Innoviva, Inc. 10-K

ITEM 1. BUSINESS Overview 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 headquarters are located at 1350 Old Bayshore Highway, Suite 400, Burlingame, CA 94010. The Company was incorporated in Delaware in November 1996 under the name Advanced Medicine, Inc., and began operations in May 1997. It later changed its name to Theravance, Inc. in April 2002. In June 2014, we spun-off our research and development operations. In January 2016, we rebranded and changed our name to Innoviva, Inc. Our Strategy Our corporate strategy is currently focused on increasing stockholder value by, among other things, maximizing the potential value of our respiratory assets partnered with GSK, optimizing our operations and augmenting capital allocation. We continue to diversify our primary royalty management business through actively pursuing opportunistic acquisitions of promising companies and assets in the healthcare industry and enhancing the returns on our capital. Our Relationship with GSK LABA Collaboration In November 2002, we entered into our LABA Collaboration Agreement with GSK to develop and commercialize once‑daily products for the treatment of chronic obstructive pulmonary disease (“COPD”) and asthma. The collaboration has developed three combination products: • RELVAR ® /BREO ® ELLIPTA ® (“FF/VI”) (BREO ® ELLIPTA ® is the proprietary name in the U.S. and Canada and RELVAR ® ELLIPTA ® is the proprietary name outside the U.S. and Canada), a once-daily combination medicine consisting of a LABA, vilanterol (“VI”), and an inhaled corticosteroid (“ICS”), fluticasone furoate (“FF”), • ANORO ® ELLIPTA ® (“UMEC/VI”), a once-daily medicine combining a long-acting muscarinic antagonist (“LAMA”), umeclidinium bromide (“UMEC”), with a LABA, VI, and • TRELEGY ® ELLIPTA ® (the combination FF/UMEC/VI), a once-daily combination medicine consisting of an ICS, LAMA and LABA. 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. 4 Table of Contents 2004 Strategic Alliance In March 2004, we entered into the Strategic Alliance Agreement with GSK where GSK received an option to license exclusive development and commercialization rights to product candidates from certain of our discovery programs on predetermined terms and on an exclusive, worldwide basis. In 2005, GSK licensed our Bifunctional Muscarinic Antagonist-Beta2 Agonist ("MABA") program for the treatment of COPD, and in October 2011, we and GSK expanded the MABA program by adding six additional Innoviva- discovered preclinical MABA compounds (the “Additional MABAs”). The development program was funded in full by GSK. As a result of the transactions effected by the spin-off of Theravance Biopharma in June 2014 (the “Spin-Off”), the Strategic Alliance Agreement was assigned to TRC, which is entitled to receive any contingent payments and royalties payable by GSK from sales of products that may be developed under the Strategic Alliance Agreement, such as MABA, and MABA/FF. In June 2020, GSK terminated the MABA program and agreed to pay a $10.0 million termination fee to TRC. This fee was recognized as revenue from collaborative arrangements with a related party on our consolidated statements of income for the year ended December 31, 2020. Recent Highlights • GSK Net Sales: o Fourth quarter 2021 net sales of RELVAR ® /BREO ® ELLIPTA ® by GSK were $384.4 million, up 3% from $372.8 million in the fourth quarter of 2020, with $158.2 million in net sales from the U.S. market and $226.2 million from non-U.S. markets. o Fourth quarter 2021 net sales of ANORO ® ELLIPTA ® by GSK were $166.7 million, down 17% from $200.9 million in the fourth quarter of 2020, with $85.3 million net sales from the U.S. market and $81.4 million from non-U.S. markets. o Fourth quarter 2021 net sales of TRELEGY ® ELLIPTA ® by GSK were $480.2 million, up 53% from $313.6 million in the fourth quarter of 2020, with $337.1 million in net sales from the U.S. market and $143.1 million in net sales from non-U.S. markets. • Strategic Investments: o During the fourth quarter of 2021, we invested an additional $4.0 million in Armata Pharmaceuticals, Inc. (“Armata”) to acquire 1.2 million shares of common stock at $3.30 per share. As of December 31, 2021, our total ownership of Armata’s outstanding stock (without giving effect to our warrants) was approximately 60%. o In February 2022, we entered into an agreement with Armata, pursuant to which we will invest, subject to certain closing conditions, an additional $45.0 million to acquire 9.0 million shares of Armata common stock and warrants to purchase up to 4.5 million shares of Armata common stock with an exercise price of $5.00 per share in two tranches. At the closing of the first tranche in February 2022, we acquired approximately 3.6 million shares of Armata common stock and 1.8 million warrants for an aggregate purchase price of $18.1 million. Upon closing of the second tranche, we expect to own approximately 70% of Armata’s outstanding stock (without giving effect to our warrants). In addition, on February 1, 2022, we submitted to Entasis Therapeutics