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Theravance, Inc. (NASDAQ:THRX)

Royalty Participation Agreement with Elan Conference Call

May 13, 2013 8:00 AM ET

Executives

Mike Aguiar – SVP and CFO

Rick Winningham – Chairman and CEO

Analysts

Howard Liang – Leerink Swann

Ian Somaiya – Piper Jaffray

Ronny Gal – Sanford C. Bernstein & Company

Alexander Robinson – Tenor Capital Management Company

Stephen Willey – Stifel Nicolaus

Operator

Ladies and gentlemen, good morning. At this time, I’d like to welcome everyone to the Theravance Conference Call. During the presentation all participants will be in a listen-only mode. A question-and-answer session will follow the company’s formal remarks. (OPERATOR INSTRUCTIONS) I’ll repeat these instructions after management completes their prepared remarks. Today’s conference is being recorded and I now I’d like to turn the call over to Mike Aguiar, Senior Vice President and Chief Financial Officer. Please go ahead sir.

Mike Aguiar

Good morning everyone and thank you for joining us. With me on the call today is Rick Winningham, our Chief Executive Officer. Early this morning Eastern Time Theravance issued a press release announcing that we’d entered into a $1 Billion Royalty Participation Agreement with Elan Pharmaceuticals relating to certain respiratory assets partnered with GSK.

Before we get started, we would like to remind you that this conference call contains forward-looking statements regarding future events and the future performance of Theravance. Forward-looking statements include anticipated results and other statements regarding Theravance’s goals, expectations, strategies and beliefs.

These statements are based upon the information available to the company today, and Theravance assumes no obligation to update these statements as circumstances change. Future events and actual results could differ materially from those projected in the Company’s forward-looking statements. Additional information concerning factors that could cause or results to differ materially from our forward-looking statements, are described in our press release and in greater detail in the Company’s Form 10-K filed with the SEC.

I’ll now turn the call over to Rick Winningham, our Chief Executive Officer. Rick?

Rick Winningham

Thanks Mike. Good morning everyone. 2013 is off to a good start for Theravance. On Friday, GSK and Theravance announced BREO ELLIPTA was approved in the U.S. as an inhaled long-term, once-daily maintenance treatment of airflow obstruction and patients with Chronic Obstructive Pulmonary Disease or COPD including chronic bronchitis and/or emphysema. BREO ELLIPTA is also indicated to reduce exacerbations of COPD in patients with a history of exacerbations.

We believe that the FDA approval of BREO ELLIPTA brings an important inhaled once-daily maintenance therapeutic option to COPD patients and doctor’s across the United States, which was a very important milestone for Theravance representing more than a decade of joint respiratory research and development between Theravance and GSK. The approval is a credit to the medical and scientific teams at GSK and Theravance, clinical investigators, and to the patients who participated in the clinical studies.

Early this morning Eastern Time, we announced that Theravance and Elan have entered into a $1 Billion Royalty Participation Agreement. This agreement covers royalties in respect to four of our six programs partnered with GSK. Those programs are RELVAR, ELLIPTA/BREO ELLIPTA, ANORO ELLIPTA, ‘081 MABA monotherapy and VI monotherapy. This agreement does not cover royalties in respect of our other drug programs, including our two potential triple-therapy programs UMEC/VI and FF sometimes referred to as the close triple and MABA combined with the inhaled corticosteroid.

Under the terms of the agreement, Elan will make a one-time cash payment of $1 billion to Theravance in exchange for a 21% participation interest in the potential future royalty payments from these four programs when, as, and if, received by Theravance. We are very excited to partner with Elan in this transaction as it recognizes the significant value of these four programs from our GSK collaboration.

Importantly, this agreement complements our strategy to facilitate and accelerate the return of capital to our stockholders and to build value. It is consistent with our recently announced plans to separate Theravance into two independent companies, which are referred to in this call as Royalty Management Company and Theravance Biopharma and does not change the overall structure of the planned separation, including which assets are expected be in each company.

The transaction is not subject to any material conditions, other than approval by Elan’s shareholders, which is required under the Irish Takeover Rules. We understand that Elan plans to promptly prepare the required documentation to enable it, to hold a shareholder vote, which Elan has agreed to hold within 35 days. If approved by Elan’s shareholders, the parties expect the transaction to be consummated by the end of June 2013.

I would now like to turn the call over to Mike Aguiar, our Chief Financial Officer who will discuss the financial impact on Theravance. Mike?

Mike Aguiar

Thank you, Rick. Theravance is very excited about this transaction as it recognizes the significant value of four of the six current respiratory assets partnered with GSK and facilities our previously announced strategy of returning capital to stockholders of Royalty Management Company following the planned separation of company’s businesses, either in late 2013 or early 2014.

