What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-28 compared with 2021-02-25 · 447 added, 330 removed, 535 unchanged (59% of the section changed)

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Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2021

Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2020

Consolidated Statements of Stockholders’

Equity for each of the three years in the period ended December 31, 2021

Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2021

Notes to Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firm

Reports of Independent Registered Public Accounting Firm (PCAOB ID 248 )

INNOVIVA, INC.

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Cash and cash equivalents

Short-term marketable securities

Related party receivables from collaborative arrangements

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Property and equipment, net

Equity and other long-term investments

Equity and long-term investments

Capitalized fees paid to a related party, net

Deferred tax assets, net

Liabilities and Stockholders' Equity

Liabilities and Stockholders’

Current liabilities:

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Commitments and contingencies (Note 9)

Stockholders’ equity:

Stockholders’

Preferred stock:

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

$ 0.01 par value, 230 shares authorized,

no shares issued and outstanding

Common stock:

$ 0.01 par value, 200,000 shares authorized, 101,392 and 101,288 issued and outstanding as of December 31, 2020 and December 31, 2019, respectively

$ 0.01 par value, 200,000 shares authorized,

69,566 and 101,392 issued and outstanding as of

December 31, 2021 and December 31, 2020 respectively

Treasury stock:

at cost, 32,005 and no shares at

December 31, 2021 and December 31, 2020, respectively

Additional paid-in capital

Accumulated other comprehensive income

Accumulated deficit

Total Innoviva stockholders’ equity

Total Innoviva stockholders’

Noncontrolling interest

Total stockholders’ equity

Total liabilities and stockholders’ equity

Total stockholders’

Total liabilities and stockholders’

See accompanying notes to consolidated financial statements.

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Year Ended December 31,

Royalty revenue from a related party, net of amortization of capitalized fees paid to a related party of $ 13,823 in the years ended December 31, 2020, 2019, 2018, respectively

Revenue from collaborative arrangements with a related party

Royalty revenue from a related party, net of amortization of

capitalized fees paid to a related party of $ 13,823 in the

years ended December 31, 2021, 2020, 2019 respectively

Revenue from collaborative arrangement

with a related party

Total net revenue

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General and administrative

General and administrative - related party

Total operating expenses

Income from operations

Interest and dividend income

Other expense, net

Interest income

Interest expense

Changes in fair values of equity investments

Changes in fair values of equity

and long-term investments, net

Income before income taxes

Income tax benefit (expense), net

Net income attributable to noncontrolling interest

Net income attributable to Innoviva stockholders

Basic net income per share attributable to Innoviva stockholders

Diluted net income per share attributable to Innoviva stockholders

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

Income tax expense, net

Net income attributable to

noncontrolling interest

Net income attributable to

Innoviva stockholders

Basic net income per share attributable

to Innoviva stockholders

Diluted net income per share attributable

to Innoviva stockholders

Shares used to compute Innoviva basic and diluted

net income per share:

Shares used to compute basic net income per share

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INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

(In thousands)

Accumulated Other

Comprehensive

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Noncontrolling

Stockholders’

Income (Loss)

Balance as of December 31, 2018

( 1,498,748 )

Distributions to noncontrolling interest

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

Exercise of stock options, and issuance

of common stock units and stock

awards, net of repurchase of shares

to satisfy tax withholding

Stock-based compensation

Cash dividend forfeited

Retirement of treasury stock

Other comprehensive income

Balance as of December 31, 2019

( 1,103,692 )

Distributions to noncontrolling interest

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

Equity activity of noncontrolling interest

from a consolidated variable interest

Exercise of stock options, and issuance

of common stock units and stock

awards, net of repurchase of shares

to satisfy tax withholding

Stock-based compensation

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Distributions to noncontrolling interest

Equity activity of noncontrolling interest from a consolidated variable interest entity

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

Equity activity of noncontrolling interest

from a consolidated variable interest

Exercise of stock options, and issuance

of common stock units and stock

awards, net of repurchase of shares

to satisfy tax withholding

Repurchase of common stock

Stock-based compensation

Other comprehensive income

Balance as of December 31, 2021

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Cash flows from operating activities

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

Adjustments to reconcile net income to net cash provided by operating

Deferred income taxes

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Amortization of lease guarantee

Changes in fair values of equity investments

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

Other non-cash items

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Purchases of marketable securities

Purchases of equity and other long term investments

Purchases of equity and long-term investments

Purchases of equity investments managed by ISP Fund LP

Sales of equity investments managed by ISP Fund LP

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

Purchases of property and equipment

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Cash flows from financing activities

Repurchase of common stock

Distributions to noncontrolling interest

Repurchase of shares to satisfy tax withholding

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Proceeds from issuances of common stock, net

Net proceeds from the issuance of variable interest entity's equity

Distributions to noncontrolling interest

Net proceeds from the issuance of variable interest entity’s equity

Net cash used in financing activities

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Description of Operations

Innoviva (referred to as “Innoviva”, the “Company”, or “we” and other similar pronouns) is a company with a portfolio of royalties and other healthcare assets.

Our royalty portfolio contains respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR ® /BREO ® ELLIPTA ® (fluticasone furoate/ vilanterol, “FF/VI”), ANORO ® ELLIPTA ® (umeclidinium bromide/ vilanterol, “UMEC/VI”) and TRELEGY ® ELLIPTA ® (the combination FF/UMEC/VI).

Under the Long-Acting Beta2 Agonist (“LABA”) Collaboration Agreement, Innoviva is entitled to receive royalties from GSK on sales of RELVAR ® /BREO ® ELLIPTA ® as follows:

Innoviva Inc.

(referred to as “Innoviva”, the “Company”, or “we”

and other similar pronouns) is a company with a portfolio of royalties and other healthcare assets.

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 ® .

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Innoviva and its wholly owned subsidiaries and variable interest entities for which we are the primary beneficiary.

The accompanying 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 the consolidated variable interest entities, we record net income attributable to noncontrolling interest on our consolidated statements of income equal to the percentage of ownership interest retained in such entity by the respective noncontrolling party.

Use of Management’s Estimates

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 consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entity by the respective noncontrolling party.

Prior Period Reclassifications

The Company reclassified certain prior period amounts related to the investments managed by ISP Fund LP to conform with the current year presentation.

These reclassifications were from purchases of equity and long-term investments of $ 388.0 million to:

(i) purchases of equity investments managed by ISP Fund LP of $ 14.9 million, (ii) purchase and sales of other investments managed by ISP Fund LP, net of $ 285.1 million.

These changes were not deemed material and did not impact total cash flows from investing activities, and any other consolidated financial statements.

Use of Management’s Estimates

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

Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.

Actual results could differ materially from those estimates.

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Certain Risks and Concentrations

Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and equity investments.

Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, equity and long-term investments.

Although we deposit our cash with multiple financial institutions, our deposits, at times, may exceed federally insured limits.

Refer to “Segment Reporting” below for concentrations with respect to revenues and geographic locations.

Refer to “Segment Reporting”

below for concentrations with respect to revenues and geographic locations.

Segment Reporting

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Our facilities are located within the United States.

Variable Interest Entities

We evaluate our ownership, contractual and other interest in entities to determine if they are variable interest entities (“VIE”), whether we have a variable interest in those entities and the nature and extent of those interests.

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

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 .

Cash and Cash Equivalents

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federal government.

We classify our marketable securities as available-for-sale securities and report them at fair value in cash equivalents or short-term marketable securities on the consolidated balance sheets with related unrealized gains and losses included as a component of stockholders’ equity.

The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest income on the consolidated statements of operations.

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When we determine that the decline in estimated fair value of an investment is below the amortized cost basis and the decline is other-than-temporary, we reduce the carrying value of the security and record a loss for the amount of such decline to other income (expense), net.

Equity Investments

We invest from time to time in equity securities of private or public companies.

If we determine that we have control over these companies, we include them in our consolidated financial statements.

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") Topic 825, Financial Instruments .

We may account for the investments where we exercise significant influence using either an equity method of accounting or at fair value by electing the fair value option under Accounting Standards Codification ("ASC") Topic 825, Financial Instruments .

