Innoviva, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts below are in millions of dollars unless stated otherwise. Innoviva combines royalties from GSK respiratory products with hospital and infectious-disease products, development programs, and strategic investments.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $81.0 | $108.2 | $157.4 | $198.3 |
| Net income | $1.3 | $21.4 | $36.1 | $59.2 |
| Net income attributable to Innoviva stockholders | $1.3 | $0.9 | $36.1 | $16.7 |
| Basic EPS attributable to Innoviva stockholders | $0.02 | $0.01 | $0.54 | $0.24 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $63.9 | $177.1 |
- Revenue mix: Q2 net royalty revenue was $62.3, product sales $15.7, and license revenue $3.0. For the first half, the respective amounts were $119.1, $27.2, and $11.0.
- Product sales and margins: Q2 GIAPREZA sales were $11.2 and XERAVA sales $4.5; first-half sales were $20.2 and $7.0. Product gross margin, calculated from reported product sales and cost of products sold, was approximately 43% in Q2 and 35% for the first half. These figures include acquisition-related inventory fair-value step-up costs of $7.0 and $13.8, respectively, and should not be treated as a normalized margin.
- Cash and liquidity: Cash and cash equivalents were $173.0 at June 30, down from $291.0 at year-end. Current assets were $323.5 and current liabilities $39.4, implying working capital of approximately $284.1. The company reported $65.7 of collaboration receivables and $15.3 of accounts receivable.
- Debt and obligations: Debt principal totaled $453.5: $192.5 of 2.5% convertible notes due 2025 and $261.0 of 2.125% convertible notes due 2028. Net carrying debt was $445.2. The $96.2 of 2023 notes was repaid at maturity in January. A separate deferred royalty obligation tied to GIAPREZA was $70.4, including $4.4 current.
- Investments and equity: Equity and long-term investments totaled $397.9. Total assets were $1,118.2 and stockholders’ equity $555.1.
Material changes versus the prior comparable period
- Q2 revenue fell 25% and first-half revenue fell 21%. The principal driver was the July 2022 sale of Innoviva’s 15% interest in Theravance Respiratory Company, ending its TRELEGY royalty entitlement. TRELEGY contributed $42.7 of Q2 2022 royalties and $72.0 for the first half of 2022.
- Excluding TRELEGY, Q2 RELVAR/BREO royalties declined 8% to $54.5, while ANORO royalties increased 17% to $11.3. First-half RELVAR/BREO royalties declined 8% to $105.3; ANORO increased 15% to $20.7.
- Product sales and license revenue were new contributors to the 2023 periods following the 2022 La Jolla acquisition and license milestones. First-half license revenue included an $8.0 Everest milestone and a $3.0 Zai Lab milestone.
- Q2 SG&A rose to $23.5 from $11.8; first-half SG&A rose to $43.3 from $18.3, mainly reflecting the Entasis and La Jolla acquisitions. First-half R&D increased 40% to $27.6, primarily reflecting development activity, including XACDURO.
- First-half operating cash flow decreased to $63.9 from $177.1. Financing cash use included $96.2 to repay the 2023 notes and $50.0 of share repurchases. Cash declined by $118.0 over the half-year.
- Innoviva stockholders’ first-half attributable income rose to $36.1 from $16.7, despite lower consolidated net income; 2022 included substantial income attributable to noncontrolling interests in TRC and Entasis, which were no longer present in 2023.
Outlook, commentary, and risks
- Management said cash resources were expected to cover anticipated debt service, operating needs, and the share repurchase program for at least the next 12 months, based on current plans and forecasts. No quantified revenue or earnings guidance was provided.
- XACDURO received FDA approval on May 23, 2023; Innoviva expected to begin commercial sales later in 2023. Recruitment was complete in the Phase 3 zoliflodacin study, with topline results expected in late 2023.
- Management cited GSK product performance and royalty variability as key dependencies. Innoviva remains exposed to changes in investment fair values; first-half results included net fair-value losses on equity method investments of $4.1 and losses on other equity and long-term investments of $2.2. Q2 equity-method investment losses were $19.9, primarily associated with Armata’s lower share price.
- GIAPREZA faces a patent-infringement dispute after Gland Pharma challenged listed patents in connection with a generic-drug application. The company said it could not reasonably estimate a potential loss and recorded no contingent liability.
- Other risks include reliance on third-party manufacturers, concentration of product sales among three distributors, clinical and regulatory execution, and possible adverse effects from inflation. Management reported no material change to the risk factors in its 2022 Form 10-K.
- After quarter-end, Innoviva extended Armata a $25.0 secured term loan at 14% interest, due January 2025, and extended the maturity of its existing Armata convertible note to January 2025.
Most important facts for investors to verify
- Whether RELVAR/BREO and ANORO royalty trends and GSK sales support future cash generation after the loss of TRELEGY royalties.
- Whether XACDURO launches as expected and whether GIAPREZA and XERAVA sales grow enough to offset acquisition-related costs and royalty obligations.
- The sustainability and cash conversion of earnings, including the effects of fair-value movements, inventory step-up amortization, and working-capital changes.
- Debt repayment and conversion terms, the GIAPREZA deferred royalty agreement, and whether the potential 2024 royalty-rate step-up applies.
- The results and valuation assumptions for the Armata and other strategic investments, including the post-quarter $25.0 loan exposure.
- The progress and potential impact of the GIAPREZA patent litigation and the zoliflodacin Phase 3 results.