Business context and reporting period
This is an unaudited Form 10-Q for the three months ended March 31, 2013. The filing identifies the registrant as Theravance, Inc., not Innoviva, Inc.; confirm that this is the intended filing. Theravance was a biopharmaceutical company developing small-molecule medicines, with partnered respiratory programs and other pipeline programs.
Key financial results
Amounts are in millions of dollars except per-share data.
| Metric | Q1 2013 | Q1 2012 or comparison |
|---|---|---|
| Revenue | $1.3 | $127.1 |
| Research and development expense | $26.4 | $33.2 |
| General and administrative expense | $8.3 | $7.9 |
| Total operating expenses | $34.7 | $41.1 |
| Operating income (loss) | $(33.4) | $86.0 |
| Net income (loss) | $(37.4) | $84.6 |
| Basic and diluted EPS | $(0.39) | $1.01 basic; $0.93 diluted |
| Operating cash flow | $(31.6) | $(41.3) |
| Cash, cash equivalents, short-term investments and marketable securities | $558.4 at March 31 | $343.7 at December 31, 2012 |
| Convertible subordinated notes, principal | $460.0 at March 31 | $172.5 at December 31, 2012 |
Revenue was overwhelmingly collaboration-related. Q1 2012 included $125.7 million of accelerated deferred revenue after Astellas terminated its VIBATIV collaboration in January 2012; this makes the year-over-year revenue and earnings comparison unusually large. Q1 2013 revenue was primarily from GSK. The filing does not present a meaningful operating-margin comparison given this revenue mix and the prior-period termination-related revenue.
Cash and cash equivalents were $266.1 million at March 31, 2013; short-term investments were $193.0 million and marketable securities were $99.3 million. The $214.7 million increase in these combined balances from year-end was primarily associated with the January debt offering. Net cash provided by financing was $247.9 million, including approximately $281.2 million of net note proceeds and $36.8 million paid for capped calls. Investing activities used $45.0 million. The company reported $91.5 million of stockholders’ equity, versus $155.0 million at year-end.
Material changes and management commentary
- Revenue fell 99% year over year, mainly because the prior-year quarter recognized the Astellas deferred revenue. Operating expenses declined 15%; R&D expense fell 20%, chiefly due to lower external costs after completion of TD-1211 Phase 2 studies and increased partner reimbursements. G&A rose 5%.
- Interest expense increased 80% to $2.7 million, primarily reflecting the new 2023 notes and related issuance-cost amortization. Interest and other expense, net, was $1.2 million; the filing attributes approximately $1.4 million of other expense to the capped-call valuation change.
- In January 2013, Theravance issued $287.5 million of 2.125% convertible subordinated notes due 2023. The initial conversion price was approximately $27.79 per share; the capped calls cost $36.8 million and have a cap price of $38.00. Existing 3.0% notes of $172.5 million are due in 2015.
- Management expected 2013 operating expenses to exceed 2012’s $148.8 million. It believed available cash and marketable securities would fund anticipated operations for at least 12 months under current plans and assumptions.
- Potential GSK milestone payments under the LABA collaboration could total $220 million, with up to $140 million estimated potentially payable in 2013 and all potentially payable by the end of 2014, subject to product development and commercialization events.
Outlook, developments, risks and unusual items
- After quarter-end, on April 25, the board approved plans to separate the partnered LABA business from the discovery and development business into two publicly traded companies. The company said it anticipated funding the new company with approximately $300 million at separation; completion, timing, consents, tax treatment and actual capitalization remained uncertain.
- FF/VI (BREO/RELVAR ELLIPTA) remained under FDA review for COPD. The FDA advisory committee recommended approval on April 17, 2013, but its recommendation was non-binding; the PDUFA goal date was May 12. The UMEC/VI application was under review, with a U.S. PDUFA goal date of December 18, 2013. The MABA program was expected to move toward further studies later in 2013.
- VIBATIV commercialization faced material supply and regulatory hurdles. The FDA’s consent decree with the former manufacturer barred distribution of unreleased lots; EU authorization had been suspended, and a new Hospira manufacturing transfer and regulatory approval were still required. The company also reported a new Clinigen European commercialization agreement with a $5 million upfront payment, but no license or committee-participation revenue had yet been recognized at quarter-end because transfer activities were incomplete.
- Key risks include clinical or regulatory setbacks, reliance on partners and third-party manufacturers, VIBATIV supply and commercialization uncertainty, substantial continuing R&D spending, potential GSK milestones, and execution, expense, consent and tax risks related to the proposed separation. The filing also cites seven investigated fatal pneumonia cases in the FF/VI Phase 3 COPD program, mostly at a higher dose than the dose pursued for approval.
- Performance-contingent awards had not met the company’s probability threshold for expense recognition at March 31. If specified conditions were met during 2013, the filing said up to $15.6 million of stock compensation and $18.7 million of cash bonus expense could be recognized.
- Management stated that disclosure controls and procedures were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the registrant identity: the source filing is for Theravance, Inc., although the request names Innoviva, Inc.
- Track FDA decisions and subsequent label or safety developments for FF/VI and UMEC/VI, and the advancement of MABA.
- Verify progress, timing, funding, required consents and tax consequences of the proposed business separation, including the final allocation of cash and liabilities.
- Monitor VIBATIV manufacturing qualification, regulatory status, supply availability and commercial restart prospects.
- Assess liquidity against operating plans, possible GSK milestone payments, development spending, debt service and any separation-related costs.
- Review the terms and potential dilution or repurchase implications of the 2015 and 2023 convertible notes and the capped-call protection limits.