Innoviva, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements The information in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve substantial risks, uncertainties, and assumptions. All statements contained herein, other than statements of historical fact, including, without limitation, statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, intentions, expectations, goals and objectives may be forward‑looking statements. The words “anticipates,” “believes,” “could,” “designed,” “estimates,” “expects,” “goal,” “intends,” “may,” “objective,” “plans,” “projects,” “pursuing,” “will,” “would” and similar expressions (including the negatives thereof) are intended to identify forward‑looking statements, although not all forward‑looking statements contain these identifying words. We may not actually achieve the plans, intentions, expectations or objectives disclosed in our forward‑looking statements and the assumptions underlying our forward‑looking statements may prove incorrect. Therefore, you should not place undue reliance on our forward‑looking statements. Actual results or events could differ materially from the plans, intentions, expectations and objectives disclosed in the forward‑looking statements that we make. All written and verbal forward‑looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Important factors that we believe could cause actual results or events to differ materially from our forward‑looking statements include, but are not limited to, risks related to: lower than expected future royalty revenue from respiratory products partnered with GSK, the commercialization of RELVAR ® /BREO ® ELLIPTA ® , ANORO ® ELLIPTA ® , GIAPREZA ® , XERAVA ® and XACDURO ® in the jurisdictions in which these products have been approved; the strategies, plans and objectives of the Company (including the Company's growth strategy and corporate development initiatives); the timing, manner, and amount of potential capital returns to shareholders; the status and timing of clinical studies, data analysis and communication of results; the potential benefits and mechanisms of action of product candidates; expectations for product candidates through development and commercialization; the timing of regulatory approval of product candidates; and projections of revenue, expenses and other financial items; the impact of the novel coronavirus (“COVID-19”); the timing, manner and amount of capital deployment, including potential capital returns to stockholders; and risks related to the Company’s growth strategy and risks discussed in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (“SEC”) on February 29, 2024, and as amended on March 5, 2024 and March 22, 2024 (“2023 Form 10-K”), and Item 1A of Part II of our Quarterly Reports on Form 10-Q and below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Item 2 of Part I. All forward-looking statements in this Quarterly Report on Form 10-Q are based on current expectations as of the date hereof and we do not assume any obligation to update any forward-looking statements on account of new information, future events or otherwise, except as required by law. We encourage you to read our unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q. We also encourage you to read Item 1A of Part I of our 2023 Form 10-K and Item 1A of Part II of our Quarterly Reports on Form 10-Q entitled “Risk Factors,” which contain a more complete discussion of the risks and uncertainties associated with our business. In addition to the risks described above and in Item 1A of Part I of our 2023 Form 10-K and Item 1A of Part II of this report, other unknown or unpredictable factors also could affect our results. Therefore, the information in this report should be read together with other reports and documents that we file with the SEC from time to time, including on Form 10-K, Form 10-Q and Form 8-K, which may supplement, modify, supersede or update those risk factors. As a result of these factors, we cannot assure you that the forward-looking statements in this report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. OVERVIEW Executive Summary Innoviva, Inc. (and where context requires, together with its subsidiaries referred to as “Innoviva”, the “Company”, or “we” and other similar pronouns) is a company with a portfolio of royalties and innovative 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”). Under the Long-Acting 35 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. 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 third product, XACDURO ® (formerly known as sulbactam-durlobactam or SUL-DUR), was approved by the United States Food and Drug Administration (“FDA”) for the treatment of hospital-acquired and ventilator-associated pneumonias caused by Acinetobacter in adults on May 23, 2023. 