Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis (“MD&A”) is intended to facilitate an understanding of our business and results of operations. This discussion and analysis should be read in conjunction with our consolidated financial statements and notes included in this Annual Report on Form 10‑K. The information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10‑K, including information with respect to our plans and strategy for our business, our operating expenses, and future payments under our collaboration agreements, includes forward‑looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. You should review the section entitled “Risk Factors” in Item 1A of Part I above for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward‑looking statements contained in the following discussion and analysis. See the section entitled “Special Note Regarding Forward Looking Statements” above for more information.
Management Overview
Innoviva, Inc. (and where context requires, together with its subsidiaries referred to as “Innoviva”, the “Company”, the “Registrant” or “we” and other similar pronouns) is a company with a portfolio of royalties and innovative healthcare assets. We currently have three primary sets of assets: a royalty portfolio, operating assets in critical care and infectious disease, and other strategic healthcare assets.
Our royalty portfolio contains respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR ® /BREO ® ELLIPTA ® (fluticasone furoate/vilanterol, “FF/VI”) and ANORO ® ELLIPTA ® (umeclidinium bromide/vilanterol, “UMEC/VI”), and up until July 2022, TRELEGY ® ELLIPTA ® (the combination FF/UMEC/VI). We sold our 15% ownership interest in Theravance Respiratory Company, LLC (“TRC”) on July 20, 2022, and are no longer entitled to receive royalties on sales of TRELEGY ® ELLIPTA ® products. 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%.
We expanded our portfolio through the acquisition of Entasis Therapeutics Holdings Inc. (“Entasis”) on July 11, 2022 and the acquisition of La Jolla Pharmaceutical Company (“La Jolla”) on August 22, 2022. Following the acquisitions, our commercial and marketed products include GIAPREZA ® (angiotensin II), approved to increase blood pressure in adults with septic or other distributive shock, and XERAVA ® (eravacycline) approved for the treatment of complicated intra-abdominal infections in adults. Our new commercial and marketed product, XACDURO ® (formerly known as sulbactam-durlobactam or SUL-DUR), was approved by the United States Food and Drug Administration (“FDA”) on May 23, 2023 for the treatment of hospital-acquired and ventilator-associated pneumonias caused by Acinetobacter in adults. We commenced commercial sales of XACDURO ® in the third quarter of 2023. Our development pipeline includes zoliflodacin, an investigational treatment for uncomplicated gonorrhea that reported positive data in a pivotal Phase 3 clinical trial on November 1, 2023. As such, we have a wholly owned robust critical care and infectious disease operating platform with hospital focus.
In addition, we own other strategic healthcare assets, such as a large equity stake in Armata Pharmaceuticals (“Armata”), a leader in development of bacteriophage with potential use across a range of infectious and other serious diseases. We also have economic interests in other healthcare companies.
Our focus on capital allocation and shareholder value maximization has led our company to a meaningful transformation, and 2023 was a significant transition year. In 2022 our financials contained royalty revenues from TRELEGY ® ELLIPTA ® which was divested mid-year in an economically accretive transaction. Additionally, our acquisition and integration of operating companies further changed the structure of our financials compared to prior years. Through these changes, we believe we are well-positioned to create significant long-term shareholder value.
Our company structure and organization are tailored to our focused activities of managing our respiratory assets partnered with GSK, commercializing our marketed products, developing of our product candidates, optimizing capital allocation, and providing for certain essential reporting and management functions of a public company. As of December 31, 2023, we had 112 employees.
Financial Highlights
• Royalty revenue: Fourth quarter 2023 gross royalty revenue from GSK was $69.6 million and full year was $252.7 million, compared to $54.7 million for the fourth quarter of 2022 and $253.4 million for the full year 2022.
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• Net Product Sales: Fourth quarter 2023 net product sales and license revenue were $19.7 million, which included $13.1 million from GIAPREZA ® , $5.2 million from XERAVA ® , and $1.4 million from XACDURO ® , compared to $14.6 million for the fourth quarter of 2022. Full year 2023 net product sales and license revenue was $71.6 million, which included $41.3 million from GIAPREZA ® , $17.3 million from XERAVA ® , $2.0 million from XACDURO ® , and $11.0 million in milestone payments from our partners.
• Equity and long-term investments: Fourth quarter and full year 2023 change in fair values of equity and long-term investments of $25.5 million and $88.5 million, respectively, was primarily attributable to Armata share price appreciation.
• Net income: Fourth quarter 2023 net income was $61.5 million, or $0.97 basic per share, compared to a net loss of $68.3 million, or $(0.98) basic per share, for the fourth quarter 2022, driven primarily by higher revenue and positive impact of change in fair values of equity. Full year 2023 net income was $179.7 million, or $2.75 basic per share, compared to net income of $213.9 million, or $3.07 basic per share, for the full year 2022.
• Share repurchase: During the fourth quarter 2023, Innoviva repurchased 1,121,835 shares of its outstanding common stock for $15.4 million. During the year 2023, Innoviva repurchased 6,173,565 shares of its outstanding common stock for $76.5 million. Approximately $15 million of the authorized program remains outstanding as of year-end.
• Cash and cash equivalents: Totaled $193.5 million. Royalty and net product sales receivables totaled $84.1 million as of December 31, 2023.
