Innoviva, Inc. (INVA) 2016 Q2 法說會逐字稿

Ladies and gentlemen, good afternoon. At this time I would like to welcome everyone to the Innoviva second-quarter 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 call is being recorded.

Now I would like to turn the call over to Eric d'Esparabus, 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 second-quarter financial results. 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, our adjusted EBITDA and adjusted cash EPS to non-GAAP financial measures will be discussed on this conference call. A reconciliation to the most directly comparable GAAP financial measures can also be found in our press release.

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

Thank you, Eric, and good afternoon everybody. I'm pleased to say that Innoviva had another strong performance during the second quarter of 2016. This included positive Phase 3 clinical results for RELVAR, also known as BREO in the United States, further share in volume gains for both products, significant growth in earnings and operating cash flow and continued capital returns to our investors.

In particular, we are pleased with the performance of both BREO and ANORO in the US where prescriptions and market share reached all-time highs. According to IMS, TRX market share for BREO now exceeds 10% and ANORO exceeds 8% for the most recent weekly report. We believe the productive collaboration between GSK and Innoviva commercial teams has contributed significantly to achieving these gains and are optimistic as we work to build BREO and ANORO into leading global respiratory franchises.

Second-quarter 2016 net sales for RELVAR BREO were $209.9 million, up 30% from $161.9 million in the first quarter. This increase was largely driven by a strong performance in the US market which grew by almost 40% compared to the first quarter of 2016. According to IMS, BREO TRX market share gained almost 2 percentage points during the second quarter which equates to more than 656,000 prescriptions, a 25% increase over Q1. We remain confident in the US growth potential for BREO due to continued strength in our new to brand market share, an important forward-looking indicator of growth potential.

According to IMS in the week ending July 15, new to brand market share increased to 16.8% overall and to 28.4% for pulmonologists. As a result, we believe BREO is well-positioned for continued strong performance in 2016.

We also announced during the second quarter positive clinical study results from the Salford Lung Study of RELVAR in COPD. RELPAR achieved a statistically superior reduction in exacerbations compared to usual care with a p-value of 0.025. This is a very important result in a world force effectiveness study in COPD as these data demonstrate the effectiveness of RELVAR BREO when taken by patients in every day clinical practice.

Total net sales for ANORO during the second quarter of 2016 were approximately $65 million compared to $48.1 million in the first quarter of 2016, an increase of 35%. Sales of ANORO were driven by higher US TRX prescription volumes of approximately 35% in the US market and strong performance from non-US markets including Japan, Germany, UK and Spain. Overall, we remain optimistic about the potential for both products and look forward to continued improvement in revenues and market share.

During GSK's call yesterday, they noted a positive view regarding the 2017 reimbursement status for the respiratory products and that they expect to achieve a similar to slightly better overall coverage next year without significant pricing concessions.

I would also like to remind everyone that we generally expect a degree of quarter-over-quarter volatility in reported sales relative to the underlying TRX performance. This volatility results from a variety of factors including for example normal slower summer, stronger winter seasonality, changes in wholesaler inventory levels, asthma COPD customer mix, accounting reserve true ups and couponing levels.

As a result when evaluating progress towards our goals, we primarily focus our analytic efforts on market share metrics that detail underlying demand for our products.

During the second quarter, we returned approximately $27 million of capital to our investors through the purchase of common stock and $10 million face value of our convertible subordinated notes. I would like to point out that since our Company's spin-off two years ago we returned a total of $223.4 million to our investors through a combination of dividends and stock or debt repurchases. This illustrates our continued commitment to generate value of our stockholders and our efforts to capture favorable market pricing windows when we can.

Now I will turn the call back to Eric to review our second-quarter 2016 financial results. Eric?

Thanks, Mike. We had a strong financial performance in the second quarter of 2016. Total revenues included $35.7 million in royalties earned, a 157% increase over the second quarter of 2015 offset by $3.2 million of net non-cash amortization expense and other revenues.

