Innoviva, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. Innoviva is primarily a royalty-management company whose principal revenue comes from respiratory medicines commercialized by GlaxoSmithKline (GSK). The filing is an annual report, not a standalone fourth-quarter report.
Business context and operating highlights
Innoviva receives royalties on GSK sales of RELVAR/BREO ELLIPTA, ANORO ELLIPTA and TRELEGY ELLIPTA. Its royalty rates vary by product and sales tier; Innoviva receives 15% of payments on TRELEGY and other products assigned to Theravance Respiratory Company (TRC). GSK owned approximately 31.6% of Innoviva’s common stock at year-end.
GSK-reported fourth-quarter 2020 product sales were $372.8 million for RELVAR/BREO (up 5% year over year), $200.9 million for ANORO (up 10%) and $313.6 million for TRELEGY (up 42%). These are GSK product sales, not Innoviva revenue.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Total net revenue | $336.8 million | $261.0 million | Up 29% |
| Royalty revenue, net of milestone-fee amortization | $326.8 million | $261.0 million | Up 25% |
| Income from operations | $321.1 million | $246.4 million | Up $74.8 million |
| Net income attributable to Innoviva stockholders | $224.4 million | $157.3 million | Up 43% |
| Diluted earnings per share | $2.02 | $1.43 | Up $0.59 |
| Net cash from operating activities | $313.1 million | $257.5 million | Up $55.7 million |
FY2020 operating margin was approximately 95% of revenue, calculated from reported operating income and revenue. Net income attributable to Innoviva increased largely because of a $50.3 million unrealized gain in equity investments. The company reported $60.4 million of income tax expense, compared with $41.9 million in 2019. Reported net income was $293.8 million before $69.4 million attributable to noncontrolling interests.
At December 31, 2020, cash and cash equivalents were $246.5 million, royalty receivables were $93.9 million, and equity and other long-term investments were $438.3 million. Total assets were $999.6 million; stockholders’ equity was $607.8 million. Debt principal totaled $433.5 million—$241.0 million of 2.125% convertible notes due 2023 and $192.5 million of 2.5% convertible notes due 2025. Net carrying value of debt was $385.5 million. Management said cash, projected royalties and cash equivalents were expected to meet operating and debt-service needs for at least 12 months.
Investing activities used $314.9 million, principally reflecting investment purchases, including the $300 million contribution to ISP Fund LP. Financing activities used $29.8 million, primarily distributions to noncontrolling interests. No company purchases of its own equity securities were reported for 2020.
Material changes versus prior year
- Royalty revenue rose as RELVAR/BREO benefited from favorable pricing adjustments and volume growth, ANORO recorded continued volume growth despite U.S. pricing pressure, and TRELEGY grew prescriptions and market share.
- RELVAR/BREO royalties increased to $221.5 million from $189.4 million; ANORO to $46.0 million from $42.6 million; and TRELEGY to $73.1 million from $42.8 million.
- Innoviva recognized a $10.0 million MABA-program termination fee after GSK ended the program in June 2020.
- The company’s $300 million investment in ISP Fund LP and other healthcare investments materially changed its investment mix; equity and other long-term investments were nil at year-end 2019 and $438.3 million at year-end 2020.
- Operating cash flow increased, while cash and cash equivalents declined to $246.5 million from $278.1 million, primarily amid substantial investing outflows.
Outlook, risks and unusual items
- No quantitative company revenue or earnings guidance is provided in the filing. Management described its liquidity as adequate for at least the next 12 months, subject to operating plans and forecasts.
- Revenue remains highly concentrated in GSK-partnered products. Innoviva does not control GSK’s development, manufacturing, pricing or commercialization decisions. Competition, generic launches, payer discounts, changing treatment standards, regulatory developments and shifts in GSK priorities could reduce royalties.
- The $300 million ISP Fund LP investment is managed by a Sarissa Capital affiliate, with a 1% management fee and 10% performance allocation. The investment has a 36-month lock-up, followed by withdrawal limits, including a 25% quarterly gate. Innoviva consolidates the fund as a variable-interest entity.
- Innoviva’s investments include significant positions in Armata and Entasis, whose stock and warrants generated reported fair-value gains. Such gains are market-sensitive and may reverse. The filing also describes an additional Armata investment agreement entered into in January 2021, including a completed $6.1 million first tranche and a conditional second tranche.
- A Theravance Biopharma arbitration concerning Innoviva’s authority as TRC manager to retain and reinvest royalties was pending, with a hearing scheduled for the first quarter of 2021. An earlier arbitration decision confirmed Innoviva’s authority over certain matters but found a technical breach concerning delivery of financial plans; the court confirmed that award in May 2020.
- Other principal risks include $433.5 million of debt, possible limits on use of approximately $0.4 billion of federal net operating loss carryforwards, reliance on a small workforce and outsourced functions, and uncertainty about the effect of COVID-19 on royalties and investments.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified the assessment of variable-interest entities and primary beneficiaries as a critical audit matter.
Key facts for investors to verify
- GSK’s subsequent product sales, royalty reports and pricing/rebate trends, especially for RELVAR/BREO, ANORO and TRELEGY.
- The performance, valuation, fees, governance and withdrawal terms of ISP Fund LP, and the sensitivity of reported investment gains to market prices.
- The status and outcome of the pending TRC arbitration and any effect on royalty distributions or reinvestment authority.
- Debt repayment or conversion plans ahead of the 2023 and 2025 maturities, and whether available liquidity remains adequate.
- Armata and Entasis ownership, warrant valuations, financing needs and clinical-development progress, including the conditional Armata investment tranche.
- Potential limitations or expiration of tax attributes and the continuing effect of GSK revenue concentration, generic competition and COVID-19.