TABLE OF CONTENTS


PART ~~I —~~I. FINANCIAL INFORMATION

Item 1. Financial Statements	3

Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2022 (Unaudited) and December 31, ~~2016~~2021	3
Unaudited Condensed Consolidated Statements of ~~Operations~~Income for the Three and ~~Nine~~Six Months ~~Ended September~~ended June 30, ~~2017~~2022 and ~~2016~~2021	4
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and ~~Nine~~Six Months ~~Ended September~~ended June 30, ~~2017~~2022 and ~~2016~~2021	5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months ended June 30, 2022 and 2021	6
Unaudited Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months ~~Ended September~~ended June 30, ~~2017~~2022 and ~~2016~~2021	68
Notes to Unaudited Condensed Consolidated Financial Statements	79

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1731

Item 3. Quantitative and Qualitative Disclosures About Market Risk	2338

Item 4. Controls and Procedures	2338

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	2538

Item 1A. Risk Factors	2538

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4238

Item ~~6. Exhibits~~3. Defaults Upon Senior Securities	4339

~~Signatures~~Item 4. Mine Safety Disclosure	4439

~~Exhibits~~Item 5. Other Information	39

Item 6. Exhibits	40

Signatures	42

PART ~~I —~~I. FINANCIAL INFORMATION

Item 1. Financial Statements

INNOVIVA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)


	September 30,			December 31,			June 30,			December 31,
	2017			2016			2022			2021
	(unaudited)			*			(unaudited)			*
Assets
Current assets:
Cash and cash equivalents	$	138,417		$	118,016		$	283,580		$	201,525
Short-term marketable securities	29,775			32,417
Related party receivables from collaborative arrangements	51,878			46,847				111,676			110,711
Prepaid expenses and other current assets	439			766
Prepaid expenses								3,953			1,367
Other current assets								1,119			70
Total current assets	220,509			198,046				400,328			313,673
Property and equipment, net	249			368				176			12
Equity and long-term investments								494,097			483,845
Capitalized fees paid to a related party, net	170,177			180,545				104,518			111,430
Right-of-use assets								3,545			97
Goodwill								5,544			0
Intangible assets								105,000			0
Deferred tax assets, net								23,274			17,327
Other assets	37			37				1,157			11
Total assets	$	390,972		$	378,996		$	1,137,639		$	926,395

Liabilities and Stockholders’ Deficit
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	629		$	128		$	4,323		$	27
Accrued personnel-related expenses	1,647			2,361				3,871			619
Accrued interest payable	3,566			7,828				4,498			4,152
Convertible subordinated notes due 2023, net of issuance costs								96,072			0
Other accrued liabilities	1,157			1,095				17,144			1,009
Current portion of long-term debt	25,000			7,752
Deferred revenue, current	885			885
Total current liabilities	32,884			20,049				125,908			5,807
Long-term debt, net of current portion, discount and issuance costs	578,449			708,341
Other long-term liabilities	1,049			1,383
Deferred revenue	1,551			2,214
Commitments and contingencies (Notes 9)
Stockholders’ deficit:
Preferred stock: $0.01 par value, 230 shares authorized, no shares issued and outstanding	—			—
Common stock: $0.01 par value, 200,000 shares authorized, 108,152 and 108,585 shares issued as of September 30, 2017 and December 31, 2016, respectively	1,080			1,085
Treasury stock: 150 shares as of September 30, 2017 and December 31, 2016	(3,263		)	(3,263		)
Long-term debt, net of discount and issuance costs								443,178			394,653
Lease liabilities, long-term								3,091			0
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock: $0.01 par value, 230 shares authorized, 0 shares issued and outstanding								0			0
Common stock: $0.01 par value, 200,000 shares authorized, 69,706 and 69,566 issued and outstanding as of June 30, 2022 and December 31, 2021 respectively								697			696
Treasury stock: at cost, 32,005 shares at June 30, 2022 and December 31, 2021, respectively								(393,829	)		(393,829	)
Additional paid-in capital	1,336,358			1,282,077				1,183,667			1,264,024
Accumulated other comprehensive (loss) income	(3		)	1
Accumulated deficit	(1,557,133		)	(1,632,891		)		(402,198	)		(456,148	)
Total stockholders’ deficit	(222,961		)	(352,991		)
Total liabilities and stockholders’ deficit	$	390,972		$	378,996
Total Innoviva stockholders’ equity								388,337			414,743
Noncontrolling interest								177,125			111,192
Total stockholders’ equity								565,462			525,935
Total liabilities and stockholders’ equity							$	1,137,639		$	926,395

Consolidated balance sheet as of December 31, 2021 has been derived from audited consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

*Condensed consolidated balance sheet as of December 31, 2016 has been derived from audited consolidated financial statements.

INNOVIVA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~INCOME

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2022			2021			2022			2021
Royalty revenue from a related party, net of amortization for capitalized fees paid to a related party of $3,456 for the three months ended September 30, 2017 and 2016 and $10,368 for the nine months ended September 30, 2017 and 2016	$	48,422		$	33,088		$	147,034		$	89,294
Revenue from collaborative arrangements from a related party	221			221			663			663
Total net revenue	48,643			33,309			147,697			89,957

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, 2022 and 2021, and $6,912 in the six months ended June 30, 2022 and 2021													$	108,220		$	100,806		$	198,279		$	186,324
Operating expenses:
Research and development	311			286			1,013			1,048				13,884			38			19,722			87
General and administrative	8,310			5,105			29,489			17,582				11,782			4,228			18,274			10,214
Total operating expenses	8,621			5,391			30,502			18,630				25,666			4,266			37,996			10,301

Income from operations	40,022			27,918			117,195			71,327				82,554			96,540			160,283			176,023

Other (expense) income, net	(6,369		)	56			(7,108		)	1,743
Interest income	376			162			918			411
Interest and dividend income														724			20			1,046			50
Other expense, net														(528	)		(951	)		(778	)		(1,384	)
Interest expense	(10,262		)	(13,103		)	(35,247		)	(39,416		)		(3,655	)		(4,745	)		(6,665	)		(9,439	)
Loss on debt extinguishment														0			0			(20,662	)		0
Changes in fair values of equity and long-term investments, net														(58,600	)		45,315			(68,011	)		100,360
Income before income taxes														20,495			136,179			65,213			265,610
Income tax expense (benefit), net														(876	)		25,333			5,984			45,069
Net income	$	23,767		$	15,033		$	75,758		$	34,065			21,371			110,846			59,229			220,541

Basic net income per share	$	0.22		$	0.14		$	0.71		$	0.31
Diluted net income per share	$	0.21		$	0.13		$	0.67		$	0.31

Shares used to compute basic and diluted net income per share:
Net income attributable to noncontrolling interest														20,432			21,898			42,517			37,470
Net income attributable to Innoviva stockholders													$	939		$	88,948		$	16,712		$	183,071
Basic net income per share attributable to Innoviva stockholders													$	0.01		$	1.01		$	0.24		$	1.93
Diluted net income per share attributable to Innoviva stockholders													$	0.05		$	0.90		$	0.24		$	1.73
Shares used to compute Innoviva basic and diluted net income per share:
Shares used to compute basic net income per share	106,841			109,282			107,236			111,128				69,643			88,423			69,594			94,858
Shares used to compute diluted net income per share	119,796			121,993			120,120			111,583				95,653			100,639			94,692			107,096

See accompanying notes to condensed consolidated financial statements.

INNOVIVA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Net income

$
23,767

$
15,033

$
75,758

$
34,065

Other comprehensive (loss) income:

Unrealized (loss) gain on marketable securities, net

(3
)
2

(4
)
11

Less: realized gain on marketable securities, net

—

—

—

(1
)
Comprehensive income

$
23,764

$
15,035

$
75,754

$
34,075


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net income	$	21,371	$	110,846	$	59,229	$	220,541
Comprehensive income		21,371		110,846		59,229		220,541
Comprehensive income attributable to noncontrolling interest		20,432		21,898		42,517		37,470
Comprehensive income attributable to Innoviva stockholders	$	939	$	88,948	$	16,712	$	183,071

See accompanying notes to condensed consolidated financial statements.

INNOVIVA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

Nine Months Ended September 30,

2017

2016

Cash flows from operating activities

Net income

$
75,758

$
34,065

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

10,487

10,458

Stock-based compensation

7,406

6,423

Amortization of debt discount and issuance costs

2,953

2,138

Loss (gain) on extinguishment of debt

7,256

(1,752
)
Amortization of discount on short-term investments

(6
)
(8
)
Amortization of lease guarantee

(243
)
(108
)
Interest added to the principal balance of non-recourse notes due 2029

—

855

Realized gain on sale of marketable securities, net

—

(1
)
Changes in operating assets and liabilities:

Receivables from collaborative arrangements

(5,031
)
(10,393
)
Prepaid expenses and other current assets

327

280

Other assets

—

(22
)
Accounts payable

501

(290
)
Accrued personnel-related expenses and other accrued liabilities

(606
)
220

Accrued interest payable

(4,262
)
(1,305
)
Other long-term liabilities

13

2

Deferred revenue

(663
)
(664
)
Net cash provided by operating activities

93,890

39,898

Cash flows from investing activities

Maturities of marketable securities

44,387

52,101

Purchases of marketable securities

(41,743
)
(82,746
)
Sales of marketable securities

—

2,995

Purchases of property and equipment

—

(250
)
Net cash provided by (used in) investing activities

2,644

(27,900
)

Cash flows from financing activities

Proceeds from senior secured term loans

250,000

—

Proceeds from issuance of convertible senior notes due 2025

192,500

—

Payments of debt issuance costs and debt discount

(12,803
)
—

Payments of principal on non-recourse notes due 2029

(487,189
)
(3,277
)
Repurchase of shares to satisfy tax withholding

(1,183
)
(884
)
Payments of cash dividends to stockholders

(146
)
(895
)
Proceeds from issuances of common stock, net

188

341

Repurchase of common stock

(17,500
)
(65,565
)
Repurchase of convertible subordinated notes due 2023

—

(8,095
)
Proceeds from capped-call options

—

391

Net cash used in financing activities

(76,133
)
(77,984
)

Net increase (decrease) in cash and cash equivalents

20,401

(65,986
)
Cash and cash equivalents at beginning of period

118,016

159,180

Cash and cash equivalents at end of period

$
138,417

$
93,194

Supplemental disclosure of cash flow information

Cash paid for interest

$
36,556

$
37,729


	Six Months Ended June 30, 2022
					Additional			Accumulated Other													Total
	Common Stock				Paid-In			Comprehensive		Accumulated			Treasury Stock					Noncontrolling			Stockholders’
	Shares		Amount		Capital			Income (Loss)		Deficit			Shares		Amount			Interest			Equity
Balance as of December 31, 2021		69,566	$	696	$	1,264,024		$	0	$	(456,148	)		32,005	$	(393,829	)	$	111,192		$	525,935
Cumulative adjustment due to adoption of ASU 2020-06		—		—		(65,361	)		—		37,238			—		—			—			(28,123	)
Distributions to noncontrolling interest		—		0		0			0		0			—		0			(6,507	)		(6,507	)
Fair value of noncontrolling interest in a consolidated variable interest entity		—		0		0			0		0			—		0			38,471			38,471
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding		28		0		214			0		0			—		0			0			214
Stock-based compensation		—		0		620			0		0			—		0			334			954
Capped call options associated with convertible senior notes due 2028		—		0		(16,585	)		0		0			—		0			0			(16,585	)
Net income		—		0		0			0		15,773			—		0			22,085			37,858
Balance as of March 31, 2022		69,594	$	696	$	1,182,912		$	0	$	(403,137	)		32,005	$	(393,829	)	$	165,575		$	552,217
Distributions to noncontrolling interest				0		0			0		0			—		0			(9,545	)		(9,545	)
Equity activity of noncontrolling interest in a consolidated variable interest entity		—		0		0			0		0			—		0			(2	)		(2	)
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding		112		1		67			0		0			—		0			0			68
Conversion of convertible subordinated notes due 2023		—		0		3			0		0			—		0			0			3
Stock-based compensation		—		0		685			0		0			—		0			665			1,350
Net income		—		0		0			0		939			—		0			20,432			21,371
Balance as of June 30, 2022		69,706	$	697	$	1,183,667		$	0	$	(402,198	)		32,005	$	(393,829	)	$	177,125		$	565,462

Six Months Ended June 30, 2021

Additional

Accumulated Other

Total

Common Stock

Paid-In

Comprehensive

Accumulated

Treasury Stock

Noncontrolling

Stockholders’

Shares

Amount

Capital

Income (Loss)

Deficit

Shares

Amount

Interest

Equity

Balance as of December 31, 2020

101,392

$
1,014

$
1,260,900

$
0

$
(722,002
)

—

$
0

$
67,925

$
607,837

Distributions to noncontrolling
   interest

—

0

0

0

0

—

0

(21,285
)

(21,285
)
Equity activity of noncontrolling
   interest from a consolidated
   variable interest entity

—

0

0

0

0

—

0

8

8

Exercise of stock options, and
   issuance of common stock
   units and stock awards, net
   of repurchase of shares to
   satisfy tax withholding

16

0

(25
)

0

0

—

0

0

(25
)
Stock-based compensation

—

0

451

0

0

—

0

0

451

Net income

—

0

0

0

94,123

—

0

15,572

109,695

Balance as of March 31, 2021

101,408

$
1,014

$
1,261,326

$
0

$
(627,879
)

—

$
0

$
62,220

$
696,681

Distributions to noncontrolling
   interest

0

0

0

0

—

0

(20,161
)

(20,161
)
Equity activity of noncontrolling
   interest from a consolidated
   variable interest entity

—

0

0

0

0

—

0

8

8

Exercise of stock options, and
   issuance of common stock
   units and stock awards, net
   of repurchase of shares to
   satisfy tax withholding

92

1

49

0

0

—

0

0

50

Repurchase of common stock

(32,005
)

(320
)

0

0

0

32,005

(393,829
)

0

(394,149
)
Stock-based compensation

—

0

470

0

0

—

0

0

470

Net income

—

0

0

0

88,948

—

0

21,898

110,846

Balance as of June 30, 2021

69,495

$
695

$
1,261,845

$
0

$
(538,931
)

$
32,005

$
(393,829
)

$
63,965

$
393,745

See accompanying notes to condensed consolidated financial statements.

INNOVIVA, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)

Six Months Ended June 30,

2022

2021

Cash flows from operating activities

Net income

$
59,229

$
220,541

Adjustments to reconcile net income to net cash provided by operating activities:

Deferred income tax

5,984

45,069

Depreciation and amortization

7,092

6,918

Stock-based compensation

2,304

921

Amortization of debt discount and issuance costs

931

4,472

Changes in fair values of equity and long-term investments, net

68,011

(99,046
)
Loss on extinguishment of debt

20,662

0

Other

857

16

Changes in operating assets and liabilities:

Receivables from collaborative arrangements

(965
)

(10,331
)
Prepaid expenses

2,968

578

Other assets, current

910

328

Other assets, non-current

(844
)

0

Accounts payable

2,713

(36
)
Accrued personnel-related expenses and other accrued liabilities

6,939

(709
)
Accrued interest payable

346

0

Net cash provided by operating activities

177,137

168,721

Cash flows from investing activities

Purchases of equity and long-term investments

(58,726
)

(46,373
)
Purchases of equity investments managed by ISP Fund LP

(38,026
)

(142,636
)
Sales of equity investments managed by ISP Fund LP

24,281

18,545

Purchase and sales of other investments managed by ISP Fund LP, net

(96,255
)

234,091

Purchases of property and equipment

(22
)

0

Cash acquired through the consolidation of Entasis Therapeutics Holdings, Inc.

23,070

0

Net cash provided by (used in) investing activities

(145,678
)

63,627

Cash flows from financing activities

Distributions to noncontrolling interest

(16,054
)

(41,446
)
Repurchase of common stock

0

(394,149
)
Repurchase of shares to satisfy tax withholding

(59
)

(35
)
Proceeds from issuances of common stock, net

341

60

Payment for repurchase of convertible subordinated notes due 2023

(165,131
)

0

Purchases of capped call options associated with convertible senior notes due 2028

(21,037
)

0

Proceeds from issuance of convertible senior notes due 2028, net of issuance costs

252,536

0

Net cash provided by (used in) financing activities

50,596

(435,570
)
Net increase (decrease) in cash and cash equivalents

82,055

(203,222
)
Cash and cash equivalents at beginning of period

201,525

246,487

Cash and cash equivalents at end of period

$
283,580

$
43,265

Supplemental disclosure of cash flow information:

Cash paid for interest

$
5,411

$
4,967

Supplemental disclosure of non-cash investing and financing activities

Adoption of ASU 2020-06

$
28,123

$
0

Right-of-use asset obtained through the consolidation of
Entasis Therapeutics Holdings, Inc.

$
3,289

$
0

See accompanying notes to condensed consolidated financial statements.
8
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”, the “Company”, or “we” and other similar pronouns) is ~~focused on bringing compelling new medicines to patients in areas~~a company with a portfolio of ~~unmet need by leveraging its significant expertise in the development, commercialization~~royalties and ~~financial management of bio-pharmaceuticals. Innoviva’s~~other healthcare assets. Our royalty portfolio ~~is anchored by the~~contains respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR®/BREO®ELLIPTA® (fluticasone furoate/ vilanterol, “FF/VI”) ~~and~~, ANORO® ELLIPTA®~~(umeclidinium~~ (umeclidinium bromide/ vilanterol, “UMEC/VI”) and TRELEGY® ELLIPTA® (the combination FF/UMEC/VI). Under the Long-Acting ~~Beta~~2Beta2 Agonist (“LABA”) Collaboration Agreement, ~~and the Strategic Alliance Agreement with GSK (referred to herein as the “GSK Agreements”),~~ Innoviva is ~~eligible~~entitled to receive royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows: 15% on the ~~associated royalty revenues~~first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion; and royalties from ~~RELVAR~~the sales of ANORO®~~/BREO~~ ELLIPTA® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~®, which tier upward at a range from 6.5% to 10%. Innoviva is also entitled to ~~15%~~15% of ~~any future~~royalty payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC (“TRC”), ~~relating to~~including TRELEGY® ELLIPTA® ~~(the combination FF/UMEC/VI) and the Bifunctional Muscarinic Antagonist — Beta~~2 ~~Agonist (“MABA”) program,~~ and any other product or combination of products that may be discovered ~~and~~or developed in the future under the LABA Collaboration Agreement ~~(“LABA Collaboration”~~and the Strategic Alliance Agreement with GSK (referred to herein as the “GSK Agreements”), which ~~has~~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 ~~U.S.~~accounting principles generally accepted ~~accounting principles~~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, ~~2017~~2022 or any other period.

The accompanying unaudited condensed 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 attributable to noncontrolling interest in our unaudited condensed 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 condensed 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, ~~2016~~2021 filed with the Securities and Exchange Commission (“SEC”) on February 28, ~~2017.~~2022, and as amended on March 17, 2022 (“2021 Form 10-K”).

Prior Period Immaterial Correction

Subsequent to the issuance of the unaudited condensed consolidated financial statements for the three and six months ended June 30, 2021, the Company identified that (i) purchases of equity investments managed by ISP Fund LP for $142.6 million, (ii) sales of equity investments managed by ISP Fund LP for $18.5 million, and (iii) purchase and sales of other investments managed by ISP Fund LP, net for $234.1 million were incorrectly netted in the unaudited condensed consolidated statement of cash flows within the distribution of equity and long-term investments line item. The Company has corrected the presentation in the accompanying unaudited condensed consolidated statement of cash flows for the six months ended June 30, 2021 from amounts previously reported to present such line items separately. The correction did not impact total cash flows from investing activities or the unaudited condensed consolidated balance sheet, statement of income, or statement of comprehensive income. Management assessed the correction on a quantitative and qualitative basis and determined that it is immaterial to the prior period unaudited condensed consolidated financial statements.

Use of Management’s Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. Management evaluates its significant accounting policies and estimates on an ongoing basis. We base our estimates on historical experience and other relevant assumptions that we believe to be reasonable under the circumstances. These estimates also form the basis for making judgments about the carrying values of assets and liabilities when these values are not readily apparent from other sources.

Certain Risks and Concentrations

Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, equity and long-term investments. Although we deposit our cash with multiple financial institutions, our deposits, at times, may exceed federally insured limits.

Segment Reporting

We operate in a single segment, which is to provide capital return to stockholders by maximizing the potential value of our respiratory assets partnered with GSK. Revenues are generated from our collaborative arrangements and royalty payments from GSK, located in Great Britain. Our facilities are located within the United States.

Variable Interest ~~Entity~~Entities

We evaluate our ownership, contractual and other interest in entities to determine if they are a variable interest ~~entities~~entity (“VIE”),. We evaluate whether we have a variable interest in those entities and the nature and extent of those interests. Based on our ~~evaluations,~~evaluation, if we determine we are the primary beneficiary of ~~such VIEs,~~a VIE, we consolidate ~~such entities into~~the entity in our financial statements.

Equity and Long-Term Investments

We ~~consolidate~~invest from time to time in equity and debt 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 unaudited condensed 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 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 ~~results~~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 ~~TRC,~~equity and long-term investments, net on the unaudited condensed 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 the security without a readily determinable fair value using the measurement alternative under ASC Topic 321, Investments - Equity Securities. 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.

We also invest in ISP Fund LP, which investments consist of money market funds and equity securities in the healthcare, pharmaceutical and biotechnology industries. Pursuant to the Partnership Agreement entered in December 2020, we became a limited partner of this partnership, and our contributions are subject to a 36-month lock-up period which restriction prevents us from having control and access to the contributions and related investments. These investments are classified as long-term investments on the unaudited condensed consolidated balance sheets.

Revenue Recognition

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 the 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 as a performance obligation is satisfied.

We recognize the royalty revenue on net sales of products with respect to which we have ~~determined~~contractual royalty rights in the period in which the royalties are earned. The net sales reports provided by our partner are based on its methodology and assumptions to ~~be a VIE, because we~~estimate rebates and returns, which it monitors and adjusts regularly in light of contractual and legal obligations, historical trends, past experience and projected market conditions. Our partner may make significant adjustments to its sales based on actual results recorded, which could cause our royalty revenue to fluctuate. We have the ~~power~~ability to ~~direct~~conduct periodic royalty audits to evaluate the ~~economically~~information provided by our partner. Royalties are recognized net of amortization of capitalized fees associated with any approval and launch milestone payments made to GSK.

Research and Development Costs

Research and development costs are expensed in the period that services are rendered or goods are received. Research and development costs consist of salaries and benefits, laboratory supplies and facility costs, as well as fees paid to third parties that conduct certain research and development activities on behalf of the Company’s consolidated variable interest entity, net of certain external research and development costs reimbursed under the collaboration arrangements of the Company’s consolidated variable interest entity. Non-refundable pre-payments for goods or services that will be used or rendered for future research and development activities are deferred. The Company’s consolidated variable interest entity also utilizes significant ~~activities~~judgment and estimates to record accruals for estimated ongoing research costs based on the progress of ~~TRC~~the studies.

Goodwill and Intangible Assets

Goodwill is recognized as the ~~obligation~~excess of the purchase price of an acquired entity over the fair value of amount assigned to ~~absorb losses~~assets acquired and liabilities assumed in a business combination. Goodwill and intangible assets with indefinite lives is subject to impairment testing at least annually and will be tested for impairment between annual tests if a triggering event occurs, such as changes due to circumstances that would indicate an impairment of or the ~~right to receive benefits from, TRC. The financial position and results~~carrying value. Significant judgments are involved in determining if an indicator of ~~operations~~impairment has occurred. Intangible assets with definite lives are amortized on a straight-line basis over the remaining useful life of ~~TRC are not material~~the intangible asset.

Operating Leases

We account for ~~the periods presented.~~

~~Recently Issued Accounting Pronouncements Not Yet Adopted~~

~~In April 2016, the~~our leases in accordance with Financial Accounting Standards Board ~~(the “FASB”~~(“FASB”) ~~issued~~ Accounting Standards ~~Update~~Codification (“~~ASU”~~ASC”) ~~2016-10 to clarify the implementation guidance on licensing and the identification of performance obligations consideration included in ASU 2014-09,~~ ~~Revenue from Contracts with Customers~~842, “Leases” (“~~ASU 2014-09”), which is also known as~~ ASC ~~606, was issued in May 2014 and outlines a single comprehensive model for entities~~842”). Right-of-use assets represent our right to use ~~in accounting for revenue arising from contracts with customers~~an underlying asset over the lease term and ~~supersedes most current revenue recognition guidance, including industry-specific guidance.~~ include any lease payments made prior to the lease commencement date and are reduced by lease incentives. Lease liabilities represent the present value of the total lease payments over the lease term, calculated using an estimated incremental borrowing rate. Lease expense is recognized on a straight-line basis over the expected lease term.

Accounting Pronouncement Adopted by the Company

In ~~March 2016,~~August 2020, the FASB issued ASU ~~2016-08~~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 ~~provide amendments to clarify~~simplify the ~~implementation guidance on principal versus agent considerations. ASU 2014-09 guidance is effective~~accounting for convertible instruments by removing certain separation models in Subtopic 470-20 for convertible instruments. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new standard also requires the fiscal years and interim reporting periods beginning after December 15, 2017 (as amended through ASU 2015-14 issued in August 2015), with early adoption permitted. Companies can elect a full retrospectiveif-converted method to ~~recast prior-period financial statements or a~~be used to calculate diluted earnings per share (“EPS”) for convertible instruments.

Effective January 1, 2022, we adopted the new standard using the modified retrospective ~~method to recognize~~approach and assessed the ~~cumulative~~ effect ~~as an adjustment to the retained earnings in the initial year. We plan to implement the standard in the first quarter~~ of ~~2018 on a modified retrospective basis and do not anticipate that~~ this ~~standard will have a material impact on our accounting for royalty revenues. We are continuing to assess the potential impacts of the standard~~adoption on the accounting for ~~other revenues associated with~~our outstanding convertible notes. The effect of the ~~collaboration agreements.~~

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases~~~~, which supersedes the lease recognition requirements in ASC Topic 840,~~ ~~Leases~~. The standard requires an entity to recognize right-of-use assets and lease liabilities arising from a lease for both financing and operating leases in the consolidated balance sheets but recognize the impactadoption on ~~the consolidated statement of operations and cash flows~~our 2025 Notes (as defined below) resulted in a ~~similar manner under current GAAP. The standard also requires~~decrease to the opening balance of accumulated deficit of $37.2 million, a reduction to additional ~~qualitative and quantitative disclosures. The standard is effective for us at~~paid-in capital of $65.4 million, an increase to the ~~beginning January 1, 2019 and requires transition under a modified retrospective method. The most significant impact~~balance of the ~~update~~notes by an aggregate amount of $35.6 million, and an increase to ~~us is that we~~deferred tax assets of $7.4 million. The dilutive EPS of our 2025 Notes will be ~~required to recognize a “right-of-use” asset and lease liability for the operating lease agreement that was not previously included on the balance sheet~~computed under the ~~existing lease guidance. We anticipate that~~if-converted method going forward. There was no financial impact from the ~~treatment~~implementation of the ~~lease on~~standard for our ~~consolidated statement of operations and cash flows will not materially be affected by the adoption of the new standard.~~2023 Notes (as defined below). Refer to Note 8, “Debt” for more information.