If the fair value option is applied to an investment that would otherwise be accounted for under the equity method, we apply it to all our financial 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 investments, net on the consolidated statements of income.

If we conclude that we do not have an ability to exercise significant influence over an investee, we may elect to account for an equity security without a readily determinable fair value using the measurement alternative described in ASC Topic 825.

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 the security without a readily determinable fair value using the measurement alternative under ASC Topic 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.

Fair Value of Financial Instruments

We define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

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 to have control and access to the contributions and related investments.

These investments are classified as long-term investments on the consolidated balance sheets.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair Value of Financial Instruments

Our valuation techniques are based on observable and unobservable inputs.

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We classify these inputs into the following hierarchy:

Level 1 —Quoted prices for identical instruments in active markets.

Level 2 —Quoted prices for similar instruments in active markets;

Level 1 —Quoted prices for identical instruments in active markets.

Level 2 —Quoted prices for similar instruments in active markets;

quoted prices for identical or similar instruments in markets that are not active;

and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 —Unobservable inputs and little, if any, market activity for the assets.

Financial instruments include cash equivalents, marketable securities, receivables from collaborative arrangements, accounts payable, and accrued liabilities.

Cash equivalents and marketable securities are carried at estimated fair value.

The carrying values of receivables from collaborative arrangements, accounts payable, and accrued liabilities approximate their estimated fair value due to the relatively short-term nature of these instruments.

The carrying values of receivables from collaborative arrangements, accounts payable, and accrued liabilities approximate their estimated fair values due to the relatively short-term nature of these instruments.

Property and Equipment

Property and equipment, which consisted of equipment, computer equipment, software, office furniture and fixtures, was immaterial as of December 31, 2021 and 2020, respectively.

Property, equipment and leasehold improvements are stated at cost and depreciated using the straight-line method as follows:

Property, equipment and leasehold improvements are stated at cost less accumulated depreciation.

Property, equipment and leasehold improvements are depreciated using the straight-line method as follows:

Leasehold improvements

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We capitalize fees paid to licensors related to agreements for approved products or commercialized products.

We capitalize these fees as capitalized fees paid to a related party (“Capitalized Fees”) and amortize them on a straight-line basis over their estimated useful lives upon the commercial launch of the product, shortly after its regulatory approval.

The estimated useful lives of these Capitalized Fees are determined on a country-by-country and product-by-product basis, as the later of the expiration or termination of the last patent right covering the compound in such product in such country and 15 years from first commercial sale of such product in such country, unless the Collaboration Agreement is terminated earlier.

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We review our Capitalized Fees for impairment on a product-by-product basis for each major geographic area when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

The recoverability of Capitalized Fees is measured by comparing the asset’s carrying amount to the expected undiscounted future cash flows that the asset is expected to generate.

The determination of recoverability typically requires various estimates and assumptions, including estimating the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any.

The recoverability of Capitalized Fees is measured by comparing the asset’s carrying amount to the expected undiscounted future cash flows that the asset is expected to generate.

We derive the required cash flow estimates from near-term forecasted product sales and long-term projected sales in the corresponding market.

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(iv) allocate the transaction price to the performance obligations in the contract;

and (v) recognize revenue when (or 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 and reported to us.

Royalties are recognized net of amortization of capitalized fees associated with any approval and launch milestone payments made to GSK.

and (v) recognize revenue as a performance obligation is satisfied.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair Value of Stock-Based Compensation Awards

We use the Black-Scholes-Merton option pricing model to estimate the fair value of options granted under our equity incentive plans and rights to acquire stock granted under our employee stock purchase plan (“ESPP”).

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 our partner.

Fair Value of Stock‑Based Compensation Awards

The Black-Scholes-Merton option valuation model requires the use of assumptions, including the expected term of the award and the expected stock price volatility.

We use the “simplified” method as described in Staff Accounting Bulletin No.

107, “ Share-Based Payment ,” for the expected option term.

We use the “simplified”

method as described in Staff Accounting Bulletin No.

107, “

Share-Based Payment ,”

for the expected option term.

We use our historical volatility to estimate expected stock price volatility.

Restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) are measured based on the fair market values of the underlying stock on the dates of grant.

Stock-based compensation expense is calculated based on awards ultimately expected to vest and is reduced for estimated forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates.

Our estimated annual forfeiture rates for stock options, RSUs and RSAs are based on our historical forfeiture experience.

The estimated fair value of stock options, RSUs and RSAs is expensed on a ratable or straight-line basis over the expected term of the grant or expected term of the vesting, and the estimated fair value of performance-contingent RSUs and RSAs is expensed using an accelerated method over the term of the award once we have determined that it is probable that performance milestones will be achieved.

Compensation expense for RSUs and RSAs that contain performance conditions is based on the grant date fair value of the award.

Compensation expense is recorded over the requisite service period based on management’s best estimate as to whether it is probable that the shares awarded are expected to vest.

We assess the probability of the performance milestones being met on a continuous basis.

The grant date fair value of the RSUs and RSAs with a market condition is determined using a Monte Carlo valuation model and the compensation expense is recognized over the implied service period.

The estimated fair value of stock options, RSUs and RSAs is expensed on a ratable or straight-line basis over the expected term of the grant or expected term of the vesting.

Compensation expense is recorded over the requisite service period based on management’s best estimate as to whether it is probable that the shares awarded are expected to vest.

Compensation expense for purchases under the ESPP is recognized based on the fair value of the common stock on the date of offering, less the purchase discount percentage provided for in the plan.

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Our judgment might change as new information becomes available.

We will continue to evaluate our deferred tax assets each reporting period to determine whether adjustments to our valuation allowance are required and deferred tax assets will be realized based on the consideration of all available positive and negative evidence, including the differences between our anticipated and actual future operating results, using a “more likely than not” standard.

We continue to evaluate our deferred tax assets each reporting period to determine whether adjustments to our valuation allowance are required and deferred tax assets will be realized based on the consideration of all available positive and negative evidence, including the differences between our anticipated and actual future operating results, using a “more likely than not”

We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities.

Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement.

As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether the factors underlying the sustainability assertion have changed and whether the amount of the recognized tax benefit is still appropriate.

As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we determine whether the factors underlying the sustainability assertion have changed and whether the amount of the recognized tax benefit is still appropriate.

Comprehensive Income

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Related Parties

GSK owned 31.6 % of our outstanding common stock as of December 31, 2020.

Transactions with GSK are described in Note 3, “Collaborative Arrangements.”

Sarissa Capital owned 6.3 % of our outstanding common stock as of December 31, 2020.

Transactions with Sarissa Capital are described in Note 4, “Consolidated Entities”.

While GSK no longer had an ownership stake in our outstanding common stock as of December 31, 2021, GSK was considered a related party during the year ended December 31, 2021 due to our collaborative arrangement with them.

Transactions with GSK are described in Note 3, “Revenue Recognition and Collaborative Arrangements.”

Sarissa Capital ow ned 9.5 % of o ur outstanding common stock as of December 31, 2021 .

Transactions with Sarissa Capital are described in Note 4, “Consolidated Entities”.

Sarissa Capital is considered to be a related party because two of its principals are members of our Board of Directors.

Recently Adopted Accounting Standards Updates

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2016-13 Financial Instruments—Credit Losses:

Measurement of Credit Losses on Financial Instruments , as clarified in subsequent amendments to the initial guidance (collectively, “Topic 326”).

Topic 326 requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecast.

We adopted ASC 326 using a modified retrospective approach which requires a cumulative effect adjustment as of the beginning of the reporting period in which the guidance is adopted.

Topic 326 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.

We adopted Topic 326 effective January 1, 2020.

The adoption did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Standards or Updates Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

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 do not expect the adoption of ASU 2019-12 to have a material impact on our consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40):

We adopted ASU 2019-12 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 improves various topics in the codification so that entities can apply guidance more consistently.

The ASU is effective for fiscal years beginning after December 15, 2020.

We adopted ASU 2020-10 effective January 1, 2021.

