary, could you maybe help characterize what percentage of patients or prescriptions are compliant with the National Formulary for CVS as well as characterize the different between the National and the Basic Formulary as well as from Tier 2 to Tier 3 just qualitative what we can expect? Thank you.

I will take an initial cut at that and then I’ll then have Rick add some comments here. With regard to the difference between Tier 3 and Tier 2, there are a number of pieces I think the biggest one out there is co-pays. Generally, Tier 2 is at a lower level of co-pays than in Tier 3. I don’t know that I have any specific guidance around the percentage of patients on each one of those. I think in general when we look at this and we don’t have very specific numbers for the number of lives that are covered by these accounts. We believe in the neighborhood of 20 million or so patients is on the Express Scripts’ Basic Formulary and we believe in the neighborhood of 25 million or so patients is on National Formulary, so both of these pieces are very significant here. Rick, I don’t if you would like add any commentary around this that could possibly (allude) [ph] a little more.

No, I think when you move between tiers and moving from Tier 3 through Tier 2 obviously it’s the co-pay that is different. But I think overall the number of lives that we’ve picked up in the two leading PBMs over the last couple of weeks is going to be very meaningful for the business.

Now, thanks for the congrats. With regard to the tax structure, clearly there’s a lot noise coming out of Washington right now, whether that turns into something or not I think remains to be seen. But we will have to continue to watch that and see where that particular discussion progresses. I think as you look at the strategy that we talk about here for our royalty management and sort of a short term tactics that are out there from a short term tax co perspective there are really two things that we are looking. One is continue to work with GSK very closely to optimize the launch for ANORO, BREO so that is something that has been, is and will be underway internally and obviously solidifying the base like that is quite important. Number two from a tax co perspective is really getting Theravance completely set up from a staffing and systems perspective going forward. So it’s a sort of a short term things from a longer term perspective we talk about three potential areas, number one is optimizing the overall financial structure of the company, we’ve done some portions of that for example, the most recent was the 450 royalty I note that we issued earlier this year. But there will be more activity on that that will happen overtime regardless of what happens with the tax situation. Now the second thing I talked about was looking at opportunities to reduce overall tax burdens. So clearly if something happened on the regulatory front it would have some level impact on that. The last thing we talked about and this is certainly not an issue that is red hot and burning with us today but overtime we want to think about this is dealing with the terminal value. As you know we have couple of very high quality assets today with very long lives in front of them. I think everybody knows the way we -- the royalty things work it goes with a longer of 15 years or that’s our cadence and this is a byproduct, by region decision, but there's a lot of runway in front of us. And as a result of it turned out we were able to deal with this problem a few years down the road, that’s certainly not a big issue from our perspective. But I think overtime we will continue to look at bringing in additional assets some period down there, the road here. So overall the question around tax is one of the pieces we think about, I don’t know where the regulatory environment ultimately is going to end up, but regardless where it ends up, I think there is a very bright future for the company here.

Thank you. Our next question comes from Ronny Gal of Bernstein. Your line is open.

Congratulation Mike on the promotion, congratulation Ricks on exceeding on a high notes from the company. I guess from the field we wish for the company. I’ve got two questions one of them is regarding the insurance coverage and the other one regarding the tax. On the royalty structure -- sorry on the coverage for BREO and ANORO, is it fair to day that I guess you had to except restriction on maximal allowed price increases per year to get the coverage, you did. My understanding is both ESI and Caremark were demanding that? And if you can let us know as you look at the script when should we see starting seeing the inflexion point? Related to that just the second part of this question is, if you look at 2015 now that most of Formulary contracts have been completed, what percentage of lives do you expect to have access to in a nonrestrictive tier in the United States, if you can divide it to commercial and Part D? And regarding the royalties from your last -- regarding the tax structure, from you last comments, Mike, am I to understand that any action on the tax rate is probably not a 2014 event, this is more of a 2015, if you [indiscernible] as a CEO?

Let me take the last question first. With regard to the tax piece, we will have to see what happens on that. I think we’ve discussed before if there was an opportunity for us to deal with taxes is probably some sort of a transaction, as you know, a transaction requires a willing counterparty. So these are not really actions that you can just execute without having somebody else who was willing to move forward. The timing on around that is always a little challenging to predict. So I would just say from a tax perspective, we certainly think about things we have various levels of ideas and discussions that we have had internally here, but I wouldn’t want to put any sort of timing around that other than -- if we able to solve that that would be terrific and we would move forward, if the right idea was there. The idea wasn’t there. You know the idea was not there.

Rick Winningham is just across the table from me and I believe he is the CEO a company based in Bermuda.

Okay, Mike, do you want to price increase?