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 ~~adjusted with the interest expense on our unsecured convertible subordinated notes due 2023 (the “2023 Notes”)~~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 ~~Notes~~(the “2023 Notes”), our convertible senior notes due 2025 (the “2025 Notes”) and our convertible senior notes due 2028 (the “2028 Notes”) using the if-converted method.

Our convertible senior notes due 2025 ~~Notes~~(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 iswas historically computed using the treasury stock method. As the average market price per share of our common stock as reported on The ~~NASDAQ~~Nasdaq Global Select Market was lower than the initial conversion price of ~~$17.26~~$17.26 per share, there was no0 dilutive effect of the assumed conversion premium for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2021. The dilutive EPS of the notes was approximately $0.01 and $0.03 per share, respectively, using the if-converted method for the three and six months ended June 30, 2022 as a result of the adoption of ASU 2020-06.

The following table shows the computation of basic and diluted net income per share for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016:~~

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands except per share data)

2017

2016

2017

2016

Numerator:

Net income, basic

$
23,767

$
15,033

$
75,758

$
34,065

Add: interest expense on 2023 Notes

1,410

1,429

4,231

—

Net income, diluted

$
25,177

$
16,462

$
79,989

$
34,065

Denominator:

Weighted-average shares used to compute basic net income per share

106,841

109,282

107,236

111,128

Dilutive effect of 2023 Notes

12,189

12,398

12,189

—

Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan

766

313

695

455

Weighted-average shares used to compute diluted net income per share

119,796

121,993

120,120

111,583

Net income per share

Basic

$
0.22

$
0.14

$
0.71

$
0.31

Diluted

$
0.21

$
0.13

$
0.67

$
0.31

2021:

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands except per share data)

2022

2021

2022

2021

Numerator:

Net income attributable to Innoviva stockholders, basic

$
939

$
88,948

$
16,712

$
183,071

Add: interest expense on 2023 Notes

570

1,163

1,591

2,367

Add: interest expense on 2025 Notes

1,375

0

2,539

0

Add: interest expense on 2028 Notes

1,709

0

2,093

0

Net income attributable to Innoviva stockholders, diluted

$
4,593

$
90,111

$
22,935

$
185,438

Denominator:

Weighted-average shares used to compute basic net income
   per share attributable to Innoviva stockholders

69,643

88,423

69,594

94,858

Dilutive effect of 2023 Notes

4,866

12,189

7,511

12,189

Dilutive effect of 2025 Notes

11,150

0

11,150

0

Dilutive effect of 2028 Notes

9,955

0

6,360

0

Dilutive effect of options and awards granted under equity
   incentive plan and employee stock purchase plan

39

27

77

49

Weighted-average shares used to compute diluted net income
   per share attributable to Innoviva stockholders

95,653

100,639

94,692

107,096

Net income per share attributable to Innoviva stockholders

Basic

$
0.01

$
1.01

$
0.24

$
1.93

Diluted

$
0.05

$
0.90

$
0.24

$
1.73

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:~~anti-dilutive for the periods presented:

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

2017

2016

2017

2016

Outstanding options and awards granted under equity incentive plan and employee stock purchase plan

1,779

3,881

2,287

4,216

Shares issuable upon conversion of 2023 Notes

—

—

—

12,635

1,779

3,881

2,287

16,851


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2022		2021		2022		2021
Outstanding options and awards granted under equity incentive plan and employee stock purchase plan		642		1,093		514		1,126

3. Revenue Recognition and Collaborative Arrangements

We recognize royalty revenue on net sales of products with respect to which we have contractual royalty rights in the period in which the royalties are earned. Royalties, which may include adjustments of estimates of net sales in prior periods, are recognized net of amortization of capitalized fees associated with any approval and launch milestone payments made to GSK.

Net Revenue from Collaborative Arrangements

Net revenue recognized under our GSK Agreements was as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

2017

2016

2017

2016

Royalties from a related party - RELVAR/BREO

$
44,604

$
31,917

$
137,938

$
87,686

Royalties from a related party - ANORO

7,274

4,627

19,464

11,976

Total royalties from a related party

51,878

36,544

157,402

99,662

Less: amortization of capitalized fees paid to a related party

(3,456
)
(3,456
)
(10,368
)
(10,368
)
Royalty revenue

48,422

33,088

147,034

89,294

Strategic alliance - MABA program license

221

221

663

663

Total net revenue from GSK

$
48,643

$
33,309

$
147,697

$
89,957


	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2022			2021			2022			2021
Royalties from a related party - RELVAR/BREO	$	59,326		$	65,916		$	115,090		$	122,306
Royalties from a related party - ANORO		9,630			11,960			18,072			22,460
Royalties from a related party - TRELEGY		42,720			26,386			72,029			48,470
Total royalties from a related party		111,676			104,262			205,191			193,236
Less: amortization of capitalized fees paid to a related party		(3,456	)		(3,456	)		(6,912	)		(6,912	)
Royalty revenue from GSK	$	108,220		$	100,806		$	198,279		$	186,324

~~LABA Collaboration~~

4. Consolidated Entities

We consolidate the financial results of Theravance Respiratory Company, LLC (“TRC”) and Entasis Therapeutics Holdings, Inc. (“Entasis”), 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”), which is 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

We held 15% of the economic interest of TRC as of June 30, 2022 and December 31, 2021. The primary source of revenue for TRC is the royalties generated from the net sales of TRELEGY® ELLIPTA® by GSK. As of June 30, 2022, TRC held equity and long-term investments in InCarda Therapeutics, Inc. (“InCarda”), ImaginAb, Inc. (“ImaginAb”), Gate Neurosciences, Inc. (“Gate”) and Nanolive SA (“Nanolive”). 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


	June 30,		December 31,
(In thousands)	2022		2021
Assets
Cash and cash equivalents	$	89,806	$	50,713
Receivables from collaborative arrangements		42,720		42,492
Prepaid expenses and other current assets		85		71
Equity and long-term investments		42,536		37,695
Total assets	$	175,147	$	130,971

Liabilities and LLC Members’ Equity
Current liabilities	$	493	$	252
LLC members’ equity		174,654		130,719
Total liabilities and LLC members’ equity	$	175,147	$	130,971

Income statements


	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2022			2021			2022			2021
Royalty revenue from a related party	$	42,720		$	26,386		$	72,029		$	48,470
Operating expenses		139			336			337			3,617
Income from operations		42,581			26,050			71,692			44,853
Other income, net		10			0			10			0
Income tax expense, net		0			0			1			0
Changes in fair values of equity and long-term investments		(9,313	)		(254	)		(8,884	)		(737	)
Net income	$	33,278		$	25,796		$	62,819		$	44,116

Entasis Therapeutics Holdings, Inc.

We started investing in Entasis in 2020 as part of our capital allocation strategy of deploying cash generated from royalty income and investing in different life sciences companies. Entasis is a clinical-stage biotechnology company focused on the discovery and development of novel antibacterial products. 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 for approximately $35.0 million in cash. 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. Effective in June 2020, after certain conditions were met with respect to the sales of Entasis equity shares, Innoviva has a right to designate 2 members to Entasis’ board. During the second quarter of 2021, Innoviva’s wholly owned subsidiary, Innoviva Strategic Opportunities, LLC (“ISO”) entered into a securities purchase agreement with Entasis to acquire 10,000,000 shares of Entasis common stock and warrants to purchase 10,000,000 additional shares of Entasis common stock for approximately $20.0 million.

The fair value of Entasis’ 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 and $2.675 per share for those warrants acquired in the second and third quarter of 2020, respectively. The warrants acquired in the second quarter of 2021 have an exercise price of $2.00 per share. All of 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.

On February 17, 2022, ISO entered into a securities purchase agreement with Entasis pursuant to which ISO purchased a convertible promissory note for a total purchase price of $15.0 million. The note bears an annual interest rate of 0.59% and will mature and become payable on August 18, 2022 unless it is converted at a conversion price of $1.48 before the maturity date. The financing is expected to support Entasis’ product development and operations into August 2022. With this financing, we determined that we have both (i) the power to direct the economically significant activities of Entasis and (ii) the obligation to absorb the losses, or the right to receive the benefits, that could potentially be significant to Entasis and therefore, we are the primary beneficiary of Entasis. Accordingly, we consolidated Entasis’ financial position and results of operations effective on February 17, 2022. Our equity ownership interest remained at 59.9% as of February 17, 2022, and the fair values of our holdings of Entasis common stock and warrants were remeasured and estimated at $64.5 million and $31.4 million, respectively. The remeasurement resulted in a $7.7 million loss which was included in changes in fair values of equity and long-term investments, net on the unaudited condensed consolidated statement of income for the six months ended June 30, 2022.

The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date. The Company has completed a preliminary valuation and expects to finalize it as soon as practical, but no later than one year from the acquisition date. The purchase accounting for this transaction is not yet finalized.

The following table summarizes the preliminary allocation of the fair values assigned to the assets acquired and liabilities assumed as of the date of the consolidation:


(In thousands)	February 17, 2022
Cash and cash equivalents	$	23,070
Prepaid expenses		5,554
Other current assets		1,959
Property and equipment, net		185
Right-of-use assets		527
Goodwill		5,544
Intangible assets		105,000
Other assets		302
Total assets acquired	$	142,141

Accounts payable	$	1,583
Accrued personnel-related expenses		1,057
Other current liabilities		5,096
Total liabilities assumed	$	7,736

Total assets acquired, net	$	134,405

Entasis’ assets can only be used to settle its obligations. The following table provides the assets and liabilities of Entasis:


(In thousands)	June 30, 2022
Assets
Current assets:
Cash and cash equivalents	$	22,408
Prepaid expenses		3,177
Other current assets		1,035
Total current assets		26,620
Property and equipment, net		171
Right-of-use assets		3,503
Goodwill		5,544
Intangible assets		105,000
Other assets		1,147
Total assets	$	141,985

Liabilities
Current liabilities:
Accounts payable	$	4,025
Accrued personnel-related expenses		3,385
Other accrued liabilities		8,195
Total current liabilities		15,605
Lease liabilities, long-term		3,091
Total liabilities	$	18,696

As a result of the ~~launch~~consolidation, we recognized a non-controlling interest of $38.5 million as of February 17, 2022. Our unaudited condensed consolidated net income for the three and ~~approval~~six months ended June 30, 2022 included the net loss attributable to Innoviva stockholders since the consolidation date of ~~RELVAR~~®~~/BREO~~® ~~ELLIPTA~~®$11.7 million and ~~ANORO~~® ~~ELLIPTA~~®$16.3 million, respectively, for Entasis.

The following table sets forth the pro-forma consolidated results of operations for the three and six months ended June 30, 2022 and 2021 as if the consolidation of Entasis occurred on January 1, 2021. The unaudited supplemental pro forma net income is adjusted by (i) reducing $64.7 million positive change in fair value related to the equity investments in Entasis’ common stock and warrants for the three months ended June 30, 2021, and increasing $7.8 million and reducing $53.2 million for the six months ended June 30, 2022 and 2021 respectively, and (ii) an increase for acquisition-related costs of $0.1 million for the six months ended June 30, 2022 and a corresponding decrease related to such costs for the six months ended June 30, 2021, as if the expenses were incurred in 2021 instead of 2022. The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the consolidation had taken place on the dates noted above, or of results that may occur in the ~~U.S.~~future.


	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands)	2022			2021		2022		2021
Revenue	$	108,220		$	100,806	$	198,279	$	186,324
Net income	$	17,221		$	34,140	$	55,248	$	144,490
Net income attributable to Innoviva stockholders	$	(3,306	)	$	17,063	$	15,727	$	116,130

On July 11, 2022, we announced the completion of our acquisition of Entasis by purchasing the remaining portion of noncontrolling interest. Refer to Note 12, “Subsequent Events,” for more information.

ISP Fund LP

In December 2020, Innoviva Strategic Partners LLC, our wholly owned subsidiary (“Strategic Partners”), ~~Japan~~contributed $300.0 million to ISP Fund LP (the “Partnership”) for investing in “long” positions in the healthcare, pharmaceutical and ~~Europe, we paid milestone~~biotechnology sectors and became a limited partner. The general partner of the Partnership (“General Partner”) is an affiliate of Sarissa Capital.

The Partnership Agreement provides for Sarissa Capital to receive management fees from the Partnership, payable quarterly in advance, measured based on the Net Asset Value of Strategic Partners’ capital account in the Partnership. In addition, General Partner is entitled to ~~GSK totaling $220.0 million~~an annual performance fee based on the Net Profits of the Partnership during the ~~year ended December 31, 2014. Although we have no further milestone payment obligations~~annual measurement period.

The Partnership Agreement includes a lock-up period of thirty-six months after which Strategic Partners is entitled to ~~GSK~~make withdrawals from the Partnership as of such lock-up expiration date and each anniversary thereafter, subject to certain limitations.

In May 2021, Strategic Partners received a distribution of $110.0 million from the Partnership to provide funding to Innoviva for a strategic repurchase of shares held by GSK. On March 30, 2022, Strategic Partners made an additional capital contribution of $110.0 million to the Partnership pursuant to the ~~LABA Collaboration Agreement,~~letter agreement entered into between Strategic Partners, the Partnership and Sarissa Capital Fund GP LP on May 20, 2021. The capital contribution is subject to a 36-month lock up period from the contribution date.

As of June 30, 2022, we held approximately 100% of the economic interest of the Partnership. As of June 30, 2022 and December 31, 2021, total assets of the Partnership were $306.9 million and $195.8 million, respectively, of which the majority was attributable to equity and long-term investments, and total liabilities were $6.4 million and $0.2 million, respectively. The partnership’s assets can only be used to settle its own obligations. During the three and six months ended June 30, 2022, we recorded $0.5 million and $0.7 million, respectively, of net investment-related expenses incurred by the Partnership, and $6.5 million and $4.4 million, respectively, of net negative changes in fair values of equity and long-term investments on the unaudited condensed consolidated statements of income. During the three and six months ended June 30, 2021, we recorded $0.9 million and $1.3 million, respectively, of net investment-related expenses incurred by the Partnership, and $25.2 million and $31.0 million, respectively, of net positive changes in fair values of equity and long-term investments on the unaudited condensed 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 as well as warrants to purchase 8,710,800 additional shares of common stock of Armata Pharmaceuticals, Inc. (“Armata”) for approximately $25.0 million in cash. Armata is a clinical stage biotechnology company focused on precisely targeted bacteriophage therapeutics for antibiotic-resistant infections.

During the first quarter of 2021, ISO 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. Armata also 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 for voting on the matters related to election or removal of Armata’s board members. The voting agreement will expire the earlier of the second anniversary of the agreement effective date and approval by the FDA of any of Armata’s product candidates for marketing and commercial distribution. During the fourth quarter of 2021, ISO also purchased an additional 1,212,122 shares of Armata common stock for approximately $4.0 million.

On February 9, 2022, ISO entered into a securities purchase agreement with Armata to acquire 9,000,000 shares of Armata common stock and warrants to purchase 4,500,000 additional shares of common stock with an exercise price of $5.00 per share for $45.0 million. The investment closed in 2 tranches on February 9, 2022 and March 31, 2022. The investment is intended to aid Armata in advancing its clinical pipeline and strengthening its bacteriophage platform. On February 9, 2022, Armata also entered a second amended and restated 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 for voting on the matters related to election or removal of Armata’s board members or amend the bylaws of Armata to reduce the maximum number of directors or set the number of directors who may serve on the board of Armata. The voting agreement will expire the earlier of the second anniversary of the agreement effective date and approval by the FDA of any of Armata’s product candidates for marketing and commercial distribution. In addition, as of February 9, 2022, Armata entered into an amended and restated investor rights agreement with the Company and ISO, pursuant to which for as long as the Company and ISO hold at least 12.5% of the outstanding shares of Armata’s common stock on a fully-diluted, the Company and ISO shall have the right to designate two directors to Armata’s board of directors, and for so long as the Company and ISO hold at least 8%, but less than 12.5%, of the outstanding shares of Armata’s common stock on a fully-diluted basis, the Company and ISO shall have the right to designate one director to Armata’s board of directors, subject to certain conditions and qualifications set forth in the amended and restated investor rights agreement. As of June 30, 2022, 3 of the 8 members of Armata’s board of directors are also members of the board of directors of Innoviva. As of June 30, 2022 and December 31, 2021, we owned approximately 69.4% and 59.3%, respectively, of Armata’s common stock.

The investments in Armata provide Innoviva and ISO the ability to have significant influence, but not control over Armata’s operations. Armata’s business and affairs are managed under the direction of its board of directors, which Innoviva and ISO do not control. 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, 2021 and 2022 have an exercise price of $2.87, $3.25 and $5.00 per share, respectively. All 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 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 June 30, 2022, the fair values of our holdings of Armata common stock and warrants were estimated at $97.6 million and $47.1 million, respectively. As of December 31, 2021, the fair values of our holdings of Armata common stock and warrants were estimated at $88.1 million and $58.6 million, respectively. The total fair value of both financial instruments in the amount of $144.7 million and $146.7 million was recorded as equity and long-term investments on the unaudited condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021, respectively. During the three and six months ended June 30, 2022, we recorded $42.8 million and $47.0 million unrealized loss, respectively, as changes in fair values of equity and long-term investments, net on the unaudited condensed consolidated statements of income. During the three and six months ended June 30, 2021, we recorded $24.3 million unrealized loss and $36.9 million unrealized gains, respectively, as changes in fair values of equity and long-term investments, net on the unaudited condensed consolidated statements of income.

The summarized financial information, including the portion we do not own, is presented for Armata on a one quarter lag regardless of the date of our investments as follows:

Income Statement Information


	Three Months Ended March 31,						Six Months Ended March 31,
(In thousands)	2022			2021			2022			2021
Revenue	$	1,236		$	1,066		$	2,225		$	1,570
Loss from operations	$	(8,775	)	$	(5,435	)	$	(14,823	)	$	(11,888	)
Net loss	$	(8,774	)	$	(5,495	)	$	(14,821	)	$	(12,119	)

Equity Investment in InCarda

During the third quarter of 2020, TRC purchased 20,469,432 shares of Series C preferred stock and a warrant to purchase 5,117,358 additional shares of Series C preferred stock of InCarda Therapeutics, Inc. (“InCarda”) (the “InCarda 2020 Warrant”) for $15.8 million, which includes $0.8 million of transaction costs. InCarda is a privately held biopharmaceutical company focused on developing inhaled therapies for cardiovascular diseases. The investment is intended to fund the ongoing ~~participation~~clinical development of InRhythmTM (flecainide for inhalation), the company’s lead program, for the treatment of a recent-onset episode of paroxysmal atrial fibrillation. TRC has the right to designate one member to InCarda’s board. As of June 30, 2022, 1 of InCarda’s 8 board members was designated by TRC. The InCarda 2020 Warrant is exercisable immediately with an exercise price of $0.7328 per share. In September 2021, TRC and InCarda entered into an amendment to extend the expiration date of the InCarda 2020 Warrant from October 6, 2021 to March 31, 2022. On March 9, 2022, TRC and InCarda entered into an amendment to further extend the expiration date of the InCarda 2020 Warrant from March 31, 2022 to March 31, 2023. The InCarda 2020 Warrant is recorded at fair value and subject to remeasurement at each balance sheet date.

On March 9, 2022, TRC entered into a Note and Warrant Purchase Agreement (the “InCarda Agreement”) with InCarda to acquire a convertible promissory note (the “InCarda Convertible Note”) and warrants (the “InCarda 2022 Warrant”) for $0.7 million. The InCarda Convertible Note bears an annual interest rate of 6% and will convert into Series D preferred stock upon a qualified financing, non-qualified financing, or maturity conversion. A qualified financing is defined as the first issuance or series of related issuances by InCarda of its equity securities following March 9, 2022 from which InCarda receives immediately available gross proceeds of at least $10.0 million (excluding the aggregate amount of any notes converted into equity securities pursuant to the conversion of notes or any other debt securities converted into equity securities) (the “Qualified Financing Amount”). A non-qualified financing is defined as the first issuance or series of related issuances by InCarda of its equity securities following March 9, 2022 from which InCarda receives immediately available gross proceeds of less than the Qualified Financing Amount. The InCarda 2022 Warrant entitles TRC to purchase a number of shares of equity securities equal to 100% of the principal amount of the InCarda Convertible Note divided by the number of shares issued in InCarda’s next equity financing, which is defined as the earliest to occur of specific financing events, including capital raises through public offerings. The InCarda 2022 Warrant expires on March 9, 2027. The InCarda Convertible Note and InCarda 2022 Warrant are measured at fair value.

On June 15, 2022, the principal amount and the accrued interest of the InCarda Convertible Note were converted into equity securities. In addition, TRC participated in InCarda’s Series D preferred stock financing by investing $2.3 million. In connection with the new round of financing, InCarda recapitalized its equity structure resulting in TRC owning 4,093,886 shares of InCarda’s common stock, 37,350 shares of its Series A-1 preferred stock, 20,469,432 shares of its Series C preferred stock, 8,771,780 shares of its Series D-1 preferred stock, 3,369,802 shares of its Series D-2 preferred stock, a warrant to purchase 5,117,358 shares of its Series C preferred stock at $0.73 per share and a warrant to purchase 2,490,033 shares of its Series D-2 preferred stock at $0.26 per share.

As of June 30, 2022 and December 31, 2021, TRC held 8.9% and 13.0%, respectively, of InCarda equity ownership. 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. 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. Due to InCarda’s equity recapitalization in the second quarter of 2022, TRC reassessed the value of its investments in InCarda using the Option Pricing Model Backsolve valuation methodology. Key assumptions used in the valuation model include an expected holding period of two years, a risk free interest rate of 3.2%, a dividend yield of 0.0% and an estimated volatility of 122.0%. The estimated volatility is calculated based on the historical volatility of a selected peer group of public companies comparable to InCarda. We recognized an impairment charge of $9.0 million. There was 0 impairment or other change to the value of our investments in InCarda as of December 31, 2021.

As of June 30, 2022, we recorded $7.2 million in fair value of InCarda's Series C preferred stock, Series C warrants and Series D warrants (the "InCarda Preferred Stock Warrants"), and $3.2 million for InCarda's Series D-1 preferred stock, Series D-2 preferred stock, and common stock using the measurement alternative. As of December 31, 2021, we recorded $0.4 million in fair value of InCarda’s 2020 Warrants and $15.8 million for the investment in InCarda’s Series C preferred stock using the measurement alternative. During the three and six months ended June 30, 2022, we recorded $9.6 million and $9.0 million in net unrealized loss, respectively, as changes in fair values of equity and long-term investments, net on the unaudited condensed consolidated statements of income. During the three and six months ended June 30, 2021, we recorded $0.3 million and $0.7 million of unrealized loss, respectively, as changes in fair values of equity and long-term investments, net on the unaudited condensed consolidated statements of income.

Equity Investment in ImaginAb

During the first quarter of 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 ~~collaboration, including joint steering~~equity investment on the condensed consolidated balance sheets. As of June 30, 2022, 1 of ImaginAb’s 5 board members is designated by TRC. As of June 30, 2022 and ~~joint project committees~~December 31, 2021, TRC held 14.4% and 14.5% of ImaginAb equity ownership, respectively.

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 ~~are expected to continue over~~ImaginAb is a VIE, but TRC is not the ~~life~~primary beneficiary of the ~~agreements. The milestone fees paid to GSK were recognized as capitalized fees paid to~~VIE. Because ImaginAb’s equity securities are not publicly traded and do not have a ~~related party, which are being amortized over their estimated useful lives commencing~~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 ~~commercial launch~~same or a similar investment with the same issuer. As of ~~the product. The amortization expense is~~June 30, 2022 and December 31, 2021, $6.4 million was recorded as ~~a reduction~~equity and long-term investments on the unaudited condensed consolidated balance sheets and there was no change to the ~~royalties from GSK.~~

~~We are entitled to receive annual 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. Sales of single-agent LABA medicines and combination medicines would be combined for the purposes of this royalty calculation. For other products combined with a LABA from the LABA Collaboration, such as ANORO® ~~ELLIPTA~~®~~, royalties are upward tiering and range from 6.5% to 10%.~~

~~We are also entitled to 15% of any future royalty payments made by GSK under its agreements originally entered into with us, and since assigned to TRC, including~~ ~~TRELEGY~~® ~~ELLIPTA~~®.

~~GSK Contingent Payments and Revenue~~

The potential future contingent payments receivable related to the MABA program of up to $363.0 million are not deemed substantive milestones due to the fact that the achievement of the event underlying the payment predominantly relates to GSK’s performance of future development, manufacturing and commercialization activities for product candidates after licensing the program. ~~We are entitled to 15% of any contingent payments payable by GSK through our ownership interest in TRC.~~

~~4. Available-for-Sale Securities and Fair Value Measurements~~

~~Available-for-Sale Securities~~

~~The estimated~~ fair value of ~~available-for-sale securities~~our investment.

Convertible Promissory Note in Gate Neurosciences

During the fourth quarter of 2021, TRC entered into a Convertible Promissory Note Purchase Agreement with Gate Neurosciences, Inc. (“Gate”) to acquire a convertible promissory note (the “Gate Convertible Note”) with a principal amount of $15.0 million. Gate is ~~based~~a privately held biopharmaceutical company focused on ~~quoted market prices~~developing the next generation of targeted nervous system therapies, leveraging precision medicine approaches to develop breakthrough drugs for ~~these~~psychiatric and neurologic diseases. The investment is intended to fund its ongoing development and research. The Gate Convertible Note bears an annual interest rate of 8% and will convert into shares of common stock of Gate upon a qualified event or ~~similar~~into shares of shadow preferred stock of Gate (“Shadow Preferred”) upon a qualified financing. A qualifying event can be a qualified initial price offering, a qualified merger, or a merger with a special-purpose acquisition company (“SPAC”).

The number of common stock shares to be issued in a qualified event shall be equal to the amount due on the conversion date divided by the lesser of a capped conversion price (the “Capped Conversion Price”) and the qualified event price (the “Qualified Event Price”). The Capped Conversion Price is calculated as $50.0 million divided by the number of shares of common stock outstanding at such time on a fully diluted basis. The Qualified Event Price is the price per share determined by the qualified event. A qualified financing is a sale or series of sales of preferred stock where (i) at least 50 percent of counterparties are not existing shareholders, (ii) net proceeds to Gate are at least $35.0 million, and (iii) the stated or implied equity valuation of Gate is at least $80.0 million. Shadow Preferred means preferred stock having identical rights, preferences and restrictions as the preferred stock that would be issued in a qualified financing.

