Innoviva, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Innoviva is a royalty-management company with six employees at quarter-end; its revenue was primarily royalties from GSK-partnered respiratory products.
Financial performance
- Revenue: Q3 net revenue was $61.7 million, up 27% year over year; nine-month revenue was $181.1 million, up 23%. Q3 royalties were $51.7 million from RELVAR/BREO, $9.8 million from ANORO, and $3.6 million from TRELEGY. Nine-month royalties were $155.4 million, $29.1 million, and $6.9 million, respectively. Revenue is reported net of $3.5 million quarterly and $10.4 million year-to-date amortization of fees paid to GSK.
- Profit: Q3 operating income was $57.7 million and net income attributable to Innoviva stockholders was $47.1 million, or $0.47 basic and $0.43 diluted per share. Nine-month operating income was $161.0 million and attributable net income was $131.3 million, or $1.30 basic and $1.19 diluted per share. No R&D expense was recorded in 2018.
- Margins: Operating margin was approximately 93% for Q3 and 89% for the first nine months. The filing does not present a conventional gross margin.
- Cash flow: Nine-month operating cash flow was $161.8 million, versus $93.9 million in 2017. Investing activities provided $49.1 million; financing activities used $235.6 million, primarily for $230.0 million of Term B Loan prepayments. Cash and cash equivalents declined $24.7 million to $48.6 million.
- Liquidity: Cash, cash equivalents, and short-term marketable securities totaled approximately $55.5 million; GSK-related receivables were $65.1 million. Management said projected royalties and available cash and securities should cover anticipated debt service and operating needs for at least 12 months, based on current plans and forecasts.
- Debt: Gross principal debt was $447.2 million at September 30; net carrying debt was $381.0 million after discounts and issuance costs. The Term B Loan balance fell from $243.8 million at year-end 2017 to $13.8 million following $120.0 million and $110.0 million prepayments. Debt fair value was $473.0 million. Principal maturities include $13.8 million in 2022 and $433.5 million thereafter.
- Balance sheet: Total assets were $277.7 million, and stockholders’ deficit was $108.3 million.
Changes versus the prior comparable period
- Q3 and nine-month revenue increased 27% and 23%, respectively, driven by higher RELVAR/BREO and ANORO royalties and TRELEGY sales beginning in late 2017. GSK reported Q3 net sales growth of 16% for RELVAR/BREO and 34.7% for ANORO; TRELEGY sales were $55.7 million.
- Attributable net income rose to $47.1 million in Q3 from $23.8 million, and to $131.3 million for nine months from $75.8 million. Lower interest expense, reflecting lower average debt, contributed to the improvement.
- G&A expense declined 52% in Q3 and 41% for nine months. The 2017 periods included substantial proxy-contest and litigation costs; 2018 included severance and, year to date, a $2.7 million payment to Sarissa Capital.
- Cash used in financing increased, primarily because of the 2018 Term B Loan repayments. Cash and short-term investments together fell from $129.1 million at December 31, 2017 to $55.5 million at September 30, 2018.
Outlook, risks, and unusual items
- The filing provides no numerical revenue or earnings guidance. Management’s liquidity assessment assumes current operating plans and royalty forecasts; additional financing could be needed if those assumptions change, and financing may not be available on acceptable terms.
- Business results depend heavily on GSK product sales and commercialization. The filing highlights risks of lower-than-expected royalties, product commercialization, and uncertainty around strategy and potential capital returns.
- Q3 included $2.5 million of cash severance costs and a $1.9 million reversal of stock-based compensation expense related to senior-management departures. Nine-month G&A included $5.7 million of severance and the $2.7 million Sarissa reimbursement. Nine-month other expense included $5.7 million of losses on Term B Loan extinguishment.
- No income tax expense was recorded. Innoviva maintained a full valuation allowance on gross deferred tax assets; it said a release could be reasonably possible near term if profitability continues and strategic options are narrowed, potentially producing an approximately $200 million tax benefit. This is conditional, not guidance.
- A lease guarantee related to facilities assigned to Theravance Biopharma had $10.8 million of remaining lease payments through May 2020 and a $0.5 million recorded liability.
- TRELEGY received a positive EMA committee opinion in September 2018 supporting an expanded COPD label. The filing says GSK was determining next steps for the MABA program.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no material risk-factor changes beyond those previously disclosed.
Key facts for investors to verify
- GSK’s subsequent product sales, market share, and royalty reporting, especially TRELEGY growth and the royalty terms applicable to each product.
- Cash generation and liquidity after the substantial Term B Loan prepayments, and the timing and terms of remaining debt obligations.
- Whether operating profitability and strategic decisions support any deferred-tax-valuation-allowance release, and whether Section 382 ownership-change limitations could affect tax attributes.
- The actual costs or liabilities, if any, arising from the Theravance Biopharma lease guarantee and other contingencies.
- The effects of management departures, severance, and stock-based compensation reversals on recurring expenses.