Theravance Inc. ( THRX - Analyst Report ) recently announced that it has inked a deal with Merck ( MRK - Analyst Report ) for the discovery, development and commercialization of novel small molecule therapeutics for treating hypertension and heart failure.

Per the terms of the deal, Theravance will grant Merck an exclusive, global license for its candidates. The deal will see Theravance receiving an upfront payment worth $5 million apart from research related funding from Merck. Moreover, Merck will have to make milestone payments of up to $148 million for the first indication. Furthermore, Theravance will receive royalties from Merck on global net sales of any products derived from the agreement.

We note that this is the second major deal inked by Theravance over the past few weeks. Earlier in the month, Theravance announced that it has entered into an agreement with a privately held, Italy based company, Alfa Wassermann S.p.A. for the development and commercialization of the former’s velusetrag (TD-5108) in some countries. Velusetrag, an investigational 5-HT4 agonist, is being developed for treating patients suffering from gastrointestinal motility disorders.

As per the agreement, both companies will undertake the responsibility of conducting a two-part phase II program. The phase II program will evaluate the efficacy, safety and tolerability of velusetrag in patients suffering from gastroparesis. Alfa Wassermann will fund this program.

Our Recommendation

Currently, we have a Neutral stance on Theravance. The stock carries a Zacks #3 Rank (Hold rating) in the short run. Though we are concerned about the challenges currently faced by Theravance relating to Vibativ’s supply following the termination of its collaboration with Astellas, we are impressed by Theravance’s pipeline.

In particular, we are positive on Theravance’s collaborations with GlaxoSmithKline ( GSK - Analyst Report ) for respiratory candidates, which include FF/VI (proposed brand names: Breo in the US and Relvar in the EU), LAMA/LABA (UMEC/VI) and MABA (GSK961081). FF/VI is currently under regulatory review and a final decision is expected by May 12, 2013. On approval, it will be positioned as a replacement for Glaxo’s Advair.