Business context and reporting period
Theravance, Inc. (the registrant named in this filing; the request identifies Innoviva, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. Following its June 2014 spin-off of research and development operations into Theravance Biopharma, the company’s business was centered on royalties and related rights under agreements with GlaxoSmithKline (GSK). It reported 12 employees at quarter-end.
Financial results and position
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 |
|---|---|---|
| Net revenue | $10.7 million | $17.6 million |
| Operating income | $5.1 million | $5.9 million |
| Net loss | $7.8 million | $18.5 million |
| Net loss per share | $0.07 | $0.16 |
| Operating cash flow | Six-month period: $0.6 million provided |
Quarterly operating margin was approximately 48%, calculated as operating income divided by net revenue. Revenue consisted primarily of GSK royalties: gross royalties were $13.9 million for the quarter and $24.0 million for six months, reduced by amortization of previously paid GSK milestone fees of $3.5 million and $6.9 million, respectively. Interest expense was $13.0 million for the quarter and $25.7 million for six months, exceeding operating income and driving the continuing-operations net loss.
At June 30, cash and cash equivalents were $149.6 million and marketable securities were $79.7 million, totaling $229.3 million. Total assets were $462.1 million. Long-term debt carrying value was $738.5 million: $255.1 million of convertible notes due 2023 and $483.4 million of non-recourse notes due 2029. Stockholders’ deficit was $294.0 million; accumulated deficit was $1.692 billion. Cash dividends paid in the first half totaled $58.0 million, or $0.50 per share.
Material changes versus the prior comparable period
- Six-month net revenue rose to $17.6 million from $0.2 million; second-quarter revenue rose to $10.7 million from $0.9 million. The filing attributes the increase mainly to higher sales of RELVAR/BREO ELLIPTA and the 2014 launch of ANORO ELLIPTA. BREO ELLIPTA received U.S. approval for adult asthma in April 2015.
- Six-month continuing-operations net loss narrowed to $18.5 million from $36.3 million, primarily on higher royalty revenue and lower operating costs after the spin-off, partly offset by higher interest expense.
- Research and development expense fell 72% to $1.4 million and general and administrative expense fell 48% to $10.3 million for the six-month period, reflecting the smaller post-spin-off organization and lower employee-related and stock-compensation costs.
- Interest expense increased to $25.7 million from $12.0 million for six months, primarily due to the 2029 notes and interest shortfalls added to their principal. Since issuance, $33.4 million of interest had been added to that principal.
- Cash and marketable securities declined $54.1 million from year-end 2014, primarily due to dividend payments. Cash increased $52.8 million during the first half, including substantial proceeds from maturities and sales of marketable securities; operating cash provided was only $0.6 million.
- 2014 comparisons include discontinued research and development operations before the June 2014 spin-off; there were no discontinued-operation results in 2015.
Outlook, commentary, and risks
Management expected 2015 research and development and general and administrative expenses to decline versus 2014 because of the spin-off. It believed available cash, securities, and future royalties, net of expenses and debt service, would fund operations for at least 12 months. The filing provides no specific revenue or earnings guidance. Management cautioned that it could need additional financing or reduce or suspend dividends if plans or forecasts change. A $0.25-per-share dividend for September 2015 was declared after quarter-end.
GSK reported second-quarter sales of $82.0 million for RELVAR/BREO and $23.7 million for ANORO; these are partner product sales, not Theravance revenue. Both were higher than the prior quarter, but management disclosed that commercial performance, U.S. pricing, and payer coverage had been below expectations. The filing identifies dependence on GSK and its commercialization decisions, pricing and reimbursement pressure, competition, regulatory and clinical outcomes, and product safety as material risks. Results from GSK’s SUMMIT mortality study were expected in 2015. The company also noted that GSK’s future portfolio-wide commercialization approach could affect the value of its retained product interests.
The 2029 notes are secured by 40% of specified GSK royalties, limiting cash available from those royalties for other purposes. The company also guaranteed Theravance Biopharma’s assigned facility leases if it defaults: remaining payments through May 2020 were $30.5 million, with a $1.3 million carrying value recorded. Management said contractual obligations had not changed significantly from the 2014 Form 10-K. Disclosure controls were assessed as effective at a reasonable-assurance level, with no material change in internal control reported during the quarter.
Important facts for investors to verify
- Confirm the issuer identity: this filing is headed Theravance, Inc., not Innoviva, Inc.
- Track GSK’s sales, pricing, payer access, and royalty calculations; company royalty revenue is net of milestone-fee amortization.
- Review the 2029 notes’ royalty security, principal accretion, payment terms, and implications for cash available to stockholders.
- Monitor the SUMMIT study and other regulatory, safety, and competitive developments affecting partnered products.
- Assess the sustainability of quarterly dividends against cash resources, debt service, and management’s stated discretion to reduce or stop distributions.
- Consider the lease guarantee and other contingencies, and distinguish reported debt carrying values from principal amounts cited elsewhere in the filing.