The adoption did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Standards or Updates Not Yet Adopted

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity's Own Equity , which is intended to simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470-20 for convertible instruments.

As a result, 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 elimination of the separation models will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument within the scope of ASU 2020-06.

The ASU is effective for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years with early adoption permitted.

We are currently in the process of evaluating the effects of the provisions of ASU 2020-06 on our consolidated financial statements.

In October 2020, the FASB issued ASU 2020-10, Codification Improvements .

ASU 2020-10 contains improvements to 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 improves various topics in the Codification so that entities can apply guidance more consistently on codifications that are varied in nature where the original guidance may have been unclear.

The amendments in ASU 2020-10 are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

Early adoption is permitted.

We do not expect the adoption of ASU 2020-10 to have a material impact on our consolidated financial statements and related disclosures.

The Company is evaluating the effect of adopting ASU 2020-06 for both of our convertible notes due in 2023 and 2025 and is currently finalizing its analysis of the financial impact of the adoption.

Upon adoption, we may apply the modified retrospective method through a cumulative effect adjustment, if any, to the accumulated deficit, compute the dilutive EPS of our notes due in 2025 under the if-converted method going forward, and update our long-term debt balance on the consolidated balance sheets accordingly.

NET INCOME PER SHARE

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Diluted net income per share attributable to Innoviva stockholders is computed by dividing net income attributable to Innoviva stockholders by the weighted-average number of shares of common stock and dilutive potential common stock equivalents then outstanding.

Dilutive potential common stock equivalents include the assumed exercise, vesting and issuance of employee stock awards using the treasury stock method, as well as common stock issuable upon assumed conversion of our convertible subordinated notes due 2023 (the “2023 Notes”) using the if-converted method.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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As the average market price per share of our common stock as reported on The Nasdaq Global Select Market was lower than the initial conversion price of $ 17.26 per share, there was no dilutive effect of the assumed conversion premium for the years ended December 31, 2021, 2020, and 2019 respectively.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table shows the computation of basic and diluted net income per share for the years ended December 31, 2021, 2020 and 2019:

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Net income attributable to Innoviva stockholders, diluted

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

Weighted-average shares used to compute basic net income

per share attributable to Innoviva stockholders

Dilutive effect of 2023 Notes

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

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

Dilutive effect of options and awards granted under equity

incentive plan and employee stock purchase plan

Weighted-average shares used to compute diluted net income

per share attributable to Innoviva stockholders

Net income per share attributable to Innoviva stockholders

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 Securities

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

Year Ended December 31,

(In thousands)

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

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Outstanding options and awards granted under equity incentive

plan and employee stock purchase plan

REVENUE RECOGNITION AND COLLABORATIVE ARRANGEMENTS

Revenue from 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 associate with any approval and launch milestone payments made to GSK.

Net revenue recognized under our GSK Agreements was as follows:

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(In thousands)

Royalties from a related party - RELVAR/BREO

Royalties from a related party - ANORO

Royalties from a related party - TRELEGY

Royalties from a related party

- RELVAR/BREO

Royalties from a related party

Total royalties from a related party

amortization of capitalized fees paid to a related party

amortization of capitalized

fees paid to a related party

Royalty revenue

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Total net revenue from GSK

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

LABA Collaboration

4 unchanged sentences

15 % on the first $ 3.0 billion of annual global net sales and 5 % for all annual global net sales above $ 3.0 billion.

Sales of single-agent LABA medicines and combination medicines would be combined for the purposes of this royalty calculation.

Sales of single‑agent LABA medicines and combination medicines would be combined for the purposes of this royalty calculation.

For other products combined with a LABA from the LABA Collaboration, such as ANORO ® ELLIPTA ® , royalties are upward tiering and range from 6.5 % to 10 %.

1 unchanged sentence

2004 Strategic Alliance

During the year ended December 31, 2020, we recognized $ 10.0 million in revenue from a termination fee paid in connection with the termination of the Bifunctional Muscarinic Antagonist-Beta2 Agonist (“MABA”) program under the Strategic Alliance Agreement with GSK.

CONSOLIDATED ENTITIES

We consolidate the financial results of TRC and Pulmoquine Therapeutics, Inc.

(“Pulmoquine”), which we have determined to be VIEs.

As we have the power to direct the economically significant activities of these entities and the obligation to absorb losses of, or the right to receive benefits from them, and we are the primary beneficiary of the entities.

We also consolidate the financial results of ISP Fund LP (the “Partnership”), our partnership with Sarissa Capital, as we have determined that the Partnership is a VIE and we are its primary beneficiary.

(“Pulmoquine”), which we have determined to be VIEs.

As we have the power to direct the economically significant activities of these entities and the obligation to absorb losses of, or the right to receive benefits from them, we are the primary beneficiary of the entities.

We also consolidate the financial results of ISP Fund LP (the “Partnership”), which is our partnership with Sarissa Capital, as we have determined that the Partnership is a VIE and we are its primary beneficiary.

Theravance Respiratory Company, LLC

The primary source of revenue for TRC is the royalties generated from the net sales of TRELEGY ® ELLIPTA ® by GSK.

As of December 31, 2020, TRC held an equity investment in InCarda Therapeutics, Inc.

Refer to Note 5, “Financial Instruments and Fair Value Measurements,” for more information.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2021, TRC held equity and long-term investments in InCarda Therapeutics, Inc.

(“InCarda”), ImaginAb, Inc.

("ImaginAb") and Gate Neurosciences, Inc.

Refer to Note 5, “Financial Instruments and Fair Value Measurements,”

for more information.

The summarized financial information for TRC is presented as follows:

4 unchanged sentences

Prepaid expenses and other current assets

Equity and other long-term investments

Liabilities and LLC Members' Equity

Equity and long-term investments

Liabilities and LLC Members’

Current liabilities

LLC members' equity

Total liabilities and LLC members' equity

LLC members’

Total liabilities and LLC members’

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Income statements

3 unchanged sentences

Revenue from collaborative arrangements

Total revenue

Total net revenue

Operating expenses

Income from operations

Other income (expense), net

Changes in fair values of equity investments

Other income, net

Changes in fair values of equity and long-term

Pulmoquine Therapeutics, Inc.

On April 20, 2020, we entered into a securities purchase agreement with Pulmoquine to purchase 5,808,550 shares of Series A preferred stock for $ 5.0 million in cash.

Upon consummation of the transaction, we owned approximately 90.9 % of Pulmoquine's outstanding shares (excluding unvested restricted shares) and hold a majority voting interest.

Pulmoquine is a biotechnology company focused on the research and development of an aerosolized formulation of hydroxychloroquine to treat respiratory infections.

As of December 31, 2020, total assets attributable to Pulmoquine were $ 3.5 million, including $ 3.2 million in cash and cash equivalents and $ 0.3 million in current assets.

Pulmoquine does not currently generate revenue.

The net loss for the year ended December 31, 2020, was $ 2.2 million, including total operating expenses of $ 2.0 million.

On December 11, 2020, we entered into a Strategic Advisory Agreement (the “Services Agreement”) with Sarissa Capital Management LP (“Sarissa Capital”), pursuant to which Sarissa Capital provides a variety of strategic services to us in order to assist us in the development and execution of our acquisition strategy.

The services shall be provided free of charge to us.

Innoviva Strategic Partners LLC, our wholly owned subsidiary (“Strategic Partners”), also entered into a subscription agreement and an Amended and Restated Limited Partnership Agreement (the “Partnership Agreement”), pursuant to which Strategic Partners became a limited partner of ISP Fund LP (the “Partnership”).

The general partner of the Partnership (“General Partner”) is an affiliate of Sarissa Capital and, pursuant to an investment management agreement, Sarissa Capital acts as the investment adviser to the Partnership.

$ 300.0 million was contributed to the Partnership for investing in “long” positions in the healthcare, pharmaceutical and biotechnology sectors.

In April 2020, we purchased 5,808,550 shares of Series A preferred stock of Pulmoquine for $ 5.0 million in cash.

These shares represented a majority voting interest in Pulmoquine.

