Innoviva, Inc. (NASDAQ:INVA) Q4 2016 Earnings Conference Call February 9, 2017 5:00 PM ET
Eric d’Esparbes - Senior Vice President and Chief Financial Officer
Michael Aguiar - President and Chief Executive Officer
Tyler Van Buren - Cowen and Company
Stephen Willey - Stifel
Ladies and gentlemen, good afternoon. At this time, I’d like to welcome everyone to the Innoviva Fourth Quarter 2016 and Full Year 2016 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 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 quarter and full year 2016 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 third quarter financial results for the fourth quarter and full year 2016. 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 very strong performance in 2016 with record revenues, operating profits and cash generation. In 2014 management and board initiated a strategic plan and subsequent restructuring to create better position entity with dramatically reduced operating expenses and a strategic imperatives to work successfully with GSK to improve the commercialization of our portfolio.
We believe this is successful as execution of these assets - excuse me, actions would fast track the company on our path to increase profitability and cash flow to drive superior shareholder value.
Based upon on our strong 2016 results, it's clear that to date y we have been successful in both components of this endeavor. For example, the effectiveness of the cost focus restructuring can be seen when comparing operating expenses from Q1, 2014 our last four quarter as a combined company to Q4, 2016.
During this timeframe, operating expenses are down over 90% to $6 million in Q4, 2016 compared to $66.2 million in Q1 of 2014. This font footing has enabled us to return significant capital to shareholders.
We continue returning capital to investors in Q4 with the repurchase of approximately $16.6 million of common stock and convertible notes. Since launching our capital return program in the fourth quarter 2015, we returned a total of $118 million to investors and reduced total shares outstanding by more than 8%.
In 2016, total capital return to investors was greater than 150% of the net cash provided by operating activities, as shown on our financial statements. Today we also announced our 2017 capital return plan, which will be primarily focused on the redemption of our 9% 2029 royalty notes and which is projected to return up to $150 million to our investors.
Our 2017 capital return plan also maintains the company's flexibility to make opportunistic purchases of common stock and convertible notes based upon market conditions.
Turning to our collaboration with GSK, I am pleased to say that we also made significant improvements in the commercialization of RELVAR, BREO, ELLIPTA and ANORO ELLIPTA. In the US both products significantly outperformed the market for the fourth quarter and full year 2016 in prescription volume growth and market share gains to reach new all-time highs.
According to the most recent weekly data compiled by IMS, TRX market share for BREO exceeded 13.8%, a share increase of 2.1 percentage points since the end of Q3 and a ANORO exceeded 10.7%.
According to IMS, BREO Q4 TRX volumes reached more than 895,000 prescriptions in the quarter, an increase of 19% over Q3. Additionally, the most recent data also shows that BREO new to brand market share increased to 21.3% overall and to 38.4% for pulmonologists. This represents share increases since the end of Q3 of 3.4% and 5.9%, respectively.
As a result, BREO is now the class leader with respiratory specialists in new to brand share accounting for more than one third of all new LABA ICS prescriptions written by specialists in the US.
As a reminder, we continue to believe that new to brand market share and specialist adoption rates remain important lead indicators of the future performance potential for our brands.
ANORO momentum also increased in the fourth quarter with market share gains in both TRX and NBRx. For the week ending January 27, ANORO new to brand market share increased to 18.1% overall and to 20.7% for pulmonologists.
We believe that productive collaboration between GSK and Innoviva commercial teams has contributed significantly to achieving these gains and we remain optimistic in our work building ANORO and BREO into leading global respiratory franchises.
As we mentioned in our prior calls, market share metrics remained primary focus of our analytic efforts, as they focus on the underlying demand for our products. In contrast, reported net sales by GSK have historically experienced quarter-over-quarter volatility relative to underlying prescriptions due to a number of factors, such as normal slower summer, stronger winter seasonality, changes in channel inventory levels, asthma, COPD customer mix, accounting reserve true ups and couponing levels.
During the fourth quarter, reported net sales in the US outpaced prescription growth which we believe is likely due to traditional increases in year ended channel inventory. For 2016, net sales for RELVAR/BREO were $273 million in Q4 and $857 million for the full year.
