Innoviva, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Innoviva’s business was primarily a royalty interest in respiratory products partnered with GSK, notably RELVAR/BREO ELLIPTA and ANORO ELLIPTA. Results are unaudited; interim results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total net revenue | $24.2 million | $6.9 million; up 251% |
| Royalty revenue, net of amortization | $24.0 million | $6.7 million; up 259% |
| Operating income | $17.5 million | $0.7 million |
| Net income (loss) | $4.4 million | $(10.7) million |
| Basic and diluted EPS | $0.04 | $(0.09) |
| Operating margin | Approximately 72% | Approximately 11% |
| Operating cash flow | $7.3 million provided | $1.6 million used |
Revenue growth chiefly reflected increased royalties as sales and market shares of both partnered products grew. GSK reported RELVAR/BREO sales of $161.9 million, up 170% year over year, and ANORO sales of $48.1 million, up 172%. These are GSK product sales, not Innoviva revenue. Innoviva’s royalty revenue reflects contractual royalty rates and a $3.456 million quarterly reduction for amortization of previously paid GSK fees.
Research and development expense fell 45% to $0.4 million; general and administrative expense rose 15% to $6.3 million, primarily due to increased employee costs and public-company expenses. Interest expense was $13.2 million, up 4%. The prior-year period included a $1.2 million gain on sale of Theravance Biopharma shares, contributing to the year-over-year change in other income.
At March 31, cash and cash equivalents were $151.8 million and short-term marketable securities were $16.4 million, or $168.2 million combined. Combined cash and securities declined $19.1 million from year-end, mainly because of share repurchases, partly offset by operating cash generation. Current assets were $196.7 million and current liabilities $10.6 million. Stockholders’ deficit was $362.0 million.
Total debt principal was approximately $749 million; reported net carrying value was $734.5 million after unamortized issuance costs. This included $255.1 million principal of 2.125% convertible notes due 2023 and $493.8 million principal of 9% non-recourse notes due 2029. The 2029 notes are supported by 40% of specified GSK royalties and may accrue interest to principal when allocated royalties are insufficient, through May 15, 2016. The company reported $43.8 million of cumulative interest added to principal since issuance.
Material changes and capital allocation
- Net income improved by $15.1 million year over year, primarily on royalty growth.
- Operating cash flow improved by $8.9 million year over year. Cash interest paid was $13.1 million in Q1 2016 versus $6.9 million in Q1 2015.
- Financing activities used $26.3 million, including $25.4 million to repurchase 2.45 million shares at an average $10.35 per share. Approximately $99.0 million remained under the $150 million repurchase authorization at quarter-end.
- No dividend was declared for Q1 2016; the repurchase program replaced the prior quarterly dividend. Q1 2015 included a $0.25-per-share dividend.
- Investing cash flow was $11.7 million provided, largely from maturities of marketable securities; the prior-year period included substantial security sales.
- The company adopted ASU 2015-03, retrospectively presenting debt issuance costs as a deduction from debt rather than as an asset. Management reported no other significant changes to critical accounting policies.
Outlook, risks, and contingencies
Management stated that cash on hand and future royalty revenue were expected to cover debt service, anticipated operating needs, and the planned share repurchases for at least the next 12 months, based on current plans and forecasts. This is not formal revenue or earnings guidance. The repurchase program is discretionary and may be changed, suspended, or discontinued. Management said additional financing could be needed sooner if plans or forecasts change and cautioned that financing may not be available on acceptable terms.
- Revenue concentration: Current and projected revenue depends on GSK and the GSK agreements. Innoviva does not control GSK’s development, marketing, pricing, or commercialization decisions.
- Commercial and pricing risks: Management noted prior commercial performance below expectations, restrictive U.S. formulary access, pricing and reimbursement pressure, and competition. Generic competition and lower-cost or newer therapies could reduce future royalties.
- Clinical and regulatory risks: The Salford Lung Study results were expected in 2016; unfavorable results could affect BREO/RELVAR acceptance. The filing also notes that the SUMMIT study did not meet its primary endpoints in 2015 and that regulatory, safety, labeling, and post-approval study developments could affect products.
- Debt and capital-return risks: Debt service and the 2029 notes’ claim on royalties may constrain funds available to shareholders. A fundamental change could trigger noteholder repurchase rights. The 2029 notes’ principal can increase through payment-in-kind interest under specified conditions.
- Contingencies: Innoviva guarantees lease obligations assigned to Theravance Biopharma if that company defaults. Remaining lease payments through May 2020 were $26.2 million; the recorded guarantee liability was $1.3 million. The company also described indemnification and other potential claims but had not recognized liabilities for those indemnification agreements.
- Taxes and other items: The effective tax rate was 0.15%; management expected any 2016 taxable income to be substantially offset by net operating losses or other deferred tax assets. The filing cites approximately $1.2 billion of NOL carryforwards at year-end 2015, subject to ownership-change limitations and other restrictions.
- The potential $363 million of future MABA-related contingent payments was not considered substantive milestones; Innoviva is entitled to 15% of applicable payments.
Management concluded that disclosure controls and procedures were effective as of March 31, 2016 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether GSK product sales, market access, pricing, and royalty receipts continue to support Innoviva’s revenue growth.
- The status and results of the Salford Lung Study and other relevant clinical, safety, and regulatory developments.
- Debt service, payment-in-kind interest, and the amount and timing of royalties allocated to the 2029 notes.
- Actual execution and remaining capacity of the share repurchase program, alongside cash needs and capital-return decisions.
- Whether the lease guarantee, NOL limitations, or other contingencies develop into material cash obligations.