Key 2023 R&D Highlights
• Zoliflodacin: potential first-in-class oral antibiotic to treat uncomplicated gonorrhea
o In November 2023, in collaboration with The Global Antibiotic Research & Development Partnership (GARDP), Innoviva announced that zoliflodacin, a first-in-class antibiotic, met its primary endpoint in a global pivotal phase 3 clinical trial for the treatment of uncomplicated gonorrhea. The Company expects a New Drug Application to be submitted to the U.S. FDA in the next twelve months.
• XACDURO ® (sulbactam for injection; durlobactam for injection), co-packaged for intravenous use: targeted antibacterial for HABP/VABP caused by Acinetobacter
o In May 2023, the U.S. Food and Drug Administration (FDA) approved XACDURO ® for use in patients 18 years of age and older for the treatment of hospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia (HABP/VABP) caused by susceptible isolates of Acinetobacter baumannii-calcoaceticus complex.
o Earlier in May, The Lancet Infectious Diseases published detailed results from the pivotal Phase 3 ATTACK trial of sulbactam-durlobactam.
Update on Strategic Healthcare Assets
• Our portfolio of strategic assets under the Company’s various subsidiaries was valued at $561.0 million as of December 31, 2023. In fourth quarter 2023, Innoviva invested an additional $5.0 million in one of our assets, Gate Neurosciences, to support its strategy of developing next generation targeted CNS therapies.
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Collaborative Arrangements with GSK
LABA Collaboration
In November 2002, we entered into the LABA Collaboration Agreement with GSK to develop and commercialize once‑daily LABA products for the treatment of chronic obstructive pulmonary disorder (“COPD”) and asthma (the “LABA Collaboration Agreement”). For the treatment of COPD, 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, vilanterol (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 approval and launch milestone payments to GSK totaling $220.0 million during the year ended December 31, 2014. Although we have no further milestone payment obligations to GSK pursuant to the LABA Collaboration Agreement, we continue to have ongoing commercialization activities under the LABA Collaboration Agreement, including participation in the joint steering committee that are expected to continue over the life of the agreement. The milestone fees paid to GSK were recognized as capitalized fees, which are being amortized over their estimated useful lives commencing upon the commercial launch of the products.
We are 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. On sales of ANORO ® ELLIPTA ® , royalties are upward tiering and range from 6.5% to 10%. We no longer receive royalties on sales of TRELEGY ® ELLIPTA ® after we sold our royalty rights along with the sale of our ownership in TRC in July 2022.
As mentioned above, on July 20, 2022, we sold our ownership interest in TRC, which received royalty payments from GSK stemming from sales of TRELEGY ® ELLIPTA ® . We retained our royalty rights with respect to RELVAR ® /BREO ® ELLIPTA ® and ANORO ® ELLIPTA ® .
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. The services are provided free of charge to us. Sarissa Capital is considered to be a related party due to its investment in Innoviva’s common stock and its representation on our board of directors.
Partnership Agreement
On December 11, 2020, Innoviva Strategic Partners LLC (“Strategic Partners”), our wholly owned subsidiary, entered into a subscription agreement (the “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 (the “General Partner”) 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 $300.0 million initial contribution into the Partnership. The Partnership was formed for the purposes of investing in equity securities in the healthcare, pharmaceutical and biotechnology industries. The Partnership Agreement provides for Sarissa Capital to receive a customary one percent management fee from the Partnership, payable quarterly in advance, measured based on the Net Asset Value of Strategic Partners’ capital account in the Partnership. In addition, the General Partner is entitled to a customary 10% annual performance allocation based on the Net Profits of the Partnership during the annual measurement period. The Partnership Agreement includes a lock-up period of thirty-six months after which Strategic Partners is entitled to make withdrawals from the Partnership as of such lock-up expiration date and each anniversary thereafter, subject to certain limitations.
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In May 2021, Strategic Partners received a distribution of $110.0 million from the Partnership to provide funding to Innoviva for a strategic repurchase of Innoviva common shares held by GSK. On March 30, 2022, Strategic Partners made an additional capital contribution of $110.0 million to the Partnership pursuant to the letter agreement entered into between Strategic Partners, the Partnership and Sarissa Capital Fund GP LP on May 20, 2021. The capital contribution is subject to a 36-month lock-up period from the contribution date.
The lock-up period for our initial contribution of $190.0 million expired in December 2023. Strategic Partners did not elect to make a withdrawal in 2023, thereby extending the lock-up period and withdrawal elections into subsequent years.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Business Combinations
We use the acquisition method of accounting under Accounting Standards Codification (“ASC”) Topic 805, Business Combinations . Each acquired company’s operating results are included in our consolidated financial statements starting on the acquisition date. The purchase price is equivalent to the fair value of consideration transferred. Tangible and identifiable intangible assets acquired, liabilities assumed and any noncontrolling interest in the acquiree as of the acquisition date are recorded at the acquisition date fair value. Goodwill is recognized for the excess of purchase price over the net fair value of assets acquired and liabilities assumed.