Holdings, Inc. (NASDAQ: ETTX) ("Entasis") a non-binding proposal to acquire all of the outstanding stock of Entasis not owned by us for all cash consideration. The proposal is non-binding and is subject to a number of conditions, including the receipt of requisite board and shareholder approvals, confirmatory diligence and negotiation and execution of a definitive merger agreement. There can be no assurance that a definitive agreement with respect to the transaction will be executed, or if executed, whether the transaction will be consummated. There is also no certainty as to the timetable for execution of a definitive agreement, if any. Any failure by us to complete this acquisition on a timely basis, or at all, or to realize the benefits that we expect as a result of the acquisition, could have an adverse effect on our business. Manufacturing Manufacturing of RELVAR ® /BREO ® ELLIPTA ® (FF/VI), ANORO ® ELLIPTA ® (UMEC/VI) and TRELEGY ® ELLIPTA ® (the combination FF/UMEC/VI) is performed by GSK. 5 Table of Contents Government Regulation The development and commercialization of products and product candidates pursuant to the GSK Agreements, or by entities that we have invested in or acquired, are subject to extensive regulation by governmental authorities in the United States and other countries. Before marketing in the United States, any medicine must undergo rigorous preclinical studies and clinical studies and an extensive regulatory approval process implemented by the U.S. Food and Drug Administration ("FDA"). Outside the United States, the ability to market a product depends upon receiving a marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct of clinical studies, marketing authorization, pricing and reimbursement vary widely from country to country. In any country, the commercialization of medicines is permitted only if the appropriate regulatory authority is satisfied that our collaborative partner has presented adequate evidence of the safety, quality and efficacy of such medicines. Once a product is approved, the FDA may withdraw the product approval if compliance with pre‑ and post‑ marketing regulatory standards is not maintained or if safety or quality issues are identified after the product reaches the marketplace. In addition, the FDA may require post marketing studies, referred to as Phase 4 studies, to monitor the effect of approved products, and may limit further marketing of the product based on the results of these post‑marketing studies. The FDA has broad post‑market regulatory and enforcement powers, including the ability to suspend or delay issuance of approvals, seize products, withdraw approvals, enjoin violations, institute criminal investigations, and refer cases to the U.S. Department of Justice for prosecution or an injunction or other civil remedies. If regulatory approval for a medicine is obtained, commercial marketing of the product will be limited to those diseases and conditions for which the medicine is effective, as demonstrated through clinical studies and included in the medicine’s labeling. Even if this regulatory approval is obtained, the manufacturer and the approved product are subject to continuing regulation by the FDA, including, among other things, monitoring and record-keeping requirements, requirements to report adverse experiences and comply with promotion and advertising requirements, which include restrictions on promoting drugs for unapproved uses or patient populations. A marketed medicine, its manufacturer and its manufacturing facilities are subject to continual review and periodic inspections by the FDA. The FDA ensures the quality of approved medicines by carefully monitoring manufacturers’ compliance with its current good manufacturing practice (“cGMP”) regulations. The cGMP regulations for drugs contain minimum requirements for the methods, facilities, and controls used in manufacturing, processing, and packaging of a medicine. The regulations are intended to make sure that a medicine is safe for use, and that it has the ingredients and strength it claims to have. Discovery of previously unknown problems with a medicine, manufacturer or facility or noncompliance with regulatory requirements may result in restrictions on the medicine or manufacturer, including revisions to the approved labeling to add new safety information, imposition of post-market studies or clinical studies to assess new safety risks, refusal of the FDA to approve pending applications or supplements to approved applications, imposition of distribution, marketing or manufacturing restrictions, costly recalls or withdrawal of the medicine from the market, warning letters, product seizure, injunction and the imposition of civil or criminal penalties. We and our collaborative partner are also subject to various laws and regulations regarding laboratory practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances in connection with the development and commercialization of products and product candidates. In each of these areas, as above, the FDA and other regulatory authorities have broad