UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2017~~2021

o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-30319

INNOVIVA, INC.

(Exact Name of Registrant as Specified in its Charter)

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

~~2000 Sierra Point Parkway,~~1350 Old Bayshore Highway Suite ~~500~~400

~~Brisbane,~~ Burlingame, CA ~~94005~~94010

(Address of Principal Executive Offices)

~~(650)~~ (650) 238-9600

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.01 per share		INVA		The NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes x☒ No o☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company,” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the ~~Exchange~~ Act.

Large accelerated filer x☒		Accelerated filer o☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the ~~Exchange~~ Act). Yes o☐ No x☒

The number of shares of registrant’s common stock outstanding on ~~October 31, 2017~~July 19, 2021 was ~~108,015,451.~~69,494,582.

Table of Contents

PART ~~I —~~I. FINANCIAL INFORMATION

Item 1. Financial Statements

~~INNOVIVA, INC.~~

~~CONDENSED~~ INNOVIVA, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

September 30,

December 31,

2017

2016

(unaudited)

*

Assets

Current assets:

Cash and cash equivalents

$
138,417

$
118,016

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

Total current assets

220,509

198,046

Property and equipment, net

249

368

Capitalized fees paid to a related party, net

170,177

180,545

Other assets

37

37

Total assets

$
390,972

$
378,996

Liabilities and Stockholders’ Deficit

Current liabilities:

Accounts payable

$
629

$
128

Accrued personnel-related expenses

1,647

2,361

Accrued interest payable

3,566

7,828

Other accrued liabilities

1,157

1,095

Current portion of long-term debt

25,000

7,752

Deferred revenue, current

885

885

Total current liabilities

32,884

20,049

Long-term debt, net of current portion, discount and issuance costs

578,449

708,341

Other long-term liabilities

1,049

1,383

Deferred revenue

1,551

2,214

Commitments and contingencies (Notes 9)

Stockholders’ deficit:

Preferred stock: $0.01 par value, 230 shares authorized, no shares issued and outstanding

—

—

Common stock: $0.01 par value, 200,000 shares authorized, 108,152 and 108,585 shares issued as of September 30, 2017 and December 31, 2016, respectively

1,080

1,085

Treasury stock: 150 shares as of September 30, 2017 and December 31, 2016

(3,263
)
(3,263
)
Additional paid-in capital

1,336,358

1,282,077

Accumulated other comprehensive (loss) income

(3
)
1

Accumulated deficit

(1,557,133
)
(1,632,891
)
Total stockholders’ deficit

(222,961
)
(352,991
)
Total liabilities and stockholders’ deficit

$
390,972

$
378,996


	June 30,		December 31,
	2021		2020
	(unaudited)		*
Assets
Current assets:
Cash and cash equivalents	$	43,265	$	246,487
Related party receivables from collaborative arrangements		104,262		93,931
Prepaid expenses and other current assets		734		1,640
Total current assets		148,261		342,058
Property and equipment, net		19		28
Equity and long-term investments		473,677		438,258
Capitalized fees paid to a related party, net		118,341		125,253
Deferred tax assets, net		48,690		93,759
Other assets		162		214
Total assets	$	789,150	$	999,570

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	30	$	66
Accrued personnel-related expenses		389		490
Accrued interest payable		4,152		4,152
Other accrued liabilities		800		1,402
Total current liabilities		5,371		6,110
Long-term debt, net of discount and issuance costs		389,989		385,517
Other long-term liabilities		45		106
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock: $0.01 par value, 230 shares authorized, 0 shares issued and outstanding		0		0
Common stock: $0.01 par value, 200,000 shares authorized, 69,495 and 101,392 issued and outstanding as of June 30, 2021 and December 31, 2020, respectively		695		1,014
Treasury stock: at cost, 32,005 and 0 shares at June 30, 2021 and December 31, 2020, respectively		(393,829)		0
Additional paid-in capital		1,261,845		1,260,900
Accumulated deficit		(538,931)		(722,002)
Total Innoviva stockholders’ equity		329,780		539,912
Noncontrolling interest		63,965		67,925
Total stockholders’ equity		393,745		607,837
Total liabilities and stockholders’ equity	$	789,150	$	999,570

*	Consolidated balance sheet as of December 31, 2020 has been derived from audited consolidated financial statements.

See accompanying notes to ~~condensed~~ consolidated financial statements.

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

INNOVIVA, INC.

~~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 June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Royalty revenue from a related party, net of amortization of capitalized fees paid to a related party of $3,456 in the three months ended June 30, 2021 and 2020, and $6,912 in the six months ended June 30, 2021 and 2020	$	100,806	$	68,946	$	186,324	$	147,624
Revenue from collaborative arrangements with a related party		0		10,000		0		10,000
Total net revenue		100,806		78,946		186,324		157,624

Operating expenses:
Research and development		38		559		87		559
General and administrative		4,228		2,596		10,214		5,159
Total operating expenses		4,266		3,155		10,301		5,718
Income from operations		96,540		75,791		176,023		151,906

Other income (expense), net		(951)		30		(1,384)		98
Interest income		20		158		50		1,460
Interest expense		(4,745)		(4,561)		(9,439)		(9,077)
Changes in fair values of equity and long-term investments, net		45,315		46,698		100,360		68,613
Income before income taxes		136,179		118,116		265,610		213,000
Income tax expense, net		25,333		19,891		45,069		35,823
Net income		110,846		98,225		220,541		177,177
Net income attributable to noncontrolling interest		21,898		21,381		37,470		34,896
Net income attributable to Innoviva stockholders	$	88,948	$	76,844	$	183,071	$	142,281

Basic net income per share attributable to Innoviva stockholders	$	1.01	$	0.76	$	1.93	$	1.40
Diluted net income per share attributable to Innoviva stockholders	$	0.90	$	0.69	$	1.73	$	1.27

Shares used to compute Innoviva basic and diluted net income per share:
Shares used to compute basic net income per share		88,423		101,324		94,858		101,280
Shares used to compute diluted net income per share		100,639		113,545		107,096		113,527

See accompanying notes to ~~condensed~~ consolidated financial statements.

Table of Contents

INNOVIVA, INC.

~~INNOVIVA, INC.~~

~~CONDENSED~~ CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Net income

$
23,767

$
15,033

$
75,758

$
34,065

Other comprehensive (loss) income:

Unrealized (loss) gain on marketable securities, net

(3
)
2

(4
)
11

Less: realized gain on marketable securities, net

—

—

—

(1
)
Comprehensive income

$
23,764

$
15,035

$
75,754

$
34,075


		Three Months Ended June 30,			Six Months Ended June 30,
	2021		2020		2021		2020
Net income	$	110,846	$	98,225	$	220,541	$	177,177
Unrealized loss on marketable securities, net		0		(35)		0		(29)
Comprehensive income		110,846		98,190		220,541		177,148
Comprehensive income attributable to noncontrolling interest		21,898		21,381		37,470		34,896
Comprehensive income attributable to Innoviva stockholders	$	88,948	$	76,809	$	183,071	$	142,252

See accompanying notes to ~~condensed~~ consolidated financial statements.

Table of Contents

INNOVIVA, INC.

~~INNOVIVA, INC.~~

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

(In thousands)

(Unaudited)

Nine Months Ended September 30,

2017

2016

Cash flows from operating activities

Net income

$
75,758

$
34,065

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

Depreciation and amortization

10,487

10,458

Stock-based compensation

7,406

6,423

Amortization of debt discount and issuance costs

2,953

2,138

Loss (gain) on extinguishment of debt

7,256

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

(6
)
(8
)
Amortization of lease guarantee

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

—

855

Realized gain on sale of marketable securities, net

—

(1
)
Changes in operating assets and liabilities:

Receivables from collaborative arrangements

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

327

280

Other assets

—

(22
)
Accounts payable

501

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

(606
)
220

Accrued interest payable

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

13

2

Deferred revenue

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

93,890

39,898

Cash flows from investing activities

Maturities of marketable securities

44,387

52,101

Purchases of marketable securities

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

—

2,995

Purchases of property and equipment

—

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

2,644

(27,900
)

Cash flows from financing activities

Proceeds from senior secured term loans

250,000

—

Proceeds from issuance of convertible senior notes due 2025

192,500

—

Payments of debt issuance costs and debt discount

(12,803
)
—

Payments of principal on non-recourse notes due 2029

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

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

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

188

341

Repurchase of common stock

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

—

(8,095
)
Proceeds from capped-call options

—

391

Net cash used in financing activities

(76,133
)
(77,984
)

Net increase (decrease) in cash and cash equivalents

20,401

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

118,016

159,180

Cash and cash equivalents at end of period

$
138,417

$
93,194

Supplemental disclosure of cash flow information

Cash paid for interest

$
36,556

$
37,729


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

Table of Contents


	Six Months ended June 30, 2020
				Additional		Accumulated Other						Total
	Common Stock			Paid-In		Comprehensive		Accumulated		Noncontrolling		Stockholders’
	Shares	Amount		Capital		Income (Loss)		Deficit		Interest		Equity
Balance as of December 31, 2019	101,288	$	1,013	$	1,258,859	$	27	$	(946,404)	$	28,621	$	342,116
Distributions to noncontrolling interest	0		0		0		0		0		(15,810)		(15,810)
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding	32		0		170		0		0		0		170
Stock-based compensation	0		0		435		0		0		0		435
Net income	0		0		0		0		65,437		13,515		78,952
Other comprehensive income	0		0		0		6		0		0		6
Balance as of March 31, 2020	101,320	$	1,013	$	1,259,464	$	33	$	(880,967)	$	26,326	$	405,869
Equity activity of noncontrolling interest from a consolidated variable interest entity	0		0		0		0		0		350		350
Distributions to noncontrolling interest	0		0		0		0		0		(12,152)		(12,152)
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding	72		2		178		0		0		0		180
Stock-based compensation	0		0		375		0		0		0		375
Net income	0		0		0		0		76,844		21,381		98,225
Other comprehensive income	0		0		0		(35)		0		0		(35)
Balance as of June 30, 2020	101,392	$	1,015	$	1,260,017	$	(2)	$	(804,123)	$	35,905	$	492,812

See accompanying notes to ~~condensed~~ consolidated financial statements.

Table of Contents

INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended June 30,
	2021		2020
Cash flows from operating activities
Net income	$	220,541	$	177,177
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes		45,069		35,823
Depreciation and amortization		6,918		6,921
Stock-based compensation		921		810
Amortization of debt discount and issuance costs		4,472		4,110
Amortization of discount on short-term investments		0		(336)
Amortization of lease guarantee		0		(135)
Changes in fair values of equity and long-term investments, net		(99,046)		(68,613)
Other non-cash items		16		6
Changes in operating assets and liabilities:
Receivables from collaborative arrangements		(10,331)		(2,975)
Prepaid expenses and other current assets		906		317
Accounts payable		(36)		185
Accrued personnel-related expenses and other accrued liabilities		(709)		(15)
Net cash provided by operating activities		168,721		153,275
Cash flows from investing activities
Maturities of marketable securities		0		82,000
Purchases of marketable securities		0		(12,943)
Purchases of equity and long-term investments		(46,373)		(60,000)
Distributions of equity and long-term investments		110,000		0
Purchases of property and equipment		0		(13)
Net cash provided by investing activities		63,627		9,044
Cash flows from financing activities
Repurchase of common stock		(394,149)		0
Distributions to noncontrolling interest		(41,446)		(27,962)
Repurchase of shares to satisfy tax withholding		(35)		(72)
Proceeds from issuances of common stock, net		60		422
Net proceeds from the issuance of variable interest entity’s equity		0		344
Net cash used in financing activities		(435,570)		(27,268)
Net increase (decrease) in cash and cash equivalents		(203,222)		135,051
Cash and cash equivalents at beginning of period		246,487		278,096
Cash and cash equivalents at end of period	$	43,265	$	413,147
Supplemental disclosure of cash flow information
Cash paid for interest	$	4,967	$	4,967

See accompanying notes to consolidated financial statements

Table of Contents

INNOVIVA, INC.

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of Operations and Summary of Significant Accounting Policies

Description of Operations

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

Basis of Presentation

The accompanying unaudited ~~condensed~~ consolidated financial statements have been prepared in accordance with ~~U.S.~~accounting principles generally accepted ~~accounting principles~~in the United States of America (“US GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In our opinion, the unaudited ~~condensed~~ consolidated financial statements have been prepared on the same basis as audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of our financial position, results of operations, comprehensive income and cash flows. The interim results are not necessarily indicative of the results of operations to be expected for the year ending December 31, ~~2017~~2021 or any other period.

The accompanying unaudited ~~condensed~~consolidated financial statements include the accounts of Innoviva, our wholly-owned subsidiaries and certain variable interest entities for which we are the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income (loss) attributable to noncontrolling interest in our unaudited consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2020 filed with the Securities and Exchange Commission (“SEC”) on February ~~28, 2017.~~25, 2021 (“2020 Form 10-K”).

