UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, ~~2021~~2022

☐ 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.)

1350 Old Bayshore Highway Suite 400

Burlingame, CA94010

(Address of Principal Executive Offices)

(650) 238-9600

(Registrant’s Telephone Number, Including Area Code)

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


Title of each class	Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.01 per share	~~INVA~~	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~~ ⌧Yes ☒ No ◻☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ~~Yes~~ ⌧Yes ☒ No ◻☐

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


Large accelerated filer⌧ ☒		Accelerated filer ◻☐

Non-accelerated filer ◻☐		Smaller reporting company ☐

		Emerging growth company ☐

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

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

The number of shares of registrant’s common stock outstanding on April ~~19, 2021~~30, 2022 was ~~101,408,012~~69,698,562.

~~Table of Contents~~

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INNOVIVA, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

March 31,

December 31,

2021

2020

(unaudited)

*
Assets

Current assets:

Cash and cash equivalents

$
282,890

$
246,487
Related party receivables from collaborative arrangements

88,974

93,931
Prepaid expenses and other current assets

1,069

1,640
Total current assets

372,933

342,058
Property and equipment, net

24

28
Equity and long-term investments

519,325

438,258
Capitalized fees paid to a related party, net

121,797

125,253
Deferred tax assets, net

74,023

93,759
Other assets

188

214
Total assets

$
1,088,290

$
999,570

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable

$
14

$
66
Accrued personnel-related expenses

652

490
Accrued interest payable

1,668

4,152
Other accrued liabilities

1,470

1,402
Total current liabilities

3,804

6,110
Long-term debt, net of discount and issuance costs

387,728

385,517
Other long-term liabilities

77

106
Commitments and contingencies (Note 8)

Stockholders’ equity:

Preferred stock: $0.01 par value, 230 shares authorized, 0 shares issued and outstanding

0

0
Common stock: $0.01 par value, 200,000 shares authorized, 101,408 and 101,392 issued and outstanding as of March 31, 2021 and December 31, 2020, respectively

1,014

1,014
Additional paid-in capital

1,261,326

1,260,900
Accumulated deficit

(627,879)

(722,002)
Total Innoviva stockholders’ equity

634,461

539,912
Noncontrolling interest

62,220

67,925
Total stockholders’ equity

696,681

607,837
Total liabilities and stockholders’ equity

$
1,088,290

$
999,570

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


	March 31,			December 31,
	2022			2021
	(unaudited)			*
Assets
Current assets:
Cash and cash equivalents	$	216,802		$	201,525
Related party receivables from collaborative arrangements		93,515			110,711
Prepaid expenses		5,576			1,367
Other current assets		1,930			70
Total current assets		317,823			313,673
Property and equipment, net		191			12
Equity and long-term investments		544,437			483,845
Capitalized fees paid to a related party, net		107,974			111,430
Right-of-use assets		3,794			97
Goodwill		5,544			0
Intangible assets		105,000			0
Deferred tax assets, net		22,398			17,327
Other assets		313			11
Total assets	$	1,107,474		$	926,395

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,808		$	27
Accrued personnel-related expenses		1,933			619
Accrued interest payable		1,397			4,152
Convertible subordinated notes due 2023, net of issuance costs		96,016			0
Other accrued liabilities		8,073			1,009
Total current liabilities		109,227			5,807
Long-term debt, net of discount and issuance costs		442,731			394,653
Lease liabilities, long-term		3,299			0
Commitments and contingencies (Note 9)
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, 69,594 and 69,566 issued and outstanding as of March 31, 2022 and December 31, 2021 respectively		696			696
Treasury stock: at cost, 32,005 at March 31, 2022 and December 31, 2021, respectively		(393,829	)		(393,829	)
Additional paid-in capital		1,182,912			1,264,024
Accumulated deficit		(403,137	)		(456,148	)
Total Innoviva stockholders’ equity		386,642			414,743
Noncontrolling interest		165,575			111,192
Total stockholders’ equity		552,217			525,935
Total liabilities and stockholders’ equity	$	1,107,474		$	926,395

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

See accompanying notes to consolidated financial statements.

~~Table of Contents~~

INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

~~(Unaudited)~~

Three Months Ended March 31,

2021

2020
Royalty revenue from a related party, net of amortization of capitalized fees paid to a related party of $3,456 in three months ended March 31, 2021 and 2020

$
85,518

$
78,678
Operating expenses:

Research and development

49

0
General and administrative

5,986

2,563
Total operating expenses

6,035

2,563
Income from operations

79,483

76,115
Other income (expense), net

(433)

68
Interest income

30

1,302
Interest expense

(4,694)

(4,516)
Changes in fair values of equity and long-term investments, net

55,045

21,915
Income before income taxes

129,431

94,884
Income tax expense, net

19,736

15,932
Net income

109,695

78,952
Net income attributable to noncontrolling interest

15,572

13,515
Net income attributable to Innoviva stockholders

$
94,123

$
65,437

Basic net income per share attributable to Innoviva stockholders

$
0.93

$
0.65
Diluted net income per share attributable to Innoviva stockholders

$
0.84

$
0.59

Shares used to compute Innoviva basic and diluted net income per share:

Shares used to compute basic net income per share

101,365

101,235
Shares used to compute diluted net income per share

113,624

113,509

(Unaudited)

Three Months Ended March 31,

2022

2021

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 March 31, 2022 and 2021

$
90,059

$
85,518

Operating expenses:

Research and development

5,838

49

General and administrative

6,492

5,986

Total operating expenses

12,330

6,035

Income from operations

77,729

79,483

Interest and dividend income

322

30

Other expense, net

(250
)

(433
)
Interest expense

(3,010
)

(4,694
)
Loss on debt extinguishment

(20,662
)

0

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

(9,411
)

55,045

Income before income taxes

44,718

129,431

Income tax expense, net

6,860

19,736

Net income

37,858

109,695

Net income attributable to noncontrolling interest

22,085

15,572

Net income attributable to Innoviva stockholders

$
15,773

$
94,123

Basic net income per share attributable to
   Innoviva stockholders

$
0.23

$
0.93

Diluted net income per share attributable
   to Innoviva stockholders

$
0.20

$
0.84

Shares used to compute Innoviva basic and diluted
   net income per share:

Shares used to compute basic net income per share

69,544

101,365

Shares used to compute diluted net income per share

93,730

113,624

See accompanying notes to consolidated financial statements.

~~Table of Contents~~

INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

~~(Unaudited)~~

Three Months Ended March 31,

2021

2020
Net income

$
109,695

$
78,952
Unrealized gain on marketable securities, net

0

6
Comprehensive income

109,695

78,958
Comprehensive income attributable to noncontrolling interest

15,572

13,515
Comprehensive income attributable to Innoviva stockholders

$
94,123

$
65,443

(Unaudited)

Three Months Ended March 31,

2022

2021

Net income

$
37,858

$
109,695

Unrealized gain on marketable securities, net

0

0

Comprehensive income

37,858

109,695

Comprehensive income attributable to noncontrolling interest

22,085

15,572

Comprehensive income attributable to Innoviva stockholders

$
15,773

$
94,123

See accompanying notes to consolidated financial statements.

~~Table of Contents~~

INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

~~(Unaudited)~~

Three Months ended March 31, 2021

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Comprehensive

Accumulated

Noncontrolling

Stockholders’


Shares

Amount

Capital

Income (Loss)

Deficit

Interest

Equity
Balance as of December 31, 2020

101,392

$
1,014

$
1,260,900

$
0

$
(722,002)

$
67,925

$
607,837
Distributions to noncontrolling interest

0

0

0

0

0

(21,285)

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

0

0

0

0

0

8

8
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding

16

0

(25)

0

0

0

(25)
Stock-based compensation

0

0

451

0

0

0

451
Net income

0

0

0

0

94,123

15,572

109,695
Balance as of March 31, 2021

101,408

$
1,014

$
1,261,326

$
0

$
(627,879)

$
62,220

$
696,681

Three Months ended March 31, 2020

Accumulated

Additional

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

(Unaudited)

Three Months Ended March 31, 2022

Additional

Accumulated Other

Total

Common Stock

Paid-In

Comprehensive

Accumulated

Treasury Stock

Noncontrolling

Stockholders’

Shares

Amount

Capital

Income (Loss)

Deficit

Shares

Amount

Interest

Equity

Balance as of December 31, 2021

69,566

$
696

$
1,264,024

$
—

$
(456,148
)

32,005

$
(393,829
)

$
111,192

$
525,935

Cumulative adjustment due to adoption
of ASU 2020-06

—

—

(65,361
)

—

37,238

—

—

—

(28,123
)
Distributions to noncontrolling interest

—

0

0

0

0

0

0

(6,507
)

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

—

0

0

0

0

0

0

38,471

38,471

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

28

0

214

0

0

0

0

0

214

Stock-based compensation

—

—

620

—

—

0

0

334

954

Capped call options associated with
   convertible senior notes due 2028

—

0

(16,585
)

0

0

0

0

0

(16,585
)
Net income

—

0

0

0

15,773

0

0

22,085

37,858

Balance as of March 31, 2022

69,594

$
696

$
1,182,912

$
—

$
(403,137
)

32,005

$
(393,829
)

$
165,575

$
552,217

6

Three Months Ended March 31, 2021

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, 2020

101,392

$
1,014

$
1,260,900

$
—

$
(722,002
)

$
67,925

$
607,837

Distributions to noncontrolling interest

—

0

0

0

0

(21,285
)

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

—

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

(25
)
Stock-based compensation

—

0

451

0

0

0

451

Net income

—

0

0

0

94,123

15,572

109,695

Balance as of March 31, 2021

101,408

$
1,014

$
1,261,326

$
—

$
(627,879
)

$
62,220

$
696,681

See accompanying notes to consolidated financial statements.

~~Table of Contents~~

INNOVIVA, INC.

CONSOLIDATED ~~STATEMENTS~~STATEMENT OF CASH FLOWS

(In thousands)

~~(Unaudited)~~

Three Months Ended March 31,

2021

2020
Cash flows from operating activities

Net income

$
109,695

$
78,952
Adjustments to reconcile net income to net cash provided by operating activities:

Deferred income taxes

19,736

15,932
Depreciation and amortization

3,460

3,463
Stock-based compensation

451

435
Amortization of debt discount and issuance costs

2,211

2,032
Amortization of discount on short-term investments

0

(272)
Amortization of lease guarantee

0

(81)
Changes in fair values of equity and long-term investments, net

(54,673)

(21,915)
Other non-cash items

8

0
Changes in operating assets and liabilities:

Receivables from collaborative arrangements

4,957

(2,707)
Prepaid expenses and other current assets

571

140
Accounts payable

(52)

112
Accrued personnel-related expenses and other accrued liabilities

227

(126)
Accrued interest payable

(2,484)

(2,484)
Net cash provided by operating activities

84,107

73,481
Cash flows from investing activities

Maturities of marketable securities

0

54,000
Purchases of marketable securities

0

(12,943)
Purchases of equity and long-term investments

(26,394)

(25,000)
Purchases of property and equipment

0

(13)
Net cash provided by (used in) investing activities

(26,394)

16,044
Cash flows from financing activities

Repurchase of shares to satisfy tax withholding

(25)

(55)
Proceeds from issuances of common stock, net

0

225
Distributions to noncontrolling interest

(21,285)

(15,810)
Net cash used in financing activities

(21,310)

(15,640)
Net increase in cash and cash equivalents

36,403

73,885
Cash and cash equivalents at beginning of period

246,487

278,096
Cash and cash equivalents at end of period

$
282,890

$
351,981
Supplemental disclosure of cash flow information

Cash paid for interest

$
4,967

$
4,967

(Unaudited)

Three Months Ended March 31,

2022

2021

Cash flows from operating activities

Net income

$
37,858

$
109,695

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

Deferred income tax

6,860

19,736

Depreciation and amortization

3,501

3,460

Stock-based compensation

954

451

Amortization of debt discount and issuance costs

377

2,211

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

9,411

(54,673
)
Loss on extinguishment of debt

20,662

0

Other

280

8

Changes in operating assets and liabilities:

Receivables from collaborative arrangements

17,196

4,957

Prepaid expenses

1,345

243

Other assets, current

99

328

Accounts payable

198

(52
)
Accrued personnel-related expenses and other accrued liabilities

2,116

227

Accrued interest payable

(2,755
)

(2,484
)
Net cash provided by operating activities

98,102

84,107

Cash flows from investing activities

Purchases of equity and long-term investments

(56,217
)

(26,394
)
Purchases of equity investments managed by ISP Fund LP

(2,015
)

(112,587
)
Sales of equity investments managed by ISP Fund LP

24,281

2,387

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

(132,266
)

110,200

Purchases of property and equipment

(9
)

0

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

23,070

0

Net cash used in investing activities

(143,156
)

(26,394
)
Cash flows from financing activities

Distributions to noncontrolling interest

(6,507
)

(21,285
)
Repurchase of shares to satisfy tax withholding

(46
)

(25
)
Proceeds from issuances of common stock, net

260

0

Payment for repurchase of convertible subordinated notes due 2023

(165,131
)

0

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

(21,037
)

0

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

252,792

0

Net cash provided by (used in) financing activities

60,331

(21,310
)
Net increase in cash and cash equivalents

15,277

36,403

Cash and cash equivalents at beginning of period

201,525

246,487

Cash and cash equivalents at end of period

$
216,802

$
282,890

Supplemental disclosure of cash flow information:

Cash paid for interest

$
5,411

$
4,967

Supplemental disclosure of non-cash investing and financing activities

Adoption of ASU 2020-06

$
28,123

$
0

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

$
3,289

$
0

See accompanying notes to consolidated financial statements.

