Innoviva Inc

NASDAQ:INVA

Earnings Call Transcript 2017-Q4

[Operator]

Ladies and gentlemen, good afternoon. At this time, I'd like to welcome everyone to the Innoviva Fourth 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 call is being recorded.

And now, I would like to turn the call over to Eric d'Esparbes, Interim Principal Executive Officer and Chief Financial Officer of Innoviva. Please go ahead, sir.

[Eric d'Esparbes]

Good afternoon, everyone, and thank you for joining us. On today's call, we will review the highlights and financial results from the fourth quarter and full year of 2017. Following our comments, we will open up the call for questions. Earlier today, Innoviva issued a press release, announcing recent corporate developments and financial results for the fourth quarter and full year of 2017. A copy of the press release can be found on our website.

Before we get started, I'd 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 the 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 details in the company's press release and the company's filings with the SEC. Additionally, adjusted EBITDA and adjusted earnings per share to 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. Also yesterday, we announced the departure of Michael Aguiar, who has resigned as President and CEO of the company, and want to advise you that we don't intend to discuss this matter in today today's call.

Innoviva had a very successful fourth quarter of successful fourth quarter of 2017 driven by record high TRx market share in the U.S. for RELVAR/BREO and ANORO and strong financial results. We remain confident that Innoviva is well positioned to deliver value to our shareholders through continuing profitability and cash generation. Our partnerships with GSK continues to make significant progress towards our goal of building BREO, ANORO and TRELEGY 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, 77% year-over-year growth for BREO versus 4% for the ICS/LABA market and 69% for ANORO versus 4% for the maintenance bronchodilator market. Resulting in new all-time high TRx market share for both products.

During Q4 2017, BREO script volume grew by 10.4% versus the third quarter of 2017. This compares favorably to the total LABA/ICS market, which grew by 4.9% during that period. We saw the same trends for ANORO, which adds Q4 script growth of 11.3% over the prior quarter versus 3% for the market. According to the most recent weekly data compiled by IQVA, formerly IMS, TRx market share for BREO was 19.5% and ANORO reached 16%.

In the week ending January 26, 201, ANORO new-to-brand market share was approximately 21.2% overall and was approximately 23.7% for pulmonologists. Of note though, IQVIA that also shows that BREO new-to-brand market share remained flat during the fourth quarter at 23.2% overall for the week ending December 29 compared to week ending September 29. But BREO remains the leading ICS/LABA pulmonologists with a 41.4% share for the last reported week of the year.

We believe these NBRx market share dynamics during the last quarter have been a result of recent competitive pressures, and we plan to continue to work very closely with our partner, GSK, to maximize market share for our joined products and remain confident that both BREO and ANORO will maintain their strong market position. In addition, our portfolio of commercialized products continued to grow in 2017 with the U.S. commercial launch of TRELEGY ELLIPTA, the new ICS/LABA triple therapy in November. TRELEGY ended 2017 with over 3,000 TRxs in the U.S.

As we've mentioned on prior calls, reported net sales by GSK traditionally experienced quarter-over-quarter volatility that has not been related to underlying prescription trends, while during the third quarter of 2017, GSK had reported net sales for BREO were affected by unfavorable payer rebate adjustments related to prior periods. In the fourth quarter of 2017, as is traditionally the case, reported net sales for BREO and ANORO benefited from stronger winter market demand.

RELVAR BREO recorded total net sales during the fourth quarter 2017 of $405.3 million, up 48% from the fourth quarter of last year. Net sales in the U.S. were $241.6 million, up 53% compared to Q4 of last year, while outside the U.S. net sales were $163.7 million in the fourth quarter of 2017, an increase of 42%. For ANORO, Q4 net sales were $147.3 million, a 62% increase from the fourth quarter of 2016.

GSK initiated the commercialization of TRELEGY ELLIPTA in the U.S. market during the fourth quarter of 2017 with reported net sales of $2.8 million. Overall, in the U.S. market, BREO TRx in the fourth quarter of 2017 reached close to $1.4 million scripts, an approximately 61% increase compared to the fourth quarter of 2016. ANORO TRx in the fourth quarter of 2017 grew by approximately 64% during the same period. With strong underlying demand trends, favorable 2018 reimbursement status and an effective collaboration with GSK, we remain optimistic about the potential for our products.

