Innoviva, Inc 10-Q for FY2021 Q3
Innoviva, Inc. (INVA)
About this 10-Q
Innoviva, Inc filed this 10-Q on October 27, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $97.86M
- up 10.3% from $88.69M a year earlier
- Net income
- $102.65M
- up 146.6% from net income of $41.62M a year earlier
- Diluted EPS
- $0.90
- up 246.2% from $0.26 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
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(State or Other Jurisdiction of |
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(I.R.S. Employer |
(Address of Principal Executive Offices)
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(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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The |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Act.
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Accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No
The number of shares of registrant’s common stock outstanding on October 18, 2021 was
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INNOVIVA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
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September 30, |
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December 31, |
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2021 |
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2020 |
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(unaudited) |
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* |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Related party receivables from collaborative arrangements |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Equity and long-term investments |
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Capitalized fees paid to a related party, net |
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Deferred tax assets, net |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued personnel-related expenses |
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Accrued interest payable |
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Other accrued liabilities |
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Total current liabilities |
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Long-term debt, net of discount and issuance costs |
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Other long-term liabilities |
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Stockholders’ equity: |
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Preferred stock: $ |
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Common stock: $ |
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Treasury stock: at cost, |
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Additional paid-in capital |
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Accumulated deficit |
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Total Innoviva stockholders’ equity |
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Noncontrolling interest |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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See accompanying notes to consolidated financial statements.
3
INNOVIVA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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Royalty revenue from a related party, net of amortization of |
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$ |
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$ |
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$ |
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$ |
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Revenue from collaborative arrangements |
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Total net revenue |
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Operating expenses: |
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Research and development |
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General and administrative |
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Total operating expenses |
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Income from operations |
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Other income (expense), net |
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Interest income |
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Interest expense |
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Changes in fair values of equity |
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Income before income taxes |
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Income tax expense, net |
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Net income |
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Net income attributable to |
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Net income attributable to |
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$ |
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$ |
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$ |
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$ |
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Basic net income per share attributable |
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$ |
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$ |
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$ |
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$ |
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Diluted net income per share attributable |
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$ |
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$ |
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$ |
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$ |
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Shares used to compute Innoviva basic and diluted |
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Shares used to compute basic net income per share |
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Shares used to compute diluted net income per share |
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See accompanying notes to consolidated financial statements.
4
INNOVIVA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Unrealized loss on marketable securities, net |
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Comprehensive income |
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Comprehensive income attributable to noncontrolling interest |
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Comprehensive income attributable to Innoviva stockholders |
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$ |
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$ |
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$ |
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$ |
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See accompanying notes to consolidated financial statements.
5
INNOVIVA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
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Nine Months Ended September 30, 2021 |
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Additional |
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Accumulated Other |
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Total |
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Common Stock |
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Paid-In |
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Comprehensive |
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Accumulated |
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Treasury Stock |
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Noncontrolling |
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Stockholders’ |
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Shares |
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Amount |
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Capital |
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Income (Loss) |
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Deficit |
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Shares |
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Amount |
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Interest |
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Equity |
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Balance as of December 31, 2020 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Distributions to noncontrolling interest |
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Equity activity of noncontrolling interest |
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Exercise of stock options, and issuance of |
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Stock-based compensation |
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Net income |
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Balance as of March 31, 2021 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Distributions to noncontrolling interest |
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Equity activity of noncontrolling interest |
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Exercise of stock options, and issuance of |
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Repurchase of common stock |
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Stock-based compensation |
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Net income |
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Balance as of June 30, 2021 |
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$ |
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$ |
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$ |
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$ |
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Distributions to noncontrolling interest |
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Equity activity of noncontrolling interest |
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Exercise of stock options, and issuance of |
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Stock-based compensation |
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Net income |
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Balance as of September 30, 2021 |
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$ |
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$ |
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6
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Nine Months Ended September 30, 2020 |
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Additional |
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Accumulated Other |
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Total |
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Common Stock |
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Paid-In |
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Comprehensive |
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Accumulated |
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Noncontrolling |
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Stockholders’ |
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Shares |
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Amount |
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Capital |
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Income (Loss) |
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Deficit |
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Interest |
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Equity |
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Balance as of December 31, 2019 |
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$ |
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$ |
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Distributions to noncontrolling interest |
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Exercise of stock options, and issuance of |
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Stock-based compensation |
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Net income |
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Other comprehensive income |
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Balance as of March 31, 2020 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Equity activity of noncontrolling interest |
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Distributions to noncontrolling interest |
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Exercise of stock options, and issuance of |
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Stock-based compensation |
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Net income |
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Other comprehensive income |
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Balance as of June 30, 2020 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Equity activity of noncontrolling interest |
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Exercise of stock options, and issuance of |
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Stock-based compensation |
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Net income |
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Other comprehensive income |
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Balance as of September 30, 2020 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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See accompanying notes to consolidated financial statements.
7
INNOVIVA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
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Nine Months Ended September 30, |
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2021 |
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2020 |
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Cash flows from operating activities |
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|
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Net income |
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$ |
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|
$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Deferred income taxes |
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Depreciation and amortization |
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Stock-based compensation |
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Amortization of debt discount and issuance costs |
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Amortization of discount on short-term investments |
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( |
) |
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Amortization of lease guarantee |
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Changes in fair values of equity and long-term investments, net |
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( |
) |
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( |
) |
Other non-cash items |
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( |
) |
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Changes in operating assets and liabilities: |
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Receivables from collaborative arrangements |
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( |
) |
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( |
) |
Prepaid expenses and other current assets |
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Accounts payable |
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Accrued personnel-related expenses and other accrued liabilities |
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( |
) |
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Accrued interest payable |
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( |
) |
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( |
) |
Net cash provided by operating activities |
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Cash flows from investing activities |
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Maturities of marketable securities |
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Purchases of marketable securities |
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( |
) |
|
Purchases of equity and long-term investments |
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( |
) |
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( |
) |
Distributions of equity and long-term investments |
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Purchases of property and equipment |
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( |
) |
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Net cash provided by investing activities |
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Cash flows from financing activities |
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Repurchase of common stock |
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( |
) |
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Distributions to noncontrolling interest |
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( |
) |
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( |
) |
Repurchase of shares to satisfy tax withholding |
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( |
) |
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( |
) |
Proceeds from issuances of common stock, net |
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Net proceeds from the issuance of variable interest entity’s equity |
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Net cash used in financing activities |
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( |
) |
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( |
) |
Net increase (decrease) in cash and cash equivalents |
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( |
) |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
|
$ |
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$ |
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||
Supplemental disclosure of cash flow information |
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Cash paid for interest |
|
$ |
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$ |
|
||
See accompanying notes to consolidated financial statements.
