Table of Contents
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 March 31, 2021
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 ofIncorporation or Organization)
(I.R.S. EmployerIdentification No.)
1350 Old Bayshore Highway Suite 400
Burlingame, CA 94010
(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 April 19, 2021 was 101,408,012.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2021 (Unaudited) and December 31, 2020
3
Unaudited Consolidated Statements of Income for the Three Months ended March 31, 2021 and 2020
4
Unaudited Consolidated Statements of Comprehensive Income for the Three Months ended March 31, 2021 and 2020
5
Unaudited Consolidated Statements of Stockholders’ Equity for the Three Months ended March 31, 2021 and 2020
6
Unaudited Consolidated Statements of Cash Flows for the Three Months ended March 31, 2021 and 2020
7
Notes to Unaudited Consolidated Financial Statements
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
Item 3. Quantitative and Qualitative Disclosures About Market Risk
24
Item 4. Controls and Procedures
25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosure
Item 5. Other Information
Item 6. Exhibits
27
Signatures
28
Exhibits
2
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31,
December 31,
2021
2020
(unaudited)
*
Assets
Current assets:
Cash and cash equivalents
$
282,890
246,487
Related party receivables from collaborative arrangements
88,974
93,931
Prepaid expenses and other current assets
1,069
1,640
Total current assets
372,933
342,058
Property and equipment, net
Equity and long-term investments
519,325
438,258
Capitalized fees paid to a related party, net
121,797
125,253
Deferred tax assets, net
74,023
93,759
Other assets
188
214
Total assets
1,088,290
999,570
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
14
66
Accrued personnel-related expenses
652
490
Accrued interest payable
1,668
4,152
Other accrued liabilities
1,470
1,402
Total current liabilities
3,804
6,110
Long-term debt, net of discount and issuance costs
387,728
385,517
Other long-term liabilities
77
106
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, 101,408 and 101,392 issued and outstanding as of March 31, 2021 and December 31, 2020, respectively
1,014
Additional paid-in capital
1,261,326
1,260,900
Accumulated deficit
(627,879)
(722,002)
Total Innoviva stockholders’ equity
634,461
539,912
Noncontrolling interest
62,220
67,925
Total stockholders’ equity
696,681
607,837
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
Royalty revenue from a related party, net of amortization of capitalized fees paid to a related party of $3,456 in three months ended March 31, 2021 and 2020
85,518
78,678
Operating expenses:
Research and development
49
General and administrative
5,986
2,563
Total operating expenses
6,035
Income from operations
79,483
76,115
Other income (expense), net
(433)
68
Interest income
30
1,302
Interest expense
(4,694)
(4,516)
Changes in fair values of equity and long-term investments, net
55,045
21,915
Income before income taxes
129,431
94,884
Income tax expense, net
19,736
15,932
Net income
109,695
78,952
Net income attributable to noncontrolling interest
15,572
13,515
Net income attributable to Innoviva stockholders
94,123
65,437
Basic net income per share attributable to Innoviva stockholders
0.93
0.65
Diluted net income per share attributable to Innoviva stockholders
0.84
0.59
Shares used to compute Innoviva basic and diluted net income per share:
Shares used to compute basic net income per share
101,365
101,235
Shares used to compute diluted net income per share
113,624
113,509
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Unrealized gain on marketable securities, net
Comprehensive income
78,958
Comprehensive income attributable to noncontrolling interest
Comprehensive income attributable to Innoviva stockholders
65,443
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three Months ended March 31, 2021
Accumulated
Additional
Other
Total
Common Stock
Paid-In
Comprehensive
Noncontrolling
Stockholders’
Shares
Amount
Capital
Income (Loss)
Deficit
Interest
Equity
Balance as of December 31, 2020
101,392
Distributions to noncontrolling interest
(21,285)
Equity activity of noncontrolling interest from a consolidated variable interest entity
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding
16
(25)
Stock-based compensation
451
Balance as of March 31, 2021
101,408
Three Months ended March 31, 2020
Balance as of December 31, 2019
101,288
1,013
1,258,859
(946,404)
28,621
342,116
(15,810)
32
170
435
Other comprehensive income
Balance as of March 31, 2020
101,320
1,259,464
33
(880,967)
26,326
405,869
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes
Depreciation and amortization
3,460
3,463
Amortization of debt discount and issuance costs
2,211
2,032
Amortization of discount on short-term investments
(272)
Amortization of lease guarantee
(81)
(54,673)
(21,915)
Other non-cash items
Changes in operating assets and liabilities:
Receivables from collaborative arrangements
4,957
(2,707)
571
140
(52)
112
Accrued personnel-related expenses and other accrued liabilities
227
(126)
