Theravance gets a fresh start

Meanwhile, Royalty Pharma bets that Trelegy will do better than the sellside expects.

Theravance’s latest move, to sell off the royalties it gets from GSK’s Trelegy Ellipta to Royalty Pharma, looks like a necessary one. With $1.1bn up front, the troubled company will get to repay its debts, return some money to shareholders, and even have something left for future drug development.

What about Royalty? On the surface this appears to be a canny deal exploiting a distressed biotech. But delve a bit deeper and it becomes clear that, for Royalty to make any money, Trelegy will have to outperform sellside expectations.

The total net present value of the transaction, including future milestone payments, is $1.6bn, Evaluate Vantage has calculated. Meanwhile, an analysis of consensus sellside forecasts from Evaluate Pharma puts the NPV of the royalty stream at just $1.5bn – a number that Royalty must be assuming undervalues the opportunity.

Royalty Pharma's balancing act ($m)
What Royalty Pharma pays…
Up front to Theravance 1,100
NPV of risk-adjusted milestones to Theravance 171
Up front to Innoviva 282
NPV of risk-adjusted milestone to Innoviva 47
…and what it stands to get
  2023e 2025e 2027e 2029e
Trelegy forecast sales 2,567 3,143 3,454 2,324
85% of GSK royalty (Theravance share) 185 227 250 168
15% of GSK royalty (Innoviva share) 33 40 44 30
Making the deal work
Total paid to Theravance 1,271 NPV of Theravance royalty 1,271
Total paid to Innoviva 329 NPV of Innoviva royalty 224
Note: Forecasts based on Evaluate Pharma sellside consensus; for convenience assumes deal ends at 2030; assumes 8.5% blended royalty rate and 6% WACC.

Our calculation factors in a blended royalty of 8.5%, around the midpoint of the 6.5-10% that Theravance and Innoviva have been receiving. Innoviva, the parent of Theravance, had retained a 15% stake in the latter; to get its hands on the Trelegy royalty stream Royalty is also paying $282m up front to Innoviva.

This analysis excludes sales beyond 2030 – after this time most US royalties return to Theravance. In any case, the companies only put the NPV of sales after this time at $200m.

Theravance gave a clue of its own expectations of what Trelegy can achieve, and the figures were all ahead of Evaluate Pharma consensus. For example, in 2023 the sellside forecasts Trelegy sales of $2.6bn, while Theravance cites $2.9bn, a figure on which it will hit a $50m milestone.

What's left?

Theravance might have lost its Trelegy cash cow, but it has also been freed from a dispute with Innoviva that had led to uncertainty about the Trelegy income.

What does Theravance have left? Its main money maker will be the royalty stream from Yupelri, sold in partnership with Viatris.

And Royalty is also making a side bet on Theravance’s ampreloxetine in symptomatic neurogenic orthostatic hypotension (nOH) in patients with multiple system atrophy (MSA).

This looks like a risky wager: ampreloxetine has already failed a pivotal trial in the wider nOH indication. Still, Royalty is only giving Theravance $25m up front; this should fund “the majority” of the phase 3 study the latter plans to start in MSA in 2023.

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