Innoviva, Inc. (then Theravance, Inc.) — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The filing was made under the name Theravance, Inc. On June 1–2, 2014, the company spun off its research and drug-development business as Theravance Biopharma, Inc. The remaining company focused on royalty interests in respiratory products partnered with GSK.
Financial results
Amounts below are in millions of dollars, except per-share amounts. Continuing operations reflect the post-spin royalty-management business; discontinued operations include the former research and development business through the spin-off.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total net revenue | $0.9 | $1.3 | $0.2 | $2.6 |
| Loss from continuing operations | $(20.2) | $(1.5) | $(36.3) | $(12.3) |
| Loss from discontinued operations | $(43.4) | $(34.9) | $(94.9) | $(61.5) |
| Net loss | $(63.6) | $(36.4) | $(131.3) | $(73.8) |
| Basic and diluted net loss per share | $(0.57) | $(0.37) | $(1.19) | $(0.76) |
| Operating expenses, continuing operations | $10.7 | $8.2 | $24.7 | $16.3 |
Q2 gross GSK royalty revenue was $3.3 million, offset by $2.6 million of amortization of GSK-related intangible assets, leaving $0.7 million net royalty revenue. For the first half, $4.0 million of gross royalties was more than offset by $4.4 million of amortization, producing negative net royalty revenue of $0.4 million. Total first-half revenue also included $0.5 million of collaboration revenue. No product revenue remained in continuing operations after the spin-off. Conventional gross-margin measures are not meaningful for this royalty-focused business.
Cash flow, balance sheet and debt
- Liquidity at June 30: $208.1 million cash and equivalents, $126.4 million short-term investments and $34.3 million marketable securities, or $368.8 million combined, excluding $15.1 million restricted cash. Combined cash and investments were down $151.7 million from year-end 2013.
- Six-month cash flows: $105.0 million used in operating activities; $2.9 million provided by investing activities; and $166.7 million provided by financing activities. Ending cash and equivalents were $208.1 million.
- Assets and equity: Total assets were $605.6 million, versus $681.3 million at December 31, 2013. Stockholders’ equity was a deficit of $187.5 million, compared with positive equity of $299.1 million at year-end.
- Debt: $287.5 million principal of 2.125% convertible subordinated notes due 2023 and $450.0 million principal of 9% non-recourse notes due 2029. The latter are secured by 40% of specified GSK royalties and had $14.2 million of related restricted cash at quarter-end. First-half interest expense was $12.0 million, up from $5.8 million a year earlier.
Changes versus the prior comparable period
- First-half continuing net loss increased by $24.0 million year over year, chiefly due to higher employee-related and stock-based compensation costs and greater interest expense following issuance of the 2029 notes.
- First-half continuing revenue fell from $2.6 million to $0.2 million. GSK collaboration revenue declined after deferred revenue under the LABA collaboration was fully recognized in 2013; new royalty revenue was partly or wholly absorbed by intangible-asset amortization.
- Operating cash use rose from $48.3 million to $105.0 million. Cash and investments declined primarily due to the $393.0 million transferred to Theravance Biopharma, $100.0 million of GSK milestone payments, and operating cash use, partly offset by $434.7 million net proceeds from the 2029 notes and $23.8 million from stock issuance.
Outlook, commentary and material risks
- Management said cash, cash equivalents and marketable securities, together with expected net royalties and reduced post-spin operating costs, should fund operations for at least the next 12 months. The filing gives no specific revenue or earnings guidance.
- GSK reported Q2 sales of $18.2 million for RELVAR/BREO ELLIPTA and $8.2 million for ANORO ELLIPTA; the latter included initial U.S. wholesaler stocking. Management noted early launches were slow and payor coverage remained a challenge, while reporting improving coverage updates from GSK.
- Key products and potential revenues depend heavily on GSK’s development, commercialization, pricing, reimbursement and market execution. Competition, safety or regulatory developments, and slower-than-expected adoption could reduce royalties. The company also disclosed that successful triple-combination products could compete with its more fully retained product interests; following the spin-off it retains only a 15% economic interest in certain future payments tied to specified programs.
- GSK milestone obligations could reach $220 million. At June 30, $185 million had been paid and $15 million accrued; a further $10 million was accrued in July, with the remaining potential $10 million expected to become payable by year-end 2014.
- Other notable items: the spin-off transferred $393.0 million in cash and investments; a $1.3 million liability was recorded for a lease guarantee covering facilities assigned to Theravance Biopharma, with lease payments of $35.8 million through May 2020; and separation-related professional fees and incentive compensation contributed to losses. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- After quarter-end, the board declared a $0.25-per-share dividend for Q3 2014. On July 15, holders converted $32.4 million principal of the 2023 notes into 1.5 million shares, subject to the filing’s reported conversion terms.
Most important facts for investors to verify
- GSK product sales, launch momentum and payer coverage, and how reported sales translate into royalties received by the company.
- The royalty calculations after GSK milestone amortization, including the timing and level at which net royalty revenue becomes positive.
- Debt service and the 2029 notes’ royalty-linked repayment mechanics, restricted reserves, and remaining GSK milestone commitments.
- Whether management’s at-least-12-month liquidity assessment remains valid as cash use, royalty receipts and post-spin expenses evolve.
- Post-spin allocation of economic rights, transition-service arrangements, lease-guarantee exposure, and potential tax effects of the separation.