Innoviva, Inc. (INVA) Q2 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, good afternoon. At this time, I’d like to welcome everyone to the Innoviva Second Quarter 2017 Financial Results Webcast and Conference Call. [Operator Instructions] Today's conference call 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.

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 second 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 Stockholders, we are not able to comment 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 second 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.

Thank you, Eric and good afternoon everybody. Innoviva had a strong performance during the second quarter of 2017 driven by record high royalties earned in the sales of RELVAR, BREO, ELLIPTA and ANORO ELLIPTA. As we said in prior calls, we believe Innoviva is well positioned to deliver value to shareholders through continuing profitability and further growth. Our partnership with GSK has made significant progress towards the goal of building BREO and ANORO into leading global medicines for the treatment of patients suffering from asthma and COPD. In the U.S. BREO and ANORO both continue to significantly outperform the market in prescription volume growth resulting in new all-time high market share for both products. According to most recent data compiled by IMS, TRx market share for BREO is now 17.4% and ANORO reached 13.5%. Additionally, the data show that BREO new to brand market share increased to 24.4% overall and accounts for more than 40% of all new LABA ICS prescriptions written by pulmonologists in the U.S. ANORO also improved during the second quarter of 2017 with higher market share in both TRx and NBRx metrics. In the week ending July 14, ANORO new to brand market share was approximately 19.4% overall and that was approximately 22.1% for pulmonologists. I'm pleased to report that GSK recently initiated a new DTC promotion campaign for ANORO in the United States that will help to further bolster market share gains later this year. As we mentioned in prior calls, improvements in various market share measures remain the primary metrics of our analytic efforts to assess overall demand and progress toward the achievement of our commercial goals. In contrast, reported net sales by GSK have experience quarter-over-quarter volatility relative to underlying prescriptions. During the first quarter of 2017, we mentioned that we believe reported net sales reflected traditional Q1 decreases in distribution channel inventory and some accounting reserve true-ups. Based on GSK's feedback, we currently believe that second quarter 2017 U.S. revenues reflect favorable TRx market share and demand trends and a slight increase in channel inventory back to more normal levels. RELVAR/BREO recorded total net sales during the second quarter of 2017 of $364.3 million up 74% from the second quarter of last year. Net sales from the U.S. were $232.4 million up 107% from Q2 2016 while outside the U.S. net sales were $131.9 million, an increase of 35% in the second quarter of 2016. For ANORO, Q2 net sales were $110 million up 69% from the second quarter of last year. Overall in the U.S. market, BREO TRx in the second quarter of 2017 grew by approximately 85% compared to the second quarter last year and ANORO TRx in the second quarter grew by approximately 70% compared to the second quarter of last year. With strong underlying demand trends, favorable 2017 reimbursement status, and an effective collaboration with GSK, we remain optimistic about the potential for both products. On the critical side, in May we announced positive results in the Salford Lung Study in asthma showing RELVAR, ELLIPTA significantly improved asthma control in Salford Lung Study patients compared with the usual care. We see this as yet another important indicator of the benefit of RELVAR BREO for asthma patients. And later this year we expect to report the results of the 10,000 patient impact study with TRILOGY the closed triple. Now I'll turn the call back to Eric to review our second quarter 2017 financial results. Eric?

