TABLE OF CONTENTS


PART ~~I —~~I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)	3

Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2023 and December 31, ~~2016~~2022	3
Condensed Consolidated Statements of ~~Operations~~Income for the Three and Nine Months Ended September 30, ~~2017~~2023 and ~~2016~~2022	4
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, ~~2017~~2023 and ~~2016~~2022	5
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022	6
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2017~~2023 and ~~2016~~2022	68
Notes to Condensed Consolidated Financial Statements	711

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1741

Item 3. Quantitative and Qualitative Disclosures About Market Risk	2349

Item 4. Controls and Procedures	2349

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	2550

Item 1A. Risk Factors	2550

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4250

Item ~~6. Exhibits~~3. Defaults Upon Senior Securities	4351

~~Signatures~~Item 4. Mine Safety Disclosure	4451

~~Exhibits~~Item 5. Other Information	51

Item 6. Exhibits	52

Signatures	53

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,			September 30,			December 31,
	2017			2016			2023			2022
	(unaudited)			*			(unaudited)			*
Assets
Current assets:
Cash and cash equivalents	$	138,417		$	118,016		$	179,997		$	291,049
Short-term marketable securities	29,775			32,417
Related party receivables from collaborative arrangements	51,878			46,847
Prepaid expenses and other current assets	439			766
Accounts receivable, net								10,752			9,401
Receivables from collaboration arrangement								57,014			54,672
Inventory								40,515			55,897
Prepaid expenses								14,729			29,559
Other current assets								1,992			2,933
Total current assets	220,509			198,046				304,999			443,511
Property and equipment, net	249			368				361			170
Capitalized fees paid to a related party, net	170,177			180,545
Equity method investments								107,040			39,154
Equity and long-term investments								422,491			363,859
Capitalized fees paid, net								87,239			97,607
Right-of-use assets								2,828			3,265
Goodwill								17,905			26,713
Intangible assets								236,845			252,919
Deferred tax assets								4,952			—
Other assets	37			37				3,444			4,299
Total assets	$	390,972		$	378,996		$	1,188,104		$	1,231,497

Liabilities and Stockholders’ Deficit
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	629		$	128		$	3,783		$	2,939
Accrued personnel-related expenses	1,647			2,361				5,166			8,022
Accrued interest payable	3,566			7,828				833			4,359
Deferred revenue								1,548			2,094
Convertible subordinated notes due 2023, net of issuance costs								—			96,193
Income tax payable								154			154
Other accrued liabilities	1,157			1,095				24,699			21,207
Current portion of long-term debt	25,000			7,752
Deferred revenue, current	885			885
Total current liabilities	32,884			20,049				36,183			134,968
Long-term debt, net of current portion, discount and issuance costs	578,449			708,341
Long-term debt, net of discount and issuance costs								445,718			444,180
Other long-term liabilities	1,049			1,383				68,690			70,918
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		)
Deferred tax liabilities, net								—			5,771
Income tax payable, long-term								10,020			9,872
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock: $0.01 par value, 230 shares authorized, no shares issued and outstanding								—			—
Common stock: $0.01 par value, 200,000 shares authorized, 64,384 and 69,188 issued and outstanding as of September 30, 2023 and December 31, 2022, respectively								644			692
Treasury stock: at cost, 32,005 shares as of September 30, 2023 and December 31, 2022								(393,829	)		(393,829	)
Additional paid-in capital	1,336,358			1,282,077				1,107,398			1,163,836
Accumulated other comprehensive (loss) income	(3		)	1
Accumulated deficit	(1,557,133		)	(1,632,891		)		(86,720	)		(204,911	)
Total stockholders’ deficit	(222,961		)	(352,991		)
Total liabilities and stockholders’ deficit	$	390,972		$	378,996
Total stockholders’ equity								627,493			565,788
Total liabilities and stockholders’ equity							$	1,188,104		$	1,231,497

*Condensed consolidated balance sheet has been derived from audited consolidated financial statements as of December 31, 2022.

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,

2017

2016

2017

2016

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

Operating expenses:

Research and development

311

286

1,013

1,048

General and administrative

8,310

5,105

29,489

17,582

Total operating expenses

8,621

5,391

30,502

18,630

Income from operations

40,022

27,918

117,195

71,327

Other (expense) income, net

(6,369
)
56

(7,108
)
1,743

Interest income

376

162

918

411

Interest expense

(10,262
)
(13,103
)
(35,247
)
(39,416
)
Net income

$
23,767

$
15,033

$
75,758

$
34,065

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:

Shares used to compute basic net income per share

106,841

109,282

107,236

111,128

Shares used to compute diluted net income per share

119,796

121,993

120,120

111,583


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Revenue:
Royalty revenue, net of amortization of capitalized fees paid of $3,456 in the three months ended September 30, 2023 and 2022, and $10,368 in the nine months ended September 30, 2023 and 2022	$	53,558		$	62,150		$	172,681		$	260,429
Net product sales		13,701			5,107			40,942			5,107
License revenue		—			—			11,000			—
Total revenue		67,259			67,257			224,623			265,536
Expenses:
Cost of products sold (inclusive of amortization of inventory fair value adjustments, excluding depreciation and amortization of intangible assets)		10,182			3,680			27,910			3,680
Cost of license revenue		—			—			1,600			—
Selling, general and administrative		28,636			27,810			71,913			46,084
Research and development		3,989			11,725			31,566			31,447
Amortization of acquired intangible assets		6,511			1,511			15,274			1,511
Gain on sale of Theravance Respiratory Company, LLC (“TRC”)		—			(266,696	)		—			(266,696	)
Loss on debt extinguishment		—			—			—			20,662
Changes in fair values of equity method investments, net		(71,980	)		(10,298	)		(67,886	)		44,475
Changes in fair values of other equity and long-term investments, net		2,640			10,168			4,887			23,406
Interest and dividend income		(4,114	)		(2,135	)		(11,032	)		(3,181	)
Interest expense		4,396			5,096			13,205			11,761
Other expense, net		1,047			(28	)		4,289			750
Total expenses		(18,693	)		(219,167	)		91,726			(86,101	)
Income before income taxes		85,952			286,424			132,897			351,637
Income tax expense, net		3,906			57,077			14,706			63,061
Net income		82,046			229,347			118,191			288,576
Net income (loss) attributable to noncontrolling interests		—			(36,176	)		—			6,341
Net income attributable to Innoviva stockholders	$	82,046		$	265,523		$	118,191		$	282,235
Basic net income per share attributable to Innoviva stockholders	$	1.26		$	3.81		$	1.79		$	4.05
Diluted net income per share attributable to Innoviva stockholders	$	0.98		$	2.80		$	1.45		$	3.07
Shares used to compute Innoviva basic and diluted net income per share:
Shares used to compute basic net income per share		64,953			69,731			66,016			69,640
Shares used to compute diluted net income per share		86,164			95,830			87,504			95,072

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 September 30,					Nine Months Ended September 30,
	2023		2022			2023		2022
Net income	$	82,046	$	229,347		$	118,191	$	288,576
Comprehensive income		82,046		229,347			118,191		288,576
Comprehensive income (loss) attributable to noncontrolling interests		—		(36,176	)		—		6,341
Comprehensive income attributable to Innoviva stockholders	$	82,046	$	265,523		$	118,191	$	282,235

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


	Nine Months Ended September 30, 2023
							Additional											Total
	Common Stock						Paid-In			Accumulated			Treasury Stock					Stockholders’
	Shares			Amount			Capital			Deficit			Shares		Amount			Equity
Balance as of January 1, 2023		69,188		$	692		$	1,163,836		$	(204,911	)		32,005	$	(393,829	)	$	565,788
Issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding		55			1			(24	)		—			—		—			(23	)
Repurchase of common stock		(3,419	)		(34	)		(40,701	)		—			—		—			(40,735	)
Stock-based compensation		—			—			1,598			—			—		—			1,598
Net income		—			—			—			34,865			—		—			34,865
Balance as of March 31, 2023		65,824			659			1,124,709			(170,046	)		32,005		(393,829	)		561,493
Issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding		177			2			78			—			—		—			80
Repurchase of common stock		(776	)		(8	)		(9,278	)		—			—		—			(9,286	)
Stock-based compensation		—			—			1,520			—			—		—			1,520
Net income		—			—			—			1,280			—		—			1,280
Balance as of June 30, 2023		65,225			653			1,117,029			(168,766	)		32,005		(393,829	)		555,087
Issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding		16			—			(11	)		—			—		—			(11	)
Repurchase of common stock		(857	)		(9	)		(11,062	)		—			—		—			(11,071	)
Stock-based compensation		—			—			1,442			—			—		—			1,442
Net income		—			—			—			82,046			—		—			82,046
Balance as of September 30, 2023		64,384		$	644		$	1,107,398		$	(86,720	)		32,005	$	(393,829	)	$	627,493

Nine Months Ended September 30, 2022

Additional

Total

Common Stock

Paid-In

Accumulated

Treasury Stock

Noncontrolling

Stockholders’

Shares

Amount

Capital

Deficit

Shares

Amount

Interest

Equity

Balance as of January 1, 2022

69,566

$
696

$
1,264,024

$
(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
   interests

—

—

—

—

—

—

(6,507
)

(6,507
)
Fair value of noncontrolling
   interests in a consolidated
   variable interest entity

—

—

—

—

—

—

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

—

214

—

—

—

—

214

Stock-based compensation

—

—

620

—

—

—

334

954

Capped call options associated
   with convertible senior notes
   due 2028

—

—

(16,585
)

—

—

—

—

(16,585
)
Net income

—

—

—

15,773

—

—

22,085

37,858

Balance as of March 31, 2022

69,594

696

1,182,912

(403,137
)

32,005

(393,829
)

165,575

552,217

Distributions to noncontrolling
   interests

—

—

—

—

—

(9,545
)

(9,545
)
Equity activity of noncontrolling
   interests in a consolidated
   variable interest entity

—

—

—

—

—

—

(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

—

—

—

—

68

Conversion of convertible
   subordinated notes due
   2023

—

—

3

—

—

—

—

3

Stock-based compensation

—

—

685

—

—

—

665

1,350

Net income

—

—

—

939

—

—

20,432

21,371

Balance as of June 30, 2022

69,706

697

1,183,667

(402,198
)

32,005

(393,829
)

177,125

565,462

Distributions to noncontrolling
   interests

—

—

—

—

—

(53,759
)

(53,759
)
Derecognition of noncontrolling
   interests upon sale of TRC

—

—

—

78

—

—

(61,304
)

(61,226
)
Derecognition of noncontrolling
   interests upon acquisition of
   Entasis Therapeutics Holdings Inc.
   (“Entasis”) minority interest

—

—

(14,153
)

—

—

—

(28,009
)

(42,162
)
Exercise of stock options and
   issuance of common stock units
   and stock awards, net of
   repurchase of shares to satisfy
   tax withholding

70

1

(12
)

—

—

—

—

(11
)
Stock-based compensation

—

—

1,594

—

—

—

2,123

3,717

Net income

—

—

—

265,523

—

—

(36,176
)

229,347

Balance as of September 30, 2022

69,776

$
698

$
1,171,096

$
(136,597
)

32,005

$
(393,829
)

$
—

$
641,368

See accompanying notes to condensed consolidated financial statements.

INNOVIVA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Nine Months Ended September 30,

2023

2022

Cash flows from operating activities

Net income

$
118,191

$
288,576

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

Deferred income taxes

(1,115
)

29,258

Amortization of capitalized fees and depreciation of property and equipment

10,437

10,447

Amortization of acquired intangible assets

15,274

1,511

Inventory fair value step-up adjustment included in cost of products sold

19,179

2,743

Stock-based compensation

4,560

6,021

Amortization of debt discount and issuance costs

1,549

1,491

Changes in fair values of equity method investments, net

(67,886
)

44,475

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

4,887

21,973

Loss on extinguishment of debt

—

20,662

Net gain on sale of TRC

—

(266,696
)
Accrued interest income added to long-term investments

(1,482
)

—

Other non-cash items

(770
)

2,026

Changes in operating assets and liabilities:

Accounts receivable

(1,351
)

(867
)
Receivables from collaboration arrangement

(2,341
)

2,385

Inventory

(3,797
)

350

Prepaid expenses

14,830

277

Other assets

1,795

(2,932
)
Accounts payable

844

958

Accrued personnel-related expenses and other
   accrued liabilities

(1,072
)

(1,709
)
Accrued interest payable

(3,526
)

(1,926
)
Income tax payable

148

33,804

Deferred revenue

(546
)

—

Net cash provided by operating activities

107,808

192,827

Cash flows from investing activities

Purchases of equity method investments

—

(45,000
)
Purchases of trading securities

(60,132
)

—

Purchases of equity and long-term investments

(1,218
)

(13,725
)
Purchases of equity investments managed by ISP Fund LP

(24,914
)

(92,951
)
Sales of equity investments managed by ISP Fund LP

39,642

24,281

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

(14,728
)

(41,330
)
Purchases of property and equipment

(260
)

(33
)
Proceeds from sale of ownership interest in TRC, net

—

248,191

Cash acquired through the consolidation of Entasis

—

23,070

Cash paid for the acquisition of La Jolla Pharmaceutical Company,
   net of cash acquired

—

(150,459
)
Net cash used in investing activities

(61,610
)

(47,956
)
Cash flows from financing activities

Distributions to noncontrolling interests

—

(69,811
)
Purchase of Entasis minority interest

—

(42,395
)
Repurchase of common stock

(61,092
)

—

Repurchase of shares to satisfy tax withholding

(65
)

(71
)
Proceeds from issuances of common stock, net

111

342

Payment for repurchase of convertible subordinated notes due 2023

(96,204
)

(165,131
)
Purchases of capped call options associated with convertible senior notes
      due 2028

—

(21,037
)
Proceeds from issuance of convertible senior notes due 2028, net of
      issuance costs

—

252,536

Net cash used in financing activities

(157,250
)

(45,567
)
Net (decrease) increase in cash and cash equivalents

(111,052
)

99,304

Cash and cash equivalents at beginning of period

291,049

201,525

Cash and cash equivalents at end of period

$
179,997

$
300,829

9

Nine Months Ended September 30,

2023

2022

Supplemental Disclosure of Cash Flow Information:

Cash paid for interest

$
11,381

$
11,736

Cash paid for income taxes

—

3,859

Supplemental Disclosure of Non-cash Investing and Financing Activities:

Adoption of ASU 2020-06

$
—

$
28,123

Reconciliation of Cash, Cash Equivalents and Restricted Cash:

Cash and cash equivalents

$
179,997

$
300,789

Restricted cash, included in “Other assets”

—

40

Total cash, cash equivalents and restricted cash at end of period shown in the
   condensed consolidated statements of cash flows

$
179,997

$
300,829

See accompanying notes to condensed consolidated financial statements.
10
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~~(and where context requires, together with its subsidiaries 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~~innovative 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 up until July 2022, TRELEGY® ELLIPTA® (the combination FF/UMEC/VI). We sold our 15% ownership interest in Theravance Respiratory Company, LLC (“TRC”) on July 20, 2022, and are no longer entitled to receive royalties on sales of TRELEGY® ELLIPTA® products. Under the Long-Acting ~~Beta~~2Beta2 Agonist (“LABA”) Collaboration Agreement, Innoviva is entitled to receive royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion; and royalties from the sales of ANORO® ELLIPTA®, which tier upward at a range from 6.5% to 10%.

We expanded our portfolio of royalties and innovative healthcare assets through the acquisition of Entasis Therapeutics Holdings Inc. (“Entasis”) on July 11, 2022 and the ~~Strategic Alliance Agreement~~acquisition of La Jolla Pharmaceutical Company (“La Jolla”) on August 22, 2022. Our commercial and marketed products include GIAPREZA® (angiotensin II), approved to increase blood pressure in adults with ~~GSK (referred to herein~~septic or other distributive shock, and XERAVA® (eravacycline) for the treatment of complicated intra-abdominal infections in adults. Our new product, XACDURO® (formerly known as sulbactam-durlobactam or SUL-DUR), was approved by the ~~“GSK Agreements”), Innoviva is eligible to receive the associated royalty revenues from RELVAR~~®~~/BREO~~® ~~ELLIPTA~~®United States Food and ~~ANORO~~® ~~ELLIPTA~~®~~. Innoviva is also entitled to 15%~~Drug Administration (“FDA”) on May 23, 2023 and we commenced commercial sales of ~~any future payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC (“TRC”), relating to TRELEGY~~XACDURO® ~~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 developed~~ in the ~~future under~~third quarter of 2023. Our development pipeline includes medicines for the ~~LABA Collaboration Agreement (“LABA Collaboration”), which has been assigned to TRC~~treatment of bacterial infections. As such, we have a wholly owned robust infectious disease and hospital operating platform, as well as other ~~than RELVAR~~®~~/BREO~~® ~~ELLIPTA~~®assets in these areas, such as a large equity stake in Armata Pharmaceuticals, a leader in bacteriophage development with potential use across a range of infectious and ~~ANORO~~® ~~ELLIPTA~~®.other serious diseases. We also have economic interests in other healthcare companies.