(2,484)
Net cash provided by operating activities
84,107
73,481
Cash flows from investing activities
Maturities of marketable securities
54,000
Purchases of marketable securities
(12,943)
Purchases of equity and long-term investments
(26,394)
(25,000)
Purchases of property and equipment
(13)
Net cash provided by (used in) investing activities
16,044
Cash flows from financing activities
Repurchase of shares to satisfy tax withholding
(55)
Proceeds from issuances of common stock, net
225
Net cash used in financing activities
(21,310)
(15,640)
Net increase in cash and cash equivalents
36,403
73,885
Cash and cash equivalents at beginning of period
278,096
Cash and cash equivalents at end of period
351,981
Supplemental disclosure of cash flow information
Cash paid for interest
4,967
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Operations and Summary of Significant Accounting Policies
Description of Operations
Innoviva Inc. (referred to as "Innoviva", the "Company", or "we" and other similar pronouns) is a company with a portfolio of royalties and other healthcare assets. Our royalty portfolio contains respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR®/BREO® ELLIPTA® (fluticasone furoate/ vilanterol, “FF/VI”), ANORO® ELLIPTA® (umeclidinium bromide/ vilanterol, “UMEC/VI”) and TRELEGY® ELLIPTA® (the combination FF/UMEC/VI). Under the Long-Acting Beta2 Agonist (“LABA”) Collaboration Agreement, Innoviva is entitled to receive royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion; and royalties from the sales of ANORO® ELLIPTA®, which tier upward at a range from 6.5% to 10%. Innoviva is also entitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC (“TRC”), including TRELEGY® ELLIPTA® and any other product or combination of products that may be discovered or developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the “GSK Agreements”), which have been assigned to TRC other than RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®.
Basis of Presentation
The accompanying unaudited 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 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, 2021 or any other period.
The accompanying unaudited consolidated financial statements include the accounts of Innoviva, our wholly-owned subsidiaries and certain variable interest entities for which we are the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation. 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, 2020 filed with the Securities and Exchange Commission (“SEC”) on February 25, 2021 (“2020 Form 10-K”).
Variable Interest Entities
We evaluate our ownership, contractual and other interest in entities to determine if they are variable interest entities (“VIE”), 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 entity in our financial statements.
Equity Investments
We invest from time to time in equity securities of private or public companies. If we determine that we have control over these companies under either voting or VIE models, we include them in our consolidated financial statements. If we determine that we do not have 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 equity investments where we exercise significant influence using either an equity method of accounting 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 equity 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 and long-term investments, net on the consolidated statements of 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 using the measurement alternative described in ASC Topic 825. This measurement alternative allows us to measure the equity investment 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.
Accounting Pronouncement Adopted by the Company
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We adopted Topic 740 effective January 1, 2021. The adoption did not have a material impact on our consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements. This ASU improves the codification by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is codified in the disclosure section of the codification. The ASU also clarifies various topics in the codification so that entities can apply guidance more consistently. The ASU is effective for fiscal years beginning after December 15, 2020. We adopted ASU 2020-10 effective January 1, 2021. The adoption did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Standards or Updates Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which is intended to simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470-20 for convertible instruments. The ASU is effective for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years with early adoption permitted. We are currently in the process of evaluating the effects of the provisions of ASU 2020-06 on our consolidated 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 converted method.
9
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 was lower than the initial conversion price of $17.26 per share, there was no dilutive effect of the assumed conversion premium for the three months ended March 31, 2021 and 2020, respectively.
