INVA
#Good afternoon, everyone, and thank you for joining us.
With me on the call today is <UNK> <UNK>, our Chief Executive Officer.
On today's call, <UNK> will review the highlights from the quarter and full year 2016, 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 financial results for the fourth quarter and full year 2016.
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 details 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 our Chief Executive Officer, <UNK> <UNK>.
Thank you, Eric, and good afternoon, everybody.
Innoviva had a very strong performance in 2016, with record revenues, operating profits, and cash generation.
In 2014, management and the board initiated a strategic plan and subsequent restructuring to create a better-positioned entity with dramatically reduced operating expenses and a strategic imperative to work successfully with GSK to improve the commercialization of our portfolio.
We believe that the successful execution of these actions would fast-track the Company on a path to increased profitability and cash flow to drive superior shareholder value.
Based upon our strong 2016 results, it's clear that to date, we have been successful in both components of this endeavor.
For example, the effectiveness of the cost focus restructuring can be seen when comparing operating expenses from Q1 2014, our last full quarter as a combined company, to Q4 2016.
During this timeframe, operating expenses are down over 90% to $6 million in Q4 of 2016, compared to $66.2 million in Q1 of 2014.
This firm footing has enabled us to return significant capital to shareholders.
We continued returning capital to investors in Q4 with the repurchase of approximately $16.6 million of common stock and convertible notes.
Since launching our capital return program in the fourth quarter of 2015, we have returned a total of $118 million to investors and reduced total shares outstanding by more than 8%.
In 2016, total capital return to investors was greater than 150% of the net cash provided by operating activities as shown on our financial statements.
Today, we also announced our 2017 capital return plan, which will be primarily focused on the redemption of our 9% 2029 royalty notes and which is projected to return up to $150 million to our investors.
Our 2017 capital return plan also maintains the Company's flexibility to make opportunistic purchases of common stock and convertible notes based upon market conditions.
Turning to our collaboration with GSK, I am pleased to say that we also made significant improvements in the commercialization of RELVAR/BREO ELLIPTA and ANORO ELLIPTA.
In the US, both products significantly outperformed the market for the fourth quarter and full year 2016 in prescription volume growth and market share gains to reach new all-time highs.
According to the most recent weekly data compiled by IMS, TRx market share for BREO exceeded 13.8%, a share increase of 2.1 percentage points since the end of Q3, and ANORO exceeded 10.7%.
According to IMS, BREO Q4 TRx volumes reached more than 895,000 prescriptions in the quarter, an increase of 19% over Q3.
Additionally, the most recent data also shows that BREO new-to-brand market share increased to 21.3% overall and to 38.4% for pulmonologists.
This represents share increases since the end of Q3 of 3.4% and 5.9% respectively.
As a result, BREO is now the class leader with respiratory specialists in new-to-brand share, accounting for more than one-third of all 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 fourth quarter, with market share gains in both TRx and NBRx.
For the week ending January 27, ANORO new-to-brand market share increased to 18.1% overall and to 20.7% for pulmonologists.
We believe the productive collaboration between GSK and Innoviva commercial teams has contributed significantly to achieving these gains, and we remain optimistic in our work building ANORO and BREO into leading global respiratory franchises.
As we've mentioned on prior calls, market share metrics remain the primary focus of our analytic efforts, as they focus on the underlying demand for our products.
In contrast, reported net sales by GSK have historically experienced quarter-over-quarter volatility relative to underlying prescriptions due to a number of factors, such as normal slower summer, stronger winter seasonality, changes in channel inventory levels, asthma/COPD customer mix, accounting reserve true-ups, and couponing levels.
During the fourth quarter, reported net sales in the US outpaced prescription growth, which we believe is likely due to traditional increases in year-end channel inventory.
For 2016, net sales for RELVAR/BREO were $273 million in Q4 and $857 million for the full year.
During the fourth quarter, RELVAR/BREO reported $157.6 million in net sales from the US and $115.3 million outside the US.
These sales were driven by higher global prescription volumes and market shares, and includes the impact of typically strong winter seasonality and some inventory build in the US during the fourth quarter that was in line with what GSK traditionally sees at year-end.
For ANORO, total 2016 net sales were approximately $275 million.
During the fourth quarter, ANORA net sales were $90.7 million, an increase of 28% compared to the third quarter of 2016, driven by higher prescription volumes and market share.
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.
Finally, I would like to highlight some changes to our board that we recently announced, including the addition of two new independent directors, Barbara Duncan and Pat Lepore.
The addition of Barbara and Pat brings the number of independent directors on our board to six out of a total seven board members.
And finally, as part of the board's ongoing governance planning processes, we recently appointed James Tyree to be Vice Chairman of the board.
Now I will turn the call back to Eric to review our fourth quarter and full year 2016 financial results.
