Innoviva, Inc. (INVA) 2014 Q3 法說會逐字稿

Ladies and gentlemen, good afternoon. At this time, I'd 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 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, Chief Financial Officer. 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 then I will review our financial results. Following our comments, we will open up the call for questions.

Earlier today, Theravance issued a press release announcing recent corporate developments and third quarter 2014 financial results. A copy of the press release can be downloaded from 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 Theravance. Forward-looking statements include anticipated results and other statements regarding Theravance goals, plans, objectives, expectations, 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 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-Q for quarter ended September 30, 2014 to be filed with the Securities and Exchange Commission.

I would now like to turn the call over to Mike Aguiar, our Chief Executive Officer. Mike?

Thank you, Eric and good afternoon, everybody. Before I discuss the Q3 business results, I have several personal items to cover.

First, I'd like to ask everyone to join me in welcoming Eric D'Esparbes to Theravance team. Eric brings a wealth of financial and [tax return] experience that we believe will be a significant asset as we work to optimize the financial performance of the company. I hope over the coming months, many of you will have the opportunity to meet and interact with Eric.

Also today, we announced that William Waltrip has been appointed as the new Chairman of the Board of Directors and Rick Winningham is stepping down. The transition of the Chairman role was part of the overall plan to complete the separation of Theravance Biopharma from Theravance, Inc. Once we are confident that the new leadership, systems and processes were ready to support a standalone public company. I am very lucky to have worked closely with Rick for nearly a decade here at Theravance. His leadership, support and mentoring have been very important to me and I wish him all the best as he strives to develop additional medicines at Theravance Biopharma that can make a difference in patients' lives. Importantly, I am also confident that the Chairman role is in great hands with Bill who has been on the Board since 2000 and most recently as the lead independent director.

Also today, we announced the appointment of Terrence Kearney to the Theravance Board of Directors. Terry got a broad background in healthcare, including senior positions at Hospira and Baxter and currently sits on the Board of Vertex. I believe that Terry will be a strong addition to our Board and look forward to -- look working closely with him as well as we continue to build the Company.

I'm very excited by the unique skill set of the new Theravance executive team and Board. We believe there are significant opportunities available to the Company and we are well positioned from a strategy, product portfolio and overall cash position. We continue to focus on our strategy of optimizing the value of BREO and ANORO, maintaining a low overall cost structure, reducing overall corporate cost of capital and building a recurring revenue business attractive to investors seeking capital returns from dividend payouts and potential future share repurchases.

Starting out with the business, this is a very exciting time here at Theravance. Following the separation, we've made significant progress toward building Theravance into a standalone royalty management company including hiring a new management team, implementing new corporate and financial systems and importantly, working closely with GSK in an effort to enhance the global commercialization and launch of RELVAR/BREO ELLIPTA, which we will refer to in the call as RELVAR/BREO and ANORO ELLIPTA, which we will refer to in the call as ANORO.

In the third quarter of 2014, we also paid our first cash dividend of $0.25 per share on September 18, and today, we announced that we will be issuing a second cash dividend of $0.25 per share to stockholders of record as of November 15. RELVAR/BREO is our lead respiratory program partnered with GSK for the treatment of patients with chronic obstructive pulmonary disease or COPD or asthma. It is a combination inhaled respiratory medicine consisting of vilanterol, a long-acting beta2 agonist or LABA and fluticasone furoate, an inhaled corticosteroid or ICS, all delivered in the ELLIPTA dry powder inhaler. As of September 30, 2014, this medicine has been approved in 53 countries and launched in 30 countries, including the US, Canada, UK, Germany and Japan. Total net product revenues for RELVAR/BREO during third quarter of 2014 were approximately $25.6 million.

Our second respiratory program with GSK, ANORO, is a combination dual bronchodilator medicine for the treatment of COPD consisting of the LABA/vilanterol and the long-acting muscarinic antagonist or LAMA umeclidinium. As of September 30, 2014, it's been approved in 42 countries and launched in 9 countries, including the US, Canada, UK, Germany and Japan. Total net revenue for ANORO during the third quarter of 2014 was approximately $1.8 million.

