Splitting a biopharma into two separate companies, one profit-oriented and the other focused on drug R&D, to better serve shareholders and “unlock” value is a familiar industry tale. Already profitable big caps Abbott Laboratories Inc. and PDL BioPharma Inc., with their respective spin-outs AbbVie Inc. and Facet Biotech Corp., leap to mind. But the latest twist to this structural strategy is to split in anticipation of the prospect of real cash flow and profitability.

That’s what Innoviva Inc. is opting to do. Ahead of a pair of PDUFA dates later this year, the company said on April 25 that it plans to split. The move will create a royalty company to return capital to shareholders, Royalty Management Co., and another devoted to pipeline development, Theravance Biopharma.

Royalty Management will have rights to a trio of products developed under a long-acting beta2 agonist (LABA) collaboration with GlaxoSmithKlinePLC that dates back to 2002 [See Deal]. Two of these, chronic obstructive pulmonary disease treatments Breo Ellipta (fluticasone furoate/vilanterol inhalation powder) and Anoro Ellipta (umeclidinium bromide/vilanterol), have respective PDUFA dates of May 12 and Dec. 18. In Europe, where the partners propose marketing Breo Ellipta as Relvar, they have filed for both asthma and COPD. Anoro is also under regulatory review in Europe for COPD. The third late-stage candidate is vilanterol monotherapy Also see "For Theravance, A Big Year Gets Off To A Strong Start" - Pink Sheet, 22 April, 2013..

“If Relvar/Breo Ellipta is approved in the U.S. and the EU in 2013, we would expect Royalty Management Company to have a short path to profitability and to provide a return of capital to stockholders unburdened by research and development spending,” Theravance CEO Rick Winningham said on a conference call.

GSK would pay a 15% royalty on the first $3 billion in annual, worldwide net sales and 5% thereafter for Relvar/Breo Ellipta. For context, 15% of $3 billion is $450 million. Earlier this month, FDA’s Pulmonary-Allergy Drugs Advisory Committee recommended approval of Breo Ellipta for the treatment of COPD ([A#00130422010]).

For purposes of a royalty calculation, any net sales of vilanterol monotherapy would be added to those of Relvar/Breo Ellipta. GSK pays for all R&D and commercialization expenses for VI monotherapy. GSK would pay a tiered royalty of 6.5% to 10% on worldwide net sales for Anoro Ellipta.

Theravance had $558 million in cash as of March 31. But not all of that cash is available; there are existing commitments to pay milestones and debt. Royalty Management would be liable for any outstanding milestone payments to GSK due under the LABA collaboration, which could total up to $220 million. An estimated $140 million could be payable this year, with the remainder payable in 2014.

In January, Theravance raised $244 million in net proceeds from a convertible debt offering earmarked for payment of milestones to GSK. Royalty Management also would be liable for the convertible debt. It will also retain the net operating losses (NOLs) for tax purposes. GSK held 18% of Theravance shares at April 2. There have long been rumors it would acquire Theravance.

Winningham will continue as Theravance Biopharma CEO and will initially also head Royalty Management, which will have a lean staff. Most Theravance employees will go with Theravance Biopharma.

Creating A New R&D Company

The proposed deal would seed Theravance Biopharma with about $300 million, which is expected to be enough to fund it through “significant” milestones over the following two or three years.

The research-focused Theravance Biopharma would retain a 98% interest in the bifunctional muscarinic antagonist-beta2 agonist (MABA) programs, also partnered with GSK [See Deal]. Royalty Management will hold a 2% interest in these programs.

The most advanced MABA is GSK961081, which is in late-stage development for COPD. It combines both muscarinic antagonist and beta2 receptor agonist activities in a single molecule. GSK is expected to advance it into Phase III trials this year, and the partners are also developing a combination of ’081 with fluticasone furoate. GSK would pay a royalty of 10% to 20% on worldwide net sales up to $3.5 billion and 7.5% thereafter. The pharma pays for all R&D and commercialization expenses for this program.

The Theravance Biopharma pipeline will also include Phase III ready TD-1211 (mu opioid receptor inhibitor) to treat opioid-induced constipation and TD-9855 (norepinephrine and serotonin reuptake inhibitor), which is in Phase II testing to treat attention deficit/hyperactivity disorder (ADHD) and fibromyalgia. Theravance Biopharma will also retain the only marketed product, Vibativ (telavancin) to treat skin and skin structure infections (cSSSI) caused by Gram-positive infections. Former partner Astellas Pharma Inc. returned rights to Vibativ to Theravance in January 2012 due to slow sales ([A#28120111010]).

About two-thirds of Theravance’s current valuation is expected to be assigned to Royalty Management, while the remaining one-third will go to Theravance Biopharma, said analyst Brian Skorney of Robert W. Baird & Co. in a note. He sees the valuation of the latter as driven by the MABA royalty interest. Theravance has a $3.2 billion market cap.

The separation of the two companies is expected to complete by late 2013 or early 2014 through a dividend of shares of Theravance Biopharma to shareholders. The current Theravance corporate structure will become Royalty Management, which may itself assume a new name and ticker. The deal is contingent on the effectiveness of a Form 10 registration statement to allow Theravance Biopharma to become a public company.

Investors warmed to the deal; sending shares up 10% on Friday. Earlier this month, a much smaller biotech, Resverlogix Corp., proposed a similar split of its platform from its lead candidate in hopes of an acquisition upon Phase IIb data due in June Also see "In Anticipation Of Acquisition, Resverlogix Spins Out Epigenetics Platform" - Pink Sheet, 9 April, 2013..

Theravance To Split Into A Royalty Play and An R&D Company

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