Pulmoquine was a biotechnology company focused on the research and development of an aerosolized formulation of hydroxychloroquine to treat respiratory infections.

In August 2021, the directors and stockholders of Pulmoquine voted to cease and terminate all operations and activities of Pulmoquine as soon as practicable.

We received a total net distribution of $ 2.4 million in cash as a result of the dissolution, which was finalized at the end of 2021.

As of December 31, 2021 and 2020, total assets attributable to Pulmoquine were nil and $ 3.5 million.

Pulmoquine did not generate revenue.

The total operating expenses for the years ended December 31, 2021 and 2020 were $ 0.7 million and $ 2.0 million, respectively.

The net loss for the years ended December 31, 2021 and 2020 were $ 0.5 million and $ 2.2 million, respectively.

In December 2020, Innoviva Strategic Partners LLC, our wholly owned subsidiary (“Strategic Partners”), contributed $ 300.0 million to ISP Fund LP (the "Partnership") for investing in “long”

positions in the healthcare, pharmaceutical and biotechnology sectors and became a limited partner.

The general partner of the Partnership ("General Partner") is an affiliate of Sarissa Capital.

The Partnership Agreement provides for Sarissa Capital to receive management fees from the Partnership, payable quarterly in advance, measured based on the Net Asset Value of Strategic Partners' capital account in the Partnership.

In addition, General Partner is entitled to an annual performance fee based on the Net Profits of the Partnership during the annual measurement period.

For the year ended December 31, 2021 and 2020, we paid management and annual performance incentive fees totaling $ 3.1 million and $ 0.2 million, respectively.

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 the Company's shares held by GSK.

The distribution is a component of "Purchases and sales of other investments held by ISP Fund, net" on the consolidated statements of cash flows.

Pursuant to the letter agreement entered into between Strategic Partners, the Partnership, and Sarissa Capital Fund GP LP on May 20, 2021, Strategic Partners agreed to make additional capital contributions to the Partnership in an aggregate amount equal to the amount of the May 2021 distribution prior to March 31, 2022.

The capital contributions will then be subject to a 36-month lock up period from the contribution date.

Refer to Note 10, "Shareholders' Equity," for more information on the GSK share repurchase.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Partnership Agreement provides for Sarissa Capital to receive a one percent management fee 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 a 10 % annual performance allocation based on the Net Profits of the Partnership during the annual measurement period.

As of December 31, 2020, we held 100 % of the economic interest of Partnership.

Total assets of the Partnership were $ 299.3 million, of which all were attributable to equity and other long-term investments.

During the year ended December 31, 2020, the Partnership incurred $ 0.4 million in net investment-related expense and recorded an unrealized loss of $ 0.4 million on the equity investments, which is included in changes in fair values of equity investments on the consolidated statements of income.

As of December 31, 2021 , we continued to hold 100 % of the economic interest of Partnership.

As of December 31, 2021 and 2020 , total assets of the Partnership were $ 195.8 million and $ 299.3 million, respectively, which were mainly attributable to equity and long-term investments.

During the year ended December 31, 2021, the Partnership incurred $ 3.6 million in net investment-related expense, generated $ 1.8 million interest and dividend income, and recorded net $ 10.5 million realized gains and net $ 2.4 million unrealized loss as changes in fair values of equity and long-term investments on the consolidated statements of income.

During the year ended December 31, 2020, the Partnership incurred $ 0.4 million in net investment-related expense and recorded an unrealized loss of $ 0.4 million as changes in fair values of equity and long-term investments on the consolidated statements of income.

FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Equity Investment in Armata

On January 27, 2020, we entered into a securities purchase agreement with Armata Pharmaceuticals, Inc.

(“Armata”) to acquire 8,710,800 shares of Armata’s common stock and warrants to purchase up to 8,710,800 additional shares of its common stock for approximately $ 25.0 million in cash.

During the first quarter of 2020, Innoviva acquired 8,710,800 shares of common stock as well as warrants to purchase 8,710,800 additional shares of common stock of Armata Pharmaceuticals, Inc.

(“Armata”) for approximately $ 25.0 million in cash.

Armata is a clinical stage biotechnology company focused on precisely targeted bacteriophage therapeutics for antibiotic-resistant infections.

The investment is to support Armata’s ongoing advancement of its bacteriophage development programs including the expected first in human studies related to Armata's lead phage candidate, AP-PA02, targeting Pseudomonas aeruginosa , as well as AP-SA02, its phage candidate targeting Staphylococcus Aureus .

The investment was closed in two tranches on February 12, 2020 and March 27, 2020.

Two of our board members joined Armata’s board at the first closing and have remained on Armata's board ever since.

As of December 31, 2020, we owned approximately 46.6 % of Armata’s common stock.

The investment provides Innoviva the ability to have significant influence, but not control over Armata’s operations.

Based on our evaluation, we determined that Armata is a VIE, but Innoviva is not the primary beneficiary of the VIE.

We elected 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 have an exercise price of $ 2.87 per share, are exercisable immediately within five years from the issuance date of the warrants and include a cashless exercise option.

On January 26, 2021, Innoviva Strategic Opportunities LLC (“ISO”), our wholly owned subsidiary, entered into a securities purchase agreement with Armata to acquire 6,153,847 shares of Armata common stock and warrants to purchase 6,153,847 additional shares of Armata common stock for approximately $ 20.0 million.

The investment was closed in two tranches on January 26, 2021 and March 17, 2021.

The additional investment increased Innoviva and ISO’s combined ownership to 59.6 % as of March 31, 2021.

Armata also entered into a voting agreement with the Company and ISO, pursuant to which the Company and ISO agreed not to vote or take any action by written consent with respect to any common shares held by the Company and ISO that represent, in the aggregate, more than 49.5 % of the total number of voting shares of Armata’s common stock for voting on the matters related to election or removal of Armata’s board members.

The voting agreement will expire the earlier of the second anniversary of the agreement effective date and approval by the FDA of any of Armata's product candidates for marketing and commercial distribution.

On October 28, 2021, ISO purchased an additional 1,212,122 shares of Armata common stock for approximately $ 4.0 million.

The investments support Armata’s ongoing advancement of its bacteriophage development programs.

As of December 31, 2021 , three of the eight members of Armata’s board of directors are also members of the board of directors of Innoviva.

As of December 31, 2021 and 2020, we owned approximately 59.3 % and 46.6 %, respectively, of Armata’s common stock.

The investments in Armata provide Innoviva and ISO the ability to have significant influence, but not control over Armata’s operations.

Armata's business and affairs are managed under the direction of its board of directors, which Innoviva and ISO do not control.

Based on our evaluation, we determined that Armata is a VIE, but Innoviva and ISO are not the primary beneficiary of the VIE.

We continue to elect the fair value option to account for both Armata’s common stock and warrants.

The fair value of Armata’s common stock is measured based on its closing market price.

The warrants purchased in 2020 and 2021 have an exercise price of $ 2.87 and $ 3.25 per share, respectively.

All warrants are exercisable immediately within five years from the issuance date of the warrants and include a cashless exercise option.

We use the Black-Scholes-Merton pricing model to estimate the fair value of these warrants with the following input assumptions:

Armata’s closing market price on the valuation date, the risk-free interest rate computed based on the U.S.

Treasury yield, the remaining contractual term as the expected term, and the expected stock price volatility calculated based on the historical volatility of the common stock of Armata and its peer companies.

As of December 31, 2020, the fair values of Armata’s common stock and warrants were estimated at $ 26.0 million and $ 18.0 million, respectively.

The total fair value of both financial instruments in the amount of $ 44.0 million was recorded as equity and long-term investments on the consolidated balance sheets as of December 31, 2020.

We recorded $ 19.0 million in unrealized gain from fair value changes in our investment in Armata securities as changes in fair values of equity, net on the consolidated statements of income for the year ended December 31, 2020.

Equity Investment in Entasis

On April 12, 2020, we entered into a securities purchase agreement with Entasis Therapeutics, Inc.

(“Entasis”) to purchase 14,000,000 shares of Entasis common stock as well as warrants to purchase 14,000,000 additional shares of its common stock for approximately $ 35.0 million in cash (the “April 2020 Entasis Agreement”).