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 (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. ~~In our opinion, the~~The unaudited condensed consolidated financial statements have been prepared on the same basis as audited consolidated financial statements and, in our opinion, include all adjustments, consisting of ~~only~~all 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~~2023, or any other ~~period.~~periods.

The accompanying unaudited condensed consolidated financial statements include the accounts of Innoviva, our wholly-owned subsidiaries, and certain variable interest entities (“VIEs”) 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~~2022 filed with the Securities and Exchange Commission (“SEC”) on February 28, ~~2017.~~2023, and as amended on March 20, 2023.

Presentation Reclassification

Amounts in equity and long-term investments and changes in fair value of equity and long-term investments, net, reported in the Company's comparative financial statements have been reclassified to conform to the current year presentation. Certain reclassifications have been made to the condensed consolidated statement of cash flows for the nine months ended September 30,

2022 to conform to the current year’s presentation. These reclassifications had no net effect on the net income or net cash flows as previously reported.

Factors Affecting Comparability

Our historical financial condition and results of operations for the periods presented may not be comparable, either between periods or going forward due to the factors below and as discussed in Note 5, “Consolidated Entities and Acquisitions”.

•
Accounting consolidation of Entasis on February 17, 2022 and purchase of remaining noncontrolling interest in Entasis on July 11, 2022;

•
Sale of our 15% ownership interest in Theravance Respiratory Company, LLC (“TRC”) on July 20, 2022, and

•
Acquisition of La Jolla on August 22, 2022.

Use of Management’s Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with U.S. 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.

Concentrations of Credit Risk and of Significant Suppliers and Partner

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

We are dependent on third-party manufacturers to supply active pharmaceutical ingredients (“API”) and drug products for research and development and commercial programs. These programs could be adversely affected by significant interruption in the supply of API or drug products.

Currently, we derive most of our revenues from GSK and our near-term success depends in large part on GSK’s ability to successfully develop and commercialize the products in the respiratory programs partnered with GSK. Our near-term success depends in large part upon the performance by GSK of its commercial obligations under the GSK Agreements and the commercial success of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®. 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, our business would 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® and ANORO® ELLIPTA®. Our quarterly royalty revenues may fluctuate due to a variety of factors, many of which are outside of our control. Our royalty revenues under the GSK Agreements may not meet our analysts’ or investors’ expectations due to a number of important factors.

We also started recognizing revenue from product sales of GIAPREZA® and XERAVA® as a result of our acquisition of La Jolla and XACDURO®, which was commercially launched in September 2023. Hospitals and other healthcare organizations generally purchase our products through a network of specialty distributors. These specialty distributors, which are located in the U.S., are considered our customers for accounting purposes. We do not believe that the loss of one of these distributors would significantly impact our ability to distribute our products, as we expect that sales volume would be absorbed by new or remaining distributors. Three of our customers each account for 27%, 28% and 26%, respectively, of our net product sales for the three months ended September 30, 2023, and 32%, 28% and 27%, respectively, for the nine months ended September 30, 2023. These same customers account for 29%, 28% and 14%, respectively, of our receivables from net product sales, which are included in “Accounts receivables, net” in our unaudited condensed consolidated balance sheet as of September 30, 2023.

Refer to Item 1A. “Risk Factors” disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

Segment Reporting
We operate in a single segment, which is to provide capital return to stockholders by maximizing the potential value of our portfolio of royalties and innovative healthcare assets. Our Chief Operating Decision Maker (“CODM”) is our Chief Executive Officer. The CODM allocates resources and evaluates the performance of Innoviva at the consolidated level using information about our revenues, operating results and other key financial data as needed. Our revenues are generated primarily from our collaborative arrangements and royalty payments from GSK, located in Great Britain. Refer to Note 3, “Revenue Recognition”, for more information on our revenues for the periods presented. We also generate revenue from net product sales of GIAPREZA®, XERAVA®, and XACDURO®. Our long-term assets 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~~The primary beneficiary of a variable interest ~~entities~~entity (“VIE”)~~, whether~~ is required to consolidate the assets and liabilities of the VIE. When we ~~have~~obtain a variable interest in ~~those entities~~another entity, we assess at the inception of the relationship and upon occurrence of certain significant events whether the ~~nature~~entity is a VIE and, ~~extent of those interests. Based on our evaluations,~~ if ~~we determine~~so, whether we are the primary beneficiary of ~~such VIEs, we consolidate such entities into~~the VIE based on our ~~financial statements. We consolidate~~power to direct the ~~financial results~~activities of ~~TRC, which we have determined~~the VIE that most significantly impact the VIE’s economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be ~~a VIE, because~~significant to the VIE.

To assess whether we have the power to direct the ~~economically significant~~ activities of ~~TRC~~a VIE that most significantly impact the VIE’s economic performance, we consider all the facts and circumstances, including our role in establishing the VIE and our ongoing rights and responsibilities. This assessment includes identifying the activities that most significantly impact the VIE’s economic performance and identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE (management and representation on the Board of Directors) and have the right to unilaterally remove those decision-makers are deemed to have the power to direct the activities of a VIE.

To assess whether we have the obligation to absorb losses of the VIE or the right to receive benefits from ~~TRC. The financial position~~the VIE that could potentially be significant to the VIE, we consider all of our economic interests that are deemed to be variable interests in the VIE. This assessment requires us to apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE.

Business Combination

When we acquire an entity in a business combination, we recognize the fair value of all assets acquired, liabilities assumed, and ~~results~~any non-controlling interest in the acquiree and establish the acquisition date as the fair value measurement point. We recognize and measure goodwill as of ~~operations~~the acquisition date, as the excess of ~~TRC~~the fair value of the consideration paid over the fair value of the identified net assets acquired. Acquisition-related expenses and related restructuring costs are expensed as incurred.

Several valuation methods may be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we typically use the income method. This method starts with a forecast of all of the expected future net cash flows for each asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or other methods include the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry. Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.

Cash and Cash Equivalents

We consider all highly liquid investments purchased with a maturity of three months or less on the date of purchase to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value.

Accounts Receivable

Accounts receivable are recorded net of estimates for prompt-pay discounts, chargebacks, returns and rebates. Allowances for prompt-pay discounts and chargebacks are based on contractual terms. We estimate the allowance for credit losses based on existing contractual payment terms, actual payment patterns of customers and individual customer circumstances.

Inventory

Inventory is stated at the lower of cost or estimated net realizable value on a first in, first out basis. We periodically analyze inventory levels and write down inventory as cost of products sold when the following occurs: inventory has become obsolete, inventory has a cost basis in excess of its estimated net realizable value, or inventory quantities are in excess of expected product sales.

Goodwill and Intangible Assets

Goodwill is recognized as the excess of the purchase consideration of an acquired entity over the fair value assigned to assets acquired and liabilities assumed in a business combination. Goodwill and intangible assets with an indefinite useful life are not ~~material~~amortized and are tested for impairment at least annually on the first day of December of each year or more frequently if indicators for potential impairment exist or whenever events or changes in circumstances indicate that the asset’s carrying asset amount may not be recoverable. Intangible assets with definite useful lives are amortized on a straight-line basis over their respective remaining useful lives and are tested for impairment only if indicators for potential impairment exist or whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. Significant judgment may be involved in determining if an indicator of impairment has occurred.

Operating Leases

Right-of-use assets represent our right to use an underlying asset over the lease term and 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.

Equity and Long-Term Investments

We 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 consolidate 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 ~~periods presented.~~

~~Recently Issued Accounting Pronouncements Not Yet Adopted~~

~~In April 2016,~~investments where we exercise significant influence using either an equity method of accounting or at fair value by electing the ~~Financial~~fair value option under Accounting Standards ~~Board (the “FASB”~~Codification (“ASC”) ~~issued Accounting Standards Update (“ASU”) 2016-10~~Topic 825, Financial Instruments. If the fair value option is applied to ~~clarify~~an investment that would otherwise be accounted for under the ~~implementation guidance on licensing~~equity method, we apply it to all our financial interests in the same entity (equity and debt, including guarantees) that are eligible items. All gains and losses from fair value changes, unrealized and realized, are presented as changes in fair values of equity method investments, net, and changes in fair values of equity and long-term investments, net, within the ~~identification~~unaudited condensed consolidated statements of ~~performance obligations consideration included~~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 method under ASC 321, Investments - Equity Securities. This measurement alternative method allows us to measure the equity investment at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in ~~ASU 2014-09,~~ 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, trading and equity and debt 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 in the unaudited condensed consolidated balance sheets.

Revenue ~~from Contracts with Customers~~ (“ASU 2014-09”), which is also known as ASC 606, was issued in May 2014 and outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In March 2016,Recognition

We apply the ~~FASB issued ASU 2016-08 to provide amendments to clarify the implementation~~ guidance on principal versus agent ~~considerations. ASU 2014-09 guidance is effective~~considerations under ASC Topic 606, Revenue from Contracts with Customers, to determine the appropriate treatment for the ~~fiscal years~~transactions between us and ~~interim reporting periods beginning after December 15, 2017 (as amended~~third parties. The classification of transactions under our arrangements is determined based on the nature and contractual terms of the arrangement along with the nature of the operations of the participants. Any consideration related to activities in which we are considered the principal, which includes being in control of the good or service before such good or service is transferred to the customer, are accounted for as product sales.

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 ~~ASU 2015-14 issued~~a five-step process: (i) identify the contract with the customer; (ii) identify the performance obligations in ~~August 2015), with early adoption permitted. Companies can elect~~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 ~~full retrospective method to recast prior-period financial statements or a modified retrospective method to~~performance obligation is satisfied.

Royalty Revenue

We recognize the ~~cumulative effect as an adjustment~~royalty revenue on net sales of products with respect to which we have contractual royalty rights in the ~~retained~~period in which the royalties are earned. The net sales reports provided by our partner are based on its methodology and assumptions to 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 conduct periodic royalty audits to evaluate the 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.

Revenue from Product Sales

Revenue from product sales is recognized when our customers obtain control of the product and is recorded at the transaction price, net of estimates for variable consideration consisting of chargebacks, discounts, returns and rebates. Variable consideration is estimated using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible consideration amounts. Actual amounts of consideration ultimately received may differ from our estimates. If actual results vary materially from our estimates, we will adjust these estimates, which will affect revenue from product sales and earnings in the ~~initial year. We plan~~period such estimates are adjusted. These items may include:

•

Chargebacks: Chargebacks are discounts we provide to ~~implement the standard~~distributors in the ~~first~~event that the sales prices to end users are below the distributors’ acquisition price. This may occur due to a direct contract with a health system, a group purchasing organization (“GPO”) agreement or a sale to a government facility. Chargebacks are estimated based on known chargeback rates and recorded as a reduction of revenue on delivery to our customers.

•

Discounts: We offer customers various forms of incentives and consideration, including prompt-pay and other discounts. We estimate discounts primarily based on contractual terms. These discounts are recorded as a reduction of revenue on delivery to our customers.

•

Returns: We offer customers a limited right of return, generally for damaged or expired product. We estimate returns based on an internal analysis, which includes actual experience. The estimates for returns are recorded as a reduction of revenue on delivery to our customers.

•

Rebates: We participate in Medicaid rebate programs, which provide assistance to certain low-income patients based on each individual state’s guidelines regarding eligibility and services. Under the Medicaid rebate programs, we pay a rebate to each participating state, generally within three months after the quarter in which product was sold. Additionally, we may offer customer incentives and consideration in the form of ~~2018~~volume-based or other rebates. The estimates for rebates are recorded as a reduction of revenue on delivery to our customers.

We continue to assess our estimates of variable consideration as we accumulate additional historical data and will adjust these estimates accordingly.

License Revenue

At the inception of a licensing arrangement that includes development and regulatory milestone payments, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price. We generally include these milestone payments in the transaction price when they are achieved because there is considerable uncertainty in the research and development processes that trigger receipt of these payments under our agreements. Similarly, we include approval milestone payments in the transaction price once the product is approved by the applicable regulatory agency.

Research and Development Expenses

Research and development expenses are recognized in the period that services are rendered or goods are received. Research and development expenses consist of salaries and benefits, laboratory supplies, facilities and other overhead costs, research-related manufacturing costs, contract service and clinical-related service costs performed by third party research organizations, research institutions and other outside service providers. Non-refundable prepayments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are recognized as an expense as the related goods are delivered or the related services are performed. We also utilize significant judgment and estimates to record accruals for estimated ongoing research costs based on the progress of the studies and progress of research manufacturing activities.

Interest Expense on Deferred Royalty Obligation

Interest expense related to the deferred royalty obligation is recognized over the expected repayment term of the deferred royalty obligation using the effective interest method. The assumptions used in determining the expected repayment term of the deferred royalty obligation require us to make estimates that could impact the effective interest rate. Each reporting period, we estimate the expected repayment term of the deferred royalty obligation based on forecasted net sales of GIAPREZA®. Changes in interest expense resulting from changes in the effective interest rate, if any, are recorded on a ~~modified retrospective basis and do not anticipate that this standard will have a material impact on our accounting~~prospective basis. Refer to Note 11, “Debt” for ~~royalty revenues. We are continuing to assess the potential impacts of the standard on the accounting for other revenues associated with the collaboration agreements.~~more information.

~~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 impact on the consolidated statement of operations and cash flows in a similar manner under current GAAP. The standard also requires additional qualitative and quantitative disclosures. The standard is effective for us at the beginning January 1, 2019 and requires transition under a modified retrospective method. The most significant impact of the update to us is that we 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 under the existing lease guidance. We anticipate that the treatment of the lease on our consolidated statement of operations and cash flows will not materially be affected by the adoption of the new standard.

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”) up until its maturity date on January 15, 2023, 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 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 intent is to settle the principal amount of the 2025 Notes in cash upon conversion. The impact of the assumed conversion premium to diluted net income per share is computed using the treasury stock method. As the average market price per share of our common stock as reported on The NASDAQ Global Select Market was lower than the initial conversion price of $17.26 per share, there was no dilutive effect of the assumed conversion premium for the three and nine months ended September 30, 2017.

The following table shows the computation of basic and diluted net income per share for the three and nine months ended September 30, ~~2017~~2023 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

2022:

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands except per share data)

2023

2022

2023

2022

Numerator:

Net income attributable to Innoviva stockholders, basic

$
82,046

$
265,523

$
118,191

$
282,235

Add: interest expense on 2023 Notes, net of tax effect

—

412

86

2,003

Add: interest expense on 2025 Notes, net of tax effect

1,236

994

3,703

3,533

Add: interest expense on 2028 Notes, net of tax effect

1,543

1,769

4,618

3,862

Net income attributable to Innoviva stockholders, diluted

$
84,825

$
268,698

$
126,598

$
291,633

Denominator:

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

64,953

69,731

66,016

69,640

Dilutive effect of 2023 Notes

—

4,866

250

6,629

Dilutive effect of 2025 Notes

11,150

11,150

11,150

11,150

Dilutive effect of 2028 Notes

9,955

9,955

9,955

7,559

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

106

128

133

94

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

86,164

95,830

87,504

95,072

Net income per share attributable to Innoviva stockholders

Basic

$
1.26

$
3.81

$
1.79

$
4.05

Diluted

$
0.98

$
2.80

$
1.45

$
3.07

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 September 30,				Nine Months Ended September 30,
(In thousands)	2023		2022		2023		2022
Outstanding options and awards granted under equity incentive plan and employee stock purchase plan		1,389		705		1,284		577
Outstanding stock warrant		591		526		591		177
Total		1,980		1,231		1,875		754

3. Revenue Recognition

~~3. Collaborative Arrangements~~

Net Revenue from ~~Collaborative Arrangements~~Collaboration Arrangement

On July 13, 2022, Innoviva’s wholly-owned subsidiary, Innoviva TRC Holdings, LLC (“ITH”) entered into an equity purchase agreement (“TRC Equity Purchase Agreement”) with Royalty Pharma Investments 2019 ICAV (“Royalty Pharma”) to sell our ownership interest in TRC. As a result of the sale of our ownership interest in TRC, which was consummated on July 20, 2022, we are no longer entitled to receive 15% of royalty payments made by GSK stemming from sales of TRELEGY® ELLIPTA®. We retained our royalty rights with respect to RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®.

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 September 30,						Nine Months Ended September 30,
(In thousands)	2023			2022			2023			2022
Royalties - RELVAR/BREO	$	45,585		$	55,663		$	150,922		$	170,753
Royalties - ANORO		11,429			9,943			32,127			28,015
Royalties - TRELEGY		—			—			—			72,029
Total royalties		57,014			65,606			183,049			270,797
Less: amortization of capitalized fees paid		(3,456	)		(3,456	)		(10,368	)		(10,368	)
Total net royalty revenue	$	53,558		$	62,150		$	172,681		$	260,429

~~LABA Collaboration~~

Net Product Sales

Our net product sales were $13.7 million, consisting of net sales of GIAPREZA®, XERAVA®, and XACDURO® for $8.0 million, $5.1 million, and $0.6 million, respectively, for the three months ended September 30, 2023. Our net product sales were $40.9 million, consisting of net sales of GIAPREZA®, XERAVA®, and XACDURO® for $28.2 million, $12.1 million, and $0.6 million, respectively, for the nine months ended September 30, 2023. We derived over 86% and 93% of our net product sales from customers located in the U.S for the three and nine months ended September 30, 2023, respectively.

