Innoviva, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results; financial amounts below are in millions unless noted. Innoviva’s core business is receiving royalties on GSK respiratory products RELVAR/BREO, ANORO and TRELEGY, alongside healthcare investments.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total net revenue | $100.8 | $78.9 | $186.3 | $157.6 |
| Operating income | $96.5 | $75.8 | $176.0 | $151.9 |
| Net income | $110.8 | $98.2 | $220.5 | $177.2 |
| Net income attributable to Innoviva stockholders | $88.9 | $76.8 | $183.1 | $142.3 |
| Diluted EPS | $0.90 | $0.69 | $1.73 | $1.27 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $168.7 | $153.3 |
Q2 revenue was entirely royalty revenue in 2021; Q2 2020 included $10.0 million from the MABA strategic alliance program. Q2 2021 royalty revenue, net of fee amortization, increased 46% year over year. For the first half, royalties increased 25%. Operating expenses were $4.3 million in Q2 and $10.3 million in the first half, including higher G&A driven mainly by business-development advisory fees and legal costs related to arbitration.
Investment fair-value gains were $45.3 million in Q2 and $100.4 million in the first half, materially contributing to reported earnings. Q2 gains included a $44.7 million gain on Entasis investments, partly offset by a $24.3 million Armata loss; the filing reports net gains across the portfolio. Reported net income therefore reflects investment valuation changes as well as royalty operations.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $43.3 million, down from $246.5 million at year-end 2020. Receivables from collaborative arrangements were $104.3 million; current assets were $148.3 million and current liabilities were $5.4 million.
- Six-month cash from operations was $168.7 million. Investing activities provided $63.6 million, including a $110.0 million distribution from ISP Fund LP, partly offset by $46.4 million of investments. Financing activities used $435.6 million, primarily the GSK share repurchase and distributions to noncontrolling interests.
- Debt principal totaled $433.5 million: $241.0 million of 2023 Notes and $192.5 million of 2025 Notes. Net carrying value was $390.0 million. Contractual maturities are in 2023 and 2025; first-half interest expense was $9.4 million.
- In May, Innoviva repurchased all GSK-held shares—32.0 million shares, approximately 32% of the company—at $12.25 per share; total consideration including fees was $394.1 million. The shares are held as treasury stock. Shares outstanding were 69.5 million at June 30, versus 101.4 million at December 31, 2020.
- Management stated that projected royalties and cash, cash equivalents and marketable securities should cover anticipated debt service and operating needs for at least 12 months, subject to current plans and forecasts.
Business trends, outlook and risks
- GSK-reported Q2 global net sales increased 45% for RELVAR/BREO to $439.5 million, 7% for ANORO to $184.0 million and 69% for TRELEGY to $405.9 million. Innoviva’s corresponding Q2 royalties were $65.9 million, $12.0 million and $26.4 million, respectively.
- No numerical revenue or earnings guidance was provided. Management cautioned that interim results may not indicate full-year results and said future results depend on royalty performance, capital deployment and business-development plans.
- Innoviva invested in Armata, Entasis, InCarda and ImaginAb, and consolidates ISP Fund LP. Publicly traded investment values and warrants can create substantial earnings volatility. A $110.0 million ISP Fund distribution used to fund the repurchase must be recontributed before March 31, 2022; recontributed amounts are subject to a 36-month lock-up.
- Key business risks include lower-than-expected GSK product royalties, competition, commercialization and product-market risks, and execution and capital-allocation risks. Management reported no material changes to the risk factors in its 2020 Form 10-K.
- Theravance Biopharma’s arbitration dispute over Innoviva’s authority to direct TRC investment and royalty distributions resulted in a March 2021 award largely in Innoviva’s favor. A motion alleging a mathematical error in the award remained pending before the Delaware Court of Chancery at the filing date. The company said current litigation was not expected to materially affect results or financial position.
- Effective tax rate for the first half was 18.6%, compared with 17.0% in 2020. Management attributed the rate below the 21% federal statutory rate primarily to non-deductible expenses and noncontrolling interest.
Important facts for investors to verify
- Whether GSK product sales and prescription growth sustain the royalty growth, particularly for TRELEGY and RELVAR/BREO.
- How much of earnings growth is recurring royalty income versus volatile investment fair-value gains.
- Liquidity following the $394.1 million repurchase, including the required $110.0 million ISP Fund recontribution and the fund’s lock-up terms.
- Debt service and the 2023 and 2025 note maturities relative to future royalty cash flows.
- The outcome of the pending arbitration-award motion and any resulting effect on TRC distributions, investment authority or legal expense.