From a tax perspective, this will likely be considered a taxable sale when the transaction is completed. We anticipate that Theravance’s NOLs will be available to offset a significant portion of Federal and state taxes arising from this transaction. As a result, we do not expect to pay significant income taxes.

Finally, I would like to make a few comments on the anticipated use of proceeds. We expected the proceeds from this transaction will be primarily directed toward our return of capital strategy consistent with our recently announced plan to separate Theravance’s businesses into two independent companies, Royalty Management Company and Theravance Biopharma. We intend for Theravance Biopharma to continue Theravance’s strategy and to primarily focus on the discovery, development, and commercialization of small molecule medicines in areas of significant unmet medical need.

We intend the Royalty Management Company to be the primary vehicle for the return of capital strategy related to the programs that will manage, which are RELVAR ELLIPTA/BREO ELLIPTA, ANORO ELLIPTA, and VI monotherapy, and that the proceeds from this transaction will facilitate an accelerate returns to stockholders following the separation. This transaction does not change the overall structure of the planned separation, including which assets are expected to be in each company.

Additionally, we do not plan to increase 2013 R&D spending, above what was included in our 2013 expense guidance. Again, the principal drivers of this transaction were to recognize the value of these assets and to accelerate our return of capital strategy. Theravance is currently evaluating the optimal strategy to return capital to stockholders of Royalty Management Company following the separation.

As mentioned in the press release, these potential strategies include dividends or the repurchase of shares and or convertible debt. We will provide further communication on our plans return capital, as we finalize details around the separation, tax impacts and timing. I will now turn the call back to Rick for final closing comments. Rick?

Rick Winningham

Thanks Mike. In Summary, this transaction provides for only 21% of our potential royalty payments when, as and if received on four of the six respiratory programs under partnership with GSK. RELVAR, BREO, ANORO, 081 MABA monotherapy and VI monotherapy, in exchange for $1 billion. We believe that this is a very compelling transaction for our stockholders at this time, coming on the heels of the approval of BREO ELLIPTA last Friday.

We believe very strongly in GSK’s ability to market BREO ELLIPTA as well as the other programs, if approved and look forward to these programs being very successful. We intend to execute a return of capital plan to stockholders. We are off to a strong start in 2013, with the approval of BREO ELLIPTA for COPD in the U.S. in a substantial royalty participation deal with Elan.

Looking forward, we have a number of important events remaining in 2013 including anticipated U.S. launch of BREO ELLIPTA during the third quarter, potential regulatory actions for RELVAR ELLIPTA in Europe, a December PDUFA goal date for ANORO. The planned advancement of MABA 081 into Phase 3 and the potential for a number of internal Theravance programs to complete Phase 2 studies.

I’m incredibly proud of the accomplishments of the Theravance team and I look forward to an exciting year. This concludes our prepared remarks and now I’d like to turn the call over to the conference facilitator to open the call for questions.

Question-and-Answer Session

Operator

Thank you sir. (OPERATOR INSTRUCTIONS) Our first question comes from Howard Liang with Leerink Swann.

Howard Liang – Leerink Swann

Thanks for taking the call. Is there a breakup fee for the transaction?

Mike Aguiar

There is a breakup fee, however, we haven’t disclosed that at this particular point, but yes there is a breakup fee that’s payable in certain instances.

Howard Liang – Leerink Swann

I think regarding the duration of this deal, I think Elan said it’s the later of 15 years from launch or the expiration of the patent exclusivity. What if the patent expires, but there has been no generic products in the market?

Mike Aguiar

We haven’t gone into exquisite detail on that. I think that Elan was correct, it was the term of the royalty arrangements under our agreements with GSK, and this mirrors that. There are certain adjustments that happen given in event of the generic entrance and things like that, but again, we haven’t gone into specific detail around this. So, I would just say there are typical and customary adjustments that can happen at certain situations.

Howard Liang – Leerink Swann

Okay and just last question; I will go back to the queue. So Elan does not have an ownership in either Royalty Management Company or Theravance Biopharma. It’s just – it’s sort of passive receiver of the royalty, is that correct?

Mike Aguiar

That is correct, this is just purely a royalty participation right. There is no ownership nor assignment of agreements or anything along those lines. This is purely a right to participate in royalties when, as, and if received by Theravance.

Howard Liang – Leerink Swann

Thank you very much.

Mike Aguiar

Thank you.

Operator

Our next question comes from Ian Somaiya with Piper Jaffray.

Ian Somaiya – Piper Jaffray

It’s Ian Somaiya, couple of questions. First, can you just speak to sort of the timelines from start to finish for Elan? How quickly this deal came into play?

Rick Winningham

Sure Ian. I mean just very generally, the overall discussions just happened very quickly. I really wouldn’t want to put any more guidance other than they just happened very quickly.