Variable Interest ~~Entity~~

Entities

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

Table of Contents

Equity Investments

We ~~consolidate the financial results~~invest from time to time in equity securities of ~~TRC, which~~private or public companies. If we determine that we have ~~determined to be a~~control over these companies under either voting or VIE ~~because~~models, we include them in our consolidated financial statements. If we determine that we do not have control over these companies under either voting or VIE models, we then determine if we have ~~the power~~an ability to ~~direct the economically~~exercise significant ~~activities of TRC and the obligation to absorb losses of,~~influence via voting interests, board representation or ~~the right to receive benefits from, TRC. The financial position and results of operations of TRC are not material~~other business relationships.

We may account for the ~~periods presented.~~

~~Recently Issued~~equity investments where we exercise significant influence using either an equity method of accounting or at fair value by electing the fair value option under Accounting ~~Pronouncements Not Yet~~Standards Codification (“ASC”) Topic 825, Financial Instruments. If the fair value option is applied to an investment that would otherwise be accounted for under the equity method, we apply it to all our financial interests in the same entity (equity and debt, including guarantees) that are eligible items. All gains and losses from fair value changes, unrealized and realized, are presented as changes in fair values of equity and long-term investments, net on the consolidated statements of income.

If we conclude that we do not have an ability to exercise significant influence over an investee, we may elect to account for an equity security without a readily determinable fair value using the measurement alternative described in ASC Topic 825. This measurement alternative allows us to measure the equity investment at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

Accounting Pronouncement Adopted by the Company

In ~~April 2016,~~December 2019, the Financial Accounting Standards Board ~~(the “FASB”~~(“FASB”) issued Accounting Standards Update (“ASU”) ~~2016-10 to clarify~~No. 2019-12, “Income Taxes (Topic 740): Simplifying the ~~implementation guidance on licensing and the identification of performance obligations consideration included in ASU 2014-09,~~ ~~Revenue from Contracts with Customers~~Accounting for Income Taxes” ~~(“ASU 2014-09”)~~, which is ~~also known as ASC 606, was issued in May 2014 and outlines a single comprehensive model for entities~~intended to ~~use in~~simplify various aspects related to accounting for ~~revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In March 2016,~~income taxes by removing certain exceptions to the ~~FASB issued ASU 2016-08 to provide amendments to clarify the implementation guidance on principal versus agent considerations. ASU 2014-09 guidance~~general principles in Topic 740. The pronouncement is effective for ~~the~~ fiscal years, and for interim ~~reporting~~ periods within those fiscal years, beginning after December 15, ~~2017 (as amended through ASU 2015-14 issued in August 2015),~~2020, with early adoption permitted. Companies can elect a full retrospective method to recast prior-period financial statements or a modified retrospective method to recognize the cumulative effect as an adjustment to the retained earnings in the initial year. We ~~plan to implement the standard in the first quarter of 2018 on a modified retrospective basis and do~~adopted ASU 2019-12 effective January 1, 2021. The adoption did not ~~anticipate that this standard will~~ have a material impact on our ~~accounting for royalty revenues. We are continuing to assess the potential impacts of the standard on the accounting for other revenues associated with the collaboration agreements.~~consolidated financial statements.

In ~~February 2016,~~October 2020, the FASB issued ASU ~~2016-02,~~2020-10, ~~Leases~~~~, which supersedes the lease recognition requirements in ASC Topic 840,~~ ~~Leases~~Codification Improvements. ~~The standard~~This ASU improves the codification by ensuring that all guidance that requires or provides an option for an entity to ~~recognize right-of-use assets and lease liabilities arising from a lease for both financing and operating leases~~provide information in the ~~consolidated balance sheets but recognize~~notes to financial statements is codified in the ~~impact on~~disclosure section of the ~~consolidated statement of operations and cash flows~~codification. The ASU also clarifies various topics in ~~a similar manner under current GAAP.~~the codification so that entities can apply guidance more consistently. The ~~standard also requires additional qualitative and quantitative disclosures. The standard~~ASU is effective for ~~us at the~~fiscal years beginning after December 15, 2020. We adopted ASU 2020-10 effective January 1, ~~2019 and requires transition under~~2021. The adoption did not have a ~~modified retrospective method. The most significant~~material 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~~financial statements.

Recently Issued Accounting Standards or Updates Not Yet Adopted

In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which is intended to simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470-20 for convertible instruments. The ASU is effective for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years with early adoption permitted. We are currently in the process of ~~operations and cash flows will not materially be affected by~~evaluating the ~~adoption~~effects of the ~~new standard.~~provisions of ASU 2020-06 on our consolidated financial statements.

2. Net Income Per Share

Basic net income per share attributable to Innoviva stockholders is computed by dividing net income attributable to Innoviva stockholders by the weighted-average number of shares of common stock outstanding. Diluted net income per share attributable to Innoviva stockholders is computed by dividing net income ~~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”) using the ~~if-converted~~if converted method.

Table of Contents

Our convertible senior notes due 2025 ~~Notes~~(the “2025 Notes”) are convertible, based on the applicable conversion rate, into cash, shares of our common stock or a combination thereof, at our election. Our current intent is to settle the principal amount of the 2025 Notes in cash upon conversion. The impact of the assumed conversion premium to diluted net income per share is computed using the treasury stock method. As the average market price per share of our common stock as reported on The ~~NASDAQ~~Nasdaq Global Select Market was lower than the initial conversion price of $17.26 per share, there was no0 dilutive effect of the assumed conversion premium for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2021 and 2020, respectively.
The following table shows the computation of basic and diluted net income per share for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 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

2020:

Three Months Ended June 30,

Six Months Ended June 30,
(In thousands except per share data)

2021

2020

2021

2020
Numerator:

Net income attributable to Innoviva stockholders, basic

$
88,948

$
76,844

$
183,071

$
142,281
Add: interest expense on 2023 Notes

1,163

1,184

2,367

2,364
Net income attributable to Innoviva stockholders, diluted

$
90,111

$
78,028

$
185,438

$
144,645
Denominator:

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

88,423

101,324

94,858

101,280
Dilutive effect of 2023 Notes

12,189

12,189

12,189

12,189
Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan

27

32

49

58
Weighted-average shares used to compute diluted net income per share attributable to Innoviva stockholders

100,639

113,545

107,096

113,527
Net income per share attributable to Innoviva stockholders

Basic

$
1.01

$
0.76

$
1.93

$
1.40
Diluted

$
0.90

$
0.69

$
1.73

$
1.27

Anti-Dilutive Securities
The following common stock equivalents were not included in the computation of diluted net income per share because their effect was anti-dilutive:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended June 30,

Six Months Ended June 30,
(In thousands)

2017

2016

2017

2016


2021

2020

2021

2020
Outstanding options and awards granted under equity incentive plan and employee stock purchase plan

1,779

3,881

2,287

4,216

1,093

1,154

1,126

1,124
Shares issuable upon conversion of 2023 Notes

—

—

—

12,635

1,779

3,881

2,287

16,851

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

Table of Contents

Net Revenue from Collaborative Arrangements
Net revenue recognized under our GSK Agreements was as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended June 30,

Six Months Ended June 30,
(In thousands)

2017

2016

2017

2016


2021

2020

2021

2020
Royalties from a related party - RELVAR/BREO

$
44,604

$
31,917

$
137,938

$
87,686

$
65,916

$
45,570

$
122,306

$
101,719
Royalties from a related party - ANORO

7,274

4,627

19,464

11,976

11,960

11,199

22,460

21,049
Royalties from a related party - TRELEGY

26,386

15,633

48,470

31,768
Total royalties from a related party

51,878

36,544

157,402

99,662

104,262

72,402

193,236

154,536
Less: amortization of capitalized fees paid to a related party

(3,456
)
(3,456
)
(10,368
)
(10,368
)

(3,456)

(3,456)

(6,912)

(6,912)
Royalty revenue

48,422

33,088

147,034

89,294

100,806

68,946

186,324

147,624
Strategic alliance - MABA program license

221

221

663

663

Strategic alliance - MABA program

0

10,000

0

10,000
Total net revenue from GSK

$
48,643

$
33,309

$
147,697

$
89,957

$
100,806

$
78,946

$
186,324

$
157,624

4. Consolidated Entities
We consolidate the financial results of TRC and Pulmoquine Therapeutics, Inc. (“Pulmoquine”), which we have determined to be VIEs. As we have the power to direct the economically significant activities of these entities and the obligation to absorb losses of, or the right to receive benefits from them, we are the primary beneficiary of the entities. We also consolidate the financial results of ISP Fund LP (the “Partnership”), our partnership with Sarissa Capital Management LP (“Sarissa Capital”), as we have determined that the Partnership is a VIE and we are its primary beneficiary.
Theravance Respiratory Company, LLC
The primary source of revenue for TRC is the royalties generated from the net sales of TRELEGY^® ELLIPTA^® by GSK. As of June 30, 2021, TRC held equity investments in InCarda Therapeutics, Inc. (“InCarda”) and ImaginAb, Inc. (“ImaginAb”). Refer to Note 5, “Financial Instruments and Fair Value Measurements,” for more information.
The summarized financial information for TRC is presented as follows:
Balance sheets


June 30,

December 31,
(In thousands)

2021

2020
Assets


Cash and cash equivalents

$
26,128

$
38,081
Receivables from collaborative arrangements

26,386

24,946
Prepaid expenses and other current assets

1

0
Equity and long-term investments

22,594

16,959
Total assets

75,109

79,986

Liabilities and LLC Members’ Equity


Current liabilities

274

508
LLC members’ equity

74,835

79,478
Total liabilities and LLC members’ equity

$
75,109

$
79,986

Table of Contents

~~LABA Collaboration~~Income statements

Three Months Ended June 30,

Six Months Ended June 30,
(In thousands)

2021

2020

2021

2020
Royalty revenue from a related party

$
26,386

$
15,633

$
48,470

$
31,768
Strategic alliance - MABA program

0

10,000

0

10,000
Total net revenue

26,386

25,633

48,470

41,768
Operating expenses

336

480

3,617

751
Income from operations

26,050

25,153

44,853

41,017
Other income, net

0

1

0

37
Changes in fair values of equity and long-term investments

(254)

0

(737)

0
Net income

$
25,796

$
25,154

$
44,116

$
41,054

Pulmoquine Therapeutics, Inc.
In April 2020, we purchased 5,808,550 shares of Series A preferred stock of Pulmoquine for $5.0 million in cash and held a majority voting interest. Pulmoquine is a biotechnology company focused on the research and development of an aerosolized formulation of hydroxychloroquine to treat respiratory infections. As of June 30, 2021 and December 31, 2020, Pulmoquine’s total assets, mainly attributable to cash and cash equivalents, were $3.2 million and $3.5 million, respectively. Pulmoquine does not currently generate revenue. Total operating expense was de minimis and $0.2 million for the three months and six months ended June 30, 2021, respectively. Total operating expense was $0.6 million for the three and six months ended June 30, 2020.
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 ~~result~~limited partner. The general partner of the ~~launch~~Partnership (“General Partner”) is an affiliate of Sarissa Capital.
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. Pursuant to the letter agreement entered into between Strategic Partners, the Partnership and ~~approval~~Sarissa Capital Fund GP LP on May 20, 2021, Strategic Partners is obligated to make additional capital contributions to the Partnership in an aggregate amount equal to the amount of ~~RELVAR~~®~~/BREO~~® ~~ELLIPTA~~®the distribution ($110.0 million) prior to March 31, 2022. The capital contributions will then be subject to a 36-month lock up period from the contribution date.
As of June 30, 2021, we continued to hold 100% of the economic interest of the Partnership. As of June 30, 2021 and ~~ANORO~~® ~~ELLIPTA~~®December 31, 2020, total assets of the Partnership were $219.0 million and $299.3 million, respectively, of which all were attributable to equity and long-term investments. During the three and six months ended June 30, 2021, the Partnership incurred $0.9 million and $1.3 million, respectively, of investment-related expenses, net of investment-related income. During the three and six months ended June 30, 2021, the Partnership recorded net unrealized and realized gains of $25.2 million and $31.0 million, respectively, as changes in fair values of equity and long-term investments, net on the consolidated statements of income.