~~Table of Contents~~

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of Operations and Summary of Significant Accounting Policies

Description of Operations

Innoviva Inc. (referred to as ~~"Innoviva"~~“Innoviva”, the ~~"Company"~~“Company”, or ~~"we"~~“we” and other similar pronouns) is a company with a portfolio of royalties and other healthcare assets. Our royalty portfolio contains respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR®/BREO® ELLIPTA® (fluticasone furoate/ vilanterol, “FF/VI”), ANORO® ELLIPTA® (umeclidinium bromide/ vilanterol, “UMEC/VI”) and TRELEGY® ELLIPTA® (the combination FF/UMEC/VI). Under the Long-Acting Beta2 Agonist (“LABA”) Collaboration Agreement, Innoviva is entitled to receive royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows: ~~15%~~15% on the first ~~$3.0~~$3.0 billion of annual global net sales and 5%5% for all annual global net sales above ~~$3.0~~$3.0 billion; and royalties from the sales of ANORO® ELLIPTA®, which tier upward at a range from ~~6.5%~~6.5% to ~~10%~~10%. Innoviva is also entitled to ~~15%~~15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC (“TRC”), including TRELEGY® ELLIPTA® and any other product or combination of products that may be discovered or developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the “GSK Agreements”), which have been assigned to TRC other than RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In our opinion, the unaudited consolidated financial statements have been prepared on the same basis as audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of our financial position, results of operations, comprehensive income and cash flows. The interim results are not necessarily indicative of the results of operations to be expected for the year ending December 31, ~~2021~~2022 or any other period.

The accompanying unaudited consolidated financial statements include the accounts of Innoviva, our wholly-owned subsidiaries and certain variable interest entities for which we are the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income ~~(loss)~~ attributable to noncontrolling interest in our unaudited consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 filed with the Securities and Exchange Commission (“SEC”) on February ~~25,~~ 28, 2022, and as amended on March 17, 2022 (“2021 ~~(“2020~~ Form 10-K”).

Prior Period Immaterial Correction

Subsequent to the issuance of the consolidated financial statements for the three months ended March 31, 2021, the Company identified that (i) sales of equity investments managed by ISP Fund LP for $2.4 million, and (ii) purchase and sales of other investments managed by ISP Fund LP, net for $110.2 million were incorrectly netted in the consolidated statement of cash flows within the line item purchases of equity and long-term investments, net. The Company has corrected the presentation in the accompanying consolidated statement of cash flows for the three months ended March 31, 2021 from amounts previously reported to present such line items separately. The correction did not impact total cash flows from investing activities or the consolidated balance sheet, statement of income, or statement of comprehensive income. Management assessed the correction on a quantitative and qualitative basis and determined that it is immaterial to the prior period consolidated financial statements. The Company additionally reclassified purchases of equity investments managed by ISP Fund LP of $112.6 million from purchases of equity and long-term investments to be presented in a separate line item in the consolidated statement of cash flows, to conform with the current period presentation.

Variable Interest 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 evaluation, if we determine we are the primary beneficiary of a VIE, we consolidate the entity in our financial statements.

~~Table of Contents~~

Equity and Long-Term Investments

We invest from time to time in equity and debt securities of private or public companies. If we determine that we have control over these companies under either voting or VIE models, we include them in our consolidated financial statements. If we determine that we do not have control over these companies under either voting or VIE models, we then determine if we have an ability to exercise significant influence via voting interests, board representation or other business relationships.

We may account for the ~~equity~~ investments where we exercise significant influence using either an equity method of accounting or at fair value by electing the fair value option under Accounting Standards Codification ~~("ASC"~~(“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~~the security without a readily determinable fair value using the measurement alternative ~~described in~~under ASC Topic ~~825.~~312, Investments - Equity Securities. This measurement alternative allows us to measure the equity investment at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

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

Revenue Recognition

Revenue is recognized when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. Revenue is recognized through a five-step process: (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price for the contract; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue as a performance obligation is satisfied.

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

Research and Development Costs

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

Goodwill and Intangible Assets

Goodwill is recognized as the excess of the purchase price of an acquired entity over the fair value of amount assigned to assets acquired and liabilities assumed in a business combination. Goodwill and intangible assets with indefinite lives is subject to impairment testing at least annually and will be tested for impairment between annual tests if a triggering event occurs, such as changes due to circumstances that would indicate an impairment of the carrying value. Significant judgments are involved in determining if an indicator of impairment has occurred. Intangible assets with definite lives are amortized on a straight-line basis over the remaining useful life of the intangible asset.

Operating Leases

We account for our leases in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 842, “Leases” (“ASC 842”). Right-of-use assets represent our right to use an underlying asset over the lease term and include any lease payments made prior to the lease commencement date and are reduced by lease incentives. Lease liabilities represent the present value of the total lease payments over the lease term, calculated using the incremental borrowing rate. Lease expense is recognized on a straight-line basis over the expected lease term.

Accounting Pronouncement Adopted by the Company

~~In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12,~~ ~~“Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”~~, which is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We adopted Topic 740 effective January 1, 2021. The adoption did not have a material impact on our consolidated financial statements.

~~In October 2020, the FASB issued ASU 2020-10,~~ ~~Codification Improvements~~. This ASU improves the codification by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is codified in the disclosure section of the codification. The ASU also clarifies various topics in the codification so that entities can apply guidance more consistently. The ASU is effective for fiscal years beginning after December 15, 2020. We adopted ASU 2020-10 effective January 1, 2021. The adoption did not have a material impact on our consolidated financial statements.

~~Recently Issued Accounting Standards or Updates Not Yet Adopted~~

In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in ~~Entity's~~Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an ~~Entity's~~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. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new standard also requires the if-converted method to be used to calculate diluted earnings per share (“EPS”) 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~~

Effective January 1, 2022, we adopted the ~~process~~new standard using the modified retrospective approach and assessed the effect of ~~evaluating~~this adoption on the ~~effects~~accounting for our outstanding convertible notes. The effect of the ~~provisions of ASU 2020-06~~adoption on our ~~consolidated~~2025 Notes (as defined below) resulted in a decrease to the opening balance of accumulated deficit of $37.2 million, a reduction to additional paid-in capital of $65.4 million, an increase to the balance of the notes by an aggregate amount of $35.6 million, and an increase to deferred tax assets of $7.4 million. The dilutive EPS of our 2025 Notes will be computed under the if-converted method going forward. There was no financial ~~statements.~~impact from the implementation of the standard for our 2023 Notes (as defined below). Refer to Note 8, “Debt” for more information.

2. Net Income Per Share

Basic net income per share attributable to Innoviva stockholders is computed by dividing net income attributable to Innoviva stockholders by the weighted-average number of shares of common stock outstanding. Diluted net income per share attributable to Innoviva stockholders is computed by dividing net income attributable to Innoviva stockholders by the weighted-average number of shares of common stock and dilutive potential common stock equivalents then outstanding. Dilutive potential common stock equivalents include the assumed exercise, vesting and issuance of employee stock awards using the treasury stock method, as well as common stock issuable upon assumed conversion of our convertible subordinated notes due 2023 (the “2023 Notes”), our convertible senior notes due 2025 (the “2025 Notes”) and our convertible senior notes due 2028 (the “2028 Notes”) using the ~~if converted~~if-converted method.

~~Table of Contents~~

Our convertible senior notes due 2025 (the “2025 Notes”) are convertible, based on the applicable conversion rate, into cash, shares of our common stock or a combination thereof, at our election. Our current intent is to settle the principal amount of the 2025 Notes in cash upon conversion. The impact of the assumed conversion premium to diluted net income per share iswas historically computed using the treasury stock method. As the average market price per share of our common stock as reported on The Nasdaq Global Select Market was lower than the initial conversion price of ~~$17.26~~$17.26 per share, there was 0 dilutive effect of the assumed conversion premium for the three months ended March 31, ~~2021 and 2020, respectively.~~2021. The dilutive EPS of the notes was approximately $0.03 per share using the if-converted method for the three months ended March 31, 2022 as a result of the adoption of ASU 2020-06.

The following table shows the computation of basic and diluted net income per share for the three months ended March 31, ~~2021~~2022 and ~~2020:~~

2021:

Three Months Ended March 31,
(In thousands except per share data)

2021

2020
Numerator:

Net income attributable to Innoviva stockholders, basic

$
94,123

$
65,437
Add: interest expense on 2023 Notes

1,204

1,180
Net income attributable to Innoviva stockholders, diluted

$
95,327

$
66,617

Denominator:

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

101,365

101,235
Dilutive effect of 2023 Notes

12,189

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

70

85
Weighted-average shares used to compute diluted net income per share attributable to Innoviva stockholders

113,624

113,509

Net income per share attributable to Innoviva stockholders

Basic

$
0.93

$
0.65
Diluted

$
0.84

$
0.59


	Three Months Ended March 31,
(In thousands except per share data)	2022		2021
Numerator:
Net income attributable to Innoviva stockholders, basic	$	15,773	$	94,123
Add: interest expense on 2023 Notes		1,021		1,204
Add: interest expense on 2025 Notes		1,164		0
Add: interest expense on 2028 Notes		384		0
Net income attributable to Innoviva stockholders, diluted	$	18,342	$	95,327
Denominator:
Weighted-average shares used to compute basic net income per share attributable to Innoviva stockholders		69,544		101,365
Dilutive effect of 2023 Notes		10,155		12,189
Dilutive effect of 2025 Notes		11,150		0
Dilutive effect of 2028 Notes		2,765		0
Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan		116		70
Weighted-average shares used to compute diluted net income per share attributable to Innoviva stockholders		93,730		113,624
Net income per share attributable to Innoviva stockholders
Basic	$	0.23	$	0.93
Diluted	$	0.20	$	0.84

Anti-Dilutive Securities

The following common stock equivalents were not included in the computation of diluted net income per share because their effect was ~~anti-dilutive:~~anti-dilutive for the periods presented:


	Three Months Ended March 31,
(In thousands)	2022		2021
Outstanding options and awards granted under equity incentive plan and employee stock purchase plan		386		1,159

Three Months Ended March 31,
(In thousands)

2021

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

$
1,159

$
1,094

3. Revenue Recognition and Collaborative Arrangements

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

Net Revenue from Collaborative Arrangements

Net revenue recognized under our GSK Agreements was as follows:


	Three Months Ended March 31,
(In thousands)	2022			2021
Royalties from a related party - RELVAR/BREO	$	55,764		$	56,390
Royalties from a related party - ANORO		8,442			10,500
Royalties from a related party - TRELEGY		29,309			22,084
Total royalties from a related party		93,515			88,974
Less: amortization of capitalized fees paid to a related party		(3,456	)		(3,456	)
Royalty revenue from GSK	$	90,059		$	85,518

Three Months Ended March 31,
(In thousands)

2021

2020
Royalties from a related party - RELVAR/BREO

$
56,390

$
56,149
Royalties from a related party - ANORO

10,500

9,850
Royalties from a related party - TRELEGY

22,084

16,135
Total royalties from a related party

88,974

82,134
Less: amortization of capitalized fees paid to a related party

(3,456)

(3,456)
Royalty revenue from GSK

$
85,518

$
78,678

~~Table of Contents~~

4. Consolidated Entities

We consolidate the financial results of ~~TRC~~Theravance Respiratory Company, LLC ("TRC") and ~~Pulmoquine~~Entasis Therapeutics Holdings, Inc. (“~~Pulmoquine”~~Entasis”), which we have determined to be VIEs. As we have the power to direct the economically significant activities of these entities and the obligation to absorb losses of, or the right to receive benefits from them, we are the primary beneficiary of the entities. We also consolidate the financial results of ISP Fund LP (the “Partnership”), which is our partnership with Sarissa Capital Management LP (“Sarissa Capital”), as we have determined that the Partnership is a VIE and we are its primary beneficiary.

