Innoviva, Inc. — 2017 Form 10-K
Business context and reporting period. Fiscal year ended December 31, 2017; the filing also reports fourth-quarter results. Innoviva is a small royalty-focused company whose revenue is derived from its respiratory-product agreements with GSK. Its principal royalty-generating products are RELVAR/BREO ELLIPTA and ANORO ELLIPTA; Innoviva receives only 15% of royalties GSK pays on TRELEGY ELLIPTA and certain other programs assigned to Theravance Respiratory Company.
Financial performance and position
- Revenue: $217.2 million in 2017, up 63% from $133.6 million in 2016. Net royalty revenue was $214.1 million after $13.8 million of amortization of capitalized fees; MABA program revenue was $3.1 million.
- Product royalties: Gross royalties were $198.7 million from RELVAR/BREO, $29.0 million from ANORO and $0.2 million from TRELEGY. GSK reported fourth-quarter sales of $405.3 million, $147.3 million and $2.8 million, respectively, for those products.
- Profit: Operating income was $183.6 million versus $109.0 million in 2016. Net income attributable to Innoviva stockholders was $134.1 million, compared with $59.5 million; diluted EPS was $1.17 versus $0.53.
- Fourth quarter: Revenue was $69.5 million and net income attributable to Innoviva stockholders was $58.4 million, compared with $43.6 million and $25.5 million, respectively, in fourth-quarter 2016.
- Cash flow and liquidity: Operating cash flow was $141.7 million, up from $61.0 million. Cash, cash equivalents and marketable securities totaled $129.1 million at year-end; working capital was $165.6 million. Management said projected royalties and available cash were expected to cover operating needs and debt service for at least the next 12 months, based on current plans and forecasts.
- Debt: Face-value debt was $677.2 million at year-end: $243.8 million under the secured Term B Loan, $241.0 million of 2023 convertible notes and $192.5 million of 2025 convertible notes. The 2029 notes were fully repaid during 2017. Balance-sheet debt carrying amounts are lower than principal, in part because of discounts and issuance costs.
Material changes versus 2016
- Revenue rose primarily on growth in prescriptions and market share for RELVAR/BREO and ANORO, with TRELEGY sales beginning in the fourth quarter. Gross royalties increased 56% to $227.9 million.
- Net income increased by $74.6 million, reflecting higher royalty revenue and lower interest expense. Interest expense fell 17% to $43.6 million after refinancing and debt repayments.
- General and administrative expense increased 39% to $32.3 million, including $8.1 million in proxy-contest and related litigation costs. Research and development expense was $1.4 million.
- Cash and marketable securities declined $21.4 million. Financing activity included $487.2 million of repayments on the 2029 notes and $97.5 million of share repurchases, partly offset by $250.0 million of Term B Loan proceeds and $192.5 million from the 2025 notes.
Outlook, risks and unusual items
- The filing gives no specific revenue or earnings guidance. Management cautions that recent revenue growth may not indicate future growth.
- Innoviva depends on GSK for essentially all current and projected revenue and does not control GSK’s development, pricing, marketing or commercialization decisions. Key risks include competition and generic entry, reimbursement and pricing pressure, changes in COPD/asthma treatment guidelines, regulatory or safety developments, and GSK prioritizing TRELEGY or other products. Innoviva’s royalty exposure to TRELEGY is limited to 15% of GSK’s applicable payments.
- The Term B Loan is secured by substantially all of the company’s and guarantors’ assets, has a variable rate, and requires scheduled principal payments and potential excess-cash-flow repayments. A 50-basis-point LIBOR increase was estimated to add $1.2 million to annual interest expense.
- Redemption of the 2029 notes generated a $7.3 million debt-extinguishment loss/write-off of unamortized issuance costs. The Tax Cuts and Jobs Act caused a provisional $124.0 million reduction in deferred tax assets and liabilities, offset by a valuation-allowance adjustment; reported 2017 income tax expense was $4,000. Innoviva reported approximately $1.0 billion of federal net operating loss carryforwards, subject to limitations and expiration rules.
- A lease guarantee tied to facilities assigned to Theravance Biopharma could expose Innoviva to $15.6 million of remaining payments through May 2020 if that entity defaults; the recorded liability was $0.8 million.
- After year-end, the CEO resigned and the CFO became interim principal executive officer. A February 2018 agreement with Sarissa provided for three board appointments and a $2.7 million payment. Management and the auditor reported effective internal controls as of year-end, while the filing notes reduced segregation of duties after the CEO departure and additional oversight procedures.
Most important facts for investors to verify
- GSK’s latest product sales, market-share trends, net pricing and royalty calculations, especially for RELVAR/BREO and ANORO.
- Debt terms and repayment capacity, including Term B Loan covenants, scheduled payments, variable-rate exposure and the 2023 and 2025 note obligations.
- The sustainability of royalty growth given generic competition, reimbursement pressure, treatment-guideline changes and GSK’s portfolio priorities.
- The realized usability of tax attributes after ownership-change limitations and final accounting for the Tax Cuts and Jobs Act.
- Subsequent governance, leadership and capital-return developments, including the Sarissa agreement and any new share repurchases or dividends.