INNOVIVA, INC. Forward-Looking Statements
The information in this Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended ("Securities Act"), and Section 21E of the Securities Exchange Act of
1934, as amended. Such forward-looking statements involve substantial risks,
uncertainties, and assumptions. All statements contained herein that are not of
historical fact, including, without limitation, statements regarding our
strategy, future operations, future financial position, future revenue,
projected costs, prospects, plans, intentions, expectations, goals and
objectives, may be forward-looking statements. The words "anticipates,"
"believes," "could," "designed," "estimates," "expects," "goal," "intends,"
"may," "objective," "plans," "projects," "pursue," "will," "would" and similar
expressions (including the negatives thereof) are intended to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words. We may not actually achieve the plans, intentions,
expectations or objectives disclosed in our forward-looking statements and the
assumptions underlying our forward-looking statements may prove incorrect.
Therefore, you should not place undue reliance on our forward-looking
statements. Actual results or events could differ materially from the plans,
intentions, expectations and objectives disclosed in the forward-looking
statements that we make. All written and verbal forward-looking statements
attributable to us or any person acting on our behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to in this
section. Important factors that we believe could cause actual results or events
to differ materially from our forward-looking statements include, but are not
limited to, risks related to: lower than expected future royalty revenue from
respiratory products partnered with GSK; the commercialization of RELVAR®/BREO®
ELLIPTA®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA® in the jurisdictions in which
these products have been approved; substantial competition from products
discovered, developed, launched and commercialized both by GSK and by other
pharmaceutical companies; the strategies, plans and objectives of the Company
(related to the Company's growth strategy and corporate development initiatives
beyond the Company's existing portfolio); the timing, manner and amount of
capital deployment, including potential capital returns to stockholders; risks
related to the Company's growth strategy; projections of revenue, expenses and
other financial items and risks discussed in "Risk Factors" in Item 1A of Part I
of our Annual Report on Form 10-K for the year ended December 31, 2021 filed
with the Securities and Exchange Commission ("SEC") on February 28, 2022 , and as
amended on March 17, 2022 ("2021 Form 10-K"), and Item 1A of Part II of our
Quarterly Reports on Form 10-Q and below in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this Item 2 of
Part I. All forward-looking statements in this Quarterly Report on Form 10-Q are
based on current expectations as of the date hereof and we do not assume any
obligation to update any forward-looking statements on account of new
information, future events or otherwise, except as required by law.
We encourage you to read our unaudited condensed consolidated financial
statements contained in this Quarterly Report on Form 10-Q. We also encourage
you to read Item 1A of Part I of our 2021 Form 10-K and Item 1A of Part II of
our Quarterly Reports on Form 10-Q entitled "Risk Factors," which contain a more
complete discussion of the risks and uncertainties associated with our business.
In addition to the risks described above and in Item 1A of Part I of our 2021
Form 10-K and Item 1A of Part II of this report, other unknown or unpredictable
factors also could affect our results. Therefore, the information in this report
should be read together with other reports and documents that we file with the
SEC from time to time, including on Form 10-K, Form 10-Q and Form 8-K, which may
supplement, modify, supersede or update those risk factors. As a result of these
factors, we cannot assure you that the forward-looking statements in this report
will prove to be accurate. Furthermore, if our forward-looking statements prove
to be inaccurate, the inaccuracy may be material. In light of the significant
uncertainties in these forward-looking statements, you should not regard these
statements as a representation or warranty by us or any other person that we
will achieve our objectives and plans in any specified time frame, or at all.