During the fourth quarter, RELVAR/BREO recorded $157.6 million in net sales in the US and $115.3 million outside the US. These sales were driven by higher global prescription volumes and market shares and includes the impact of typically strong winter seasonality and some inventory build in the US during the fourth quarter that was in line with where GSK traditionally sees at year end.
For ANORO, total 2016 net sales were approximately $275 million. During the fourth quarter ANORO net sales were $90.7 million, an increase of 28% compared to the third quarter 2016, driven by higher prescription volumes and market share.
With strong underlying demand trends, favorable 2017 reimbursement status and improved effectiveness of the collaboration's sales and marketing efforts, we remain optimistic about the potential for both products.
Finally, I like to highlight some changes to our board that we recently announced, including the addition of two new independent directors Barbara Duncan and Pat Lepore. The addition of Barbara Pat brings the number of independent directors on our bored to six out of a total seven board members. And finally, as part of the board's ongoing governance planning processes, we recently appointed James Tyree to be Vice Chairman of the Board.
Now I will turn the call back to Eric to review our fourth quarter and full year 2016 results. Eric?
Thanks, Mike. We had a very strong fourth quarter of 2016 with total royalties earned a $46.8 million, an 80% increase over the fourth quarter of 2015, offset by $3.5 million of net non-cash amortization expense. Royalty revenues earned, included $41 million for BREO and $5.8 million for ANORO.
As Mike mentioned earlier, quarterly net sales of BRIO and ANORO reported by GSK do not directly track prescription volume changes during the same time period, due to variety of non-demand factors. Therefore, we typically analyze longer time periods when gauging revenue performance.
Looking at the prior ten quarters, on average, our royalties earned have now grown at a quarterly compound rate of approximately 32% which reinforces our continued confidence in the company's prospects for 2017.
Total operating expenses in the fourth quarter of 2016 were $6 million, compared to $5.5 million in the fourth quarter of 2015. I am pleased to report that full year 2016 operating expenses, excluding non-cash stock-based compensation accruals were $16.3 million, which is well below are 2016 guidance of $18 million to $20 million.
For 2017, we are providing guidance for OpEx of - composed of R&D and G&A cost before stock-based compensation accruals of a range of between $18 million and $20 million.
During the fourth quarter of 2016, we repurchased approximately $12.5 million of common stock, bringing our total repurchases under the program since Q4, 2015 to $103.7 million, at an average price of $10.50 per share or 7% below the V1 [ph] for the period of $11.30 per share.
As Mike mentioned earlier, during the fourth quarter of 2016, we also repurchased in the open market $4.1 million face value of our convertible subordinated notes due 2023, for net cash consideration of $3.3 million, representing approximately a 20% gain.
In addition to stock and notes repurchases, we also made a principal repayment of $3.6 million on our non-recourse notes during the fourth quarter, and increase our reserve for principal repayment to be made during the first quarter of 2017 to $7.8 million, resulting from a strong royalties earned during the fourth quarter of 2016.
We continue to generate growing cash flow from our operations in the fourth quarter of 2016. Income from operations reached $37.7 million, compared to $17.3 million in the fourth quarter of 2015. And adjusted EBITDA was $43.7 million in the fourth quarter of 2016, compared to $22.4 million in the fourth quarter of 2015.
On a 12 months rolling basis, we have now generated approximately $134 million in adjusted EBITDA. For the fourth quarter of 2016, our adjusted earnings per share was $0.26 per share, up significantly compared to adjusted earnings per share of $0.08 per share in the fourth quarter of 2015.
Cash, cash equivalents, short-term investments and marketable securities totaled $150.4 million as of December 31, 2016 and we had $46.8 million of royalty receivables from GSK at the end of the fourth quarter, which we believe puts us in a strong liquidity position for 2017.
And now, I'd like to turn the call over to Mike for some closing comments.
Thank you, Eric. In summary, we're pleased with the performance of Innoviva to the fourth quarter 2016, and believe that our ongoing gains in prescription volumes, market share and significantly improved commercial effectiveness for both products during 2016 bode well for our future prospects. As a result, we remain optimistic about the long-term potential of our respiratory portfolio.