The following table shows the computation of basic and diluted net income per share for the three months ended March 31, 2021 and 2020:
(In thousands except per share data)
Numerator:
Net income attributable to Innoviva stockholders, basic
Add: interest expense on 2023 Notes
1,204
1,180
Net income attributable to Innoviva stockholders, diluted
95,327
66,617
Denominator:
Weighted-average shares used to compute basic net income per share attributable to Innoviva stockholders
Dilutive effect of 2023 Notes
12,189
Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan
70
85
Weighted-average shares used to compute diluted net income per share attributable to Innoviva stockholders
Net income per share attributable to Innoviva stockholders
Basic
Diluted
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:
Outstanding options and awards granted under equity incentive plan and employee stock purchase plan
1,159
1,094
3. Revenue Recognition and Collaborative Arrangements
Net Revenue from Collaborative Arrangements
Net revenue recognized under our GSK Agreements was as follows:
Royalties from a related party - RELVAR/BREO
56,390
56,149
Royalties from a related party - ANORO
10,500
9,850
Royalties from a related party - TRELEGY
22,084
16,135
Total royalties from a related party
82,134
Less: amortization of capitalized fees paid to a related party
(3,456)
Royalty revenue from GSK
10
4. Consolidated Entities
We consolidate the financial results of TRC and Pulmoquine Therapeutics, Inc. (“Pulmoquine”), which we have determined to be VIEs. As we have the power to direct the economically significant activities of these entities and the obligation to absorb losses of, or the right to receive benefits from them, we are the primary beneficiary of the entities. We also consolidate the financial results of ISP Fund LP (the “Partnership”), our partnership with Sarissa Capital Management LP (“Sarissa Capital”), as we have determined that the Partnership is a VIE and we are its primary beneficiary.
Theravance Respiratory Company, LLC
The primary source of revenue for TRC is the royalties generated from the net sales of TRELEGY® ELLIPTA® by GSK. As of March 31, 2021, TRC held equity investments in InCarda Therapeutics, Inc. (“InCarda”) and ImaginAb, Inc. (“ImaginAb”). Refer to Note 5, “Financial Instruments and Fair Value Measurements,” for more information.
The summarized financial information for TRC is presented as follows:
Balance sheets
28,444
38,081
24,946
1
22,869
16,959
73,398
79,986
Liabilities and LLC Members' Equity
Current liabilities
640
508
LLC members' equity
72,758
79,478
Total liabilities and LLC members' equity
Income statements
Royalty revenue from a related party
Operating expenses
3,281
271
18,803
15,864
36
Changes in fair values of equity and long-term investments
(483)
18,320
15,900
Pulmoquine Therapeutics, Inc.
In April 2020, we purchased 5,808,550 shares of Series A preferred stock of Pulmoquine for $5.0 million in cash and held 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. As of March 31, 2021, Pulmoquine’s total assets, mainly attributable to cash and cash equivalents, were $3.3 million. Pulmoquine does not currently generate revenue. Total operating expense was de minimis for the three months ended March 31, 2021.
11
ISP Fund LP
In December 2020, Innoviva Strategic Partners LLC, our wholly owned subsidiary (“Strategic Partners”), contributed $300.0 million to ISP Fund LP (the “Partnership”) for investing in “long” positions in the healthcare, pharmaceutical and biotechnology sectors and became a limited partner. The general partner of the Partnership (“General Partner”) is an affiliate of Sarissa Capital.
As of March 31, 2021, we held 100% of the economic interest of the Partnership. As of March 31, 2021, total assets of the Partnership were $304.7 million, of which all were attributable to equity and long-term investments. During the three months ended March 31, 2021, the Partnership incurred $0.4 million investment-related expenses, net of investment-related income and recorded an unrealized gain of $5.8 million from the changes of fair value as changes in fair values of equity and long-term investments, net on the consolidated statements of income.
5. Financial Instruments and Fair Value Measurements
Equity Investment in Armata
During the first quarter of 2020, Innoviva acquired 8,710,800 shares of common stock and an equal number of warrants of Armata Pharmaceuticals, Inc. (“Armata”) for $25.0 million in cash. Armata is a clinical stage biotechnology company focused on precisely targeted bacteriophage therapeutics for antibiotic-resistant infections.
On January 26, 2021, Innoviva Strategic Opportunities LLC (“ISO”), our wholly owned subsidiary, entered into a securities purchase agreement with Armata to acquire 6,153,847 shares of Armata common stock and warrants to purchase 6,153,847 additional shares of Armata common stock for approximately $20.0 million. The investment was closed in two tranches on January 26, 2021 and March 17, 2021. The investment continues to support Armata’s ongoing advancement of its bacteriophage development programs. The additional investment in the first quarter of 2021 increased Innoviva and ISO’s combined ownership to 59.6%. Armata entered into a voting agreement with the Company and ISO, pursuant to which the Company and ISO agreed not to vote or take any action by written consent with respect to any common shares held by the Company and ISO that represent, in the aggregate, more than 49.5% of the total number of shares of Armata’s common stock issued and outstanding as of the record date for voting on the matters related to election or removal of Armata’s board members. Currently, three of the eight members of Armata’s board of directors are also members of the board of directors of Innoviva.
