Innoviva, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts below are in millions of U.S. dollars unless noted.
Business context
Innoviva combines royalties on respiratory medicines partnered with GSK with hospital and infectious-disease products, development programs, and strategic healthcare investments. Its retained GSK royalties are from RELVAR/BREO and ANORO; it sold its 15% interest in TRELEGY royalties in July 2022. GIAPREZA and XERAVA are marketed products, and XACDURO was FDA-approved in May 2023 and commercially launched in September.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $67.3 | $67.3 | $224.6 | $265.5 |
| Net income | $82.0 | $229.3 | $118.2 | $288.6 |
| Net income attributable to Innoviva stockholders | $82.0 | $265.5 | $118.2 | $282.2 |
| Diluted earnings per share | $0.98 | $2.80 | $1.45 | $3.07 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $107.8 | $192.8 |
- Q3 net royalty revenue was $53.6 million, down 14% year over year; product sales were $13.7 million. Nine-month net royalty revenue was $172.7 million, down 34%, while product sales were $40.9 million and license revenue was $11.0 million.
- Q3 product sales comprised GIAPREZA $8.0 million, XERAVA $5.1 million, and XACDURO $0.6 million. Nine-month amounts were $28.2 million, $12.1 million, and $0.6 million, respectively.
- Q3 gross product margin is not clearly stated in the filing. Cost of products sold was $10.2 million for the quarter and $27.9 million for the nine months; the latter includes $19.2 million of acquired-inventory fair-value step-up amortization.
- At September 30, cash and cash equivalents were $180.0 million, current assets $305.0 million, and current liabilities $36.2 million. Total assets were $1.188 billion and stockholders’ equity $627.5 million.
- Debt principal was $453.5 million: $192.5 million of 2.5% convertible notes due 2025 and $261.0 million of 2.125% notes due 2028. Net carrying value was $445.7 million. The $96.2 million 2023 notes were repaid at maturity in January 2023. Debt is fixed-rate; the filing reports no variable-rate debt outstanding.
- Cash declined $111.1 million during the first nine months. Investing used $61.6 million and financing used $157.3 million, including $96.2 million to repay notes and $61.1 million for share repurchases. The company repurchased 5.05 million shares for approximately $60.5 million through September 30.
Changes versus comparable periods
- Q3 revenue was essentially flat, as higher ANORO royalties and product sales offset lower RELVAR/BREO royalties. RELVAR/BREO royalties fell 18% in Q3; ANORO royalties rose 15%. Nine-month net royalties fell mainly because Innoviva no longer receives TRELEGY royalties following the 2022 TRC sale, and because RELVAR/BREO royalties declined.
- Net income was lower than in 2022, when results included a $266.7 million gain on the TRC sale. The 2023 quarter also included a $72.0 million favorable fair-value change in equity-method investments, primarily related to Armata. Accordingly, reported earnings are affected by large, potentially volatile investment marks and prior-year unusual items.
- Nine-month SG&A rose 56% to $71.9 million, while research and development was broadly unchanged at $31.6 million. Q3 R&D fell 66% to $4.0 million, which management attributed mainly to XACDURO’s approval and personnel transfers to SG&A.
- Interest and dividend income increased with higher rates and average balances. Nine-month interest expense rose 12% to $13.2 million, mainly due to the deferred royalty obligation and a higher average debt balance.
Outlook, risks and unusual items
- Management said cash and cash equivalents should fund anticipated debt service, operating needs, and the ongoing repurchase program for at least the next 12 months, based on current plans and forecasts. No specific revenue or earnings guidance was provided.
- Key business dependencies include GSK’s commercialization of RELVAR/BREO and ANORO and the concentration of revenue in those royalties. Three customers each represented 26%–28% of Q3 product sales, creating additional customer concentration.
- Innoviva’s results are exposed to fair-value volatility in investments, including Armata; the filing reported $75.2 million of Armata common stock, $31.8 million of warrants, and $75.9 million of Armata notes and term loans at fair value at quarter-end. Several investments use significant unobservable inputs.
- GIAPREZA is subject to a generic patent challenge by Gland Pharma and related parties. Innoviva is contesting the challenge; the company said it could not reasonably estimate a potential loss and recorded no litigation accrual at September 30.
- The GIAPREZA royalty financing with HCR had a $70.1 million carrying value and a $225 million maximum aggregate payment. The maximum royalty rate was 14%, with a possible 4-percentage-point increase from 2024 if a cumulative sales threshold is not met. Failure to meet specified obligations could trigger substantial repayment demands.
- After quarter-end, Innoviva invested an additional $5.0 million in Gate, increasing the convertible note principal to $27.7 million. In November 2023, the company and GARDP announced that zoliflodacin met its primary endpoint in a Phase 3 trial; this is a post-quarter development, not Q3-period revenue.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter, while noting that integration of the 2022 acquisitions and related control implementation continued.
Most important facts for investors to verify
- How the loss of TRELEGY royalties and the decline in RELVAR/BREO royalties affect recurring royalty revenue, and whether ANORO growth persists.
- Commercial uptake, pricing, costs, and inventory-step-up effects for XACDURO, GIAPREZA, and XERAVA.
- The assumptions and volatility behind investment fair values and their contribution to reported earnings and cash-generation assessments.
- Cash deployment, remaining share-repurchase authorization, and capacity to service the 2025 and 2028 notes while funding operations and investments.
- Developments in the GIAPREZA patent litigation and the terms and sales thresholds governing the HCR royalty obligation.