Our primary focus in 2017 will be the optimization of the commercial success and global rollout of BRIO and ANORO. As we believe that both products have significant future commercial potential. There are many exciting developments happening here at Innoviva and we remain confident in the future prospects for the company.
Now I'd like to the conference facilitator to open the call for questions.
Thank you, sir. [Operator Instructions] We have our first question from the line of Tyler Van Buren of Cowen and Company. Your line is now open,
Tyler Van Buren
Hi, good afternoon. Congratulations on the results and the continued progress. Just had a couple of quick questions, specifically related to the update and then a couple more strategic questions.
First, with respect to the $150 million capital return plan for the year, can you give us any more granularity on exactly what amount of that you are - plan on using towards paying down the royalty notes versus what amount might be available for buying back shares?
And also, with respect to the inventory increase in Q4 in the US, which obviously changed the US, X US sales split. Could you give us any detail on what the increases in inventory where there?
Thanks, Tyler. This is Eric. Thanks for the question. So I'll address the first one and I think Mike will cover the second one. So on the capital return plan, I can't really say exactly how much we will ultimately do in terms of early redemption to royalty notes, but that will be our focus - our main focus and as we said we're keeping some flexibility to potentially do share buyback. But the real focus is really on reducing the size of that - that’s going to be the main focus.
So - and then the second part of your question there, Tyler, with regard to inventory, we don't have a specific number we're going [indiscernible] today, what I would say is, it was described to us by GSK as very typical, very in line with what they normally do. As you're aware this happened in 2015 in Q4, and prior to that it’s a very typical pattern.
So you frequently hear us talk about looking over multiple quarters when you're trying to assess trends and all of that and what we see is are these consistent trend, right, you typically have a - lower, higher prescription volumes during the winter, and cold flu season, so you'll see up-ticks and there you typically see a little bit of herein channel inventory. This is your classic management practice by a lot of wholesalers as they are anticipating a price increase next year that seems to happen every year.
So I would describe all this is being very typical, but unfortunately what I can do is give you specific number. The only final thing I would say is, you know, of course, we're selling a lot more product right now, so there is probably a little bit larger absolute number than last year.
But as a percentage again, GSK said, it's very similar to what we've seen in the past. So sorry, I couldn’t be much more specific than that. But hopefully you get a sense that these are just very typical traditional repeating type patterns as far as we are aware.
Tyler Van Buren
Okay, understood. And then on - for the more kind of strategic questions, I guess, with respect to the capital structure, perhaps any thoughts on optimizing that with respect to the royalty notes. Obviously you've got the 9% interest, but you guys are in a very different point in time now, then you were when that deal was first made.
And then lastly, any thoughts on the transition of the new CEO at Glaxo and your strategic relationship with them and how that might affect it?. Thank you.
Sure. So I'll try to kind of chalk out you know, take up all of those there. With regard to the capital structure, I think our thoughts surrounded a pretty well-articulated and where we're focusing our capital returns here. There are couple of things to think about of these notes, as you look at them and think about why we may or may not be focusing on.
One of course is, they are non-recourse, as we've talked about a lot and that's a nice feature in, the downside of course is today that 9% coupon is a little more expensive then perhaps you would want. Ideally it was a great deal when put the notes in place, when we had essentially no revenues.
The second piece of that 9% is there is as you know a fair amount of tax uncertainty looking forward here with some of the tax discussions that are going on. One possibility that is being discussed, and I know it's been discussed pretty broadly in the conversation to watch in is the reduction of interest as a tax deduction and where in that an example, Eric and I have been thinking about these notes on an after-tax basis being much cheaper than 9% if that goes away, of course the notes will get a little more expensive.
So there is kind of the top level thinking again. We're really focusing this year on those 9% notes, if there are some market dislocations that present exceptional opportunities then of course we would potentially look at other vehicle or other share or something else. But that’s really the primary focus for this year. The second part of your question was - GSK transition…
Tyler Van Buren
So you know, we were probably a little more apprehensive of some of the changes that were happening two years ago to the people who were running the franchises. You know, there were some that were good, like for example, that US going away who we didn’t have terrifically high and Payne [ph] is over that that point in time, and a few others.
