Innoviva, Inc. (INVA) 2014 Q1 法說會逐字稿

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 remarks.

(Operator Instructions)

I will repeat these instructions after management completes their prepared remarks. Today's conference is being recorded. Now I would like to turn the conference over to Mike Aguiar, SVP & CFO please go ahead sir.

Good afternoon everyone and thank you for joining us.

With me on the call today is Rick Winningham our Chief Executive Officer and Mathai Mammen, Senior Vice President of Research and Development. The focus of our prepared remarks with the announcement of a May 15 record date for Theravance's strategic separation and our intention to initiate a quarterly cash dividend to stockholders of Theravance.

While we will not be covering our programs or the quarterly financial results in depth during the prepared remarks, we will be happy to answer any questions on the topics during the Q&A session. Earlier today Theravance issued a press release announcing recent corporate developments in first-quarter 2014 results. A copy of the press release can be downloaded from our website, or you can call investor relations at 650-808-4100 and we will be happy to assist you.

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 goals expectations and 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 those projected in the forward-looking statements. Additional information can turn back to that could cause results to differ materially from our forward-looking statements are described in greater detail in the company's form 10K filed with the SEC.

I'll now turn the call over to Rick Winningham our Chief Executive Officer, Rick?

Thank you Mike, good afternoon everyone.

The past few months have been very exciting and an important time at Theravance on both the program and strategic level. Strategically we have made significant progress on our separation highlighted by the announcement of a May 15 record date for the dividend of ordinary shares of Theravance Biopharma to be paid to Theravance stockholders to affect the separation.

We also recently completed the $450 million, 9% non-recourse pharma note royalty financing. Additionally, we are announcing today Theravance intention to initiate a $0.25 per share quarterly dividend for stockholders of Theravance following the separation. We have also had a number of positive program developments recently,, which I will not be covering in detail on the call including the US launch of the ANORO for the treatment of COPD, GSK's intention to file BREO for the treatment of asthma in the US later this year, and two positive Phase 2 studies with our earlier stage assets one with TD 9855 for the treatment of fibromyalgia, and the second in our partnership with Alfa Wassermann with Velusetrag for the treatment of gastroparesis. Overall I am pleased that we are poised to complete this separation in the coming weeks and more importantly that both companies are very well-positioned financially and strategically for the future.

I will begin my discussion with the separation. We are currently targeting the separation date of June 2 when shares of Theravance Biopharma will be distributed to stockholders of Theravance; this is the culmination of a significant amount of work over the past year and the final step in the separation. Over the next few weeks we expect to make additional stockholder communications including the filing of a final form 10 with the SEC and the mailing of stockholder information statement.

After the May 15 record date, we expect Theravance shares to trade exdividend and Theravance Biopharma shares to begin a when-issued trading. The first company Theravance, a royalty management company, which all I referred to simply as Theravance, is targeting stockholders who seek capital returns from dividend payouts, which we intend to grow over time and potential future share repurchases.

Theravance will be well-capitalized with the net proceeds of approximately $434 million from our recently completed nonrecourse royalty notes, less any approval on launch milestones paid to GSK prior to the separation. The two lead respiratory products RELVAR/BREO, ELLIPTA and ANORO ELLIPTA are in the process of a global launch into a multi billion-dollar respiratory market.

The strategic objective of Theravance is to manage all of the development and commercial responsibilities under its respiratory partnership agreements with GSK and associated royalty revenues with the intention of providing capital returns to stockholders. As a result of our strong cash position and confidence in the potential of these respiratory programs, again we announced our intention to initiate a $0.25 per share quarterly dividend following the separation which we intend to grow over time.

Regarding RELVAR/BREO, as of April 25, 2014 this medicine has been approved in 42 countries for marketing and has been launched in 12 countries across North America, Europe, and Asia. Total net revenue for RELVAR/BREO during the first quarter was approximately $4.9 million with royalties payable to Theravance of approximately $730,000.

GSK and Theravance remain very optimistic about BREO's potential. Regarding the launch in the US Andrew Whitty noted last week in GSK's quarterly call that while it is been a slow call the underlying trends look good, the leading indicators look promising, and significant progress on reimbursement has been accomplished since the beginning of the year.

