Innoviva, Inc. (NASDAQ:INVA)
Q4 2015 Results Earnings Conference Call
February 03, 2016, 5 PM ET
Michael Aguiar - President and Chief Executive Officer
Eric d’Esparbes - Senior Vice President and Chief Financial Officer
Stephen Willey - Stifel Nicolaus
Ronny Gal - Sanford Bernstein
Ladies and gentlemen, good afternoon. At this time, I’d like to welcome everyone to the Innoviva Fourth Quarter 2015 Financial Results Webcast and Conference Call. [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 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 quarter, and I will review our financial results. Following our comments, we will open up the call for questions. Earlier today, Innoviva issued a press release announcing recent corporate developments and fourth quarter financial results for 2015. A copy of the press release can be found on our website.
Before we get started, we’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 information available to the company today, and Innoviva assumes no obligations 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-K for the year ended December 31, 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. Reconciliation to the most directly comparable GAAP financial measure can also be found in our press release.
I would now like to turn the call over to Mike Aguiar, our Chief Executive Officer. Mike?
Thank you, Eric, and good afternoon everybody. Innoviva had a strong fourth quarter of 2015, and I’m pleased to announce that we generated quarterly net income of $4.3 million, our first quarterly profit since inception. When we designed the spinoff of our research and development activities in 2014, our goal was that Innoviva would have a short path to profitability, due to its lower cost profile and high revenue growth prospects. I’m pleased that we have now met this goal.
This achievement was largely due to the successful work of the team in building BREO and ANORO towards becoming leading global respiratory franchises. Revenues and market share continued to expand for both products in the fourth quarter, highlighted by the performance of BREO, which has sales growth of more than 79% in the US market, and 43% in non-US markets compared to the third quarter.
Fourth quarter income from operations more than doubled to $17.3 million, compared with $8.4 million in the third quarter, due to higher revenues and below guidance operating expenses. As a result, we remain confident in our overall financial trajectory, capital return plan and business model.
As you know, in October, we announced a $150 million share repurchase program that extends through the end of 2016. As of January 29, we have repurchased a total of $37.3 million of stock, including shares repurchased in the tender offer completed in December.
I will now turn to our program updates. RELVAR/BREO is our lead respiratory program, partnering with GSK for the treatment of patients with asthma and chronic obstructive pulmonary disease, or COPD. It’s a combination inhaled respiratory medicine, consisting of Vilanteral, a long-acting beta2-agonist, or LABA, and Fluticasone Furoate, an inhaled corticosteroid, or ICS, both of which are delivered in the ELLIPTA dry powder inhaler. Total net sales for RELVAR/BREO during the fourth quarter of 2015 were $154.7 million, a 58% increase compared to the previous quarter.
Sales in the US were $72.5 million, a 79% increase over Q3, driven by higher TRX prescription volumes of approximately 47%. We believe a significant portion of this growth in the US was due to the approval of the asthma indication, the initiation of the BREO asthma DTC campaign in Q4 and improved commercial execution. This includes a strong performance by the US sales organization, as mentioned by Andrew Whittier earlier today.
According to IMS, BREO currently has an approximate 7% TRX market share in the US. While it is still early in the overall asthma launch, we remain encouraged by the continuing growth trends for BREO. For example, according to IMS, in the week ending January 22, new-to-brand market share increased to 12.4% overall and to 24.4% for pulmonologists. As we mentioned in our last earnings call, we believe that new-to-brand market share is an important forward-looking indicator of the potential growth trajectory for these products.
Looking forward, we believe the recent improvements in 2016 coverage of CVS Caremark and Express Scripts combined with recent momentum in prescriptions position BREO for a solid year in 2016. Sales were $82.2 million outside the US in the fourth quarter, representing a 43% increase compared to the third quarter of 2015. This results from a strong performance in the Japan market and recovery from traditionally slower summer sales in Europe.
