Innoviva, Inc.
Q1 2013 Earnings Call Transcript

Published: 26 Apr 2013

[Operator:]

Ladies and gentlemen, good afternoon. At this time, I would like to welcome everyone to the Theravance 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). I will repeat these instructions after management completes their prepared remarks. Today's conference call is being recorded. Now, I would like to turn the call over to Mike Aguiar, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

[Michael Aguiar:]

Good afternoon, everyone, and thanks for joining us. With me on the call today is, Rick Winningham, our Chief Executive Officer. Earlier today, Theravance issued two press releases. One, announced our Q1 2013 operating results and the second announced our intention to separate certain respiratory assets partnered with GSK from the biopharmaceutical operations of Theravance resulting in two independent publicly traded companies with different business objective and opportunities. One copy will continue to manage the late-stage respiratory assets partnered with GSK and associated potential royalty revenues with the intention of returning capital to stockholders. The other company will be a separate biopharmaceutical company focusing on the discovery, development and commercialization of small molecule medicines in areas of significant unmet medical needs. The primary focus of today's call will be for Rick to discuss the strategic decision to separate Theravance into two independent entities. We posted slides on your website that Rick will be using to describe this plan in greater detail. The Q1 results press release provide a detail on the relevant financial items for Q1 and we will not be making any prepared remarks about that release. However, we will be happy to answer any questions related to the first quarter clinical and regulatory events or financial results of Theravance during the question and answer session. 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, expectations, strategies and beliefs. These statements are based upon the 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 Form 10-K filed with the SEC. I'll now turn the call over to Rick Winningham, our Chief Executive Officer. Rick?

[Rick Winningham:]

