UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20192020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-30319
INNOVIVA, INC.
(Exact Name of Registrant as Specified in its Charter)
| | |
Delaware | | 94-3265960 |
(State or Other Jurisdiction of | | (I.R.S. Employer |
2000 Sierra Point Parkway,1350 Old Bayshore Highway Suite 500400
BrisbaneBurlingame, CA 9400594010
(Address of Principal Executive Offices)
(650) 238-9600
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.01 per share |
| INVA | | The NASDAQ Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Act.
Large accelerated filer ⌧ | | Accelerated filer ◻ |
| | |
Non-accelerated filer ◻ | | Smaller reporting company ☐ |
| | |
| | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ◻ No ⌧
The number of shares of registrant’s common stock outstanding on July 17, 201920, 2020 was 101,279,669.101,392,431.
TABLE OF CONTENTS
2
PART I —I. FINANCIAL INFORMATION
Item 1. Financial Statements
INNOVIVA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| | | | | | | | | | | | |
|
| June 30, |
| December 31, |
| June 30, |
| December 31, | ||||
| | 2019 | | 2018 | | 2020 | | 2019 | ||||
| | (unaudited) | | * | | (unaudited) | | * | ||||
Assets | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 141,952 | | $ | 62,417 | | $ | 413,147 | | $ | 278,096 |
Short-term marketable securities | |
| 107,711 | |
| 52,491 | |
| 3,999 | |
| 72,749 |
Related party receivables from collaborative arrangements | |
| 67,563 | |
| 83,286 | |
| 82,402 | |
| 79,427 |
Prepaid expenses and other current assets | |
| 459 | |
| 849 | |
| 645 | |
| 962 |
Total current assets | |
| 317,685 | |
| 199,043 | |
| 500,193 | |
| 431,234 |
Property and equipment, net | |
| 136 | |
| 160 | |
| 37 | |
| 33 |
Operating lease right-of-use asset | | | 1,348 | | | — | ||||||
Equity investments | | | 128,613 | | | — | ||||||
Capitalized fees paid to a related party, net | |
| 145,987 | |
| 152,899 | |
| 132,164 | |
| 139,076 |
Deferred tax assets | | | 177,114 | | | 196,054 | ||||||
Deferred tax assets, net | | | 118,348 | | | 154,171 | ||||||
Other assets | |
| 37 | |
| 37 | |
| 264 | |
| 312 |
Total assets | | $ | 642,307 | | $ | 548,193 | | $ | 879,619 | | $ | 724,826 |
| | | | | | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | ||||||
Liabilities and Stockholders' Equity | | | | | | | ||||||
Current liabilities: | | | | | | | | | | | | |
Accounts payable | | $ | 1,139 | | $ | 11 | | $ | 195 | | $ | 10 |
Accrued personnel-related expenses | |
| 371 | |
| 470 | |
| 291 | |
| 647 |
Accrued interest payable | |
| 4,262 | |
| 4,264 | |
| 4,152 | |
| 4,152 |
Other accrued liabilities | |
| 1,386 | |
| 955 | |
| 776 | |
| 562 |
Operating lease liability, current portion | | | 317 | | | — | ||||||
Total current liabilities | |
| 7,475 | |
| 5,700 | |
| 5,414 | |
| 5,371 |
Long-term debt, net of discount and issuance costs | |
| 386,675 | |
| 382,855 | |
| 381,230 | |
| 377,120 |
Operating lease liability, net of current portion | | | 1,157 | | | — | ||||||
Other long-term liabilities | |
| 298 | |
| 586 | |
| 163 | |
| 219 |
Commitments and contingencies | | | | | | | ||||||
Commitments and contingencies (Note 8) | | | | | | | ||||||
Stockholders’ equity: | | | | | | | | | | | | |
Preferred stock: $0.01 par value, 230 shares authorized, no shares issued and outstanding | | | — | | | — | ||||||
Common stock: $0.01 par value, 200,000 shares authorized, 101,272 and 101,098 issued and outstanding as of June 30, 2019 and December 31, 2018, respectively | |
| 1,013 | |
| 1,011 | ||||||
Preferred stock: $0.01 par value, 230 shares authorized, 0 shares issued and outstanding | | | — | | | — | ||||||
Common stock: $0.01 par value, 200,000 shares authorized, 101,392 and 101,288 issued and outstanding as of June 30, 2020 and December 31, 2019, respectively | |
| 1,015 | |
| 1,013 | ||||||
Additional paid-in capital | |
| 1,257,799 | |
| 1,256,267 | |
| 1,260,017 | |
| 1,258,859 |
Accumulated other comprehensive income (loss) | |
| 33 | |
| (3) | |
| (2) | |
| 27 |
Accumulated deficit | |
| (1,032,162) | |
| (1,103,692) | |
| (804,123) | |
| (946,404) |
Total Innoviva stockholders’ equity | | | 226,683 | | | 153,583 | | | 456,907 | | | 313,495 |
Noncontrolling interest | | | 20,019 | | | 5,469 | | | 35,905 | | | 28,621 |
Total stockholders’ equity | |
| 246,702 | |
| 159,052 | |
| 492,812 | |
| 342,116 |
Total liabilities and stockholders’ equity | | $ | 642,307 | | $ | 548,193 | | $ | 879,619 | | $ | 724,826 |
* |
See accompanying notes to condensed consolidated financial statements.
3
INNOVIVA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSINCOME
(In thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
| | | | | | | | | | | | |
Royalty revenue from a related party, net of amortization of capitalized fees paid to a related party of $3,456 in the three months ended June 30, 2019 and 2018, and $6,912 in the six months ended June 30, 2019 and 2018 | | $ | 64,107 | | $ | 67,086 | | $ | 119,290 | | $ | 119,466 |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
General and administrative | |
| 4,347 | |
| 4,411 | |
| 7,362 | |
| 13,396 |
General and administrative - related party | | | — | | | — | | | — | | | 2,700 |
Total operating expenses | |
| 4,347 | |
| 4,411 | |
| 7,362 | |
| 16,096 |
| | | | | | | | | | | | |
Income from operations | |
| 59,760 | |
| 62,675 | |
| 111,928 | |
| 103,370 |
| | | | | | | | | | | | |
Other income (expense), net | |
| (8) | |
| 39 | |
| (7) | |
| (3,060) |
Interest income | |
| 1,403 | |
| 380 | |
| 2,378 | |
| 771 |
Interest expense | |
| (4,661) | |
| (6,478) | |
| (9,278) | |
| (14,135) |
Income before income taxes | | | 56,494 | | | 56,616 | | | 105,021 | | | 86,946 |
Income tax expense, net | | | 10,433 | | | — | | | 18,941 | | | — |
Net income | | | 46,061 | | | 56,616 | | | 86,080 | | | 86,946 |
Net income attributable to noncontrolling interest | | | 8,321 | | | 1,990 | | | 14,550 | | | 2,739 |
Net income attributable to Innoviva stockholders | | $ | 37,740 | | $ | 54,626 | | $ | 71,530 | | $ | 84,207 |
| | | | | | | | | | | | |
Basic net income per share attributable to Innoviva stockholders | | $ | 0.37 | | $ | 0.54 | | $ | 0.71 | | $ | 0.84 |
Diluted net income per share attributable to Innoviva stockholders | | $ | 0.34 | | $ | 0.49 | | $ | 0.65 | | $ | 0.77 |
| | | | | | | | | | | | |
Shares used to compute Innoviva basic and diluted net income per share: | | | | | | | | | | | | |
Shares used to compute basic net income per share | | | 101,151 | | | 100,873 | | | 101,105 | | | 100,739 |
Shares used to compute diluted net income per share | | | 113,391 | | | 113,399 | | | 113,384 | | | 113,483 |
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | | | | | | | | | | | |
Royalty revenue from a related party, net of amortization of capitalized fees paid to a related party of $3,456 in the three months ended June 30, 2020 and 2019, and $6,912 in the six months ended June 30, 2020 and 2019 | | $ | 68,946 | | $ | 64,107 | | $ | 147,624 | | $ | 119,290 |
Revenue from collaborative arrangements with a related party | | | 10,000 | | | — | | | 10,000 | | | — |
Total net revenue | | | 78,946 | | | 64,107 | | | 157,624 | | | 119,290 |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Research and development | | | 559 | | | — | | | 559 | | | — |
General and administrative | |
| 2,596 | |
| 4,347 | |
| 5,159 | |
| 7,362 |
Total operating expenses | |
| 3,155 | |
| 4,347 | |
| 5,718 | |
| 7,362 |
| | | | | | | | | | | | |
Income from operations | |
| 75,791 | |
| 59,760 | |
| 151,906 | |
| 111,928 |
| | | | | | | | | | | | |
Other income (expense), net | |
| 30 | |
| (8) | |
| 98 | |
| (7) |
Interest income | |
| 158 | |
| 1,403 | |
| 1,460 | |
| 2,378 |
Interest expense | |
| (4,561) | |
| (4,661) | |
| (9,077) | |
| (9,278) |
Changes in fair values of equity investments | | | 46,698 | | | — | | | 68,613 | | | — |
Income before income taxes | | | 118,116 | | | 56,494 | | | 213,000 | | | 105,021 |
Income tax expense, net | | | 19,891 | | | 10,433 | | | 35,823 | | | 18,941 |
Net income | | | 98,225 | | | 46,061 | | | 177,177 | | | 86,080 |
Net income attributable to noncontrolling interest | | | 21,381 | | | 8,321 | | | 34,896 | | | 14,550 |
Net income attributable to Innoviva stockholders | | $ | 76,844 | | $ | 37,740 | | $ | 142,281 | | $ | 71,530 |
| | | | | | | | | | | | |
Basic net income per share attributable to Innoviva stockholders | | $ | 0.76 | | $ | 0.37 | | $ | 1.40 | | $ | 0.71 |
Diluted net income per share attributable to Innoviva stockholders | | $ | 0.69 | | $ | 0.34 | | $ | 1.27 | | $ | 0.65 |
| | | | | | | | | | | | |
Shares used to compute Innoviva basic and diluted net income per share: | | | | | | | | | | | | |
Shares used to compute basic net income per share | | | 101,324 | | | 101,151 | | | 101,280 | | | 101,105 |
Shares used to compute diluted net income per share | | | 113,545 | | | 113,391 | | | 113,527 | | | 113,384 |
See accompanying notes to condensed consolidated financial statements.
4
INNOVIVA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 46,061 | | $ | 56,616 | | $ | 86,080 | | $ | 86,946 | | $ | 98,225 | | $ | 46,061 | | $ | 177,177 | | $ | 86,080 |
Unrealized gain on marketable securities, net | |
| 23 | |
| 12 | |
| 36 | |
| 8 | |
| (35) | |
| 23 | |
| (29) | |
| 36 |
Comprehensive income | | | 46,084 | | | 56,628 | | | 86,116 | | | 86,954 | | | 98,190 | | | 46,084 | | | 177,148 | | | 86,116 |
Comprehensive income attributable to noncontrolling interest | | | 8,321 | | | 1,990 | | | 14,550 | | | 2,739 | | | 21,381 | | | 8,321 | | | 34,896 | | | 14,550 |
Comprehensive income attributable to Innoviva stockholders | | $ | 37,763 | | $ | 54,638 | | $ | 71,566 | | $ | 84,215 | | $ | 76,809 | | $ | 37,763 | | $ | 142,252 | | $ | 71,566 |
See accompanying notes to condensed consolidated financial statements.
