Innoviva(INVA) - 2019 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements This section presents Innoviva's unaudited condensed consolidated financial statements, including balance sheets, statements of income, comprehensive income, stockholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, revenue recognition, debt, and other financial disclosures for the periods ended September 30, 2019 and December 31, 2018 Condensed Consolidated Balance Sheets Innoviva's balance sheet shows significant growth in total assets and stockholders' equity from December 31, 2018, to September 30, 2019, driven by increases in cash, marketable securities, and a reduction in accumulated deficit Condensed Consolidated Balance Sheet Data | Metric | Sep 30, 2019 (Unaudited) (in thousands) | Dec 31, 2018 (Audited) (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :------------------------------------- | :----------------------------------- | :-------------------- | :------- | | Total Assets | $675,953 | $548,193 | $127,760 | 23.3% | | Cash and cash equivalents | $172,946 | $62,417 | $110,529 | 177.1% | | Short-term marketable securities | $124,255 | $52,491 | $71,764 | 136.7% | | Total Stockholders' Equity | $283,763 | $159,052 | $124,711 | 78.4% | | Accumulated Deficit | $(992,353) | $(1,103,692) | $111,339 | -10.1% | Unaudited Condensed Consolidated Statements of Income Innoviva reported increased royalty revenue for both the three and nine months ended September 30, 2019, compared to the prior year, primarily driven by TRELEGY® ELLIPTA®. However, net income attributable to Innoviva stockholders decreased due to higher income tax expense in 2019 Unaudited Condensed Consolidated Statements of Income Data | Metric (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Royalty revenue from a related party, net | $65,755 | $61,680 | $185,045 | $181,146 | | Income from operations | $60,793 | $57,661 | $172,721 | $161,031 | | Income before income taxes | $57,609 | $50,167 | $162,630 | $137,113 | | Income tax expense, net | $10,558 | $0 | $29,499 | $0 | | Net income attributable to Innoviva stockholders | $39,809 | $47,089 | $111,339 | $131,296 | | Basic net income per share | $0.39 | $0.47 | $1.10 | $1.30 | | Diluted net income per share | $0.36 | $0.43 | $1.01 | $1.19 | Unaudited Condensed Consolidated Statements of Comprehensive Income Comprehensive income attributable to Innoviva stockholders decreased for both the three and nine months ended September 30, 2019, mirroring the trend in net income, with minimal impact from unrealized gains/losses on marketable securities Unaudited Condensed Consolidated Statements of Comprehensive Income Data | Metric (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------------------------------------------------ | :------------------------------ | :------------------------------ | :------------------------------ | :------------------------------ | | Net income | $47,051 | $50,167 | $133,131 | $137,113 | | Unrealized gain (loss) on marketable securities, net | $(8) | $7 | $28 | $15 | | Comprehensive income attributable to Innoviva stockholders | $39,801 | $47,096 | $111,367 | $131,311 | Unaudited Condensed Consolidated Statements of Stockholders' Equity (Deficit) Innoviva's total stockholders' equity significantly increased from December 31, 2018, to September 30, 2019, primarily due to net income contributions and an increase in noncontrolling interest, despite distributions to noncontrolling interest Unaudited Condensed Consolidated Statements of Stockholders' Equity (Deficit) Data | Metric (in thousands) | As of Dec 31, 2018 | As of Sep 30, 2019 | | :-------------------------- | :----------------- | :----------------- | | Total Stockholders' Equity | $159,052 | $283,763 | | Noncontrolling interest | $5,469 | $16,708 | | Accumulated Deficit | $(1,103,692) | $(992,353) | - Net income attributable to Innoviva stockholders for the nine months ended September 30, 2019, was $111.3 million, contributing to the increase in equity[12] - Distributions to noncontrolling interest totaled $(10.6 million) for the nine months ended September 30, 2019[18] Unaudited Condensed Consolidated Statements of Cash Flows Innoviva experienced a substantial net increase in cash and cash equivalents for the nine months ended September 30, 2019, primarily driven by strong operating cash flows and a significant shift from net cash used in investing activities in 2018 to net cash provided by investing activities in 2019, alongside reduced cash used in financing activities due to lower debt prepayments Unaudited Condensed Consolidated Statements