regulatory and enforcement powers, including the ability to suspend or delay issuance of approvals, seize products, withdraw approvals, enjoin violations, and institute criminal prosecution, any one or more of which could have a material adverse effect upon our business, financial condition and results of operations. Outside the United States, the ability to market products will also depend on receiving marketing authorizations from the appropriate regulatory authorities. Risks similar to those associated with FDA approval and continuing review described above exist with the regulatory approval processes in other countries. Patents and Proprietary Rights We and our collaborative partner will be able to protect our partnered technology from unauthorized use by third parties only to the extent that such technology is covered by valid and enforceable patents or is effectively maintained as trade secrets. Our success depends in part on obtaining patent protection for products and product candidates within our portfolio, including the products partnered with GSK. Accordingly, patents and other proprietary rights are essential elements of our business. 6 Table of Contents Our Strategic Partnership with Sarissa Capital Strategic Advisory Agreement On December 11, 2020, we entered into a Strategic Advisory Agreement (the “Services Agreement”) with Sarissa Capital Management LP (“Sarissa Capital”), pursuant to which Sarissa Capital provides a variety of strategic services to us in order to assist us in the development and execution of our acquisition strategy intended to diversify our assets and the potential sources of revenue. Sarissa Capital is considered to be a related party due to its investment in Innoviva and its representation on our Board of Directors. Partnership Agreement On December 11, 2020, Innoviva Strategic Partners LLC, our wholly owned subsidiary (“Strategic Partners”), entered into a subscription agreement and an Amended and Restated Limited Partnership Agreement (the “Partnership Agreement”) pursuant to which Strategic Partners became a limited partner of ISP Fund LP (the “Partnership”). The general partner of the Partnership is an affiliate of Sarissa Capital and, pursuant to an investment management agreement, Sarissa Capital acts as the investment adviser to the Partnership. Strategic Partners made a $300 million initial contribution to the Partnership. The Partnership was formed for the purposes of investing in equity securities in the healthcare, pharmaceutical and biotechnology industries. In May 2021, Strategic Partners received a distribution of $110.0 million from the Partnership to provide funding to us for a strategic repurchase of shares held by GSK. Pursuant to the letter agreement entered into between Strategic Partners, the Partnership, and Sarissa Capital Fund GP LP on May 20, 2021, Strategic Partners agreed to make additional capital contributions to the Partnership in an aggregate amount equal to the amount of the May 2021 distribution prior to March 31, 2022. Competition We anticipate that RELVAR ® /BREO ® ELLIPTA ® (FF/VI), ANORO ® ELLIPTA ® (UMEC/VI) and TRELEGY ® ELLIPTA ® (the combination FF/UMEC/VI) will compete with a number of approved bronchodilator drugs alone or in combination, including each other and drug candidates under development that are designed to treat asthma and COPD. These include but are not limited to: • Advair ® /Seretide™ Diskus ® /HFA ® (salmeterol and fluticasone propionate as a combination) marketed by GSK • Symbicort ® (formoterol and budesonide as a combination) marketed by AstraZeneca • AirDuo Respiclick ® (salmeterol and fluticasone propionate), a non-substitutable generic version of Advair, marketed by TEVA • Spiriva ® Handihaler ® and Spiriva ® Respimat ® (tiotropium) marketed by Boehringer Ingelheim • Dulera ® (formoterol and mometasone as a combination) marketed by Merck • Tudorza ® Pressair ® (aclidinium) marketed by AstraZeneca and Seebri ® Breezehaler ® (glycopyrronium) marketed by Novartis outside the U.S. and Sunovion in the U.S. • Incruse ® Ellipta ® (umeclidinium) and Arnuity ® Ellipta ® (fluticasone furoate) (Innoviva is not entitled to any royalties from either product.) • Foradil ® Aerolizer ® /Oxis ® Turbuhaler ® (formoterol) marketed by a number of companies • Striverdi ® Respimat ® (olodaterol) marketed by Boehringer Ingelheim • Onbrez ® Breezehaler ® (E.U.)/Arcapta ® Neohaler ® (U.S.) (indacaterol) marketed by Novartis • Ultibro ® Breezehaler ® (E.U.)/Utibron ® Neohaler ® (U.S.) (indacaterol combined with glycopyrronium bromide) developed by Novartis and approved and launched in Europe and Japan in the year ended December 31, 2013 as a once-daily treatment for COPD. In the U.S., the product was approved in October 2015 at a lower strength as a twice-daily COPD treatment, and was licensed to Sunovion in December 2016, and launched in May 2017 • Stiolto (U.S.)