5
INNOVIVA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 | ||||||||||||||||||
| | | | | | | | | | Accumulated Other | | | | | | | | Total | ||
| | Common Stock | | Additional Paid-In | | Comprehensive | | Accumulated | | Noncontrolling | | Stockholders’ | ||||||||
|
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Deficit |
| Interest |
| Equity | ||||||
Balance as of December 31, 2018 |
| 101,098 | | $ | 1,011 | | $ | 1,256,267 | | $ | (3) | | $ | (1,103,692) | | $ | 5,469 | | $ | 159,052 |
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding |
| 85 | |
| 1 | |
| 253 | |
| — | |
| — | |
| — | |
| 254 |
Stock-based compensation |
| — | |
| — | |
| 605 | |
| — | |
| — | |
| — | |
| 605 |
Net income |
| — | |
| — | |
| — | |
| — | |
| 33,790 | |
| 6,229 | |
| 40,019 |
Other comprehensive income |
| — | |
| — | |
| — | |
| 13 | |
| — | |
| — | |
| 13 |
Balance as of March 31, 2019 |
| 101,183 | | | 1,012 | | | 1,257,125 | | | 10 | | | (1,069,902) | | | 11,698 | | | 199,943 |
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding | | 89 | | | 1 | | | 200 | | | — | | | — | | | — | | | 201 |
Stock-based compensation | | — | | | — | | | 474 | | | — | | | — | | | — | | | 474 |
Net income | | — | | | — | | | — | | | — | | | 37,740 | | | 8,321 | | | 46,061 |
Other comprehensive income | | — | | | — | | | — | | | 23 | | | — | | | — | | | 23 |
Balance as of June 30, 2019 | | 101,272 | | $ | 1,013 | | $ | 1,257,799 | | $ | 33 | | $ | (1,032,162) | | $ | 20,019 | | $ | 246,702 |
| | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, 2020 | ||||||||||||||||||
| | | | | | | Additional | | Accumulated Other | | | | | | | | Total | |||
| | Common Stock | | Paid-In | | Comprehensive | | Accumulated | | Noncontrolling | | Stockholders’ | ||||||||
|
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Deficit |
| Interest |
| Equity | ||||||
Balance as of December 31, 2019 |
| 101,288 | | | 1,013 | | | 1,258,859 | | | 27 | | $ | (946,404) | | $ | 28,621 | | $ | 342,116 |
Distributions to noncontrolling interest |
| — | |
| — | |
| — | |
| — | |
| — | |
| (15,810) | |
| (15,810) |
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding |
| 32 | |
| — | |
| 170 | |
| — | |
| — | |
| — | |
| 170 |
Stock-based compensation |
| — | |
| — | |
| 435 | |
| — | |
| — | |
| — | |
| 435 |
Net income |
| — | |
| — | |
| — | |
| — | |
| 65,437 | |
| 13,515 | |
| 78,952 |
Other comprehensive income |
| — | |
| — | |
| — | |
| 6 | |
| — | |
| — | |
| 6 |
Balance as of March 31, 2020 |
| 101,320 | | $ | 1,013 | | $ | 1,259,464 | | $ | 33 | | $ | (880,967) | | $ | 26,326 | | $ | 405,869 |
Equity activity of noncontrolling interest from a consolidated variable interest entity | | — | | | — | | | — | | | — | | | — | | | 350 | | | 350 |
Distributions to noncontrolling interest |
| — | |
| — | |
| — | |
| — | |
| — | |
| (12,152) | |
| (12,152) |
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding |
| 72 | |
| 2 | |
| 178 | |
| — | |
| — | |
| — | |
| 180 |
Stock-based compensation |
| — | |
| — | |
| 375 | |
| — | |
| — | |
| — | |
| 375 |
Net income |
| — | |
| — | |
| — | |
| — | |
| 76,844 | |
| 21,381 | |
| 98,225 |
Other comprehensive income |
| — | |
| — | |
| — | |
| (35) | |
| — | |
| — | |
| (35) |
Balance as of June 30, 2020 |
| 101,392 | | $ | 1,015 | | $ | 1,260,017 | | $ | (2) | | $ | (804,123) | | $ | 35,905 | | $ | 492,812 |
6
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 | | Six months ended June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | Accumulated Other | | | | | | | | | | | | | | Total | | | | | | | Additional | | Accumulated Other | | | | | | | | Total | |||||
| | Common Stock | | Additional Paid-In | | Comprehensive | | Accumulated | | Treasury Stock | | Noncontrolling | | Stockholders’ | | Common Stock | | Paid-In | | Comprehensive | | Accumulated | | Noncontrolling | | Stockholders’ | ||||||||||||||||||||
|
| Shares | | Amount |
| Capital |
| Loss |
| Deficit |
| Shares |
| Amount |
| Interest |
| Deficit |
| Shares | | Amount |
| Capital |
| Income (Loss) |
| Deficit |
| Interest |
| Equity | ||||||||||||||
Balance as of December 31, 2017 | | 102,046 | | $ | 1,019 | | $ | 1,258,151 | | $ | (18) | | $ | (1,498,748) | | | (150) | | $ | (3,263) | | $ | 152 | | $ | (242,707) | ||||||||||||||||||||
Distributions to noncontrolling interest | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (90) | | | (90) | ||||||||||||||||||||
Exercise of stock options, and issuance of common stock units and stock awards, net of cancellation of stock awards and repurchase of shares to satisfy tax withholding | | (571) | | | (5) | | | (2,492) | | | — | | | — | | | — | | | — | | | — | | | (2,497) | ||||||||||||||||||||
Balance as of December 31, 2018 | | 101,098 | | $ | 1,011 | | $ | 1,256,267 | | $ | (3) | | $ | (1,103,692) | | $ | 5,469 | | $ | 159,052 | ||||||||||||||||||||||||||
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding | | 85 | | | 1 | | | 253 | | | — | | | — | | | — | | | 254 | ||||||||||||||||||||||||||
Stock-based compensation | | — | | | — | | | 2,169 | | | — | | | — | | | — | | | — | | | — | | | 2,169 | | — | | | — | | | 605 | | | — | | | — | | | — | | | 605 |
Cash dividend forfeited | | — | | | — | | | 52 | | | — | | | — | | | — | | | — | | | — | | | 52 | ||||||||||||||||||||
Net income | | — | | | — | | | — | | | — | | | 29,581 | | | — | | | — | | | 749 | | | 30,330 | ||||||||||||||||||||
Other comprehensive loss | | — | | | — | | | — | | | (4) | | | — | | | — | | | — | | | — | | | (4) | ||||||||||||||||||||
Balance as of March 31, 2018 | | 101,475 | | | 1,014 | | | 1,257,880 | | | (22) | | | (1,469,167) | | | (150) | | | (3,263) | | | 811 | | | (212,747) | ||||||||||||||||||||
Distributions to noncontrolling interest | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (809) | | | (809) | ||||||||||||||||||||
Exercise of stock options, and issuance of common stock units and stock awards, net of cancellation of stock awards and repurchase of shares to satisfy tax withholding | | 182 | | | 1 | | | 110 | | | — | | | — | | | — | | | — | | | — | | | 111 | ||||||||||||||||||||
Stock-based compensation | | — | | | — | | | 1,452 | | | — | | | — | | | — | | | — | | | — | | | 1,452 | ||||||||||||||||||||
Cash dividend forfeited | | — | | | — | | | 1 | | | — | | | — | | | — | | | — | | | — | | | 1 | ||||||||||||||||||||
Net income | | — | | | — | | | — | | | — | | | 54,626 | | | — | | | — | | | 1,990 | | | 56,616 | | — | | | — | | | — | | | — | | | 33,790 | | | 6,229 | | | 40,019 |
Other comprehensive income | | — | | | — | | | — | | | 12 | | | — | | | — | | | — | | | — | | | 12 | | — | | | — | | | — | | | 13 | | | — | | | — | | | 13 |
Balance as of June 30, 2018 | | 101,657 | | $ | 1,015 | | $ | 1,259,443 | | $ | (10) | | $ | (1,414,541) | | | (150) | | $ | (3,263) | | $ | 1,992 | | $ | (155,364) | ||||||||||||||||||||
Balance as of March 31, 2019 | | 101,183 | | $ | 1,012 | | $ | 1,257,125 | | $ | 10 | | $ | (1,069,902) | | $ | 11,698 | | $ | 199,943 | ||||||||||||||||||||||||||
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding | | 89 | | | 1 | | | 200 | | | — | | | — | | | — | | | 201 | ||||||||||||||||||||||||||
Stock-based compensation | | — | | | — | | | 474 | | | — | | | — | | | — | | | 474 | ||||||||||||||||||||||||||
Net income | | — | | | — | | | — | | | — | | | 37,740 | | | 8,321 | | | 46,061 | ||||||||||||||||||||||||||
Other comprehensive income | | — | | | — | | | — | | | 23 | | | — | | | — | | | 23 | ||||||||||||||||||||||||||
Balance as of June 30, 2019 | | 101,272 | | $ | 1,013 | | $ | 1,257,799 | | $ | 33 | | $ | (1,032,162) | | $ | 20,019 | | $ | 246,702 |
See accompanying notes to condensed consolidated financial statements.