of Cash Flow Data | Cash Flow Activity (in thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Change | | :-------------------------------- | :----------------------------- | :----------------------------- | :----- | | Net cash provided by operating activities | $190,553 | $161,754 | $28,799 | | Net cash provided by (used in) investing activities | $(69,997) | $49,113 | $(119,110) | | Net cash used in financing activities | $(10,027) | $(235,588) | $225,561 | | Net increase (decrease) in cash and cash equivalents | $110,529 | $(24,721) | $135,250 | | Cash and cash equivalents at end of period | $172,946 | $48,615 | $124,331 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the condensed consolidated financial statements, covering Innoviva's operations, accounting policies, per-share calculations, revenue recognition, fair value measurements, stock-based compensation, debt, related party transactions, income taxes, and lease arrangements Note 1. Description of Operations and Summary of Significant Accounting Policies Innoviva operates as a royalty management company, primarily deriving revenue from respiratory assets partnered with GSK, including RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA®, and TRELEGY® ELLIPTA®. The company consolidates Theravance Respiratory Company, LLC (TRC) as a Variable Interest Entity (VIE) and adopted new lease accounting standards (ASC 842) in 2019, which had a non-material impact on financial statements - Innoviva's core business is royalty management, with a portfolio of respiratory assets partnered with Glaxo Group Limited (GSK), including RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA®, and TRELEGY® ELLIPTA®[24] - Innoviva consolidates the financial results of Theravance Respiratory Company, LLC (TRC), which is determined to be a Variable Interest Entity (VIE)[27] TRC Revenue from TRELEGY® ELLIPTA® | TRC Revenue from TRELEGY® ELLIPTA® (in millions) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total revenue | $11.2 | $3.6 | $28.4 | $6.9 | - The company adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019, recognizing a $1.5 million right-of-use asset and $1.6 million lease liabilities for its corporate headquarters, which were subsequently reversed upon lease termination on September 13, 2019[28][30] Note 2. Net Income Per Share Innoviva calculates basic and diluted net income per share, with diluted EPS reflecting the impact of convertible notes and employee stock awards. The 2025 Notes had no dilutive effect as the market price was below the conversion price Net Income Per Share Attributable to Innoviva Stockholders | Net Income Per Share Attributable to Innoviva Stockholders | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------------------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic | $0.39 | $0.47 | $1.10 | $1.30 | | Diluted | $0.36 | $0.43 | $1.01 | $1.19 | - The convertible senior notes due 2025 (2025 Notes) had no dilutive effect on net income per share for the three and nine months ended September 30, 2019 and 2018, as the average market price of common stock was lower than the initial conversion price of $17.26 per share[33] Note 3. Revenue Recognition and Collaborative Arrangements Innoviva recognizes royalty revenue from GSK based on licensee net sales, net of amortization of capitalized fees. TRELEGY® ELLIPTA® showed significant royalty growth, while RELVAR®/BREO® ELLIPTA® royalties decreased Royalties from a Related Party | Royalties from a related party (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | RELVAR®/BREO® ELLIPTA® | $46,433 | $51,745 | $136,259 | $155,420 | | ANORO® ELLIPTA® | $11,548 | $9,769 | $30,753 | $29,149 | | TRELEGY® ELLIPTA® | $11,230 | $3,622 | $28,401 | $6,945 | | Total royalties from a related party | $69,211 | $65,136 | $195,413 | $191,514 | | Royalty revenue from GSK (net) | $65,755 | $61,680 | $185,045 | $181,146 | - Royalties from TRELEGY® ELLIPTA® showed significant growth, increasing from $3.6 million to $11.2 million for the three months ended September 30, 2019, and from $6.9 million to $28.4 million for the nine months ended September 30, 2019[38] - Royalties from RELVAR®/BREO® ELLIPTA® decreased by $5.3 million (10%) for the three months and $19.2 million (12%) for the nine months ended September 30, 2019, compared to the prior year[38] Note 4. Available-for-Sale Securities and Fair Value Measurements Innoviva's available-for-sale securities, primarily U.S. government securities, commercial paper, and money market funds, significantly increased in fair value from December 2018 to September 