Since BREO and ANORO are launching into a highly competitive therapeutic category in a primary care setting, we expected that the initial commercial launches for these products would be relatively slow. We are still in the early part of the launch with both products and believe there are significant potential growth drivers ahead. Theravance continues to work very closely with GSK to achieve our goal of optimizing all aspects of these launches. As GSK said in their earnings call, they believe BREO and ANORO will see an acceleration as issues with access are resolved and event free trial period end.

Regarding reimbursement, GSK noted that access to BREO and ANORO is steadily improving with Medicare Part D coverage for BREO now over 70% and ANORO are expected to be over 50% by the end of October. Looking into 2015, we expected a number of key regulatory and clinical data events that will provide additional catalyst to the trajectory of these programs. In particular, we view the upcoming April 30, 2015 PDUFA date for the US BREO sNDA for the treatment of asthma as potentially very impactful, given the size of the US asthma market. Additionally, we expect new RELVAR/BREO clinical data from the SUMMIT mortality study to readout in 2015 and the Salford COPD study to readout in 2016. If the SUMMIT study is positive, it would be the first LABA/ICS to demonstrate a benefit on survival for patients with COPD. These are significant catalysts that have the potential to substantially increase the long-term revenue growth and value for Theravance.

We are pleased with the organizational progress we have made at Theravance since the separation and look forward to working closely with our partner GSK to further optimize the launch trajectories for both BREO and ANORO. I'll now turn the call over to Eric to review our Q3 financial results. Eric?

Thank you, Mike.

Before I discuss the results from the quarter, I would like to thank Mike and the Theravance Board and to say how proud I am to join the management team. Also before I present the Q3 results, I want to remind you that Theravance completed the separation and spinoff of Theravance Biopharma from Theravance, Inc. earlier this year and the financial impact of this is reflected as discontinued operations accounting, which makes a number of adjusting entries to prior periods. As a result, there is a limited comparability between Q3 financials, our previously reported results and our future operating results.

Royalty revenues received on net sales of RELVAR/BREO and ANORO for the quarter ended September 30, 2014 were $4 million. The majority of royalties were driven by RELVAR/BREO sales, which grew 40% versus last quarter. This growth was mainly driven by a steadily improving coverage and access. Looking forward, we expect additional improvements in coverage for BREO as disclosed last quarter where from January 1, 2015, CVS Caremark will move BREO from its current non-formulary position to a Tier 3 unrestricted position, and Express Scripts will move BREO from its current Tier 3 position on the basic formulary to a preferred Tier 2 unrestricted position.

With regards to ANORO, sales were down versus the second quarter due to the initial stocking of the US wholesaler during Q2 and the gross to net charges related to discounting and couponing. Regarding the levels of couponing and product sampling mentioned by GSK in their call, we have received a number of investor calls expressing concern that the level of sampling and couponing is too high. I would like to note that Theravance does not believe that this is the case as couponing and sampling are integral components of the overall marketing efforts for both products, and as GSK mentioned, they continue to make progress on the reimbursement for ANORO. As a reminder, last quarter, we noted that CVS Caremark will move ANORO from its current Tier 3 non-preferred position to a preferred Tier 2 unrestricted position, effective October 1, 2014.

Research and development expenses for the third quarter of 2014 were $1.9 million compared to $2.1 million for the same period last year. This decrease was mainly due to the reduced level of operation as a result of the spin-off. During the third quarter, we still had some overlapping headcounts, but at October 1, all personnel transitions with Theravance Biopharma have been completed.

General and administrative expenses for the third quarter of 2014 were $8.6 million compared to $6 million for the same period last year. This increase was mainly due to the recognition of higher stock compensation expense and employee-related costs, outside services and one-time costs all mostly associated with the post spin-off transition activities. Total general and administrative stock-based compensation expenses for the third quarter of 2014 were $3.4 million compared with $1.9 million for the same period in 2013. Here also as of October 1, all personal transitions to Theravance Biopharma have been completed. We expect outside services spending to continue at a slightly higher rate into the early part of 2015 as we finalize new systems implementation and transition activities.