Thanks, Mike. Good afternoon, everyone. 2013 is a very important year for Theravance with a number of important regulatory and development milestones. At the JPMorgan meeting in January, I said that 2013 was a potentially transformative year for Theravance because of a number of upcoming significant events in our pipeline. Just last week, the Pulmonary-Allergy Drugs Advisory Committee recommended approval of BREO ELLIPTA for the treatment of COPD. PDUFA goal dates in May for BREO ELLIPTA and in December for ANORO ELLIPTA. MABA, monotherapy is set to commence Phase 3 later this year and we expect Phase 2 results from several internal Theravance programs around year end. These important events are result of more of a decade of hard work by dedicated Theravance employees. Our strategy is to discover new medicines using the insights in multivalency and partner with pharmaceutical companies to accelerate development and commercialization of a product candidate pipeline. I am pleased to tell you about Theravance's decision to take the next step in our strategy, specifically the separate three late-stage respiratory assets partnered with GSK from the biopharmaceutical operations of Theravance. The goal of separating Theravance into two companies was to continue its businesses in a new structure designed to unlock potential value, facilitate return of capital to stockholders and further our strategy of advancing medicines that address unmet medical needs. Now, if you would please turn to slide three on our website titled Theravance Today. Theravance's pipeline today is highlighted by respiratory programs partnered with GSK. This portfolio withheld investigational medicines for the treatment of both, asthma and chronic obstructive pulmonary disease, or COPD, has the potential to be the most comprehensive in the industry. These late-stage respiratory assets include RELVAR or BREO, ELLIPTA, ANORO ELLIPTA and VI monotherapy all delivered by the ELLIPTA inhaler. Two of these investigational medicines were filed with regulatory agencies and have the potential for regulatory action this year. If approved, these products will be available to treat a wide range of patients with COPD and potentially assuming clinical and regulatory success for BREO with asthma. Who have different needs these patients have different needs and different severities of disease. Theravance's role in collaboration with GSK is managed by a relatively small footprint of highly skilled Theravance employees and require great energy and laser-like focus but will not require significant development or commercial infrastructure going forward. Our product pipeline also includes three additional respiratory programs partnered with GSK, MABA, MABA/ICS and triple UMEC, VI and FF, as well as a number of potential medicines in a variety of therapeutic areas throughout our portfolio. Theravance has insights and expertise in the multivalency that we use and discover and develop small molecule medicines for areas of unmet significant medical need. Theravance has discovered more than 20 development candidate to-date, a number of which have advanced to mid-to-late stage development. These capabilities in the R&D and partnering activities they generate involve a majority of the existing Theravance employees. We are in a strong financial position and have the opportunity to unlock potential additional value. Please turn now to slide four. Theravance believes that separation announced today will create two highly focused businesses with the potential to increase overall shareholder value. The separation is designed to provide investors with the opportunity to unlock potential value from these desperate sets of assets and to provide a consistent return on capital to stockholders and to better align employee incentives. One company referred to as Royalty Management Company in the press release will continue to manage all development and commercial responsibilities under the LABA collaboration with GSK and associated potential near-term royalty revenues from RELVAR, or BREO, ELLIPTA, ANORO ELLIPTA and VI monotherapy. I would like to point out that Royalty Management Company is the current Theravance Corporation. If RELVAR, or BREO, ELLIPTA is approved in the U.S. and the E.U. in 2013, we would expect Royalty Management Company to have a short path to profitability and to provide a return of capital to stockholders unburden by research and development spending. The other company referred to as Theravance Biopharma in the press release, will focus on discovery, development and commercialization of small-molecule medicines exploiting insights into multivalency. Importantly, partnering will remain a key strategy and we will continue to work on existing partnered programs, including the cardiovascular collaboration with Merck and partnerships with agreements with Alfa Wassermann, Clinigen and R-Pharm. The result will be two independent, publicly traded companies with different business models enabling investors to align their investment philosophies with the strategic opportunities and financial objectives of the two independent companies. Now, please turn to slide five. Let me elaborate on the highlights for each company. Let's start with Royalty Management Company. From a structural perspective, this will be again the existing Theravance corporate entity that may assume a new name and ticker symbol to be determined of separation. This company will directly or indirectly hold and manage the rights to the potential near-term respiratory product royalty revenues due from GSK with the intention of distributing the stockholders a significant portion of any future royalty revenues less operating expenses, debt service and taxes. Royalty Management Company will manage the RELVAR, or BREO, ELLIPTA, the ANORO ELLIPTA and VI monotherapy programs. We expect Royalty Management Company to have an efficient and lien corporate structure, because GSK pays all commercialization and R&D expenses related to the partnered respiratory programs. Please turn to slide six. The two outstanding convertible notes and any unpaid milestone payments due to GSK due to GSK upon regulatory approval and the launch of RELVAR/BREO, ELLIPTA and ANORO ELLIPTA would remain as obligations of Royalty Management Company. The Company would also retain Theravance's net operating loss carry forwards. The current plan is that initially I will be Chief Executive Officer of Royalty Management Company, and other management positions and board members will be determined prior to separation. Now, please turn to slide seven. Shifting to highlights for Theravance Biopharma, which will have the proven R&D capabilities of Theravance today and a number of significant near-term catalysts. Theravance Biopharma will focus on a mix of research and development programs as well as partnered assets. It will also continue with our current strategy of seeking partnerships for current development candidates. Theravance Biopharma portfolio will include 98% of the economic interest Theravance currently has in the following programs which are partnered with GSK. MABA, MABA/ICS, UMEC, VI and FF, sometimes called the closed triple. All of Theravance's preclinical and clinical assets and research and development, including TD-1211, the Peripheral Mu Opioid Antagonist for the treatment of opioid induced constipation, TD-9855, a norepinephrine and serotonin reuptake inhibitor, or NSRI in Phase 2 study for ADHD and fibromyalgia, endpoint TD- 4208, a long-acting muscarinic antagonist is currently in a Phase 2b study for COPD. VIBATIV will also be included, is VIBATIV that is approved in the U.S. for the treatment of complicated skin and skin structure infections caused by Gram-positive bacteria, and is under regulatory review in the U.S. for nosocomial pneumonia. Please turn now to slide eight. This company will be an independent publicly traded biopharmaceutical company with no ownership retention by Royalty Management Company. Theravance Biopharma may assume a new name and ticker symbol to be determined at the time of separation. Theravance Biopharma will keep its headquarters in current South San Francisco facility and we expect no material changes to the current organization. This means that I expect to be CEO and most of the current Theravance employees are expected to join Theravance Biopharma. We currently plan to capitalize Theravance Biopharma with approximately $300 million at separation, which we expect to fund operations through significant potential corporate milestones over the following two to three years. Now, please turn to slide nine. As for the mechanics and timing of the separation, we plan to directly distribute 100% of the Theravance Biopharma to existing stockholders via a dividend. Theravance stockholders will receive Theravance Biopharma shares in proportion of their stock holdings in Theravance. We expect that the actual separation will be completed in either late 2013 or early 2014. We are currently evaluating a number of potential tax structures associated with the separation, including whether it will be tax free or taxable. Additional details regarding the structure and the financial operations of the two separate companies will be disclosed at a later time. Please now turn to slide 10. In summary, we are all very excited about the upcoming potential regulatory events this year and about taking the next step in our corporate strategy. Each corporate entity has potential significant value driving events coming up in the two years. We believe that the separation will provide investors with the opportunity to unlock value from two desperate sets of assets. If RELVAR, BREO, ELLIPTA is approved in the U.S. and the E.U., we anticipate a short path to profitability for Royalty management company with the intention of providing us consistent return of capital to its stockholders. Theravance Biopharma will focus on the discovery, development and commercialization of small molecule medicines in areas unmet significant medical needs, leveraging the multivalency drug discovery platform and proven management team. I would like to thank you for your attention to this incredibly important announcement for us and this concludes our prepared remarks. Now, I would like to turn the call over to the conference facilitator and open the call for questions.