Ian Somaiya – Piper Jaffray

And is this is a competitive process or are you proactively seeking interest in a portion of the royalty stake?

Rick Winningham

No, I wouldn’t want to comment on the process.

Ian Somaiya – Piper Jaffray

Okay and just, did you think about the evaluation, $1 billion implied, $5 billion evaluation for the entire royalty stream? Can you just give us a sense of what the assumptions are in terms of maybe even generally the value of BREO versus ANORO or any of the other component drugs?

Mike Aguiar

Yes Ian. Unfortunately, I wouldn’t want to get into that level of detail in terms of that. I mean, obviously, we took a look at our internal forecasts, our current strategy around returning capital to shareholders, opportunity to accelerate that return on capital. So there were a variety of factors we consider whether it’s a good deal or not for our shareholders, but I would not want to get into specifics around program A versus program B. Just at the top level, we think this is a really solid deal and are very happy with it, but again I wouldn’t want to talk about the specific assets.

Rick Winningham

I think Elan performed their due diligence on strictly publicly available information on the programs in their own internal outlook as to the future of the respiratory markets.

Ian Somaiya – Piper Jaffray

Okay, maybe just one last question on the tax treatment. You said it’s going to be taxable. You’re going to use NOLs to offset it. Can you give us a sense of what portion of NOLs remains at the conclusion of this deal or closing of this deal?

Mike Aguiar

Yes, so that obviously will depend on where we end up this year the end of the year. We ended 2012 with about $1.2 billion worth of total NOLs. There are also various state tax credits and things like that. So, we have to see what our overall taxable income is for this year and there will be some portion left over, what the exact number that remains to be seen, sort of quick and dirty math says you have around $1 billion of gain, a $1.2 billion of NOLs, plus whatever we add that this year.

So, there will still be clearly several hundred million available likely by the end of the year.

Ian Somaiya – Piper Jaffray

Okay, thank you very much.

Mike Aguiar

Thanks.

Operator

Our next question comes from Ronny Gal with Bernstein.

Ronny Gal – Sanford C. Bernstein & Company

Thank you for taking my question. I joined a couple minutes late, if you have answered a couple of those questions already, I apologize. But I guess the first question is, you obviously have one dominant shareholder, it is GSK, and the question is, when did you notify them of that transaction, was that over this weekend or was that couple of weeks ago?

Rick Winningham

No, we informed them very recently.

Ronny Gal – Sanford C. Bernstein & Company

Okay, so essentially the question I’m getting from investors are coming from two sides. First of all, essentially could you actually find enough buyers in the royalty market to sell a 100% of your royalties. Obviously, there are a (inaudible) investors between GSK coming in and buying those royalty streams versus you being able to place 100% of them with royalty vehicles.

So I guess you guys probably had a round of discussion already with royalty players. I know the pricing range is one and different issue, but reasonably once do you do this deal, you make it much harder for your large partner to essentially not have royalty bearing partners (inaudible)the assets? So the question would be, do you think you would be able to place 100% of those royalties with the capital markets?

Mike Aguiar

Yes, I don’t know that I want to make a comment of whether we could find buyers for 100% or not, obviously royalties are fairly desirable today. You can look at some of the activity that’s happening out there. I would just say, with regard to this transaction, we are quite pleased with where it is and the value that represents for our shareholders, and we are pretty comfortable with our strategy as of today whether we would choose to do future things or not is a completely separate issue, and I wouldn’t want to get any further down that line, but again obviously with the activity you are seeing with some other companies, there is clearly an interest of various purchasers to acquire additional royalty assets.

Ronny Gal – Sanford C. Bernstein & Company

So I think you’re telling me that you’ve considered this issue of whether one buyer for 100% is better or whether you want to divide the assets, and based on your current assessment, you are not losing anything by placing 20% with one player.

Mike Aguiar

No, I think this was a terrific transaction for Theravance shareholders, and again I do want to emphasize the one additional point that we mentioned earlier, which is our strategy with a separation was to accelerate returns of capital to shareholders, and this really facilitates that quite a bit. So again, I think it’s just entirely consistent what we’ve talked about doing from the point of announcing the separation on forward.

Ronny Gal – Sanford C. Bernstein & Company

Very good and last the process from getting Elan’s shareholder approval, can you give us a feel for the duration of time between now and the time they will actually close this?

Mike Aguiar

Well, we announced in the release today that Elan had committed to get the documentation together to support a shareholder vote within the next 35 days, so that -- I think is the best current guidance I can give today.

Ronny Gal – Sanford C. Bernstein & Company

Very good. All right. Thank you very much and congratulations on a fabulous deal.

Mike Aguiar

Thank you Ronny.

