Theravance and Elan enter into a billion-dollar royalty participation deal

Elan will purchase a participation interest in potential future royalty payments related to four respiratory programs partnered with GlaxoSmithKline plc

| 3 min read

Jeffrey Bouley

SOUTH SAN FRANCISCO, Calif. & DUBLIN—In what may be in part an attempt to fend off a takeover attempt of Elan Corp. by Royalty Pharma, Theravance Inc. and Elan on May 13 entered into a royalty participation agreement wherein Elan willpurchase a participation interest in potential future royalty payments relatedto four respiratory programs partnered with GlaxoSmithKline plc (GSK): RelvarEllipta/Breo Ellipta, Anoro Ellipta, MABA (Bifunctional MuscarinicAntagonist-Beta2 Agonist) monotherapy (GSK961081, or MABA '081), and vilanterol(VI) monotherapy.

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Under the terms of the agreement, Irish company Elan will make a one-timecash payment of $1 billion to U.S.-based Theravance in exchange for a 21-percent participationinterest in the potential future royalty payments from the four programs when,as and if received by Theravance.

"We are very excited to partner with Elan in atransaction that recognizes the significant value of four programs from our GSKcollaborations targeted at respiratory disease," said Rick E Winningham,Theravance's CEO. "This agreement complements our strategyto facilitate and accelerate the return of capital to our stockholders andbuild value, consistent with our recently announced plan to separate Theravanceinto two entities, Royalty Management Co. and Theravance Biopharma."

Over at Elan, CEO

Kelly Martin said, "This transaction, upon closing, will immediately diversify ourbusiness with an investment in four high quality and late stage clinical assetswithin a large and growing therapeutic area. This diversification shouldbenefit our shareholders by spreading the inherent risk embedded in any onespecific asset. In addition, the long-term and future potential cash flowstreams and net income will be shared with investors both directly

—through adividend pass-through

—and indirectly through overall after tax earnings."

"Being involved, even indirectly,with an important therapeutic area that addresses the needs of millions ofpatients who suffer from respiratory disease is particularly meaningful to allof us at Elan," he added.

Relvar Ellipta/Breo Ellipta, Anoro Elliptaand VI monotherapy have been developed under the LABA collaboration with GSK.For

Relvar Ellipta/Breo Ellipta and VI, Theravance is entitled to receiveroyalties from GSK of 15 percent of the first $3 billion of combined annual globalnet sales and 5 percent of combined annual global net sales above $3 billion. If

Anoro Ellipta is approved and commercialized, royalties on annual global netsales are upward tiering and range from the mid-single digits to 10 percent.

Thetransaction does not include any royalty participation interest associated withUMEC/VI/FF, an investigational medicine also in development under the LABAcollaboration with GSK.

MABA '081 is an investigational medicine indevelopment under the strategic alliance between Theravance and GSK. If MABA'081 is successfully developed and commercialized as monotherapy, Theravance isentitled to receive royalties from GSK of between 10 percent and 20 percent of the first $3.5billion of annual global net sales and 7.5 percent of all annual global net salesabove $3.5 billion.

The transaction does not include any royalty participationinterest associated with MABA '081 in combination with any othertherapeutically active component, including an inhaled corticosteroid, or anyother MABA compound as monotherapy or in combination.

The transaction is not subject to any materialconditions, other than approval by Elan's shareholders. Elan plans to promptlyprepare the required documentation to enable a shareholder vote, which Elan hasagreed to hold within 35 days. If approved by Elan's shareholders, the partiesexpect the transaction to be consummated by the end of June 2013.

Where Royalty Pharma figures into all this, say some market-watchers, is that the deal between Theravance and Elan may be intended, at least in part, to act as a "poison pill" to derail Royalty's attempt to acquire Elan for about $5.7 billion, a move that Elan has so far rebuffed. The theory by some is that the Theravance deal will add assets to Elan that Royalty Pharma may not want to acquire.

Also, Elan wants to diversify fromits neurological focus after selling its 50 percent interest in multiplesclerosis treatment Tysabri to Biogen Idec in February for $3.25billion plus royalty rights. Those royalty rights are what Royalty Pharma seems to have its eyes on, and has tried to convince shareholders that Elan is incapable of handling or pulling off big deals. This deal with Theravance, some say, is an attempt to instill confidence in shareholders that such is not the case.

Martin has countered such thoughts with an insistence that the deal with Theravance was simply good business, and has nothing to do with Royalty Pharma, maintaining that the Royalty offer is neither credible nor of any substance.

Theravance and Elan enter into a billion-dollar royalty participation deal

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Jeffrey Bouley

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