The investment in Gate does not provide TRC the ability to control or have significant influence over Gate’s operations. Based on our evaluation, we determined that Gate is a VIE, but TRC is not the primary beneficiary of the VIE. We have accounted for the Gate Convertible Note as a trading security, measured at fair value using a Monte Carlo simulation model with the probability of certain qualified events and the assumptions of equity value of Gate, risk-free rate, expected stock price volatility of its peer companies, and the time until a financing is raised. TRC has the right to designate one board member to Gate’s board. As of June 30, 2022, TRC has designated a board member to Gate’s board, which currently consists of three directors. As of June 30, 2022 and December 31, 2021, the fair value of the Gate Convertible Note was estimated at $15.2 million and $15.1 million, respectively, and recorded as equity and long-term investments on the unaudited condensed consolidated balance sheets. We recorded $0.3 million and $0.1 million unrealized gain, respectively, as changes in fair values of equity and long-term investments, net on the unaudited condensed consolidated statement of income for the three and six months ended June 30, 2022.

Equity Investment in Nanolive

On February 18, 2022, TRC entered into an investment and shareholders agreement with Nanolive SA (“Nanolive”) to purchase 18,750,000 shares of Nanolive Series C preferred stock for $9.8 million (equivalent to 9.0 million CHF). Nanolive SA is a Swiss privately held life sciences company focused on developing breakthrough imaging solutions that ~~were based~~accelerate research in growth industries such as drug discovery and cell therapy. $0.7 million was incurred for investment due diligence costs and execution and recorded as part of the equity and long-term investment on ~~prices obtained from~~the condensed consolidated balance sheets. TRC has the right to designate one member to Nanolive’s board. TRC also has the right to designate another member, who will be mutually acceptable to TRC and another majority common stockholder, to Nanolive’s board. As of June 30, 2022, 0 Innoviva designees are serving on Nanolive’s 7-member board. As of June 30, 2022, TRC held 16.1% of Nanolive equity ownership.

The investment in Nanolive does not provide TRC the ability to control or have significant influence over Nanolive’s operations. Based on our evaluation, we determined that Nanolive is a ~~commercial pricing service. Available-for-sale~~VIE, but TRC is not the primary beneficiary of the VIE. Because Nanolive’s equity securities are ~~summarized below:~~

September 30, 2017

(In thousands)

Amortized Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value

U.S. government agencies

$
9,959

$
—

$
—

$
9,959

U.S. corporate notes

9,879

—

(3
)
9,876

U.S. commercial paper

24,582

—

—

24,582

Money market funds

118,163

—

—

118,163

Total

$
162,583

$
—

$
(3
)
$
162,580

December 31, 2016

(In thousands)

Amortized Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value

U.S. government agencies

$
12,428

$
1

$
—

$
12,429

U.S. commercial paper

72,065

—

—

72,065

Money market funds

64,319

—

—

64,319

Total

$
148,812

$
1

$
—

$
148,813

not publicly traded and do not have a readily determinable fair value, we have accounted for our investment in Nanolive’s Series C preferred 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 ~~September~~June 30, ~~2017, all~~2022, $10.6 million was recorded as equity and long-term investments on the unaudited condensed consolidated balance sheets and there was no change to the fair value of ~~the available-for-sale securities had contractual maturities within one year and the weighted average maturity of marketable securities was approximately four months.~~our investment.

Fair Value Measurements

Our ~~available-for-sale securities~~equity and long-term investments are measured at fair value on a recurring basis and our debt is carried at ~~the~~ amortized cost basis. Equity investments accounted for using the measurement alternative are valued using Level 3 inputs.


	Estimated Fair Value Measurements as of June 30, 2022 Using:
	Quoted Price in Active Markets for		Significant Other		Significant
	Identical		Observable		Unobservable
Types of Instruments	Assets		Inputs		Inputs
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	156,460	$	—	$	—	$	156,460
Investments held by ISP Fund LP (1)		304,810		—		2,053		306,863
Equity investment - Armata Common Stock		97,549		—		—		97,549
Equity investment - Armata Warrants		—		47,148		—		47,148
Equity investment - InCarda Series C Preferred Stock						6,808		6,808
Equity investment - InCarda Preferred Stock Warrants						342		342
Convertible debt investment - Gate Note		—		—		15,200		15,200
Total assets measured at estimated fair value	$	558,819	$	47,148	$	24,403	$	630,370
Debt
2023 Notes	$	—	$	95,606	$	—	$	95,606
2025 Notes		—		214,443		—		214,443
2028 Notes		—		225,530		—		225,530
Total fair value of debt	$	—	$	535,579	$	—	$	535,579

(1)

The ~~estimated~~investments held by ISP Fund LP, consisted of $201.6 million in equity investments, which included a private placement position of $2.1 million, $35.3 million in money market funds and $70.0 million in cash. Our total capital contribution of $300.0 million is subject to a 36-month lock-up period from the date of such capital contributions.


	Estimated Fair Value Measurements as of December 31, 2021 Using:
	Quoted Price
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
Types of Instruments	Assets		Inputs		Inputs
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	145,132	$	—	$	—	$	145,132
Investments held by ISP Fund LP (1)		193,677		—		2,068		195,745
Equity investment - Armata Common Stock		88,101		—		—		88,101
Equity investment - Armata Warrants		—		58,595		—		58,595
Equity investment - Entasis Common Stock		62,794		—		—		62,794
Equity investment - Entasis Warrants		—		40,914		—		40,914
Equity investment - InCarda Warrants		—		—		411		411
Convertible debt investment - Gate Note		—		—		15,100		15,100
Total assets measured at estimated fair value	$	489,704	$	99,509	$	17,579	$	606,792
Debt
2023 Notes	$	—	$	261,769	$	—	$	261,769
2025 Notes		—		234,498		—		234,498
Total fair value of debt	$	—	$	496,267	$	—	$	496,267

(1)

The investments held by ISP Fund LP, consisted of $192.2 million equity investments and $3.5 million money market funds, are subject to a 36-month lock-up period from our initial contribution date, December 11, 2020.

The fair values ~~were~~of our equity investments in Armata’s common stock and publicly traded investments held by ISP Fund LP are based on the quoted prices in active markets and are classified as ~~follows:~~

Estimated Fair Value Measurements as of September 30, 2017 Using:

Types of Instruments

Quoted Price in
Active Markets
for Identical
Assets

Significant Other
Observable
Inputs

Significant
Unobservable
Inputs

(In thousands)

Level 1

Level 2

Level 3

Total

Assets

U.S. government agencies

$
—

$
9,959

$
—

$
9,959

U.S. corporate notes

—

9,876

—

9,876

U.S. commercial paper

—

24,582

—

24,582

Money market funds

118,163

—

—

118,163

Total assets measured at estimated fair value

$
118,163

$
44,417

$
—

$
162,580

Liabilities

Term B Loan

$
—

$
250,000

$
—

$
250,000

2023 Notes

—

234,658

—

234,658

2025 Notes

—

202,125

—

202,125

Total fair value of liabilities

$
—

$
686,783

$
—

$
686,783

Estimated Fair Value Measurements as of December 31, 2016 Using:

Types of Instruments

Quoted Price in
Active Markets
for Identical
Assets

Significant Other
Observable
Inputs

Significant
Unobservable
Inputs

(In thousands)

Level 1

Level 2

Level 3

Total

Assets

U.S. government agencies

$
—

$
12,429

$
—

$
12,429

U.S. commercial paper

—

72,065

—

72,065

Money market funds

64,319

—

—

64,319

Total assets measured at estimated fair value

$
64,319

$
84,494

$
—

$
148,813

Liabilities

2023 Notes

$
—

$
202,125

$
—

$
202,125

2029 Notes

—

487,189

—

487,189

Total fair value of liabilities

$
—

$
689,314

$
—

$
689,314

Level 1 financial instruments. The fair ~~value~~values of ~~our marketable securities~~the warrants of Armata classified within Level 2 isare 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.

InCarda’s equity securities, the Gate Convertible Note, and private placement positions held by ISP Fund LP are classified as Level 3 financial instruments as these securities are not publicly traded and the assumptions used in the valuation model for valuing these securities are based on significant unobservable and observable inputs including those of publicly traded peer companies.

The fair ~~value~~values of our 2023 Notes, ~~of our~~ 2025 Notes and ~~of our previously outstanding non-recourse fixed rate term notes due 2029 (the “2029 Notes”) is~~2028 Notes are based on recent trading prices of the respective instruments.

6. Goodwill and Intangible Assets

Goodwill and intangible assets acquired in our consolidation of Entasis were recognized at fair value as of the consolidation date, February 17, 2022. The carrying amount of ~~our initial senior secured term loan (the “Term B Loan”) before deducting debt issuance costs approximates fair value~~goodwill as ~~the loan carries a variable interest rate that is tied to the LIBOR rate plus an applicable spread.~~

~~5. Capitalized Fees Paid to a Related Party~~

~~We capitalize fees paid to licensors related to agreements for approved products or commercialized products and amortize these fees on a straight-line basis~~of June 30, 2022 was $5.5 million. Intangible assets with definite lives are amortized over their estimated useful ~~lives~~lives. The carrying basis and accumulated amortization of recognized intangible assets as of June 30, 2022 were as follows:


	Carrying
(In thousands)	Amount
Intangible assets with indefinite life	$	69,500
Intangible asset with determinable life		35,500
Total	$	105,000

All intangible assets are related to in-process research and development. The intangible assets with indefinite life consist of antibacterial therapeutic products. The intangible asset with determinable life consists of a contract, which commences in 2023. The useful life of this intangible asset will be determined upon ~~the commercial launch~~commercialization of the ~~product. The estimated useful lives~~underlying product candidate. Thus, 0 amortization expense of ~~these capitalized fees~~determinable assets was recognized during the period ended June 30, 2022.

Goodwill and indefinite-lived intangible assets are not amortized but are tested at least annually for impairment, or more frequently if triggering events occur, based on ~~a country-by-country and product-by-product basis, as~~ the ~~later~~estimated fair value of the ~~expiration or termination~~intangible asset.

7. Balance Sheet Components

Other Accrued Liabilities

Other accrued liabilities consisted of the ~~last patent right covering the compound in such product in such country and 15 years from first commercial sale of such product in such country, unless the agreement is terminated earlier.~~ ~~Capitalized fees paid to a related party of $220.0 million consist registrational and launch-related milestone fees paid to GSK. Accumulated amortization of these capitalized fees is $49.8 million~~following:


	June 30,		December 31,
(in thousands)	2022		2021
Accrued contract manufacturing	$	4,621	$	0
Accrued clinical		994		0
Accrued research		330		0
Accrued professional services		3,829		894
Current portion of lease liabilities		687		106
Liabilities for unsettled security transactions		6,328		0
Other		355		9
Total other accrued liabilities	$	17,144	$	1,009

The other accrued liabilities balance as of ~~September~~June 30, ~~2017.~~2022 included $8.2 million related to Entasis.

8. Stock-Based Compensation

~~Performance-Contingent RSAs and RSUs~~

~~Since 2011, the~~Stock- Based Compensation Committee of our Board of Directors (the “Compensation Committee”) have approved grants of performance-contingent RSAs and RSUs to senior management and a non-executive officer. Generally, these awards have dual triggers of vesting based upon the achievement of certain performance goals by a pre-specified date, as well as a requirement for continued employment. Recognition ofExpense

The following table summarizes stock-based compensation expense, ~~begins when the performance goals are deemed probable of achievement.~~

~~Included in these performance-contingent RSAs is the remaining grant of 63,000 special long-term retention~~which included $0.7 million and ~~incentive performance-contingent RSAs~~$1.0 million, respectively, related to ~~senior management in 2011. The~~Entasis’ equity awards, have dual triggers of vesting based upon the achievement of certain performance conditions over a six-year timeframe from 2011 through December 31, 2016 and require continued service to the company. During the year ended December 31, 2016, we determined that the achievement of the requisite performance conditions was met. These awards remain subject to continued employment and will vest in November 2017. The ~~stock-based compensation cost for these awards was not material~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2022:


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2022		2021		2022		2021
General and administrative	$	1,030	$	470	$	1,818	$	921
Research and development		320		0		486		0
Total	$	1,350	$	470	$	2,304	$	921

Valuation Assumptions

Black-Scholes-Merton assumptions used in calculating the estimated value of stock options granted by Innoviva on the date of grant were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Risk-free interest rate	2.84% - 3.03%			1.07%			1.6% - 3.03%			1.07% - 1.13%
Expected term (in years)	5.50 - 6.11				6.00		5.50 - 6.11				6.00
Volatility	38.8% - 39.0%				45.0	%	38.8% - 40.5%				45.0	%
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Weighted-average estimated fair value of stock options granted	$6.98 - $7.18			$	5.80		$6.98 - $7.73			$	5.61

9. Debt

Our debt consisted of the following:


	June 30,			December 31,
(In thousands)	2022			2021
2023 Notes	$	96,204		$	240,984
2025 Notes		192,500			192,500
2028 Notes		261,000			0
Total debt		549,704			433,484
Less: Unamortized debt discount and issuance costs		(10,454	)		(38,831	)
Total debt, net	$	539,250		$	394,653
Less: Current portion of long-term debt, net		96,072			0
Total long-term debt, net	$	443,178		$	394,653

Convertible Subordinated Notes Due 2023

In January ~~14, 2016,~~2013, we completed an underwritten public offering of $287.5 million aggregate principal amount of our 2023 Notes, which will mature on January 15, 2023. The financing raised proceeds, net of issuance costs, of approximately $281.2 million, less $36.8 million to purchase 2 privately negotiated capped call option transactions in connection with the ~~Compensation Committee approved~~issuance of the notes. The 2023 Notes bear interest at the rate of 2.125% per year that is payable semi-annually in arrears in cash on January 15 and ~~granted 282,394 RSAs~~July 15 of each year, beginning on July 15, 2013.

At the option of the holders, the 2023 Notes may be converted into fully paid and ~~46,294 RSUs~~non-assessable shares of our common stock prior to ~~senior management. These awards include~~the close of the business on the second business day immediately preceding the final maturity date. The initial conversion rate was 35.9903 shares per $1,000 principal amount of the 2023 Notes, subject to customary anti-dilution adjustment in certain circumstances, which represented an initial conversion price of approximately $27.79 per share.

In event of default or a ~~market condition based~~fundamental change (as defined in the indenture governing the 2023 Notes), holders of the 2023 Notes may require us to repurchase all or a portion of their 2023 Notes at price equal to 100% of the principal amount of the 2023 Notes, plus any accrued and unpaid interest.

In connection with the offering of the 2023 Notes, we entered into two privately negotiated capped call option transactions with a single counterparty. The capped call option transaction is an integrated instrument consisting of a call option on ~~Total Shareholder Return (“TSR”)~~our common stock purchased by us with a strike price equal to the initial conversion price of $27.79 per share for the underlying number of shares and a ~~service condition that requires continued employment, collectively~~cap price of $38.00 per share, both of which are subject to adjustments consistent with the ~~“Performance Measures I”.~~2023 Notes. The ~~vesting percentages of these awards are calculated based on~~cap component is economically equivalent to a call option sold by us for the two-year TSR with a catch-up provision opportunity measured on January 13, 2019 for RSAs and on September 30, 2018 for RSUs. Two-thirds of amounts earned at the end of year two will vest and be distributed on February 20, 2018, while the final one-third earned after two years as well as the catch-up amount earned will vest and be distributed on February 20, 2019 for RSAs and November 20, 2018 for RSUs. The actual payoutunderlying number of shares ~~may~~with an initial strike price of $38.00 per share. As an integrated instrument, the settlement of the capped call coincides with the due date of the convertible debt. Upon settlement, we would receive from our hedge counterparty a number of shares of our common shares that would range from ~~a minimum of zero shares~~0, if the stock price was below $27.79 per share, to a maximum of ~~328,688~~2,779,659 shares, ~~granted upon~~if the ~~actual performance against the Performance Measures I. The grant date fair value of these awards~~stock price is ~~determined using a Monte Carlo valuation model. The aggregate value of $2.0 million is recognized as compensation expense over the implied service period and will not be reversed~~above $38.00 per share. However, if the market ~~condition is not met.~~

~~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~~price of ~~Innoviva’s~~our common stock, as ~~compared~~measured under the terms of the capped call transactions, exceeds $38.00 per share, there is no incremental anti-dilutive benefit from the capped call.

As a result of the partial conversion by certain holders of the 2023 Notes in July 2014, and dividends declared and paid in 2014 and 2015, the conversion rate with respect to our 2023 Notes was adjusted in total to 50.5818 shares of our common stock per $1,000 principal amount of the ~~TSR~~2023 Notes, which represents a conversion price of ~~NASDAQ Biotechnology Index (“Index”)~~approximately $19.77 per share. As a result of the conversion rate adjustments, the capped call strike price and cap price were also adjusted to $19.77 and $27.04, respectively.

During 2016, we retired a ~~service condition that requires continued employment, collectively the “Performance Measures II”. The vesting percentages~~portion of ~~these awards are calculated based on the two-year performance period~~our 2023 Notes with a catch-up provision opportunity measured on December 31, 2019 for RSAs and on September 30, 2019 for RSUs. Two-thirds of amounts earned at the end of year two will vest and be distributed on February 20, 2019, while the final one-third earned after two years as well as the catch-up amount earned will vest and be distributed on February 20, 2020 for RSAs and November 20, 2019 for RSUs. The actual payout of shares may range from a minimum of zero shares to a maximum of 406,868 shares granted upon the actual performance against the Performance Measures II. The grant date fairface value of ~~these awards is determined using a Monte Carlo valuation model. The aggregate~~$14.1 million and carrying value of ~~$3.2~~$13.9 million ~~is recognized as compensation expense over the implied service period and will not be reversed if the market condition is not met.~~

~~Stock-Based Compensation Expense~~

~~Stock-based compensation expense is included~~by way of purchase in the ~~condensed consolidated statements of operations as follows:~~open market.

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

2017

2016

2017

2016

Research and development

$
180

$
143

$
533

$
490

General and administrative

2,292

1,575

6,873

5,933

Total stock-based compensation expense

$
2,472

$
1,718

$
7,406

$
6,423

~~As of~~ ~~September 30, 2017, unrecognized stock-based compensation cost, including performance-contingent RSAs for which~~On March 7, 2022, we used $165.6 million from the ~~performance milestones were determined to be probable of achievement, was as follows:~~

(In thousands)

Unrecognized
Compensation
Cost

Stock options

$
455

RSUs

1,623

RSAs

8,887

Performance-based RSAs

38

Market-based RSUs

360

Market-based RSAs

2,425

Total unrecognized compensation cost

$
13,788

~~7. Debt~~

~~Our debt consists of:~~

September 30,

December 31,

(In thousands)

2017

2016

Senior secured term loan

$
250,000

$
—

Convertible subordinated notes due 2023

240,984

240,984

Convertible senior notes due 2025

192,500

—

Non-recourse notes due 2029

—

487,189

Total debt

683,484

728,173

Unamortized debt discount and issuance costs

(80,035
)
(12,080
)
Current portion of senior secured term loans

(25,000
)
—

Current portion of non-recourse notes due 2029

—

(7,752
)
Net long-term debt

$
578,449

$
708,341

~~Senior Secured Term Loans~~

On August 18, 2017, we entered into a credit agreement (the “Credit Agreement”) and completed a financing of $250.0 million Term B Loan, the net proceeds of which were used to repay the remaining balance of our 2029 Notes. The Term B Loan will mature on August 18, 2022. Two and one half percent (2.5%)sale of the initial principal amount is 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 ability2028 Notes to request one or more additional tranches of term loans (or increase an existing term loan) at any time prior to maturity. Interest on each term loan, at our option, may bear a varying rate of LIBOR plus 4.5% or a certain alternate base rate plus 3.5%. The initial term loan bears interest at a varying rate of three-month LIBOR plus 4.5%. Interest is due quarterly, beginning November 20, 2017.

The term loans under the Credit Agreement are unconditionally guaranteed by one of our wholly-owned subsidiaries, and will be required to be guaranteed by each of our subsequently acquired or organized direct and indirect restricted wholly-owned domestic subsidiaries whose assets or net revenues exceed 5%repurchase 60% of the ~~consolidated assets or net revenues, as the case may be,~~2023 Notes with a face value of our and our restricted subsidiaries (the “Guarantors”). Other domestic restricted subsidiaries, subject to certain customary exceptions, will be required to become Guarantors to the extent that domestic restricted subsidiaries excluded from such guarantee obligation represent, in the aggregate, more than 10%$144.8 million. The carrying value of the ~~consolidated assets~~repurchased 2023 Notes was $144.5 million. Accrued interest was $0.4 million and more than 10% of our consolidated net revenues. These loans are senior secured obligations, collateralized by a lien on substantially all of our and the Guarantors’ personal property and material real property assets (if any).

Additionally, the Credit Agreement stipulates an annual principal payment of a percentage of Excess Cash Flow (“ECF”) to repay the term loans. The percentage of the ECF scales upwards on a tiered basis from 0% to 50%, based on our leverage ratio, as calculated pursuant to the Credit Agreement, as of the last day of the applicable fiscal year. The first ECF application date will be measured as of the end of fiscal year 2018.

~~In connection with the financing of the Term B Loan, we incurred $2.5 million in original interest discount and $4.9 million in~~unamortized debt issuance costs ~~which are being amortized~~were $0.3 million on the date of repurchase. We recognized a loss on the extinguishment of the 2023 Notes of $20.7 million in other expense, net in the unaudited condensed consolidated statement of operations. The repurchase reduced the outstanding principal balance to $96.2 million and unamortized debt issuance costs to $0.2 million. The effective interest rate of the 2023 Notes changed to 2.37%.

On April 18, 2022, certain 2023 Notes holders converted their notes of $3.0 thousand into Innoviva’s common stock. The outstanding principal balance was reduced slightly to $96.2 million.

Our outstanding 2023 Notes balances consisted of the following:


	June 30,			December 31,
(In thousands)	2022			2021
Liability component
Principal	$	96,204		$	240,984
Debt issuance costs, net		(132	)		(620	)
Net carrying amount	$	96,072		$	240,364

The following table sets forth total interest expense ~~over~~recognized related to the ~~estimated life of~~2023 Notes for the ~~loan using the effective interest method. As of September~~three and six months ended June 30, ~~2017, the principal balance of the Term B Loan was $250.0 million, of which $25.0 million was classified as a short-term liability.~~2022 and 2021:


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2022		2021		2022		2021
Contractual interest expense	$	511	$	1,280	$	1,595	$	2,560
Amortization of debt issuance costs		59		147		181		288
Total interest and amortization expense	$	570	$	1,427	$	1,776	$	2,848

Convertible Senior Notes Due 2025

On August 7, 2017, we completed a private placement of ~~$192.5~~$192.5 million aggregate principal amount of our 2025 Notes. The proceeds include the 2025 Notes sold pursuant to the ~~$17.5~~$17.5 million over-allotment option granted by us to the initial purchasers, which option was exercised in full. The 2025 Notes were sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities ~~Act of 1933, as amended (the “Securities Act”).~~Act. The 2025 Notes are senior unsecured obligations and bear interest at a rate of ~~2.5%~~2.5% per year, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2018.

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. The initial conversion rate for the 2025 Notes is 57.9240 shares of our common stock per $1,000 principal amount of the 2025 Notes (which is equivalent to an initial conversion price of approximately ~~$17.26~~$17.26 per share), representing a ~~30.0%~~30.0% conversion premium over the last reported sale price of the Company’s common stock on August 1, 2017, which was ~~$13.28~~$13.28 per share. The conversion rate is subject to customary anti-dilution adjustments in certain circumstances. The 2025 Notes will mature on August 15, 2025, unless repurchased or converted in accordance with their terms prior to such date. Prior to February 15, 2025, the 2025 Notes will be convertible at the option of the holders only upon the occurrence of specified events and during certain ~~periods.~~periods, as described below. From, and including, February 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, the 2025 Notes will be convertible at any time.

Concurrently with the pricing of the offering, we repurchased and retired 1,317,771 shares of our common stock for approximately $17.5 million of the net proceeds from the offering, in privately negotiated transactions effected through one of the initial purchasers or its affiliate, as our agent. The remaining net proceeds from the saleHolders of the 2025 Notes ~~in the offering were used to redeem~~may convert all or a portion of their 2025 Notes prior to the close of business on February 15, 2025 only under the following circumstances:

•

after September 30, 2017, if our closing common stock price for at least 20 days out of the most recent 30 consecutive trading days of the preceding quarter is greater than 130% of the current conversion price of the 2025 Notes;

•

for five consecutive business days, if the average trading price per $1,000 of Notes during the prior 10 consecutive trading days is less than 98% of the product of the our closing common stock price and the conversion rate of the 2025 Notes on such day;

•

upon the occurrence of specified corporate events, including certain distributions, the occurrence of a fundamental changes (as defined in the indenture governing the 2025 Notes) or a transaction resulting in our common stock converting into other securities or property or assets.

On or after February 15, 2025, holders of the 2025 Notes may convert their 2025 Notes at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2025 Notes.

In event of default or a fundamental change (as defined above), holders of the 2025 Notes may require us to repurchase all or a portion of their 2025 Notes at price equal to 100% of the principal ~~outstanding~~amount of the 2025 Notes, plus any accrued and unpaid interest.

Effective January 1, 2022, we adopted ASU 2020-06 using a modified retrospective method, under which financial results reported in prior periods were not adjusted. The adoption of ASU 2020-06 had a material impact on the ~~2029 Notes on August 15, 2017.~~2025 notes.

~~In accordance with accounting guidance for debt with conversion and other options,~~Prior to the adoption of the standard, 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 of $67.3 million 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.~~method over the term of the 2025 Notes. The equity component is not ~~re-measured~~remeasured as long as it continues to meet the conditions for equity classification. Additionally, we separated the total issuance costs of $5.4 million incurred into liability and equity components in proportion to the allocation of the initial proceeds, resulting in liability issuance costs of $3.5 million and equity issuance costs of $1.9 million. Issuance costs attributable to the liability component were amortized on a straight-line basis, which approximated the effective interest rate method, to interest expense over the term of the 2025 Notes. The issuance costs attributable to the equity component were netted against the equity component in additional paid-in capital. The effective interest rate of the liability component of the 2025 Notes was 8.87%.

Upon adoption of ASU 2020-06 on January 1, 2022, we combined the liability and equity components of the 2025 Notes assuming that the instrument was accounted for as a single liability from inception to the date of adoption. We similarly combined the liability and equity components of the issuance costs. The issuance costs are presented as a deduction from the outstanding principal balance of the 2025 Notes, and are amortized on a straight-line basis over the term of the 2025 Notes under the effective interest rate method. As of January 1, 2022, the effective interest rate on the 2025 Notes was 2.88%.

