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, 2020 filed
with the Securities and Exchange Commission ("SEC") on February 25, 2021 , ("2020
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 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 2020 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 2020 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.
21
Table of Contents
OVERVIEW
Executive Summary
Innoviva, 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
with Glaxo 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 to Theravance 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, optimizing our operations
and augmenting capital allocation. Our revenues consist of royalties from our
respiratory partnership agreements with GSK.
Recent Highlights
? GSK Net Sales:
Second quarter 2021 net sales of RELVAR®/BREO® ELLIPTA® by GSK were
? million, up 45% from
million in net sales from the U.S. market and
markets.
Second quarter 2021 net sales of ANORO® ELLIPTA® by GSK were
? 7% from
sales from the U.S. market and
Second quarter 2021 net sales of TRELEGY® ELLIPTA® by GSK were
? up 69% from
net sales from the U.S. market and
markets. ? Capital Allocation:
In
? GSK at
of
in the Company, which was approximately 32% of the Company.
During the second quarter of 2021, the Company's wholly owned subsidiary,
? million shares of Entasis' common stock and warrants to purchase up to an
additional 10 million shares of common stock at
additional investment,
Entasis' common stock as ofJune 30, 2021 in addition to the warrants. 22 Table of Contents
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
?
and
(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 . 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.
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. As part of our capital allocation strategies, we invest from time to time in equity securities of private or public companies. We also enter into strategic partnerships in order to accelerate the execution of our strategy and enhance returns on our capital. If we determine that we have control over these companies or partnerships, we consolidate the financial statements of these companies or partnerships. If we determine that we do not have control over these companies or partnerships under either voting or VIE models, we then determine if we have an ability to exercise significant influence via voting interests, board representation or other business relationships. We may account for the equity investments where we exercise significant influence using either an equity method of accounting or at fair value by electing the fair value option under Accounting Standards Codification ("ASC") Topic 825, Financial Instruments. If the fair value option is applied to an investment that would otherwise be accounted for under the equity method, we apply it to all our financial interests in the same entity (equity and debt, including guarantees) that are eligible items. All gains and losses from fair value changes, unrealized and realized, are presented as changes in fair values of equity and long-term investments, net on the consolidated statements of income. If we conclude that we do not have an ability to exercise significant influence over an investee, we may elect to account for an equity security without a readily determinable fair value using the measurement alternative as prescribed by ASC Topic 825. This measurement alternative allows us to measure the equity investment at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. There were no significant changes to our critical accounting policies and estimates. Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC onFebruary 25, 2021 provides a more complete discussion of our critical accounting policies and estimates. 23 Table of Contents Results of OperationsNet Revenue
Total net revenue, as compared to the prior year periods, was as follows:
Three Months Ended June 30, Change Six Months Ended June 30, Change(In thousands) 2021 2020 $ % 2021 2020 $ % Royalties from a related party - RELVAR/BREO$ 65,916 $ 45,570 $
20,346 45 %
11,960 11,199 761 7 % 22,460 21,049 1,411 7 %
Royalties from a related party
- TRELEGY 26,386 15,633 10,753 69 % 48,470 31,768 16,702 53 %
Total royalties from a related
party 104,262 72,402 31,860 44 % 193,236 154,536 38,700 25 %
Less: amortization of
capitalized fees paid to a
related party (3,456) (3,456) - 0 % (6,912) (6,912) - 0 %
Royalty revenue 100,806 68,946 31,860 46 % 186,324 147,624 38,700 26 %
Strategic alliance -MABA
program - 10,000 (10,000) * - 10,000 (10,000) *
Total net revenue from GSK
21,860 28 %$ 186,324 $ 157,624 $ 28,700 18 % *Not Meaningful
Total net revenue increased to
Research & Development
Research and development ("R&D") expenses attributable to Pulmoquine's product
development efforts were de minimis for the three and six months ended June 30,
2021 . Research and development expenses of $0.6 million for the three and six
months ended June 30, 2020 were attributable to Pulmoquine's product development
efforts.
General & Administrative
General and administrative expenses, as compared to the prior year periods, were
as follows:
Three Months Ended June 30, Change Six Months Ended June 30, Change
(In thousands) 2021 2020 $ % 2021 2020 $ %
General and administrative
63 %$ 10,214 $ 5,159 $ 5,055 98 %
General and administrative expenses for the three and six months endedJune 30, 2021 increased compared to the same periods in 2020 mainly due to business development related advisory service fees and legal expenses incurred for the arbitration initiated by Theravance Biopharma against the Company and TRC. The arbitration related legal fees were recognized in TRC's statement of income.