For the comparative periods in 2022, our net product sales amounted to $5.1 million, consisting of $3.8 million in net sales of GIAPREZA® and $1.3 million in net sales of XERAVA®. These sales were recognized from the date of our acquisition of La Jolla, which took place on August 22, 2022, through September 30, 2022.

License Revenue

Refer to the out-license agreement with Zai Lab and Everest in Note 4, “License and Collaboration Arrangements”.

24. License and Collaboration Arrangements

Out-License Agreements

Zai Lab

Entasis entered into a license and collaboration agreement with Zai Lab (Shanghai) Co., Ltd. (“Zai Lab”) (Nasdaq: ZLAB), pursuant to which Zai Lab licensed exclusive rights to durlobactam and SUL-DUR, in the Asia-Pacific region (“the Zai Agreement”). Under the terms of the Zai Agreement, Zai Lab will fund most of the registrational clinical trial costs in China for SUL-DUR, with the exception of Phase 3 patient drug supply of licensed products. Zai Lab will conduct development activities and plan and obtain regulatory approval in a specified number of countries in the Asia-Pacific region beyond China after receipt of regulatory approval of a licensed product in China. Zai Lab is also solely responsible for commercializing licensed products in the Asia-Pacific region and will commercialize licensed products for which it has obtained regulatory approval. We are obligated to supply Zai Lab with the licensed products for clinical development and, if the licensed product is approved, for commercial use for a certain period unless Zai Lab notifies otherwise. Zai Lab may take over manufacturing responsibilities for its own commercialization activities within a specified time period following the effective date of the Zai Agreement.

We are eligible to receive up to an aggregate of $91.0 million in research and development support payments and development, regulatory and sales milestone payments related to SUL-DUR, imipenem and other combinations with the licensed products. Zai Lab will pay us a tiered royalty equal to from a high-single digit to low-double digit percentage based on annual net sales of licensed products in the territory, subject to specified reductions for the market entry of competing products, loss of patent coverage of licensed products and for payments owed to third parties for additional rights necessary to commercialize licensed products in the territory. Payments received for research support and reimbursable clinical trial costs are recorded as a reduction to research and development expense during the period in which the qualifying expenses are incurred. Such amounts recorded for the three and nine months ended September 30, 2023 and 2022 were not material. Following the approval of XACDURO® by the FDA in May 2023, we recognized $3.0 million in license revenue for the nine months ended September 30, 2023.

GARDP

Entasis entered into a collaboration agreement with the Global Antibiotic Research and Development Partnership (“GARDP”) for the development, manufacture and commercialization of the product candidate zoliflodacin in certain countries (“the GARDP Collaboration Agreement”). Under the terms of the GARDP Collaboration Agreement, GARDP will use commercially reasonable endeavors to perform and fully fund the Phase 3 registrational trial, including the manufacture and supply of the product candidate containing zoliflodacin, in uncomplicated gonorrhea. We recorded reimbursements from GARDP under this agreement as reduction to research and development expense. Relevant amounts for the three and nine months ended September 30, 2023 and 2022 were not material.

In addition, under the GARDP Collaboration Agreement, GARDP was granted a worldwide, fully paid, exclusive and royalty-free license, with the right to sublicense, to use our zoliflodacin technology in connection with GARDP’s development, manufacture and commercialization of zoliflodacin in low-income and specified middle-income countries. We retained commercial rights in all other countries worldwide, including the major markets in North America, Europe and Asia-Pacific. We also retained the right to use and grant licenses to our zoliflodacin technology to perform our obligations under the GARDP Collaboration Agreement and for any purpose other than gonorrhea or community-acquired indications. If we believe that the results of the Phase 3 registrational trial of zoliflodacin would be supportive of an application for marketing approval, we are obligated to use our best efforts to file an application for marketing approval with the FDA within six months of the completion of the trial and to use commercially reasonable endeavors to file an application for marketing approval with the European Medicines Agency (“EMA”). Each party is responsible for using commercially reasonable efforts to obtain marketing authorizations for the product candidate in their respective territories.

PAION AG

Pursuant to the PAION AG (“PAION”) License, La Jolla granted PAION an exclusive license to commercialize GIAPREZA® and XERAVA® in the European Economic Area, the United Kingdom and Switzerland (collectively, the “PAION Territory”). We are entitled to receive potential commercial milestone payments of up to $109.5 million and double-digit tiered royalty payments. Royalties payable in a given jurisdiction under the PAION License will be subject to reduction on account of generic competition and after patent expiration in that jurisdiction. Pursuant to the PAION License, PAION will be solely responsible for the future development and commercialization of GIAPREZA® and XERAVA® in the PAION Territory. PAION is required to use commercially reasonable efforts to commercialize GIAPREZA® and XERAVA® in the PAION Territory. We have not recognized any revenue from PAION related to commercial milestones from the date of acquisition of La Jolla to September 30, 2023. Royalty revenue recognized under this agreement for the three and nine months ended September 30, 2023 was not material.

La Jolla also entered into the PAION commercial supply agreement (the “PAION Supply Agreement”) whereby La Jolla will supply PAION a minimum quantity of GIAPREZA® and XERAVA® through July 13, 2024. The PAION supply agreement will automatically renew until the earlier of July 13, 2027, or until a new supply agreement is executed. During the initial term of the supply agreement, we will be reimbursed for direct and certain indirect manufacturing costs at cost. We recognized $1.0 million in cost reimbursements under this agreement for the three and nine months ended September 30, 2023.

Everest Medicines Limited

Pursuant to the Everest Medicines Limited (“Everest”) License, La Jolla granted Everest an exclusive license to develop and commercialize XERAVA® for the treatment of complicated intra-abdominal infections (“cIAI”) and other indications in mainland China, Taiwan, Hong Kong, Macau, South Korea, Singapore, the Malaysian Federation, the Kingdom of Thailand, the Republic of Indonesia, the Socialist Republic of Vietnam and the Republic of the Philippines (collectively, the “Everest Territory”). Under the Everest License, we recognized $8.0 million in license revenue for the nine months ended September 30, 2023 as a result of our achievement of a regulatory milestone during the period. We are eligible to receive additional sales milestone payments of up to an aggregate of $20.0 million.

We are also entitled to receive tiered royalties from Everest at percentages in the low double digits on sales, if any, in the Everest Territory of products containing eravacycline. Royalties are payable with respect to each jurisdiction in the Everest Territory until the latest to occur of: (i) the last-to-expire of specified patent rights in such jurisdiction in the Everest Territory; (ii) expiration of marketing or regulatory exclusivity in such jurisdiction in the Everest Territory; or (iii) 10 years after the first commercial sale of a product in such jurisdiction in the Everest Territory. Royalty revenue recognized under this agreement for the three and nine months ended September 30, 2023 was not material.

La Jolla also entered into the Everest commercial supply agreement (the “Everest Supply Agreement”) whereby La Jolla will supply Everest a minimum quantity of XERAVA® through December 31, 2023 and will transfer to Everest certain XERAVA®-related manufacturing know-how. We will be reimbursed for direct and certain indirect manufacturing costs at 110% of cost through December 31, 2023. We recognized a $0.9 million and $1.6 million in revenue under this agreement for the three and nine months ended September 30, 2023, respectively.

In-License Agreements

George Washington University

Pursuant to the George Washington University (“GW”) License, GW exclusively licensed to La Jolla certain intellectual property rights relating to GIAPREZA®, including the exclusive rights to certain issued patents and patent applications covering GIAPREZA®. Under the GW License, we are obligated to use commercially reasonable efforts to develop, commercialize, market and sell GIAPREZA®. We are obligated to pay a 6% royalty on net sales of GIAPREZA® and 15% on payments received from sublicensees. The obligation to pay royalties under this agreement extends through the last-to-expire patent covering GIAPREZA®. Amounts recognized under this agreement for the three and nine months ended September 30, 2023 were $0.5 million and $1.7 million, respectively.

Harvard University

Pursuant to the Harvard University (“Harvard”) License, Harvard exclusively licensed to La Jolla certain intellectual property rights relating to tetracycline-based products, including XERAVA®, including the exclusive rights to certain issued patents and patent applications covering such products. Under the Harvard License, we are obligated to use commercially reasonable efforts to develop, commercialize, market and sell tetracycline-based products, including XERAVA®. For each product covered by the Harvard License, we are obligated to make certain payments for the following: (i) up to approximately $15.1 million upon the achievement of certain clinical development and regulatory milestones; (ii) a 5% royalty on direct U.S. net sales of XERAVA®; (iii) a single-digit tiered royalty on direct ex-U.S. net sales of XERAVA®, starting at a minimum royalty rate of 4.5%, with step-ups to a maximum royalty of 7.5% based on the achievement of annual net product sales thresholds; and (iv) 20% on payments received from sublicensees. The obligation to pay royalties under this agreement extends through the last-to-expire patent covering tetracycline-based products, including XERAVA®. For the nine months ended September 30, 2023, we recognized $1.6 million in cost of license revenue under this agreement as a result of the license revenue we earned under the out-licensing agreement with Everest for the same period.

Paratek Pharmaceuticals, Inc.

Pursuant to the Paratek Pharmaceuticals, Inc. (“Paratek”) License, Paratek non-exclusively licensed to La Jolla certain intellectual property rights relating to XERAVA®, including non-exclusive rights to certain issued patents and patent applications covering XERAVA®. We are obligated to pay Paratek a 2.25% royalty based on direct U.S. net sales of XERAVA®. Our obligation to pay royalties with respect to the licensed product is retroactive to the date of the first commercial sale of XERAVA® and shall continue until there are no longer any valid claims of the Paratek patents, which expires in October 2023. Amounts recognized under this agreement for the three and nine months ended September 30, 2023 were not material.

5. Consolidated Entities and Acquisitions

Consolidated Entities

Theravance Respiratory Company, LLC

Up until July 20, 2022, we consolidated TRC under the VIE model as we determined that TRC was a VIE and we were the primary beneficiary of the entity because we had the power to direct the economically significant activities of TRC and the obligation to absorb losses of, or the right to receive benefits from, TRC. We held 15% ownership interest of TRC. The primary source of revenue for TRC is the royalties generated from the net sales of TRELEGY® ELLIPTA® by GSK.

As discussed in Note 3, “Revenue Recognition”, on July 13, 2022, ITH entered into the TRC Equity Purchase Agreement to sell our ownership interest in TRC. Upon the closing of the transaction on July 20, 2022, we received $277.5 million in cash from Royalty Pharma. We are also entitled to receive up to $50.0 million in contingent sales-based milestone payments in the future. As part of the closing of the transaction, we also received our portion of TRC’s remaining cash balance of $4.4 million from Royalty Pharma rather than through a cash distribution from TRC.

Prior to the closing of the transaction and as part of the agreement, TRC distributed its ownership interests and investments in InCarda Therapeutics, Inc. (“InCarda”), ImaginAb, Inc. (“ImaginAb”), Gate Neurosciences, Inc. (“Gate”) and Nanolive SA (“Nanolive”), which had a total carrying value of $39.4 million, to ITH.

The summarized financial information of TRC for the three and nine months ended September 30, 2022 are presented as follows:


	Three Months Ended September 30,			Nine Months Ended September 30,
(In thousands)	2022			2022
Royalty revenue	$	—		$	72,029
Operating expenses		(5	)		332
Income (loss) from operations		5			71,697
Other income, net		—			10
Realized loss		(39,386	)		(39,386	)
Income tax expense, net		—			1
Changes in fair values of equity and long-term investments		—			(8,884	)
Net income (loss)	$	(39,381	)	$	23,438

ISP Fund LP

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

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 an annual performance fee based on the Net Profits of the Partnership during the annual measurement period.

The Partnership Agreement includes a lock-up period of thirty-six months after which Strategic Partners is entitled to 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 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.

We consolidate ISP Fund LP under the VIE model as we have determined that ISP Fund LP is a VIE and we are the primary beneficiary of the entity via our related party relationships with Sarissa Capital entities. Our maximum exposure to loss is equal to the amount we invested in the entity.

As of September 30, 2023, we held approximately 100% of the economic interest of the Partnership. As of September 30, 2023 and December 31, 2022, total assets of the Partnership were $298.6 million and $320.6 million, respectively, of which the majority was attributable to equity, debt and long-term investments. As of September 30, 2023 and December 31, 2022, total liabilities were $1.1 million and $1.6 million, respectively. The partnership’s assets can only be used to settle its own obligations. During the three and nine months ended September 30, 2023, we recorded $1.1 million and $1.2 million, respectively, of net investment-related income earned by the Partnership, and $22.4 million and $22.7 million of net negative changes, respectively, in fair values of equity and long-term investments in the unaudited condensed consolidated statements of income. During the three and nine months ended September 30, 2022, we recorded $0.3 million and $1.0 million, respectively, of net investment-related expenses incurred by the Partnership, and $10.5 million and $14.9 million, respectively, of net negative changes in fair values of equity and long-term investments in the unaudited condensed consolidated statements of income.

Acquisitions

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 an advanced, late clinical-stage biopharmaceutical company focused on the discovery and development of novel antibacterial products. Effective in June 2020, after certain conditions were met with respect to the sales of Entasis equity shares, Innoviva had the right to designate two members to Entasis’ board. Our investments in Entasis consisted of shares of common stock and warrants to purchase shares of Entasis common stock.

The fair value of Entasis’ common stock was measured based on its closing market price at each balance sheet date. We used the Black-Scholes-Merton pricing model to estimate the fair value of the warrants.

On February 17, 2022, Innoviva Strategic Opportunities, LLC (“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 bore an annual interest rate of 0.59% and was due to mature and become payable on August 18, 2022 unless it was converted at a conversion price of $1.48 before the maturity date. With this financing, we determined that we had 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 were 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 $7.8 million loss in the first quarter of 2022 which was included in changes in fair values of equity method investments, net, in the unaudited condensed consolidated statement of income for the period.

We completed our acquisition of Entasis’ minority interest on July 11, 2022. No payments were made toward the convertible promissory note through the date of acquisition of Entasis. In connection with the acquisition, all of the Entasis warrants were replaced with Innoviva warrants (the “Replacement Warrants”) of equivalent value and bearing the same terms. The Replacement Warrants are classified as equity.

We recognized the difference between the acquisition price and the carrying value of the acquired minority interest on July 11, 2022 in our additional paid-in capital.

The fair values assigned to assets acquired and liabilities assumed as of February 17, 2022 were based on management’s best estimates and assumptions. After the acquisition in July 2022, we adjusted the purchase price allocation based on new and additional information related to product sales forecast provided by Entasis and deferred tax liabilities.

In February 2023, we recorded a measurement period adjustment of $1.2 million increase in goodwill, primarily related to a decrease in intangible assets of $0.8 million and an increase in deferred tax liabilities of $0.4 million. The measurement period adjustment did not impact the consolidated net income for the periods presented.

The following table represents the adjusted fair values of the assets acquired and liabilities assumed by us in the transaction:


(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		959
Goodwill		11,493
Intangible assets		106,700
Other assets		302
Total assets acquired	$	150,222

Accounts payable	$	1,583
Accrued personnel-related expenses		1,058
Other current liabilities		5,096
Deferred tax liabilities		7,769
Total liabilities assumed	$	15,506

Total assets acquired, net	$	134,716

The goodwill arising from the acquisition of Entasis is primarily attributable to Entasis’ assembled workforce and the value associated with growing our business more efficiently. The goodwill from this acquisition is not expected to be deductible for tax purposes.

Refer to Note 7, “Goodwill and Intangible Assets” for more discussion on the intangible assets recognized as part of this acquisition.

As a result of the ~~launch~~consolidation, we recognized a non-controlling interest of $38.5 million as of February 17, 2022. Our consolidated net income for the three and ~~approval~~nine months ended September 30, 2022 included the net loss attributable to Innoviva stockholders since the consolidation date of ~~RELVAR~~®~~/BREO~~® ~~ELLIPTA~~®$2.7 million and ~~ANORO~~® ~~ELLIPTA~~®$13.6 million, respectively, from the results of operations of Entasis.

La Jolla Pharmaceutical Company

On August 22, 2022, ISO acquired La Jolla for a total consideration of $206.6 million. ISO acquired La Jolla at a price of $6.23 per share. La Jolla is dedicated to the commercialization of innovative therapies that improve outcomes in patients suffering from life-threatening diseases. La Jolla brought to Innoviva an established product portfolio, including GIAPREZA® (angiotensin II), approved to increase blood pressure in adults with septic or other distributive shock and XERAVA® (eravacycline) for the ~~U.S., Japan and Europe, we paid milestone fees to GSK totaling $220.0~~treatment of complicated intra-abdominal infections (cIAIs). We incurred approximately $5.3 million in acquisition-related costs in connection with this acquisition during the year ended December 31, ~~2014. Although~~2022.

The fair values assigned to assets acquired and liabilities assumed as of August 22, 2022 were based on management’s best estimates and assumptions.

