Innoviva, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; interim financial statements are unaudited. Innoviva is primarily a royalty company: its current revenue is generated under agreements with GSK for RELVAR/BREO ELLIPTA and ANORO ELLIPTA.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net revenue | $58.6m | $32.5m | $99.1m | $56.6m |
| Operating income | $47.8m | $25.9m | $77.2m | $43.4m |
| Net income | $35.1m | $14.6m | $52.0m | $19.0m |
| Diluted EPS | $0.30 | $0.13 | $0.46 | $0.17 |
| Operating margin | 81.7% | 79.7% | 77.9% | 76.6% |
Amounts in millions except per-share data. Operating margins are calculated from reported revenue and operating income.
- Revenue drivers: Q2 royalties before amortization were $61.8m, up 73% year over year. RELVAR/BREO royalties were $54.6m (+74%); ANORO royalties were $7.2m (+69%). After $3.5m quarterly amortization of capitalized GSK fees, reported royalty revenue was $58.3m. Management attributed growth to higher prescriptions and market share.
- Costs and earnings: Q2 G&A increased 67% to $10.4m, mainly due to $4.3m of proxy-contest and related litigation costs. For the six months, G&A rose 70% to $21.2m, including $8.5m of those costs. R&D remained low at $0.7m for the half-year.
- Cash flow: First-half operating cash flow was $50.4m, versus $19.7m a year earlier. Receivables from collaborative arrangements increased $14.9m. Investing activities provided $24.4m, while financing used $65.2m, primarily for $64.4m of 2029-note principal repayments. Cash and equivalents ended at $127.6m, up from $118.0m; cash, equivalents and short-term marketable securities totaled $135.6m.
- Liquidity and debt: GSK receivables were $61.8m at June 30. Debt principal totaled $663.7m: $241.0m of unsecured 2023 convertible notes and $422.8m of non-recourse 2029 notes. The 2029 notes carry 9% interest and are secured by 40% of royalties under the LABA collaboration. Management said cash and projected royalties should cover anticipated operating and debt-service needs for at least 12 months under current plans.
- Other metrics: Effective tax rate was 0.06%; management expected taxable income, if generated in 2017, to be substantially offset by tax attributes. Innoviva reported 13 employees at June 30.
Changes, outlook and notable matters
- First-half net revenue increased 75% and net income increased from $19.0m to $52.0m year over year, primarily reflecting higher product royalties. Interest expense declined 5% to $25.0m for the half, mainly due to lower average debt balances.
- The 2017 Capital Return Plan authorizes up to $150m for share repurchases and/or debt actions through December 31, 2017. Innoviva prepaid $50m of 2029-note principal in May; $100m remained available at June 30. There were no plan-related share repurchases in the first half.
- After quarter-end, Innoviva completed an offering of $175m of 2.50% convertible notes due 2025; purchasers exercised the option for an additional $17.5m. The company said it intended to use part of the proceeds to redeem some 2029 notes and used approximately $17.5m to repurchase 1,317,771 shares.
- No specific revenue or earnings guidance was provided. Management highlighted the Salford Lung Study result that Relvar improved asthma control versus usual care. Future royalty income remains dependent on GSK’s development and commercialization decisions and product performance.
- Sarissa litigation concerning an alleged proxy-settlement agreement was awaiting a court ruling following a July 27, 2017 trial. A court order maintains the board and restricts certain corporate actions while the case is pending. Innoviva said it considers the claim without merit; insurance coverage for legal costs had not been determined.
- Key risks include reliance on GSK and two respiratory products, competition and potential generic entry, pricing and reimbursement pressure, regulatory and clinical uncertainty, and substantial debt. The company also disclosed activist-shareholder and litigation risks, possible limits on use of net operating losses, and an $18.6m lease guarantee exposure if Theravance Biopharma defaults on assigned leases.
Important facts for investors to verify
- Whether growth in GSK product sales and royalties continues, and how pricing, payer access, competition and GSK’s product priorities affect net royalties.
- The status and eventual outcome of the Sarissa litigation, related restrictions, and insurance reimbursement for legal expenses.
- Use of 2025-note proceeds, the amount and terms of any 2029-note redemption, and the company’s resulting debt service and capital-return capacity.
- Whether the 12-month liquidity assessment remains valid as royalty receipts, debt payments and capital-return activity evolve.
- Potential generic, regulatory, clinical, tax-attribute and lease-guarantee developments identified in the filing.