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Shares of Theravance (THRX) gained 19% after GlaxoSmithKline gave the company a big vote of confidence as the pharmaceutical giant raised its stake in the company.

The deal

GlaxoSmithKline (GSK) bought 10 million shares of Theravance for $21.29 a piece, thereby boosting its capital by $213 million. This is a 9.2% premium over Friday's closing price of $19.50

As a result of the deal Glaxo's stake in the company will rise from 18.3% to 26.8%. Both companies have been partners in developing a drug called "Relovair" since 2002. The lung drug is expected to be placed in the regulatory approval trajectory of the FDA later this year. GlaxoSmithKline hopes that Relovair may be the successor of its current blockbuster drug Advair which has annual revenue of $8 billion.

Dilution
The announcement is good news for shareholders of Theravance. The company is able to raise $213 million in a transaction without paying fat fees to investment bankers and is able to sell shares at a premium, compared to the usual discount. At its latest quarterly filing the company reported $240 million in cash and $170 million in long term debt. The company needs the cash injection badly as Theravance lost $115 million over the year 2011.

Takeover
The fact that GlaxoSmithKline increased its stake once again in Theravance is good news as it might imply a potential acquisition of the entire company in the nearby future. A drawback is that if Relovair does not become a big blockbuster, the number of competing bids for the company might be limited due to the fact that Glaxo already holds a significant stake. In such a scenario, shareholders will most likely face significant losses anyway.

Vote of confidence?
GlaxoSmithKline could regard this new capital injection a "cheap" option to increase its stake in Theravance at a $2 billion valuation. In case Relovair becomes a blockbuster, GlaxoSmithKline will be the prominent suitor to acquire the entire company. If the drug trials reveal disappointing results, GlaxoSmithKline has spend a relative modest amount to keep Theravance solvent throughout the development trajectory.

Source: Theravance: Vote Of Confidence?