In June 2023, we recorded a measurement period adjustment of $13.1 million decrease in goodwill, primarily related to an increase in deferred tax assets of $10.5 million and a decrease in deferred tax liabilities of $2.6 million. In August 2023, we recorded a

measurement period adjustment of $3.0 million increase in goodwill, primarily related to a decrease in deferred tax assets of $2.4 million and an increase in deferred tax liabilities of $0.6 million.

The following table represents the adjusted fair values of the assets acquired and liabilities assumed by us in the transaction:


(In thousands)	August 22, 2022
Cash and cash equivalents	$	47,415
Short-term marketable securities		471
Accounts receivable		5,876
Inventory		66,200
Prepaid expenses		1,261
Other current assets		907
Property and equipment, net		13
Right-of-use assets		226
Goodwill		6,411
Intangible assets		151,000
Deferred tax assets		7,461
Other assets		710
Total assets acquired	$	287,951

Accounts payable	$	1,237
Deferred revenue, current		2,849
Other accrued liabilities		11,362
Other long-term liabilities		65,944
Total liabilities assumed	$	81,392

Total assets acquired, net	$	206,559

The goodwill arising from the acquisition of La Jolla is primarily attributable to La Jolla’s assembled workforce and the value associated with leveraging the workforce to develop and commercialize new drug products in the future and growing our business more efficiently. The goodwill from this acquisition is not expected to be deductible for tax purposes.

Refer to Note 7, “Goodwill and Intangible Assets” for more discussion on the intangible assets recognized as part of this acquisition.

Pro Forma Financial Information

The following table presents certain unaudited pro-forma financial information for the three and nine months ended September 30, 2022 as if the consolidation of Entasis and La Jolla occurred on January 1, 2021. The unaudited pro forma financial information is presented for informational purposes only, and is not indicative of the results of operations that would have ~~no further milestone payment~~been achieved if the acquisitions had taken place on January 1, 2021, or of results that may occur in the future. The unaudited pro forma financial information combines the historical results of the Entasis and La Jolla with the Company’s consolidated historical results and includes certain adjustments including, but not limited to, fair value adjustments to equity investments in Entasis’ common stock and warrants, fair value adjustments to inventory, amortization of intangible assets, and interest expense on deferred royalty obligations and acquisition-related costs.


	Three Months Ended September 30,		Nine Months Ended September 30,
(In thousands)	2022		2022
Revenue	$	72,830	$	292,077
Net income	$	223,082	$	273,301
Net income attributable to Innoviva stockholders	$	274,407	$	282,704

6. Equity and Long-term Investments 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 ~~GSK~~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 ~~LABA Collaboration~~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 two 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. On July 10, 2023, Armata entered into an amendment to the amended and restated investor rights agreement with the Company and ISO, pursuant to which the Company and ISO agreed that the voting agreement will expire on the earlier of the fifth anniversary of the original agreement's effective date, January 26, 2021, or the approval by the FDA of any of Armata’s product candidates for marketing and commercial distribution. As of September 30, 2023, three of the seven members of Armata’s board of directors are also members of the board of directors of Innoviva. As of September 30, 2023 and December 31, 2022, the Company and ISO owned approximately 69.4%, of Armata’s common stock.

On January 10, 2023, we entered into a Secured Convertible Credit Agreement (the “Credit Agreement”) with Armata, under which we ~~continue~~extended a one-year convertible note (the "Armata Convertible Note") in an aggregate amount of $30.0 million at an interest rate of 8.0% per annum. Pursuant to the Credit Agreement, the balance on the Armata Convertible Note, including all accrued and unpaid interest thereon, will convert into shares of Armata's common stock upon the occurrence of a qualified financing, as defined in the Credit Agreement. Any portion of the balance on the Armata Convertible Note, including all accrued and unpaid interest thereon, may also be converted into shares of Armata's common stock at our option once a registration statement covering the resale of such securities has been declared effective by the SEC. The Armata Convertible Note is secured by substantially all of the assets of Armata and its domestic and foreign material subsidiaries. On July 10, 2023, ISO and Armata executed an amendment to the Armata Convertible Note extending the maturity date from January 10, 2024 to January 10, 2025.

On July 10, 2023, ISO and Armata entered into a Credit and Security Agreement (the “Credit and Security Agreement"), under which we extended a term loan to Armata (the “Armata Term Loan”) in an aggregate amount of $25.0 million. The Armata Term Loan is subject to an interest rate of 14% per annum and is due to mature on January 10, 2025. The Credit and Security Agreement is secured by substantially all of the assets of Armata and its domestic and foreign material subsidiaries.

The investments in Armata's common stock and warrants 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 have not provided financial or other support that we were not previously contractually required to provide during the periods presented. Our maximum exposure to loss is equal to the amount we invested in the entity.

We account for Armata’s common stock and warrants under the equity method using the fair value option. 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. We account for the Armata 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 risk-free rate, volatility of stock price and timing of certain qualified events. We account for the Armata Term Loan as a trading security, measured at fair value using an income approach based on the discounted value of expected future cash flows.

As of September 30, 2023, the fair values of our holdings of Armata common stock, warrants, the Armata Convertible Note and the Armata Term Loan were estimated at $75.2 million, $31.8 million, $49.7 million and $26.2 million, respectively. As of December 31, 2022, the fair values of our holdings of Armata common stock and warrants were estimated at $31.1 million and $8.1 million, respectively. For the Armata common stock and warrants, we recorded $72.0 million and $67.9 million in unrealized gain for the three and nine months ended September 30, 2023, respectively, as changes in fair values of equity method investments, net, in the unaudited condensed consolidated statements of income. During the three and nine months ended September 30, 2022, we recorded $11.7 million unrealized gain and $35.3 million unrealized loss, respectively, as changes in fair values of equity method investments, net, in the unaudited condensed consolidated statements of income. For the Armata Convertible Note, we recorded $18.5 million and $19.6 million unrealized gain as changes in fair values of equity and long-term investments, net, in the unaudited condensed consolidated statement of income for three and nine months ended September 30, 2023, respectively. For the Armata Term Loan, we recorded $1.1 million unrealized gain as changes in fair values of equity and long-term investments, net, in the unaudited condensed consolidated statement of income for three and nine months ended September 30, 2023.

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

Income Statement Information


	Three Months Ended June 30,						Nine Months Ended June 30,
(In thousands)	2023			2022			2023			2022
Revenue	$	980		$	1,883		$	2,827		$	4,108
Loss from operations	$	(9,629	)	$	(9,220	)	$	(31,303	)	$	(24,043	)
Net loss	$	(3,547	)	$	(9,215	)	$	(28,351	)	$	(24,036	)

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 included $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), InCarda’s lead program, for the treatment of a recent-onset episode of paroxysmal atrial fibrillation. On July 20, 2022, under the terms of the TRC Equity Purchase Agreement, TRC transferred to Innoviva’s wholly-owned subsidiary, Innoviva TRC Holdings, LLC (“ITH”) all of TRC’s ownership interests and investments in InCarda. ITH has the right to designate one member to InCarda’s board of directors. As of September 30, 2023, none of InCarda’s six board members was designated by ITH. We did not exercise the InCarda 2020 Warrant which expired in March 2023 and wrote off its carrying value of $0.1 million during the nine months ended September 30, 2023.

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 2022 Warrant expires on March 9, 2027 and is 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-1 preferred stock at $0.20 per share.

As of September 30, 2023 and December 31, 2022, we held 8.1% and 9.0% of InCarda equity ownership, respectively. Our investment in InCarda does not provide us with the ability to control or have significant influence over InCarda’s operations. Based on our evaluation, we determined that InCarda is a VIE, but we are not the primary beneficiary of the VIE. We have not provided financial or other support that we were not previously contractually required to provide during the periods presented. Our maximum exposure to loss is equal to the amount we invested in the entity.

We account for our investments in InCarda under 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. 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 included 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 was 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 during the second quarter of 2022.

Due to certain changes in InCarda’s business operations during the second quarter of 2023, TRC reassessed the value of its investments in InCarda using the Option Pricing Model methodology. Key assumptions used in the valuation model included an expected holding period of two years, a risk-free interest rate of 4.9%, a dividend yield of 0.0% and an estimated volatility of 114.2%. The estimated volatility was calculated based on the historical volatility of a selected peer group of public companies comparable to InCarda. We recognized an impairment charge of $2.9 million during the second quarter of 2023.

As of September 30, 2023, we recorded $4.8 million in fair value of InCarda’s Series C preferred stock and $0.2 million in fair value of Series D warrants (the “InCarda Preferred Stock Warrants”). As of December 31, 2022, we recorded $6.8 million in fair value of InCarda’s Series C preferred stock and $0.6 million in fair value of the InCarda Preferred Stock Warrants. As of September 30, 2023 and December 31, 2022, we recognized $2.7 million and $3.2 million, respectively, for InCarda’s Series D-1 preferred stock, Series D-2 preferred stock, and common stock using the measurement alternative. During the three months ended September 30, 2023, there was no change in the carrying amount of our investment. During the nine months ended September 30, 2023, we recorded a $3.0 million net unrealized loss, as a change in fair values of equity and long-term investments, net, in the unaudited condensed consolidated statements of income. During the three and nine months ended September 30, 2022, we recorded $0.2 million in net unrealized gain and $8.8 million in net unrealized loss, respectively, as changes in fair values of equity and long-term investments, net, in the unaudited condensed consolidated statements of income.

Equity Investment in ImaginAb

On March 18, 2021, TRC entered into a securities purchase agreement with ImaginAb, 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 and joint project committees that are expected to continue over~~equity investment in the ~~life~~condensed consolidated balance sheets.

On July 20, 2022, under the terms of the ~~agreements. The milestone fees paid~~TRC Equity Purchase Agreement, TRC transferred to ~~GSK were recognized as capitalized fees paid~~ITH all of TRC’s ownership interests and investments in ImaginAb.

On March 14, 2023, ITH entered into a securities purchase agreement with ImaginAb to purchase 270,568 shares of ImaginAb Series C-2 preferred stock for $0.6 million. On September 14, 2023, ITH entered into a ~~related party, which~~securities purchase agreement with

ImaginAb to purchase another 405,852 shares of ImaginAb Series C-2 preferred stock for $0.6 million. As of September 30, 2023, one of ImaginAb’s six board members was designated by ITH. As of September 30, 2023 and December 31, 2022, we held 11.8% and 12.7%, respectively, of ImaginAb equity ownership.

Our investment in ImaginAb does not provide us with the ability to control or have significant influence over ImaginAb’s operations. Based on our evaluation, we determined that ImaginAb is a VIE, but we are ~~being amortized over their estimated useful lives commencing upon~~not the ~~commercial launch~~primary beneficiary of the ~~product. The amortization expense~~VIE. We have not provided financial or other support that we were not previously contractually required to provide during the periods presented. Our maximum exposure to loss is equal to the amount we invested in the entity.

Because ImaginAb’s equity securities are not publicly traded and do not have a readily determinable fair value, we account for our investment in ImaginAb’s Series C preferred stock, Series C-2 preferred stock and common stock using the measurement alternative. As of September 30, 2023 and December 31, 2022, $7.6 million and $6.4 million, respectively, was recorded as equity and long-term investments in the unaudited condensed consolidated balance sheets and there was no change in the carrying amount of our investments.

Convertible Promissory Note in Gate Neurosciences

On November 24, 2021, TRC entered into a ~~reduction~~Convertible Promissory Note Purchase Agreement with Gate to acquire a convertible promissory note (the “Gate Convertible Note”) with a principal amount of $15.0 million. Gate is a privately held biopharmaceutical company focused on developing the next generation of targeted nervous system therapies, leveraging precision medicine approaches to develop breakthrough drugs for psychiatric and neurologic diseases. The investment is intended to fund Gate's 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 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”). Shadow Preferred means preferred stock having identical rights, preferences and restrictions as the preferred stock that would be issued in a qualified financing.

The number of common stock shares to be issued in a qualified event shall be equal to the ~~royalties from GSK.~~

~~We are entitled to receive annual royalties from GSK~~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 ~~RELVAR~~®~~/BREO~~® ~~ELLIPTA~~®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.

On July 20, 2022, under the terms of the TRC Equity Purchase Agreement, TRC transferred to ITH all of TRC’s debt investments in Gate.

On February 2, 2023, ITH entered into a Note Amendment Agreement (the “Note Amendment Agreement”) with Gate to amend the Gate Convertible Note. Pursuant to the Note Amendment Agreement, the principal amount of the Gate Convertible Note was increased from $15.0 million to $21.5 million, which represents the original principal, accrued interest as ~~follows: 15% on~~of the ~~first $3.0 billion~~amendment date and an additional cash investment of ~~annual global net sales and 5% for all annual global net sales above $3.0 billion. Sales~~$5.0 million. All other material terms of ~~single-agent LABA medicines and combination medicines would be combined~~the Gate Convertible Note were unchanged.

We have accounted for the ~~purposes~~Gate Convertible Note as a trading security, measured at fair value using a Monte Carlo simulation model with the probability of ~~this royalty calculation. For other products combined~~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. As of September 30, 2023 and December 31, 2022, the fair value of the Gate Convertible Note was estimated at $22.3 million and $15.7 million, respectively, and recorded as equity and long-term investments in the unaudited condensed consolidated balance sheets. We recorded $0.1 million and $0.8 million unrealized gain as changes in fair values of equity and long-term investments, net in the unaudited condensed consolidated statement of income for the three and nine months ended September 30, 2023, respectively. We recorded $0.2 million and $0.3 million unrealized gain as changes in fair values of equity and long-term investments, net, in the unaudited condensed consolidated statement of income for the three and nine months ended September 30, 2022, respectively.

Equity Investment in Nanolive

On February 18, 2022, TRC entered into an investment and shareholders agreement with 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 ~~LABA from the LABA Collaboration,~~Swiss privately held life sciences company focused on developing breakthrough imaging solutions that accelerate research in growth industries such as ~~ANORO~~® ~~ELLIPTA~~®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 in the condensed consolidated balance sheets. On July 20, 2022, under the terms of the TRC Equity Purchase Agreement, TRC transferred to ITH all of TRC’s ownership interests and investments in Nanolive. ITH has the right to designate one member to Nanolive’s board. ITH also has the right to designate another member, who will be mutually acceptable to ITH and another stockholder, to Nanolive’s board. As of September 30, 2023, one of Innoviva designees is serving on Nanolive’s seven-member board. As of September 30, 2023 and December 31, 2022, we held 15.3% and 15.5%, ~~royalties~~respectively, of Nanolive equity ownership.

Our investment in Nanolive does not provide us with the ability to control or have significant influence over Nanolive’s operations. Based on our evaluation, we determined that Nanolive is a VIE, but we are ~~upward tiering and range from 6.5%~~not the primary beneficiary of the VIE. We have not provided financial or other support that we were not previously contractually required to ~~10%.~~

~~We are also entitled~~provide during the periods presented. Our maximum exposure 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~~loss is equal to the ~~MABA program of up to $363.0 million~~amount we invested in the entity.

Because Nanolive’s equity securities are not ~~deemed substantive milestones due~~publicly traded and do not have a readily determinable fair value, we account for our investment in Nanolive’s Series C preferred stock using the measurement alternative. As of September 30, 2023 and December 31, 2022, $10.6 million was recorded as equity and long-term investments in the unaudited condensed consolidated balance sheets and there was no change to the ~~fact that the achievement~~carrying amount 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.~~investment.

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

~~Available-for-Sale Securities~~

The estimated fair value of available-for-sale securities is based on quoted market prices for these or similar investments that were based on prices obtained from a commercial pricing service. Available-for-sale securities are summarized below:


	September 30, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
(In thousands)	Cost		Gains		Losses		Fair Value
Money market funds(1)	$	134,287	$	—	$	—	$	134,287
Total	$	134,287	$	—	$	—	$	134,287

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

(1) Money market funds are included in cash and cash equivalents in the condensed consolidated balance sheets.


	December 31, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
(In thousands)	Cost		Gains		Losses		Fair Value
Money market funds (1)	$	263,469	$	—	$	—	$	263,469
Total	$	263,469	$	—	$	—	$	263,469

(1) Money market funds are included in cash and cash equivalents in the condensed consolidated balance sheets.

As of September 30, ~~2017,~~2023, all ~~of the available-for-sale securities had contractual maturities within one year~~investments were money market funds, and ~~the weighted average maturity of marketable securities~~there was ~~approximately four months.~~no credit loss recognized.

Fair Value Measurements

Our available-for-sale securities, equity and long-term investments and contingent value rights are measured at fair value on a recurring basis and our debt is carried at ~~the~~ amortized cost basis.


