Innoviva, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial amounts below are in millions of dollars unless stated otherwise. Innoviva primarily earns royalties from GSK respiratory products RELVAR/BREO, ANORO and TRELEGY.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total net revenue | $78.9 | $64.1 | $157.6 | $119.3 |
| Operating income | $75.8 | $59.8 | $151.9 | $111.9 |
| Net income | $98.2 | $46.1 | $177.2 | $86.1 |
| Net income attributable to Innoviva | $76.8 | $37.7 | $142.3 | $71.5 |
| Diluted earnings per share | $0.69 | $0.34 | $1.27 | $0.65 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $153.3 | $133.2 |
- Q2 revenue rose 23%; royalty revenue increased 8%. Six-month revenue rose 32%, including a one-time $10.0 MABA termination fee.
- Q2 operating expenses were $3.2 versus $4.3; six-month expenses were $5.7 versus $7.4. Operating income was about 96% of revenue in Q2 2020 versus 93% in Q2 2019; the filing does not present a gross margin measure.
- Q2 results included $46.7 of gains from changes in fair value of equity investments; the six-month gain was $68.6. These non-cash valuation gains materially increased reported net income.
- At June 30, cash and cash equivalents were $413.1 and short-term marketable securities were $4.0, totaling $417.1. Receivables from collaborative arrangements were $82.4. Total current assets were $500.2 versus current liabilities of $5.4.
- Gross principal debt was $433.5, comprising $241.0 of 2023 Notes and $192.5 of 2025 Notes. Net carrying debt was $381.2. Debt fair value was $445.3. No scheduled maturities fall before 2023; $241.0 is due in 2023 and $192.5 thereafter.
- Cash increased $135.1 during the first half. Investing cash flow was positive $9.0, including $60.0 invested in Armata and Entasis; financing cash flow was negative $27.3, primarily from distributions to noncontrolling interests.
Changes and business developments
- Product royalty trends differed: Q2 RELVAR/BREO royalties fell 3% to $45.6, ANORO rose 5% to $11.2, and TRELEGY rose 59% to $15.6. Management cited U.S. pricing pressure affecting RELVAR/BREO and ANORO, partly offset by volume growth; TRELEGY growth reflected increased prescriptions and market share.
- GSK reported Q2 product net sales of $303.8 for RELVAR/BREO, $172.3 for ANORO and $240.5 for TRELEGY. These are GSK sales, not Innoviva revenue.
- Innoviva invested $25.0 in Armata and $35.0 in Entasis. At period-end, the investments’ reported fair values were $60.3 and $68.3, respectively. Innoviva held approximately 46.7% of Armata and 51.3% of Entasis; it reported significant influence but not control over either.
- In June, GSK terminated the MABA program and paid TRC a $10.0 termination fee, recognized as collaboration revenue. Pavel Raifeld was named CEO in May 2020.
- Net income attributable to noncontrolling interests increased to $21.4 in Q2 from $8.3, mainly reflecting TRELEGY-related growth in TRC. Innoviva’s ownership of TRC’s economic interests is 15%.
Outlook, risks and contingencies
- Management said cash, marketable securities and projected royalties should cover anticipated debt service and operating needs for at least the next 12 months, based on current plans and forecasts. No numerical revenue or earnings guidance was provided.
- Innoviva relies significantly on GSK royalties. The company said it could not predict the COVID-19 pandemic’s impact on royalty revenue or investee operations; prolonged economic or supply-chain disruption could materially affect results.
- Other stated risks include lower-than-expected product royalties, commercialization and development outcomes, clinical and regulatory timing, investment and corporate-development execution, and the timing and amount of potential capital returns.
- Fair-value changes in Armata and Entasis create earnings volatility; their reported gains were unrealized. The filing also notes that actual results may differ from interim results and forward-looking expectations.
- A prior arbitration with Theravance Biopharma over TRC distributions and reinvestment was resolved: the arbitrator found no breach in withholding royalties or pursuing reinvestment, but found a technical breach related to quarterly financial plans. The award was confirmed by Delaware Chancery Court on May 4, 2020.
- Disclosure controls were assessed as effective; the company reported no material changes in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether GSK product sales and Innoviva royalty trends continue, particularly TRELEGY growth and U.S. pricing pressure on RELVAR/BREO and ANORO.
- How much future earnings depend on non-cash fair-value changes versus recurring royalties, and the valuation assumptions and liquidity of the Armata and Entasis holdings.
- Cash availability relative to debt obligations, including the 2023 Notes maturity and the company’s distribution or reinvestment decisions involving TRC.
- Any measurable COVID-19 effects on royalty revenue, product demand, or portfolio-company development plans.