Amounts allocated to assets and liabilities are based upon fair values. Such valuations require us to make significant estimates and assumptions, especially with respect to the identifiable intangible assets. We make estimates of fair value based upon assumptions believed to be reasonable and that of a market participant. Significant estimates and assumptions may involve projected future revenues, earnings, cash flows, estimated probabilities of certain milestone achievements, discount rates, asset lives, among other items. Our estimates may also impact our deferred tax assets and liabilities. Unanticipated events and circumstances may occur that may affect the accuracy and validity of such assumptions, estimates or actual results. Our estimates are based on available historical information as well as future expectations, and the estimates are inherently uncertain. The separately identifiable intangible assets generally include marketed products, in-process research and development and collaboration agreement.
Revenue Recognition from Royalties
We recognize the royalty revenue on net sales of products with respect to which we have contractual royalty rights in the period in which the royalties are earned. The net sales reports provided by our partner are based on its methodology and assumptions to estimate rebates and returns, which it monitors and adjusts regularly in light of contractual and legal obligations, historical trends, past experience and projected market conditions. Our partner may make significant adjustments to its sales based on actual results recorded, which could cause our royalty revenue to fluctuate. We conduct periodic royalty audits to evaluate the information provided by our partner. Royalties are recognized net of amortization of capitalized fees associated with any approval and launch milestone payments made to GSK.
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Revenue Recognition from Product Sales
We started recognizing revenue from product sales as a result of our acquisition of La Jolla. We apply the guidance on principal versus agent considerations under ASC Topic 606, Revenue from Contracts with Customers , to determine the appropriate treatment for the transactions between us and third parties. The classification of transactions under our arrangements is determined based on the nature and contractual terms of the arrangement along with the nature of the operations of the participants. Any consideration related to activities in which we are considered the principal, which includ es being in control of the good or service before such good or service is transferred to the customer, are accounted for as product sales.
Prior to recognizing any revenue from product sales, we identify the contract, performance obligations, and transaction price, and allocate the transaction price to the performance obligations. Revenue from product sales is recognized when our customers obtain control of the product and is recorded at the transaction price, net of estimates for variable consideration consisting of chargebacks, discounts, returns and rebates. Variable consideration is estimated using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible consideration amounts. Actual amounts of consideration ultimately received may differ from our estimates. If actual results vary materially from our estimates, we will adjust these estimates, which will affect revenue from product sales and earnings in the period such estimates are adjusted. These items may include:
• Chargebacks: Chargebacks are discounts we provide to distributors in the event that the sales prices to end users are below the distributors’ acquisition price. This may occur due to a direct contract with a health system, a group purchasing organization (“GPO”) agreement or a sale to a government facility. Chargebacks are estimated based on known chargeback rates and recorded as a reduction of revenue on delivery to our customers.
• Discounts: We offer customers various forms of incentives and consideration, including prompt-pay and other discounts. We estimate discounts primarily based on contractual terms. These discounts are recorded as a reduction of revenue on delivery to our customers.
• Returns: We offer customers a limited right of return, generally for damaged or expired product. We estimate returns based on an internal analysis, which includes actual experience. The estimates for returns are recorded as a reduction of revenue on delivery to our customers.
• Rebates: We participate in Medicaid rebate programs, which provide assistance to certain low-income patients based on each individual state’s guidelines regarding eligibility and services. Under the Medicaid rebate programs, we pay a rebate to each participating state, generally within three months after the quarter in which product was sold. Additionally, we may offer customer incentives and consideration in the form of volume-based or other rebates. The estimates for rebates are recorded as a reduction of revenue on delivery to our customers.
We continue to assess our estimates of variable consideration as we accumulate additional historical data and will adjust these estimates accordingly.
Capitalized Fees Paid
We review our Capitalized Fees for impairment on a product‑by‑product basis for each major geographic area when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The recoverability of Capitalized Fees is measured by comparing the asset’s carrying amount to the expected undiscounted future cash flows that the asset is expected to generate. The determination of recoverability typically requires various estimates and assumptions, including estimating the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. We derive the required cash flow estimates from near‑term forecasted product sales and long‑term projected sales in the corresponding market. Based upon our analyses of past, current and future sales and trends, there have been no indicators of impairment and no impairment charges have been recorded on the Capitalized Fees as of December 31, 2023.
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Variable Interest Entities
The primary beneficiary of a variable interest entity (“VIE’) is required to consolidate the assets and liabilities of the VIE. When we obtain a variable interest in another entity, we assess at the inception of the relationship and upon occurrence of certain significant events whether the entity is a VIE and, if so, whether we are the primary beneficiary of the VIE based on our power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. To determine whether a variable interest that we hold could potentially be significant to the VIE, we consider both qualitative and quantitative factors regarding the nature, size and form of our involvement with the VIE.
To assess whether we have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, we consider all the facts and circumstances, including our role in establishing the VIE and our ongoing rights and responsibilities. This assessment includes identifying the activities that most significantly impact the VIE’s economic performance and identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE (management and representation on the Board of Directors) and have the right to unilaterally remove those decision-makers are deemed to have the power to direct the activities of a VIE.
To assess whether we have the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, we consider all of our economic interests that are deemed to be variable interests in the VIE. This assessment requires us to apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE.
Equity and Long-Term Investments
Our investments in Armata include a convertible note (the “Armata Convertible Note”) and a term loan (the “Armata Term Loan”), both of which are classified as Level 3 financial instruments. The Armata Convertible Note is measured at fair value using a Monte Carlo simulation model with the probability of certain qualified events and the assumptions of risk-free rate, volatility of stock price and timing of certain qualified events. We measure the Armata Term Loan at fair value using an income approach based on the discounted value of expected future cash flows.