In November, we announced positive data from a study comparing ANORO ELLIPTA and Stiolto Respimat for symptomatic patients with COPD. We view this study as an additional complement to support commercialization effort of ANORO in a competitive market. In addition, in November 2017, we announced the filing of a supplemental new drug application with the U.S. Food and Drug Administration for an expanded indication for the use of TRELEGY ELLIPTA in COPD.

Turning to our financial results. We are very pleased with our strong financial performance during 2017. In total, we generated more than $227.9 million in royalties earned in 2017, which translated into more than $183.6 million in income from operations and $207.5 million in adjusted EBITDA for the year, achieving a 91% EBITDA margin. Looking at the progress we've seen over the last year, we remain confident in our financial performance.

Our royalties earned in the fourth quarter of 2017 were $70.5 million, a 51% increase over the fourth quarter of 2016, offset by $3.5 million of net noncash amortization expense. Royalty revenues earned for the fourth quarter of 2017 included $60.8 million for BREO, $9.5 million for ANORO and $0.2 million for TRELEGY. Total operating expenses in the fourth quarter of 2017 were $3.1 million. This includes $3.4 million in operating expenses, $2.4 million in non-cash stock compensation expenses and $2.7 million insurance recovery for litigation costs resulting from proxy contents.

Year-to-date, total operating expenses were $33.6 million, which includes $8.1 million in that proxy contest and related litigation costs, and $9.8 million of noncash stock-based compensation expenses. We continue to generate strong cash flow from our operations in the fourth quarter of 2017. Income from operation was $66.4 million, a 76% increase compared to $37.7 million in the fourth quarter of 2016.

Adjusted EBITDA was $72.3 million in the fourth quarter of 2017, a 65% increase compared to $43.7 million in the fourth quarter of 2016. Net income attributable to Innoviva stockholders for the fourth quarter of 2017 was $58.4 million, or $0.55 per basic EPS, a 129% increase compared to $25.5 million in the fourth quarter of 2016, or $0.24 basis EPS. For the full year 2017, our income from operation was $183.6 million, an increase of 68% compared to 2016.

In spite of incurring costs associated with the proxy contest litigations, which reduced basic EPS by approximately $0.08 per share in 2017. Our basic EPS was $1.25 per share for the full year 2017, up 131% compared with basic EPS at $0.54 in 2016. This strong annual increase in the result is the result of the steady growth in our profitability and a gradual reduction in share count resulting from the execution of our 2017 capital return program.

We completed in December 2017, the $80 million ASR program by purchasing 6.1 million shares of our common stock at an average price of $13.09 per share, bringing our total stock repurchases for the year to $97.5 million for a total of 7.4 million shares, or 7% of outstanding shares at the beginning of the year. We also repaid $85.9 million of our long-term debt during 2017.

Over the last twelve months, we generated approximately $207.5 million in adjusted EBITDA, and with the continued reduction of our debt level, our total net debt balance was reduced to $548.2 million at the end of 2017, resulting in a leverage ratio of 2.6x net debt to last twelve months adjusted EBITDA as of that date. Cash, cash equivalents, short-term investment and marketable securities totaled $129.1 million as of December 31, 2017 and we had $70.5 million of royalties receivables from GSK at the end of the fourth quarter.

With a more optimized capital structure, substantially reduced cash interest costs and continued strong cash-generating capacity, we believe we are in a strong financial position for 2018. Finally, I would like to mention our preliminary assessment of the effects of the December 2017 U.S. tax reform. Although review is ongoing, we currently expect to see a positive impact from the new tax regime for Innoviva, mainly due to the reduction in the corporate tax rate from 35% to 21%. Assuming the rates remain as they are now, this should lead to lower cash taxes to be paid by the company once our NOLs are fully utilized.

In summary, we remain optimistic about our future prospects based up on gains and prescription volumes and market share of our products, and a strong financial profile of the business. Our primary focus in 2018 will remain the optimization of the commercial success and global rollout of our products, and we remain optimistic about the outlook of the company.

And now, I'd like to ask the conference facilitator to open the call for questions.

[Operator]

Thank you, sir. [Operator Instructions] We will have our first question from Esther Rajavelu of Deutsche Bank. Your line is now open.

