Innoviva, Inc.
Q1 2017 Earnings Call Transcript

Published: 27 Apr 2017

[Executives:]

Eric d’Esparbes - CFO Michael Aguiar - CEO

[Analysts:]

Prakhar Verma - Stifel

[Operator:]

Ladies and gentlemen, good afternoon. At this time, I’d like to welcome everyone to the Innoviva First Quarter 2017 Financial Results Webcast and Conference Call. During the presentation, all participants will be in a listen-only mode. A question-and-answer session will follow the Company’s formal remarks. [Operator Instructions] Today’s conference is being recorded. And now, I would like to turn the call over to Eric d’Esparbes, Chief Financial Officer of Innoviva. Please go ahead, sir.

[Eric d’Esparbes:]

Good afternoon, everyone, and thank you for joining us. With me on the call today is Mike Aguiar, our Chief Executive Officer. On today’s call, Mike will review the highlights from the first quarter of 2017 and I will review our financial results. Following our comments, we will open up the call for questions. I also want to take a moment to say that due to the ongoing litigation with Sarissa Capital Domestic Fund LP and certain of its affiliates related to the Innoviva 2017 annual meeting of shareholders, we are not able to come in further at this time on this topic and do not intend to address the matter on this call. Earlier today, Innoviva issued a press release announcing recent corporate developments and financial results for the first quarter of 2017. A copy of the press release can be found on our website. Before we get started, we would like to remind you that this conference call contains forward-looking statements regarding future events and the future performance of Innoviva. Forward-looking statements include anticipated results and other statements regarding Innoviva’s goals, plans, objectives, expectations, strategies and beliefs. These statements are based upon information available to the Company today and Innoviva assumes no obligation to update these statements as circumstances change. Future events and actual results could differ materially from those projected in the Company’s forward-looking statements. Additional information concerning factors that could cause results to differ materially from our forward-looking statements are described in greater detail in the Company’s press release and the Company’s filings with the SEC. Additionally, adjusted EBITDA and adjusted earnings per share, two non-GAAP financial measures, will be discussed on this conference call. A reconciliation to the most directly comparable GAAP financial measures can also be found in our press release. I would now like to turn the call over to our Chief Executive Officer, Mike Aguiar.

[Michael Aguiar:]

Thank you, Eric, and good afternoon everybody. 2017 has been eventual year here at Innoviva. First and foremost, our Board and I would like to thank our shareholders for the ongoing constructive dialogue and support we received for our team, strategy and reelected directors. We take shareholder feedback seriously. Based upon the shareholder feedback, we recently announced that the Board has formed a special committee to take a comprehensive look at our cost structure. We look forward to reporting results with review and we will continue our dialogue with shareholders as we go forward. Turing to operations, we believe Innoviva is well positioned to deliver value to our shareholders through continued profitability and steady capital returns to investors. Our growth platform is anchored by a strong partnership with GSK that is focused on developing RELVAR, BREO, ELLIPTA and ANORO ELLIPTA into leading global medicines for the treatment of patients suffering from asthma and COPD. During the first quarter of 2017, I am pleased to say we continue to make significant progress in the commercialization of both products. In the U.S. BREO and ANORO were both significantly outperforming market for the first quarter 2017 and prescription volume growth resulting in new all-time high market share for both products. According to the most recent complied by IMS TRx market share for BREO is now 16.1%, an increase of 3.9 percentage points since Q4 and ANORO has reached 12.3%, the share increase of 2.7 percentage points since Q4. As a result, BREO TRx volumes exceeded 1 million prescriptions in the U.S. during the quarter, a 22% increase over Q4 2016. Additionally, these data show that BREO new to brand market share increased to 23.6% overall, which is a quarterly increase of 5.2 percentage points and for pulmonologists an increase of 40% for quarterly growth of 4.4 percentage points. BREO remains the class leader in new to brand care with pulmonology segment accounting for one out of every 2.5 LABA ICS prescriptions written by pulmonologists in the U.S. ANORO momentum also increased in the first quarter of 2017 with market share gains in both TRx and NBRx. In the week ending April 14, ANORO new to brand market share increased to 20.7% overall and 22.6% for pulmonologists. We continue to believe that new to brand market share and specialist adoption rates are important leading indicators of the future performance potential for these brands. As a result, we remain optimistic about the potential about BREO and ANORO in the leading global respiratory franchises. As we've mentioned on prior calls, market shares remains the primary metric of our analytic efforts as it is useful method for measuring the underlying demand of our products versus our goals. In contrast, reported net sales by GSK have historically experienced quarter-over-quarter volatility relative to underlying prescriptions, this is due to a number of factors, including normal slower summer, and stronger winter seasonality, changes in channel inventory levels, asthma COPD customer mix, accounting reserve true ups and couponing levels. We saw this phenomenon again in the first quarter. While in the fourth quarter 2016, reported net sales outpace prescription growth during the first quarter of 2017 prescription growth outpace reported net sales in the U.S. from both products. According to GSK, this is due to traditional Q1 decreases in distribution channel inventory and accounting reserve true ups. RELVAR/BREO recorded $137.2 million in net sales in the U.S., up 70% from the first quarter of 2016. Outside the U.S. net sales were $120.7 million in the first quarter of 2017, an increase of 49% from the first quarter of last year. For ANORO, Q1 net sales were $77.5 million up 61% from the first quarter of last year. Overall, in the U.S. market BREO TRx in our first quarter of 2017 grew by approximately 103% compared to the first quarter of 2016 while ANORO TRx in the first quarter of 2017 grew by approximately 80% compared to the same period last year. The strong underlying demand trends, favorable 2017 reimbursement status and an effective collaboration in GSK, we remain optimistic about the potential for both products. On the clinical side, we have two Phase 3 programs reading out this year. In the first half of the year, we plan to report the result of the Salford Lung Study in asthma, and during the second half of 2017, we expect to report the results of the impact study with the closed triple. Now, I’ll turn the call back to Eric to review our first quarter 2017 financial results. Eric?

