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Elan Buys Stake in Theravance Royalties on Drugs

Deal gives Irish company a 21 percent stake in future payments associated with four respiratory programs.


The Burrill Report

“This diversification should benefit our shareholders by spreading the inherent risk embedded in any one specific asset.”

Elan, which is seeking to fend off Royalty Pharma’s efforts to buy it, said it will pay Theravance $1 billion for a 21 percent stake in the royalty stream from four respiratory programs partnered with GlaxoSmithKline.

The deal includes royalties that come from Relvar, Ellipta, Breo Ellipta, Anoro Ellipta, ‘081 Maba monotherapy, and vilanterol monotherapy. The U.S. Food and Drug Administration just granted approval to Breo Ellipta as a treatment for chronic obstructive pulmonary disease. The transaction is dependent on Elan winning shareholder approval, which is required under Irish law.

“We believe this is a very compelling transaction for our stockholders at this time, coming on the heels of the approval of Breo Ellipta last Friday,” Theravance CEO Rick Winningham said during a conference call discussing the agreement. He said the transaction is consistent with its previously announced plans to split the company into two entities. Its biopharmaceutical operations will make up Theravance Biopharma and its late-stage partnered respiratory assets will be in a separate company named Royalty Management.

Winningham said the agreement with Elan happened quickly, but declined through the call to comment on the process, whether other bidders were involved, and whether its partner and shareholder GSK was given an opportunity to provide a counter offer. Elan CEO Kelly Martin says the transaction diversifies Elan’s business with an investment in four, high quality, late-stage clinical assets in a growing therapeutic area.

“This diversification should benefit our shareholders by spreading the inherent risk embedded in any one specific asset,” he says. “In addition, the long term and future potential cash flow streams and net income will be shared with investors both directly—through a dividend pass through—and indirectly through overall after tax earnings.”

Theravance, under its agreement with GSK, will receive 15 percent royalties from GSK on the first $3 billion of combined annual global net sales from Relvar, Ellipta, Breo Ellipta, and vilanterol monotherapy. It receives 5 percent of combined annual global net sales after $3 billion.

If Anoro Ellipta is approved and commercialized, Theravance will receive royalties on annual global net sales that are upward tiering and range from the mid-single digits to 10 percent, the company says. If ‘081 Maba is successfully developed and commercialized as a monotherapy, Theravance is entitled to receive royalties from GSK of between 10 percent and 20 percent of the first $3.5 billion of annual global net sales, and 7.5 percent of all annual global net sales above $3.5 billion.

Elan says it will initiate a cash dividend policy from the long-term cash flow expected to be generated by the four respiratory products under the agreement with Theravance. Elan expects to pay out directly to its shareholders in twice yearly installments of 20 percent of the royalties paid to it.

Elan’s Martin described the Theravance transaction as “one piece” of the company’s strategy and said the company expects to make additional announcements regarding other assets and opportunities in the near future. To pay for the transaction, Elan will turn to the debt markets as well as use available cash on hand, he said.

May 15, 2013

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