Innoviva, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter results. Innoviva is a royalty-management company; substantially all revenue comes from royalties and related payments under agreements with GSK for RELVAR/BREO ELLIPTA, ANORO ELLIPTA and TRELEGY ELLIPTA.
Key financial results
| Metric | 2018 | 2017 |
|---|---|---|
| Net revenue | $261.0 million | $217.2 million |
| Operating income | $238.3 million | $183.6 million |
| Net income attributable to Innoviva stockholders | $395.1 million | $134.1 million |
| Diluted EPS | $3.53 | $1.17 |
| Operating cash flow | $223.5 million | $141.7 million |
| Cash, cash equivalents and marketable securities | $114.9 million | $129.1 million |
| Working capital | $193.3 million | $165.6 million |
| Debt principal outstanding | $447.2 million | $677.2 million |
Operating margin was approximately 91%. Reported net income included a $196.1 million non-cash income-tax benefit, primarily from releasing a valuation allowance on deferred tax assets; it is not a recurring operating gain. Cash flow from operations was strong, while financing activities used $238.0 million, principally for $230.0 million of Term B Loan prepayments. Cash and marketable securities fell by $14.2 million year over year.
Revenue and fourth-quarter performance
- Net revenue increased 20% year over year. Net royalty revenue rose 22% to $261.0 million, reflecting growth in RELVAR/BREO and ANORO and increased TRELEGY royalties; the 2017 comparison also included $3.1 million of MABA program revenue.
- 2018 royalties before amortization of capitalized fees were $220.2 million from RELVAR/BREO, $41.3 million from ANORO and $13.4 million from TRELEGY. Innoviva’s royalty share is 15% on the first $3.0 billion of annual global RELVAR/BREO net sales and 5% above that level; ANORO royalties tier from 6.5% to 10%. Innoviva receives 15% of payments under the assigned GSK agreements, including TRELEGY.
- Fourth-quarter revenue was $79.9 million versus $69.5 million in 2017. Innoviva-attributable net income was $263.8 million versus $58.4 million, and diluted EPS was $2.34 versus $0.50; the 2018 quarter included the full $196.1 million tax benefit.
- GSK reported fourth-quarter sales of $431.6 million for RELVAR/BREO, up 7% year over year; $186.2 million for ANORO, up 26%; and $99.0 million for TRELEGY. These are GSK product sales, not Innoviva revenue.
Costs, debt and liquidity
- Total operating expenses declined to $22.8 million from $33.6 million. G&A was $20.1 million, down 38%; 2017 included $8.1 million in proxy-contest and related litigation costs. 2018 included $5.7 million of management-separation severance and a $2.7 million payment under a Sarissa settlement. No R&D expense was recorded in 2018.
- Interest expense declined 45% to $24.0 million, primarily following debt repayment. A $5.7 million debt-extinguishment loss related to Term B Loan prepayments was recorded in other expense.
- Year-end principal debt comprised $241.0 million of 2023 convertible subordinated notes, $192.5 million of 2025 convertible senior notes and $13.8 million of secured Term B Loan. The Term B Loan matures in 2022; the notes mature in 2023 and 2025. Net debt carrying value was $382.9 million after discounts and issuance costs.
- Management said cash, investments and projected royalties should cover anticipated debt service and operating needs for at least 12 months, based on current plans and forecasts. Future financing could be needed if plans or forecasts change.
Outlook, developments and risks
- No specific revenue or earnings guidance was provided. Management’s strategy is to maximize the value of GSK-partnered respiratory assets, optimize operations and capital allocation, and potentially pursue additional royalty-generating assets.
- The European Commission expanded TRELEGY’s COPD label in November 2018. Innoviva cautions that its economic interest in TRELEGY and other assigned-program royalties is 15%, with Theravance Biopharma receiving 85%.
- Key business risk is concentration: future royalties depend on GSK’s commercialization and development decisions, product demand, pricing and reimbursement, treatment guidelines, competition and regulatory outcomes. The filing highlights generic competition, including FDA approval of the first generic Advair in January 2019, and ongoing pricing pressure.
- Innoviva reported six employees and management changes during 2018. No common-stock repurchases were made during the year, and no dividends were declared. The board retains discretion over future capital returns.
- Innoviva remains contingently responsible for certain Theravance Biopharma facility leases if that company defaults: remaining payments were $9.3 million through May 2020, with a $0.5 million guarantee liability recorded. The company reported no material legal proceedings.
- The 2018 financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- How much of future earnings and cash generation is sustainable excluding the one-time, non-cash $196.1 million tax benefit.
- Current GSK product sales, royalty calculations and the effect of pricing, reimbursement, guidelines and generic competition on net royalties.
- Debt repayment, interest costs, convertible-note terms and the liquidity available after scheduled obligations.
- Whether Innoviva can maintain or grow royalty assets beyond its GSK concentration, and what capital-return plans the board adopts.
- Potential utilization limits on tax attributes, including approximately $0.8 billion of federal net operating loss carryforwards, and the assumptions supporting deferred tax asset recognition.