Our second program, ANORO, is a combination dual bronchodilator medicine for the treatment of COPD, consisting of a LABA Vilanteral and the long-acting muscarinic antagonist, or LAMA, umeclidinium. Total net sales for ANORO during the fourth quarter of 2015 were approximately $45.4 million, compared to $31.7 million in the previous quarter. This represents a quarter-over-quarter net sales growth of 43%, mostly resulting from continuing growth in the US market, ongoing launches in Europe, and strong performance in Japan, following the lifting of Reotan restrictions in October of 2015.
In the US, sales were $31.2 million, an increase of 42% compared to Q3, driven by higher TRX volumes of approximately 24%. According to IMS, both BREO and ANORO continue to gain market share during the fourth quarter in key physician groups, including primary care, pulmonologists and allergists.
For example, since the US asthma launch in May and the start of the BREO asthma DTC campaign in the US in Q4 2015, IMS reported that BREO, TRX and new-to-brand growth has outperformed the LABA ICS market by an average compound weekly growth of approximately 2.5% and 2.3%, respectively. Additionally, for the most recent week ended January 22, weekly BREO NBRX growth of 0.8% was nearly 5.5 percentage points better than the LABA ICS market as a whole, which shrank by 4.7%.
As I mentioned earlier, coverage for both products continued to improve as a result of the recent formulary wins at CVS Caremark and Express Scripts. As of January 1, 2016, commercial coverage for BREO in the US was 79% and Medicare Part D coverage had 72% favorable access. ANORO commercial coverage remained strong at 90% and Medicare part D coverage at 74% favorable access.
Looking forward, we have significant data expected during the first half of 2016 from the Salford Lung Study in COPD patients. Salford Lung Study evaluates the impact of RELVAR/BREO in a real world setting with a goal of identifying the effectiveness of once-a-day treatment with RELVAR/BREO versus usual care. 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 fourth quarter 2015 financial results. Eric?
Thanks, Mike. Before I present our Q4 financial results, I want to remind you that as a result of the separation of our research and development activities from Innoviva, Inc in mid-2014, there have been a number of adjusting entries to prior periods that reflect the financial impact as discontinued operation accounting. This results in limited comparability between Q4 financials and some of our previously reported results.
We had a very strong financial performance in the fourth quarter. Total revenues included $26.1 million in royalties earned, a 55% increase over the previous quarter, offset by $3.2 million of net non-cash amortization expense and other revenues. Royalty revenues earned included $23.2 million for BREO and $2.9 million for ANORO. The impact of currency movements between the third and fourth quarters of 2015 on our revenues from non-US markets was slightly less than 1%.
The strong quality growth trend in our royalty revenues continued in Q4 2015. Looking at the prior six quarters, on average, our royalties earned have grown at a compound rate of approximately 42%, which reinforces our confidence in the prospects of the company going into 2016.
Total operating expenses in the fourth quarter of 2015 were $5.5 million, compared to $5.1 million in the third quarter of 2015. On an annual basis, our operating expenses, composed of R&D and G&A costs before stock-based compensation accruals, were $15.5 million, beating our already reduced guidance level we mentioned in October.
For 2016, we are establishing our guidance level for operating expenses of R&D and G&A costs, before stock-based compensation accrual, in a range of between $18 million and $20 million.
Our $150 million stock repurchase program was initiated in October 2015. And as Mike mentioned earlier, through January 29, 2016, we’ve now repurchased approximately $37.3 million of stock in total, through the combination of our modified Dutch auction tender offer in Q4 2015 and additional open market purchases. The average purchase price for those purchases was $9.49 per share. Going forward, we will be providing an update on the program on a quarterly basis.
We continued to generate positive and growing cash contribution from operations in Q4 2015, allowing the continuation of our stockholder return of capital program. For the fourth quarter of 2015, income from operations increased more than 100% to $17.2 million, compared to $8.4 million in the third quarter. And we generated an adjusted EBITDA of $22.4 million, compared to $13.4 million in the previous quarter, an increase of 68%.
