Innoviva, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; filed May 5, 2017. Innoviva’s business is primarily royalty income from respiratory medicines commercialized by GSK, principally RELVAR/BREO ELLIPTA and ANORO ELLIPTA. Unless indicated otherwise, amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 / prior balance-sheet date |
|---|---|---|
| Total net revenue | $40.5 million | $24.2 million |
| Operating expenses | $11.1 million | $6.6 million |
| Operating income | $29.3 million | $17.5 million |
| Net income | $16.8 million | $4.4 million |
| Basic / diluted EPS | $0.16 / $0.15 | $0.04 / $0.04 |
| Operating cash flow | $27.8 million | $7.3 million |
| Cash and cash equivalents | $159.8 million | $118.0 million at Dec. 31, 2016 |
| Short-term marketable securities | $10.0 million | $32.4 million at Dec. 31, 2016 |
| Total debt principal | $720.4 million | $728.2 million at Dec. 31, 2016 |
Revenue comprised $43.7 million of gross GSK royalties, less $3.5 million amortization of capitalized fees, plus $0.2 million from a strategic-alliance license. Operating margin was approximately 72.5% in both periods; net margin rose to approximately 41.6% from 18.3%. Interest expense was $12.8 million, versus $13.2 million. The effective tax rate was 0.1%.
Cash, cash equivalents and short-term marketable securities totaled $169.8 million at quarter-end; GSK royalties receivable were $43.7 million. Investing activities provided $22.4 million, mainly from net maturities of marketable securities. Financing activities used $8.4 million, including a $7.8 million payment on the 2029 notes. Net cash increased $41.8 million.
Debt comprised $241.0 million principal of unsecured 2.125% convertible notes due 2023 and $479.4 million of 9% non-recourse notes due 2029. The latter receive 40% of royalties under the specified GSK collaboration until repaid. Net long-term debt, after issuance costs and the current portion, was $702.3 million. Stockholders’ deficit was $334.2 million.
Changes versus the prior comparable period
- Net revenue rose 67%, primarily reflecting higher royalties: RELVAR/BREO royalties increased 59% to $38.7 million and ANORO royalties increased 61% to $5.0 million. GSK-reported product sales were $257.9 million for RELVAR/BREO, up 76%, and $77.5 million for ANORO, up 61%.
- Net income increased to $16.8 million from $4.4 million, while operating cash flow increased to $27.8 million from $7.3 million.
- General and administrative expense increased 73% to $10.8 million, primarily due to $4.2 million of proxy-contest costs. Research and development expense declined 10% to $0.4 million.
- Q1 2016 financing included $25.4 million of common-stock repurchases; Q1 2017 had no repurchases under the new capital return plan and included a $7.8 million 2029-note principal payment.
Outlook, commentary and risks
- Management said available cash, investments and projected royalties should cover anticipated debt service and operating needs, including the capital return plan, for at least the next 12 months, based on current plans and forecasts. No specific revenue or earnings guidance was provided.
- The February 2017 capital return plan authorizes up to $150 million of combined equity and debt repurchases, redemptions or prepayments through December 31, 2017; execution is discretionary. On April 10, the company announced a plan to prepay $50 million of 2029 notes on May 15, 2017.
- Revenue is highly concentrated in GSK-partnered products, and Innoviva depends on GSK’s development, commercialization and resource-allocation decisions. Competition, generic entry, pricing and reimbursement pressure, regulatory or safety developments, and changes in treatment standards could reduce royalties. The filing also discusses potential competition or portfolio effects from GSK’s closed triple-combination therapy; Innoviva is entitled to 15% of specified future payments for that program.
- After quarter-end, Sarissa Capital filed litigation seeking specific performance of an alleged proxy-contest settlement and requested restrictions on company actions. Innoviva moved to dismiss and said it believed the suit was without merit. The proxy contest contributed to Q1 expenses; litigation outcomes and costs remain uncertain.
- Innoviva reported a $20.2 million remaining lease guarantee exposure through May 2020 if Theravance Biopharma defaults on assigned leases; the recorded liability was $1.0 million. Management also announced a comprehensive cost review in April, with no assurance it will produce meaningful savings.
- Other notable risks include substantial debt and potential noteholder put rights upon a defined fundamental change, possible limits on use of approximately $1.1 billion of tax net operating losses, and dependence on a small workforce of 14 employees. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- GSK’s subsequent sales, market share, pricing and reimbursement trends for RELVAR/BREO and ANORO, and the resulting royalty receipts.
- Whether the announced $50 million 2029-note prepayment occurred and how the broader $150 million capital return authorization is used.
- Progress and commercial implications of the closed triple-combination program, including Innoviva’s 15% economic participation.
- Developments, potential restrictions, costs and outcomes in the Sarissa litigation and any related governance or noteholder consequences.
- Debt repayment pace, liquidity and the extent to which royalty cash flows remain sufficient for debt service and planned capital returns.