Innoviva, Inc. — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016; filed February 28, 2017. The filing is an annual report, not a standalone fourth-quarter filing. Unless noted, financial figures below are in U.S. dollars.
Business context
Innoviva primarily receives royalties from respiratory medicines commercialized by GlaxoSmithKline (GSK), notably RELVAR/BREO ELLIPTA and ANORO ELLIPTA. Innoviva does not manufacture or sell these products. GSK owns approximately 29.5% of Innoviva at year-end 2016 and is responsible for product development and commercialization. Innoviva’s former research and development business was spun off in 2014.
Innoviva receives royalties on RELVAR/BREO at 15% on the first $3.0 billion of annual global net sales and 5% above that threshold; royalties on other LABA-combination products such as ANORO are tiered from 6.5% to 10%. Following the spin-off, Innoviva is entitled to 15% of certain future payments relating to the triple-combination and MABA programs.
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net revenue | $133.6 million | $53.9 million |
| Net royalty revenue, after amortization of GSK fees | $132.7 million | $53.1 million |
| Operating income | $109.0 million | $31.6 million |
| Net income (loss) from continuing operations | $59.5 million | $(18.8) million |
| Diluted earnings (loss) per share | $0.53 | $(0.16) |
| Cash provided by operating activities | $61.0 million | $10.1 million |
| Cash, cash equivalents and marketable securities at year-end | $150.4 million | $187.3 million |
| Working capital at year-end | $178.0 million | $200.8 million |
| Total debt principal at year-end | $728.2 million | $748.3 million |
Revenue growth was driven by increased prescriptions and market share for both partnered products. Gross royalties from GSK were $146.5 million; $13.8 million of amortization of previously capitalized fees paid to GSK reduced reported royalty revenue. Operating expenses were $24.6 million, including $23.2 million of general and administrative expense and $1.4 million of research and development expense. Interest expense was $52.4 million. Net income included a $2.3 million gain on repurchases of the 2023 notes.
Fourth-quarter 2016 net revenue was $43.6 million and net income was $25.5 million. GSK reported fourth-quarter product sales of $273.0 million for RELVAR/BREO, up 76% year over year, and $90.7 million for ANORO, approximately double the prior-year quarter. These are GSK sales, not Innoviva revenue.
Net cash used in financing was $97.6 million, mainly reflecting $78.1 million of common-stock repurchases, $11.6 million of 2023-note repurchases and $6.8 million of principal payments on the 2029 notes. Cash declined by $36.9 million during the year. The company reported a stockholders’ deficit of $353.0 million.
Material changes versus the prior comparable period
- Net revenue increased 148% from 2015, and continuing-operations results improved from an $18.8 million loss to $59.5 million of income.
- Cash from operations increased to $61.0 million from $10.1 million, while cash and marketable securities fell to $150.4 million from $187.3 million, primarily amid capital returns and debt payments.
- Interest expense remained elevated at $52.4 million, up slightly from $51.8 million. General and administrative expense rose 17% to $23.2 million; research and development expense fell 47% to $1.4 million.
- Innoviva repurchased 7.2 million shares during 2016 for approximately $78.1 million. Since December 2015, cumulative repurchases under the prior program were $103.7 million at an average $10.50 per share. The company stopped quarterly dividends after 2015.
- Principal outstanding on the 2029 notes decreased to $487.2 million from $493.2 million; the 2023 notes declined to $241.0 million from $255.1 million.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no specific revenue or earnings guidance. Management said cash, cash equivalents and marketable securities were expected to fund anticipated operating needs for at least the next 12 months under current plans. A February 2017 capital-return plan authorized up to $150 million of share and/or debt repurchases through year-end 2017, funded from working capital, but the company is not obligated to spend the full amount and may suspend the plan.
- Concentration and commercialization: Current and projected revenue depends on GSK and the partnered respiratory portfolio. Innoviva has limited control over GSK’s commercial priorities, pricing, development and resource allocation. Competition, generic entry, reimbursement pressure and changing treatment standards could reduce royalties.
- Clinical and regulatory uncertainties: GSK submitted the closed triple-combination therapy for COPD for U.S. and EU review at the end of 2016. Innoviva’s interest in certain associated future payments is limited to 15%. The filing also highlighted the pending 2017 Salford Lung Study asthma results and LABA safety-study results; unfavorable findings or regulatory actions could affect sales or product use.
- Debt and royalty security: The 2023 notes are unsecured, bear 2.125% interest and mature in 2023. The 2029 notes bear 9% interest and are secured by 40% of royalties from RELVAR/BREO and ANORO in a segregated account. Their principal and payment timing depend on royalty receipts. Debt service can constrain cash available for stockholders.
- Other exposures: Innoviva remains contingently liable for up to $21.7 million of lease payments through May 2020 if Theravance Biopharma defaults on assigned South San Francisco leases. Federal NOL carryforwards were approximately $1.1 billion, but deferred tax assets were fully offset by a valuation allowance and use of tax attributes may be limited by ownership-change rules. No material legal proceedings were reported.
- Unusual and governance items: The 2016 results benefited from a $2.3 million gain on repurchased 2023 notes. GSK’s approximately 29.5% year-end ownership and its commercial-partner role create potential conflicts. The independent auditor gave unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Most important facts for investors to verify
- Whether GSK’s product-sales growth translates into sustained Innoviva royalty growth, and how gross royalties reconcile to reported revenue after fee amortization and the 2029-note royalty allocation.
- The amount, timing and effective cost of debt service, including future 2029-note payments, any further principal growth or paydown, and the maturity and potential conversion or repayment of the 2023 notes.
- Progress and regulatory outcomes for the triple-combination program, Salford Lung Study and LABA safety studies, and their implications for Innoviva’s retained royalty interests.
- The effects of generic competition, payer discounts, pricing pressure and GSK portfolio decisions on RELVAR/BREO and ANORO sales and royalties.
- Actual execution and funding of the 2017 capital-return authorization, and the resulting impact on liquidity and strategic flexibility.
- Availability of NOL tax attributes, including the effects of ownership-change limits and any tax authority challenge to prior transactions.