[Eric d’Esparbes:]

Thanks Mike. Our royalties earned in the first quarter of 2017 were $43.7 million, a 60% increase over the first quarter of 2016 offset by 3.5 million of net non-cash amortization expense. Royalty revenues included $38.7 million for BREO and $5 million for ANORO. As Mike mentioned earlier, quarterly net sales for BREO and ANORO reported by GSK do not directly track prescription to the volume changes during the same time period due to variety of non-demand factors, especially during the first quarter of the year where traditional and inventory destocking from the previous quarter can occur. Therefore, when gauging revenue performance, we typically analyze it over a much longer time period. Over the prior 11 quarters on average, our royalties earned have grown at a quarterly compound rate of approximately 27%, which combined with the strong NBRx market share of our products, reinforces our continued confidence in the Company's prospect for 2017. Total operating expenses in the first quarter of 2017 were $11.1 million, including $4.2 million of proxy contest costs. Excluding the non-recurring proxy contest costs, our order of grading expenses were $6.9 million in the first quarter of 2017, compared to $6.6 million in the first quarter of 2016. For modeling purposes excluding proxy contest and litigation costs, 2017 full year operating expenses excluding non-cash, stock-based compensation accruals are expected to remain at or below our previous guidance of a range of between $18 million and $20 million. On a comparable basis to our guidance range, our first quarter 2017 operating expenses excluding non-cash stock-based compensation accrual and proxy contest and litigation costs were $4.4 million. We announced in our last earnings call that our 2017 a $156 million capital return plan will primarily focus on the redemption of our 9%, 2029 royalty notes. Our objective is to gradually reduce our debt and better position the Company to optimize its capital structure. During the first quarter of 2017, we made a principal repayment from royalties received are $7.8 million on our 2029 royalty notes. In addition, we recently announced that on May 15, 2017, the next interest payment date on our 2029 royalty notes. We will prepay $50 million in outstanding principal. This is an addition to the scheduled principal repayment of $6.7 million and in total this will present the substantial portion of our 2017 capital return fund. This steady reduction in the balance of our 9% 2029 royalty notes combined with our increasing level of adjusted EBITDA on a 12 month rolling basis with now generated approximately $146 million in adjusted EBITDA. We believe the Company is in the strong position to look for refinancing options for 2029 royalty notes, reduce our overall cost of funding and generate value for our investors. In fact at the end of the first quarter of 2017, our leverage ratio has now been reduced to approximately 3.8 times net debt to adjusted EBITDA which is a strong indication of this steady improvement of our financial profile. We continue to generate strong cash flow from our operations in the first quarter of 2017. Income from operation was $29.3 million compared to $17.5 million in the first quarter of 2016. Adjusted EBITDA was $35.4 million in the first quarter of 2017, compared to $22.8 million in the first quarter of 2016. In spite of incurring cost associated with the proxy context which cost represent a negative impact totaling $0.03 per share in the first quarter of 2017, our adjusted earnings per share was $0.19 still up significantly compared to adjusted earnings per share of $0.09 first quarter of 2016. Cash, cash equivalents, short-term investments and marketable securities totaled 169.8 million as of March 31, 2017 and we had $43.7 million in royalty receivables from GSK at the end of the first quarter, which we believe puts us in a strong liquidity position for 2017. And now, I'd like to turn the call over to Mike for some closing comments.

[Michael Aguiar:]

Thank you, Eric. In summary, we remain optimistic about our future prospects based upon ongoing gains in prescription volumes and market share for both products and a steadily improvement financial profile as a business. Our primary focus in 2017 remains the optimization of the commercial success and global rollout of BRIO and ANORO. As we believe the both products have significant future commercial potential and the continued optimization of our capital structure, there are many positive things happening here at Innoviva and we remain optimistic about the outlook of the Company. Now, I'd like to the conference facilitator to open the call for questions.

[Operator:]

Thank you, sir. [Operator Instruction] We will have our first question from the line of Stephen Willey of Stifel. Your line is now open.

[Prakhar Verma:]

This is Prakhar Verma on for Steve. So, I have question on Teva's AirDuo RespiClick which was recently approved and I know it's not interchangeable for Advair, but can you just comment on your expectation for how they're that going to approve Adair and BREO going forward? Thank you.

[Eric d’Esparbes:]

So, we were certainly aware of the approval. I think we have probably kept our eyes a little more focused on AB generics as having a potential to impact the product. BREO and ANORO are rather than the RespiClick, so want to see how rolls out, obviously Teva is a quality company with present today in the respiratory space. But since this is not a substitutable product, it will have to be in associated sales and marketing effort and promotion and other pieces on that. So, we are aware of that, we don’t think it's going to be a gigantic impediment to us and typically have been looking a little more closely at AB and there is potential for AB. So, again, what we were successfully through one of the initial GDUFA dates was Mylan and there is another one coming up for Hikma, I think this next week. So, we probably pay a little more attention to those. So, hopefully I cover your question.

[Operator:]

Thank you. [Operator Instruction] Thank you, it appears we have no further questions on the phone. I would now like to turn the call back to Mr. Esparbes. Please go ahead, sir.

[Eric d’Esparbes:]

All right thank you very much operator. And thanks everyone for participating. Have a great day.

[Operator:]

This does conclude today's conference call. We thank you for your participation. You may now disconnect.