Our outstanding 2025 Notes balances ~~as September 30, 2017~~ consisted of the following:


				June 30,			December 31,
(In thousands)				2022			2021
Liability component
Principal	$	192,500		$	192,500		$	192,500
Debt discount and issuance costs, net	(69,895		)		(2,265	)		(38,211	)
Net carrying amount	$	122,605		$	190,235		$	154,289
Equity component	$	65,361
Equity component, net				$	0		$	65,361

In connection with the issuance of the 2025 Notes, we incurred approximately $5.4 million of debt issuance costs, which primarily consisted of placement, legal and other professional fees, and allocated these costs to the liability and equity components based on the allocation of the proceeds. Of the total $5.4 million of debt issuance costs, $1.9 million were allocated to the equity component and recorded as a reduction to additional paid-in capital and $3.5 million were allocated to the liability component and recorded as a reduction to the carrying amount of the liability component on the consolidated balance sheet. The portion allocated to the liability component is amortized to interest expense over the expected life of the 2025 Notes using the effective interest method.

The following table sets forth total interest expense recognized related to the 2025 Notes ~~from~~for the ~~date of issuance through September~~three and six months ended June 30, ~~2017:~~2022 and 2021:


			Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)			2022		2021		2022		2021
Contractual interest expense	$	722	$	1,203	$	1,203	$	2,406	$	2,406
Amortization of debt issuance costs	69			172		162		343		321
Amortization of debt discount	834			0		1,951		0		3,862
Total interest expense	$	1,625
Total interest and amortization expense			$	1,375	$	3,316	$	2,749	$	6,589

Convertible ~~Subordinated~~Senior Notes Due ~~2023~~2028

In ~~January 2013,~~March 2022, we completed ~~an underwritten public offering~~a private placement of ~~$287.5~~$261.0 million aggregate principal amount of our ~~unsecured 2023~~2028 Notes, which will mature on ~~January~~March 15, ~~2023.~~2028. The ~~financing raised~~ proceeds include the 2028 Notes sold pursuant to the $45.0 million over-allotment option granted by us to the initial purchasers, of which $36.0 million was exercised. The 2028 Notes were sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act.

The net proceeds from the sale of ~~issuance costs,~~the $261.0 million aggregate principal amount of 2028 Notes were approximately ~~$281.2~~$252.6 million ~~less $36.8~~after deducting the initial purchasers’ discounts and commissions and our estimated offering expenses. We used approximately $21.0 million of the net proceeds from the offering to ~~purchase two privately-negotiated~~fund the cost of entering into the capped call ~~option~~ transactions described below. In addition, we used $165.6 million of the remaining net proceeds to repurchase $144.8 million aggregate principal amount of the 2023 Notes in ~~connection~~separate and individually negotiated transactions with certain holders of the 2023 Notes, which closed concurrently with the issuance of the ~~notes.~~ 2028 Notes. We expect to use the remaining net proceeds for general corporate purposes.

The ~~2023~~2028 Notes bear interest at ~~the~~an annual rate of ~~2.125% per year~~2.125% that is payable semi-annually in arrears in cash on ~~January~~March 15 and ~~July~~September 15 of each year, beginning on ~~July~~September 15, ~~2013.~~2022.

The 2028 Notes are convertible, based on the applicable conversion rate, into cash, shares of our common stock or a combination thereof, at our election. The initial conversion rate was 38.1432 shares per $1,000 principal ~~balance~~amount of the ~~2023~~2028 Notes, ~~was reduced~~subject to ~~$241.0 million by~~customary anti-dilution adjustment in certain circumstances, which represented an initial conversion price of approximately $26.22 per share.

Prior to September 15, 2027, the ~~partial~~2028 Notes will be convertible at the option of the holders only upon the occurrence of specified events and during certain periods, and will be convertible on or after September 15, 2027, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the Notes.

Holders of the 2028 Notes may convert all or a portion of their 2028 Notes prior to the close of business on September 15, 2027, only under the following circumstances:

•

after March 31, 2022, if our closing common stock price for at least 20 days out of the most recent 30 consecutive trading days of the preceding quarter is greater than 130% of the current conversion price of the 2028 Notes;

•

for five consecutive business days, if the average trading price per $1,000 of Notes during the prior 10 consecutive trading days is less than 98% of the product of our closing common stock price and the conversion rate of the 2028 Notes on such day;

•

upon the occurrence of specified corporate events, including certain distributions, the occurrence of a fundamental changes (as defined in the indenture governing the 2028 Notes) or a transaction resulting in our common stock converting into other securities or property or assets.

On or after September 15, 2027, holders of the 2028 Notes may convert their 2028 Notes at any time until the close of the business on the second day immediately preceding the maturity date of the 2028 Notes.

The 2028 Notes will be redeemable, in whole or in part, at our option at any time, and from time to time, on or after March 20, 2025, and on or before the 75th scheduled trading day immediately before the maturity date but only if the last reported sale price per share of our common stock exceeds 130% of the conversion price for a specified period of time. The redemption price will be equal to the principal amount of the 2028 Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, calling any 2028 Note for redemption will constitute a make-whole fundamental change (as defined in the indenture governing the 2028 Notes) with respect to that 2028 Note, in which case the conversion rate applicable to the conversion of ~~$32.4 million~~that 2028 Note will be increased in ~~2014~~certain circumstances if it is converted after it is called for redemption.

If we undergo a fundamental change, subject to certain conditions, holders may require us to purchase for cash all or any portion of their 2028 Notes. The fundamental change purchase price will be 100% of the principal amount of the 2028 Notes to be purchased plus any accrued and ~~repurchase~~unpaid interest to, but excluding, the fundamental change purchase date.

The indenture governing the 2028 Notes contains customary terms and covenants, including a merger covenant and that upon certain events of ~~$14.1 million in~~default occurring and continuing, either the ~~open market in 2016. As~~Trustee or the holders of ~~September 30, 2017,~~at least 25% of the ~~capped call strike price and cap price are at $19.77 and $27.04, respectively.~~

~~Non-Recourse Notes Due 2029~~

~~In April 2014, we entered into certain note purchase agreements relating to the private placement of $450.0 million~~ aggregate principal amount of the ~~2029~~outstanding Notes ~~issued by our wholly-owned subsidiary. The 2029 Notes were subject to an annual fixed interest rate~~may declare 100% of ~~9%, with interest and principal paid quarterly.~~

~~In August 2017, we paid down~~ the principal ~~balance~~ of, ~~the 2029 Notes with $15.2 million from the royalty revenues generated in the second quarter of 2017~~ and ~~used~~accrued and unpaid interest, if any, on, all the ~~net proceeds of the Term B Loan and the 2025~~ Notes to ~~redeem $407.6 million of the remaining outstanding balance of~~ ~~the 2029 Notes.~~ be due and payable immediately.

In connection with the ~~redemptions~~offering of the ~~debt,~~2028 Notes, we ~~wrote off $6.4 million~~entered into privately negotiated capped call transactions. The cap price of ~~unamortized debt~~the capped call transaction is initially $33.9850 per share and is subject to certain adjustments under the terms of the capped call transactions. The capped call transactions cover, subject to customary adjustments, the number of shares of common stock initially underlying the 2028 Notes. The capped call transactions are expected generally to reduce potential dilution to our common stock upon conversion of the 2028 Notes or at our election (subject to certain conditions) offset any cash payments we are required to make in excess of the aggregate principal amount of converted 2028 Notes, as the case may be, with such reduction or offset subject to a cap.

As of June 30, 2022, the effective interest rate on the 2028 Notes was 2.70%.

Our outstanding 2028 Notes balance as of June 30, 2022 consisted of the following:


(In thousands)	June 30, 2022
Liability component
Principal	$	261,000
Debt issuance costs, net		(8,057	)
Net carrying amount	$	252,943

The following table sets forth total interest expense recognized related to the 2028 Notes from the date of issuance ~~costs and these are presented as part of Other income (expense), net in our consolidated statements of operations.~~through June 30, 2022:


	Three Months Ended June 30,		Six Months Ended June 30,
(In thousands)	2022		2022
Contractual interest expense	$	1,387	$	1,756
Amortization of debt issuance costs		323		407
Total interest and amortization expense	$	1,710	$	2,163

Debt Maturities

The aggregate scheduled maturities of our ~~long-term~~convertible debt as of ~~September~~June 30, ~~2017 are~~2022 were as follows:

(In thousands)

Years ending December 31:

Remainder of 2017

$
6,250

2018

25,000

2019

25,000

2020

25,000

2121

25,000

2022

143,750

Thereafter

433,484

Total

$
683,484


(In thousands)	June 30, 2022
Years ending December 31:
Remainder of 2022	$	0
2023		96,204
2024		0
2025		192,500
2026		0
Thereafter		261,000
Total	$	549,704

~~8. Shareholders’ Deficit~~

In February 2017, we announced a new capital return plan, the 2017 Capital Return Plan. The 2017 Capital Return Plan authorizes a combination of repurchases of stock and/or repurchases, redemptions or prepayments of debt up to $150.0 million, through tender offers, open market purchases, private transactions, exchange offers or other means through December 31, 2017. In August 2017, as part of the 2017 Capital Return Plan, we used approximately $17.5 million of the net proceeds from the offering of our 2025 Notes to repurchase and retire 1,317,771 shares of our common stock at an average price of $13.28 per share concurrently with the pricing of the offering in privately negotiated transactions effected through one of the initial purchasers or its affiliate, as our agent.

9.10. Commitments and Contingencies

Operating Lease

~~Legal Proceedings~~Our operating leases include Entasis’ facility lease (the “Entasis Lease”) consisting of 20,062 square feet of office and laboratory space in Waltham, Massachusetts. In February 2022, Entasis decided to exercise a renewal option for the Entasis Lease to extend the lease term for three additional years through 2025 and subsequently signed the Second Amendment in April 2022. As of June 30, 2022, the weighted average remaining lease term was 2.8 years and the estimated weighted-average incremental borrowing rate used to determine the operating lease right-of-use assets and lease liabilities was 7.8%.

We also lease approximately 2,111 square feet of office space in Burlingame, California.

The following table summarizes our operating leases as presented in the unaudited condensed consolidated balance sheets:

~~In April 2017, Sarissa Capital Domestic Fund LP and certain~~


	June 30,		December 31,
(In thousands)	2022		2021
Assets
Right-of-use assets	$	3,545	$	97
Liabilities
Lease liabilities, current	$	687	$	106
Lease liabilities, long-term		3,091		0
Total lease liabilities	$	3,778	$	106

Future minimum operating lease payments on the Entasis Lease as of June 30, 2022 were as follows:


(In thousands)	June 30, 2022
Years ending December 31:
Remainder of 2022	$	368
2023		1,249
2024		1,269
2025		1,289
Total undiscounted lease payments		4,175
Less: imputed interest		(442	)
Total operating lease liabilities	$	3,733

Future minimum operating lease payments on our corporate headquarters in Burlingame, California as of June 30, 2022 were as follows:


(In thousands)	June 30, 2022
Years ending December 31:
Remainder of 2022	$	46
Thereafter		0
Total	$	46

LegalProceedings

From time to time, the Company is involved in legal proceedings in the ordinary course of its ~~affiliates (together, “Sarissa”) filed a Verified Complaint Pursuant to Section 225 of the Delaware General Corporation Law and for Specific Performance~~business. Currently, we believe that no litigation or arbitration, either individually or in the ~~Delaware Court~~aggregate, to which we are presently a party is likely to have a material adverse effect on our operating results or financial position.

11. Income Taxes

We recorded a provisional income tax benefit of Chancery, captioned Sarissa Capital Domestic Fund LP, et al. v. Innoviva, Inc., C.A. No. 2017-0309-JRS (the “Specific Performance Litigation”). Sarissa alleges that it had entered into a binding agreement to settle its proxy contest in exchange$0.9 million for the ~~inclusion~~three months ended June 30, 2022 and provisional income tax expense of ~~each~~$6.0 million for the six months ended June 30, 2022, compared to provisional income tax expense of ~~George W. Bickerstaff, III~~$25.3 million and ~~Odysseas Kostas, M.D. on our Board of Directors. Sarissa seeks specific performance of~~$45.1 million for the ~~alleged agreement. On April~~three and six months ended June 30, 2017, we filed a motion to dismiss the Specific Performance Litigation. On May 17, 2017, the Court entered an Order Maintaining Status Quo, which ordered that, during the pendency of the Specific Performance Litigation, the Innoviva Board of Directors shall remain in place, and prohibits the Company from entering or agreeing to any transactions, the consummation of which would require the approval of or vote by Innoviva stockholders or amending, modifying, or repealing Innoviva’s bylaws or charter in the absence of an affirmative vote of five of the then-seven member board of directors or without providing plaintiffs’ counsel five business days’ advance written notice. Trial in the Specific Performance Litigation occurred on July 27, 2017, and the parties are currently awaiting the Court’s ruling. We believe the Specific Performance Litigation is without merit and intend to defend it vigorously. Legal fees relating to this claim have been submitted to the2021 respectively. The Company’s ~~insurance carrier for~~

~~reimbursement pursuant to the terms of its directors’ and officers’ insurance policy; however, as of~~ November 3, 2017, the insurance carrier has not yet made a determination as to the extent to which these costs are covered, if at all, under the Company’s policy. We can provide no assurances that such coverage is or will be available and the Company may not be able to recover any portion of the cost of such litigation.

~~10. Income Taxes~~

~~The~~ effective income tax rate for the ~~three and nine~~six months ended ~~September~~June 30, ~~2017~~2022 was ~~0.05%~~4.3%, compared to ~~0.11%~~18.6% for the same ~~periods~~period in ~~2016. Should we continue to generate taxable~~2021. The income tax expense for the six months ended June 30, 2022 and 2021 was determined based upon estimates of the Company’s effective income tax rates in ~~2017, we expect that the taxable income will be substantially offset by the utilization of net operating losses or other deferred tax assets. The difference between the consolidated~~various jurisdictions. Our effective income tax rate ~~and~~for the six months ended June 30, 2022 was lower than the U.S. federal statutory income tax rate isdue primarily ~~attributable~~ to noncontrolling interest and a ~~change~~decrease in ~~valuation allowance against net deferred tax assets.~~the fair value of our equity investments.

~~11.~~12. Subsequent Events

On July 11, 2022, we announced the completion of our acquisition of Entasis by acquiring all the issued and outstanding equity securities of Entasis not already owned by our company for $2.20 per share for a consideration of $42.4 million.

~~In October 2017,~~On July 11, 2022, we also entered into a definitive merger agreement, whereby we will acquire La Jolla Pharmaceutical Company (“La Jolla”), a company dedicated to the commercialization of innovative therapies that improve outcomes in patients suffering from life-threatening diseases. Under the terms of the agreement, we will acquire all of the outstanding shares of La Jolla for $6.23 per share in cash subject to certain closing conditions.

On July 13, 2022, we announced that we entered into an ~~accelerated share repurchase (ASR)~~ agreement to sell our 15% economic stake in TRC, which receives royalties stemming from sales of TRELEGY® ELLIPTA®, to Royalty Pharma plc for an upfront cash payment of approximately $282.0 million and a potential $50.0 million contingent sales-based milestone payment. Under the terms of the agreement, TRC also transferred to Innoviva all of TRC's ownership interests and investments in InCarda, ImaginAb, Gate Neurosciences and Nanolive. We retain our royalty rights with ~~a financial institution~~respect to ~~repurchase $80 million of our common stock.~~RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®, as well as the GSK Agreements associated with the retained products. The ~~repurchases under the ASR agreement are expected to complete the previously announced 2017 Capital Return Plan authorized by our Board of Directors.~~transaction was closed on July 20, 2022.

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 ~~differ~~ from the plans, intentions, expectations and objectives disclosed in the forward-looking statements that we make. ~~Factors~~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, ~~those~~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 ~~below~~ in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022, and as amended on March 17, 2022 (“2021 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 ~~document~~Quarterly Report on Form 10-Q are based on ~~information available to us~~current expectations as of the date hereof and we do not assume noany obligation to update any ~~such~~ forward-looking statements on account of new information, future events or otherwise, except as required by law.

We encourage you to read our unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q. We also encourage you to read Item 1A of Part I of our 2021 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 2021 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~~31

OVERVIEW

Executive Summary

Innoviva, Inc. (“Innoviva”, the “Company”, the “Registrant” or “we”) and other similar pronouns) is ~~focused on bringing compelling new medicines to patients in areas~~a company with a portfolio of ~~unmet need by leveraging its significant expertise in the development, commercialization~~royalties and ~~financial management of bio-pharmaceuticals, to maximize the commercial potential of its~~other healthcare assets. Our royalty portfolio contains respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR®/BREO® ELLIPTA® (fluticasone furoate/ vilanterol, “FF/VI”) ~~and~~, ANORO® ELLIPTA® (umeclidinium bromide/ vilanterol, “UMEC/VI”) and TRELEGY® ELLIPTA® (the combination FF/UMEC/VI). Under the Long-Acting ~~Beta~~2Beta2 Agonist (“LABA”) Collaboration Agreement, ~~and the Strategic Alliance Agreement with GSK (referred to herein collectively as the “GSK Agreements”), we are~~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. For other products combined with a LABA~~billion; and royalties from the ~~LABA collaboration, such as ANORO™ ELLIPTA™~~sales of ANORO® ELLIPTA®, ~~royalties are~~which tier upward ~~tiering and~~at a range from 6.5% to 10%. Innoviva is also entitled to 15% of ~~any future~~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® ~~(the~~ and any other product or combination ~~FF/UMEC/VI)~~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, including the commercial and developmental obligations associated with the GSK Agreements, ~~intellectual property, licensing operations, business development activities~~optimizing capital allocation and providing for certain essential reporting and management functions of a public company. ~~As of September 30, 2017, we had 12 employees.~~ Our revenues consist of royalties ~~and potential milestone payments, if any,~~ from our respiratory partnership agreements with GSK.

Recent Highlights

•

GSK Net Sales:

· ~~Third~~

•

Second quarter ~~2017~~2022 net sales of RELVAR®/BREO® ELLIPTA®by GSK were ~~$297.4~~$395.5 million, ~~up 40%~~down 10% from ~~$212.2~~$439.5 million in the ~~third~~same quarter of ~~2016,~~2021, with ~~$164.4~~$189.7 million in net sales from the U.S. market and ~~$133.0~~$205.8 million from non-U.S. markets.

· ~~Third~~

•

Second quarter ~~2017~~2022 net sales of ANORO® ELLIPTA®by GSK were ~~$111.9~~$148.2 million, ~~up 57%~~down 19% from ~~$71.2~~$184.0 million in the ~~third~~same quarter of ~~2016,~~2021, with ~~$74.7~~$74.5 million ofnet sales from the U.S. market and ~~$37.2~~$73.7 million from non-U.S. markets.

· ~~Product Updates:~~

· ~~Received~~

•

Second quarter 2022 net sales of TRELEGY® ELLIPTA® by GSK were $590.1 million, up 45% from $405.9 million in ~~September 2017 positive opinion~~the same quarter of 2021, with $449.1 million in net sales from the ~~European Medicines Agency’s Committee for Medicinal Products for Human Use for TRELEGY~~® ~~ELLIPTA~~® ~~for the treatment of chronic obstructive pulmonary disease (COPD) in appropriate patients.~~

· ~~Received in September 2017~~ U.S. ~~Food~~market and ~~Drug Administration approval of TRELEGY~~® ~~ELLIPTA~~® ~~for the treatment of COPD in appropriate patients.~~

· ~~Announced in September 2017 positive headline results from the IMPACT study.~~

· ~~Capital Structure:~~

· ~~Completed in August 2017 the full refinancing of our 2029 Notes.~~

· ~~Issued in August 2017 $192.5~~$141.0 million in ~~aggregate principal~~net sales from non-U.S. markets.

•

Capital Allocations:

•

During the second quarter of ~~2.50% convertible senior notes due 2025.~~

· ~~Closed~~2022, the Company’s wholly owned subsidiary, Innoviva Strategic Opportunities LLC, announced the purchase of all the issued and outstanding equity securities of Entasis Therapeutics not already owned by Innoviva and its affiliates for $2.20 per share for a consideration of $42.4 million. The purchase closed on July 11, 2022.

•

Subsequent to the close of the second quarter of 2022, the Company’s wholly owned subsidiary, Innoviva Strategic Opportunities LLC, entered into a definitive merger agreement to acquire La Jolla Pharmaceutical Company (Nasdaq: LJPC). Innoviva has agreed to pay $5.95 per share and an incremental $0.28 per share for additional cash proceeds received in ~~August 2017~~connection with the divestiture of a ~~$250 million 5 year Term B loan, paying LIBOR + 4.5% interest rate.~~

· ~~Repurchased and retired $17.5 million~~non-core asset. The implied enterprise value of ~~our common stock in August 2017.~~

· ~~Cost Reduction Initiative:~~

· A special committee of our independent directors and the Compensation Committee of our Board of Directors completed a comprehensive review of our spending, including executive and board compensation structures, outside services, travel and entertainment and other expenses.

· ~~Reduced cash interest spending by more than $18.0 million on an annual run rate basis following the refinancing in August 2017 of our 2029 Notes.~~

· ~~Reduced our expected full year 2017 cash operating costs by $2.2~~La Jolla was approximately $149.0 million.

· The ~~Compensation Committee and the full Board of Directors also reviewed and made certain changes to executive and Board compensation plans.~~

~~Capital Return Plan~~

•

In July, the Company sold its 15% stake in Theravance Respiratory Company (“TRC”), which received royalties stemming from sales of TRELEGY® ELLIPTA®, to ~~repurchase any specific dollar amount~~Royalty Pharma plc (Nasdaq: RPRX) for an upfront cash payment of ~~debt or equity or number of shares of common stock under~~approximately $282.0 million and a potential $50.0 million contingent sales-based milestone payment. Under the 2017 Capital Return Plan. We will determine when, if and how to proceed with any repurchase transactions under the program, as well as the amount of any such repurchase transactions, based upon, among other things, our evaluation of our liquidity and capital needs (including for strategic and other opportunities), our business, results of operations, and financial position and prospects, general financial, economic and market conditions, prevailing market prices for shares of our common stock and notes, corporate, regulatory and legal requirements, and other conditions and factors deemed relevant by our management and Board of Directors from time to time. Our 2017 Capital Return Plan may be suspended or discontinued at any time. There can be no assurance as to the actual volume of any debt or share repurchases in any given period or over the termterms of the ~~program or~~agreement, TRC also transferred to Innoviva all of TRC’s ownership interests and investments in InCarda Therapeutics Inc., ImaginAb, Inc., Gate Neurosciences, Inc. and Nanolive SA; collectively, these ownership interests are valued at $42.5 million as of quarter-end. Innoviva retained its royalty rights with respect to ~~the manner or terms of any such transactions.~~

~~As previously announced in April 2017, we prepaid $50.0 million in outstanding principal on our 2029 Notes in May 2017 as part of the 2017 Capital Return Plan discussed above.~~

~~In August 2017, as part of the 2017 Capital Return Plan, we used approximately $17.5 million of the net proceeds from the offering of our 2025 Notes to repurchase~~ANORO® ELLIPTA® and retire 1,317,771 shares of our common stock concurrently with the pricing of the offering in privately negotiated transactions effected through one of the initial purchasers or its affiliate, as our agent.

RELVAR®/BREO® ELLIPTA®.

In October 2017, we entered into an accelerated share repurchase (ASR) agreement with a financial institution to repurchase $80 million of our common stock. The repurchases under the ASR agreement are expected to complete the previously announced 2017 Capital Return Plan authorized by our Board of Directors.

Collaborative Arrangements with GSK

LABA Collaboration

In November 2002, we entered into ~~our~~the LABA ~~Collaboration Agreement~~collaboration with GSK to develop and commercialize once-daily LABA products for the treatment of ~~COPD~~chronic obstructive pulmonary disorder (“COPD”) and ~~asthma.~~asthma (the “LABA Collaboration Agreement”). For the treatment of COPD, the collaboration has developed ~~two~~three combination products: ~~(1)~~

•

RELVAR®/BREO® ELLIPTA® ~~(FF/VI)~~ (“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)~~(“ICS”), fluticasone furoate ~~(FF) and (2)~~ (“FF”),

•

ANORO® ELLIPTA® ~~(UMEC/VI)~~ (“UMEC/VI”), a once-daily medicine combining a long-acting muscarinic antagonist (“LAMA”), umeclidinium bromide ~~(UMEC)~~(“UMEC”), with a LABA, ~~VI. Under the LABA Collaboration Agreement, GSK~~vilanterol (VI), and ~~Innoviva are exploring various paths to create triple therapy medications.~~

•

TRELEGY® ELLIPTA® (the combination FF/UMEC/VI), a once-daily combination medicine consisting of an ICS, LAMA and LABA.

As a result of the launch and approval of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® in the U.S., Japan and Europe, in accordance with the ~~GSK Agreements,~~LABA Collaboration Agreement, we paid milestone fees to GSK totaling $220.0 million during the year ended December 31, 2014. Although we have no further milestone payment obligations to GSK pursuant to the LABA Collaboration Agreement, we continue to have ongoing ~~development and~~ commercialization activities under the ~~GSK Agreements~~LABA Collaboration Agreement, including participation onin the joint steering committee and joint project ~~committees~~committee that are expected to continue over the life of the ~~agreements.~~

agreement. 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.

~~We are entitled to receive royalties from GSK on sales of RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® as follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion. For other products combined with a LABA from the LABA collaboration, such as ANORO® ~~ELLIPTA~~®~~, royalties are upward tiering and range from 6.5% to 10%.~~

~~We are also entitled to 15% of any future royalty payments made by GSK under its agreements originally entered into with us, and since assigned to TRC, including~~ ~~TRELEGY~~® ~~ELLIPTA~~®.

~~2004 Strategic Alliance~~

In March 2004, we entered into the Strategic Alliance Agreement with GSK in which 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. GSK is responsible for funding all future development, manufacturing and commercialization activities for product candidates in that program. We are entitled to receive 15% of any contingent payments and royalties payable by GSK from sales of MABA treatments. For a detailed discussion of our alliance with GSK, see 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, 2016 filed with the SEC on February 28, 2017.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with ~~U.S.~~accounting principles generally accepted ~~accounting principles~~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.

~~Accounting for Convertible Senior Notes Due 2025~~

~~On August 7, 2017, we completed a private placement of $192.5 million aggregate principal amount of our 2025 Notes.~~ ~~Due~~ Other than those set out in Note 1 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,~~accompanying unaudited condensed consolidated financial statements, 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”). The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does notbelieve there 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. The equity component is not re-measured as long as it continues to meet the conditions for equity classification.

~~There were~~been no ~~other~~ significant changes toin our critical accounting policies ~~and estimates. Management’s Discussion and Analysis of Financial Condition and Results of Operations contained~~as described in ~~Part II, Item 7 of our Annual Report on~~the Form 10-K for the year ended December 31, ~~2016~~2021 filed with the SEC on February 28, ~~2017 provides a more complete discussion of our critical accounting policies~~2022, and ~~estimates.~~as amended on March 17, 2022.