8
INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Operations and Summary of Significant Accounting Policies
Description of Operations
Innoviva Inc. (referred to as “Innoviva”, the “Company”, or “we” and other similar pronouns) is a company with a portfolio of royalties and other healthcare assets. Our royalty portfolio contains respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR®/BREO® ELLIPTA® (fluticasone furoate/ vilanterol, “FF/VI”), ANORO® ELLIPTA® (umeclidinium bromide/ vilanterol, “UMEC/VI”) and TRELEGY® ELLIPTA® (the combination FF/UMEC/VI). Under the Long-Acting Beta2 Agonist (“LABA”) Collaboration Agreement, Innoviva is entitled to receive royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows:
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In our opinion, the unaudited consolidated financial statements have been prepared on the same basis as audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of our financial position, results of operations, comprehensive income and cash flows. The interim results are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2021 or any other period.
The accompanying unaudited consolidated financial statements include the accounts of Innoviva, our wholly-owned subsidiaries and certain variable interest entities for which we are the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income (loss) attributable to noncontrolling interest in our unaudited consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on February 25, 2021 (“2020 Form 10-K”).
Variable Interest Entities
We evaluate our ownership, contractual and other interest in entities to determine if they are variable interest entities (“VIE”). We evaluate whether we have a variable interest in those entities and the nature and extent of those interests. Based on our evaluation, if we determine we are the primary beneficiary of a VIE, we consolidate the entity in our financial statements.
Equity Investments
We invest from time to time in equity securities of private or public companies. If we determine that we have control over these companies under either voting or VIE models, we include them in our consolidated financial statements. If we determine that we do not have control over these companies under either voting or VIE models, we then determine if we have an ability to exercise significant influence via voting interests, board representation or other business relationships.
9
We may account for the equity investments where we exercise significant influence using either an equity method of accounting or at fair value by electing the fair value option under Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments. If the fair value option is applied to an investment that would otherwise be accounted for under the equity method, we apply it to all our financial interests in the same entity (equity and debt, including guarantees) that are eligible items. All gains and losses from fair value changes, unrealized and realized, are presented as changes in fair values of equity and long-term investments, net on the consolidated statements of income.
Revenue Recognition
Revenue is recognized when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. Revenue is recognized through a five-step process: (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price for the contract; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue as a performance obligation is satisfied.
We recognize the royalty revenue on net sales of products with respect to which we have contractual royalty rights in the period in which the royalties are earned. The net sales reports provided by our partner are based on its methodology and assumptions to estimate rebates and returns, which it monitors and adjusts regularly in light of contractual and legal obligations, historical trends, past experience and projected market conditions. Our partner may make significant adjustments to its sales based on actual results recorded, which could cause our royalty revenue to fluctuate. We have the ability to conduct periodic royalty audits to evaluate the information provided by our partner. Royalties are recognized net of amortization of capitalized fees associated with any approval and launch milestone payments made to GSK.
Accounting Pronouncement Adopted by the Company
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We adopted ASU 2019-12 effective January 1, 2021. The adoption did not have a material impact on our consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements. This ASU improves the codification by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is codified in the disclosure section of the codification. The ASU also clarifies various topics in the codification so that entities can apply guidance more consistently. The ASU is effective for fiscal years beginning after December 15, 2020. We adopted ASU 2020-10 effective January 1, 2021. The adoption did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Standards or Updates Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which is intended to simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470-20 for convertible instruments. The ASU is effective for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years with early adoption permitted. We are currently in the process of evaluating the effects of the provisions of ASU 2020-06 on our consolidated financial statements.
2. Net Income Per Share
Basic net income per share attributable to Innoviva stockholders is computed by dividing net income attributable to Innoviva stockholders by the weighted-average number of shares of common stock outstanding. Diluted net income per share attributable to Innoviva stockholders is computed by dividing net income attributable to Innoviva stockholders by the weighted-average number of
10
shares of common stock and dilutive potential common stock equivalents then outstanding. Dilutive potential common stock equivalents include the assumed exercise, vesting and issuance of employee stock awards using the treasury stock method, as well as common stock issuable upon assumed conversion of our convertible subordinated notes due 2023 (the “2023 Notes”) using the if converted method.
Our convertible senior notes due 2025 (the “2025 Notes”) are convertible, based on the applicable conversion rate, into cash, shares of our common stock or a combination thereof, at our election. Our current intent is to settle the principal amount of the 2025 Notes in cash upon conversion. The impact of the assumed conversion premium to diluted net income per share is computed using the treasury stock method. As the average market price per share of our common stock as reported on The Nasdaq Global Select Market was lower than the initial conversion price of $
The following table shows the computation of basic and diluted net income per share for the three and nine months ended September 30, 2021 and 2020:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(In thousands except per share data) |
|
2021 |
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2020 |
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|
2021 |
|
|
2020 |
|
||||
Numerator: |
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|
|
|
|
|
|
|
||||
Net income attributable to Innoviva stockholders, basic |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Add: interest expense on 2023 Notes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income attributable to Innoviva stockholders, diluted |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Denominator: |
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Weighted-average shares used to compute basic net income |
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Dilutive effect of 2023 Notes |
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Dilutive effect of options and awards granted under equity |
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|
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Weighted-average shares used to compute diluted net income |
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|
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Net income per share attributable to Innoviva stockholders |
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||||
Basic |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Diluted |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Anti-Dilutive Securities
The following common stock equivalents were not included in the computation of diluted net income per share because their effect was anti-dilutive:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(In thousands) |
|
2021 |
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2020 |
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2021 |
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2020 |
|
||||
Outstanding options and awards granted under equity incentive |
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3. Revenue Recognition and Collaborative Arrangements
We recognize royalty revenue on net sales of products with respect to which we have contractual royalty rights in the period in which the royalties are earned. Royalties, which may include adjustments of estimates of net sales in prior periods, are recognized net of amortization of capitalized fees associated with any approval and launch milestone payments made to GSK.
