Innoviva, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; this is an annual report, not a standalone fourth-quarter filing. Amounts below are U.S. dollars unless stated otherwise.
Business context
Innoviva is a diversified healthcare company combining royalties on respiratory medicines commercialized by GSK with hospital and infectious-disease products, development programs and strategic investments. In 2022, it acquired Entasis and La Jolla, sold its 15% interest in Theravance Respiratory Company (TRC), and consequently ended its entitlement to TRELEGY royalties. It retained royalties on RELVAR/BREO and ANORO.
Financial performance and position
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Total revenue | $331.3 million | $391.9 million |
| Net income attributable to Innoviva stockholders | $213.9 million | $265.9 million |
| Basic / diluted earnings per share | $3.07 / $2.37 | $3.24 / $2.87 |
| Cash from operating activities | $201.7 million | $363.8 million |
- Revenue comprised $311.6 million in net royalty revenue and $19.7 million in product sales recognized after the La Jolla acquisition. Product sales included $14.2 million from GIAPREZA and $5.5 million from XERAVA.
- Royalty revenue fell 20% to $311.6 million. RELVAR/BREO royalties were $215.0 million, down 8%; ANORO royalties were $38.4 million, down 15%; and TRELEGY royalties were $72.0 million through the July 20 TRC sale, down 43% year over year.
- Research and development expense was $41.4 million, primarily for SUL-DUR development. Selling, general and administrative expense was $63.5 million, reflecting consolidation of Entasis and La Jolla.
- Net income included a $266.7 million gain on the TRC sale, a $20.7 million debt-extinguishment loss, and substantial fair-value volatility in investments. The filing reports $161.7 million of losses on equity-method investments and an $8.5 million gain on other equity and long-term investments. Earnings therefore include significant unusual and non-cash items.
- Cash and cash equivalents were $291.0 million at year-end. Current assets were $443.5 million and current liabilities $135.0 million. Total assets were $1.23 billion and stockholders’ equity $565.8 million.
- Year-end debt principal was $549.7 million: $96.2 million of 2023 Notes, $192.5 million of 2025 Notes and $261.0 million of 2028 Notes. The 2023 Notes matured and were fully paid in January 2023. The company reported $46.0 million of future interest payments on the notes as of year-end.
- Net cash used in investing activities was $56.6 million and net cash used in financing activities was $55.6 million. Investing cash flows included $248.2 million of net proceeds from the TRC sale and cash paid for La Jolla; financing included debt repurchases, acquisition of Entasis noncontrolling interests, and share repurchases.
- No conventional operating margin is clearly presented; reported results include royalty revenue, product sales, investment fair-value changes and the TRC gain.
Material changes versus the prior year
- Revenue decreased $60.5 million, mainly reflecting the loss of TRC/TRELEGY royalties after the July sale and lower RELVAR/BREO and ANORO royalties amid U.S. pricing pressure and foreign-exchange effects.
- Net income attributable to Innoviva stockholders decreased $52.0 million. The comparison is affected by investment fair-value changes, the TRC sale gain, and a lower noncontrolling-interest allocation after the sale and Entasis acquisition.
- Operating cash flow fell $162.1 million to $201.7 million. Cash and cash equivalents nevertheless increased by $89.5 million during the year.
- Entasis was consolidated beginning February 17 and acquired in full on July 11; La Jolla was acquired on August 22. These transactions expanded Innoviva into commercial hospital products and infectious-disease development, but make year-over-year comparisons less directly comparable.
- The company issued $261.0 million of 2028 convertible notes and used part of the proceeds to repurchase $144.8 million principal amount of 2023 Notes. It adopted ASU 2020-06, changing convertible-debt and diluted-EPS accounting.
Outlook, commentary and risks
- Management stated that cash and cash equivalents should fund anticipated debt service, operations and the share-repurchase program for at least the next 12 months, based on current plans and forecasts. No quantified revenue or earnings guidance was provided.
- The SUL-DUR NDA received FDA priority review; the target action date was May 29, 2023, with an advisory committee meeting planned. Zoliflodacin Phase 3 enrollment was expected to be completed in 2023. These were forward-looking expectations, not reported outcomes.
- Innoviva authorized a $100 million share-repurchase program. By December 31, 2022, it had repurchased 647,394 shares for approximately $8.5 million; it reported further repurchases of 1,522,947 shares for approximately $19.2 million through February 24, 2023.
- Key business risks include dependence on GSK and competition, generic entry and pricing pressure affecting respiratory royalties; clinical, regulatory and commercialization uncertainty for pipeline and acquired products; integration and acquisition risks; and dependence on third-party manufacturers and collaborators.
- Gland Pharma challenged GIAPREZA patents after filing a generic application. Innoviva filed an infringement suit; the filing says FDA approval of the application is generally blocked until at least 7.5 years after GIAPREZA’s NDA approval unless the court rules against the asserted patents. The company could not reasonably estimate any potential loss.
- GIAPREZA royalties payable to HCR can reach a 14% maximum rate, potentially increasing by 4 percentage points from 2024 if a sales threshold is unmet; aggregate payments are capped at $225 million. Failure to meet specified obligations could trigger accelerated payment provisions.
- The company reported effective disclosure controls and effective internal control over financial reporting. Management and the auditor excluded Entasis and La Jolla from the 2022 internal-control assessment; those businesses represented approximately 33% of total assets and 6% of revenue.
- Auditors issued unqualified opinions on the 2022 financial statements and internal controls. The critical audit matter concerned management’s judgments in determining the primary beneficiary of variable-interest entities.
Important facts for investors to verify
- How GSK product sales, pricing, foreign exchange and generic competition are affecting ongoing RELVAR/BREO and ANORO royalty trends after the loss of TRELEGY royalties.
- Whether SUL-DUR received FDA approval and whether its launch, if approved, can achieve expected hospital adoption, reimbursement and commercial scale; also check the status and results of the zoliflodacin Phase 3 trial.
- The GIAPREZA patent litigation, potential generic timing, HCR royalty terms and any subsequent developments affecting GIAPREZA sales or the deferred royalty obligation.
- Post-acquisition product revenue, operating costs, integration progress and final purchase-accounting valuations for Entasis and La Jolla; the filing said purchase accounting was not yet finalized.
- Debt repayments, refinancing or conversion needs, and the cash impact of the 2025 and 2028 Notes, acquisition obligations, HCR royalties and share repurchases.
- Investment concentration and valuation risks, particularly Armata and the Sarissa-managed ISP Fund; much of the portfolio’s value is exposed to market movements or Level 3 valuation assumptions.
- Whether the company completes integration of acquired businesses into its internal-control framework, given their exclusion from the 2022 assessment.