76
INNOVIVA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | | | |
| | Six Months Ended June 30, | ||||
|
| 2019 |
| 2018 | ||
Cash flows from operating activities | | | | | | |
Net income | | $ | 86,080 | | $ | 86,946 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Deferred income taxes | | | 18,940 | | | — |
Depreciation and amortization | |
| 7,080 | |
| 6,936 |
Stock-based compensation | |
| 1,079 | |
| 3,621 |
Amortization of debt discount and issuance costs | | | 3,820 | | | 4,028 |
Amortization of discount on short-term investments | | | (1,124) | | | (160) |
Amortization of lease guarantee | |
| (162) | |
| (162) |
Loss on extinguishment of debt | | | — | | | 3,137 |
Changes in operating assets and liabilities: | | | | | | |
Receivables from collaborative arrangements | |
| 15,723 | |
| (2) |
Prepaid expenses and other current assets | |
| 390 | |
| 178 |
Accounts payable | |
| 1,128 | |
| (543) |
Accrued personnel-related expenses and other accrued liabilities | |
| 343 | |
| (1,539) |
Accrued interest payable | |
| (2) | |
| (805) |
Operating lease liability | | | (144) | | | |
Other long-term liabilities | |
| — | |
| 4 |
Net cash provided by operating activities | |
| 133,151 | |
| 101,639 |
Cash flows from investing activities | | | | | | |
Maturities of marketable securities | |
| 57,875 | |
| 54,875 |
Purchases of marketable securities | |
| (111,935) | |
| (19,284) |
Net cash provided by (used in) investing activities | | | (54,060) | |
| 35,591 |
Cash flows from financing activities | | | | | | |
Repurchase of shares to satisfy tax withholding | | | (74) | | | (2,840) |
Payments of principal on senior secured term loans | | | — | | | (120,000) |
Payments of cash dividends to stockholders | | | (11) | | | (55) |
Proceeds from issuances of common stock, net | | | 529 | | | 454 |
Distributions to noncontrolling interest | | | — | | | (899) |
Net cash provided by (used in) financing activities | |
| 444 | |
| (123,340) |
Net increase in cash and cash equivalents | |
| 79,535 | |
| 13,890 |
Cash and cash equivalents at beginning of period | |
| 62,417 | |
| 73,336 |
Cash and cash equivalents at end of period | | $ | 141,952 | | $ | 87,226 |
Supplemental disclosure of cash flow information | | | | | | |
Cash paid for interest | | $ | 5,461 | | $ | 10,913 |
| | | | | | |
| | Six Months Ended June 30, | ||||
|
| 2020 |
| 2019 | ||
Cash flows from operating activities | | | | | | |
Net income | | $ | 177,177 | | $ | 86,080 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Deferred income taxes | | | 35,823 | | | 18,940 |
Depreciation and amortization | |
| 6,921 | |
| 7,080 |
Stock-based compensation | |
| 810 | |
| 1,079 |
Amortization of debt discount and issuance costs | | | 4,110 | | | 3,820 |
Amortization of discount on short-term investments | | | (336) | | | (1,124) |
Amortization of lease guarantee | | | (135) | | | (162) |
Changes in fair values of equity investments | | | (68,613) | | | — |
Other non-cash items | | | 6 | | | — |
Changes in operating assets and liabilities: | | | | | | |
Receivables from collaborative arrangements | |
| (2,975) | |
| 15,723 |
Prepaid expenses and other current assets | |
| 317 | |
| 390 |
Accounts payable | |
| 185 | |
| 1,128 |
Accrued personnel-related expenses and other accrued liabilities | |
| (15) | |
| 343 |
Accrued interest payable | |
| — | |
| (2) |
Operating lease liability | | | — | | | (144) |
Net cash provided by operating activities | |
| 153,275 | |
| 133,151 |
Cash flows from investing activities | | | | | | |
Maturities of marketable securities | |
| 82,000 | |
| 57,875 |
Purchases of marketable securities | |
| (12,943) | |
| (111,935) |
Purchases of equity investments | | | (60,000) | | | — |
Purchases of property and equipment | | | (13) | | | — |
Net cash provided by (used in) investing activities | | | 9,044 | |
| (54,060) |
Cash flows from financing activities | | | | | | |
Repurchase of shares to satisfy tax withholding | | | (72) | | | (74) |
Payments of cash dividends to stockholders | | | — | | | (11) |
Proceeds from issuances of common stock, net | | | 422 | | | 529 |
Net proceeds from the issuance of variable interest entity's equity | | | 344 | | | — |
Distributions to noncontrolling interest | | | (27,962) | | | — |
Net cash provided by (used in) financing activities | |
| (27,268) | |
| 444 |
Net increase in cash and cash equivalents | |
| 135,051 | |
| 79,535 |
Cash and cash equivalents at beginning of period | |
| 278,096 | |
| 62,417 |
Cash and cash equivalents at end of period | | $ | 413,147 | | $ | 141,952 |
Supplemental disclosure of cash flow information | | | | | | |
Cash paid for interest | | $ | 4,967 | | $ | 5,461 |
See accompanying notes to condensed consolidated financial statements.
87
INNOVIVA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Operations and Summary of Significant Accounting Policies
Description of Operations
Innoviva Inc. (referred to as “Innoviva”"Innoviva", the “Company”"Company", or “we”"we" and other similar pronouns) is focused on royalty management. Innoviva’sa company with a portfolio includes theof royalties that include respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR®/BREO®ELLIPTA® (fluticasone furoate/ vilanterol, “FF/VI”), ANORO® ELLIPTA®(umeclidinium (umeclidinium bromide/ vilanterol, “UMEC/VI”) and TRELEGY® ELLIPTA® (the combination FF/UMEC/VI). Under the Long-Acting Beta2Beta2 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 and ANORO® ELLIPTA® which tier upward at a range from 6.5% to 10%. Innoviva is also entitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC (“TRC”), including TRELEGY® ELLIPTA® and any other product or combination of products that may be discovered or developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the “GSK Agreements”), which have been assigned to TRC other than RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In our opinion, the unaudited condensed consolidated financial statements have been prepared on the same basis as audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of our financial position, results of operations, comprehensive income and cash flows. The interim results are not necessarily indicative of the results of operations to be expected for the year ending December 31, 20192020 or any other period.
The accompanying unaudited condensedconsolidated financial statements include the accounts of Innoviva and certain variable interest entities for which we are the primary beneficiary. All intercompany transactions have been eliminated. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income (loss) attributable to noncontrolling interest in our unaudited consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 20182019 filed with the Securities and Exchange Commission (“SEC”) on February 19, 2020, and as amended on February 21, 2020 (“2019 (“2018 Form 10-K”).
Variable Interest EntityEntities
We evaluate our ownership, contractual and other interest in the entities that we invest in to determine if they are variable interest entities (“VIE”VIEs”), whether we have a variable interest in those entities and the nature and extent of those interests. Based on our evaluation, if we determine we are the primary beneficiary of a VIE, we consolidate the entityentity’s financial results into our financial statements.
We consolidate the financial results of TRC and Pulmoquine Therapeutics, Inc. (“Pulmoquine”), which we have determined to be a VIE,VIEs, because we have the power to direct the economically significant activities of TRCthese entities and the obligation to absorb losses of, or the right to receive benefits from TRC. As of June 30, 2019them, and December 31, 2018, $9.8 million and $6.4 million, respectively,we are the primary beneficiary of the related party receivables from collaborative arrangements were attributable to TRC. The cash balance attributable to TRC as of June 30, 2019 was $13.8 million. Total revenue for TRC related to TRELEGY® ELLIPTA® was $9.8 million and $2.4 million for the three months ended June 30, 2019 and 2018, respectively, and $17.2 million and $3.3 million for the six months ended June 30, 2019 and 2018, respectively.entities.
Accounting Pronouncement Adopted by the Company
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016 02, Leases (Topic 842), which requires an entity to recognize right of use assets representing its
98
rightEquity Investments
We invest from time to use the underlying asset for the lease term and lease liabilities representing the present valuetime in equity securities of the future lease payments for both financing and operating leases on its consolidated balance sheets. For a lease with a term of 12 monthsprivate or less, the standard allows an entity to elect not to recognize a right-of-use asset and a lease liability and recognize the lease expense on a straight-line basis. We adopted the standard on the effective date of January 1, 2019 using the alternative transition approach. This approach is similar to a prospective transition, which requires the application of ASC 842 at the effective date with a cumulative-effect adjustment recognized through retained earnings. Under this approach,public companies. If we determine that we do not presenthave control over these companies under either voting or VIE models, we then determine if we have an ability to exercise significant influence via voting interests, board representation or other business relationships. We may account for the adjusted comparative periods. Our pro-rata shareequity investments where we exercise significant influence using either an equity method of common area expenses are recorded as lease expense when incurred since they are variable and considered nonlease componentsaccounting or at fair value by electing the fair value option under Accounting Standards Codification ("ASC") Topic 825, Financial Instruments. If the fair value option is applied to an investment that would otherwise be accounted for under the standard. The mostequity method, we apply it to all our financial interests in the same entity (equity and debt, including guarantees) that are eligible items. All gains and losses from fair value changes, unrealized and realized, are presented as changes in fair values of equity investments, net on the consolidated statements of income.
If we conclude that we do not have an ability to exercise significant impactinfluence over an investee, we may elect to account for an equity security without a readily determinable fair value at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
As of June 30, 2020, we accounted for our equity investments in common stock and warrants of Armata Pharmaceuticals, Inc. (NYSE American: ARMP) (“Armata ") and Entasis Therapeutics Holdings Inc. (NASDAQ: ETTX) ("Entasis”) at fair value by electing the fair value option and presented the investments as equity investments on the consolidated balance sheets.
Accounting Pronouncement Adopted by the Company
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13 Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, as clarified in subsequent amendments to the initial guidance (collectively, Topic 326). Topic 326 requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecast. ASC 326 must be adopted using a modified retrospective approach with a cumulative effect adjustment as of the beginning of the reporting period in which the guidance is adopted. Topic 326 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption to us is that we recognized a right of use asset in the amount of $1.5 million and lease liabilities in the total amount of $1.6 million atpermitted. We adopted Topic 326 effective January 1, 2019 for the operating lease on our corporate headquarters.2020. The adoption did not have a material impact on our retained earnings and consolidated statements of operations and cash flows.financial statements.
Recently Issued Accounting Standards or Updates Not Yet Adopted
In August 2018,December 2019, the U.S. Securities and Exchange Commission (the “SEC”) adoptedFASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the final rule under SEC Release No. 33-10532, Disclosure Update and SimplificationAccounting for Income Taxes”, amendingwhich is intended to simplify various aspects related to accounting for income taxes by removing certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements relatingexceptions to the analysis of stockholders’ equitygeneral principles in Topic 740. The pronouncement is effective for fiscal years, and for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presentedperiods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We are currently in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliationprocess of evaluating the effects of the beginning balance to the ending balanceprovisions of each period for which a statement of income is required to be filed. This final rule is effectiveASU 2019-12 on November 5, 2018. Effective January 1, 2019, the Company adopted SEC Release No. 33-10532. In accordance with the new guidance, the Company has added a Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit) in its Form 10-Q and elected to present a reconciliation in a single statement that shows the changes in stockholders equity for each interim period, as well as each comparable period.our financial statements.
2. Net Income Per Share
Basic net income per share attributable to Innoviva stockholders is computed by dividing net income attributable to Innoviva stockholders by the weighted-average number of shares of common stock outstanding. Diluted net income per share attributable to Innoviva stockholders is computed by dividing net income attributable to Innoviva stockholders by the weighted-average number of shares of common stock and dilutive potential common stock equivalents then outstanding. Dilutive potential common stock equivalents include the assumed exercise, vesting and issuance of employee stock awards using the treasury stock method, as well as common stock issuable upon assumed conversion of our convertible subordinated notes due 2023 (the “2023 Notes”) using the if-convertedif converted method.
Our convertible senior notes due 2025 (the “2025 Notes”) are convertible, based on the applicable conversion rate, into cash, shares of our common stock or a combination thereof, at our election. Our current intent is to settle the principal amount of the 2025 Notes in cash upon conversion. The impact of the assumed conversion premium to diluted net income per share is computed using the treasury stock method. As the average market price per share of our common stock as reported on The Nasdaq Global Select Market during the relevant periods was lower than the initial conversion price of $17.26 per share, there was no0 dilutive effect of the assumed conversion premium for the three and six months ended June 30, 20192020 and 2018,2019, respectively.