Thanks Mike. Our royalties earned in the second quarter of 2017 were $61.8 million, a 73% increase over the second quarter of 2016 offset by $3.5 million of net non-cash amortization expense. Warranty revenues earned in the second quarter of 2017 included $54.6 million for BREO and $7.2 million for ANORO. As we have mentioned previously, quarterly net sales for BREO and ANORO reported by GSK do not always directly track prescription, volume changes during the same time period due to variety of non-demand factors. Therefore, when gauging revenue performance we typically analyze it over a much longer time period. In fact, over the prior 13 quarters, on average our royalties earn up growing at a quarterly compound rate of approximately 28%, which combined with a strong NBRx market share for our products reinforces our continued confidence in the Company's prospects for 2017. Total operating expenses in the second quarter of 2017 were $10.7 million. This includes $4 million of operating expenses, $4.3 million in proxy contest and litigation costs, and $2.4 million in non-cash stock compensation expenses. Year-to-date total operating expenses were $21.9 million consisting of $8.4 million of operating expenses, $8.6 million of proxy contest and litigation costs, and $4.9 million of non-cash stock-based compensation expenses. As a reminder, our Board is in the process of a review of our operating expenses and we will update our 2017 guidance later this quarter when the review is completed. Over the last 12 months, we generated approximately $166.1 million in adjusted EBITDA and currently have total debt balances of $663.7 million. As a result, at the end of the second quarter of 2017, our leverage ratio has now been reduced to approximately 3.2 times net debt to EBITDA. To last 12 months adjusted EBITDA, apologies, a significant improvement in our financial profile compared to Q2 2016 when the same leverage ratio was 6.2 times. We believe that this strength puts us in a position to further improvements in our capital structure. We continue to generate strong cash from operation in the second quarter of 2017. Income from operation was $47.8 million compared to $25.9 million in the second quarter of 2016. Adjusted EBITDA for the quarter was $3.8 million compared to $34.1 million in the second quarter of 2016. In spite of incurring cost associated with the proxy contest and related litigations which reduced basic EPS by approximately $0.04 per share in the second quarter of 2017, our adjusted earnings per share was $0.35 still up significantly compared to adjusted earnings per share of $0.17 in the second quarter of 2016. Cash, cash equivalents, short term investments, and marketable securities totaled $135.6 million as of June 30, 2017 and we had $61.8 million of royalty receivables from GSK at the end of the second quarter which we believe puts us in a strong liquidity position for the rest of 2017. And now I like to turn the call over to Mike for some closing comments.

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 improving financial profile for the business. Our primary focuses in 2017 remain the optimization of the commercial success and global rollout of BREO and ANORO and the continued optimization of our capital structure. There are many positive things happening here in Innoviva and we remains optimistic about the outlook of the company. I'd like to ask the conference facilitator to open the call for questions.

[Operator Instructions] We will have our first question from Tazeen Ahmad of Bank of America. Your line is now open.

This is Peter Stapor on for Tazeen. I had two questions the first is on your comment on a slight increase in channel inventory, I was wondering how slight that increase was and if the trends for the quarters this year should reflect similarly on last year?

So when we said slight, it's a small number as we talked almost every quarter you would have this normal fluctuation that happens kind of on a quarter-to-quarter basis. So when we talk with GSK they didn't note anything untoward. Again it's very typical to see some channel inventory go in during Q4. It tends to come out during Q1 and to normalize in Q2. So I wouldn't get too caught up on that really we are working this, there's a little bit of increase but we use the return slide to indicate that it wasn't anything dramatic. So I couldn't give you an exact number unfortunately but hopefully it gives you some color around it.

And my second question, maybe you could you comment a little bit more on potential capital restructuring going forward?

I think as everyone knows, we’ve had a capital structure here that is in pretty successful for the company over time. We put this in place right before the separation and intention of the capital structure where we had it was to really facilitate the successful launching of Theravance BioPharma which I think everyone would agree have been a pretty successful venture. And at the same time to provide some additional liquidity for companies who are working through the early start of the company and then making sure we could get the products where they are today. I think as we have matures the company it is certainly something we look at you. In particular we talked earlier this year about providing capital by paying out some of the 9% notes. So that’s an area that we tended to focus on as the 9% royalty notes. I think they were a terrific piece of paper for everybody involved who were place when there was almost no royalty revenues. We're probably at a point today where it’s not the optimal structure out there. So we continue to look at a variety of different things with a view towards that being one opportunity that we could do some improvements if the right alternative came up.

And Our next question comes from the line of Stephen Willey of Stifel. Your line is now open.

I guess maybe just two follow-up on the last question, I guess you've repaid the $50 million of the notes in May and just - I am just wondering if you at some point be providing any guidance or if there's any intention in 2017 or even beyond continue to pay that down?

So yes, our plan that we announced at the beginning of the year remains. We're still working through our process, we have a bit of time ahead of us before the next interest payment on the notes. So I would say just stay tuned on news about how the plan will unfold on the additional capital return on the 2029 notes but we’re still working through this.

And then Mike you talked about the closed triple data that's coming at year-end. I believe that there was a citizen petition that was filed by Boehringer, kind of discussing perhaps a potential violation of the combination rule. I think we’ve talked about this before but is there any commentary you can provide around that?