In particular GSK stated that they had 75% Medicare part D coverage for BREO as of April 30, up from the low-single digits in January. And that 50% of patients are currently covered in commercial plans. Also direct to consumer advertising is now underway in the US; GSK announced its intention to file BREO for asthma in the United States in 2014.

Needless to say the decision to proceed with the US asthma filing is a very important milestone for the GSK Theravance respiratory collaboration. Progress continues with the Salford studies, as well as Summit. Our second respiratory program with GSK, ANORO ELLIPTA was launched in the US last week and is now available in US pharmacies.

Although it is very early as GSK noted during its call, we are in good position with the part D book of business compared to where BREO was at this point in time in its launch Phase. In the EU and ANORO received a positive opinion from the European Medicines Agency committee for medicinal products for human use in February 2014, recommending marketing authorization for UMEC/VI under the proposed brand-name ANORO as it once daily maintenance bronchodilator treatment to relieve symptoms in adult patients with COPD and we expect to hear a final decision from the EMA shortly.

Now turning to the second company, Theravance Biopharma which I will refer to as Biopharma. Biopharma is targeting shareholders to seek capital appreciation associated with the progress in research development and commercialization activities in our pipeline. Biopharma will also be well-capitalized, with approximately $400 million following the separation, and will be focused on small molecule product candidates in infectious disease, central nervous system and pain, respiratory disease, and gastrointestinal disease. Additionally Theravance Biopharma will have rights to 85% of the economics, from UMEC/VI FF also known as diamond, MABA FF and MABA monotherapy, and any other product that may be developed in the future under these agreements with GSK.

We're very excited about the prospects of Biopharma following the separation, based on a robust pipeline and proven R&D capabilities. We have had a number of positive clinical events for programs residing in Biopharma including two recent positive Phase 2 studies one with 9855 our dual serotonin norepinephrine reuptake inhibitor in the treatment of fibromyalgia, and the second with Velusetrag which is partnered with Alfa Wassermann for the treatment of gastroparesis. In addition, we have two other product candidates currently in Phase 2, TD-4208 and nebulized long acting Muscarinic Antagonist for the treatment of COPD and TD-8954 a 5-HT4 agonist delivered via IV for the treatment of enteral feeding intolerance.

Finally we're making good progress with VIBATIV our commercialized antibiotic for the treatment of resistant gram positive infections, which was reintroduced into the US market late last year. In addition in February GSK communicated its intention to take the triple therapy UMEC/VI FF, also known as Diamond into Phase 3. Portfolio programs provide a number of potential catalysts for Biopharma following the separation.

Overall I am pleased with the execution of our previously communicated strategy, the distinct strategic opportunities for each company, and the strong financial position for both entities. Since we announced our strategy to separate the companies a little over a year ago, we have had three product approvals, multiple product launches, we have initiated a capital return strategy, we have adjusted our capital structure to the royalty monetization strategy, and we made significant progress across our pipeline with 9855, 4208, 8954, 5108, as well as BREO in asthma, and Diamond, the closed triple therapy.

But with that I'll turn it over to Mike our Chief Financial Officer, Mike.

Thank you Rick and good afternoon everyone.

Today I will provide a few very brief comments on the financial results for the quarter ended March 31, 2014. Before discussing these results, however, I would like to note that due to the upcoming separation of Theravance into two publicly traded companies, we will not be providing financial guidance at this time. Our current expectation is each company will provide financial guidance following the separation.

For the quarter ended March 31, 2014 Theravance had a net loss of $67.7 million or $0.62 per share. Total first-quarter 2014 non-GAAP operating expenses were $49.3 million. As a reminder non-GAAP operating expenses exclude stock-based compensation expense and costs associated with separation activities. Product sales of VIBATIV in the first quarter of 2014 were approximately $0.9 million which includes amounts that were previously deferred.

Global sales of RELVAR/BREO totaled approximately $4.9 million during the first quarter resulting in gross royalty revenue of $730,000 from GSK. Of note, royalty revenue was reduced by amortization expense for intangible assets of $1.8 million related to approval and launch milestones that we have paid to GSK.

