Innoviva, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unless otherwise noted, amounts below are in millions of dollars. Innoviva’s principal operating revenue is royalties from GSK’s respiratory products; the company also held healthcare investments and consolidated Entasis and other entities.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Royalty revenue, net | $108.2 | $100.8 | $198.3 | $186.3 |
| Income from operations | $82.6 | $96.5 | $160.3 | $176.0 |
| Net income | $21.4 | $110.8 | $59.2 | $220.5 |
| Net income attributable to Innoviva stockholders | $0.9 | $88.9 | $16.7 | $183.1 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $177.1 | $168.7 |
Q2 royalty revenue increased 7%; six-month revenue rose 6%. TRELEGY royalties grew 62% in Q2 and 49% for the six-month period, while RELVAR/BREO and ANORO royalties declined. GSK’s Q2 product sales were $590.1 million for TRELEGY (up 45%), $395.5 million for RELVAR/BREO (down 10%) and $148.2 million for ANORO (down 19%).
Operating expenses were $25.7 million in Q2 and $38.0 million in the first half, up from $4.3 million and $10.3 million, respectively, largely reflecting Entasis expenses after consolidation. The resulting operating margin was approximately 76% in Q2 versus 96% a year earlier. Investment fair-value changes swung to a $58.6 million Q2 loss from a $45.3 million gain, and to a $68.0 million first-half loss from a $100.4 million gain. A $20.7 million first-half debt-extinguishment loss also reduced earnings. These items contributed to the sharp decline in net income.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $283.6 million, versus $201.5 million at year-end 2021; current assets were $400.3 million and current liabilities $125.9 million.
- First-half operating cash flow was $177.1 million. Investing activities used $145.7 million and financing activities provided $50.6 million; ending cash increased by $82.1 million.
- Total 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. Net carrying debt was $539.3 million. The 2023 notes mature in 2023, making near-term repayment or refinancing a key consideration.
- In March, Innoviva issued $261.0 million of 2028 convertible notes and used proceeds in part to repurchase $144.8 million principal of 2023 notes. It also paid $21.0 million for capped-call transactions. The remaining 2023-note repurchase premium and write-off of issuance costs generated the $20.7 million loss.
- Management said cash, investments and projected royalties were expected to cover anticipated debt service and operating needs for at least the next 12 months, based on current plans and forecasts.
Material changes, outlook and risks
- Innoviva consolidated Entasis from February 17, 2022 after a $15.0 million convertible-note investment gave it primary-beneficiary status. Preliminary acquisition accounting included $105.0 million of in-process R&D intangible assets and $5.5 million of goodwill; the allocation remained subject to finalization. Entasis contributed losses attributable to Innoviva stockholders of $11.7 million in Q2 and $16.3 million for the first half since consolidation.
- Effective January 1, the company adopted ASU 2020-06 for convertible debt. Adoption changed the accounting for the 2025 notes and reduced reported interest expense; reported prior periods were not restated.
- After quarter-end, Innoviva completed the purchase of remaining Entasis shares for $42.4 million. It agreed to acquire La Jolla Pharmaceutical for $5.95 per share plus a potential $0.28 per share tied to proceeds from a non-core asset divestiture; closing was subject to conditions.
- On July 20, Innoviva completed the sale of its 15% TRC interest to Royalty Pharma for approximately $282.0 million upfront and a potential $50.0 million sales-based milestone. Innoviva retained royalty rights to RELVAR/BREO and ANORO; TRC’s investments in InCarda, ImaginAb, Gate and Nanolive transferred to Innoviva.
- Management identified risks including lower-than-expected GSK royalties, product competition and commercialization, investment valuation volatility, and execution and integration risks associated with acquisitions and capital deployment. It provided no specific financial forecast or quantified guidance in the supplied filing text.
- The company reported no material legal proceedings expected to adversely affect results or financial position, and management concluded disclosure controls were effective as of June 30, 2022.
Important facts for investors to verify
- Current sales and royalty trends for TRELEGY, RELVAR/BREO and ANORO, including the impact of product competition and market changes.
- How Innoviva will address the $96.2 million 2023-note maturity and service total debt, including any conversion or refinancing plans.
- Final Entasis purchase accounting, its development spending and clinical progress, and the financial terms and status of the La Jolla acquisition.
- Receipt and use of the TRC sale proceeds, likelihood of the contingent milestone, and the continuing economics of retained GSK royalties.
- Valuation, liquidity and lock-up restrictions on investments, and the effect of further investment fair-value changes on reported earnings.