Results of Operations

Net Revenue

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

Three Months Ended
September 30,

Change

Nine Months Ended
September 30,

Change

(In thousands)

2017

2016

$

%

2017

2016

$

%

Royalties from a related party - RELVAR/BREO

$
44,604

$
31,917

$
12,687

40
%
$
137,938

$
87,686

$
50,252

57
%
Royalties from a related party - ANORO

7,274

4,627

2,647

57
%
19,464

11,976

7,488

63
%
Total royalties from a related party

51,878

36,544

15,334

42
%
157,402

99,662

57,740

58
%
Less: amortization of capitalized fees paid to a related party

(3,456
)
(3,456
)
—

—
%
(10,368
)
(10,368
)
—

—
%
Royalty revenue

48,422

33,088

15,334

46
%
147,034

89,294

57,740

65
%
Strategic alliance - MABA program license

221

221

—

—
%
663

663

—

—
%
Total net revenue from GSK

$
48,643

$
33,309

$
15,334

46
%
$
147,697

$
89,957

$
57,740

64
%


	Three Months Ended June 30,						Change						Six Months Ended June 30,						Change
(In thousands)	2022			2021			$			%			2022			2021			$			%
Royalties from a related party - RELVAR/BREO	$	59,326		$	65,916		$	(6,590	)		(10	)%	$	115,090		$	122,306		$	(7,216	)		(6	)%
Royalties from a related party - ANORO		9,630			11,960			(2,330	)		(19	)%		18,072			22,460			(4,388	)		(20	)%
Royalties from a related party - TRELEGY		42,720			26,386			16,334			62	%		72,029			48,470			23,559			49	%
Total royalties from a related party		111,676			104,262			7,414			7	%		205,191			193,236			11,955			6	%
Less: amortization of capitalized fees paid to a related party		(3,456	)		(3,456	)		—		*				(6,912	)		(6,912	)		—		*
Royalty revenue from GSK	$	108,220		$	100,806		$	7,414			7	%	$	198,279		$	186,324		$	11,955			6	%

*Not Meaningful

Total net revenue increased to $108.2 million and $198.3 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022, compared to $100.8 million and $186.3 million, respectively, for the same period a year ago, primarily due to ~~the~~ growth in prescriptions ~~and market share quarter over quarter~~ for ~~both~~ ~~RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~®.our TRELEGY products.

Research & Development

Research and development (“R&D”) expenses attributable to Entasis’ product development efforts were $13.9 million and $19.7 million, respectively, for the three and six months ended June 30, 2022. Research and development expenses ~~as compared to the prior year periods, were as follows:~~

Three Months Ended
September 30,

Change

Nine Months Ended
September 30,

Change

(In thousands)

2017

2016

$

%

2017

2016

$

%

Research and development expenses

$
311

$
286

$
25

9
%
$
1,013

$
1,048

$
(35
)
(3
)%

~~Research and development expenses slightly increased~~ for the three and six months ended ~~September~~June 30, ~~2017 compared~~2021 were attributable to the ~~same period a year ago primarily due to slightly higher recognized stock-based compensation expense. Research and~~product development ~~expenses decreased for~~of Pulmoquine Therapeutics Inc., which was dissolved at the ~~nine months ended September 30, 2017 compared to the same period a year ago primarily due to reduced activities related to the late-stage partnered respiratory assets with GSK.~~end of 2021.

General & Administrative

General and administrative expenses, as compared to the prior year ~~periods,~~period, were as follows:


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change				Three Months Ended June 30,				Change					Six Months Ended June 30,				Change
(In thousands)	2017		2016		$		%		2017		2016		$		%		2022		2021		$		%			2022		2021		$		%
General and administrative expenses	$	8,310	$	5,105	$	3,205	63	%	$	29,489	$	17,582	$	11,907	68	%

General and administrative																	$	11,782	$	4,228	$	7,554		179	%	$	18,274	$	10,214	$	8,060		79	%

General and administrative expenses for the three and six months ended ~~September~~June 30, ~~2017 were $8.3 million~~2022 increased compared to ~~$5.1 million~~the same period in ~~the three months ended September 30, 2016, an increase of $3.2 million. The increase was~~2021 mainly due to ~~$2.5 million~~the consolidation of ~~litigation costs resulting from proxy contest. General~~Entasis’ operating expenses starting February 17, 2022.

Interest and administrative expenses for the nine months ended September 30, 2017 were $29.5 million compared with $17.6 million in the nine months ended September 30, 2016, an increase of $11.9 million. The increase was mainly due to $11.0 million of proxy contestdividend income and ~~associated litigation costs.~~other expense, net

~~Other Income (Expense),~~Interest and dividend income and other expense, net, ~~and Interest Income~~

~~Other income (expense), net and interest income,~~ as compared to the prior year ~~periods,~~period, were as follows:

Three Months Ended
September 30,

Change

Nine Months Ended
September 30,

Change

(In thousands)

2017

2016

$

%

2017

2016

$

%

Other (expense) income, net

$
(6,369
)
$
56

$
(6,425
)
*

$
(7,108
)
$
1,743

$
(8,851
)
*

Interest income

376

162

214

132
%
918

411

507

123
%


	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
(In thousands)	2022			2021			$		%			2022			2021			$		%
Interest and dividend income	$	724		$	20		$	704	*			$	1,046		$	50		$	996	*
Other expense, net		(528	)		(951	)		423		(44	)%		(778	)		(1,384	)		606		(44	)%

*Not ~~meaningful~~Meaningful

~~Other~~Interest and dividend income ~~(expense), net~~increased for the three and ~~nine~~six months ended ~~September~~June 30, 2017, mainly consists of the write-off of unamortized debt issuance costs of $6.4 million and $7.3 million, respectively, in relation to our redemptions of the 2029 Notes. Other income (expense), net for the nine months ended September 30, 2016, primarily pertains to a realized gain of $1.7 million from the repurchase of our 2023 Notes.

~~Interest income increased for the~~ ~~three and nine months ended September 30, 2017 as~~2022 compared to the same periods a year ago ~~primarily~~ due to higher ~~interest generated~~returns on investments, including those managed by ISP Fund LP.

Other expense, net, was primarily expenses incurred by ISP Fund LP. Other expense, net was partially offset by income from ~~our investments in marketable securities.~~grants of $0.4 million and $0.7 million during the three and six months ended June 30, 2022. There was no income from grants during 2021.

Interest Expense

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


	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change				Three Months Ended June 30,				Change						Six Months Ended June 30,				Change
(In thousands)	2017			2016			$		%		2017			2016			$		%		2022		2021		$			%			2022		2021		$			%
Interest expense	$	(10,262	)	$	(13,103	)	$	2,841	(22	)%	$	(35,247	)	$	(39,416	)	$	4,169	(11	)%	$	3,655	$	4,745	$	(1,090	)		(23	)%	$	6,665	$	9,439	$	(2,774	)		(29	)%

~~Interest~~The decrease in interest expense ~~decreased~~was primarily due to the adoption of the new accounting standard, ASU 2020-06, which is to simplify the accounting for convertible debt instruments, and the debt discount associated with the cash settlement feature of our convertible notes due 2025 (“2025 Notes”), which was adjusted to zero as of January 1, 2022. The interest expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 included the contractual interest expense and the amortization of debt issuance costs for our 2023 Notes, 2025 Notes and 2028 Notes. Interest expense for the three and six months ended June 30, 2021 included the contractual interest expense, the amortization of debt discount and issuance costs for our 2023 Notes and 2025 Notes.

Loss on Debt Extinguishment

We recognized a loss of $20.7 million due to the total premium payment of $20.4 million and the write-off of $0.3 million debt issuance costs in connection with the repurchase of $144.8 million aggregate principal amount of our 2023 Notes in March 2022.

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:


	Three Months Ended June 30,					Change						Six Months Ended June 30,					Change
(In thousands)	2022			2021		$			%			2022			2021		$			%
Changes in fair values of equity and long-term investments, net	$	(58,600	)	$	45,315	$	(103,915	)		(229	)%	$	(68,011	)	$	100,360	$	(168,371	)		(168	)%

The changes in fair values of equity and long-term investments for the three and six months ended June 30, 2022 decreased compared to the same ~~periods a year ago primarily~~period in 2021 mainly due to the ~~redemption~~volatility in the capital markets. The changes in fair values of equity and long-term investments reflect the realized gains and losses and net unrealized gains and losses in our ~~2029 Notes with~~strategic investments in Armata, InCarda, Gate, and those investments managed by ISP Fund LP.

Provision for Income Taxes

We recorded a provisional income tax benefit of $0.9 million for the ~~net proceeds from~~three months ended June 30, 2022 and provisional income tax expense of $6.0 million for the ~~Term B Loan~~six months ended June 30, 2022, compared to provisional interest tax expense of $25.3 million and ~~2025 Notes,~~$45.1 million for the ~~lower~~three and six months ended June 30, 2021. The effective income tax rate for the six months ended June 30, 2022 and 2021 was 4.3% and 18.6%, respectively.

Net Income Attributable to Noncontrolling Interest

Net income attributable to noncontrolling interest, ~~rates starting August 2017 under the Term B Loan and 2025 Notes~~as compared to the prior periods, was as follows:


	Three Months Ended June 30,				Change						Six Months Ended June 30,				Change
(In thousands)	2022		2021		$			%			2022		2021		$		%
Net income attributable to noncontrolling interest	$	20,432	$	21,898	$	(1,466	)		(7	)%	$	42,517	$	37,470	$	5,047		13	%

Net income attributable to noncontrolling interest ~~rates~~represents $28.3 million and $53.4 million for the 85% share of net income in Theravance Respiratory Company, LLC for Theravance Biopharma and $7.9 million and $10.9 million for the ~~2029 Notes,~~40% share of net loss in Entasis Therapeutics Holdings, Inc. for the three and ~~lower balance~~six months ended June 30, 2022, respectively. The net income attributable to noncontrolling interest for the three and six months ended June 30, 2021 represents the 85% share of ~~our 2023 Notes, of which $4.1 million was repurchased since September 30, 2016. See “Liquidity” section below~~net income in Theravance Respiratory Company, LLC for ~~further information.~~Theravance Biopharma.

Liquidity and Capital Resources

Liquidity

~~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. ~~Since~~For the ~~start of the commercialization of RELVAR~~®~~/ BREO~~® ~~ELLIPTA~~® ~~in the fourth quarter of 2013 and ANORO~~® ~~ELLIPTA~~® ~~during 2014, we have complemented the source of financing with royalty revenues from the global net sales of these products by GSK. In the nine~~six months ended ~~September~~June 30, ~~2017,~~2022, we generated gross royalty revenues from GSK of ~~$157.4~~$205.2 million. Net cash and cash equivalents ~~short term investments~~totaled $283.6 million, inclusive of $22.4 million of Entasis’ cash balance, and ~~marketable securities totaled $168.2 million, and royalties receivable~~receivables from GSK totaled ~~$51.9~~$111.7 million as of ~~September~~June 30, ~~2017.~~2022.

In April 2014, we entered into certain note purchase agreements relating to the private placement of $450.0 million aggregate principal amount of our 2029 Notes. The 2029 Notes were secured exclusively by a security interest in a segregated bank account established to receive 40% of the royalties from global net sales due to us under the LABA Collaboration Agreement with GSK and ending upon the earlier of full repayment of principal or May 15, 2029. In August 2017, we used the net proceeds of the Term B Loan and the 2025 Notes (both described below) to redeem the 2029 Notes in full.

On August 7, 2017, we completed a private placement of $192.5 million aggregate principal amount of our 2025 Notes. The proceeds include the 2025 Notes sold pursuant to the $17.5 million over-allotment option granted by us to the initial purchasers, which option was exercised in full. The 2025 Notes were sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The 2025 Notes will mature on August 15, 2025, unless repurchased or converted in accordance with their terms prior to such date. Concurrently with the pricing of the offering, we repurchased and retired 1,317,771 shares of our common stock for approximately $17.5 million of the net proceeds from the offering, in privately negotiated transactions effected through one of the initial purchasers or its affiliate, as our agent. The remaining net proceeds from the sale of the 2025 Notes in the offering were used to redeem a portion of the principal outstanding under the 2029 Notes on August 15, 2017.

On August 18, 2017, we entered into a Credit Agreement and completed a financing of $250.0 million Term B Loan, the proceeds of which were used to repay the remaining balance of the 2029 Notes. The Term B Loan will mature on August 18, 2022. Two and a half percent (2.5%) of the initial principal amount is 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.

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 ~~including the funding of the 2017 Capital Return Plan discussed in the preceding section,~~ for at least the next ~~twelve~~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 ~~consistent~~allowable with the terms of our debt agreements.

Cash Flows

Cash flows, as compared to the prior year ~~periods,~~period, were as follows:


	Nine Months Ended September 30,								Six Months Ended June 30,
(In thousands)	2017			2016			Change		2022			2021			Change
Net cash provided by operating activities	$	93,890		$	39,898		$	53,992	$	177,137		$	168,721		$	8,416
Net cash provided by (used in) investing activities	2,644			(27,900		)	30,544			(145,678	)		63,627			(209,305	)
Net cash used in financing activities	(76,133		)	(77,984		)	1,851

Net cash provided by (used in) financing activities										50,596			(435,570	)		486,166

Cash Flows from Operating Activities

~~Cash~~Net cash provided by operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 was ~~$93.9~~$177.1 million, consisting primarily of our net income of ~~$75.8~~$59.2 million, adjusted for net non-cash items such as ~~$10.5~~$6.0 million of deferred income tax, $7.1 million of depreciation and amortization, $20.7 million of loss on extinguishment of debt, and $68.0 million decrease in the fair value of our equity and long-term investments, offset by $6.9 million of accrued personnel-related expenses and other accrued liabilities, $3.0 million of prepaid expenses and $2.7 million of accounts payable.

Net cash provided by operating activities for the six months ended June 30, 2021 was $168.7 million, consisting primarily of our net income of $220.5 million, adjusted for net non-cash items such as $45.1 million of deferred income taxes, $6.9 million of depreciation and amortization, and ~~$7.4~~$4.5 million ~~for stock-based compensation expense,~~of amortization of debt discount and issuance costs, partially offset by ~~changes~~an increase of $99.0 million in ~~operating assets~~the fair value of our equity and ~~liabilities, including~~long-term investments, net and an increase in receivables from collaborative arrangements of ~~$5.0 million and a reduction in accrued interest payable of $4.3~~$10.3 million.

~~Cash provided by operating activities~~ for the nine months ended September 30, 2016 was $39.9 million, consisting primarily of our net income of $34.1 million, adjusted for non-cash items such as $10.5 million of depreciation and amortization and $6.4 million for stock-based compensation expense, offset by changes in operating assets and liabilities, including an increase in receivables from collaborative arrangements of $10.4 million.

Cash Flows from Investing Activities

Net cash flows from investing activities for the nine months ended September 30, 2017 of $2.6 million was primarily due to $44.4 million proceeds received from maturities of marketable securities, partially offset by $41.7 million in purchases of marketable securities.

Net cash used in investing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2022 of ~~$27.9~~$145.7 million was primarily due to $38.0 million of purchases of ~~marketable securities~~equity investments managed by ISP Fund LP, $96.3 million of ~~$82.7~~purchases and sales of other investments managed by ISP Fund LP, net, and $58.7 million investments in Armata, InCarda, and Nanolive, partially offset by ~~$55.1~~$24.3 million of ~~proceeds received from~~ sales of equity investments managed by ISP Fund LP and ~~maturities~~$23.1 million of ~~marketable securities.~~cash acquired through the consolidation of Entasis.

Net cash provided by investing activities for the six months ended June 30, 2021 of $63.6 million was due to $18.5 million of sales of equity investments managed by ISP Fund LP and $234.1 million of purchase and sales of other investments managed by ISP Fund LP, net partially offset by $142.6 million of purchases of equity investments managed by ISP Fund LP and $46.4 million investments in Armata, ImaginAb and Entasis.

Cash Flows from Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2022 of $50.6 million was primarily due to the net proceeds of $252.5 million from the issuance of the convertible senior notes due in 2028, net of issuance costs, offset with $21.0 million purchase of capped call options associated with the 2028 Notes, $165.1 million for the repurchase of the 2023 Notes, and $16.1 million distributions to noncontrolling interest.

Net cash used in financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 of ~~$76.1 million~~ was primarily due to $487.2 million principal repayments of the 2029 Notes and $17.5 million paid for repurchase of our common stock, offset by the net proceeds of $242.6 million from the financing of our Term B Loan and the net proceeds of $187.1 million from issuance of our 2025 Notes.

~~Net cash used in financing activities for the nine months ended~~ ~~September 30, 2016 of $78.0~~$435.6 million was primarily due to ~~$65.6~~$394.1 million ~~paid~~used for ~~the repurchase of~~our common stock repurchase from GSK and ~~$3.3~~$41.4 million ~~partial payment~~distributions to noncontrolling interest.

Contractual Obligations

In March 2022, we completed a private placement of $261.0 million aggregate principal amount of unsecured convertible senior notes, the 2028 Notes, which will mature on March 15, 2028. Under the ~~principal~~terms of the ~~2029 Notes. Additionally, $8.1~~2028 Notes, we will make interest payments of approximately $2.9 million ~~was paid for~~during the ~~repurchase~~year 2022 and $5.5 million in each of the years from 2023 through 2027. The principal balance of $261.0 million will become due in March 2028. As of March 31, 2022, our notes payable obligation also included $96.2 million related to our 2023 Notes which are due in 2023 and $192.5 million related to our 2025 Notes which are due in 2025. Refer to Note 8, “Debt”, to the Condensed Consolidated Financial Statements for more information.

During the six months ended June 30, 2022, we determined that we have both (1) the power to direct the economically significant activities of Entasis and (2) the obligation to absorb the losses, or the right to receive the benefits, that could potentially be significant to Entasis, and therefore, we are the primary beneficiary of Entasis. Accordingly, we consolidated Entasis’ financial position and results of operations effective on February 17, 2022. In connection with the consolidation, we assumed contractual obligations related to an operating lease of Entasis for office and laboratory space in Waltham, Massachusetts with an expiration date in 2025. As of June 30, 2022, total undiscounted future minimum lease payments related to the Entasis lease were $4.2 million, with approximately $0.4 million ~~was received from the termination~~payable through December 31, 2022 and approximately $1.3 million payable in each of the ~~corresponding portion of~~years from 2023 to 2025. Refer to Note 9, “Commitments and Contingencies”, to the ~~capped call arrangement, which resulted in net cash consideration of $7.7 million.~~

~~Off-Balance Sheet Arrangements~~Condensed Consolidated Financial Statements for more information.

In June 2014, our facility leases in South San Francisco, California were assigned to 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 maintenance, which may be as much as the actual lease payments. As of September 30, 2017, the total remaining lease payments for the duration of the lease, which runs through May 2020, were $17.1 million. The carrying value of this lease guarantee was $0.9 million as of September 30, 2017 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 September 30, 2017.~~

Payment Due by Period

Less Than

More Than

(In thousands)

Total

1 Year

1 - 3 Years

3 - 5 Years

5 Years

2023 Notes

$
269,149

$
5,121

$
10,242

$
10,242

$
243,544

2025 Notes

231,121

4,933

9,625

9,625

206,938

Term B Loan

250,000

25,000

50,000

175,000

—

Facility leases

2,378

389

813

863

313

Total

$
752,648

$
35,443

$
70,680

$
195,730

$
450,795

~~The Term B Loan balances reflect the principal repayment obligations and do not include the interest payments as the loan bears interest at a varying rate of three-month LIBOR plus 4.5% margin.~~

Item 3. Quantitative and Qualitative Disclosure about Market Risk

~~Other than as set forth below, during the nine months ended~~ ~~September 30, 2017, there~~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, ~~2016.~~2021.

~~Interest Rate Risk~~

Our debt portfolio includes the senior secured term loans under the Term B Loan which bear interest at a varying rate of LIBOR plus 4.5% or a certain alternate base rate plus 3.5%. We are exposed to market risks related to fluctuations in interest rates on these loans. As of September 30, 2017, the stated interest rate for the Term B Loan, based on the LIBOR, was 5.8%. An increase in the LIBOR of 50 basis points would increase our annual interest expense by $1.3 million based on the outstanding balance of $250.0 million as of September 30, 2017.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

We conducted an evaluation as of ~~September~~June 30, ~~2017,~~2022, under the supervision and with the participation of our management, ~~including our Chief Executive Officer and Chief Financial Officer,~~ 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 ~~Financial~~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 ~~including our Chief Executive Officer and Chief Financial Officer,~~ 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~~have been 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 ~~September~~June 30, ~~2017~~2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

~~As disclosed~~There have not been any material changes to our legal proceedings from those reported in our ~~Current~~fiscal year 2021 Annual Report on Form ~~8-K,~~10-K filed with the SEC on April 26, 2017, on April 20, 2017, Sarissa Capital Domestic Fund LP and certain of its affiliates (together, “Sarissa”) filed a Verified Complaint Pursuant to Section 225 of the Delaware General Corporation Law and for Specific Performance in the Delaware Court of Chancery, captioned Sarissa Capital Domestic Fund LP, et al. v. Innoviva, Inc., C.A. No. 2017-0309-JRS (the “Specific Performance Litigation”). Sarissa alleges that it had entered into a binding agreement to settle its proxy contest in exchange for the inclusion of each of George W. Bickerstaff, III and Odysseas Kostas, M.D. on our Board of Directors. Sarissa seeks specific performance of the alleged agreement. With the complaint, Sarissa also filed a Motion for Entry of Status Quo Order, which seeks, among other things, to prevent us from engaging in any action outside the ordinary course of business without first giving Sarissa ten (10) business days’ notice until the Specific Performance Litigation is resolved. On April 30, 2017, we filed a motion to dismiss the Specific Performance Litigation. On May 17, 2017, the Court entered an Order Maintaining Status Quo, which ordered that, during the pendency of the Specific Performance Litigation, the Innoviva Board of Directors shall remain in place, and prohibits the Company from entering or agreeing to any transactions, the consummation of which would require the approval of or vote by Innoviva stockholders or amending, modifying, or repealing Innoviva’s bylaws or charter in the absence of an affirmative vote of five of the then-seven member board of directors or without providing plaintiffs’ counsel five business days’ advance written notice. Trial in the Specific Performance Litigation occurred on July 27, 2017, and the parties are currently awaiting the Court’s ruling. We believe the Specific Performance Litigation is without merit and intend to defend it vigorously. Legal fees relating to this claim have been submitted to the Company’s insurance carrier for reimbursement pursuant to the terms of its directors’ and officers’ insurance policy; however, as of November 3, 2017, the insurance carrier has not yet made a determination as to the extent to which these costs are covered, if at all, under the Company’s policy. We can provide no assurances that such coverage is or will be available and the Company may not be able to recover any portion of the cost of such litigation.SEC.

~~From time to time, we may also be involved in legal proceedings in the ordinary course of business.~~

Item 1A. Risk Factors

~~Risks Related to our Business~~

~~For~~The information presented below supplements the ~~foreseeable future we will derive all~~risk factors set forth in Item 1A of Part I of our ~~royalty revenues from GSK and our future success depends~~2021 Form 10-K. As previously disclosed, on ~~GSK’s ability to successfully develop and commercialize the products in the respiratory programs partnered with GSK.~~

~~Pursuant to the GSK Agreements, GSK is responsible for the development and commercialization of products in the partnered respiratory programs. Royalty revenues from RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~® will represent the majority of our future revenues from GSK. The amount and timing of revenue from such royalties and milestones are unknown and highly uncertain. Our future success depends upon the performance by GSK of its commercial obligations under the GSK Agreements and the commercial success of RELVAR®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~®~~. We have no control over GSK’s marketing and sales efforts, and GSK might not be successful, which would harm our business and cause the price of our securities to fall.~~

~~The amount of royalties and milestone payments, if any,~~July 11, 2022, we ~~receive will depend on many factors, including the following:~~

· ~~the extent and effectiveness of the sales and marketing and distribution support GSK provides to our partnered products;~~

· ~~market acceptance and demand for our partnered products;~~

· ~~changes in the treatment paradigm or standard of care for COPD or asthma, for instance through changes to the GOLD (Global Initiative for Chronic Obstructive Lung Disease) guidelines;~~

· ~~the competitive landscape of generic and branded products and developing therapies that compete with our partnered products, including TRELEGY~~® ~~ELLIPTA~~® ~~or products owned by GSK (such as Advair~~®~~) but which are not partnered with us and pricing pressure in the respiratory markets targeted by our partnered products;~~

· ~~the size of the market for our partnered products;~~

· ~~decisions as to the timing of product launches, pricing and discounts;~~

· ~~GSK reprioritizing its commercial efforts on other products, including TRELEGY~~® ~~ELLIPTA~~® ~~or products owned by GSK (such as Advair~~®~~) but which are not partnered with us;~~

· ~~GSK’s ability to expand the indications for which our partnered products can be marketed;~~

· ~~a satisfactory efficacy and safety profile as demonstrated in a broad patient population;~~

· ~~acceptance of, and ongoing satisfaction with, our partnered products by the medical community, patients receiving therapy and third party payors;~~

· ~~the ability of patients to be able to afford our partnered products or obtain health care coverage that covers our partnered products;~~

· ~~safety concerns in the marketplace for respiratory therapies in general and with our partnered products in particular;~~

· ~~regulatory developments relating to the manufacture or continued use of our partnered products;~~

· ~~the requirement to conduct additional post-approval studies or trials for our partnered products;~~

· ~~GSK’s ability to successfully achieve development milestones with respect to our partnered MABA program;~~

· ~~GSK’s ability to obtain regulatory approval of our partnered products in additional countries;~~

· ~~the unfavorable outcome of any potential litigation relating to our partnered products; or~~

· ~~general economic conditions in the jurisdictions where our partnered products are sold, including microeconomic disruptions or slowdowns.~~

~~If the FDA or other applicable regulatory authorities approve generic products, including but not limited to generic forms of Advair~~®~~, that compete with RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~®~~, or generic form of RELVAR~~®~~/BREO~~® ~~ELLIPTA~~®, ~~the royalties payable to us pursuant to the LABA Collaboration Agreement will be less than anticipated, which in turn would harm our business and the price of our securities could fall.~~

Once an NDA or marketing authorization application outside the United States is approved, the product covered thereby becomes a “listed drug” that can, in turn, be cited by potential competitors in support of approval of an Abbreviated New Drug Application (“ANDA”) in the United States. Agency regulations and other applicable regulations and policies provide incentives to manufacturers to create modified, non-infringing versions of a drug to facilitate the approval of an ANDA or other application for generic substitutes in the United States and in nearly every pharmaceutical market around the world. Numerous companies like Mylan N.V., Hikma Pharmaceuticals PLC (Hikma), Novartis’ Sandoz division and Teva Pharmaceuticals Industries Ltd. (Teva) have publicly stated their intentions to bring generic forms of the ICS/LABA drug Advair®~~, when certain patents covering the Advair~~® delivery device expired in 2016. In March 2017, Mylan N.V. received a complete response letter from the FDA relating to its ANDA for fluticasone propionate 100, 250, 500 mcg and salmeterol 50 mcg inhalation powder. In May 2017, Hikma announced that it received a complete response letter form the FDA relating to its ANDA for fluticasone propionate and salmeterol inhalation powder. In addition, Teva announced recently that the FDA approved two of their products for adolescent and adult patients with asthma, AirDuoTM ~~RespiClick~~® ~~(fluticasone propionate and salmeterol inhalation powder) and ArmonAirTM RespiClick~~® ~~(fluticasone propionate inhalation powder), which are non-AB generic versions of Advair~~®. In general, these manufactures are required to conduct a restricted number of clinical efficacy, pharmacokinetic and device studies to demonstrate equivalence to Advair, per FDA’s September 2013 Draft Guidance document. These studies are designed to demonstrate that the generic product has the same active ingredient(s), dosage form, strength, exposure and clinical efficacy as the branded product. These generic equivalents, which must meet the same exacting quality standards as branded products, may be significantly less costly to bring to market, and companies that produce generic equivalents are generally able to offer their products at lower prices. Thus, after the introduction of a generic competitor, a significant percentage of the sales of any branded product and products that may compete with such branded product is typically lost to the generic product. In addition, in April 2016, the FDA issued draft guidelines documents covering Fluticasone Furoate/Vilanterol Trifenatate (FF/VI), the active ingredients used in RELVAR®~~/BREO~~® ~~ELLIPTA~~®~~. Accordingly, introduction of generic products that compete against ICS/LABA products, like RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~®, would materially adversely impact our future royalty revenue, profitability and cash flows. We cannot yet ascertain what impact these generic products and any future approved generic products will have on any sales of RELVAR®~~/BREO~~® ~~ELLIPTA~~® ~~or ANORO~~® ~~ELLIPTA~~®~~, if approved.~~

Reduced prices and reimbursement rates due to the actions of governments, payors, or competition or other healthcare cost containment initiatives such as restrictions on use, may negatively impact royalties generated under the GSK Agreements.