/Spiolto (E.U.) Respimat ® (tiotropium combined with olodaterol) marketed by Boehringer Ingelheim for the treatment of COPD 7 Table of Contents • Bevespi Aerosphere ® (glycopyrronium bromide in combination with formoterol fumarate) marketed by AstraZeneca • Duaklir ® Genuair ® (aclidinium bromide in combination with formoterol fumarate) developed by AstraZeneca as a maintenance bronchodilator treatment for COPD and approved in November 2014 in the EU and March 2019 in the U.S. • QMF149 (indacaterol in combination with mometasone) developed by Novartis for markets outside the U.S. and under regulatory review in the E.U. for asthma. In Phase 3 development for COPD • Trimbow (a fixed-dose, twice daily combination of formoterol, beclomethasone and glycopyrronium) manufactured by Chiesi and indicated for use in COPD in the E.U. • Foster (beclomethasone dipropionate in combination with formoterol fumarate) manufactured by Chiesi and indicated for use in asthma and COPD outside the U.S. • Enerzair Breezehaler (QVM149) (a fixed-dose combination of indacaterol, mometasone and glycopyrronium) developed by Novartis as a triple therapy/single inhaler for the treatment of asthma and approved in the E.U., Canada, and Japan • Breztri Aerosphere (fixed dose combination of formoterol, glycopyrronium and budesonide) developed by AstraZeneca as a triple therapy single inhaler twice-daily medication for COPD and approved in the U.S. in July 2020 • Nucala (mepolizumab; an interleukin-5 antagonist monoclonal antibody) developed by GSK for add on maintenance treatment of severe asthma in patients 12 years and older and approved in the U.S. in June 2019 • Xolair ® (omalizumab, an anti-IgE antibody) developed by Genentech for patients 6 years of age and older with moderate to severe persistent asthma uncontrolled by inhaled corticosteroids and approved in 2003. Single-dose pre-filled syringes were approved by the FDA in September 2018. • Cinqair ® (anti-interleukin-5 monoclonal antibody for the add-on maintenance treatment of adults with severe asthma and an eosinophilic phenotype) marketed by TEVA Pharmaceutical Industries Ltd. • Dupixent ® (dupilamab, an injectable IL-4 and IL-13 inhibitor) developed by Sanofi Genzyme and approved by the FDA in October 2018 as an add-on maintenance therapy in patients with moderate-to-severe asthma aged 12 years and older with an eosinophilic phenotype or with oral corticosteroid-dependent asthma • Fasenra ® (benralizumab, an injectable anti-IL-5 monoclonal antibody) for the treatment of severe asthma in patients 12 years of age and older marketed by AstraZeneca. Fasenra Pen pre-filled auto-injector was approved by the FDA for self-administration in November 2019. • Singulair ® (monteleukast), an orally active leukotriene receptor antagonist for the prophylaxis and treatment of asthma in patients 12 months of age and older marketed by Merck • Tezspire ® (tezepelumab-ekko), an injectable monoclonal antibody designed to inhibit thymic stromal lymphopoietin (TSLP), an epithelial cytokine thought to be critical in the initiation and persistence of airway inflammation. Co-developed by Astra Zeneca and Amgen for the treatment of severe asthma. The FDA approved the Tezspire solution for subcutaneous injection in December 2021; it is indicated for the add-on maintenance treatment of adult and pediatric patients aged 12 years and older with severe asthma. 8 Table of Contents In addition, several firms are developing new formulations of Advair/Seretide (salmeterol /fluticasone propionate) and Symbicort (formoterol fumerate/budesonide) which may be marketed as generics or branded generics relative to the existing products from GSK and AstraZeneca, respectively. All of these efforts represent potential competition for any of our partnered products. Efforts have intensified following the publication of FDA draft guidance for the approval of fully substitutable versions of Advair and Symbicort in late 2013 and mid-2015, respectively. Current examples of these products include the marketed products Duoresp/Biresp from Teva (generic Symbicort), AirFluSal Forspiro by Sandoz, Rolenium by Elpen and Sirdupla by Mylan (all generic versions of Seretide) which are all available in a wide number of countries in the E.U. Numerous companies have brought to market generic forms of the ICS/LABA drug Advair ® since certain patents covering the Advair ® delivery device expired in 2016. In March 2017, Mylan N.V. received a complete response letter from the FDA relating to its Abbreviated New Drug Application (“ANDA”) for fluticasone propionate 100, 250, 500 mcg and salmeterol 50 mcg inhalation powder. In May 2017, Hikma announced that it received a complete response letter from the FDA relating to its ANDA for fluticasone propionate and salmeterol inhalation powder, and in February 2018, Novartis announced that its generic division Sandoz had received a complete response letter from the FDA in response to its ANDA for a third fluticasone propionate and salmeterol product. In January 2019, Mylan announced that the FDA approved Wixela™ Inhu™ (fluticasone propionate and salmeterol inhalation powder, USP), the first generic of Advair Diskus ® and Sandoz terminated development of generic Advair. Teva announced that the FDA approved two of