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The following table shows the computation of basic and diluted net income per share for the three and six months ended June 30, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||||||||||
(In thousands except per share data) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||
Numerator: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income attributable to Innoviva stockholders, basic | | $ | 37,740 | | $ | 54,626 | | $ | 71,530 | | $ | 84,207 | | $ | 76,844 | | $ | 37,740 | | $ | 142,281 | | $ | 71,530 |
Add: interest expense on 2023 Notes | | | 1,158 | | | 1,417 | | | 2,325 | | | 2,829 | | | 1,184 | | | 1,158 | | | 2,364 | | | 2,325 |
Net income attributable to Innoviva stockholders, diluted | | $ | 38,898 | | $ | 56,043 | | $ | 73,855 | | $ | 87,036 | | $ | 78,028 | | $ | 38,898 | | $ | 144,645 | | $ | 73,855 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average shares used to compute basic net income per share attributable to Innoviva stockholders | |
| 101,151 | |
| 100,873 | |
| 101,105 | |
| 100,739 | |
| 101,324 | |
| 101,151 | |
| 101,280 | |
| 101,105 |
Dilutive effect of 2023 Notes | | | 12,189 | | | 12,189 | | | 12,189 | | | 12,189 | | | 12,189 | | | 12,189 | | | 12,189 | | | 12,189 |
Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan | | | 51 | | | 337 | | | 90 | | | 555 | | | 32 | | | 51 | | | 58 | | | 90 |
Weighted-average shares used to compute diluted net income per share attributable to Innoviva stockholders | |
| 113,391 | |
| 113,399 | |
| 113,384 | |
| 113,483 | |
| 113,545 | |
| 113,391 | |
| 113,527 | |
| 113,384 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income per share attributable to Innoviva stockholders | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.37 | | $ | 0.54 | | $ | 0.71 | | $ | 0.84 | | $ | 0.76 | | $ | 0.37 | | $ | 1.40 | | $ | 0.71 |
Diluted | | $ | 0.34 | | $ | 0.49 | | $ | 0.65 | | $ | 0.77 | | $ | 0.69 | | $ | 0.34 | | $ | 1.27 | | $ | 0.65 |
Anti-Dilutive Securities
The following common stock equivalents were not included in the computation of diluted net income per share because their effect was anti-dilutive:
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
(In thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
Outstanding options and awards granted under equity incentive plan and employee stock purchase plan |
| 1,188 | | 1,633 |
| 1,120 | | 1,562 |
| 1,154 | | 1,188 | | 1,124 | | 1,120 |
3. Revenue Recognition and Collaborative Arrangements
Revenue is recognized when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. Revenue is recognized through a five-step process: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price for the contract; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) a performance obligation is satisfied. We recognize the royalty revenue on licensee net sales of products with respect to which we have contractual royalty rights in the period in which the royalties are earned and reported to us. Royalties are recognized net of amortization of capitalized fees associated with any approval and launch milestone payments made to GSK.
11
3. Revenue Recognition and Collaborative Arrangements
Net Revenue from Collaborative Arrangements
Net revenue recognized under our GSK Agreements was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||||||||||
(In thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||
Royalties from a related party - RELVAR/BREO | | $ | 47,086 | | $ | 57,515 | | $ | 89,826 | | $ | 103,675 | | $ | 45,570 | | $ | 47,086 | | $ | 101,719 | | $ | 89,826 |
Royalties from a related party - ANORO | | | 10,635 | | | 10,656 | | | 19,205 | | | 19,380 | | | 11,199 | | | 10,635 | | | 21,049 | | | 19,205 |
Royalties from a related party - TRELEGY | | | 9,842 | | | 2,371 | | | 17,171 | | | 3,323 | | | 15,633 | | | 9,842 | | | 31,768 | | | 17,171 |
Total royalties from a related party | | | 67,563 | | | 70,542 | | | 126,202 | | | 126,378 | | | 72,402 | | | 67,563 | | | 154,536 | | | 126,202 |
Less: amortization of capitalized fees paid to a related party | |
| (3,456) | |
| (3,456) | |
| (6,912) | |
| (6,912) | |
| (3,456) | |
| (3,456) | |
| (6,912) | |
| (6,912) |
Royalty revenue from GSK | | $ | 64,107 | | $ | 67,086 | | $ | 119,290 | | $ | 119,466 | ||||||||||||
Royalty revenue | | | 68,946 | | | 64,107 | | | 147,624 | | | 119,290 | ||||||||||||
Strategic alliance - MABA program | | | 10,000 | | | — | | | 10,000 | | | — | ||||||||||||
Total net revenue from GSK | | $ | 78,946 | | $ | 64,107 | | $ | 157,624 | | $ | 119,290 |
During the three months ended June 30, 2020, we recognized $10.0 million in revenue in connection with the termination of the Bifunctional Muscarinic Antagonist-Beta2 Agonist (“MABA”) program under the Strategic Alliance Agreement with GSK.
10
4. Consolidated Entities
Theravance Respiratory Company, LLC
As of June 30, 2020, and December 31, 2019, $25.6 million and $14.4 million, respectively, of the related party receivables from collaborative arrangements were attributable to TRC. The cash balance attributable to TRC as of June 30, 2020 was $16.5 million. Total revenue for TRC related to TRELEGY® ELLIPTA® was $15.6 million and $9.8 million for the three months ended June 30, 2020 and 2019, respectively, and $31.8 million and $17.2 million for the six months ended June 30, 2020 and 2019, respectively. Total revenue for TRC also included a $10.0 million fee for the termination of the MABA program for the three and six months ended June 30, 2020. Total operating expenses were $0.5 million and $0.8 million for the three and six months ended June 30, 2020, respectively, compared to minimal amounts for the same periods in 2019.
Pulmoquine Therapeutics, Inc.
On April 20, 2020, we entered into a securities purchase agreement with Pulmoquine to purchase 5,808,550 shares of Series A preferred stock for $5.0 million in cash. Upon consummation of the transaction, we owned approximately 90.9% of Pulmoquine's outstanding shares and hold a majority voting interest. Pulmoquine is a biotechnology company focused on the research and development of an aerosolized formulation of hydroxychloroquine to treat respiratory infections, such as the novel coronavirus (“COVID-19”). As of June 30, 2020, total assets including cash balance attributable to Pulmoquine was $4.9 million. Pulmoquine does not currently generate revenue. Total operating expense was $0.6 million for the three and six months ended June 30, 2020.
5. Financial Instruments and Fair Value Measurements
Equity Investment in Armata
On January 27, 2020, we entered into a securities purchase agreement to acquire 8,710,800 shares of Armata’s common stock and warrants to purchase up to 8,710,800 additional shares of its common stock for $25.0 million in cash. Armata is a clinical stage biotechnology company focused on precisely targeted bacteriophage therapeutics for antibiotic-resistant infections. The investment is to support Armata’s ongoing advancement of its bacteriophage development programs including the expected first in human studies related to Armata's lead phage candidate, AP-PA02, targeting Pseudomonas aeruginosa, as well as AP-SA02, its phage candidate targeting Staphylococcus Aureus.
The investment was closed in 2 tranches on February 12, 2020 and March 27, 2020. NaN of our board members joined Armata’s board. After the second closing, we owned approximately 46.7% of Armata’s common stock.
The investment provides Innoviva the ability to have significant influence, but not control over Armata’s operations. Based on our evaluation, we determined that Armata is a VIE, but Innoviva is not the primary beneficiary of the VIE. We elected the fair value option to account for both Armata’s common stock and warrants at fair value. The fair value of Armata’s common stock is measured based on its closing market price. The warrants have an exercise price of $2.87 per share, are exercisable immediately within five years from the issuance date of the warrants, and include a cashless exercise option. We use the Black-Scholes-Merton pricing model to estimate the fair value of these warrants with the following input assumptions: Armata’s closing market price on the valuation date, 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 Armata’s peer companies.
As of June 30, 2020, the fair values of Armata’s common stock and warrants were estimated at $34.1 million and $26.2 million, respectively. The total fair value of both financial instruments in the amount of $60.3 million was recorded as equity investments on the consolidated balance sheets as of June 30, 2020. We recorded $13.4 million and $35.3 million of unrealized gains and fair value changes in Armata’s investments as changes in fair values of equity investments, net on the consolidated statements of income for the three and six months ended June 30, 2020, respectively.
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4. Available-for-Sale SecuritiesEquity Investment in Entasis
On April 12, 2020, we entered into a securities purchase agreement with Entasis to purchase 14,000,000 shares of Entasis common stock as well as warrants to purchase 14,000,000 additional shares of its common stock for approximately $35.0 million in cash. Entasis is a clinical-stage biotechnology company focused on the discovery and Fair Value Measurementsdevelopment of novel antibacterial products. The investment is to support Entasis's ongoing advancement of its pathogen-targeted antibacterial product candidates, which include their global Phase 3 registration trial evaluating a fixed-dose combination of sulbactam and durlobactam (SUL-DUR) against Acinetobacter baumanii infections.
The investment was closed in 2 tranches on April 22, 2020 and June 11, 2020. Innoviva has a right to designate 2 members to Entasis's board. After the second closing, we owned approximately 51.3% of Entasis's common stock.
The investment provides Innoviva the ability to have significant influence, but not control, over Entasis's operations. Based on our evaluation, we determined that Entasis is a VIE, but Innoviva is not the primary beneficiary of the VIE. We elected the fair value option to account for both Entasis's common stock and warrants at fair value. The fair value of Entasis's common stock is measured based on its closing market price at each balance sheet date. The warrants have an exercise price of $2.50 per share, are exercisable immediately within five years from the issuance date of the warrants and include a cashless exercise option. We use the Black-Scholes-Merton pricing model to estimate the fair value of these warrants with the following input assumptions: Entasis's closing market price on the valuation date, 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 Entasis's peer companies.
As of June 30, 2020, the fair values of Entasis's common stock and warrants were estimated at $41.4 million and $26.9 million, respectively. The total fair value of both financial instruments in the amount of $68.3 million was recorded as equity investments on the consolidated balance sheets. We recorded $33.3 million of unrealized gains and fair value changes in Entasis's investments as changes in fair values of equity investments, net on the consolidated statements of income for the three and six months ended June 30, 2020.
Available-for-Sale Securities
The estimated fair value of available-for-sale securities is based on quoted market prices for these or similar investments that were based on prices obtained from a commercial pricing service. Available-for-sale securities are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2019 | | June 30, 2020 | ||||||||||||||||||||
|
| | |
| Gross |
| Gross |
| | |
| | |
| Gross |
| Gross |
| | | ||||
| | | | Unrealized | | Unrealized | | Estimated | | | | | Unrealized | | Unrealized | | Estimated | |||||||
(In thousands) | | Amortized Cost | | Gains | | Losses | | Fair Value | | Amortized Cost | | Gains | | Losses | | Fair Value | ||||||||
U.S. government securities | | $ | 49,012 | | $ | 25 | | $ | — | | $ | 49,037 | | $ | 3,993 | | $ | 6 | | $ | — | | $ | 3,999 |
U.S. government agencies | | | 19,919 | | | 8 | | | — | | | 19,927 | ||||||||||||
U.S. commercial paper | |
| 38,747 | |
| — | |
| — | |
| 38,747 | ||||||||||||
Money market funds | |
| 120,581 | |
| — | |
| — | |
| 120,581 | |
| 378,472 | |
| — | |
| — | |
| 378,472 |
Total | | $ | 228,259 | | $ | 33 | | $ | — | | $ | 228,292 | | $ | 382,465 | | $ | 6 | | $ | — | | $ | 382,471 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2019 | ||||||||||||||||||||
|
| | |
| Gross |
| Gross |
| | |
| | |
| Gross |
| Gross |
| | | ||||
| | | | Unrealized | | Unrealized | | Estimated | | | | Unrealized | | Unrealized | | Estimated | ||||||||
(In thousands) | | Amortized Cost | | Gains | | Losses | | Fair Value | | Amortized Cost | | Gains | | Losses | | Fair Value | ||||||||
U.S. government securities | | $ | 29,736 | | $ | — | | $ | (3) | | $ | 29,733 | | $ | 53,799 | | $ | 35 | | $ | — | | $ | 53,834 |
U.S. government agencies | | | 4,971 | | | — | | | — | | | 4,971 | ||||||||||||
U.S. corporate notes | | | 2,875 | | | — | | | — | | | 2,875 | ||||||||||||
U.S. commercial paper | |
| 22,037 | |
| — | |
| — | |
| 22,037 | |
| 18,915 | |
| — | |
| — | |
| 18,915 |
Money market funds | |
| 49,358 | |
| — | |
| — | |
| 49,358 | |
| 233,992 | |
| — | |
| — | |
| 233,992 |
Total | | $ | 108,977 | | $ | — | | $ | (3) | | $ | 108,974 | | $ | 306,706 | | $ | 35 | | $ | — | | $ | 306,741 |
As of June 30, 2019,2020, all of the available-for-sale debt securities had contractual maturities within one year, and the weighted average maturityduration of marketabledebt securities was approximately two months.one month. There was 0 credit loss of these securities as of June 30, 2020.
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Fair Value Measurements
Our available-for-sale securities and equity investments are measured at fair value on a recurring basis and our debt is carried at amortized cost basis. The estimated fair values were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Estimated Fair Value Measurements as of June 30, 2019 Using: | | Estimated Fair Value Measurements as of June 30, 2020 Using: | ||||||||||||||||||||
| | Quoted Price in | | | | | | | | | | | Quoted Price in | | | | | | | | | | ||
| | Active Markets | | Significant Other | | Significant | | | | | Active Markets | | Significant Other | | Significant | | | | ||||||
| | for Identical | | Observable | | Unobservable | | | | | for Identical | | Observable | | Unobservable | | | | ||||||
Types of Instruments | | Assets | | Inputs | | Inputs | | | | | Assets | | Inputs | | Inputs | | | | ||||||
(In thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||||
Assets | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government securities | | $ | — | | $ | 49,037 | | $ | — | | $ | 49,037 | | $ | — | | $ | 3,999 | | $ | — | | $ | 3,999 |
U.S. government agencies | | | — | | | 19,927 | | | — | | | 19,927 | ||||||||||||
U.S. commercial paper | |
| — | |
| 38,747 | |
| — | |
| 38,747 | ||||||||||||
Money market funds | |
| 120,581 | |
| — | |
| — | |
| 120,581 | |
| 378,472 | |
| — | |
| — | |
| 378,472 |
Equity investment - Armata Common Stock | | | 34,146 | | | — | | | — | | | 34,146 | ||||||||||||
Equity investment - Armata Warrants | | | — | | | 26,181 | | | — | | | 26,181 | ||||||||||||
Equity investment - Entasis Common Stock | | | 41,440 | | | — | | | — | | | 41,440 | ||||||||||||
Equity investment - Entasis Warrants | | | — | | | 26,846 | | | — | | | 26,846 | ||||||||||||
Total assets measured at estimated fair value | | $ | 120,581 | | $ | 107,711 | | $ | — | | $ | 228,292 | | $ | 454,058 | | $ | 57,026 | | $ | — | | $ | 511,084 |
Debt | | | | | | | | | | | | | | | | | | | | | | | | |
Term B Loan | | $ | — | | $ | 13,750 | | $ | — | | $ | 13,750 | ||||||||||||
2023 Notes | | | — | | | 252,754 | | | — | | | 252,754 | | $ | — | | $ | 246,303 | | $ | — | | $ | 246,303 |
2025 Notes | |
| — | |
| 208,181 | |
| — | |
| 208,181 | |
| — | |
| 198,997 | |
| — | |
| 198,997 |
Total fair value of debt | | $ | — | | $ | 474,685 | | $ | — | | $ | 474,685 | | $ | — | | $ | 445,300 | | $ | — | | $ | 445,300 |
| | | | | | | | | | | | | ||||||||||||
| | Estimated Fair Value Measurements as of December 31, 2019 Using: | ||||||||||||||||||||||
| | Quoted Price in | | | | | | | | |||||||||||||||
| | | | | | | | | | | | | | Active Markets | | Significant Other | | Significant | | | | |||
| | Estimated Fair Value Measurements as of December 31, 2018 Using: | | for Identical | | Observable | | Unobservable | | | | |||||||||||||
Types of Instruments | | Quoted Price in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | | | Assets | | Inputs | | Inputs | | | | ||||||
(In thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||||
Assets | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government securities | | $ | — | | $ | 29,733 | | $ | — | | $ | 29,733 | | $ | — | | $ | 53,834 | | $ | — | | $ | 53,834 |
U.S. government agencies | | | — | | | 4,971 | | | — | | | 4,971 | ||||||||||||
U.S. corporate notes | | | — | | | 2,875 | | | — | | | 2,875 | ||||||||||||
U.S. commercial paper | |
| — | |
| 22,037 | |
| — | |
| 22,037 | |
| — | |
| 18,915 | |
| — | |
| 18,915 |
Money market funds | |
| 49,358 | |
| — | |
| — | |
| 49,358 | |
| 233,992 | |
| — | |
| — | |
| 233,992 |
Total assets measured at estimated fair value | | $ | 49,358 | | $ | 59,616 | | $ | — | | $ | 108,974 | | $ | 233,992 | | $ | 72,749 | | $ | — | | $ | 306,741 |
Debt | | | | | | | | | | | | | | | | | | | | | | | | |
Term B Loan | | $ | — | | $ | 13,750 | | $ | — | | $ | 13,750 | ||||||||||||
2023 Notes | | | — | | | 258,918 | | | — | | | 258,918 | | $ | — | | $ | 243,394 | | $ | — | | $ | 243,394 |
2025 Notes | | | — | | | 230,692 | | | — | | | 230,692 | | | — | | | 208,976 | | | — | | | 208,976 |
Total fair value of debt | | $ | — | | $ | 503,360 | | $ | — | | $ | 503,360 | | $ | — | | $ | 452,370 | | $ | — | | $ | 452,370 |
The fair value of our marketable securities classified within Level 2 is based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, including market research publications.
The fair values of our equity investments in Armata and Entasis's common stock are based on their respective closing market prices per share at the reporting date and are classified as Level 1 financial instruments. The fair values of our equity investments in Armata and Entasis's warrants are included within Level 2 as the assumptions used in the valuation model are based on the observable inputs that include their respective closing market prices per share, their respective comparable companies’ market data and the U.S. Treasury yield.
The fair value of our 2023 Notes and of our 2025 Notes is based on recent trading prices of the instruments. The carrying amount of our initial senior secured term loan (the “Term B Loan”) before deducting debt issuance costs approximates fair value as the loan carries a variable interest rate that is tied to the LIBOR rate plus an applicable spread.
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5.6. Stock-Based Compensation
Stock-based compensation expense is included in the consolidated statements of income as follows:
Market-Based RSAs and RSUs
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
(In thousands) |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
General and administrative | | $ | 375 | | $ | 474 | | $ | 810 | | $ | 1,079 |
2016 Market-Based RSAs and RSUs
On January 14, 2016, the Compensation Committee approved and granted 282,394 RSAs and 46,294 RSUs to senior management. These awards include a market condition based on Total Shareholder Return (“TSR”) and a service condition that requires continued employment.
In February 2018, the Compensation Committee certified the maximum achievement of the TSR as of the first measurement date, January 12, 2018. RSAs totaling 69,440 and RSUs totaling 30,862 representing two-thirds of the amounts were released on February 20, 2018. In connection with the separation of certain members of senior management from the Company in early February 2018, the Board of Directors agreed to accelerate the vesting and distribution of an aggregate of 118,821 RSAs to these members of senior management. The remaining 59,411 RSAs for these members of senior management were forfeited. As a net result of the vesting acceleration of the RSAs and the forfeiture of those unvested RSAs, an additional $0.7 million compensation expense was recognized during the three months ended March 31, 2018.
In August and September 2018, the remaining 34,722 RSAs and 15,432 RSUs were forfeited due to the additional separation of senior management members, and $0.2 million of previously recognized compensation expense was reversed.
2017 Market-Based RSAs and RSUs
On January 17, 2017, the Compensation Committee approved and granted 353,508 RSAs and 53,360 RSUs to senior management. These awards include a market condition based on the TSR of Innoviva’s common stock as compared to the TSR of NASDAQ Biotechnology Index (“Index”) and a service condition that requires continued employment.
In connection with the separation of certain members of senior management from the Company in February 2018, an aggregate of 233,448 RSAs were forfeited, and $0.8 million of previously recognized compensation expense was reversed during the three months ended June 30, 2018.
In August and September 2018, the remaining 120,060 RSAs and 53,360 RSUs were forfeited due to the additional separation of senior management members, and $0.9 million of previously recognized compensation expense was reversed.
2018 Market-Based RSAs and RSUs
On March 2, 2018, the Compensation Committee approved and granted 111,668 RSAs and 49,630 RSUs to senior management. These awards include a market condition based on the TSR of Innoviva’s common stock over a three-year performance period from the date of grant for the RSAs and from the date of grant until September 30, 2020 for RSUs, and a service condition that requires continued employment. The grant date fair value of these awards was determined using a Monte Carlo valuation model. The aggregate value of $1.7 million was to be recognized as compensation expense over the implied service period and would not be reversed if the market condition was not met, but with the exception of such person’s continued employment with the Company.
In August and September 2018, all of 111,668 RSAs and 49,630 RSUs were forfeited, and $0.2 million of previously recognized compensation expense was reversed due to the separation of these senior management members.
14
Stock-Based Compensation Expense
Stock-based compensation expense is included in the condensed consolidated statements of operations as follows:
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
(In thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
General and administrative | | $ | 474 | | $ | 1,452 | | $ | 1,079 | | $ | 3,621 |
As of June 30, 2019, unrecognized stock-based compensation cost was as follows:
| | | |
| | Unrecognized | |
| | Compensation | |
(In thousands) |
| Cost | |
RSUs | | $ | 1,095 |
RSAs | | | 1,192 |
Total unrecognized compensation cost | | $ | 2,287 |
6.7. Debt
Our debt consists of:
| | | | | | | | | | | | |
| | June 30, | | December 31, | | June 30, | | December 31, | ||||
(In thousands) |
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||
Term B Loan | | $ | 13,750 | | $ | 13,750 | ||||||
2023 Notes |
| | 240,984 |
| | 240,984 |
| $ | 240,984 |
| $ | 240,984 |
2025 Notes | | | 192,500 | | | 192,500 | | | 192,500 | | | 192,500 |
Total debt | | | 447,234 | | | 447,234 | | | 433,484 | | | 433,484 |
Unamortized debt discount and issuance costs | | | (60,559) | | | (64,379) | | | (52,254) | | | (56,364) |
Net long-term debt |
| $ | 386,675 |
| $ | 382,855 |
| $ | 381,230 |
| $ | 377,120 |
Prepayments of Senior Secured Term Loans
On February 28 and August 1, 2018, we prepaid the principal balance of the Term B Loan by $120.0 million and $110.0 million, respectively. With the prepayments, we incurred a loss on the extinguishment of debt of $3.1 million and $2.6 million, respectively, representing unamortized debt issuance costs. The loss on the extinguishment of debt is presented as part of other expense, net in our consolidated statements of operations. As of June 30, 2019, the outstanding principal balance of the Term B Loan was $13.8 million.