5. Financial Instruments and Fair Value Measurements
Equity Investment in Armata
During the first quarter of 2020, Innoviva acquired 8,710,800 shares of common stock and an equal number of warrants of Armata Pharmaceuticals, Inc. (“Armata”) for $25.0 million in cash. Armata is a clinical stage biotechnology company focused on precisely targeted bacteriophage therapeutics for antibiotic-resistant infections.
On January 26, 2021, Innoviva Strategic Opportunities LLC (“ISO”), our wholly owned subsidiary, entered into a securities purchase agreement with Armata to acquire 6,153,847 shares of Armata common stock and warrants to purchase 6,153,847 additional shares of Armata common stock for approximately $20.0 million. The investment was closed in 2 tranches on January 26, 2021 and March 17, 2021. The investments support Armata’s ongoing advancement of its bacteriophage development programs. The additional investment in the ~~U.S., Japan~~first quarter of 2021 increased Innoviva and ~~Europe, we paid milestone fees~~ISO’s combined ownership to ~~GSK totaling $220.0 million during~~59.6% as of March 31, 2021. Armata entered into a voting agreement with the ~~year ended~~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

Table of Contents

49.5% of the total number of shares of Armata’s common stock issued and outstanding as of the record date for voting on the matters related to election or removal of Armata’s board members. Currently, 3 of the 7 members of Armata’s board of directors are also members of the board of directors of Innoviva. As of June 30, 2021 and December 31, ~~2014. Although~~2020, we owned approximately 59.5% and 46.6%, respectively, of Armata’s common stock.

The investment in Armata provides Innoviva and ISO the ability to have ~~no further milestone payment obligations to GSK pursuant to~~significant influence, but not control over Armata’s operations. Based on our evaluation, we determined that Armata is a VIE, but Innoviva and ISO are not the ~~LABA Collaboration Agreement, we~~primary beneficiary of the VIE. We continue to elect the fair value option to account for both Armata’s common stock and warrants. The fair value of Armata’s common stock is measured based on its closing market price. The warrants purchased in 2020 and 2021 have ~~ongoing participation~~an exercise price of $2.87 and $3.25 per share, respectively, are exercisable immediately within five years from the issuance date of the warrants and include a cashless exercise option. We use the Black-Scholes-Merton pricing model to estimate the fair value of these warrants with the following input assumptions: Armata’s closing market price on the valuation date, the risk-free interest rate computed based on the U.S. Treasury yield, the remaining contractual term as the expected term, and the expected stock price volatility calculated based on the historical volatility of the common stock of Armata and its peer companies.

As of June 30, 2021, the fair values of Armata’s common stock and warrants were estimated at $59.0 million and $41.9 million, respectively. As of December 31, 2020, the fair values of Armata’s common stock and warrants were estimated at $26.0 million and $18.0 million, respectively. The total fair value of both financial instruments in the amount of $100.9 million and $44.0 million was recorded as equity and long-term investments on the consolidated balance sheets as of June 30, 2021 and December 31, 2020, respectively. During the three and six months ended June 30, 2021, we recorded $24.3 million unrealized loss and $36.9 million unrealized gains, respectively, as changes in fair values of equity and long-term investments, net on the consolidated statements of income. We recorded $13.4 million and $35.3 million of unrealized gains for the three and six months ended June 30, 2020, respectively.

Equity Investment in Entasis

During the second quarter of 2020, we purchased 14,000,000 shares of common stock as well as warrants to purchase 14,000,000 additional shares of common stock of Entasis Therapeutics, Inc. (“Entasis”) for approximately $35.0 million in cash. Entasis is a clinical-stage biotechnology company focused on the discovery and development of novel antibacterial products.

During the third quarter of 2020, we purchased 4,672,897 shares of Entasis common stock as well as warrants to purchase 4,672,897 additional shares of its common stock for approximately $12.5 million in cash. Innoviva has a right to designate 2 members to Entasis’ board. As of June 30, 2021 and the date hereof, 0 Innoviva designees are serving on Entasis’ six-member board.

On May 3, 2021, ISO entered into a securities purchase agreement with Entasis to acquire 10,000,000 shares of Entasis common stock and warrants to purchase 10,000,000 additional shares of Entasis common stock for approximately $20.0 million. The investment was closed in 2 tranches on May 3, 2021 and June 11, 2021. This investment supports the continued development of Entasis’ novel pipeline of pathogen-targeted antibacterial product candidates. The additional investment increased Innoviva and ISO’s combined ownership, such that as of June 30,2021, we owned approximately 60.6% of Entasis’ common stock. As of December 31, 2020, we owned approximately 51.0% of Entasis’ common stock.

The investment in Entasis provides Innoviva the ability to have significant influence, but not control over Entasis’ operations. Based on our evaluation, we determined that Entasis is a VIE, but Innoviva is not the primary beneficiary of the VIE. We elected the fair value option to account for both Entasis’s common stock and warrants at fair value. The fair value of Entasis’ common stock is measured based on its closing market price at each balance sheet date. The warrants have an exercise price of $2.50 per share and $2.675 per share for those warrants acquired in the second and third quarter of 2020, respectively. The warrants acquired in the second quarter of 2021 have an exercise price of $2.00 per share. All of the warrants are exercisable immediately within five years from the issuance date of the warrants and include a cashless exercise option. We use the Black-Scholes-Merton pricing model to estimate the fair value of these warrants.

As of June 30, 2021, the fair values of Entasis’s common stock and warrants were estimated at $76.6 million and $54.7 million, respectively. As of December 31, 2020, the fair values of Entasis’s common stock and warrants were estimated at $46.1 million and $31.9 million, respectively. The total fair value of both financial instruments in the amount of $131.3 million and $78.0 million was recorded as equity and long-term investments on the consolidated balance sheets as of June 30, 2021 and December 31, 2020, respectively. We recorded $44.7 million and $33.2 million unrealized gains as changes in fair values of equity and long-term

Table of Contents

investments, net on the consolidated statements of income, for the three and six months ended June 30, 2021, respectively. We recorded $33.3 million of unrealized gains for the three and six months ended June 30, 2020.

Equity Investment in InCarda

In October, 2020, TRC purchased 20,469,432 shares of Series C preferred stock and warrants to purchase 5,117,358 additional shares of Series C preferred stock of InCarda Therapeutics, Inc. (“InCarda”) for $15.0 million. $0.8 million was incurred for investment due diligence costs and recorded as part of the ~~collaboration, including joint steering~~equity investment on the consolidated balance sheets. InCarda is a privately held biopharmaceutical company focused on developing inhaled therapies for cardiovascular diseases. As of June 30, 2021 and ~~joint project committees that are expected to continue over the life~~as of the ~~agreements.~~ date hereof, 1 of InCarda’s 8 board members is designated by TRC. As of June 30, 2021 and December 31, 2020, TRC held 13.0% and 13.4%, respectively, of InCarda’s outstanding equity.

The ~~milestone fees paid~~investment in InCarda does not provide TRC the ability to ~~GSK were recognized as capitalized fees paid to~~control or have significant influence over InCarda’s operations. Based on our evaluation, we determined that InCarda is a ~~related party, which are being amortized over their estimated useful lives commencing upon~~VIE, but TRC is not the ~~commercial launch~~primary beneficiary of the ~~product.~~ VIE. We account for our investment in the Series C preferred shares in InCarda using the measurement alternative. Under the measurement alternative, the equity investment is initially recorded at its allocated cost, but the carrying value may be adjusted through earnings upon an impairment or when there is an observable price change involving the same or a similar investment with the same issuer. As of June 30, 2021 and December 31, 2020, we recorded $15.8 million from our investment in InCarda’s Series C preferred stock as equity and long-term investments on the consolidated balance sheets. There was 0 impairment or other change to the value of InCarda’s Series C preferred stock as of June 30, 2021 and December 31, 2020.

The ~~amortization expense is~~warrants are recorded at fair value and subject to remeasurement at each balance sheet date. The warrants are exercisable immediately with an exercise price of $0.7328 per share and expire on October 6, 2021, one year from the issuance date. We use the Black-Scholes-Merton pricing model to estimate the fair value of the warrants with the following input assumptions: the exercise price of the warrants, the risk-free interest rate computed based on the U.S. Treasury yield, the remaining contractual term as the expected term, and the expected stock price volatility calculated based on the historical volatility of the common stock of its peer companies. As of June 30, 2021 and December 31, 2020, the fair value of InCarda’s warrants was estimated at $0.4 million and $1.1 million, respectively, and recorded as equity and long-term investments on the consolidated balance sheets. During the three and six months ended June 30, 2021, we recorded $0.3 million and $0.7 million, respectively, of unrealized loss from fair value changes in our investment in InCarda’s warrants as changes in fair values of equity and long-term investments, net on the consolidated statements of income.

Equity Investment in ImaginAb

On March 18, 2021, TRC entered into a ~~reduction~~securities purchase agreement with ImaginAb, Inc. to purchase 4,051,724 shares of ImaginAb Series C preferred stock for $4.7 million. On the same day, TRC also entered into a securities purchase agreement with one of ImaginAb’s common stockholders to purchase 4,097,157 shares of ImaginAb common stock for $1.3 million. ImaginAb is a privately held biotechnology company focused on clinically managing cancer and autoimmune diseases via molecular imaging. $0.4 million was incurred for investment due diligence costs and execution and recorded as part of the equity investment on the consolidated balance sheets. As of the date hereof, 1 of ImaginAb’s 5 board members is designated by TRC. As of June 30, 2021, TRC held 12.5% of ImaginAb equity ownership.

The investment in ImaginAb does not provide TRC the ability to control or have significant influence over ImaginAb’s operations. Based on our evaluation, we determined that ImaginAb is a VIE, but TRC is not the primary beneficiary of the VIE. Because ImaginAb’s equity securities are not publicly traded and do not have a readily determinable fair value, we have accounted for our investment in ImaginAb’s Series C preferred stock and common stock using the measurement alternative. Under the measurement alternative, the equity investment is initially recorded at its allocated cost, but the carrying value may be adjusted through earnings upon an impairment or when there is an observable price change involving the same or a similar investment with the same issuer. As of June 30, 2021, $6.4 million was recorded as equity and long-term investments on the consolidated balance sheets. There was no change to the ~~royalties from GSK.~~

~~We are entitled to receive annual royalties from GSK on sales~~value of ~~RELVAR~~®~~/BREO~~® ~~ELLIPTA~~®our investment in ImaginAB’s equity securities as ~~follows: 15% on the first $3.0 billion~~ of ~~annual global net sales and 5% for all annual global net sales above $3.0 billion. Sales~~June 30, 2021.

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

~~We are also entitled to 15% of any future royalty payments made by GSK under its agreements originally entered into with us, and since assigned to TRC, including~~ ~~TRELEGY~~® ~~ELLIPTA~~®.
~~GSK Contingent Payments and Revenue~~
The potential future contingent payments receivable related to the MABA program of up to $363.0 million are not deemed substantive milestones due to the fact that the achievement of the event underlying the payment predominantly relates to GSK’s performance of future development, manufacturing and commercialization activities for product candidates after licensing the program. ~~We are entitled to 15% of any contingent payments payable by GSK through our ownership interest in TRC.~~
4. Available-for-Sale Securities ~~and Fair Value Measurements~~
~~Available-for-Sale Securities~~
The estimated fair value of available-for-sale securities 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, 2017

June 30, 2021

Gross

Gross

Unrealized

Unrealized

Estimated
(In thousands)

Amortized Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value


Amortized Cost

Gains

Losses

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(1)

118,163

—

—

118,163

$
2,843

$
0

$
0

$
2,843
Total

$
162,583

$
—

$
(3
)
$
162,580

$
2,843

$
0

$
0

$
2,843
(1) Money market funds were included in cash and cash equivalents on the consolidated balance sheets.

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

December 31, 2020

Gross

Gross

Unrealized

Unrealized

Estimated
(In thousands)

Amortized Cost

Gains

Losses

Fair Value
Money market funds ⁽¹⁾

$
204,808

$
0

$
0

$
204,808
Total

$
204,808

$
0

$
0

$
204,808
(1) Money market funds were included in cash and cash equivalents on the consolidated balance sheets.

~~As of~~ ~~September 30, 2017, all of the~~
There was 0 credit loss to our available-for-sale securities ~~had contractual maturities within one year~~as of June 30, 2021 and ~~the weighted average maturity of marketable securities was approximately four months.~~December 31, 2020.
Fair Value Measurements
Our available-for-sale securities and equity investments are measured at fair value on a recurring basis and our debt is carried at ~~the~~ amortized cost basis. The estimated fair values were as follows:

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

Estimated Fair Value Measurements as of June 30, 2021 Using:

Quoted Price in Active

Significant Other

Significant

Markets for

Observable

Unobservable

Types of Instruments

Quoted Price in
Active Markets
for Identical
Assets

Significant Other
Observable
Inputs

Significant
Unobservable
Inputs

Identical Assets

Inputs

Inputs

(In thousands)

Level 1

Level 2

Level 3

Total


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

$
2,843

$
0

$
0

$
2,843
Investments held by ISP Fund LP ⁽¹⁾

218,978

0

0

218,978
Equity investment - Armata Common Stock

59,013

0

0

59,013
Equity investment - Armata Warrants

0

41,874

0

41,874
Equity investment - Entasis Common Stock

76,557

0

0

76,557
Equity investment - Entasis Warrants

0

54,660

0

54,660
Equity investment - InCarda Warrants

0

0

410

410
Total assets measured at estimated fair value

$
118,163

$
44,417

$
—

$
162,580

$
357,391

$
96,534

$
410

$
454,335
Liabilities

Term B Loan

$
—

$
250,000

$
—

$
250,000

Debt

2023 Notes

—

234,658

—

234,658

$
0

$
246,298

$
0

$
246,298
2025 Notes

—

202,125

—

202,125

0

210,185

0

210,185
Total fair value of liabilities

$
—

$
686,783

$
—

$
686,783

Total fair value of debt

$
0

$
456,483

$
0

$
456,483
(1) The investments held by ISP Fund LP consisted of equity investments and money market funds are subject to a 36-month lock-up period from our initial contribution date, December 11, 2020.