	Estimated Fair Value Measurements as of September 30, 2023 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	$	134,287	$	—	$	—	$	134,287
Investments held by ISP Fund LP (1)		239,058		—		2,330		241,388
Equity investment - Armata Common Stock		75,230		—		—		75,230
Equity investment - Armata Warrants		—		31,810		—		31,810
Convertible debt investment - Armata Note		—		—		49,684		49,684
Term loan investment - Armata Term Loan		—		—		26,199		26,199
Convertible debt investment - Gate Note		—		—		22,276		22,276
Total assets measured at estimated fair value	$	448,575	$	31,810	$	100,489	$	580,874
Liabilities
Debt
2025 Notes	$	—	$	191,923	$	—	$	191,923
2028 Notes		—		217,745		—		217,745
Total fair value of debt	$	—	$	409,668	$	—	$	409,668
Contingent value rights		—		—		595		595
Total liabilities measured at estimated fair value	$	—	$	409,668	$	595	$	410,263

(1)

The ~~estimated~~investments held by ISP Fund LP consisted of $298.5 million in equity investments, which included $36.9 million in money market funds, and $57.1 million receivable from the maturity of convertible notes. Our total capital contribution of $300 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, 2022 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	$	263,469	$	—	$	—	$	263,469
Investments held by ISP Fund LP (1)		265,982		—		54,578		320,560
Equity investment - Armata Common Stock		31,095		—		—		31,095
Equity investment - Armata Warrants		—		8,059		—		8,059
Equity investment - InCarda Warrants		—		—		605		605
Convertible debt investment - Gate Note		—		—		15,700		15,700
Total assets measured at estimated fair value	$	560,546	$	8,059	$	70,883	$	639,488
Liabilities
Debt
2023 Notes	$	—	$	96,089	$	—	$	96,089
2025 Notes		—		197,807		—		197,807
2028 Notes		—		211,768		—		211,768
Total fair value of debt	$	—	$	505,664	$	—	$	505,664
Contingent value rights		—		—		595		595
Total liabilities at estimated fair value	$	—	$	505,664	$	595	$	506,259

(1)

The investments held by ISP Fund LP consisted of $295.4 million equity investments, which included private placement positions and convertible notes of $54.6 million, and $25.1 million in money market funds. Our total capital contributions of $300.0 million is subject to a 36-month lock-up period from the date of such capital contributions.

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 in 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.

The InCarda warrants, the Gate Convertible Note, the Armata Convertible Note, the Armata Term Loan, private placement positions and convertible notes held by ISP Fund LP, and contingent value rights 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 of our 2023 Notes,~~values 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. The fair values of our 2023 Notes, which were fully paid off in January 2023, were also based on their trading prices.

7. Goodwill and Intangible Assets

Goodwill and intangible assets acquired are recognized at fair value as of the acquisition date. 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~~

of September 30, 2023 and December 31, 2022 was $17.9 million and $26.7 million, respectively. We ~~capitalize fees paid to licensors~~have not recognized any impairment losses related to ~~agreements for approved products or commercialized products and amortize these fees on a straight-line basis~~goodwill during the periods presented.

Intangible assets with definite lives are amortized over their estimated useful ~~lives upon the commercial launch of the product.~~ lives. The ~~estimated useful lives of these capitalized fees are based on a country-by-country~~carrying basis and product-by-product basis, as the later of the expiration or termination 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~~accumulated amortization of ~~these capitalized fees is $49.8 million~~recognized intangible assets as of September 30, ~~2017.~~2023 and December 31, 2022 were as follows:


	September 30, 2023
	Useful Life	Gross		Accumulated			Net Carrying
(In thousands)	(Years)	Amount		Amortization			Amount
Marketed products	8-10	$	219,700	$	(19,586	)	$	200,114
In-process research and development			2,600		—		$	2,600
Collaboration agreement	10		35,400		(1,269	)	$	34,131
Total		$	257,700	$	(20,855	)	$	236,845


	December 31, 2022
	Useful Life	Gross		Accumulated			Net Carrying
(In thousands)	(Years)	Amount		Amortization			Amount
Marketed products	8-10	$	151,000	$	(5,581	)	$	145,419
In-process research and development			72,100		—			72,100
Collaboration agreement			35,400		—			35,400
Total		$	258,500	$	(5,581	)	$	252,919

~~6. Stock-Based Compensation~~

~~Performance-Contingent RSAs~~Intangible assets recognized as a result of the acquisition of Entasis amounted to $106.7 million, which consisted of Entasis’ in-process research and ~~RSUs~~

~~Since 2011, the Compensation Committee of our Board of Directors (the “Compensation Committee”) have approved grants of performance-contingent RSAs and RSUs~~development related to ~~senior management~~its antibacterial therapeutic product candidates and a ~~non-executive officer. Generally, these awards have dual triggers~~collaboration agreement amounting to $71.3 million and $35.4 million, respectively. Following the FDA approval of ~~vesting based upon~~XACDURO® in May 2023, we started amortizing $68.7 million of the ~~achievement of certain performance goals by~~then in-process research and development as a ~~pre-specified date,~~marketed product, as well as ~~a requirement for continued employment. Recognition~~the collaboration agreement, over their estimated useful lives. The useful life of ~~stock-based compensation expense begins when the performance goals are deemed probable of achievement.~~

~~Included in these performance-contingent RSAs is~~ the remaining ~~grant~~in-process research and development of ~~63,000 special long-term retention and incentive performance-contingent RSAs to senior management in 2011. The awards have dual triggers of vesting based~~$2.6 million will be determined 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 achievementcommercialization of the ~~requisite performance conditions~~underlying product candidate; thus, no amortization expense for this intangible asset was ~~met.~~recognized for the periods presented.

Intangible assets recognized as a result of the acquisition of La Jolla amounting to $151.0 million pertain to product rights and developed technologies on La Jolla’s currently marketed products. These ~~awards remain subject to continued employment~~are intangible assets with determinable lives and ~~will vest in November 2017. The~~ ~~stock-based compensation cost for these awards was not material~~are amortized over their estimated useful lives.

We recognized amortization expense of $6.5 million and $15.3 million for the three and nine months ended September 30, ~~2017.~~

~~On January 14, 2016,~~2023, respectively. We recognized amortization expense of $1.5 million for the ~~Compensation Committee approved~~three and granted 282,394 RSAs and 46,294 RSUs to senior management. These awards include a market condition based on Total Shareholder Return (“TSR”) and a service condition that requires continued employment, collectively the “Performance Measures I”. The vesting percentages of these awards are calculated based on the two-year TSR with a catch-up provision opportunity measured on January 13, 2019 for RSAs and onnine months ended 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 payout of shares may range from a minimum of zero shares to a maximum of 328,688 shares granted upon the actual performance against the Performance Measures I. The grant date fair value of these awards 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 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 of Innoviva’s common stock as compared to the TSR of NASDAQ Biotechnology Index (“Index”) and a service condition that requires continued employment, collectively the “Performance Measures II”. The vesting percentages of these awards are calculated based on the two-year performance period 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 fair value of these awards is determined using a Monte Carlo valuation model. The aggregate value of $3.2 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~~2022. Future amortization expense is ~~included in the condensed consolidated statements of operations as follows:~~

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 the performance milestones were determined~~expected to be ~~probable~~$6.5 million for the remainder 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~~2023, $25.8 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%)~~for each 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 abilityyears from 2024 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, 2017.2027 and $124.5 million thereafter.

8. Balance Sheet Components

Inventory

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%Inventory consisted of the consolidated assets or net revenues, as the case may be, 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% of the consolidated assets 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).following:


	September 30,		December 31,
(in thousands)	2023		2022
Raw materials	$	8,859	$	5,757
Work-in-progress		13,231		25,052
Finished goods		18,425		25,088
Total inventory	$	40,515	$	55,897

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 2018.32

In connection with the financing of the Term B Loan, we incurred $2.5 million in original interest discount and $4.9 million in debt issuance costs, which are being amortized to interest expense over the estimated life of the loan using the effective interest method.

As of September 30, ~~2017,~~2023 and December 31, 2022, total inventory included net fair value adjustments resulting from the acquisition of La Jolla of approximately $31.0 million and $49.5 million, respectively, which will be amortized and recognized as cost of products sold when sales occur in future periods. The fair value adjustments recorded as part of cost of products sold amounted to $5.4 million and $19.2 million for the three and nine months ended September 30, 2023, respectively. The fair value adjustments recorded as part of cost of products sold amounted to $2.7 million for the three and nine months ended September 30, 2022.

Other Accrued Liabilities

Other accrued liabilities consisted of the following:


	September 30,		December 31,
(in thousands)	2023		2022
Accrued contract manufacturing expenses	$	5,645	$	8,382
Accrued clinical expenses		712		692
Accrued research expenses		211		349
Accrued professional services		9,796		3,977
Current portion of lease liabilities		1,211		1,316
Current portion of deferred royalty obligations		3,976		2,639
Accrued license fees and royalties		730		943
Other		2,418		2,909
Total other accrued liabilities	$	24,699	$	21,207

Other Long-term Liabilities

Other long-term liabilities consisted of the following:


	September 30,		December 31,
(in thousands)	2023		2022
Long-term portion of deferred royalty obligation	$	66,142	$	67,947
Long-term portion of lease liabilities		1,953	$	2,376
Contingent value rights liability		595		595
Total other long-term liabilities	$	68,690	$	70,918

9. Stock-Based Compensation

Stock- Based Compensation Expense

The following table summarizes stock-based compensation expense:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2023		2022		2023		2022
Selling, general and administrative	$	1,308	$	2,422	$	3,502	$	4,240
Research and development		134		1,295	$	1,058		1,781
Total	$	1,442	$	3,717	$	4,560	$	6,021

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 September 30,		Nine Months Ended September 30,
	2023	2022(1)	2023	2022
Risk-free interest rate	4.13% - 4.21%	—%	3.50% - 4.21%	1.60% - 3.03%
Expected term (in years)	6.01 - 6.22	—	5.16 - 6.22	5.50 - 6.11
Volatility	37.3% - 37.8%	—%	37.3% - 38.5%	38.8% - 40.5%
Dividend yield	—%	—%	—%	—%
Weighted-average estimated fair value of stock options granted	$5.66 - $5.97	$—	$5.22 - $5.97	$6.98 - $7.73

(1)

There were no options granted for the three months ended September 30, 2022.

10. Stockholders' Equity

On October 31, 2022, our board of directors authorized a new share repurchase program under which we may repurchase up to $100.0 million of our outstanding shares of common stock. The repurchase program authorizes the repurchase by the Company of its common stock in open market transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), privately negotiated transactions, in block trades, accelerated share repurchase transactions, exchange transactions, or any combination thereof or by other means in accordance with federal securities laws. The authorization permits management to repurchase shares of the Company’s common stock from time to time at management’s discretion. Repurchases may also be made pursuant to a trading plan under Rule 10b5-1 under the Exchange Act, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions. The actual means and timing of any shares purchased under the program will depend on a variety of factors, including ongoing assessments of the capital needs of the business, the market price of our common stock, prevailing stock prices, general market conditions and other considerations. This program has no termination date, may be suspended or discontinued at any time at our discretion, and does not obligate us to acquire any amount of common stock. For the nine months ended September 30, 2023, we have repurchased 5,051,730 shares in the open market at an average price of $11.97 per share for a total amount of approximately $60.5 million. All the repurchased shares were retired. Subsequent to September 30, 2023 and through October 26, 2023, we have repurchased 447,838 shares in the open market at an average price of $13.07 per share for a total amount of approximately $5.9 million.

11. Debt

Our debt consists of the following:


	September 30,			December 31,
(In thousands)	2023			2022
2023 Notes	$	—		$	96,204
2025 Notes		192,500			192,500
2028 Notes		261,000			261,000
Total debt		453,500			549,704
Less: Unamortized debt discount and issuance costs		(7,782	)		(9,331	)
Total debt, net	$	445,718		$	540,373
Less: Current portion of long-term debt, net		—			96,193
Total long-term debt, net	$	445,718		$	444,180

Convertible Subordinated Notes Due 2023

In January 2013, we completed an underwritten public offering of $287.5 million aggregate principal amount of our 2023 Notes, which matured on January 15, 2023.

The remaining balance of the ~~Term B Loan was $250.0 million,~~2023 Notes in the amount of ~~which $25.0~~$96.2 million was ~~classified as a short-term liability.~~fully paid upon the maturity date in January 2023.

The following table sets forth total interest expense recognized related to the 2023 Notes:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2023		2022		2023		2022
Contractual interest expense	$	—	$	511	$	85	$	2,106
Amortization of debt issuance costs		—		59		11		240
Total interest and amortization expense	$	—	$	570	$	96	$	2,346

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 ~~principal outstanding~~close of business on February 15, 2025 only under the ~~2029 Notes on August 15, 2017.~~following circumstances:

~~In accordance with accounting guidance~~

•

after September 30, 2017, if our closing common stock price for ~~debt with~~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 ~~and other options, we separately account for the liability and equity components~~price of the 2025 Notes;

•

for five consecutive business days, if the average trading price per $1,000 of Notes ~~by allocating~~during the ~~proceeds between~~prior 10 consecutive trading days is less than 98% of the ~~liability component~~product of our closing common stock price and the ~~embedded~~ conversion option (“equity component”) due to our ability to settle the conversion obligation of the 2025 Notes in cash, common stock or a combination of cash and common stock, at our option. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature using the income approach. The allocation was performed in a manner that reflected our non-convertible debt borrowing rate for similar debt. The equity component of the 2025 Notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the 2025 Notes and the fair value of the liability of the 2025 Notes on such day; and,

•

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 ~~issuance. The excess~~the 2025 Notes.

In the 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 amount of the ~~liability component over its carrying amount (“debt discount”) is amortized to interest expense using the~~2025 Notes, plus any accrued and unpaid interest.

The annual effective interest ~~method. The equity component~~rate on the 2025 Notes is ~~not re-measured as long as it continues to meet the conditions for equity classification.~~2.88%.

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


				September 30,			December 31,
(In thousands)				2023			2022
Liability component
Principal	$	192,500		$	192,500		$	192,500
Debt discount and issuance costs, net	(69,895		)		(1,385	)		(1,917	)
Net carrying amount	$	122,605		$	191,115		$	190,583
Equity component	$	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.35

The following table sets forth total interest expense recognized related to the 2025 Notes ~~from~~for the ~~date of issuance through~~three and nine months ended September 30, ~~2017:~~2023 and 2022:


			Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)			2023		2022		2023		2022
Contractual interest expense	$	722	$	1,203	$	1,203	$	3,609	$	3,609
Amortization of debt issuance costs	69			179		174		532		517
Amortization of debt discount	834
Total interest expense	$	1,625
Total interest and amortization expense			$	1,382	$	1,377	$	4,141	$	4,126

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 2028 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; and,

•

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 of unamortized debt issuance costs and these are presented as part of Other income (expense), net in our consolidated statements of operations.~~

~~Debt Maturities~~

entered into privately negotiated capped call transactions. The ~~aggregate scheduled maturities of our long-term debt as of September 30, 2017 are 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

~~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 partcap price of the ~~2017 Capital Return Plan, we used approximately $17.5 million~~capped call transaction is initially $33.9850 per share and is subject to certain adjustments under the terms of the ~~net proceeds from~~capped call transactions. The capped call transactions cover, subject to customary adjustments, the ~~offering~~number of ~~our 2025 Notes~~shares of common stock initially underlying the 2028 Notes. The capped call transactions are expected generally to ~~repurchase and retire 1,317,771 shares of~~reduce potential dilution to our common stock ~~at an average price of $13.28 per share concurrently with the pricing~~upon conversion of the ~~offering~~2028 Notes or at our election (subject to certain conditions) offset any cash payments we are required to make in ~~privately negotiated transactions effected through one~~excess of the ~~initial purchasers~~aggregate principal amount of converted 2028 Notes, as the case may be, with such reduction or ~~its affiliate, as our agent.~~offset subject to a cap.

The annual effective interest rate on the 2028 Notes is 2.70%.

~~9. Commitments and Contingencies~~

~~Legal Proceedings~~

~~In April 2017, Sarissa Capital Domestic Fund LP and certain of its affiliates (together, “Sarissa”) filed a Verified Complaint Pursuant to Section 225~~Our outstanding 2028 Notes balance consisted 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. 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 submittedfollowing:


	September 30,			December 31,
(In thousands)	2023			2022
Principal	$	261,000		$	261,000
Debt issuance costs, net		(6,397	)		(7,403	)
Net carrying amount	$	254,603		$	253,597

The following table sets forth total interest expense recognized related 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.

~~10. Income Taxes~~

~~The effective tax rate~~2028 Notes for the three and nine months ended September 30, ~~2017~~2023 and 2022:


	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2023		2022		2023		2022
Contractual interest expense	$	1,387	$	1,371	$	4,160	$	3,127
Amortization of debt issuance costs		340		328		1,006		735
Total interest and amortization expense	$	1,727	$	1,699	$	5,166	$	3,862

Debt Maturities

The aggregate scheduled maturities of our convertible debt as of September 30, 2023 were as follows:


(In thousands)	September 30, 2023
Years ending December 31:
Remainder of 2023	$	—
2024		—
2025		192,500
2026		—
2027		—
Thereafter		261,000
Total	$	453,500

Deferred Royalty Obligation

As part of our acquisition of La Jolla, we recorded the fair value of its deferred royalty obligation in connection with La Jolla’s royalty financing agreement (“La Jolla Royalty Agreement”) with HealthCare Royalty Partners (“HCR”). Under the terms of the La Jolla Royalty Agreement, HCR is entitled to receive quarterly royalties on worldwide net sales of GIAPREZA® until either January 1, 2031 or when the maximum aggregate royalty payments have been made, whichever occurs first. Quarterly payments to HCR under the Royalty Agreement start at a maximum royalty rate, with step-downs based on the achievement of annual net product sales thresholds. The current maximum royalty rate is 14%. Starting January 1, 2024, the maximum royalty rate may increase by an additional 4%, if an agreed-upon cumulative net product sales threshold has not been met. The La Jolla Royalty Agreement is subject to maximum aggregate royalty payments to HCR of $225.0 million.

