Business context and reporting period
Issuer identification: The supplied filing identifies the registrant as Theravance, Inc. (Form 10-Q for the quarter ended September 30, 2014), not Innoviva, Inc. The summary below reflects the filing’s stated issuer and figures.
Following the June 2014 spin-off of Theravance Biopharma, the company described itself as a royalty-management business focused on partnered respiratory products with GSK, including RELVAR/BREO ELLIPTA and ANORO ELLIPTA. Former research and drug-development operations are reported as discontinued operations. The company reported nine employees as of October 31, 2014.
Financial results and position
Amounts below are in millions of dollars, except per-share data.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $1.0 | $0.4 | $1.2 | $3.1 |
| Operating expenses | $10.5 | $8.1 | $35.2 | $24.4 |
| Operating loss | $(9.5) | $(7.7) | $(34.1) | $(21.4) |
| Interest expense | $12.4 | $1.9 | $24.3 | $7.7 |
| Continuing-operations net loss | $(21.3) | $(9.5) | $(57.6) | $(21.7) |
| Net loss, including discontinued operations | $(21.3) | $(47.0) | $(152.5) | $(120.8) |
| Basic and diluted net loss per share | $(0.19) | $(0.44) | $(1.37) | $(1.20) |
Q3 2014 gross GSK royalty revenue was $4.0 million, offset by $3.2 million of amortization of GSK-related intangible assets, leaving $0.7 million net royalty revenue. For the first nine months, gross royalties were $8.0 million and amortization was $7.6 million, leaving $0.3 million net royalty revenue. GSK-reported Q3 sales were $25.6 million for RELVAR/BREO and $1.8 million for ANORO.
Operating margin is not a useful indicator given the company’s very small net revenue relative to expenses. Q3 and year-to-date comparisons are also affected by the spin-off: 2013 and first-half 2014 results include the former businesses as discontinued operations, while Q3 2014 does not.
Cash flow, nine months: Cash used in operations was $126.1 million, cash used in investing was $56.6 million, and financing provided $158.8 million. Cash and cash equivalents declined by $23.9 million to $119.6 million.
Liquidity and debt at September 30, 2014: Cash, cash equivalents and marketable securities, excluding restricted cash, totaled $310.9 million. Restricted cash was $6.4 million. Long-term debt was $705.1 million: $255.1 million of 2.125% convertible notes due 2023 and $450.0 million of 9% non-recourse notes due 2029. Total stockholders’ equity was negative $193.1 million. The company paid a $0.25-per-share dividend in September; a further $0.25 dividend was declared for December payment.
Material changes versus the prior comparable period
- Continuing-operations net loss for the first nine months widened to $57.6 million from $21.7 million, primarily due to higher employee-related and stock-based compensation costs and increased interest expense on the 2029 notes.
- Q3 total revenue rose to $1.0 million from $0.4 million, reflecting initial net royalties, but nine-month revenue fell to $1.2 million from $3.1 million, principally because previously deferred GSK collaboration revenue had been fully recognized in 2013.
- G&A expense increased 43% in Q3 and 59% year to date; R&D expense was broadly flat year to date. Interest expense increased substantially following the April 2014 2029-note financing.
- The June spin-off transferred $393.0 million of cash, cash equivalents and marketable securities to Theravance Biopharma and separated the research and drug-development business. The company’s operating structure and reported results changed materially.
Outlook, commentary, risks and unusual items
- Management expected cash, cash equivalents and marketable securities to fund operations for at least the next 12 months, based on current plans and forecasts. This is not earnings or revenue guidance; the filing provides no clear numerical forecast for future revenue or profit.
- Management’s capital-return strategy depends substantially on GSK royalties. The filing says early sales performance for BREO/RELVAR and ANORO was below expectations; launches were slow, with restrictive U.S. formulary access and lower net pricing also cited as concerns.
- Royalty revenue is exposed to GSK’s development, commercialization and pricing decisions, competition, reimbursement access, regulatory outcomes and product safety. The filing notes that GSK’s portfolio-wide commercialization approach for potential triple-therapy products could reduce the value of the company’s retained interests.
- Regulatory milestones include the FDA’s April 30, 2015 target date for review of the FF/VI asthma supplemental application. The filing highlights possible delays, additional study requirements, restrictive labeling and uncertainty around LABA safety requirements.
- The 2029 notes pledge 40% of specified LABA royalty receipts for debt service; before May 15, 2016, a royalty shortfall versus quarterly interest could increase principal. Debt service, dividends and royalty variability could constrain future distributions.
- As part of the spin-off, leases for former headquarters facilities were assigned to Theravance Biopharma, but Theravance remains liable if that company defaults. Remaining lease payments through May 2020 were $34.6 million; the recorded guarantee liability was $1.3 million.
- The final $10.0 million GSK milestone payment was made in October 2014, after quarter-end. The company also disclosed a fourth-quarter $0.25 dividend and a November agreement for GSK to buy approximately $12.8 million of shares.
- Other notable exposures include dependence on transition services from Theravance Biopharma, a small workforce and management transition, potential limitations on use of tax loss carryforwards, and GSK’s significant ownership and governance rights. Disclosure controls were assessed as effective at the reasonable-assurance level.
Important facts for investors to verify
- Confirm issuer identity and corporate history: this filing is for Theravance, Inc., not an entity named Innoviva, Inc.
- Track GSK product sales, launches, payer access and net pricing, and reconcile these with reported royalty revenue after intangible-asset amortization.
- Review the terms, royalty-linked payment mechanics and potential shortfall provisions of the $450 million 2029 notes, alongside the 2023 convertible notes.
- Assess cash available for operations and dividends after debt service, restricted cash, and any subsequent dividends or share issuances.
- Monitor the FF/VI asthma regulatory review and GSK’s development and commercialization decisions for partnered products, including triple therapy.
- Evaluate post-spin transition-service dependence, the lease guarantee and the company’s ability to use tax attributes.