Innoviva, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Innoviva is a royalty-management company whose revenue is primarily royalties from GSK respiratory products RELVAR/BREO, ANORO and TRELEGY.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $67.1 million | $58.6 million | $119.5 million | $99.1 million |
| Operating income | $62.7 million | $47.8 million | $103.4 million | $77.2 million |
| Net income | $56.6 million | $35.1 million | $86.9 million | $52.0 million |
| Net income attributable to Innoviva | $54.6 million | $35.1 million | $84.2 million | $52.0 million |
| Diluted EPS attributable to Innoviva | $0.49 | $0.30 | $0.77 | $0.46 |
Approximate operating margin was 93% for Q2 and 87% for the first half; approximate net margin attributable to Innoviva was 81% and 71%, respectively. These ratios are derived from reported figures.
- Revenue drivers: Q2 royalties before amortization were $57.5 million from RELVAR/BREO (up 5%), $10.7 million from ANORO (up 49%) and $2.4 million from TRELEGY, which had no comparable 2017 royalties. Net royalty revenue is reported after $3.5 million quarterly amortization of capitalized fees paid to GSK.
- Cash flow: First-half operating cash flow was $101.6 million, versus $50.4 million a year earlier. Investing activities provided $35.6 million, mainly from marketable-security maturities; financing used $123.3 million, including a $120.0 million term-loan prepayment. Cash and cash equivalents ended at $87.2 million.
- Liquidity: Cash, cash equivalents and short-term marketable securities totaled $107.5 million; GSK receivables were $70.5 million. Current assets were $178.7 million and current liabilities $6.8 million.
- Debt: Debt principal totaled $557.2 million: $123.8 million Term B Loan, $241.0 million 2023 Notes and $192.5 million 2025 Notes. Net carrying debt was $486.5 million after discounts and issuance costs. The loan prepayment reduced its principal from $243.8 million and contributed to lower interest expense.
Changes versus the comparable period
- Net revenue rose 15% in Q2 and 21% in the first half, driven by growth in RELVAR/BREO and ANORO and the launch of TRELEGY.
- Operating income rose to $62.7 million in Q2 and $103.4 million for the half. General and administrative expense fell year over year, partly because 2017 included proxy-contest and related litigation costs ($4.3 million in Q2 and $8.5 million in the first half).
- First-half 2018 G&A included $3.2 million in cash severance for departing senior management and a $2.7 million reimbursement to Sarissa Capital under a February 2018 agreement. Senior-management award vesting and forfeitures also affected compensation expense.
- Interest expense declined 47% in Q2 and 43% in the first half, primarily due to lower average debt. First-half other expense included a $3.1 million loss on extinguishment of debt related to the Term B Loan prepayment.
- Innoviva reported $2.7 million of net income attributable to noncontrolling interest in the first half of 2018; none was reported in the 2017 comparable period.
Outlook, risks and contingencies
- Management stated that projected royalties and available cash and investments should cover anticipated debt service and operating needs for at least the next 12 months under current plans and forecasts. No specific revenue or earnings guidance was provided.
- Management cited risks including lower-than-expected GSK royalties, product commercialization and market performance, and uncertainty around strategy and future capital returns. The company relies substantially on GSK-partnered products.
- Innoviva maintained a full valuation allowance against gross deferred tax assets. It stated that, if profitability continues and strategic options are narrowed, the allowance could potentially be released in the near term, resulting in an estimated tax benefit of approximately $200 million; this is conditional, not guaranteed.
- Innoviva has a lease guarantee related to facilities assigned to Theravance Biopharma: remaining lease payments were $12.4 million through May 2020, with a $0.6 million carrying liability. The filing reports no material change in risk factors from prior disclosures and no material changes to internal control over financial reporting.
- The MABA development program was in Phase II, funded by GSK, which was determining next steps. Adoption of ASC 606 had no material financial-statement impact; lease accounting changes were expected to require recognition of a right-of-use asset and lease liability beginning in 2019.
Important facts for investors to verify
- GSK product sales, royalty rates and the persistence of RELVAR/BREO and ANORO growth, as well as TRELEGY’s contribution.
- Debt terms, scheduled maturities, variable-rate exposure on the Term B Loan and the company’s capacity to service debt from royalties.
- The assumptions behind the full deferred-tax-asset valuation allowance and any potential release, including Section 382 ownership-change limits.
- Whether current cash-flow forecasts and management’s stated 12-month liquidity assessment remain valid if royalty performance or operating plans change.
- Potential exposure under the lease guarantee and developments in the MABA program or other GSK collaboration arrangements.