Following in the footsteps of Abbott Laboratories (NYSE:ABT) spinning out its drug division into AbbVie Inc (NYSE:ABBV), and Pfizer spinning out its animal health division into animal health products into Zoetis, Theravance Inc (NASDAQ:THRX) is splitting up.
Unlike big pharma though, biotech companies don’t tend to have multiple products that have little to do with each other. Instead, Theravance Inc (NASDAQ:THRX) is separating its products, which should be generating revenue shortly, from those that will burn cash for awhile.
Theravance Inc (NASDAQ:THRX) isn’t the first biotech to think of the idea. Multiple biotech companies have made similar splits with varying degrees of success.
A few years ago, genetic-tests maker Myriad Genetics, Inc. (NASDAQ:MYGN) spun off its drug discovery business, Myrexis. It didn’t work out too well for investors that held, either. Myrexis is trading on the pink sheets, nearly worthless, while Myraid is down about 25% since the split. Of course, you could argue that Myriad Genetics, Inc. (NASDAQ:MYGN) would be down more if it had held onto the drug development business, which didn’t end up developing much.
PDL BioPharma Inc. (NASDAQ:PDLI) did much better with the spin out of its development stage program into Facet Biotech. The biotech started trading at $13 per share, and was eventually taken out by Abbott for $27. The main assets now reside in Abbott’s aforementioned spinout AbbVie in conjunction with Biogen Idec, which was developing the drugs with PDL. If the drugs are successful, maybe the duo will spin them out into a joint venture, completing the cycle?
Most recently Elan Corporation, plc (ADR) (NYSE:ELN) spun out its drug discovery business into Prothena. Without the burden of a drug discovery unit, the parent company is now being pursued by Royalty Pharma, although Elan isn’t keen on its current offer.
One has to think a potential sale is one of the driving forces in Theravance Inc (NASDAQ:THRX)’s decision. The assets that should be generating revenue soon — lung drugs Breo and Anoro — have been submitted to the Food and Drug Administration for marketing approval by Thervance’s partner GlaxoSmithKline plc (ADR) (NYSE:GSK). Much like PDL, the new biotech company will essentially be a holding company, collecting royalties from Glaxo, and paying it out to shareholders as dividends.
Unlike PDL, the holding company will only have one partner, making it ripe for a takeout. Theravance Inc (NASDAQ:THRX), of course, has long been speculated as a takeout target of Glaxo, but the split makes things much cleaner; pharmas don’t like to pay extra for entire biotech companies if they don’t want all the assets. The new entity makes for a clean takeout of the assets by GlaxoSmithKline plc (ADR) (NYSE:GSK) to avoid paying the royalty. Of course, GlaxoSmithKline plc (ADR) (NYSE:GSK) could have purchased the full rights to the assets directly from Theravance Inc (NASDAQ:THRX), so one has to assume that either GlaxoSmithKline plc (ADR) (NYSE:GSK) isn’t interested at the moment, or that Thervance’s management wasn’t willing to let it go for a price Glaxo was willing to pay.
Either way, splitting into two biotech companies will make it easier for GlaxoSmithKline plc (ADR) (NYSE:GSK) to make a move when/if it makes financial sense.
The article Biotech Companies Breaking Up originally appeared on Fool.com and is written by Brian Orelli.
Fool contributor Brian Orelli has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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