We're certainly aware of that. I would say I am not able to give you any really in-depth analysis of that. When I read it the logic of how they wrote the paper makes sense to me. So I guess I would just - so I understand that. That being said we didn't file the triple application with our guidance. So I wouldn’t want to go too much further than that, I would just say you’ll be either smart people to understand the rest of the space, understood the logic of their argument. But I would also argue that we didn't enter into this filing blind and have a solid understanding of how the FDA is probably be looking at it. So I wouldn’t want to go too much further than that. We will see how everything shakes out here there is of course an interesting confluence of events, the PDUFA date and the timing of the data from the impact study are not internally for our part. And how all of that works together is going to be interesting to see how it comes. So I would rather being said we remain supporters of the triple here, this is an important product for us. It completes the portfolio and I think as everyone knows we’ve been talking for a long time how important it is to us to have the full portfolio of single agent, double agent and triple agent, even though we don’t have either full royalties or in some cases no royalties feeling. For example we had some single agent products. But that full portfolio is quite important as we look forward to how the market will evolve in the future. So we remain optimistic about the triple, we're supporters of the triple, and we'll see how everything shakes out in the second half of this year as we come upon our data dates and PDUFA dates.

And then do you just have any color around the proportion of BREO scripts either in COPD or perhaps even in asthma that are being written in conjunction with LAMA and perhaps you might have some insight into how that might be playing out in terms of increase in BREO together?

Yes, I wouldn’t be able to give you specific internal data but I will give you some top level data to think about and maybe I’ll help you understand how this market probably is structured today and then potentially how it evolves going forward. If you look at the best data I have seen, it says something like 60%, 65% in that range of the market for LABA ICS combination is asthma. And then the rest whatever that is 35% or 40% is COPD. And the triple predominantly we believe will play in a COPD side. Of the LABA ICS business and COPD today, we think about 40% of COPD business is in some sort of an open triple today. And the open triple could be BREO plus Incruse as an example or could be something like Advair plus tiotropium. So there is a whole variety of different potential open triples. My view is that's the right place where the triple should logically play. These are going to be patients who are little more severe as oppose to less severe. Generally a more severe patient would have been on medicine longer than a patient is less severe. So if you follow up that logic it would imply that more of the business today I have opened triples is in the longer 10-year products. So the Advairs of the world and Symbicort of the world and you see relatively less data in some of the newer products such as BREO because they were a little early in the lifecycle. So I wouldn’t gone to make a comment about what we think the actual percentage of BREO patients being used in the RRR, but I think the overall market dynamics are something along the lines of what I just mentioned the - again the big caveat all market research data is by definition not perfect. So there's some level of perfection there. So that's generally how we again Innoviva think this is going to probably play out. It could be a case where you see a little expansion in that market as you better more convenient product certainly it's a possibility. We think that we’ll have the best product out there because you have the only triple that would be approved to this point in a single device and of course it’s a great device. So there is some much impossibility of that happening but we want to see that all shakes out, so hopefully that very top level, that will give you a good feel of how Innoviva takes a look at the market and thinks about it. So we’ll have to see how that plays out, we come to those dates and then see how the market develops but that would be a reasonable place to start from your thinking.

And then maybe just one other quick question if I might, I just want to know why the DTC campaign for Innoviva was only now just being launched. I guess their product would've been eligible for DTC advertising at least probably about a year and a year half ago. So just kind of wondering why now?

Yes, I wouldn’t want to get into the specifics around all the decision on that. I would just say that we're happy it’s out there now and we will be - we think we are good contributor to step going forward. I seen their commercial multiple times so it is definitely out there and then giving some playing time. There are some other competitors who are out there as well, some of the new competitors in the U.S. market. So I don’t want to get into specifics around the timing other then say, the BREO ads had a positive inflection on BREO would be a reasonable assumption that the ANORO ad should have a positive inflection on ANORO as well.

[Operator Instructions] Our next question comes from the line of Tyler Van Buren of Cowen and Company. Your line is now open.

My first question would be related to the ongoing cost structure review with a special committee. You clearly noted that its ongoing, I was hoping maybe that you could give us any additional color on the discussions that you are having and the potential pushes and pulls and you know anything with respect to the potential magnitude of cost that could be taken out of the business?