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--------------------------------------------------------------------------------OVERVIEW Executive SummaryInnoviva, Inc. ("Innoviva", the "Company", the "Registrant" or "we" and other similar pronouns) is a company with a portfolio of royalties and other healthcare assets. Our royalty portfolio contains respiratory assets partnered withGlaxo Group Limited ("GSK"), including RELVAR®/BREO® ELLIPTA® (fluticasone furoate/ vilanterol, "FF/VI"), ANORO® ELLIPTA® (umeclidinium bromide/ vilanterol, "UMEC/VI") and TRELEGY® ELLIPTA® (the combination FF/UMEC/VI). Under the Long-Acting Beta2 Agonist ("LABA") Collaboration Agreement,Innoviva is entitled to receive royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows: 15% on the first$3.0 billion of annual global net sales and 5% for all annual global net sales above$3.0 billion ; and royalties from the sales of ANORO® ELLIPTA®, which tier upward at a range from 6.5% to 10%.Innoviva is also entitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned toTheravance Respiratory Company, LLC ("TRC"), including TRELEGY® ELLIPTA® and any other product or combination of products that may be discovered or developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the "GSK Agreements"), which have been assigned to TRC other than RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®. Our company structure and organization are tailored to our focused activities of managing our respiratory assets partnered with GSK, including the commercial and developmental obligations associated with the GSK Agreements, optimizing capital allocation and providing for certain essential reporting and management functions of a public company. Our revenues consist of royalties from our respiratory partnership agreements with GSK. Recent Highlights • GSK Net Sales: • Second quarter 2022 net sales of RELVAR®/BREO® ELLIPTA® by GSK were$395.5 million , down 10% from$439.5 million in the same quarter of 2021, with$189.7 million in net sales from the U.S. market and$205.8 million from non-U.S. markets.
•
Second quarter 2022 net sales of ANORO® ELLIPTA® by GSK were$148.2 million , down 19% from$184.0 million in the same quarter of 2021, with$74.5 million net sales from the U.S. market and$73.7 million from non-U.S. markets.
•
Second quarter 2022 net sales of TRELEGY® ELLIPTA® by GSK were$590.1 million , up 45% from$405.9 million in the same quarter of 2021, with$449.1 million in net sales from the U.S. market and$141.0 million in net sales from non-U.S. markets. 32 --------------------------------------------------------------------------------
• Capital Allocations: • During the second quarter of 2022, the Company's wholly owned subsidiary,Innoviva Strategic Opportunities LLC , announced the purchase of all the issued and outstanding equity securities ofEntasis Therapeutics not already owned byInnoviva and its affiliates for$2.20 per share for a consideration of$42.4 million . The purchase closed onJuly 11, 2022 .
•
Subsequent to the close of the second quarter of 2022, the Company's wholly owned subsidiary,Innoviva Strategic Opportunities LLC , entered into a definitive merger agreement to acquire La Jolla Pharmaceutical Company (Nasdaq: LJPC).Innoviva has agreed to pay$5.95 per share and an incremental$0.28 per share for additional cash proceeds received in connection with the divestiture of a non-core asset. The implied enterprise value of La Jolla was approximately$149.0 million . The acquisition is expected in to close later in the third quarter of 2022.
•
In July, the Company sold its 15% stake inTheravance Respiratory Company ("TRC"), which received royalties stemming from sales of TRELEGY® ELLIPTA®, to Royalty Pharma plc (Nasdaq: RPRX) for an upfront cash payment of approximately$282.0 million and a potential$50.0 million contingent sales-based milestone payment. Under the terms of the agreement, TRC also transferred toInnoviva all of TRC's ownership interests and investments inInCarda Therapeutics Inc. ,ImaginAb, Inc. ,Gate Neurosciences, Inc. andNanolive SA ; collectively, these ownership interests are valued at$42.5 million as of quarter-end.Innoviva retained its royalty rights with respect to ANORO® ELLIPTA® and RELVAR®/BREO® ELLIPTA®.
Collaborative Arrangements with GSK
LABA Collaboration
InNovember 2002 , we entered into the LABA collaboration with GSK to develop and commercialize once-daily LABA products for the treatment of chronic obstructive pulmonary disorder ("COPD") and asthma (the "LABA Collaboration Agreement"). For the treatment of COPD, the collaboration has developed three combination products:
•
RELVAR®/BREO® ELLIPTA® ("FF/VI") (BREO® ELLIPTA® is the proprietary name in the
U.S. and Canada and RELVAR® ELLIPTA® is the proprietary name outside the U.S.
and Canada ), a once-daily combination medicine consisting of a LABA, vilanterol
(VI), and an inhaled corticosteroid ("ICS"), fluticasone furoate ("FF"),
•
ANORO® ELLIPTA® ("UMEC/VI"), a once-daily medicine combining a long-acting muscarinic antagonist ("LAMA"), umeclidinium bromide ("UMEC"), with a LABA, vilanterol (VI), and
•
TRELEGY® ELLIPTA® (the combination FF/UMEC/VI), a once-daily combination medicine consisting of an ICS, LAMA and LABA.