The investment in Armata provides Innoviva and ISO 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 and ISO are not the primary beneficiary of the VIE. We continue to elect the fair value option to account for both Armata’s common stock and warrants. The fair value of Armata’s common stock is measured based on its closing market price. The warrants purchased in 2020 and 2021 have an exercise price of $2.87 and $3.25 per share, respectively, 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 and its peer companies.
As of March 31, 2021, the fair values of Armata’s common stock and warrants were estimated at $71.1 million and $54.2 million, respectively. As of December 31, 2020, the fair values of Armata’s common stock and warrants were estimated at $26.0 million and $18.0 million, respectively. The total fair value of both financial instruments in the amount of $125.3 million and $44.0 million was recorded as equity and long-term investments on the consolidated balance sheets as of March 31, 2021 and December 31, 2020, respectively. The changes in the fair values in the amount of $61.2 million and $21.9 million for the three months ended March 31, 2021 and 2020, respectively, were recorded as changes in fair value of equity and long-term investments, net on the consolidated statements of income.
Equity Investment in Entasis
During the second quarter of 2020, we purchased 14,000,000 shares of common stock as well as warrants to purchase 14,000,000 additional shares of common stock of Entasis Therapeutics, Inc. (“Entasis”) for approximately $35.0 million in cash. Entasis is a clinical-stage biotechnology company focused on the discovery and development of novel antibacterial products.
12
During the third quarter of 2020, we purchased 4,672,897 shares of Entasis common stock as well as warrants to purchase 4,672,897 additional shares of its common stock for approximately $12.5 million in cash. Innoviva has a right to designate two members to Entasis’ board. As of March 31, 2021 and the date hereof, no Innoviva designees are serving on Entasis’ six-member board. As of March 31, 2021, we owned approximately 51.0% of Entasis’s common stock.
The investment in Entasis provides Innoviva the ability to have significant influence, but not control over Entasis’ 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 for those warrants acquired in the second quarter of 2020 and an exercise price of $2.675 per share for the warrants acquired in the third quarter of 2020. The warrants 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.
As of March 31, 2021, the fair values of Entasis’s common stock and warrants were estimated at $40.0 million and $26.6 million, respectively. As of December 31, 2020, the fair values of Entasis’s common stock and warrants were estimated at $46.1 million and $31.9 million, respectively. The total fair value of both financial instruments in the amount of $66.6 million and $78.0 million was recorded as equity and long-term investments on the consolidated balance sheets as of March 31, 2021 and December 31, 2020, respectively. We recorded $11.5 million unrealized loss from the changes of fair value as changes in fair values of equity and long-term investments, net on the consolidated statements of income for the three months ended March 31, 2021.
Equity Investment in InCarda
In October, 2020, TRC purchased 20,469,432 shares of Series C preferred stock and warrants to purchase 5,117,358 additional shares of Series C preferred stock of InCarda Therapeutics, Inc. for $15.0 million. $0.8 million was incurred for investment due diligence costs and recorded as part of the equity investment on the consolidated balance sheets. InCarda is a privately held biopharmaceutical company focused on developing inhaled therapies for cardiovascular diseases. As of March 31, 20201 and as of the date hereof, one of InCarda’s eight board members is designated by TRC. As of March 31, 2021, TRC held 13.0% of InCarda‘s outstanding equity.
The investment in InCarda does not provide TRC the ability to control or have significant influence over InCarda's operations. Based on our evaluation, we determined that InCarda is a VIE, but TRC is not the primary beneficiary of the VIE. We account for our investment in the Series C preferred shares in InCarda using the measurement alternative. Under the measurement alternative, the equity investment is initially recorded at its allocated cost, but the carrying value may be adjusted through earnings upon an impairment or when there is an observable price change involving the same or a similar investment with the same issuer. The warrants are recorded at fair value and subject to remeasurement at each balance sheet date. The warrants are exercisable immediately with an exercise price of $0.7328 per share and expire on October 6, 2021, one year from the issuance date. We use the Black-Scholes-Merton pricing model to estimate the fair value of the warrants with the following input assumptions: the exercise price of the warrants, the risk-free interest rate computed based on the U.S. Treasury yield, the remaining contractual term as the expected term, and the expected stock price volatility calculated based on the historical volatility of the common stock of its peer companies.