For the three and nine months ended September 30, 2023, we recognized interest expense of $1.2 million and $3.7 million, respectively. For the three and nine months ended September 30, 2022, we recognized interest expense of $1.5 million. The carrying value of the deferred royalty obligation as of September 30, 2023 was ~~0.05%~~$70.1 million, $66.1 million of which was classified as part of other long-term liabilities and the remaining $4.0 million was classified as other accrued liabilities in the condensed consolidated balance sheet. The carrying value of the deferred royalty obligation as of December 31, 2022 was $70.6 million, $67.9 million of which was classified as part of other long-term liabilities and the remaining $2.7 million was classified as other accrued liabilities in the condensed consolidated balance sheet. During the nine months ended September 30, 2023, we made royalty payments to HCR of $4.3 million. The deferred royalty obligation was valued using Level 3 inputs, and its carrying value as of September 30, 2023 approximates fair value. The fair value of the deferred royalty obligation was calculated as the discounted deferred royalty obligations based on risk-adjusted revenue projections for GIAPREZA®. The annual effective interest rate of the deferred royalty obligation for the current period is 7.40%.

Under the terms of the La Jolla Royalty Agreement, if we are unable to meet certain obligations, including the obligation to use commercially reasonable and diligent efforts to commercialize GIAPREZA®, HCR would have the right to terminate the La Jolla Royalty Agreement and demand payment of either $125.0 million or $225.0 million (depending on which obligation we have failed to meet) less aggregate royalties already paid to HCR. As of September 30, 2023, inclusive of the aggregate royalties paid to HCR by La Jolla under the La Jolla Royalty Agreement prior to our acquisition, La Jolla paid $17.0 million of aggregate royalties to HCR. In the event that we fail to pay such amount if and when due in a timely manner, HCR would have the right to foreclose on the GIAPREZA®-related assets. HCR has no recourse against any asset other than GIAPREZA®.

Certain contract provisions within the La Jolla Royalty Agreement that could result in an acceleration of amounts due under the La Jolla Royalty Agreement are recognized as embedded derivatives that require bifurcation from the deferred royalty obligation and fair value recognition. We determined the fair value of each derivative by assessing the probability of each event occurring, as well as the potential repayment amounts and timing of such repayments that would result under various scenarios. As a result of this assessment, we determined that the fair value of the embedded derivatives is immaterial and, therefore, not recognized as of September 30, 2023 and December 31, 2022. We estimate the fair value of the embedded derivatives for each reporting period until either the features lapse or the La Jolla Royalty Agreement is terminated, whichever occurs first. Any material change in the fair value of the embedded derivatives will be recorded as either a gain or loss in the unaudited condensed consolidated statements of income.

12. Commitments and Contingencies

Operating Lease

We have operating leases for our corporate headquarters, office spaces and laboratory facilities.

The components of lease cost are as follows:


	Three Months Ended September 30,				Nine months ended September 30,
(In thousands)	2023		2022		2023		2022
Straight line operating lease costs	$	361	$	640	$	1,080	$	1,101
Variable lease costs		49		35		144		110
Total lease costs	$	410	$	675	$	1,224	$	1,211

Supplemental cash flow information related to leases are as follows:


	Nine months ended September 30,
(In thousands)	2023		2022
Cash paid for amounts included in the measurement of operating lease liabilities:	$	1,157	$	540
Operating lease right-of-use assets obtained in exchange for operating lease obligations		463		3,323
Right-of-use assets obtained through acquisitions		—		1,185

As of September 30, 2023, our operating leases have weighted-average remaining term of approximately 2.5 years and the weighted average discount rate on our operating lease liabilities was 7.5%.

Future minimum payments on our operating leases as of September 30, 2023 were as follows:


(In thousands)
Years ending December 31:
Remainder of 2023	$	377
2024		1,373
2025		1,428
Thereafter		291
Total undiscounted lease payments		3,469
Less: imputed interest		(305	)
Total operating lease liabilities	$	3,164

LegalProceedings

From time to time, the Company is involved in legal proceedings in the ordinary course of its business. We are not currently a party to any material legal proceedings except as discussed below.

On February 15, 2022, La Jolla received a paragraph IV notice of certification (the “First Notice Letter”) from Gland Pharma Limited (“Gland”) advising that Gland had submitted an Abbreviated New Drug Application (“ANDA”) to the FDA seeking approval to manufacture, use or sell a generic version of GIAPREZA® in the U.S. prior to the expiration of U.S. Patent Nos.: 9,220,745; 9,572,856; 9,867,863; 10,028,995; 10,335,451; 10,493,124; 10,500,247; 10,548,943; 11,096,983; and 11,219,662 (the “GIAPREZA® Patents”), which are listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (the “Orange Book”). The First Notice Letter alleges that the GIAPREZA® Patents are invalid, unenforceable and/or will not be infringed by the commercial manufacture, use or sale of the generic product described in Gland’s ANDA.

On March 29, 2022, La Jolla filed a complaint for patent infringement of the GIAPREZA® Patents against Gland and certain related entities in the United States District Court for the District of New Jersey in response to Gland’s ANDA filing. In accordance with the Hatch-Waxman Act, because GIAPREZA® is a new chemical entity and La Jolla filed a complaint for patent infringement within 45 days of receipt of the First Notice Letter, the FDA cannot approve Gland’s ANDA any earlier than 7.5 years from the approval of the GIAPREZA® NDA unless the District Court finds that all of the asserted claims of the patents-in-suit are invalid, unenforceable and/or not infringed.

On February 22, 2023, La Jolla received a paragraph IV notice of certification (the “Second Notice Letter”) from Gland advising that Gland had amended its ANDA filing to include a paragraph IV certification alleging that all claims of the newly-issued and Orange Book-listed U.S. Patent No. 11,559,559 (“the ’559 Patent”), which covers GIAPREZA®, are invalid, unenforceable and/or not infringed.

On March 22, 2023, La Jolla filed a First Amended Complaint in this litigation adding Gland’s marketing and distribution partners for its ANDA angiotensin II product, Fresenius Kabi USA LLC and Fresenius Kabi SwissBiosim GmbH, as co-defendants. On April 7, 2023, La Jolla filed a Second Amended Complaint in response to the Second Notice Letter, adding claims that the manufacture, use, sale, offer for sale, or import of Gland’s ANDA angiotensin II product will infringe the ’559 Patent. We intend to vigorously enforce our intellectual property rights relating to GIAPREZA®.

The parties have completed claim construction briefing, and a claim construction hearing is set for November 9, 2023. Fact discovery is set to conclude on December 8, 2023 and expert discovery will be complete by April 19, 2024. A trial date has not yet been set in this matter.

Given the early stage of this matter, we cannot reasonably estimate a potential future loss or a range of potential future losses, if any, and have not recorded a contingent liability accrual as of September 30, 2023.

Indemnification

In the ordinary course of business, we may provide indemnifications of varying scope and terms to vendors, directors, officers, and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by us, our negligence or willful misconduct, violations of law, or intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. No material demands have been made upon us to provide indemnification under such agreements, and thus, there are no claims that we are aware of that could have a material effect on our unaudited condensed consolidated financial statements. We also maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors. To date, we have not incurred any material costs and have not accrued any material liabilities in the condensed consolidated financial statements as a result of these provisions.

13. Income Taxes

We recorded a provision for income tax expense of $3.9 million and $14.7 million for the three and nine months ended September 30, 2023, respectively, compared to ~~0.11%~~the recorded provision for income tax expense of $57.1 million and $63.1 million for the same periods in 2016. Should we continue to generate taxable income in 2017, we expect that the taxable income will be substantially offset by the utilization of net operating losses or other deferred tax assets.three and nine months ended September 30, 2022, respectively. The ~~difference between the consolidated~~Company’s effective income tax rate for the nine months ended September 30, 2023 was 10.6% compared to 18.3% for the same period in 2022. The income tax expense for the nine months ended September 30, 2023 and 2022 was determined based upon estimates of the Company’s effective income tax rates in various jurisdictions. Our effective tax rate for the nine months ended September 30, 2023 was lower than the U.S. federal statutory income tax rate isdue primarily ~~attributable~~ to ~~a change in valuation allowance against net deferred tax assets.~~non-deductible expenses.

~~11.~~14. Subsequent Events

InOn October ~~2017, we~~6, 2023, ITH entered into a Second Note Amendment Agreement (the “Second Note Amendment Agreement”) with Gate to amend the Gate Convertible Note. Pursuant to the Second Note Amendment Agreement, the principal amount of the Gate Convertible Note was increased from $21.5 million to $27.7 million, which represents the principal and accrued interest as of the amendment date and an ~~accelerated share repurchase (ASR) agreement with a financial institution to repurchase $80 million~~additional cash investment of ~~our common stock. The repurchases under~~$5.0 million. All other material terms of the ~~ASR agreement are expected to complete the previously announced 2017 Capital Return Plan authorized by our Board of Directors.~~Gate Convertible Note were unchanged.

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~~other than statements of historical fact, including, without limitation, statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, intentions, expectations, goals and objectives may be ~~forward-looking~~forward‑looking statements. The words “anticipates,” “believes,” “could,” “designed,” “estimates,” “expects,” “goal,” “intends,” “may,” “objective,” “plans,” “projects,” ~~“pursue,~~“pursuing,” “will,” “would” and similar expressions (including the negatives thereof) are intended to identify ~~forward-looking~~forward‑looking statements, although not all ~~forward-looking~~forward‑looking statements contain these identifying words. We may not actually achieve the plans, intentions, expectations or objectives disclosed in our ~~forward-looking~~forward‑looking statements and the assumptions underlying our ~~forward-looking~~forward‑looking statements may prove incorrect. Therefore, you should not place undue reliance on our ~~forward-looking~~forward‑looking statements. Actual results or events could differ materially ~~differ~~ from the plans, intentions, expectations and objectives disclosed in the ~~forward-looking~~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~~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®, GIAPREZA®, XERAVA® and XACDURO® in the jurisdictions in which these products have been approved; the strategies, plans and objectives of the Company (including the Company's growth strategy and corporate development initiatives); the timing, manner, and amount of potential capital returns to shareholders; the status and timing of clinical studies, data analysis and communication of results; the potential benefits and mechanisms of action of product candidates; expectations for product candidates through development and commercialization; the timing of regulatory approval of product candidates; and projections of revenue, expenses and other financial items; the impact of the novel coronavirus (“COVID-19”); the timing, manner and amount of capital deployment, including potential capital returns to stockholders; and risks related to the Company’s growth strategy and risks discussed ~~below~~ in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2023, and as amended on March 20, 2023 (“2022 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 2022 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 2022 Form 10-K and Item 1A of Part II of this report, other unknown or unpredictable factors also could affect our results. Therefore, the information in this report should be read together with other reports and documents that we file with the SEC from time to time, including on Form 10-K, Form 10-Q and Form 8-K, which may supplement, modify, supersede or update those risk factors. As a result of these factors, we cannot assure you that the forward-looking statements in this report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.

OVERVIEW

Executive Summary

Innoviva, Inc. ~~(“Innoviva”~~(and where context requires, together with its subsidiaries 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, to maximize the commercial potential of its~~innovative healthcare assets. Our royalty portfolio contains respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR®/BREO® ELLIPTA® (fluticasone furoate/vilanterol, “FF/VI”) and ANORO® ELLIPTA® ~~(umeclidinium~~(umeclidinium bromide/ vilanterol, “UMEC/VI”), and up until July 2022,

TRELEGY® ELLIPTA® (the combination FF/UMEC/VI). We sold our 15% ownership interest in Theravance Respiratory Company, LLC (“TRC”) on July 20, 2022, and are no longer entitled to receive royalties on sales of TRELEGY® ELLIPTA® products. 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 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 combination FF/UMEC/VI).~~

~~Our company structure and organization are tailored to~~We expanded our focused activities of managing our respiratory assets with GSK, the commercial and developmental obligations associated with the GSK Agreements, intellectual property, licensing operations, business development activities and providing for certain essential reporting and management functions of a public company. As of September 30, 2017, we had 12 employees. Our revenues consistportfolio of royalties and ~~potential milestone payments, if any, from our respiratory partnership agreements~~innovative healthcare assets through the acquisition of Entasis Therapeutics Holdings Inc. (“Entasis”) on July 11, 2022 and the acquisition of La Jolla Pharmaceutical Company (“La Jolla”) on August 22, 2022. Our commercial and marketed products include GIAPREZA® (angiotensin II), approved to increase blood pressure in adults with ~~GSK.~~

~~Recent Highlights~~

· ~~GSK Net Sales:~~

· ~~Third quarter 2017 net~~septic or other distributive shock, and XERAVA® (eravacycline) approved for the treatment of complicated intra-abdominal infections in adults. Our new product, XACDURO® (formerly known as sulbactam-durlobactam or SUL-DUR), was approved by the United States Food and Drug Administration (“FDA”) on May 23, 2023 and we commenced commercial sales of ~~RELVAR~~XACDURO®~~/BREO~~® ~~ELLIPTA~~® ~~by GSK were $297.4 million, up 40% from $212.2 million~~ in the third quarter of ~~2016,~~2023. Our development pipeline includes medicines for the treatment of bacterial infections. As such, we have a wholly owned robust infectious disease and hospital operating platform, as well as other assets in these areas, such as a large equity stake in Armata Pharmaceuticals, a leader in bacteriophage development with ~~$164.4~~potential use across a range of infectious and other serious diseases. We also have economic interests in other healthcare companies.

Our corporate strategy is currently focused on increasing stockholder value by, among other things, maximizing the potential value of our respiratory assets partnered with GSK, optimizing our operations and augmenting capital allocation. We continue to diversify our royalty management business through actively pursuing opportunistic acquisitions of promising companies and assets in the healthcare industry and enhancing the returns on our capital. In particular, our recent acquisitions of Entasis and La Jolla created a robust hospital and infectious disease platform.

Third Quarter 2023 and Recent Highlights:

GSK Net Sales

•

Third quarter 2023 net sales of RELVAR®/BREO® ELLIPTA® by GSK were $303.9 million with $109.5 million in net sales from the U.S. market and ~~$133.0~~$194.4 million from non-U.S. markets.

•

Third quarter ~~2017~~2023 net sales of ANORO® ELLIPTA®by GSK were ~~$111.9~~$175.8 million ~~up 57% from $71.2~~with $89.2 million ~~in the third quarter of 2016, with $74.7 million of~~net sales from the U.S. market and ~~$37.2~~$86.6 million from non-U.S. markets.

Corporate Updates

•

During the third quarter of 2023, Innoviva repurchased 856,750 shares of its outstanding common stock for $11.0 million.

•

On July 10, 2023, Innoviva’s wholly owned subsidiary, Innoviva Strategic Opportunities, entered into a credit and security agreement with Armata Pharmaceuticals, Inc. (NYSE: ARMP) (“Armata”) and invested $25.0 million to advance Armata’s pipeline of therapeutic phage candidates and support the buildout of its state-of-the art cGMP manufacturing facility.

•

On August 21, 2023, Innoviva appointed Stephen Basso as Chief Financial Officer.

Clinical Updates

· ~~Product Updates:~~

· ~~Received~~

•

In September 2023, Innoviva’s wholly owned subsidiary, Innoviva Specialty Therapeutics, launched XACDURO® (sulbactam for injection; durlobactam for injection), co-packaged for intravenous use in ~~September 2017 positive opinion from the European Medicines Agency’s Committee for Medicinal Products for Human Use for TRELEGY~~® ~~ELLIPTA~~®patients 18 years of age and older for the treatment of ~~chronic obstructive pulmonary disease (COPD)~~hospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia (HABP/VABP) caused by susceptible isolates of Acinetobacter baumannii-calcoaceticus complex (Acinetobacter). XACDURO® is the first and only pathogen-targeted antibiotic and a significant advancement in ~~appropriate patients.~~

· ~~Received~~the way healthcare professionals treat Acinetobacter.