Cash, cash equivalents, short-term investments, marketable securities and restricted cash totaled $316.5 million as of September 30, 2014. If we compare with our cash balance at the end of the second quarter of 2014, which was $383 million, the decrease of approximately $66.4 million was mainly due to the cash dividends paid of $28.3 million, launch related payments to GSK of $25 million and a final payment of $17 million to Theravance Biopharma associated with pre-spin-off obligations. As of September 30, 2014, the final $10 million of launch-related milestone payments was earned by GSK and was in account payable. Looking forward, Theravance will continue to be in a period of transition into early 2015. And as I mentioned earlier, we will still be incurring some incremental and non-recurring costs such as hiring expenses, new system implementation activities and other transition costs. As a result, we will not be providing specific expense guidance at this time for the remainder of 2014.

And now I'd like to turn the call over to Mike for final closing comments.

Thanks, Eric. Looking forward, we remain excited by the opportunities available at Theravance. Our immediate priorities are to complete the transition to a standalone entity, and importantly to continue working with GSK to achieve our goal of maximizing the value of our commercial assets.

As I mentioned earlier, there are a number of catalysts in action with the potential for significantly increase the launch slope and long-term potential for both BREO and ANORO including the continued global roll out of both products, ongoing improvements in coverage and reimbursement in the US, the potential approval of the BREO asthma NDA in April, results from the SUMMIT mortality study with BREO in 2015 and the COPD Salford Lung Study in 2016.

We believe that Theravance is well positioned from a strategy, product portfolio and cash position. Our longer-term priorities are to retain a low overall cost structure, reduce our overall corporate cost of capital and to build a recurring revenue business attractive to investors seeking capital returns from dividend payouts and potential future share repurchases.

I'd now like to turn the call over to the conference facilitator and open the call for questions.

(Operator Instruction) Tyler Van Buren, Cowen and Company.

On GSK's call about a week ago, I think, they mentioned that the ANORO rejection rate is still fairly high at around a 30% to 40% of scripts. So I'm curious, just if you could maybe contrast that with BREO and the current rejection rate and accordingly as we see formulary position improve here in the near future and coverage continue to improve. What are your thoughts on the doctors' responses to the improved coverage and how that might affect prescriptions? I think that commentary would be very helpful, thank you so much.

You are right on the number that GSK quoted related to ANORO. I'm not sure we've actually ever disclose any specific numbers related to BREO but certainly early in the BREO launch there was a very high percentage of overall rejections for a lack of coverage. As you probably remember the initial coverage for the first few months of the BREO launch was quite low principally related to timing. If you recall, we've launched in the fourth quarter of last year and it's a little bit difficult to get on 2013 formularies, i.e., in the fourth quarter. So I would say looking on a month-by-month basis, ANORO was certainly ahead of where BREO was at that particular point in time. Today of course, those numbers are changed, BREO is in a better overall position principally because that's been on the market for a longer time, but ANORO was certainly doing quite, quite well and I think overall from a reimbursement perspective, GSK has done a very good job this year in securing overall reimbursement status for both products.

So looking forward, our expectations that we are going to continue to improve and in overtime hopefully approach where the current market leaders are in terms of overall reimbursement. I'm not sure that I have a specific forecast that I will be comfortable giving on our rejection rates today. I would like to highlight a comment that Eric made here. We think a number of calls following the GSK call where there were some level of concern about the discussion that Andrew had regarding the overall level of couponing, and for example, they were going on. And this is absolutely critical in the launch, when you have a patient who comes in and prescribed a medicine that they don't have coverage, more likely than not without some sort of coupon and they would not fill that [overall] prescription. So there is a lot of work going on, a lot of investment going on by GSK to, number one, improve the overall reimbursement status and I think (inaudible), the history here will certainly demonstrate that.

And number 2, to facilitate patients today we don't have coverage to get on these medicines. So I would just say stay tuned and we're looking forward and expect that these metrics will continue to improve over time. Last point. There are pieces of business that of course have been one and still are reflected in the scripts. If you look at the recent events that we had with BREO and Express Scripts and Caremark goes down kick in, for example, until after the turn of the year. So we do expect to see coverage continue to improve going forward.