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

Table of Contents

Estimated Fair Value Measurements as of December 31, 2020 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

$
204,808

$
0

$
0

$
204,808
Investments held by ISP Fund LP ⁽¹⁾

299,288

0

0

299,288
Equity investment - Armata Common Stock

25,958

0

0

25,958
Equity investment - Armata Warrants

0

18,049

0

18,049
Equity investment - Entasis Common Stock

46,122

0

0

46,122
Equity investment - Entasis Warrants

0

31,882

0

31,882
Equity investment - InCarda Warrants

0

0

1,147

1,147
Total assets measured at estimated fair value

$
576,176

$
49,931

$
1,147

$
627,254
Debt

2023 Notes

$
0

$
239,779

$
0

$
239,779
2025 Notes

0

206,135

0

206,135
Total fair value of debt

$
0

$
445,914

$
0

$
445,914
(1) The investments held by ISP Fund LP consisted of equity investments and money market funds are subject to a 36-month lock-up period from our initial contribution date, December 11, 2020.

The fair ~~value~~values of our ~~marketable securities~~equity investments in Armata and Entasis’s common stock and those investments held by ISP Fund LP are based on the quoted prices in active markets and are classified as Level 1 financial instruments. The fair values of the warrants of Armata and Entasis classified within Level 2 isare based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications.
InCarda’s warrants are classified as Level 3 financial instruments as InCarda’s securities are not publicly traded and the assumptions used in the valuation model for valuing the warrants are based on significant unobservable and observable inputs including those of publicly traded peer companies.
The fair ~~value~~values of our 2023 Notes ofand our 2025 Notes ~~and of our previously outstanding non-recourse fixed rate term notes due 2029 (the “2029 Notes”) is~~are based on recent trading prices of the respective instruments. The carrying amount of our initial senior secured term loan (the “Term B Loan”) before deducting debt issuance costs approximates fair value as the loan carries a variable interest rate that is tied to the LIBOR rate plus an applicable spread.

~~5. Capitalized Fees Paid to a Related Party~~
We capitalize fees paid to licensors related to agreements for approved products or commercialized products and amortize these fees on a straight-line basis over their estimated useful lives upon the commercial launch of the product. The estimated useful lives of these capitalized fees are based on a country-by-country 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 amortization of these capitalized fees is $49.8 million as of September 30, 2017.
6. Stock-Based Compensation
~~Performance-Contingent RSAs and RSUs~~
~~Since 2011, the~~Stock- Based Compensation Committee of our Board of Directors (the “Compensation Committee”) have approved grants of performance-contingent RSAs and RSUs to senior management and a non-executive officer. Generally, these awards have dual triggers of vesting based upon the achievement of certain performance goals by a pre-specified date, as well as a requirement for continued employment. Recognition 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 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 upon the achievement of certain performance conditions over a six-year timeframe from 2011 through December 31, 2016 and require continued service to the company. During the year ended December 31, 2016, we determined that the achievement of the requisite performance conditions was met. These awards remain subject to continued employment and will vest in November 2017. The ~~stock-based compensation cost for these awards was not material for the three and nine months ended September 30, 2017.~~
On January 14, 2016, the Compensation Committee approved and granted 282,394 RSAs and 46,294 RSUs to senior management. These awards include a market condition based on Total Shareholder Return (“TSR”) and a service condition that requires continued employment, 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 on September 30, 2018 for RSUs. Two-thirds of amounts earned at the end of year two will vest and be distributed on February 20, 2018, while the final one-third earned after two years as well as the catch-up amount earned will vest and be distributed on February 20, 2019 for RSAs and November 20, 2018 for RSUs. The actual 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 expense iswas included in the ~~condensed~~ consolidated statements of ~~operations~~income as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended June 30,

Six Months Ended June 30,
(In thousands)

2017

2016

2017

2016


2021

2020

2021

2020
Research and development

$
180

$
143

$
533

$
490

General and administrative

2,292

1,575

6,873

5,933

$
470

$
375

$
921

$
810
Total stock-based compensation expense

$
2,472

$
1,718

$
7,406

$
6,423

Table of Contents

As
Valuation Assumptions
Black-Scholes-Merton assumptions used in calculating the estimated value of ~~September 30, 2017, unrecognized stock-based compensation cost, including performance-contingent RSAs for which~~our stock options on the ~~performance milestones~~date of grant were ~~determined to be probable of achievement, was~~ as follows:

(In thousands)

Unrecognized
Compensation
Cost

Stock options

$
455

RSUs

1,623

RSAs

8,887

Performance-based RSAs

38

Market-based RSUs

360

Market-based RSAs

2,425

Total unrecognized compensation cost

$
13,788

Three Months Ended

Six Months Ended


June 30, 2021

June 30, 2021

Risk-free interest rate

1.07
%

1.07% - 1.13
%
Expected term (in years)

6

6

Volatility

45
%

45
%
Dividend yield

0
%

0
%
Weighted-average estimated fair value of stock options granted

$
5.80

$
5.61

There were 0 grants of stock options during the three and six months ended June 30, 2020.

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

June 30,

December 31,
(In thousands)

2021

2020
2023 Notes

$
240,984

$
240,984
2025 Notes

192,500

192,500
Total debt

433,484

433,484
Unamortized debt discount and issuance costs

(43,495)

(47,967)
Net long-term debt

$
389,989

$
385,517

~~Senior Secured Term Loans~~
On August 18, 2017, we entered into a credit agreement (the “Credit Agreement”) and completed a financing of $250.0 million Term B Loan, the net proceeds of which were used to repay the remaining balance of our 2029 Notes. The Term B Loan will mature on August 18, 2022. Two and one half percent (2.5%) 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. Interest on each term loan, at our option, may bear a varying rate of LIBOR plus 4.5% or a certain alternate base rate plus 3.5%. The initial term loan bears interest at a varying rate of three-month LIBOR plus 4.5%. Interest is due quarterly, beginning November 20, 2017.
The term loans under the Credit Agreement are unconditionally guaranteed by one of our wholly-owned subsidiaries, and will be required to be guaranteed by each of our subsequently acquired or organized direct and indirect restricted wholly-owned domestic subsidiaries whose assets or net revenues exceed 5% 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).
Additionally, the Credit Agreement stipulates an annual principal payment of a percentage of Excess Cash Flow (“ECF”) to repay the term loans. The percentage of the ECF scales upwards on a tiered basis from 0% to 50%, based on our leverage ratio, as calculated pursuant to the Credit Agreement, as of the last day of the applicable fiscal year. The first ECF application date will be measured as of the end of fiscal year 2018.
In connection with the financing of the Term B Loan, we incurred $2.5 million in original interest discount and $4.9 million in 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, the principal balance of the Term B Loan was $250.0 million, of which $25.0 million was classified as a short-term liability.
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. 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 are senior unsecured obligations and bear interest at a rate of 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 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 per share), representing a 30.0% conversion premium over the last reported sale price of the Company’s common stock on August 1, 2017, which was $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. 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 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.
In accordance with accounting guidance for debt with conversion and other options, we separately account for the liability and equity components of the 2025 Notes by allocating the proceeds between the liability component and the embedded conversion option (“equity component”) due to our ability to settle the conversion obligation of the 2025 Notes in cash, common stock or a combination of cash and common stock, at our option. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature using the income approach. The allocation was performed in a manner that reflected our non-convertible debt borrowing rate for similar debt. The equity component of the 2025 Notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the 2025 Notes and the fair value of the liability of the 2025 Notes on the date of issuance. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense using the effective interest ~~method.~~method over the term of the 2025 Notes. The equity component is not ~~re-measured~~remeasured as long as it continues to meet the conditions for equity classification.
Our outstanding 2025 Notes balances ~~as September 30, 2017~~ consisted of the following:

June 30,

December 31,
(In thousands)


2021

2020
Liability component


Principal

$
192,500

$
192,500

$
192,500
Debt discount and issuance costs, net

(69,895
)

(42,583)

(46,766)
Net carrying amount

$
122,605

$
149,917

$
145,734
Equity component

$
65,361

Equity component, net

$
65,361

$
65,361

~~In connection with the issuance~~18

Table 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.Contents

The following table sets forth total interest expense recognized related to the 2025 Notes ~~from~~for the ~~date of issuance through September~~three and six months ended June 30, ~~2017:~~2021 and 2020:

Three Months Ended June 30,

Six Months Ended June 30,
(In thousands)


2021

2020

2021

2020
Contractual interest expense

$
722

$
1,203

$
1,203

$
2,406

$
2,406
Amortization of debt issuance costs

69

162

149

321

294
Amortization of debt discount

834

1,951

1,786

3,862

3,535
Total interest expense

$
1,625

Total interest and amortization expense

$
3,316

$
3,138

$
6,589

$
6,235

~~Convertible Subordinated Notes Due 2023~~
In January 2013, we completed an underwritten public offering of $287.5 million aggregate principal amount of our unsecured 2023 Notes, which will mature on January 15, 2023. The financing raised proceeds, net of issuance costs, of approximately $281.2 million, less $36.8 million to purchase two privately-negotiated capped call option transactions in connection with the issuance of the notes. The 2023 Notes bear interest at the rate of 2.125% per year that is payable semi-annually in arrears in cash on January 15 and July 15 of each year, beginning on July 15, 2013. The principal balance of the 2023 Notes was reduced to $241.0 million by the partial conversion of $32.4 million in 2014 and repurchase of $14.1 million in the open market in 2016. As of September 30, 2017, 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 Notes issued by our wholly-owned subsidiary. The 2029 Notes were subject to an annual fixed interest rate 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 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. In connection with the redemptions of the debt, 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
The aggregate scheduled maturities of our long-term debt as of ~~September~~June 30, ~~2017 are~~2021 were as follows:

(In thousands)

Years ending December 31:

Remainder of 2017

$
6,250

2018

25,000

2019

25,000

2020

25,000

2121

25,000

2022

143,750

Thereafter

433,484

Total

$
683,484

(In thousands)


Years ending December 31:

Remainder of 2021

$
0
2022

0
2023

240,984
2024

0
2025

192,500
Total

$
433,484

8. Commitments and Contingencies
Operating Lease
Future minimum operating lease payments on our corporate headquarters as of June 30, 2021 were as follows:

(In thousands)


Years ending December 31:

Remainder of 2021

$
62
2022

109
Thereafter

0
Total

$
171

LegalProceedings
From time to time, the Company is involved in legal proceedings in the ordinary course of its business. Currently, we believe that no litigation or arbitration, either individually or in the aggregate, to which we are presently a party is likely to have a material adverse effect on our operating results or financial position.

8.9. Shareholders’ ~~Deficit~~Equity

~~In February 2017, we announced~~On May 20, 2021, the Company entered into 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~~share repurchase agreement with GSK to $150.0 million, through tender offers, open market purchases, private transactions, exchange offers or other means through December 31, 2017. In August 2017, as part of the 2017 Capital Return Plan, we used approximately $17.5 million of the net proceeds from the offering of our 2025 Notes to repurchase and retire 1,317,771buy back 32,005,260 shares of ~~our~~its common stock at ~~an average price of $13.28~~$12.25 per share ~~concurrently with the pricing~~from GSK, representing all of the ~~offering in privately negotiated transactions effected through one~~shares of ~~the initial purchasers~~common stock or other capital interests of Innoviva owned by GSK or its ~~affiliate, as our agent.~~
~~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 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.affiliates. The total consideration including related transaction fees was $394.1 million. The share repurchase closed 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, 2017,25, 2021, 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 submittedshares were transferred to the ~~Company’s insurance carrier for~~
~~reimbursement pursuant to~~Company. These shares are recorded as treasury stock on the ~~terms~~consolidated balance sheets.

Table 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.Contents

10. Income Taxes

~~The effective~~Provisional income tax ~~rate~~expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 was ~~0.05%,~~$25.3 million and $45.1 million, respectively, compared to ~~0.11%~~$19.9 million and $35.8 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.~~2020 respectively. The ~~difference between the consolidated~~Company’s effective income tax rate for the six months ended June 30, 2021 was 18.6%, compared to 17.0% for the same period in 2020. The income tax expense for the six months ended June 30, 2021 and 2020 was determined based upon estimates of the Company’s effective income tax rates in various jurisdictions. Our effective income tax rate for the six months ended June 30, 2021 was lower than the U.S. federal statutory income tax rate isof 21% due primarily ~~attributable~~ to ~~a change in valuation allowance against net deferred tax assets.~~non-deductible expenses and noncontrolling interest.