Eric.
Thanks, <UNK>.
We had a very strong fourth quarter of 2016, with total royalties earned of $46.8 million, an 80% increase over the fourth quarter of 2015, offset by $3.5 million of net non-cash amortization expense.
Royalty revenues earned included $41 million for BREO and $5.8 million for ANORO.
As <UNK> mentioned earlier, quarterly net sales of BREO and ANORO reported by GSK do not directly track prescription volume changes during the same time period due to a variety of non-demand factors.
Therefore, we typically analyze longer time periods when gauging revenue performance.
Looking at the prior 10 quarters, on average, our royalties earned have now grown at a quarterly compound rate of approximately 32%, which reinforces our continued confidence in the Company's prospects for 2017.
Total operating expenses in the fourth quarter of 2016 were $6 million compared to $5.5 million in the fourth quarter of 2015.
I am pleased to report that full-year 2016 operating expenses, excluding non-cash stock-based compensation accruals, were $16.3 million, which is well below our 2016 guidance of $18 million to $20 million.
For 2017, we are providing guidance for OPEX composed of R&D and G&A cost before stock-based compensation accruals of a range of between $18 million and $20 million.
During the fourth quarter of 2016, we repurchased approximately $12.5 million of common stock, bringing our total repurchases under the program since Q4 2015 to $103.7 million at an average price of $10.50 per share, or 7% below the VWAP for that period of $11.30 per share.
As <UNK> mentioned earlier, during the fourth quarter of 2016, we also repurchased in the open marked $4.1 million face value of our convertible subordinated notes due 2023, for a net cash consideration of $3.3 million, representing approximately a 20% gain.
In addition to stock and notes repurchases, we also made a principal repayment of $3.6 million on our non-recourse notes during the fourth quarter, and increased our reserve for principal repayment to be made during the first quarter of 2017 to $7.8 million, resulting from the strong royalties earned during the fourth quarter of 2016.
We continued to generate growing cash flow from our operations in the fourth quarter of 2016.
Income from operations reached $37.7 million compared to $17.3 million in the fourth quarter of 2015, and adjusted EBITDA was $43.7 million in the fourth quarter of 2016 compared to $22.4 million in the fourth quarter of 2015.
On a 12-months rolling basis, we've now generated approximately $134 million in adjusted EBITDA.
For the fourth quarter of 2016, our adjusted earnings per share was $0.26 per share, up significantly compared to adjusted earnings per share of $0.08 per share in the fourth quarter of 2015.
Cash, cash equivalents, short-term investments, and marketable securities totaled $150.4 million as of December 31, 2016, and we had $46.8 million of royalty receivables from GSK at the end of the fourth quarter, which we believe puts us in a strong liquidity position for 2017.
And now I'd like to turn the call over to <UNK> for some closing comments.
Thank you, Eric.
In summary, we're pleased with the performance of Innoviva through the fourth quarter of 2016, and believe that our ongoing gains in prescription volumes, market share, and significantly improved commercial effectiveness for both products during 2016 bode well for our future prospects.
As a result, we remain optimistic about the long-term potential of our respiratory portfolio.
Our primary focus in 2017 will be the optimization of the commercial success and global rollout of BREO and ANORO, as we believe that both products have significant future commercial potential.
There are many exciting developments happening here at Innoviva, and we remain confident in the future prospects for the Company.
Now I'd like to ask the conference facilitator to open the call for questions.
Thanks, <UNK>.
This is Eric.
Thanks for the question.
So I'll address the first one and I think <UNK> will cover the second one.
So on the capital return plan, I can't really say exactly how much we will ultimately do in terms of early redemption of royalty notes, but that will be our main focus.
And as we said, we're keeping some flexibility to potentially do share buyback, but the real focus is really on reducing the size of that debt.
That's going to be the main focus.
And the second part of your question there, <UNK>, with regard to the inventory, we don't have a specific number we're going to be able to offer up today.
What I would say is it was described to us by GSK as very typical, very in line with what they normally do.
As you're aware, this happened in 2015 in Q4 and prior to that.
It's a very typical pattern.
So you frequently hear us talk about looking over multiple quarters when you're trying to assess trends and all of that, and what we see are these consistent trends, right.
You typically have little higher prescription volumes during the winter.
You're in cold and flu season, so you'll see upticks in that there.
You typically see a little bit of year-end channel inventory.
This is your classic management practice by a lot of the wholesalers as they're anticipating a price increase next year.
That seems to happen every year.
So I would describe all of this as being very typical, but unfortunately what I can't do is give you a specific number.
The only final thing I would say is, you know, of course we're selling a lot more product right now, so it's probably a little bit larger absolute number than last year, but as a percentage, again, GSK said it's very similar to what we've seen in the past.