Our Level 3 financial instruments include the Gate Neurosciences Inc. (“Gate”) convertible promissory note and private placement positions held by ISP Fund LP as these securities are not publicly traded and the assumptions used in the valuation model for valuing these securities are based on significant unobservable and observable inputs including those of publicly traded peer companies. We measure the Gate convertible promissory note at fair value using a Monte Carlo simulation model with the probability of certain qualified events and the assumptions of equity value of Gate, risk-free rate, expected stock price, volatility of its peer companies, and the time until a financing is raised. Valuations models applied for the private placement positions held by ISP Fund LP may include the Black-Scholes-Merton pricing model, the Monte Carlo simulation model and other applicable valuation models. Key assumptions involve inputs to the Black-Scholes-Merton pricing model, probability rates of certain events and scenarios applied in the Monte Carlo simulation model and discount rates, as appropriate. The Monte Carlo simulation model also incorporates assumptions made based on transaction details such as the security’s stock price, the expected term, maturity, risk-free interest rates and dividend yield, as well as volatility.
We also hold preferred stock warrants in InCarda Therapeutics Inc. (“InCarda”), a privately held, clinical-stage biopharmaceutical company. The preferred stock warrants are classified as Level 3 financial instruments and recorded at fair value subject to remeasurement at each balance sheet date. We use the Black-Scholes-Merton pricing model to estimate the fair value of the warrants with the following input assumptions: the exercise price of the warrants, the risk-free interest rate computed based on the U.S. Treasury yield, the remaining contractual term as the expected term, and the expected stock price volatility calculated based on the historical volatility of the common stock of its public peer companies. As of December 31, 2023, the fair value of these warrants was minimal.
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Factors Affecting Comparability
Our historical financial condition and results of operations for the periods presented may not be comparable, either between periods or going forward due to the factors described below.
• Adoption of Accounting Standards Update (“ASU”) 2020-06 effective January 1, 2022;
• Accounting consolidation of Entasis on February 17, 2022 and purchase of remaining minority interest in Entasis on July 11, 2022;
• Sale of our 15% ownership interest in TRC on July 20, 2022; and
• Acquisition of La Jolla on August 22, 2022.
Refer to Note 12, “Debt”, to the Consolidated Financial Statements for more information related to the adoption of ASU 2020-06. Refer to Note 5, “Consolidated Entities and Acquisitions”, to the Consolidated Financial Statements for more information related to our acquisitions of Entasis and La Jolla and the sale of our ownership interest in TRC.
Results of Operations
Net Revenue
Royalty Revenue
Total royalty revenue, net, as compared to the prior years, was as follows:
Change
Year Ended December 31,
2023
2022
(In thousands)
2023
2022
2021
$
%
$
%
Royalties – RELVAR/BREO
$
208,042
$
215,034
$
234,066
$
(6,992
)
(3
)%
$
(19,032
)
(8
)%
Royalties – ANORO
44,627
38,405
44,935
6,222
16
%
(6,530
)
(15
)%
Royalties – TRELEGY
—
72,029
126,688
(72,029
)
(100
)%
(54,659
)
(43
)%
Total royalties
252,669
325,468
405,689
(72,799
)
(22
)%
(80,221
)
(20
)%
Less: amortization of capitalized
fees paid
(13,823
)
(13,823
)
(13,823
)
—
*
—
*
Total net royalty revenue
$
238,846
$
311,645
$
391,866
$
(72,799
)
(23
)%
$
(80,221
)
(20
)%
* Not Meaningful
Total royalty revenue, net, decreased to $238.8 million for the year ended December 31, 2023, compared to $311.6 million for the year ended December 31, 2022. The decrease in total net royalty revenue was primarily due to the sale of our ownership interest in TRC, which received royalties stemming from sales of TRELEGY ® ELLIPTA ® .
Total royalty revenue, net, decreased to $311.6 million for the year ended December 31, 2022, compared to the year ended December 31, 2021. The decrease in total net royalty revenue was primarily due to the sale of our ownership interest in TRC, which received royalties stemming from sales of TRELEGY ® ELLIPTA ® . Royalties for RELVAR ® /BREO ® ELLIPTA ® and ANORO ® ELLIPTA ® decreased due to pricing pressures in the U.S. market and foreign currency rate changes.
Net Product Sales
Net product sales for the year ended December 31, 2023 was $60.6 million, consisting of net sales of GIAPREZA ® , XERAVA ® and XACDURO ® for $41.3 million, $17.3 million, and $2.0 million, respectively. We derived approximately 91% of our net product sales for the same period from customers located in the U.S. and 9% from the rest of the world.
Net product sales we recognized from the date of acquisition of La Jolla, which occurred on August 22, 2022, to December 31, 2022 was $19.7 million, consisting of net sales of GIAPREZA ® and XERAVA ® for $14.2 million and $5.5 million, respectively. We derived approximately 96% of our net product sales for the same period from customers located in the U.S. and 4% from the rest of the world.
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License Revenue
We recognized $8.0 million in license revenue for the year ended December 31, 2023 as a result of achievement of a regulatory milestone under our license agreement with Everest. We also recognized $3.0 million in license revenue as a result of achievement of a regulatory milestone under our license and collaboration agreement with Zai Lab.