~~11. Subsequent Events~~

~~In October 2017, we entered into an accelerated share repurchase (ASR) agreement with a financial institution to repurchase $80 million~~

Table 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.~~Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The information in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve substantial risks, uncertainties, and assumptions. All statements contained herein that are not of historical fact, including, without limitation, statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, intentions, expectations, goals and objectives, may be forward-looking statements. The words “anticipates,” “believes,” “could,” “designed,” “estimates,” “expects,” “goal,” “intends,” “may,” “objective,” “plans,” “projects,” “pursue,” “will,” “would” and similar expressions (including the negatives thereof) are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions, expectations or objectives disclosed in our forward-looking statements and the assumptions underlying our forward-looking statements may prove incorrect. Therefore, you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially ~~differ~~ from the plans, intentions, expectations and objectives disclosed in the forward-looking statements that we make. ~~Factors~~All written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Important factors that we believe could cause actual results or events to differ materially from our forward-looking statements include, but are not limited to, ~~those~~risks related to: lower than expected future royalty revenue from respiratory products partnered with GSK; the commercialization of RELVAR^®/BREO^® ELLIPTA^®, ANORO^® ELLIPTA^® and TRELEGY^® ELLIPTA^® in the jurisdictions in which these products have been approved; substantial competition from products discovered, developed, launched and commercialized both by GSK and by other pharmaceutical companies; the strategies, plans and objectives of the Company (related to the Company’s growth strategy and corporate development initiatives beyond the Company’s existing portfolio); the timing, manner and amount of capital deployment, including potential capital returns to stockholders; risks related to the Company’s growth strategy; projections of revenue, expenses and other financial items and risks discussed ~~below~~ in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on February 25, 2021, (“2020 Form 10-K”), and Item 1A of Part II of our Quarterly Reports on Form 10-Q and below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Item 2 of Part I. All forward-looking statements in this ~~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 consolidated financial statements contained in this Quarterly Report on Form 10-Q. We also encourage you to read Item 1A of Part I of our 2020 Form 10-K and Item 1A of Part II of our Quarterly Reports on Form 10-Q entitled “Risk Factors,” which contain a more complete discussion of the risks and uncertainties associated with our business. In addition to the risks described above and in Item 1A of Part I of our 2020 Form 10-K and Item 1A of Part II of this report, other unknown or unpredictable factors also could affect our results. Therefore, the information in this report should be read together with other reports and documents that we file with the SEC from time to time, including on Form 10-K, Form 10-Q and Form 8-K, which may supplement, modify, supersede or update those risk factors. As a result of these factors, we cannot assure you that the forward-looking statements in this report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.

Table of Contents

OVERVIEW

~~OVERVIEW~~Executive Summary

~~Executive Summary~~

Innoviva, Inc. (“Innoviva”, the “Company”, the “Registrant” or “we”) and other similar pronouns) is ~~focused on bringing compelling new medicines to patients in areas~~a company with a portfolio of ~~unmet need by leveraging its significant expertise in the development, commercialization~~royalties and ~~financial management of bio-pharmaceuticals, to maximize the commercial potential of its~~other healthcare assets. Our royalty portfolio contains respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR^®/BREO^® ELLIPTA^® (fluticasone furoate/ vilanterol, “FF/VI”) ~~and~~, ANORO^® ELLIPTA^® (umeclidinium bromide/ vilanterol, “UMEC/VI”) and TRELEGY^® ELLIPTA^® (the combination FF/UMEC/VI). Under the Long-Acting ~~Beta~~2Beta2 Agonist (“LABA”) Collaboration Agreement, ~~and the Strategic Alliance Agreement with GSK (referred to herein collectively as the “GSK Agreements”), we are~~Innoviva is entitled to receive royalties from GSK on sales of RELVAR^®/BREO^® ELLIPTA^® as follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 ~~billion. For other products combined with a LABA~~billion; and royalties from the ~~LABA collaboration, such as ANORO™ ELLIPTA™~~sales of ANORO^® ELLIPTA^®, ~~royalties are~~which tier upward ~~tiering and~~at a range from 6.5% to 10%. Innoviva is also entitled to 15% of ~~any future~~royalty payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC (“TRC”), including TRELEGY^® ELLIPTA^® ~~(the~~ and any other product or combination ~~FF/UMEC/VI)~~of products that may be discovered or developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the “GSK Agreements”), which have been assigned to TRC other than RELVAR^®/BREO^® ELLIPTA^® and ANORO^® ELLIPTA^®.

Our company structure and organization are tailored to our focused activities of managing our respiratory assets partnered with GSK, ~~the commercial~~optimizing our operations 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.augmenting capital allocation. Our revenues consist of royalties ~~and potential milestone payments, if any,~~ from our respiratory partnership agreements with GSK.

Recent Highlights

· ~~GSK Net Sales:~~

· ~~Third quarter 2017~~
● GSK Net Sales:

●

Second quarter 2021 net sales of RELVAR^®/BREO^® ELLIPTA^® by GSK were $439.5 million, up 45% from $303.8 million in the same quarter of 2020, with $212.3 million in net sales from the U.S. market and $227.2 million from non-U.S. markets.

●

Second quarter 2021 net sales of ANORO^® ELLIPTA^® by GSK were $184.0 million, up 7% from $172.3 million in the same quarter of 2020, with $106.0 million net sales from the U.S. market and $78.0 million from non-U.S. markets.

●

Second quarter 2021 net sales of TRELEGY^® ELLIPTA^® by GSK were $405.9 million, up 69% from $240.5 million in the same quarter of 2020, with $285.5 million in net sales from the U.S. market and $120.4 million in net sales from non-U.S. markets.

●

Capital Allocation:

●

In May 2021, the Company repurchased 32,005,260 shares of its common stock from GSK at $12.25 per share for a total amount (including related transaction fees) of $394.1 million. The repurchased shares represented all of GSK’s equity stake in the Company, which was approximately 32% of the Company.

●

During the second quarter of 2021, the Company’s wholly owned subsidiary, Innoviva Strategic Opportunities LLC, invested $20.0 million to acquire 10 million shares of Entasis’ common stock and warrants to purchase up to an additional 10 million shares of common stock at $2.00 per share. With this additional investment, Innoviva collectively owned approximately 60.6% of Entasis’ common stock as of June 30, 2021 in addition to the warrants.

Table of ~~RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~by GSK were $297.4 million, up 40% from $212.2 million in the third quarter of 2016, with $164.4 million in net sales from the U.S. market and $133.0 million from non-U.S. markets.~~Contents

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

· ~~Product Updates:~~

· ~~Received in September 2017 positive opinion from the European Medicines Agency’s Committee for Medicinal Products for Human Use for TRELEGY~~® ~~ELLIPTA~~® ~~for the treatment of chronic obstructive pulmonary disease (COPD) in appropriate patients.~~

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

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

·                  ~~Capital Structure:~~
·                  ~~Completed in August 2017 the full refinancing of our 2029 Notes.~~
·                  ~~Issued in August 2017 $192.5 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 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, as well as the amount of any such repurchase transactions, based upon, among other things, our evaluation of our liquidity and capital needs (including for strategic and other opportunities), our business, results of operations, and financial position and prospects, general financial, economic and market conditions, prevailing market prices for shares of our common stock and notes, corporate, regulatory and legal requirements, and other conditions and factors deemed relevant by our management and Board of Directors from time to time. Our 2017 Capital Return Plan may be suspended or discontinued at any time. There can be no assurance as to the actual volume of any debt or share repurchases in any given period or over the 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 concurrently with the pricing of the offering in privately negotiated transactions effected through one of the initial purchasers or its affiliate, as our agent.

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

Collaborative Arrangements with GSK

LABA Collaboration

In November 2002, we entered into ~~our~~the LABA ~~Collaboration Agreement~~collaboration with GSK to develop and commercialize once-daily LABA products for the treatment of ~~COPD~~chronic obstructive pulmonary disorder (“COPD”) and ~~asthma.~~asthma (the “LABA Collaboration Agreement”). For the treatment of COPD, the collaboration has developed ~~two~~three combination products: ~~(1) RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~(FF/VI) (BREO~~® ~~ELLIPTA~~® ~~is the proprietary name in the U.S. and Canada and RELVAR~~® ~~ELLIPTA~~® is the proprietary name outside the U.S. and Canada), a once-daily combination medicine consisting of a LABA, vilanterol (VI), and an inhaled corticosteroid (ICS), fluticasone furoate (FF) and (2) ANORO® ~~ELLIPTA~~® (UMEC/VI), a once-daily medicine combining a long-acting muscarinic antagonist (“LAMA”), umeclidinium bromide (UMEC), with a LABA, VI. Under the LABA Collaboration Agreement, GSK and Innoviva are exploring various paths to create triple therapy medications.

●

RELVAR^®/BREO^® ELLIPTA^® (“FF/VI”) (BREO^® ELLIPTA^® is the proprietary name in the U.S. and Canada and RELVAR^® ELLIPTA^® is the proprietary name outside the U.S. and Canada), a once-daily combination medicine consisting of a LABA, vilanterol (VI), and an inhaled corticosteroid (“ICS”), fluticasone furoate (“FF”),

●

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

●

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

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 including participation on the joint steering committee and joint project committees that are expected to continue over the life of the agreements.

The milestone fees paid to GSK were recognized as capitalized fees paid to a related party, which are being amortized over their estimated useful lives commencing upon the commercial launch of the products.
~~We are entitled to receive royalties from GSK on sales of RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® as follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion. For other products combined with a LABA from the LABA collaboration, such as ANORO® ~~ELLIPTA~~®~~, royalties are upward tiering and range from 6.5% to 10%.~~
~~We are also entitled to 15% of any future royalty payments made by GSK under its agreements originally entered into with us, and since assigned to TRC, including~~ ~~TRELEGY~~® ~~ELLIPTA~~®.
~~2004 Strategic Alliance~~
In March 2004, we entered into the Strategic Alliance Agreement with GSK in which GSK received an option to license exclusive development and commercialization rights to product candidates from certain of our discovery programs on pre-determined terms and on an exclusive, worldwide basis. In 2005, GSK licensed our MABA program for the treatment of COPD. GSK is responsible for funding all future development, manufacturing and commercialization activities for product candidates in that program. We are entitled to receive 15% of any contingent payments and royalties payable by GSK from sales of MABA treatments. For a detailed discussion of our alliance with GSK, see Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on February 28, 2017.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with ~~U.S.~~accounting principles generally accepted ~~accounting principles~~in the United States of America (“US GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
~~Accounting for Convertible Senior Notes Due 2025~~
~~On August 7, 2017, we completed a private placement of $192.5 million aggregate principal amount~~As part of our ~~2025 Notes.~~ ~~Due~~capital allocation strategies, we invest from time to time in equity securities of private or public companies. We also enter into strategic partnerships in order to accelerate the execution of our strategy and enhance returns on our capital. If we determine that we have control over these companies or partnerships, we consolidate the financial statements of these companies or partnerships. If we determine that we do not have control over these companies or partnerships under either voting or VIE models, we then determine if we have an ability to ~~settle the conversion obligation of the 2025 Notes in cash, common stock~~exercise significant influence via voting interests, board representation or ~~a combination of cash and common stock, at our option, we separately~~other business relationships.
We may account for the ~~liability and~~ equity ~~components~~investments where we exercise significant influence using either an equity method of ~~the 2025 Notes~~accounting or at fair value 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~~electing the fair value option under Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments. If the fair value option is applied to an investment that would otherwise be accounted for under the equity method, we apply it to all our financial interests in the same entity (equity and debt, including guarantees) that are eligible items. All gains and losses from fair value changes, unrealized and realized, are presented as changes in fair values of ~~a similar liability~~equity and long-term investments, net on the consolidated statements of income.
If we conclude that ~~does~~we do not have an ~~associated convertible feature~~ability to exercise significant influence over an investee, we may elect to account for an equity security without a readily determinable fair value using the ~~income approach. The allocation was performed~~measurement alternative as prescribed by ASC Topic 825. This measurement alternative allows us to measure the equity investment at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a ~~manner that reflected our non-convertible debt borrowing rate for~~ similar ~~debt. The equity component~~investment 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.
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.
same issuer.
There were no ~~other~~ significant changes to our critical accounting policies and estimates. Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2020 filed with the SEC on February ~~28, 2017~~25, 2021 provides a more complete discussion of our critical accounting policies and estimates.

