UPDATED: Elan pays $1B for a slice of Theravance's COPD franchise royalty stream

Elan has struck a deal to pay a billion dollars for a share of Theravance's future royalties on Breo and a slate of other respiratory drugs now in development, announcing the deal right on the heels of Breo's approval in the U.S. on Friday.

Theravance's ($THRX) deal with GlaxoSmithKline ($GSK), which holds the marketing rights on Breo, gives it 15% of the first $3 billion in royalties that come in for the COPD drug. Then it will earn 5% of the rest, or $50 million for each billion dollars in revenue, sharing about $10 million of that with Elan ($ELN). Elan now also stands to gain a slice of revenue from Anoro, a late-stage COPD drug that provides Theravance with a royalty stream ranging from the mid-single digits to 10% of the total revenue flow. Vilanterol VI and the mid-stage MABA '081 are also included in the pact.

Theravance investors clearly liked all the upfront cash included in the offer. The biotech's shares zoomed up 12% this morning.

A group of analysts give Breo a decent chance of earning more than a billion dollars a year. But the success of this deal for Elan may rest on the fate of Anoro--a once-daily combination of UMEC and vilanterol now under regulatory review. Thomson Reuters has pegged peak potential sales of the drug, which would be headed into a changing and very competitive market if approved, at $1.4 billion, while some have ranged higher.

The deal today marks the latest twist in a series of financial maneuvers that began with Elan's move to spin out R&D and then sell its interest in Tysabri to Biogen Idec for $3.25 billion and a royalty stream, leaving it with a fat bank account and plans to buy in new assets. That triggered a bid by Royalty Pharma to buy out Elan for $5.7 billion, a bid which the Irish company has heaped scorn on. And just weeks ago Theravance said it was spinning out its COPD drugs so they could cash in on the royalty agreement while the R&D side of the business continued on independently. GlaxoSmithKline owns 27% of Theravance, sparking a long series of analysts' predictions that GSK would buy them out and swallow the biotech company whole.

Elan CEO Kelly Martin

Bernstein's Ronny Gal did the math and concluded that Elan's deal values Theravance at $6 billion, roughly twice what it was worth at the close on Friday. 

"It is tough to see how the assets acquired, risk discounted, would command such a value," Gal writes, according to Matthew Herper in Forbes. But Royalty Pharma's hostile bid essentially makes this a poison pill for Elan, by bringingin assets Royalty Pharma would just as soon avoid buying.

Elan also continues to control a slice of the Tysabri royalties, giving the company a wider revenue stream that Elan CEO Kelly Martin insists will be reinvested in new products, bot approved and experimental. 

"We have other transactions that we'll do that will have us involved more directly with other assets and those assets could give us footprint geographically, could give us pipeline and mid-to-late stage assets, or a combination of both," Martin said, according to a report from Reuters. "We're not just a royalty company alone but what this transaction does is it unbelievably diversifies us, gives us long-term income and will allow us to use that to invest in different assets, molecules or businesses."

Elan shareholders will gain 20% of the royalty stream in a promised dividend.

"We are very excited to partner with Elan in a transaction that recognizes the significant value of four programs from our GSK collaborations targeted at respiratory disease," said Rick E. Winningham, Theravance's CEO. "This agreement complements our strategy to facilitate and accelerate the return of capital to our stockholders and build value, consistent with our recently announced plan to separate Theravance into two entities, Royalty Management Company and Theravance Biopharma."

- here's the press release
- read the Reuters story
- see the Bloomberg piece

- here's Herper's column at Forbes.com