Business context and reporting period
This is Theravance, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2013—not a filing identified as Innoviva, Inc. The company was a biopharmaceutical business with partnered respiratory programs, including products developed with GSK, and internally developed programs. It was planning to separate its businesses into two public companies; the separation had not occurred by quarter-end.
Financial results and liquidity
- Revenue: Third-quarter collaborative revenue was $0.439 million, down from $1.430 million. Nine-month revenue was $3.110 million, versus $129.960 million. The prior-year nine-month figure included $125.7 million of deferred revenue recognized after Astellas terminated its VIBATIV collaboration.
- Profit and expenses: Third-quarter net loss was $46.985 million ($0.44 per share), compared with a $34.692 million loss ($0.37 per share). Nine-month net loss was $120.772 million ($1.20 per share), versus net income of $12.782 million ($0.14 per share) in 2012. Nine-month operating loss was $120.411 million. No meaningful revenue-based margin comparison is apparent given the unusually large prior-period deferred-revenue recognition.
- Operating costs: Nine-month R&D expense was $91.550 million, up 2%; SG&A was $31.971 million, up 38%, partly reflecting $6.2 million of separation-related external expenses.
- Cash flow: Nine-month operating cash use was $89.628 million, investing cash use was $218.154 million, and financing cash provided was $384.825 million. Financing included $281.6 million net proceeds from 2023 notes and $140.0 million net proceeds from stock issuance; investing included $40.0 million of GSK milestone payments.
- Liquidity: Cash, cash equivalents, short-term investments and marketable securities totaled $594.5 million at September 30, excluding $0.8 million restricted cash. Current assets were $522.341 million and current liabilities $38.661 million. Management said available cash and marketable securities were expected to fund anticipated operating needs for at least 12 months under current plans.
- Debt: The company had $287.5 million principal amount of unsecured 2.125% convertible subordinated notes due 2023. The $172.5 million 3% notes due 2015 were converted into 6.668 million shares in June–July 2013, not redeemed for cash. The filing reports a $476.5 million fair value for the 2023 notes, compared with $287.5 million principal.
Material changes, outlook and risks
- The company reintroduced VIBATIV in the U.S. in August 2013. Revenue recognition for quarter-end shipments was deferred until sell-through; $0.5 million was recorded as deferred revenue. Sales and returns estimates, channel inventory, and a limited commercial footprint are relevant uncertainties.
- BREO ELLIPTA was FDA-approved in May 2013 and began U.S. shipments in October. RELVAR ELLIPTA was approved in Japan in September; the European regulator had issued a positive opinion, with a decision anticipated in Q4 2013. ANORO ELLIPTA remained under review, with an FDA action date of December 18, 2013.
- Management expected 2013 operating expenses to exceed 2012 levels. It anticipated funding the proposed spun-off company with approximately $300 million, subject to separation timing, cash balances, approvals and other conditions. The filing describes potential GSK milestone obligations inconsistently: $180 million in one collaboration discussion and up to $220 million elsewhere. It states $30 million became payable in October and estimates another $70 million could become payable by year-end; verify the applicable total and timing.
- Other notable items include a $10.0 million Elan termination fee, partly offset by related expenses and a capped-call valuation charge; and a correction of 2012 diluted EPS from $0.18 to $0.14 because convertible notes had been treated incorrectly as dilutive.
- Key risks include regulatory or commercialization setbacks for partnered respiratory products, VIBATIV adoption and supply risks (including single-source suppliers), continued operating losses, dependence on collaborators, separation execution and tax treatment, and potential dilution or financing needs. Merck had given notice of termination of its research collaboration, effective December 2013.
Most important facts for investors to verify
- Confirm the issuer and corporate history: this filing names Theravance, Inc., not Innoviva, Inc.
- Verify the proposed separation’s completion, funding allocation, tax treatment and effects on ongoing GSK rights and obligations.
- Reconcile the filing’s differing $180 million and $220 million descriptions of potential GSK milestone payments and confirm amounts paid or payable after quarter-end.
- Track product approvals, launch progress, sales, royalty receipts and VIBATIV channel inventory, returns and manufacturing availability.
- Review the 2023 notes’ conversion, repurchase and dilution terms, and the company’s cash runway against ongoing losses and development costs.