11
Net Revenue from Collaborative Arrangements
Net revenue recognized under our GSK Agreements was as follows:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(In thousands) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Royalties from a related party |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Royalties from a related party |
|
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|
|
|
|
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|
||||
Royalties from a related party |
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|
||||
Total royalties from a related party |
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|
||||
Less: amortization of capitalized fees |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Royalty revenue |
|
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|
||||
Strategic alliance - MABA program |
|
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|
||||
Total net revenue from GSK |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
4. Consolidated Entities
We consolidate the financial results of TRC and Pulmoquine Therapeutics, Inc. (“Pulmoquine”), which we have determined to be VIEs. As we have the power to direct the economically significant activities of these entities and the obligation to absorb losses of, or the right to receive benefits from them, we are the primary beneficiary of the entities. We also consolidate the financial results of ISP Fund LP (the “Partnership”), which is our partnership with Sarissa Capital Management LP (“Sarissa Capital”), as we have determined that the Partnership is a VIE and we are its primary beneficiary.
Theravance Respiratory Company, LLC
The primary source of revenue for TRC is the royalties generated from the net sales of TRELEGY® ELLIPTA® by GSK. As of September 30, 2021, TRC held equity investments in InCarda Therapeutics, Inc. (“InCarda”) and ImaginAb, Inc. (“ImaginAb”). Refer to Note 5, “Financial Instruments and Fair Value Measurements,” for more information.
The summarized financial information for TRC is presented as follows:
Balance sheets
|
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September 30, |
|
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December 31, |
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||
(In thousands) |
|
2021 |
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2020 |
|
||
Assets |
|
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|
|
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|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Receivables from collaborative arrangements |
|
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|
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|
||
Prepaid expenses and other current assets |
|
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|
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|
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Equity and long-term investments |
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Total assets |
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$ |
|
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$ |
|
||
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|
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Liabilities and LLC Members’ Equity |
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Current liabilities |
|
$ |
|
|
$ |
|
||
LLC members’ equity |
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|
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|
||
Total liabilities and LLC members’ equity |
|
$ |
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$ |
|
||
12
Income statements
|
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Three Months Ended September 30, |
|
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Nine Months Ended September 30, |
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(In thousands) |
|
2021 |
|
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2020 |
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2021 |
|
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2020 |
|
||||
Royalty revenue from a related party |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Strategic alliance - MABA program |
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|
|
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|
||||
Total net revenue |
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Operating expenses |
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Income from operations |
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Other income, net |
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Changes in fair values of equity and long-term |
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|
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( |
) |
|
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|
|||
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Pulmoquine Therapeutics, Inc.
In April 2020, we purchased
As of September 30, 2021 and December 31, 2020, Pulmoquine’s total assets, mainly attributable to cash and cash equivalents, were $
ISP Fund LP
In December 2020, Innoviva Strategic Partners LLC, our wholly owned subsidiary (“Strategic Partners”), contributed $
In May 2021, Strategic Partners received a distribution of $
As of September 30, 2021, we continued to hold
13
5. Financial Instruments and Fair Value Measurements
Equity Investment in Armata
During the first quarter of 2020, Innoviva acquired
On January 26, 2021, Innoviva Strategic Opportunities LLC (“ISO”), our wholly owned subsidiary, entered into a securities purchase agreement with Armata to acquire
The investment in Armata provides Innoviva and ISO the ability to have significant influence, but not control over Armata’s operations. Based on our evaluation, we determined that Armata is a VIE, but Innoviva and ISO are not the primary beneficiary of the VIE. We continue to elect the fair value option to account for both Armata’s common stock and warrants. The fair value of Armata’s common stock is measured based on its closing market price. The warrants purchased in 2020 and 2021 have an exercise price of $
As of September 30, 2021, the fair values of Armata’s common stock and warrants were estimated at $
Equity Investment in Entasis
During the second quarter of 2020, we purchased
During the third quarter of 2020, we purchased
On May 3, 2021, ISO entered into a securities purchase agreement with Entasis to acquire
14
The investment in Entasis provides Innoviva the ability to have significant influence, but not control over Entasis’ operations. Based on our evaluation, we determined that Entasis is a VIE, but Innoviva is not the primary beneficiary of the VIE. We elected the fair value option to account for both Entasis’s common stock and warrants at fair value. The fair value of Entasis’ common stock is measured based on its closing market price at each balance sheet date. The warrants have an exercise price of $
As of September 30, 2021, the fair values of Entasis’s common stock and warrants were estimated at $
Equity Investment in InCarda
During the third quarter of 2020, TRC purchased
The investment in InCarda does not provide TRC the ability to control or have significant influence over InCarda’s operations. Based on our evaluation, we determined that InCarda is a VIE, but TRC is not the primary beneficiary of the VIE. We account for our investment in the Series C preferred shares in InCarda using the measurement alternative. Under the measurement alternative, the equity investment is initially recorded at its allocated cost, but the carrying value may be adjusted through earnings upon an impairment or when there is an observable price change involving the same or a similar investment with the same issuer. As of September 30, 2021 and December 31, 2020, we recorded $
The warrants are recorded at fair value and subject to remeasurement at each balance sheet date. The warrants are exercisable immediately with an exercise price of $
Equity Investment in ImaginAb
On March 18, 2021, TRC entered into a securities purchase agreement with ImaginAb, Inc. to purchase
15
The investment in ImaginAb does not provide TRC the ability to control or have significant influence over ImaginAb’s operations. Based on our evaluation, we determined that ImaginAb is a VIE, but TRC is not the primary beneficiary of the VIE. Because ImaginAb’s equity securities are not publicly traded and do not have a readily determinable fair value, we have accounted for our investment in ImaginAb’s Series C preferred stock and common stock using the measurement alternative. Under the measurement alternative, the equity investment is initially recorded at its allocated cost, but the carrying value may be adjusted through earnings upon an impairment or when there is an observable price change involving the same or a similar investment with the same issuer. As of September 30, 2021, $
Available-for-Sale Securities
The estimated fair value of available-for-sale securities is based on quoted market prices for these or similar investments that were based on prices obtained from a commercial pricing service. Available-for-sale securities are summarized below:
|
|
September 30, 2021 |
|
|||||||||||||
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Gross |
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|
Gross |
|
|
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|
||||
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
||||
(In thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
||||
Money market funds(1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
December 31, 2020 |
|
|||||||||||||
|
|
|
|
|
Gross |
|
|
Gross |
|
|
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|
||||
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
||||
(In thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
||||
Money market funds (1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
There was
16
Fair Value Measurements
Our available-for-sale securities and equity investments are measured at fair value on a recurring basis and our debt is carried at amortized cost basis. The estimated fair values were as follows:
|
|
Estimated Fair Value Measurements as of September 30, 2021 Using: |
|
|||||||||||||
|
|
Quoted Price |
|
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Significant |
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Significant |
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|
||||
|
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Identical |
|
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Observable |
|
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Unobservable |
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|
||||
Types of Instruments |
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Assets |
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Inputs |
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Inputs |
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|
||||
(In thousands) |
|
Level 1 |
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Level 2 |
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Level 3 |
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Total |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Investments held by ISP Fund LP (1) |
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|
||||
Equity investment - Armata Common Stock |
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|
||||
Equity investment - Armata Warrants |
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|
||||
Equity investment - Entasis Common Stock |
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|
||||
Equity investment - Entasis Warrants |
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|
||||
Equity investment - InCarda Warrants |
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|
||||
Total assets measured at estimated fair value |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Debt |
|
|
|
|
|
|
|
|
|
|
|
|
||||
2023 Notes |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
2025 Notes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total fair value of debt |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
Estimated Fair Value Measurements as of December 31, 2020 Using: |
|
|||||||||||||
|
|
Quoted Price |
|
|
|
|
|
|
|
|
|
|
||||
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
||||
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
||||
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
||||
Types of Instruments |
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
||||
(In thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Investments held by ISP Fund LP (1) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity investment - Armata Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity investment - Armata Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity investment - Entasis Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity investment - Entasis Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity investment - InCarda Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets measured at estimated fair value |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Debt |
|
|
|
|
|
|
|
|
|
|
|
|
||||
2023 Notes |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
2025 Notes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total fair value of debt |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The fair values of our equity investments in Armata and Entasis’s common stock and publicly traded investments held by ISP Fund LP are based on the quoted prices in active markets and are classified as Level 1 financial instruments. The fair values of the warrants of Armata and Entasis classified within Level 2 are based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications.
17
InCarda’s warrants and private placement positions held by the ISP Fund LP and are classified as Level 3 financial instruments as these securities are not publicly traded and the assumptions used in the valuation model for valuing these securities are based on significant unobservable and observable inputs including those of publicly traded peer companies.
The fair values of our 2023 Notes and our 2025 Notes are based on recent trading prices of the respective instruments.
6. Stock-Based Compensation
Stock- Based Compensation Expense
Stock-based compensation expense was included in the consolidated statements of income as follows:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(In thousands) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
General and administrative |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Valuation Assumptions
Black-Scholes-Merton assumptions used in calculating the estimated value of our stock options on the date of grant were as follows:
|
|
Nine Months Ended |
|
|
|
|
September 30, 2021 |
|
|
Risk-free interest rate |
|
|
||
Expected term (in years) |
|
|
|
|
Volatility |
|
|
% |
|
Dividend yield |
|
|
% |
|
Weighted-average estimated fair value of stock options granted |
|
$ |
|
|
There were
7. Debt
Our debt consists of:
|
|
September 30, |
|
|
December 31, |
|
||
(In thousands) |
|
2021 |
|
|
2020 |
|
||
2023 Notes |
|
$ |
|
|
$ |
|
||
2025 Notes |
|
|
|
|
|
|
||
Total debt |
|
|
|
|
|
|
||
Unamortized debt discount and issuance costs |
|
|
( |
) |
|
|
( |
) |
Net long-term debt |
|
$ |
|
|
$ |
|
||
Convertible Senior Notes Due 2025
In accordance with accounting guidance for debt with conversion and other options, we separately account for the liability and equity components of the 2025 Notes by allocating the proceeds between the liability component and the embedded conversion option (“equity component”) due to our ability to settle the conversion obligation of the 2025 Notes in cash, common stock or a combination of cash and common stock, at our option. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature using the income approach. The allocation was performed in a manner that reflected our non-convertible debt borrowing rate for similar debt. The equity component of the 2025 Notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the 2025 Notes and the fair value of the liability of the 2025 Notes on the date of issuance. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense using the effective interest method over the term of the 2025 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
18
Our outstanding 2025 Notes balances consisted of the following:
|
|
September 30, |
|
|
December 31, |
|
||
(In thousands) |
|
2021 |
|
|
2020 |
|
||
Liability component |
|
|
|
|
|
|
||
Principal |
|
$ |
|
|
$ |
|
||
Debt discount and issuance costs, net |
|
|
( |
) |
|
|
( |
) |
Net carrying amount |
|
$ |
|
|
$ |
|
||
Equity component, net |
|
$ |
|
|
$ |
|
||
The following table sets forth total interest expense recognized related to the 2025 Notes for the three and nine months ended September 30, 2021 and 2020:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(In thousands) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Contractual interest expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Amortization of debt issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization of debt discount |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total interest and amortization expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Debt Maturities
The aggregate scheduled maturities of our long-term debt as of September 30, 2021 were as follows:
(In thousands) |
|
|
|
|
Years ending December 31: |
|
|
|
|
Remainder of 2021 |
|
$ |
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
Total |
|
$ |
|
|
8. Commitments and Contingencies
Operating Lease
Future minimum operating lease payments on our corporate headquarters as of September 30, 2021 were as follows:
(In thousands) |
|
|
|
|
Years ending December 31: |
|
|
|
|
Remainder of 2021 |
|
$ |
|
|
2022 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
Legal Proceedings
From time to time, the Company is involved in legal proceedings in the ordinary course of its business. Currently, we believe that no litigation or arbitration, either individually or in the aggregate, to which we are presently a party is likely to have a material adverse effect on our operating results or financial position.