Cash, cash equivalents, short-term investments and marketable securities totaled $187.3 million as of December 31, 2015, and we had $26.1 million of royalty receivables at the end of the year, which puts us in a strong liquidity position for 2016.
And now, I’d like to turn the call over to Mike for final closing comments.
Thank you, Eric. In summary, we had a very solid fourth quarter of 2015, with increased prescription volumes, higher market share and continued optimization of the commercial efforts for both products. As a result, we remain optimistic about the long-term potential of our product portfolio, which supports our capital return plan.
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 Innoviva and we remain optimistic about the future prospects for the company.
I’d now like to turn the call over to the conference facilitator and open the call for questions.
[Operator Instructions] We have our first question from the line of Stephen Willey with Stifel.
Was just wondering, I think if you look at the IMS data that we have, just trying to extrapolate. I think the data relative to what was announced today, it looks like there is a meaningful improvement in gross to net. And I’m not sure if Glaxo discussed this at all on their call today, but just wondering, Mike, if you could provide some color around this and maybe how that relates to the level of couponing that might be going on right now?
We were very pleased with the results of the quarter and we’ve been looking forward to having positive net income for a while. So it was a great quarter.
Regarding the question of sales, scripts and all of that, this is clearly something I think that is going to be an ongoing situation where you tend to have a fair amount of volatility in this. And if you go back and take a look at quarter-over-quarter, generally there is a disconnect either on the positive side or the negative side between scripts and sales. And that is really resulting from a variety of different factors.
You have sales mix, things like that. You have inventory changes that happen at wholesalers, you have couponing, and depending on how that goes, what the impact from growth to net is, et cetera. So there have been, and will continue to be, I would say, fluctuations in the script growth versus the sales growth going forward. So my strong guess would be going forward that will continue to be the norm rather than the exception.
Now, regarding this quarter in particular, GSK did advise us that there was some additional – some true-ups that were happening relative to returns and rebates accruals and that was from prior periods. So there was a piece of that that was happening here this quarter in addition to other items.
And I thought I saw some mention of this in the GSK’s transcript as well. But again, I would just say, on a going forward, I think script is a pretty good proxy long-term for where we are going. But don’t be surprised if you do see a level of fluctuation that happens on a quarter-over-quarter basis.
And then maybe just lastly, with liquidity tightening across all of biotech, I’m just wondering if that’s resulted in – or if you expect that result to result in more optionality on maybe some of these royalty assets that are being made available? And second to that, how competitive do you feel the company is right now in that bidding process and maybe what you might be doing to try to further enhance that competitiveness?
On that front, I think we’ve mentioned before there is a hierarchy of our priorities here, with number one being ensuring that our existing portfolio reaches maximum potential. And that’s really the operation of the joint steering committee working with GSK. And I think we’re pleased with where we’ve come so far. Obviously, there is always more work to do on that one, but that’s clearly number one.
Number two is focusing on managing our cost of capital down and that’s an area that we are definitely continuing to look at in a variety of areas. On the last piece, which is what you were referring to, in terms of new opportunities, I think it is highly dependent upon what type of opportunities you’re looking at. We have certainly seen opportunities that are, I guess I will call them fully competed, if you will. And those are things we haven’t put a lot of effort into. And there are other places where there is less competition.
So again, as our third of our three priorities, I think we continue to believe there are places that we could do something. But I would really want to reemphasize the final piece, which is it’s our third of our three priorities and we are going to continue to be very fiscally thoughtful on this should we come up against an idea that warrants our attention. But again, there are definitely things that are fully competed today.
Our next question comes from the line of Ronny Gal with Bernstein.
Actually, I’ve got three questions. The first one is, the international lower numbers that you have for sales, especially for BREO, is this just a lower trend line? Should this rebound just like some of the US numbers might be a bit stronger than average? This quarter, is there an offsetting numbers on the international sales side or should we think about this is the case?
