Elan to Pay $1 Billion for Stake in Theravance Royalties

Elan Corp. (ELN) agreed to pay $1 billion for a share of the royalties on new drugs from Theravance Inc. (THRX) as the Irish drugmaker tries to persuade shareholders to spurn a takeover offer by Royalty Pharma.

Elan will receive 21 percent of the royalties earned by Theravance from GlaxoSmithKline Plc (GSK) on the four respiratory medicines, and 20 percent of that income stream will be paid to Elan shareholders as a dividend, the Dublin-based company said in a statement today. The transaction is subject to shareholder approval, it said. Theravance shares rose to its highest price in eight years.

Elan is adopting an investment model pioneered by Pablo Legorreta, chief executive officer of Royalty Pharma, which has offered to buy Elan for about $5.7 billion. The company’s board last month unanimously rejected the takeover bid, advising shareholders not to take action. Elan plans to announce several more deals this year, Chief Executive Officer Kelly Martin said in a phone interview today.

“This is just one piece of the puzzle,” Martin said. “This deal allows us to invest our long-term cash flow into interesting clinical and commercial assets.”

Elan’s hunt for new assets stems from Biogen Idec Inc.’s Feb. 6 agreement to buy Elan’s stake in the Tysabri multiple sclerosis drug for $3.25 billion in cash plus future royalties. The sale transformed the Irish company into an investment vehicle, since it has no operations. Elan said at the time that it planned to use the cash for possible acquisitions and would return some of the proceeds to shareholders.

‘Risk Spectrum’

Royalty Pharma offered $11.25 for each of Elan’s American depositary receipts. Investors in Elan tendered only 15 percent of the shares last month when Elan did a share buyback at that price, in what Adrian Howd, an analyst at Berenberg Bank in London, said was a vote of confidence in management.

With today’s deal, the longer-term prospects of Elan’s business now feels more solid with limited risk, said Howd. “These assets are at the lower end of the risk spectrum” given Glaxo’s strong commercial track record in respiratory drugs, he said.

Tom Buchanan, a spokesman for Royalty Pharma at Maitland in London, didn’t immediately comment on Elan’s purchase of the Theravance royalty stream.

Elan’s ADRs fell 1.4 percent to $11.61 at the close in New York. They’ve fallen 12 percent in the past year, compared with a 33 percent return for the Bloomberg Europe Pharmaceuticals Index. Theravance rose 18 percent to $41.20, its highest closing value since October 2004.

Breo Approval

The investment comes just days after U.S. regulators approved Breo, the first of four drugs that South San Francisco, California-based Theravance has been developing with Glaxo. Breo, an inhaled treatment for airflow obstruction in chronic obstructive pulmonary disease, may generate $4 billion in worldwide peak sales, according to M. Ian Somaiya, an analyst with Piper Jaffray & Co. The drug is sold with an inhaler called Ellipta.

Under its agreement with London-based Glaxo, Theravance will receive 15 percent of the first $3 billion of global sales of Breo Ellipta and 5 percent of revenues above that amount, Elan said. Royalties for the other three drugs range between the mid-single digits to 20 percent.

Breakup Planned

Theravance said last month it would split into two companies at the end of this year or early 2014. One of the companies will be called Royalty Management Co. and will focus on the Glaxo collaboration, while the other, Theravance Biopharma, will focus on developing drugs.

Theravance generated $135.8 million in revenue last year. while sales are projected to almost triple to $382.6 million in 2016, according to the average of five analysts’ estimates compiled by Bloomberg.

Analysts have speculated that Glaxo may acquire Theravance to fully control the respiratory drugs the companies developed together. Glaxo owns 27 percent of Theravance and may pay $51 a share for the remainder, Piper Jaffray analysts said in a note to investors on March 4.

David Daley, a spokesman for Glaxo, declined to comment.

Separately, Elan is also considering raising debt capital, given interest in the company and attractive rates, it said, without specifying the amount.

Centerview Partners LLC; Skadden, Arps, Slate, Meagher & Flom LLP; and Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP are advising Theravance. Elan’s advisers were Evercore Partners; Ondra Partners; Cadwalader, Wickersham & Taft LLP; and A&L Goodbody.

To contact the reporter on this story: Makiko Kitamura in London at mkitamura1@bloomberg.net

To contact the editor responsible for this story: Phil Serafino at pserafino@bloomberg.net

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