Royalty revenues earned included $31.5 million for BREO and $4.2 million for ANORO. We had only approximately 2% negative impact from currency movements between the first quarter of 2016 and the second quarter of 2016 on our revenues from non-US markets since have a limited exposure to recent fluctuations in the British pound exchange rate.

The long-term historical growth trend in our relative revenues remain strongly positive in the second quarter. Looking at the prior eight quarters on average, our royalties earned have grown at a compound rate of approximately 37% which reinforces our continued confidence and the prospects of a Company for 2016.

Total operating expenses in the second quarter of 2016 were $6.6 million compared to $5.5 million in the second quarter of 2015. This increase is mostly related to a non-cash accrual of stock-based compensation associated with a pre-spin-off off legacy program. On an annual basis, we maintain our guidance level for our 2016 operating expenses of R&D and G&A before stock-based compensation accruals in a range of between $18 million and $20 million.

During the second quarter of 2016, we repurchased approximately $19 million of common stock at an average price of $11.23 per share. Since the start of the $150 million repurchase program, we have now repurchased a total of $70 million of stock. As Mike mentioned earlier, we also repurchased in the open market $10 million face value of our convertible subordinated notes due 2023 for a purchase price of $8.1 million and recovered $0.4 million from the corresponding termination of the pre-existing cap call arrangement resulting in a net cash consideration of only $7.7 million. As a result of the share repurchases in the quarter, we reduced our shares outstanding by $1.7 million and on a fully diluted basis, by an additional 0.5 million shares associated with the conversion rights for the notes we repurchased.

We continued to generate positive and growing cash flow from our operations in the second quarter of 2016. Income from operations increased to $25.9 million compared to $5.1 million in the second quarter of 2015 and adjusted EBITDA was $34 million in the second quarter of 2016, more than triple the $10.4 million we generated in the second quarter of 2015.

For the second quarter of 2016, our adjusted cash EPS was $0.17 per share, up significantly compared to an adjusted cash EPS of negative $0.02 per share in the second quarter of 2015.

Cash, cash equivalents, short-term investments and marketable securities totaled $153.9 million at June 31, 2016, net of $26.7 million used in stock and debt repurchases.

As a result of the continued growth of our royalty revenues, the Company is beginning to repay the principal on its long-term debt with $3.3 million reserved for the payment of principal on our nonrecourse notes to be paid in August. Additionally, we further decreased our leverage by $10 million through the repurchase of a portion of the convertible notes.

We also had $35.7 million of royalty receivables from GSK at the end of the second quarter which puts us in a strong liquidity position for the remainder of 2016.

Now I would like to turn the call over to Mike for final closing comments.

Thank you, Eric. In summary, I'm pleased with the performance of Innoviva through the first half of 2016 due to significant revenue increases for both products, positive clinical results from the Salford Lung Study, increased prescription volumes, higher market share and continued progress in the commercial efforts for both products. As a result, we remain optimistic about the long-term potential of our product portfolio.

Our primary focus in 2016 remains the optimization of the commercial success and global rollout of BREO and ANORO and believe that both products have significant untapped commercial potential. There are many exciting developments happening here at Innoviva and we remain optimistic about the future prospects for the Company.

I would now like to turn the call over to our conference facilitator and open the call for questions.

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

Good afternoon, guys, and congratulations on the nice quarter. I have a few questions.

First, I would like to ask about the recent development with the close triple. Clearly Glaxo has noted recently that that timeline has moved up by a couple of years. On that product you guys have a smaller portion of economics on those royalties. So curious as you think about the long-term impact on potential BREO and ANORO royalties how you think about that? They mentioned that they have about 30% of COPD patients on the triple regimen. I think the Salford had up out 50% of patients. Could it potentially take patients from BREO and ANORO or do you see the overall number of patients on the ELLIPTA inhaler just growing? Curious to get your thoughts on that and I have a couple of follow-ups.

Let me go ahead and take that and thanks for the congrats on the quarter, Tyler.