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 a hospital focus anchored by three differentiated products with significant growth potential and a promising drug candidate. In addition, we own other strategic healthcare assets, such as a large equity stake in Armata Pharmaceuticals (“Armata”), a leader in development of bacteriophages with potential use across a range of infectious and other serious diseases. We also have economic interests in other healthcare companies. 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 royalty management business through actively pursuing opportunistic acquisitions of promising companies and assets in the healthcare industry and enhancing the returns on our capital. In particular, our recent acquisitions of Entasis and La Jolla created a robust hospital and infectious disease platform. First Quarter 2024 and Recent Highlights: GSK Net Sales • First quarter 2024 net sales of RELVAR ® /BREO ® ELLIPTA ® by GSK were $347.6 million with $125.0 million in net sales from the U.S. market and $222.6 million from non-U.S. markets. • First quarter 2024 net sales of ANORO ® ELLIPTA ® by GSK were $149.7 million with $56.1 million net sales from the U.S. market and $93.6 million from non-U.S. markets. Key Business and R&D Highlights • XACDURO ® (sulbactam for injection; durlobactam for injection), co-packaged for intravenous use: targeted antibacterial for patients with HABP/VABP caused by Acinetobacter o Following the launch in September 2023, commercial efforts continue to deliver strong performance with growing numbers of health systems integrating XACDURO ® into their protocols. • Zoliflodacin: a potential first-in-class, single dose, oral antibiotic in development for the treatment of patients with uncomplicated gonorrhea o Positive Phase 3 zoliflodacin clinical trial results highlighted in an oral presentation given by the Company’s non-profit partner, The Global Antibiotic Research & Development Partnership (GARDP), at the European Society of Clinical Microbiology and Infectious Disease Global Congress (ESCMID Global 2024). o The data showed at that in the micro-intent-to-treat population (n=744), zoliflodacin achieved a microbiological cure rate of 90.9%, a 5.3% difference compared to ceftriaxone and azithromycin, the current global standard of care, which achieved a 96.2% cure rate (95% CI: 1.4%, 8.7%). Microbiological cure rates at extragenital sites were comparable between treatment arms (secondary endpoints). Zoliflodacin was generally well tolerated and emergent adverse events were comparable between treatment arms (46.2% vs 46.4%). No deaths or other serious adverse events were reported. 36 o The Company expects a New Drug Application to be submitted to the FDA during the first quarter of 2025. Strategic Healthcare Assets • Our portfolio of strategic assets under the Company’s various subsidiaries was valued at $628.4 million as of March 31, 2024, compared to $561.0 million as of December 31, 2023. In the first quarter 2024, Innoviva invested an additional $35.0 million in one of our assets, Armata, to help advance its lead therapeutic phage candidates. In addition, Innoviva invested an additional $5.8 million, with accrued interest, in Gate Neurosciences (“Gate”) to support its strategy of developing next generation targeted CNS therapies, and an additional $2.7 million into ImaginAb Inc. (“ImaginAb”) to support its radiopharmaceutical platform. Corporate Updates • In April 2024, Derek Small, an accomplished biopharmaceutical entrepreneur and executive, joined the Company’s Board of Directors. Collaboration Arrangement with GSK LABA Collaboration In November 2002, we entered into the LABA collaboration 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 milestone fees 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. 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 ® . 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 accounting principles generally accepted in the United States of America (“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 there have been no significant changes in our critical accounting policies as described in the Form 10-K for the year ended December 31, 2023 filed with the SEC on February 29, 2024, and as amended on March 5 and 22, 2024. 37 Results of Operations Net Revenue Royalty Revenue Total royalty revenue, net, as compared to the prior year period, was as follows: Three Months Ended March 31, Change (In thousands) 2024 2023 $ % Royalties - RELVAR/BREO $ 52,138 $ 50,883 $ 1,255 2 % Royalties - ANORO 9,733 9,431 302 3 % Total royalties 61,871 60,314 1,557 3 % Less: amortization of capitalized fees paid (3,456 ) (3,456 ) — * Total net royalty revenue $ 58,415 $ 56,858 $ 1,557 3 % *Not Meaningful Total net royalty revenue increased to $58.4 million for the three months ended March 31, 2024, compared to $56.9 million for the same period a year ago. The increase of total net royalty revenue was primarily due to sales growth in both RELVAR ® /BREO ® ELLIPTA ® and ANORO ® ELLIPTA ® . Net Product Sales Net product sales recognized for the three months ended March 31, 2024 was $19.1 million, consisting of net sales of GIAPREZA ® , XERAVA ® , and XACDURO ® for $12.1 million, $4.8 