Research & Development
Research and development expenses, as compared to the prior year period, were as follows:
Change
Year Ended December 31,
2023
2022
(In thousands)
2023
2022
2021
$
%
$
%
Research and development
$
33,922
$
41,432
$
576
$
(7,510
)
(18
)%
$
40,856
*
* Not Meaningful
Research and development expenses consisted of the following:
Change
Year Ended December 31,
2023
2022
(In thousands)
2023
2022
2021
$
%
$
%
External services
$
20,051
$
24,666
$
576
$
(4,615
)
(19
)%
$
24,090
*
Compensation and related personnel costs
10,081
13,863
—
(3,782
)
(27
)%
13,863
*
Facilities related
2,483
2,255
—
228
10
%
2,255
*
Other
1,307
648
—
659
102
%
648
*
Total research and development expenses
$
33,922
$
41,432
$
576
$
(7,510
)
(18
)%
$
40,856
*
* Not Meaningful
Research and development expenses for the year ended December 31, 2023 were mainly attributable to our product development efforts for XACDURO ® . Research and development expenses for the year ended December 31, 2022 were mainly attributable to product development efforts of Entasis that we recognized from February 17, 2022. Research and development expenses for the year ended December 31, 2023 decreased compared to the same period in 2022 primarily due to the FDA approval of XACDURO ® in May 2023 and resource reallocation from the research development function to general and administrative function after the FDA approval. External services costs consist primarily of fees paid to consultants, contractors and contract manufacturing organizations.
Research and development expenses for the year ended December 31, 2021 were attributable to the product development efforts of Pulmoquine Therapeutics Inc., which was dissolved at the end of 2021.
Selling, General & Administrative
Selling, general and administrative expenses, as compared to the prior years, were as follows:
Change
Year Ended December 31,
2023
2022
(In thousands)
2023
2022
2021
$
%
$
%
Selling, general and administrative
$
98,232
$
63,538
$
16,187
$
34,694
55
%
$
47,351
293
%
Selling, general and administrative expenses increased by $34.7 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, mainly attributable to the resource reallocation from the research development function to general and administrative function after the FDA approval of XACDURO ® . Selling, general and administrative expenses for the year ended December 31, 2023 also reflect certain full-year expenses of Entasis which we started consolidating on February 17, 2022 and of La Jolla, which we acquired in August 22, 2022.
Selling, general and administrative expenses increased by $47.4 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, mainly attributable to the consolidation of Entasis’ operating expenses and La Jolla’s operating expenses as previously mentioned.
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Interest and Dividend Income and Other Expense, Net
Interest and dividend income and other expense, net, as compared to the prior years, were as follows:
Change
Year Ended December 31,
2023
2022
(In thousands)
2023
2022
2021
$
%
$
%
Interest and dividend income
$
(15,818
)
$
(6,369
)
$
(1,839
)
$
(9,449
)
148
%
$
(4,530
)
246
%
Other expense, net
4,969
3,373
3,626
1,596
47
%
(253
)
*
* Not Meaningful
Interest and dividend income increased for the year ended December 31, 2023, compared to the year ended December 31, 2022, due to higher interest rates and higher average balances of our cash equivalents, money market funds and other interest-bearing investments.
Interest and dividend income increased for the year ended December 31, 2022, compared to the year ended December 31, 2021, due to higher interest rates and higher average balances of our cash equivalents, money market funds and other interest-bearing investments. Other expense, net, primarily consisted of expenses incurred by ISP Fund LP.
Interest Expense
Interest expense, as compared to the prior years, was as follows:
Change
Year Ended December 31,
2023
2022
(In thousands)
2023
2022
2021
$
%
$
%
Interest expense
$
19,157
$
15,789
$
19,070
$
3,368
21
%
$
(3,281
)
(17
)%
The interest expense included the contractual interest expense and the amortization of debt issuance costs for our convertible subordinated notes due 2023 (the “2023 Notes”), our convertible senior notes due 2025 (the “2025 Notes”) and our convertible senior notes due 2028 (the “2028 Notes”), as well as effective interest expense on our deferred royalty obligation. The increase in 2023, compared to the year ended December 31, 2022, was mainly due to the interest expense on our deferred royalty obligation from the acquisition of La Jolla.
The change in interest expense for the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily due to the adoption of ASU 2020-06, which simplifies the accounting for convertible debt instruments. As a result of the adoption, the debt discount associated with the cash settlement feature of the 2025 Notes was adjusted to zero as of January 1, 2022. Interest expense for the year ended December 31, 2022 included the contractual interest expense and the amortization of debt issuance costs for our 2023 Notes, the 2025 Notes and 2028 Notes. Interest expense for the year ended December 31, 2021 included the amortization of debt discount in addition to the contractual interest expense and the amortization of debt issuance costs for our 2023 Notes and 2025 Notes. The decrease in interest expense as a result of the adoption of ASU 2020-06 was partially offset by a higher debt balance and interest expense incurred for the deferred royalty obligation from the acquisition of La Jolla.
Loss on Debt Extinguishment
For the year ended December 31, 2022, we recognized a loss of $20.7 million due to the total premium payment of $20.4 million and the write-off of $0.3 million debt issuance costs in connection with the repurchase of $144.8 million aggregate principal amount of our 2023 Notes in March 2022.