19
9. Shareholders’ Equity
On May 20, 2021, the Company entered into a share repurchase agreement with GSK to buy back
10. Income Taxes
Provisional income tax expense for the three and nine months ended September 30, 2021 was $
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The information in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve substantial risks, uncertainties, and assumptions. All statements contained herein that are not of historical fact, including, without limitation, statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, intentions, expectations, goals and objectives, may be forward-looking statements. The words “anticipates,” “believes,” “could,” “designed,” “estimates,” “expects,” “goal,” “intends,” “may,” “objective,” “plans,” “projects,” “pursue,” “will,” “would” and similar expressions (including the negatives thereof) are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions, expectations or objectives disclosed in our forward-looking statements and the assumptions underlying our forward-looking statements may prove incorrect. Therefore, you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions, expectations and objectives disclosed in the forward-looking statements that we make. All written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Important factors that we believe could cause actual results or events to differ materially from our forward-looking statements include, but are not limited to, risks related to: lower than expected future royalty revenue from respiratory products partnered with GSK; the commercialization of RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA® in the jurisdictions in which these products have been approved; substantial competition from products discovered, developed, launched and commercialized both by GSK and by other pharmaceutical companies; the strategies, plans and objectives of the Company (related to the Company’s growth strategy and corporate development initiatives beyond the Company’s existing portfolio); the timing, manner and amount of capital deployment, including potential capital returns to stockholders; risks related to the Company’s growth strategy; projections of revenue, expenses and other financial items and risks discussed in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on February 25, 2021, (“2020 Form 10-K”), and Item 1A of Part II of our Quarterly Reports on Form 10-Q and below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Item 2 of Part I. All forward-looking statements in this Quarterly Report on Form 10-Q are based on current expectations as of the date hereof and we do not assume any obligation to update any forward-looking statements on account of new information, future events or otherwise, except as required by law.
We encourage you to read our consolidated financial statements contained in this Quarterly Report on Form 10-Q. We also encourage you to read Item 1A of Part I of our 2020 Form 10-K and Item 1A of Part II of our Quarterly Reports on Form 10-Q entitled “Risk Factors,” which contain a more complete discussion of the risks and uncertainties associated with our business. In addition to the risks described above and in Item 1A of Part I of our 2020 Form 10-K and Item 1A of Part II of this report, other unknown or unpredictable factors also could affect our results. Therefore, the information in this report should be read together with other reports and documents that we file with the SEC from time to time, including on Form 10-K, Form 10-Q and Form 8-K, which may supplement, modify, supersede or update those risk factors. As a result of these factors, we cannot assure you that the forward-looking statements in this report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.
21
OVERVIEW
Executive Summary
Innoviva, Inc. (“Innoviva”, the “Company”, the “Registrant” or “we” and other similar pronouns) is a company with a portfolio of royalties and other healthcare assets. Our royalty portfolio contains respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR®/BREO® ELLIPTA® (fluticasone furoate/ vilanterol, “FF/VI”), ANORO® ELLIPTA® (umeclidinium bromide/ vilanterol, “UMEC/VI”) and TRELEGY® ELLIPTA® (the combination FF/UMEC/VI). Under the Long-Acting Beta2 Agonist (“LABA”) Collaboration Agreement, Innoviva is entitled to receive royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion; and royalties from the sales of ANORO® ELLIPTA®, which tier upward at a range from 6.5% to 10%. Innoviva is also entitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC (“TRC”), including TRELEGY® ELLIPTA® and any other product or combination of products that may be discovered or developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the “GSK Agreements”), which have been assigned to TRC other than RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®.
Our company structure and organization are tailored to our focused activities of managing our respiratory assets partnered with GSK, optimizing our operations and augmenting capital allocation. Our revenues consist of royalties from our respiratory partnership agreements with GSK.
Recent Highlights
Collaborative Arrangements with GSK
LABA Collaboration
In November 2002, we entered into the LABA collaboration with GSK to develop and commercialize once-daily LABA products for the treatment of chronic obstructive pulmonary disorder (“COPD”) and asthma (the “LABA Collaboration Agreement”). For the treatment of COPD, the collaboration has developed three combination products:
22
As a result of the launch and approval of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® in the U.S., Japan and Europe, in accordance with the LABA Collaboration Agreement, we paid milestone fees to GSK totaling $220.0 million during the year ended December 31, 2014. The milestone fees paid to GSK were recognized as capitalized fees paid to a related party, which are being amortized over their estimated useful lives commencing upon the commercial launch of the products.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
As part of our capital allocation strategies, we invest from time to time in equity securities of private or public companies. We also enter into strategic partnerships in order to accelerate the execution of our strategy and enhance returns on our capital. If we determine that we have control over these companies or partnerships, we consolidate the financial statements of these companies or partnerships. If we determine that we do not have control over these companies or partnerships under either voting or VIE models, we then determine if we have an ability to exercise significant influence via voting interests, board representation or other business relationships.