•

In November 2023, in ~~September 2017 U.S. Food and Drug Administration approval of TRELEGY~~® ~~ELLIPTA~~®collaboration with The Global Antibiotic Research & Development Partnership (GARDP), we announced that zoliflodacin, a first-in-class antibiotic, met its primary endpoint in a global pivotal phase 3 clinical trial for the treatment of ~~COPD in appropriate patients.~~

· ~~Announced in September 2017 positive headline results from~~uncomplicated gonorrhea, a prevalent disease affecting over 80 million patients a year globally with rapidly rising antimicrobial resistance concerns. Study investigators found that oral zoliflodacin demonstrated statistical non-inferiority of microbiological cure at the ~~IMPACT study.~~

· ~~Capital Structure:~~

· ~~Completed in August 2017~~urogenital site when compared to treatment with intramuscular injection of ceftriaxone and oral azithromycin, a current global standard of care regimen. In the ~~full refinancing of our 2029 Notes.~~study, zoliflodacin demonstrated a

· ~~Issued in August 2017 $192.5 million in aggregate principal of 2.50% convertible senior notes due 2025.~~

· ~~Closed in August 2017 a $250 million 5 year Term B loan, paying LIBOR + 4.5% interest rate.~~

· ~~Repurchased~~

favorable safety profile and ~~retired $17.5 million 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 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 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. We are not obligated to repurchase any specific dollar amount of debt or equity or number of shares of common stock under the 2017 Capital Return Plan. We will determine when, if and how to proceed with any repurchase transactions under the program, aswas generally 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 term of the program or as 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 and retire 1,317,771 shares of our common stock concurrentlytolerated, with the ~~pricing~~majority of ~~the offering in privately negotiated transactions effected through one of the initial purchasers~~adverse events being mild-to-moderate. There were no discontinuations reported due to adverse events, serious adverse events, or ~~its affiliate, as our agent.~~

deaths.

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~~Collaboration Arrangement 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~~ 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~~As mentioned above, on July 20, 2022, we sold our ownership interest in TRC, which received royalty payments 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 GSKstemming from sales of ~~MABA treatments.~~ ~~For a detailed discussion of~~TRELEGY® ELLIPTA®. We retained our ~~alliance~~royalty rights with ~~GSK, see Management’s Discussion~~respect to RELVAR®/BREO® ELLIPTA® 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.ANORO® ELLIPTA®.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with ~~U.S.~~accounting principles generally accepted ~~accounting principles~~in the United States of America (“U.S. GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

~~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 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, 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 not We believe 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~~2022 filed with the SEC on February 28, ~~2017 provides a more complete discussion~~2023, and as amended on March 20, 2023.

Factors Affecting Comparability

Our historical financial condition and results of operations for the periods presented may not be comparable, either between periods or going forward due to the factors described below.

•

Accounting consolidation of Entasis on February 17, 2022 and purchase of remaining minority interest in Entasis on July 11, 2022,

•

Sale of our ~~critical accounting policies~~15% ownership interest in Theravance Respiratory Company, LLC (“TRC”) on July 20, 2022, and ~~estimates.~~

•

Acquisition of La Jolla on August 22, 2022.

Refer to Note 5, “Consolidated Entities and Acquisitions” to our accompanying unaudited consolidated financial statement for more information.

Results of Operations

Net Revenue

Royalty Revenue

Total royalty revenue, 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 September 30,						Change						Nine Months Ended September 30,						Change
(In thousands)	2023			2022			$			%			2023			2022			$			%
Royalties - RELVAR/BREO	$	45,585		$	55,663		$	(10,078	)		(18	)%	$	150,922		$	170,753		$	(19,831	)		(12	)%
Royalties - ANORO		11,429			9,943			1,486			15	%		32,127			28,015			4,112			15	%
Royalties - TRELEGY		—			—			—			0	%		—			72,029			(72,029	)		(100	)%
Total royalties		57,014			65,606			(8,592	)		(13	)%		183,049			270,797			(87,748	)		(32	)%
Less: amortization of capitalized fees paid		(3,456	)		(3,456	)		—		*				(10,368	)		(10,368	)		—		*
Total net royalty revenue	$	53,558		$	62,150		$	(8,592	)		(14	)%	$	172,681		$	260,429		$	(87,748	)		(34	)%

*Not Meaningful

Total net royalty revenue decreased to $53.6 million and $172.7 million for the three and nine months ended September 30, 2023, compared to $62.2 million and $260.4 million, respectively, for the same period a year ago. The decrease of total net royalty revenue was primarily due to the sale of our ownership interest in TRC, which received royalties stemming from sales of TRELEGY® ELLIPTA® in 2022.

Net Product Sales

Net product sales recognized for the three months ended September 30, 2023 was $13.7 million, consisting of net sales of GIAPREZA®, XERAVA®, and XACDURO® for $8.0 million, $5.1 million, and $0.6 million, respectively. Net product sales recognized for the nine months ended September 30, 2023 was $40.9 million, consisting of net sales of GIAPREZA®, XERAVA® and XACDURO® for $28.2 million, $12.1 million and $0.6 million, respectively.

License Revenue

We recognized $8.0 million in license revenue for the first quarter of 2023 as a result of achievement of a regulatory milestone under our license agreement with Everest. We also recognized $3.0 million in license revenue for the second quarter of 2023 as a result of achievement of a regulatory milestone under our license and collaboration agreement with Zai Lab.

Research and Development

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


	Three Months Ended September 30,				Change						Nine Months Ended September 30,				Change
(In thousands)	2023		2022		$			%			2023		2022		$		%
Research and development	$	3,989	$	11,725	$	(7,736	)		(66	)%	$	31,566	$	31,447	$	119		0	%

Research and development expenses consist of the following:


	Three Months Ended September 30,					Change						Nine Months Ended September 30,				Change
(in thousands)	2023		2022			$			%			2023		2022		$			%
Compensation and related personnel costs	$	1,825	$	4,238		$	(2,413	)		(57	)%	$	8,636	$	9,525	$	(889	)		-9	%
External services		1,359		6,937			(5,578	)		-80	%		20,085		20,457		(372	)		-2	%
Facilities related		482		563			(81	)		-14	%		1,730		1,390		340			24	%
Other		323		(13	)		336		*				1,115		75		1,040		*
Total research and development expense	$	3,989	$	11,725		$	(7,736	)		-66	%	$	31,566	$	31,447	$	119			0	%

*Not Meaningful

Research and development expenses, which are mainly attributable to Entasis’ product development efforts for XACDURO®, were $4.0 million and $31.6 million, for the three and nine months ended September 30, 2023, respectively. Research and development expenses for the three and nine months ended September 30, 2022 were attributable to the product development efforts of Entasis from February 17, 2022. Research and development expenses for the three months ended September 30, 2023 decreased compared to the same period in 2022. The decrease was primarily a result of the FDA approval of XACDURO® in May 2023 and personnel transfers from the research development function to general and administrative function after the FDA approval.

Selling, General & Administrative

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


	Three Months Ended September 30,				Change					Nine Months Ended September 30,				Change
(In thousands)	2023		2022		$		%			2023		2022		$		%
Selling, general and administrative	$	28,636	$	27,810	$	826		3	%	$	71,913	$	46,084	$	25,829		56	%

Selling, general and administrative expenses increased for the three and nine months ended September 30, ~~2017~~2023, compared to the same period ~~a year ago primarily~~in 2022 mainly due to the ~~growth in prescriptions~~personnel transfers from the research development function to general and ~~market share quarter over quarter for both~~ ~~RELVAR~~administrative function after the FDA approval of XACDURO®~~/BREO~~® ~~ELLIPTA~~®.

Interest and ~~ANORO~~® ~~ELLIPTA~~®.dividend income and other expense, net

~~Research & Development~~

~~Research~~Interest and ~~development expenses,~~dividend income and other expense, net, 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 September 30,						Change						Nine Months Ended September 30,						Change
(In thousands)	2017		2016		$		%		2017		2016		$			%		2023			2022			$			%			2023			2022			$			%
Research and development expenses	$	311	$	286	$	25	9	%	$	1,013	$	1,048	$	(35	)	(3	)%

Interest and dividend income																		$	(4,114	)	$	(2,135	)	$	(1,979	)		93	%	$	(11,032	)	$	(3,181	)	$	(7,851	)		247	%
Other expense, net																		$	1,047		$	(28	)	$	1,075		*			$	4,289		$	750		$	3,539		*

Research and development expenses slightly increased for the three months ended September 30, 2017 compared to the same period a year ago primarily due to slightly higher recognized stock-based compensation expense. Research and development expenses decreased for 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.45

~~General & Administrative~~

~~General and administrative 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

$

%

General and administrative expenses

$
8,310

$
5,105

$
3,205

63
%
$
29,489

$
17,582

$
11,907

68
%

General and administrative expenses for the three months ended September 30, 2017 were $8.3 million compared to $5.1 million in the three months ended September 30, 2016, an increase of $3.2 million. The increase was mainly due to $2.5 million of litigation costs resulting from proxy contest. General 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 contest and associated litigation costs.

~~Other Income (Expense), net and Interest Income~~

~~Other income (expense), net and interest income, 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

$

%

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
%

*Not ~~meaningful~~Meaningful

~~Other~~Interest and dividend income ~~(expense), net~~increased for the three and nine months ended September 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~~ compared to the same periods a year ago ~~primarily~~ due to higher interest ~~generated from~~rates and higher average balances of our ~~investments in marketable securities.~~cash equivalents, money market funds and other interest-bearing investments.

Other expense, net, was primarily expenses incurred by ISP Fund LP. Other expense, net during the nine months ended September 30, 2022 was partially offset by grant income of $1.3 million.

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 September 30,				Change						Nine Months Ended September 30,				Change
(In thousands)	2017			2016			$		%		2017			2016			$		%		2023		2022		$			%			2023		2022		$		%
Interest expense	$	(10,262	)	$	(13,103	)	$	2,841	(22	)%	$	(35,247	)	$	(39,416	)	$	4,169	(11	)%	$	4,396	$	5,096	$	(700	)		(14	)%	$	13,205	$	11,761	$	1,444		12	%

The interest expense included the contractual interest expense and the amortization of debt issuance costs for our 2023 Notes, 2025 Notes and 2028 Notes, as well as effective interest expense on our deferred royalty obligation. Interest expense ~~decreased~~for the nine months ended September 30, 2023 included the amount on the 2023 Notes until the notes were fully paid off on January 15, 2023. Interest expense for the three and nine months ended September 30, ~~2017~~2022 included the amount on the 2028 Notes from March 7, 2022, the date of issuance, through September 30, 2022. The increase for the nine months ended September 30, 2023, compared to the ~~same periods~~nine months ended September 30, 222, was mainly due to interest expense on our deferred royalty obligation and a ~~year ago~~higher average debt balance. Interest expense for the three months ended September 30, 2022 was higher compared to the three months ended September 30, 2023 primarily due to interest expense on our 2023 Notes which matured and were fully paid in January 2023.

Loss on Debt Extinguishment

We recognized a loss of $20.7 million due to the ~~redemption~~total premium payment of ~~our 2029 Notes~~$20.4 million and the write-off of $0.3 million debt issuance costs in connection with the ~~net proceeds from the Term B Loan and 2025 Notes, the lower interest rates starting August 2017 under the Term B Loan and 2025 Notes compared to the interest rates~~repurchase of ~~the 2029 Notes, and lower balance~~$144.8 million aggregate principal amount of our 2023 Notes in March 2022.

Gain on Sale of ~~which $4.1~~TRC

We recognized a net gain of $266.7 million ~~was repurchased since~~due to the sale of our ownership interest in TRC to Royalty Pharma, consummated on July 20, 2022.

Changes in Fair Values of Equity Method Investments and Equity and Long-Term Investments

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


	Three Months Ended September 30,						Change				Nine Months Ended September 30,					Change
(In thousands)	2023			2022			$			%	2023			2022		$			%
Changes in fair values of equity method investments, net	$	(71,980	)	$	(10,298	)	$	(61,682	)	*	$	(67,886	)	$	44,475	$	(112,361	)	*
Changes in fair values of other equity and long-term investments, net	$	2,640		$	10,168		$	(7,528	)	*	$	4,887		$	23,406	$	(18,519	)	*

*Not Meaningful

The changes in fair values of equity method investments for the three and nine months ended September 30, ~~2016. See “Liquidity” section below~~2023 were more favorable mainly due to Armata's higher stock prices during this period. We recorded $72.0 million and $67.9 million in unrealized gain for ~~further information.~~the three and nine months ended September 30, 2023, respectively, related to our equity method investments in Armata. During the three and nine months ended September 30, 2022, we recorded $11.7 million unrealized gain and $35.3 million unrealized loss, respectively, related to our equity method investments in Armata.

The changes in fair values of other equity and long-term investments primarily reflected the realized gains and losses and net unrealized gains and losses in our strategic investments in Armata, InCarda, Gate, and those investments managed by ISP Fund LP. We recorded $19.6 million and $20.7 million in unrealized gain for the three and nine months ended September 30, 2023, respectively, related to other long-term investments we made in Armata in 2023.

Provision for Income Taxes

We recorded a provision for income tax expense of $3.9 million and $14.7 million for the three and nine months ended September 30, 2023, compared to a provision for income tax benefit of $57.1 million and for income tax expense of $63.1 million for the three and nine months ended September 30, 2022, respectively. The effective income tax rate for the nine months ended September 30, 2023 and 2022 was 10.6% and 18.3%, respectively.

Net Income (Loss) Attributable to Noncontrolling Interest

Net income (loss) attributable to noncontrolling interest represents $(33.5) million and $19.9 million for the three and nine months ended September 30, 2022, respectively, for the 85% share of net income (loss) in TRC for Theravance Biopharma and $(2.7) million and $(13.6) million for the three and nine months ended September 30, 2022, respectively, for the 40% share of net loss in Entasis.

There is no noncontrolling interest in any of our subsidiaries in 2023.

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 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~~collaboration arrangement. For the nine months ended September 30, ~~2017,~~2023, we generated gross royalty revenues from GSK of ~~$157.4~~$183.0 million, net product sales of $40.9 million and license revenue of $11.0 million. Net cash and cash equivalents ~~short term investments and marketable securities~~ totaled ~~$168.2~~$180.0 million, ~~and~~ royalties ~~receivable~~receivables from GSK totaled ~~$51.9~~$57.0 million and accounts receivable associated with our product sales totaled $10.8 million as of September 30, ~~2017.~~2023.

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 and 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,~~as well our ongoing share repurchase program, for at least the next ~~twelve~~12 months based upon current operating plans and financial forecasts. Our long-term capital requirements will depend on many factors including the amount of our royalty revenues, sales growth of our currently marketed products, timing of regulatory approval of our product candidates and outcome of our acquisitions and strategic investments. If our current operating plans and financial forecasts change, we may require additional funding sooner in the form of public or private equity offerings or debt financings. Furthermore, if in our view favorable financing opportunities arise, we may seek additional funding in the form of public or private equity offerings or debt financings at any time. However, future financing may not be available in amounts or on terms acceptable to us, if at all. This could leave us without adequate financial resources to fund our operations as currently planned. In addition, from time to time we may restructure or reduce our debt, including through privately negotiated repurchases, tender offers, redemptions, ~~repurchases~~amendments, 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,								Nine Months Ended September 30,
(In thousands)	2017			2016			Change		2023			2022			Change
Net cash provided by operating activities	$	93,890		$	39,898		$	53,992	$	107,808		$	192,827		$	(85,019	)
Net cash provided by (used in) investing activities	2,644			(27,900		)	30,544
Net cash used in investing activities									$	(61,610	)	$	(47,956	)	$	(13,654	)
Net cash used in financing activities	(76,133		)	(77,984		)	1,851		$	(157,250	)	$	(45,567	)	$	(111,683	)

Cash Flows from Operating Activities

~~Cash~~Net cash provided by operating activities for the nine months ended September 30, ~~2017~~2023 was ~~$93.9~~$107.8 million, consisting primarily of our net income of ~~$75.8~~$118.2 million, adjusted for net non-cash items, ~~such as $10.5~~which included $19.2 million of amortization of inventory fair value step-up adjustment, $10.4 million of amortization of capital fees and depreciation of property and equipment, $15.3 million of amortization ~~and $7.4 million for stock-based compensation expense,~~of acquired intangible assets, partially offset by $63.0 million of net changes in fair value of our investments and $5.0 million net changes in operating assets and ~~liabilities, including an increase in receivables from collaborative arrangements of $5.0 million and a reduction in accrued interest payable of $4.3 million.~~liabilities.

~~Cash~~Net cash provided by operating activities for the nine months ended September 30, ~~2016~~2022 was ~~$39.9~~$192.8 million, consisting primarily of our net income of ~~$34.1~~$288.6 million, adjusted for net non-cash items, ~~such as $10.5~~which included a net gain of $266.7 million on the sale of TRC. Other non-cash items included $29.3 million of deferred income tax, $12.5 million of depreciation and amortization, $20.7 million of loss on extinguishment of debt, and ~~$6.4~~$66.4 million ~~for stock-based compensation expense,~~decrease in the fair value of our equity and long-term investments. Net non-cash items were partially offset by ~~changes~~increases of $3.6 million in ~~operating~~other assets, non-current and ~~liabilities, including an increase~~$0.9 million in ~~receivables from collaborative arrangements~~accounts receivable and decreases of ~~$10.4 million.~~$1.9 million in accrued interest payable and $1.7 million in accrued personnel-related expenses and other accrued liabilities.

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 months ended September 30, ~~2016~~2023 of ~~$27.9~~$61.6 million ~~was~~ primarily ~~due to~~consisted of $60.1 million in purchases of ~~marketable~~trading securities, $1.2 million in purchases of ~~$82.7~~equity and long-term investments, $24.9 million in purchases of equity investments managed by ISP Fund LP, and $14.7 million from purchase and sales of other investments managed by ISP Fund LP. The use of cash for investing activities was partially offset by ~~$55.1~~net proceeds of $39.6 million from the sales of equity investments managed by ISP Fund LP.