million and $2.2 million, respectively. For the comparative period in 2023, our net product sales amounted to $11.5 million, consisting of net sales of GIAPREZA ® and XERAVA ® for $9.0 million and $2.5 million, respectively. XACDURO® was not commercially available until September 2023. License Revenue We recognized $8.0 million in license revenue for the first quarter of 2023 as a result of achievement of a regulatory milestone under our license agreement with Everest. Research and Development Research and development expenses, as compared to the prior year period, were as follows: Three Months Ended March 31, Change (In thousands) 2024 2023 $ % Research and development $ 3,878 $ 12,588 $ (8,710 ) (69 )% 38 Research and development expenses consist of the following: Three Months Ended March 31, Change (in thousands) 2024 2023 $ % Compensation and related personnel costs $ 1,561 $ 3,472 $ (1,911 ) (55 )% External services 1,649 8,147 (6,498 ) (80 )% Facilities related 438 616 (178 ) (29 )% Other 230 353 (123 ) (35 )% Total research and development expense $ 3,878 $ 12,588 $ (8,710 ) (69 )% Research and development expenses, which are mainly attributable to post-marketing commitments required by the FDA and ongoing product developments, were $3.9 million for the three months ended March 31, 2024. Research and development expenses for the three months ended March 31, 2023, which were mainly attributable to the product development efforts for XACDURO ® , were $12.6 million. The decrease was primarily a result of the FDA approval of XACDURO ® in May 2023 and personnel transfers from the research development function to general and administrative function after the FDA approval. Selling, General & Administrative Selling, general and administrative expenses, as compared to the prior year period, were as follows: Three Months Ended March 31, Change (In thousands) 2024 2023 $ % Selling, general and administrative $ 30,405 $ 19,735 $ 10,670 54 % Selling, general and administrative expenses increased for the three months ended March 31, 2024, compared to the same period in 2023, primarily due to the reallocation of resources from the research development function to general and administrative function after the FDA approval of XACDURO ® , as well as increased efforts in sales and marketing of our marketed products. Interest and dividend income and other expense, net Interest and dividend income and other expense, net, as compared to the prior year period, were as follows: Three Months Ended March 31, Change (In thousands) 2024 2023 $ % Interest and dividend income $ (4,399 ) $ (3,365 ) $ (1,034 ) 31 % Other expense, net $ 1,236 $ 1,346 $ (110 ) (8 )% Interest and dividend income increased for the three months ended March 31, 2024, compared to the same periods a year ago due to higher interest rates and higher average balances of our cash equivalents, money market funds and other interest-bearing investments. Other expense, net, was primarily expenses incurred by ISP Fund LP. Interest Expense Interest expense, as compared to the prior year period, was as follows: Three Months Ended March 31, Change (In thousands) 2024 2023 $ % Interest expense $ 5,851 $ 4,427 $ 1,424 32 % 39 Interest expense for the three months ended March 31, 2024 comprised mainly of the contractual interest expense and the amortization of debt issuance costs for our 2025 Notes and 2028 Notes, as well as effective interest expense on our deferred royalty obligation. Interest expense for the three months ended March 31, 2023 included the amount on the 2023 Notes until the notes were fully paid off on January 15, 2023. The increase for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, was mainly due to higher effective interest rate on our deferred royalty obligation as a result of higher sales performance of GIAPREZA ® . Changes in Fair Values of Equity Method Investments and Equity and Long-Term Investments Changes in fair values of equity and long-term investments, as compared to the prior year period, were as follows: Three Months Ended March 31, Change (In thousands) 2024 2023 $ % Changes in fair values of equity method investments, net $ (35,342 ) $ (15,817 ) $ (19,525 ) 123 % Changes in fair values of equity and long-term investments, net $ 13,335 $ 2,164 $ 11,171 * *Not Meaningful The changes in fair values of equity method investments for the three months ended March 31, 2024 were more favorable mainly due to Armata's higher stock prices during this period. We recorded $35.3 million and $15.8 million in unrealized gain for the three months ended March 31, 2024 and 2023, respectively, related to our equity method investments in Armata. The changes in fair values of other equity and long-term investments primarily reflected the realized gains and losses and net unrealized gains and losses in our strategic investments in Armata, InCarda, Gate, ImaginAb and those investments managed by ISP Fund LP. We recorded $26.2 million of net negative changes in fair values of equity and long-term investments related to the investments managed by ISP Fund LP, partially offset by $13.2 million in unrealized gain for the three months ended March 31, 2024 related to other long-term investments we made in Armata. Provision for Income Taxes We recorded a provision for income tax expense of $8.6 million for the three months ended March 31, 2024, compared to a provision for income tax expense of $6.3 million for the three months ended March 31, 2023, respectively. The effective income tax rate for the three months ended March 31, 2024 and 2023 was 19.0% and 15.3%, respectively. 