Yes, on the insurance side Ronny we haven’t given a whole lot of additional detail sort of on what the limitations are or the percentage of lives that are on unrestricted coverage. The only guidance that has been given to-date has been the guidance that GSK gave here at their last call about percentages of patients for both ANORO and BREO who had various levels of coverage whether it was commercial or part D. So they were looking at those on an absolute number as opposed to on unrestricted basis. The last -- as an example the last numbers that were given out here which clearly are dated at this point with the CVS, I can’t mark and express this data, but the last numbers that they gave for BREO were that 70% of part D lives at coverage and 50% of the commercial lives at coverage. So again we have not gone into any sort of the various specific details on limitations or future actions or anything like that. The last piece of your question I think was around inflexion point. We gave the point in time where these various levels of new patients were going to be coming into the pool for these products. I think generally those are reasonably selling points to think about when patients from those pools are going to come on, but again you go back to how these products typically launch which is not sort of a (full body) [ph] like trajectory but rather going overtime. So I think our expectation is two folds, number one those will begin to build when the coverage become available but again it will be building rather than a kind of inflexion, and number two is there is a level of seasonality going on particularly in the LABA ICS market as you look at particularly in our access historically you can see a low point for the year of interacts in the July timeframe. So we’re coming out of July right now. So I think our expectations that history repeat itself you would begin to see additional growth coming out just through the seasonality.

(Operator Instructions) Our next question comes from Stephen Willey of Stifel. Your line is open.

Thanks and Mike also my congratulations on the new role. I guess it looks like Glaxo has gotten some descent regularly guidance with respect to the close triple just given the amount of resources that differ among the COPD program, so I guess in some of your conversations kind of on the steering committee, is there anything you can tell us kind of around MABA and whether or not that’s going to be a development path they plan on pursuing in parallel and then I guess second to that I guess what if any plans might be on deck in terms of pursuing triple in asthma as well?

: Thanks for the congrats Stephen. We were obviously quite pleased that the closed triple program moved forward here. But I think we have a pretty good view in terms of where the regulators are in that program you can clearly see, what they were expecting with regard to the exacerbation prices of program. And (I said to Steve) [ph] earlier, I would say stay tuned that what the other components of that are. With regards to asthma we haven’t made any comments around that today from Theravance GSK perspective, if you look at data that's been presented at ERS last couple of years particularly by [indiscernible] there is clearly a level of potential utility in patients with asthma and as a result I think that is a potential area that the collaboration could look at but at least today we haven’t made any formal communications around that. With regard to MABA we are not quite at the point in time yet to sit back down with the FDA and have discussions, we’re still finishing up with what we call the phase III enabling work. So once that is done, I think that will really inform out of where we’re going with MABA combined with FF which is the pathway for the triple with MABA. And I think as you know there were two things that were happening here as we moved the program forward, recently one was we were progressing it forward in a new device which is lift up [indiscernible] there’s a level work that needs to happen related to that. And the second one was we were combining with FF as opposed to FP and so there’s a level of again this phase III enabling work that will be required on that. So when that [indiscernible] work is done and we’ve analyzed all that well, certainly communicates that where we’re going [indiscernible]. I am not sure that the closed triple guidance would be perfectly applicable to MABA, there’s a whole variety of differences on that, most notable of course the close triple has three separate active ingredients as opposed to a MABA plus FF would only have two. So there will be a lot less complexity from a combination will perspective. So I would just say stay tuned on both of those topics, MABA and [indiscernible] and then what if anything happened with the triple and asthma but again I think those rates we continue to be actively looking at and I would say stay tuned.

Okay. And then just a question which I am not sure you’ll be able to answer or not. But I know GSK had mentioned on the call that there are still is quite a bit of sampling that’s ongoing and also about utilization and I guess is there any way that you can characterize or just provide color just around the magnitude of that as to whether or not it’s still ramping up in terms of sampling and then I guess whether or not we should expect that to kind of taper off once these formularies become active on Gen1. Thanks.

Yes. I think we haven’t give any guidance on what the future holds on that, I would say sampling is very heavy. There are clearly far more patients who are on the medicine today as a result of the sampling program that are on that active scripts, that’s a big number of patients who are getting the medicine to samples today, this is pretty typical on this market, if you look at total samples that are been distributed for the other players in here whether its Symbicort or Spiriva or Advair. There is a fairly level -- a high level of sampling that’s ongoing in here. So I would just add that a component that is quite important in this particular market and again the number of patients that are on the medicine is certainly higher than the number of scripts you’re seeing after today.

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

All right, thank you very much operator and thank you everyone for participating. We’ve got a great strategy. I think that’s being executed with Theravance, with the recent success in the PBM channel. I think we are well on our way to establishing significant products and with both BREO and ANORO is not only in the United States but as we roll out the global launch platform. So again thanks for participating. And have a great day.