Innoviva(INVA) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section covers unaudited financial statements, management's discussion, market risk, and internal controls Item 1. Financial Statements Assets decreased due to share repurchase, net income rose from royalties and investment gains, and operating cash flow was strong Consolidated Balance Sheets The balance sheet shows decreased total assets and cash due to a share repurchase, offset by increased equity investments Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $135,115 | $246,487 | | Equity and long-term investments | $507,116 | $438,258 | | Total Assets | $887,239 | $999,570 | | Liabilities & Equity | | | | Long-term debt, net | $392,295 | $385,517 | | Treasury stock | ($393,829) | $0 | | Total Stockholders' Equity | $491,805 | $607,837 | - The significant decrease in cash and cash equivalents and the appearance of treasury stock are primarily due to the repurchase of common stock during the period[8] Consolidated Statements of Income Net income and EPS grew significantly, driven by increased revenue and positive fair value changes in investments Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Total net revenue | $97,862 | $88,694 | $284,186 | $246,318 | | Income from operations | $94,553 | $84,430 | $270,576 | $236,336 | | Changes in fair values of investments, net | $33,613 | ($29,368) | $133,973 | $39,245 | | Net income attributable to Innoviva | $72,438 | $28,218 | $255,509 | $170,499 | | Diluted EPS | $0.90 | $0.26 | $2.63 | $1.53 | - Net income growth was driven by a 10% YoY increase in Q3 royalty revenue and significant positive swings in the fair value of equity and long-term investments compared to the prior year[11] Consolidated Statements of Cash Flows Cash flow statement shows strong operating cash, positive investing, and significant financing outflow from a share repurchase Consolidated Cash Flow Highlights (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $265,432 | $227,833 | | Net cash provided by investing activities | $63,627 | $544 | | Net cash used in financing activities | ($440,431) | ($27,280) | | Net (decrease) increase in cash | ($111,372) | $201,097 | - The significant use of cash in financing activities was primarily due to a $394.1 million repurchase of common stock[21][119] - Investing activities were positive due to a $110.0 million distribution from equity investments, offsetting new purchases[21][119] Notes to Consolidated Financial Statements Notes detail the company's royalty-based business, revenue, VIEs, equity investments, debt, and a major share repurchase - The company's primary business is managing a portfolio of royalties from respiratory assets partnered with Glaxo Group Limited (GSK), including RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA®, and TRELEGY® ELLIPTA®[23] Royalty Revenue by Product (in thousands) | Product | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | RELVAR/BREO | $54,092 | $63,893 | $176,398 | $165,612 | | ANORO | $11,641 | $11,882 | $34,101 | $32,931 | | TRELEGY | $35,585 | $16,375 | $84,055 | $48,143 | - The company consolidates several Variable Interest Entities (VIEs), including Theravance Respiratory Company, LLC (TRC), Pulmoquine Therapeutics, Inc., and ISP Fund LP, a partnership with Sarissa Capital[42] - Significant equity investments are held in Armata Pharmaceuticals and Entasis Therapeutics, which are accounted for at fair value, leading to substantial unrealized gains recorded in the income statement[53][58][59] - On May 20, 2021, the company repurchased all 32,005,260 shares of its common stock held by GSK for a total of $394.1 million[82] - These shares are now held as treasury stock[82] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses royalty-based business, revenue growth, increased expenses, and strong liquidity after a share repurchase Overview and Recent Highlights This section provides an overview of the company's royalty portfolio and business structure, highlighting key product sales GSK Net Sales of Partnered Products - Q3 2021 | Product | Q3 2021 Net Sales | YoY Change | | :--- | :--- | :--- | | RELVAR®/BREO® ELLIPTA® | $360.6 million | -15% | | ANORO® ELLIPTA® | $179.1 million | -2% | | TRELEGY® ELLIPTA® | $445.6 million | +77% | - The company's royalty portfolio consists of respiratory assets partnered with GSK[88][89] - The business structure is tailored to manage these assets, optimize operations, and manage capital allocation[88][89] Results of Operations This section details revenue growth, operating expense changes, and fair value adjustments' impact on financial results - Total net revenue increased by 10% to $97.9 million in Q3 2021 and by 15% to $284.2 million for the nine months ended Sep 30, 2021, compared to the same periods in 2020[101] - The growth in revenue was primarily driven by a 117% YoY increase in TRELEGY® royalties in Q3 2021, which more than offset a 15% decline in RELVAR/BREO® royalties[101] - General and administrative expenses increased 55% for the nine-month period, mainly due to business development advisory fees and legal expenses related to arbitration with Theravance Biopharma[103] - Changes in fair values of equity and long-term investments contributed a gain of $33.6 million in Q3 2021 and $134.0 million for the nine-month period, reflecting strong performance of investments in Armata, Entasis, and the ISP Fund[107][108] Liquidity and Capital Resources This section assesses cash position, liquidity outlook, and the impact of financing activities, including the share repurchase - As of September 30, 2021, the company had $135.1 million in cash and cash equivalents and $101.3 million in receivables from GSK[112] - Management believes that cash from future royalty revenues and existing cash reserves will be sufficient to meet operating and debt service needs for at least the next 12 months[113] Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash from operating activities | $265,432 | $227,833 | | Net cash from investing activities | $63,627 | $544 | | Net cash used in financing activities | ($440,431) | ($27,280) | - The primary use of cash in financing activities for the nine months of 2021 was the $394.1 million repurchase of common stock from GSK[119] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to market risk or its management are reported compared to the 2020 Annual Report on Form 10-K - There have been no significant changes in the company's market risk profile or its management since the year ended December 31, 2020[120] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control - Based on an evaluation as of September 30, 2021, the Chief Executive Officer and Chief Accounting Officer concluded that the company's disclosure controls and procedures were effective[121] - No material changes were made to the company's internal control over financial reporting during the quarter ended September 30, 2021[123] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and a list of exhibits Item 1. Legal Proceedings The company won arbitration against Theravance Biopharma, confirming its authority to withhold TRC royalty proceeds for reinvestment - Theravance Biopharma initiated arbitration challenging Innoviva's authority, as manager of TRC, to withhold royalty proceeds from GSK for reinvestment[124][127] - The arbitrator ruled that Innoviva did not breach the operating agreement or its fiduciary duties by withholding royalties to pursue investment opportunities, and the award was confirmed by the Delaware Court of Chancery[127][128] - The arbitrator also ruled that Innoviva is entitled to indemnification from TRC for 100% of its fees and expenses incurred in the second arbitration[127] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the company's 2020 Annual Report on Form 10-K - No material changes have been made to the risk factors described in the company's 2020 Form 10-K[129] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None reported for the period - The company reported no unregistered sales of equity securities or use of proceeds during the period[130] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including officer certifications and XBRL data files - The report includes certifications from the Principal Executive Officer and Principal Financial Officer as exhibits[134]