Innoviva, Inc. (INVA) 2016 Q3 法說會逐字稿

Ladies and gentlemen, good afternoon. At this time I'd like to welcome everyone to the Innoviva third-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 is being recorded.

And 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 third-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, 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 measure can also be found in our press release.

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

Thank you, Eric, and good afternoon, everybody. We are pleased with the progress that our collaboration with GSK made during the third quarter, commercializing RELVAR/BREO ELLIPTA and ANORO ELLIPTA. In the US, both products significantly outperformed the market, with prescription volume to market share reaching all-time highs. According to the most recent weekly data compiled by IMS, TRx market share for BREO now exceeds 11.5%, and ANORO exceeds 9% in the US.

More importantly, the data shows that BREO new-to-brand market share increased to 17.7% overall, and at 33.2% for pulmonologists. This means that BREO now accounts for approximately one out of every three 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 increased in the third quarter, with market share gains in both TRx and NBRx. In the week ending October 14, ANORO new-to-brand market share increased to 17.6% overall and to 19.1% for pulmonologists. We believe that the productive collaboration between GSK and Innoviva commercial teams has contributed significantly to achieving these gains, and we remain optimistic in our work building BREO and ANORO into leading global respiratory franchises.

As we've mentioned in prior calls, market share metrics remain the primary focus of our analytic efforts, as they focus on underlying demand for our products. In contrast, reported net sales by GSK experienced quarter-over-quarter volatility due to various non-demand factors, such as normal slower summer, stronger winter seasonality, changes in wholesaler inventories, asthma/COPD customer mix, accounting reserve true-ups, and couponing levels.

Third-quarter 2016 net sales for RELVAR/BREO were $212.2 million, with $111.5 million from the US and $100.7 million outside the US. These net sales were driven by higher global prescription volumes and market shares, partially offset by traditionally slow summer seasonality and a negative adjustment GSK made in its payer rebate reserves related to prior quarters. This resulted in lower realized BREO net pricing this quarter and caused quarter-over-quarter sales growth to be below underlying demand growth. Nevertheless, according to IMS, BREO quarterly TRx have now reached to more than 752,000 prescriptions, a 14% increase over Q2 despite flat to slightly down ICS/LABA market as a whole.

Total net sales for ANORO during the third quarter of 2016 were approximately $71.2 million compared to $65 million in the second quarter of 2016, an increase of 9.5%. This net sales data reflects higher prescription volumes and market share, partially offset by normal slower summer sales in key European markets and by a negative adjustment to payer rebates related to prior quarters GSK took in the US market.

With strong underlying demand trends, favorable 2017 reimbursement status, and improved effectiveness of the collaboration sales and marketing efforts, we remain optimistic about the potential for both products.

We also maintained our focus on returning capital to investors with the repurchase of approximately $21.2 million of our common stock during the third quarter. This brings total capital returns of $103.7 million to investors since the initiation of the repurchase program in Q4 2015. During this time, we have reduced total shares outstanding by 7.7% and total outstanding debt by $10 million.

Finally, I am very pleased to welcome Patrick G. LePore as a new member of our Board of Directors. Patrick brings a strong pharmaceutical background, including development, licensing, manufacturing, and distribution. Mr. LePore's leadership in the pharmaceutical industry has spanned both private and public sectors, with board and operational experience in each, complemented with in-depth knowledge of branded products, generics, and pharmaceutical service industries. Patrick's a great addition to our Board and we look forward to his contributions.

Now I'll turn the call back to Eric to review our third-quarter 2016 financial results. Eric?

Thanks, Mike. Total revenues in the third quarter of 2016 included $36.5 million in royalties earned, a 118% increase over the third quarter of 2015, offset by $3.2 million of net non-cash amortization expense and other revenues. Royalty revenues earned included $31.9 million for BREO and $4.6 million for ANORO.

As Mike mentioned earlier, net sales of BREO and ANORO reported by GSK were impacted by normal slower summer sales into European markets and by a negative adjustment to payer rebates related to prior quarters in 2016 for the US market. Nevertheless, the long-term historical growth trend in our royalty revenues remains strongly positive in the third quarter. Looking at the prior nine quarters on average, our royalties earned have grown at a compound rate of approximately 32%, which reinforces our continued confidence in the prospects of the Company for the rest of 2016 and into 2017.

Total operating expenses in the third quarter of 2016 were $5.4 million compared to $5.1 million in the third quarter of 2015. On an annual basis, we are maintaining our guidance level for 2016 operating expenses of R&D and G&A before stock-based compensation accruals with a range of between $18 million and $20 million, with a higher likelihood of being at the lower end of the range.

During the third quarter of 2016, we repurchased approximately $21.2 million of common stock, bringing our total repurchases under the program since Q4 2015 to $95.6 million at an average price of $10.56 per share. Currently we have $54.4 million available for future stock purchases until the end of 2016.