2019. The company also provides fair value measurements for its debt, which is carried at amortized cost Available-for-Sale Securities | Available-for-Sale Securities (in thousands) | Estimated Fair Value as of Sep 30, 2019 | Estimated Fair Value as of Dec 31, 2018 | | :----------------------------------------- | :-------------------------------------- | :-------------------------------------- | | U.S. government securities | $91,465 | $29,733 | | U.S. commercial paper | $54,356 | $22,037 | | Money market funds | $101,636 | $49,358 | | Total | $247,457 | $108,974 | - As of September 30, 2019, all available-for-sale securities had contractual maturities within one year, with a weighted average maturity of approximately four months[40] Fair Value of Debt | Fair Value of Debt (in thousands) | Estimated Fair Value as of Sep 30, 2019 | Estimated Fair Value as of Dec 31, 2018 | | :-------------------------------- | :-------------------------------------- | :-------------------------------------- | | Term B Loan | $13,750 | $13,750 | | 2023 Notes | $226,139 | $258,918 | | 2025 Notes | $182,729 | $230,692 | | Total fair value of debt | $422,618 | $503,360 | Note 5. Stock-Based Compensation Innoviva's stock-based compensation expense decreased for the nine months ended September 30, 2019, compared to the prior year, largely due to reversals of previously recognized expenses related to forfeited market-based and service-based awards following senior management separations in 2018 Stock-Based Compensation Expense | Stock-Based Compensation Expense (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :---------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | General and administrative | $489 | $(874) | $1,568 | $2,747 | - For the three months ended September 30, 2018, $1.9 million of stock-based compensation was reversed due to forfeited market-based and service-based awards following the separation of senior management members[53] Unrecognized Compensation Cost | Unrecognized Compensation Cost (in thousands) | As of Sep 30, 2019 | | :------------------------------------------ | :----------------- | | RSUs | $733 | | RSAs | $1,067 | | Total unrecognized compensation cost | $1,800 | Note 6. Debt Innoviva's total debt balance remained constant at $447.2 million from December 2018 to September 2019, with a net long-term debt of $388.6 million as of September 30, 2019. The company made significant prepayments on its Term B Loan in 2018, reducing its outstanding principal balance to $13.8 million Debt Balances | Debt (in thousands) | Sep 30, 2019 | Dec 31, 2018 | | :------------------ | :----------- | :----------- | | Term B Loan | $13,750 | $13,750 | | 2023 Notes | $240,984 | $240,984 | | 2025 Notes | $192,500 | $192,500 | | Total debt | $447,234 | $447,234 | | Net long-term debt | $388,644 | $382,855 | - The outstanding principal balance of the Term B Loan was $13.8 million as of September 30, 2019, following prepayments of $120.0 million and $110.0 million in February and August 2018, respectively[56] Debt Maturities | Debt Maturities (in thousands) | Total | | :----------------------------- | :---- | | Years ending December 31: | | | 2019 to 2021 | $0 | | 2022 | $13,750 | | 2023 | $240,984 | | Thereafter | $192,500 | | Total | $447,234 | Note 7. Related Party Transaction Innoviva entered into an agreement with Sarissa Capital Management LP in February 2018, which included the appointment of Sarissa designees to the Board and partial reimbursement of expenses, establishing Sarissa as a related party - On February 12, 2018, Innoviva entered into an agreement with Sarissa Capital Management LP, which included the appointment of three Sarissa designees to the Board of Directors and partial reimbursement of $2.7 million for expenses[61] - The Sarissa Group is considered a related party due to its representation on the Board of Directors[61] Note 8. Income Taxes Innoviva recognized significant provisional income tax expense for the three and nine months ended September 30, 2019, compared to minimal amounts in 2018, due to a full valuation allowance previously maintained on deferred taxes. The effective tax rate for the nine months was 18% Income Tax Expense | Income Tax Expense (in millions) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Provisional income tax expense | $10.6 | Minimal | $29.5 | Minimal | - The effective income tax rate for the nine months ended September 30, 2019, was 18%, primarily differing from the U.S. federal statutory rate of 21% due to state income tax, non-deductible expenses, and noncontrolling interest[63] Note 9. Lease