What changed in this filing

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Item 1. Financial Statements

2022-07-27 compared with 2022-05-05 · 316 added, 207 removed, 762 unchanged (41% of the section changed)

1 unchanged sentence

INNOVIVA, INC.

CONSOLIDATED BALANCE SHEETS

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

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69,706 and 69,566 issued and outstanding as of

March 31, 2022 and December 31, 2021 respectively

June 30, 2022 and December 31, 2021 respectively

Treasury stock:

at cost, 32,005 at March 31, 2022

at cost, 32,005 shares at June 30, 2022

and December 31, 2021, respectively

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

See accompanying notes to consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF INCOME

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Royalty revenue from a related party, net of amortization

of capitalized fees paid to a related party of $ 3,456

in the three months ended March 31, 2022 and 2021

in the three months ended June 30, 2022 and 2021, and

$ 6,912 in the six months ended June 30, 2022 and 2021

Operating expenses:

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Loss on debt extinguishment

Changes in fair values of equity and long-term

investments, net

Changes in fair values of equity and

long-term investments, net

Income before income taxes

Income tax expense, net

Net income attributable to noncontrolling interest

Net income attributable to Innoviva stockholders

Income tax expense (benefit), net

Net income attributable to

noncontrolling interest

Net income attributable to

Innoviva stockholders

Basic net income per share attributable to

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Shares used to compute diluted net income per share

See accompanying notes to consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

Three Months Ended March 31,

Unrealized gain on marketable securities, net

Three Months Ended June 30,

Six Months Ended June 30,

Comprehensive income

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Comprehensive income attributable to Innoviva stockholders

See accompanying notes to consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

(In thousands)

Three Months Ended March 31, 2022

Six Months Ended June 30, 2022

Accumulated Other

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Income (Loss)

Balance as of December 31, 2021

Cumulative adjustment due to adoption

of ASU 2020-06

Distributions to noncontrolling interest

Fair value of noncontrolling interest in 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

Balance as of

December 31, 2021

Cumulative adjustment due

to adoption of

Distributions to

noncontrolling interest

Fair value of noncontrolling

interest in 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

Stock-based compensation

Capped call options associated with

convertible senior notes due 2028

Balance as of March 31, 2022

Three Months Ended March 31, 2021

Capped call options

associated with

convertible senior

notes due 2028

Balance as of

March 31, 2022

Distributions to

noncontrolling interest

Equity activity of

noncontrolling interest

in 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

Conversion of convertible

subordinated notes due

Stock-based compensation

Balance as of

June 30, 2022

Six Months Ended June 30, 2021

Accumulated Other

Comprehensive

Treasury Stock

Noncontrolling

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Balance as of December 31, 2020

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

Distributions to noncontrolling

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

Stock-based compensation

Balance as of March 31, 2021

See accompanying notes to consolidated financial statements.

Distributions to noncontrolling

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

Repurchase of common stock

Stock-based compensation

Balance as of June 30, 2021

See accompanying notes to condensed consolidated financial statements.

INNOVIVA, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

C ONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities

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Other assets, current

Other assets, non-current

Accounts payable

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

Net cash used in investing activities

Net cash provided by (used in) investing activities

Cash flows from financing activities

Distributions to noncontrolling interest

Repurchase of common stock

Repurchase of shares to satisfy tax withholding

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Net cash provided by (used in) financing activities

Net increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

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Adoption of ASU 2020-06

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

See accompanying notes to consolidated financial statements.

Right-of-use asset obtained through the consolidation of

Entasis Therapeutics Holdings, Inc.

See accompanying notes to condensed consolidated financial statements.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Description of Operations and Summary of Significant Accounting Policies

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Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information.

Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements.

In our opinion, the unaudited consolidated financial statements have been prepared on the same basis as audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of our financial position, results of operations, comprehensive income and cash flows.

In our opinion, the unaudited condensed consolidated financial statements have been prepared on the same basis as audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of our financial position, results of operations, comprehensive income and cash flows.

The interim results are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2022 or any other period.

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

The accompanying unaudited condensed consolidated financial statements include the accounts of Innoviva, our wholly-owned subsidiaries and certain variable interest entities for which we are the primary beneficiary.

All intercompany balances and transactions have been eliminated in consolidation.

For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income attributable to noncontrolling interest in our unaudited consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties.

The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022, and as amended on March 17, 2022 (“2021 Form 10-K”).

For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income attributable to noncontrolling interest in our unaudited condensed consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022, and as amended on March 17, 2022 (“2021 Form 10-K”).

Prior Period Immaterial Correction

Subsequent to the issuance of the consolidated financial statements for the three months ended March 31, 2021, the Company identified that (i) sales of equity investments managed by ISP Fund LP for $ 2.4 million, and (ii) purchase and sales of other investments managed by ISP Fund LP, net for $ 110.2 million were incorrectly netted in the consolidated statement of cash flows within the line item purchases of equity and long-term investments, net.

The Company has corrected the presentation in the accompanying consolidated statement of cash flows for the three months ended March 31, 2021 from amounts previously reported to present such line items separately.

The correction did not impact total cash flows from investing activities or the consolidated balance sheet, statement of income, or statement of comprehensive income.

Management assessed the correction on a quantitative and qualitative basis and determined that it is immaterial to the prior period consolidated financial statements.

The Company additionally reclassified purchases of equity investments managed by ISP Fund LP of $ 112.6 million from purchases of equity and long-term investments to be presented in a separate line item in the consolidated statement of cash flows, to conform with the current period presentation.

Subsequent to the issuance of the unaudited condensed consolidated financial statements for the three and six months ended June 30, 2021, the Company identified that (i) purchases of equity investments managed by ISP Fund LP for $ 142.6 million, (ii) sales of equity investments managed by ISP Fund LP for $ 18.5 million, and (iii) purchase and sales of other investments managed by ISP Fund LP, net for $ 234.1 million were incorrectly netted in the unaudited condensed consolidated statement of cash flows within the distribution of equity and long-term investments line item.

The Company has corrected the presentation in the accompanying unaudited condensed consolidated statement of cash flows for the six months ended June 30, 2021 from amounts previously reported to present such line items separately.

The correction did not impact total cash flows from investing activities or the unaudited condensed consolidated balance sheet, statement of income, or statement of comprehensive income.