We may account for the equity investments where we exercise significant influence using either an equity method of accounting or at fair value by electing the fair value option under Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments. If the fair value option is applied to an investment that would otherwise be accounted for under the equity method, we apply it to all our financial interests in the same entity (equity and debt, including guarantees) that are eligible items. All gains and losses from fair value changes, unrealized and realized, are presented as changes in fair values of equity and long-term investments, net on the consolidated statements of income.
If we conclude that we do not have an ability to exercise significant influence over an investee, we may elect to account for an equity security without a readily determinable fair value using the measurement alternative as prescribed by ASC Topic 825. This measurement alternative allows us to measure the equity investment at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
We recognize the royalty revenue on net sales of products with respect to which we have contractual royalty rights in the period in which the royalties are earned. The net sales reports provided by our partner are based on its methodology and assumptions to estimate rebates and returns, which it monitors and adjusts regularly in light of contractual and legal obligations, historical trends, past experience and projected market conditions. Our partner may make significant adjustments to its sales based on actual results recorded, which could cause our royalty revenue to fluctuate. We have the ability to conduct periodic royalty audits to evaluate the information provided by our partner. Royalties are recognized net of amortization of capitalized fees associated with any approval and launch milestone payments made to GSK.
There were no significant changes to our critical accounting policies and estimates. Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 25, 2021 provides a more complete discussion of our critical accounting policies and estimates.
23
Results of Operations
Net Revenue
Total net revenue, as compared to the prior year periods, was as follows:
|
|
Three Months Ended September 30, |
|
|
Change |
|
|
Nine Months Ended September 30, |
|
|
Change |
|
||||||||||||||||||||
(In thousands) |
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||||||
Royalties from a related party |
|
$ |
54,092 |
|
|
$ |
63,893 |
|
|
$ |
(9,801 |
) |
|
|
(15 |
)% |
|
$ |
176,398 |
|
|
$ |
165,612 |
|
|
$ |
10,786 |
|
|
|
7 |
% |
Royalties from a related party |
|
|
11,641 |
|
|
|
11,882 |
|
|
|
(241 |
) |
|
|
(2 |
)% |
|
|
34,101 |
|
|
|
32,931 |
|
|
|
1,170 |
|
|
|
4 |
% |
Royalties from a related party |
|
|
35,585 |
|
|
|
16,375 |
|
|
|
19,210 |
|
|
|
117 |
% |
|
|
84,055 |
|
|
|
48,143 |
|
|
|
35,912 |
|
|
|
75 |
% |
Total royalties from a related party |
|
|
101,318 |
|
|
|
92,150 |
|
|
|
9,168 |
|
|
|
10 |
% |
|
|
294,554 |
|
|
|
246,686 |
|
|
|
47,868 |
|
|
|
19 |
% |
Less: amortization of capitalized fees |
|
|
(3,456 |
) |
|
|
(3,456 |
) |
|
|
— |
|
|
|
0 |
% |
|
|
(10,368 |
) |
|
|
(10,368 |
) |
|
|
— |
|
|
* |
|
|
Royalty revenue |
|
|
97,862 |
|
|
|
88,694 |
|
|
|
9,168 |
|
|
|
10 |
% |
|
|
284,186 |
|
|
|
236,318 |
|
|
|
47,868 |
|
|
|
20 |
% |
Strategic alliance - MABA program |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
* |
|
|
|
— |
|
|
|
10,000 |
|
|
|
(10,000 |
) |
|
* |
|
||
Total net revenue from GSK |
|
$ |
97,862 |
|
|
$ |
88,694 |
|
|
$ |
9,168 |
|
|
|
10 |
% |
|
$ |
284,186 |
|
|
$ |
246,318 |
|
|
$ |
37,868 |
|
|
|
15 |
% |
*Not Meaningful
Total net revenue increased to $97.9 million and $284.2 million for the three and nine months ended September 30, 2021, compared to $88.7 million and $246.3 million, respectively, for the same periods a year ago, primarily due to favorable adjustments and the growth in prescriptions for our respiratory products.
Research & Development
Research and development (“R&D”) expenses attributable to Pulmoquine’s product development efforts were $0.4 million and $0.5 million for the three and nine months ended September 30, 2021. Research and development expenses of $1.0 million and $1.6 million for the three and nine months ended September 30, 2020 were attributable to Pulmoquine’s product development efforts.
General & Administrative
General and administrative expenses, as compared to the prior year periods, were as follows:
|
|
Three Months Ended |
|
|
Change |
|
|
Nine Months Ended |
|
|
Change |
|
||||||||||||||||||||
(In thousands) |
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||||||
General and administrative |
|
$ |
2,860 |
|
|
$ |
3,254 |
|
|
$ |
(394 |
) |
|
|
(12 |
)% |
|
$ |
13,074 |
|
|
$ |
8,413 |
|
|
$ |
4,661 |
|
|
|
55 |
% |
General and administrative expenses for the three months ended September 30, 2021 decreased compared to the same periods in 2020. General and administrative expenses for the nine months ended September 30, 2021 increased compared to the same periods in 2020 mainly due to business development related advisory service fees and legal expenses incurred for the arbitration initiated by Theravance Biopharma against the Company and TRC. The arbitration related legal fees were recognized in TRC’s statement of income.
Other Income, net and Interest Income
Other income, net and interest income, as compared to the prior year periods, were as follows:
|
|
Three Months Ended |
|
|
Change |
|
Nine Months Ended |
|
|
Change |
|
|||||||||||||||||||
(In thousands) |
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
|||||||
Other income (expense), net |
|
$ |
(652 |
) |
|
$ |
(13 |
) |
|
$ |
(639 |
) |
|
* |
|
$ |
(2,036 |
) |
|
$ |
85 |
|
|
$ |
(2,121 |
) |
|
* |
|
|
Interest income |
|
|
453 |
|
|
|
41 |
|
|
|
412 |
|
|
* |
|
|
503 |
|
|
|
1,501 |
|
|
|
(998 |
) |
|
|
(66 |
)% |
*Not Meaningful
24
The increase in other expense, net, for the three and nine months ended September 30, 2021 compared to the same periods a year ago was primarily due to the expenses incurred by ISP Fund LP. Interest income increased for the three and nine months ended September 30, 2021 compared to the same periods a year ago mainly due to favorable returns on investments managed by the ISP Fund LP.