So thanks for the congrats on that, unfortunately I am not able to give a whole lot of inside in there just as was a Board led activity and to their credit they are taking it quite seriously and I would say there is no sacred area anywhere that is not being looked at. What the magnitude of those number are going to be, when it's all said and done I don't know and as soon as we get there we will have some communication out. So I wouldn’t, unfortunately be able to tell you it's going to be x or y percent, and we’re looking at this area that area I feel very comfortable saying we are looking at everything top to bottom that is for sure. And we’re looking at with a fairly new eye as opposed to old eyes. So stayed tuned, Q3 is underway and our commitment was to get that information out before the end of the third quarter but I don't today seems reasonable why that will be a problem so I would say tuned on that one.

And unfortunately and kind of ironically with respect to the litigation continue to see costs show up similar to last quarter. I know you not going to comment on the merits of the litigation but can you give us any sense if we should expect kind of the same costs moving forward increasing, decreasing as long as this litigation is ongoing just so for modeling purposes?

That's a tough one right, I would hope of course that they don't continue but we don't control that as you know. So unfortunately what we’re going to do, is we’re going to call it out, it's obviously not we where we wanted to be spending funds as it was not a choice that we made. So I would just say that it is a little out of our control. So we have continued to talk about things as it prolongs the lines of what we are controlling, was is the spending we have and that's why we’re calling out all the numbers so you guys can take a look at what we spending and say whether we are or not being true to the guidance but the other one here is not something that is going to be in our control. So I hope it goes down that would be fantastic but we’ll just have to kind of keeping playing that one as cards are dealt.

And this morning your partner, Glaxo noted that they don't expect the generic Advair this year which sounds reasonable but now that we've had some time following the CRL's was wondering if you guys have any additional clarity on the issues that they are experiencing in a better understanding that you could share with us?

Yes, that’s a great question. I don’t have any new information and fortunately our guidance for quite a while has been - we thought it was unlikely that the parts to get approved in the first rounds but they were probably be approved or someone would get approved on the second round. And so we had been aiming towards next year with that guidance for quite a while, I still hold that guidance. So I think somewhere around the middle of next year is a reasonable assumption for the first entrant to come in. Which one its going to be who knows, it's a little hard to decipher the relatively meager information that some of the folks who got the CRL put out. There are various mentions of the human factors guidance has been something that was a consideration, I don't know if that's totally true or what part of that human factor was the issue or not. Obviously you can think of that being less severe more severe. So we’re generally going to stick with our prior guidance which is we didn't think something was likely to happen this year fortunately we were correct on the first two but somebody probably going to exit - in the middle of next year, we’re going to call it Q2, Q3 for a window that could make sense. And we’ll see I think folks may have seen that Sandoz filed here also for their application. I always thought Sandoz is a pretty smart company in this particular area. So all of that thinking we put in initially still seems to be holding water and I don't see any reason to change the guidance that we had out there for multiple years now.

And just one final question, obviously the respiratory leadership at Glaxo turned over not too long ago and it sounds like they made some positive changes and things continue to go well but obviously they have a new CEO in place. Any kind of strategic changes with respect to the respiratory franchisor or change in thought process or is just kind of business as usual?

Well, I guess I’ll make a couple comments on this because this is a good news area for us. We know the people who are the new occupants of the offices at various places and we like them. I have met with Emma, she is a solid. I had a very, very good discussion with her so I have no concerns about the new leadership over there at all. There had been various changes - at positions that I previously said were quite important to us I will give you one example here. We really like the woman who use to run the U.S. sales and marketing organization who got promoted to run Viv, she is excellent. And as she was being promoted, I wasn't surprised at all that because I think Debra is really excellent and we’re hoping to get was there - a woman who work with her promoted into spot and she got the promoted right in there. So we like the new Head of the U.S. Restaurant Marketing, she is excellent. We like the Head of the U.S. Jack Bailey, he is very good. And so the new organization over there doesn't concern me at all in fact they’ll be opposite and say what we know about all the occupants there are positive whether it is at the U.S. marketing level or whether it is – I'll go back to Emma. Again I had a terrific conversation with her and so I am optimistic today about the organization.

It appears we have no further questions on the phone. I’d now like to turn the conference back to Mr. d’Esparbes, please go ahead sir.

Thank you very much operator, and thanks everyone for joining the call. Have a great day.

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