Management assessed the correction on a quantitative and qualitative basis and determined that it is immaterial to the prior period unaudited condensed consolidated financial statements.

Use of Management’s Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes.

Actual results could differ materially from those estimates.

Management evaluates its significant accounting policies and estimates on an ongoing basis.

We base our estimates on historical experience and other relevant assumptions that we believe to be reasonable under the circumstances.

These estimates also form the basis for making judgments about the carrying values of assets and liabilities when these values are not readily apparent from other sources.

Certain Risks and Concentrations

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

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

Segment Reporting

We operate in a single segment, which is to provide capital return to stockholders by maximizing the potential value of our respiratory assets partnered with GSK.

Revenues are generated from our collaborative arrangements and royalty payments from GSK, located in Great Britain.

Our facilities are located within the United States.

Variable Interest Entities

We evaluate our ownership, contractual and other interest in entities to determine if they are variable interest entities (“VIE”).

We evaluate our ownership, contractual and other interest in entities to determine if they are a variable interest entity (“VIE”).

We evaluate whether we have a variable interest in those entities and the nature and extent of those interests.

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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 have control over these companies under either voting or VIE models, we include them in our unaudited condensed consolidated financial statements.

If we determine that we do not have control over these companies under either voting or VIE models, we then determine if we have an ability to exercise significant influence via voting interests, board representation or other business relationships.

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If the fair value option is applied to an investment that would otherwise be accounted for under the equity method, we apply it to all our financial interests in the same entity (equity and debt, including guarantees) that are eligible items.

All gains and losses from fair value changes, unrealized and realized, are presented as changes in fair values of equity and long-term investments, net on the consolidated statements of income.

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 unaudited condensed consolidated statements of income.

If we conclude that we do not have an ability to exercise significant influence over an investee, we may elect to account for the security without a readily determinable fair value using the measurement alternative under ASC Topic 321, Investments - Equity Securities .

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Pursuant to the Partnership Agreement entered in December 2020, we became a limited partner of this partnership, and our contributions are subject to a 36-month lock-up period which restriction prevents us from having control and access to the contributions and related investments.

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

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

Revenue Recognition

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Non-refundable pre-payments for goods or services that will be used or rendered for future research and development activities are deferred.

The Company’s consolidated variable interest entity also records accruals for estimated ongoing research costs based on the progress of the studies with significant judgement and estimates.

The Company’s consolidated variable interest entity also utilizes significant judgment and estimates to record accruals for estimated ongoing research costs based on the progress of the studies.

Goodwill and Intangible Assets

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Right-of-use assets represent our right to use an underlying asset over the lease term and include any lease payments made prior to the lease commencement date and are reduced by lease incentives.

Lease liabilities represent the present value of the total lease payments over the lease term, calculated using the incremental borrowing rate.

Lease liabilities represent the present value of the total lease payments over the lease term, calculated using an estimated incremental borrowing rate.

Lease expense is recognized on a straight-line basis over the expected lease term.

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The new standard also requires the if-converted method to be used to calculate diluted earnings per share (“EPS”) for convertible instruments.

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

Effective January 1, 2022, we adopted the new standard using the modified retrospective approach and assessed the effect of this adoption on the accounting for our outstanding convertible notes.

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The impact of the assumed conversion premium to diluted net income per share was historically computed using the treasury stock method.

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

The dilutive EPS of the notes was approximately $ 0.03 per share using the if-converted method for the three months ended March 31, 2022 as a result of the adoption of ASU 2020-06.

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

Three Months Ended March 31,

The dilutive EPS of the notes was approximately $ 0.01 and $ 0.03 per share, respectively, using t he if-converted method for the three and six months ended June 30, 2022 as a result of the adoption of ASU 2020-06.

The following table shows the computation of basic and diluted net income per share for the three and six months ended June 30, 2022 and 2021:

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands except per share data)

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

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Net revenue recognized under our GSK Agreements was as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

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Consolidated Entities

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

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

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

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Theravance Respiratory Company, LLC

We held 15 % of the economic interest of TRC as of March 31, 2022 and December 31, 2021.

We held 15 % of the economic interest of TRC as of June 30, 2022 and December 31, 2021.

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

As of March 31, 2022, TRC held equity and long-term investments in InCarda Therapeutics, Inc.

As of June 30, 2022, TRC held equity and long-term investments in InCarda Therapeutics, Inc.

(“InCarda”), ImaginAb, Inc.

(“ImaginAb”), Gate Neurosciences, Inc.

("Gate") and Nanolive SA ("Nanolive").

(“Gate”) and Nanolive SA (“Nanolive”).

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

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Income statements

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

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Income from operations

Other income, net

Income tax expense, net

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Effective in June 2020, after certain conditions were met with respect to the sales of Entasis equity shares, Innoviva has a right to designate two members to Entasis’

During the second quarter of 2021, Innoviva’s wholly owned subsidiary, Innoviva Strategic Opportunities, LLC ("ISO") entered into a securities purchase agreement with Entasis to acquire 10,000,000 shares of Entasis common stock and warrants to purchase 10,000,000 additional shares of Entasis common stock for approximately $ 20.0 million.

During the second quarter of 2021, Innoviva’s wholly owned subsidiary, Innoviva Strategic Opportunities, LLC (“ISO”) entered into a securities purchase agreement with Entasis to acquire 10,000,000 shares of Entasis common stock and warrants to purchase 10,000,000 additional shares of Entasis common stock for approximately $ 20.0 million.

The fair value of Entasis’

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financial position and results of operations effective on February 17, 2022.

Our equity interest remained at 59.9 % as of February 17, 2022, and the fair values of our holdings of Entasis common stock and warrants were remeasured and estimated at $ 64.5 million and $ 31.4 million, respectively.

The remeasurement resulted in a $ 7.7 million loss which was included in c hanges in fair values of equity and long-term investments, net on the consolidated statement of income.

Our equity ownership interest remained at 59.9 % as of February 17, 2022, and the fair values of our holdings of Entasis common stock and warrants were remeasured and estimated at $ 64.5 million and $ 31.4 million, respectively.

The remeasurement resulted in a $ 7.7 million loss which was included in c hanges in fair values of equity and long-term investments, net on the unaudited condensed consolidated statement of income for the six months ended June 30, 2022.

The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date.

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(In thousands)

March 31, 2022

June 30, 2022

Current assets:

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As a result of the consolidation, we recognized a non-controlling interest of $ 38.5 million as of February 17, 2022.