Table of Contents

Results of Operations

Net Revenue

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

	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change

																					Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
(In thousands)	2017			2016			$		%		2017			2016			$		%		2021		2020		$		%		2021		2020		$		%
Royalties from a related party - RELVAR/BREO	$	44,604		$	31,917		$	12,687	40	%	$	137,938		$	87,686		$	50,252	57	%	$	65,916	$	45,570	$	20,346	45	%	$	122,306	$	101,719	$	20,587	20	%
Royalties from a related party - ANORO	7,274			4,627			2,647		57	%	19,464			11,976			7,488		63	%		11,960		11,199		761	7	%		22,460		21,049		1,411	7	%
Royalties from a related party - TRELEGY																						26,386		15,633		10,753	69	%		48,470		31,768		16,702	53	%
Total royalties from a related party	51,878			36,544			15,334		42	%	157,402			99,662			57,740		58	%		104,262		72,402		31,860	44	%		193,236		154,536		38,700	25	%
Less: amortization of capitalized fees paid to a related party	(3,456		)	(3,456		)	—		—	%	(10,368		)	(10,368		)	—		—	%		(3,456)		(3,456)		—	0	%		(6,912)		(6,912)		—	0	%
Royalty revenue	48,422			33,088			15,334		46	%	147,034			89,294			57,740		65	%		100,806		68,946		31,860	46	%		186,324		147,624		38,700	26	%
Strategic alliance - MABA program license	221			221			—		—	%	663			663			—		—	%
Strategic alliance -MABA program																						—		10,000		(10,000)	*			—		10,000		(10,000)	*
Total net revenue from GSK	$	48,643		$	33,309		$	15,334	46	%	$	147,697		$	89,957		$	57,740	64	%	$	100,806	$	78,946	$	21,860	28	%	$	186,324	$	157,624	$	28,700	18	%

*Not Meaningful

Total net revenue increased to $100.8 million and $186.3 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021, compared to $78.9 million and $157.6 million, respectively, for the same ~~period~~periods a year ago, primarily due to favorable adjustments and the growth in prescriptions ~~and market share quarter over quarter~~ for ~~both~~ ~~RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~®.our respiratory products.

Research & Development

Research and development (“R&D”) expenses ~~as compared~~attributable to Pulmoquine’s product development efforts were de minimis for the ~~prior year periods, were as follows:~~

Three Months Ended
September 30,

Change

Nine Months Ended
September 30,

Change

(In thousands)

2017

2016

$

%

2017

2016

$

%

Research and development expenses

$
311

$
286

$
25

9
%
$
1,013

$
1,048

$
(35
)
(3
)%
three and six months ended June 30, 2021. Research and development expenses ~~slightly increased~~of $0.6 million for the three and six months ended ~~September~~June 30, ~~2017 compared~~2020 were attributable to ~~the same period a year ago primarily due to slightly higher recognized stock-based compensation expense. Research and~~Pulmoquine’s product 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.efforts.
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

Three Months Ended June 30,

Change

Six Months Ended June 30,

Change

(In thousands)

2017

2016

$

%

2017

2016

$

%


2021

2020

$

%

2021

2020

$

%

General and administrative expenses

$
8,310

$
5,105

$
3,205

63
%
$
29,489

$
17,582

$
11,907

68
%
General and administrative

$
4,228

$
2,596

$
1,632

63
%
$
10,214

$
5,159

$
5,055

98
%

General and administrative expenses for the three and six months ended ~~September~~June 30, ~~2017 were $8.3 million~~2021 increased compared to ~~$5.1 million~~the same periods in ~~the three months ended September 30, 2016, an increase of $3.2 million. The increase was~~2020 mainly due to ~~$2.5 million of litigation costs resulting from proxy contest. General~~business development related advisory service fees and ~~administrative~~legal expenses incurred for the ~~nine months ended September 30, 2017~~arbitration initiated by Theravance Biopharma against the Company and TRC. The arbitration related legal fees were ~~$29.5 million compared with $17.6 million~~recognized in ~~the nine months ended September 30, 2016, an increase~~TRC’s statement of ~~$11.9 million. The increase was mainly due to $11.0 million of proxy contest and associated litigation costs.~~income.
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
%

Three Months Ended June 30,

Change

Six Months Ended June 30,

Change

(In thousands)

2021

2020

$

%

2021

2020

$

%

Other income (expense), net

$
(951)

$
30

$
(981)

*

$
(1,384)

$
98

$
(1,482)

*

Interest income

$
20

$
158

$
(138)

(87)
%
$
50

$
1,460

$
(1,410)

(97)
%
*Not ~~meaningful~~Meaningful

~~Other income (expense),~~Table of Contents

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

~~Interest income increased for the~~ ~~three and nine months ended September 30, 2017 as~~2021 compared to the same periods a year ago was primarily due to ~~higher~~the expenses incurred by ISP Fund LP. Interest income decreased for the three and six months ended June 30, 2021 compared to the same periods a year ago mainly due to lower interest ~~generated from our investments in marketable securities.~~rates impacted by the COVID-19 pandemic.

Interest Expense

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

	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change

																					Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
(In thousands)	2017			2016			$		%		2017			2016			$		%		2021		2020		$		%		2021		2020		$		%
Interest expense	$	(10,262	)	$	(13,103	)	$	2,841	(22	)%	$	(35,247	)	$	(39,416	)	$	4,169	(11	)%	$	4,745	$	4,561	$	184	4	%	$	9,439	$	9,077	$	362	4	%

Interest expense ~~decreased~~includes the amortization of debt discount and issuance costs for our convertible notes. The increase in interest expense was mainly due to more debt discount and issuance costs being recognized through amortization.

Changes in Fair Values of Equity and Long-Term Investments

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

Three Months Ended June 30,

Change

Six Months Ended June 30,

Change

(In thousands)

2021

2020

$

%

2021

2020

$

%

Changes in fair values of equity and long-term investments

$
45,315

$
46,698

$
(1,383)

(3)
%
$
100,360

$
68,613

$
31,747

46
%

The changes in fair values of equity and long-term investments reflect the net changes in the fair values of our equity investments in Armata, Entasis, and InCarda, and those equity investments managed by ISP Fund LP.
Provision for Income Taxes
The provisional income tax expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 was $25.3 million and $45.1 million with an effective income tax rate of 18.6%, respectively, compared to $19.9 million and $35.8 million, respectively, with an effective interest rate of 17.0% in the same period a year ago.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest, as compared to the ~~same~~prior periods, ~~a year ago~~was as follows:

Three Months Ended June 30,

Change

Six Months Ended June 30,

Change

(In thousands)

2021

2020

$

%

2021

2020

$

%

Net income attributable to noncontrolling interest

$
21,898

$
21,381

$
517

2
%
$
37,470

$
34,896

$
2,574

7
%

This represents the 85% share of net income in Theravance Respiratory Company, LLC for Theravance Biopharma for the three and six months ended June 30, 2021 and 2020. The increase was primarily due to the ~~redemption of our 2029 Notes with~~increase in the ~~net proceeds from the Term B Loan~~growth in prescriptions and 2025 Notes, the lower interest rates starting August 2017 under the Term B Loan and 2025 Notes compared to the interest rates of the 2029 Notes, and lower balance of our 2023 Notes, of which $4.1 million was repurchased since September 30, 2016. See “Liquidity” section belowmarket share for ~~further information.~~
TRELEGY^® ELLIPTA^®.
Liquidity and Capital Resources
Liquidity
~~Liquidity~~
Since our inception, we have financed our operations primarily through private placements and public offerings of equity and debt securities and payments received under collaborative arrangements. ~~Since~~For the ~~start of the commercialization of RELVAR~~®~~/ BREO~~® ~~ELLIPTA~~® ~~in the fourth quarter of 2013 and ANORO~~® ~~ELLIPTA~~® ~~during 2014, we have complemented the source of financing with royalty revenues from the global net sales of these products by GSK. In the nine~~six months ended ~~September~~June 30, ~~2017,~~2021, we generated gross royalty revenues from GSK of ~~$157.4~~$193.2 million. Net cash and cash equivalents ~~short term investments and marketable securities~~ totaled ~~$168.2~~$43.3 million and ~~royalties receivable~~receivables from GSK totaled ~~$51.9~~$104.3 million as of ~~September~~June 30, ~~2017.~~2021.

~~In April 2014, we entered into certain note purchase agreements relating to the private placement~~Table 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.Contents

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

On August 18, 2017, we entered into a Credit Agreement and completed a financing of $250.0 million Term B Loan, the proceeds of which were used to repay the remaining balance of the 2029 Notes. The Term B Loan will mature on August 18, 2022. Two and a half percent (2.5%) of the initial principal amount is due quarterly beginning December 31, 2017. The remaining outstanding balance is due at maturity. Prepayments, in whole or in part, can be made at any time without a penalty. The Credit Agreement also provides us the ability to request one or more additional tranches of term loans (or increase an existing term loan) at any time prior to maturity.

Adequacy of Cash Resources to Meet Future Needs
We believe that cash from projected future royalty revenues and our cash, cash equivalents and marketable securities will be sufficient to meet our anticipated debt service and operating needs ~~including the funding of the 2017 Capital Return Plan discussed in the preceding section,~~ for at least the next ~~twelve~~12 months based upon current operating plans and financial forecasts. If our current operating plans and financial forecasts change, we may require additional funding sooner in the form of public or private equity offerings or debt financings. Furthermore, if in our view favorable financing opportunities arise, we may seek additional funding at any time. However, future financing may not be available in amounts or on terms acceptable to us, if at all. This could leave us without adequate financial resources to fund our operations as currently planned. In addition, from time to time we may restructure or reduce our debt, including through tender offers, redemptions, amendments, repurchases or otherwise, all ~~consistent~~allowable with the terms of our debt agreements.
Cash Flows
Cash flows, as compared to the prior year ~~periods,~~period, were as follows:

Nine Months Ended
September 30,


Six Months Ended June 30,


(In thousands)

2017

2016

Change


2021

2020

Change
Net cash provided by operating activities

$
93,890

$
39,898

$
53,992

$
168,721

$
153,275

$
15,446
Net cash provided by (used in) investing activities

2,644

(27,900
)
30,544

Net cash provided by investing activities

63,627

9,044

54,583
Net cash used in financing activities

(76,133
)
(77,984
)
1,851

(435,570)

(27,268)

(408,302)

Cash Flows from Operating Activities
~~Cash~~Net cash provided by operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 was ~~$93.9~~$168.7 million, consisting primarily of our net income of ~~$75.8~~$220.5 million, adjusted for net non-cash items such as ~~$10.5~~$45.1 million of deferred income taxes, $6.9 million of depreciation and amortization, and ~~$7.4~~$4.5 million ~~for stock-based compensation expense,~~of amortization of debt discount and issuance costs, partially offset by ~~changes~~an increase of $99.0 million in ~~operating assets~~the fair value of our equity and ~~liabilities, including~~long-term investments, net and an increase in receivables from collaborative arrangements of ~~$5.0 million and a reduction in accrued interest payable of $4.3~~$10.3 million.
~~Cash~~Net cash provided by operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2020 was ~~$39.9~~$153.3 million, consisting primarily of our net income of ~~$34.1~~$177.2 million, adjusted for net non-cash items such as ~~$10.5~~$35.8 million of deferred income taxes, $7.0 million of depreciation and amortization, ~~and $6.4 million for stock-based compensation expense,~~partially offset by ~~changes in operating assets and liabilities, including~~ an increase of $68.6 million in ~~receivables from collaborative arrangements~~the fair value of ~~$10.4 million.~~our equity investments.
Cash Flows from Investing Activities
Net cash ~~flows from~~provided by investing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 of ~~$2.6~~$63.6 million was primarily due to ~~$44.4~~$110.0 million ~~proceeds~~in distribution of equity and long-term investments from the ISP Fund LP, partially offset by $46.4 million investments in Armata, ImaginAb and Entasis.
Net cash provided by investing activities for the six months ended June 30, 2020 of $9.0 million was primarily due to $82.0 million received from maturities of marketable securities, partially offset by ~~$41.7~~$12.9 million in purchases of marketable ~~securities.~~securities and $60.0 million for our investments in Armata and Entasis.
~~Net cash used in investing activities for the nine months ended~~ September 30, 2016 of $27.9 million was primarily due to purchases of marketable securities of $82.7 million, partially offset by $55.1 million of proceeds received from sales and maturities of marketable securities.
Cash Flows from Financing Activities
Net cash used in financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 of ~~$76.1~~$435.6 million was primarily due to ~~$487.2~~$394.1 million ~~principal repayments of the 2029 Notes and $17.5 million paid~~used for ~~repurchase of~~ our common stock ~~offset by the net proceeds of $242.6~~repurchase from GSK and $41.4 million ~~from the financing of our Term B Loan and the net proceeds of $187.1 million from issuance of our 2025 Notes.~~distributions to noncontrolling interest.
Net cash used in financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2020 of ~~$78.0~~$27.3 million was primarily due to ~~$65.6~~$28.0 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 million was received from the termination of the corresponding portion of the capped call arrangement, which resulted in net cash consideration of $7.7 million.distributions to noncontrolling interest.

