Innoviva, Inc. (INVA) 2017 Q2 法說會逐字稿

Ladies and gentlemen, good afternoon. At this time, I'd like to welcome everyone to the Innoviva Second Quarter 2017 Financial Results Webcast and Conference Call. (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 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 second quarter of 2017, and I will review our financial results. Following our comments, we will open up the call for questions. I also want to take a moment to say that due to the ongoing litigation with Sarissa Capital Domestic Fund LP and certain of its affiliates related to Innoviva's 2017 Annual Meeting of Stockholders, we are not able to comment further at this time on this topic and do not intend to address the matter on this call.

Earlier today, Innoviva issued a press release, announcing recent corporate developments and financial results for the second quarter of 2017. A copy of the press release can be found on our website.

Before we get started, we'd 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 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 filing with the SEC.

Additionally, adjusted EBITDA and adjusted earnings per share, 2 non-GAAP financial measures, will be discussed on this conference call. A reconciliation to the most directly comparable GAAP financial measures can also be found in our press release.

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

Thank you, Eric, and good afternoon, everybody. Innoviva had a strong performance during the second quarter of 2017, driven by record-high royalties earned from the sales of RELVAR/BREO ELLIPTA and ANORO ELLIPTA. As we said in prior calls, we believe Innoviva is well positioned to deliver value to shareholders through continuing profitability and further growth. Our partnership with GSK has made significant progress toward the goal of building BREO and ANORO into leading global medicine for the treatment of patients suffering from asthma and COPD. In the U.S., BREO and ANORO both continue to significantly outperform the market in prescription volume growth, resulting in new all-time high market share for both products. According to the most recent data compiled by IMS, TRx market share for BREO is now 17.4% and ANORO reached 13.5%.

Additionally, the data show that BREO new-to-brand market share increased to 24.4% overall and accounts for more than 40% of all new LABA/ICS prescriptions written by pulmonologists in the U.S. ANORO also improved during the second quarter of 2017 with higher market share on both TRx and NBRx metrics. In the week ending July 14, ANORO new-to-brand market share was approximately 19.4% overall, that was approximately 22.1% for pulmonologists. I'm pleased to report that GSK recently initiated a new DTC promotion campaign for ANORO in the United States that we hope will further bolster market share gains later this year.

As we mentioned in prior calls, improvements in various market share measures remain the primary metrics of our analytic efforts to assess overall demand and progress toward the achievement of our commercial goals. In contrast, reported net sales by GSK have experienced quarter-over-quarter volatility relative to underlying prescriptions.

During the first quarter of 2017, we mentioned that we believe reported net sales reflected traditional Q1 decreases in distribution channel inventory and some accounting reserve true-ups. Based on GSK's feedback, we currently believe that second quarter 2017 U.S. revenues reflect favorable TRx market share and demand trends and a slight increase in channel inventory back to more normal levels. RELVAR/BREO recorded total net sales during the second quarter of 2017 of $364.3 million, up 74% from the second quarter of last year.

Net sales from the U.S. were $232.4 million, up 107% from Q2 2016, while outside the U.S., net sales were $131.9 million, compared an increase of 35% from the second quarter of 2016. For ANORO, Q2 net sales were $110 million, up 69% from the second quarter of last year.

Overall in the U.S. market, BREO TRx in the second quarter of 2017 grew by approximately 85% compared to the second quarter last year, and ANORO TRx, in the second quarter, grew by approximately 70% compared to the second quarter of last year.

With strong underlying demand trends, favorable 2017 reimbursement status and an effective collaboration with GSK, we remain optimistic about the potential for both products.

On the clinical side, in May, we announced positive results from the Salford Lung Study in asthma, showing the RELVAR ELLIPTA significantly improved asthma control in Salford Lung Study patients compared with their usual care. We see this as yet another important indicator of the benefit of RELVAR/BREO for asthma patients. And later this year, we expect to report the results of the 10,000-patient IMPACT study with Trilogy to closed triple.

Now I'll turn the call back to Eric to review our second quarter 2017 financial results. Eric?

Thanks, Mike. Our royalties earned in the second quarter of 2017 were $61.8 million, a 73% increase over the second quarter of 2016, offset by $3.5 million of net noncash amortization expense. Royalty revenues earned in the second quarter of 2017 included $54.6 million for BREO and $7.2 million for ANORO. As we've mentioned previously, quarterly net sales for BREO and ANORO reported by GSK do not always directly track prescription volume changes during the same time period due to a variety of nondemand factors. Therefore, when gauging revenue performance, we typically analyze it over a much longer time period.

