Innoviva, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Innoviva is a royalty-management company whose current royalty revenue is derived from respiratory products partnered with GSK.
Financial performance
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net revenue | $52.4 million | $40.5 million; up 29% |
| Operating income | $40.7 million | $29.3 million |
| Net income attributable to Innoviva stockholders | $29.6 million | $16.8 million |
| Basic / diluted EPS | $0.29 / $0.27 | $0.16 / $0.15 |
| Operating cash flow | $49.9 million | $27.8 million |
Royalty revenue, net of $3.5 million amortization of fees paid to GSK, was $52.4 million, up 30%. Gross royalties were $55.8 million: RELVAR/BREO $46.2 million, ANORO $8.7 million and TRELEGY $1.0 million. Operating margin was approximately 77.7%, versus 72.5% a year earlier.
GSK reported Q1 product sales of $307.7 million for RELVAR/BREO (up 19%), $134.2 million for ANORO (up 73%), and $14.6 million for TRELEGY. Innoviva attributed revenue growth primarily to prescription and market-share growth for RELVAR/BREO and ANORO, and TRELEGY’s launch in late 2017.
Liquidity, debt and cash flow
At March 31, 2018, cash and cash equivalents were $27.1 million and short-term marketable securities were $29.3 million, totaling $56.5 million. GSK-related receivables were $55.8 million. Current assets were $113.2 million; current liabilities were $4.1 million. Stockholders’ deficit was $212.7 million.
Debt principal totaled $557.2 million: $123.8 million on the Term B Loan, $241.0 million on 2023 convertible notes and $192.5 million on 2025 convertible notes. Net long-term debt carrying value was $484.6 million. On February 28, Innoviva prepaid $120.0 million of the Term B Loan, reducing its principal from $243.8 million; the prepayment generated a $3.1 million debt-extinguishment loss. Interest expense fell 40% to $7.7 million, primarily reflecting lower average debt.
Investing activities provided $26.5 million, mainly from security maturities. Financing activities used $122.6 million, chiefly for the loan prepayment and $2.6 million of share repurchases to satisfy tax withholding. Cash declined by $46.2 million during the quarter. Management said projected royalties and available cash and securities should cover anticipated debt service and operating needs for at least 12 months under current plans.
Material changes and unusual items
- G&A expense was $11.7 million, including $3.2 million of cash severance and a $2.7 million reimbursement to Sarissa Capital under a February agreement. Q1 2017 included $4.2 million of proxy-contest and related legal costs.
- The CEO resigned in February; the CFO became interim principal executive officer while the company searches for a permanent CEO. Innoviva had nine employees at quarter-end. Three Sarissa designees joined the board under the agreement.
- ASC 606 was adopted January 1, 2018, with no material financial-statement impact. The company expected adoption of the new lease standard in 2019 to add a right-of-use asset and lease liability; it did not expect material effects on operating results or cash flows.
Outlook, risks and contingencies
The filing gives no numerical revenue or earnings guidance. Results depend on GSK’s development and commercialization decisions, product sales, pricing, reimbursement and market access. Innoviva receives royalties under specified agreements, including only a 15% economic interest in TRELEGY-related royalties assigned to TRC.
- All current and projected royalty revenue is tied to GSK products; weaker sales, competitive or generic entry, pricing pressure, changing treatment guidelines, safety or regulatory developments, or GSK reprioritization could reduce royalties.
- The company cites substantial debt obligations and potential limits on future stockholder returns. Term B Loan interest is variable; note holders may have repurchase rights following defined fundamental changes.
- Innoviva guaranteed certain facilities assigned to Theravance Biopharma if that entity defaults. Remaining lease payments were $14.0 million through May 2020; the recorded guarantee liability was $0.7 million.
- Management reported effective disclosure controls, but noted reduced segregation of duties after the CEO departure because the CFO also served as interim principal executive officer; additional oversight procedures were implemented.
- The company reported a minimal effective tax rate and expected taxable income, if generated in 2018, to be substantially offset by net operating losses or other deferred tax assets. Use of tax attributes may be limited.
Key facts for investors to verify
- Subsequent GSK sales, royalty reports and the sustainability of Q1 growth, especially for ANORO and TRELEGY.
- Cash generation and liquidity after the $120.0 million term-loan prepayment, alongside upcoming debt service and maturities.
- Progress on appointing a permanent CEO and the effectiveness of compensating controls for the temporary segregation-of-duties issue.
- Developments in generic competition, reimbursement and pricing, product labels and guidelines, and GSK’s commercial priorities.
- Potential exposure under the $14.0 million lease guarantee and any constraints on capital returns or royalty monetization.