The continuing efforts of governments, pharmaceutical benefit management organizations (PBMs), insurance companies, managed care organizations and other payors of health care costs to contain or reduce costs of health care has adversely affected the price, market access, and total revenues of RELVAR®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~® and may continue to adversely affect them in the future. In addition, we have experienced and expect to continue to experience increased competitive activity which has resulted in lower overall prices for our products.

~~The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (together, “PPACA”) and other~~ legislative or regulatory requirements or potential legislative or regulatory actions regarding healthcare and insurance matters, along with the trend toward managed healthcare in the U.S., could adversely influence the purchase of healthcare products and reduce demand and prices for our partnered products. This could harm GSK’s ability to market our partnered products and significantly reduce future revenues. For example, when GSK launched BREO® ~~ELLIPTA~~® for the treatment of COPD in the U.S. in October 2013, GSK experienced significant challenges gaining coverage at some of the largest PBMs, healthcare payors, and providers and lower overall prices than expected. Recent actions by U.S. PBMs in particular have increased discount levels for respiratory products resulting in lower net sales pricing realized for products in our collaboration. In addition, in certain foreign markets, the pricing of prescription drugs is subject to government control and reimbursement may in some cases be unavailable. We believe that pricing pressures will continue and may increase. This may make it difficult for GSK to sell our partnered products at a price acceptable to us or GSK or to generate revenues in line with our analysts’ or investors’ expectations, which may cause the price of our securities to fall.

More recently, the new presidential administration and the U.S. Congress have taken actions in an effort to replace PPACA and related legislation with new healthcare legislation. There is uncertainty with respect to the impact these potential changes may have, if any, and any changes will likely take time to unfold, and could have an impact on coverage and reimbursement for healthcare items and services covered by plans that were authorized by PPACA. However, we cannot predict the ultimate content, timing or effect of any healthcare reform legislation or the impact of potential legislation on us.

We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products once approved or additional pricing pressures, and may adversely affect our operating results.

~~All of our current revenues are from royalties derived from sales of our respiratory products partnered with GSK, RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~and~~ ~~ANORO~~® ~~ELLIPTA~~®. If the treatment paradigm for the indications our partnered products are approved for change or if GSK is unable to, or does not devote sufficient resources to, maintain or continue increasing sales of these products, our results of operations will be adversely affected.

We currently depend on royalties from sales of our products partnered with GSK to support our existing operations. The treatment paradigm for COPD and asthma constantly evolve. For instance, in December 2016, the GOLD (Global Initiative for Chronic Obstructive Lung Disease) guidelines were revised to favorably position LABA/LAMA treatment compared to ICS/LABA for the treatment of COPD. If the treatment paradigms were to change further, causing our partnered products to fall out of favor, or if GSK was unable, or did not devote sufficient resources, to maintain or continue increasing our partnered product sales, our results of operations would likely suffer and we may need to scale back our operations and capital return programs.

~~If the commercialization of RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~or ANORO~~® ~~ELLIPTA~~® in the countries in which they have received regulatory approval encounters any delays or adverse developments, or perceived delays or adverse developments, or if sales or payor coverage do not meet investors, analysts or our expectations, our business will be harmed, and the price of our securities could fall.

~~Under our agreements with our collaborative partner GSK, GSK has full responsibility for commercialization of RELVAR~~®~~/ BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~®~~. GSK has launched RELVAR~~®~~/ BREO~~® ~~ELLIPTA~~® in a number of countries including the United States (U.S.), Canada, Japan, the United Kingdom, and Germany among others. The commercialization of both products in countries where they are already launched and the commercialization launch in new countries are still subject to fluctuating overall pricing levels and uncertain timeframes to obtain payor coverage. Any delays or adverse developments or perceived additional delays or adverse developments with respect to the commercialization of RELVAR®~~/ BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~® ~~including if sales or payor coverage do not meet investors, analysts or our expectations, will significantly harm our business and the price of our securities could fall.~~

We are dependent on GSK for the successful commercialization and development of products under the GSK Agreements. If GSK does not devote sufficient resources to the commercialization or development of these products, is unsuccessful in its efforts, or chooses to reprioritize its commercial programs, including ~~TRELEGY~~® ~~ELLIPTA~~®~~, our business will be materially harmed.~~

~~GSK is responsible for all clinical and other product development, regulatory, manufacturing and commercialization activities for products developed under the GSK Agreements, including RELVAR~~®~~/BREO~~® ~~ELLIPTA~~®~~, ANORO~~® ~~ELLIPTA~~® ~~and TRELEGY~~® ~~ELLIPTA~~®. Our royalty revenues under the GSK Agreements may not meet our, analysts’, or investors’ expectations, due to a number of important factors. GSK has a substantial respiratory product portfolio in addition to the partnered products that are covered by the GSK Agreements. GSK may make respiratory product portfolio decisions or statements about its portfolio which may be, or may be perceived to be, harmful to the respiratory products partnered with us. For instance, GSK has wide discretion in determining the efforts and resources that it will apply to the commercialization of our partnered products. The timing and amount of royalties that we may receive will depend on, among other things, the efforts, allocation of resources and successful development and commercialization of these product candidates by GSK. In addition, GSK may determine to focus its commercialization efforts on its own products or TRELEGY® ~~ELLIPTA~~®~~. For example, in January 2015, GSK launched Incruse~~® (Umec) in the U.S., which is a LAMA for the treatment of COPD. GSK may determine to focus its marketing efforts on Incruse, which could have the effect of decreasing the potential market share of ANORO® ~~ELLIPTA~~® ~~and lowering the royalties we may receive for such product. Alternatively, GSK may decide to market Incruse~~® ~~in combination with RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~as an open triple therapy alternative to TRELEGY~~® ~~ELLIPTA~~®~~, or market TRELEGY~~® ~~ELLIPTA~~® ~~to eventually compete directly against sales of RELVAR~~®~~/BREO~~® ~~ELLIPTA~~®~~. Following the FDA approval of TRELEGY~~® ~~ELLIPTA~~® in September 2017, GSK’s diligent efforts obligations regarding commercialization matters now has the objective of focusing on the best interests of patients and maximizing the net value of the overall portfolio of products under the GSK Agreements. Since GSK’s commercialization efforts following this regulatory approval is guided by a portfolio approach across products in which we have retained our full interest and also products in which we now have only a small portion of our former interest, GSK’s commercialization efforts may have the effect of reducing the overall value of our remaining interests in the GSK Agreements in the future. If GSK prioritizes TRELEGY® ~~ELLIPTA~~® following commercialization, we will only be entitled to a 15% economic interest of the royalties paid pursuant to the GSK Agreements with respect to this product. In the event GSK does not devote sufficient resources to the commercialization of our partnered products or chooses to reprioritize its commercial programs, our business, operations and stock price would be negatively affected.

~~Any adverse change in FDA policy or guidance regarding the use of LABAs to treat asthma may significantly harm our business and the price of our securities could fall.~~

On February 18, 2010, the FDA announced that LABAs should not be used alone in the treatment of asthma and it will require manufacturers to include this warning in the product labels of these drugs, along with taking other steps to reduce the overall use of these medicines. The FDA now requires that the product labels for LABA medicines reflect, among other things, that the use of LABAs is contraindicated without the use of an asthma controller medication such as an inhaled corticosteroid, that LABAs should only be used long-term in patients whose asthma cannot be adequately controlled on asthma controller medications, and that LABAs should be used for the shortest duration of time required to achieve control of asthma symptoms and discontinued, if possible, once asthma control is achieved. In addition, in March 2010, the FDA held an Advisory Committee to discuss the design of medical research studies (known as “clinical trial design”) to evaluate serious asthma outcomes (such as hospitalizations, a procedure using a breathing tube known as intubation, or death) with the use of LABAs in the treatment of asthma in adults, adolescents, and children. Further, in April 2011, the FDA announced that to further evaluate the safety of LABAs, it is requiring the manufacturers of currently marketed LABAs to conduct additional randomized, double-blind, controlled clinical trials comparing the addition of LABAs to inhaled corticosteroids versus inhaled corticosteroids alone. These post-marketing studies have been completed, however, the FDA has not taken any action to remove the required warning from the product labels for LABA medicines. It is unknown at this time what, if any, effect these or future FDA actions will have on the prospects for FF/VI. The current uncertainty regarding the FDA’s position on LABAs for the treatment of asthma and the lack of consensus expressed at the March 2010 Advisory Committee may result in the FDA requiring additional asthma clinical trials in the U.S. for FF/VI and increase the overall risk of FF/VI for the treatment of asthma in the U.S. We cannot predict the extent to which new FDA policy or guidance might significantly impede the discovery, development, production and marketing of FF/VI. Any adverse change in FDA policy or guidance regarding the use of LABAs to treat asthma may significantly harm our business and the price of our securities could fall.

~~Any adverse developments to the regulatory status of either RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~or ANORO~~® ~~ELLIPTA~~® in the countries in which they have received regulatory approval including labeling restrictions, safety findings, or any other limitation to usage, will harm our business and may cause the price of our securities to fall.

~~Although RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~® are approved and marketed in a number of countries, it is possible that adverse changes to the regulatory status of these products could occur in the event new safety issues are identified, treatment guidelines are changed, or new studies fail to demonstrate product benefits. A number of notable pharmaceutical products have experienced adverse developments during commercialization that have resulted in the product being withdrawn, approved uses being limited, or new warnings being included. In the event that any adverse regulatory change was to occur to any of our products, our business will be harmed and the price of our securities could fall.

Any adverse developments or results or perceived adverse developments or results with respect to the ongoing studies for FF/VI in asthma or COPD, for UMEC/VI in COPD, or any future studies will significantly harm our business and the price of our

securities could fall, and if regulatory authorities in those countries in which approval has not yet been granted determine that the ongoing studies for FF/VI in asthma or COPD or the ongoing studies for UMEC/VI for COPD do not demonstrate adequate safety and efficacy, the continued development of FF/VI or UMEC/VI or both may be significantly delayed, they may not be approved by these regulatory authorities, and even if approved it may be subject to restrictive labeling, any of which will harm our business, and the price of our securities could fall.

~~Although we have~~ announced the completion of our acquisition of Entasis by acquiring all the issued and ~~reported certain top-line data from, the Phase 3 registrational program for FF/VI in COPD and asthma, additional studies~~outstanding equity securities of FF/VI are underway or may commence in the future. Any adverse developments or perceived adverse developments with respect to any prior, current or future studies in these programs will significantly harm our business and the price of our securities could fall. For example, in September 2015, GSK and we announced that the Study to Understand Mortality and MorbidITy (SUMMIT) didEntasis not ~~meet its primary endpoints, which resulted in a significant decline in the price of our stock.~~

~~Although the FDA, the European Medicines Agency, the Japanese Ministry of Health, Labour and Welfare and Health Canada and other jurisdictions have approved ANORO~~® ~~ELLIPTA~~®~~, it has not yet been approved in all jurisdictions.~~

Any adverse developments or results or perceived adverse developments or results with respect to other pending or future regulatory submissions for the FF/VI program or the UMEC/VI program will significantly harm our business and the price of our securities could fall. Examples of such adverse developments include, but are not limited to:

· ~~not every study, nor every dose in every study, in the Phase 3 programs for FF/VI achieved its primary endpoint and regulatory authorities may determine that additional clinical studies are required;~~

· ~~safety, efficacy or other concerns arising from clinical or non-clinical studies in these programs having to do with the LABA VI, which is a component of FF/VI and UMEC/VI;~~

· ~~analysts adjusting their sales forecasts downward from previous projections based on results or interpretations of results of prior, current or future studies;~~

· ~~safety, efficacy or other concerns arising from clinical or non-clinical studies in these programs;~~

· ~~regulatory authorities determining that the Phase 3 programs in asthma or in COPD raise safety concerns or do not demonstrate adequate efficacy; or~~

· ~~any change in FDA (or comparable foreign regulatory agency) policy or guidance regarding the use of LABAs to treat asthma or the use of LABAs combined with a LAMA to treat COPD.~~

~~RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~® face substantial competition for their intended uses in the targeted markets from products discovered, developed, launched and commercialized both by GSK and by other pharmaceutical companies, which could cause the royalties payable to us pursuant to the LABA Collaboration Agreement to be less than expected, which in turn would harm our business and the price of our securities could fall.

~~GSK has responsibility for obtaining regulatory approval, launching and commercializing RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~® for their intended uses in the targeted markets around the world. While these products have received regulatory approval and been launched and commercialized in the U.S. and certain other targeted markets, the products face substantial competition from existing products previously developed and commercialized both by GSK and by other competing pharmaceutical companies and can expect to face additional competition from new products that are discovered, developed and commercialized by the same pharmaceutical companies and other competitors going forward. For example, sales of Advair®~~, GSK’s approved medicine for both COPD and asthma, continue to be significantly greater than sales of RELVAR~~®~~/BREO~~® ~~ELLIPTA~~®~~, and GSK has indicated publicly that it intends to continue commercializing Advair~~®.

Many of the pharmaceutical companies competing in respiratory markets are international in scope with substantial financial, technical and personnel resources that permit them to discover, develop, obtain regulatory approval and commercialize new products in a highly efficient and low cost manner at competitive prices to consumers. In addition, many of these competitors have substantial commercial infrastructure that facilitates commercializing their products in a highly efficient and low cost manner at competitive prices to consumers. The market for products developed for treatment of COPD and asthma continues to experience significant innovation and reduced cost in bringing products to market over time. There can be no assurance that RELVAR®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~® ~~will not be replaced by new products that are deemed more effective at lower cost to consumers. The ability of RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~® to succeed and achieve the anticipated level of sales depends on the commercial and development performance of GSK to achieve and maintain a competitive advantage over other products with the same intended use in the targeted markets.

~~In addition, following the September 2017 FDA approval of TRELEGY~~® ~~ELLIPTA~~®, GSK’s diligent efforts obligations regarding commercialization matters has the objective of focusing on the best interests of patients and maximizing the net value of the overall portfolio of products under the GSK Agreements. Since GSK’s commercialization efforts following this regulatory approval is guided by a portfolio approach across products in which we have retained our full interest and also products in which we now have only a small portion of our former interest, GSK’s commercialization efforts may have the effect of reducing the overall value of our remaining interests in the GSK Agreements in the future. If GSK prioritizes TRELEGY® ~~ELLIPTA~~®~~, we would only be entitled to a 15% economic interest in the future payments made by GSK under the GSK Agreements with respect to this product.~~

~~If sales of RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~® are less than anticipated because of existing or future competition in the markets in which they are commercialized, including competition from existing and new products that are perceived as lower cost or more effective, our royalty payments will be less than anticipated, which in turn would harm our business and the price of our securities could fall.

We and GSK recently received regulatory approval in the US and positive regulatory opinion in Europe for UMEC/VI/FF (LAMA/LABA/ICS) as triple combination treatments for COPD. As a result of the Spin-Off, most of our economic rights in this program and other programs were assigned to Theravance Biopharma. If these programs are successful and GSK and the respiratory market in general views triple combination therapy as significantly more beneficial than existing therapies, including RELVAR®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~®~~, our business could be harmed, and the price of our securities could fall.~~

The use of triple therapy is supported by the GOLD (“Global initiative for chronic Obstructive Lung Disease”) guidelines in high-risk patients with severe COPD and a high risk of exacerbations. Prior to the Spin-Off, we were entitled to receive 100% of any royalties payable under the GSK Agreements arising from sales of TRELEGY® ~~ELLIPTA~~® and any other product or combination of products that may be discovered and developed in the future under the GSK Agreements. As a result of the transactions effected by the Spin-Off, however, we are now only entitled to receive 15% of any contingent payments and royalties payable by GSK from sales of TRELEGY® ~~ELLIPTA~~® and any other product or combination of products that may be discovered and developed in the future under the GSK Agreements which were assigned to TRC while Theravance Biopharma receives 85% of those same payments. The commercial success of RELVAR®~~/BREO~~® ~~ELLIPTA~~® ~~may be adversely effected if GSK or the respiratory markets view TRELEGY~~® ~~ELLIPTA~~® or other combination therapies as more beneficial. GSK’s diligent efforts obligations regarding commercialization matters has the objective of focusing on the best interests of patients and maximizing the net value of the overall portfolio of products under the GSK Agreements. Since GSK’s commercialization efforts following this regulatory approval is guided by a portfolio approach across products in which we have retained our full interest and also products in which we now have only a small portion of our former interest, GSK’s commercialization efforts may have the effect of reducing the overall value of our remaining interests in the GSK Agreements in the future.

~~In the event that Theravance Biopharma defaults or breaches the agreements we entered into with them in connection with the Spin-Off, our business and results of operations may be materially harmed.~~

Upon the Spin-Off, our facility leases in South San Francisco, California were assigned to 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 maintenance, which may be as much as the actual lease payments. As of September 30, 2017, the total remaining lease payments, which run through May 2020, were $17.1 million. In the event that Theravance Biopharma defaults on such obligations, our business and results of operations may be materially harmed.

Under the terms of a separation and distribution agreement entered into between us and Theravance Biopharma, Theravance Biopharma will indemnify us from (i) all debts, liabilities and obligations transferred to Theravance Biopharma in connection with the Spin-Off (including its failure to pay, perform or otherwise promptly discharge any such debts, liabilities or obligations after the Spin-Off), (ii) any misstatement or omission of a material fact in its information statement filed with the SEC, resulting in a misleading statement and (iii) any breach by it of certain agreements entered into between the parties in connection with the Spin-Off. Theravance Biopharma’s ability to satisfy these indemnities, if called upon to do so, will depend upon its future financial strength and if we are not able to collect on indemnification rights from Theravance Biopharma, our financial condition may be harmed.

~~We may not be able to utilize all of our net operating loss carryforwards.~~

We have net operating loss carryforwards and other significant U.S. tax attributes that we believe could offset otherwise taxable income in the U.S. As a part of the overall Spin-Off transaction, the transfer of certain assets by us to Theravance Biopharma and our distribution of Theravance Biopharma ordinary shares resulted in taxable transfers pursuant to applicable provisions of the Internal Revenue Code of 1986, as amended (the “Code”) and Treasury Regulations. The taxable gain recognized by us attributable to the transfer of certain assets to Theravance Biopharma will generally equal the excess of the fair market value of each asset transferred over our adjusted tax basis in such asset. Although we will not recognize any gain with respect to the cash we transferred to

Theravance Biopharma, we may recognize substantial gain based on the fair market value of the other assets (other than cash) transferred to Theravance Biopharma. The determination of the fair market value of these assets is subjective and could be subject to adjustments or future challenge by the Internal Revenue Service (“IRS”), which could result in an increase in the amount of gain realized by us as a result of the transfer. Our U.S. federal income tax resulting from any gain recognized upon the transfer of our assets to Theravance Biopharma (including any increased U.S. federal income tax that may result from a subsequent determination of higher fair market values for the transferred assets), may be reducedalready owned by our ~~net operating loss carryforward.~~company for $2.20 per share. The net operating loss carryforwards available in any year to offset our net taxable income will be reduced following a more than 50% change in ownership during any period of 36 consecutive months (an “ownership change”) as determined under the Internal Revenue Code of 1986 (the “Code”). Transactions involving our common stock, even those outside our control, such as purchases or sales by investors, within the testing period could result in an ownership change. We have conducted an analysis to determine whether an ownership change had occurred since inception through December 31, 2015, and concluded that we had undergone two ownership changes in prior years. Subsequent changes in our ownership or sale of our stock could have the effect of limiting the use of our net operating losses in the future. We have approximately $1.1 billion of net operating loss carryforward as of December 31, 2016. There may be certain annual limitations for utilization based on the above-described ownership change provisions. In addition, we may not be able to have sufficient future taxable income prior to their expiration because net operating losses have carryforward periods. Future changes in federal and state tax laws pertaining to net operating loss carryforwards may also cause limitations or restrictions from us claiming such net operating losses. If the net operating loss carryforwards become unavailable to us or are fully utilized, our future taxable income will not be shielded from federal and state income taxation absent certain U.S. federal and state tax credits, and the funds otherwise available for general corporate purposes would be reduced.

~~If any product candidates in any respiratory program partnered with GSK are not approved by regulatory authorities or are determined to be unsafe or ineffective in humans, our~~Entasis business ~~will be adversely affected and the price of our securities could fall.~~

The FDA must approve any new medicine before it can be marketed and sold in the U.S. Our partner GSK must provide the FDA and similar foreign regulatory authorities with data from preclinical and clinical studies that demonstrate that the product candidates are safe and effective for a defined indication before they can be approved for commercial distribution. GSK will not obtain this approval for a partnered product candidate unless and until the FDA approves a NDA. The processes by which regulatory approvals are obtained from the FDA to market and sell a new product are complex, require a number of years and involve the expenditure of substantial resources. In order to market medicines in foreign countries, separate regulatory approvals must be obtained in each country. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. Conversely, failure to obtain approval in one or more country may make approval in other countries more difficult.

Clinical studies involving product candidates partnered with GSK may reveal that those candidates are ineffective, inferior to existing approved medicines, unacceptably toxic, or that they have other unacceptable side effects. In addition, the results of preclinical studies do not necessarily predict clinical success, and larger and later-stage clinical studies may not produce the same results as earlier-stage clinical studies.

Frequently, product candidates that have shown promising results in early preclinical or clinical studies have subsequently suffered significant setbacks or failed in later clinical or non-clinical studies. In addition, clinical and non-clinical studies of potential products often reveal that it is not possible or practical to continue development efforts for these product candidates. If these studies are substantially delayed or fail to prove the safety and effectiveness of product candidates in development partnered with GSK, GSK may not receive regulatory approval for such product candidates and our business and financial condition will be materially harmed and the price of our securities may fall.

Several well-publicized Complete Response letters issued by the FDA and safety-related product withdrawals, suspensions, post-approval labeling revisions to include boxed warnings and changes in approved indications over the last several years, as well as growing public and governmental scrutiny of safety issues, have created a conservative regulatory environment. The implementation of new laws and regulations and revisions to FDA clinical trial design guidance have increased uncertainty regarding the approvability of a new drug. Further, there are additional requirements for approval of new drugs, including advisory committee meetings for new chemical entities, and formal risk evaluation and mitigation strategy at the FDA’s discretion. These laws, regulations, additional requirements and changes in interpretation could cause non-approval or further delays in the FDA’s review and approval of any product candidates in any respiratory program partnered with GSK.

~~Even if product candidates in any respiratory program partnered with GSK receive regulatory approval, as is the case with RELVAR~~®~~/BREO~~® ~~ELLIPTA~~®~~, ANORO~~® ~~ELLIPTA~~®~~and~~ ~~TRELEGY~~® ~~ELLIPTA~~®~~, commercialization of such products may be adversely affected by regulatory actions and oversight.~~

Even if GSK receives regulatory approval for product candidates in any respiratory program partnered with GSK, this approval may include limitations on the indicated uses for which GSK can market the medicines or the patient population that may utilize the medicines, which may limit the market for the medicines or put GSK at a competitive disadvantage relative to alternative therapies. These restrictions make it more difficult to market the approved products.

~~For example, at the joint meeting of the Pulmonary-Allergy Drugs Advisory Committee and Drug Safety and Risk Management Advisory Committee of the FDA regarding the sNDA for BREO~~® ~~ELLIPTA~~® ~~as a treatment for asthma, the advisory committee recommended that a large LABA safety trial with BREO~~® ~~ELLIPTA~~® should be required in adults and in 12-17 year olds, similar to the ongoing LABA safety trials being conducted as an FDA Post-Marketing Requirement by each of the manufacturers of LABA containing asthma treatments.

In addition, the manufacturing, labeling, packaging, adverse event reporting, advertising, promotion and recordkeeping for the approved product remain subject to extensive and ongoing regulatory requirements. If we or GSK become aware of previously unknown problems with an approved product in the U.S. or overseas or at contract manufacturers’ facilities, a regulatory authority may impose restrictions on the product, the contract manufacturers or on GSK, including requiring it to reformulate the product, conduct additional clinical studies, change the labeling of the product, withdraw the product from the market or require the contract manufacturer to implement changes to its facilities. GSK is also subject to regulation by regional, national, state and local agencies, including the Department of Justice, the Federal Trade Commission, the Office of Inspector General of the U.S. Department of Health and Human Services and other regulatory bodies as well as governmental authorities in those foreign countries in which any of the product candidates in any respiratory program partnered with GSK are approved for commercialization. The Federal Food, Drug, and Cosmetic Act, the Public Health Service Act and other federal and state statutes and regulations govern to varying degrees the research, development, manufacturing and commercial activities relating to prescription pharmaceutical products, including non-clinical and clinical testing, approval, production, labeling, sale, distribution, import, export, post-market surveillance, advertising, dissemination of information and promotion. Any failure to maintain regulatory approval will limit GSK’s ability to commercialize the product candidates in any respiratory program partnered with GSK, which would materially and adversely affect our business and financial condition and which may cause the price of our securities to fall.