In fact, over the prior 13 quarters, on average, our royalties earned have grown at a quarterly compound rate of approximately 28%, which, combined with a strong NBRx market share for our products, reinforces our continued confidence in the company's prospects for 2017.

Total operating expenses in the second quarter of 2017 were $10.7 million. This includes: $4 million of operating expenses, $4.3 million in proxy contest and litigation costs and $2.4 million in noncash stock compensation expenses. Year-to-date, total operating expenses were $21.9 million, consisting of: $8.4 million of operating expenses, $8.6 million of proxy contest and litigation cost and $4.9 million of noncash stock-based compensation expenses.

As a reminder, our board is in a process of a review of our operating expenses, and we will update our 2017 guidance later this quarter when the review is completed.

Over the last 12 months, we generated approximately $166.1 million in adjusted EBITDA and currently have total debt balances of $663.7 million. As a result, at the end of the second quarter of 2017, our leverage ratio has now been reduced to approximately 3.2x net debt to EBITDA -- to last 12 month's adjusted EBITDA, apologies, a significant improvement in our financial profile compared to Q2 2016 when the same leverage ratio was 6.2x. We believe that this strength puts us in the position to further improvements in our overall capital structure. We continue to generate strong cash flow from our operation in the second quarter of 2017. Income from operation was $47.8 million compared to $25.9 million in the second quarter of 2016. Adjusted EBITDA for the quarter was $53.8 million compared to $34.1 million in the second quarter of 2016.

In spite of recurring costs associated with the proxy contest related litigations, which reduce basic EPS by approximately $0.04 per share in the second quarter of 2017, our adjusted earnings per share was $0.35, still up significantly compared to adjusted earnings per share of $0.17 in the second quarter of 2016. Cash, cash equivalents, short-term investments and marketable securities total $135.6 million as of June 30, 2017, and we had $61.8 million of royalty receivables from GSK at the end of the second quarter, which we believe puts us in a strong liquidity position for the rest of 2017.

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

Thank you, Eric. In summary, we remain optimistic about our future prospects based upon ongoing gains and prescription volumes and market share for both products and a steadily improving financial profile for the business. Our primary focuses in 2017 remain the optimization of the commercial success and global rollout of BREO and ANORO and the continued optimization of our capital structure. There are many positive things happening here at Innoviva and we remain optimistic about the outlook of the company.

I'd now like to (inaudible) the conference facilitator to open the call for questions.

(Operator Instructions) We'll have our first question from Tazeen Ahmad of Bank of America.

This is Peter Stapor on for Tazeen. I had 2 questions. The first question is on your comment on the slight increase in channel inventory. I was wondering how slight that increase was, and if the trends for the quarters this year should reflect similarly on last year.

Peter, this is Mike. So when we said slight, it's a small number because we've talked almost every quarter. You have this normal fluctuation that happens kind of on a quarter-to-quarter basis. So when we talk with GSK, they didn't note anything untoward. Again, it's very typical to see some channel inventory go in during Q4, it tends to come out during Q1 and to normalize in Q2. So I wouldn't get too caught up on that. We are reflecting there is a little bit of increase, but we use the term slight to indicate that it wasn't anything dramatic. So I couldn't give you an exact number unfortunately, but hopefully it gives you some color around it.

Got you. And my second question, maybe could you comment a little bit more on potential capital restructuring going forward?

Yes, I think, as everyone knows, we've had a capital structure here that has been pretty successful for the company over time. We've put this in place right before the separation and the intention of the capital structure where we had it was to really facilitate the successful launching of Theravance Biopharma, which I think everyone would agree have been a pretty successful venture. And at the same time, to provide some additional liquidity for a company as we're working through the early start of the company and making sure we could get the products where they are today. I think as we have matured as a company, it is certainly something we look at. In particular, we talked earlier this year about providing capital while we're paying off some of the 9% notes. So that's an area that we've tended to focus on. As I said the 9% royalty notes, I think they were a terrific piece of paper for everybody involved, we put them in place when there was almost no royalty revenues. But we're probably at a point today where it's not the optimal structure out there. So we continue to look at a variety of different things. I would view towards that being one opportunity that we could do some improvements, if the right alternatives came up.

And our next question comes from the line of Stephen Willey of Stifel.

I guess, maybe just to follow up on the last question, I guess you've repaid the $50 million of the notes in May. And just -- I was just wondering, if you at some point be providing any guidance? Or if is there any intention in 2017 or even beyond to continue to pay that down?

Yes, Stephen, this is Eric. So yes, that -- our plan that we announced at the beginning of the year remains. We're still working through our process. We have a bit of time ahead of us before the next interest payment on the notes. So I would say just stay tuned on news about how the plan will unfold on the additional capital return on the 2029 notes. But we're still working through this.

