12:00 AM
Jul 02, 2007
 |  BioCentury  |  Finance

Calling card put away

When GlaxoSmithKline gained an exclusive option in 2004 to all of Theravance's programs through August 2007, the initial worry among investors was that THRX had become a hostage to the pharma giant. That turned out not to be the case. Indeed, by the time the option expired last week, no one on the Street expected GSK to exercise its call to acquire ownership of half of THRX. And on Friday that proved true.

Under the 2004 deal, GlaxoSmithKline (LSE:GSK; GSK) paid $20 million up front plus $108.9 million in an equity investment that increased its stake from 6% to 19%. The deal included the potential for $162-$240 million in clinical, regulatory and commercial milestones per program optioned under the deal, plus royalties (see BioCentury, April 5, 2004).

THRX raised $131.1 million in a follow-on in February 2006. At last April 30, GSK held 15.6%. Under last week's deadline, it could have exercised a call to acquire 50% of the biotech at $54.25 per share, an 81% premium to THRX's Friday close. Exercising the call would have extended the pharma's exclusive option to new programs at THRX through September 2012.

Even though THRX is up 45% from a recent low of $22.06 in June 2006, it is clear the Street had not been expecting GSK to pull the trigger. On Friday the stock declined $1.59 to $32 in anticipation of the news, which came after market, leaving THRX up $0.10 for the week.

THRX shareholders now have the right to require the company to acquire up to half of their stock at $19.38 per share, using funds provided by GSK - a potential $525 million obligation. This may be exercised from Aug. 1 until Sept. 12, but is hardly likely to happen, given the shares are so far under the put price.

So far, GSK has licensed THRX's long-acting muscarinic antagonist program (LAMA) and its muscarinic antagonist-beta 2 agonist (MABA) program. The pharma declined to exercise its option on Telavancin (TD-6424) and THRX's short-acting sedative-hypnotic (SASH) program. Astellas (Tokyo:4503) subsequently acquired worldwide rights to Telavancin.

Under a separate 2002 agreement, dubbed Beyond Advair, GSK also partnered with THRX to develop long-acting beta 2 agonists (LABAs) to treat and prevent asthma and chronic obstructive pulmonary disorder (COPD).

Going forward

Next up looks to be a decision on TD-5108, a selective serotonin (5-HT4) receptor agonist to treat chronic constipation. THRX spokesperson Allison Parker told Ebb & Flow that GSK will have 60 days to exercise its option once the biotech submits proof-of-concept data, which it expects to do shortly. Last week, THRX reported TD-5108 met the primary endpoint in a Phase II trial to treat constipation (see B19).

Parker said the pharma also retains an option to three discovery stage programs in hypertension, neuropathic pain and opioid-induced bowel dysfunction. GSK retains the right to see data in these programs any time through the completion of proof-of-concept trials. Again, it has 60 days to exercise its option once it sees these data.

However, by not exercising its call right last week, GSK has forgone its exclusive option to THRX programs initiated in the future.

Prior to the announcement, buysiders were skeptical that GSK would make this move. "I think the odds are relatively lower than 50-50 that GSK will come in for the call feature," said Kurt von Emster of MPM Capital.

GSK is already the largest single shareholder. "It had the opportunity to have one board seat, but hasn't taken it. You would think they would have, if there were a real yearning for control," noted von Emster.

At March 31, THRX had received $36 million in upfront and milestone payments related to the 2004 agreement. The Beyond Advair agreement had brought in another $60 million. In addition, GSK has covered all R&D costs for the licensed programs.

Ingenious combination

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