Our consolidated net income for the three months ended March 31, 2022 included the net loss since the consolidation date of $ 4.5 million for Entasis.

The following table sets forth the pro-forma consolidated results of operations for the three months ended March 31, 2022 and 2021 as if the consolidation of Entasis occurred on January 1, 2021.

The unaudited supplemental pro forma information includes adjustments for (i) increases in fair value related to the equity investments in Entasis’

common stock and warrants of $ 7.8 million and $ 11.5 million for the three months ended March 31, 2022 and 2021, respectively, and (ii) an increase for acquisition-related costs of $ 0.1 million for the three months ended March 31, 2021 and a corresponding decrease related to such costs for the three months ended March 31, 2022, as if the expenses were incurred in 2021 instead of 2022.

Our unaudited condensed consolidated net income for the three and six months ended June 30, 2022 included the net loss attributable to Innoviva stockholders since the consolidation date of $ 11.7 million and $ 16.3 million, respectively, for Entasis.

The following table sets forth the pro-forma consolidated results of operations for the three and six months ended June 30, 2022 and 2021 as if the consolidation of Entasis occurred on January 1, 2021.

The unaudited supplemental pr o forma net income is adjusted by (i) reducing $ 64.7 million positive change in fair value related to the equity investments in Entasis ’

common stock and warrants for the three months ended June 30, 2021 , and increasing $ 7.8 million and reducing $ 53.2 million for th e six months ended June 30, 2022 and 2021 respectively, and (ii) an increase for acquisition-related costs of $ 0.1 million f or the six months ended June 30, 2022 and a corresponding decrease related to such costs for the six months ended June 30, 2021, as if the expenses were incurred in 2021 instead of 2022.

The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the consolidation had taken place on the dates noted above, or of results that may occur in the future.

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

Net income attributable to Innoviva stockholders

On July 11, 2022, we announced the completion of our acquisition of Entasis by purchasing the remaining portion of noncontrolling interest.

Refer to Note 12, “Subsequent Events,”

for more information.

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”

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The capital contribution is subject to a 36-month lock up period from the contribution date.

As of March 31, 2022, we he ld approximately 100 % of t he economic interest of the Partnership.

As of March 31, 2022 and December 31, 2021, total assets of the Partnership were $ 307.6 million and $ 195.8 million, respectively, of which all were attributable to equity and long-term investments, and total liabilities were $ 0.1 million and $ 0.2 million, respectively.

As of June 30, 2022, we held approximately 100 % of the e conomic interest of the Partnership.

As of June 30, 2022 and December 31, 2021, total assets of the Partners hip were $ 306.9 million and $ 195.8 million, respectively, of which the majority was attributable to equity and long-term investments, and total liabilitie s were $ 6.4 million and $ 0.2 million, respectively.

The partnership’s assets can only be used to settle its own obligations.

During the three months ended March 31, 2022 and 2021 , we recorded $ 0.3 million and $ 0.4 million, respectively, of net investment-related expenses incurred by the Partnership, and $ 2.1 million and $ 5.8 million, respectively, of net positive changes in fair values of equity and long-term investments on the consolidated statements of income.

During the three and six months ended June 30, 2022, we recorded $ 0.5 million and $ 0.7 million, r espectively, of net investment-related expenses incurred by the Partnership, a nd $ 6.5 million and $ 4.4 million, respectively, of net negative changes in fair values of equity and long-term investments on the unaudited condensed consolidated statements of income.

During the three and six months ended June 30, 2021, we recorded $ 0.9 million and $ 1.3 million, respectively, of net investment-related expenses incurred by the Partnership, and $ 25.2 million and $ 31.0 million, respectivel y, of net positive changes in fair values of equity and long-term investments on the unaudited condensed consolidated statements of income.

Financial Instruments and Fair Value Measurements

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s board of directors, and for so long as the Company and ISO hold at least 8 %, but less than 12.5 %, of the outstanding shares of Armata ’s common stock on a fully-diluted basis, the Company and ISO shall have the right to designate one director to Armata’s board of directors, subject to certain conditions and qualifications set forth in the amended and restated investor rights agreement.

As of March 31, 2022 , three of th e eight members of Armata’s board of directors are also members of the board of directors of Innoviva.

As of March 31, 2022 and December 31, 2021, we owned approximatel y 69.4 % a nd 59.3 %, respectively, of Armata’s common stock.

As of June 30, 2022, three of the eight members of Armata’s board of directors are also members of the board of directors of Innoviva.

As of June 30, 2022 and December 31, 2021, we owned approximately 69.4 % a nd 59.3 %, respectively, of Armata’s common stock.

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

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

As of March 31, 2022 , the fair values of our holdings of Armata common stock and warrants were estimated at $ 122.6 million and $ 64.9 million, respectively.

As of June 30, 2022, the fair values of our holdings of Armata common stock and warrants were estimated at $ 97.6 million and $ 47.1 million, respectively.

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

The total fair value of both financial instruments in the amount of $ 187.5 million an d $ 146.7 million was recorded as equity and long-term investments on the consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively.

We recorde d $ 4.2 million unrealized loss and $ 61.2 million unrealized gain as changes in fair values of equity and long-term i nvestments, net on the consolidated statements of income for the three months ended March 31, 2022 and 2021, respectively.

The total fair value of both financial instruments in the amount of $ 144.7 million and $ 146.7 million was recorded as equity and long-term investments on the unaudited condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021, respectively.

During the three and six months ended June 30, 2022 , we recorded $ 42.8 million and $ 47.0 million unrealized loss, respect ively, as changes in fair values of equity and long-term investments, net on the unaudited condensed consolidated statements of income.

During the three and six months ended June 30, 2021 , we recorded $ 24.3 million unrealized loss and $ 36.9 million unrealized gains, respectively, as changes in fair values of equity and long-term investments, net on the unaudited condensed consolidated statements of income.

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

Income Statement Information

For the Three Months Ended December 31,

Three Months Ended March 31,

Six Months Ended March 31,

(In thousands)

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TRC has the right to designate one member to InCarda’s board.

As of March 31, 2022, one of InCarda’s eight board members wa s designated by TRC.

As of June 30, 2022 , one of InCarda’s eight board members wa s designated by TRC.