Gain on Sale of TRC
We recognized a net gain of $266.7 million for the year ended December 31, 2022 due to the sale of our ownership interest in TRC to Royalty Pharma, consummated on July 20, 2022.
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Changes in Fair Values of Equity Method Investments and Equity and Long-Term Investments
Changes in fair values of equity method investments and equity and long-term investments, net, as compared to the prior years, were as follows:
Change
Year Ended December 31,
2023
2022
(In thousands)
2023
2022
2021
$
%
$
%
Changes in fair values of equity
method investments, net
$
(77,392
)
$
161,749
$
(84,392
)
$
(239,141
)
(148
)%
$
246,141
(292
)%
Changes in fair values of equity
and long-term investments, net
$
(11,129
)
$
(8,462
)
$
(6,638
)
$
(2,667
)
32
%
$
(1,824
)
27
%
The changes in fair values of equity method investments for the year ended December 31, 2023 were favorable mainly due to Armata’s higher stock prices during this period. We recorded $77.4 million in unrealized gains, $152.5 million in unrealized losses and $78.7 million in unrealized gains associated with our equity method investments in Armata for the years ended December 31, 2023, 2022 and 2021, respectively. The changes in fair values of equity method investments for the years ended December 31, 2022 and 2021 also include $9.2 million in unrealized losses and $5.7 million in unrealized gains, respectively, we recorded from our then equity method investments in Entasis. Refer to Note 6, “Equity and Long-Term Investments and Fair Value Measurements”, to the Consolidated Financial Statements for more information.
The changes in fair values of equity and long-term investments year over year reflect the realized gains and losses and net unrealized gains and losses in our strategic investments in Armata, InCarda, and Gate, and those investments managed by ISP Fund LP. We recorded $23.8 million in unrealized gain for the year ended December 31, 2023 related to other long-term investments we made in Armata in 2023.
Income Taxes
Income tax expense, net, as compared to the prior years, was as follows:
Change
Year Ended December 31,
2023
2022
(In thousands)
2023
2022
2021
$
%
$
%
Income tax expense, net
$
14,376
$
66,687
$
76,439
$
(52,311
)
(78
)%
$
(9,752
)
(13
)%
As of December 31, 2023, 2022 and 2021, we had net operating loss carryforwards for federal income taxes of $543.5 million, $411.5 million and $92.9 million, respectively. As of December 31, 2023, 2022 and 2021, we also had state net operating loss carryforwards of approximately $1.0 billion, $955.3 million and $648.6 million, respectively, which will expire beginning 2029. As of December 31, 2021, we had federal research and development tax credit carryforwards of $42.1 million. We did not have such federal research and development tax credit carryforwards as of December 31, 2023 and 2022. As of December 31, 2023, we had state research and development tax credits of $33.3 million.
For the year ended December 31, 2023, 2022 and 2021, we recognized $14.4 million, $66.7 million and $76.4 million of income tax expense, respectively, mainly based on the taxable income generated during those years.
We had total unrecognized tax benefits of $19.4 million as of December 31, 2023. Our total unrecognized tax benefits as of December 31, 2022 and December 31, 2021 were $16.3 million and $14.9 million, respectively.
Utilization of net operating loss and tax credit carryforwards is subject to rules, provided by the Internal Revenue Code and similar state provisions, governing annual limitations tied to ownership changes. We conducted an analysis of the Company through December 31, 2023 to determine whether an ownership change had occurred since inception. The study concluded that it is more likely than not that the Company did not experience an ownership change during the testing period. If we ever undergo an ownership change, the utilization of the pre-ownership change net operating loss carryforwards or pre-ownership change tax attributes, such as research tax credits, to offset the post-ownership change income may be subject to an annual limitation, pursuant to Sections 382 and 383 of the Internal Revenue Code of 1986, as amended. Similar rules may apply under state tax laws.
As a result of the acquisition of Entasis, we conducted a study of Entasis’ ownership changes and estimated that we will be able to utilize $155.6 million of its federal net operating losses, which are subject to annual limitations.
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As a result of the acquisition of La Jolla, we also performed an analysis of its ownership changes and estimated that we will be able to utilize $309.5 million of its federal net operating losses, which are subject to annual limitations.
In December 2021, the Organization for Economic Cooperation and Development (“OECD”) enacted model rules for a new global minimum tax framework (“BEPS Pillar Two”), and various governments around the world have enacted, or are in the process of enacting legislation. We are in the process of evaluating whether and when these new rules may come into effect and apply to us. We plan to treat the tax if any as a period cost. We do not believe that the Pillar Two rules apply to us yet. As such, the potential future quantitative impact of the enacted or substantively enacted legislation is not yet reasonably estimable.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interests, as compared to the prior years, was as follows:
Change
Year Ended December 31,
2022
2022 (1)
(In thousands)
2023
2022 (1)
2021
$
%
$
%
Net income attributable to
noncontrolling interest
$
—
$
6,341
$
102,983
$
(6,341
)
(100
)%
$
(96,642
)
(94
)%
(1) The year ended December 31, 2022 represents the period from the initial date of consolidation of Entasis on February 17, 2022 to the date of the acquisition of Entasis on July 11, 2022, and the period from January 1, 2022 through the date of the sale of our ownership interest in TRC on July 20, 2022.