Our cash, cash equivalents, and marketable security positions totaled $430.8 million as of March 31, which does not include net proceeds of approximately $434 million related to the recent sale of nonrecourse royalty notes. This cash balance represents a decrease of approximately $89.7 million during the quarter, primarily due to registrational and launch related milestone payments to GSK of $55 million and cash used in operations, which are partially offset by net proceeds of $18.3 million, received from issuances of our common stock.

Now I will turn the call back to Rick for final closing comments, Rick.

Thank you Mike.

It is been a productive quarter for Theravance, and with today's announcements on the separation record date, we remain on track to complete the separation this quarter. Again, we believe that both Theravance, a royalty management company, and Theravance Biopharma are well positioned in 2014 and beyond with adequate financial capitalization, strong product portfolios, and significant strategic opportunities.

Initially we believe both organizations will have strong Board of Directors, strong senior management teams, and deep sets of key functional skills relevant for each business. Looking forward, each company will have a number of important near-term catalysts.

At Theravance further launches in major markets for RELVAR, potential further approvals and launches for ANORO, and the US asthma filing for BREO, as well as our capital return strategy, highlighted today by a commitment to pay cash dividend with the objective to grow the dividend over time.

Initially share repurchases may be used opportunistically in the future. At Theravance Biopharma we look forward to the Phase 2b results from TD-4208 in COPD, continued commercial progression with VIBATIV, and GSK's initiation of Phase 3 program with UMEC/VI FF and the potential for additional partnership and progression of other programs in our pipeline.

Before concluding, I would like to thank the Theravance team for their extraordinary level of focus and commitment since our announcement of the separation slightly over a year ago. Given the significance of the change in operating structure and the drain on administrative resources required to accomplish the separation, it would've been easy to become distracted at the project level. The various Theravance teams have remained extremely focused and delivered on key goals.

From working closely with GSK on the various committees to ensuring the long-term success of multiple GSK and Theravance respiratory programs, to the VIBATIV team, who received HAP/VAP approval and put VIBATIV back on the US market, to the multiple development teams that delivered on clinical and regulatory milestones, to the research organization that's pushed forward into new and exciting areas from which compounds will enter the clinic in the coming months and years. We look forward to completing the separation over the next few weeks and most importantly we are very excited and energized about the future opportunities for both companies. And now I would like to turn the call over to the conference facilitator and open the call for questions.

Thank you, sir.

(Operator Instructions)

First question, David Friedman, Morgan Stanley.

Hi, thanks for taking the question. I was wondering if you could just talk a little bit about the tax implications of the upcoming split and whether the full tax burden of the split is going to be borne by shareholders, or whether the royalty co will incur a specific tax and is there a way to help understand what that might be? Thank you.

Thanks for the question, David. So the transaction is a taxable transaction; it has always been envisioned to be a taxable transaction at the corporate level. We currently believe that whatever the taxable impact is at the corporate level will be offset by our existing NOL balance.

From a shareholder level it is taxable as well. Both of these levels of taxation will be depend upon the initial trading value or Theravance Biopharma. The higher it trades the higher the potential tax burden and the lower it trades the lower the tax burden. With regard to you know the specifics for shareholders, the way the tax is ultimately going to be assessed is going to depend upon this trading value and the 2014 annual earnings in profits from Theravance Inc not net income but earnings and profit, so the taxable earnings as opposed to GAAP earnings.

Whatever proportion of earnings and profits there on a per-share basis will be taxed at a normal dividend rate for the individual shareholders. Once you work through the earnings and profits, whatever is left will more likely than not be a return of basis related to the Theravance basis that an individual shareholder has in their Theravance share holdings. In the event they were to actually work through their basis then it would turn into capital gains, I think that will be a relatively rare phenomenon where an individual shareholder would work through the basis in their stock. So ultimately depend upon the trading value Biopharma and we will have to just wait and see where that rolls out.

Okay great, thanks.

Next, Steve Byrne, Bank of America.

With respect to the Phase 3 programs for the closed triple, has it been determined which two components are going to be co-formulated together into one strip in the ELLIPTA device? Is it UMEC and vilanterol together?

