Innoviva, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. Fourth-quarter figures are included where disclosed. Unless otherwise stated, financial amounts are in U.S. dollars.
Business context
Innoviva combines royalty rights on GSK respiratory medicines RELVAR/BREO ELLIPTA and ANORO ELLIPTA with a hospital-focused critical-care and infectious-disease business. Its marketed products include GIAPREZA, XERAVA and, following FDA approval in May 2023, XACDURO. Zoliflodacin, an investigational gonorrhea treatment, reported positive Phase 3 results. Innoviva also holds strategic healthcare investments, including a large interest in Armata Pharmaceuticals.
Comparisons with 2022 are affected by the July 2022 sale of Innoviva’s TRC interest, which ended its TRELEGY royalties, and by the 2022 acquisitions of Entasis and La Jolla. These changes make year-over-year results less directly comparable.
Financial performance and liquidity
| Metric | 2023 | 2022 |
|---|---|---|
| Total revenue | $310.5 million | $331.3 million |
| Net royalty revenue | $238.8 million | $311.6 million |
| Net product sales | $60.6 million | $19.7 million |
| License revenue | $11.0 million | None reported |
| Net income attributable to Innoviva stockholders | $179.7 million; $2.75 basic and $2.20 diluted per share | $213.9 million; $3.07 basic and $2.37 diluted per share |
| Cash provided by operating activities | $141.1 million | $201.7 million |
| Cash and cash equivalents at year-end | $193.5 million | $291.0 million |
| Total debt principal outstanding | $453.5 million | $549.7 million |
Gross royalties from GSK were $252.7 million in 2023, versus $325.5 million in 2022; net royalties reflect $13.8 million of annual amortization of capitalized fees. RELVAR/BREO royalties fell 3% to $208.0 million, while ANORO royalties rose 16% to $44.6 million. The royalty decline primarily reflects the loss of TRELEGY royalties after the TRC sale.
Product sales were $60.6 million: GIAPREZA $41.3 million, XERAVA $17.3 million and XACDURO $2.0 million. The company also reported $11.0 million of license revenue from regulatory milestones. Cost of products sold was $41.0 million, including $27.2 million of acquired-inventory fair-value step-up expense; product gross margin is therefore affected by this acquisition accounting item.
Reported net income included $88.5 million of net favorable fair-value changes in equity-method and other equity/long-term investments, mainly associated with Armata. These gains are valuation-sensitive and not equivalent to recurring operating cash flow. The reported net margin was approximately 57.9%, but it should be interpreted in light of these investment gains and other non-operating items.
Fourth-quarter 2023 gross GSK royalties were $69.6 million, versus $54.7 million in Q4 2022. Product sales and license revenue were $19.7 million, versus $14.6 million. Q4 net income was $61.5 million, or $0.97 basic per share, compared with a net loss of $68.3 million, or a $0.98 basic loss per share, in Q4 2022.
Operating cash flow declined to $141.1 million. Cash fell by $97.5 million during 2023, including $171.8 million of net financing outflows, principally $96.2 million to repay the 2023 Notes at maturity and $75.7 million for share repurchases. Year-end current assets were $344.2 million and current liabilities $38.1 million. Cash plus collaboration and product receivables totaled about $277.6 million. Management stated that available cash should cover anticipated debt service, operating needs and the ongoing repurchase program for at least 12 months.
Debt principal comprised $192.5 million of 2.5% convertible notes due August 2025 and $261.0 million of 2.125% convertible notes due March 2028. The notes are unsecured; future interest payments were estimated at $34.6 million. The balance sheet also included a $69.9 million deferred royalty obligation related to GIAPREZA.
Material changes and management commentary
- Net revenue declined 6% year over year, while net income attributable to stockholders declined about 16%. Net royalty revenue fell 23%, primarily because TRELEGY royalties ended after the TRC sale; acquired product sales and milestone revenue partly offset that decline.
- Research and development expense decreased 18% to $33.9 million, mainly following XACDURO’s approval and a reallocation of resources. Selling, general and administrative expense increased 55% to $98.2 million, reflecting commercialization activity and the acquired businesses.
- Innoviva repurchased 6.17 million shares for approximately $76.5 million during 2023. About $15 million remained under the $100 million authorization at year-end. No cash dividend has been paid since 2015.
- Strategic healthcare assets were valued by the company at $561.0 million at year-end. Changes in investment fair values materially affect reported earnings.
- Management described 2023 as a transition year and emphasized maximizing GSK royalties, growing the critical-care and infectious-disease platform, pursuing acquisitions and optimizing capital allocation.
Outlook, risks and contingencies
- No numerical revenue or earnings guidance was provided. Innoviva said it expects to submit a zoliflodacin New Drug Application to the FDA within the next 12 months. GARDP funded the Phase 3 trial and retains commercial rights in specified lower-income markets; Innoviva retains rights in other territories.
- Royalty results remain substantially dependent on GSK’s commercialization of RELVAR/BREO and ANORO. Generic competition, pricing and reimbursement pressure, changing treatment guidelines, foreign exchange and GSK’s priorities could reduce royalties.
- GIAPREZA faces an ANDA patent dispute with Gland Pharma and related parties. Innoviva has not accrued a loss because the outcome and potential loss could not be reasonably estimated; discovery was scheduled to continue in 2024 and no trial date had been set.
- Under the GIAPREZA royalty financing, the maximum royalty rate payable to HCR increased from 14% to 18% beginning January 1, 2024, subject to sales-based step-downs and a $225 million aggregate payment cap. Failure to meet specified obligations could permit HCR to demand accelerated payments and potentially foreclose on GIAPREZA-related assets.
- PAION, which commercializes GIAPREZA and XERAVA in certain European markets, entered insolvency proceedings; its business operations were agreed for sale to Humanwell. Innoviva was discussing continuation of the commercial relationship with the acquirer.
- Three customers accounted for approximately 85% of 2023 net product sales. The company also relies on third-party manufacturers and faces hospital adoption, reimbursement, regulatory, supply and product-acceptance risks.
- Investment values are exposed to market volatility; some ISP Fund assets are subject to withdrawal restrictions. The company also disclosed acquisition-integration, cybersecurity, tax and debt-related risks.
Important facts for investors to verify
- GSK’s latest product sales, pricing, market share and royalty calculations, including the trend in RELVAR/BREO and ANORO royalties.
- Commercial uptake of XACDURO and the sales, inventory and recurring margin profile of GIAPREZA and XERAVA, excluding inventory fair-value step-up effects.
- Regulatory filing timing and complete trial data for zoliflodacin, plus any subsequent FDA review requirements.
- Developments in the GIAPREZA patent litigation and the practical effect of PAION’s insolvency and business transfer on European sales.
- Cash generation, investment liquidity and fair-value assumptions, the HCR royalty burden, and funding or refinancing plans ahead of the 2025 and 2028 note maturities.
- The filing reports unqualified audit opinions on the financial statements and effective internal control over financial reporting as of December 31, 2023.