Innoviva, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; balance-sheet comparisons are with December 31, 2019. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Innoviva primarily earns royalties from GSK-partnered respiratory medicines RELVAR/BREO, ANORO and TRELEGY. The company reported five employees and relies substantially on royalty revenue from GSK. Innoviva also made investments in Armata Pharmaceuticals, Entasis Therapeutics and Pulmoquine.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $88.7m | $65.8m | $246.3m | $185.0m |
| Operating income | $84.4m | $60.8m | $236.3m | $172.7m |
| Net income | $41.6m | $47.1m | $218.8m | $133.1m |
| Net income attributable to Innoviva stockholders | $28.2m | $39.8m | $170.5m | $111.3m |
| Diluted EPS attributable to Innoviva stockholders | $0.26 | $0.36 | $1.53 | $1.01 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $227.8m | $190.6m |
- Q3 royalty revenue, net of amortization of capitalized GSK fees, rose 35% year over year; nine-month net revenue rose 33%. Nine-month revenue includes a $10.0m MABA program termination fee.
- Product royalties before capitalized-fee amortization were $92.2m in Q3 and $246.7m for the first nine months. Q3 RELVAR/BREO royalties rose 38%, TRELEGY rose 46%, and ANORO rose 3% year over year.
- Q3 net income attributable to Innoviva fell 29% year over year, despite higher operating income. A $29.4m quarterly fair-value loss on equity investments was a major factor; nine-month results included a net $39.2m fair-value gain.
- Cash and cash equivalents were $479.2m at September 30, up from $278.1m at year-end 2019; related-party receivables were $92.2m. Current liabilities were $3.9m.
- Gross debt principal was $433.5m; net carrying value was $383.4m. The debt comprises $241.0m of 2023 Notes and $192.5m of 2025 Notes. Scheduled principal maturities are in 2023 and thereafter, respectively.
- Total assets were $922.3m and stockholders’ equity was $534.9m. Equity investments had a reported fair value of $111.7m.
- The filing does not provide a gross margin measure; revenue is principally royalty income. Interest expense was $13.7m for the first nine months, while interest income fell to $1.5m from $4.0m.
Material changes versus the prior comparable period
- Revenue growth reflected RELVAR/BREO pricing and volume, TRELEGY prescription and market-share growth, and continued ANORO volume growth partly offset by U.S. pricing pressure.
- General and administrative expense decreased 32% for the first nine months, to $8.4m; the prior-year period included legal and related arbitration costs.
- Nine-month operating cash flow increased to $227.8m from $190.6m. Cash increased by $201.1m during the period. Investing included $72.5m of purchases of Armata and Entasis securities; financing cash outflow included $28.0m of distributions to noncontrolling interests.
- Net income attributable to noncontrolling interests increased to $48.3m from $21.8m for the first nine months, principally reflecting growth in TRC’s TRELEGY royalties.
Outlook, commentary, risks and unusual items
- Management stated that cash, cash equivalents, 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 quantified revenue or earnings guidance was provided.
- Management attributed lower interest income to reduced interest rates during the COVID-19 pandemic. The filing identifies potential risks from lower-than-expected GSK royalties, product commercialization, COVID-19 effects, development and regulatory outcomes, and future financing availability.
- In June 2020, GSK terminated the MABA program and paid TRC a $10.0m fee, recognized as revenue in the nine-month period.
- Innoviva reported unrealized fair-value losses in Q3 on Armata and Entasis investments, but net unrealized gains for the nine-month period. These investment valuations may make reported earnings volatile.
- A new arbitration initiated by Theravance Biopharma on October 6, 2020 challenges Innoviva’s authority to direct TRC to pursue non-TRELEGY investments and alleges TRC should distribute substantially all GSK royalties. A hearing was scheduled for Q1 2021; Innoviva said it would defend the claims, with no assurance of success.
- In early October, TRC invested $15.0m in a privately held biopharmaceutical company. Innoviva also consolidates Pulmoquine, which is developing an aerosolized hydroxychloroquine formulation for respiratory infections, including COVID-19; it had no revenue in the period.
- The company reported no litigation then believed likely to materially affect results or financial position, while separately disclosing the arbitration described above. Management concluded disclosure controls were effective as of September 30, 2020.
Key facts for investors to verify
- GSK product sales, royalty calculations and the degree of continued dependence on the GSK portfolio.
- How the new TRC arbitration may affect investment authority, royalty distributions and capital allocation.
- Armata and Entasis investment values, warrant assumptions and the effect of future price changes on earnings and equity.
- Debt terms, cash settlement intentions for the 2025 Notes, and the company’s liquidity under lower-royalty scenarios.
- Progress, funding needs and risks for Pulmoquine and other TRC investments, including the subsequent $15.0m investment.