Investor Seth Klarman (Trades, Portfolio) sold 93% of his stake in Innoviva (INVA, Financial) April 30, days after the company’s shareholders rejected an activist investor’s slate of board nominees that wanted to overhaul employee compensation.
Sarissa Capital, a Greenwich, Connecticut-based hedge fund focused on health care companies, purchased a 2.72% activist stake in Innoviva over the latter half of 2016. The fund’s leader, Alexander Denner, sharpened his activist skills at Carl Icahn (Trades, Portfolio)’s Icahn Capital, and worked before that for Andreas Halvorsen (Trades, Portfolio)’s Viking Global.
Innoviva’s shares gained 29% for the year through March as Sarissa began to seek changes. The firm accused Innoviva of taking too much compensation for itself and losing focus on shareholders, allotting $14 million, or $1 million each employee per year. The total comes out to more than half of its $25 million per-year operating expenses.
Innoviva’s main business is to work on collaborations with Glaxo Group Ltd. (GSK, Financial) to develop its respiratory drugs, Relvar/Breo, Ellipta and Adnoro Ellipta through joint committees and manage the royalties from the drugs.
In a series of aggressive Icahn-like public letters, Sarissa said it sought to reduce Innoviva’s CEO pay to less than $500,000 per year and to cut pay for all board members. It also nominated three directors to Innoviva’s board. Innoviva originally agreed to a deal to add two Sarissa nominees to the board, but changed its mind the same day, for which Sarissa has sued. On April 20, 10 days before Klarman’s sell, Innoviva shareholders rejected the Sarissa board nominees.
Innoviva subsequently formed a special committee of independent directors to review its costs. It expects to deliver the report in the third quarter.
In its first quarter results, released two days before Klarman sold, on April 28, Innoviva reported a 68% increase in royalty revenue and 67% increase in total net revenue from Glaxo to $40.5 million. Revenue increased primarily due to an uptick in prescriptions and expansion of market share for its drugs Relvar/Breo Ellipta and Anoro Ellipta.
Innoviva’s balance sheet contained $169.8 million of cash as of March 31, with $702.3 million in long-term debt. The company reported positive earnings for the first time in a decade in 2016 at $59.5 million. It generated its first positive free cash flow in 2015 at $10.1 million and increased it to $61 million in 2016.
Klarman, head of the Baupost Group, owned a 13.7% stake in Innoviva, starting the holding in the fourth quarter of 2015. After buying the shares for an average price around $9, he sold them at an average price around $12. Innoviva was the third-biggest of his 14 health care positions, below Allergan (AGN, Financial) and Theravance Biopharma (TBPH, Financial).
Innoviva’s share price has gained 8.8% year to date and the stock traded for $11.64 at the close of trading Tuesday.
See Seth Klarman (Trades, Portfolio)'s portfolio here.
