Innoviva(INVA) - 2019 Q4 - Annual Report

PART I Item 1. Business Innoviva maximizes stockholder value via respiratory royalties partnered with GSK, optimizing assets and capital allocation - Innoviva's core business revolves around a portfolio of royalties from respiratory assets partnered with GSK, specifically RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA®, and TRELEGY® ELLIPTA®[11][160][246] - The company's strategy is to maximize stockholder value by optimizing its GSK-partnered respiratory assets and capital allocation[13] - GSK beneficially owned approximately 31.6% of Innoviva's outstanding common stock as of February 11, 2020[18] GSK Net Sales for Q4 2019 vs Q4 2018 | Product | Q4 2019 Net Sales ($M) | Q4 2018 Net Sales ($M) | Change (%) | | :---------------------- | :--------------------- | :--------------------- | :--------- | | RELVAR®/BREO® ELLIPTA® | 354.4 | 431.7 | -18% | | ANORO® ELLIPTA® | 182.7 | 186.2 | -2% | | TRELEGY® ELLIPTA® | 221.4 | 99.0 | Significant| Overview Our Strategy Our Relationship with GSK Manufacturing Government Regulation Patents and Proprietary Rights Competition Employees Information about our Executive Officers Code of Business Conduct Available Information Item 1A. Risk Factors Innoviva faces significant risks from reliance on GSK royalties, competition, regulatory changes, debt, and conflicts of interest - Innoviva's future success is highly dependent on GSK's ability to successfully develop and commercialize partnered respiratory products, as all foreseeable royalty revenues are derived from GSK[40] - The introduction of generic products poses a material adverse impact on future royalty revenue, profitability, and cash flows for RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®[43][44][45] - GSK's commercialization efforts for TRELEGY® ELLIPTA®, where Innoviva holds only a 15% economic interest, may reduce the overall value of Innoviva's remaining interests in other GSK Agreements if TRELEGY® is prioritized[54][68][119] Total Debt Outstanding as of December 31, 2019 | Debt Type | Amount ($M) | | :---------------------------- | :---------- | | Convertible Subordinated Notes Due 2023 | 241.0 | | Convertible Senior Notes Due 2025 | 192.5 | | Total Debt | 433.5 | Risks Related to our Business Risks Related to our Alliance with GSK Risks Related to Legal and Regulatory Uncertainty Risks Related to Ownership of our Common Stock Item 1B. Unresolved Staff Comments No unresolved staff comments were reported for the fiscal year ended December 31, 2019 - No unresolved staff comments were reported[139] Item 2. Properties Innoviva's headquarters is a 2,111 sq ft leased office in Burlingame, California, expiring November 2022 - Innoviva's headquarters is a leased office space of 2,111 square feet in Burlingame, California, with the lease expiring in November 2022[140] Item 3. Legal Proceedings Innoviva faced arbitration over royalty reinvestment, ruled not to have breached fiduciary duties, and awarded 95% indemnification - Theravance Biopharma initiated arbitration against Innoviva and TRC in May 2019 concerning Innoviva's decision to explore reinvestment opportunities for royalty proceeds instead of distributing them[141] - The arbitrator ruled in September 2019 that Innoviva did not breach the Operating Agreement or its fiduciary duties by withholding royalties or pursuing reinvestment opportunities[141] - Innoviva was found to have technically breached a provision requiring quarterly financial plans but this caused no damages, and is entitled to indemnification from TRC for 95% of its arbitration fees and expenses[141] Item 4. Mine Safety Disclosures Mine Safety Disclosures are not applicable to Innoviva, Inc - Mine Safety Disclosures are not applicable to the company[144] PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Innoviva's common stock trades on Nasdaq under 'INVA', with 74 stockholders of record and no equity repurchases in 2019 - Innoviva's common stock ticker symbol changed from 'THRX' to 'INVA' effective January 11, 2016[146] - As of February 11, 2020, there were 74 stockholders of record[147] - No purchases of equity securities by the issuer were made for the year ended December 31, 2019[148] Market Information Holders Purchases of Equity Securities by the Issuer Stock Performance Graph Item 6. Selected Financial Data This section summarizes Innoviva's selected consolidated financial data for the past five fiscal years, highlighting key trends Consolidated Statements of Income Data (2015-2019) | Metric | 2019 ($K) | 2018 ($K) | 2017 ($K) | 2016 ($K) | 2015 ($K) | | :----------------------------------------- | :-------- | :-------- | :-------- | :-------- | :-------- | | Net revenue | 261,016 | 261,004 | 217,217 | 133,569 | 53,949 | | Total operating expenses | 14,656 | 22,753 | 33,613 | 24,581 | 22,369 | | Income from operations | 246,360 | 238,251 | 183,604 | 108,988 | 31,580 | | Net income (loss) attributable to Innoviva stockholders | 157,288 | 395,056 | 134,143 | 59,536 | (18,760) | | Basic net income (loss) per share | 1.55 | 3.92 | 1.25 | 0.54 | (0.16) | | Diluted net income (loss) per share | 1.43 | 3.53 | 1.17 | 0.53 | (0.16) | Consolidated Balance Sheets Data (as of December 31, 2015-2019) | Metric | 2019 ($K) | 2018 ($K) | 2017 ($K) | 2016 ($K) | 2015 ($K) | | :------------------------------------ | :-------- | :-------- | :-------- | :-------- | :-------- | | Cash, cash equivalents and marketable securities | 350,845 | 114,908 | 129,075 | 150,433 | 187,283 | | Total assets | 724,826 | 548,193 | 367,337 | 378,996 | 408,932 | | Total Innoviva stockholders' equity (deficit) | 313,495 | 153,583 | (242,859) | (352,991) | (342,645) | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Innoviva's 2019 financial condition and results, covering revenue, expenses, cash flows, and accounting policies - Innoviva's net income attributable to stockholders decreased by $237.8 million to $157.3 million in 2019, primarily due to a $196.1 million income tax benefit recognized in 2018 that did not recur[162] - Cash, cash equivalents, and marketable securities increased by $235.9 million to $350.8 million as of December 31, 2019, driven by $257.5 million in cash provided by operating activities[162] Net Revenue from GSK (2017-2019) | Metric | 2019 ($K) | 2018 ($K) | 2017 ($K) | YoY Change 2019 vs 2018 ($K) | YoY Change 2019 vs 2018 (%) | | :----------------------------------------- | :-------- | :-------- | :-------- | :--------------------------- | :-------------------------- | | Royalties from RELVAR/BREO | 189,424 | 220,162 | 198,726 | (30,738) | (14)% | | Royalties from ANORO | 42,625 | 41,286 | 29,036 | 1,339 | 3% | | Royalties from TRELEGY | 42,790 | 13,379 | 179 | 29,411 | * | | Total royalties from a related party | 274,839 | 274,827 | 227,941 | 12 | —% | | Less: amortization of capitalized fees | (13,823) | (13,823) | (13,823) | — | —% | | Total net revenue from GSK | 261,016 | 261,004 | 217,217 | 12 | —% | - Total net revenue remained flat year-over-year in 2019, with a decrease in RELVAR®/BREO® ELLIPTA® royalties due to pricing pressure offset by significant growth in TRELEGY® ELLIPTA®[184] Management Overview Financial Highlights Collaborative Arrangements with GSK Critical Accounting Policies and Estimates Results of Operations Liquidity and Capital Resources Off-Balance Sheet Arrangements Commitments and Contingencies Contractual Obligations and Commercial Commitments Item 7A. Quantitative and Qualitative Disclosures About Market Risk Innoviva faces interest rate risk from investments and fixed-rate debt, with a short average maturity limiting exposure - Innoviva's exposure to interest rate risk on its investment portfolio is not material, with an average remaining maturity of approximately three months as of December 31, 2019[226] - The 2023 Notes and 2025 Notes bear fixed interest rates (2.125% and 2.5% respectively), meaning cash flows are not subject to variability from interest rate changes[227] Fair Value of Debt as of December 31, 2019 | Debt Type | Fair Value ($M) | | :---------- | :-------------- | | 2023 Notes | 243.4 | | 2025 Notes | 209.0 | Interest Rate Risk Item 8. Financial Statements and Supplementary Data This section presents Innoviva's audited consolidated financial statements and supplementary data for 2017-2019, covering balance sheets, income, and cash flows with detailed notes Consolidated Balance Sheets (as of December 31, 2019 and 2018) | Asset/Liability Category | 2019 ($K) | 2018 ($K) | | :----------------------------------- | :-------- | :-------- | | Cash and cash equivalents | 278,096 | 62,417 | | Short-term marketable securities | 72,749 | 52,491 | | Total current assets | 431,234 | 199,043 | | Total assets | 724,826 | 548,193 | | Total current liabilities | 5,371 | 5,700 | | Long-term debt, net | 377,120 | 382,855 | | Total Innoviva stockholders' equity | 313,495 | 153,583 | Consolidated Statements of Income (Years Ended December 31, 2019, 2018, 2017) | Metric | 2019 ($K) | 2018 ($K) | 2017 ($K) | | :----------------------------------------- | :-------- | :-------- | :-------- | | Total net revenue | 261,016 | 261,004 | 217,217 | | Total operating expenses | 14,656 | 22,753 | 33,613 | | Income from operations | 246,360 | 238,251 | 183,604 | | Income before income taxes | 232,895 | 210,255 | 134,276 | | Income tax benefit (expense), net | (41,902) | 196,073 | (4) | | Net income | 190,993 | 406,328 | 134,272 | | Net income attributable to Innoviva stockholders | 157,288 | 395,056 | 134,143 | | Diluted net income per share | 1.43 | 3.53 | 1.17 | Consolidated Statements of Cash Flows (Years Ended December 31, 2019, 2018, 2017) | Cash Flow Category | 2019 ($K) | 2018 ($K) | 2017 ($K) | | :------------------------------------- | :-------- | :-------- | :-------- | | Net cash provided by operating activities | 257,458 | 223,531 | 141,749 | | Net cash provided by (used in) investing activities | (18,003) | 3,519 | (23,236) | | Net cash used in financing activities | (23,776) | (237,969) | (163,193) | | Net increase (decrease) in cash and cash equivalents | 215,679 | (10,919) | (44,680) | | Cash and cash equivalents at end of period | 278,096 | 62,417 | 73,336 | Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Stockholders' Equity (Deficit) Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Note 1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Note 2. NET INCOME PER SHARE Note 3. REVENUE RECOGNITION AND COLLABORATIVE ARRANGEMENTS Note 4. AVAILABLE-FOR-SALE SECURITIES AND FAIR VALUE MEASUREMENTS Note 5. CAPITALIZED FEES PAID TO A RELATED PARTY Note 6. STOCK-BASED COMPENSATION Note 7. DEBT Note 8. COMMITMENTS AND CONTINGENCIES Note 9. INCOME TAXES Note 10. SUBSEQUENT EVENTS Supplementary Financial Data (Unaudited) Reports of Independent Registered Public Accounting Firm Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes or disagreements with accountants on accounting and financial disclosure were reported for 2019 - No changes in or disagreements with accountants on accounting and financial disclosure were reported[397] Item 9A. Controls and Procedures Innoviva's disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with an unqualified opinion - Innoviva's disclosure controls and procedures were deemed effective at reasonable assurance levels as of December 31, 2019[398] - Management concluded that internal control over financial reporting was effective as of December 31, 2019, based on the COSO 2013 framework[400] - Grant Thornton LLP issued an unqualified opinion on the effectiveness of Innoviva's internal control over financial reporting[401][406][407] Evaluation of Disclosure Controls and Procedures Management's Report on Internal Control over Financial Reporting Limitations on the Effectiveness of Controls Changes in Internal Control over Financial Reporting Item 9B. Other Information No other information is reported under this item - No other information was reported[413] PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement - Information for this item is incorporated by reference from the 2019 Proxy Statement[414] Item 11. Executive Compensation Information on executive compensation is incorporated by reference from the 2019 Proxy Statement - Information for this item is incorporated by reference from the 2019 Proxy Statement[415] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details security ownership of beneficial owners and management, largely incorporated by reference from the 2019 Proxy Statement, and includes equity compensation plan data - Most information for this item is incorporated by reference from the 2019 Proxy Statement[416] Securities Authorized for Issuance under Equity Compensation Plans (as of December 31, 2019) | Plan Category | Number of securities to be issued upon exercise of outstanding options and vesting of outstanding restricted stock units and restricted stock awards (a) | Weighted‑average exercise price of outstanding options (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | | :---------------------------------------------- | :------------------------------------------------------------------------------------------------------------------------------------------------ | :--------------------------------------------------------- | :---------------------------------------------------------------------------------------------------------------------------------------------------- | | Equity compensation plans approved by security holders | 1,181,499 | $24.18 | 5,210,527 | Securities Authorized for Issuance under Equity Compensation Plans Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2019 Proxy Statement - Information for this item is incorporated by reference from the 2019 Proxy Statement[419] Item 14. Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2019 Proxy Statement - Information for this item is incorporated by reference from the 2019 Proxy Statement[420] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists financial statements and schedules filed as part of the Annual Report on Form 10-K, referencing the exhibit index - The financial statements and schedules are contained in Part II, Item 8 of this Annual Report[422] - All financial statement schedules have been omitted due to absence of conditions requiring them or because information is already presented in financial statements/notes[422] - Exhibits required by Item 601 of Regulation S-K are set forth in the exhibit index following the signature page[423] Item 16. Form 10-K Summary Innoviva, Inc. does not provide a Form 10-K Summary - No Form 10-K Summary is provided[424]