Net income attributable to noncontrolling interests for the year ended December 31, 2022 was $6.3 million compared to $103.0 million for the year ended December 31, 2021, or a decrease of $96.6 million, which was mainly due to lower net income attributable to the sale of our ownership interest in TRC, offset with net loss attributable to Entasis’ noncontrolling interest.
Liquidity and Capital Resources
Liquidity
Since our inception, we have financed our operations primarily through private placements and public offerings of equity and debt securities and payments received under collaborative arrangements. For the year ended December 31, 2023, we generated gross royalty revenues of $252.7 million and net product sales revenues of $60.6 million. Cash and cash equivalents totaled $193.5 million, royalties receivable from GSK totaled $69.6 million and accounts receivable associated with our product sales totaled $14.5 million, as of December 31, 2023.
As of December 31, 2023, we had two outstanding convertible notes, the 2025 Notes and the 2028 Notes, in an aggregate principal amount of $453.5 million, of which $192.5 million and $261.0 million will become due in August 2025 and March 2028, respectively. Future interest payments associated with these notes total $34.6 million.
On October 31, 2022, our Board of Directors authorized a share repurchase program under which we may repurchase up to $100.0 million of Innoviva’s outstanding shares of common stock. As of December 31, 2023, we have repurchased Innoviva common stock in the open market for total price of approximately $84.2 million. This program has no termination date, may be suspended or discontinued at any time at our discretion and does not obligate us to acquire any amount of common stock.
In May 2021, Strategic Partners received a distribution of $110.0 million from the Partnership to provide funding to Innoviva for a strategic repurchase of Innoviva common shares held by GSK. On March 30, 2022, Strategic Partners made an additional capital contribution of $110.0 million to the Partnership pursuant to the letter agreement entered into between Strategic Partners, the Partnership and Sarissa Capital Fund GP LP on May 20, 2021. The capital contribution is subject to a 36-month lock-up period from the contribution date.
The lock-up period for our initial contribution of $190.0 million expired in December 2023. Strategic Partners did not elect to make a withdrawal in 2023, thereby extending the lock-up period and withdrawal elections into subsequent years.
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Adequacy of Cash Resources to Meet Future Needs
We believe that our cash and cash equivalents will be sufficient to meet our anticipated debt service and operating needs, as well our ongoing share repurchase program, for at least the next 12 months based upon current operating plans and financial forecasts. Our long-term capital requirements will depend on many factors including the amount of our royalty revenues, sales growth of our currently marketed products, timing of regulatory approval of our product candidates and outcome of our acquisitions and strategic investments. If our current operating plans and financial forecasts change, we may require additional funding sooner in the form of public or private equity offerings or debt financings. Furthermore, if in our view favorable financing opportunities arise, we may seek additional funding in the form of public or private equity offerings or debt financings at any time. However, future financing may not be available in amounts or on terms acceptable to us, if at all. This could leave us without adequate financial resources to fund our operations as currently planned. In addition, from time to time we may restructure or reduce our debt, including through privately negotiated repurchases, tender offers, redemptions, amendments, or otherwise, all allowable with the terms of our debt agreements.
Cash Flows
Cash flows, as compared to the prior years, were as follows:
Year Ended December 31,
Change
(In thousands)
2023
2022
2021
2023
2022
Net cash provided by operating activities
$
141,064
$
201,726
$
363,813
$
(60,662
)
$
(162,087
)
Net cash provided by (used in) investing activities
(66,761
)
(56,634
)
43,722
(10,127
)
(100,356
)
Net cash used in financing activities
(171,839
)
(55,568
)
(452,497
)
(116,271
)
396,929
Cash Flows from Operating Activities
Cash provided by operating activities for the year ended December 31, 2023 was $141.1 million, consisting primarily of our net income of $179.7 million, partially offset by net non-cash items of $13.9 million and net changes in operating assets and liabilities of $24.8 million. Non-cash items included a $88.5 million net increase in fair values of equity method investments and equity and long-term investments, partially offset by $27.2 million in inventory fair value adjustments included in cost of products sold, $21.8 million in amortization of acquired intangible assets, $13.9 million of amortization of capitalized fees and depreciation of property and equipment, $5.8 million in stock-based compensation expense, $4.4 million of deferred income taxes and $2.1 million in amortization of debt discount and issuance costs. The changes in operating assets and liabilities included increases in receivables from collaboration arrangements of $14.9 million, inventories of $12.0 million, accounts receivable of $5.1 million, other assets of $3.0 million and a decrease in personnel-related, interest and other accrued expenses of $2.4 million, partially offset by a decrease in prepaid expenses of $7.9 million and increases in accounts payable of $3.8 million and income tax payable of $1.7 million.