Theravance Respiratory Company, LLC

We held 15% of the economic interest of TRC as of March 31, 2022 and December 31, 2021. The primary source of revenue for TRC is the royalties generated from the net sales of TRELEGY® ELLIPTA® by GSK. As of March 31, ~~2021,~~2022, TRC held equity and long-term investments in InCarda Therapeutics, Inc. (“InCarda”) ~~and~~, ImaginAb, Inc. (“ImaginAb”), Gate Neurosciences, Inc. ("Gate") and Nanolive SA ("Nanolive"). Refer to Note 5, “Financial Instruments and Fair Value Measurements,” for more information.

The summarized financial information for TRC is presented as follows:

~~Balance sheets~~

March 31,

December 31,
(In thousands)

2021

2020
Assets


Cash and cash equivalents

$
28,444

$
38,081
Receivables from collaborative arrangements

22,084

24,946
Prepaid expenses and other current assets

1

0
Equity and long-term investments

22,869

16,959
Total assets

73,398

79,986

Liabilities and LLC Members' Equity


Current liabilities

640

508
LLC members' equity

72,758

79,478
Total liabilities and LLC members' equity

$
73,398

$
79,986

~~Income statements~~

Three Months Ended March 31,
(In thousands)

2021

2020
Royalty revenue from a related party

$
22,084

$
16,135
Operating expenses

3,281

271
Income from operations

18,803

15,864
Other income (expense), net

0

36
Changes in fair values of equity and long-term investments

(483)

0
Net income

$
18,320

$
15,900

~~Pulmoquine~~Balance sheets


	March 31,		December 31,
(In thousands)	2022		2021
Assets
Cash and cash equivalents	$	74,160	$	50,713
Receivables from collaborative arrangements		29,309		42,492
Prepaid expenses and other current assets		84		71
Equity and long-term investments		49,341		37,695
Total assets	$	152,894	$	130,971

Liabilities and LLC Members’ Equity
Current liabilities	$	289	$	252
LLC members’ equity		152,605		130,719
Total liabilities and LLC members’ equity	$	152,894	$	130,971

Income statements


	Three Months Ended March 31,
(In thousands)	2022		2021
Royalty revenue from a related party	$	29,309	$	22,084
Operating expenses		198		3,281
Income from operations		29,111		18,803
Income tax expense, net		1		0
Changes in fair values of equity and long-term investments		429		(483	)
Net income	$	29,541	$	18,320

Entasis Therapeutics Holdings, Inc.

~~In April~~We started investing in Entasis in 2020 ~~we purchased 5,808,550 shares~~as part of ~~Series A preferred stock~~our capital allocation strategy of ~~Pulmoquine for $5.0 million~~deploying cash generated from royalty income and investing in ~~cash and held~~different life sciences companies. Entasis is a ~~majority voting interest. Pulmoquine is a~~clinical-stage biotechnology company focused on the ~~research~~discovery and development of novel antibacterial products. During the second quarter of 2020, we purchased 14,000,000 shares of common stock as well as warrants to purchase 14,000,000 additional shares of common stock of Entasis for approximately $35.0 million in cash. During the third quarter of 2020, we purchased 4,672,897 shares of Entasis common stock as well as warrants to purchase 4,672,897 additional shares of its common stock for approximately $12.5 million in cash. Effective in June 2020, after certain conditions were met with respect to the sales of Entasis equity shares, Innoviva has a right to designate 2 members to Entasis’ board. During the second quarter of 2021, Innoviva’s wholly owned subsidiary, Innoviva Strategic Opportunities, LLC ("ISO") entered into a securities purchase agreement with Entasis to acquire 10,000,000 shares of Entasis common stock and warrants to purchase 10,000,000 additional shares of Entasis common stock for approximately $20.0 million.

The fair value of Entasis’ common stock is measured based on its closing market price at each balance sheet date. The warrants have an ~~aerosolized formulation~~exercise price of ~~hydroxychloroquine~~$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 ~~treat respiratory infections.~~ estimate the fair value of these warrants.

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

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

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


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

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

Total assets acquired, net	$	134,405

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


(In thousands)	March 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	33,547
Prepaid expenses		4,490
Other current assets		1,841
Total current assets		39,878
Property and equipment, net		183
Right-of-use assets		3,724
Goodwill		5,544
Intangible assets		105,000
Other assets		303
Total assets	$	154,632

Liabilities
Current liabilities:
Accounts payable	$	1,781
Accrued personnel-related expenses		1,529
Other accrued liabilities		5,824
Total current liabilities		9,134
Lease liabilities, long-term		3,299
Total liabilities	$	12,433

As a result of ~~March 31, 2021, Pulmoquine’s total assets, mainly attributable to cash and cash equivalents, were $3.3 million. Pulmoquine does not currently generate revenue. Total operating expense was de minimis~~the consolidation, we recognized a non-controlling interest of $38.5 million as of February 17, 2022. Our consolidated net income for the three months ended March 31, ~~2021.~~2022 included the net loss since the consolidation date of $4.5 million for Entasis.

The following table sets forth the pro-forma consolidated results of operations for the three months ended March 31, 2022 and 2021 as if the consolidation of Entasis occurred on January 1, 2021. The unaudited supplemental pro forma information includes adjustments for (i) increases in fair value related to the equity investments in Entasis’ common stock and warrants of $7.8 million and $11.5 million for the three months ended March 31, 2022 and 2021, respectively, and (ii) an increase for acquisition-related costs of $0.1 million for the three months ended March 31, 2021 and a corresponding decrease related to such costs for the three months ended March 31, 2022, as if the expenses were incurred in 2021 instead of 2022. The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the consolidation had taken place on the dates noted above, or of results that may occur in the future.


	Three Months Ended March 31,
(In thousands)	2022		2021
Revenue	$	90,059	$	85,518
Net income	$	38,027	$	110,350
Net income attributable to Innoviva stockholders	$	19,033	$	99,067

~~Table of Contents~~

ISP Fund LP

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

The Partnership Agreement provides for Sarissa Capital to receive management fees from the Partnership, payable quarterly in advance, measured based on the Net Asset Value of Strategic Partners’ capital account in the Partnership. In addition, General Partner is entitled to an annual performance fee based on the Net Profits of the Partnership during the annual measurement period.

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

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

As of March 31, ~~2021,~~2022, we held ~~100%~~approximately 100% of the economic interest of the Partnership. As of March 31, 2022 and December 31, 2021, total assets of the Partnership were ~~$304.7~~$307.6 million and $195.8 million, respectively, of which all were attributable to equity and long-term ~~investments.~~investments, and total liabilities were $0.1 million and $0.2 million, respectively. The partnership’s assets can only be used to settle its own obligations. During the three months ended March 31, 2022 and 2021, we recorded $0.3 million and $0.4 million, respectively, of net investment-related expenses incurred by the Partnership, ~~incurred $0.4~~and $2.1 million ~~investment-related expenses,~~and $5.8 million, respectively, of net ~~of investment-related income and recorded an unrealized gain of $5.8 million from the changes of fair value as~~positive 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~~as well as warrants to purchase 8,710,800 additional shares of ~~warrants~~common stock of Armata Pharmaceuticals, Inc. (“Armata”) for ~~$25.0~~approximately $25.0 million in ~~cash~~.cash. Armata is a clinical stage biotechnology company focused on precisely targeted bacteriophage therapeutics for antibiotic-resistant infections.

~~On January 26,~~During the first quarter of 2021, ~~Innoviva Strategic Opportunities LLC (“ISO”), our wholly owned subsidiary,~~ISO entered into a securities purchase agreement with Armata to acquire 6,153,847 shares of Armata common stock and warrants to purchase 6,153,847 additional shares of Armata common stock for approximately ~~$20.0~~$20.0 million. The investment was closed in 2 tranches on January 26, 2021 and March 17, 2021. The investment continues to support Armata’s ongoing advancement of its bacteriophage development programs. The additional investment in the first quarter of 2021 increased Innoviva and ISO’s combined ownership to 59.6%. Armata also entered into a voting agreement with the Company and ISO, pursuant to which the Company and ISO agreed not to vote or take any action by written consent with respect to any common shares held by the Company and ISO that represent, in the aggregate, more than ~~49.5%~~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~~The voting agreement will expire the earlier of the second anniversary of the agreement effective date and approval by the FDA of any of Armata’s product candidates for marketing and commercial distribution. During the fourth quarter of 2021, ISO also purchased an additional 1,212,122 shares of Armata common stock for approximately $4.0 million.

On February 9, 2022, ISO entered into a securities purchase agreement with Armata to acquire 9,000,000 shares of Armata common stock and warrants to purchase 4,500,000 additional shares of common stock with an exercise price of $5.00 per share for $45.0 million. The investment closed in 2 tranches on February 9, 2022 and March 31, 2022. The investment is intended to aid Armata in advancing its clinical pipeline and strengthening its bacteriophage platform. On February 9, 2022, Armata also entered a second amended and restated voting agreement with the Company and ISO, pursuant to which the Company and ISO agreed not to vote or take any action by written consent with respect to any common shares held by the Company and ISO that represent, in the aggregate, more than 49.5% of the total number of shares of Armata’s common stock for voting on the matters related to election or removal of Armata’s board members or amend the bylaws of Armata to reduce the maximum number of directors or set the number of directors who may serve on the board of Armata. The voting agreement will expire the earlier of the second anniversary of the agreement effective date and approval by the FDA of any of Armata’s product candidates for marketing and commercial distribution. In addition, as of February 9, 2022, Armata entered into an amended and restated investor rights agreement with the Company and ISO, pursuant to which for as long as the Company and ISO hold at least 12.5% of the outstanding shares of Armata’s common stock on a fully-diluted, the Company and ISO shall have the right to designate two directors to Armata’s board of directors, and for so long as the Company and ISO hold at least 8%, but less than 12.5%, of the outstanding shares of Armata’s common stock on a fully-diluted basis, the Company and ISO shall have the right to designate one director to Armata’s board of directors, subject to certain conditions and qualifications set forth in the amended and restated investor rights agreement. As of March 31, 2022, 3 of the 8 members of Armata’s board of directors are also members of the board of directors of Innoviva. As of March 31, 2022 and December 31, 2021, we owned approximately 69.4% and 59.3%, respectively, of Armata’s common stock.

The ~~investment~~investments in Armata ~~provides~~provide Innoviva and ISO the ability to have significant influence, but not control over Armata’s operations. Armata’s business and affairs are managed under the direction of its board of directors, which Innoviva and ISO do not control. Based on our evaluation, we determined that Armata is a VIE, but Innoviva and ISO are not the primary beneficiary of the VIE. We continue to elect the fair value option to account for both Armata’s common stock and warrants. The fair value of Armata’s common stock is measured based on its closing market price. The warrants purchased in 2020, 2021 and ~~2021~~2022 have an exercise price of ~~$2.87~~$2.87, $3.25 and ~~$3.25~~$5.00 per share, ~~respectively,~~respectively. All warrants are exercisable immediately within five years from the issuance date of the warrants and include a cashless exercise option. We use the Black-Scholes-Merton pricing model to estimate the fair value of these warrants with the following input assumptions: Armata’s closing market price on the valuation date, the risk-free interest rate computed based on the U.S. Treasury yield, the remaining contractual term as the expected term, and the expected stock price volatility calculated based on the historical volatility of the common stock of Armata and its peer companies.

As of March 31, ~~2021,~~2022, the fair values of ~~Armata’s~~our holdings of Armata common stock and warrants were estimated at ~~$71.1~~$122.6 million and ~~$54.2~~$64.9 million, respectively. As of December 31, ~~2020,~~2021, the fair values of ~~Armata’s~~our holdings of Armata common stock and warrants were estimated at ~~$26.0~~$88.1 million and ~~$18.0~~$58.6 million, respectively. The total fair value of both financial instruments in the amount of ~~$125.3~~$187.5 million and $146.7~~$44.0~~ million was recorded as equity and long-term investments on the consolidated balance sheets as of March 31, ~~2021~~2022 and December 31, ~~2020, respectively. The changes in the fair values in the amount of $61.2 million and $21.9 million for the three months ended March 31,~~ 2021, ~~and 2020, respectively, were recorded as changes in fair value of equity and long-term investments, net on the consolidated statements of income.~~

~~Equity Investment in Entasis~~

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

~~Table of Contents~~

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 March 31, 2021 and the date hereof, 0 Innoviva designees are serving on Entasis’ ~~six-member~~ ~~board. As of March 31, 2021, we owned approximately 51.0% of Entasis’s common stock.~~

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

As of March 31, 2021, the fair values of Entasis’s common stock and warrants were estimated at $40.0 million and $26.6 million, respectively. As of December 31, 2020, the fair values of Entasis’s common stock and warrants were estimated at $46.1 million and $31.9 million, respectively. The total fair value of both financial instruments in the amount of $66.6 million and $78.0 million was recorded as equity and long-term investments on the consolidated balance sheets as of March 31, 2021 and December 31, 2020, respectively. We recorded ~~$11.5~~$4.2 million unrealized loss ~~from the changes of fair value~~and $61.2 million unrealized gain as changes in fair values of equity and long-term investments, net on the consolidated statements of income for the three months ended March 31, ~~2021.~~2022 and 2021, respectively.