Thanks, Steve, this is Rick Winningham, we have not communicated that. I would just say stay tuned for future announcements on the progression of the studies.

What is holding up starting at this point, are there any specific gating events?

Not that we are aware of. I think GSK communicated the intention to move forward with the triple therapy into Phase 3 in the first quarter. As you might imagine you know given that it is triple therapy is a relatively complicated, it will be relatively complicated Phase 3 program. It would be targeted in order to maximize the value of the medicine to patients, but nothing that we are aware of is significant in terms of standing in the way so, I'd just say stay tuned

Okay and if indeed it is UMEC and vilanterol together on one side, you essentially have ANORO on one side. What at that point would you see as the differentiation between say MABA down the line versus ANORO together in one strip? How would you compare those two, those two drugs at that point?

I think that is a terrific question. I think we remain very excited about MABA and the potential to combine MABA with FF and other potential -- in the future other type anti-inflammatories or some other medicine that might facilitate patient treatment in respiratory disease. I think that MABA just because it is a single entity and a single compound provides certain level of flexibility that may not be prevalent, might not be present with the combination product that would effectively be like ANORO.

I think it is important to understand the enormous significance of the markets that we are talking about on a global basis. And the opportunity that we may have with GSK over time to address really multiple segments of the market, all of the segments of the markets and COPD, and potentially a number of segments in asthma with the portfolio.

So I think we look forward to that. I think we believe that there are some inherent benefits regarding MABA and MABA as a platform for future drug development, the closed triple is ahead of where MABA is right now, but I think we remain pretty optimistic about both.

And just to that point, Rick what would you see as the gating events to start in the Phase 3 program in MABA?

Well as we have announced previously we are switching the product over to ELLIPTA, the ELLIPTA platform. Some additional work has been required there and the teams from GSK and Theravance are working through that transfer of the platform and I hope to be able to bring you more information about that in upcoming calls.

Okay thank you.

Next, Brian Skorney, Robert W. Baird & Company.

Good afternoon guys, thanks for taking the questions. I guess just when we think about the dividend that you announced today and returning cash to shareholders, how do you view any sale of the royalty interest in the future? Would you anticipate that just resulting in the dividend increases that you're speculating will come around eventually? Or when you think about a special dividend I mean you said you did mention that you might do some share repurchases, but just how do you think about the best methodology for returning cash to shareholders? And what sort of deals have you struck in the future how would that influence how you would do it?

Yes, Brian that is a great question. We looked at this pretty closely. As I think everybody knows, one of the initial strategies we laid out when we announce the separation about a year ago, was that the intention of the Theravance royalty management side was to find a way to return significant portions of capital back to shareholders. Generally there are two ways to do it; you have dividends and share repurchases. We've looked at both of those quite closely here and I think there are opportunities for both of them in the future of Theravance Royalty Management Company.

With regard to dividends, there are two ways again to do it, you sort of have an option to create a recurring dividend, which is what we initiated here today, or you would do is sort of special dividend. I think generally here we are not particularly fond of special dividends. I think there's much more value to be created in a recurring dividend, so I think it would be unlikely at least today to see a special dividend going forward.

With regard to the current strategy here, and how we thought about this vis-a-vis share repurchases, you know this is something we looked at pretty closely and in particular with our Board. I think most folks know we have a very financially astute Board who have lots of insight and experience in this particular area. I think when you look at them sort of finance 101 at times could suggest that a share repurchase is appropriate if you have an undervalued stock and you have a desire to reduce the overall share count outstanding. I think the down side of share repurchases is generally I am not aware if a lot of funds that have an objective of purchasing securities where a company is intent on repurchasing shares. That is not generally an investment thesis that I'm aware of, so the investor targeting is not particularly good on that.

With regard to dividends, I think dividends today are something that the market values quite highly. In particular they're generally seen as a commitment that the company is making to not only maintain, but to increase the dividend over time. And as you know, there are a number of funds who actively seek out those types of investments, so there are a better opportunity for targeting specific types of investors here. So on a very high level that was the thought process that went into here.