[Operator:]

Thank you, sir. (Operator Instructions) And our first question comes from the line of Ian Somaiya from Piper Jaffray.

[Ian Somaiya:]

Thanks. Congratulations, and it seems a great idea. The one question that would immediately come to mind is, what is driving sort of factor or reasons for doing this and doing it now maybe potential rating to some of the (Inaudible) through?

[Rick Winningham:]

Yes. Well, I'll take the first part of that, Ian. That was a great question. Well, I think we have just finished the advisory committee with BREO. We received five positive votes to five different questions. We are optimistic although we are not done yet with the BREO application, but we are optimistic and in fact the time period for the separation of the companies will take six to nine month, so we've got a period of time in front of us. During this period of time, we would expect for any remaining regulatory uncertainty to be significantly reduced, therefore giving Royalty Management Company a strong foundation for its launch into the public market as a public entity?

[Ian Somaiya:]

And what was the reason MABA effort not being included in the Royalty Management Company, or that's just simply because of you feel whether your current shareholders or you are not getting enough value for that asset?

[Rick Winningham:]

No. I think to your point, there has not been a lot of focus on the bifunctional compound that characterizes MABA and ANORO and some of the other assets that are involved in the GSK relationship. There is certain complicated elements that are part of this structure are really the result of that complying with our agreements with GSK, but clearly the objective here is to concentrate one set of asset that have a less overall development and regulatory risk and another set of asset that are sort of more growth oriented over the long-term that have more development and regulatory risk and that's the purpose of the division.

[Ian Somaiya:]

Okay. Just one last question of mine, can you maybe just spend a little bit more time on tax consideration, whether there will be or won't be (Inaudible) with the transaction. When we think about Royalty Management Company, should we assume that it remains headquartered in California or are there plans to relocate it maybe to a lower jurisdiction?

[Mike Aguiar:]

Ian, It's Mike. I think that's a great question. As you know taxes are complex to say the least. So, with regard to whether it's taxable or tax free, we have some more work to do. There is more driven really by whether we have the ability to go down one path or the other and that's a complex process, so that will be sorted out here over the coming months, but it's not a one day or one-hour type conversation to figure it out. With regard to the domicile Royalty Management Co, right now there are no plans to move out of California. Unusually that sounds. It's actually not a bad place for a company with the profile of Royalty Management Co from an overall tax perspective. So, at least as of today, there would be no intention to move the company or to get the new headquarters anything else like that for Royalty Management Co. I would just like to make one more extension in addition to add on what Rick said, if you think about these sets of assets that are in the business today, clearly there is the opportunity we believe to better align those certain investor-type. There are certain investors who would have more interest in assets that are delivering current and future earnings and that obviously is where we are targeting the Royalty Management Co, and there are investors who have risk profile that would put them more into an investment in the development stage, which is probably going to be a little better focused on the Theravance Biopharma. So, we did that by better aligning those, we are able to capture some value today that's being perhaps overshadowed in our current structure by the [bright] light that's being shown on the respiratory assets given some of the extremely important events that we are going through the year, this year. So, we are extremely excited this today and we think that there is really continuation of our strategy of being quite thoughtful with overall management shareholder capital.