Interest Expense
Interest expense, as compared to the prior year periods, was as follows:
|
|
Three Months Ended |
|
|
Change |
|
|
Nine Months Ended |
|
|
Change |
|
||||||||||||||||||||
(In thousands) |
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||||||
Interest expense |
|
$ |
4,790 |
|
|
$ |
4,603 |
|
|
$ |
187 |
|
|
|
4 |
% |
|
$ |
14,229 |
|
|
$ |
13,680 |
|
|
$ |
549 |
|
|
|
4 |
% |
Interest expense includes the amortization of debt discount and issuance costs for our convertible notes. The increase in interest expense was mainly due to more debt discount and issuance costs being recognized through amortization.
Changes in Fair Values of Equity and Long-Term Investments
Changes in fair values of equity and long-term investments, as compared to the prior year periods, were as follows:
|
|
Three Months Ended |
|
|
Change |
|
Nine Months Ended |
|
|
Change |
||||||||||||||||||
(In thousands) |
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
||||||
Changes in fair values of equity |
|
$ |
33,613 |
|
|
$ |
(29,368 |
) |
|
$ |
62,981 |
|
|
* |
|
$ |
133,973 |
|
|
$ |
39,245 |
|
|
$ |
94,728 |
|
|
* |
*Not Meaningful
The changes in fair values of equity and long-term investments reflect the net changes in the fair values of our equity investments in Armata, Entasis, InCarda and those equity investments managed by ISP Fund LP.
Provision for Income Taxes
The provisional income tax expense for the three and nine months ended September 30, 2021 was $20.5 million and $65.6 million with an effective income tax rate of 16.9%, respectively, compared to $8.9 million and $44.7 million, respectively, with an effective income tax rate of 17.0% in the same period a year ago.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest, as compared to the prior periods, was as follows:
|
|
Three Months Ended |
|
|
Change |
|
Nine Months Ended |
|
|
Change |
|
|||||||||||||||||||
(In thousands) |
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
|||||||
Net income attributable to |
|
$ |
30,208 |
|
|
$ |
13,403 |
|
|
$ |
16,805 |
|
|
* |
|
$ |
67,678 |
|
|
$ |
48,299 |
|
|
$ |
19,379 |
|
|
|
40 |
% |
*Not Meaningful
This represents the 85% share of net income in Theravance Respiratory Company, LLC for Theravance Biopharma for the three and nine months ended September 30, 2021 and 2020. The increase was primarily due to the increase in the growth in prescriptions and market share for TRELEGY® ELLIPTA®.
Liquidity and Capital Resources
Liquidity
Since our inception, we have financed our operations primarily through private placements and public offerings of equity and debt securities and payments received under collaborative arrangements. For the nine months ended September 30, 2021, we
25
generated gross royalty revenues from GSK of $294.6 million. Net cash and cash equivalents totaled $135.1 million and receivables from GSK totaled $101.3 million as of September 30, 2021.
Adequacy of Cash Resources to Meet Future Needs
We believe that cash from projected future royalty revenues and our cash, cash equivalents and marketable securities will be sufficient to meet our anticipated debt service and operating needs for at least the next 12 months based upon current operating plans and financial forecasts. If our current operating plans and financial forecasts change, we may require additional funding sooner in the form of public or private equity offerings or debt financings. Furthermore, if in our view favorable financing opportunities arise, we may seek additional funding at any time. However, future financing may not be available in amounts or on terms acceptable to us, if at all. This could leave us without adequate financial resources to fund our operations as currently planned. In addition, from time to time we may restructure or reduce our debt, including through tender offers, redemptions, amendments, repurchases or otherwise, all allowable with the terms of our debt agreements.
Cash Flows
Cash flows, as compared to the prior year period, were as follows:
|
|
Nine Months Ended |
|
|
|
|
||||||
(In thousands) |
|
2021 |
|
|
2020 |
|
|
Change |
|
|||
Net cash provided by operating activities |
|
$ |
265,432 |
|
|
$ |
227,833 |
|
|
$ |
37,599 |
|
Net cash provided by investing activities |
|
|
63,627 |
|
|
|
544 |
|
|
|
63,083 |
|
Net cash used in financing activities |
|
|
(440,431 |
) |
|
|
(27,280 |
) |
|
|
(413,151 |
) |
Cash Flows from Operating Activities
Net cash provided by operating activities for the nine months ended September 30, 2021 was $265.4 million, consisting primarily of our net income of $323.2 million, adjusted for net non-cash items such as $65.6 million of deferred income taxes, $10.4 million of depreciation and amortization, and $6.8 million of amortization of debt discount and issuance costs, partially offset by an increase of $132.5 million in the fair value of our equity and long-term investments, net and an increase in receivables from collaborative arrangements of $7.3 million.
Net cash provided by operating activities for the nine months ended September 30, 2020 was $227.8 million, consisting primarily of our net income of $218.8 million, adjusted for net non-cash items such as $44.7 million of deferred income taxes, $10.4 million of depreciation and amortization, partially offset by an increase of $39.2 million in the fair value of our equity investments and an increase of $12.7 million in receivables from collaborative arrangements.
Cash Flows from Investing Activities
Net cash provided by investing activities for the nine months ended September 30, 2021 of $63.6 million was primarily due to $110.0 million in distribution of equity and long-term investments from the ISP Fund LP, partially offset by $46.4 million investments in Armata, ImaginAb and Entasis.
Net cash provided by investing activities for the nine months ended September 30, 2020 of $0.5 million was primarily due to $86.0 million received from maturities of marketable securities, partially offset by $12.9 million in purchases of marketable securities and $72.5 million for our investments in Armata and Entasis.
