Innoviva, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Innoviva is primarily a royalty company: its current revenue comes from respiratory products commercialized by GlaxoSmithKline (GSK), principally RELVAR/BREO ELLIPTA and ANORO ELLIPTA.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total net revenue | $48.6 million | $33.3 million | $147.7 million | $90.0 million |
| Operating income | $40.0 million | $27.9 million | $117.2 million | $71.3 million |
| Net income | $23.8 million | $15.0 million | $75.8 million | $34.1 million |
| Diluted EPS | $0.21 | $0.13 | $0.67 | $0.31 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $93.9 million | $39.9 million |
- Q3 revenue rose 46% year over year; nine-month revenue rose 64%. Net income increased 58% and 122%, respectively. Growth chiefly reflected higher GSK sales and royalties: Q3 GSK sales were $297.4 million for RELVAR/BREO (+40%) and $111.9 million for ANORO (+57%).
- Calculated from reported figures, operating margin was approximately 82% for Q3 and 79% for the nine-month period; net margin was approximately 49% and 51%, respectively.
- General and administrative expense increased 63% in Q3 and 68% year to date, primarily due to proxy contest and related litigation costs ($2.5 million in Q3; $11.0 million year to date). Nine-month R&D expense declined 3%.
- Cash and cash equivalents were $138.4 million and short-term marketable securities $29.8 million at September 30, totaling $168.2 million. GSK receivables were $51.9 million. Cash increased $20.4 million from year-end 2016.
- Gross debt principal was $683.5 million; balance-sheet debt, net of discounts and issuance costs, was approximately $603.4 million. Stockholders’ deficit was $223.0 million. The effective tax rate was 0.05%.
Material changes and capital structure
- In August, Innoviva refinanced the 9% 2029 non-recourse notes in full using a $250 million senior secured Term B Loan and proceeds from $192.5 million of 2.5% convertible senior notes due 2025. The refinancing generated a $6.4 million Q3 write-off of unamortized debt issuance costs ($7.3 million for the nine-month period), reported in other expense.
- The Term B Loan matures in 2022, bears interest at three-month LIBOR plus 4.5% (5.8% stated rate at September 30), and requires quarterly principal payments beginning December 2017. A 50-basis-point LIBOR increase would add an estimated $1.3 million to annual interest expense at the reported balance.
- Management said the refinancing reduced annualized cash interest spending by more than $18 million. Interest expense fell 22% in Q3 and 11% year to date versus 2016.
- Under the 2017 capital return plan, the company repurchased $17.5 million of stock in August. In October, it entered an $80 million accelerated share repurchase agreement, expected to complete the plan’s authorized capital return. The plan authorized up to $150 million through December 31, 2017.
Outlook, risks and unusual items
- Management stated that projected royalties and cash, cash equivalents and marketable securities should cover anticipated debt service and operating needs, including the capital return plan, for at least the next 12 months under current forecasts. No specific revenue or earnings guidance was provided.
- The company reduced expected full-year 2017 cash operating costs by $2.2 million following a spending review. Future savings are not assured.
- Innoviva’s revenues are concentrated in GSK-partnered products, and GSK controls their development and commercialization. Risks include weaker sales, pricing and reimbursement pressure, competition and generics, changing treatment guidelines, regulatory or safety developments, and GSK reprioritizing its portfolio. Innoviva receives only 15% of future GSK payments on TRELEGY and certain other assigned programs.
- Sarissa Capital litigation over an alleged proxy-contest settlement remained pending after a July trial; the court had not ruled as of the filing. A status quo order limits certain corporate actions. Insurance reimbursement of legal fees had not been determined, and coverage was not assured.
- Innoviva guaranteed certain facility lease obligations assigned to Theravance Biopharma; remaining lease payments through May 2020 were $17.1 million. The company reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
- Other risks include substantial debt obligations and potential change-of-control put rights, interest-rate exposure, dependence on GSK, and possible limits on use of approximately $1.1 billion of tax net operating loss carryforwards.
Important facts for investors to verify
- Whether GSK sales growth and royalty receipts continue, and how TRELEGY commercialization affects the existing partnered products and Innoviva’s royalty economics.
- The outcome and potential cost of the Sarissa litigation, including whether insurance covers any legal expenses.
- Debt repayment requirements, variable-rate exposure, convertible-note terms and the cash impact of the October $80 million share repurchase.
- Whether pricing, reimbursement, generic competition or regulatory developments materially affect product sales and royalties.
- Whether management’s 12-month liquidity assessment and expected cost reductions remain valid as operating and capital-return plans evolve.