~~Off-Balance Sheet Arrangements~~
In June 2014, our facility leases in South San Francisco, California were assigned to Theravance Biopharma. However, if Theravance Biopharma were to default on its lease obligations, we would be held liable by the landlord and thus, we have in substance guaranteed the lease payments for these facilities. We would also be responsible for lease-related payments including utilities, property taxes, and common area maintenance, which may be as much as the actual lease payments. As of September 30, 2017, the total remaining lease payments for the duration of the lease, which runs through May 2020, were $17.1 million. The carrying value of this lease guarantee was $0.9 million as of September 30, 2017 and is reflected in other long-term liabilities in our condensed consolidated balance sheet.
~~Contractual Obligations and Commercial Commitments~~
~~In the table below, we set forth our significant enforceable and legally binding obligations and future commitments as of September 30, 2017.~~

Payment Due by Period

Less Than

More Than

(In thousands)

Total

1 Year

1 - 3 Years

3 - 5 Years

5 Years

2023 Notes

$
269,149

$
5,121

$
10,242

$
10,242

$
243,544

2025 Notes

231,121

4,933

9,625

9,625

206,938

Term B Loan

250,000

25,000

50,000

175,000

—

Facility leases

2,378

389

813

863

313

Total

$
752,648

$
35,443

$
70,680

$
195,730

$
450,795

~~The Term B Loan balances reflect the principal repayment obligations and do not include the interest payments as the loan bears interest at a varying rate of three-month LIBOR plus 4.5% margin.~~
Item 3. Quantitative and Qualitative Disclosure about Market Risk
~~Other than as set forth below, during the nine months ended~~ ~~September 30, 2017, there~~There have been no significant changes in our market risk or how our market risk is managed compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2020.

Table of Contents

~~Interest Rate Risk~~
Our debt portfolio includes the senior secured term loans under the Term B Loan which bear interest at a varying rate of LIBOR plus 4.5% or a certain alternate base rate plus 3.5%. We are exposed to market risks related to fluctuations in interest rates on these loans. As of September 30, 2017, the stated interest rate for the Term B Loan, based on the LIBOR, was 5.8%. An increase in the LIBOR of 50 basis points would increase our annual interest expense by $1.3 million based on the outstanding balance of $250.0 million as of September 30, 2017.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
We conducted an evaluation as of ~~September~~June 30, ~~2017,~~2021, under the supervision and with the participation of our management, ~~including our Chief Executive Officer and Chief Financial Officer,~~ of the effectiveness of the design and operation of our disclosure controls and procedures, which are defined under SEC rules as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within required time periods. Based upon that evaluation, our Chief Executive Officer and Chief ~~Financial~~Accounting Officer, concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance levels.
Limitations on the Effectiveness of Controls
Our management ~~including our Chief Executive Officer and Chief Financial Officer,~~ does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all frauds. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Innoviva have been detected. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There ~~were~~have been no material changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) ~~that occurred~~ during the quarter ended ~~September~~June 30, ~~2017~~2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION
Item 1. Legal Proceedings
~~As disclosed~~In May 2019, Theravance Biopharma, which is the owner of 85% of the economic interests in ~~our Current Report~~TRC, initiated arbitration against the Company and TRC, relating to a dispute as to the determination by Innoviva (as manager of TRC) to cause TRC to explore potential reinvestment opportunities for the royalty proceeds received by GSK into initiatives that Innoviva believes will increase the value of TRC and TRELEGY^® ELLIPTA^®. Theravance Biopharma alleged that, in causing TRC to not distribute substantially all royalty proceeds received from GSK, Innoviva breached the limited liability company operating agreement governing TRC (the “Operating Agreement”), as well as the fiduciary duties applicable to Innoviva as manager of TRC. The hearing in respect of the arbitration was conducted from July 23, 2019 through July 25, 2019. Post-arbitration oral argument was heard on ~~Form 8-K, filed~~August 14, 2019. On September 26, 2019, the arbitrator issued a final decision. The arbitrator ruled that Innoviva did not breach the Operating Agreement or its fiduciary duties by withholding royalties or pursuing reinvestment opportunities. Accordingly, the Company is permitted to continue to pursue development and commercialization initiatives. The arbitrator did conclude that Innoviva breached a provision of the Operating Agreement requiring Innoviva to deliver quarterly financial plans to Theravance Biopharma. However, the arbitrator concluded that this technical breach did not cause any damages to Theravance Biopharma and the arbitrator awarded limited injunctive relief to expand and clarify the disclosure obligations under the Operating Agreement related to the delivery of financial plans and the pursuit of investment opportunities (if those opportunities related to TRELEGY^® ELLIPTA^®). Finally, the arbitrator ruled that the Company is entitled to indemnification from TRC for 95% of its fees and expenses incurred in connection with the ~~SEC on April 26, 2017, on April 20, 2017, Sarissa Capital Domestic Fund LP~~arbitration.
On September 30, 2019, the Company and ~~certain of its affiliates (together, “Sarissa”)~~TRC filed a Verified Complaint ~~Pursuant to Section 225 of the Delaware General Corporation Law and for Specific Performance~~ in the ~~Delaware~~ Court of Chancery captioned Sarissa Capital Domestic Fund LP, et al. v. Innoviva, Inc., C.A. No. 2017-0309-JRS (the “Specific Performance Litigation”). Sarissa alleges that it had entered into a binding agreement to settle its proxy contest in exchange for the inclusion of each of George W. Bickerstaff, III and Odysseas Kostas, M.D. on our Board of Directors. Sarissa seeks specific performance of the ~~alleged agreement. With~~State of Delaware (“Court of Chancery”) to confirm the ~~complaint, Sarissa also~~arbitration award. The award was confirmed by the Court of Chancery on May 4, 2020.

Table of Contents

On July 16, 2020, Innoviva and TRC initiated a lawsuit in the Court of Chancery against Theravance Biopharma, seeking a permanent injunction preventing Theravance Biopharma from interfering with Innoviva’s ability to cause TRC to reserve cash to pursue non-Trelegy related investments opportunities and a declaration that the arbitration award conclusively established that Innoviva, as manager of TRC, has such authority. The Court of Chancery directed the parties to obtain the arbitrator’s opinion as to whether the arbitration award addressed non-Trelegy related investment opportunities. On July 31, 2020, the arbitrator, while reiterating that Innoviva has broad authority as manager of TRC, found that this award did not specifically address this situation. Accordingly, on August 5, 2020, the parties stipulated to the dismissal of the Court of Chancery action.

On October 6, 2020, Theravance Biopharma initiated a new arbitration against the Company and TRC, challenging Innoviva’s authority as manager of TRC to cause TRC to pursue non-Trelegy related investment opportunities and again alleging that Innoviva is required to cause TRC to distribute substantially all royalty proceeds from GSK. The hearing in respect of the arbitration was conducted from February 16, 2021 through February 19, 2021. Post-arbitration oral argument was heard on March 8, 2021. On March 30, 2021, the arbitrator issued a final decision. The arbitrator ruled that Innoviva did not breach the Operating Agreement or its fiduciary duties by withholding royalties to pursue non-Trelegy-related investment opportunities. Additionally, the arbitrator ruled that the Company is entitled to indemnification from TRC for 100% of its fees and expenses reasonably incurred in connection with the arbitration.

On April 15, 2021, the Company filed a Verified Complaint in the Court of Chancery to confirm the arbitration award. On May 19, 2021, Theravance Biopharma submitted an answer to the Verified Complaint and filed a Motion ~~for Entry of Status Quo Order, which seeks, among other things,~~ to ~~prevent us from engaging in any action outside~~Modify 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~~Arbitral Award, alleging that it contained a mathematical error. The parties filed a proposed stipulation to remand the motion to ~~dismiss the Specific Performance Litigation. On May 17, 2017,~~Chancellor Chandler for his consideration, which the Court ~~entered an Order Maintaining Status Quo, which ordered that, during the pendency~~ of ~~the Specific Performance Litigation, the~~Chancery granted. On June 25, 2021, Innoviva ~~Board of Directors shall remain~~submitted a brief to Chancellor Chandler 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 submittedopposition to the ~~Company’s insurance carrier for reimbursement pursuant to~~motion. On July 15, 2021, Theravance Biopharma submitted a reply brief. Chancellor Chandler’s decision on 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 coveragemotion is ~~or will be available and the Company may not be able to recover any portion of the cost of such litigation.~~pending.

~~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~~Our business 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”) in the United States. Agency regulations and other applicable regulations and policies provide incentives to manufacturers to create modified, non-infringing versions of a drug to facilitate the approval of an ANDA or other application for generic substitutes in the United States and in nearly every pharmaceutical market around the world. Numerous companies like Mylan N.V., Hikma Pharmaceuticals PLC (Hikma), Novartis’ Sandoz division and Teva Pharmaceuticals Industries Ltd. (Teva) have publicly stated their intentions to bring generic forms of the ICS/LABA drug Advair®~~, when certain patents covering the Advair~~® delivery device expired in 2016. In March 2017, Mylan N.V. received a complete response letter from the FDA relating to its ANDA for fluticasone propionate 100, 250, 500 mcg and salmeterol 50 mcg inhalation powder. In May 2017, Hikma announced that it received a complete response letter form the FDA relating to its ANDA for fluticasone propionate and salmeterol inhalation powder. In addition, Teva announced recently that the FDA approved two of their products for adolescent and adult patients with asthma, AirDuoTM ~~RespiClick~~® ~~(fluticasone propionate and salmeterol inhalation powder) and ArmonAirTM RespiClick~~® ~~(fluticasone propionate inhalation powder), which are non-AB generic versions of Advair~~®. In general, these manufactures are required to conduct a restricted number of clinical efficacy, pharmacokinetic and device studies to demonstrate equivalence to Advair, per FDA’s September 2013 Draft Guidance document. These studies are designed to demonstrate that the generic product has the same active ingredient(s), dosage form, strength, exposure and clinical efficacy as the branded product. These generic equivalents, which must meet the same exacting quality standards as branded products, may be significantly less costly to bring to market, and companies that produce generic equivalents are generally able to offer their products at lower prices. Thus, after the introduction of a generic competitor, a significant percentage of the sales of any branded product and products that may compete with such branded product is typically lost to the generic product. In addition, in April 2016, the FDA issued draft guidelines documents covering Fluticasone Furoate/Vilanterol Trifenatate (FF/VI), the active ingredients used in RELVAR®~~/BREO~~® ~~ELLIPTA~~®~~. Accordingly, introduction of generic products that compete against ICS/LABA products, like RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~®, would materially adversely impact our future royalty revenue, profitability and cash flows. We cannot yet ascertain what impact these generic products and any future approved generic products will have on any sales of RELVAR®~~/BREO~~® ~~ELLIPTA~~® ~~or ANORO~~® ~~ELLIPTA~~®~~, if approved.~~
Reduced prices and reimbursement rates due to the actions of governments, payors, or competition or other healthcare cost containment initiatives such as restrictions on use, may negatively impact royalties generated under the GSK Agreements.
The continuing efforts of governments, pharmaceutical benefit management organizations (PBMs), insurance companies, managed care organizations and other payors of health care costs to contain or reduce costs of health care has adversely affected the price, market access, and total revenues of RELVAR®~~/BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~® and may continue to adversely affect them in the future. In addition, we have experienced and expect to continue to experience increased competitive activity which has resulted in lower overall prices for our products.
~~The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (together, “PPACA”) and other~~ legislative or regulatory requirements or potential legislative or regulatory actions regarding healthcare and insurance matters, along with the trend toward managed healthcare in the U.S., could adversely influence the purchase of healthcare products and reduce demand and prices for our partnered products. This could harm GSK’s ability to market our partnered products and significantly reduce future revenues. For example, when GSK launched BREO® ~~ELLIPTA~~® for the treatment of COPD in the U.S. in October 2013, GSK experienced significant challenges gaining coverage at some of the largest PBMs, healthcare payors, and providers and lower overall prices than expected. Recent actions by U.S. PBMs in particular have increased discount levels for respiratory products resulting in lower net sales pricing realized for products in our collaboration. In addition, in certain foreign markets, the pricing of prescription drugs is subject to government control and reimbursement may in some cases be unavailable. We believe that pricing pressures will continue and may increase. This may make it difficult for GSK to sell our partnered products at a price acceptable to us or GSK or to generate revenues in line with our analysts’ or investors’ expectations, which may cause the price of our securities to fall.
More recently, the new presidential administration and the U.S. Congress have taken actions in an effort to replace PPACA and related legislation with new healthcare legislation. There is uncertainty with respect to the impact these potential changes may have, if any, and any changes will likely take time to unfold, and could have an impact on coverage and reimbursement for healthcare items and services covered by plans that were authorized by PPACA. However, we cannot predict the ultimate content, timing or effect of any healthcare reform legislation or the impact of potential legislation on us.
We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products once approved or additional pricing pressures, and may adversely affect our operating results.
~~All of our current revenues are from royalties derived from sales of our respiratory products partnered with GSK, RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~and~~ ~~ANORO~~® ~~ELLIPTA~~®. If the treatment paradigm for the indications our partnered products are approved for change or if GSK is unable to, or does not devote sufficient resources to, maintain or continue increasing sales of these products, our results of operations will be adversely affected.
We currently depend on royalties from sales of our products partnered with GSK to support our existing operations. The treatment paradigm for COPD and asthma constantly evolve. For instance, in December 2016, the GOLD (Global Initiative for Chronic Obstructive Lung Disease) guidelines were revised to favorably position LABA/LAMA treatment compared to ICS/LABA for the treatment of COPD. If the treatment paradigms were to change further, causing our partnered products to fall out of favor, or if GSK was unable, or did not devote sufficient resources, to maintain or continue increasing our partnered product sales, our results of operations would likely suffer and we may need to scale back our operations and capital return programs.
~~If the commercialization of RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~or ANORO~~® ~~ELLIPTA~~® in the countries in which they have received regulatory approval encounters any delays or adverse developments, or perceived delays or adverse developments, or if sales or payor coverage do not meet investors, analysts or our expectations, our business will be harmed, and the price of our securities could fall.
~~Under our agreements with our collaborative partner GSK, GSK has full responsibility for commercialization of RELVAR~~®~~/ BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~®~~. GSK has launched RELVAR~~®~~/ BREO~~® ~~ELLIPTA~~® in a number of countries including the United States (U.S.), Canada, Japan, the United Kingdom, and Germany among others. The commercialization of both products in countries where they are already launched and the commercialization launch in new countries are still subject to fluctuating overall pricing levels and uncertain timeframes to obtain payor coverage. Any delays or adverse developments or perceived additional delays or adverse developments with respect to the commercialization of RELVAR®~~/ BREO~~® ~~ELLIPTA~~® ~~and ANORO~~® ~~ELLIPTA~~® ~~including if sales or payor coverage do not meet investors, analysts or our expectations, will significantly harm our business and the price of our securities could fall.~~
We are dependent on GSK for the successful commercialization and development of products under the GSK Agreements. If GSK does not devote sufficient resources to the commercialization or development of these products, is unsuccessful in its efforts, or chooses to reprioritize its commercial programs, including ~~TRELEGY~~® ~~ELLIPTA~~®~~, our business will be materially harmed.~~
~~GSK is responsible for all clinical and other product development, regulatory, manufacturing and commercialization activities for products developed under the GSK Agreements, including RELVAR~~®~~/BREO~~® ~~ELLIPTA~~®~~, ANORO~~® ~~ELLIPTA~~® ~~and TRELEGY~~® ~~ELLIPTA~~®~~. Our royalty revenues under the GSK Agreements may not meet our, analysts’, or investors’ expectations, due~~ to a number of ~~important factors. GSK has a substantial respiratory product portfolio~~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 studies2020 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:~~2020 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
None.