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 collaboration arrangement. For the three months ended March 31, 2024, we generated gross royalty revenues from GSK of $61.9 million and net product sales of $19.1 million. Net cash and cash equivalents totaled $178.4 million, royalties receivables from GSK totaled $61.9 million and accounts receivable associated with our product sales totaled $14.1 million as of March 31, 2024. 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 40 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 year period, were as follows: Three Months Ended March 31, (In thousands) 2024 2023 Change Net cash provided by operating activities $ 37,047 $ 25,684 $ 11,363 Net cash used in investing activities $ (43,038 ) $ (35,722 ) $ (7,316 ) Net cash used in financing activities $ (9,165 ) $ (136,962 ) $ 127,797 Cash Flows from Operating Activities Net cash provided by operating activities for the three months ended March 31, 2024 was $37.0 million, consisting primarily of our net income of $36.5 million, adjusted for net non-cash items, which included $6.8 million of amortization of inventory fair value step-up adjustment, $6.4 million of amortization of acquired intangible assets, $3.5 million of amortization of capitalized fees and depreciation of property and equipment, $3.2 million of deferred income taxes, partially offset by $22.0 million of net changes in fair value of our investments and $2.0 million net changes in operating assets and liabilities. Net cash provided by operating activities for the three months ended March 31, 2023 was $25.7 million, consisting primarily of our net income of $34.9 million, adjusted for net non-cash items, which included $13.7 million of net changes in fair value of our investments, $6.8 million of amortization of inventory fair value step-up adjustment, $3.5 million of amortization of capitalized fees and depreciation of property and equipment and $3.8 million of amortization of acquired intangible assets partially offset by increases of $6.1 million in accounts receivable, $5.6 million in receivables from collaboration arrangement and decreases of $3.5 million in accrued interest payable. Cash Flows from Investing Activities Net cash used in investing activities for the three months ended March 31, 2024 of $43.0 million primarily consisted of $43.1 million in purchases of trading securities and $8.8 million in purchases of equity and long-term investments managed by ISP Fund LP. The use of cash for investing activities was partially offset by net proceeds of $5.3 million from the sales of equity investments managed by ISP Fund LP and $3.4 million from the sale of other investments managed by ISP Fund LP. Net cash used in investing activities for the three months ended March 31, 2023 of $35.7 million primarily consisted of $35.7 million in purchases of equity and other long-term investments and $3.9 million in purchases of equity investments managed by ISP Fund LP. The use of cash for investing activities was partially offset by net proceeds of $3.9 million from the sale of equity and other investments managed by ISP Fund LP. Cash Flows from Financing Activities Net cash used in financing activities for the three months ended March 31, 2024 of $9.2 million was primarily due to $9.6 million for the repurchase of common stock under our current stock repurchase program. Net cash used in financing activities for the three months ended March 31, 2023 of $137.0 million was primarily due to the payments of $96.2 million upon maturity of the 2023 Notes in January 2023 and $40.7 million for the repurchase of common stock under our current stock repurchase program. Contractual Obligations As of March 31, 2024, 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 11, “Debt” to the Condensed Consolidated Financial Statements for more information. 41 Our short-term and long-term obligations also include contractual payments related to our operating leases were $2.8 million, with approximately $1.1 million payable through December 31, 2024, approximately $1.4 million payable in 2025, and approximately $0.1 million payable in 2026 and 2027. Refer to Note 12, “Commitments and Contingencies” to the condensed 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 maximum royalty rate through December 31, 2023 was 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 Condensed 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.