Innoviva, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Innoviva is primarily a royalty-management company whose revenue comes from respiratory products partnered with GSK. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise stated.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / prior date | Change |
|---|---|---|---|
| Royalty revenue, net | $55.2 | $52.4 | Up 5% |
| Income from operations | $52.2 | $40.7 | Up 28% |
| Net income | $40.0 | $30.3 | Up 32% |
| Net income attributable to Innoviva stockholders | $33.8 | $29.6 | Up 14% |
| Diluted earnings per share | $0.31 | $0.27 | Up $0.04 |
| Operating cash flow | $76.7 | $49.9 | Up $26.7 |
| Cash and cash equivalents | $65.2 | $62.4 at Dec. 31, 2018 | |
| Short-term marketable securities | $127.0 | $52.5 at Dec. 31, 2018 | |
| Debt principal | $447.2 | $447.2 at Dec. 31, 2018 | |
| Net carrying amount of debt | $384.7 | $382.9 at Dec. 31, 2018 | |
| Total stockholders’ equity | $199.9 | $159.1 at Dec. 31, 2018 |
Gross royalties from GSK were $58.6 million; reported royalty revenue was $55.2 million after $3.5 million of amortization of capitalized fees. The filing reports no gross-margin measure. The company reported $8.5 million of income tax expense and a 17.5% effective tax rate, versus an immaterial tax amount in Q1 2018. Cash, cash equivalents and short-term investments totaled approximately $192.2 million at quarter-end.
Investing cash flow was negative $74.2 million, primarily reflecting purchases of marketable securities; financing cash flow was positive $0.2 million. Cash and cash equivalents increased by $2.7 million during the quarter. Debt principal comprised $13.8 million of Term B Loan, $241.0 million of 2023 Notes and $192.5 million of 2025 Notes. Debt fair value was $465.0 million at March 31, 2019. The Term B Loan matures in 2022; the notes mature in 2023 and 2025.
Material changes and operating drivers
- Net royalty revenue rose 5%, primarily due to growth in TRELEGY prescriptions and market share, partly offset by lower RELVAR/BREO and ANORO royalties, which management attributed primarily to increasing U.S. pricing pressure.
- Royalties by product: RELVAR/BREO $42.7 million, down 7%; ANORO $8.6 million, down 2%; TRELEGY $7.3 million, versus $1.0 million in Q1 2018.
- GSK-reported product net sales were $284.9 million for RELVAR/BREO (down 7%), $131.8 million for ANORO (down 2%), and $112.7 million for TRELEGY (up from $14.6 million). These are GSK sales, not Innoviva revenue.
- G&A expense fell to $3.0 million from $11.7 million. Q1 2018 included $3.2 million in management severance and a $2.7 million reimbursement to Sarissa; lower headcount also reduced expenses.
- Interest expense decreased 40% to $4.6 million, mainly reflecting lower average debt. Q1 2018 included a $3.1 million loss on debt extinguishment; no such loss was reported in Q1 2019.
- Net income attributable to noncontrolling interest increased to $6.2 million from $0.7 million. This reflects Theravance Biopharma’s 85% share of TRC net income, with the increase primarily related to TRELEGY growth.
Outlook, risks and unusual items
- Management stated that projected royalty revenue and cash, cash equivalents and marketable securities should fund anticipated debt service and operating needs for at least the next 12 months under current plans. No specific revenue or earnings guidance was provided.
- Key stated uncertainties include lower-than-expected royalties, product commercialization and pricing, and the timing and outcomes of development and regulatory activities. Innoviva’s revenue is dependent on GSK-partnered products.
- GSK’s TRELEGY received Japanese approval for COPD during the quarter; the filing describes it as the first single-inhaler triple therapy approved in Japan.
- Innoviva adopted lease accounting guidance on January 1, 2019, recognizing a $1.5 million right-of-use asset and $1.6 million of lease liabilities for its headquarters lease. The company said adoption did not materially affect retained earnings, operations or cash flows.
- Innoviva disclosed a guarantee related to facilities assigned to Theravance Biopharma: remaining lease payments were $7.7 million through May 2020, with a $0.4 million carrying value for the guarantee. The headquarters operating lease liability was $1.5 million at quarter-end.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2019.
Important facts for investors to verify
- Whether TRELEGY growth can continue to offset declines and pricing pressure affecting RELVAR/BREO and ANORO.
- GSK product sales, royalty calculations, and the effect of Innoviva’s contractual royalty tiers and TRC’s noncontrolling ownership.
- Debt terms, interest costs, and the company’s ability to meet future obligations while maintaining liquidity.
- The assumptions supporting management’s statement that available resources cover at least 12 months of needs, particularly if royalties or operating plans change.
- Potential exposure under the Theravance Biopharma facility-lease guarantee and the status of the assigned leases.