The InCarda 2020 Warrant is exercisable immediately with an exercise price of $ 0.7328 per share.

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The InCarda 2022 Warrant expires on March 9, 2027.

The InCarda Convertible Note and InCarda 2022 Warrant are measured at fair value, but the changes in fair value were immaterial for the period ended March 31, 2022.

As of March 31, 2022 and December 31, 2021, TRC h eld 13.0 % of InCarda equity ownership.

The InCarda Convertible Note and InCarda 2022 Warrant are measured at fair value.

On June 15, 2022, the principal amount and the accrued interest of the InCarda Convertible Note were converted into equity securities.

In addition, TRC participated in InCarda’s Series D preferred stock financing by investing $ 2.3 million.

In connection with the new round of financing, InCarda recapitalized its equity structure resulting in TRC owning 4,093,886 shares of InCarda’s common stock, 37,350 shares of its Series A-1 preferred stock, 20,469,432 shares of its Series C preferred stock, 8,771,780 shares of its Series D-1 preferred stock, 3,369,802 shares of its Series D-2 preferred stock, a warrant to purchase 5,117,358 shares of its Series C preferred stock at $ 0.73 per share and a warrant to purchase 2,490,033 shares of its Series D-2 preferred stock at $ 0.26 per share.

As of June 30, 2022 and December 31, 2021, TR C held 8.9 % and 13.0 %, respectively, of InCarda equity ownership.

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

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

We account for the InCarda Convertible Note as a trading security, measured at fair value.

We account for the investment in InCarda’s Series C preferred stock 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 March 31, 2022 and December 31, 2021, we recorded $ 16.5 million and $ 15.8 million, respectively, from our i nvestments in InCarda’s Series C preferred stock and InCarda Convertible Note as equity and long-term investments on the consolidated balance sheets .

There was no impairment to the value of our investments in InCarda as of March 31, 2022 and December 31, 2021.

We use the Black-Scholes-Merton pricing model to estimate the fair value of the InCarda 2020 Warrant with the following input assumptions:

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

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

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

(In thousands)

Risk-free interest rate

Expected volatility

Expected dividend yield

Expected term (in years)

As of March 31, 2022 and December 31, 2021, the fair value of InCarda’s warrants wa s estimated at $ 1.0 million a nd $ 0.4 million, respectively, and recorded as equity and long-term investments on the consolidated balance sheets.

As of March 31, 2022 , the fair value of InCarda’s Convertible Note was approximately the purchase price of $ 0.7 million and recorded as equity and long-term investments on the consolidated balance sheets.

During the three months ended March 31, 2022 and 2021, we rec orded $ 0.6 million unrealized gain and $ 0.5 million unrealized loss, respe ctively, as changes in fair values of equity and long-term investments, net on the consolidated statements of income.

Due to InCarda’s equity recapitalization in the second quarter of 2022, TRC reassessed the value of its investments in InCarda using the Option Pricing Model Backsolve valuation methodology.

Key assumptions used in the valuation model include an expected holding period of two years, a risk free interest rate of 3.2 %, a dividend yield of 0.0 % and an estimated volatility of 122.0 %.

The estimated volatility is calculated based on the historical volatility of a selected peer group of public companies comparable to InCarda.

We recognized an impairment charge of $ 9.0 million.

There was no impairment or other change to the value of our investments in InCarda as of December 31, 2021.

As of June 30, 2022 , we recorded $ 7.2 million in fair value of InCarda's Series C preferred stock, Series C warrants and Series D warrants (the "InCarda Preferred Stock Warrants"), and $ 3.2 million for InCarda's Series D-1 preferred stock, Series D-2 preferred stock, and common stock using the measurement alternative.

As of December 31, 2021 , we recorded $ 0.4 million in fair value of InCarda’s 2020 Warrants and $ 15.8 million for the investment in InCarda’s Series C preferred stock using the measurement alternative.

During the three and six months ended June 30, 2022, we recorded $ 9.6 million and $ 9.0 million in net unrealized loss, r espectively, as changes in fair values of equity and long-term investments, net on the unaudited condensed consolidated statements of income.

During the three and six months ended June 30, 2021 , we recorded $ 0.3 million and $ 0.7 million of unrealized loss, respectively, as changes in fair values of equity and long-term investments, net on the unaudited condensed consolidated statements of income.

Equity Investment in ImaginAb

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

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

As of March 31, 2022 , one of ImaginAb’s five board members is designated by TRC.

As of March 31, 2022 and December 31, 2021 , TRC held 14.4 % and 14.5 % of Ima ginAb equity ownership, respectively.

$ 0.4 million was incurred for investment due diligence costs and execution and recorded as part of the equity investment on the condensed consolidated balance sheets.

As of June 30, 2022 , one of ImaginAb’s five b oard members is designated by TRC.

As of June 30, 2022 and December 31, 2021, TRC he ld 14.4 % and 14.5 % of Ima ginAb equity ownership, respectively.

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

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As of March 31, 2022 and 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.

As of June 30, 2022 and December 31, 2021, $ 6.4 million was recorded as equity and long-term investments on the unaudited condensed consolidated balance sheets and there was no change to the fair value of our investment.

Convertible Promissory Note in Gate Neurosciences

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

As of March 31, 2022, TRC has designated a board member to Gate’s board, which currently consists of three directors.

As of March 31, 2022 and December 31, 2021 , the fair value of the Gate Convertible Note was estimated at $ 14.9 million and $ 15.1 million, respectively, and recorded as equity and long-term investments on the consolidated balance sheets.

We recorde d $ 0.2 million unrealized loss as changes in fair values of equity and long-term i nvestments, net on the consolidated statement of income for the three months ended March 31, 2022.

As of June 30, 2022, TRC has designated a board member to Gate’s board, which currently consists of three directors.

As of June 30, 2022 and December 31, 2021, the fair value of the Gate Convertible Note was estimated at $ 15.2 million and $ 15.1 million, respectively, and recorded as equity and long-term investments on the unaudited condensed consolidated balance sheets.

We recorde d $ 0.3 million and $ 0.1 million unrealized gain, respectively, as changes in fair values of equity and long-term investments, net on the unaudited condensed consolidated state ment of income for the three and six months ended June 30, 2022.

Equity Investment in Nanolive

On February 18, 2022, TRC entered into an investment and shareholders agreement with Nanolive SA ("Nanolive") to purchase 18,750,000 shares of Nanolive Series C preferred stock for $ 9.8 million (equivalent to 9.0 million CHF).