In addition to stock purchases, we also made a principal repayment of $3.3 million on our non-recourse royalty notes during the third quarter, and we reserved an additional $3.6 million for principal repayment to be made during the fourth quarter.

We continued to generate positive and growing cash flow from our operations in the third quarter of 2016. Income from operations reached $27.9 million compared to $8.4 million in the third quarter of 2015, and adjusted EBITDA was $33.2 million in the third quarter of 2016 compared to $13.3 million generated in the third quarter of 2015. This means that on a 12-months rolling basis, we've now generated approximately $112.4 million in adjusted EBITDA.

For the third quarter of 2016, our adjusted earnings per share was $0.17 per share, up significantly compared with an adjusted earnings per share of zero per share in the third quarter of 2015. Cash, cash equivalents, short-term investments, and marketable securities totaled $149 million as of September 30, 2016, net of $21.2 million used in stock repurchases and $3.3 million in principal repayment of our non-recourse notes. We also had $36.5 million of royalty receivables from GSK at the end of the third quarter, which puts us in a strong liquidity position for the remainder of 2016.

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

Thank you, Eric. In summary, I remain pleased with the performance of Innoviva through the third quarter of 2016 and believe that our ongoing gains in prescription volumes, market share, and significantly improved commercial effectiveness for both products bode well for our future prospects. As a result, we remain optimistic about the long-term potential of our product portfolio.

Our primary focus in 2016 and leading into 2017 remains the optimization of the commercial success of the global rollout of BREO and ANORO, and we 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'd now like to turn the call over to the conference facilitator and open the call for questions.

Thank you, sir. (Operator Instructions.) Stephen Willey, Stifel.

Hi. This is Prakhar Verma on for Steve today. Thank you for taking my questions. So I wanted to ask you a question on the level of couponing going on. Is GSK still aggressively couponing or, given the improving sales trajectory for BREO, are they slowing down the couponing?

Great. Thanks for the question. So yes, we are still aggressively couponing with the programs. We started this program over a year ago now, and it has been very successful. As you recall when we entered into the program, one of the big issues we were trying to address was a perception -- not a reality, but a perception -- of relatively limited coverage for both products. And this program was quite successful in terms of resolving that and has been a big key part of what we're doing here in terms of increasing volume. So as of today, we remain pretty aggressive with the program. I'm not aware of any plans currently to stop that, and we certainly support the ongoing efforts on that one.

Okay. A second question -- I would love to get your views on the recent citizen's petition filing with Sandoz, your thoughts on ADVAIR, generic ADVAIR and the timing of it. When do you expect generic ADVAIR to hit the market?

Sure. With regard to Sandoz's petition, obviously, we had nothing to do with it. GSK had nothing to do with it and are not sure whether there's been dialogue between Sandoz and the FDA or anything like that. So I don't have any particular comments I can give related to that, other than we have believed that this is a complex generic. It's not going to be simple to bring a new product on market. You have to deal with not only active pharmaceutical ingredients, but formulations and device and the interaction between all of that.

So generally, we have been guiding folks to the likely timeframe for a new generic to be coming into the market of somewhere between late 2017 and early 2018. Clearly, it could be the case if somebody gets there a little bit earlier -- if, for example, Mylan had an approval of their GDUFA on their first GDUFA date, which is in March of next year. Again, generally we have viewed that as a lower probability rather than a higher probability, but it certainly is possible. It's certainly possible, also, it could slip out on the other side and go beyond those dates that I gave you.

So we're giving you our best guess of when a reasonable timeframe might be, and generally, we've been sticking to the view that it's either late next year or early next year. But again, it could come earlier or later. It's all going to sit in the FDA's discretion at this point and also in the quality of the package that Mylan put together, which there's a significant amount of data that would need to be included in that.

Okay. Thanks for taking my questions.

Tyler Van Buren, Cowen and Company.

Congratulations on the continued progress with the launches. My first question was related to the RAR rates, or the rebates that changed in the US. Is it possible for you to quantify the impact on that change in the rebates for both BREO and ANORO, perhaps describe it a little more? And is there a potential for this to reverse in Q4, or is it completely random and unpredictable? If I recall correctly, in Q4 of last year, or either Q1, there was a positive impact due to rebate assessment. So just hoping to get some more clarity there.

Yes, great. I appreciate the question. So with regard to is this ever going to happen again, I wouldn't be surprised if it does. We've had a couple of adjustments that have happened in the past. On the call yesterday morning, Simon Dingemans mentioned that they are seeing more volatility in the rates of return and reserve, changes that have happened on their side. And I do think it's important to note that this has nothing to do with us. We have no input into this. This is a 100% GSK-driven decision.