Entasis is a clinical-stage biotechnology company focused on the discovery and development of novel antibacterial products.

The investment is to support Entasis’s ongoing advancement of its pathogen-targeted antibacterial product candidates, which include their global Phase 3 registration trial evaluating a fixed-dose combination of sulbactam and durlobactam (SUL-DUR) against Acinetobacter baumanii infections.

The investment was closed in two tranches on April 22, 2020 and June 11, 2020.

Innoviva has a right to designate two members to Entasis's board.

As of December 31, 2021, the fair values of our holdings of Armata common stock and warrants were estimated at $ 88.1 million and $ 58.6 million, respectively.

As of December 31, 2020, the fair values of our holdings of Armata common stock and warrants were estimated at $ 26.0 million and $ 18.0 million, respectively .

The total fair value of both financial instruments in the amount of $ 146.7 million and $ 44.0 million was recorded as equity and long-term investments on the consolidated balance sheets as of December 31, 2021 and 2020, respectively.

We recorded $ 78.7 million and $ 19.0 million unrealized gains as changes in fair values of equity and long-term investments, net on the consolidated statements of income for the years ended December 31, 2021 and 2020, respectively.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

On August 27, 2020, we entered into another securities purchase agreement with Entasis (the “August 2020 Entasis Agreement”) to purchase 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.

As of December 31, 2020, we owned approximately 51.0 % of Entasis’s common stock.

The investment provides Innoviva the ability to have significant influence, but not control, over Entasis’s operations.

Equity Investment in Entasis

During the second quarter of 2020, we purchased 14,000,000 shares of common stock as well as warrants to purchase 14,000,000 additional shares of common stock of Entasis Therapeutics, Inc.

(“Entasis”) for approximately $ 35.0 million in cash.

Entasis is a clinical-stage biotechnology company focused on the discovery and development of novel antibacterial products.

During the third quarter of 2020, we purchased 4,672,897 shares of Entasis common stock as well as warrants to purchase 4,672,897 additional shares of its common stock for approximately $ 12.5 million in cash.

Innoviva has a right to designate two members to Entasis' board.

As of December 31, 2021 , no Innoviva designees are serving on Entasis' six -member board.

On May 3, 2021, ISO entered into a securities purchase agreement with Entasis to acquire 10,000,000 shares of Entasis common stock and warrants to purchase 10,000,000 additional shares of Entasis common stock for approximately $ 20.0 million.

The investment was closed in two tranches on May 3, 2021 and June 11, 2021.

This investment supports the continued development of Entasis' novel pipeline of pathogen-targeted antibacterial product candidates.

As of December 31, 2021 and 2020, we owned approximately 59.9 % and 51.0 %, respectively, of Entasis’s common stock.

The investments in Entasis provide Innoviva the ability to have significant influence, but not control over Entasis’s operations.

Entasis'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 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 under the April 2020 Entasis Agreement and an exercise price of $ 2.675 under the August 2020 Entasis Agreement.

The warrants are exercisable immediately within five years from the issuance date of the warrants and include a cashless exercise option.

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 and $ 2.675 per share for those warrants acquired in the second and third quarter of 2020, respectively.

The warrants acquired in the second quarter of 2021 have an exercise price of $ 2.00 per share.

All of the warrants are exercisable immediately within five years from the issuance date of the warrants and include a cashless exercise option.

We use the Black-Scholes-Merton pricing model to estimate the fair value of these warrants with the following input assumptions:

Entasis’s closing market price on the valuation date, the risk-free interest rate computed based on the U.S.

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 $ 78.0 million was recorded as equity and long-term investments on the consolidated balance sheets.

We recorded $ 30.5 million in unrealized gain from fair value changes in our investment in Entasis securities as changes in fair values of equity, net on the consolidated statements of income for the year ended December 31, 2020.

As of December 31, 2021, the fair values of our holdings of Entasis common stock and warrants were estimated at $ 62.8 million and $ 40.9 million, respectively.

As of December 31, 2020, the fair values of our holdings of Entasis 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 $ 103.7 million and $ 78.0 million was recorded as equity and long-term investments on the consolidated balance sheets as of December 31, 2021 and 2020, respectively.

We recorded $ 5.7 million and $ 30.5 million unrealized gains as changes in fair values of equity and long-term investments, net on the consolidated statements of income for the years ended December 31, 2021 and 2020, respectively.

Equity Investment in InCarda

On October 6, 2020, TRC entered into a securities purchase agreement with InCarda Therapeutics, Inc.

(“InCarda”) to purchase 20,469,432 shares of InCarda Series C preferred stock and warrants to purchase 5,117,358 additional shares of Series C preferred stock for $ 15.0 million.

During the third quarter of 2020, TRC purchased 20,469,432 shares of Series C preferred stock and warrants to purchase 5,117,358 additional shares of Series C preferred stock of InCarda Therapeutics, Inc.

(“InCarda”) for $ 15.8 million, which includes $ 0.8 million of transaction costs.

InCarda is a privately held biopharmaceutical company focused on developing inhaled therapies for cardiovascular diseases.

The investment is intended to fund the ongoing clinical development of InRhythm™ (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 December 31, 2020, TRC held 13.4 % of InCarda equity ownership.

The investment does not provide TRC the ability to control or have significant influence over InCarda's operations.

The investment is intended to fund the ongoing clinical development of InRhythm (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 December 31, 2021 , one of InCarda's eight board members is designated by TRC.

As of December 31, 2021 and 2020, TRC he ld 13.0 % and 13.4 % of InCarda equity ownership.

The investment in InCarda does not provide TRC the ability to control or have significant influence over InCarda's operations.

Based on our evaluation, we determined that InCarda is a VIE, but TRC is not the primary beneficiary of the VIE.

We have accounted for the investment in Series C preferred shares in InCarda using the measurement alternative.

We have accounted for the investment in Series C preferred shares in InCarda using the measurement 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.

As of December 31, 2021 and 2020, we recorded $ 15.8 million for our investment in InCarda's series C preferred stock as equity and long-term investments on the consolidated balance sheets.

T here was no impairment or other change to the value of the InCarda's Series C preferred stock as of December 31, 2021 and 2020, respectively.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The warrants are recorded at fair value and subject to remeasurement at each balance sheet date.

The warrants are exercisable immediately with an exercise price of $ 0.7328 per share and expire on October 6, 2021, one year from the issuance date.

The warrants are 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 warrants from October 6, 2021 to March 31, 2022 .

We use the Black-Scholes-Merton pricing model to estimate the fair value of the warrants with the following input assumptions:

the exercise price of the warrants, the risk-free interest rate computed based on the U.S.

Treasury yield, the remaining contractual term as the expected term, and the expected stock price volatility calculated based on the historical volatility of the common stock of its peer companies.

As of December 31, 2020, the fair value of InCarda’s warrants was estimated at $ 1.1 million and recorded as equity and long-term investments on the consolidated balance sheets.

We recorded $ 1.1 million unrealized gains as changes in fair values of equity investments, net on the consolidated statements of income for the year ended December 31, 2020.

There was no impairment or other change to the value of the Series C preferred stock of $ 15.0 million as of December 31, 2020.

As of December 31, 2021 and 2020, the fair value of InCarda’s warrants was estimated at $ 0.4 million and $ 1.1 million, respectively, and recorded as equity and long-term investments on the consolidated balance sheets.

We recorded $ 0.7 million unrealized loss and $ 1.1 million unrealized gains as changes in fair values of equity and long-term investments, net on the consolidated statements of income for the years ended December 31, 2021 and 2020, respectively.

Equity Investment in ImaginAb

On March 18, 2021, TRC entered into a securities purchase agreement with ImaginAb, Inc.

("ImaginAb") to purchase 4,051,724 shares of ImaginAb Series C preferred stock for $ 4.7 million.

On the same day, TRC also entered into a securities purchase agreement with one of ImaginAb's common stockholders to purchase 4,097,157 shares of ImaginAb common stock for $ 1.3 million.