On February 18, 2022, TRC entered into an investment and shareholders agreement with Nanolive SA (“Nanolive”) to purchase 18,750,000 shares of Nanolive Series C preferred stock for $ 9.8 million (equivalent to 9.0 million CHF).

Nanolive SA is a Swiss privately held life sciences company focused on developing breakthrough imaging solutions that accelerate research in growth industries such as drug discovery and cell therap y.

$ 0.7 million was incurred fo r investment due diligence costs and execution and recorded as part of the equity and long-term investment on the consolidated balance sheets.

$ 0.7 million was incurred fo r investment due diligence costs and execution and recorded as part of the equity and long-term investment on the condensed consolidated balance sheets.

TRC has the right to designate one member to Nanolive’s board.

TRC also has the right to designate another member, who will be mutually acceptable to TRC and another majority common stockholder, to Nanolive’s board.

As of March 31, 2022, no I nnoviva designees are serving on Nanolive’s seven -member board.

As of March 31, 2022 , TRC held 16.1 % of Nanolive equity ownership.

As of June 30, 2022, no Innoviva designees are serving on Nanolive’s seven -member board.

As of June 30, 2022, TRC held 16.1 % o f Nanolive equity ownership.

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

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As of March 31, 2022 , $ 10.6 million was recorded as equity and long-term investments on the consolidated balance sheets and there was no change to the fair value of our investment.

As of June 30, 2022, $ 10.6 million was recorded as equity and long-term investments on the unaudited condensed consolidated balance sheets and there was no change to the fair value of our investment.

Fair Value Measurements

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Equity investments accounted for using the measurement alternative are valued using Level 3 inputs.

Estimated Fair Value Measurements as of March 31, 2022 Using:

Estimated Fair Value Measurements as of June 30, 2022 Using:

Types of Instruments

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Equity investment - Armata Warrants

Equity investment - InCarda Warrants

Convertible debt investment - InCarda Note

Equity investment - InCarda Series C Preferred Stock

Equity investment - InCarda Preferred Stock Warrants

Convertible debt investment - Gate Note

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Total fair value of debt

(1) The investments held by ISP Fund LP, consisted of $ 172.1 million in equity investments, which included $ 2.1 million in a private placement position, $ 25.2 million in money market funds and $ 110.3 million in cash.

(1) The investments held by ISP Fund LP, consisted of $ 201.6 million in equity investments, which included a private placement position of $ 2.1 million, $ 35.3 million in money market funds and $ 70.0 million in cash.

Our total capital contribution of $ 300.0 million is subject to a 36-month lock-up period from the date of such capital contributions.

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The fair values of the warrants of Armata 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 convertible note and warrants, Gate’s convertible note, and private placement positions held by ISP Fund LP and 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.

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

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

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Goodwill and intangible assets acquired in our consolidation of Entasis were recognized at fair value as of the consolidation date, February 17, 2022.

The carrying amount of goodwill as of March 31, 2022 was $ 5.5 million.

The carrying amount of goodwill as of June 30, 2022 was $ 5.5 million .

Intangible assets with definite lives are amortized over their estimated useful lives.

The carrying basis and accumulated amortization of recognized intangible assets as of March 31, 2022 were as follows:

March 31, 2022

The carrying basis and accumulated amortization of recognized intangible assets as of June 30, 2022 were as follows:

(In thousands)

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The intangible asset with determinable life consists of a contract, which commences in 2023.

The useful life of this intangible asset will be determined upon commercialization of the underlying product candidate.

Thus, no amortization expense of determinable assets was recognized during the period ended March 31, 2022.

The useful l ife of this intangible asset will be determined upon commercialization of the underlying product candidate.

Thus, no amortization expense of determinable assets was recognized during the period ended June 30, 2022.

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

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Other Accrued Liabilities

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

Other accrued liabilities consisted of the following:

(in thousands)

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Current portion of lease liabilities

Liabilities for unsettled security transactions

Total other accrued liabilities

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

Stock-Based Compensation

Stock- Based Compensation Expense

The following table summarizes stock-based compensation expense which included $ 0.3 million related to Entasis’

equity awards for the three months ended March 31, 2022:

Three Months Ended March 31,

The following table summarizes stock-based compensation expense, which included $ 0.7 million and $ 1.0 million, respectively, related to Entasis’

equity awards, for the three and six months ended June 30, 2022:

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Risk-free interest rate

2.84 % - 3.03 %

1.6 % - 3.03 %

1.07 % - 1.13 %

Expected term (in years)

38.8 % - 39.0 %

38.8 % - 40.5 %

Dividend yield

Weighted-average estimated fair value of stock options granted

Our debt consisted of:

$ 6.98 - $ 7.18

$ 6.98 - $ 7.73

Our debt consisted of the following:

(In thousands)

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Accrued interest was $ 0.4 million and unamortized debt issuance costs were $ 0.3 million on the date of repurchase.

We recognized a loss on the extinguishment of the 2023 Notes of $ 20.7 million in other expense, net in the consolidated statement of operations.

We recognized a loss on the extinguishment of the 2023 Notes of $ 20.7 million in other expense, net in the unaudited condensed consolidated statement of operations.

The repurchase reduced the outstanding principal balance to $ 96.2 million and unamortized debt issuance costs to $ 0.2 million.

The effective interest rate of the 2023 Notes changed to 2.37 %.

On April 18, 2022, certain 2023 Notes holders converted their notes of $ 3.0 thousand into Innoviva’s common stock.

The outstanding principal balance was reduced slightly to $ 96.2 million.

Our outstanding 2023 Notes balances consisted of the following:

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Net carrying amount

The following table sets forth total interest expense recognized related to the 2023 Notes for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

The following table sets forth total interest expense recognized related to the 2023 Notes for the three and six months ended June 30, 2022 and 2021:

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

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Equity component, net

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

Three Months Ended March 31,

The following table sets forth total interest expense recognized related to the 2025 Notes for the three and six months ended June 30, 2022 and 2021:

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

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The capped call transactions are expected generally to reduce potential dilution to our common stock upon conversion of the 2028 Notes or at our election (subject to certain conditions) offset any cash payments we are required to make in excess of the aggregate principal amount of converted 2028 Notes, as the case may be, with such reduction or offset subject to a cap.