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

Income Statement Information


	For the Three Months Ended December 31,
(In thousands)	2021			2020
Revenue	$	989		$	504
Loss from operations	$	(6,048	)	$	(6,453	)
Net loss	$	(6,047	)	$	(6,624	)

Equity Investment in InCarda

~~In October,~~During the third quarter of 2020, TRC purchased 20,469,432 shares of Series C preferred stock and ~~warrants~~a warrant to purchase 5,117,358 additional shares of Series C preferred stock of InCarda Therapeutics, Inc. (“InCarda”) (the “InCarda 2020 Warrant”) for ~~$15.0 million. $0.8~~$15.8 million, ~~was incurred for investment due diligence costs and recorded as part~~which includes $0.8 million of ~~the equity investment on the consolidated balance sheets.~~transaction costs. InCarda is a privately held biopharmaceutical company focused on developing inhaled therapies for cardiovascular diseases. The investment is intended to fund the ongoing clinical development of InRhythmTM (flecainide for inhalation), the company’s lead program, for the treatment of a recent-onset episode of paroxysmal atrial fibrillation. TRC has the right to designate one member to InCarda’s board. As of March 31, ~~20201 and as of the date hereof,~~ 2022, 1 of InCarda’s 8 board members iswas designated by TRC. The InCarda 2020 Warrant is exercisable immediately with an exercise price of $0.7328 per share. In September 2021, TRC and InCarda entered into an amendment to extend the expiration date of the InCarda 2020 Warrant from October 6, 2021 to March 31, 2022. On March 9, 2022, TRC and InCarda entered into an amendment to further extend the expiration date of the InCarda 2020 Warrant from March 31, 2022 to March 31, 2023. The InCarda 2020 Warrant is recorded at fair value and subject to remeasurement at each balance sheet date.

On March 9, 2022, TRC entered into a Note and Warrant Purchase Agreement (the “InCarda Agreement”) with InCarda to acquire a convertible promissory note (the “InCarda Convertible Note”) and warrants (the “InCarda 2022 Warrant”) for $0.7 million. The InCarda Convertible Note bears an annual interest rate of 6% and will convert into Series D preferred stock upon a qualified financing, non-qualified financing, or maturity conversion. A qualified financing is defined as the first issuance or series of related issuances by InCarda of its equity securities following March 9, 2022 from which InCarda receives immediately available gross proceeds of at least $10.0 million (excluding the aggregate amount of any notes converted into equity securities pursuant to the conversion of notes or any other debt securities converted into equity securities) (the “Qualified Financing Amount”). A non-qualified financing is defined as the first issuance or series of related issuances by InCarda of its equity securities following March 9, 2022 from which InCarda receives immediately available gross proceeds of less than the Qualified Financing Amount. The InCarda 2022 Warrant entitles TRC to purchase a number of shares of equity securities equal to 100% of the principal amount of the InCarda Convertible Note divided by the number of shares issued in InCarda’s next equity financing, which is defined as the earliest to occur of specific financing events, including capital raises through public offerings. The InCarda 2022 Warrant expires on March 9, 2027. The InCarda Convertible Note and InCarda 2022 Warrant are measured at fair value, but the changes in fair value were immaterial for the period ended March 31, 2022.

As of March 31, 2022 and December 31, 2021, TRC held ~~13.0%~~13.0% of ~~InCarda‘s outstanding equity.~~

InCarda equity ownership. The investment in InCarda does not provide TRC the ability to control or have significant influence over ~~InCarda's~~InCarda’s operations. Based on our evaluation, we determined that InCarda is a VIE, but TRC is not the primary beneficiary of the VIE. We account for ~~our~~the InCarda Convertible Note as a trading security, measured at fair value. We account for the investment in ~~the~~InCarda’s Series C preferred ~~shares in InCarda~~stock using the measurement ~~alternative.~~alternative because the securities are not publicly traded and do not have a readily determinable fair value. Under the measurement alternative, the equity investment is initially recorded at its allocated cost, but the carrying value may be adjusted through earnings upon an impairment or when there is an observable price change involving the same or a similar investment with the same issuer. ~~The warrants are~~As of March 31, 2022 and December 31, 2021, we recorded ~~at fair~~$16.5 million and $15.8 million, respectively, from our investments in InCarda’s Series C preferred stock and InCarda Convertible Note as equity and long-term investments on the consolidated balance sheets. There was 0 impairment to the value of our investments in InCarda as of March 31, 2022 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,~~ December 31, 2021.

~~one year from the issuance date.~~ We use the Black-Scholes-Merton pricing model to estimate the fair value of the ~~warrants~~InCarda 2020 Warrant 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.

Black-Scholes-Merton assumptions used in calculating the estimated fair value of the InCarda 2020 Warrant as of March 31, 2022 and December 31, 2021 were as follows:


	March 31,			December 31,
(In thousands)	2022			2021
Risk-free interest rate		1.63	%		0.06	%
Expected volatility		69.37	%		55.44	%
Expected dividend yield		0			0
Expected term (in years)		1.00			0.25

As of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the fair value of InCarda’s warrants was estimated at ~~$0.7~~$1.0 million and ~~$1.1~~$0.4 million, respectively, and recorded as equity and long-term investments on the consolidated balance sheets. WeAs of March 31, 2022, the fair value of InCarda’s Convertible Note was approximately the purchase price of $0.7 million and recorded ~~$0.5~~as equity and long-term investments on the consolidated balance sheets. During the three months ended March 31, 2022 and 2021, we recorded $0.6 million unrealized gain and $0.5 million unrealized loss, ~~from the changes of fair value~~respectively, as changes in fair values of equity and long-term investments, net on the consolidated statements of ~~income for the three months ended March 31, 2021. There was 0 impairment or other change to the value of InCarda’s Series C preferred stock of~~income. ~~$15.8 million as of March 31, 2021.~~

Equity Investment in ImaginAb

~~On March 18,~~During the first quarter of 2021, TRC entered into a securities purchase agreement with ImaginAb, Inc. to purchase 4,051,724 shares of ImaginAb Series C preferred stock for ~~$4.7~~$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~~$1.3 million. ImaginAb is a privately held biotechnology company focused on clinically managing cancer and autoimmune diseases via molecular imaging. ~~$0.4~~$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,~~ March 31, 2022, 1 of ImaginAb’s 75 board members is designated by TRC. As of March 31, 2022 and December 31, 2021, TRC held ~~13.0%~~14.4% and 14.5% of ImaginAb equity ~~ownership.~~ownership, respectively.

~~Table of Contents~~

The investment in ImaginAb does not provide TRC the ability to control or have significant influence over ImaginAb’s operations. Based on our evaluation, we determined that ImaginAb is a VIE, but TRC is not the primary beneficiary of the VIE. Because ImaginAb’s equity securities are not publicly traded and do not have a readily determinable fair value, we have accounted for our investment in ImaginAb’s Series C preferred stock and common stock using the measurement alternative. Under the measurement alternative, the equity investment is initially recorded at its allocated cost, but the carrying value may be adjusted through earnings upon an impairment or when there is an observable price change involving the same or a similar investment with the same issuer. As of March 31, 2022 and December 31, 2021, ~~$6.4~~$6.4 million was recorded as equity and long-term investments on the consolidated balance ~~sheets.~~

~~Available-for-Sale Securities~~

~~The estimated~~sheets and there was no change to the fair value of available-for-sale securities is based on quoted market prices for these or similar investments that were based on prices obtained from a commercial pricing service. Available-for-sale securities are summarized below:

March 31, 2021

Gross

Gross

Unrealized

Unrealized

Estimated
(In thousands)

Amortized Cost

Gains

Losses

Fair Value
Money market funds⁽¹⁾

$
248,932

$
0

$
0

$
248,932
Total

$
248,932

$
0

$
0

$
248,932

~~(1)~~

~~Money market funds were included in cash and cash equivalents on the consolidated balance sheets.~~

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.~~

our investment.

Convertible Promissory Note in Gate Neurosciences

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

no ~~credit loss~~The number of common stock shares to be issued in a qualified event shall be equal to the ~~money market funds~~amount due on the conversion date divided by the lesser of a capped conversion price (the “Capped Conversion Price”) and the qualified event price (the “Qualified Event Price”). The Capped Conversion Price is calculated as $50.0 million divided by the number of shares of common stock outstanding at such time on a fully diluted basis. The Qualified Event Price is the price per share determined by the qualified event. A qualified financing is a sale or series of sales of preferred stock where (i) at least 50 percent of counterparties are not existing shareholders, (ii) net proceeds to Gate are at least $35.0 million, and (iii) the stated or implied equity valuation of Gate is at least $80.0 million. Shadow Preferred means preferred stock having identical rights, preferences and restrictions as the preferred stock that would be issued in a qualified financing.

The investment in Gate does not provide TRC the ability to control or have significant influence over Gate’s operations. Based on our evaluation, we determined that Gate is a VIE, but TRC is not the primary beneficiary of the VIE. We have accounted for the Gate Convertible Note as a trading security, measured at fair value using a Monte Carlo simulation model with the probability of certain qualified events and the assumptions of equity value of Gate, risk-free rate, expected stock price volatility of its peer companies, and the time until a financing is raised. TRC has the right to designate one board member to Gate’s board. As of March 31, ~~2021.~~

~~Table~~2022, TRC has designated a board member to Gate’s board, which currently consists of ~~Contents~~three directors. As of March 31, 2022 and December 31, 2021, the fair value of the Gate Convertible Note was estimated at $14.9 million and $15.1 million, respectively, and recorded as equity and long-term investments on the consolidated balance sheets. We recorded $0.2 million unrealized loss as changes in fair values of equity and long-term investments, net on the consolidated statement of income for the three months ended March 31, 2022.

Equity Investment in Nanolive

On February 18, 2022, TRC entered into an investment and shareholders agreement with Nanolive SA ("Nanolive") to purchase 18,750,000 shares of Nanolive Series C preferred stock for $9.8 million (equivalent to 9.0 million CHF). Nanolive SA is a Swiss privately held life sciences company focused on developing breakthrough imaging solutions that accelerate research in growth industries such as drug discovery and cell therapy. $0.7 million was incurred for investment due diligence costs and execution and recorded as part of the equity and long-term investment on the consolidated balance sheets. TRC has the right to designate one member to Nanolive’s board. TRC also has the right to designate another member, who will be mutually acceptable to TRC and another majority common stockholder, to Nanolive’s board. As of March 31, 2022, 0 Innoviva designees are serving on Nanolive’s 7-member board. As of March 31, 2022, TRC held 16.1% of Nanolive equity ownership.

The investment in Nanolive does not provide TRC the ability to control or have significant influence over Nanolive’s operations. Based on our evaluation, we determined that Nanolive is a VIE, but TRC is not the primary beneficiary of the VIE. Because Nanolive’s equity securities are not publicly traded and do not have a readily determinable fair value, we have accounted for our investment in Nanolive’s Series C preferred stock using the measurement alternative. Under the measurement alternative, the equity investment is initially recorded at its allocated cost, but the carrying value may be adjusted through earnings upon an impairment or when there is an observable price change involving the same or a similar investment with the same issuer. As of March 31, 2022, $10.6 million was recorded as equity and long-term investments on the consolidated balance sheets and there was no change to the fair value of our investment.

Fair Value Measurements

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


	Estimated Fair Value Measurements as of March 31, 2022 Using:
	Quoted Price in Active Markets for		Significant Other		Significant
	Identical		Observable		Unobservable
Types of Instruments	Assets		Inputs		Inputs
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	103,181	$	—	$	—	$	103,181
Investments held by ISP Fund LP (1)		305,516		—		2,060		307,576
Equity investment - Armata Common Stock		122,625		—		—		122,625
Equity investment - Armata Warrants		—		64,894		—		64,894
Equity investment - InCarda Warrants		—		—		1,040		1,040
Convertible debt investment - InCarda Note						652		652
Convertible debt investment - Gate Note		—		—		14,900		14,900
Total assets measured at estimated fair value	$	531,322	$	64,894	$	18,652	$	614,868
Debt
2023 Notes	$	—	$	106,499	$	—	$	106,499
2025 Notes		—		253,497		—		253,497
2028 Notes		—		260,815		—		260,815
Total fair value of debt	$	—	$	620,811	$	—	$	620,811

(1)

The ~~estimated fair values were as follows:~~

investments held by ISP Fund LP, consisted of $172.1 million in equity investments, which included $2.1 million in a private placement position, $25.2 million in money market funds and $110.3 million in cash. Our total capital contribution of $300.0 million is subject to a 36-month lock-up period from the date of such capital contributions.