~~Purchases of Equity Securities by the Issuer~~
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 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.
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.
~~The following table reflects the repurchases of our common stock under the 2017 Capital Return Plan during the fiscal quarter ended September 30, 2017:~~
Period

Total Number
of Shares
Purchased

Average Price
Paid
per Share

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

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

July 1, 2017 to July 31, 2017

—

$
—

—

August 1, 2017 to August 31, 2017

1,317,771

$
13.28

1,317,771

September 1, 2017 to September 30, 2017

—

$
—

—

$
82,500,000

Item 3: Defaults Upon Senior Securities
None.

Item 4: Mine Safety Disclosures
None.

Item 5: Other Information
None.

Table of Contents

Item 6. ~~Exhibits~~Exhibits
(a) Index to Exhibits

Exhibit
Number

Description

Form

Exhibit

Incorporated
by Reference
Filing
Date/Period
End Date

10.1

Share Repurchase Agreement, dated as of May 20, 2021, by and between Innoviva, Inc.
and Glaxo Group Limited

8-K

10.1

May 20, 2021

10.2

Letter Agreement, dated as of May 20, 2021, by and among Innoviva Strategic Partners
LLC, ISP Fund LP and Sarissa Capital Fund GP LP

8-K

10.2

May 20, 2021

31.1

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

31.2

Certification of Principal Financial Officer pursuant to Rules 13a-14 pursuant to the Securities Exchange Act of 1934

32

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

101

Interactive Data File (Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2021) formatted in iXBRL (Inline eXtensible Business Reporting Language).

104

Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101).

~~(a)~~ ~~Index to Exhibits~~29

Table of Contents

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
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 3, 2017~~July 29, 2021
/s/ ~~Michael W. Aguiar~~Pavel Raifeld

~~Michael W. Aguiar~~Pavel Raifeld

Chief Executive Officer

(~~principal executive officer)~~Principal Executive Officer)

Date: ~~November 3, 2017~~July 29, 2021
/s/ ~~Eric d’Esparbes~~Marianne Zhen

~~Eric d’Esparbes~~Marianne Zhen

~~Senior Vice President, Finance and~~ Chief Accounting Officer

(Principal Financial ~~Officer (principal financial and principal accounting officer)~~Officer)

44

PART ~~I —~~I. FINANCIAL INFORMATION

Item 1. Financial Statements

~~Condensed~~ Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2021 (Unaudited) and December 31, ~~2016~~2020	3
~~Condensed~~Unaudited Consolidated Statements of ~~Operations~~Income for the Three and ~~Nine~~Six Months ~~Ended September~~ended June 30, ~~2017~~2021 and ~~2016~~2020	4
~~Condensed~~Unaudited Consolidated Statements of Comprehensive Income for the Three and ~~Nine~~Six Months ~~Ended September~~ended June 30, ~~2017~~2021 and ~~2016~~2020	5
~~Condensed~~Unaudited Consolidated Statements of Stockholders’ Equity for the Three and Six Months ended June 30, 2021 and 2020	6
Unaudited Consolidated Statements of Cash Flows for the ~~Nine~~Six Months ~~Ended September~~ended June 30, ~~2017~~2021 and ~~2016~~2020	68
Notes to ~~Condensed~~Unaudited Consolidated Financial Statements	79

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1721

Item 3. Quantitative and Qualitative Disclosures About Market Risk	2326

Item 4. Controls and Procedures	2327

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	2527

Item 1A. Risk Factors	2528

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4228

Item ~~6. Exhibits~~3. Defaults Upon Senior Securities	4328

~~Signatures~~Item 4. Mine Safety Disclosure	4428

Item 5. Other Information	28

Item 6. Exhibits	29

Signatures	30

Exhibits

	September 30,			December 31,
	2017			2016
	(unaudited)			*
Assets
Current assets:
Cash and cash equivalents	$	138,417		$	118,016
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
Total current assets	220,509			198,046
Property and equipment, net	249			368
Capitalized fees paid to a related party, net	170,177			180,545
Other assets	37			37
Total assets	$	390,972		$	378,996

Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	629		$	128
Accrued personnel-related expenses	1,647			2,361
Accrued interest payable	3,566			7,828
Other accrued liabilities	1,157			1,095
Current portion of long-term debt	25,000			7,752
Deferred revenue, current	885			885
Total current liabilities	32,884			20,049
Long-term debt, net of current portion, discount and issuance costs	578,449			708,341
Other long-term liabilities	1,049			1,383
Deferred revenue	1,551			2,214
Commitments and contingencies (Notes 9)
Stockholders’ deficit:
Preferred stock: $0.01 par value, 230 shares authorized, no shares issued and outstanding	—			—
Common stock: $0.01 par value, 200,000 shares authorized, 108,152 and 108,585 shares issued as of September 30, 2017 and December 31, 2016, respectively	1,080			1,085
Treasury stock: 150 shares as of September 30, 2017 and December 31, 2016	(3,263		)	(3,263		)
Additional paid-in capital	1,336,358			1,282,077
Accumulated other comprehensive (loss) income	(3		)	1
Accumulated deficit	(1,557,133		)	(1,632,891		)
Total stockholders’ deficit	(222,961		)	(352,991		)
Total liabilities and stockholders’ deficit	$	390,972		$	378,996

	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

	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

	September 30, 2017

										June 30, 2021
												Gross		Gross
												Unrealized		Unrealized		Estimated
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gains		Losses		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(1)	118,163		—		—			118,163		$	2,843	$	0	$	0	$	2,843
Total	$	162,583	$	—	$	(3	)	$	162,580	$	2,843	$	0	$	0	$	2,843

	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


	December 31, 2020
			Gross		Gross
			Unrealized		Unrealized		Estimated
(In thousands)	Amortized Cost		Gains		Losses		Fair Value
Money market funds ⁽¹⁾	$	204,808	$	0	$	0	$	204,808
Total	$	204,808	$	0	$	0	$	204,808

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

									Estimated Fair Value Measurements as of June 30, 2021 Using:
									Quoted Price in Active		Significant Other		Significant
									Markets for		Observable		Unobservable
Types of Instruments	Quoted Price in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs				Identical Assets		Inputs		Inputs
(In thousands)	Level 1		Level 2		Level 3		Total		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		$	2,843	$	0	$	0	$	2,843
Investments held by ISP Fund LP ⁽¹⁾										218,978		0		0		218,978
Equity investment - Armata Common Stock										59,013		0		0		59,013
Equity investment - Armata Warrants										0		41,874		0		41,874
Equity investment - Entasis Common Stock										76,557		0		0		76,557
Equity investment - Entasis Warrants										0		54,660		0		54,660
Equity investment - InCarda Warrants										0		0		410		410
Total assets measured at estimated fair value	$	118,163	$	44,417	$	—	$	162,580	$	357,391	$	96,534	$	410	$	454,335
Liabilities
Term B Loan	$	—	$	250,000	$	—	$	250,000
Debt
2023 Notes	—		234,658		—		234,658		$	0	$	246,298	$	0	$	246,298
2025 Notes	—		202,125		—		202,125			0		210,185		0		210,185
Total fair value of liabilities	$	—	$	686,783	$	—	$	686,783
Total fair value of debt									$	0	$	456,483	$	0	$	456,483


	Estimated Fair Value Measurements as of December 31, 2020 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	$	204,808	$	0	$	0	$	204,808
Investments held by ISP Fund LP ⁽¹⁾		299,288		0		0		299,288
Equity investment - Armata Common Stock		25,958		0		0		25,958
Equity investment - Armata Warrants		0		18,049		0		18,049
Equity investment - Entasis Common Stock		46,122		0		0		46,122
Equity investment - Entasis Warrants		0		31,882		0		31,882
Equity investment - InCarda Warrants		0		0		1,147		1,147
Total assets measured at estimated fair value	$	576,176	$	49,931	$	1,147	$	627,254
Debt
2023 Notes	$	0	$	239,779	$	0	$	239,779
2025 Notes		0		206,135		0		206,135
Total fair value of debt	$	0	$	445,914	$	0	$	445,914

(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


	Three Months Ended			Six Months Ended
	June 30, 2021			June 30, 2021
Risk-free interest rate		1.07	%		1.07% - 1.13	%
Expected term (in years)		6			6
Volatility		45	%		45	%
Dividend yield		0	%		0	%
Weighted-average estimated fair value of stock options granted	$	5.80		$	5.61

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


(In thousands)
Years ending December 31:
Remainder of 2021	$	0
2022		0
2023		240,984
2024		0
2025		192,500
Total	$	433,484

			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

10.1	Share Repurchase Agreement, dated as of May 20, 2021, by and between Innoviva, Inc. and Glaxo Group Limited	8-K	10.1	May 20, 2021

10.2	Letter Agreement, dated as of May 20, 2021, by and among Innoviva Strategic Partners LLC, ISP Fund LP and Sarissa Capital Fund GP LP	8-K	10.2	May 20, 2021

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

31.2	Certification of Principal Financial Officer pursuant to Rules 13a-14 pursuant to the Securities Exchange Act of 1934

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

101	Interactive Data File (Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2021) formatted in iXBRL (Inline eXtensible Business Reporting Language).

104	Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101).

	Innoviva, Inc.


Date: ~~November 3, 2017~~July 29, 2021	/s/ ~~Michael W. Aguiar~~Pavel Raifeld
	~~Michael W. Aguiar~~Pavel Raifeld
	Chief Executive Officer
	(~~principal executive officer)~~Principal Executive Officer)

Date: ~~November 3, 2017~~July 29, 2021	/s/ ~~Eric d’Esparbes~~Marianne Zhen
	~~Eric d’Esparbes~~Marianne Zhen
	~~Senior Vice President, Finance and~~ Chief Accounting Officer
	(Principal Financial ~~Officer (principal financial and principal accounting officer)~~Officer)