Second, do you have any concrete data points that suggest to you that Salford trial, positive results from Salford trial will actually lead to better coverage? I’m thinking specifically about Europe where some of this data might be useful. The UK, do you have any indication that actually will make a difference for them?
And then third, just broadening the point around other priorities beyond BREO and ANORO, 2016 looks like a quiet year for you guys in terms of risk simply because generics for ADVAIR are not there yet. If you have to think about things you have to get done before you see ADVAIR generic, are there anything that you basically sit there and go this would be a lot harder to do, come mid-2017 or early 2018 or essentially you are in no rush at this point?
With regard to international, international continues to grow. Obviously, it’s a little bit lower rate here recently than what you were seeing in the US. My guess is a big portion of that is some of those things that I talked with Steve about where you do have some level of variability in the gross to net that you see if you were just literally taking sales and dividing it by scripts. And so I think there is a piece that’s just that fluctuation. But we had in the 40% plus quarter-over-quarter growth for BREO internationally, so I’m certainly okay with that. If you follow that trend out that will result in good things happening.
The second question around Salford, Salford is an important study for us. Do I have direct evidence that if we have a successful study, we will absolutely get coverage? No. That being said, I think this is one of the fundamental potential differentiators that we have out there. If it turns out that we are able to show once-a-day dosing is better in certain aspects, for example, in compliance and exacerbations and hospitalizations, things like that, all of which will be looked at in this study, I do think that could provide some pretty compelling evidence.
For example, if you remember the TOY study that we’ve had in our investor deck for a while, they were looking at the various dosing regimens and they had a conclusion in there that going from twice-a-day dosing to once-a-day dosing was a net savings to the healthcare system of approximately $300,000 per thousand patient years. And that was net of hospital costs and everything else.
And given that the cost focuses going on not only in Europe, but increasingly so in the US, I think our view is that any time we can demonstrate a benefit from what we are doing here that will be beneficial. Will it be sufficient? I don’t know. But it would absolutely increase our [indiscernible] of arguments around this and so we are certainly keeping our fingers crossed that we have a positive outcome on this one.
I would just say and I’ve certainly mentioned this lots and lots of times, this is a very unusual study in a real-world setting and nobody has done this type of study before in respiratory. And so it has the potential to have a fair amount of noise in there and will be a pretty interesting statistical project for the statisticians when they get in there and go through it. So I would say, stay tuned. We are optimistic on it. Hopefully, our optimism results coincides with the outcome.
The last question around 2016, what are our big priorities? And then specifically, you asked around generic and I think that is a pretty important question. So there has been a lot of chatter, as you know, lately about generics. None of the chatter has been outside of our expectations. And in fact, it’s still largely been in line with what we thought was a reasonably likely outcome. And with regard to generics, our biggest concern here has been building as much market share as possible prior to the entry. And that’s really where we are principally focused. So that goes back to my number one focus this year.
So the single most important thing we can do before a generic entry comes in is get BREO out there and using in as many patients as possible. And that really coincides with how we think about the order of priorities for the company. Could other activities be considered out there? So for example, the topic number three, of potentially bringing additional assets in, do we think about those things? Yes. Is it the most important thing we are doing? No, but I suppose that would have a level of importance if things got fairly competitive out there.
All that being said, I would just like to close on the generic comment with, right now, based upon what we know, there is nothing new or surprising happening here. This is right down the middle of our fairway of expectations regarding generics. We have historically assumed more likely timing of a generic ADVAIR in the US was in the late 2017, early 2018 time frame.
Obviously, there are significant arrow bars around that. It could come a little sooner; it could come a little later. But if we are roughly right with the timing on this one, we feel pretty comfortable about where we are. So hopefully, that covered the questions. But if not, I’d be happy to follow on on any of them.
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 participating and have a great day. Thank you.
Ladies and gentlemen, this does conclude today’s conference. We thank you for your participation. You may now disconnect.
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