Innoviva, Inc.
Q3 2015 Earnings Call Transcript

Published: 28 Oct 2015

[Operator:]

Ladies and gentlemen, good afternoon. At this time, I’d like to welcome everyone to the Theravance Third Quarter 2015 Financial Results Webcast and Conference Call. During the presentation, all participants will be in listen-only mode. A question-and-answer session will follow the Company's formal remarks. [Operator Instructions] Today's conference call is being recorded. And now I’d like to turn the call over to Eric D'Esparbes, Chief Financial Officer of Theravance. 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 quarter and I will review our financial results. Following our comments, we will open up the call for questions. Earlier today, Theravance issued a press release announcing recent corporate developments and third quarter financial results. A copy of the press release can be found on our Web site. 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 Theravance. Forward-looking statements include anticipated results and other statements regarding Theravance's goals, plans, objectives, expectations, strategies and beliefs. These statements are based upon information available to the Company today and Theravance 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 Form 10-Q for the quarter ended September 30, 2015 to be filed with the Securities and Exchange Commission. Additionally, adjusted EBITDA, a non-GAAP financial measure will be discussed on this conference call. A reconciliation to the most directly comparable GAAP financial measure can also be found in our press release. The discussion of the Company’s planned tender offer is for informational purposes only and is not an offer to buy or the solicitation to an offer to sell any shares of the Company's common stock. The tender offer will be made solely by an Offer to Purchase and the related Letter of Transmittal, as they may be amended or supplemented. Stockholders and investors are urged to read any Tender Offer Statement on Schedule TO, the Offer to Purchase, the related Letter of Transmittal and the other offer materials, as well as any amendments or supplements to the Schedule TO when they become available, because they will contain important information including various trending conditions of the tender offer. I’d now like to turn the call over to Mike Aguiar, our Chief Executive Officer. Mike?

[Michael W. Aguiar:]

Thank you Eric and good afternoon everybody. During the third quarter, Theravance continue to make progress toward our goal of building BREO and ANORO into leading global respiratory franchise with our partner GSK. In particular, sales and market share continue to expand from both products, highlighted by the U.S performance of BREO with increases in net sales of more than 40% compared to the second quarter and by recent improvements in 2016 coverage at CVS Caremark and ExpressScripts. Additionally, we’ve made further operational progress, streamlining our operations as evidenced by lower overall operating expenses versus Q2 and we’re reducing our 2015 expense guidance accordingly. During the third quarter, our income from operations increased by approximately 65% to $8.4 million versus $5.1 million in the second quarter. As a result of our projected revenue and profit growth, we remain confident in our overall financial trajectory, capital return levels and business model. Based upon this confidence, we’re announcing today an acceleration of our capital return plan with a $150 million share repurchase plan effective through the end of 2016. This will replace our quarterly dividend which represented an annualized capital return rate to shareholders of approximately $116 million. A component of the plan will be a modified Dutch auction tender offer to purchase up to $75 million of our common stock, at a price per share of not less than $8.50 and not greater than $9.25, which we plan to initiate shortly. We currently intent to repurchase our shares under the plan through a combination of this planned tender offer and open market purchases, and may also make repurchase shares through private transactions, exchange offers, additional tender offers or other means. The tender offer will be continued upon satisfaction of customary conditions. Additional details regarding the pricing and other terms will be provided upon a formal commencement of the tender offer. The decision to accelerate the overall capital return program and a change from dividends to a share buyback was based upon our confidence in the commercial potential of BREO and ANORO, our overall financial position and the current share price of our common stock. We believe the implementation of this program will result in significant long-term value for our stockholders. I'll now turn to our program updates. RELVAR/BREO a lead respiratory program partnered with GSK for the treatment of patients with asthma and chronic obstructive pulmonary disease or COPD. It is a combination inhaled respiratory medicine consisting of vilanterol, a long-acting beta2 agonist or LABA, and fluticasone furoate, an inhaled corticosteroid, or ICS, both delivered in the ELLIPTA dry powder inhaler. Total net sales for RELVAR/BREO in the third quarter of 2015 were $97.8 million representing a 19% increase compared with the previous quarter. Sales in the U.S were $40.4 million, a 44% increase over Q2 driven by higher TRx prescription volumes of approximately 35%. We believe a significant portion of this growth in the U.S. was due to the approval of the asthma medication and to improvements in the effectiveness of GSK’s sales and marketing efforts. While its still early in the asthma launch, we’re encouraged by the overall trend for BREO, including in particular new to brand share which reached 14.6% among allergists, and 9.5% overall in the weekending October 16. As a reminder, we believe that new to brand market share is an important forward-looking indicator of the potential growth trajectory of these products. Looking forward, we expect to see further improvements for BREO with the recently initiated DTC campaign for asthma and the coverage improvement starting in 2016. Sales were $57.4 million outside the U.S., a smaller percentage increase from prior quarters which was primarily related to the traditionally slow summer sales in Europe. Our second program ANORO is a combination dual bronchodilator medicine for the treatment of COPD consisting of the LABA vilanterol and the long-acting muscarinic antagonist, or LAMA umeclidinium. Total net sales for ANORO during the third quarter of 2015 were approximately $32.7 million compared to $23.7 million in the previous quarter. This represents a quarter-over-quarter net sales growth of 38% mostly resulting from continuing growth in the U.S market and initial inventory stocking to support the launch of the product in Italy, and the end of real-time restrictions in Japan. In the U.S., sales were $22 million, an increase of 23% compared to Q2, driven by higher TRx volumes of approximately 26%. According to IMS both BREO and ANORO continue to gain market share during the second quarter in key physician groups including primary care, pulmonologists and allergists. For example, following the U.S asthma launch in mid-May through the week ending October 16, IMS reported that BREO TRx and new to brand growth has outperformed the LABA ICS market in average compound weekly growth by approximately 2.2% and 2.5% respectively. Additionally, for the most recent weekending October 16, weekly BREO TRx growth of 2.3% was nearly 4 percentage points better than the LABA ICS market which contracted by 1.5%. Coverage for both products continued to improve. As of September 30, commercial coverage for BREO was 68%, up from 50% last September and ANORO coverage was at 90% compared to 80% a year-ago. I’d also like to note that these levels of coverage do not include the impact of the recent formulary wins at CVS Caremark and ExpressScripts. Looking forward we’ve significant data expected during the first half of next year from the Salford Lung Study in COPD patients. The Salford Lung Study evaluates the impact of RELVAR/BREO in a real world setting with the goal of identifying the effectiveness of once a day treatment with RELVAR/BREO versus standard-of-care therapy. We remain optimistic about the long-term potential for both products and look forward to the upcoming clinical study results from Salford. I'll now turn the call over to Eric to review our third quarter 2015 financial results. Eric?

