What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-07-31 compared with 2024-05-08 · 81 added, 68 removed, 144 unchanged (51% of the section changed)

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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.

• 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.

Second Quarter 2024 and Recent Highlights:

Financial Highlights

• Second quarter 2024 gross royalty revenue from GSK was $67.2 million, compared to $65.7 million for the second quarter 2023.

• Second quarter 2024 net product sales were $21.7 million, which included $13.1 million from GIAPREZA ® , $6.2 million from XERAVA ® , and $2.4 million from XACDURO ® , a 38% increase compared to $15.7 million for the second quarter 2023.

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.

• XACDURO ® , co-packaged for intravenous use:

targeted antibacterial for the treatment of patients with hospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia (HABP/VABP) caused by susceptible isolates of Acinetobacter baumannii calcoaceticus complex .

o In May 2024, XACDURO ® was approved in China by the National Medical Products Administration for use in Chinese patients 18 years of age and older.

o In July 2024, XACDURO ® was named as the preferred agent for the treatment of Carbapenem-resistant Acinetobacter baumannii infections, in combination with a carbapenem, in the updated 2024 IDSA treatment guidelines.

o In July 2024, Galien Foundation announced XACDURO ® as a nominee for highly prestigious Prix Galien USA, America’s preeminent prize acknowledging the leading-edge of scientific advances in life sciences, in Best Biotechnology Product category.

o The World Health Organization considers Acinetobacter a top-priority pathogen worldwide that needs novel antibiotics.

• XERAVA ® , for injection is indicated for the treatment of complicated intra-abdominal infections (cIAI) caused by susceptible microorganisms in patients 18 years or older.

o In July 2024, XERAVA ® was named as a recommended agent for empiric therapy in the updated 2024 SIS treatment guidelines for the management of complicated intra-abdominal infections.

SIS also recommended XERAVA ® be reserved for high-risk patients.

• 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:

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.

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.

a potential first-in-class, single dose, oral antibiotic in development for the treatment of patients with uncomplicated gonorrhea is currently being developed in partnership with The Global Antibiotic Research & Development Partnership

o Zoliflodacin has successfully completed Phase 3 clinical trials and the results were reported at ESCMID Global 2024.

The Company expects to submit an NDA to the U.S.

FDA in early 2025.

Collaboration Arrangement with GSK

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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:

For the treatment of COPD, the collaboration has developed the following 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.

and Canada), a once-daily combination medicine consisting of a LABA, vilanterol (VI), and an inhaled corticosteroid (“ICS”), fluticasone furoate (“FF”), and

• ANORO ® ELLIPTA ® (“UMEC/VI”), a once-daily medicine combining a long-acting muscarinic antagonist (“LAMA”), umeclidinium bromide (“UMEC”), with a LABA, vilanterol (VI).

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.

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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

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Royalty Revenue

Total royalty revenue, net, as compared to the prior year period, was as follows:

Total royalty revenue, net, as compared to the prior year periods, was as follows:

Three Months Ended

Six Months Ended

(In thousands)

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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.

Total net royalty revenue increased to $63.7 million and $122.2 million for the three and six months ended June 30, 2024, compared to $62.3 million and $119.1 million, respectively, 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.

Net product sales recognized for the three months ended June 30, 2024 was $21.7 million, consisting of net sales of GIAPREZA ® , XERAVA ® , and XACDURO ® for $13.1 million, $6.2 million and $2.4 million, respectively.

Net product sales recognized for the six months ended June 30, 2024 was $40.7 million, consisting of net sales of GIAPREZA ® , XERAVA ® , and XACDURO ® for $25.2 million, $10.9 million and $4.6 million, respectively.

Net product sales recognized for the three months ended June 30, 2023 was $15.7 million, consisting of net sales of GIAPREZA ® and XERAVA ® for $11.2 million and $4.5 million, respectively.

Net product sales recognized for the six months ended June 30, 2023 was $27.2 million, consisting of net sales of GIAPREZA ® and XERAVA ® for $20.2 million and $7.0 million, respectively.

XACDURO ® was not commercially available until September 2023.

Our net product sales increased during the periods presented as a result of increased efforts in sales and marketing of our marketed products.

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.

We recognized $8.0 million in license revenue for the second quarter of 2024 as a result of achievement of a regulatory milestone under our license agreement with Zai Lab.

We also recognized $6.5 million in license revenue for the second quarter of 2024 under the Amended Zai Agreement with Zai Lab.

We recognized license revenue of $8.0 million for the first quarter of 2023 and $3.0 million for the second quarter of 2023 as a result of achievement of regulatory milestones under our license agreements with Everest and Zai Lab, respectively.

Cost of Products Sold

Cost of products sold, as compared to the prior year periods, were as follows:

Three Months Ended

Six Months Ended

(In thousands)

Cost of products sold

Our inventory includes net fair value adjustments resulting from the acquisition of La Jolla, which are being amortized and recognized as cost of products sold when sales occur.

The fair value adjustments recorded as part of cost of products sold amounted to $3.5 million and $10.3 million for the three and six months ended June 30, 2024, respectively, and $7.0 million and $13.8 million for the three and six months ended June 30, 2023, respectively.

Research and Development

Research and development expenses, as compared to the prior year period, were as follows:

Research and development expenses, as compared to the prior year periods, were as follows:

Three Months Ended

Six Months Ended

(In thousands)

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Total research and development expense

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.

Research and development expenses, which are mainly attributable to post-marketing commitments required by the FDA and ongoing product developments, were $2.6 million and $6.4 million for the three and six months ended June 30, 2024.

