Why Theravance Shares Soared Again

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Theravance , which specializes in developing therapies to treat central nervous and respiratory disorders, rallied as much as 16% -- its second straight day of double-digit gains -- following the announcement that Elan had entered into a $1 billion royalty deal with Theravance.

So what: On the heels of Friday's approval from the Food and Drug Administration of inhaled long-acting COPD maintenance treatment Breo Ellipta, which was co-developed by Theravance and GlaxoSmithKline , cash-rich Elan agreed to pay Theravance $1 billion for a 21% royalty stake in four of Theravance's respiratory program drugs. These include the recently approved Breo Ellipta, as well as Breo Anoro, which is also being developed with Glaxo and is forecast to also be a blockbuster drug if approved. With respect to Elan, in addition to gaining a much needed revenue stream from this deal, it also adds a monkey wrench into private equity firm Royalty Pharma's $6.7 billion, or $11.25 per share, takeover bid, which Elan's board has voted overwhelmingly against.

Now what: Talk about your Monday morning deals out of left field! I give Elan credit for thinking outside of the box, but $1 billion for a "stake" in Theravance's respiratory program seems like a bit of a stretch. It could take an extremely long time before Elan sees any big benefits from this deal, and I highly doubt it'll add significantly to shareholder value any time soon. Conversely, for Theravance it's a great deal as it received top-dollar for a stake in its royalty revenue stream. Shareholders in Theravance certainly have no reason to complain this year and should get even more earnings and pipeline visibility when it splits into two separate companies later this year or early 2014.

Craving more input? Start by adding Theravance to your free and personalized watchlist so you can keep up on the latest news with the company.

While you can certainly make huge gains in biotechs like Theravance, the best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

The article Why Theravance Shares Soared Again originally appeared on Fool.com.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story