ImaginAb is a privately held biotechnology company focused on clinically managing cancer and autoimmune diseases via molecular imaging.

$ 0.4 million was incurred for investment due diligence costs and execution and recorded as part of the equity and long-term investment on the consolidated balance sheet.

As of December 31, 2021 , one of ImaginAb's five board members is designated by TRC, and TRC held 14.5 % of ImaginAb's equity.

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 as 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 December 31, 2021, $ 6.4 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.

Convertible Promissory Note in Gate Neurosciences

On November 24, 2021, TRC entered into a Convertible Promissory Note Purchase Agreement with Gate Neurosciences, Inc.

("Gate") to acquire a convertible promissory note (the "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 Convertible Note bears an annual interest rate of 8 % and will convert into common stock shares upon a qualified event or into shares of shadow preferred stock ("Shadow Preferred") upon a qualified financing.

A qualifying event can be a qualified initial price offering, a qualified merger, or a merger with a special-purpose acquisition company ("SPAC").

The number of common stock shares to be issued in a qualified event shall be equal to the amount due on the conversion date divided by the lesser of a capped conversion price (the "Capped Conversion Price") and the qualified event price (the "Qualified Event Price").

The Capped Conversion Price is calculated as $50.0 million divided by the number of 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.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 convertible debt investment as a trading security, measured at fair value using a Monte Carlo simulation model with the probability of certain qualified events.

TRC has the right to designate one board member to Gate's board.

As of December 31, 2021, TRC has not designated a board member to Gate's board, which currently consists of two directors.

As of December 31, 2021, $ 15.9 million, which includes $ 0.9 million of transaction costs, was recorded as equity and long-term investments on the consolidated balance sheets.

We recorded $ 0.8 million unrealized loss as changes in fair values of equity and long-term investments, net on the consolidated statements of income for the years ended December 31, 2021.

Summarized Financial Data

3 unchanged sentences

Armata Pharmaceuticals, Inc.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Balance Sheet Information

September 30,

(In thousands)

4 unchanged sentences

Income Statement Information

For the twelve months

ended September 30,

For the nine months

5 unchanged sentences

September 30,

(In thousands)

4 unchanged sentences

Income Statement Information

For the twelve months

ended September 30,

For the six months

2 unchanged sentences

Loss from operations

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Available-for-Sale Securities

3 unchanged sentences

(In thousands)

Amortized Cost

Money market funds (1)

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

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

December 31, 2020

(In thousands)

Amortized Cost

government securities (1)

commercial paper (1)

Money market funds (1)

government securities and U.S.

commercial paper were included in short-term marketable securities on the consolidated balance sheets.

(2) Money market funds were presented in cash and cash equivalents on the consolidated balance sheets.

As of December 31, 2020, all investments were money market funds.

There was no credit loss as of December 31, 2020.

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

As of December 31, 2021 , all investments were money market funds, and there was no credit loss.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair Value Measurements

Our securities are measured at fair value on a recurring basis and our debt is carried at amortized cost basis.

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

The estimated fair values were as follows:

1 unchanged sentence

Types of Instruments

Identical Assets

(In thousands)

6 unchanged sentences

Equity investment - InCarda Warrants

Convertible debt investment - Gate Note

Total assets measured at estimated fair value

Total fair value of debt

(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.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(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.

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

Types of Instruments

Identical Assets

(In thousands)

government securities

commercial paper

Money market funds

Investments held by ISP Fund LP (1)

Equity investment - Armata Common Stock

Equity investment - Armata Warrants

Equity investment - Entasis Common Stock

Equity investment - Entasis Warrants

Equity investment - InCarda Warrants

Total assets measured at estimated fair value

Total fair value of debt

The fair values of our equity investments in Armata’s and Entasis's common stock and those investments held by ISP Fund LP are based on the quoted prices in active markets and are classified as Level 1 financial instruments.

The fair values of our marketable securities and 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.

The fair value of InCarda’s warrants is classified as Level 3 financial instruments as InCarda’s securities are not publicly traded and the assumptions used in the valuation model are based on significant unobservable and observable inputs including those of publicly traded peer companies.

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

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The fair values of our equity investments in Armata’s and Entasis's common stock and public 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.

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

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

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These milestone fees are amortized over their estimated useful lives commencing upon the commercial launch of the product in their respective regions with the amortization expense recorded as a reduction in revenue from collaborative arrangements.

As of December 31, 2020, the weighted average remaining amortization period was 9.1 years.

Additional information regarding these milestone fees is included in Note 3, “Collaborative Arrangements.” Amortization expense for each of the years ended December 31, 2020, 2019 and 2018 was $ 13.8 million.

As of December 31, 2021, the weighted average remaining amortization period wa s 8.1 years.

Additional information regarding these milestone fees is included in Note 3, “Revenue Recognition and Collaborative Arrangements.”

Amortization expense for each of the years ended December 31, 2021, 2020 and 2019 was $ 13.8 million .

The remaining estimated amortization expense is $ 13.8 million for each of the years from 2022 to 2026 and $ 42.3 million thereafter.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

STOCK-BASED COMPENSATION

STOCK‑BASED COMPENSATION

Equity Incentive Plans

In May 2012, we adopted the 2012 Equity Incentive Plan (the “2012 Plan”).

The 2012 Plan provides for the grant of incentive stock options, nonstatutory stock options, RSAs, RSUs and Stock Appreciation Rights to employees, non-employee directors and consultants.

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Employee Stock Purchase Plan

Under the 2004 Employee Stock Purchase Plan (the “ESPP”), our employees may purchase common stock through payroll deductions at a price equal to 85 % of the lower of the fair market value of the stock at the beginning of the offering period or at the end of each applicable purchase period.

The ESPP provides for consecutive and overlapping offering periods of 24 months in duration, with each offering period composed of four consecutive six-month purchase periods.

The purchase periods end on either May 15 or November 15.

ESPP contributions are limited to a maximum of 15 % of an employee’s eligible compensation.

The maximum number of shares that an employee may purchase in any purchase period is 2,500 .

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As of December 31, 2021 , total shares remaining available for issuance under the ESPP were 171,827 .

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Director Compensation Program

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Each of our independent directors receives periodic automatic grants of equity awards under a program implemented under the 2012 Plan.

These grants are non-discretionary.

These grants are non‑discretionary.

Only our independent directors or affiliates of such directors are eligible to receive automatic grants under the 2012 Plan.

Under the program, each individual who first became a non-employee director will, on the date such individual joins the Board of Directors, automatically be granted a one-time grant of RSUs covering a number of shares of our common stock calculated as $ 125,000 ($ 250,000 prior to the October 2017 Amendments) divided by our common stock closing share price on the date of grant as reported on The Nasdaq Global Select Market, rounded down to the nearest whole share (the “Initial RSUs”), plus a one-time grant of RSUs covering a number of shares of our common stock calculated as $ 225,000 ($ 250,000 prior to the October 2017 Amendments) divided by our common stock closing share price on the date of grant as reported on The Nasdaq Global Select Market, which would be pro-rated for the number of whole months remaining until the anniversary of the prior year’s stockholders’ meeting, rounded down to the nearest whole share (the “Pro Rata RSUs”).

The Initial RSUs vest in two equal annual installments, while Pro Rata RSUs vest in a single installment at the sooner of the next annual stockholder meeting or the one-year grant anniversary, in each case subject to the non-employee director’s continuous service through the applicable vesting date.

Annually, upon his or her re-election to the Board of Directors at the Annual Meeting of Stockholders, each non-employee director is automatically granted an RSU covering a number of shares of our common stock calculated as $ 225,000 ($ 250,000 prior to the October 2017 Amendments) divided by our common stock closing share price on the date of grant as reported on The Nasdaq Global Select Market, rounded down to the nearest whole share.

These RSUs will vest at the sooner of the next annual stockholder meeting or the one-year anniversary of grant, subject to the non-employee director’s continuous service through the applicable vesting date.

