Theravance Seen Luring Glaxo Bid as Drugs Near FDA Nod: Real M&A

Theravance Inc. (THRX)’s projected U.S. approval for its respiratory drugs is fueling speculation of an almost threefold revenue surge and a takeover bid from partner GlaxoSmithKline Plc. (GSK)

As two of the treatments developed with Glaxo come up for review by the Food and Drug Administration this year, Robert W. Baird & Co. pegs the odds of clearance at about 70 percent, an outcome that may spur Theravance’s larger partner to pursue a takeover. The lung-disease drugs Breo and Anoro -- which Piper Jaffray Cos. projects may have annual sales of more than $2 billion and $4 billion, respectively -- are poised to help drive a 174 percent increase in Theravance’s revenue by 2016, according to analysts’ estimates compiled by Bloomberg.

“There’s a good chance they will get acquired,” Ronny Gal, a New York-based analyst at Sanford C. Bernstein & Co., said in a telephone interview. Glaxo “has a history of buying partners after the products have been approved and they feel fairly confident the product will do well.”

Theravance formed an alliance with Glaxo a decade ago to develop respiratory treatments to supplement the largest U.K. drugmaker’s aging best-seller, Advair. Glaxo now owns a 27 percent stake in the $2.2 billion company. With revenue growth forecast to outpace 86 percent of U.S. biotechnology and specialty drug peers, Theravance may even lure private-equity firms or RP Management LLC, the investor in drug royalty streams known as Royalty Pharma, said Piper Jaffray. Analysts estimate Theravance could draw an 85 percent premium -- double the industry average, data compiled by Bloomberg show.

Chronic Bronchitis

Cheryllyn De Ocampo, a spokeswoman for Theravance, declined to comment on whether the South San Francisco, California-based company would consider a sale or had held discussions with potential buyers about a deal.

Sarah Spencer, a spokeswoman for Glaxo in London, declined to comment on whether the company is interested in acquiring the rest of Theravance.

Breo is a once-daily treatment for chronic obstructive pulmonary disease, an umbrella term for emphysema and chronic bronchitis often caused by cigarette smoking. Since Breo and Anoro share a key component, their fates are closely tied, and the FDA advisory committee meeting on April 17 to review Breo should indicate the likelihood of the second drug gaining clearance, Brian Skorney of Baird said in a phone interview.

Approval Probability

“There’s reason to be optimistic that the probability is greater that it will get approved than won’t get approved,” the New York-based analyst said of Breo.

The committee meeting was rescheduled from March 7 due to weather. As of March 14, Theravance still expected a regulatory decision on Breo May 12 and for Anoro on Dec. 18.

Anoro, which includes the same medication used in Breo to relax the airways, has an 80 percent chance of gaining U.S. approval, slightly more than Breo’s 75 percent odds, according to Bernstein’s Gal.

On March 4, Theravance shares rose 16 percent, the most in 11 months, after Ian Somaiya, a New York-based analyst at Piper Jaffray, wrote in a note to clients that Glaxo may consider buying full control of the company after Anoro is granted clearance. The stock is up 22 percent in the last year.

Glaxo is a logical buyer because of its existing relationship with Theravance, according to Les Funtleyder, a health-industry analyst at New York-based investment firm Poliwogg LLC. Almost a year ago, Glaxo boosted its stake in Theravance to 27 percent from 18 percent.

Glaxo’s Advair

“This is a company that’s behaving like a motivated buyer,” Somaiya said in a phone interview. Approval of Breo and Anoro would be “an ideal entry point” for a takeover.

Glaxo’s Advair, the world’s best-selling drug for smoker’s cough and asthma with global sales of $8 billion last year, is set to lose patent protection in Europe this year after it already lapsed in the U.S. in 2010.

Expanding its respiratory offerings could help Glaxo fend off market share attacks from competing products, such as Novartis AG’s once-a-day Arcapta Neohaler and a twice-daily product from London-based AstraZeneca Plc (AZN), Somaiya said.

Theravance, which currently markets the pneumonia treatment Vibativ, reported $136 million in revenue for 2012. As its respiratory disease drugs come on the market, analysts project that amount will increase by 174 percent to $372 million in 2016, compared with median revenue growth of 75 percent for U.S. biotechnology and specialty pharmaceutical companies that had at least $100 million of sales in the last 12 months, data compiled by Bloomberg show.

Royalty Fees

With Somaiya estimating peak annual sales of more than $2 billion for Breo and more than $4 billion for Anoro, royalty fees paid to Theravance could exceed $600 million a year.

For Glaxo,“it makes a lot of sense to just buy the assets,” Bernstein’s Gal said. “It’s just the math. Would you rather pay royalties or pay a one-time fee?”

Glaxo has a track record of acquiring the companies with which it collaborates on the development of new treatments. Last year Glaxo bought the 80 percent of Cellzome it didn’t already own, and it also succeeded with a $3 billion bid for Human Genome Sciences Inc., its partner on the lupus treatment Benlysta.

“Health care is a pretty transaction-heavy industry,” Funtleyder said in a phone interview. “All pharmaceutical companies need products and pipelines.”

Takeover Price

Skorney and Gal both estimate that Theravance could fetch $35 to $40 a share in a takeover, while Somaiya said bids may be as high as $51.

An average estimate of $42 a share equates to 85 percent more than last week’s closing price of $22.74. That compares with the average premium of 42 percent offered in biotechnology takeovers of more than $1 billion, data compiled by Bloomberg show.

Theravance may also appeal to pharmaceutical companies seeking a foothold in respiratory treatments, private-equity firms or New York-based Royalty Pharma, according to Somaiya.

“It’s such an attractive opportunity,” he said. “It’s literally a free call option on the pipeline and an acquisition that’s paid for by the royalty stream of the respiratory franchise.”

Alexander von Perfall, a spokesman for Royalty Pharma, didn’t respond to a phone message or e-mail seeking comment.

While there’s no guarantee that Breo and Anoro will gain regulatory approval, Skorney of Baird said Glaxo is likely to eventually seek a deal, even without immediately regulatory approval, because of its investment in the development of the regulatory drugs.

“Glaxo is not going to get out of respiratory,” he said. “Since all of their three most advanced, most significant programs Theravance has a royalty interest in, at some point, for a certain value, Glaxo would buy them.”

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.