~~We may not be successful in our efforts to expand our portfolio of royalty generating products.~~

~~In the future,~~ we may choose to acquire interests in or rights to one or more additional royalty generating products. However, we may be unable to license or acquire rights to suitable royalty generating products for a number of reasons. In particular, the licensing and acquisition of pharmaceutical product rights is a competitive area. Several more established companies are also pursuing strategies to license or acquire rights to royalty generating products. These established companies may have a competitive advantage over us. Other factors that may prevent us from licensing or otherwise acquiring rights to suitable royalty generating products include the following:

· ~~we may be unable to license or acquire the rights on terms that would allow us to make an appropriate return from the product;~~

· ~~companies that perceive us to be their competitors may be unwilling to assign or license their product rights to us; or~~

· ~~we may be unable to identify suitable royalty generating products.~~

~~If we are unable to acquire or license rights to suitable royalty generating product candidates, our business may suffer.~~

We are engaged in a continual review of opportunities to acquire income generating assets, whether royalty-based or otherwise, or to acquire companies that hold royalty or other income generating assets. We currently, and generally at any time, have acquisition opportunities in various stages of active review, including, for example, our engagement of consultants and advisors to analyze particular opportunities, technical, financial and other confidential information, submission of indications of interest and involvement as a bidder in competitive auctions or other processes for the acquisition of income generating assets. Many potential acquisition targets do not meet our criteria, and for those that do, we may face significant competition for these acquisitions from other financial investors and enterprises whose cost of capital may be lower than ours. Competition for future asset acquisition opportunities in our markets is competitive and we may be forced to increase the price we pay for such assets or face reduced potential acquisition opportunities. The success of any future income generating asset acquisitions is based on our ability to make accurate assumptions regarding the valuation, timing and amount of payments, which is highly complex and uncertain. The failure of any of these acquisitions to produce anticipated revenues may materially and adversely affect our financial condition and results of operations.

~~We have a significant amount of debt including Term Loans, Convertible Subordinated Notes and~~ ~~Convertible Senior~~ Notes that are senior in capital structure and cash flow, respectively, to our common stockholders. Satisfying the obligations relating to our debt could adversely affect the amount or timing of distributions to our stockholders.

As of September 30, 2017, we had approximately $683.5 million in total debt outstanding, comprised primarily of, $250.0 million in principal outstanding on our Term B Loan, $241.0 million in principal that remains outstanding under our convertible subordinated notes, due 2023 (the “2023 Notes”) and $192.5 million in principal outstanding under our convertible senior notes due 2025 (the “2025 Notes”) (the 2023 Notes and 2025 Notes hereinafter, the “Notes”). The Notes are unsecured debt and are not redeemable by us prior to the maturity date. Holders of the Notes may require us to purchase all or any portion of their Notes at 100% of their principal amount, plus any unpaid interest, upon a fundamental change. A fundamental change is generally defined to include a merger involving us, an acquisition of a majority of our outstanding common stock, and the change of a majority of our board without the approval of the board. In addition, to the extent we pursue and complete a monetization transaction or a transaction that modifies our corporate structure, the structure of such transaction may qualify as a fundamental change under the Notes, which could trigger the put rights of the holders of the Notes, in which case we would be required to use a portion of the net proceeds from such transaction to repurchase any Notes put to us.

Our Term Loan B is secured by a lien on substantially all of our and the Guarantors’ personal property and material real property assets (if any). If we default under the terms of the Term B Loan, the lenders may accelerate all of our repayment obligations and take control of our pledged assets, potentially requiring us to renegotiate our agreement on terms less favorable to us or to immediately cease operations. Further, if we are liquidated, the lenders’ right to repayment would be senior to the rights of the holders of our common stock. The lenders could declare a default upon the occurrence of any event that they interpret as a material adverse effect as defined under the Term B Loan agreement. Any declaration by the lenders of an event of default could significantly harm our business and prospects and could cause the price of our common stock to decline. If we raise any additional debt financing, the terms of such additional debt could further restrict our operating and financial flexibility.

Satisfying the obligations of this debt could adversely affect the amount or timing of any distributions to our stockholders. We may choose to satisfy repurchase, or refinance this debt through public or private equity or debt financings if we deem such financings available on favorable terms. If any or all of the Notes are not converted into shares of our common stock before the maturity date, we will have to pay the holders the full aggregate principal amount of the Notes then outstanding. Any of the above payments could have a material adverse effect on our cash position. If we fail to satisfy these obligations, it may result in a default under the indenture, which could result in a default under certain of our other debt instruments, if any. Any such default would harm our business and the price of our securities could fall.

~~If we lose key management personnel, or if we fail to retain our key employees, our ability to manage our business will be impaired.~~

We have a small management team and very few employees. We are highly dependent on principal members of our management team and a small group of key employees to operate our business. Our company is located in northern California, which is headquarters to many other biotechnology and biopharmaceutical companies and many academic and research institutions. As a result, competition for certain skilled personnel in our market remains intense. None of our employees have employment commitments for any fixed period of time and they all may leave our employment at will. In April 2017, we announced that our Board of Directors had determined to undertake a comprehensive review of all of our costs, including executive compensation structures. The result of this review has led us to make changes to our compensation structure. If we fail to retain our qualified personnel or replace them when they leave, we may be unable to successfully continue our business operations or grow our business, which may cause the price of our securities to fall.

~~We rely and will continue to rely on outsourcing arrangements for many of our activities, including financial reporting and accounting and human resources.~~

~~As of September 30, 2017, we had only 12 full-time employees and, as a result, we rely, and expect to continue to rely, on outsourcing arrangements for~~constitutes a significant portion of our ~~activities, including financial reporting~~business and ~~accounting~~additional significant risks may apply to the Entasis business as detailed in the Annual Report on Form 10-K filed by Entasis on March 3, 2022, and ~~human resources,~~ as ~~well~~amended on May 2, 2022, which are hereby incorporated by reference.

On July 11, 2022, we also entered into a definitive merger agreement, whereby we will acquire La Jolla. Additional risks regarding the La Jolla business are detailed in La Jolla's Form 10-K filed on March 9, 2022, and as ~~for certain functions as a public company. We may have limited control over these third parties and we cannot guarantee that they will perform their obligations in an effective and timely manner.~~

If we fail to maintain proper and effective internal control over financial reporting or if the interpretations, estimates or judgments utilized in preparing our financial statements prove to be incorrect, our operating results and our ability to operate our business could be harmed.

The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal control over financial reporting and disclosure controls and procedures. Under the SEC’s current rules, we are required to perform system and process evaluation and testing of our internal control over financial reporting to allow management to reportamended on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our independent registered public accounting firm is also required to report on our internal control over financial reporting. Our testing and our independent registered public accounting firm’s testing may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses and render our internal control over financial reporting ineffective. We have and expect to continue to incur substantial accounting and auditing expense and to expend significant management time in complying with the requirements of Section 404. If we are not able to maintain compliance with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to investigations or sanctions by the SEC, FINRA, NASDAQ or other regulatory authorities. In addition, we could be required to expend significant management time and financial resources to correct any material weaknesses that may be identified or to respond to any regulatory investigations or proceedings.

We are also subject to complex tax laws, regulations, accounting principles and interpretations thereof. The preparation of our financial statements requires us to interpret accounting principles and guidance and make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our interpretations, estimates and judgments 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 the preparation of our financial statements. GAAP presentation is subject to interpretation by the SEC, the Financial Accounting Standards Board and various other bodies formed to interpret and create appropriate accounting principles and guidance.May 2, 2022. In the event ~~that one~~our acquisition of ~~these bodies disagrees with our accounting recognition, measurement or disclosure or any of our accounting interpretations, estimates or assumptions, it~~La Jolla is ultimately consummated, certain risks detailed therein may have a significant effect on our reported results and may retroactively affect previously reported results. The need to restate our financial results could, among other potential adverse effects, result in us incurring substantial costs, affect our ability to timely file our periodic reports until such restatement is completed, divert the attention of our management and employees from managing our business, result in material changes to our historical and future financial results, result in investors losing confidence in our operating results, subject us to securities class action litigation, and cause our stock price to decline.

As we continue to develop our business, our mix of assets and our sources of income may require that we register with the SEC as an “investment company” in accordance with the Investment Company Act of 1940.

We have not been and have no current intention to register as an “investment company” under the Investment Company Act of 1940, or the 40 Act, because we believe the nature of our assets and the sources of our income currently exclude us from the definition of an investment company pursuant to Sections (3)(a)(1)(A), (3)(a)(1)(C) under the 40 Act and Rule 270.3a-1 of Title 17 of the Code of Federal Regulations. Accordingly, we are not currently subject to the provisions of the 40 Act, such as compliance with the 40 Act’s registration and reporting requirements, capital structure requirements, affiliate transaction restrictions, conflict of interest rules, requirements for disinterested directors, and other substantive provisions. Generally, to avoid being a company that is an “investment company” under the 40 Act, it must both: (a) not be or hold itself out as being engaged primarily in the business of investing, reinvesting or trading in securities, and (b) either (i) not be engaged or propose to engage in the business of investing in securities or own or propose to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis or (ii) not have more than 45% of the value of its total assets (exclusive of Government securities and cash items) consist of or more than 45% of its net income after taxes (for the last four fiscal quarters combined) be derived from securities. In addition, we would not be an “investment company” if an exception, exemption, or safe harbor under the 40 Act applies.

We monitor our assets and income for compliance with the tests under the 40 Act and seek to conduct our business activities to ensure that we do not fall within its definitions of “investment company.” If we were to become an “investment company” and be subject to the strictures of the 40 Act, the restrictions imposed by the 40 Act would likely require changes in the way we do business and add significant administrative burdens to our operations. In order to ensure that we do not fall within the 40 Act, we may need to take various actions which we might otherwise not pursue. These actions may include restructuring the Company and/or modifying our mixture of assets and income.

Specifically, our mixture of debt vs. royalty assets is important to our classification as an “investment company” or not. In this regard, while we currently believe that none of the definitions of “investment company” apply to us, we may in the future rely on an exception under the 40 Act provided by Section 3(c)(5)(A). To qualify for Section 3(c)(5)(A), as interpreted by the staff of the SEC, we would be required to have at least 55% of our total assets in “notes, drafts, acceptances, open accounts receivable, and other obligations representing part or all of the sales price of merchandise, insurance, and services” (or Qualifying Assets). In a no-action letter issued to Royalty Pharma on August 13, 2010, the staff stated that royalty interests are Qualifying Assets under this exception. If

the SEC or its staff in the future adopts a contrary interpretation or otherwise restricts the conclusions in the staff’s no-action letter such that our royalty interests are no longer Qualifying Assets for purposes of Section 3(c)(5)(A), we could be required to register under the 40 Act.us.

The rules and interpretations of the SEC and the courts, relating to the definition of “investment company” are highly complex in numerous respects. While we currently intend to conduct our operations so that we will not be deemed an investment company, we can give no assurances that we will not determine it to be in the Company’s and our stockholders’ interest to register as an “investment company”, not be deemed an “investment company” and not be required to register under the 40 Act.

Prolonged economic uncertainties or downturns, as well as unstable market, credit and financial conditions, may exacerbate certain risks affecting our business and have serious adverse consequences on our business.

The global economic downturn and market instability has made the business climate more volatile and more costly. These economic conditions, and uncertainty as to the general direction of the macroeconomic environment, are beyond our control and may make any necessary debt or equity financing more difficult, more costly, and more dilutive. While we believe we have adequate capital resources to meet current working capital and capital expenditure requirements, a lingering economic downturn or significant increase in our expenses could require additional financing on less than attractive rates or on terms that are excessively dilutive to existing stockholders. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our stock price and could require us to delay or abandon clinical development plans.

Sales of our partnered products will be dependent, in large part, on reimbursement from government health administration authorities, private health insurers, distribution partners and other organizations. As a result of negative trends in the general economy in the U.S. or other jurisdictions in which we may do business, these organizations may be unable to satisfy their reimbursement obligations or may delay payment. In addition, federal and state health authorities may reduce Medicare and Medicaid reimbursements, and private insurers may increase their scrutiny of claims. A reduction in the availability or extent of reimbursement could negatively affect our or our partners’ product sales and revenue.

In addition, we rely on third parties for several important aspects of our business. During challenging and uncertain economic times and in tight credit markets, there may be a disruption or delay in the performance of our third party contractors, suppliers or partners. If such third parties are unable to satisfy their commitments to us, our business and results of operations would be adversely affected.

~~Our business could be negatively affected as a result of the actions of activist stockholders, including future proxy contests.~~

Proxy contests have been waged against many companies in the biopharmaceutical industry over the last several years. We have been the subject of actions taken by activist stockholders. On February 8, 2017, Sarissa, which on that date reported beneficial ownership of approximately 3.9% of our outstanding common stock, delivered a notice, dated February 7, 2017 (the “Notice”), to the Company indicating Sarissa’s intent to nominate four candidates to stand for election as directors at the 2017 annual meeting of stockholders (the “Annual Meeting”). In the Notice, Sarissa also notified us that it would present for a vote of stockholders a proposal calling for repeal of any provision of our amended and restated bylaws in effect at the time of the Annual Meeting that was not included in our amended and restated bylaws publicly filed with the SEC on or prior to February 6, 2017 (the “Sarissa Bylaw Proposal”). On March 13, 2017, Sarissa reduced its slate to nominate three candidates for election as directors in opposition to our director nominees. At the Annual Meeting, held on April 20, 2017, representatives of Sarissa withdrew the Sarissa Bylaw Proposal. Also at the Annual Meeting, our stockholders elected each of our seven director nominees and did not elect any of Sarissa’s candidates. At the Annual Meeting, representatives of Sarissa indicated that Sarissa intended to continue its activist campaign against the Company.

Another proxy contest or an activist campaign launched by Sarissa or another activist stockholder(s) would require us to incur significant professional fees (including, but not limited to, legal fees, fees for financial advisors, fees for investor relations advisors, and proxy solicitation expenses) and the time-consuming nature of our response to any such activity may significantly divert the attention of management, the Board of Directors and our employees. Further, any perceived uncertainties as to our future direction and control resulting from any proxy contest or similar actions by activist stockholders could result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel and business partners, any of which could adversely affect our business and operating results.

~~Even if we are successful in any proxy contest, our business could be adversely affected by any such proxy contest because:~~

· responding to proxy contests and other actions by activist stockholders can be costly (resulting in significant professional fees and proxy solicitation expenses) and time-consuming, disrupting operations and diverting the attention of our Board of Directors, management and employees;

· perceived uncertainties as to future direction may result in the loss of potential acquisitions, collaborations or other strategic opportunities, and may make it more difficult to attract and retain qualified personnel and business partners;

· if individuals are elected to our Board of Directors with a specific agenda, it may adversely affect our ability to effectively and timely implement our strategic plan and create additional value for our stockholders; and

· if individuals are elected to our Board of Directors who do not agree with our strategic plan, the ability of our Board of Directors to function effectively could be adversely affected, which could in turn adversely affect our business, operating results and financial condition.

~~Uncertainties related to, or the results of, such actions could cause our stock price to experience periods of volatility.~~

In addition, under certain circumstances arising out of or related to a proxy contest or threatened proxy contest or the nomination of directors by an activist stockholder, a change in the composition of a majority of our Board of Directors may (1) trigger the requirement that we make an offer to repurchase all of our outstanding 2023 Notes at a price equal to 100% of the principal and unpaid interest on such Notes, (2) constitute a change in control under the terms of our severance plans, which provide for payment of severance if a covered executive officer is subject to an involuntary termination within 3 months prior to or 24 months after a change in control of the Company and (3) constitute a change in control under the terms of certain of the Company’s equity award grants and equity plans for its employees, and depending on the terms of the award or plan, may result in the accelerated vesting of such award. In the event we were required to offer to repurchase all of the 2023 Notes, which as of September 30, 2017 had an aggregate outstanding principal of approximately $241.0 million, we would be required to obtain additional financing. As of September 30, 2017, we had cash, cash equivalents, and marketable securities of $168.2 million. We cannot assure stockholders that we would be able to timely obtain such financing on commercially reasonable terms, if at all. To the extent that additional capital is raised through the sale of equity or equity-linked securities, the issuance of those securities could result in substantial dilution for our current stockholders and the terms may include liquidation or other preferences that adversely affect the rights of our current stockholders. Furthermore, the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our common stock to decline and existing stockholders may not agree with our financing plans or the terms of such financings. We also could be required to seek funds through arrangements with partners or otherwise that may require us to relinquish rights to our intellectual property, our product candidates or otherwise agree to terms unfavorable to us. The occurrence of any of the foregoing events could materially adversely affect our business.

We cannot predict, and no assurances can be given as to, the outcome or timing of any matters relating to actions by activist stockholders or the ultimate impact on our business, liquidity, financial condition or results of operations.

~~We have incurred litigation and may incur additional litigation.~~

On March 10, 2017, Sarissa, in connection with its proxy contest, requested that we provide certain of its books and records pursuant to Section 220 of the Delaware General Corporation Law (the “DGCL”). We offered to provide Sarissa with certain of the confidential materials that Sarissa requested subject to executing a confidentiality agreement. On March 21, 2017, Sarissa filed a complaint in the Delaware Court of Chancery (the “Court”), captioned Sarissa Capital Domestic Fund LP v. Innoviva, Inc., C.A. No. 2017-0216-JRS (the “220 Litigation”), demanding that we provide books and records pursuant to Section 220 of the DGCL. Sarissa additionally requested that the Court grant a motion to expedite so that a trial on the 220 Litigation would be held prior to the Annual Meeting. On March 27, 2017, we provided Sarissa with certain of the confidential books and records requested pursuant to an executed confidentiality agreement. At a hearing held on March 28, 2017, the Court denied Sarissa’s motion to expedite the trial. In connection with the hearing on March 28, 2017, we agreed to provide minutes of recently completed Nominating/Corporate Governance Committee meetings responsive to Sarissa’s demand as such minutes become available for production. We intend to vigorously defend against the 220 Litigation.

On April 20, 2017, several Sarissa entities filed a Verified Complaint Pursuant to Section 225 of the DGCL and for Specific Performance in the Court, captioned Sarissa Capital Domestic Fund LP, et al. v. Innoviva, Inc., C.A. No. 2017-0309-JRS (the “Specific Performance Litigation”). Sarissa alleges that it had entered into a binding agreement to settle its proxy contest in exchange for the inclusion of each of George W. Bickerstaff, III and Odysseas Kostas, M.D. on our Board of Directors. Sarissa seeks specific performance of the alleged agreement. On May 17, 2017, the Court entered an Order Maintaining Status Quo, which ordered that, during the pendency of the Specific Performance Litigation, the Innoviva Board of Directors shall remain in place, and prohibits the Company from entering or agreeing to any transactions, the consummation of which would require the approval of or vote by Innoviva stockholders or amending, modifying, or repealing Innoviva’s bylaws or charter in the absence of an affirmative vote of five of the then-seven member board of directors or without providing plaintiffs’ counsel five business days’ advance written notice. Trial in the Specific Performance Litigation occurred on July 27, 2017, and the parties are currently awaiting the Court’s ruling. We believe the Specific Performance Litigation is without merit and intend to defend it vigorously.

Sarissa could decide to expand the current litigation or bring additional litigation against us and/or against directors and officers whom we are obliged to indemnify and defend. Separately, we may be exposed to, or threatened with, future litigation, claims and proceedings incident to the ordinary course of, or otherwise in connection with, our business.

Litigation is inherently uncertain, and there is no assurance as to the outcome of the matters described above. We could incur substantial unreimbursed legal fees and other expenses in connection with these and any other future legal and regulatory proceedings, which could adversely affect our results of operations. These matters also may distract the time and attention of our officers and directors or divert our other resources away from our ongoing commercial and development programs. An unfavorable outcome in any of these matters could damage our business, reputation and our image with customers or result in additional claims or proceedings against us.

We have determined to undertake a comprehensive review of our costs, including our executive compensation structure, which review may not result in meaningful cost savings, may have unintended consequences and could negatively impact our business.

~~In April 2017, we announced that our Board of Directors had determined to undertake a fresh, comprehensive review of all of our costs,~~ including executive compensation structures, with the goal that this review would result in meaningful savings in our core operating costs that will benefit our financial performance. In October 2017, we announced that a special committee of the our independent directors and the Compensation Committee of our Board of Directors completed a comprehensive review of our spending, including executive and board compensation structures, outside services, travel and entertainment and other expenses. Pursuant to this review, we announced that we have reduced our expeced full year 2017 cash operating costs by $2.2 million. The Compensation Committee of our Board of Directors and the full Board also reviewed and made certain changes to executive and board compensation plans. While our cost reduction efforts are expected to reduce our operating costs, we cannot be certain that such efforts will be successful. There can be no assurances that any meaningful cost savings will correlate with an increase in the price of our common stock.

Future cost reduction efforts may result in the elimination of certain functional areas and/or reductions of our business operations, which may limit our ability to effectively manage and grow our business and which could result in the potential decrease in our royalty revenues. It is likely that we will incur short-term costs to implement any longer-term expense reduction initiatives. In addition, in the event ~~that the aggregate amount of cost reductions implemented as a result of our review, if any, do not meet investor or analyst expectations, the price of our common stock could be adversely affected.~~

~~Risks Related to our Alliance with GSK~~

~~Because all our current and projected revenues are derived from products under the GSK Agreements, disputes with GSK could harm our business and cause the price of our securities to fall.~~

All of our current and projected revenues are derived from products under the GSK Agreements. Any action or inaction by either GSK or us that results in a material dispute, allegation of breach, litigation, arbitration, or significant disagreement between the parties may be interpreted negatively by the market or by our investors, could harm our business and cause the price of our securities to fall. Examples of these kinds of issues include but are not limited to non-performance of contractual obligations and allegations of non-performance, disagreements over the relative marketing and sales efforts for our partnered products and other GSK respiratory products, disputes over public statements, and similar matters. In addition, while we obtained GSK’s consent to the Spin-Off as structured, GSK could decide to challenge various aspects of our post-Spin-Off operation of TRC, the limited liability company jointly owned by us and Theravance Biopharma as violating or allowing it to terminate the GSK Agreements. Although we believe our operation of TRC fully complies with the GSK Agreements and applicable law, there can be no assurance that we would prevail against any such claims by GSK. Moreover, regardless of the merit of any claims by GSK, we may incur significant cost and diversion of resources in defending them. In addition, any market or investor uncertainty about the respiratory programs partnered with GSK or the enforceability of the GSK Agreements could result in significant reduction in the market price of our securities and other material harm to our business.

~~Because GSK is a strategic partner as well as a significant stockholder, it may take actions that in certain cases are materially harmful to both our business or to our other stockholders.~~

Although GSK beneficially owns approximately 29.6% of our outstanding common stock as of October 31, 2017, it is also a strategic partner with rights and obligations under the GSK Agreements that cause its interests to differ from the interests of us and our other stockholders. In particular, GSK has a substantial respiratory product portfolio in addition to the partnered products that are covered by the GSK Agreements. GSK may make respiratory product portfolio decisions or statements about its portfolio which may be, or may be perceived to be, harmful to the respiratory products partnered with us. For example, GSK could promote its non-GSK/Innoviva respiratory products ~~or a partnered product for which we are entitled to receive a lower percentage of royalties, delay or~~

terminate the development or commercialization of the respiratory programs covered by the GSK Agreements, or take other actions, such as making public statements, that have a negative effect on our stock price. In this regard and by way of example, sales of Advair®~~, GSK’s approved medicine for both COPD and asthma, continue to be significantly greater than sales of RELVAR~~®~~/BREO~~® ~~ELLIPTA~~®~~, and GSK has indicated publicly that it intends to continue commercializing Advair~~®. Also, given the potential future royalty payments GSK may be obligated to pay under the GSK Agreements, GSK may seek to acquire us to reduce those payment obligations. The timing of when GSK may seek to acquire us could potentially be when it possesses information regarding the status of drug programs covered by the GSK Agreements that has not been publicly disclosed and is not otherwise known to us. As a result of these differing interests, GSK may take actions that it believes are in its best interest but which might not be in the best interests of either us or our other stockholders. In addition, following the FDA regulatory approval of TRELEGY® ~~ELLIPTA~~® in September 2017, GSK’s diligent efforts obligations as to commercialization matters under the GSK Agreements has the objective of focusing on the best interests of patients and maximizing the net value of the overall portfolio of products under the GSK Agreements. Since GSK’s commercialization efforts following this regulatory approval is guided by a portfolio approach across products in which we have retained our full interest and also products in which we now have only a portion of our former interest, GSK’s commercialization efforts may have the effect of reducing the overall value of our remaining interests in the products covered by the GSK Agreements in the future. In addition, following the expiration of our governance agreement with GSK in September 2015, GSK is no longer subject to the restrictions thereunder regarding the voting of the shares of our common stock owned by it.

GSK’s diligent efforts obligations as to commercialization matters under the GSK Agreements has the objective of focusing on the best interests of patients and maximizing the net value of the overall portfolio of products under the GSK Agreements, which may be harmful to both our business and our stockholders.

~~Following the FDA approval of~~ ~~TRELEGY~~® ~~ELLIPTA~~® in September 2017, GSK’s diligent efforts obligations as to commercialization matters under the GSK Agreements has the objective of focusing on the best interests of patients and maximizing the net value of the overall portfolio of products under the GSK Agreements. As such, GSK may prioritize TRELEGY® ~~ELLIPTA~~®~~, which may be harmful to our business, operations and stock price. If GSK prioritizes TRELEGY~~® ~~ELLIPTA~~®, we will only be entitled to a 15% economic interest of the royalties paid pursuant to the commercialization of our partnered products or chooses to reprioritize its commercial programs, our businesses, operations and stock price would be negatively affected.

GSK has also indicated to us that it believes its consent may be required before we can engage in certain royalty monetization transactions with third parties, which may inhibit our ability to engage in these transactions.

In the course of our discussions with GSK concerning the Spin-Off of Theravance Biopharma, GSK indicated to us that it believes that its consent may be required before we can engage in certain transactions designed to monetize the future value of royalties that may be payable to us from GSK under the GSK Agreements. GSK has informed us that it believes that there may be certain covenants included in these types of transactions that might violate certain provisions of the GSK Agreements. Although we believe that we can structure royalty monetization transactions in a manner that fully complies with the requirements of the GSK Agreements without GSK’s consent, a third party in a proposed monetization transaction may nonetheless insist that we obtain GSK’s consent for the transaction or re-structure the transaction on less favorable terms. We have obtained GSK’s agreement that (i) we may grant certain pre-agreed covenants in connection with monetization of our interests in RELVAR®~~/BREO~~® ~~ELLIPTA~~®~~, ANORO~~® ~~ELLIPTA~~® and vilanterol monotherapy and portions of our interests in TRC, and (ii) it will not unreasonably withhold its consent to our requests to grant other covenants, provided, among other conditions, that in each case, the covenants are not granted in favor of pharmaceutical or biotechnology company with a product either being developed or commercialized for the treatment of respiratory disease. If we seek GSK’s consent to grant covenants other than pre-agreed covenants, we may not be able to obtain GSK’s consent on reasonable terms, or at all. If we proceed with a royalty monetization transaction that is not otherwise covered by the GSK Agreement without GSK’s consent, GSK could request that its consent be obtained or seek to enjoin or otherwise challenge the transaction as violating or allowing it to terminate the GSK Agreements. Regardless of the merit of any claims by GSK, we would incur significant cost and diversion of resources in defending against GSK’s claims or asserting our own claims and GSK may seek concessions from us in order to provide its consent. Any uncertainty about whether or when we could engage in a royalty monetization transaction, the potential impact on the enforceability of the GSK Agreements or the loss of potential royalties from the respiratory programs partnered with GSK, could impair our ability to pursue a return of capital strategy for our stockholders ahead of our receipt of significant royalties from GSK, result in significant reduction in the market price of our securities and cause other material harm to our business.