Under the program, each individual who first became a non-employee director will, on the date such individual joins the Board of Directors, automatically be granted a one‑time grant of RSUs covering a number of shares of our common stock calculated as $ 125,000 ($ 250,000 prior to the October 2017 Amendments) divided by our common stock closing share price on the date of grant as reported on The Nasdaq Global Select Market, rounded down to the nearest whole share (the “Initial RSUs”), plus a one‑time grant of RSUs covering a number of shares of our common stock calculated as $ 225,000 ($ 250,000 prior to the October 2017 Amendments) divided by our common stock closing share price on the date of grant as reported on The Nasdaq Global Select Market, which would be pro-rated for the number of whole months remaining until the anniversary of the prior year’s stockholders’

meeting, rounded down to the nearest whole share (the “Pro Rata RSUs”).

Annually, upon his or her re‑election to the Board of Directors at the Annual Meeting of Stockholders, each non-employee director is automatically granted an RSU covering a number of shares of our common stock calculated as $ 225,000 ($ 250,000 prior to the October 2017 Amendments) divided by our common stock closing share price on the date of grant as reported on The Nasdaq Global Select Market, rounded down to the nearest whole share.

Following the amendment to our non-employee director compensation program, both the annual RSUs and Initial RSUs described above remained unchanged with the exception that the number of shares of our common stock subject to each award has been reduced.

These RSUs will vest in full upon the director’s death, the occurrence of a change in control or, with respect to awards made after the October 2017 Amendments, the director’s disability before the director’s service terminates.

Director RSUs carry dividend equivalent rights to be credited with an amount equal to all cash dividends paid on the underlying shares of common stock while unvested.

Dividend equivalents are subject to the same terms and conditions, including vesting, as the RSUs to which they attach and are paid in cash upon vesting.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock-Based Compensation Expense

Stock-based compensation expense is included in the consolidated statements of income as follows:

Stock‑Based Compensation Expense

Stock‑based compensation expense is included in the consolidated statements of income as follows:

Year Ended December 31,

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General and administrative

Stock-based compensation expense included in the consolidated statements of income by award type is as follows:

Stock‑based compensation expense included in the consolidated statements of income by award type is as follows:

Year Ended December 31,

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Stock options

Market-based RSUs (PSUs)

Market-based RSAs (PSAs)

Total stock-based compensation expense

For the year ended December 31, 2018, $ 1.7 million of stock-based compensation was reversed for the forfeited market-based awards due to the separation of senior management members.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2021, the unrecognized stock-based compensation cost and the estimated weighted-average amortization period were as follows:

Weighted-Average

(In thousands)

Period (Years)

Unrecognized Compensation Cost

Weighted-Average Amortization Period (Years)

Stock options

Total unrecognized compensation cost

Total unrecognized compensation expense

Compensation Awards

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(In thousands, except per share data)

Number of outstanding options

Weighted-Average Exercise Price of Outstanding Options

Number of outstanding RSUs

Weighted-Average Fair Value per Share at Grant

Number of outstanding RSAs

Weighted-Average Fair Value per Share at Grant

Balance as of December 31, 2020

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Balance as of December 31, 2021

As of December 31, 2020, the aggregate intrinsic value of the options outstanding and options exercisable was nil .

All outstanding options were exercisable.

As of December 31, 2021 , the aggregate intrinsic value of the options outstanding and options exercisable was $ 1.3 million and $ 0.3 million , respectively.

All outstanding optio ns were exercisable.

The weighted average remaining contractual term was 4.43 years.

The total intrinsic value of the options exercised was $ 0.2 million, $ 0.1 million and $ 0.2 million for the years ended December 31, 2021, 2020, and 2019, respectively.

The total estimated fair value of options vested was not material for the year ended December 31, 2020 and 2019, and $ 0.8 million for the year ended December 31, 2018, respectively.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The total estimated fair value of options vested was $ 0.6 million for the year ended December 31, 2021.

The total estimated fair value of options vested was no t material for the year ended December 31, 2020 and 2019, respectively.

The total estimated fair value of RSUs vested was $ 1.1 million, $ 1.3 million, and $ 1.4 million in the years ended December 31, 2021, 2020, and 2019, respectively.

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The weighted-average assumptions used in calculating the estimated value of our stock options on the date of grant as follows:

December 31, 2020

Year Ended December 31,

Risk-free interest rate

2 unchanged sentences

Weighted-average estimated fair value of stock options granted

There were no grants of stock options during the years ended December 31, 2019 and 2018.

There were no grants of stock options during the year ended December 31, 2019.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Our debt consists of:

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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.

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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.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with accounting guidance for debt with conversion and other options, we separately account for the liability and equity components of the 2025 Notes by allocating the proceeds between the liability component and the embedded conversion option (“equity component”) due to our ability to settle the conversion obligation of the 2025 Notes in cash, common stock or a combination of cash and common stock, at our option.

The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature using the income approach.

1 unchanged sentence

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.

5 unchanged sentences

Equity component, net

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table sets forth total interest expense recognized related to the 2025 Notes for the years ended December 31, 2021, 2020 and 2019:

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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.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

5 unchanged sentences

Years ending December 31:

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

COMMITMENTS AND CONTINGENCIES

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We have not recognized any liabilities relating to these matters as of December 31, 2021 .

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Income tax benefit (expense) consists of the following:

SHAREHOLDERS' EQUITY

On May 20, 2021, the Company entered into a share repurchase agreement with GSK to buy back 32,005,260 shares of its common stock at $ 12.25 per share from GSK, representing all of the shares of common stock or other capital interests of Innoviva owned by GSK or its affiliates.

The total consideration, including related transaction fees, was $ 394.1 million.

The share repurchase was completed on May 25, 2021.

These shares are recorded as treasury stock on the consolidated balance sheets.

Income tax expense consists of the following:

Year Ended December 31,

(In thousands)

Total income tax benefit (expense), net

Total income tax expense, net

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The impacts of the differences between the expected U.S.

4 unchanged sentences

State income tax, net of federal benefit

Non-deductible executive compensation

Federal and state research credits

Noncontrolling interest

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Debt issuance discount and other

Unrealized Gain on Investment

Unrealized gain on investment, net

Net deferred tax assets

2 unchanged sentences

We have considered all available evidence, both positive and negative, such as our historical operating results and predictability of future taxable income, in making such determination.

We are also required to exercise significant management’s judgment in forecasting future taxable income.

Specifically, we evaluate the following criteria when considering a valuation allowance:

1 unchanged sentence

predictability of operating results;

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

profitability for a sustained period of time;

level of profitability on a quarterly basis.

As of December 31, 2020, we recognized $ 60.4 million income tax expense and reduced the deferred tax assets by the same amount based on the taxable income generated during the year.

As of December 31, 2020, we had federal net operating loss carryforwards of approximately $ 0.4 billion, of which approximately $ 2.0 million can be carried forward indefinitely and the remaining will expire from 2032 through 2035.

As of December 31, 2021, we recognized $ 76.4 million income tax expense and reduced the deferred tax assets by the same amount mainly based on the taxable income generated during the year.

As of December 31, 2021, we had federal net operating loss carryforwards of approximately $ 92.9 million , which expire from 2033 through 2035.

We also had federal research and development tax credit carryforwards of approximately $ 42.1 million , which will expire beginning 2022.

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Annual limitations may result in expiration of net operating loss and tax credit carryforwards before some or all of such amounts have been utilized.

We conducted an Internal Revenue Code of 1986, as amended, Section 382 (“Section 382”) analysis through September 30, 2020 to determine whether an ownership change had occurred since inception.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We conducted an Internal Revenue Code of 1986, as amended, Section 382 (“Section 382”) analysis through October 31, 2021 to determine whether an ownership change had occurred since inception.

The Section 382 study concluded that it is more likely than not that the Company did not experience an ownership change during the testing period.

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Unrecognized tax benefits as of December 31, 2019

Gross decrease in tax portions for 2019

Net decrease in tax portions for 2020

Unrecognized tax benefits as of December 31, 2020

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The tax years 2004 through 2013, 2015 and forward remain open to examination by the federal and most state tax authorities due to net operating loss and overall credit carryforward positions.

