Innoviva, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Innoviva’s primary business is receiving royalties from GSK on respiratory products RELVAR/BREO, ANORO and TRELEGY, alongside investments in healthcare companies and funds. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $97.9 | $88.7 | $284.2 | $246.3 |
| Operating income | $94.6 | $84.4 | $270.6 | $236.3 |
| Net income | $102.6 | $41.6 | $323.2 | $218.8 |
| Net income attributable to Innoviva stockholders | $72.4 | $28.2 | $255.5 | $170.5 |
| Diluted earnings per share | $0.90 | $0.26 | $2.63 | $1.53 |
- Nine-month royalty revenue rose 20% to $284.2 million. Q3 royalty revenue rose 10% to $97.9 million. Growth reflected favorable adjustments and prescription growth; TRELEGY royalties increased while RELVAR/BREO royalties declined in Q3.
- Operating margin was approximately 96.6% in Q3 and 95.2% for the nine-month period, calculated as operating income divided by net revenue. These high margins reflect the royalty-based business model.
- Changes in fair values of equity and long-term investments added $33.6 million to Q3 pretax income and $134.0 million for the nine months, versus a $29.4 million Q3 loss and $39.2 million gain in the prior-year periods. Investment valuation movements materially influenced reported earnings.
Cash flow, balance sheet and capital allocation
- Nine-month operating cash flow was $265.4 million, compared with $227.8 million in 2020. Investing activities provided $63.6 million, principally from a $110 million distribution from ISP Fund LP, partly offset by investment purchases. Financing used $440.4 million, mainly the GSK share repurchase and distributions to noncontrolling interests.
- Cash and cash equivalents were $135.1 million at September 30, down from $246.5 million at year-end 2020. Receivables from collaborative arrangements were $101.3 million.
- Total assets were $887.2 million; equity and long-term investments were $507.1 million. Total stockholders’ equity was $491.8 million.
- Debt principal totaled $433.5 million: $241.0 million of 2023 Notes and $192.5 million of 2025 Notes. Net carrying value was $392.3 million after unamortized discount and issuance costs. Scheduled principal maturities are in 2023 and 2025. Nine-month interest expense was $14.2 million.
- Current liabilities were $3.1 million. Management stated that cash, cash equivalents, marketable securities and projected royalties were expected to cover anticipated debt service and operating needs for at least the next 12 months; additional financing could be needed if plans or forecasts change.
- In May, Innoviva repurchased 32.0 million shares from GSK for $394.1 million including transaction fees, leaving 69.5 million shares outstanding at September 30. The shares are recorded as treasury stock.
Material changes, outlook and risks
- GSK’s Q3 product sales were $360.6 million for RELVAR/BREO, down 15%; $179.1 million for ANORO, down 2%; and $445.6 million for TRELEGY, up 77% year over year. Innoviva’s royalty revenue reflects contractual rates and is not the same as GSK product sales.
- For the nine months, G&A expense increased 55% to $13.1 million, primarily due to business-development advisory fees and legal expenses associated with arbitration. R&D expense remained limited and related to Pulmoquine, whose directors and stockholders voted to wind down operations; dissolution was expected to be finalized in Q4 2021.
- The ISP Fund distribution used to help fund the GSK repurchase is subject to an obligation to contribute $110 million back to the Partnership before March 31, 2022. Those contributions are subject to a 36-month lock-up.
- Innoviva reported no material changes to the risk factors in its 2020 Form 10-K. Key disclosed risks include lower-than-expected GSK royalties, product competition and commercialization, and uncertainty around growth strategy and capital deployment. Royalty estimates depend on GSK sales reporting and may be adjusted.
- In a dispute with Theravance Biopharma over TRC’s authority to retain royalties for non-TRELEGY investment opportunities, the arbitrator ruled for Innoviva; the modified award was confirmed by the Delaware Court of Chancery on September 16, 2021. The filing reports no current litigation or arbitration expected to have a material adverse effect.
- No specific revenue or earnings guidance was provided. Management’s 12-month liquidity assessment is based on current operating plans and financial forecasts. Disclosure controls were judged effective at a reasonable assurance level, with no material internal-control changes reported for the quarter.
Important facts for investors to verify
- Whether GSK product sales and prescription trends, particularly TRELEGY growth and RELVAR/BREO declines, support future royalty receipts.
- The performance, valuation assumptions and liquidity restrictions of the $507.1 million investment portfolio, including public-company holdings and ISP Fund LP positions.
- The timing and funding of the required $110 million ISP Fund contribution, and the implications of its lock-up.
- Debt service and refinancing considerations around the $241.0 million 2023 Notes and $192.5 million 2025 Notes.
- The sustainability of earnings excluding investment fair-value gains, and the effects of the large share repurchase on cash and share count.