Operator

Our next question comes from Alexander Robinson with Tenor Capital.

Alexander Robinson – Tenor Capital Management Company

(Inaudible) hosting the call. Just two questions, first, if Royalty Management Company should at some point in the future become subject to a change of control, is there any sort of impact on this Elan arrangement that you’ve announced.

Rick Winningham

No, there is no impact from a change of control on this agreement.

Alexander Robinson – Tenor Capital Management Company

Okay and second question, does Elan have any sort of first right of refusal or most favored nation status, if anyone should at some point take an interest in acquiring, the 79% remainder of these assets that you’re keeping?

Rick Winningham

No, there is no right of first refusal or anything like that.

Alexander Robinson – Tenor Capital Management Company

Okay, thank you very much.

Rick Winningham

All right. Thank you.

Operator

Our next question comes from Howard Liang with Leerink Swann.

Howard Liang – Leerink Swann

Thanks for taking the follow-up. Can you talk about what is the rationale behind the 21%?

Mike Aguiar

I don’t think there’s any specific magic on that number. It was a negotiated transaction. We wanted to have, what we felt was a reasonable amount of capital coming into support of strategy by accelerating rate of returns of capital to shareholders. There is sort of – I know you think about it’s about right some numbers too small, some numbers too big. So we were trying to solve for an overall number that would really facilitate, the return of capital in an accelerated fashion and also represent the right thing for shareholder.

So I would say, as largely a negotiated deal and something that was discussed quite heavily with the board to make sure, we were getting where that was right amount of capital support return of capital strategy.

Rick Winningham

And so Elan has no part of obligation for the $20 million now so to GSK.

Mike Aguiar

Correct, that obligation for the approval amount of milestones that remains with Theravance and the Royalty Management Co. post separation.

Howard Liang – Leerink Swann

Okay then just on the MABA. I think it’s only – not only gets the MABA alone, I guess not part of the triple, is this so they just get no part of – no royalty at all on the combination of MABA with ICS or what they get, on MABA’s share in that comp?

Mike Aguiar

It’s correct, so the way this deal works is for BREO ELLIPTA, ANORO ELLIPTA, RELVAR ELLIPTA. So those three plus MABA ICS and MABA monotherapy. Those are the assets that Elan has royalty participation rights in. For any other combination of MABA, so for example MABA ICS or for what we call the closed triple or you know the combination of the UMEC/VI and FF in a single device. Those assets are not included in this deal. So they have no royalty participation rights in those assets.

Howard Liang – Leerink Swann

Okay, thanks very much.

Mike Aguiar

Thanks Howard.

Operator

Our next question comes from (inaudible).

Unidentified Analyst

I wanted to just understand what the process was, how extensive did you reach out to other royalty players, buyers to purchase the assets and then, why did you not sort of reach out to the GSK to sort of let them participate or wouldn’t they be one of the most natural buyers of the asset?

Mike Aguiar

I don’t really want to go too deeply into exactly the process without, I think I would just say, we are pretty pleased with the outcome overall, but again I wouldn’t want to get into the specific to sort of timelines and who we did or didn’t contact etc. I think at the end of the day, the overall transaction is very, very good for our shareholders. We are very pleased with it, but again the specifics around the transactions, I wouldn’t want to get into.

Unidentified Analyst

Can I just ask, if it was a one-on-one negotiation with Elan or at least who market tested it, otherwise?

Mike Aguiar

Again that would be getting into specifics around the overall process, which I really wouldn’t like to do at this point.

Unidentified Analyst

Okay.

Operator

Our next question comes from Stephen Willey with Stifel.

Stephen Willey – Stifel Nicolaus

I’ve got a question and maybe just a follow-up to Howard’s question, but I’m not sure which color you’re going to provide around, I guess to what extent if any where the triple based product royalties involved in the Elan negotiations and are those kind of more important to you, from a strategic perspective at this point going forward or would you actually look for monetize those if the price was right?

Rick Winningham

Well, I think the triple therapies were represented by MABA combined with an ICS or the closed triple, are strategically quite important for Theravance and I believe there will be successfully developed and commercialized, will be quite important for patients. I think, what we do with those assets in the future relative to the royalty stream coming off of those particular assets is sort of TVD, I think we’ll do whatever is in the best interest of our shareholders.

Stephen Willey – Stifel Nicolaus

Okay. Thanks.

Operator

Thank you. It appears that we have no other questions on the phone. I would now like to turn the call over back to Mr. Winningham. Please go ahead sir.

Rick Winningham

Okay, thank you very much operator and thanks everyone for participating and joining us in this announcement of very important news for Theravance and its shareholders and have a great day.

Operator

This does conclude today’s conference call. We thank you for your participation, you may now disconnect.

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