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

Estimated Fair Value Measurements as of March 31, 2021 Using:

Quoted Price

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Types of Instruments

Identical Assets

Inputs

Inputs

(In thousands)

Level 1

Level 2

Level 3

Total
Assets

Money market funds

$
248,932

$
0

$
0

$
248,932
Investments held by ISP Fund LP ⁽¹⁾

304,696

0

0

304,696
Equity investment - Armata Common Stock

71,053

0

0

71,053
Equity investment - Armata Warrants

0

54,166

0

54,166
Equity investment - Entasis Common Stock

39,960

0

0

39,960
Equity investment - Entasis Warrants

0

26,580

0

26,580
Equity investment - InCarda Warrants

0

0

664

664
Total assets measured at estimated fair value

$
664,641

$
80,746

$
664

$
746,051
Debt

2023 Notes

$
0

$
242,336

$
0

$
242,336
2025 Notes

0

203,513

0

203,513
Total fair value of debt

$
0

$
445,849

$
0

$
445,849

(1)

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

~~(1)~~

~~The investments, which consisted of equity investments of $130.5 million and money market funds of $174.2 million, held by ISP Fund LP were subject to a~~ ~~36-month lock-up period from our initial contribution date, December 11, 2020.~~

Estimated Fair Value Measurements as of December 31, 2020 Using:

Quoted Price

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Types of Instruments

Identical 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

$
—

$
445,914

~~(1)~~

~~The investments, which consisted of equity investments of $14.5 million and money market funds of $284.8 million, held by ISP Fund LP were subject to a~~ ~~36-month lock-up period from our initial contribution date, December 11, 2020.~~

The fair values of our equity investments in ~~Armata and Entasis's~~Armata’s common stock and ~~those~~publicly traded investments held by ISP Fund LP are based on the quoted prices in active markets and are classified as Level 1 financial instruments. The fair values of the warrants of Armata ~~and Entasis~~ classified within Level 2 are based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications.

~~Table of Contents~~

~~The fair value of~~ InCarda’s convertible note and warrants, isGate’s convertible note, and private placement positions held by ISP Fund LP and are classified as Level 3 financial instruments as ~~InCarda’s~~these securities are not publicly traded and the assumptions used in the valuation model for valuing these securities are based on significant unobservable and observable inputs including those of publicly traded peer companies.

The fair values of our 2023 Notes, 2025 Notes and ~~our 2025~~2028 Notes are based on recent trading prices of the respective instruments.

6. Goodwill and Intangible Assets

Goodwill and intangible assets acquired in our consolidation of Entasis were recognized at fair value as of the consolidation date, February 17, 2022. The carrying amount of goodwill as of March 31, 2022 was $5.5 million. Intangible assets with definite lives are amortized over their estimated useful lives. The carrying basis and accumulated amortization of recognized intangible assets as of March 31, 2022 were as follows:


	March 31, 2022
	Carrying
(In thousands)	Amount
Intangible assets with indefinite life	$	69,500
Intangible asset with determinable life		35,500
Total	$	105,000

6.All intangible assets are related to in-process research and development. The intangible assets with indefinite life consist of antibacterial therapeutic products. The intangible asset with determinable life consists of a contract, which commences in 2023. The useful life of this intangible asset will be determined upon commercialization of the underlying product candidate. Thus, 0 amortization expense of determinable assets was recognized during the period ended March 31, 2022.

Goodwill and indefinite-lived intangible assets are not amortized but are tested at least annually for impairment, or more frequently if triggering events occur, based on the estimated fair value of the intangible asset.

7. Balance Sheet Components

Other Accrued Liabilities

Other accrued liabilities, which included $5.8 million related to Entasis as of March 31, 2022, consisted of the following:

March 31,

December 31,

(in thousands)

2022

2021

Accrued contract manufacturing

$
2,610

$
—

Accrued clinical

1,273

—

Accrued research

361

—

Accrued professional services

2,935

894

Current portion of lease liabilities

622

106

Other

272

9

Total other accrued liabilities

$
8,073

$
1,009

8. Stock-Based Compensation

Stock- Based Compensation Expense

~~Stock-based~~ The following table summarizes stock-based compensation expense ~~was~~which included in$0.3 million related to Entasis’ equity awards for the ~~consolidated statements of income as follows:~~

three months ended March 31, 2022:

Three Months Ended March 31,
(In thousands)

2021

2020
General and administrative

$
451

$
435


	Three Months Ended March 31,
(In thousands)	2022		2021
General and administrative	$	788	$	451
Research and development		166		0
Total	$	954	$	451

Valuation Assumptions

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


	Three Months Ended March 31,
	2022			2021
Risk-free interest rate		1.6	%	1.1 %
Expected term (in years)		6.11			6.11
Volatility		40.5	%		45.6	%
Dividend yield		0.0	%		0.0	%
Weighted-average estimated fair value of stock options granted	$	7.73		$	5.42

9. Debt

Our debt consisted of:


	March 31,			December 31,
(In thousands)	2022			2021
2023 Notes	$	96,207		$	240,984
2025 Notes		192,500			192,500
2028 Notes		261,000			—
Total debt		549,707			433,484
Less: Unamortized debt discount and issuance costs		(10,960	)		(38,831	)
Total debt, net	$	538,747		$	394,653
Less: Current portion of long-term debt, net		96,016			0
Total long-term debt, net	$	442,731		$	394,653

Three Months Ended

March 31, 2021

Risk-free interest rate

1.1
%
Expected term (in years)

6.11

Volatility

45.6
%
Dividend yield

0.0
%
Weighted-average estimated fair value of stock options granted

$
5.42

Convertible Subordinated Notes Due 2023

~~There~~In January 2013, we completed an underwritten public offering of $287.5 million aggregate principal amount of our 2023 Notes, which will mature on January 15, 2023. The financing raised proceeds, net of issuance costs, of approximately $281.2 million, less $36.8 million to purchase 2 privately negotiated capped call option transactions in connection with the 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.

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

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

In connection with the offering of the 2023 Notes, we entered into two privately negotiated capped call option transactions with a single counterparty. The capped call option transaction is an integrated instrument consisting of a call option on our common stock purchased by us with a strike price equal to the initial conversion price of $27.79 per share for the underlying number of shares and a cap price of $38.00 per share, both of which are subject to adjustments consistent with the 2023 Notes. The cap component is economically equivalent to a call option sold by us for the underlying number of shares with an initial strike price of $38.00 per share. As an integrated instrument, the settlement of the capped call coincides with the due date of the convertible debt. Upon settlement, we would receive from our hedge counterparty a number of shares of our common shares that would range from 0, if the stock price was below $27.79 per share, to a maximum of 2,779,659 shares, if the stock price is above $38.00 per share. However, if the market price of our common stock, as measured under the terms of the capped call transactions, exceeds $38.00 per share, there is no incremental anti-dilutive benefit from the capped call.

As a result of the partial conversion by certain holders of the 2023 Notes in July 2014, and dividends declared and paid in 2014 and 2015, the conversion rate with respect to our 2023 Notes was adjusted in total to 50.5818 shares of our common stock per $1,000 principal amount of the 2023 Notes, which represents a conversion price of approximately $19.77 per share. As a result of the conversion rate adjustments, the capped call strike price and cap price were ~~0 grants~~also adjusted to $19.77 and $27.04, respectively.

During 2016, we retired a portion of ~~stock options during~~our 2023 Notes with a face value of $14.1 million and carrying value of $13.9 million by way of purchase in the open market.

On March 7, 2022, we used $165.6 million from the sale of the 2028 Notes to repurchase 60% of the 2023 Notes with a face value of $144.8 million. The carrying value of the repurchased 2023 Notes was $144.5 million. Accrued interest was $0.4 million and unamortized debt issuance costs were $0.3 million on the date of repurchase. We recognized a loss on the extinguishment of the 2023 Notes of $20.7 million in other expense, net in the consolidated statement of operations. The repurchase reduced the outstanding principal balance to $96.2 million and unamortized debt issuance costs to $0.2 million. The effective interest rate of the 2023 Notes changed to 2.37%.

Our outstanding 2023 Notes balances consisted of the following:


	March 31,			December 31,
(In thousands)	2022			2021
Liability component
Principal	$	96,207		$	240,984
Debt issuance costs, net		(191	)		(620	)
Net carrying amount	$	96,016		$	240,364

The following table sets forth total interest expense recognized related to the 2023 Notes for the three months ended March 31, ~~2020.~~

2022 and 2021:

~~7. Debt~~

~~Our debt consists of:~~

March 31,

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

(45,756)

(47,967)
Net long-term debt

$
387,728

$
385,517


	Three Months Ended March 31,
(In thousands)	2022		2021
Contractual interest expense	$	1,084	$	1,280
Amortization of debt issuance costs		122		141
Total interest and amortization expense	$	1,206	$	1,421

Convertible Senior Notes Due 2025

InOn 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. 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 2025 Notes is 57.9240 shares of our common stock per $1,000 principal amount of the 2025 Notes (which is equivalent to an initial conversion price of approximately $17.26 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 ~~accounting guidance~~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, as described below. From, and including, February 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, the 2025 Notes will be convertible at any time.

Holders of the 2025 Notes may convert all or a portion of their 2025 Notes prior to the close of business on February 15, 2025 only under the following circumstances:

•

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

•

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

•

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

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

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

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

Prior to the adoption of the standard, we separately account for the liability and equity components of the 2025 Notes by allocating the proceeds between the liability component and the embedded conversion option (“equity component”) due to our ability to settle the conversion obligation of the 2025 Notes in cash, common stock or a combination of cash and common stock, at our option. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature using the income approach. The allocation was performed in a manner that reflected our non-convertible debt borrowing rate for similar debt. The equity component of the 2025 Notes of $67.3 million was recognized as a debt discount and represents the difference between the proceeds from the issuance of the 2025 Notes and the fair value of the liability of the 2025 Notes on the date of issuance. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense using the effective interest method over the term of the 2025 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. Additionally, we separated the total issuance costs of $5.4 million incurred into liability and equity components in proportion to the allocation of the initial proceeds, resulting in liability issuance costs of $3.5 million and equity issuance costs of $1.9 million. Issuance costs attributable to the liability component were amortized on a straight-line basis, which approximated the effective interest rate method, to interest expense over the term of the 2025 Notes. The issuance costs attributable to the equity component were netted against the equity component in additional paid-in capital. The effective interest rate of the liability component of the 2025 Notes was 8.87%.

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

~~Table of Contents~~

Our outstanding 2025 Notes balances consisted of the following:


	March 31,			December 31,
(In thousands)	2022			2021
Liability component
Principal	$	192,500		$	192,500
Debt discount and issuance costs, net		(2,437	)		(38,211	)
Net carrying amount	$	190,063		$	154,289
Equity component, net	$	0		$	65,361

March 31,

December 31,
(In thousands)

2021

2020
Liability component


Principal

$
192,500

$
192,500
Debt discount and issuance costs, net

(44,697)

(46,766)
Net carrying amount

$
147,803

$
145,734
Equity component, net

$
65,361

$
65,361

The following table sets forth total interest expense recognized related to the 2025 Notes for the three months ended March 31, ~~2021~~2022 and ~~2020:~~2021:


	Three Months Ended March 31,
(In thousands)	2022		2021
Contractual interest expense	$	1,203	$	1,203
Amortization of debt issuance costs		171		159
Amortization of debt discount		0		1,911
Total interest and amortization expense	$	1,374	$	3,273

Convertible Senior Notes Due 2028

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

Three Months Ended March 31,
(In thousands)

2021

2020
Contractual interest expense

$
1,203

$
1,203
Amortization of debt issuance costs

159

145
Amortization of debt discount

1,911

1,749
Total interest and amortization expense

$
3,273

$
3,097

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

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

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

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

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

•

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

•

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

•

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

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

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

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

The indenture governing the 2028 Notes contains customary terms and covenants, including a merger covenant and that upon certain events of default occurring and continuing, either the Trustee or the holders of at least 25% of the aggregate principal amount of the outstanding Notes may declare 100% of the principal of, and accrued and unpaid interest, if any, on, all the Notes to be due and payable immediately.

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

As of March 31, 2022, the effective interest rate on the 2028 Notes was 2.69%.