The last part of your question was regarding the potential for future monetizations additional future financial restructuring. The answer is that absolutely we're always keeping our options open on this. Clearly as you look forward there will be opportunities as the financial picture continues to improve for the Company to potentially leverage up additional debt-to-equity ratio to get the Company in a little more appropriate overall capital structure for a company of this type. And potentially do additional royalty work as well should the right opportunity come up, whether it's a sale or something else.

I think the final point I would like to add is that this recently completed royalty monetization was really a terrific deal. We're quite pleased to get this done. I think a number of folks are familiar with the terms in this market. The terms we got were extremely favorable. 9% is one of the lowest coupon rates that has been done for one of these deals and certainly the lowest for a similar combination of products, and importantly we have relatively favorable you know terms and prepayment penalties and things like that.

So sitting here today we're very pleased to get this done. It allows the process to begin of returning capital and it provides us tremendous amount of flexibility not only from capital structure, the potential to refinance, but also to manage the overall dividends going forward, so I think overall we're feeling pretty good about it. Hopefully that covered the question you had answered.

Yes, yes, it did actually, it answered my second question too, but real quick I just had one last one. You said earlier that you had capitalized Theravance Biopharma at $400 million in cash, but I think the prior guidance was for $300 million? So is this a change and what about what brought about that decision?

It is a change the prior guidance we had been given in the Form 10 was for approximately $300 million. That being said, we have been pretty consistent with our communication that the really optimal way to set up Biopharma for success was to ensure that as much capital ended up over there as possible in the separation to remove what everybody knows is frequently a financing overhang for the initial trading life of some of these companies, that there is not enough cash there. So the intention that Rick and I have had all along was to put as many dollars into Biopharma as we could.

In terms of what is changed that, the big single piece of course was this recently completed royalty financing which enabled us to leave the entire net proceeds from that royalty note in the Theravance Inc side of the business and be able to put the rest of the capital over into Biopharma. So this is something that we had our eyes on. I'm extremely happy we're able to do this because it will give Biopharma the maximum probability of being successful.

Thanks.

Thanks, Brian.

Next, Ronny Gal from Bernstein.

Good afternoon gentleman and thank you for taking the call. I have got three, the first one is around this timing of the trials. So now that SUMMIT has finished recruiting, when do you expect essentially, based on current event rate completion of SUMMIT, and can you give us a refresher on when you expect the [commission] of the SALFORD trial? Second, expectation for LAMA/LABA competition if you could just review to us how you think about the field right now? And last one should we just assumed that the vilanterol is not in the launch as a single agent and if it would, what geographies would be launch at?

I will take the first one on vilanterol, no that, we intend on bringing vilanterol forward as a single agent. It is an important part of the overall armamentarium. The clinical work for required for vilanterol has been completed as a part of the studies for BREO as well as ANORO. So no vilanterol very much I think we can fit into a space in the overall armamentarium of the treatment of COPD patients.

Global launch?

Pardon me?

Global launch?

Well I would assume so eventually, we need to file it forward first, but clearly the product the data on the product is out there and as a part of all of the previous BREO and ANORO studies so everyone knows quite well how it will perform as a once a day product, and there may be certain patients with COPD that actually benefit specifically from the long acting beta agonist, I will turn the SUMMIT and the Salford study over to Mathai.

On Salford and Summit, so Salford is a study that is taking place with COPD and separately on asthma in the town of Salford in that region in the UK. That continues to recruit, albeit a tad more slowly than I guess originally anticipated when study kicked off. Our plan is to have top line data in 2016 from that study for COPD.

And then for SUMMIT, SUMMIT as a reminder is the study that enrolls patients with COPD but with cardiovascular risk factors. And that is a very, very important exciting study for us and that is enrolling and again it is 2016 where we will be looking at some data there too.

I thought it had completed in there?

It has completed enrollment, it will be. He is talking about data, it is an event driven study so that is our best guess for the timing of events.

Given that it's an event related study the timing is a bit variable, so 2016.

So and, Ronny, the last question I believe was on LAMA/LABA and competition. Obviously that's a nuanced question depending upon geography. I'm just going to focus on the once a day compounds for simplicity here.

Within the US obviously were first here. I think based on what we understand today I think it is unlikely Novartis gets here with the once a day LAMA/LABA. Clearly you've got BI who has the potential to come here, looks like a couple of decent compounds, I do not know whether they are going to have any issues or not with regard to the device et cetera, so I would say we're watching that.