Thank you.

Steve Byrne, Bank of America Merrill Lynch.

Hello, this is Sarah on for Steve. Thanks for taking the question. Since you control the relationship, I guess, with GSK, would you be able to provide some color on when you would expect MABA Phase III study to start and I guess the priority level for the triple therapies?

With regard to MABA, I don't have an update at this point in time. The last guidance we gave was we were not expecting a Phase III program to start in 2014 and we're in the middle right now what we have characterized externally as the Phase III enabling work, so that that consists of fairly wide variety of preclinical as well as clinical studies to complete the transition from this device into the ELLIPTA device and also in combination with -- from transition FP into FF. So that process is underway today.

Of the two programs that we have going towards triple therapy, which is number one, MABA/FF, a name what we have called the closed triple, which is the combination of umeclidinium/vilanterol and FF. Clearly the closed triple was ahead. It is already in the Phase III now and then moving forward. So we had two shots on goal we're pursuing, one of which is in Phase III today and then there is a closed triple. And then the MABA/FF program is working its way towards completion of the overall Phase III enabling work. So we do have an update on the MABA program. I will provide that, but again the overall triple program I think is in pretty good shape given that the closed triple is currently in Phase III.

Thank you.

Thanks, Sarah.

(Operator Instructions) Gena Wang, Leerink Partners.

So it seems that there is a disconnect between the IMS script and reported revenue. Wonder what is the IMS capture rate and the gross to net for ANORO and BREO and related question for ANORO. I'm wondering what's the treatment duration that the free trial offers and what is the percentage of the [trial] offer turn into commercial scripts? And I will have a follow-up question.

Sure. With regard to your first part, which was the disconnect or apparent disconnect or potential disconnect between IMS data and recorded scripts as I reported revenues, early in the launch you tend to have a lumpiness to reported sales principally due to things like initial wholesaler inventory stocking that certainly impacted ANORO sales this quarter. As you recall last quarter, we've put about $10 million into the channel and so during this quarter you had some portion of the time where you were burning that off that was highly expected certainly by Theravance here. We've seen this happen over and over with the product launches where once the initial launch inventory goes out, it takes a period of time for the wholesaler inventory to get to the right level. So it did take a couple of months for the wholesaler who were adjusting to the expected level going forward of sales. So I'm not sure in aggregate per se, if there is a significant difference between the IMS scripts and the overall reported sales, it's just a timing difference right now as we're working through the launch. And again, that is pretty typical and highly expected on our part.

Your second question was regarding the treatment duration at the samples and the percentage conversion from a free sample into a paying customer. The second one, I don't have that data here, so I'm not sure what the actual conversion rate is from a sample into a paying customer. The treatment duration is 14 days, so sample is a 14-day vial, so you have to have two samples to have a full month’s supply of either ANORO or BREO in sample form.

Thank you. So my last question is, could you provide an update of net operating loss carry-forward and then would you expect your tax rate would be once -- the net operating loss complete offset to tax payments?

Yes, so we haven't -- we don't have the NOLs that adds on a quarterly basis, we had approximately $1.3 billion coming into this year. You would have to work through the spending to date that would obviously had to be NOLs and then you have to subtract off of that the gain associated with the Theravance Biopharma, our dividend which was going to be in the neighborhood of $400 million. So we don't have an exact number, if we stick to $1.3 billion, subtract that year-to-date spending and added at to -- then took out the gain on the transaction, you're probably somewhere in the neighborhood of a $1 billion. but again that's a guess as opposed to an actual number. We won't complete the actual NOL calculation until the end of the year.

On an ongoing basis, the tax rate once we burn through the NOLs, we'll be just standard US corporate taxes or US entity, so I will be in the neighborhood of 35%. But again, coming out of this year, we'll probably have somewhere in the neighborhood of a $1 billion worth of NOLs to burn through before we actually have cash expenses associated with the taxes.

Thank you very much.

Thanks.

Brian Skorney, Robert W. Baird.

This is Morgan on for Brian. I just had a quick question, I'm sorry, if I missed this earlier. I'm just wondering about the status of SUMMIT and Salford studies. Thanks.

Sure. So, SUMMIT again is a mortality study with BREO in COPD. We previously had guidance out there jus to complete in 2016. We pulled that up last quarter and looks to us right now that's we're going to be completing that in 2015. As you know this is an events-driven study. So it's not really a question of timing, it's more a question of a number of events. It could be a little sooner or a little bit later on that, we'll have to continue watch that going forward here. But the most recent guidance was around the middle of the year, we were hopeful to see results from the SUMMIT study.

Salford on the other hand is 2016 for the COPD study. We haven't been any more specific than that, whether it's first half or second half. Right now, (inaudible) continues to roll out. The asthma study is only behind that right now. So COPD is where the majority of the clinical data is coming out here, and middle of the next year SUMMIT and in 2016, Salford.

Okay, great and I have one more question. So with the open triple, so if the Phase III enabling (inaudible) right now that's just converting like you were talking about earlier (inaudible) correct?

Yes there is two pieces to it. One is we are combining MABA with a different steroid. So if you recall previously, the work was done in combination with FP and we are doing this now in combination with FF, which is a once-a-day steroid. In addition to that, we are putting it into the LFD device versus the discus. So there is a fair amount of work going on in that program right now to convert from once scale with the other and one device to the other as well.

Okay, great. Thanks.

Thanks, Morgan.

Gena Wang, Leerink Partners.

Thank you for taking my follow-up. So just wondering even coming relatively weak sales, wondering how should we think about dividend payout for Q1 2015?

Yes. Great question, Gena and thanks for that. Today looking forward here, I think we're very confident where we are with the dividend. Obviously, we did quite a bit of modeling before we initiated the EBITDA and we understand the commitment around that. And we did not model our highest scenarios in terms of deciding what level of overall dividend we'll be paying. So sitting here today, I would make two comments. One is, we actually did model, the dividends forecast on numbers that are lower than where we're at today. So we took a pretty conservative view in terms of the overall forecast when we decided to initiate a dividend. Clearly there is growth associated in that forecast going forward.

And then number two, based on where we are today, where our cash position and in particular, looking at the catalyst coming forward for both products, I think we're pretty comfortable. Looking forward, there are some significant catalysts that are coming down the pike. Number one, we remain quite committed to working very closely with GSK to optimize the launch. There is a lot of activity going on on that front in terms of the overall marketing mix and various components of that.

Number two, the upcoming asthma PDUFA date, this is certainly probably the single most important event I've been watching here going forward. Roughly, roughly speaking, the US housing market is in the neighborhood of 25% of the global dollar value of the LABA/ICS market. So this is obviously a very important potential approval coming up here and that has the potential to significantly increase the overall economic opportunity available to -- for BREO in the US and then globally.

And then again SUMMIT, later this year, if summit hits, I will be the only LABA/ICS that has shown a mortality benefit. So looking forward, we see significant catalysts coming forward that has a potential to significantly increase the overall launch trajectory of the products.

Thank you.

Stephen Willey, Stifel.

(inaudible) SUMMIT, is that all cause mortality or is that mortality based on some kind of adjudication process that's actually COPD specifically?

Thanks for the question, Steve. This is going to be all-cause mortality, that's the way you typically run these studies. Clearly, there will be various adjudications going through there on assignment of the causes of mortality and all that, but it's an all-cause mortality study.

Okay, presuming the control arm again is just physician's choice with respect to treatment?

Yes.

And you know what the range of treatments look like at this point or presumably these patients are getting cycled through a variety of different options?

Yes. So I certainly haven't seen any interim data at all. I would suspect it's going to be the usual group of products that are out there. I couldn't honestly tell you what the mix is on that, but again I would suspect they (inaudible) see all the representative products that are in the space, probably in some level of proportion to their availability out there in the market today.

Okay, thanks.

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

Great. Well, thank you very much, Operator, and thanks again to everyone for participating today. Have a great day.

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