As of March 31, 2021 and December 31, 2020, the fair value of InCarda’s warrants was estimated at $0.7 million and $1.1 million, respectively, and recorded as equity and long-term investments on the consolidated balance sheets. We recorded $0.5 million unrealized loss from the changes of fair value as changes in fair values of equity and long-term investments, net on the consolidated statements of income for the three months ended March 31, 2021. There was no impairment or other change to the value of InCarda’s Series C preferred stock of $15.8 million as of March 31, 2021.
Equity Investment in ImaginAb
On March 18, 2021, TRC entered into a securities purchase agreement with ImaginAb, Inc. to purchase 4,051,724 shares of ImaginAb Series C preferred stock for $4.7 million. On the same day, TRC also entered into a securities purchase agreement with one of ImaginAb’s common stockholders to purchase 4,097,157 shares of ImaginAb common stock for $1.3 million. ImaginAb is a privately held biotechnology company focused on clinically managing cancer and autoimmune diseases via molecular imaging. $0.4 million was incurred for investment due diligence costs and execution and recorded as part of the equity investment on the consolidated balance sheets. As of the date hereof, one of ImaginAb’s seven board members is designated by TRC. As of March 31, 2021, TRC held 13.0% of ImaginAb equity ownership.
13
The investment in ImaginAb does not provide TRC the ability to control or have significant influence over ImaginAb’s operations. Based on our evaluation, we determined that ImaginAb is a VIE, but TRC is not the primary beneficiary of the VIE. Because ImaginAb’s equity securities are not publicly traded and do not have a readily determinable fair value, we have accounted for our investment in ImaginAb’s Series C preferred stock and common stock using the measurement alternative. Under the measurement alternative, the equity investment is initially recorded at its allocated cost, but the carrying value may be adjusted through earnings upon an impairment or when there is an observable price change involving the same or a similar investment with the same issuer. As of March 31, 2021, $6.4 million was recorded as equity and long-term investments on the consolidated balance sheets.
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:
March 31, 2021
Gross
Unrealized
Estimated
Amortized Cost
Gains
Losses
Fair Value
Money market funds(1)
248,932
December 31, 2020
Money market funds (1)
204,808
There was no credit loss to the money market funds as of March 31, 2021.
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 March 31, 2021 Using:
Quoted Price
Significant
in Active
Markets for
Observable
Unobservable
Types of Instruments
Identical Assets
Inputs
Level 1
Level 2
Level 3
Money market funds
Investments held by ISP Fund LP (1)
304,696
Equity investment - Armata Common Stock
71,053
Equity investment - Armata Warrants
54,166
Equity investment - Entasis Common Stock
39,960
Equity investment - Entasis Warrants
26,580
Equity investment - InCarda Warrants
664
Total assets measured at estimated fair value
664,641
80,746
746,051
Debt
2023 Notes
242,336
2025 Notes
203,513
Total fair value of debt
445,849
Estimated Fair Value Measurements as of December 31, 2020 Using:
299,288
25,958
18,049
46,122
31,882
1,147
576,176
49,931
627,254
239,779
206,135
445,914
The fair values of our equity investments in Armata and Entasis's common stock and those investments held by ISP Fund LP are based on the quoted prices in active markets and are classified as Level 1 financial instruments. The fair values of the warrants of Armata and Entasis classified within Level 2 are 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.
15
The fair value of InCarda’s warrants is classified as Level 3 financial instruments as InCarda’s securities are not publicly traded and the assumptions used in the valuation model are based on significant unobservable and observable inputs including those of publicly traded peer companies.
The fair values of our 2023 Notes and our 2025 Notes are based on recent trading prices of the respective instruments.
6. Stock-Based Compensation
Stock- Based Compensation Expense
Stock-based compensation expense was included in the consolidated statements of income as follows:
Valuation Assumptions
Black-Scholes-Merton assumptions used in calculating the estimated value of our stock options on the date of grant were as follows:
Three Months Ended
Risk-free interest rate
1.1
%
Expected term (in years)
6.11
Volatility
45.6
Dividend yield
0.0
Weighted-average estimated fair value of stock options granted
5.42
There were no grants of stock options during the three months ended March 31, 2020.