Cash provided by operating activities for the year ended December 31, 2022 was $201.7 million, consisting primarily of our net income of $220.3 million and net changes in operating assets and liabilities of $6.9 million, partially offset by net non-cash items of $25.4 million. Non-cash items included a net gain of $266.7 million recognized on the sale of TRC, partially offset by net non-cash charges of $241.3 million. Non-cash charges included a $153.3 million net decrease in fair values of equity method investments and equity and long-term investments, $25.0 of deferred income taxes, $13.9 million of amortization of capitalized fees and depreciation of property and equipment and $5.6 million in amortization of acquired intangible assets, $20.7 million in loss on the extinguishment of debt, $7.3 million in stock-based compensation expense, $10.0 million in inventory fair value adjustments included in cost of products sold and $2.1 million in the amortization of debt discount and issuance costs. The changes in operating assets and liabilities included an increase in prepaid expenses of $21.4 million, a decrease in receivables from collaboration arrangements of $13.3 million and increases of $11.9 million and $10.0 million in accrued personnel-related expenses and other accrued liabilities and in income tax payable, respectively.
Cash provided by operating activities for the year ended December 31, 2021 was $363.8 million, consisting primarily of our net income of $368.8 million, adjusted for non-cash items such as $76.4 million of deferred income taxes, $13.8 million of depreciation and amortization, $9.1 million amortization of debt discount and issuance costs, $2.0 million of stock-based compensation expense, partially offset by a $89.3 million net increase in fair values of equity method investments and equity and long-term investments and an increase in receivables from collaborative arrangements of $16.8 million.
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Cash Flows from Investing Activities
Net cash used in investing activities for the year ended December 31, 2023 of $66.8 million included $65.1 million for purchases trading securities, $31.2 million for purchases of equity investments managed by ISP Fund LP, $41.3 million in net purchases and sales of other investments managed by ISP Fund LP and $1.2 million for purchases of equity and long-term investments. Net cash used in investing activities was partially offset by $72.5 million in sales of equity investments managed by ISP Fund LP.
Net cash used in investing activities for the year ended December 31, 2022 of $56.6 million included $159.1 million in cash paid for the acquisition of La Jolla, net of cash acquired, $58.7 million in purchases of equity and long-term investments, $60.9 million in purchases of equity investments managed by ISP Fund LP, $50.0 million in purchases of a trading security managed by ISP Fund LP and $23.4 million in net purchases and sales of other investments managed by ISP Fund LP. Net cash used in investing activities was partially offset by $248.2 million in net proceeds from the sale of our ownership interest in TRC, $24.3 million in sales of equity investments managed by ISP Fund LP and $23.1 million in cash acquired through the consolidation of Entasis.
Net cash provided by investing activities for the year ended December 31, 2021 of $43.7 million was primarily due to $110.0 million net cash inflow from $301.0 million sales and $191.0 million purchases of equity and other investments managed by ISP Fund LP, offset by $66.3 million in purchases of various investment instruments including, but not limited to, common stock, warrants, convertible debt investment, money market funds and other securities.
Cash Flows from Financing Activities
Net cash used in financing activities for the year ended December 31, 2023 of $171.8 million consist mainly of the repayments of $96.2 million upon maturity of the 2023 Notes in January 2023 and $75.7 million for the repurchases of our common stock under the current stock repurchase program.
Net cash used in financing activities for the year ended December 31, 2022 of $55.6 million included $165.1 million for the repurchase of convertible subordinated notes due 2023, $69.8 million in distributions to noncontrolling interest, $43.9 million for the purchase of Entasis noncontrolling interest, $21.0 million for purchases of capped call options associated with our 2028 Notes and $8.5 million for the repurchase of common stock. Net cash used in financing activities was partially offset by $252.5 million in net proceeds from the issuance of our 2028 Notes.
Net cash used in financing activities for the year ended December 31, 2021 of $452.5 million was primarily due to a $394.1 million repurchase of our common stock from GSK and $59.5 million in distributions to noncontrolling interest.
Contractual Obligations
As of December 31, 2023, our notes payable obligation included $192.5 million related to our 2025 Notes and $261.0 million related to our 2028 Notes, which are due in 2025 and 2028, respectively. Under the terms of the 2025 Notes and 2028 Notes, we will make interest payments of 2.5% and 2.125%, respectively, of outstanding principal. Refer to Note 12, “Debt” to the Consolidated Financial Statements for more information.
Our short-term and long-term obligations also include contractual payments related to our operating leases amounting to $3.1 million, with approximately $1.4 million payable through December 31, 2024 and 2025 and approximately $0.1 million payable in each of the years 2026 and 2027. Refer to Note 13, “Commitments and Contingencies” to the Consolidated Financial Statements for more information.
As part of our acquisition of La Jolla, we recognized its deferred royalty obligation in connection with La Jolla Royalty Agreement with HCR. Under the terms of the Agreement, HCR is entitled to receive quarterly royalties on worldwide net sales of GIAPREZA ® until either January 1, 2031 or when the maximum aggregate royalty payments have been made, whichever occurs first. Quarterly payments to HCR under the Royalty Agreement start at a maximum royalty rate, with step-downs based on the achievement of annual net product sales thresholds. The current maximum royalty rate is 14%. Starting January 1, 2024, the maximum royalty rate was increased to 18% based on the terms of the Agreement. The La Jolla Royalty Agreement is subject to maximum aggregate royalty payments to HCR of $225.0 million.
Additionally, we have certain contingent payment obligations under various in-license agreements which we are required to make royalty payments or milestone payments upon successful completion and achievement of certain milestones. Refer to Note 4, “License and Collaboration Arrangements” to the Consolidated Financial Statements for more information.
We also enter into agreements in the normal course of business with vendors for manufacturing, clinical trials and preclinical studies, and other services and products for operating purposes.
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