Innoviva, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted.
Business context
Innoviva’s primary business is receiving royalties under its respiratory-product agreements with GSK. Its principal products are RELVAR/BREO ELLIPTA and ANORO ELLIPTA. Innoviva reported 13 employees and stated that its current and projected revenues depend on GSK-partnered products. Following the 2014 spin-off, Innoviva is entitled to 15% of certain future payments for the closed triple-combination and MABA programs.
Key financial metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Total net revenue | $32.5 million | $10.7 million | $56.6 million | $17.6 million |
| Income (loss) from operations | $25.9 million | $5.1 million | $43.4 million | $5.9 million |
| Net income (loss) | $14.6 million | $(7.8) million | $19.0 million | $(18.5) million |
| Diluted earnings (loss) per share | $0.13 | $(0.07) | $0.17 | $(0.16) |
Operating margin, calculated as operating income divided by revenue, was approximately 79.7% for Q2 2016 and 76.6% for the first half of 2016.
- Revenue: Q2 royalty revenue, net of amortization of capitalized GSK fees, was $32.3 million; first-half royalty revenue was $56.2 million. The increase reflected growth in prescriptions and market share for both products. GSK reported Q2 sales of $209.9 million for RELVAR/BREO, up 156% year over year, and $65.0 million for ANORO, up 174%.
- Cash flow: First-half operating cash flow was $19.7 million, versus $0.6 million in 2015. Investing activities used $12.8 million, versus providing $107.8 million in 2015, when substantial securities proceeds were received. Financing activities used $53.1 million, primarily for share repurchases and debt repurchase. Cash and cash equivalents declined $46.2 million to $112.9 million.
- Liquidity: Cash, cash equivalents and short-term marketable securities totaled $153.9 million at June 30, 2016. Current assets were $190.4 million and current liabilities were $14.6 million. Management said available cash and future royalties should cover debt service and anticipated operating needs for at least 12 months under current plans.
- Debt: Principal outstanding was $739.1 million: $245.1 million of 2.125% convertible notes due 2023 and $494.0 million of 9% non-recourse notes due 2029. Net debt carrying amount was $722.3 million. The 2029 notes receive 40% of specified GSK royalties; principal and interest payments vary with royalties, and $3.3 million was expected to be paid in August 2016.
- Other balance-sheet items: Total assets were $378.1 million and stockholders’ deficit was $363.1 million at June 30, 2016. The company reported no cash dividend declared for the first half of 2016, after paying dividends in 2015.
Material changes versus the prior comparable period
- Revenue more than tripled in both Q2 and the first half of 2016, primarily reflecting higher product royalties. Total net revenue rose 205% in Q2 and 223% in the first half.
- Innoviva moved from a net loss to net income in both comparisons. Higher revenue was partly offset by interest expense of $13.2 million in Q2 and $26.3 million for the first half.
- First-half G&A expense rose 21% to $12.5 million, mainly due to employee costs and stock-based compensation. R&D expense fell 44% to $0.8 million.
- In May, Innoviva repurchased $10.0 million face value of 2023 notes for $8.1 million, recognizing a $1.7 million gain. It also repurchased 4.14 million common shares during the first half for $44.3 million, at an average $10.71 per share.
- Cash and cash equivalents fell from $159.2 million at year-end 2015, while short-term marketable securities increased to $40.9 million. Total cash and marketable securities therefore declined to $153.9 million.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance was provided. Management’s liquidity assessment depends on future royalty receipts and current operating forecasts; additional financing could be needed if plans or forecasts change.
- Management cited growth in prescriptions and market share, while the risk disclosures note that product launches and sales have been below prior expectations, particularly due to U.S. pricing and payer-coverage challenges.
- Results are highly concentrated in GSK-partnered products. Royalty income is exposed to GSK’s commercial priorities, competition (including generics), pricing and reimbursement pressure, regulatory developments, clinical outcomes and product safety.
- GSK planned regulatory submissions for the closed triple COPD therapy in the U.S. and EU by the end of 2016. Innoviva receives only a 15% economic interest in specified payments for that program; success could also affect sales of existing products.
- Other notable exposures include a $24.7 million guarantee of former facilities leased by Theravance Biopharma if it defaults, and a new seven-year headquarters lease with $2.8 million in stated minimum payments. The filing reports no significant market-risk changes and says disclosure controls were effective.
- Income tax expense was minimal; the company said any 2016 taxable income was expected to be substantially offset by net operating losses or other deferred tax assets. Use of tax attributes may be limited.
Important facts for investors to verify
- GSK’s subsequent product sales, royalty statements and the portion of royalties directed to service the 2029 notes.
- Whether payer access, net pricing and market-share trends support continued royalty growth, especially in the U.S.
- Debt-service requirements, the variable repayment schedule for the non-recourse notes, and any future note repurchases or refinancing.
- Remaining authorization and timing under the $150 million share-repurchase program, and the company’s capital-return plans.
- Progress, regulatory submissions and economic terms for the closed triple program, alongside potential competitive effects on existing products.
- Potential exposure from the Theravance Biopharma lease guarantee, tax-attribute limitations and other contingencies.