Convertible Senior Notes Due 2025
In accordance with accounting guidance for debt with conversion and other options, we separately account for the liability and equity components of the 2025 Notes by allocating the proceeds between the liability component and the embedded conversion option (“equity component”) due to our ability to settle the conversion obligation of the 2025 Notes in cash, common stock or a combination of cash and common stock, at our option. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature using the income approach. The allocation was performed in a manner that reflected our non-convertible debt borrowing rate for similar debt. The equity component of the 2025 Notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the 2025 Notes and the fair value of the liability of the 2025 Notes on the date of issuance. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense using the effective interest method over the term of the 2025 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
15
Our outstanding 2025 Notes balances consisted of the following:
| | | | | | | | | | | | |
| | June 30, | | December 31, | | June 30, | | December 31, | ||||
(In thousands) |
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||
Liability component |
| | |
| | |
| | |
| | |
Principal | | $ | 192,500 | | $ | 192,500 | | $ | 192,500 | | $ | 192,500 |
Debt discount and issuance costs, net |
| | (58,261) |
| | (61,766) |
| | (50,768) |
| | (54,597) |
Net carrying amount |
| $ | 134,239 |
| $ | 130,734 |
| $ | 141,732 |
| $ | 137,903 |
Equity component, net | | $ | 65,361 | | $ | 65,361 | | $ | 65,361 | | $ | 65,361 |
The following table sets forth total interest expense recognized related to the 2025 Notes for the three and six months ended June 30, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||||||||||
(In thousands) |
| 2019 | | 2018 | | 2019 | | 2018 |
| 2020 | | 2019 | | 2020 | | 2019 | ||||||||
Contractual interest expense | | $ | 1,203 | | $ | 1,203 |
| $ | 2,406 |
| $ | 2,393 | | $ | 1,203 | | $ | 1,203 |
| $ | 2,406 |
| $ | 2,406 |
Amortization of debt issuance costs | | | 136 | | | 125 | | | 269 | | | 248 | | | 149 | | | 136 | | | 294 | | | 269 |
Amortization of debt discount |
| | 1,635 | | | 1,496 | | | 3,236 | | | 2,975 |
| | 1,786 | | | 1,635 | | | 3,535 | | | 3,236 |
Total interest and amortization expense |
| $ | 2,974 | | $ | 2,824 | | $ | 5,911 | | $ | 5,616 |
| $ | 3,138 | | $ | 2,974 | | $ | 6,235 | | $ | 5,911 |
Debt Maturities
The aggregate scheduled maturities of our long-term debt as of June 30, 2019, are as follows:
| | | |
(In thousands) |
| |
|
Years ending December 31: | | |
|
2019 to 2021 | | $ | — |
2022 | | | 13,750 |
2023 | | | 240,984 |
Thereafter | | | 192,500 |
Total |
| $ | 447,234 |
7. Related Party Transaction
On February 12, 2018, the Company entered into an agreement with Sarissa Capital Management LP, and certain of its affiliates (collectively, the “Sarissa Group”) related to the Company’s 2018 Annual Meeting of Stockholders (the “2018 Annual Meeting”). The agreement provided for, among other things, the concurrent appointment of three designees of the Sarissa Group as members of the Company’s Board of Directors and an agreement to recommend and nominate a five-person slate of directors for election at the 2018 Annual Meeting composed of the three new directors and two current directors of the Company and partially reimburse the Sarissa Group $2.7 million for expenses, which reimbursement obligation relating to the 2018 Annual Meeting arose upon execution of the agreement. The Sarissa Group is considered to be a related party due to its representation on the Board of Directors.
8. Income Taxes
Provisional income tax expense for the three and six months ended June 30, 2019 was $10.4 million and $18.9 million, respectively, compared to minimal amounts for the same periods in 2018 as a full valuation allowance was maintained on the Company's gross deferred taxes. The difference between the Company’s effective income tax rate of 18% for the six months ended June 30, 2019 and the U.S. federal statutory rate of 21% is primarily attributable to state income tax, non-deductible expenses and noncontrolling interest.
1614
Debt Maturities
The aggregate scheduled maturities of our long-term debt as of June 30, 2020, are as follows:
| | | |
(In thousands) |
| |
|
Years ending December 31: | | |
|
2020 to 2022 | | $ | — |
2023 | | | 240,984 |
2024 | | | — |
Thereafter | | | 192,500 |
Total |
| $ | 433,484 |
9. Lease8. Commitments and Contingencies
We have an operating lease for our corporate headquarters with a remaining lease term of approximately four years. The lease includes a five-year renewal option at our sole discretion. The total operating lease expense for this lease was $0.1 million for the three months ended June 30, 2019 and 2018, respectively; and $0.2 million for the six months ended June 30, 2019 and 2018, respectively.
Cash paid for amount included in the measurement of operating lease liabilities was $0.1 million and $0.2 million for the three and six months ended June 30, 2019, respectively. The lease liabilities were measured using a discount rate of 7.15% based on the most recent borrowing rate for our senior secured Term B Loan at the time of adoption of ASC 842 as discussed in Note 1.Lease
Future minimum operating lease payments on our corporate headquarters as of June 30, 20192020 are as follows:
| | | | | | |
(In thousands) |
| | |
| | |
Years ending December 31: | | | | | | |
Remainder of 2019 | | $ | 204 | |||
2020 | |
| 416 | |||
Remainder of 2020 | | $ | 60 | |||
2021 | |
| 428 | |
| 123 |
2022 | |
| 441 | |
| 109 |
2023 | |
| 201 | |||
Total future minimum lease payments | |
| 1,690 | |||
Imputed interest | |
| (216) | |||
Thereafter | |
| — | |||
Total | | $ | 1,474 | | $ | 292 |
| | | | |||
Reported as of June 30, 2019 | | | | |||
Operating lease liability, current portion | | $ | 317 | |||
Operating lease liability, net of current portion | |
| 1,157 | |||
Total | | $ | 1,474 |
10. Subsequent Events9. Income Taxes
In May 2019, Theravance Biopharma, who is the owner of 85% of the economic interests in TRC, initiated arbitration against the Company and TRC, relating to a dispute as to the determination by Innoviva (as manager of TRC) to cause TRC to explore potential reinvestment opportunitiesProvisional income tax expense for the royalty proceeds received by GSK into initiatives that Innoviva believes will increasethree and six months ended June 30, 2020 was $19.9 million and $35.8 million, respectively, compared to $10.4 million and $18.9 million for the valuesame periods in 2019 respectively. The Company’s effective income tax rate for the six months ended June 30, 2020 was 17%, compared to 18% for the same period in 2019. The difference between the Company’s effective income tax rate and the U.S. federal statutory income tax rate of TRC21% is primarily attributable to state income tax, non-deductible expenses and TRELEGY® ELLIPTA®. Theravance Biopharma alleges that in causing TRC to not distribute substantially all royalty proceeds received from GSK, Innoviva breached the limited liability company operating agreement governing TRC (the “Operating Agreement”), as well as the fiduciary duties applicable to Innoviva as manager of TRC. The hearing in respect of the arbitration commenced on July 23, 2019 and is expected to last several days. While Innoviva believes that it has complied with all applicable duties and is not in breach of the Operating Agreement, Theravance Biopharma is alleging such breach and is seeking material damages and there is no certainty that the arbitrator will rule in favor of Innoviva.
noncontrolling interest.
1715
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 that are not 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,” “pursue,” “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® and TRELEGY® ELLIPTA® 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 beyond the existing respiratory portfolio); the timing, manner and amount of potential capital returns to stockholders; 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; projections of revenue, expenses and other financial items; the impact of the COVID-19 pandemic; 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, 20182019 filed with the Securities and Exchange Commission (“SEC”) on February 19, 2020 (“2019 (“2018 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 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 20182019 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 20182019 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.
16
OVERVIEW
Executive Summary
Innoviva, Inc. (“Innoviva”, the “Company”, the “Registrant” or “we”) and other similar pronouns) is focused on royalty management. Innoviva’sa company with a portfolio includes theof royalties that include respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR®/BREO® ELLIPTA® (fluticasone furoate/ vilanterol, “FF/VI”), ANORO® ELLIPTA® (umeclidinium
18
bromide/ vilanterol, “UMEC/VI”) and TRELEGY® ELLIPTA® (the combination FF/UMEC/VI). Under the Long-Acting Beta2 Agonist (“LABA”) Collaboration Agreement, Innoviva is entitled to receive royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion; and royalties from the sales of ANORO® ELLIPTA®, which tier upward at a range from 6.5% to 10%. Innoviva is also entitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC (“TRC”),TRC, including TRELEGY® ELLIPTA® and any other product or combination of products that may be discovered or developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the “GSK Agreements”), which have been assigned to TRC other than RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®.
Our company structure and organization are tailored to our focused activities of managing our respiratory assets with GSK, the commercial and developmental obligations associated with the GSK Agreements, intellectual property, licensing operations, business development activities and providing for certain essential reporting and management functions of a public company. As of June 30, 2019,2020, we had sixfive employees. Our revenues consist of royalties and potential milestone payments, if any, from our respiratory partnership agreements with GSK.
Recent Highlights
GSK Net Sales:
● | GSK Net Sales: |
o | Second quarter |
o | Second quarter |
o | Second quarter |
● | Capital Allocation: |
o | During the second quarter of 2020, the Company invested $35.0 million in 14.0 million shares of Entasis’s common stock and warrants to purchase up to an additional 14.0 million shares of the common stock at $2.50 per share. With this initial investment, Innoviva owned approximately 51% of Entasis’s common stock as of June 30, 2020. Innoviva has a right to designate two members to Entasis’s board. |
● | Other: |
o | In May 2020, Pavel Raifeld was named as Chief Executive Officer. |
17
Collaborative Arrangements with GSK
LABA Collaboration
In November 2002, we entered into our LABA Collaboration Agreement with GSK to develop and commercialize once-daily LABA products for the treatment of chronic obstructive pulmonary disease (“COPD”) and asthma. The collaboration has developed three combination products: (1) 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), (2) ANORO® ELLIPTA® (UMEC/VI), a once-daily medicine combining a long-acting muscarinic antagonist (“LAMA”), umeclidinium bromide (UMEC), with a LABA, VI and (3) TRELEGY® ELLIPTA®, fluticasone furoate/umeclidinium/vilanterol (FF/UMEC/VI), a once-daily combination medicine consisting of an ICS, LAMA and LABA.
As a result of the launch and approval of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® in the U.S., Japan and Europe, in accordance with the LABA Collaboration Agreement, we paid milestone fees to GSK totaling $220.0 million during the year ended December 31, 2014. The milestone fees paid to GSK were recognized as capitalized fees paid to a related party, which are being amortized over their estimated useful lives commencing upon the commercial launch of the products.
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2004 Strategic Alliance
In March 2004, we entered into the Strategic Alliance Agreement with GSK where GSK received an option to license exclusive development and commercialization rights to product candidates from certain of our discovery programs on pre-determined terms and on an exclusive, worldwide basis. In 2005, GSK licensed our MABA program for the treatment of COPD, and in October 2011, we and GSK expanded the MABA program by adding six additional Innoviva-discovered preclinical MABA compounds (the “Additional MABAs”). The development program has beenwas funded in full by GSK. In June of 2020, GSK is interminated the processprogram and agreed to pay a $10.0 million termination fee to TRC. This fee was recognized as revenue from collaborative arrangements with a related party on our consolidated statements of determining next stepsincome for the program. For a detailed discussion of our alliance with GSK, see Management’s Discussionthree and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our 2018 Form 10-K.six months ended June 30, 2020, respectively.