[Eric D'Esparbes:]

Thanks, Mike. Before I present our Q3 financial results, I want to remind you that as a result of the separation of Theravance Biopharma from Theravance, Inc in mid 2014, there have been a number of adjusting entries to prior periods that reflect the financial impact as a discontinued operations accounting. This results in limited comparability between Q3 financials and our previously reported results. We had a strong financial performance in the third quarter. Total revenues included $16.8 million of royalties earned a 21% increase over the previous quarter, offset by $3.2 million of noncash net of amortization expense and other revenues. Royalty revenues earned include $14.7 million for BREO and $2.1 million for ANORO. I want to highlight that looking at the prior five quarters, on average, all royalties earned have grown at a compound rate of almost 40%, which reinforces our confidence in the prospects of the Company going into Q4 2015 and into 2016. Total operating expenses in the third quarter of 2015 were $5.1 million compared to $5.5 million in the second quarter of 2015. We are reducing our guidance level for operating expenses composed of R&D and G&A costs before stock-based compensation accruals from a range of between $17 million and $19 million to a new range of between $16 million and $17 million for the full-year 2015. So far in 2015, we have made capital return payments to shareholders of $87.1 million in the form of dividends. As Mike mentioned earlier, we’re accelerating our capital return plan through a $150 million share repurchase program. We believe our financial position is strong and remain comfortable with this level of capital returns on to stockholders, giving our growth projections for both products. It is important to note that we’re already generating positive and growing cash contribution from our operations. We are therefore already accumulating cash from operations before stockholders return of capital. For the third quarter of 2015 income from operations increased 65% to $8.4 million compared to $5.1 million in the second quarter and generated an adjusted EBITDA of $13.4 million compared to $10.4 million in the previous quarter, an increase of 29%. This growth and the cash generating ability of our operations results from the combination of steadily increasing royalty revenues and a continued optimization of our cost structure. Cash, cash equivalent, short-term investments, and marketable securities totaled $206.2 million as of September 30, 2015. Now, I'd like to turn the call over to Mike for final closing comments.