There was also some commentary yesterday on GSK's call about how they had multiple products with adjustments. So clearly, something was going on over there that we're not completely plugged into. As you just step back -- unfortunately, I can't give you an exact number just because of our agreements with GSK on that one -- but the volume growth in the quarter in the US was around 14%, while sales growth was around 1%. So between some of the factors we've talked about in the past, whether it is reserve true-ups like we were just talking about or changes in wholesale inventory, somewhere in there is around a 13% delta versus the underlying demand on that.

So I can't give you, unfortunately, the appropriate breakout at this point of what all those various pieces are, but I would reiterate the thing we focus on here at Innoviva in terms of measuring whether we are on track or not on track is not a quarter or two quarters type of number, but rather, the underlying market share. Again, as you correctly pointed out, there have been quarters -- typically, the last couple of years, it's been the fourth quarter of the year where you've had a surprise on the upside, where either there was a little bit of additional inventory that went into the overall channels at that point in time, or there were some positive adjustments. So you might have times where you're a little better than you expected to be, and there are times you'll be a little worse than you expected to be. But it's really all very typical intra-quarter variability that goes on there.

So my best guess that I can have, and we've been saying this for a couple of years now, is expect quarter-over-quarter variability in terms of reported net sales. As a result, we focus just on market share and script growth.

Great. That makes a lot of sense. And so Glaxo also noted that they expect coverage in 2017 to be even better. Just hoping to get perhaps some additional thoughts there. Could we potentially see an acceleration in launches like we did starting, I guess, around this time last year?

What we've been hearing from GSK is that we're in a good position next year, but we have good coverage this year as well. So I would say it's unlikely you're going to see this sort of step improvement we saw a couple of years ago, where we're going from a much, much lower place to a much, much better. So I would say we're going from a very good to a better coverage. And I would put this more in the category, from what we're hearing, of slight improvements on a very good position.

So we're pleased with what we are hearing from them. I haven't seen the final, final numbers for everything. But overall, we're not hearing of any significant changes in pricing or any significant adverse developments that would be of concern at this particular juncture.

So what I would expect, as opposed to a step function, would be the continued grinding out of a very effective sales and marketing organization and picking up market share over the time as opposed to having a step function related to coverage changes between the years.

Got it. And lastly, just as we think about use of cash moving forward, clearly you all have been using a significant amount of the cash generation for buying back shares and repaying some of the debt. Should we expect a similar use of cash going into 2017, or is there a possibility that you may, instead of buying back shares, stockpile some of it and use it for potential business development activities?

So Tyler, I'll say two things. First of all, we still have a plan in place that we're in the process of continuing to implement, so we'll continue doing this. Every time we allocate a dollar, we view this as a capital allocation decision where we try to maximize the value for investors. I think I mentioned this in a previous call. And it's going to be the same.

So the options are still there for next year in terms of continuing with buying back shares or, as you mentioned, either allocating to the investments. Retiring debt is also something that we're looking at, or other forms of capital return to investors. So we'll announce the programs as they continue to evolve. But we try to pick the allocation that are best value-driven for investors.

Thanks again.

(Operator Instructions.) Tazeen Ahmad, Bank of America.

This is Peter Stapor on for Tazeen. You commented a little bit on volume growth in terms of prescriptions. Could you comment on your expectations for how closely IMS will track to actual BREO and ANORO prescriptions, given the disconnect that you also mentioned between actual sales and volume growth? Thanks.

Yes, so thanks for the question. We use IMS to track scripts over here as well, so the data that I'm reporting is not different from what IMS would be providing. There's clearly going to be some difference in actual number of units shipped every single quarter relative to the number of scripts that are written because IMS doesn't capture 100%. I'm sure it captures a very, very close number to that, but it does not capture every last thing that's happening out there. And, of course, far more importantly is you have changes going to wholesaler inventory that shipments are more than one month or less than one month, or there are more particular days of the week that get shipped in or something like that. And that will always be the case in terms of how that works.

So IMS is really our database for tracking what's happening. We use the same numbers, same source every single quarter for reporting them. So I would say that's about as good of a source as we're going to be able to get. And since we're using that same one each quarter, there's really no inconsistency in terms of how we are reporting the numbers across from there.

But again, I would really strongly reiterate what I said a couple of times. The actual shipment in any quarter is almost never going to mirror that, because you can have a whole variety of factors, whether it's just simply something like number of shipping days in a particular quarter being more or less than a previous time, or whether it's something like a wholesaler making a conscious decision to bring inventories up a little bit or down a little bit or something like that. So there will always be some level of disconnect between reported net sales and the actual script volume that you see.

As a result, the last thing I would just say is we tend to look at four quarters' worth of data as opposed to one in a row as we're trying to evaluating how the products are doing.

Great. Thanks for the color. Appreciate it.

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

All right. Well, thank you very much, operator, and thanks, everyone, for participating. Have a great day.

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