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 (“US 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.
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016 02, Leases (Topic 842), which requires an entityAs part of our capital allocation strategies, we invest from time to recognize righttime in equity securities of use assets representing its right to use the underlying asset for the lease term and lease liabilities representing the present value of the future lease payments for both financing and operating leases on its consolidated balance sheets. For a lease with a term of 12 monthsprivate or less, the standard allows an entity to elect not to recognize a right-of-use asset and a lease liability and recognize the lease expense on a straight-line basis. We adopted the standard on the effective date of January 1, 2019 using the alternative transition approach. This approach is similar to a prospective transition, which requires the application of ASC 842 at the effective date with a cumulative-effect adjustment recognized through retained earnings. Under this approach,public companies. If we determine that we do not presenthave control over these companies under either voting or VIE models, we then determine if we have an ability to exercise significant influence via voting interests, board representation or other business relationships. We may account for the adjusted comparative periods. Our pro-rata shareequity investments where we exercise significant influence using either an equity method of common area expenses are recorded as lease expense when incurred since they are variable and considered nonlease componentsaccounting or at fair value by electing the fair value option. If the fair value option is applied to an investment that would otherwise be accounted for under the standard. The most significant impact of the adoptionequity method, we apply it to us is that we recognized a right of use assetall our financial interests in the amountsame entity (equity and debt, including guarantees) that are eligible items. All gains and losses from fair value changes, unrealized and realized, are presented as changes in fair values of $1.5 million and lease liabilities inequity investments, net on the total amount of $1.6 million at January 1, 2019 for the operating lease on our corporate headquarters. The adoption did not have a material impact on our retained earnings and consolidated statements of operations and cash flows.income.
If we conclude that we do not have an ability to exercise significant influence over an investee, we may elect to account for an equity security without a readily determinable fair value at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
There were no other significant changes to our critical accounting policies and estimates. Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 20182019 filed with the SEC on February 19, 20192020 provides a more complete discussion of our critical accounting policies and estimates.
2018
Results of Operations
Net Revenue
Total net revenue, as compared to the prior year period,periods, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Change |
| | Six Months Ended June 30, | | Change |
| | Three Months Ended June 30, | | Change |
| Six Months Ended June 30, | | Change |
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(In thousands) |
| 2019 |
| 2018 |
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| % |
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| 2019 |
| 2018 |
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| 2019 |
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| ||||||||||||
Royalties from a related party - RELVAR/BREO | | $ | 47,086 | | $ | 57,515 | | $ | (10,429) | | (18) | % | | $ | 89,826 | | $ | 103,675 | | $ | (13,849) | | (13) | % | | $ | 45,570 | | $ | 47,086 | | $ | (1,516) | | (3) | % | $ | 101,719 | | $ | 89,826 | | $ | 11,893 | | 13 | % |
Royalties from a related party - ANORO | |
| 10,635 | |
| 10,656 | |
| (21) | | 0 | % | |
| 19,205 | |
| 19,380 | |
| (175) | | (1) | % | |
| 11,199 | |
| 10,635 | |
| 564 | | 5 | % |
| 21,049 | |
| 19,205 | |
| 1,844 | | 10 | % |
Royalties from a related party - TRELEGY | |
| 9,842 | |
| 2,371 | |
| 7,471 | | * | | |
| 17,171 | |
| 3,323 | |
| 13,848 | | * | | |
| 15,633 | |
| 9,842 | |
| 5,791 | | 59 | % |
| 31,768 | |
| 17,171 | |
| 14,597 | | 85 | % |
Total royalties from a related party | |
| 67,563 | |
| 70,542 | |
| (2,979) | | (4) | % | |
| 126,202 | |
| 126,378 | |
| (176) | | 0 | % | |
| 72,402 | |
| 67,563 | |
| 4,839 | | 7 | % |
| 154,536 | |
| 126,202 | |
| 28,334 | | 22 | % |
Less: amortization of capitalized fees paid to a related party | |
| (3,456) | |
| (3,456) | |
| — | | — | | |
| (6,912) | |
| (6,912) | |
| — | | — | | |
| (3,456) | |
| (3,456) | |
| — | | 0 | % |
| (6,912) | |
| (6,912) | |
| — | | 0 | % |
Royalty revenue from GSK | | $ | 64,107 | | $ | 67,086 | | $ | (2,979) | | (4) | % | | $ | 119,290 | | $ | 119,466 | | $ | (176) | | 0 | % | |||||||||||||||||||||||
Royalty revenue | | | 68,946 | | | 64,107 | | | 4,839 | | 8 | % | | 147,624 | | | 119,290 | | | 28,334 | | 24 | % | ||||||||||||||||||||||||
Strategic alliance -MABA program | | | 10,000 | | | — | | | 10,000 | | * | | | 10,000 | | | — | | | 10,000 | | * | | ||||||||||||||||||||||||
Total net revenue from GSK | | $ | 78,946 | | $ | 64,107 | | $ | 14,839 | | 23 | % | $ | 157,624 | | $ | 119,290 | | $ | 38,334 | | 32 | % |
* Not Meaningful
Total net revenue decreasedincreased to $64.1$78.9 million and $119.3$157.6 million for the three and six months ended June 30, 2019,2020, compared to $67.1$64.1 million and $119.5$119.3 million, respectively, for the same periodsperiod a year ago. Royalties for RELVAR®/BREO® ELLIPTA® were lower primarily due to the increasing pricing pressure in the U.S., offset by the volume growth in both U.S. and non-U.S. markets. ANORO® ELLIPTA® maintained its steady volume growth, offset by the increasing pricing pressure in the U.S. GrowthRoyalties for TRELEGY® ELLIPTA® were higher due to the continued growth in prescriptions and market shareshare.
Research & Development
Research and development expenses of $0.6 million for TRELEGY® ELLIPTA® continued quarter over quarter.the three and six months ended June 30, 2020 were attributable to Pulmoquine’s product development efforts.
General & Administrative
General and administrative expenses, as compared to the prior year period,periods, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Change |
| | Six Months Ended June 30, | | Change |
| | Three Months Ended June 30, | | Change |
| Six Months Ended June 30, | | Change |
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(In thousands) |
| 2019 |
| 2018 |
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| 2019 |
| 2018 |
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| 2019 |
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| 2019 |
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General and administrative expenses | | $ | 4,347 | | $ | 4,411 | | $ | (64) | | (1) | % | | $ | 7,362 | | $ | 13,396 | | $ | (6,034) | | (45) | % | | $ | 2,596 | | $ | 4,347 | | $ | (1,751) | | (40) | % | $ | 5,159 | | $ | 7,362 | | $ | (2,203) | | (30) | % |
General and administrative expenses - related party | |
| — | |
| — | | | — | | — | | |
| — | |
| 2,700 | | | (2,700) | | — | |
General and administrative expenses for the three months ended June 30, 2019 were slightly lower, compared to the same period in 2018.
General and administrative expenses for the six months ended June 30, 2019 were $7.4 million2020 decreased compared with $13.4 millionto the same periods in the six months ended June 30, 2018, a decrease of $6.0 million mainly2019, attributable to overall lower personnel-relatedoperating expenses as a result of lower headcount. The amount for the six months ended June 30, 2018 included $3.2 million cash severance payments in connection with certain members of senior management’s separation from the Company and payment of $2.7 million to Sarissa to partially reimburse expenses pursuant to a settlement agreement in February 2018.incurred.
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Other Income, (Expense), net and Interest Income
Other income, (expense), net and interest income, as compared to the prior year period,periods, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change | | | Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change | | ||||||||||||||||||||||||
(In thousands) |
| 2019 |
| 2018 |
| $ |
| 2019 |
| 2018 |
| $ | |
| 2020 |
| 2019 |
| $ |
| % | | 2020 |
| 2019 | | $ | | % | | ||||||||||||
Other income (expense), net | | $ | (8) | | $ | 39 | | $ | (47) | | $ | (7) | | $ | (3,060) | | $ | 3,053 | | | $ | 30 | | $ | (8) | | $ | 38 | | * | | $ | 98 | | $ | (7) | | $ | 105 | | * | |
Interest income | |
| 1,403 | |
| 380 | | | 1,023 | |
| 2,378 | |
| 771 | | | 1,607 | | |
| 158 | | $ | 1,403 | | | (1,245) | | (89) | % |
| 1,460 | | $ | 2,378 | | | (918) | | (39) | % |
Other income (expense), net for the six months ended June 30, 2018, mainly consists of the loss on the extinguishment of debt of $3.1 million in relation to the $120.0 million prepayment of our Term B Loan.* Not Meaningful
Interest income increaseddecreased for the three and six months ended June 30, 2019,2020, as compared to the same periods a year ago primarily due to higher cash and investment balances.lower interest rates impacted by the COVID-19 pandemic.
19
Interest Expense
Interest expense, as compared to the prior year period,periods, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Change |
| | Six Months Ended June 30, | | Change |
| | Three Months Ended June 30, | | Change |
| Six Months Ended June 30, | | Change |
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(In thousands) |
| 2019 |
| 2018 |
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| 2019 |
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Interest expense | | $ | 4,661 | | $ | 6,478 | | $ | (1,817) | | (28) | % | | $ | 9,278 | | $ | 14,135 | | $ | (4,857) | | (34) | % | | $ | 4,561 | | $ | 4,661 | | $ | (100) | | (2) | % | $ | 9,077 | | $ | 9,278 | | $ | (201) | | (2) | % |
Interest expense decreased slightly for the three and six months ended June 30, 2019,2020, compared to the same periods a year ago primarily due to the lower average outstanding debt balance. See “Liquidity” section below
Changes in Fair Values of Equity Investments
During the quarter ended June 30, 2020, Innoviva invested $35.0 million in 14,000,000 shares of Entasis’s common stock as well as warrants to purchase up to an additional 14,000,000 shares of the common stock at $2.50 per share. As a result of this initial investment, Innoviva owned approximately 51% of Entasis’s common stock as of June 30, 2020. The total fair value of Entasis’s common stock and warrants was estimated at $68.3 million. We recorded $33.3 million as unrealized gains and fair value changes and presented it in the changes in fair values of equity investments on the consolidated statements of income for further information.the three and six months ended June 30, 2020, respectively.
As of June 30, 2020, the total fair value of Armata’s common stock and warrants was estimated at $60.3 million. We recorded $13.4 million and $35.3 million as unrealized gains and fair value changes and presented it in the changes in fair values of equity investments on the consolidated statements of income for the three and six months ended June 30, 2020, respectively.
Provision for Income Taxes
The provisional income tax expense for the three and six months ended June 30, 20192020 was $19.9 million and $35.8 million with an effective income tax rate of 17%, respectively, compared to $10.4 million and $18.9 million, respectively, with an effective interest rate of 18% in the same period a year ago. The difference between the Company's effective income tax rate and the U.S. federal statutory income tax rate of 18%, compared21% is primarily attributable to immaterial amounts in the same periods a year ago as a full valuation allowance was maintained on our gross deferred taxes.state income tax, non-deductible expenses and noncontrolling interests.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest, as compared to the prior period,periods, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | Six Months Ended June 30, | | | | | | Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change | |||||||||||||||||||||||
(In thousands) |
| 2019 |
| 2018 |
| Change |
| 2019 |
| 2018 |
| Change | |
| 2020 |
| 2019 |
| $ |
| % |
| 2020 |
| 2019 | | $ |
| % | |||||||||||||
Net income attributable to noncontrolling interest | | $ | 8,321 | | $ | 1,990 | | $ | 6,331 | | $ | 14,550 | | $ | 2,739 | | $ | 11,811 | | | $ | 21,381 | | $ | 8,321 | | $ | 13,060 | | * | | $ | 34,896 | | $ | 14,550 | | $ | 20,346 | | | * |
* Not Meaningful
This represents the 85% share of net income in Theravance Respiratory Company, LLC for Theravance Biopharma for the three and six months ended June 30, 20192020 and 2018.2019. The increase was primarily due to the increase in the growth in prescriptions and market share for TRELEGY® ELLIPTA®.