[Rick Winningham:]

Yes. And just the only other point I would add to that relative to taxes is that we do have a substantial amount of net operating loss carry forwards as I mentioned those net operating loss carry forwards are in Royalty Management Company.

[Ian Somaiya:]

Okay. Thank you very much.

[Operator:]

Thank you. And, our next question comes from the line of Steve Byrne from Bank of America.

[Steve Byrne:]

So, you drew a line in your sand with respect to your respiratory program and it seems to split ANORO versus ANORO with a steroid. Is there some is there some logic behind that, why that product which is clearly going to be marketed by GSK if that proves to be a feasible combination, why that one would have been with the biopharma where you put MABA just better understanding of why you split that way would be helpful.

[Rick Winningham:]

Sure. Definitely a great question, Steve, that we've separated these assets and that we have RELVAR BREO that has completed their Phase 3 program with RELVAR, BREO and COPD, asthma completed Phase 3 around the world with the ongoing 900-patient study in asthma in the United States, but that will finish some time, expected to be finished sometime this year. ANORO was already on file, so I think that these are very near-term projects with minimal additional development risk associated with them. The other thing, the other point I would make is that the vilanterol largely, I mean now has been in a number of Phase 3 studies and it's really one who listen to the Advisory Committee, I think the Advisory Committee was generally quite complementary of the effectiveness of vilanterol. I think, when you turn over to Theravance Biopharma, these products MABA, the ANORO plus the steroid to address the two questions that you had, these products have not been in Phase 3 yet. Hopefully, MABA, we expect with GSK to put MABA into Phase 3 later this year and ANORO plus FF is going through Phase 3 enabling study. So, that's really the separation. The separation is that we've got a set of assets here that are filed effectively in ANORO and BREO and we got a set of assets that are going into Phase 3 and that's the distinction and that's the reason for the separation. Mike?

[Mike Aguiar:]

Yes. Rick, I think, you've hit it right on the head. The other piece of this and Rick, [caveat] that what Rick said is the primary reason we did that, as you think about Theravance Biopharma, including these assets over there give some extremely important development milestones in the relatively near-term should we be fortunate to progress those into Phase 3. As you know, we've already talked about having a decision internally to move MABA forward into Phase 3, and should we be successful with the Phase 1 study that the closed triple is in right now, and that the Phase enabling studies with MABA/ICS are successful as well and potentially those can go in there as well. And as a result, the economic rights associated with these programs would be quite interesting and quite important milestones for Theravance Biopharma going forward to provide catalyst for that company.

[Rick Winningham:]

Yes. Just to reemphasize something Mike said, what we've really done with MABA, MABA/ICS, the closed triple as we've assigned 98% of the economic rights into the Theravance Biopharma and either the 2% of those will remain as well as the management rights will remain in a limited liability corporation that is owned by Royalty Management Company, so the Royalty Management Company and the company that is effectively Theravance now, will have management responsibility for the MABA, MABA/ICS and extend the closed triple and 2% of the economic rights that 98% of the economic rights will go to the Theravance Biopharma.

[Steve Byrne:]

And one other respiratory product I didn't see anywhere in here was your own LAMA 4208, is that still in development?

[Rick Winningham:]

Sure, and we didn't put it on the slides, but as I referenced quickly in my prepared remarks, 4208 is in a Phase 2b study and COPD in a nebulized fashion and we are very excited about that, because that addresses a particular segment of the COPD market that is not served by the dry powered inhaler products that we are developing with GSK, so that remains a very important product for us going forward and we should have the data from that Phase 2b program before the end of the year.

