Theravance Inc (THRX), GlaxoSmithKline plc (ADR) (GSK), Elan Corporation, plc (ADR) (ELN): Who Benefits From This Market Moving Biotechnology Partnership?

Back towards the end of April 2013, Theravance Inc (NASDAQ:THRX) surprised everyone when it announced plans to split into two separate companies. The two companies will split its independent biopharmaceuticals operations and its respiratory assets (including the recently approved BREO ELLIPTA) partnered with GlaxoSmithKline plc (ADR) (NYSE:GSK). Since this announcement, news of yet another partnership with Elan Corporation, plc (ADR) (NYSE:ELN) might leave investors confused as to the direction of the company. My question is for whom does this new partnership benefit?

Large sales potential for Theravance products

If we look at just the respiratory segment, which is partnered with GlaxoSmithKline plc (ADR) (NYSE:GSK) and now Elan Corporation, plc (ADR) (NYSE:ELN), Theravance Inc (NASDAQ:THRX) now has one FDA approved product and another near approval. The company’s FDA approved product, BREO ELLIPTA, is entering the massive COPD market. It’s reported that this market was $11 billion in 2012 for medications taken twice a day. BREO ELLIPTA will benefit from this market, with peak sales expectations of $4 billion.

The other drug ANORO ELLIPTA will also be used for COPD. The difference is that this drug is taken once daily and is a $4.6 billion market for the once daily Tiotropium. It is estimated that peak sales for this product will exceed $1 billion, and should be near $1.5 billion. However, it is not yet approved, although it has completed studies and is currently awaiting an approval.

How is the revenue split?

When a small biopharmaceutical company has a potential blockbuster product, they almost always partner with a larger company that has more resources to launch. As a result, it cuts the costs associated with marketing, sales, development, and operations. It allows the company to focus solely on the development of other products. In the case of Theravance Inc (NASDAQ:THRX), four total with GlaxoSmithKline plc (ADR) (NYSE:GSK) and a large pipeline for its “new business.”

With GlaxoSmithKline plc (ADR) (NYSE:GSK), Theravance Inc (NASDAQ:THRX) got a fair deal. The company will receive royalties of 15% for global sales up to $3 billion and then 5% on all sales following $3 billion for BREO ELLIPTA. For ANORO ELLIPTA the royalties are upward tiering and range from mid-single digits to 10%.

It is projected that within three years sales of BREO ELLIPTA could reach $1.5 billion, which should then move Theravance into the 5% royalty rate. If we use a 30% growth rate for the following three years then total sales should see more than $9 billion in the first six years after launch. If ANORO ELLIPTA follows a similar pattern of reaching half of its peak sales within three years ($700 million) and continues with the same growth rate (30%), then it could produce total sales of $4 billion in its first six years.

If my estimates are near correct, which are consistent with analysts, then Theravance Inc (NASDAQ:THRX) should receive $1 billion in royalties during the first six years after launch (by 2020). If peak sales are reached for both products then the company would receive annual royalties of $300 million after the six year period. While the company does have two Phase 2 candidates, those products are still far from approval and should not be incorporated into future revenue. Therefore, when we look at Theravance’s deal with Elan Corporation, plc (ADR) (NYSE:ELN), longs should be satisfied.