Innoviva(INVA) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Comprehensive financial data including statements, management analysis, market risks, and internal controls Item 1. Financial Statements (Unaudited) Unaudited condensed consolidated financial statements for Q3 2022 reflect significant impacts from recent acquisitions and asset sales Condensed Consolidated Balance Sheets Total assets increased to $1.33 billion due to acquisitions, significantly raising liabilities and stockholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $1,327,712 | $926,395 | | Cash and cash equivalents | $300,789 | $201,525 | | Goodwill | $15,995 | $— | | Intangible assets | $258,489 | $— | | Total Liabilities | $686,344 | $6,816 | | Total current liabilities | $163,884 | $5,807 | | Long-term debt, net | $443,679 | $394,653 | | Total Stockholders' Equity | $641,368 | $525,935 | Condensed Consolidated Statements of Income Q3 2022 revenue decreased due to TRC sale, but a significant gain from the sale boosted net income Q3 2022 vs Q3 2021 Income Statement (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Total Revenue | $67,257 | $97,862 | | Gain on sale of TRC | $266,696 | $— | | Net Income | $229,347 | $102,646 | | Net Income Attributable to Innoviva Stockholders | $265,523 | $72,438 | | Diluted EPS | $2.80 | $0.90 | Nine Months 2022 vs 2021 Income Statement (in thousands, except per share data) | Metric | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | Total Revenue | $265,536 | $284,186 | | Gain on sale of TRC | $266,696 | $— | | Net Income | $288,576 | $323,187 | | Net Income Attributable to Innoviva Stockholders | $282,235 | $255,509 | | Diluted EPS | $3.07 | $2.63 | Condensed Consolidated Statements of Cash Flows Operating cash flow provided $192.8 million, with investing and financing activities reflecting acquisitions and debt restructuring Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $192,827 | $265,432 | | Net cash (used in) provided by investing activities | $(47,956) | $63,627 | | Net cash used in financing activities | $(45,567) | $(440,431) | | Net increase (decrease) in cash | $99,304 | $(111,372) | | Cash and cash equivalents at end of period | $300,789 | $135,115 | - Key investing activities included the $150.5 million cash paid for the La Jolla acquisition and $248.2 million in proceeds from the sale of the company's interest in TRC[18][19] - Financing activities were driven by the issuance of $252.5 million in 2028 convertible notes, offset by a $165.1 million repurchase of 2023 convertible notes and a $42.4 million payment for the Entasis minority interest[18] Notes to Condensed Consolidated Financial Statements Detailed notes explain significant accounting policies and transactions, including major acquisitions and asset sales impacting comparability - The company's portfolio expanded through the acquisition of Entasis (July 11, 2022) and La Jolla (August 22, 2022), adding commercial products GIAPREZA® and XERAVA® and a development pipeline[23] - On July 20, 2022, the company sold its 15% ownership interest in Theravance Respiratory Company, LLC (TRC), and is no longer entitled to royalties from TRELEGY® ELLIPTA® sales[22] - The company adopted ASU 2020-06, simplifying the accounting for convertible instruments, which impacted the accounting for its 2025 Notes and the calculation of diluted EPS[56][57] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial impact of strategic acquisitions and asset sales on revenue, expenses, and liquidity Overview Innoviva diversified its portfolio through strategic acquisitions of Entasis and La Jolla, and the sale of its TRC interest - Completed the acquisition of Entasis on July 11, 2022, adding an infectious disease R&D platform with lead asset SUL-DUR[194] - Completed the acquisition of La Jolla on August 22, 2022, for a net cash price of $150.5 million, adding commercial products GIAPREZA® and XERAVA®[194] - Completed the sale of its 15% ownership interest in TRC to Royalty Pharma for $282.0 million on July 20, 2022, plus potential milestones[194] Results of Operations Q3 2022 revenue declined due to TRC sale, offset by new product sales, while operating expenses significantly increased Royalty Revenue Breakdown (in thousands) | Royalty Source | Q3 2022 | Q3 2021 | Change % | | :--- | :--- | :--- | :--- | | RELVAR/BREO | $55,663 | $54,092 | 3% | | ANORO | $9,943 | $11,641 | (15)% | | TRELEGY | $— | $35,585 | (100)% | | Total Royalties | $65,606 | $101,318 | (35)% | - Net product sales of $5.1 million were recognized from the date of the La Jolla acquisition (Aug 22, 2022) to Sep 30, 2022, comprising $3.8 million from GIAPREZA® and $1.3 million from XERAVA®[207] - R&D expenses increased to $11.7 million in Q3 2022 from $0.4 million in Q3 2021, mainly attributable to Entasis' product development for SUL-DUR[208][209] - SG&A expenses increased to $27.8 million in Q3 2022 from $2.9 million in Q3 2021, due to the consolidation of Entasis and La Jolla operating expenses[210][211] Liquidity and Capital Resources Innoviva maintains strong liquidity with $300.8 million cash, sufficient for future operations and debt service - The company ended Q3 2022 with $300.8 million in cash and cash equivalents and $65.6 million in receivables from GSK[221] - Management believes cash from future royalties and existing cash reserves will be sufficient to meet needs for at least the next 12 months[222] Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $192,827 | $265,432 | | Net cash (used in) provided by investing activities | $(47,956) | $63,627 | | Net cash used in financing activities | $(45,567) | $(440,431) | - Significant new contractual obligations include interest and principal on the $261.0 million 2028 Notes and a deferred royalty obligation to HCR on GIAPREZA® sales, acquired with La Jolla[230][232] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from investments and inflation, though debt obligations have fixed interest rates - The company's debt bears fixed interest rates, mitigating risk from interest rate changes on its debt obligations[235] - The company is exposed to fair value fluctuations in its investments in equity and debt securities, which could lead to material gains or losses[236] - Inflationary factors, such as increased costs for raw materials and overhead, may adversely affect future operating results, although the impact to date has not been material[238] Item 4. Controls and Procedures Disclosure controls were effective, with ongoing integration of internal controls for newly acquired businesses - Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2022[239] - The company is integrating the acquired operations of Entasis and La Jolla and implementing new internal controls related to inventory management, R&D, and product sales[241] PART II. OTHER INFORMATION Additional disclosures include legal proceedings, updated risk factors, and a list of filed exhibits Legal Proceedings The company is engaged in a patent infringement lawsuit to protect GIAPREZA® from generic competition - La Jolla (now a subsidiary) filed a patent infringement suit against Gland Pharma Limited on March 29, 2022, in response to Gland's ANDA filing for a generic version of GIAPREZA®[243][244] - The lawsuit triggers a stay under the Hatch-Waxman Act, preventing the FDA from approving Gland's ANDA for up to 7.5 years from the original NDA approval, unless the patents are found invalid, unenforceable, or not infringed[244] Risk Factors Risk factors are supplemented to include those related to the recent acquisitions of Entasis and La Jolla - Risk factors have been supplemented to include those related to the acquisitions of Entasis and La Jolla[245][246] - The company incorporates by reference the risk factors detailed in the standalone 10-K filings of Entasis and La Jolla, and a Form 8-K filed on August 23, 2022[245][246][247] Unregistered Sales of Equity Securities and Use of Proceeds None reported for the period - None[248] Exhibits An index of all exhibits filed with the Form 10-Q, including merger agreements and debt indentures - Lists exhibits filed with the report, including merger agreements, debt indentures, and certifications[253]