7. Debt
Our debt consists of:
240,984
192,500
Total debt
433,484
Unamortized debt discount and issuance costs
(45,756)
(47,967)
Net long-term debt
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.
Our outstanding 2025 Notes balances consisted of the following:
Liability component
Principal
Debt discount and issuance costs, net
(44,697)
(46,766)
Net carrying amount
147,803
145,734
Equity component, net
65,361
The following table sets forth total interest expense recognized related to the 2025 Notes for the three months ended March 31, 2021 and 2020:
Contractual interest expense
1,203
Amortization of debt issuance costs
159
145
Amortization of debt discount
1,911
1,749
Total interest and amortization expense
3,273
3,097
Debt Maturities
The aggregate scheduled maturities of our long-term debt as of March 31, 2021 were as follows:
Years ending December 31:
2021 to 2022
2023
2024
2025
8. Commitments and Contingencies
Operating Lease
Future minimum operating lease payments on our corporate headquarters as of March 31, 2021 were as follows:
Remainder of 2021
92
2022
109
Thereafter
201
Legal Proceedings
From time to time, the Company is involved in legal proceedings in the ordinary course of its business. Currently, we believe that no litigation or arbitration, either individually or in the aggregate, to which we are presently a party is likely to have a material adverse effect on our operating results or financial position.
17
9. Income Taxes
Provisional income tax expense for the three months ended March 31, 2021 and 2020 was $19.7 million and $15.9 million, respectively. The Company’s effective income tax rate for the three months ended March 31, 2021 was 15.2%, compared to 16.8% for the same period in 2020. The income tax expense for the three months ended March 31, 2021 and 2020 was determined based upon estimates of the Company's effective income tax rates in various jurisdictions. Our effective income tax rate for the three months ended March 31, 2021 was lower than the U.S. federal statutory income tax rate of 21% due primarily to non-deductible expenses and noncontrolling interest.
18
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; substantial competition from products discovered, developed, launched and commercialized both by GSK and by other pharmaceutical companies; the strategies, plans and objectives of the Company (related to the Company’s growth strategy and corporate development initiatives beyond the Company’s existing portfolio); the timing, manner and amount of capital deployment, including potential capital returns to stockholders; risks related to the Company’s growth strategy; projections of revenue, expenses and other financial items 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, 2020 filed with the Securities and Exchange Commission (“SEC”) on February 25, 2021, (“2020 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 2020 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 2020 Form 10-K and Item 1A of Part II of this report, other unknown or unpredictable factors also could affect our results. Therefore, the information in this report should be read together with other reports and documents that we file with the SEC from time to time, including on Form 10-K, Form 10-Q and Form 8-K, which may supplement, modify, supersede or update those risk factors. As a result of these factors, we cannot assure you that the forward-looking statements in this report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.
OVERVIEW
Executive Summary
Innoviva, Inc. (“Innoviva”, the “Company”, the “Registrant” or “we” and other similar pronouns) is a company with a portfolio of royalties and other healthcare assets. Our royalty portfolio contains respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR®/BREO® ELLIPTA® (fluticasone furoate/ vilanterol, “FF/VI”), ANORO® ELLIPTA® (umeclidinium bromide/ vilanterol, “UMEC/VI”) and TRELEGY® ELLIPTA® (the combination FF/UMEC/VI). Under the Long-Acting Beta2 Agonist (“LABA”) Collaboration Agreement, Innoviva is entitled to receive royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion; and royalties from the sales of ANORO® ELLIPTA®, which tier upward at a range from 6.5% to 10%. Innoviva is also entitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC (“TRC”), including TRELEGY® ELLIPTA® and any other product or combination of products that may be discovered or developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the “GSK Agreements”), which have been assigned to TRC other than RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®.
Our company structure and organization are tailored to our focused activities of managing our respiratory assets partnered with GSK, optimizing our operations and augmenting capital allocation. Our revenues consist of royalties from our respiratory partnership agreements with GSK.
Recent Highlights
20
Collaborative Arrangements with GSK
LABA Collaboration
In November 2002, we entered into the LABA collaboration with GSK to develop and commercialize once-daily LABA products for the treatment of chronic obstructive pulmonary disorder (“COPD”) and asthma (the “LABA Collaboration Agreement”). For the treatment of COPD, the collaboration has developed three combination products:
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.