So the close triple, we did have an acceleration in the timeline we announced here a few weeks ago. This really is not a particular change in the long-term outlook of the business. I would say there is just an acceleration on the triple itself. We always thought this was a possibility going in but I think as you know, we had historically been a little more conservative in terms of the timing around it, being a little bit more in alignment with having to finish some of the studies as opposed to having accelerated approval here.

So again long-term, there is really no impact of where we had been before but this is a quicker filing.

With regard to what is this going to do, we think there is a home for every one of our products and I'm going to simplify this quite a bit when we talk here just for simplicity sake, there is a lot of bleed that happens in between the various categories.

But generally speaking when we thought about the gold guidelines, the existing gold guidelines, there is Box A, B, C and D. Generally speaking we had always assumed that ANORO would have a very strong home in Box B which is high symptoms, few exacerbations. That Box C would be the home for BREO. Again this is going to be more exacerbations, less symptoms and then Box B with patients with a severe COPD was the home of the triple. We still generally think that is the right place to go and the reason I'm saying generally is there is bleed over from boxes as you kind of go up and down and around. So at least as of today nothing has really changed that view at all.

We think there is a very good home for each of these products.

With regard to what percentage of patients are going to be on each, we will have to see how that all ends up taking out. There are different numbers of patients from different studies and you mentioned a couple that I wouldn't quibble with those numbers that have different numbers based upon different studies.

So overall long-term, this is exactly in alignment with where we wanted to be. The intention was to create a suite of respiratory products all centered around the ELLIPTA device so that as a patient progressed in their disease they would continue to have the same device all the way through which would facilitate the transition from one product to the other so it is exactly in line with where we would expect it in COPD.

The last thing I will say is this really has no impact whatsoever on asthma. Asthma is going to be a LABA/ICS market for the foreseeable future.

So hopefully that covered it but again I would say right down the middle of the fairway where we thought things were going to be, just a little bit quicker [filing] potential for the triple in the US.

That is helpful. Thanks. And on the buyback, you mentioned there was about $70 million that has been done to date. If I recall the original authorization was for $150 million. On the buyback for the quarter, at what prices was that done at and would the remaining amount of the buyback if that is up to the $150 million, for what time period is that authorized for and at which levels will you guys be opportunistic in buying shares?

I have one follow-up after that.

Thanks, Tyler. This is Eric. I can answer that question. It is all a program we approved back in October is $150 million. That runs until the end of 2016. The purchases we have done in this quarter, the average price was $11.23 for this quarter and part of our strategy is to try to make sure that we can implement our program. Obviously we will try to make sure we don't impact the stock. We are a price taker so we are consistently working with our bookers. There are occasionally some limitations. We have blackout periods when we have to structure programs that are a little bit less than our control to do that but to the best of our ability, we try to implement the plan.

Maybe just one final comment on that, Tyler. When we put the program in place, there were five quarters in front of us that the program had. So we are 60% of the way through that. We are closing in on halfway through in terms of the total repurchases that have happened under there. So within the arrow bars of how share repurchase programs go particularly ones that are not meant to move the stock or rather to capitalize on pricing when it became available, I'm feeling pretty good about where we are.

So our intention is to continue in exactly the same direction with the share buyback program here, be opportunistic when the prices present themselves. We are certainly not in any intention of trying to drive the price up or anything like that.

Okay. Great. Last question, clearly we had an FX move at the end of the quarter. In the release you all noted that it was only a negative 2% impact I believe. Moving forward assuming that currencies stay where they are for the third quarter, how can we think about that, what percentage of European sales are denominated by the British pound and would potentially be affected? And obviously assuming that there is no effect with the US sales just wanted to get your thoughts on the mechanics there. Thanks.

Thanks, Tyler. This is Eric. To address the British pound (inaudible) and net sales. For BREO, we have less than 2% year to date of our net sales that come from the UK market and for ANORO, it is less than 5%. So we have a limited exposure to the British pound exchange rate fluctuations.

And secondly, we have about more than 50% of our net sales that are for the US market and more than 68% I think of our net sales for ANORO are US denominated. So we have already in our portfolio a relatively lower risk on currencies. And all the other currencies move back and forth occasionally which is why even though some currencies occasionally move a lot in the aggregate, we have been embedded if you want to hedge into the allocation of a non-US sales by markets, so we have limited exposure I would say right now.