As a result of the launch and approval of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® in theU.S. ,Japan andEurope , in accordance with the LABA Collaboration Agreement, we paid milestone fees to GSK totaling$220.0 million during the year endedDecember 31, 2014 . Although we have no further milestone payment obligations to GSK pursuant to the LABA Collaboration Agreement, we continue to have ongoing commercialization activities under the LABA Collaboration Agreement, including participation in the joint steering committee and joint project committee that are expected to continue over the life of the agreement. The milestone fees paid to GSK were recognized as capitalized fees paid to a related party, which are being amortized over their estimated useful lives commencing upon the commercial launch of the products. 33 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("US GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Other than those set out in Note 1 to our accompanying unaudited condensed consolidated financial statements, we believe there have been no significant changes in our critical accounting policies as described in the Form 10-K for the year endedDecember 31, 2021 filed with theSEC onFebruary 28, 2022 , and as amended onMarch 17, 2022 . Results of OperationsNet Revenue
Total net revenue, as compared to the prior year period, was as follows:
Three Months Ended Six Months Ended
June 30, Change June 30, Change
(In thousands) 2022 2021 $ % 2022 2021 $ %
Royalties from a
related party
- RELVAR/BREO $ 59,326 $ 65,916 $ (6,590 ) (10 )%- ANORO 9,630 11,960 (2,330 ) (19 )%
18,072 22,460 (4,388 ) (20 )% Royalties from a related party
- TRELEGY 42,720 26,386 16,334 62 %
72,029 48,470 23,559 49 % Total royalties from a related party
111,676 104,262 7,414 7 % 205,191 193,236 11,955 6 %
Less: amortization of
capitalized fees
paid to a related
party (3,456 ) (3,456 ) - * (6,912 ) (6,912 ) - *
Royalty revenue from
GSK $ 108,220 $ 100,806 $ 7,414 7 % $ 198,279 $ 186,324 $ 11,955 6 %
*Not Meaningful
Total net revenue increased to $108.2 million and $198.3 million for the three
and six months ended June 30, 2022 , compared to $100.8 million and $186.3
million , respectively, for the same period a year ago, primarily due to growth
in prescriptions for our TRELEGY products.
Research & Development
Research and development ("R&D") expenses attributable to Entasis' product
development efforts were $13.9 million and $19.7 million , respectively, for the
three and six months ended June 30, 2022 . Research and development expenses for
the three and six months ended June 30, 2021 were attributable to the product
development of Pulmoquine Therapeutics Inc. , which was dissolved at the end of
2021.
General & Administrative
General and administrative expenses, as compared to the prior year period, were
as follows:
Three Months Ended Six Months Ended
June 30, Change June 30, Change
(In thousands) 2022 2021 $ % 2022 2021 $ %
General and
administrative $ 11,782 $ 4,228 $ 7,554 179 % $ 18,274 $ 10,214 $ 8,060 79 %
General and administrative expenses for the three and six months ended
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--------------------------------------------------------------------------------Interest and dividend income and other expense, net
Interest and dividend income and other expense, net, as compared to the prior year period, were as follows:
Three Months Ended Six Months Ended
June 30, Change June 30, Change
(In thousands) 2022 2021 $ % 2022 2021 $ %
Interest and dividend income $ 724 $ 20 $ 704 * $ 1,046 $ 50 $ 996 *
Other expense, net (528 ) (951 ) 423 (44 )% (778 ) (1,384 ) 606 (44 )%
*Not Meaningful
Interest and dividend income increased for the three and six months ended
Other expense, net, was primarily expenses incurred byISP Fund LP . Other expense, net was partially offset by income from grants of$0.4 million and$0.7 million during the three and six months endedJune 30, 2022 . There was no income from grants during 2021. Interest Expense
Interest expense, as compared to the prior year period, was as follows:
Three Months Ended Six Months Ended
June 30, Change June 30, Change
(In thousands) 2022 2021 $ % 2022 2021 $ %
Interest expense
The decrease in interest expense was primarily due to the adoption of the new
accounting standard, ASU 2020-06, which is to simplify the accounting for
convertible debt instruments, and the debt discount associated with the cash
settlement feature of our convertible notes due 2025 ("2025 Notes"), which was
adjusted to zero as of January 1, 2022 . The interest expense for the three and
six months ended June 30, 2022 included the contractual interest expense and the
amortization of debt issuance costs for our 2023 Notes, 2025 Notes and 2028
Notes. Interest expense for the three and six months ended June 30, 2021
included the contractual interest expense, the amortization of debt discount and
issuance costs for our 2023 Notes and 2025 Notes.