Innoviva terminated its operating lease for its corporate headquarters in September 2019, incurring termination fees and reversing previously recognized right-of-use assets and lease liabilities. A new lease in Burlingame, California, is anticipated to commence in November - Innoviva terminated the operating lease for its corporate headquarters in Brisbane, California, in September 2019[64] - In connection with the termination, the company incurred $0.6 million in termination-related fees and reversed $1.3 million in right-of-use assets and $1.4 million in lease liabilities[65] - A new operating lease in Burlingame, California, is anticipated to commence in early November 2019[64] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Innoviva's financial condition and results of operations, including an executive summary of its royalty management business, recent highlights from its GSK collaboration, and a detailed analysis of revenue, expenses, and liquidity. It also includes cautionary statements regarding forward-looking information Forward-Looking Statements This section provides a cautionary statement regarding forward-looking statements in the report, highlighting inherent risks, uncertainties, and assumptions that could cause actual results to differ materially from projections. It advises against undue reliance on these statements and refers readers to "Risk Factors" for a more complete discussion - Forward-looking statements involve substantial risks, uncertainties, and assumptions, and actual results or events could differ materially from disclosed plans[67] - Readers should not place undue reliance on forward-looking statements and are encouraged to read "Risk Factors" in the 2018 Form 10-K and current 10-Q for a more complete discussion of business risks[67][68] OVERVIEW This overview summarizes Innoviva's business as a royalty management company focused on respiratory assets partnered with GSK, details recent sales highlights for key products, and discusses critical accounting policies, including the adoption of new lease accounting standards Executive Summary Innoviva is a royalty management company focused on respiratory assets partnered with GSK, including RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA®, and TRELEGY® ELLIPTA®. The company's structure is streamlined for managing these assets, intellectual property, and public company functions, with six employees as of September 30, 2019 - Innoviva's business is focused on royalty management from respiratory assets partnered with GSK, specifically RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA®, and TRELEGY® ELLIPTA®[69] - The company's structure is tailored for managing GSK agreements, intellectual property, licensing operations, business development, and essential public company functions[70] - As of September 30, 2019, Innoviva had six employees[70] Recent Highlights Recent highlights include the continued collaboration with GSK on LABA products for COPD and asthma, with specific sales figures for RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA®, and TRELEGY® ELLIPTA® for Q3 2019. TRELEGY® ELLIPTA® showed significant sales growth, while RELVAR®/BREO® ELLIPTA® sales declined - Innoviva's collaboration with GSK focuses on developing and commercializing once-daily LABA products for COPD and asthma, including RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA®, and TRELEGY® ELLIPTA®[72] GSK Net Sales | GSK Net Sales (in millions) | Q3 2019 | Q3 2018 | Change | % Change | | :-------------------------- | :------ | :------ | :----- | :------- | | RELVAR®/BREO® ELLIPTA® | $309.5 | $344.9 | $(35.4) | -10% | | ANORO® ELLIPTA® | $177.7 | $150.8 | $26.9 | 18% | | TRELEGY® ELLIPTA® | $172.8 | $55.7 | $117.1 | Significant | | Note: 'Significant' indicates a large percentage change not explicitly quantified as a percentage in the source text. | | | | | - GSK licensed Innoviva's Bifunctional Muscarinic Antagonist-Beta2 Agonist (MABA) program in 2005, which GSK fully funds, and is currently determining next steps for the program[74] Critical Accounting Policies and Estimates The financial statements are prepared under US GAAP, requiring estimates and assumptions. The company adopted ASU 2016-02 (Leases) on January 1, 2019, recognizing right-of-use assets and lease liabilities for its corporate headquarters, which were later reversed due to lease termination. No other significant changes to critical accounting policies were noted - Financial statements are prepared in accordance with US GAAP, requiring management to make estimates and assumptions[75] - Innoviva adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019, recognizing a $1.5 million right-of-use asset and $1.6 million lease liabilities for its corporate headquarters, which were subsequently reversed upon lease termination[76] - There were no other significant changes to critical accounting policies and estimates[77] Results of Operations Innoviva's results of operations show an increase in net revenue driven by TRELEGY® ELLIPTA®'s growth, despite declines in RELVAR®/BREO® ELLIPTA®. General and administrative expenses decreased year-to-date, while interest expense also fell due to lower debt balances. The company recorded significant income tax expense in 2019, and net income attributable to noncontrolling interest increased Net Revenue Total net revenue increased for both the three and nine months ended September 30, 2019, driven by significant growth in TRELEGY® ELLIPTA® royalties, which offset declines in RELVAR®/BREO® ELLIPTA® due to pricing pressure. ANORO® ELLIPTA® maintained steady volume growth Net Revenue from GSK | Net Revenue (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Change ($) | Change (%) | | :------------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Royalty revenue from GSK | $65,755 | $61,680 | $4,075 | 7% | | Royalties from RELVAR/BREO | $46,433 | $51,745 | $(5,312) | (10)% | | Royalties from ANORO | $11,548 | $9,769 | $1,779 | 18% | | Royalties from TRELEGY | $11,230 | $3,622 | $7,608 | * | | Not meaningful due to large percentage change. | | | | | - For the nine months ended September 30, 2019, total net revenue increased by 2% to $185.0 million from $181.1 million in the prior year[79] - Royalties for RELVAR®/BREO® ELLIPTA® were lower primarily due to increasing pricing pressure in the U.S., partially offset by volume growth[79] General & Administrative General and administrative expenses for the three months ended September 30, 2019, were slightly higher due to legal fees related to an arbitration, while for the nine months, they decreased significantly due to lower personnel-related expenses and the absence of certain 2018 payments General and Administrative Expenses | General and Administrative Expenses (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Change ($) | Change (%) | | :----------------------------------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | General and administrative expenses | $4,962 | $4,019 | $943 | 23% | | General and administrative expenses - related party | $0 | $0 | $0 | 0% | - For the nine months ended September 30, 2019, general and administrative expenses decreased by $5.1 million (29%) to $12.3 million, primarily due to lower headcount and the absence of $5.7 million cash severance payments and $2.7 million payment to Sarissa in 2018[81] - The three months ended September 30, 2019, included $2.8 million in legal and related fees for an arbitration initiated by Theravance Biopharma[80] Other Income (Expense), net and Interest Income Other expense, net, significantly decreased for both the three and nine months ended September 30, 2019, primarily due to the absence of debt extinguishment losses incurred in 2018. Interest income increased due to higher cash and investment balances Other Expense, Net and Interest Income | Other Expense, net (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Change ($) | | :-------------------------------- | :------------------------------ | :------------------------------ | :--------- | | Other expense, net | $(115) | $(2,626) | $2,511 | | Interest income | $1,624 | $370 | $1,254 | - Other expense, net, for the three and nine months ended September 30, 2018, mainly consisted of losses on the extinguishment of debt of $2.6 million and $5.7 million, respectively, related to Term B Loan prepayments[84] - Interest income increased for both periods in 2019 primarily due to higher cash and investment balances[84] Interest Expense Interest expense decreased for both the three and nine months ended September 30, 2019, compared to the prior year, primarily due to a lower average outstanding debt balance following significant prepayments on the Term B Loan in 2018 Interest Expense | Interest Expense (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Change ($) | Change (%) | | :------------------------------ | :------------------------------ | :------------------------------ | :--------- | :--------- | | Interest expense | $4,693 | $5,238 | $(545) | (10)% | | Interest expense (9 months) | $13,971 | $19,373 | $(5,402) | (28)% | - The decrease in interest expense was primarily due to a lower average outstanding debt