[Steve Byrne:]

Okay. Thank you.

[Operator:]

Thank you. And, our next question comes from the line of Stephen Willey from Stifel.

[Stephen Willey:]

Yes. Hi. Thanks for taking the question. I guess it seems like a bit of an obvious question, but I'll ask it anyways. Just out of curiosity this discussion was discussed or if the strategy was discussed with GSK prior to execution?

[Rick Winningham:]

Well, I can discuss the board's decision with GSK prior to the announcement today.

[Stephen Willey:]

Okay. And, any color you can provide on the reaction to the decision?

[Rick Winningham:]

No.

[Stephen Willey:]

Okay. And then I guess with respect to the MABA, I know you are kind of framing that as being something that's kind of a late market ready versus something that's Phase 3, but I guess as you kind of silo off the both, MABA and then MABA/ICS in the closed triple, the success of those three products themselves seem to occur at the expense of the products that are being put into royalty management, so I am just trying to wonder if that had anything to do with the delineation that you guys made.

[Rick Winningham:]

No. You know, on that, Stephen, I really couldn't disagree more. I mean, we are talking about a market that is currently at $20 billion and rolling. Unfortunately, and COPD growing more rapidly than asthma, so that really had nothing to do with it, because I think we see a significant opportunity, and as I addressed this in my prepared remarks for all of the products in this portfolio because of the incredible size of the market and keep in mind that the market today is measured largely by twice-a-day LABA, ICSs or in some cases more frequent dosing than that with one, through once-a-day product and it is Spiriva, we see the improvement hopefully, the improvement in compliance that we'll see whether once-a-day medicine facilitating the growth overall globally of the market, so I think now that really had nothing to do. We view this as just an incredibly significant opportunity to, with the entire set of products to address significant unmet medical need.

[Stephen Willey:]

Then just to be clear, is the decision to execute on the breakup, is that fully contingent upon these regulatory boxes getting checked without any complications? So, for example, say if there's [some] new way to get a response letter on both BREO and ANORO, would that then change your plans or is this something that you guys are kind of intent on moving forward?

[Rick Winningham:]

Yes. I think, we are intent on moving forward with it. This does have the name of Royalty Management Company, so the assumption is that that organization will be managing royalties that come in from those two products and I think based on where we are today, the positive advisory committee and I don't know anything about timing and the data that we've seen thus far for ANORO, but we got every reason to be optimistic, which with regard to the ultimate regulatory outcome, we've got both of those programs.

[Mike Aguiar:]

Steven, and with the timing we talked about here was late this year, early next year for getting this done and there are two PDUFA dates that come up there, the U.S. PDUFA date for BREO as well as the U.S. PDUFA date for ANORO, so those dates are out there. Obviously, we'll see how things continue to go. I think, we remain optimistic, but Royalty Management Co is the name of the entity as Rick correctly pointed out.

[Stephen Willey:]

Okay. So, the late '13, kind of early '14, execution date here isn't necessarily a function of the December 18th PDUFA on ANORO?

[Rick Winningham:]

No. I mean, those dates are out there. It's really more of a mechanistic question for us. As Rick mentioned earlier you have regulatory agencies you need to work with between now and the time you can spend. Things like the SEC and things like the IRS that take a little bit of time, so unfortunately there are pieces of that time period that are just not in our control. The intention is, as soon as we get all this done and are ready to go, will affect the transaction, but again you do have to pass through a couple of regulatories.

[Stephen Willey:]

Okay. I mean, just to be clear, you went to GSK with this decision today for the first time?

[Rick Winningham:]

What I said was we have discussed the board's decision with GSK, I wouldn't want to give any more details than that.

[Stephen Willey:]

Okay. Thanks.

[Rick Winningham:]

Thanks for the question.

[Operator:]

Thank you. And our next question comes from the line of David Friedman from Morgan Stanley.