Our outstanding 2028 Notes balance as of March 31, 2022 consisted of the following:



(In thousands)
Liability component
Principal	$	261,000
Debt issuance costs, net		(8,332	)
Net carrying amount	$	252,668

The following table sets forth total interest expense recognized related to the 2028 Notes from the date of issuance through March 31, 2022:



(In thousands)
Contractual interest expense	$	346
Amortization of debt issuance costs		84
Total interest and amortization expense	$	430

Debt Maturities

The aggregate scheduled maturities of our ~~long-term~~convertible debt as of March 31, ~~2021~~2022 were as follows:


(In thousands)
Years ending December 31:
Remainder of 2022	$	0
2023		96,207
2024		0
2025		192,500
2026		0
Thereafter		261,000
Total	$	549,707

(In thousands)

Years ending December 31:

2021 to 2022

$
0
2023

240,984
2024

0
2025

192,500
Total

$
433,484

8.. Commitments and Contingencies

Operating Lease

Our operating leases include Entasis’ facility lease (“Entasis Lease”) consisting of 20,062 square feet of office and laboratory space in Waltham, Massachusetts. In February 2022, Entasis decided to exercise a renewal option for the Entasis Lease to extend the lease term for three additional years through 2025 and subsequently signed the Second Amendment in April 2022. As of March 31, 2022, the weighted average remaining lease term was 3.8 years and the weighted-average incremental borrowing rate used to determine the operating lease right-of-use assets was 7.8%.

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

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


	March 31,		December 31,
(In thousands)	2022		2021
Assets
Right-of-use assets	$	3,794	$	97
Liabilities
Lease liabilities, current	$	622	$	106
Lease liabilities, long-term		3,299		0
Total lease liabilities	$	3,921	$	106

Future minimum operating lease payments on the Entasis Lease as of March 31, 2022 were as follows:


(In thousands)
Years ending December 31:
Remainder of 2022	$	553
2023		1,249
2024		1,269
2025		1,289
Total undiscounted lease payments		4,360
Less: imputed interest	$	(516	)
Total operating lease liabilities	$	3,844

Future minimum operating lease payments on our corporate headquarters in Burlingame, California as of March 31, ~~2021~~2022 were as follows:

(In thousands)

Years ending December 31:

Remainder of 2021

$
92
2022

109
2023

0
Thereafter

0
Total

$
201


(In thousands)
Years ending December 31:
Remainder of 2022	$	76
Thereafter		0
Total	$	76

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.

~~Table of Contents~~

9.11. Income Taxes

Provisional income tax expense for the three months ended March 31, 2022 and 2021 ~~and 2020~~ was ~~$19.7~~$6.9 million and ~~$15.9~~$19.7 million, respectively. The Company’s effective income tax rate for the three months ended March 31, ~~2021~~2022 was ~~15.2%~~15.3%, compared to ~~16.8%~~15.2% for the same period in ~~2020.~~2021. The income tax expense for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021 was determined based upon estimates of the ~~Company's~~Company’s effective income tax rates in various jurisdictions. Our effective income tax rate for the three months ended March 31, ~~2021~~2022 was lower than the benefit computed at the U.S. federal statutory income tax rate ~~of 21%~~ due primarily to ~~non-deductible expenses and~~ noncontrolling interest.

~~Table of 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 from the plans, intentions, expectations and objectives disclosed in the forward-looking statements that we make. All written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Important factors that we believe could cause actual results or events to differ materially from our forward-looking statements include, but are not limited to, risks related to: lower than expected future royalty revenue from respiratory products partnered with GSK; the commercialization of RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA® in the jurisdictions in which these products have been approved; substantial competition from products discovered, developed, launched and commercialized both by GSK and by other pharmaceutical companies; the strategies, plans and objectives of the Company (related to the Company’s growth strategy and corporate development initiatives beyond the Company’s existing portfolio); the timing, manner and amount of capital deployment, including potential capital returns to stockholders; risks related to the Company’s growth strategy; projections of revenue, expenses and other financial items and risks discussed in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 filed with the Securities and Exchange Commission (“SEC”) on February ~~25,~~ 28, 2022, and as amended on March 17, 2022 (“2021 ~~(“2020~~ Form 10-K”), and Item 1A of Part II of our Quarterly Reports on Form 10-Q and below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Item 2 of Part I. All forward-looking statements in this Quarterly Report on Form 10-Q are based on current expectations as of the date hereof and we do not assume any obligation to update any forward-looking statements on account of new information, future events or otherwise, except as required by law.

We encourage you to read our consolidated financial statements contained in this Quarterly Report on Form 10-Q. We also encourage you to read Item 1A of Part I of our ~~2020~~2021 Form 10-K and Item 1A of Part II of our Quarterly Reports on Form 10-Q entitled “Risk Factors,” which contain a more complete discussion of the risks and uncertainties associated with our business. In addition to the risks described above and in Item 1A of Part I of our ~~2020~~2021 Form 10-K and Item 1A of Part II of this report, other unknown or unpredictable factors also could affect our results. Therefore, the information in this report should be read together with other reports and documents that we file with the SEC from time to time, including on Form 10-K, Form 10-Q and Form 8-K, which may supplement, modify, supersede or update those risk factors. As a result of these factors, we cannot assure you that the forward-looking statements in this report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.

~~Table of Contents~~

~~OVERVIEW~~

OVERVIEW

Executive Summary

Innoviva, Inc. (“Innoviva”, the “Company”, the “Registrant” or “we” and other similar pronouns) is a company with a portfolio of royalties and other healthcare assets. Our royalty portfolio contains respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR®/BREO® ELLIPTA® (fluticasone furoate/ vilanterol, “FF/VI”), ANORO® ELLIPTA® (umeclidinium bromide/ vilanterol, “UMEC/VI”) and TRELEGY® ELLIPTA® (the combination FF/UMEC/VI). Under the Long-Acting Beta2 Agonist (“LABA”) Collaboration Agreement, Innoviva is entitled to receive royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion; and royalties from the sales of ANORO® ELLIPTA®, which tier upward at a range from 6.5% to 10%. Innoviva is also entitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC (“TRC”), including TRELEGY® ELLIPTA® and any other product or combination of products that may be discovered or developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the “GSK Agreements”), which have been assigned to TRC other than RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®.

Our company structure and organization are tailored to our focused activities of managing our respiratory assets partnered with GSK, including the commercial and developmental obligations associated with the GSK Agreements, optimizing ~~our operations~~capital allocation and ~~augmenting capital allocation.~~providing for certain essential reporting and management functions of a public company. Our revenues consist of royalties from our respiratory partnership agreements with GSK.

Recent Highlights

●

•

GSK Net Sales:

~~First quarter 2021 net sales of RELVAR~~^®~~/BREO~~^® ~~ELLIPTA~~^® ~~by GSK were $375.9 million, up slightly from $374.3 million in the same quarter of 2020, with $154.6 million in net sales from the U.S. market and $221.3 million from non-U.S. markets.~~

~~First quarter 2021 net sales of ANORO~~^® ~~ELLIPTA~~^® ~~by GSK were $161.5 million, up 7% from $151.6 million in the same quarter of 2020, with $88.4 million net sales from the U.S. market and $73.1 million from non-U.S. markets.~~

~~First quarter 2021 net sales of TRELEGY~~^® ~~ELLIPTA~~^® ~~by GSK were $339.8 million, up 37% from $248.2 million in the same quarter of 2020, with $237.5 million in net sales from the U.S. market and $102.3 million in net sales from non-U.S. markets.~~

●

~~Capital Allocation:~~

During the first quarter of 2021, the Company’s wholly owned subsidiary, Innoviva Strategic Opportunities LLC, invested $20.0 million to acquire 6.2 million shares of Armata's common stock and warrants to purchase up to an additional 6.2 million shares of the common stock at $3.25 per share. With this additional investment, Innoviva collectively owned approximately 59.6% of Armata's common stock as of March 31, 2021.

●

~~New Director:~~

On March 9, 2021, the Company appointed Deborah L. Birx, M.D., to its Board of Directors, where she serves as an independent director. Dr. Birx is a world renowned medical expert and leader who most recently served as the response coordinator of the White House Coronavirus Task Force. Dr. Birx’s career highlights also include having served as Ambassador-at-Large, when she assumed the role of the Coordinator of the United States Government Activities to Combat HIV/AIDS and U.S. Special Representative for Global Health Diplomacy. Dr. Birx also served as the U.S. Global AIDS Coordinator where she oversaw the President’s Emergency Plan for AIDS Relief (PEPFAR) at the Centers for Disease Control and Prevention and as the Director of the U.S. Military HIV Research Program (USMHRP) at the Walter Reed Army Institute of Research.

•

First quarter 2022 net sales of RELVAR®/BREO® ELLIPTA® by GSK were $371.8 million, down 1% from $375.9 million in the same quarter of 2021, with $160.4 million in net sales from the U.S. market and $211.4 million from non-U.S. markets.

•

First quarter 2022 net sales of ANORO® ELLIPTA® by GSK were $129.9 million, down 20% from $161.5 million in the same quarter of 2021, with $54.5 million net sales from the U.S. market and $75.4 million from non-U.S. markets.

•

~~Table~~First quarter 2022 net sales of ~~Contents~~TRELEGY

® ELLIPTA® by GSK were $450.9 million, up 33% from $339.8 million in the same quarter of 2021, with $317.4 million in net sales from the U.S. market and $133.5 million in net sales from non-U.S. markets.

•

Capital Allocation:

•

During the first quarter of 2022, the Company’s wholly owned subsidiary, Innoviva Strategic Opportunities LLC, invested $45.0 million to acquire 9.0 million shares of Armata common stock and warrants to purchase 4.5 million additional shares of common stock exercisable at $5.00 per share, which resulted in Innoviva collectively owning approximately 69% of Armata’s outstanding stock (without giving effect to our warrants).

•

During the first quarter of 2022, the Company’s wholly owned subsidiary, Innoviva Strategic Opportunities LLC, purchased a $15.0 million note from Entasis that is convertible, subject to certain conditions, into Entasis’ shares at $1.48 per share price and equal number of warrants with $1.48 per share strike price. During the first quarter of 2022, the Company determined that it is the primary beneficiary of Entasis and consolidated Entasis’ financial position and results of operations effective on February 17, 2022. The Company also made a non-binding offer to acquire all outstanding equity securities of Entasis that it does not own at $2.00 per share.

•

During the first quarter of 2022, the Company issued 2.125% convertible notes due in 2028 (“2028 Notes”) with principal value of $261.0 million and used a portion of the proceeds to repurchase $144.8 million (or approximately 60% of outstanding) convertible notes due in 2023 (“2023 Notes”), resulting in $20.7 million accounting loss on debt extinguishment.

Collaborative Arrangements with GSK

LABA Collaboration

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

●

~~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.~~

•

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 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 commercialization activities under the LABA Collaboration Agreement, including participation in the joint steering committee and joint project committee that are expected to continue over the life of the agreement. The milestone fees paid to GSK were recognized as capitalized fees paid to a related party, which are being amortized over their estimated useful lives commencing upon the commercial launch of the products.

Critical Accounting Policies and Estimates

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

~~As part of~~ Other than those set out in Note 1 to our capital allocation strategies, we invest from time to time in equity securities of private or public companies. We also enter into strategic partnerships in order to accelerate the execution of our strategy and enhance returns on our capital. If we determine that we have control over these companies or partnerships, we consolidate theaccompanying unaudited consolidated financial statements, ~~of these companies or partnerships. If~~ we ~~determine that we do not~~believe there have control over these companies or partnerships under either voting or VIE models, we then determine if we have an ability to exercise significant influence via voting interests, board representation or other business relationships.

We may account for the equity investments where we exercise significant influence using either an equity method of accounting or at fair value by electing the fair value option under Accounting Standards Codification ("ASC") Topic 825, ~~Financial Instruments~~. If the fair value option is applied to an investment that would otherwise be accounted for under the equity method, we apply it to all our financial interests in the same entity (equity and debt, including guarantees) that are eligible items. All gains and losses from fair value changes, unrealized and realized, are presented as changes in fair values of equity and long-term investments, net on the consolidated statements of income.

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

~~There were~~been no significant changes toin our critical accounting policies ~~and estimates. Management’s Discussion and Analysis of Financial Condition and Results of Operations contained~~as described in ~~Part II, Item 7 of our Annual Report on~~the Form 10-K for the year ended December 31, ~~2020~~2021 filed with the SEC on February ~~25, 2021 provides a more complete discussion of our critical accounting policies~~28, 2022, and ~~estimates.~~as amended on March 17, 2022.

~~Table of Contents~~

Results of Operations

Net Revenue

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


	Three Months Ended March 31,						Change
(In thousands)	2022			2021			$			%
Royalties from a related party - RELVAR/BREO	$	55,764		$	56,390		$	(626	)		(1	)%
Royalties from a related party - ANORO		8,442			10,500			(2,058	)		(20	)%
Royalties from a related party - TRELEGY		29,309			22,084			7,225			33	%
Total royalties from a related party		93,515			88,974			4,541			5	%
Less: amortization of capitalized fees paid to a related party		(3,456	)		(3,456	)		—		*
Royalty revenue from GSK	$	90,059		$	85,518		$	4,541			5	%

Three Months Ended March 31,

Change

(In thousands)

2021

2020

$

%

Royalties from a related party - RELVAR/BREO

$
56,390

$
56,149

$
241

0
%
Royalties from a related party - ANORO

10,500

9,850

650

7
%
Royalties from a related party - TRELEGY

22,084

16,135

5,949

37
%
Total royalties from a related party

88,974

82,134

6,840

8
%
Less: amortization of capitalized fees paid to a related party

(3,456)

(3,456)

—

0
%
Royalty revenue from GSK

$
85,518

$
78,678

$
6,840

9
%

*Not Meaningful

Total net revenue increased to ~~$85.5~~$90.1 million for the three months ended March 31, ~~2021,~~2022, compared to ~~$78.7~~$85.5 million for the same period a year ago, primarily due to ~~favorable adjustments and the~~ growth in prescriptions for our ~~respiratory~~TRELEGY products.