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.
As part of our capital allocation strategies, we invest from time to time in equity securities of private or public companies. We also enter into strategic partnerships in order to accelerate the execution of our strategy and enhance returns on our capital. If we determine that we have control over these companies or partnerships, we consolidate the financial statements of these companies or partnerships. If we determine that we do not have control over these companies or partnerships 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.
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 using the measurement alternative as prescribed by ASC Topic 825. This measurement alternative allows us to measure the equity investment 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 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, 2020 filed with the SEC on February 25, 2021 provides a more complete discussion of our critical accounting policies and estimates.
21
Results of Operations
Net Revenue
Total net revenue, as compared to the prior year period, was as follows:
Change
241
0
650
5,949
37
6,840
Total net revenue increased to $85.5 million for the three months ended March 31, 2021, compared to $78.7 million for the same period a year ago primarily due to favorable adjustments and the growth in prescriptions for our respiratory products.
Research & Development
Research and development (“R&D”) expenses attributable to Pulmoquine’s product development efforts were de minimis for the three months ended March 31, 2021. We did not incur any R&D expenses during the three months ended March 31, 2020.
General & Administrative
General and administrative expenses, as compared to the prior year period, were as follows:
3,423
*Not Meaningful
General and administrative expenses for the three months ended March 31, 2021 increased compared to the same period in 2020 mainly due to $3.1 million legal and related expenses incurred for the arbitration initiated by Theravance Biopharma against the Company and TRC. These arbitration related legal fees were recognized in TRC’s statement of income.
Other Income, net and Interest Income
Other income, net and interest income, as compared to the prior year period, were as follows:
(501)
(1,272)
(98)
Interest income decreased for the three months ended March 31, 2021 compared to the same period a year ago primarily due to lower interest rates impacted by the COVID-19 pandemic.
22
Interest Expense
Interest expense, as compared to the prior year period, was as follows:
4,694
4,516
(178)
Interest expense includes the amortization of debt discount and issuance costs for our convertible notes. The increase in interest expense was mainly due to more debt discount and issuance costs being recognized through amortization.
Changes in Fair Values of Equity and Long-Term Investments
Changes in fair values of equity and long-term investments, as compared to the prior year period, were as follows:
33,130
The changes in fair values of $55.0 million for the quarter ended March 31, 2021 reflect the net unrealized gain in the stock and warrants of our investments in Armata, Entasis, and InCarda, and those equity investments managed by ISP Fund LP. The changes in fair value of $21.9 million for the quarter ended March 31, 2020 reflect the net changes in our initial investment in Armata.
Provision for Income Taxes
The provisional income tax expense for the three months ended March 31, 2021 was $19.7 million with an effective income tax rate of 15.2%, compared to $15.9 million with an effective interest rate of 16.8% in the same period a year ago.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest, as compared to the prior period, was as follows:
2,057
This represents the 85% share of net income in Theravance Respiratory Company, LLC for Theravance Biopharma for the three months ended March 31, 2021 and 2020. 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 three months ended March 31, 2021, we generated gross royalty revenues from GSK of $89.0 million. Net cash and cash equivalents, short term investments and marketable securities totaled $282.9 million, and receivables from GSK totaled $89.0 million as of March 31, 2021.
23
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 allowable with the terms of our debt agreements.
Cash Flows
Cash flows, as compared to the prior year period, were as follows:
10,626
(42,438)
(5,670)
Cash Flows from Operating Activities
Net cash provided by operating activities for the three months ended March 31, 2021 was $84.1 million, consisting primarily of our net income of $109.7 million, adjusted for net non-cash items such as $19.7 million of deferred income taxes and $3.5 million of depreciation and amortization, partially offset by $54.7 million increase in the fair values of our equity investments, an increase in receivables from collaborative arrangements of $5.0 million and a reduction in accrued interest payable of $2.5 million.
Net cash provided by operating activities for the three months ended March 31, 2020 was $73.5 million, consisting primarily of our net income of $79.0 million, adjusted for net non-cash items of $0.4 million, an increase in receivables from collaborative arrangements of $2.7 million and a reduction in accrued interest payable of $2.5 million.
Cash Flows from Investing Activities
Net cash used in investing activities for the three months ended March 31, 2021 of $26.4 million was primarily due to our investments in Armata and ImaginAb.
