Innoviva, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts below are in millions of dollars unless stated otherwise. Innoviva’s portfolio combined royalties from GSK respiratory medicines with newly acquired marketed products and anti-infective development assets.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $67.3 | $97.9 | $265.5 | $284.2 |
| Net income | $229.3 | $102.6 | $288.6 | $323.2 |
| Net income attributable to Innoviva stockholders | $265.5 | $72.4 | $282.2 | $255.5 |
| Basic / diluted EPS | $3.81 / $2.80 | $1.04 / $0.90 | $4.05 / $3.07 | $2.96 / $2.63 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $192.8 | $265.4 |
- Revenue mix: Q3 royalty revenue from GSK was $62.2 million, down 36%; product sales were $5.1 million, recognized from La Jolla’s August 22 acquisition through quarter-end. Nine-month GSK royalties were $260.4 million, down 8%.
- Profit quality and margins: Q3 included a $266.7 million gain on the TRC sale. Nine-month results also included $67.9 million of net losses from changes in investment fair values and a $20.7 million debt-extinguishment loss. These items materially affect comparisons; the filing does not provide a clear consolidated operating or gross margin measure.
- Cash and assets: Cash and equivalents were $300.8 million at September 30, versus $201.5 million at year-end 2021. Total current assets were $454.6 million and current liabilities $163.9 million. Receivables from the GSK collaboration were $65.6 million. Equity and long-term investments totaled $489.1 million.
- Debt and other obligations: Gross convertible notes totaled $549.7 million: $96.2 million due in 2023, $192.5 million due in 2025 and $261.0 million due in 2028. Net carrying debt was $539.8 million. The acquired GIAPREZA royalty obligation had a carrying value of $79.9 million, including accrued interest.
- Cash flows: Nine-month investing cash flow was a $48.0 million use, including La Jolla acquisition spending, partly offset by TRC sale proceeds. Financing cash flow was a $45.6 million use. Cash increased by $99.3 million during the period.
Material changes versus comparable periods
- Q3 revenue declined mainly because Innoviva sold its 15% interest in TRC on July 20 and no longer receives TRELEGY royalties. Nine-month TRELEGY royalties were $72.0 million versus $84.1 million in 2021; no Q3 2022 TRELEGY royalty was reported.
- RELVAR/BREO royalties rose 3% in Q3, while ANORO royalties fell 15%. GSK reported Q3 product sales of $371.1 million for RELVAR/BREO, up 3%, and $153.0 million for ANORO, down 15%.
- Innoviva acquired Entasis (remaining minority interest) in July and La Jolla in August. La Jolla added GIAPREZA and XERAVA sales; Entasis added antibacterial research and development costs, including for SUL-DUR. These transactions, and the TRC sale, make year-over-year comparisons less comparable.
- Q3 SG&A rose to $27.8 million from $2.9 million and R&D to $11.7 million from $0.4 million, substantially reflecting the acquired businesses and their operations.
- Effective January 1, 2022, Innoviva adopted convertible-debt accounting guidance that changed accounting for the 2025 notes and diluted EPS. In March, it issued $261.0 million of 2028 notes and used part of the proceeds to repurchase $144.8 million principal amount of 2023 notes.
Outlook, commentary and risks
- Management said cash, cash equivalents, marketable securities and projected royalty revenues should cover anticipated debt service and operating needs for at least the next 12 months under current plans. No numerical revenue or earnings guidance was provided.
- The company highlighted positive safety and efficacy findings from the pivotal Phase 3 ATTACK trial of SUL-DUR; conference presentations occurred after quarter-end. Development, regulatory approval and commercialization remain uncertain.
- Innoviva depends substantially on GSK’s commercialization of RELVAR/BREO and ANORO; royalty receipts can fluctuate and are exposed to sales performance, pricing, foreign exchange and partner decisions. The company also depends on third-party manufacturers for drug supply.
- Three distributors each represented at least 10% of La Jolla product sales since acquisition, accounting for 32%, 32% and 29%, respectively. The filing notes customer concentration in product sales and receivables.
- Gland Pharma challenged GIAPREZA patents in connection with a generic-drug application. Innoviva/La Jolla filed a patent-infringement complaint; the outcome could affect product exclusivity and sales.
- The GIAPREZA royalty financing requires payments to HCR based on sales, with a maximum aggregate payment of $225 million. If specified obligations are not met, HCR may demand accelerated payment or foreclose on GIAPREZA-related assets, subject to the agreement’s terms.
- Management reported disclosure controls were effective at the reasonable-assurance level. Integration of acquired companies was ongoing, including implementation of controls for inventory, R&D and product sales. The filing also flags investment fair-value volatility and potential inflation impacts.
Important facts for investors to verify
- How the loss of TRELEGY royalties and trends in RELVAR/BREO and ANORO affect future recurring royalty revenue.
- Whether GIAPREZA and XERAVA sales grow after acquisition, including the impact of inventory fair-value step-up costs and distributor concentration.
- Clinical, regulatory and commercial milestones for SUL-DUR and other acquired pipeline assets, and the associated funding requirements.
- The GIAPREZA patent litigation outcome and the economics and payment conditions of the HCR royalty obligation.
- Debt repayment, refinancing and potential dilution from the 2023, 2025 and 2028 convertible notes; reported diluted EPS reflects substantial potential share dilution.
- Performance and valuation of the investment portfolio, which contributed significant gains or losses across reporting periods, and completion of acquisition purchase accounting.