Great. Thanks for taking my questions.

Matthew Harrison, Morgan Stanley.

This is [Vikor] on for Matthew. Just had a quick question on sales trends in Europe and Japan. You touched on it a little earlier during the call but I was wondering if you could provide a little more color or any kind of metrics to track exactly how those trends have been developing over the past quarters?

It is Mike. We don't get too much into detail on the ex US sales as you guys know. It is a little harder to dig in and get the right metrics there particularly metrics that are widely available. So the access of information that we have generally would not be something that we would share too broadly.

I would just make this comment, it is generally in line with where we wanted to be this year when we look at the overall expectations from an annual perspective. I know we haven't provided guidance so unfortunately that is a very imperfect answer for you in terms of how to think about that and how to measure it. But generally we are in line with our expectations on a global basis. I have highlighted this quarter and last quarter some very nice performance by the US so one could assume that the US is doing perhaps slightly better than our expectations here this year.

But I would not unfortunately be able to go too deep into any particular discussion about some of the other areas just because that data like I said is not generally public.

We have made some comments historically the Japanese subsidiary is doing a very nice job. That is one of the larger subsidiaries at this point.

And then after that, you kind of things that move around up and down and sideways sort of on a monthly basis. A lot of words but I do know we are a little bit unsatisfying because we are stuck from a confidentiality basis about providing too much more detail on that.

No worries. Thank you.

(Operator Instructions). Stephen Willey, Stifel.

Thanks for taking the question and congrats on the quarter. Just a question first I guess on some of the NBRx data that you may have on ANORO. I know that you gave us some of the statistics on BREO and it has been a pretty good surrogate for future TRx growth. So just kind of wondering if you have that data available for ANORO at this point?

Stephen, first of all, thanks for the congrats on the quarter. I don't have that right here in front of me so I would be mis-recalling that probably if I was to look at those numbers. I think they are generally of the same magnitude difference what you are going to see with BREO between the TRx and NBRx.

Eric just actually handed this to me here. So let me go ahead and give you the numbers as opposed to that. So the ANORO market share at NBRx has increased. This is data here for the most recent week reported to 14.8% so again, we were at about 8.2% for the last week so call it plus 6%. Again that is a pretty similar delta between what you have seen with that and with what is happening with BREO today so those have been fairly similar.

In the guidance we have tried to give is somewhere in the 6 to 12 month timeframe we have historically seen the NBRx convert into TRx. Hopefully we continue to see those trends out there. But again we are feeling pretty good about the US market at this point.

Do you have any data at this point just with respect the level of traction ANORO has gained amongst non-pulmonologists, nonspecialist prescribers?

I don't have any specific numbers I can provide you. I can tell you it has been a little tougher path in terms of bringing ANORO to primary care doctors. I think we've talked about this before publicly. The education process with primary care doctors has been a little bit tougher. What you are seeing is a fairly rapid uptake amongst some of the pulmonologists and that has been something that has been in place for quite a while. For example, if you were to take a look at the pulmonologist numbers for the last week that was out there for ANORO, the NBRx numbers are around 17% and the TRx share is 11% so again, higher than what you are seeing for the market in general which of course would imply on the primary care doctors you are going to see correspondingly lower numbers there.

So that has been a big challenge we have had with ANORO is sort of the education effort for the primary care doctors of where exactly it fits in the treatment regimen. You do find a lot of stickiness again at the primary care doctor level with some of the existing treatment regimens, the single agent LAMAs, the LABA/ICS. They are pretty well ingrained and they know what to do with them. So it will be a longer rather than shorter path we believe with ANORO.

The last thing I would add if you were to go and take a look at our performance relative to STIOLTO, you are going to see exactly the same type of trajectory with STIOLTO which of course is the LAMA LABA from Boehringer Ingelheim that we are seeing today.