But clearly they are aways behind us in the US. As you think of Europe I think our expectation is it is likely that GSK, BI, and Novartis are all there. Again Novartis is there today and we are hopefully going to be their relatively soon, with what is going to hopefully be a positive EMA opinion here in there very near future, and then again BI a little behind us there. But our expectation generally is that it is more likely than not, all three of the companies will be in Europe.

Is there any reason to not expect BI to submit this year? I mean is there anything in the public domain about data that suggest that they will not be able to submit; that they need additional trials?

I am not aware of it. We're just looking at the historical questions that have been out there relative to the [rest of them] from the FDA. I do not know whether we believe there is any issue or not, but I know there has been some level of question there, so the issue is whether or not that issue needs to percolate around or whether it resolves and I do not have any particular insight on that.

Okay thank you very much, gentlemen.

Thanks, Ronny.

(Operator Instructions)

Our next question, Stephen Willey, Stifel Nicolaus.

Thanks for taking the question. Can you just follow up quickly on I think a question Brian asked? I guess in the absence of a special dividend and assuming that there is some kind of monetization opportunity here, would then you look to take those dollars and I guess try to address some of the terminal value questions that we have been getting a lot of?

And I guess kind of second to that can you begin to address the terminal value without first addressing the tax optimization part of it? And I guess can one come before the other, and I guess where is the tax optimization piece of the story in terms of your list of priorities?

Yes, thanks Stephen. There are a lot of rich opportunities and the question there. Going back to JPMorgan earlier this year we laid out three potential things that we felt would be pretty significant opportunities to improve the overall valuation of Theravance, a royalty management company following the separation.

Number one was to do some financial work and in particular look at things like debt to equity ratios, the opportunity to pull in future royalties related to some of the respiratory programs of monetization et cetera. And clearly we have done one of those which is the recently completed Pharma note. So that is one area that we think will have significant opportunity going forward, particularly the ability to issue straight debt down the road when the financial results can support something like that. That really has the ability to shrink the equity base to lever up the company and improve overall returns, so that is sort of one area of strategy that is out there.

The second area is to see if there's a way we can reduce the overall tax burden on the company. We are a US Corporation right now. That is something we think about a fair amount if there was the right opportunity to reduce that tax rate or manager tax rates better, we would certainly look at that very closely.

The last piece, sort of has been come to known as number three which is getting to your question is related to the tail value of these assets. As everybody knows, these are very long lived assets that are at least 15 years of royalties from the date of launch, so very long life in front of these. However, 15 years is not infinity as most folks know. So I think the third opportunity is to improve terminal value and over time if we were able to purchase additional assets with some portion of the economics coming in here, that would broaden the opportunity to increase the terminal value of the company.

The last thing that I will mention with regard to terminal value is, there is a portion of the royalties coming in from the closed triple and MABA and or MABA FF, 15% of all the royalties they get redirected back to Theravance rather than to Theravance Biopharma, so again by definition there is terminal value associated with the overall entity. So we're pretty excited about these opportunities when you look forward at the various levels of ability to influence each of those three. The only thing I would say is we do not have the Board here and having approved those three strategies at this point in time, but they certainly seem like significant opportunities to improve the overall economic picture and overall valuation of the company.

And then I guess just with respect to your options on the tax optimization front, I mean obviously there's kind of the fairly popular inversion transaction at this point. But I guess beyond that it would seemingly be too expensive to try to offshore some of the IP at this point? So I guess come it would have to come in the form of the transaction, is that a safe assumption to make this point?

I think it is more likely than not, any opportunity there will be a transaction related opportunity as opposed to just an inversion. The facts and circumstances of Theravance today would make it quite difficult if not impossible just to do a simple inversion. So if there was an opportunity it probably would be, and again the transaction with the right target similar to what you've seen in some of the other companies do.

Okay, thank you.

Thanks Steve.

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

Thank you very much operator and thanks everyone for participating. As I said we are very excited about the next steps in the evolution of each of the two companies. We look forward to bringing forward those next steps you in future calls and have a great day.

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