balance[85] Provision for Income Taxes Innoviva recorded significant provisional income tax expense for the three and nine months ended September 30, 2019, at an effective rate of 18% for the nine-month period, in contrast to minimal amounts in the prior year due to a previously maintained full valuation allowance on deferred taxes Provisional Income Tax Expense | Income Tax Expense (in millions) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Provisional income tax expense | $10.6 | Immaterial | $29.5 | Immaterial | - The effective income tax rate for the nine months ended September 30, 2019, was 18%[86] Net Income Attributable to Noncontrolling Interest Net income attributable to noncontrolling interest significantly increased for both the three and nine months ended September 30, 2019, primarily driven by the growth in prescriptions and market share for TRELEGY® ELLIPTA® Net Income Attributable to Noncontrolling Interest | Net Income Attributable to Noncontrolling Interest (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Change ($) | | :--------------------------------------------------------------- | :------------------------------ | :------------------------------ | :--------- | | Net income attributable to noncontrolling interest | $7,242 | $3,078 | $4,164 | | Net income attributable to noncontrolling interest (9 months) | $21,792 | $5,817 | $15,975 | - The increase was primarily due to the growth in prescriptions and market share for TRELEGY® ELLIPTA®[87] - This represents the 85% share of net income in Theravance Respiratory Company, LLC for Theravance Biopharma[87] Liquidity and Capital Resources Innoviva's liquidity position improved significantly, with substantial cash and marketable securities. The company's cash flows from operating activities increased, while financing activities saw reduced cash usage due to lower debt prepayments. Innoviva also details its off-balance sheet lease guarantee and contractual debt obligations Liquidity Innoviva's liquidity position improved significantly, with cash, cash equivalents, and marketable securities totaling $297.2 million as of September 30, 2019. The company has financed operations through equity, debt, and collaborative arrangements, and believes current resources are sufficient for the next 12 months - As of September 30, 2019, net cash and cash equivalents, short-term investments, and marketable securities totaled $297.2 million[88] - Royalties receivable from GSK totaled $69.2 million as of September 30, 2019[88] - The outstanding principal balance of the Term B Loan was $13.8 million as of September 30, 2019, after significant prepayments in 2018[89] - Management believes that projected future royalty revenues and current cash/investments will be sufficient to meet anticipated debt service and operating needs for at least the next 12 months[90] Cash Flows Innoviva's cash flows from operating activities increased for the nine months ended September 30, 2019, while investing activities shifted to a net cash outflow due to increased purchases of marketable securities. Financing activities saw a substantial reduction in cash used, primarily due to lower debt prepayments compared to the prior year Cash Flow Activities | Cash Flow Activity (in thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Change | | :-------------------------------- | :----------------------------- | :----------------------------- | :----- | | Net cash provided by operating activities | $190,553 | $161,754 | $28,799 | | Net cash provided by (used in) investing activities | $(69,997) | $49,113 | $(119,110) | | Net cash used in financing activities | $(10,027) | $(235,588) | $225,561 | - Cash provided by operating activities for the nine months ended September 30, 2019, was $190.6 million, primarily from net income and adjustments for non-cash items[92] - Net cash used in financing activities for the nine months ended September 30, 2019, decreased significantly due to lower debt prepayments compared to $230.0 million in Term B Loan prepayments in 2018[96][97] Off-Balance Sheet Arrangements Innoviva has an off-balance sheet arrangement related to a lease guarantee for facilities assigned to Theravance Biopharma, Inc. in 2014. Innoviva would be liable for remaining lease payments totaling $4.4 million through May 2020 if Theravance Biopharma defaults - Innoviva has guaranteed lease payments for facilities in South San Francisco, California, which were assigned to Theravance Biopharma, Inc. in 2014[98] - If Theravance Biopharma defaults, Innoviva would be liable for the remaining lease payments, which