Shionogi and ViiV Healthcare announce new agreement to commercialise and develop integrase inhibitor portfolio

ViiV Healthcare Ltd and Shionogi & Co., Ltd., announced that they have entered into an agreement substantially revising their integrase inhibitor relationship. Under the new agreement, ViiV Healthcare will acquire the exclusive global rights to the Shionogi-ViiV Healthcare LLC joint venture assets. The assets include the investigational medicine dolutegravir and other early stage integrase inhibitor compounds.

In the new relationship, Shionogi will receive a royalty on net sales of the integrase inhibitor portfolio averaging in the high teens. For a defined period post-launch, as the franchise is becoming established, the royalty applies to sales above certain minimum thresholds; after that period, the royalty applies to all sales. Shionogi will also become a 10% shareholder in ViiV Healthcare and will be entitled to a proportional share of ordinary dividends paid. Shionogi will be entitled to representation on the ViiV Healthcare Board, and will, for a defined period, continue to have ongoing involvement in the formulation of the development and commercialization plans for the integrase inhibitor portfolio. The deal is effective on 31 October 2012 and replaces the existing joint venture agreement between ViiV Healthcare and Shionogi.

The transaction is well aligned with both companies’ mutual goal to advance the integrase inhibitor portfolio most effectively and efficiently, while maximising the full potential long-term value of the assets. ViiV Healthcare will acquire exclusive development and commercialization rights to the integrase inhibitor portfolio. This will enable streamlining of R&D and commercial operations in order to maximise sales growth and shareholder returns. For Shionogi, the revised relationship offers the value of a royalty stream augmented by a shareholding in ViiV Healthcare itself, while releasing financial, operational, and R&D resources to support its other pipeline products in global development.

ViiV Healthcare was established in 2009 as a speciality HIV company between GlaxoSmithKline and Pfizer, with an 85%, 15% equity split respectively. Post transaction, equity positions in ViiV Healthcare are GSK: 76.5%, Pfizer: 13.5% and Shionogi: 10%. Should dolutegravir be approved in the US and EU, GSK would be entitled to 1.8% additional equity. This will be an adjustment between GSK and Pfizer and will not dilute Shionogi. In addition GSK, Pfizer and Shionogi will continue to each be entitled to certain preferred ordinary dividends on the products they contributed to ViiV Healthcare (including the integrase inhibitors).

David Redfern, Chairman of the Board, ViiV Healthcare stated: “The Shionogi-ViiV Healthcare joint venture has been extremely productive, with the first integrase inhibitor, dolutegravir, scheduled to commence filings before the end of the year. Both ViiV Healthcare and Shionogi believe that now is the right time to simplify and evolve their existing arrangement. In doing so, we will deepen the relationship as shareholders and at Board level. We will also unlock synergies through simplifying processes and avoiding duplication. We believe this new agreement will create long-term value for ViiV Healthcare and its shareholders.”

Dr. Dominique Limet, Chief Executive Officer, ViiV Healthcare stated: “Our key priority when we established ViiV Healthcare was to build a successful and sustainable business to deliver advances in treatment and care for people living with HIV and today’s agreement is a crucial milestone in delivering on that commitment.”

Isao Teshirogi, Ph.D., President and Chief Executive Officer, Shionogi & Co., Ltd. Stated: “The new deal perfectly aligns with the strategic goals and capabilities of both companies. Shionogi are able to secure a continued revenue stream from the integrase inhibitor portfolio as well as a stake in ViiV Healthcare itself, and will be able to contribute to the future direction of these compounds which we know very well and continue to be excited about. In parallel, we now have increased flexibility in our ability to dedicate resources to the global development of our internal development pipeline.”

Accounting post completion of the agreement

• Sales: ViiV Healthcare will record 100% of the net sales of the assets previously owned by the Shionogi-ViiV Healthcare JV
• Operating Costs: ViiV Healthcare will now record all operating costs (cost of sales, SG&A and R&D) related to the assets previously owned by the Shionogi-ViiV Healthcare JV
• GSK will continue to consolidate 100% of ViiV Healthcare into its consolidated financial statements
• The portion of ViiV Healthcare’s after-tax profit attributable to the non-controlling interests of Pfizer and Shionogi will be reflected in the GSK income statement
• The new agreement is expected to be recorded as a business combination. The estimated value of all the assets and obligations acquired, together with the estimated value of future royalty payments, will be included on GSK’s balance sheet.
• As a result of this transaction a non-cash accounting gain is expected to be recognized in GSK’s Q4 2012 non-core results.
• Future royalty payments to Shionogi will be recorded as a reduction of the royalty obligation on GSK’s balance sheet.