GSK’s ownership of a significant percentage of our stock and its ability to acquire additional shares of our stock may create conflicts of interest, and may inhibit our management’s ability to continue to operate our business in the manner in which it is currently being operated.

As of October 31, 2017, GSK beneficially owned approximately 29.6% of our outstanding common stock. As such, GSK could have substantial influence in the election of our directors, delay or prevent a transaction in which stockholders might receive a premium over the prevailing market price for their shares and have significant control over certain changes in our business. The procedures previously governing and restricting GSK offers to our stockholders to acquire outstanding voting stock and the

restrictions regarding the voting of shares of our common stock owned by it terminated upon the expiration of the governance agreement in September 2015. Further, pursuant to our Certificate of Incorporation, we renounce our interest in and waive any claim that a corporate or business opportunity taken by GSK constitutes a corporate opportunity of ours unless such corporate or business opportunity is expressly offered to one of our directors who is a director, officer or employee of GSK, primarily in his or her capacity as one of our directors.

~~GSK’s significant ownership position may deter or prevent efforts by other companies to acquire us, which could prevent our stockholders from realizing a control premium.~~

As of October 31, 2017 GSK beneficially owned approximately 29.6% of our outstanding common stock. As a result of GSK’s significant ownership, other companies may be less inclined to pursue an acquisition of us and therefore we may not have the opportunity to be acquired in a transaction that stockholders might otherwise deem favorable, including transactions in which our stockholders might realize a substantial premium for their shares.

~~GSK could sell or transfer a substantial number of shares of our common stock, which could depress the price of our securities or result in a change in control of our company.~~

GSK is not subject to any contractual restrictions with us on its ability to sell or transfer our common stock on the open market, in privately negotiated transactions or otherwise, and these sales or transfers could create substantial declines in the price of our securities or, if these sales or transfers were made to a single buyer or group of buyers, could contribute to a transfer of control of our company to a third party. Sales by GSK of a substantial number of shares, or the expectation of such sales, could cause a significant reduction in the market price of our common stock.

~~Risks Related to Legal and Regulatory Uncertainty~~

~~If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.~~

Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which are necessary to build name and brand recognition among potential partners or customers in our markets of interest. At times, competitors may adopt trademarks or trade names similar to ours, thereby impeding our ability to build name and brand identity and possibly leading to market confusion. In addition, there could be potential trademark or trade name infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. There was also a risk that if there is confusion in the marketplace, the reputation, performance and/or actions of such third parties may negatively impact our stock price and our business. We therefore have, as of January 2016, adopted a new brand, Innoviva. Over the long term, if we are unable to establish name and brand recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. If we fail to promote and maintain our brand successfully, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, our business may be harmed.

If the efforts of our partner, GSK, to protect the proprietary nature of the intellectual property related to products in any respiratory program partnered with GSK are not adequate, the future commercialization of any such product could be delayed, limited or prevented, which would materially harm our business and the price of our securities could fall.

To the extent the intellectual property protection of products in any respiratory program partnered with GSK are successfully challenged or encounter problems with the U.S. Patent and Trademark Office or other comparable agencies throughout the world, the commercialization of these products could be delayed, limited or prevented. Any challenge to the intellectual property protection of a late-stage development asset or approved product arising from any respiratory program partnered with GSK could harm our business and cause the price of our securities to fall.

Our commercial success depends in part on products in any respiratory program partnered with GSK not infringing the patents and proprietary rights of third parties. Third parties may assert that these products are using their proprietary rights without authorization. In addition, third parties may obtain patents in the future and claim that use of GSK’s technologies infringes upon these patents. Furthermore, parties making claims against GSK may obtain injunctive or other equitable relief, which could effectively block GSK’s ability to further develop or commercialize one or more of the product candidates or products in any respiratory program partnered with GSK.

In the event of a successful claim of infringement against GSK, it may have to pay substantial damages, obtain one or more licenses from third parties or pay royalties. In addition, even in the absence of litigation, GSK may need to obtain licenses from third parties to advance its research or allow commercialization of the products. GSK may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, GSK would be unable to further develop and commercialize one or more of the products, which could harm our business significantly. In addition, in the future GSK could be required to initiate litigation to enforce its proprietary rights against infringement by third parties. Prosecution of these claims to enforce its rights against others would involve substantial litigation expenses. If GSK fails to effectively enforce its proprietary rights related to our partnered respiratory programs against others, our business will be harmed, and the price of our securities could fall.

~~Risks Related to Ownership of our Common Stock~~

~~The price of our securities has been volatile and may continue to be so, and purchasers of our securities could incur substantial losses.~~

The price of our securities has been volatile and may continue to be so. Between January 1, 2017 and September 30, 2017, the high and low sales prices of our common stock as reported on The NASDAQ Global Select Market varied between $10.43 and $14.42 per share. The stock market in general and the market for biotechnology and biopharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the companies’ operating performance, in particular during the last several years. The following factors, in addition to the other risk factors described in this section, may also have a significant impact on the market price of our securities:

· ~~any adverse developments or results or perceived adverse developments or results with respect to the commercialization of RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~® ~~with GSK, including, without limitation, if payor coverage is lower than anticipated or if sales of RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~® are less than anticipated because of pricing pressure in the respiratory markets targeted by our partnered products or existing or future competition in the markets in which they are commercialized, including competition from existing and new products that are perceived as lower cost or more effective, and our royalty payments are less than anticipated;

· ~~any positive developments or results or perceived positive developments or results with respect to the commercialization of TRELEGY~~® ~~ELLIPTA~~® ~~with GSK, including, if GSK and the respiratory market in general view this triple combination therapy as significantly more beneficial than existing therapies, including RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~®;

· any adverse developments or results or perceived adverse developments or results with respect to the on-going development of FF/VI with GSK, including, without limitation, any difficulties or delays encountered with the regulatory path for FF/VI or any indication from clinical or non-clinical studies, including the large Phase 3b program, that FF/VI is not safe or efficacious or does not sufficiently differentiate itself from alternative therapies;

· any adverse developments or results or perceived adverse developments or results with respect to the on-going development of UMEC/VI with GSK, including, without limitation, any difficulties or delays encountered with regard to the regulatory path for UMEC/VI, any indication from clinical or non-clinical studies that UMEC/VI is not safe or efficacious;

· any adverse developments or perceived adverse developments in the field of LABAs, including any change in FDA (or comparable foreign regulatory authority) policy or guidance (such as the pronouncement in February 2010 warning that LABAs should not be used alone in the treatment of asthma and related labeling requirements, the impact of the March 2010 FDA Advisory Committee discussing LABA clinical trial design to evaluate serious asthma outcomes or the FDA’s April 2011 announcement that manufacturers of currently marketed LABAs conduct additional clinical studies comparing the addition of LABAs to inhaled corticosteroids versus inhaled corticosteroids alone);

· ~~GSK reprioritizing its commercial efforts on other products, including TRELEGY~~® ~~ELLIPTA~~® ~~or products owned by GSK (such as Advair~~®~~) but which are not partnered with us;~~

· ~~the occurrence of a fundamental change triggering a put right of the holders of the Notes or our inability, or perceived inability, to satisfy the obligations under the Notes when they become due;~~

· ~~our incurrence of expenses in any particular quarter that are different than market expectations;~~

· ~~announcements regarding the cost review undertaken by our Board of Directors and the implementation of any cost-saving measures resulting from such review;~~

· ~~changes in the treatment paradigm or standards of care for COPD or asthma;~~

· ~~the extent to which GSK advances (or does not advance) FF/VI, UMEC/VI, TRELEGY~~® ~~ELLIPTA~~®~~, through commercialization in all indications in all major markets;~~

· ~~any adverse developments or perceived adverse developments with respect to our relationship with GSK, including, without limitation, disagreements that may arise between us and GSK;~~

· ~~announcements by or regarding GSK generally;~~

· ~~announcements of patent issuances or denials, technological innovations or new commercial products by GSK;~~

· ~~publicity regarding actual or potential study results or the outcome of regulatory review relating to products under development by GSK;~~

· regulatory developments in the U.S. and foreign countries, including the possibility that the new presidential administration and the U.S. Congress may replace PPACA and related legislation with new healthcare legislation;

· ~~economic and other external factors beyond our control;~~

· sales of stock by us or by our stockholders, including sales by certain of our employees and directors whether or not pursuant to selling plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended;

· relative illiquidity in the public market for our common stock (our three largest stockholders other than GSK collectively owned approximately 32.0% of our outstanding common stock as of October 31, 2017 based on our review of publicly available filings); and,

· ~~potential sales or purchases of our common stock by GSK.~~

~~We may be unable to or elect not to continue returning capital to our stockholders~~

We have a corporate goal of returning capital to stockholders and paid quarterly dividends during the third and fourth quarters of 2014 and during the first three quarters of 2015. In October 2015, we announced the acceleration of our capital return plan with an up to $150.0 million share repurchase program approved by our Board of Directors effective through December 31, 2016, which replaced our quarterly dividends. As of December 31, 2016, we had repurchased an aggregate of $103.7 million under the share repurchase program through a combination of a tender offer and open market purchases and $11.6 million of our 2023 Notes. In February 2017, we announced a new capital return plan, the 2017 Capital Return Plan. The 2017 Capital Return Plan authorizes a combination of repurchases of stock and/or repurchases, redemptions or prepayments of debt up to $150.0 million, through tender offers, open market purchases, private transactions, exchange offers or other means through December 31, 2017. The 2017 Capital Return Plan is expected to be funded using our working capital. In October 2017, we entered into an accelerated share repurchase (ASR) agreement with a financial institution to repurchase $80 million of our common stock. The repurchases under the ASR agreement are expected to complete the previously announced 2017 Capital Return Plan authorized by our Board of Directors. Our announcement of this or future capital return programs does not obligate us to repurchase any specific dollar amount of debt or equity or number of shares of common stock.

The payment of, or continuation of, capital returns to stockholders is at the discretion of our Board of Directors and is dependent upon our financial condition, results of operations, capital requirements, general business conditions, tax treatment of capital returns, potential future contractual restrictions contained in credit agreements and other agreements and other factors deemed relevant by our board of directors. Future capital returns may also be affected by, among other factors: our views on potential future capital requirements for investments in acquisitions and our working capital and debt maintenance requirements; legal risks; stock or debt repurchase programs; changes in federal and state income tax laws or corporate laws; and changes to our business model. Our capital return programs may change from time to time, and we cannot provide assurance that we will continue to provide any particular amounts. A reduction, suspension or change in our capital return programs could have a negative effect on our stock price.

~~Concentration of ownership will limit your ability to influence corporate matters.~~

As of October 31, 2017, GSK beneficially owned approximately 29.6% of our outstanding common stock and our directors, executive officers and investors affiliated with these individuals beneficially owned approximately 2.3% of our outstanding common stock. Based on our review of publicly available filings as of October 31, 2017, our three largest stockholders other than GSK collectively owned approximately 32.0% of our outstanding common stock. These stockholders could control the outcome of actions

taken by us that require stockholder approval, including a transaction in which stockholders might receive a premium over the prevailing market price for their shares. Following the expiration of the governance agreement in September 2015, GSK is no longer subject to the restrictions thereunder regarding the voting of the shares of our common stock owned by it.

~~Anti-takeover provisions in our charter and bylaws and in Delaware law could prevent or delay a change in control of our company.~~

Provisions of our Certificate of Incorporation and Bylaws may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions include:

· ~~requiring supermajority stockholder voting to effect certain amendments to our Certificate of Incorporation and Bylaws;~~

· ~~restricting the ability of stockholders to call special meetings of stockholders;~~

· ~~prohibiting stockholder action by written consent; and~~

· ~~establishing advance notice requirements for nominations for election to the Board or for proposing matters that can be acted on by stockholders at meetings.~~

~~In addition, some provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging with us.~~

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

~~Purchases of Equity~~38

Item 3: Defaults Upon Senior Securities ~~by the Issuer~~

None.

~~In April 2017, we prepaid $50.0 million in outstanding principal on our 2029 Notes in May 2017 as part of the 2017 Capital Return Plan.~~Item 5: Other Information

None.

In August 2017, as part of the 2017 Capital Return Plan, we used approximately $17.5 million of the net proceeds from the offering of our 2025 Notes to repurchase and retire 1,317,771 shares of our common stock concurrently with the pricing of the offering in privately negotiated transactions effected through one of the initial purchasers or its affiliate, as our agent.39

~~The following table reflects the repurchases of our common stock under the 2017 Capital Return Plan during the fiscal quarter ended September 30, 2017:~~

Period

Total Number
of Shares
Purchased

Average Price
Paid
per Share

Total Number
of Shares
Purchased as Part of
Publicly
Announced
Plans or
Programs

Approximate
Dollar Value of
Shares That
May Yet Be
Purchased
Under the
Plans or
Programs

July 1, 2017 to July 31, 2017

—

$
—

—

August 1, 2017 to August 31, 2017

1,317,771

$
13.28

1,317,771

September 1, 2017 to September 30, 2017

—

$
—

—

$
82,500,000

Item 6. Exhibits

(a)

Index to Exhibits



		Incorporated by Reference
Exhibit Number	Description	Form	Exhibit	Filing Date/Period End Date

2.1	Agreement and Plan of Merger, dated as of May 23, 2022, by and among Innoviva, Inc., Innoviva Merger Sub, Inc. and Entasis Therapeutics Holdings Inc.	8-K	2.1	5/24/2022

2.2	Agreement and Plan of Merger, dated as of July 10, 2022, by and among Innoviva, Inc., Innoviva Acquisition Sub, Inc. and La Jolla Pharmaceutical Company	8-K	2.1	7/11/2022

3.1	Amended and Restated Certificate of Incorporation	S-1	3.3	7/26/2004

3.2	Certificate of Amendment of Restated Certificate of Incorporation	10-Q	3.4	3/31/2007

3.3	Certificate of Ownership and Merger Merging LABA Merger Sub, Inc. with and into Theravance, Inc., as filed with the Secretary of State of the State of Delaware, effective on January 7, 2016	8-K	3.1	1/8/2016

3.4	Amended and Restated Bylaws, amended and restated as of February 8, 2017	8-K	3.1	2/9/2017

4.1	Specimen certificate representing the common stock of the registrant	10-K	4.1	12/31/2006

4.2	Indenture, dated as of January 4, 2013 by and between Theravance, Inc. and the Bank of New York Mellon Trust Company, N.A., as trustee	8-K	4.1	1/25/2013

4.3	Form of 2.125% Convertible Subordinated Note Due 2023 (included in Exhibit 4.2)

4.4	Indenture (including form of Note) with respect to Innoviva’s 2.5% Convertible Senior Notes due 2025, dated as of August 7, 2017, between Innoviva and The Bank of New York Mellon Trust Company, N.A., as trustee	8-K	4.1	8/7/2017

4.5	Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934	10-K	4.9	2/19/2020

4.6	Indenture (including form of Note) with respect to Innoviva’s 2.125% Convertible Senior Notes due 2028, dated as of March 7, 2022, between Innoviva and The Bank of New York Mellon Trust Company, N.A., as trustee	8-K	4.1	3/8/2022

10.1	Offer Letter between Innoviva, Inc. and Pavel Raifeld, dated April 29, 2022	8-K	10.1	5/2/2022

10.2	Amendment No. 1 to the Investor Rights Agreement, dated May 23, 2022, by and among Innoviva, Inc. and Entasas Therapeutics Holdings Inc	8-K	10.1	5/24/2022

10.3	Support Agreement, dated July 10, 2022, by and among Innoviva, Inc., Innoviva Acquisition Sub, Inc., Tang Capital Partners, LP and Kevin C. Tang Foundation	8-K	10.1	7/11/2022

10.4	Equity Purchase Agreement, dated July 13, 2022, by and among Innoviva, Inc., Innoviva TRC Holdings LLC and Royalty Pharma Investments 2019 ICAV.	8-K	10.1	7/13/2022

10.5	Third Amendment to Collaboration Agreement, dated July 13, 2022, by and among Innoviva, Inc., Glaxo Group Limited, and Theravance Respiratory Company, LLC.	8-K	10.2	7/13/2022

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

32	Certifications Pursuant to 18 U.S.C. Section 1350

101.INS	Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

101.SCH	Inline XBRL Taxonomy Extension Schema Document

Exhibit
Number

Description

Form

Exhibit

Incorporated
by Reference
Filing
Date/Period
End Date
3.1

Amended and Restated Certificate of Incorporation

8-K

99.2

4/28/16

3.2

Amended and Restated Bylaws (as amended by the board of directors February 8, 2017)

8-K

3.1

2/9/17

4.8

Indenture (including form of Note) with respect to Innoviva’s 2.50% Convertible Senior Notes due 2025, dated as of August 7, 2017, between Innoviva and The Bank of New York Mellon Trust Company, N.A., as trustee

8-K

4.1

8/7/2017

10.73

Credit Agreement, dated as of August 18, 2017, among Innoviva, Inc., Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent, the other agents party thereto and the lenders referred to therein

8-K

10.1

8/21/2017

10.74

Assignment Agreement, dated as of August 18, 2017, by and between Innoviva, Inc. and LABA Royalty Sub LLC

8-K

10.2

8/21/2017

10.75

Termination Agreement, dated as of August 18, 2017, by and among LABA Royalty Sub LLC, Innoviva, Inc. and U.S. Bank National Association

8-K

10.3

8/21/2017

31.1

Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated pursuant to the Securities Exchange Act of 1934, as amended

31.2

Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated pursuant to the Securities Exchange Act of 1934, as amended

32

Certifications Pursuant to 18 U.S.C. Section 1350

101

Interactive Data File (Quarterly Report on Form 10-Q, for the quarterly period ended September 30, 2017)

~~SIGNATURES~~



101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

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: July 27, 2022	/s/ Pavel Raifeld
~~Date: November 3, 2017~~	~~/s/ Michael W. Aguiar~~Pavel Raifeld
	~~Michael W. Aguiar~~Chief Executive Officer
	~~Chief~~(Principal Executive ~~Officer~~Officer)
	~~(principal executive officer)~~
Date: July 27, 2022	/s/ Marianne Zhen
~~Date: November 3, 2017~~	~~/s/ Eric d’Esparbes~~Marianne Zhen
	~~Eric d’Esparbes~~Chief Accounting Officer
	~~Senior Vice President, Finance and Chief~~(Principal Financial ~~Officer (principal financial and principal accounting officer)~~Officer)


Delaware		94-3265960
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)


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


Large accelerated filerx ☒		Accelerated filer o☐

Non-accelerated filer o☐		Smaller reporting company o☐
~~(Do not check if a smaller reporting company)~~
		Emerging growth company o☐

	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016
Net income	$	23,767		$	15,033	$	75,758		$	34,065

Other comprehensive (loss) income:
Unrealized (loss) gain on marketable securities, net	(3		)	2		(4		)	11
Less: realized gain on marketable securities, net	—			—		—			(1		)
Comprehensive income	$	23,764		$	15,035	$	75,754		$	34,075


	Six Months Ended June 30, 2021
							Additional			Accumulated Other													Total
	Common Stock						Paid-In			Comprehensive		Accumulated			Treasury Stock					Noncontrolling			Stockholders’
	Shares			Amount			Capital			Income (Loss)		Deficit			Shares		Amount			Interest			Equity
Balance as of December 31, 2020		101,392		$	1,014		$	1,260,900		$	0	$	(722,002	)		—	$	0		$	67,925		$	607,837
Distributions to noncontrolling interest		—			0			0			0		0			—		0			(21,285	)		(21,285	)
Equity activity of noncontrolling interest from a consolidated variable interest entity		—			0			0			0		0			—		0			8			8
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding		16			0			(25	)		0		0			—		0			0			(25	)
Stock-based compensation		—			0			451			0		0			—		0			0			451
Net income		—			0			0			0		94,123			—		0			15,572			109,695
Balance as of March 31, 2021		101,408		$	1,014		$	1,261,326		$	0	$	(627,879	)		—	$	0		$	62,220		$	696,681
Distributions to noncontrolling interest					0			0			0		0			—		0			(20,161	)		(20,161	)
Equity activity of noncontrolling interest from a consolidated variable interest entity		—			0			0			0		0			—		0			8			8
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding		92			1			49			0		0			—		0			0			50
Repurchase of common stock		(32,005	)		(320	)		0			0		0			32,005		(393,829	)		0			(394,149	)
Stock-based compensation		—			0			470			0		0			—		0			0			470
Net income		—			0			0			0		88,948			—		0			21,898			110,846
Balance as of June 30, 2021		69,495		$	695		$	1,261,845		$	0	$	(538,931	)	$	32,005	$	(393,829	)	$	63,965		$	393,745

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands except per share data)	2017		2016		2017		2016
Numerator:
Net income, basic	$	23,767	$	15,033	$	75,758	$	34,065
Add: interest expense on 2023 Notes	1,410		1,429		4,231		—
Net income, diluted	$	25,177	$	16,462	$	79,989	$	34,065

Denominator:
Weighted-average shares used to compute basic net income per share	106,841		109,282		107,236		111,128
Dilutive effect of 2023 Notes	12,189		12,398		12,189		—
Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan	766		313		695		455
Weighted-average shares used to compute diluted net income per share	119,796		121,993		120,120		111,583

Net income per share
Basic	$	0.22	$	0.14	$	0.71	$	0.31
Diluted	$	0.21	$	0.13	$	0.67	$	0.31


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands except per share data)	2022		2021		2022		2021
Numerator:
Net income attributable to Innoviva stockholders, basic	$	939	$	88,948	$	16,712	$	183,071
Add: interest expense on 2023 Notes		570		1,163		1,591		2,367
Add: interest expense on 2025 Notes		1,375		0		2,539		0
Add: interest expense on 2028 Notes		1,709		0		2,093		0
Net income attributable to Innoviva stockholders, diluted	$	4,593	$	90,111	$	22,935	$	185,438
Denominator:
Weighted-average shares used to compute basic net income per share attributable to Innoviva stockholders		69,643		88,423		69,594		94,858
Dilutive effect of 2023 Notes		4,866		12,189		7,511		12,189
Dilutive effect of 2025 Notes		11,150		0		11,150		0
Dilutive effect of 2028 Notes		9,955		0		6,360		0
Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan		39		27		77		49
Weighted-average shares used to compute diluted net income per share attributable to Innoviva stockholders		95,653		100,639		94,692		107,096
Net income per share attributable to Innoviva stockholders
Basic	$	0.01	$	1.01	$	0.24	$	1.93
Diluted	$	0.05	$	0.90	$	0.24	$	1.73

	September 30, 2017
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government agencies	$	9,959	$	—	$	—		$	9,959
U.S. corporate notes	9,879		—		(3		)	9,876
U.S. commercial paper	24,582		—		—			24,582
Money market funds	118,163		—		—			118,163
Total	$	162,583	$	—	$	(3	)	$	162,580

	December 31, 2016
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government agencies	$	12,428	$	1	$	—	$	12,429
U.S. commercial paper	72,065		—		—		72,065
Money market funds	64,319		—		—		64,319
Total	$	148,812	$	1	$	—	$	148,813

	Estimated Fair Value Measurements as of September 30, 2017 Using:
Types of Instruments	Quoted Price in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
U.S. government agencies	$	—	$	9,959	$	—	$	9,959
U.S. corporate notes	—		9,876		—		9,876
U.S. commercial paper	—		24,582		—		24,582
Money market funds	118,163		—		—		118,163
Total assets measured at estimated fair value	$	118,163	$	44,417	$	—	$	162,580
Liabilities
Term B Loan	$	—	$	250,000	$	—	$	250,000
2023 Notes	—		234,658		—		234,658
2025 Notes	—		202,125		—		202,125
Total fair value of liabilities	$	—	$	686,783	$	—	$	686,783

(In thousands)	Unrecognized Compensation Cost
Stock options	$	455
RSUs	1,623
RSAs	8,887
Performance-based RSAs	38
Market-based RSUs	360
Market-based RSAs	2,425
Total unrecognized compensation cost	$	13,788

(In thousands)
Years ending December 31:
Remainder of 2017	$	6,250
2018	25,000
2019	25,000
2020	25,000
2121	25,000
2022	143,750
Thereafter	433,484
Total	$	683,484

			Payment Due by Period
			Less Than						More Than
(In thousands)	Total		1 Year		1 - 3 Years		3 - 5 Years		5 Years
2023 Notes	$	269,149	$	5,121	$	10,242	$	10,242	$	243,544
2025 Notes	231,121		4,933		9,625		9,625		206,938
Term B Loan	250,000		25,000		50,000		175,000		—
Facility leases	2,378		389		813		863		313
Total	$	752,648	$	35,443	$	70,680	$	195,730	$	450,795

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
July 1, 2017 to July 31, 2017	—	$	—	—
August 1, 2017 to August 31, 2017	1,317,771	$	13.28	1,317,771
September 1, 2017 to September 30, 2017	—	$	—	—
					$	82,500,000

Exhibit Number	Description	Form	Exhibit	Incorporated by Reference Filing Date/Period End Date
3.1	Amended and Restated Certificate of Incorporation	8-K	99.2	4/28/16

3.2	Amended and Restated Bylaws (as amended by the board of directors February 8, 2017)	8-K	3.1	2/9/17

4.8	Indenture (including form of Note) with respect to Innoviva’s 2.50% Convertible Senior Notes due 2025, dated as of August 7, 2017, between Innoviva and The Bank of New York Mellon Trust Company, N.A., as trustee	8-K	4.1	8/7/2017

10.73	Credit Agreement, dated as of August 18, 2017, among Innoviva, Inc., Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent, the other agents party thereto and the lenders referred to therein	8-K	10.1	8/21/2017

10.74	Assignment Agreement, dated as of August 18, 2017, by and between Innoviva, Inc. and LABA Royalty Sub LLC	8-K	10.2	8/21/2017

10.75	Termination Agreement, dated as of August 18, 2017, by and among LABA Royalty Sub LLC, Innoviva, Inc. and U.S. Bank National Association	8-K	10.3	8/21/2017

31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated pursuant to the Securities Exchange Act of 1934, as amended

31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated pursuant to the Securities Exchange Act of 1934, as amended

32	Certifications Pursuant to 18 U.S.C. Section 1350

101	Interactive Data File (Quarterly Report on Form 10-Q, for the quarterly period ended September 30, 2017)