Elan Corporation ( ELN - Snapshot Report ) recently inked a deal with Theravance Inc. ( THRX - Analyst Report ) to purchase a participation interest in potential future royalty payments for a one-time cash payment of $1.0 billion. The royalty payments are related to the four respiratory programs that Theravance partners with GlaxoSmithKline ( GSK - Analyst Report ) .

Elan is expected to receive a 21% participation interest in potential future royalty payments from the four respiratory programs: Relvar Ellipta/Breo Ellipta, Anoro Ellipta, MABA (bifunctional muscarinic antagonist-beta2 agonist) monotherapy (GSK961081, or MABA ‘081), and vilanterol (VI) monotherapy.

The transaction is yet to be approved by Elan’s shareholders. In the event of Elan’s shareholders approving the deal, it is expected to complete by the end of June 2013.

We note that Theravance is entitled to receive royalties of 15% from Glaxo on the first $3.0 billion of combined annual global net sales of Relvar Ellipta/Breo Ellipta and VI monotherapy. Theravance will be receiving 5% of combined annual global net sales above $3.0 billion. Ellipta/Breo was recently approved for the treatment of chronic obstructive pulmonary disease (COPD) in the US.

Theravance is also expected to receive royalties in the mid-single digit to 10% on annual global net sales of Anoro Ellipta on approval. Anoro Ellipta is currently under review in the US for the treatment of patients suffering from COPD. A final decision from the US regulatory body is expected in Dec 2013.

Theravance is expected to receive royalties in the range of 10% to 20% for the first $3.5 billion annual global sales of MABA ‘081 and 7.5% thereafter. MABA ‘081 is currently in phase II development and is expected to be advanced to a phase III study this year.

We believe the agreement is a smart move from Elan. The transaction will enable Elan to receive royalties on a regular basis. The transaction will also diversify Elan’s current portfolio. The company expects the transaction to be earnings accretive from 2014.

The company has taken several strategic initiatives following the loss of its multiple sclerosis drug, Tysabri. Elan expects to announce additional strategic transactions in the near term as well.

Elan, a biotechnology company, currently carries a Zacks Rank #2 (Buy). Athersys Inc. ( ATHX - Snapshot Report ) appears to be more favourably placed in the biotech space with a Zacks Rank #1 (Strong Buy).