National Editor

With their deal for respiratory diseases already having reached Phase II trials, Theravance Inc. and GlaxoSmithKline plc said they are broadening their relationship to the tune of $129 million, of which a "significant" portion involves GSK upping its ownership of Theravance from 6 percent to 19 percent - and GSK could end up with as much as 60 percent in 2007.

"It was a natural extension to try to move beyond the success in that one therapeutic area into others," said David Brinkley, senior vice president of commercial development for South San Francisco-based Theravance.

"We were looking for financial instruments that would enable Theravance to have access to capital over the next few years, which is an important time in the growth of our company," he added. "This is a good one."

The new deal covers a variety of therapeutic areas, including bacterial infection, respiratory disorders, urinary incontinence and gastrointestinal illness, with London-based GSK holding an option to worldwide licenses on potential drugs from all current and future programs through August 2007.

For each Theravance program GSK accepts, the overseas firm will foot the bill for development, manufacturing and commercialization activities, and provide milestone payments to privately held Theravance ranging from $162 million to $240 million per program.

How many programs are eligible is not being disclosed, but during the past six years Theravance's small-molecule discovery efforts have yielded seven potential new drugs, all in active development.

"In antibiotics, for example, there are two [compounds]," Brinkley said. One has completed Phase IIa trials and the other is preclinical.

Two lead exploratory programs are in respiratory diseases, Brinkley told BioWorld Today. "It's a strength of ours from the discovery standpoint, and clearly a strength of GSK's from the development and commercialization standpoints," he said.

The seven drugs include a treatment for serious infections due to Gram-positive organisms, and a drug in Phase I trials for overactive bladder.

Theravance and GSK signed a potential $545 million deal at the start of 2003 to find new, long-acting beta2-agonists for respiratory diseases. By the end of the year, positive data emerged from a pair of early Phase II studies. One compound, GSK 159797 - known as TD-3327, from Theravance's research - showed good results against mild asthma. The second drug, GSK 597901, also proved encouraging, but fewer details were offered. (See BioWorld Today, Jan. 7, 2003, and Dec. 4, 2003.)

"They're both beta agonists, so they could potentially be developed for asthma and/or [chronic obstructive pulmonary disease]," Brinkley noted, adding that GSK 597901 originated with GSK, which also has said it is working toward a next-generation, once-daily combination consisting of its GSK 685698, a new long-acting corticosteroid, and GSK 159797. The former has shown evidence of greater potency, compared to existing treatments. GSK said it expects a regulatory filing for the drugs in combination in 2008.

Of particular interest now, though, may be the structure of the broadened deal between the two companies, which Brinkley characterized as "very unusual" but ideally fitted to Theravance's needs. The put/call arrangement resembles the pact between South San Francisco neighbor Genentech Inc. and Roche Holding Ltd., of Basel, Switzerland - the only other such deal in the industry, Brinkley said, yet hardly identical since Genentech was publicly traded when Roche exercised its call option. And the option, when fully exercised, was for 100 percent of shares.

In the put/call arrangement between Genentech and Roche, the Swiss firm took the last 33 percent of Genentech's stock in the summer of 1999, paying $82.50 per share, or about $4.2 billion, but then reissued some of the shares. (See BioWorld Today, June 4, 1999.)

Under the terms of Theravance's deal with GSK, the latter can further boost its holdings from 19 percent to 60 percent in 2007 by acquiring half of Theravance's outstanding shares at an undisclosed "significant" premium to the price paid in the current transaction. If the "call" doesn't happen, Theravance shareholders (other than GSK) have the right to cause GSK to buy up to half of their outstanding stock. The price, again, is set at a premium to the current transaction's cost - though not a "significant premium," in the language of the press release, and this value is guaranteed for half the shares held by Theravance stockholders as of 2007. In the second possible scenario, the "put," GSK's maximum payout would be $525 million.

"The call happens first," Brinkley said, in the middle of 2007. About a month later, the put period comes into effect. "There's a large difference between the put and the call," he said.

Brinkley said the put/call setup is "a very solid, innovative" approach.

"On the downside particularly, it provides support for the stock in the event we go public," he said. "Presumably, if the stock is being publicly traded [in 2007] above the put price, it doesn't make much sense to have GSK buy it at the lower price." Either way, call or put, if GSK's ownership rises to more than 50 percent in 2007, the company automatically gets a five-year extension of its exclusive option to Theravance's product portfolio.

The deal, for which New York-based Lazard Freres & Co. served as adviser to Theravance, is pending regulatory approval and the nod from Theravance's shareholders.