total $4.4 million through May 2020[99] - The carrying value of this lease guarantee was $0.2 million as of September 30, 2019[99] Contractual Obligations and Commercial Commitments Innoviva's significant contractual obligations as of September 30, 2019, primarily consist of its 2023 Notes, 2025 Notes, and the Term B Loan, totaling $494.0 million, with varying maturities Contractual Obligations | Contractual Obligations (in thousands) | Total | Less Than 1 Year | 1 - 3 Years | 3 - 5 Years | More Than 5 Years | | :----------------------------------- | :---- | :--------------- | :---------- | :---------- | :---------------- | | 2023 Notes | $258,907 | $5,121 | $10,242 | $243,544 | $0 | | 2025 Notes | $221,375 | $4,813 | $9,625 | $9,625 | $197,312 | | Term B Loan | $13,750 | $0 | $0 | $13,750 | $0 | | Total | $494,032 | $9,934 | $19,867 | $266,919 | $197,312 | | *The Term B Loan balances reflect principal repayment obligations and do not include interest payments as the loan bears a variable interest rate. | | | | | Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no significant changes in Innoviva's market risk or its management compared to what was disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018 - No significant changes in market risk or its management have occurred compared to disclosures in the 2018 Annual Report on Form 10-K[102] Item 4. Controls and Procedures Innoviva's management concluded that its disclosure controls and procedures were effective at reasonable assurance levels as of September 30, 2019. The report acknowledges inherent limitations in control systems, which can only provide reasonable, not absolute, assurance. No material changes in internal control over financial reporting occurred during the quarter - Management concluded that disclosure controls and procedures were effective at reasonable assurance levels as of September 30, 2019[103] - Control systems provide only reasonable, not absolute, assurance that objectives are met, due to inherent limitations and resource constraints[104] - There were no material changes in internal control over financial reporting during the quarter ended September 30, 2019[105] PART II. OTHER INFORMATION Item 1. Legal Proceedings Theravance Biopharma initiated arbitration against Innoviva and TRC in May 2019 regarding the reinvestment of royalty proceeds. The arbitrator ruled that Innoviva did not breach the operating agreement or fiduciary duties by withholding royalties for reinvestment, but did breach a disclosure provision, awarding limited injunctive relief. Innoviva is entitled to indemnification for 95% of arbitration fees - Theravance Biopharma initiated arbitration in May 2019 against Innoviva and TRC concerning Innoviva's decision to reinvest TRC royalty proceeds rather than distribute them[106] - The arbitrator ruled that Innoviva did not breach the operating agreement or its fiduciary duties by withholding royalties or pursuing reinvestment opportunities[106] - Innoviva was found to have technically breached a disclosure provision for quarterly financial plans, resulting in limited injunctive relief to clarify disclosure obligations[106] - Innoviva is entitled to indemnification from TRC for 95% of its total fees and expenses incurred in connection with the arbitration[106] Item 1A. Risk Factors There have been no material changes to the risk factors previously described in Innoviva's 2018 Form 10-K, except for the legal proceedings discussed in Item 1 - No material changes to the risk factors described in the 2018 Form 10-K, except for the legal proceedings detailed in Item 1[108] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported - None[109] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported - None[110] Item 4. Mine Safety Disclosure No mine safety disclosures were reported - None[111] Item 5. Other Information No other information was reported - None[112] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the Lease Termination Agreement, certifications from executive officers, and interactive data files in iXBRL format - Exhibits include the Lease Termination Agreement (10.84), Certifications of Principal Executive Officer and Principal Financial Officer (31.1, 31.2, 32), and Interactive Data Files in iXBRL format (101, 104)[114] Signatures Signatures The report is signed by Geoffrey Hulme, Interim Principal Executive Officer, and Marianne Zhen, Chief Accounting Officer, on October 30, 2019 - The report was signed by Geoffrey Hulme, Interim Principal Executive Officer, and Marianne Zhen, Chief Accounting Officer, on October 30, 2019[118]