Innoviva, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted.
Business context
Innoviva primarily earns royalties on respiratory medicines commercialized by GSK: RELVAR/BREO ELLIPTA, ANORO ELLIPTA and TRELEGY ELLIPTA. The company reported five employees and consolidated Theravance Respiratory Company, LLC (TRC), a variable interest entity. Its results depend substantially on royalty income from GSK.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Royalty revenue, net | $78.7 million | $55.2 million; up 43% |
| Operating expenses | $2.6 million | $3.0 million |
| Income from operations | $76.1 million | $52.2 million |
| Income before taxes | $94.9 million | $48.5 million |
| Net income | $79.0 million | $40.0 million |
| Net income attributable to Innoviva stockholders | $65.4 million | $33.8 million |
| Basic / diluted earnings per share | $0.65 / $0.59 | $0.33 / $0.31 |
| Operating cash flow | $73.5 million | $76.7 million |
| Cash and cash equivalents | $352.0 million | $278.1 million at December 31, 2019 |
| Short-term marketable securities | $32.0 million | $72.7 million at December 31, 2019 |
| Net long-term debt carrying value | $379.2 million | $377.1 million at December 31, 2019 |
Cash, cash equivalents and marketable securities totaled $384.0 million at quarter-end; royalty receivables were $82.1 million. Current assets were $466.9 million versus current liabilities of $2.8 million. Gross note principal was $433.5 million: $241.0 million due in 2023 and $192.5 million due in 2025. Management said available cash and projected royalties were expected to cover debt service and operating needs for at least 12 months, based on current plans and forecasts.
Revenue changes and notable items
- RELVAR/BREO royalties were $56.1 million, up 31%; ANORO royalties were $9.9 million, up 15%; and TRELEGY royalties were $16.1 million, up 120% year over year.
- Total royalties before amortization of capitalized fees were $82.1 million, up 40%. Management attributed growth to increased prescriptions and a one-time favorable U.S. rebate adjustment for RELVAR/BREO.
- Q1 results included a $21.9 million unrealized gain from fair-value changes in Armata Pharmaceuticals investments. Innoviva invested $25.0 million for common shares and warrants; its reported 46.7% ownership did not give it control. This non-operating gain materially contributed to the increase in pretax income.
- Net income attributable to noncontrolling interest was $13.5 million, compared with $6.2 million a year earlier, reflecting TRC income and TRELEGY growth. Innoviva distributed $15.8 million to noncontrolling interest during the quarter.
Cash flow, outlook and risks
Operating cash flow was $73.5 million. Investing activities provided $16.0 million, primarily from $54.0 million of security maturities, partly offset by security purchases and the $25.0 million Armata investment. Financing activities used $15.6 million, mainly for distributions to noncontrolling interest. Operating cash flow was below the prior-year period despite higher net income; the prior-year period benefited from a substantial collection of collaborative-arrangement receivables.
No specific earnings or revenue guidance was provided. The filing cautions that interim results are not necessarily indicative of full-year results. Innoviva said the COVID-19 pandemic’s effect on GSK royalties could not yet be predicted and that prolonged economic or supply-chain disruption could materially affect revenue and financial condition.
A subsequent event: on April 12, 2020, Innoviva agreed, subject to closing conditions, to invest approximately $35 million in Entasis Therapeutics common stock and warrants, expected in two tranches in Q2 2020. The company also disclosed an arbitration-related dispute with Theravance Biopharma concerning TRC distributions and reinvestment: the arbitrator found no breach in withholding royalties or pursuing reinvestment, but found a technical breach of financial-plan delivery requirements; the Delaware action to confirm the award remained pending.
Key facts for investors to verify
- How much of the reported earnings increase reflects recurring royalty growth versus the $21.9 million Armata fair-value gain and one-time rebate adjustment.
- GSK product sales, prescription trends and any COVID-19-related effects on royalties, given Innoviva’s substantial reliance on these revenues.
- Armata’s investment valuation and performance, including the assumptions underlying the warrants’ fair value.
- Debt terms and maturity obligations, particularly the 2023 and 2025 convertible notes, and management’s liquidity assumptions.
- Completion and terms of the proposed Entasis investment, and developments in the TRC-related Delaware proceedings.