Net cash used in investing activities for the nine months ended September 30, 2022 of $48.0 million primarily consisted of $150.5 million of cash used for the acquisition of La Jolla, $93.0 million in purchases of equity investments managed by ISP Fund LP, $41.3 million in purchases and sales of other investments managed by ISP Fund LP and $58.7 million in purchases of equity and long-term investments. The use of cash for investing activities was partially offset by net proceeds ~~received~~of $248.2 million from ~~sales~~the sale of our ownership interest of TRC, $24.3 million from the sale of equity investments managed by ISP Fund LP and ~~maturities~~$23.1 million of ~~marketable securities.~~cash acquired through the consolidation of Entasis.

Cash Flows from Financing Activities

Net cash used in financing activities for the nine months ended September 30, ~~2017~~2023 of ~~$76.1~~$157.3 million was primarily due to ~~$487.2~~the payments of $96.2 million ~~principal repayments~~upon maturity of the ~~2029~~2023 Notes in January 2023 and ~~$17.5~~$61.1 million ~~paid~~ for the repurchase of ~~our~~ common stock ~~offset by the net proceeds of $242.6 million from the financing of~~under our ~~Term B Loan and the net proceeds of $187.1 million from issuance of our 2025 Notes.~~current stock repurchase program.

Net cash used in financing activities for the nine months ended September 30, ~~2016~~2022 of ~~$78.0~~$45.6 million was primarily due to ~~$65.6~~a payment of $165.1 million ~~paid~~ for the repurchase of ~~common stock and $3.3 million partial payment on~~ the ~~principal of the 2029 Notes. Additionally, $8.1 million was paid for the repurchase of our~~ 2023 Notes and ~~$0.4~~$21.0 million for the purchases of capped call options associated with the 2028 Notes, $69.8 million in distributions to noncontrolling interests and $42.4 million for the purchase of Entasis’ minority interest. The use of cash for financing activities was ~~received~~partially offset by $252.5 million in net proceeds from the ~~termination~~issuance of the ~~corresponding portion of the capped call arrangement, which resulted in net cash consideration of $7.7 million.~~

~~Off-Balance Sheet Arrangements~~convertible senior notes due 2028.

Contractual Obligations

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,~~2023, our notes payable obligation included $192.5 million related to our 2025 Notes and $261.0 million related to our 2028 Notes, which are due in 2025 and 2028, respectively. Under the ~~total remaining lease payments for the duration~~terms of the ~~lease, which runs~~2025 Notes and 2028 Notes, we will make interest payments of 2.5% and 2.125%, respectively, of outstanding principal. Refer to Note 11, “Debt” to the Condensed Consolidated Financial Statements for more information.

Our short-term and long-term obligations also include contractual payments related to our operating leases were $3.5 million, with approximately $0.4 million payable through ~~May 2020, were $17.1 million. The carrying value~~December 31, 2023, approximately $1.4 million payable in each of ~~this lease guarantee was $0.9~~the years 2024 and 2025, and $0.3 million ~~as of September 30, 2017~~thereafter. Refer to Note 12, “Commitments and ~~is reflected in other long-term liabilities in our~~Contingencies” to the condensed consolidated ~~balance sheet.~~financial statements for more information.

~~Contractual Obligations and Commercial Commitments~~

InAs part of our acquisition of La Jolla, we recognized its deferred royalty obligation in connection with La Jolla Royalty Agreement with HCR. Under the ~~table below, we set forth our significant enforceable and legally binding obligations and future commitments as~~terms 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~~Agreement, HCR is entitled to receive quarterly royalties on worldwide net sales of GIAPREZA® until either January 1, 2031 or when the ~~interest~~maximum aggregate royalty payments ashave been made, whichever occurs first. Quarterly payments to HCR under the ~~loan bears interest~~Royalty Agreement start at a ~~varying~~maximum royalty rate, with step-downs based on the achievement of ~~three-month LIBOR plus 4.5% margin.~~annual net product sales thresholds. The current maximum royalty rate is 14%. Starting January 1, 2024, the maximum royalty rate may increase by an additional 4%, if an agreed-upon, cumulative net product sales threshold has not been met. The La Jolla Royalty Agreement is subject to maximum aggregate royalty payments to HCR of $225.0 million.

Additionally, we have certain contingent payment obligations under various in-license agreements which we are required to make royalty payments or milestone payments upon successful completion and achievement of certain milestones. Refer to Note 4, “License and Collaboration Arrangements” to the Condensed Consolidated Financial Statements for more information.

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

Item 3. Quantitative and Qualitative Disclosure about Market Risk

~~Other than as set forth below, during the nine months ended~~ As of September 30, ~~2017, there have been~~2023, our debt bears fixed interest rates and we had no ~~significant~~outstanding debt with variable interest rate. Our cash flows on these debt obligations are not subject to variability as a result of 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.~~interest rates.

~~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~~changes in the fair value of certain or our investments in equity and debt securities. Fluctuations in the underlying fair value of the investments could result in material gains or losses. Refer to ~~fluctuations~~Note 6 “Equity and Long-Term Investments and Fair Value Measurements” to the Condensed Consolidated Financial Statements for more information.

Inflation has increased in recent periods and could continue to increase for the near future. Inflationary factors, such as increases in the cost of our raw materials, supplies, interest rates and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on ~~these loans. As~~our financial position or results of ~~September 30, 2017, the stated interest rate for the Term B Loan, based on the LIBOR, was 5.8%. An increase~~operations to date, we may experience some effect in the ~~LIBOR of 50 basis points would increase our annual interest expense by $1.3 million based on~~near future if inflation rates continue to rise. Significant adverse changes in inflation and prices in the ~~outstanding balance of $250.0 million as of September 30, 2017.~~future could result in material losses.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and ~~Procedures.~~Procedures

We conducted an evaluation as of September 30, ~~2017,~~2023, 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 the time periods specified in the Commission’s rules and forms and controls and procedures that are designed to ensure that information required ~~time periods.~~to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decision regarding required disclosure. Based upon that evaluation, our Chief Executive Officer and Chief Financial 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

We completed our acquisitions of Entasis and La Jolla in 2022. We continue the process of integrating the acquired operations and processes into our internal control environment and implementing necessary changes to our internal control over financial reporting, including, but not limited, to the creation of new controls related to inventory management, research and development activities and product sales.

~~There were~~Other than the above, there 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 30, ~~2017~~2023 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 previously disclosed in ~~our Current~~the Quarterly Report on Form ~~8-K,~~10-Q filed ~~with the SEC~~by La Jolla on ~~April 26, 2017,~~August 15, 2022, on ~~April 20, 2017, Sarissa Capital Domestic Fund LP and certain~~February 15, 2022, La Jolla received a paragraph IV notice of ~~its affiliates (together, “Sarissa”~~certification (the “First Notice Letter”) 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”from Gland Pharma Limited (“Gland”)~~. Sarissa alleges~~ advising that itGland 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.

~~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 foreseeable future we will derive all of our royalty revenues from GSK and our future success depends 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, 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”) to the FDA seeking approval to manufacture, use or sell a generic version of GIAPREZA®in the ~~United States. Agency regulations~~U.S. prior to the expiration of U.S. Patent Nos.: 9,220,745; 9,572,856; 9,867,863; 10,028,995; 10,335,451; 10,493,124; 10,500,247; 10,548,943; 11,096,983; and ~~other applicable regulations~~11,219,662 (the “GIAPREZA® Patents”), which are listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (the “Orange Book”). The First Notice Letter alleges that the GIAPREZA® Patents are invalid, unenforceable and/or will not be infringed by the commercial manufacture, use or sale of the generic product described in Gland’s ANDA.

On March 29, 2022, La Jolla filed a complaint for patent infringement of the GIAPREZA® Patents against Gland 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~~certain related entities in the United States District Court for the District of New Jersey in response to Gland’s ANDA filing. In accordance with the Hatch-Waxman Act, because GIAPREZA® is a new chemical entity 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~~La Jolla filed a complaint for patent infringement within 45 days of receipt of the ~~ICS/LABA drug Advair~~®~~, when certain patents covering~~First Notice Letter, the ~~Advair~~FDA cannot approve Gland’s ANDA any earlier than 7.5 years from the approval of the GIAPREZA® ~~delivery device expired in 2016. In March 2017, Mylan N.V.~~ NDA unless the District Court finds that all of the asserted claims of the patents-in-suit are invalid, unenforceable and/or not infringed.

On February 22, 2023, La Jolla received a ~~complete~~paragraph IV notice of certification (the “Second Notice Letter”) from Gland advising that Gland had amended its ANDA filing to include a paragraph IV certification alleging that all claims of the newly-issued and Orange Book-listed U.S. Patent No. 11,559,559 (“the ’559 Patent”), which covers GIAPREZA®, are invalid, unenforceable and/or not infringed.

On March 22, 2023, La Jolla filed a First Amended Complaint in this litigation adding Gland’s marketing and distribution partners for its ANDA angiotensin II product, Fresenius Kabi USA LLC and Fresenius Kabi SwissBiosim GmbH, as co-defendants. On April 7, 2023, La Jolla filed a Second Amended Complaint in response ~~letter from~~to the ~~FDA~~Second Notice Letter, adding claims that the manufacture, use, sale, offer for sale, or import of Gland’s ANDA angiotensin II product will infringe the ’559 Patent. We intend to vigorously enforce our intellectual property rights relating to ~~its ANDA~~GIAPREZA®.

The parties have completed claim construction briefing, and a claim construction hearing is set for ~~fluticasone propionate 100, 250, 500 mcg~~November 9, 2023. Fact discovery is set to conclude on December 8, 2023 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~~expert discovery will be ~~adopted~~complete by April 19, 2024. A trial date has not yet been set 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.this matter.

Item 1A. Risk Factors

~~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~~Our business 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~~risks, including those identified 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 commercializationItem 1A of Part I 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 studies2022 Form 10-K. There 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, and reported certain top-line data from, the Phase 3 registrational program for FF/VI in COPD and asthma, additional studies 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) did 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 reduced by our net operating loss carryforward. 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 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 a significant portion of our activities, including financial reporting and accounting and human resources, as well 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 report 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. In the event that one of these bodies disagrees with our accounting recognition, measurement or disclosure or any of our accounting interpretations, estimates or assumptions, it 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.

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:~~2022 Form 10-K.

· ~~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

a) Sales of Unregistered Securities

None.

(b) Use of Proceeds from Public Offering of Common Stock
None.

(c) Purchases of Equity Securities by the Issuer

~~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.~~

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.

The following table reflects ~~the~~share repurchases of our common stock ~~under~~for the ~~2017 Capital Return Plan during the fiscal quarter~~three months ended September 30, ~~2017:~~2023.

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


Period	Total Number of Shares Purchases		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
July 1, 2023 to July 31, 2023		144,756	$	12.64		144,756	$	40,140,644
August 1, 2023 to August 31, 2023		108,606		13.18		108,606		38,709,433
September 1, 2023 to September 30, 2023		603,388		12.76		603,388		31,009,211
Total		856,750	$	12.79		856,750

(1) On October 31, 2022, our board of directors authorized a new share repurchase program under which we may repurchase up to

$100.0 million of our outstanding shares of common stock. The repurchase program authorizes the repurchase by the Company of its common stock in open market transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Exchange Act, privately negotiated transactions, in block trades, accelerated share repurchase transactions, exchange transactions, or any combination thereof or by other means in accordance with federal securities laws. The authorization permits management to repurchase shares of the Company’s common stock from time to time at management’s discretion. Repurchases may also be made pursuant to a trading plan under Rule 10b5-1 under the Exchange Act, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions. The actual means and timing of any shares purchased under the program will depend on a variety of factors, including ongoing assessments of the capital needs of the business, the market price of our common stock, prevailing stock prices, general market conditions and other considerations. This program has no termination date, may be suspended or discontinued at any time at our discretion, and does not obligate us to acquire any amount of common stock.

Item 3: Defaults Upon Senior Securities

None.

Item 4: Mine Safety Disclosures

None.

Item 5: Other Information

None.

Item 6. Exhibits

(a)

Index to Exhibits


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

3.1	Amended and Restated Certificate of Incorporation	8-K	99.2	4/28/2016

3.2	Amended and Restated Bylaws, amended and restated as of January 1, 2023	8-K	3.1	1/4/2023

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)	8-K	4.2	1/25/2013

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	Employee Offer Letter	8-K	10.1	8/25/2023

31.1	Certification of Principal Executive Officer pursuant to Rules 13a‑14 pursuant to the Securities Exchange Act of 1934

31.2	Certification of Chief 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

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)

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~~+ Management contract or compensatory plan or arrangement.

* Furnished herewith.

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: November 1, 2023	/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: November 1, 2023	/s/ Stephen Basso
~~Date: November 3, 2017~~	~~/s/ Eric d’Esparbes~~Stephen Basso
	~~Eric d’Esparbes~~Chief Financial 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						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
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

Operating expenses:
Research and development	311			286			1,013			1,048
General and administrative	8,310			5,105			29,489			17,582
Total operating expenses	8,621			5,391			30,502			18,630

Income from operations	40,022			27,918			117,195			71,327

Other (expense) income, net	(6,369		)	56			(7,108		)	1,743
Interest income	376			162			918			411
Interest expense	(10,262		)	(13,103		)	(35,247		)	(39,416		)
Net income	$	23,767		$	15,033		$	75,758		$	34,065

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:
Shares used to compute basic net income per share	106,841			109,282			107,236			111,128
Shares used to compute diluted net income per share	119,796			121,993			120,120			111,583

	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


	Nine Months Ended September 30, 2022
					Additional														Total
	Common Stock				Paid-In			Accumulated			Treasury Stock					Noncontrolling			Stockholders’
	Shares		Amount		Capital			Deficit			Shares		Amount			Interest			Equity
Balance as of January 1, 2022		69,566	$	696	$	1,264,024		$	(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 interests		—		—		—			—			—		—			(6,507	)		(6,507	)
Fair value of noncontrolling interests in a consolidated variable interest entity		—		—		—			—			—		—			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		—		214			—			—		—			—			214
Stock-based compensation		—		—		620			—			—		—			334			954
Capped call options associated with convertible senior notes due 2028		—		—		(16,585	)		—			—		—			—			(16,585	)
Net income		—		—		—			15,773			—		—			22,085			37,858
Balance as of March 31, 2022		69,594		696		1,182,912			(403,137	)		32,005		(393,829	)		165,575			552,217
Distributions to noncontrolling interests				—		—			—			—		—			(9,545	)		(9,545	)
Equity activity of noncontrolling interests in a consolidated variable interest entity		—		—		—			—			—		—			(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			—			—		—			—			68
Conversion of convertible subordinated notes due 2023		—		—		3			—			—		—			—			3
Stock-based compensation		—		—		685			—			—		—			665			1,350
Net income		—		—		—			939			—		—			20,432			21,371
Balance as of June 30, 2022		69,706		697		1,183,667			(402,198	)		32,005		(393,829	)		177,125			565,462
Distributions to noncontrolling interests				—		—			—			—		—			(53,759	)		(53,759	)
Derecognition of noncontrolling interests upon sale of TRC		—		—		—			78			—		—			(61,304	)		(61,226	)
Derecognition of noncontrolling interests upon acquisition of Entasis Therapeutics Holdings Inc. (“Entasis”) minority interest		—		—		(14,153	)		—			—		—			(28,009	)		(42,162	)
Exercise of stock options and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding		70		1		(12	)		—			—		—			—			(11	)
Stock-based compensation		—		—		1,594			—			—		—			2,123			3,717
Net income		—		—		—			265,523			—		—			(36,176	)		229,347
Balance as of September 30, 2022		69,776	$	698	$	1,171,096		$	(136,597	)		32,005	$	(393,829	)	$	—		$	641,368

	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 September 30,				Nine Months Ended September 30,
(In thousands except per share data)	2023		2022		2023		2022
Numerator:
Net income attributable to Innoviva stockholders, basic	$	82,046	$	265,523	$	118,191	$	282,235
Add: interest expense on 2023 Notes, net of tax effect		—		412		86		2,003
Add: interest expense on 2025 Notes, net of tax effect		1,236		994		3,703		3,533
Add: interest expense on 2028 Notes, net of tax effect		1,543		1,769		4,618		3,862
Net income attributable to Innoviva stockholders, diluted	$	84,825	$	268,698	$	126,598	$	291,633
Denominator:
Weighted-average shares used to compute basic net income per share attributable to Innoviva stockholders		64,953		69,731		66,016		69,640
Dilutive effect of 2023 Notes		—		4,866		250		6,629
Dilutive effect of 2025 Notes		11,150		11,150		11,150		11,150
Dilutive effect of 2028 Notes		9,955		9,955		9,955		7,559
Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan		106		128		133		94
Weighted-average shares used to compute diluted net income per share attributable to Innoviva stockholders		86,164		95,830		87,504		95,072
Net income per share attributable to Innoviva stockholders
Basic	$	1.26	$	3.81	$	1.79	$	4.05
Diluted	$	0.98	$	2.80	$	1.45	$	3.07

	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)