Innoviva, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. Innoviva earns royalties primarily from GSK-partnered respiratory medicines and also invests in healthcare companies. Amounts below are in U.S. dollars; financial statement figures are in millions unless specified.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Royalty revenue, net of capitalized-fee amortization | $90.1 | $85.5 | +5% |
| Income from operations | $77.7 | $79.5 | -2% |
| Net income | $37.9 | $109.7 | -65% |
| Net income attributable to Innoviva stockholders | $15.8 | $94.1 | -83% |
| Basic / diluted EPS | $0.23 / $0.20 | $0.93 / $0.84 | Lower |
| Operating cash flow | $98.1 | $84.1 | +$14.0 |
| Cash and cash equivalents at quarter-end | $216.8 | $201.5 at year-end 2021 | +$15.3 |
Royalty revenue by product: RELVAR/BREO $55.8 million (-1%); ANORO $8.4 million (-20%); TRELEGY $29.3 million (+33%). GSK-reported sales were $371.8 million, $129.9 million and $450.9 million, respectively. Management attributed the revenue increase primarily to TRELEGY prescription growth.
Profit was affected by a $20.7 million loss on extinguishment of debt and a $9.4 million net decrease in fair values of equity and long-term investments, compared with a $55.0 million net fair-value gain in Q1 2021. Interest expense was $3.0 million versus $4.7 million; income tax expense was $6.9 million, at a 15.3% effective rate. Operating expenses totaled $12.3 million, including $5.8 million of R&D, primarily attributable to Entasis.
Cash, debt and liquidity
Cash provided by operations was $98.1 million; investing activities used $143.2 million and financing activities provided $60.3 million. Investing outflows included $134.3 million of purchases of ISP Fund LP investments and $56.2 million of investments in Armata, InCarda and Nanolive, partly offset by investment sales and $23.1 million of cash acquired through Entasis consolidation.
Gross convertible debt was $549.7 million at March 31, 2022: $96.2 million due 2023, $192.5 million due 2025 and $261.0 million due 2028. Net carrying debt was $538.7 million. The 2023 notes are classified as current. Cash and cash equivalents were $216.8 million; receivables from GSK were $93.5 million. Management stated that projected royalties and available cash and investments are expected to meet anticipated debt-service and operating needs for at least the next 12 months, subject to assumptions in its operating plans and forecasts.
Material changes and notable items
- In March, Innoviva issued $261.0 million of 2.125% convertible notes due 2028. It used $165.6 million of proceeds to repurchase $144.8 million principal amount—about 60%—of its 2023 notes, and paid $21.0 million for capped-call transactions. The repurchase generated the $20.7 million accounting loss.
- Effective February 17, Innoviva began consolidating Entasis after a $15.0 million convertible-note investment made it the primary beneficiary of that variable-interest entity. It recognized $105.0 million of in-process R&D intangible assets, $5.5 million of goodwill and $38.5 million of noncontrolling interest. Entasis contributed a $4.5 million net loss after consolidation. Purchase accounting remained preliminary.
- Innoviva invested $45.0 million in Armata shares and warrants during Q1; its reported ownership rose to approximately 69.4%. It also invested $9.8 million in Nanolive preferred shares, plus related costs.
- Effective January 1, 2022, Innoviva adopted ASU 2020-06 for convertible-debt accounting. Adoption materially changed the carrying amount and presentation of the 2025 notes and EPS dilution calculation; prior-period results were not restated.
Outlook, risks and contingencies
The filing provides no quantified revenue or earnings guidance. Management’s liquidity outlook is based on current plans and financial forecasts; additional financing could be needed sooner if those plans change, and acceptable financing may not be available. Key stated risks include lower-than-expected GSK product royalties, competition, commercialization performance, and execution of growth and capital-allocation strategies. Results are exposed to volatility in strategic-investment valuations. The filing reports no material change in risk factors from the 2021 Form 10-K, no litigation expected to materially affect financial position or operating results, and effective disclosure controls as of quarter-end.
The Entasis facility lease was renewed for three years through 2025; undiscounted future Entasis lease payments were approximately $4.4 million. A prior-period cash-flow presentation correction was described as immaterial and did not affect total investing cash flows or the prior-period balance sheet or income statement.
Investor verification points
- Check subsequent GSK sales and royalty trends, particularly TRELEGY growth and ANORO declines.
- Review the final Entasis purchase-price allocation, development funding needs, and outcome of Innoviva’s non-binding offer for remaining Entasis shares at $2.00 per share.
- Assess the 2023 note repayment and remaining debt maturities, including conversion, refinancing and cash-settlement implications of the convertible notes.
- Evaluate liquidity against the 36-month lock-up on ISP Fund LP contributions and the valuation and liquidity risks of strategic investments.
- Monitor investment fair-value movements and their impact on reported earnings, which differed substantially between the periods compared.