Innoviva, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Unless otherwise indicated, figures are in millions of dollars. Innoviva is a royalty-management company whose revenue primarily comes from GSK respiratory products RELVAR/BREO, ANORO and TRELEGY.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Royalty revenue, net | $65.8 | $61.7 | $185.0 | $181.1 |
| Operating income | $60.8 | $57.7 | $172.7 | $161.0 |
| Income before taxes | $57.6 | $50.2 | $162.6 | $137.1 |
| Income tax expense | $10.6 | — | $29.5 | — |
| Net income | $47.1 | $50.2 | $133.1 | $137.1 |
| Net income attributable to Innoviva stockholders | $39.8 | $47.1 | $111.3 | $131.3 |
| Diluted EPS attributable to Innoviva stockholders | $0.36 | $0.43 | $1.01 | $1.19 |
| Operating cash flow | — | — | $190.6 | $161.8 |
Revenue mix: Q3 royalties before amortization were $46.4 million from RELVAR/BREO, $11.5 million from ANORO and $11.2 million from TRELEGY. Net royalty revenue grew 7% in Q3 and 2% year to date. Gross royalties increased 6% in Q3 and 2% year to date; amortization of capitalized fees was unchanged.
Cash and liquidity: At September 30, cash and cash equivalents were $172.9 million and short-term marketable securities were $124.3 million, totaling $297.2 million. Collaborative-arrangement receivables were $69.2 million. Current assets were $366.8 million versus current liabilities of $3.3 million. Management stated available cash, investments and projected royalties should cover anticipated debt service and operating needs for at least 12 months.
Debt: Gross principal debt was $447.2 million: $13.8 million Term B Loan, $241.0 million 2023 Notes and $192.5 million 2025 Notes. Net carrying debt was $388.6 million after unamortized discounts and issuance costs. The Term B Loan matures in August 2022; scheduled principal maturities include $241.0 million in 2023 and $192.5 million thereafter. Interest expense was $14.0 million for the first nine months, down 28% year over year.
Margins: The filing does not report a named profit-margin measure. Operating income was approximately 92.5% of net royalty revenue in Q3 and 93.3% for the first nine months.
Material changes versus the prior comparable period
- RELVAR/BREO royalty revenue declined 10% in Q3 and 12% year to date, primarily reflecting U.S. pricing pressure, partly offset by volume growth.
- ANORO royalty revenue increased 18% in Q3 and 6% year to date, with volume growth partly offset by U.S. pricing pressure.
- TRELEGY royalty revenue rose to $11.2 million in Q3 from $3.6 million, and to $28.4 million year to date from $6.9 million, alongside continued prescription and market-share growth.
- GSK-reported Q3 product sales were $309.5 million for RELVAR/BREO (down 10%), $177.7 million for ANORO (up 18%) and $172.8 million for TRELEGY (up substantially from $55.7 million).
- Innoviva stockholder net income declined despite higher operating income, principally alongside 2019 income tax expense and higher net income allocated to noncontrolling interests. The 2018 comparison had immaterial tax expense because a full valuation allowance was maintained.
- Nine-month G&A fell 29% to $12.3 million, mainly due to lower personnel costs and the absence of 2018 severance and a $2.7 million Sarissa reimbursement. Q3 G&A increased to $5.0 million and included arbitration-related costs.
- Cash and cash equivalents increased from $62.4 million at year-end 2018; net operating cash flow improved. Investing cash outflow largely reflected purchases of short-term securities, while 2018 financing outflow included $230 million of Term B Loan prepayments.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management cited dependence on GSK product royalties and the risk that future royalties could be lower than expected, including from commercialization outcomes and pricing pressure.
- Management identified potential risks involving product commercialization, development and regulatory outcomes, corporate-development plans, and the timing and amount of possible capital returns. It cautioned that forward-looking statements are uncertain.
- In the TRC arbitration, the arbitrator ruled Innoviva did not breach the operating agreement or fiduciary duties by withholding royalties or pursuing reinvestment opportunities. A technical breach involving quarterly financial plans was found, but no damages were awarded; limited injunctive relief expanded disclosure obligations. Innoviva was entitled to 95% indemnification of its arbitration fees and expenses from TRC. A Delaware court proceeding to confirm the award remained pending.
- Innoviva terminated its headquarters lease in September and entered into a new Burlingame lease expected to commence in early November. It incurred $0.6 million in termination fees. The lease termination reversed previously recognized right-of-use assets and lease liabilities.
- Innoviva consolidates TRC as a variable interest entity and recognizes noncontrolling interests; Theravance Biopharma holds 85% of TRC’s economic interests. TRC-related TRELEGY royalties contributed to the increase in noncontrolling-interest income.
- The company guaranteed certain Theravance Biopharma facility lease obligations in the event of default; remaining lease payments were $4.4 million through May 2020. Disclosure controls were assessed as effective at a reasonable-assurance level, with no material internal-control changes reported for the quarter.
Key facts for investors to verify
- GSK’s latest product-level sales, regional trends and pricing effects—particularly the decline in RELVAR/BREO and growth in TRELEGY.
- The pace and durability of TRELEGY royalty growth and the related allocation of TRC earnings to noncontrolling interests.
- Tax expense and deferred-tax assumptions following the change from the prior-year valuation-allowance position.
- Debt terms, scheduled maturities, cash available for debt service and any future capital-return or reinvestment decisions.
- Status and implementation of the arbitration award, including the pending confirmation proceeding and TRC indemnification.