Net cash provided by investing activities for the three months ended March 31, 2020 of $16.0 million was primarily due to $54.0 million received from maturities of marketable securities, partially offset by $12.9 million in purchases of marketable securities and $25.0 million for our investments in Armata.
Cash Flows from Financing Activities
Net cash used in financing activities for the three months ended March 31, 2021 of $21.3 million was primarily due to distributions to noncontrolling interest.
Net cash used in financing activities for the three months ended March 31, 2020 of $15.6 million was primarily due to $15.8 million distributions to noncontrolling interest.
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, 2020.
Evaluation of Disclosure Controls and Procedures.
We conducted an evaluation as of March 31, 2021, 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 Chief Executive Officer and Chief Accounting Officer, concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance levels.
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 have been no material changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In May 2019, Theravance Biopharma, which 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 alleged 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 was 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 commercialization initiatives. The arbitrator did conclude that Innoviva breached 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 and the arbitrator awarded limited injunctive relief to expand and clarify 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 Company is entitled to indemnification from TRC for 95% of its fees and expenses incurred in connection with the arbitration.
On September 30, 2019, the Company and TRC filed a Verified Complaint in the Court of Chancery of the State of Delaware (“Court of Chancery”) to confirm the arbitration award. The award was confirmed by the Court of Chancery on May 4, 2020.
On July 16, 2020, Innoviva and TRC initiated a lawsuit in the Court of Chancery against Theravance Biopharma, seeking a permanent injunction preventing Theravance Biopharma from interfering with Innoviva's ability to cause TRC to reserve cash to pursue non-Trelegy related investments opportunities and a declaration that the arbitration award conclusively established that Innoviva, as manager of TRC, has such authority. The Court of Chancery directed the parties to obtain the arbitrator's opinion as to whether the arbitration award addressed non-Trelegy related investment opportunities. On July 31, 2020, the arbitrator, while reiterating that Innoviva has broad authority as manager of TRC, found that this award did not specifically address this situation. Accordingly, on August 5, 2020, the parties stipulated to the dismissal of the Court of Chancery action.
On October 6, 2020, Theravance Biopharma initiated a new arbitration against the Company and TRC, challenging Innoviva’s authority as manager of TRC to cause TRC to pursue non-Trelegy related investment opportunities and again alleging that Innoviva is required to cause TRC to distribute substantially all royalty proceeds from GSK. The hearing in respect of the arbitration was conducted from February 16, 2021 through February 19, 2021. Post-arbitration oral argument was heard on March 8, 2021. On March 30, 2021, the arbitrator issued a final decision. The arbitrator ruled that Innoviva did not breach the Operating Agreement or its fiduciary duties by withholding royalties to pursue non-Trelegy-related investment opportunities. Additionally, the arbitrator ruled that the Company is entitled to indemnification from TRC for 100% of its fees and expenses reasonably incurred in connection with the arbitration.
On April 15, 2021, the Company filed a Verified Complaint in the Court of Chancery to confirm the arbitration award. Theravance Biopharma must respond to the Verified Complaint by May 19, 2021.
Our business is subject to a number of risks, including those identified in Item 1A of Part I of our 2020 Form 10-K. There have been no material changes to the risk factors described in our 2020 Form 10-K.
None.
Item 3: Defaults Upon Senior Securities
Item 4: Mine Safety Disclosures
Item 5: Other Information
ExhibitNumber
Description
Form
Exhibit
Incorporatedby ReferenceFilingDate/PeriodEnd Date
10.1
Indemnification Agreement, dated as of March 9, 2021, by and between Innoviva, Inc. and Deborah L. Birx, M.D.
31.1
Certification of Principal Executive Officer pursuant to Rules 13a-14 pursuant to the Securities Exchange Act of 1934
31.2
Certification of Principal Financial Officer pursuant to Rules 13a-14 pursuant to the Securities Exchange Act of 1934
Certifications Pursuant to 18 U.S.C. Section 1350
101
Interactive Data File (Quarterly Report on Form 10-Q, for the quarterly period ended March 31, 2021) formatted in iXBRL (Inline eXtensible Business Reporting Language).
104
Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101).
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.
Innoviva, Inc.
Date: April 28, 2021
/s/ Pavel Raifeld
Pavel Raifeld
Chief Executive Officer
(Principal Executive Officer)
/s/ Marianne Zhen
Marianne Zhen
Chief Accounting Officer
(Principal Financial Officer)