Innoviva, Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing also provides unaudited fourth-quarter results. Filed February 19, 2020.
Business context
Innoviva is primarily a royalty company whose revenue depends on respiratory products commercialized by GSK: RELVAR/BREO ELLIPTA, ANORO ELLIPTA and TRELEGY ELLIPTA. Innoviva receives tiered royalties on RELVAR/BREO and ANORO, and 15% of royalties on TRELEGY and certain other rights assigned to Theravance Respiratory Company (TRC). GSK handles development, manufacturing and commercialization. Innoviva reported six employees at year-end.
Financial results and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net revenue | $261.0 million | $261.0 million |
| Operating income | $246.4 million | $238.3 million |
| Net income | $191.0 million | $406.3 million |
| Net income attributable to Innoviva stockholders | $157.3 million | $395.1 million |
| Diluted earnings per share | $1.43 | $3.53 |
| Cash from operating activities | $257.5 million | $223.5 million |
Operating margin was approximately 94.4% in 2019, versus 91.3% in 2018. The sharp decline in reported net income and EPS chiefly reflects the comparison with a $196.1 million deferred-tax benefit recorded in 2018; 2019 included $41.9 million of income tax expense.
2019 royalties before amortization of capitalized fees were $274.8 million: RELVAR/BREO $189.4 million, ANORO $42.6 million and TRELEGY $42.8 million. After $13.8 million of amortization, net royalty revenue was $261.0 million.
At December 31, 2019, cash, cash equivalents and marketable securities totaled $350.8 million; working capital was $425.9 million; total assets were $724.8 million; and Innoviva stockholders’ equity was $313.5 million. Royalties receivable from GSK were $79.4 million.
Principal debt outstanding was $433.5 million: $241.0 million of 2.125% convertible subordinated notes due 2023 and $192.5 million of 2.5% convertible senior notes due 2025. Net carrying value of long-term debt was $377.1 million. The $13.8 million remaining Term B Loan balance was repaid in December 2019. Management stated that cash and projected royalties were expected to cover anticipated operating and debt-service needs for at least 12 months.
Fourth-quarter results and period comparisons
Unaudited Q4 2019 net revenue was $76.0 million, down from $79.9 million in Q4 2018. Income from operations was $73.6 million versus $77.2 million. Net income attributable to Innoviva stockholders was $45.9 million, compared with $263.8 million in Q4 2018, which included the $196.1 million tax benefit. Q4 2019 diluted EPS was $0.42 versus $2.34.
Full-year revenue was essentially flat. RELVAR/BREO royalties declined 14% to $189.4 million, primarily due to U.S. pricing pressure, partly offset by volume growth. ANORO royalties rose 3% to $42.6 million, while TRELEGY royalties increased to $42.8 million from $13.4 million as prescriptions and market share grew. Lower general and administrative expense ($14.7 million, down from $22.8 million) and lower interest expense ($18.7 million, down from $24.0 million) supported operating performance. Operating cash flow increased by $33.9 million year over year.
GSK’s Q4 2019 product sales were $354.4 million for RELVAR/BREO (down 18% year over year), $182.7 million for ANORO (down 2%) and $221.4 million for TRELEGY (up substantially from $99.0 million). These are GSK product sales, not Innoviva revenue.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management cited dependence on future royalties and GSK’s commercial and development decisions.
- Key business risks include reliance on GSK for essentially all current and projected revenue; competitive products and generics; pricing, rebates and reimbursement pressure; changes in COPD/asthma treatment guidelines; and potential shifts in GSK’s portfolio priorities, including toward TRELEGY, for which Innoviva retains only a 15% economic interest.
- GSK beneficially owned approximately 31.6% of Innoviva’s common stock at year-end, creating potential influence and conflicts of interest. Innoviva also warned that GSK-related disputes or restrictions could affect royalty monetization transactions.
- In an arbitration brought by Theravance Biopharma concerning TRC distributions and reinvestment, the arbitrator found no breach for withholding royalties or pursuing reinvestment, but found a technical breach concerning quarterly financial plans, awarded limited injunctive relief and no damages on that issue. Innoviva was awarded indemnification from TRC for 95% of its arbitration fees and expenses. A Delaware action to confirm the award remained pending.
- Innoviva disclosed a $2.8 million potential exposure under a guarantee of Theravance Biopharma’s South San Francisco facility leases, which run through May 2020. The carrying value of the guarantee was $0.1 million.
- Subsequent event: In January 2020, Innoviva agreed to invest up to approximately $25 million in Armata Pharmaceuticals common stock and warrants, subject to closing conditions, with the investment expected in two tranches. Innoviva may appoint two Armata directors while meeting the stated ownership threshold.
- The company reported effective disclosure controls and internal control over financial reporting. The auditor issued unqualified opinions on the financial statements and internal controls and reported no critical audit matters.
Most important facts for investors to verify
- Whether GSK’s product-level sales, pricing, market share and royalty reporting support the trajectory in Innoviva’s reported royalties—especially the decline in RELVAR/BREO and growth in TRELEGY.
- How generic competition, reimbursement changes and evolving treatment guidelines affect future net sales and royalty rates.
- Debt repayment, conversion and maturity terms for the 2023 and 2025 notes, alongside cash, securities and future royalty receipts.
- The outcome of the Delaware proceeding confirming the TRC arbitration award, and the terms and completion of the planned Armata investment.
- Availability and potential limitations on approximately $0.6 billion of federal net operating loss carryforwards, including ownership-change restrictions.
- Whether capital returns resume: no company share repurchases were made in 2019, and the filing gives no assurance of future repurchases or dividends.