SUBSEQUENT EVENTS

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 is set to close in two tranches.

The first tranche consisting of approximately 3.6 million shares of common stock and warrants to purchase approximately 1.8 million shares of common stock for an aggregate purchase price of approximately $ 18.1 million was consummated simultaneously with the execution of the agreement.

The second tranche consisting of approximately 5.4 million shares of common stock and warrants to purchase approximately 2.7 million shares of common stock for an aggregate purchase price of $ 26.9 million will be consummated upon satisfaction of certain closing conditions, which is expected to occur in the first quarter of 2022.

Upon closing of the second tranche, we expect to own approximately 70 % of Armata’s outstanding stock.

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 voting shares of Armata’s common stock for voting on the matters related to election or removal of Armata’s board.

The Company and ISO also agreed not to amend Armata’s bylaws to reduce its maximum number of directors or set the number of directors who may serve on Armata’s board.

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.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SUBSEQUENT EVENTS

On January 26, 2021, we entered into a securities purchase agreement with Armata to acquire approximately $ 20 million in Armata common stock and warrants in two tranches.

The first tranche consisting of approximately 1.9 million shares of common stock and warrants to purchase an equal number of shares of common stock for an aggregate purchase price of $ 6.1 million was consummated simultaneously with the execution of the agreement.

The second tranche consisting of approximately 4.3 million shares of common stock and warrants to purchase an equal number of shares of common stock for an aggregate purchase price of $ 13.9 million will be consummated upon satisfaction of certain closing conditions, which is expected to occur in the first quarter of 2021.

The investment is to support Armata’s ongoing advancement of its bacteriophage development programs, including its FDA cleared first-in-human study, SWARM- P.a.

, which is evaluating its lead phage product candidate, AP-PA02, as a potential treatment for Pseudomonas aeruginosa airway infections in cystic fibrosis patients.

In addition, Armata expects to initiate a second clinical trial related to another product candidate, AP-SA02, a phage targeting Staphylococcus aureus , in patients with complicated bacteremia later this year.

On February 17, 2022, ISO entered into a securities purchase agreement with Entasis to purchase 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 the conversion price of $ 1.48 before the maturity date.

This financing is expected to support Entasis’

product development and operations into August 2022.

With this financing, we have become the primary beneficiary of Entasis and expect to consolidate its financial position and results of operations effective on the date of the transaction.

Entasis was valued at $ 85.3 million based on its close trading price on February 17, 2022.

On February 18, 2022, TRC entered into an investment and shareholders agreement with Nanolive SA ("Nanolive") to purchase 18,750,000 shares of 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.

TRC owns 16.1 % of Nanolive's equity and has a right to designate one board member to Nanolive's board.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Innovia, Inc.

To the Stockholders and Board of Directors of Innoviva, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Innoviva, Inc.

(a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 25, 2021 expressed an unqualified opinion.

(a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’

equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 28, 2022 expressed an unqualified opinion.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

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The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Determination of VIEs and Primary Beneficiaries

As described further in notes 4 and 5 to the financial statements, certain of the Company’s investments have complex structures and agreements which must be evaluated for consolidation, including determining whether the investee is a variable interest entity (“VIE”).

An entity is considered to be a VIE if (a) the entity cannot finance its operations without subordinated financial support from other parties, (b) the entity’s at-risk equity holders lack the characteristics of a controlling financial interest, (c) the entity is structured with non-substantive voting rights, or (d) the equity holders do not have the obligation to bear potential losses or the right to receive potential gains.

If an entity has at least one of these characteristics, it is considered a VIE, and is consolidated by its primary beneficiary.

This accounting assessment is performed at the inception of the investment and upon the occurrence of reconsideration events, as defined in accounting principles generally accepted in the United States of America, and requires significant judgment by management.

We identified this accounting assessment of VIEs as a critical audit matter.

The principal consideration for our determination that the initial accounting assessment or reconsideration accounting assessment of VIEs for the Company’s investments is a critical audit matter is that they require significant judgement by management to interpret the impact of complex agreements on the VIE and primary beneficiary determinations.

The assessment made by management of whether an entity’s at-risk equity holders lack the characteristics of a controlling financial interest and the Company’s interest in that entity qualifies as that entity’s primary beneficiary is a complex and judgmental determination.

Therefore, a high degree of auditor judgement, subjectivity and effort in performing procedures is required to evaluate evidence obtained related to the initial or continuous assessment of VIEs.

Our audit procedures related to consolidation and primary beneficiary assessments included the following, among others:

We tested the effectiveness of controls related to the initial accounting assessment of the investments and the continuous reassessment for reconsideration events, as required by the accounting framework.

We evaluated the Company’s accounting analysis for all significant investments by performing procedures including, but not limited to:

Obtaining an understanding of the composition and governance of the entity, its board of directors, and management to evaluate whether management’s assessment of the VIE considerations are based on the facts.

Reading the purchase agreements and other related documents and evaluating the structures and terms of the agreements to verify if the investments should be classified as VIEs by evaluating management’s assessment of whether an entity meets the criteria of a VIE.

Considering whether the Company appropriately determined the primary beneficiary by evaluating the investment arrangements of the entity to determine if the Company has the power to direct activities, and if the Company has the obligation to absorb losses of the entity or the right to receive benefits from the entity that could be significant to the VIE.

Evaluating whether or not the Company consolidated the balances at the appropriate amounts for those entities where the Company has determined it is the primary beneficiary.

Evaluating the evidence obtained in other areas of the audit to determine if there were additional reconsideration events that had not been identified by the Company, including, among others, reading board minutes and confirming the terms of certain agreements, if any.

Consolidation of Investees

As described further in Notes 4 and 5 to the financial statements, certain of the Company’s investees have complex structures and agreements which must be evaluated for consolidation, including determining whether the investee is a variable interest entity (“VIE”), and if so, whether the Company is the primary beneficiary.

This assessment is performed at the inception of the investment and upon the occurrence of reconsideration events and requires significant judgment by management.

As of December 31, 2021, the carrying values of the Company’s consolidated VIEs’

total assets and total liabilities aggregated to $326.8 million and $0.5 million, respectively.

As of December 31, 2021, the Company’s investments in unconsolidated VIEs was $250.4 million.

We identified the assessment of consolidation of investees as a critical audit matter.

The principal consideration for our determination that the consolidation determination for the Company’s investees either at inception or upon a reconsideration event is a critical audit matter is that there is significant judgment required by management to interpret complex structures and agreements.

This required a high degree of auditor judgment and an increased audit effort.

Our audit procedures related to consolidation assessment included the following, among others.

We tested the design and operating effectiveness of controls related to management’s initial accounting assessment for each investment and the reassessment upon reconsideration events.

We evaluated the Company’s consolidation accounting analysis for all significant investees by performing procedures including, but not limited to:

o Obtaining an understanding of the composition and governance of the investee, its board of directors and management.

o Reading the purchase agreements and other related documents and evaluating the structures and terms of the agreements to verify whether the investees should be considered VIEs.

o If an investee is determined to be a VIE, considering whether the Company appropriately determined the primary beneficiary of the VIE by evaluating the investment arrangements of the entity to determine if the Company has the power to direct activities and if the Company has the obligation to absorb losses of the entity or the right to receive benefits from the entity that could be significant to the VIE.

o For those investees for which the Company has determined consolidation is appropriate, evaluating whether the Company consolidated the balances at the appropriate amounts, including applying appropriate audit procedures to the investees’

financial statements.

o Evaluating other audit evidence obtained to determine if there were additional reconsideration events that had not been identified by the Company, including reading board minutes and confirming the terms of certain agreements, as applicable.

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2019.

San Francisco, California

February 28, 2022

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Innoviva, Inc.

Opinion on the Financial Statements

We have audited the consolidated statements of operations, comprehensive income, stockholders' equity (deficit), and cash flows, of Innoviva, Inc.

(the “Company”) for the year ended December 31, 2018, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the results of the Company’s operations and its cash flows the years ended December 31, 2018, in conformity with US generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company's auditor from 1996 to 2019.

San Jose, California

February 25, 2021

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data