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 six months ended June 30, 2019,2020, we generated gross royalty revenues from GSK of $126.2 million.$154.5 million and a $10.0 million fee from the termination of the MABA program. Net cash and cash equivalents, short term investments and marketable securities totaled $249.7$417.1 million, and royalties receivablereceivables from GSK totaled $67.6$82.4 million as of June 30, 2019.2020.
2220
On August 18, 2017, we entered into a Credit Agreement and completed a financing of the $250.0 million Term B Loan. The Term B Loan will mature on August 18, 2022. Two and a half percent (2.5%) of the initial principal amount was originally due quarterly beginning December 31, 2017. The remaining outstanding balance is due at maturity. Prepayments, in whole or in part, can be made at any time without a penalty. The Credit Agreement also provides us the ability to request one or more additional tranches of term loans (or increase an existing term loan) at any time prior to maturity. In December 2017, February 2018 and August 2018, we repaid the principal balance of the Term B Loan by $6.3 million, $120.0 million and $110.0 million, respectively. The outstanding principal balance of the Term B Loan as of June 30, 2019 was $13.8 million.
Adequacy of Cash Resources to Meet Future Needs
We believe that cash from projected future royalty revenues and our cash, cash equivalents and marketable securities will be sufficient to meet our anticipated debt service and operating needs for at least the next 12 months based upon current operating plans and financial forecasts. 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 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 tender offers, redemptions, amendments, repurchases or otherwise, all consistentallowable with the terms of our debt agreements.
Cash Flows
Cash flows, as compared to the prior year period, were as follows:
| | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | Six Months Ended June 30, | | | | ||||||||
(In thousands) |
| 2019 |
| 2018 |
| Change |
| 2020 |
| 2019 |
| Change | ||||||
Net cash provided by operating activities | | $ | 133,151 | | $ | 101,639 | | $ | 31,512 | | $ | 153,275 | | $ | 133,151 | | $ | 20,124 |
Net cash provided by (used in) investing activities | |
| (54,060) | |
| 35,591 | |
| (89,651) | |
| 9,044 | |
| (54,060) | |
| 63,104 |
Net cash provided by (used in) financing activities | |
| 444 | |
| (123,340) | |
| 123,784 | |
| (27,268) | |
| 444 | |
| (27,712) |
Cash Flows from Operating Activities
CashNet cash provided by operating activities for the six months ended June 30, 2020 was $153.3 million, consisting primarily of our net income of $177.2 million, adjusted for net non-cash items such as $35.8 million of deferred income taxes, $7.0 million of depreciation and amortization and $68.6 million increase in the fair values of our equity investments.
Net cash provided by operating activities for the six months ended June 30, 2019 was $133.2 million, consisting primarily of our net income of $86.1 million, adjusted for non-cash items such as $18.9 million of deferred income taxes, $7.1 million of depreciation and amortization and $3.8 million amortization of debt discount and issuance costs, as well as a decrease in receivables from collaborative arrangements of $15.7 million.
Cash Flows from Investing Activities
Net cash provided by operatinginvesting activities for the six months ended June 30, 20182020 of $9.0 million was $101.6primarily due to $82.0 million consisting primarilyreceived from maturities of our net income of $86.9 million, adjusted for non-cash items such as $6.9 million of depreciation and amortization, $4.0 million amortization of debt discount and issuance costs, $3.6 million of stock-based compensation expense and $3.1 million of loss on extinguishment of debt,marketable securities, partially offset by a reduction$12.9 million in accrued personnel-related expensespurchases of marketable securities and other accrued liabilities of $1.5 million.
Cash Flows from Investing Activities$60.0 million for our investments in Armata and Entasis.
Net cash flows used in investing activities for the six months ended June 30, 2019 of $54.1 million was primarily due to $111.9 million in purchases of marketable securities, partially offset by $57.9 million proceeds received from maturities of marketable securities.
Cash Flows from Financing Activities
Net cash flows from investingused in financing activities for the six months ended June 30, 20182020 of $35.6$27.3 million was primarily due to $54.9$28.0 million proceeds received from maturities of marketable securities, partially offset by $19.3 million in purchases of marketable securities.
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Cash Flows from Financing Activitiesdistributions to noncontrolling interest.
Net cash provided by financing activities for the six months ended June 30, 2019 of $0.4 million was primarily due to $0.5 million net proceeds from issuance of common stock.
Net cash used in financing activities for the six months ended June 30, 2018 of $123.3 million was primarily due to $120.0 million prepayment on our Term B Loan and $2.8 million paid for the repurchase of shares to satisfy tax withholding.
Off-Balance Sheet Arrangements
In June 2014, our facility leases in South San Francisco, California were assigned to Theravance Biopharma, Inc. (“Theravance Biopharma”) in connection with the spin-off of Theravance Biopharma. However, if Theravance Biopharma were to default on its lease obligations, we would be held liable by the landlord and thus, we have in substance guaranteed the lease payments for these facilities. We would also be responsible for lease-related payments including utilities, property taxes, and common area
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maintenance, which may be as much as the actual lease payments. As of June 30, 2019, the total remainingThis lease paymentsconcluded in May 2020, and we have no further obligations for the duration of the lease, which runs through May 2020, were $6.0 million. The carrying value of this lease guarantee was $0.3 million as of June 30, 2019 and is reflected in other long-term liabilities in our condensed consolidated balance sheet.
Contractual Obligations and Commercial Commitments
In the table below, we set forth our significant enforceable and legally binding obligations and future commitments as of June 30, 2019.lease.
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| Payment Due by Period | ||||||||||
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(In thousands) |
| Total |
| 1 Year |
| 1 - 3 Years |
| 3 - 5 Years |
| 5 Years | |||||
2023 Notes | | $ | 261,468 | | $ | 5,121 | | $ | 10,242 | | $ | 246,105 | | $ | — |
2025 Notes | |
| 223,781 | |
| 4,813 | |
| 9,625 | |
| 9,625 | |
| 199,718 |
Term B Loan* | |
| 13,750 | |
| — | |
| �� | |
| 13,750 | |
| — |
Facility lease | |
| 1,690 | |
| 409 | |
| 856 | |
| 425 | |
| — |
Total | | $ | 500,689 | | $ | 10,343 | | $ | 20,723 | | $ | 269,905 | | $ | 199,718 |
Item 3. Quantitative and Qualitative Disclosure about Market Risk
There have been no significant changes in our market risk or how our market risk is managed compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
We conducted an evaluation as of June 30, 2019,2020, under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures, which are defined under SEC rules as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within required time periods. Based upon that evaluation, our Interim PrincipalChief Executive Officer and Chief Accounting Officer, concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance levels.
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Limitations on the Effectiveness of Controls
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all frauds. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Innoviva have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There were no material changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. LegalProceedings
In May 2019, Theravance Biopharma, who is the owner of 85% of the economic interests in TRC, initiated arbitration against the Company and TRC, relating to a dispute as to the determination by Innoviva (as manager of TRC) to cause TRC to explore potential reinvestment opportunities for the royalty proceeds received by GSK into initiatives that Innoviva believes will increase the value of TRC and TRELEGY® ELLIPTA®. Theravance Biopharma allegesalleged that in causing TRC to not distribute substantially all royalty proceeds received from GSK, Innoviva breached the limited liability company operating agreement governing TRC (the “Operating Agreement”), as well as the fiduciary duties applicable to Innoviva as manager of TRC. The hearing in respect of the arbitration commenced onwas conducted from July 23, 2019 through July 25, 2019. Post-arbitration oral argument was heard on August 14, 2019. On September 26, 2019, the arbitrator issued a final decision. The arbitrator ruled that Innoviva did not breach the Operating Agreement or its fiduciary duties by withholding royalties or pursuing reinvestment opportunities. Accordingly, the Company is permitted to continue to pursue development and is expected to last several days. Whilecommercialization initiatives. The arbitrator did conclude that Innoviva believes that it has complied with all applicable duties and is not in breachbreached a provision of the Operating Agreement requiring Innoviva to deliver quarterly financial plans to Theravance Biopharma. However, the arbitrator concluded that this technical breach did not cause any damages to Theravance Biopharma is alleging such breach and is seeking material damagesthe arbitrator awarded limited injunctive relief to expand and there is no certaintyclarify the disclosure obligations under the Operating Agreement related to the delivery of financial plans and the pursuit of investment opportunities (if those opportunities related to TRELEGY® ELLIPTA®). Finally, the arbitrator ruled that the arbitrator will ruleCompany is entitled to indemnification from TRC for 95% of its fees and expenses incurred in favorconnection with the arbitration.
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On September 30, 2019, the Company and TRC filed a Verified Complaint in the Court of Chancery of the State of Delaware to confirm the arbitration award. The award was confirmed by the Court of Chancery on May 4, 2020.
Item 1A. Risk Factors
Our business is subject to a number of risks, including those identified in Item 1A of Part I of our 20182019 Form 10-K. Except as set forth under “Item 1. Legal Proceedings” above and as discussed below, there have been no other material changes to the risk factors described in our 20182019 Form 10-K,, which is incorporated by reference herein.
The widespread outbreak of an illness or any other communicable disease, or any other public health crisis, could adversely affect our business, results of operations and financial condition.
In December 2019, an outbreak of COVID-19 began in Wuhan, Hubei Province, China. In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption of financial markets. At this time, based on the information available to us, we can not predict the extent of the impact, if any, of the COVID-19 pandemic on our royalty revenues derived from GSK upon which we significantly rely, or on the operations of our equity and other investments. It is possible that an extended period of global supply chain and economic disruption could materially affect our results of operations and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3: Defaults Upon Senior Securities
None.
Item 4: Mine Safety Disclosures
None.
Item 5: Other Information
None.
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Item 6. Exhibits
(a) | Index to Exhibits |
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Exhibit |
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10.1 | | Offer Letter between Innoviva, Inc. and Pavel Raifeld, dated May 20, 2020 | | 8-K | | 10.1 | | 05/26/2020 |
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10.2 | | Transition Agreement between Innoviva, Inc. and Geoffrey L. Hulme, dated June 11, 2020 | | 8-K | | 10.1 | | 06/12/2020 |
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99.1 | | Form of Indemnification Agreement between Innoviva, Inc. and its executive officers | | 8-K | | 99.1 | | 05/26/2020 |
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101 | | Interactive Data File (Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2020) formatted in iXBRL (Inline eXtensible Business Reporting Language). | | | | | | |
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104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101). | | | | | | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| Innoviva, Inc. |
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Date: July | /s/ |
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| (Principal Executive Officer) |
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Date: July | /s/ Marianne Zhen |
| Marianne Zhen |
| Chief Accounting Officer |
| (Principal Financial Officer) |
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