So we don't really believe this is anything to do with our commercialization effort. It is more a facet of the market and how it is going to probably develop.

And I guess your comment regarding I think the challenges associated with primary care physicians kind of adopting a new therapeutic class, would you envision a similar adoption hurdle being posed with something like close triple amongst the retail prescribers as well?

That is a great question. The only thing I could reasonably guess would be to look at the uptake trajectories for all of the recent respiratory products. So you look at BREO, you look at ANORO, you look STIOLTO, you look at [IMCRUZ], so all of these ones that have come out here so you have some that are existing treatment regimens like BREO, you have some that are new treatment regimens like ANORO or STIOLTO and they all have these similar shapes which is they tend to start with a fairly shallow curve, it builds over time but it is not a vertical slope, it is sort of a slow growth and long trajectory growth cycle.

Given that is the all of these products are launching, it seems like the best comp you would look at. Obviously it is going to be what it is going to be when it comes out there and clearly a lot of doctors are experienced with triple therapy albeit in an open format meaning with two separate devices, even products from two different companies.

I don't know there is a lot of education effort that would be there but similar to BREO, BREO didn't have a lot of education about where LABA/ICS fits in. So if is history is any guidelines it would seem like that would be the best comp I could point you to but of course it is going to be what it is going to be.

That is helpful. And then just lastly, do you know if Glaxo is going to have any of the Salford data available for presentation at ERS?

We are very interested in getting the data out there. Of course I couldn't make a comment about any particular venue for it other than we are very interested in getting this data out there. It is great that data. We were very happy when we opened it up and the last think I would of say is historically GSK has liked ERS, it is a good venue for them so we will see where it all comes out. But it is an historically new where there is some level of familiarity with GSK.

Thanks for taking my questions and congrats again.

[Erica Kaslo], Bernstein.

This is Erica on for Ronnie Gal. Thanks for taking the question and congrats on a nice quarter.

With the potential for generic ADVAIR coming in next year, can you give us an idea of how you are thinking about long-term payer contracts for BREO? Is contracting for next year being looked at as a proxy for longer-term contracts or is it being looked at on a year-by-year basis and how will this impact pricing going forward?

Lots of factors in there of course. The first one is when and if it is a generic going to be approved and there is a very wide window around that about when it may come and if it comes what it is going to look like, etc.

We have been pretty consistent in saying our general expectations here are perhaps it would be coming in late 2017, early 2018, sometime in that timeframe and what that would imply would be one full round of review plus some additional review from the regulatory agency. Obviously they could happen in a first round or they could happen in some round later than that, that really remains to be seen. So that is sort of the first question that has to be asked.

I wouldn't want to get into contracting strategy about are we going after multiyear contracts or shorter-term contracts. I really wouldn't want to get into that level of tactics with what we are doing. I would say we are feeling good and comfortable about the current coverage we have out there and I had mentioned the comments that Glaxo had made yesterday. So generally we think the market is reasonable for us today and we have plenty of coverage and we are not seeing at least at this point any significant additional pricing that is being taken as we are looking forward here.

The last piece will be when and if somebody comes, who is it, what does the product look like, how aggressive are they going to be, what is the supply situation like? And again, it is a whole additional pod of unknown. You have a number of public comments made by people like Mylan that they would potentially have some supply issues if they were to come out. And they talked about how their discounting strategy may or may not be affected by that. So again it is really a little difficult to say.

The last thing I am going to add on this is all of that being said, we remain confident there is a very substantial home for BREO that is out there today. It will be the only one today, LABA/ICS product in the US that would be competing there. We do not believe it is likely that 100% of the market will go generic. It could be a significant portion goes over time but we don't think it would be 100% of the market going generic.

And then last piece on that is if you look at historic respiratory launches as I talked with the last question from Stephen, these don't just necessarily go vertical which means there is still plenty of time to build share here.

So we will see how it all goes. Obviously there is some more positive and more negative scenarios one could come up with but our best guess today is there is a pretty good home for BREO going forward.

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

Thank you very much, operator, and thanks everyone for participating. Have a nice day.

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