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

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

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

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

(In thousands)

June 30, 2022

Liability component

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Net carrying amount

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

The following table sets forth total interest expense recognized related to the 2028 Notes from the date of issuance through June 30, 2022:

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

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Debt Maturities

The aggregate scheduled maturities of our convertible debt as of March 31, 2022 were as follows:

The aggregate scheduled maturities of our convertible debt as of June 30, 2022 were as follows:

(In thousands)

June 30, 2022

Years ending December 31:

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Our operating leases include Entasis’

facility lease (“Entasis Lease”) consisting of 20,062 square feet of office and laboratory space in Waltham, Massachusetts .

facility lease (the “Entasis Lease”) consisting of 20,062 square feet of office and laboratory space in Waltham, Massachusetts .

In February 2022, Entasis decided to exercise a renewal option for the Entasis Lease to extend the lease term for three additional years through 2025 and subsequently signed the Second Amendment in April 2022.

As of March 31, 2022, the weighted average remaining lease term was 3.8 years and the weighted-average incremental borrowing rate used to determine the operating lease right-of-use assets was 7.8 %.

As of June 30, 2022, the weighted average remaining lease term was 2.8 years and the estimated weighted-average incremental borrowing rate used to determine the operating lease right-of-use assets and lease liabilities was 7.8 %.

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

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

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

(In thousands)

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Total lease liabilities

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

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

(In thousands)

June 30, 2022

Years ending December 31:

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Total operating lease liabilities

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

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

(In thousands)

June 30, 2022

Years ending December 31:

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Currently, we believe that no litigation or arbitration, either individually or in the aggregate, to which we are presently a party is likely to have a material adverse effect on our operating results or financial position.

Provisional income tax expense for the three months ended March 31, 2022 and 2021 was $ 6.9 million and $ 19.7 million, respectively.

The Company’s effective income tax rate for the three months ended March 31, 2022 was 15.3 %, co mpared to 15.2 % for the same period in 2021.

The income tax expense for the three months ended March 31, 2022 and 2021 was determined based upon estimates of the Company’s effective income tax rates in various jurisdictions.

Our effective income tax rate for the three months ended March 31, 2022 was lower than the benefit computed at the U.S.

federal statutory income tax rate due primarily to noncontrolling interest.

We recorded a provisional income tax benefit of $ 0.9 million for the three months ended June 30, 2022 and provisional income tax expense of $ 6.0 million for the six months ended June 30, 2022 , compared to provisional income tax expense of $ 25.3 million and $ 45.1 million for the three and six months ended June 30, 2021 respectively.

The Company’s effective income tax rate for the six months ended June 30, 2022 wa s 4.3 %, com pared to 18.6 % for the same period in 2021.

The income tax expense for the six months ended June 30, 2022 and 2021 was determined based upon estimates of the Company’s effective income tax rates in various jurisdictions.

Our effective income tax rate for the six months ended June 30, 2022 was lower than the U.S.

federal statutory income tax rate due primarily to noncontrolling interest and a decrease in the fair value of our equity investments.

Subsequent Events

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

On July 11, 2022 , we also entered into a definitive merger agreement, whereby we will acquire La Jolla Pharmaceutical Company (“La Jolla”), a company dedicated to the commercialization of innovative therapies that improve outcomes in patients suffering from life-threatening diseases.

Under the terms of the agreement, we will acquire all of the outstanding shares of La Jolla for $ 6.23 per share in cash subject to certain closing conditions.

On July 13, 2022 , we announced that we entered into an agreement to sell our 15 % economic stake in TRC, which receives royalties stemming from sales of TRELEGY ® ELLIPTA ® , to Royalty Pharma plc for an upfront cash payment of approximately $ 282.0 million and a potential $ 50.0 million contingent sales-based milestone payment.

Under the terms of the agreement, TRC also transferred to Innoviva all of TRC's ownership interests and investments in InCarda, ImaginAb, Gate Neurosciences and Nanolive.

We retain our royalty rights with respect to R ELVAR ® /BREO ® ELLIPTA ® and ANORO ® ELLIPTA ® , as well as the GSK Agreements associated with the retained products.

The transaction was closed on July 20, 2022.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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All forward-looking statements in this Quarterly Report on Form 10-Q are based on current expectations as of the date hereof and we do not assume any obligation to update any forward-looking statements on account of new information, future events or otherwise, except as required by law.

We encourage you to read our consolidated financial statements contained in this Quarterly Report on Form 10-Q.

We encourage you to read our unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.

We also encourage you to read Item 1A of Part I of our 2021 Form 10-K and Item 1A of Part II of our Quarterly Reports on Form 10-Q entitled “Risk Factors,”

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GSK Net Sales:

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

Second quarter 2022 net sales of RELVAR ® /BREO ® ELLIPTA ® by GSK were $395.5 million, down 10% from $439.5 million in the same quarter of 2021, with $189.7 million in net sales from the U.S.

market and $205.8 million from non-U.S.

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

Second quarter 2022 net sales of ANORO ® ELLIPTA ® by GSK were $148.2 million, down 19% from $184.0 million in the same quarter of 2021, with $74.5 million net sales from the U.S.

market and $73.7 million from non-U.S.

First quarter 2022 net sales of TRELEGY ® ELLIPTA ® by GSK were $450.9 million, up 33% from $339.8 million in the same quarter of 2021, with $317.4 million in net sales from the U.S.

Second quarter 2022 net sales of TRELEGY ® ELLIPTA ® by GSK were $590.1 million, up 45% from $405.9 million in the same quarter of 2021, with $449.1 million in net sales from the U.S.

market and $141.0 million in net sales from non-U.S.

Capital Allocation:

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

During the first quarter of 2022, the Company’s wholly owned subsidiary, Innoviva Strategic Opportunities LLC, purchased a $15.0 million note from Entasis that is convertible, subject to certain conditions, into Entasis’

shares at $1.48 per share price and equal number of warrants with $1.48 per share strike price.

During the first quarter of 2022, the Company determined that it is the primary beneficiary of Entasis and consolidated Entasis’

financial position and results of operations effective on February 17, 2022.

The Company also made a non-binding offer to acquire all outstanding equity securities of Entasis that it does not own at $2.00 per share.