So, sorry I couldn't be much more specific than that, but hopefully you get a sense that these are just very typical, traditional, repeating-type patterns as far as we're aware.
Sure.
So I'll try to kind of (inaudible) all of those there.
With regard to the capital structure, I think our thoughts on that are pretty well articulated in where we're focusing our capital returns here.
There are a couple things to think about with these notes as you look at them and think about why we may or may not be focusing on them.
One, of course, is they're non-recourse, as we've talked about a lot, and that's a nice feature in them.
The downside, of course, is today, that 9% coupon is a little more expensive than perhaps you would want ideally.
It was a great deal when we put these notes in place when we had, essentially, no revenues.
The second piece of that 9% is there is, as you know, a fair amount of tax uncertainty looking forward here with some of the tax discussions that are going on.
One possibility that is being discussed, and I know it's been discussed pretty broadly in the conversation (inaudible), is the reduction of interest as a tax deduction.
And in that example, Eric and I had been thinking about these notes on an after-tax basis being much cheaper than 9%.
If that goes away, of course, the notes would get a little more expensive.
So there is kind of the top-level thinking.
Again, we're really focusing this year on those 9% notes.
If there are some market dislocations that present exceptional opportunities, then of course we would potentially look at other vehicles, other shares or something else.
But that's really the primary focus for this year.
And forgive me.
The second part of your question was.
Oh, the GSK transition.
So, you know, we were probably a little more apprehensive of some of the changes that were happening two years ago to the people who were running the franchises.
There were some that were good like, for example, the head of the US going away, who we didn't have terrifically high opinions of at that point in time, and a few others.
And subsequent to that, they put some terrific people in those spots.
So, you know, the head of the US now is terrific, the marketing folks in the US are terrific, et cetera, and those are really the key people that are out there.
At the very top level, my guess is there will be very, very few adverse changes at all.
In fact, I have optimism these guys are going to be pretty thoughtful.
I haven't personally met Emma yet.
I have heard terrific things about her.
And I would just say that the people we're dealing with, the people that are on the ground in the various regions, are the ones who are going to make or break these products, and they are terrific.
The US marketing team, you've heard me say lots of great things about them, and that team really performs quite well.
And again, as you know, prior to some of those transitions, so two and a half, three years ago, you definitely didn't hear me saying good things about that.
But those teams are intact and in good shape, so my best guess is we're going to go through this with little to no hiccups whatsoever.
Appreciate it, <UNK>.
Thank you.
Yeah, thanks for the question and thanks for the congrats.
You know, of course, we're very pleased with where things have gone and that the strategies we put in place and the restructurings really have borne fruit the way we hoped they would, so we're very pleased on that front.
You know, with regard to gross-to-net and pricing next year, Andrew made a comment, not at this call but in the last one, that he wasn't expecting anything particularly dramatic to happen this year, and that's generally what we've been talking about as well.
We haven't been specific and said it's going up or down.
So I tend to look at net rather than gross-to-net.
Gross-to-net very well could expand if, for example, GSK took a gross price increase during the period.
But the net price is really what we focus on, and again, we're not expecting anything dramatic out there.
Obviously, with regard to the potential for disruptions, there's the possibility this year of having AB generics coming in.
That could be a catalyst one way or another.
We'll have to wait and see.
But right now, we don't have any plans or expectations for anything dramatic happening with prices.
Well, there are certain stories around both of those.
You know, our general view, and of course when you make a general view, you can immediately find a hundred exceptions to it.
But as a rule, you're going to find more stickiness with primary care doctors and following traditional, well-known therapeutic paths and categories.
As a result, we're not surprised that we've had a little more uptake initially in the community with BREO, for example.
We had a little faster initial uptake among specialists with ANORO because they got the benefits of the product.
As you look forward, it's going to be quite interesting to see how these continue to develop because as you're aware, there were some recent changes in the GOLD guidelines, and the GOLD guidelines are putting a little more emphasis on LAMA/LABAs.
It wouldn't surprise me if you saw not a lot of change at the primary care doctors going forward, but you would see more adoption by the specialists there.
I think the last thing I would offer is, is there has been quite a bit of acceleration in the new-to-brand scripts you're seeing on BREO.
My guess is a lot has to do with some combination of formularies and awareness out there.
The product's been out for a few years.
The marketing efforts around this are really quite good.
The recent materials that are out there and the recent focus of the US BREO salesforce, I think, has just really been clicking in.
So we'll have to see how all these things continue to move going forward.
I guess as the top-level comment, we're pleased with where we are.
We have higher aspirations in this and we'll have to see how this continues to roll out.
But again, both products are performing well, GSK is performing well, particularly in the US, and I think we're feeling pretty good.
Thanks, <UNK>.
Appreciate it.
Thank you very much, Operator, and thanks everyone for participating to the call.
Have a good day.