Research & Development

Research and development (“R&D”) expenses attributable to ~~Pulmoquine’s~~Entasis' product development efforts were ~~de minimis~~$5.8 million for the three months ended March 31, ~~2021. We did not incur any R&D~~2022. Research and development expenses ~~during~~for the three months ended March 31, ~~2020.~~2021 were attributable to the product development of Pulmoquine Therapeutics Inc., which was dissolved at the end of 2021.

General & Administrative

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


	Three Months Ended March 31,				Change
(In thousands)	2022		2021		$		%
General and administrative	$	6,492	$	5,986	$	506		8	%

Three Months Ended March 31,

Change
(In thousands)

2021

2020

$

%
General and administrative

$
5,986

$
2,563

$
3,423

*

*Not Meaningful

General and administrative expenses for the three months ended March 31, ~~2021~~2022 increased compared to the same period in ~~2020~~2021 mainly due to ~~$3.1~~the consolidation of Entasis' operating expenses of $2.0 million ~~legal~~starting February 17, 2022.

Interest and ~~related expenses incurred for the arbitration initiated by Theravance Biopharma against the Company~~dividend income and ~~TRC. These arbitration related legal fees were recognized in TRC’s statement of income.~~other expense, net

~~Other Income,~~Interest and dividend income and other expense, net, ~~and Interest Income~~

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


	Three Months Ended March 31,						Change
(In thousands)	2022			2021			$		%
Interest and dividend income	$	322		$	30		$	292	*
Other expense, net		(250	)		(433	)		183		(42	)%

Three Months Ended March 31,

Change

(In thousands)

2021

2020

$

%

Other income (expense), net

$
(433)

$
68

$
(501)

*

Interest income

$
30

$
1,302

$
(1,272)

(98)
%

*Not Meaningful

Interest and dividend income ~~decreased~~increased for the three months ended March 31, ~~2021~~2022 compared to the same ~~period~~periods a year ago ~~primarily~~ due to ~~lower interest rates impacted~~higher returns on investments, including those managed by ~~the COVID-19 pandemic.~~ISP Fund LP.

~~Table of Contents~~

Interest Expense

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


	Three Months Ended March 31,				Change
(In thousands)	2022		2021		$			%
Interest expense	$	3,010	$	4,694	$	(1,684	)		(36	)%

Three Months Ended March 31,

Change

(In thousands)

2021

2020

$

%

Interest expense

$
4,694

$
4,516

$
(178)

4
%

The decrease in interest expense was primarily due to the adoption of the new accounting standard, ASU 2020-06, which is to simplify the accounting for convertible debt instruments, and the debt discount associated with the cash settlement feature of our convertible notes due 2025 (“2025 Notes”), which was adjusted to zero as of January 1, 2022. The interest expense for the three months ended March 31, 2022 included the contractual interest expense and the amortization of debt issuance costs for our 2023 Notes, 2025 Notes and 2028 Notes. Interest expense ~~includes~~for the three months ended March 31, 2021 included the contractual interest expense, the amortization of debt discount and issuance costs for our ~~convertible notes. The increase in interest expense was mainly~~2023 Notes and 2025 Notes.

Loss on Debt Extinguishment

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

Changes in Fair Values of Equity and Long-Term Investments

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

Three Months Ended March 31,

Change
(In thousands)

2021

2020

$

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

$
55,045

$
21,915

$
33,130

*


	Three Months Ended March 31,					Change
(In thousands)	2022			2021		$			%
Changes in fair values of equity and long-term investments, net	$	(9,411	)	$	55,045	$	(64,456	)		(117	)%

*Not Meaningful

The changes in fair values of ~~$55.0 million~~equity and long-term investments for the ~~quarter~~three months ended March 31, 2022 decreased compared to the same period in 2021 mainly due to the volatility in the capital markets. The changes in fair values of equity and long-term investments reflect the realized gains and losses and net unrealized ~~gain~~gains and losses in ~~the stock and warrants of~~ our strategic investments in Armata, Entasis, ~~and~~ InCarda, Gate, and those ~~equity~~ investments managed by ISP Fund LP. ~~The changes in fair value of $21.9 million for the quarter ended March 31, 2020 reflect the net changes in our initial investment in Armata.~~

Provision for Income Taxes

The provisional income tax expense for the three months ended March 31, ~~2021~~2022 was $6.9 million with an effective income tax rate of 15.3%, compared to $19.7 million with an effective income tax rate of 15.2%~~, compared to $15.9 million with an effective interest rate of 16.8%~~ in the same period a year ago.

Net Income Attributable to Noncontrolling Interest

Net income attributable to noncontrolling interest, as compared to the prior ~~period,~~periods, was as follows:


	Three Months Ended March 31,				Change
(In thousands)	2022		2021		$		%
Net income attributable to noncontrolling interest	$	22,085	$	15,572	$	6,513		42	%

Three Months Ended March 31,

Change

(In thousands)

2021

2020

$

%

Net income attributable to noncontrolling interest

$
15,572

$
13,515

$
2,057

15
%

This represents $25.1 million for the 85% share of net income in Theravance Respiratory Company, LLC for Theravance Biopharma and $3.0 million for the 40% share of net loss in Entasis Therapeutics Holdings, Inc. for the three months ended March 31, 2022. The net income attributable to noncontrolling interest for the three months ended March 31, 2021 represents the 85% share of net income in Theravance Respiratory Company, LLC for Theravance ~~Biopharma for the three months ended March 31, 2021 and 2020.~~Biopharma. The increase was primarily due to ~~the increase in~~ the growth in prescriptions and market share for TRELEGY^® ELLIPTA®., offset with $3.0 million net loss for Entasis’ noncontrolling interest.

Liquidity and Capital Resources

Liquidity

Since our inception, we have financed our operations primarily through private placements and public offerings of equity and debt securities and payments received under collaborative arrangements. For the three months ended March 31, ~~2021,~~2022, we generated gross royalty revenues from GSK of ~~$89.0~~$93.5 million. Net cash and cash equivalents ~~short term investments and marketable securities~~ totaled ~~$282.9~~$216.8 million, inclusive of $33.5 million of Entasis' cash balance, and receivables from GSK totaled ~~$89.0~~$93.5 million as of March 31, ~~2021.~~2022.

~~Table of Contents~~

Adequacy of Cash Resources to Meet Future Needs

We believe that cash from projected future royalty revenues and our cash, cash equivalents and marketable securities will be sufficient to meet our anticipated debt service and operating needs for at least the next 12 months based upon current operating plans and financial forecasts. If our current operating plans and financial forecasts change, we may require additional funding sooner in the form of public or private equity offerings or debt financings. Furthermore, if in our view favorable financing opportunities arise, we may seek additional funding at any time. However, future financing may not be available in amounts or on terms acceptable to us, if at all. This could leave us without adequate financial resources to fund our operations as currently planned. In addition, from time to time we may restructure or reduce our debt, including through tender offers, redemptions, amendments, repurchases or otherwise, all allowable with the terms of our debt agreements.

Cash Flows

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

Three Months Ended March 31,


(In thousands)

2021

2020

Change
Net cash provided by operating activities

$
84,107

$
73,481

$
10,626
Net cash provided by (used in) investing activities

(26,394)

16,044

(42,438)
Net cash used in financing activities

(21,310)

(15,640)

(5,670)


	Three Months Ended March 31,
(In thousands)	2022			2021			Change
Net cash provided by operating activities	$	98,102		$	84,107		$	13,995
Net cash used in investing activities		(143,156	)		(26,394	)		(116,762	)
Net cash provided by (used in) financing activities		60,331			(21,310	)		81,641

Cash Flows from Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2022 was $98.1 million, consisting primarily of our net income of $37.9 million, adjusted for net non-cash items such as $6.9 million of deferred income tax, $3.5 million of depreciation and amortization, $20.7 million of loss on extinguishment of debt, and $9.4 million decrease in the fair value of our equity and long-term investments and a decrease in receivables from collaborative arrangements of $17.2 million, offset by a reduction of accrued interest payable of $2.8 million.

Net cash provided by operating activities for the three months ended March 31, 2021 was $84.1 million, consisting primarily of our net income of $109.7 million, adjusted for net non-cash items such as $19.7 million of deferred income taxes and $3.5 million of depreciation and amortization, partially offset by $54.7 million increase in the fair values of our equity and long-term investments, an increase in receivables from collaborative arrangements of $5.0 million and a reduction in accrued interest payable of $2.5 million.

Cash Flows from Investing Activities

Net cash ~~provided by operating~~used in investing activities for the three months ended March 31, ~~2020~~2022 of $143.2 million was ~~$73.5~~primarily due to $134.3 million ~~consisting primarily~~ of ~~our net income~~purchases of ~~$79.0~~equity and other investments managed by ISP Fund LP and $56.2 million ~~adjusted for net non-cash items~~investments in Armata, InCarda, and Nanolive, partially offset by $24.3 million of ~~$0.4~~sales of equity investments managed by ISP Fund LP and $23.1 million ~~an increase in receivables from collaborative arrangements~~ of ~~$2.7 million and a reduction in accrued interest payable~~cash acquired through the consolidation of ~~$2.5 million.~~Entasis.

~~Cash Flows from Investing Activities~~

Net cash used in investing activities for the three months ended March 31, 2021 of $26.4 million was primarily due to our investments in Armata and ImaginAb. $112.6 million of sales was offset by $112.6 million of purchases of equity and other investments managed by the ISP Fund LP.

Cash Flows from Financing Activities

Net cash provided by ~~investing~~financing activities for the three months ended March 31, ~~2020~~2022 of ~~$16.0~~$60.3 million was primarily due to ~~$54.0~~the net proceeds of $252.8 million ~~received~~ from ~~maturities~~the issuance of ~~marketable securities, partially~~the convertible senior notes due in 2028, offset ~~by $12.9~~with $21.0 million ~~in purchases~~purchase of ~~marketable securities and $25.0~~capped call options associated with the 2028 Notes, $165.1 million for ~~our investments in Armata.~~the repurchase of the 2023 Notes, and $6.5 million distributions to noncontrolling interest.

~~Cash Flows from Financing Activities~~

Net cash used in financing activities for the three months ended March 31, 2021 of $21.3 million was primarily due to distributions to noncontrolling interest.

~~Net cash used~~Contractual Obligations

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

During the three months ended March 31, ~~2020~~2022, we determined that we have both (1) the power to direct the economically significant activities of ~~$15.6~~Entasis and (2) the obligation to absorb the losses, or the right to receive the benefits, that could potentially be significant to Entasis, and therefore, we are the primary beneficiary of Entasis. Accordingly, we consolidated Entasis' financial position and results of operations effective on February 17, 2022. In connection with the consolidation, we assumed contractual obligations related to an operating lease of Entasis for office and laboratory space in Waltham, Massachusetts with an expiration date in 2025. As of March 31, 2022, total undiscounted future minimum lease payments related to the Entasis lease were $4.5 million, ~~was primarily due~~with approximately $0.6 million payable through December 31, 2022 and approximately $1.3 million payable in each of the years from 2023 to ~~$15.8 million distributions~~2025. Refer to ~~noncontrolling interest.~~Note 9, “Commitments and Contingencies”, to the Consolidated Financial Statements for more information.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

There have been no significant changes in our market risk or how our market risk is managed compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~

2021.

~~Table of Contents~~

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

We conducted an evaluation as of March 31, ~~2021,~~2022, under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures, which are defined under SEC rules as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within required time periods. Based upon that evaluation, our Chief Executive Officer and Chief Accounting Officer, concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance levels.