Okay. And then, Mike, you talked about the closed triple data that's coming at year-end, I believe that there was a citizens' petition that was filed by Boehringer, kind of discussing perhaps a potential violation of the combination rule. I think we talked about this before, but is there any commentary you can provide around that?

Yes, we're certainly aware of that. I would say -- I'm not able to give you any really in-depth analysis to that. When I read it, the logic of how they wrote the paper makes sense to me. So I guess, I would just -- so I understand that. That being said, we didn't file the triple application without guidance. So I wouldn't want to go too much further than that. I would just say, VI, they're smart people, they understand the respiratory space. I understood the logic of their argument, but I would also argue that we didn't enter into this filing blind and have a solid understanding of how the FDA is probably looking at it. So I wouldn't want to go too much further than that. We will see how everything shakes out here. There is, of course, an interesting confluence of events. The PDUFA date and the timing of the data from the IMPACT study are not infinitely far apart. And how all of that works together is going to be interesting to see how it comes. So with all of that being said, we remain supporters of the triple here, this is an important product for us. It completes the portfolio. And I think, as everyone knows, we've been talking for a long time how important it is to us to have the full portfolio of single agent, double agent and triple agent. Even though we don't have either full royalties, or in some cases, no royalties, (inaudible) for example, with the single-agent products. But that full portfolio is quite important as we look forward to how the market will evolve in the future. So we remain optimistic about the triple. We're supporters of the triple. And we'll see everything shakes out in the second half of this year, as we come up on our data dates and PDUFA dates.

Okay. And then, do you just have any color around, I guess, the proportion of BREO scripts, either in COPD or perhaps even in asthma that are being written in conjunction with LAMA? And perhaps you might have some insight into how that might be playing out in terms of Incruse and BREO together?

Yes, so I wouldn't be able to give you specific internal data, but I'll give you some top-level data to think about and maybe I'll help you understand how this market probably is structured today and then potentially how it evolves going forward.

If you look at the best data I've seen, it says something like 60%, 65%, in that range of the market for LABA/ICS combination is asthma, and then the rest, whatever that is, 35% or 40% is COPD. And the triple, predominantly we believe will play into the COPD side. Of the LABA/ICS business in COPD today, we think about 40% of that -- about 40% of the COPD business is in some sort of an open triple today, and the open triple could be BREO plus Incruse, as an example, or it could be something like Advair plus tiotropium. So there's a whole variety of different potential open triples. My view is, that's the right place where the triple should logically play because there are going to be patients who are a little more severe as opposed to less severe. Generally, a more severe patient would have been on medicine longer than a patient who's less severe. So if you follow that logic, it would imply that more of the business today of open triples is in the longer-tenure products. So the Advairs of the world and the Symbicorts of the world. Then you'd see relatively less of that in some of the newer products, such as BREO, because they're a little earlier in the life cycle. So I wouldn't want to go and make a comment about what we think the actual percentage of BREO patients being used in the triple are, but I think the overall market dynamics are something along the lines of what I just mentioned there with -- again, the big caveat of all market research data is, by definition, not perfect. So there's some level of imperfection in there. So that's generally how we at Innoviva think this is going to probably play out. Could it be the case that you see a little expansion in that market as you have a better, more convenient product, certainly it's a possibility. We think that we will have the best product out there because we have the only triple that would be approved at this point, and a single device, and of course, it's a great device. So there's certainly some possibility of that happening. But we'll have to see how it all shakes out. So hopefully that very top-level data gave you a good feel of how Innoviva takes a look at the market and thinks about it. So we'll have to see how that plays out as they -- we come to those dates and then see how the market develops. But that would be a reasonable place to start from your thinking.

That's helpful. And then maybe just one other quick question, if I may. As you just know why the DTC campaign for ANORO is only now just being launched? I guess, their product would've been eligible for DTC advertising at least probably 1 year, 1.5 year ago, so just kind of wondering, why now?

Yes, I wouldn't want to get into the kind of specifics around all the decisions on that. I would just say that we're happy it's out there now and will be, we think, a good contributor to stuff going forward. I've seen the commercial multiple times, so it is definitely out there and getting some playing time. There are some other competitors who are out there as well, some of the newer competitors in the U.S. market. So I don't want to get into the specifics around the timing other than, say, the BREO ads had a positive inflection on BREO, would be a reasonable assumption that the ANORO ads should have a positive inflection on ANORO as well.

(Operator Instructions) Our next question comes from the line of Tyler Van Buren with Cowen & Company.

I guess, my first question would be related to the ongoing cost structure review with the special committee. You clearly noted that it's ongoing. But was hoping maybe that you could give us any additional color on the discussions that you're having and the potential pushes and pulls and anything with respect to potential magnitude of cost that could be taken out of business.