Other Income, net and Interest Income
Other income, net and interest income, as compared to the prior year periods,
were as follows:
Three Months Ended June 30, Change Six Months Ended June 30, Change
(In thousands) 2021 2020 $ % 2021 2020 $ %
Other income (expense), net $ (951) $ 30 $ (981) * $ (1,384) $ 98 $ (1,482) *
Interest income $ 20 $ 158 $ (138) (87) % $ 50 $ 1,460 $ (1,410) (97) %
*Not Meaningful
24
Table of Contents
The increase in other expense, net, for the three and six months endedJune 30, 2021 compared to the same periods a year ago was primarily due to the expenses incurred byISP Fund LP . Interest income decreased for the three and six months endedJune 30, 2021 compared to the same periods a year ago mainly due to lower interest rates impacted by the COVID-19 pandemic.
Interest Expense
Interest expense, as compared to the prior year periods, was as follows:
Three Months Ended June 30, Change Six Months Ended June 30, Change(In thousands) 2021 2020 $ % 2021 2020 $ % Interest expense$ 4,745 $ 4,561 $ 184 4 %$ 9,439 $ 9,077 $ 362 4 % Interest expense includes the amortization of debt discount and issuance costs for our convertible notes. The increase in interest expense was mainly due to more debt discount and issuance costs being recognized through amortization.
Changes in Fair Values of Equity and
Changes in fair values of equity and long-term investments, as compared to the prior year periods, were as follows:
Three Months Ended June 30, Change Six Months Ended June 30, Change
(In thousands) 2021 2020 $ % 2021 2020 $ %
Changes in fair values of
equity and long-term
investments $ 45,315 $ 46,698 $ (1,383) (3) % $ 100,360 $ 68,613 $ 31,747 46 %
The changes in fair values of equity and long-term investments reflect the net changes in the fair values of our equity investments in Armata, Entasis, and InCarda, and those equity investments managed byISP Fund LP .
Provision for Income Taxes
The provisional income tax expense for the three and six months endedJune 30, 2021 was$25.3 million and$45.1 million with an effective income tax rate of 18.6%, respectively, compared to$19.9 million and$35.8 million , respectively, with an effective interest rate of 17.0% in the same period a year ago.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest, as compared to the prior
periods, was as follows:
Three Months Ended June 30, Change Six Months Ended June 30, Change
(In thousands) 2021 2020 $ % 2021 2020 $ %
Net income attributable to
noncontrolling interest $ 21,898 $ 21,381 $ 517 2 % $ 37,470 $ 34,896 $ 2,574 7 %
This represents the 85% share of net income in Theravance Respiratory Company,
LLC for Theravance Biopharma for the three and six months ended June 30, 2021
and 2020. The increase was primarily due to the increase in the growth in
prescriptions and market share for TRELEGY® ELLIPTA®.
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, 2021 , we generated gross royalty revenues from GSK of$193.2 million . Net cash and cash equivalents totaled$43.3 million and receivables from GSK totaled$104.3 million as ofJune 30, 2021 . 25
Table of Contents
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) 2021 2020 Change
Net cash provided by operating activities
63,627 9,044 54,583
Net cash used in financing activities (435,570) (27,268) (408,302)
Cash Flows from Operating Activities
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 . Net cash provided by operating activities for the six months endedJune 30, 2020 was$153.3 million , consisting primarily of our net income of$177.2 million , adjusted for net non-cash items such as$35.8 million of deferred income taxes,$7.0 million of depreciation and amortization, partially offset by an increase of$68.6 million in the fair value of our equity investments.
Cash Flows from Investing Activities
Net cash provided by investing activities for the six months endedJune 30, 2021 of$63.6 million was primarily due to$110.0 million in distribution of equity and long-term investments from theISP Fund LP , partially offset by$46.4 million investments in Armata,ImaginAb and Entasis. Net cash provided by investing activities for the six months endedJune 30, 2020 of$9.0 million was primarily due to$82.0 million received from maturities of marketable securities, partially offset by$12.9 million in purchases of marketable securities and$60.0 million for our investments in Armata and Entasis.
Cash Flows from Financing Activities
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. Net cash used in financing activities for the six months endedJune 30, 2020 of$27.3 million was primarily due to$28.0 million distributions to noncontrolling interest.
© Edgar Online, source