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

Capital Allocations:

During the second quarter of 2022, the Company’s wholly owned subsidiary, Innoviva Strategic Opportunities LLC, announced the purchase of all the issued and outstanding equity securities of Entasis Therapeutics not already owned by Innoviva and its affiliates for $2.20 per share for a consideration of $42.4 million.

The purchase closed on July 11, 2022.

Subsequent to the close of the second quarter of 2022, the Company’s wholly owned subsidiary, Innoviva Strategic Opportunities LLC, entered into a definitive merger agreement to acquire La Jolla Pharmaceutical Company (Nasdaq:

Innoviva has agreed to pay $5.95 per share and an incremental $0.28 per share for additional cash proceeds received in connection with the divestiture of a non-core asset.

The implied enterprise value of La Jolla was approximately $149.0 million.

The acquisition is expected in to close later in the third quarter of 2022.

In July, the Company sold its 15% stake in Theravance Respiratory Company (“TRC”), which received royalties stemming from sales of TRELEGY ® ELLIPTA ® , to Royalty Pharma plc (Nasdaq:

RPRX) for an upfront cash payment of approximately $282.0 million and a potential $50.0 million contingent sales-based milestone payment.

Under the terms of the agreement, TRC also transferred to Innoviva all of TRC’s ownership interests and investments in InCarda Therapeutics Inc., ImaginAb, Inc., Gate Neurosciences, Inc.

and Nanolive SA;

collectively, these ownership interests are valued at $42.5 million as of quarter-end.

Innoviva retained its royalty rights with respect to ANORO ® ELLIPTA ® and RELVAR ® /BREO ® ELLIPTA ® .

Collaborative Arrangements with GSK

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Actual results may differ from these estimates under different assumptions or conditions.

Other than those set out in Note 1 to our accompanying unaudited consolidated financial statements, we believe there have been no significant changes in our critical accounting policies as described in the Form 10-K for the year ended December 31, 2021 filed with the SEC on February 28, 2022, and as amended on March 17, 2022.

Other than those set out in Note 1 to our accompanying unaudited condensed consolidated financial statements, we believe there have been no significant changes in our critical accounting policies as described in the Form 10-K for the year ended December 31, 2021 filed with the SEC on February 28, 2022, and as amended on March 17, 2022.

Results of Operations

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

Three Months Ended March 31,

Three Months Ended

Six Months Ended

(In thousands)

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*Not Meaningful

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

Total net revenue increased to $108.2 million and $198.3 million for the three and six months ended June 30, 2022, compared to $100.8 million and $186.3 million, respectively, for the same period a year ago, primarily due to growth in prescriptions for our TRELEGY products.

Research & Development

Research and development (“R&D”) expenses attributable to Entasis' product development efforts were $5.8 million for the three months ended March 31, 2022.

Research and development expenses for the three months ended March 31, 2021 were attributable to the product development of Pulmoquine Therapeutics Inc., which was dissolved at the end of 2021.

Research and development (“R&D”) expenses attributable to Entasis’

product development efforts were $13.9 million and $19.7 million, respectively, for the three and six months ended June 30, 2022.

Research and development expenses for the three and six months ended June 30, 2021 were attributable to the product development of Pulmoquine Therapeutics Inc., which was dissolved at the end of 2021.

General & Administrative

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Three Months Ended

Six Months Ended

(In thousands)

General and administrative

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

General and administrative expenses for the three and six months ended June 30, 2022 increased compared to the same period in 2021 mainly due to the consolidation of Entasis’

operating expenses starting February 17, 2022.

Interest and dividend income and other expense, net

1 unchanged sentence

Three Months Ended

Six Months Ended

(In thousands)

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*Not Meaningful

Interest and dividend income increased for the three months ended March 31, 2022 compared to the same periods a year ago due to higher returns on investments, including those managed by ISP Fund LP.

Interest and dividend income increased for the three and six months ended June 30, 2022 compared to the same periods a year ago due to higher returns on investments, including those managed by ISP Fund LP.

Other expense, net, was primarily expenses incurred by ISP Fund LP.

Other expense, net was partially offset by income from grants of $0.4 million and $0.7 million during the three and six months ended June 30, 2022.

There was no income from grants during 2021.

Interest Expense

1 unchanged sentence

Three Months Ended

Six Months Ended

(In thousands)

1 unchanged sentence

The decrease in interest expense was primarily due to the adoption of the new accounting standard, ASU 2020-06, which is to simplify the accounting for convertible debt instruments, and the debt discount associated with the cash settlement feature of our convertible notes due 2025 (“2025 Notes”), which was adjusted to zero as of January 1, 2022.

The interest expense for the three months ended March 31, 2022 included the contractual interest expense and the amortization of debt issuance costs for our 2023 Notes, 2025 Notes and 2028 Notes.

Interest expense for the three months ended March 31, 2021 included the contractual interest expense, the amortization of debt discount and issuance costs for our 2023 Notes and 2025 Notes.

The interest expense for the three and six months ended June 30, 2022 included the contractual interest expense and the amortization of debt issuance costs for our 2023 Notes, 2025 Notes and 2028 Notes.

Interest expense for the three and six months ended June 30, 2021 included the contractual interest expense, the amortization of debt discount and issuance costs for our 2023 Notes and 2025 Notes.

Loss on Debt Extinguishment

3 unchanged sentences

Three Months Ended

Six Months Ended

(In thousands)

Changes in fair values of equity and long-term

investments, net

The changes in fair values of equity and long-term investments for the three months ended March 31, 2022 decreased compared to the same period in 2021 mainly due to the volatility in the capital markets.

The changes in fair values of equity and long-term investments reflect the realized gains and losses and net unrealized gains and losses in our strategic investments in Armata, Entasis, InCarda, Gate, and those investments managed by ISP Fund LP.

Changes in fair values of equity and

long-term investments, net

The changes in fair values of equity and long-term investments for the three and six months ended June 30, 2022 decreased compared to the same period in 2021 mainly due to the volatility in the capital markets.

The changes in fair values of equity and long-term investments reflect the realized gains and losses and net unrealized gains and losses in our strategic investments in Armata, InCarda, Gate, and those investments managed by ISP Fund LP.

Provision for Income Taxes

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

We recorded a provisional income tax benefit of $0.9 million for the three months ended June 30, 2022 and provisional income tax expense of $6.0 million for the six months ended June 30, 2022, compared to provisional interest tax expense of $25.3 million and $45.1 million for the three and six months ended June 30, 2021.