[Sara Slifka:]

Hi. This is Sara calling for Dave. Something a little less related to the actual transaction, but I am looking forward to your possible label for BREO. Are you expecting both, FEV and exacerbated claim and if you only had one or the other, how do you expect it to impact the commercial potential? Thanks.

[Rick Winningham:]

Yes. So, thanks for the question. I don't want to really get into the commentary on that. We are, sort of post the favorable advisory committee and it's pretty well known what the votes were on the advisory committee and we'll just go from there. I mean, the PDUFA date is not that far away, we'll just have to see where we end up.

[Operator:]

Thank you. (Operator Instructions). Our next question comes from the line of Alex Lach from Camden Asset Management.

[Alex Lach from Camden Asset Management:]

Hi. I just wanted to ask, will you be adjusting the conversion ratio, so that it will be just convertible into a higher number of shares of Royalty Management Company as shown in the indenture, or there is no plan to distribute Theravance buy those shares to the convert all those or convert it into a basket. Is that correct?

[Rick Winningham:]

Yes. This was a question regarding the conversion ratio of the converts and we are just going to follow the languages in the indenture, so there are going to be various changes to the conversion ratio. We will be done on that, so you are correct on that.

[Alex Lach from Camden Asset Management:]

Okay. And, if BREO is not approved or do you still plan to go forward with this plan? It just seems like it just was very material to the convert holder who bought your bonds in January?

[Rick Winningham:]

Yes. So, I think we are optimistic with where we stand with BREO and ANORO, and certainly the changes here isolate for the convert holders, they isolate the value.

[Alex Lach from Camden Asset Management:]

They do not.

[Rick Winningham:]

BREO and ANORO into Royalty Management Company, and the plan is to remove the majority of this R&D spending off of Royalty Management Company and have it go with sell them to Biopharma.

[Alex Lach from Camden Asset Management:]

I mean, I am sure you aware that the lack of the losses or volatility from the new products groups to covert holders?

[Rick Winningham:]

Yes. We'll certainly make the adjustments required when we get to the end, further terms of the indenture.

[Alex Lach from Camden Asset Management:]

Okay. Yes. You can have a lot of unhappy convert holders who just [bought] quarter, but thank you.

[Operator:]

Thank you. And, our next question comes from the line of Gena Wang from Leerink Swann.

[Howard Liang:]

Hi. This is actually Howard Liang. Just I guess a couple of questions on the deal again. What determines whether it's a tax free or taxable transaction I guess I would ask [on] it? And there's what effect whether you are moving forward?

[Rick Winningham:]

The answer to the second part of the question is, no. We do not believe that's going to affect our decision to move forward. The first part of your question what determines whether taxable or non-taxable would require a very long time, so I would really don't want to get into all of the details on there at this particular point in time. So, we do not plan on that to be a gating item, meaning, a go, no go decision, but it really is going to be which path does it sit down and again you are familiar with how complex the tax code is, so it's more than a one-minute discussion on that one.

[Howard Liang:]

I don't know if you already said this, what is the plan for the Royalty Management Company to fund the milestone obligation?

[Rick Winningham:]

Yes. The milestone obligation would remain with the Royalty Management Company, so we did communicate at our last call that we had the potential in 2013 to pay up to $240 million of the total milestones this year. If we were to hit sort of everything that's in the possibility this year, and then going forward in that example there would be $80 million, so the intention would be that Royalty Management Co would fund all of this.

[Howard Liang:]

Okay. GSK, I assume. I don't know if there is anything like it, but are they committed to holding either the royalty company or Theravance Biopharma?

[Rick Winningham:]

I didn't get any questions regarding what GSK does or doesn't want to do probably a better directed exam, so I wouldn't want to get into any discussion about how they feel about each of these entities or anything else. They've been a very, very good partner for us and I would just leave any comps around that to questions on that to them.

[Howard Liang:]

Okay. Great. Thank you very much.

[Operator:]

Thank you. It appears, we have no further questions from the phone. I would now like to turn the conference to Mr. Winningham. Please go ahead, sir.

[Rick Winningham:]

All right. Thank you very much, operator, and thanks everyone for participating today in this exciting that we have, and you have a great day.

[Operator:]

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