[Michael W. Aguiar:]

Thank you, Eric. In summary, we’ve had a solid quarter Q3 in 2015 with increased prescription volume, higher market share, and continued optimization of commercial efforts for both products. As a result we remain optimistic about the long-term potential of our product portfolio, which supports our accelerated capital return plan through a $150 million share repurchase program. Our primary focus remains the optimization of the commercial success and global rollout of BREO and ANORO. There are many exciting developments happening here at Theravance and we remain optimistic about the future prospects of the Company. And now I’d like to turn the call over to the conference facilitator and open the call for questions. Thank you, sir. [Operator Instructions] And we will have our first question from the line of Tyler Van Buren with Cowen. Your line is open.

[Tyler Van Buren:]

Hi. Thanks for taking my questions. I had just a couple of questions regarding the new share repurchase program. With respect to the modified Dutch auction tender offer, what’s with the timing and the mechanics of that? Meaning that if your stock stays below at 9.25 through the end of the year, can we expect the $70 million -- $75 million in capital be deployed and with respect to the second half of the share repurchase plan, which could go into next year. How do you think about buying back shares there will have similar terms and with respect to this stock pricing or maybe just little more granularity there? Thanks so much.

[Michael W. Aguiar:]

Sure. Thanks for the question, Tyler. With regard to the pricing of the tender offer we’ve done at a premium to today’s closing price. We are going to go ahead and proceed going forward here with that price range of course. It is important to note that we’re not making any recommendation for or against this proposal. This is only a shareholder decision. And we will go ahead and take over here under the typical terms and timing. So we will get the documentation filed here very shortly. It would be a 20 or 21 day period from the filing of that until this tender offer closes. So I don’t want to go too much further on to that other than the range of the established based upon a premium of the stock price to date. I will say couple more points. Number one, of course we mentioned during the call, we remain pretty optimistic in terms of the Company and the prognosis for our programs. Certainly in terms of our internal projections we think that the value of the Company is above the current share price today. And I think interestingly is, if you take a look at this and think what is it continues to give us confidence, I think I’d like to just mention three things here in this. First is that the base case that we use in terms of designing the Theravance business and capital returns models was not dependent upon some of the upside scenarios that were associated with the positive SUMMIT study outcome. So we really designed the -- a comping [ph] around what we call the base case scenario. Secondly, if you look at recent prescription and volume trends, they’re very consistent with our base case scenarios and we expect to have significant future growth looking forward. And as you look backward here over the last year or so we’ve been seeing relatively consistent quarter-over-quarter growth in the 30% to 40% range on a TRx type of basis. And looking forward today, which is sort of a third point, I think I’d say that we have significant reasons to believe that GSK is going to continue to grow these products. In particular, we recently initiated the DTC advertising campaign for BREO in the U.S. We expect to see positive inflection related to that. We are seeing positive trends in the leading indicator new to brand segment. If you were to look back here, about a year-ago you would see is that the new to brand market share at that point of time ended up turning into TRx market share about a year later. And today our new to brand market share is about 2, 2.5 times big as where we’re from an -- I assume a TRx perspective and so we’ve -- history was to repeat itself, you would expect to see significant growth going forward. And then finally of course, we continue to make progress on coverage. Two recent examples here -- I will focus on BREO just for the purpose of this, where BREO got improvements in overall positioning include ExpressScripts. BREO is no longer on an excluded list for national formulary. As you guys know that is potentially very significant win. And then also BREO was upgraded at CVS Caremark under their SilverScript program to TR2, which was a terrific positioning for BREO. So going forward with history as some guideline with DTC starting and with improved coverage I think we remain pretty confident about the prognosis for the Company.

[Tyler Van Buren:]

Great. That’s helpful. And just assuming that the $75 million tender offer is completed, how do you think about deploying the second half of that share repurchase program? Can you give us any additional thoughts on that?

[Michael W. Aguiar:]

Sitting here today, we will have to wait and see what that is. We want to get through the 75 first. We thought it was pretty important to get that that done in out of the way before we’d look at this other piece here. I think we will address that once we get this first piece done. So we’re going to be relatively aggressive in getting the first piece done and that’s what we will be filing this year pretty shortly. I would say stay tuned on the other 75, we will cross that bridge once we get to the tender offer.

[Tyler Van Buren:]

Great. Thanks so much.

[Michael W. Aguiar:]

Thanks, Tyler.

[Operator:]

[Operator Instructions] And it appears we have no further questions on the phone. I'd like to turn the call back to Mr. D'Esparbes. Please go ahead sir.

[Eric D'Esparbes:]

All right. Well, thank you very much operator and thanks everyone for participating in the call. Have a great day.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a great day.