[Esther Rajavelu, Deutsche Bank]

Hi, Eric, thank you for taking my question. I had one on the G&A costs. So the D&O recovery, was that for litigation costs incurred just in the fourth quarter or did it include prior quarter costs as well?

[Eric d'Esparbes]

Yeah, so the recovery was for prior quarters. So basically, the way it works is that you have the total legal fees, and you have certain recovery mechanisms under the D&O policy and a $2.7 million is for the whole year.

[Esther Rajavelu, Deutsche Bank]

Got it. And then was there any litigation costs in the $5.69 million G&A expense?

[Eric d'Esparbes]

No, not really. We had just this very minor spending. All the costs were basically over by September, I think, if I recall.

[Esther Rajavelu, Deutsche Bank]

Got it, okay. And then more broadly, I have a couple more questions on the marketing strategy for TRELEGY. Can you talk a little bit about changes to the marketing strategy for the entire portfolio after TRELEGY was launched?

[Eric d'Esparbes]

So I think what we have said in the past are really two main things. First off, we think it's important to have TRELEGY as part of the ELLIPTA portfolio. And the reason for this – to the one of the main benefit is for patient that goes – comes to the doctor from first to last visit, they can have a progression of different medicines using the same device. We think this is a strategic advantage compared to all the other products that are out there because it makes life easier for both the doctors, the nurses and the patients to – as they evolve through their disease to just – adjust the compounds are prescribed without regard to the devices. So that's one thing that we think is extremely useful.

There is no change as far as we understand in the commercial strategy that we've presented in the past for the products. The COPD is a very diverse. As a disease, we've diverse set of symptoms and each patients have then the ability to have their appropriate treatment based on their symptoms, specifically. So we think it's a great addition to the portfolio, and the commercial strategy is always planned for this and is being implemented accordingly.

[Esther Rajavelu, Deutsche Bank]

Got it. Thank you and I will jump back in the queue.

[Eric d'Esparbes]

Thank you. Thanks, Esther.

[Operator]

Thank you. [Operator Instructions] Our next question comes from the line of Stephen Willey of Stifel. Your line is now open.

[Prakhar Verma, Stifel]

Hi, thank you. It's actually Prakhar Verma on for Steve. Thank you for taking my question. Eric, can you talk about the current level of couponing sampling with BREO and ANORO? And do you see the changing going forward with the launch of TRELEGY?

[Eric d'Esparbes]

So we usually don’t give a detail of the couponing level. However, what we've said in the past, and we remain – we have the same view today. Couponing is essential as part of the different tool set that is available to GSK for the commercialization of their products. This is a – respiratory is a very mature and very competitive market, and couponing is an essential tool that is available. So we're very supportive of it.

The couponing usually tends to decrease overtime as coverage increases because you need less and less couponing as your coverage increases. And frankly, the coverage for our products for BREO and ANORO is excellent. It's not a differentiating factor anymore as it was several years ago. It's really good. So the – I would say, the couponing level is way less than it was before, but it's an important tool for GSK.

[Prakhar Verma, Stifel]

Okay. And just lastly can you talk about any initial feedback that you have received from physicians for TRELEGY? Was the feedback was taken among physicians?

[Eric d'Esparbes]

So it’s I think too early to really have any real statement. As I mentioned, I think this was 3,000 scripts in the U.S. during the quarter. I think, we'll have to wait a little bit over time to see what the response is. But for sure, you have a lot of triple therapy in the markets today. I think, historically, what we've explained is that of the COPD portion of the ICS/LABA class, about 40% of that segment tends to be in triple therapy. So there's definitely a market opportunity there, and it's being used. So our hope is that it's going to be very well received by patients who really need that triple therapy. But for having conclusions and the risk – reception so far we’ll just have to wait a little bit, if we can.

[Prakhar Verma, Stifel]

All right, thank you.

[Operator]

Thank you. It appears we have no further questions on the phone. I would now like to turn the conference back to Mr. d'Esparbes. Please go ahead, sir.

[Eric d'Esparbes]

Thank you, operator. As we conclude our call today, I would like to provide a couple of final thoughts. First, we have to recognize our strong financial performance in 2017, and we remain committed to our goal of maximizing shareholder stockholder value. The second is our teams’ continuing efforts to actively manage our GSK collaboration. We believe this commitment is a key to maximizing the potential value of our respiratory assets. Thank you very much for joining us today. We appreciate your continued support.

[Operator]

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