And subsequent to that they put some terrific people in the spots. So you know, heavy US now is terrific, the marketing folks in the US are terrific, et cetera and those are really the key people that are out there, you know at the very top level, my guess there will be very, very few adverse changes at all, like I have optimism these guys are going to be pretty thoughtful.
I haven't personally met him yet. I have heard terrific things about her and, I would just say that the people we're dealing with, the people who are on the ground, in the various regions are the ones who are going to make or break these product and they are terrific.
The US market and you heard me say lot's the great things about them and that team really performs quite well and again, as you know prior to some of those transitions. So two and half, three years ago, you definitely didn’t hear me saying good things about that. But those teams are intact and in good shape. So my best guess is we're going to go through this with little to no, hiccups whatsoever.
Tyler Van Buren
That’s great to hear. Thanks for taking the questions.
Appreciate it, Tyler. Thank you.
Thank you. [Operator Instructions] Our next question comes from the line of Stephen Willey of Stifel. Your line is now open.
Yes, thanks for taking the questions. And congratulations on all the progress here. I guess, so kind of [indiscernible] little bit of comments with respect to maybe price softening a little bit, I think on the conference call yesterday, do you have any gross to net data for the quarter and I guess whether or not that is kind of trending upwards with respect to just the absolute discounts that you guys are providing at this point?
Yes, thanks for the question and thanks for the congrats. Of course, we're very pleased with where things have gone and that the strategy we put in place on restructurings really has borne fruit the way we hope it would. So we're very pleased on that front.
With regard to gross in that and pricing next year, and you know, Andrew made a comment not at this call, but at the last one, that he wasn’t expecting anything particularly dramatic to happen this year and that’s generally what we've been talking about as well. We haven't been specific and said it’s going up or down.
So I tend to look at net rather than gross to net, gross to net very well could expand it. For example, GSK took you know, gross price increase during the period, but the net price is where we focus on and again we're not expecting anything dramatic out there.
Obviously, with regard to the potential for disruptions there is a possibility this year having AB Generics coming in, that could be a catalyst one way or another, we'll have to wait and see. But right now we don't have any plans or expectations for anything dramatic happenings with prices.
Okay. And then I guess, just on the NBRx data, it’s - I guess, it’s kind of interesting to you know, when you look at BREO there is obviously a bit of a disconnect between where the community prescribers are relative to the pulmonologist.
But I guess with ANORO, which I guess, that would be inclined to believe would be a product that would maybe be easier for the specialty providers or the specialty prescribers to adopt versus the community docs, it seems like there's not a disconnect there between the two?
What do you think is the rationale, I guess, between kind of the same NBRx numbers for ANORO between both pulmonologist and the community docs?
Well, there are certainly stories around both of those you know, our general view and of course, we make a general view, you can immediately find 100 exceptions to it. But as a rule you're going to find more stickiness with primary care doctors and following traditional well-known therapeutic paths and categories, as a result, you know, we're not surprised that we had a little more uptake initially in the community with BREO for example. We had a little faster initial uptake among specialist with ANORO because they got the benefits of the product.
As you forward it can be quite interesting to see how these continue to develop because as you're aware, there were some recent changes in the GOLD guidelines and the GOLD guidelines are putting a little more emphasis on LAMA, LABAs. It wouldn't surprise me if you saw not a lot of change that the primary care docs are going forward, but you would be more adoption by the specialist there.
I think the last thing I would offer is there has been quite a bit of acceleration in the new to brand scripts you're seeing on BREO. My guess is a lot has to do with some combination of formularies and awareness out there. The product is been out for a few years.
The marketing efforts around this are really no quite good. The recent materials that are out there and the recent focus of the US BREO sales force, I think has just really been clicking in.
So we'll have to see how all these things continue to move going forward. I guess, the top level, we're pleased with where we are. We have higher aspirations in this and you know, want to see how this continues to rollout. But again, both products are performing well, GSK is performing well, particularly in the US and I think we're feeling pretty good.
All right. Thanks for taking the questions. And congrats again.
Thanks, Stephen, I appreciate it.
Thank you. 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 to the call. Have a good day.
This does conclude today’s conference call. We thank you for your participation. You may now disconnect.
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