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Diversifying Royalties at a Hefty Cost

Brian Orelli
May 13, 2013

What do a multiple sclerosis drug from Biogen Idec (NASDAQ: BIIB) and several lung drugs from GlaxoSmithKline (NYSE: GSK) have in common? Basically nothing other than the fact they generate royalties for the biotechs that helped develop them.

That's apparently the point of Elan's (NYSE: ELN) new deal. The biotech is diversifying its royalty stream, moving beyond collecting royalties from Biogen's Tysabri to sign an agreement with Theravance (NASDAQ: THRX) to collect a portion of the royalties Thervance is due on Glaxo's lung drugs.

I'm not convinced it's necessarily the best use of cash -- returning it all to shareholders might be better -- but at least it's better than Elan in-licensing a bunch of compounds and reinventing its pipeline wheel.

In exchange for a $1 billion payment, Elan is entitled to 21% of royalties that Theravance receives on the four respiratory programs it helped develop: Breo, Anoro, GSK961081, and vilanterol, which is one of the components of Breo and Anoro.

Thervance gets royalties of 15% on the first $3 billion of combined annual sales of Breo and vilanterol monotherapy and 5% on sales above $3 billion. For Anoro, Glaxo pays royalties that range from mid-single digits to 10%. GSK961081 is a littl