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Elan agreed to pay Theravance a one-time cash payment of $1 billion for a 21 percent share in future royalty payments from four respiratory programmes partnered with GlaxoSmithKline, the companies announced Monday. Elan CEO Kelly Martin said the deal “will immediately diversify our business,” adding that the agreement “allows us to invest our long-term cash flow into interesting clinical and commercial assets.”

In February, Elan sold its 50 percent interest in Tysabri to partner Biogen Idec for nearly $3.3 billion plus royalty rights and has used some of the funds to buy back $1 billion worth of shares as it looks to fend off a takeover offer from Royalty Pharma. Last month, the drugmaker’s board rejected the $11.25 per share bid from Royalty Pharma saying it significantly undervalues the company (for related analysis, read ViewPoints: Will attractiveness of Tysabri franchise tempt Royalty Pharma to increase ‘opportune’ bid for Elan?). Martin noted Monday that the deal with Theravance “was not done because of Royalty whatsoever,” adding that “I can say unequivocally that I haven’t spoken to one shareholder who thinks Royalty Pharma’s offer is either credible or of any substance whatsoever.”

Under the transaction, Elan will receive a share of royalties that Theravance is entitled to through its agreement with GlaxoSmithKline on Breo Ellipta (fluticasone/vilanterol), which was approved last week by the FDA for patients with chronic obstructive pulmonary disease (COPD). The deal between GlaxoSmithKline and Theravance will see the latter receive royalties of 15 percent on the first $3 billion of combined annual global sales of Breo Ellipta and vilanterol monotherapy, if approved, and 5 percent of combined worldwide revenue above this amount. GlaxoSmithKline and Theravance submitted Breo Ellipta for approval in the EU last year, where if authorised will be sold as Relvar Ellipta. Analysts project that the combination therapy could generate annual sales of $559 million by 2015.

In addition, Elan will receive a portion of royalties on the COPD therapy Anoro Ellipta (umeclidinium bromide/ vilanterol), which is under regulatory review in the US,Europe and Japan. If approved, Theravance stands to receive royalties from GlaxoSmithKline ranging from the mid-single digits to 10 percent. According to analysts, Anoro Ellipta could generate peak annual sales of nearly $1.4 billion. Elan and Theravance noted that the deal also includes the experimental drug GSK961081, which has completed Phase II studies. Theravance is entitled to receive royalties from GlaxoSmithKline of between 10 percent and 20 percent of the first $3.5 billion of annual global sales, and 7.5 percent of all revenue above this figure.

Elan indicated that due to the recent approval of Breo Ellipta, the deal will be accretive to earnings from next year. The company added that linked to the transaction, it will initiate a cash dividend policy to shareholders of 20 percent of the royalties received on the four drugs. Elan previously announced that it would pay shareholders a 20-percent dividend on the royalties it receives from Tysabri sales.

“The Theravance transaction is an important next step in the implementation of our strategy,” Martin commented, adding “it is, however, only one piece of the equation and to that end, we intend to make further announcements regarding other assets and specific opportunities in the near future.” For related analysis, read ViewPoints: Price paid for GlaxoSmithKline/Theravance royalties by Elan raises eyebrows.

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