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Elan is Buying into Theravance, GSK Royalty Stream for $1B

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By Cormac Sheridan
Staff Writer

DUBLIN, Ireland – Elan Corp. plc is putting down a $1 billion bet that the respiratory franchise shared by Theravance Inc. and GlaxoSmithKline plc will pay generous dividends over the next decade. Elan is acquiring a 21 percent stake in Theravance's future royalty streams from four drugs that are partnered with London-based GSK.

One of them, Breo (fluticasone furoate [FF] and vilanterol inhalation powder), which is administered using the Ellipta inhaler, has just gained FDA approval as a daily maintenance therapy for relieving airflow obstruction in patients with chronic obstructive pulmonary disease (COPD). It is also under regulatory review in the European Union. (See BioWorld Today, May 13, 2013.)

The other drugs involved in the deal are not yet approved. Anoro Ellipta, which combines two investigational bronchodilators, vilanterol, a long-acting beta agonist (LABA), and umeclidinium bromide (UMEC), a long-acting muscarinic antagonist (LAMA), was accepted by the FDA for review as a COPD therapy on Feb. 19. It has a Dec. 18 PDUFA date and is also under review in Europe.

MABA '081 , a bifunctional muscarinic antagonist and beta 2 agonist, is awaiting the start of a Phase III trial in COPD. A Phase III trial of vilanterol, as monotherapy, is currently recruiting patients with COPD. Excluded from the deal is a triple therapy, based on FF, UMEC and vilanterol, which GSK and Theravance are also developing under their LABA alliance, signed originally in 2003 and then extended in 2005. (See BioWorld Today, Jan. 7, 2003, and March 23, 2005.).

Elan had a pro forma net cash position of $1 .997 billion at March 31 . It plans to finance the transaction with a combination of cash and debt. The deal, which is expected to close in June, represents a major step forward in Dublin, Ireland-based Elan's ambitions to assemble what CEO Kelly Martin recently referred to as a "constellation of transactions," in the wake of its $3.25 billion disposal of its 50 percent stake in the multiple sclerosis drug Tysabri (natalizumab) to erstwhile partner Biogen Idec Inc., of Weston, Mass. (See BioWorld Today, April 25, 2013.)

Elan also will receive 18 percent of future sales of Tysabri up to $2 billion and 25 percent of sales above that threshold. That position, taken together with this latest deal, points to a possible future for the company as a royalty management outfit – akin to that of its would-be acquirer, the New York-based Paul Royalty Fund – but this is not the only path it intends to pursue.

"This is not a pure royalty model," an Elan spokesman told BioWorld Today. "I think you're going to see a mixed approach where they'll also invest in assets in development and help to bring them on."

The deal implies a valuation of $4.76 billion for Theravance's future royalty income from the four-product franchise, which suggests that the market considerably undervalues the South San Francisco-based biotech firm.

Even after the news broke Monday – and the Theravance share price (NASDAQ:THRX) gained more than 14 percent to hit $40 – the entire company was still only valued at $3.94 billion. Its stock closed at $41.20 Monday, up 18 percent.

Theravance will receive 15 percent of royalties on the first $3 billion in combined annual sales of Breo Ellipta (which will be marketed as Revlar Ellipta in Europe and Japan) and of vilanterol. It would receive 5 percent of combined sales above $3 billion.

If Anoro Ellipta reaches the market, Theravance would receive tiered royalties, ranging from mid-single digits up to 10 percent. If MABA '081 reaches the market, Theravance would receive between 10 percent and 20 percent of the first $3.5 billion of annual sales and 7.5 percent of all sales above that threshold. The agreement excludes any sales of MABA '081 where it is combined with another drug.

Elan released consensus sales expectations for three of the four products – there are no available estimates for vilanterol – which forecast combined sales of $5.876 billion by 2020, including $2.467 billion for Breo Ellipta, $2.292 billion for Anoro Ellipta and $1.117 billion for MABA '081.

Berenberg analyst Adrian Howd wrote in a research note that Elan appeared to have paid a "fair" price. "At what looks to be a reasonable price, and given its favorable tax structure, Elan is getting superior economic exposure to blue-chip, long duration assets that are central to the future growth of the respiratory market leader, GSK," he wrote.

Elan's investors were less enthusiastic. Shares in Elan (NYSE:ELN) at $11.62, down 17 cents on Monday.

With casualties falling off the patent cliff and continued pressure to grow top-line sales, "royalty rates have gone up as large pharma has competed to in-license products to fill this product gap," Clarke Futch, founder and managing director of HealthCare Royalty Partners, said during a recent BioWorld webinar recently.

Editor's note: To obtain a CD of the webinar, "Royalty Financing for Biotech and Medical Device Companies: How to Determine Eligibility and Take Advantage of this Unique Financing Opportunity" or for a deeper dive, BioWorld's Biopharmaceutical Royalty Rates Analysis: Essential Benchmarks for Dealmaking, call 800-477-6307 for details.