Limitations on the Effectiveness of Controls

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all frauds. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Innoviva have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There have been no material changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended March 31, ~~2021~~2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

~~In May 2019, Theravance Biopharma, which is the owner of 85% of the economic interests~~There have not been any material changes to our legal proceedings from those reported in TRC, initiated arbitration against the Company and TRC, relating to a dispute as to the determination by Innoviva (as manager of TRC) to cause TRC to explore potential reinvestment opportunities for the royalty proceeds received by GSK into initiatives that Innoviva believes will increase the value of TRC and TRELEGY^® ~~ELLIPTA~~^®. Theravance Biopharma alleged that, in causing TRC to not distribute substantially all royalty proceeds received from GSK, Innoviva breached the limited liability company operating agreement governing TRC (the “Operating Agreement”), as well as the fiduciary duties applicable to Innoviva as manager of TRC. The hearing in respect of the arbitration was conducted from July 23, 2019 through July 25, 2019. Post-arbitration oral argument was heardour fiscal year 2021 Annual Report on August 14, 2019. On September 26, 2019, the arbitrator issued a final decision. The arbitrator ruled that Innoviva did not breach the Operating Agreement or its fiduciary duties by withholding royalties or pursuing reinvestment opportunities. Accordingly, the Company is permitted to continue to pursue development and commercialization initiatives. The arbitrator did conclude that Innoviva breached a provision of the Operating Agreement requiring Innoviva to deliver quarterly financial plans to Theravance Biopharma. However, the arbitrator concluded that this technical breach did not cause any damages to Theravance Biopharma and the arbitrator awarded limited injunctive relief to expand and clarify the disclosure obligations under the Operating Agreement related to the delivery of financial plans and the pursuit of investment opportunities (if those opportunities related to TRELEGY^® ~~ELLIPTA~~^®~~). Finally, the arbitrator ruled that the Company is entitled to indemnification from TRC for 95% of its fees and expenses incurred in connection~~Form 10-K filed with the ~~arbitration.~~

On September 30, 2019, the Company and TRC filed a Verified Complaint in the Court of Chancery of the State of Delaware (“Court of Chancery”) to confirm the arbitration award. The award was confirmed by the Court of Chancery on May 4, 2020.

~~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. Theravance Biopharma must respond to the Verified Complaint by May 19, 2021.~~

SEC.

Item 1A. Risk Factors

Our business is subject to a number of risks, including those identified in Item 1A of Part I of our ~~2020~~2021 Form 10-K. There have been no material changes to the risk factors described in our ~~2020~~2021 Form ~~10-K~~.

10-K.

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

~~None.~~

None.

Item 3: Defaults Upon Senior Securities

~~None.~~

None.

Item 4: Mine Safety Disclosures

~~None.~~

None.

Item 5: Other Information

~~None.~~

None.

~~Table of Contents~~

Item 6. Exhibits

~~(a)~~

~~Index to Exhibits~~

(a)

Index to Exhibits


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

~~10.1~~	~~Indemnification Agreement, dated as of March 9, 2021, by and between Innoviva, Inc. and Deborah L. Birx, M.D.~~

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

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

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 March 31, 2021) formatted in iXBRL (Inline eXtensible Business Reporting Language).~~

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



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

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

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

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

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

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

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

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

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

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

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

10.1	Form of Capped Call Confirmation	8-K	10.1	3/8/2022

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

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

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

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

101.SCH	Inline XBRL Taxonomy Extension Schema Document

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document

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

2738

~~Table of Contents~~

~~SIGNATURES~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Innoviva, Inc.

Date: ~~April 28, 2021~~May 05, 2022	/s/ Pavel Raifeld
	Pavel Raifeld
	Chief Executive Officer
	(Principal Executive Officer)

Date: ~~April 28, 2021~~May 05, 2022	/s/ Marianne Zhen
	Marianne Zhen
	Chief Accounting Officer
	(Principal Financial Officer)


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of March 31, ~~2021~~2022 (Unaudited) and December 31, ~~2020~~2021	3
Unaudited Consolidated Statements of Income for the Three Months ended March 31, ~~2021~~2022 and ~~2020~~2021	4
Unaudited Consolidated Statements of Comprehensive Income for the Three Months ended March 31, ~~2021~~2022 and ~~2020~~2021	5
Unaudited Consolidated Statements of Stockholders’ Equity for the Three Months ended March 31, ~~2021~~2022 and ~~2020~~2021	6
Unaudited Consolidated Statements of Cash Flows for the Three Months ended March 31, ~~2021~~2022 and ~~2020~~2021	78
Notes to Unaudited Consolidated Financial Statements	89

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1930

Item 3. Quantitative and Qualitative Disclosures About Market Risk	2437

Item 4. Controls and Procedures	2537

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	2537

Item 1A. Risk Factors	2637

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	2637

Item 3. Defaults Upon Senior Securities	2637

Item 4. Mine Safety Disclosure	2637

Item 5. Other Information	2638

Item 6. Exhibits	2738

Signatures	2839

~~Exhibits~~


	March 31,		December 31,
	2021		2020
	(unaudited)		*
Assets
Current assets:
Cash and cash equivalents	$	282,890	$	246,487
Related party receivables from collaborative arrangements		88,974		93,931
Prepaid expenses and other current assets		1,069		1,640
Total current assets		372,933		342,058
Property and equipment, net		24		28
Equity and long-term investments		519,325		438,258
Capitalized fees paid to a related party, net		121,797		125,253
Deferred tax assets, net		74,023		93,759
Other assets		188		214
Total assets	$	1,088,290	$	999,570

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	14	$	66
Accrued personnel-related expenses		652		490
Accrued interest payable		1,668		4,152
Other accrued liabilities		1,470		1,402
Total current liabilities		3,804		6,110
Long-term debt, net of discount and issuance costs		387,728		385,517
Other long-term liabilities		77		106
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock: $0.01 par value, 230 shares authorized, 0 shares issued and outstanding		0		0
Common stock: $0.01 par value, 200,000 shares authorized, 101,408 and 101,392 issued and outstanding as of March 31, 2021 and December 31, 2020, respectively		1,014		1,014
Additional paid-in capital		1,261,326		1,260,900
Accumulated deficit		(627,879)		(722,002)
Total Innoviva stockholders’ equity		634,461		539,912
Noncontrolling interest		62,220		67,925
Total stockholders’ equity		696,681		607,837
Total liabilities and stockholders’ equity	$	1,088,290	$	999,570


	Three Months Ended March 31,
	2021		2020
Royalty revenue from a related party, net of amortization of capitalized fees paid to a related party of $3,456 in three months ended March 31, 2021 and 2020	$	85,518	$	78,678
Operating expenses:
Research and development		49		0
General and administrative		5,986		2,563
Total operating expenses		6,035		2,563
Income from operations		79,483		76,115
Other income (expense), net		(433)		68
Interest income		30		1,302
Interest expense		(4,694)		(4,516)
Changes in fair values of equity and long-term investments, net		55,045		21,915
Income before income taxes		129,431		94,884
Income tax expense, net		19,736		15,932
Net income		109,695		78,952
Net income attributable to noncontrolling interest		15,572		13,515
Net income attributable to Innoviva stockholders	$	94,123	$	65,437

Basic net income per share attributable to Innoviva stockholders	$	0.93	$	0.65
Diluted net income per share attributable to Innoviva stockholders	$	0.84	$	0.59

Shares used to compute Innoviva basic and diluted net income per share:
Shares used to compute basic net income per share		101,365		101,235
Shares used to compute diluted net income per share		113,624		113,509


	Three Months ended March 31, 2021
						Accumulated
				Additional		Other						Total
	Common Stock			Paid-In		Comprehensive		Accumulated		Noncontrolling		Stockholders’
	Shares	Amount		Capital		Income (Loss)		Deficit		Interest		Equity
Balance as of December 31, 2020	101,392	$	1,014	$	1,260,900	$	0	$	(722,002)	$	67,925	$	607,837
Distributions to noncontrolling interest	0		0		0		0		0		(21,285)		(21,285)
Equity activity of noncontrolling interest from a consolidated variable interest entity	0		0		0		0		0		8		8
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding	16		0		(25)		0		0		0		(25)
Stock-based compensation	0		0		451		0		0		0		451
Net income	0		0		0		0		94,123		15,572		109,695
Balance as of March 31, 2021	101,408	$	1,014	$	1,261,326	$	0	$	(627,879)	$	62,220	$	696,681


	Three Months ended March 31, 2020
						Accumulated
				Additional		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


	Three Months Ended March 31, 2022
					Additional			Accumulated Other													Total
	Common Stock				Paid-In			Comprehensive		Accumulated			Treasury Stock					Noncontrolling			Stockholders’
	Shares		Amount		Capital			Income (Loss)		Deficit			Shares		Amount			Interest			Equity
Balance as of December 31, 2021		69,566	$	696	$	1,264,024		$	—	$	(456,148	)		32,005	$	(393,829	)	$	111,192		$	525,935
Cumulative adjustment due to adoption of ASU 2020-06		—		—		(65,361	)		—		37,238			—		—			—			(28,123	)
Distributions to noncontrolling interest		—		0		0			0		0			0		0			(6,507	)		(6,507	)
Fair value of noncontrolling interest in a consolidated variable interest entity		—		0		0			0		0			0		0			38,471			38,471
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding		28		0		214			0		0			0		0			0			214
Stock-based compensation		—		—		620			—		—			0		0			334			954
Capped call options associated with convertible senior notes due 2028		—		0		(16,585	)		0		0			0		0			0			(16,585	)
Net income		—		0		0			0		15,773			0		0			22,085			37,858
Balance as of March 31, 2022		69,594	$	696	$	1,182,912		$	—	$	(403,137	)		32,005	$	(393,829	)	$	165,575		$	552,217


	Three Months Ended March 31, 2021
					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, 2020		101,392	$	1,014	$	1,260,900		$	—	$	(722,002	)	$	67,925		$	607,837
Distributions to noncontrolling interest		—		0		0			0		0			(21,285	)		(21,285	)
Equity activity of noncontrolling interest from a consolidated variable interest entity		—		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			(25	)
Stock-based compensation		—		0		451			0		0			0			451
Net income		—		0		0			0		94,123			15,572			109,695
Balance as of March 31, 2021		101,408	$	1,014	$	1,261,326		$	—	$	(627,879	)	$	62,220		$	696,681


	Three Months Ended March 31,
(In thousands except per share data)	2021		2020
Numerator:
Net income attributable to Innoviva stockholders, basic	$	94,123	$	65,437
Add: interest expense on 2023 Notes		1,204		1,180
Net income attributable to Innoviva stockholders, diluted	$	95,327	$	66,617

Denominator:
Weighted-average shares used to compute basic net income per share attributable to Innoviva stockholders		101,365		101,235
Dilutive effect of 2023 Notes		12,189		12,189
Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan		70		85
Weighted-average shares used to compute diluted net income per share attributable to Innoviva stockholders		113,624		113,509

Net income per share attributable to Innoviva stockholders
Basic	$	0.93	$	0.65
Diluted	$	0.84	$	0.59


	Three Months Ended March 31,
(In thousands)	2021		2020
Outstanding options and awards granted under equity incentive plan and employee stock purchase plan	$	1,159	$	1,094


	March 31, 2021
			Gross		Gross
			Unrealized		Unrealized		Estimated
(In thousands)	Amortized Cost		Gains		Losses		Fair Value
Money market funds⁽¹⁾	$	248,932	$	0	$	0	$	248,932
Total	$	248,932	$	0	$	0	$	248,932


	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 March 31, 2021 Using:
	Quoted Price		Significant
	in Active		Other		Significant
	Markets for		Observable		Unobservable
Types of Instruments	Identical Assets		Inputs		Inputs
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	248,932	$	0	$	0	$	248,932
Investments held by ISP Fund LP ⁽¹⁾		304,696		0		0		304,696
Equity investment - Armata Common Stock		71,053		0		0		71,053
Equity investment - Armata Warrants		0		54,166		0		54,166
Equity investment - Entasis Common Stock		39,960		0		0		39,960
Equity investment - Entasis Warrants		0		26,580		0		26,580
Equity investment - InCarda Warrants		0		0		664		664
Total assets measured at estimated fair value	$	664,641	$	80,746	$	664	$	746,051
Debt
2023 Notes	$	0	$	242,336	$	0	$	242,336
2025 Notes		0		203,513		0		203,513
Total fair value of debt	$	0	$	445,849	$	0	$	445,849


	Three Months Ended
	March 31, 2021
Risk-free interest rate		1.1	%
Expected term (in years)		6.11
Volatility		45.6	%
Dividend yield		0.0	%
Weighted-average estimated fair value of stock options granted	$	5.42


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


(In thousands)
Years ending December 31:
Remainder of 2021	$	92
2022		109
2023		0
Thereafter		0
Total	$	201


	Three Months Ended March 31,				Change
(In thousands)	2021		2020		$		%
Royalties from a related party - RELVAR/BREO	$	56,390	$	56,149	$	241	0	%
Royalties from a related party - ANORO		10,500		9,850		650	7	%
Royalties from a related party - TRELEGY		22,084		16,135		5,949	37	%
Total royalties from a related party		88,974		82,134		6,840	8	%
Less: amortization of capitalized fees paid to a related party		(3,456)		(3,456)		—	0	%
Royalty revenue from GSK	$	85,518	$	78,678	$	6,840	9	%