its products for adolescent and adult patients with asthma, one of which is AirDuo™ RespiClick ® (fluticasone propionate and salmeterol inhalation powder), a non-AB substitutable generic version of Advair ® . In May 2020, Cipla filed for FDA approval of a generic version of Advair ® . In April 2021, Hikma launched a generic version of Advair Diskus ® in the U.S. In January 2020, Astra Zeneca launched an authorized generic version of Symbicort. In August 2021, Lupin launched Luforbec ® , a branded generic alternative to Foster, in select European markets. Boehringer Ingelheim is expected to lose patent protection for Spiriva ® in 2022 which could lead to increased competition in the triple therapy space. In general, these manufacturers are required to conduct a number of clinical efficacy, pharmacokinetic and device studies to demonstrate equivalence to Advair, per the FDA’s September 2013 Draft Guidance Document. These studies are designed to demonstrate that the generic product has the same active ingredient(s), dosage form, strength, exposure and clinical efficacy as the branded product. These generic equivalents, which must meet the same exacting quality standards as branded products, may be significantly less costly to bring to market, and companies that produce generic equivalents are generally able to offer their products at lower prices. Thus, after the introduction of a generic competitor, a significant percentage of the sales of any branded product and products that may compete with such branded product is typically lost to the generic product. In addition, in April 2016, the FDA issued a draft guidance document covering Fluticasone Furoate/Vilanterol Trifenatate (FF/VI), the active ingredients used in RELVAR ® /BREO ® ELLIPTA ® . Human Capital Resources As of December 31, 2021, we had five employees. None of our employees are represented by a labor union. We consider our employee relations to be good. Our human capital objectives are to attract, recruit and retain top talent to manage the royalty assets with our partner, GSK, and optimize our operations and capital allocation. To support these objectives, our reward programs include equity incentive plans, bonus plan, competitive benefits and flexible working arrangements. Information about our Executive Officers The following table sets forth the name, age, and position of each of our executive officers as of February 28, 2022: Name Age Positions Held Pavel Raifeld 38 Chief Executive Officer Marianne Zhen 53 Chief Accounting Officer Pavel Raifeld , CFA, was appointed Chief Executive Officer in May 2020. Prior to his appointment, Mr. Raifeld, served on the investment team at Sarissa Capital Management LP. Earlier, he was a senior member of the healthcare investment banking team at Credit Suisse Securities (USA) LLC. Previously, Mr. Raifeld worked as a consultant, primarily specializing in advising biopharmaceutical companies, at McKinsey & Company, Inc. and The Boston Consulting Group Ltd. Mr. Raifeld earned an AB degree from Harvard University and an MBA degree from Columbia University. Marianne Zhen , CPA, was appointed Chief Accounting Officer in July 2018. Prior to joining Innoviva in October 2014, Ms. Zhen served as the Corporate Controller at Steelwedge Software Inc. from 2012 to 2014, Intelmate from 2011 to 2012 and Model N, Inc. from 2007 to 2011. Previously, Ms. Zhen served as a member of the board of directors of CalCPA Peninsula Silicon Valley Chapter. Ms. Zhen earned a Bachelor of Science degree in Business Administration with a concentration in Accounting from San Francisco State University. She is a member of the American Institute of Certified Public Accountants (AICPA) and a member of the California Society of Certified Public Accountants (CalCPA). 9 Table of Contents Code of Business Conduct The Company has adopted the Innoviva, Inc. Code of Business Conduct that applies to all directors, officers and employees. The Code of Business Conduct, as amended through March 9, 2021, is available on the corporate governance section of our website at www.inva.com . If the Company makes any substantive amendments to the Code of Business Conduct or grants a waiver from any provision of such code to any executive officer or director, the Company will promptly disclose the nature of the amendment or waiver, as required by applicable law. Available Information Our web page address is www.inva.com . Our investor relations website is located at http://investor.inva.com . We make available free of charge on our investor relations website under “SEC Filings” our Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K, our directors’ and officers’ Section 16 Reports and any amendments to those reports after filing or furnishing such materials to the SEC. The information found on our website is not part of this or any other report that we file with or furnish to the SEC. Innoviva and the Innoviva logo are registered trademarks of Innoviva, Inc. Trademarks, tradenames or service marks of other companies appearing in this report are the property of their respective owners.