Loss on Debt Extinguishment
We recognized a loss of$20.7 million due to the total premium payment of$20.4 million and the write-off of$0.3 million debt issuance costs in connection with the repurchase of$144.8 million aggregate principal amount of our 2023 Notes inMarch 2022 .
Changes in Fair Values of Equity and
Changes in fair values of equity and long-term investments, as compared to the prior year period, were as follows:
Three Months Ended Six Months Ended
June 30, Change June 30, Change
(In thousands) 2022 2021 $ % 2022 2021 $ %
Changes in fair values of
equity and
long-term investments,
net $ (58,600 ) $ 45,315 $ (103,915 ) (229 )%
The changes in fair values of equity and long-term investments for the three and six months endedJune 30, 2022 decreased compared to the same period in 2021 mainly due to the volatility in the capital markets. The changes in fair values of equity and long-term investments reflect the realized gains and losses and net unrealized gains and losses in our strategic investments in Armata, InCarda, Gate, and those investments managed byISP Fund LP . 35 --------------------------------------------------------------------------------
Provision for Income Taxes
We recorded a provisional income tax benefit of$0.9 million for the three months endedJune 30, 2022 and provisional income tax expense of$6.0 million for the six months endedJune 30, 2022 , compared to provisional interest tax expense of$25.3 million and$45.1 million for the three and six months endedJune 30, 2021 . The effective income tax rate for the six months endedJune 30, 2022 and 2021 was 4.3% and 18.6%, respectively.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest, as compared to the prior
periods, was as follows:
Three Months Ended Six Months Ended
June 30, Change June 30, Change
(In thousands) 2022 2021 $ % 2022 2021 $ %
Net income attributable to
noncontrolling interest
Net income attributable to noncontrolling interest represents$28.3 million and$53.4 million for the 85% share of net income inTheravance Respiratory Company, LLC for Theravance Biopharma and$7.9 million and$10.9 million for the 40% share of net loss inEntasis Therapeutics Holdings, Inc. for the three and six months endedJune 30, 2022 , respectively. The net income attributable to noncontrolling interest for the three and six months endedJune 30, 2021 represents the 85% share of net income inTheravance Respiratory Company, LLC for Theravance Biopharma.
Liquidity and Capital Resources
Liquidity
Since our inception, we have financed our operations primarily through private placements and public offerings of equity and debt securities and payments received under collaborative arrangements. For the six months endedJune 30, 2022 , we generated gross royalty revenues from GSK of$205.2 million . Net cash and cash equivalents totaled$283.6 million , inclusive of$22.4 million of Entasis' cash balance, and receivables from GSK totaled$111.7 million as ofJune 30, 2022 .
Adequacy of Cash Resources to Meet Future Needs
We believe that cash from projected future royalty revenues and our cash, cash equivalents and marketable securities will be sufficient to meet our anticipated debt service and operating needs for at least the next 12 months based upon current operating plans and financial forecasts. If our current operating plans and financial forecasts change, we may require additional funding sooner in the form of public or private equity offerings or debt financings. Furthermore, if in our view favorable financing opportunities arise, we may seek additional funding at any time. However, future financing may not be available in amounts or on terms acceptable to us, if at all. This could leave us without adequate financial resources to fund our operations as currently planned. In addition, from time to time we may restructure or reduce our debt, including through tender offers, redemptions, amendments, repurchases or otherwise, all allowable with the terms of our debt agreements.
