Theravance: wish for another $1-2 pull-back to get an attractive risk-reward

And I might just jinx it by saying so. But heck, no one reads my blog anyways so my impact is likely minimal.
2 really good background articles here going through what's going on :
http://seekingalpha.com/article/2123883-theravance-is-a-classic-ben-graham-bargain
http://seekingalpha.com/article/2118623-theravance-baby-thrown-out-with-the-bath-water-35-percent-to-65-percent-upside

And a Jefferies piece that goes through the space excellently:

http://jefferies.com/CMSFiles/Jefferies.com/files/Insights/JeffreyHolford_Pharmaceuticals_09122013.pdf

But basically, you are betting on 1 of 4 things:

- Breo peak sales
- Anoro peak sales
- Biophama valuation
- Yes / No on GSK take-out and multiples

Go ahead, assign numbers and probabilities to each. Here's where the street is at...1-3 Bn on Breo & 1.5-2.5 on Anoro.

I currently have Breo at 1 Bn peak sales, Anoro at 3 Bn, and then some for MABA, UMEC/VI/FF + VI Monotherapy with 25% tax rate and 10% discount rate I get to $19 of value with the bonds fully converted. Add $1.5 of cash you get $20.5 for the THRX RoyaltyCo. I don’t know how to value the TBPH piece and I don’t think I’m alone. A few ways to triangulate it may be (1) Look at where PRTA printed (3x Book) and put a finger and say, with 300mm in cash, it’s worth 900 mm, or $8 / share, but that’s kind of silly given the pipeline needs to be accessed on a case by case basis. (2) Or I can use what management suggested “the TBPH is like THRX 3 years ago” as a guide-line, and get to ~800-1000 mm of value, or again $8 / share. (3) I guess if MABA and UMEC+VI+FF indeed blossom into 1 Bn peak sales drugs or better eventually and TRC is spun off eventually, on the same DCF basis I get to around $5 / share on that alone, and add back cash of 300 mm, I get around $7.50. So I would assume TBPH prints at $8. But what am I missing? Feels like wet finger in the air here. All in, my base case is $28-30 / share. Hardly good upside. You get downside in Anoro, which if I assume MS is right, the downside is $22-23 / share, or 20% downside. I guess it’s not bad? The upside is if people are willing to pay a lower discount rate on royaltyCo (let’s say 8% vs. my 10% assumption), Breo nails it @ 2 Bn peak sales, and Bio tech gets 4x cash value, then the upside is $40 / share, or 40% upside, I guess 2:1 risk reward is not bad, but it feels wishy-washy to me.

Regardless, see below for my pdf of share price distribution:

So unless something goes really, really wrong, my nightmare case is $18-19 per share. This only happens if everyone freaks the heck out, in which case GSK might say "Screw it, let's buy THRX out". The blue-sky case is clearly contingent on Breo and Anoro performing well, whereby GSK, based on such, buys them out (thus 10-20% premium assigned). We get this nice right-hand tail.

Not sure if it ever gets to 24-25 if everyone thinks this way, so it might be worth nibbling @26 today. Your risk-reward is $4-5 downside, and a broad range of $4 - 20 upside. At 24/25, it gets pretty attractive --($2-3 downside vs. 6-24? Yes please). We will see.