Unfortunately, I'm not going to be able to give a whole lot of insight in there. This, as you know, is a board-led activity, and to their credit, they're taking it quite seriously. And I would say, there's no sacred area anywhere that's not being looked at. What the magnitude of those numbers are going to be? When it's all said and done, I don't know. And as soon as we get there, we'll have some communications out. So I wouldn't, unfortunately, be able to tell you it's going to be X% or Y%, and we're looking at this area, that area. I feel very comfortable saying we're looking at everything top to bottom, that is for sure. And we're looking at it with a fairly new eye as opposed to old eyes. So stay tuned. Q3 is underway and our commitment was to get that information out before the end of the third quarter. And -- but I don't, today, see any reason why that will be a problem. So I would say, stay tuned on that one.

Okay. And unfortunately and kind of ironically, with respect to the litigation, continue to see cost show up similar to last quarter. I know you're not going to comment on the merits of the litigation, but can you give us any sense if we should expect kind of the same costs moving forward? Increasing? Decreasing? As long as this litigation is ongoing just so we -- for modeling purposes.

Yes, I -- that's a tough one, right? I would hope, of course, that they don't continue, but we don't control that, as you know. And so I, unfortunately what we're going to do is we're going to call it out, it's obviously not where we wanted to be spending funds. That was not a choice that we made. So I would just say that is a little out of our control. So we have continued to talk, as you know, about things along the lines of, what are we controlling? What is the spending we have? That's why we're calling out all the numbers, so you guys can take a look at what we're spending and say whether we are or are not being true to the guidance. But the other one here is not something that’s going to be in our control. So I hope that goes down, that would be fantastic, but we'll just have to kind of keep playing that one as cards are dealt.

Okay. And this morning, your partner, Glaxo, noted that they don't expect a generic Advair this year, which sounds reasonable. But now that we've had some time following the CRLs, was wondering if you guys have any additional clarity on the issues that they're experiencing and a better understanding that you could share with us.

Yes, it's a -- that's a great question. I don't have any new information. And fortunately, our guidance, for quite a while, has been -- we thought it was unlikely that the products would get approved in the first rounds, but they would probably be approved, or some of them will get approved on the second round. And so we had been aiming towards next year with that guidance for quite a while. I still hold that guidance. So I think somewhere around the middle of next year is a reasonable assumption for the first entrant to come in. Which one it's going to be? Who knows? It's a little hard to decipher the relatively meager information that some of the folks who got the CRLs put out. They are -- as various mentions of the human factors, guidance as being something that was a consideration. I don't know if that's totally true or what part of that human factors was the issue or not. Obviously, you can think of that being less severe or more severe. So we're generally going to stick with our prior guidance, which is, we didn't think something was likely to happen this year. Fortunately, we were correct on the first 2. But somewhere probably in the middle of next year, we're going to call it Q2, Q3, for a window that could be made to make sense, and that we will see. I think folks may have seen that Sandoz filed here also, for their application. I've always thought Sandoz was a pretty smart company in this particular area. So all of that thinking we put in, initially, still seems to be holding the water and I don't see any reason to change the guidance that we've had out there for multiple years now.

And just 1 final question. Obviously, the respiratory leadership at Glaxo turned over not too long ago. And it sounds like they made some positive changes and things continue to go well, but obviously they have a new CEO in place. Any kind of strategic changes with respect to the respiratory franchise or change in thought process? Or is it just kind of business as usual?

Well, I would -- I guess, I'm going to make a couple of comments on this. So this is a good news area for us. We know the people who are the new occupants of the offices at the various places, we like them. I have met with Emma, she is solid. I had a very, very good discussion with her. So I have no concerns about the new leadership over there at all. There had been various changes at positions that I've previously said were quite important to us. I know -- I'll give you 1 example here, we really liked the woman who used to run the U.S. sales and marketing organization, who got promoted to run Viv, she is excellent. And as she was being promoted, I wasn't surprised at all because I think Deborah is really excellent. And what we were hoping to get was a woman who worked for her promoted into the spot, Pam, and she got promoted right in there. So we like the new head of the U.S. respiratory marketing, she's excellent. We like the head of the U.S., Jack Bailey, he's very good. And so the new organization over there doesn't concern me at all. In fact, I would go the opposite to say, what we know about all the occupants there are positive, whether it is at the U.S. marketing level or whether it is -- I'll go back to Emma, again, I had a terrific conversation with her, and so I'm optimistic today about the organization.

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

Thank you, Beatrice. All right, thank you very much, operator. And thanks, everyone, for joining the call. Have a great day.

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