Innoviva, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016; financial statements are unaudited. Innoviva’s revenue is primarily royalties from respiratory products commercialized by GSK, principally RELVAR/BREO ELLIPTA and ANORO ELLIPTA.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total net revenue | $33.3 million | $13.6 million | $90.0 million | $31.1 million |
| Operating income | $27.9 million | $8.4 million | $71.3 million | $14.3 million |
| Net income (loss) | $15.0 million | ($4.6 million) | $34.1 million | ($23.1 million) |
| Diluted EPS | $0.13 | ($0.04) | $0.31 | ($0.20) |
| Operating cash flow | Not presented quarterly | $39.9 million | $3.2 million |
- Q3 operating margin was approximately 83.8% and net margin approximately 45.1%; nine-month operating and net margins were approximately 79.3% and 37.9%, respectively.
- GSK-reported Q3 sales were $212.2 million for RELVAR/BREO, up 117%, and $71.2 million for ANORO, up 118%. Innoviva recognized respective Q3 royalties of $31.9 million and $4.6 million.
- At September 30, cash and cash equivalents were $93.2 million and short-term marketable securities were $55.8 million, totaling $149.0 million. Current assets were $186.1 million against current liabilities of $14.9 million.
- Total debt principal was $735.8 million: $245.1 million of convertible notes due 2023 and $490.7 million of non-recourse notes due 2029. Net long-term debt on the balance sheet was $719.4 million. Nine-month interest expense was $39.4 million; cash interest paid was $37.7 million.
- Total assets were $370.5 million and stockholders’ deficit was $367.9 million. No cash dividends were declared in the first nine months of 2016.
Material changes versus the prior comparable period
- Nine-month net revenue rose 189%, driven mainly by higher product sales and royalties: gross royalties increased 144%. Management attributed growth to prescription and market-share gains for both partnered products.
- Nine-month net income improved from a $23.1 million loss to $34.1 million income, reflecting revenue growth. A $1.7 million gain on repurchase of convertible notes contributed to other income.
- Nine-month operating cash flow increased to $39.9 million from $3.2 million, primarily reflecting higher royalties, partly offset by interest payments and increased royalty receivables.
- Cash and cash equivalents declined $66.0 million from year-end 2015. Financing included $65.6 million of common-stock repurchases, $8.1 million paid to repurchase convertible notes, and $3.3 million of principal payments on the 2029 notes. Investing cash use included net purchases of marketable securities.
- Innoviva repurchased 5.93 million shares during the nine months for $65.6 million, averaging $11.05 per share. Since the $150 million program began in October 2015, it had repurchased approximately $91.2 million; approximately $58.8 million remained available at quarter-end.
Outlook, commentary, and risks
- Management stated that cash on hand and future royalty receipts should fund debt service and anticipated operating needs, including the repurchase program, for at least the next 12 months under current plans and forecasts. No revenue or earnings guidance was provided.
- The 2029 notes are non-recourse and secured by 40% of specified GSK royalties. Their payment amounts depend on product sales and vary by quarter; a $3.6 million partial principal payment was expected in November 2016. The notes had accumulated $44.0 million of payment-in-kind interest since issuance.
- Key risks include dependence on GSK for substantially all current and expected royalty revenue; product sales, pricing, reimbursement, competition and generic entry; clinical and regulatory developments; and GSK’s commercial priorities. Innoviva receives only 15% of future payments on certain triple-combination and MABA programs following the spin-off.
- Other notable exposures include a lease guarantee for Theravance Biopharma facilities with $23.2 million of remaining payments through May 2020, and the risk that tax attributes may be limited. The company reported a 0.11% effective tax rate for 2016 and expects available tax attributes to substantially offset taxable income.
- Management reported effective disclosure controls as of September 30, 2016 and no material quarter-on-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Confirm GSK’s continuing product sales, market access, net pricing, and the resulting royalties to Innoviva.
- Review debt service and cash-flow sensitivity to royalty performance, including the 40% royalty allocation securing the 2029 notes and the schedule of future principal payments.
- Track remaining authorization and actual purchases under the $150 million repurchase program, alongside liquidity needs and any future capital returns.
- Monitor regulatory, clinical, competitive, and generic-entry developments affecting RELVAR/BREO, ANORO, and the triple-combination program.
- Assess the potential exposure under the Theravance Biopharma lease guarantee and the availability and limitations of tax-loss carryforwards.