The effective income tax rate for the six months ended June 30, 2022 and 2021 was 4.3% and 18.6%, respectively.

Net Income Attributable to Noncontrolling Interest

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Three Months Ended

Six Months Ended

(In thousands)

Net income attributable to noncontrolling interest

This represents $25.1 million for the 85% share of net income in Theravance Respiratory Company, LLC for Theravance Biopharma and $3.0 million for the 40% share of net loss in Entasis Therapeutics Holdings, Inc.

for the three months ended March 31, 2022.

The net income attributable to noncontrolling interest for the three months ended March 31, 2021 represents the 85% share of net income in Theravance Respiratory Company, LLC for Theravance Biopharma.

The increase was primarily due to the growth in prescriptions and market share for TRELEGY ® ELLIPTA ® , offset with $3.0 million net loss for Entasis’

Net income attributable to

noncontrolling interest

Net income attributable to noncontrolling interest represents $28.3 million and $53.4 million for the 85% share of net income in Theravance Respiratory Company, LLC for Theravance Biopharma and $7.9 million and $10.9 million for the 40% share of net loss in Entasis Therapeutics Holdings, Inc.

for the three and six months ended June 30, 2022, respectively.

The net income attributable to noncontrolling interest for the three and six months ended June 30, 2021 represents the 85% share of net income in Theravance Respiratory Company, LLC for Theravance Biopharma.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through private placements and public offerings of equity and debt securities and payments received under collaborative arrangements.

For the three months ended March 31, 2022, we generated gross royalty revenues from GSK of $93.5 million.

Net cash and cash equivalents totaled $216.8 million, inclusive of $33.5 million of Entasis' cash balance, and receivables from GSK totaled $93.5 million as of March 31, 2022.

For the six months ended June 30, 2022, we generated gross royalty revenues from GSK of $205.2 million.

Net cash and cash equivalents totaled $283.6 million, inclusive of $22.4 million of Entasis’

cash balance, and receivables from GSK totaled $111.7 million as of June 30, 2022.

Adequacy of Cash Resources to Meet Future Needs

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

Three Months Ended

Six Months Ended June 30,

(In thousands)

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by (used in) investing activities

Net cash provided by (used in) financing activities

Cash Flows from Operating Activities

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

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

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

Net cash provided by operating activities for the six months ended June 30, 2021 was $168.7 million, consisting primarily of our net income of $220.5 million, adjusted for net non-cash items such as $45.1 million of deferred income taxes, $6.9 million of depreciation and amortization, and $4.5 million of amortization of debt discount and issuance costs, partially offset by an increase of $99.0 million in the fair value of our equity and long-term investments, net and an increase in receivables from collaborative arrangements of $10.3 million.

Cash Flows from Investing Activities

Net cash used in investing activities for the three months ended March 31, 2022 of $143.2 million was primarily due to $134.3 million of purchases of equity and other investments managed by ISP Fund LP and $56.2 million investments in Armata, InCarda, and Nanolive, partially offset by $24.3 million of sales of equity investments managed by ISP Fund LP and $23.1 million of cash acquired through the consolidation of Entasis.

Net cash used in investing activities for the three months ended March 31, 2021 of $26.4 million was primarily due to our investments in Armata and ImaginAb.

$112.6 million of sales was offset by $112.6 million of purchases of equity and other investments managed by the ISP Fund LP.

Net cash used in investing activities for the six months ended June 30, 2022 of $145.7 million was primarily due to $38.0 million of purchases of equity investments managed by ISP Fund LP, $96.3 million of purchases and sales of other investments managed by ISP Fund LP, net, and $58.7 million investments in Armata, InCarda, and Nanolive, partially offset by $24.3 million of sales of equity investments managed by ISP Fund LP and $23.1 million of cash acquired through the consolidation of Entasis.

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

Cash Flows from Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2022 of $60.3 million was primarily due to the net proceeds of $252.8 million from the issuance of the convertible senior notes due in 2028, offset with $21.0 million purchase of capped call options associated with the 2028 Notes, $165.1 million for the repurchase of the 2023 Notes, and $6.5 million distributions to noncontrolling interest.

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

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

Net cash used in financing activities for the six months ended June 30, 2021 of $435.6 million was primarily due to $394.1 million used for our common stock repurchase from GSK and $41.4 million distributions to noncontrolling interest.

Contractual Obligations

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As of March 31, 2022, our notes payable obligation also included $96.2 million related to our 2023 Notes which are due in 2023 and $192.5 million related to our 2025 Notes which are due in 2025.

Refer to Note 8, “Debt”, to the Consolidated Financial Statements for more information.

During the three months ended March 31, 2022, we determined that we have both (1) the power to direct the economically significant activities of Entasis and (2) the obligation to absorb the losses, or the right to receive the benefits, that could potentially be significant to Entasis, and therefore, we are the primary beneficiary of Entasis.

Accordingly, we consolidated Entasis' financial position and results of operations effective on February 17, 2022.

Refer to Note 8, “Debt”, to the Condensed Consolidated Financial Statements for more information.

During the six months ended June 30, 2022, we determined that we have both (1) the power to direct the economically significant activities of Entasis and (2) the obligation to absorb the losses, or the right to receive the benefits, that could potentially be significant to Entasis, and therefore, we are the primary beneficiary of Entasis.

Accordingly, we consolidated Entasis’

financial position and results of operations effective on February 17, 2022.

In connection with the consolidation, we assumed contractual obligations related to an operating lease of Entasis for office and laboratory space in Waltham, Massachusetts with an expiration date in 2025.

As of March 31, 2022, total undiscounted future minimum lease payments related to the Entasis lease were $4.5 million, with approximately $0.6 million payable through December 31, 2022 and approximately $1.3 million payable in each of the years from 2023 to 2025.

Refer to Note 9, “Commitments and Contingencies”, to the Consolidated Financial Statements for more information.

As of June 30, 2022, total undiscounted future minimum lease payments related to the Entasis lease were $4.2 million, with approximately $0.4 million payable through December 31, 2022 and approximately $1.3 million payable in each of the years from 2023 to 2025.

Refer to Note 9, “Commitments and Contingencies”, to the Condensed Consolidated Financial Statements for more information.

Quantitative and Qualitative Disclosure about Market Risk

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What changed 10-Q

Item 1. Financial Statements