Cash Flows from Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2021 of $440.4 million was primarily due to $394.1 million used for our common stock repurchase from GSK and $46.4 million distributions to noncontrolling interest.
Net cash used in financing activities for the nine months ended September 30, 2020 of $27.3 million was primarily due to $28.0 million distributions to noncontrolling interest.
26
Item 3. Quantitative and Qualitative Disclosure about Market Risk
There have been no significant changes in our market risk or how our market risk is managed compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
We conducted an evaluation as of September 30, 2021, under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures, which are defined under SEC rules as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within required time periods. Based upon that evaluation, our Chief Executive Officer and Chief Accounting Officer, concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance levels.
Limitations on the Effectiveness of Controls
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all frauds. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Innoviva have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There have been no material changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In May 2019, Theravance Biopharma, which is the owner of 85% of the economic interests in TRC, initiated arbitration against the Company and TRC, relating to a dispute as to the determination by Innoviva (as manager of TRC) to cause TRC to explore potential reinvestment opportunities for the royalty proceeds received by GSK into initiatives that Innoviva believes will increase the value of TRC and TRELEGY® ELLIPTA®. Theravance Biopharma alleged that, in causing TRC to not distribute substantially all royalty proceeds received from GSK, Innoviva breached the limited liability company operating agreement governing TRC (the “Operating Agreement”), as well as the fiduciary duties applicable to Innoviva as manager of TRC. The hearing in respect of the arbitration was conducted from July 23, 2019 through July 25, 2019. Post-arbitration oral argument was heard on August 14, 2019. On September 26, 2019, the arbitrator issued a final decision. The arbitrator ruled that Innoviva did not breach the Operating Agreement or its fiduciary duties by withholding royalties or pursuing reinvestment opportunities. Accordingly, the Company is permitted to continue to pursue development and commercialization initiatives. The arbitrator did conclude that Innoviva breached a provision of the Operating Agreement requiring Innoviva to deliver quarterly financial plans to Theravance Biopharma. However, the arbitrator concluded that this technical breach did not cause any damages to Theravance Biopharma and the arbitrator awarded limited injunctive relief to expand and clarify the disclosure obligations under the Operating Agreement related to the delivery of financial plans and the pursuit of investment opportunities (if those opportunities related to TRELEGY® ELLIPTA®). Finally, the arbitrator ruled that the Company is entitled to indemnification from TRC for 95% of its fees and expenses incurred in connection with the arbitration.
27
On September 30, 2019, the Company and TRC filed a Verified Complaint in the Court of Chancery of the State of Delaware (“Court of Chancery”) to confirm the arbitration award. The award was confirmed by the Court of Chancery on May 4, 2020.
On July 16, 2020, Innoviva and TRC initiated a lawsuit in the Court of Chancery against Theravance Biopharma, seeking a permanent injunction preventing Theravance Biopharma from interfering with Innoviva’s ability to cause TRC to reserve cash to pursue non-Trelegy related investments opportunities and a declaration that the arbitration award conclusively established that Innoviva, as manager of TRC, has such authority. The Court of Chancery directed the parties to obtain the arbitrator’s opinion as to whether the arbitration award addressed non-Trelegy related investment opportunities. On July 31, 2020, the arbitrator, while reiterating that Innoviva has broad authority as manager of TRC, found that this award did not specifically address this situation. Accordingly, on August 5, 2020, the parties stipulated to the dismissal of the Court of Chancery action.
On October 6, 2020, Theravance Biopharma initiated a new arbitration against the Company and TRC, challenging Innoviva’s authority as manager of TRC to cause TRC to pursue non-Trelegy related investment opportunities and again alleging that Innoviva is required to cause TRC to distribute substantially all royalty proceeds from GSK. The hearing in respect of the arbitration was conducted from February 16, 2021 through February 19, 2021. Post-arbitration oral argument was heard on March 8, 2021. On March 30, 2021, the arbitrator issued a final decision. The arbitrator ruled that Innoviva did not breach the Operating Agreement or its fiduciary duties by withholding royalties to pursue non-Trelegy-related investment opportunities. Additionally, the arbitrator ruled that the Company is entitled to indemnification from TRC for 100% of its fees and expenses reasonably incurred in connection with the arbitration.
On April 15, 2021, the Company filed a Verified Complaint in the Court of Chancery to confirm the arbitration award. On May 19, 2021, Theravance Biopharma submitted an answer to the Verified Complaint and filed a Motion to Modify the Arbitral Award, alleging that it contained a mathematical error. The parties filed a proposed stipulation to remand the motion to Chancellor Chandler for his consideration, which the Court of Chancery granted. On June 25, 2021, Innoviva submitted a brief to Chancellor Chandler in opposition to the motion and on July 15, 2021, Theravance Biopharma submitted a reply brief. On August 6, 2021, Chancellor Chandler issued a modified final award, which did not affect any of his ultimate conclusions. The modified award was confirmed by the Court of Chancery on September 16, 2021.
Item 1A. Risk Factors
Our business is subject to a number of risks, including those identified in Item 1A of Part I of our 2020 Form 10-K. There have been no material changes to the risk factors described in our 2020 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3: Defaults Upon Senior Securities
None.
Item 4: Mine Safety Disclosures
None.
Item 5: Other Information
None.
28
Item 6. Exhibits
|
|
|
|
|
|
|
|
|
Exhibit |
|
Description |
|
Form |
|
Exhibit |
|
Incorporated |
|
|
|
|
|
|
|
|
|
31.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
|
|
|
|
|
|
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Innoviva, Inc. |
|
|
Date: October 27, 2021 |
/s/ Pavel Raifeld |
|
Pavel Raifeld |
|
Chief Executive Officer |
|
(Principal Executive Officer) |
|
|
Date: October 27, 2021 |
/s/ Marianne Zhen |
|
Marianne Zhen |
|
Chief Accounting Officer |
|
(Principal Financial Officer) |
30