Cash Flows
Cash flows, as compared to the prior year period, were as follows:
Six Months Ended June 30,
(In thousands) 2022 2021 Change
Net cash provided by operating activities$ 177,137 $ 168,721 $ 8,416 Net cash provided by (used in) investing activities (145,678 ) 63,627 (209,305 ) Net cash provided by (used in) financing activities 50,596 (435,570 ) 486,166 36
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Cash Flows from Operating Activities
Net cash provided by operating activities for the six months endedJune 30, 2022 was$177.1 million , consisting primarily of our net income of$59.2 million , adjusted for net non-cash items such as$6.0 million of deferred income tax,$7.1 million of depreciation and amortization,$20.7 million of loss on extinguishment of debt, and$68.0 million decrease in the fair value of our equity and long-term investments, offset by$6.9 million of accrued personnel-related expenses and other accrued liabilities,$3.0 million of prepaid expenses and$2.7 million of accounts payable. Net cash provided by operating activities for the six months endedJune 30, 2021 was$168.7 million , consisting primarily of our net income of$220.5 million , adjusted for net non-cash items such as$45.1 million of deferred income taxes,$6.9 million of depreciation and amortization, and$4.5 million of amortization of debt discount and issuance costs, partially offset by an increase of$99.0 million in the fair value of our equity and long-term investments, net and an increase in receivables from collaborative arrangements of$10.3 million .
Cash Flows from Investing Activities
Net cash used in investing activities for the six months endedJune 30, 2022 of$145.7 million was primarily due to$38.0 million of purchases of equity investments managed byISP Fund LP ,$96.3 million of purchases and sales of other investments managed byISP Fund LP , net, and$58.7 million investments in Armata, InCarda, and Nanolive, partially offset by$24.3 million of sales of equity investments managed byISP Fund LP and$23.1 million of cash acquired through the consolidation of Entasis. Net cash provided by investing activities for the six months endedJune 30, 2021 of$63.6 million was due to$18.5 million of sales of equity investments managed byISP Fund LP and$234.1 million of purchase and sales of other investments managed byISP Fund LP , net partially offset by$142.6 million of purchases of equity investments managed byISP Fund LP and$46.4 million investments in Armata,ImaginAb and Entasis.
Cash Flows from Financing Activities
Net cash provided by financing activities for the six months endedJune 30, 2022 of$50.6 million was primarily due to the net proceeds of$252.5 million from the issuance of the convertible senior notes due in 2028, net of issuance costs, offset with$21.0 million purchase of capped call options associated with the 2028 Notes,$165.1 million for the repurchase of the 2023 Notes, and$16.1 million distributions to noncontrolling interest. Net cash used in financing activities for the six months endedJune 30, 2021 of$435.6 million was primarily due to$394.1 million used for our common stock repurchase from GSK and$41.4 million distributions to noncontrolling interest.
Contractual Obligations
InMarch 2022 , we completed a private placement of$261.0 million aggregate principal amount of unsecured convertible senior notes, the 2028 Notes, which will mature onMarch 15, 2028 . Under the terms of the 2028 Notes, we will make interest payments of approximately$2.9 million during the year 2022 and$5.5 million in each of the years from 2023 through 2027. The principal balance of$261.0 million will become due inMarch 2028 . As ofMarch 31, 2022 , our notes payable obligation also included$96.2 million related to our 2023 Notes which are due in 2023 and$192.5 million related to our 2025 Notes which are due in 2025. Refer to Note 8, "Debt", to the Condensed Consolidated Financial Statements for more information. During the six months endedJune 30, 2022 , we determined that we have both (1) the power to direct the economically significant activities of Entasis and (2) the obligation to absorb the losses, or the right to receive the benefits, that could potentially be significant to Entasis, and therefore, we are the primary beneficiary of Entasis. Accordingly, we consolidated Entasis' financial position and results of operations effective onFebruary 17, 2022 . In connection with the consolidation, we assumed contractual obligations related to an operating lease of Entasis for office and laboratory space inWaltham, Massachusetts with an expiration date in 2025. As ofJune 30, 2022 , total undiscounted future minimum lease payments related to the Entasis lease were$4.2 million , with approximately$0.4 million payable throughDecember 31, 2022 and approximately$1.3 million payable in each of the years from 2023 to 2025. Refer to Note 9, "Commitments and Contingencies", to the Condensed Consolidated Financial Statements for more information. 37
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