Biotech Drug Royalty Deal

In a recent $1 billion royalties deal, Elan Corporation (NYSE: ELN) eased investor and analyst concerns over a possible takeover by Royalty Pharma.

Just last month, Elan had rejected a $5.7 billion bid for takeover by Royalty. Now Elan, based in Ireland, has opted to purchase 21 percent of all royalties that Theravance (NASDAQ: THRX), a U.S.-based company, gets for its respiratory drugs from GlaxoSmithKline (NYSE: GSK). The Theravance deal is worth $1 billion.

Reuters reports that back in February, Elan had sold its 50 percent share in Tysabri, a treatment for multiple sclerosis, to Biogen Idec (NASDAQ: BIIB) in a deal worth around $3.25 billion, royalty rights on top of that.

Royalty Pharma’s strategy appears to have been to try and add those rights to its own stable while questioning Elan’s expertise in playing in the big leagues. The rights are worth it – they’re estimated to be worth several hundreds of millions. That’s why the most recent move could be a positive signal to concerned investors.

Reuters quotes Kelly Martin, Elan’s Chief Executive:

“This (Theravance deal) was not done because of Royalty whatsoever. Royalty – to myself, to the board, to pretty much every shareholder that we can talk to, frankly – is utterly irrelevant.

“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.”

Shareholders stand to receive a fifth of all royalties stemming from the deal with Theravance, and Elan has stated that it has further projects brewing. The Tysabri stake that Elan holds continues to provide a 20 percent dividend.

Elan Drug Royalties

Following the rejection of Royalty’s earlier bid, Elan had mentioned acquisition of further assets and general development, but those plans have not been very forthcoming.

Meanwhile, the deal with Theravance is (at least in the short term) highly beneficial to Elan. Elan now gets to be involved in four of Theravance’s drugs – Breo Ellipta, Anoro Ellipta, MABA monotherapy, and vilanterol monotherapy – all of which are in late-stage development.

Breo is particularly interesting, as it is a new and innovative response to chronic obstructive pulmonary disease. The drug had just received approval for combating COPD by the U.S. Food and Drug Administration last Friday. This sets up Breo to compete with Glaxo’s Advair. Advair has been a massive success for Glaxo, earning them $8 billion per year.

Breo could also receive approval in countries beyond the U.S., in which case it would be branded Relvar. According to Thomson Reuters analyses, that scenario could mean yearly sales of up to $559 million by 2015.

Anoro is another COPD-combating drug that Theravance is working on in collaboration with Glaxo, and this drug is perhaps more profitable than Breo. Anoro could lead to worldwide sales topping out at around $1.4 billion, according to present analyses.

Mixed Responses

Analyst response was a bit varied. While UBS decried the $1 billion cost of the deal as overly expensive, Berenberg Bank indicated that the new royalties mean Elan can now breathe a bit easier.

On the other hand, Deutsche Bank was more critical, suggesting that little, if any, new shareholder value would be generated from the deal.

Regardless of the mixed response, it’s clear that Elan’s overall position is now significantly stronger, and the move has ensured it some reprieve from Royalty’s takeover attempts and subtle machinations. What’s more, the long-term drug assets that Elan now has a stake in could prove rather worthwhile in the longer run.

With the biotech and biopharma sectors heating up rapidly, it’s the right time for companies like Elan to broaden their options and get involved in prospective new drugs. And investors would certainly benefit in the longer term from carefully-chosen deals like the one Elan has just struck. 

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