Innoviva, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing was made under the company’s former name, Theravance, Inc.; it changed its name to Innoviva in January 2016. Dollar amounts below are in U.S. dollars.
Business context
Innoviva is a focused royalty company whose principal current revenue comes from respiratory products commercialized by GlaxoSmithKline (GSK), chiefly RELVAR/BREO ELLIPTA and ANORO ELLIPTA. GSK controls their development, manufacturing, regulatory submissions, sales and marketing; Innoviva does not sell or manufacture them. Innoviva receives 15% royalties on the first $3.0 billion of annual global net sales of RELVAR/BREO and 5% above that threshold; royalties on ANORO and other LABA-combination products are tiered from 6.5% to 10%. Following the 2014 spin-off of its research and development business, Innoviva had 13 employees at year-end and operated in one segment.
Financial results and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Total net revenue | $53.9 million | $8.4 million |
| Gross royalties from GSK, before amortization | $66.9 million | $18.4 million |
| Net royalty revenue, after amortization of GSK milestone fees | $53.1 million | $7.4 million |
| Operating expenses | $22.4 million | $42.4 million |
| Operating income (loss) | $31.6 million | $(33.9) million |
| Interest expense | $51.8 million | $36.9 million |
| Loss from continuing operations | $(18.8) million | $(73.5) million |
| Net loss | $(18.8) million | $(168.5) million |
| Net cash from (used in) operating activities | $10.1 million | $(130.7) million |
| Cash, cash equivalents and marketable securities at year-end | $187.3 million | $283.4 million |
- Revenue growth reflected higher sales of RELVAR/BREO and ANORO, including ANORO’s first full commercial year, and the April 2015 U.S. approval of BREO for adult asthma. Gross royalties rose 263% year over year; amortization of the $220 million in GSK milestone fees reduced reported royalty revenue by $13.8 million in 2015.
- Operating expenses fell 47%, including lower R&D spending after the spin-off and lower G&A costs and stock-based compensation. Operating income was positive, but interest expense exceeded operating income, leaving a continuing-operations net loss. The sharp year-over-year improvement in net loss also reflects that 2014 included large losses from discontinued operations.
- Operating cash flow turned positive, principally on royalty receipts, partly offset by a $15.7 million increase in collaboration receivables and $25.9 million of cash interest paid. Investing cash flow was $159.2 million, mainly reflecting maturities and sales of marketable securities rather than operating earnings. Financing cash outflow was $106.9 million, including $87.3 million in dividends and $25.6 million in share repurchases.
- Year-end working capital was $200.8 million. Total assets were $424.1 million and stockholders’ deficit was $342.6 million. Cash, cash equivalents and marketable securities decreased $96.1 million during 2015, principally due to dividends and repurchases, partly offset by operating cash flow and other receipts.
- Long-term debt carrying value was $748.3 million: $255.1 million of 2.125% convertible subordinated notes due 2023 and $493.2 million of 9% non-recourse notes due 2029. The 2029 notes receive 40% of specified GSK royalties through repayment; $22.7 million of interest was added to their principal in 2015, bringing cumulative payment-in-kind interest to $43.2 million.
Fourth-quarter and commercial developments
In Q4 2015, Innoviva reported net revenue of $22.8 million, operating income of $17.3 million and net income of $4.3 million. GSK reported Q4 product net sales of $154.7 million for RELVAR/BREO ($72.5 million U.S.; $82.2 million non-U.S.) and $45.4 million for ANORO ($31.2 million U.S.; $14.2 million non-U.S.). These are GSK product sales, not Innoviva revenue. By year-end, the products had launched in 45 and 38 countries, respectively.
Innoviva paid $0.25 per share in each of the first three quarters of 2015, totaling $87.3 million in cash dividends. In October it replaced the quarterly dividend with a discretionary $150 million repurchase program through December 31, 2016. By year-end, it had repurchased $25.6 million of stock; through January 29, 2016, repurchases totaled $37.3 million at an average $9.49 per share. The board may suspend or discontinue the program, and the company made no commitment to repurchase a specified amount.
Outlook, risks and contingencies
- No formal revenue or earnings guidance was provided. Management said available cash, cash equivalents and marketable securities, together with expected royalty receipts and current plans, should fund operations for at least the next 12 months. This depends on current forecasts and product royalty performance.
- Innoviva’s revenues are highly concentrated in GSK-partnered products, and the company has no control over GSK’s commercial priorities or execution. Management disclosed that launches and sales had been below expectations, with U.S. pricing, discounts and payer access among the challenges. Lower prices, reimbursement restrictions, competition and slower uptake could reduce royalties.
- In September 2015, the SUMMIT study of FF/VI did not meet its primary endpoints; the announcement significantly affected Innoviva’s share price. GSK expected to report the Salford Lung Study results in 2016. Further clinical or regulatory setbacks, safety findings, restrictive labeling or changes to LABA policy could adversely affect product sales and royalties. GSK had also notified Innoviva of its intent to discontinue development of VI monotherapy, so Innoviva did not expect future revenue from that product.
- Generic competition is a material risk: Mylan filed an ANDA for a generic Advair product in December 2015, and other competitors were developing potential substitutes. Innoviva also identified competition from existing and pipeline COPD and asthma therapies.
- The 2029 notes’ royalty-linked debt service and PIK feature may constrain cash available for stockholder returns. The 2023 notes can be put to the company at par following a defined fundamental change. GSK’s consent position regarding some royalty-monetization structures could also affect financing or capital-return options.
- Innoviva had approximately $1.175 billion of federal net operating loss carryforwards, but recorded a full valuation allowance against deferred tax assets; use may be limited by ownership-change rules. The company also disclosed a contingent guarantee of Theravance Biopharma’s former facility leases: remaining lease payments were $27.6 million through May 2020 if that entity defaults. Innoviva reported no material legal proceedings.
- Auditors gave unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective at December 31, 2015. The company cautioned that it could face Investment Company Act classification risk if its asset or income mix changes or relevant interpretations shift.
Most important facts for investors to verify
- Current GSK sales, net pricing, payer access and royalty receipts for RELVAR/BREO and ANORO, including how gross royalties reconcile to reported revenue after milestone-fee amortization.
- Product and pipeline developments, including Salford results, the impact of SUMMIT, and any regulatory, safety, labeling or generic-competition changes.
- Debt balances, PIK accruals, royalty-sweep terms and the cash available for debt service and any future repurchases or dividends.
- Whether royalty monetization or other financing transactions require GSK consent, and whether Innoviva can maintain its stated liquidity outlook if royalties are below plan.
- Availability and potential ownership-change limitations on tax attributes, and the exposure under the Theravance Biopharma lease guarantee.