Research and development expenses for the three and six months ended June 30, 2023, which were mainly attributable to the product development efforts for XACDURO ® , were $15.0 million and $27.6 million, respectively.

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:

Selling, general and administrative expenses, as compared to the prior year periods, were as follows:

Three Months Ended

Six Months Ended

(In thousands)

Selling, general and administrative

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.

Selling, general and administrative expenses increased for the three and six months ended June 30, 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:

Interest and dividend income and other expense, net, as compared to the prior year periods, were as follows:

Three Months Ended

Six Months Ended

(In thousands)

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Other expense, net

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.

Interest and dividend income increased for the six months ended June 30, 2024, compared to the same period 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:

Interest expense, as compared to the prior year periods, was as follows:

Three Months Ended

Six Months Ended

(In thousands)

Interest expense

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 ® .

Interest expense for the three and six months ended June 30, 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 six months ended June 30, 2023 included the amount on the 2023 Notes until the notes were fully paid off on January 15, 2023.

The increase for the three and six months ended June 30, 2024, compared to the three and six months ended June 30, 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:

Changes in fair values of equity and long-term investments, as compared to the prior year periods, were as follows:

Three Months Ended

Six Months Ended

(In thousands)

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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 equity method investments for the three and six months ended June 30, 2024 were unfavorable mainly due to the decrease in Armata's stock price during this period.

We recorded $60.1 million and $24.8 million in unrealized loss for the three and six months ended June 30, 2024, respectively, and $19.9 million and $4.1 million in unrealized loss for the three and six months ended June 30, 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.

We recorded $15.8 million and $42.0 million of net negative changes in fair values of equity and long-term investments related to the investments managed by ISP Fund LP, for the three and six months ended June 30, 2024, respectively.

We also recorded $15.1 million and $1.9 million in net negative changes in fair values of equity and long-term investments for the three and six months ended June 30, 2024, respectively, 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.

We recorded income tax benefit of $4.6 million and income tax expense of $4.0 million for the three and six months ended June 30, 2024, respectively, compared to a provision for income tax expense of $4.5 million and $10.8 million for the three and six months ended June 30, 2023, respectively.

The effective income tax rate for the six months ended June 30, 2024 and 2023 was 68.4% and 25.7%, respectively.

Liquidity and Capital Resources

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.

For the six months ended June 30, 2024, we generated gross royalty revenues from GSK of $129.1 million and net product sales of $40.7 million.

Net cash and cash equivalents totaled $217.0 million, royalties receivables from GSK totaled $67.2 million and accounts receivable associated with our product sales and license revenue totaled $26.8 million as of June 30, 2024.

Adequacy of Cash Resources to Meet Future Needs

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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.

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, as compared to the prior year period, were as follows:

Three Months Ended March 31,

Six Months Ended June 30,

(In thousands)

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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.

Net cash provided by operating activities for the six months ended June 30, 2024 was $80.8 million, consisting primarily of our net income of $1.8 million, adjusted for net non-cash items, which included $68.7 million in changes in fair value of our investments, $12.9 million of amortization of acquired intangible assets, $10.3 million of amortization of inventory fair value step-up adjustment, $7.0 million of amortization of capitalized fees and depreciation of property and equipment, partially offset by $12.0 million of deferred income taxes and $11.9 million in net changes in operating assets and liabilities.

Net cash provided by operating activities for the six months ended June 30, 2023 was $63.9 million, consisting primarily of our net income of $36.1 million, adjusted for net non-cash items, which included $13.8 million of amortization of inventory fair value step-up adjustment, $8.8 million of amortization of acquired intangible assets, $7.0 million of amortization of capital fees and depreciation of property and equipment, $6.3 million of net changes in fair value of our investments, partially offset by decreases of $11.0 million in receivables from collaboration arrangement and $4.7 million in inventory.

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.

Net cash used in investing activities for the six months ended June 30, 2024 of $43.0 million primarily consisted of $43.1 million in purchases of trading securities and $30.9 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 proceeds of $24.9 million from net sales of other investments managed by ISP Fund LP and $6.0 million from the sales of equity investments managed by ISP Fund LP.

Net cash used in investing activities for the six months ended June 30, 2023 of $35.7 million primarily consisted of $35.7 million in purchases of equity and long-term investments and $17.8 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 $15.3 million from the purchases and sales of 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.

Net cash used in financing activities for the six months ended June 30, 2024 of $14.2 million was primarily due to $14.8 million for the repurchase of common stock under our stock repurchase program which concluded in April 2024.

Net cash used in financing activities for the six months ended June 30, 2023 of $146.2 million was primarily due to the payments of $96.2 million upon maturity of the 2023 Notes in January 2023 and $50.0 million for the repurchase of common stock under our 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.

As of June 30, 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.

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.

Our short-term and long-term obligations also include contractual payments related to our operating leases were $3.8 million, with approximately $0.8 million payable through December 31, 2024, and approximately $3.0 million payable through 2029.

Refer to Note 12, “Commitments and Contingencies” to the condensed consolidated financial statements for more information.

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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.

We also entered into a Commercial Supply Agreement with Corden Pharma CHENÔVE SAS (“Corden”), under which we engaged Corden to manufacture and supply certain products related to XACDURO ® and to perform certain services and studies.

Under the agreement, we committed to minimum purchase commitments through December 31, 2027.

As of June 30, 2024, we have approximately $9.7 million, $6.8 million, $7.6 million and $6.1 million in outstanding purchase commitments under the agreement for the remainder of 2024 and for the years 2025, 2026 and 2027, respectively.

We also enter into other agreements in the normal course of business with vendors for manufacturing, clinical trials and preclinical studies, and other services and products for operating purposes.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis