What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-11-09 compared with 2022-07-27 · 846 added, 431 removed, 647 unchanged (66% of the section changed)

3 unchanged sentences

(In thousands, except per share data)

September 30,

Current assets:

Cash and cash equivalents

Related party receivables from collaborative arrangements

Short-term marketable securities

Accounts receivable, net

Receivables from collaboration arrangement

Prepaid expenses

12 unchanged sentences

Accrued interest payable

Convertible subordinated notes due 2023,

net of issuance costs

Deferred revenue

Convertible subordinated notes due 2023, net of issuance costs

Income tax payable

Other accrued liabilities

1 unchanged sentence

Long-term debt, net of discount and issuance costs

Lease liabilities, long-term

Other long-term liabilities

Deferred tax liabilities

Commitments and contingencies (Note 11)

6 unchanged sentences

69,776 and 69,566 issued and outstanding as of

June 30, 2022 and December 31, 2021 respectively

September 30, 2022 and December 31, 2021 respectively

Treasury stock:

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

at cost, 32,005 shares as of September 30, 2022

and December 31, 2021, respectively

5 unchanged sentences

Total liabilities and stockholders’

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

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

(In thousands, except per share data)

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 June 30, 2022 and 2021, and

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

Operating expenses:

Three Months Ended September 30,

Nine Months Ended September 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 September 30, 2022 and

2021, and $ 10,368 in the nine months

ended September 30, 2022 and 2021

Net product sales

Total revenue

Cost of products sold (inclusive of

amortization of inventory fair value

adjustments, excluding depreciation

and amortization of intangible assets)

Selling, general and administrative

Research and development

General and administrative

Total operating expenses

Income from operations

Interest and dividend income

Other expense, net

Interest expense

Amortization of acquired intangible assets

Gain on sale of Theravance Respiratory

Company, LLC (“TRC”)

Loss on debt extinguishment

1 unchanged sentence

long-term investments, net

Interest and dividend income

Interest expense

Other expense (income), net

Total expenses

Income before income taxes

Income tax expense (benefit), net

Net income attributable to

noncontrolling interest

Income tax expense, net

Net income (loss) attributable to

noncontrolling interests

Net income attributable to

12 unchanged sentences

(In thousands)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Comprehensive income

Comprehensive income attributable to noncontrolling interest

Comprehensive income attributable to Innoviva stockholders

Comprehensive income (loss) attributable to

noncontrolling interests

Comprehensive income attributable to

Innoviva stockholders

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

(In thousands)

Six Months Ended June 30, 2022

Accumulated Other

Comprehensive

Nine Months Ended September 30, 2022

Treasury Stock

1 unchanged sentence

Stockholders’

Income (Loss)

Balance as of

December 31, 2021

Cumulative adjustment due

to adoption of

Distributions to

noncontrolling interest

Balance as of January 1, 2022

Cumulative adjustment due to

adoption of ASU 2020-06

Distributions to noncontrolling

Fair value of noncontrolling

interest in a consolidated

interests 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

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

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

Capped call options associated

with convertible senior notes

Balance as of March 31, 2022

Distributions to noncontrolling

Equity activity of noncontrolling

interests 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

Exercise of stock options and

issuance of common stock units

and stock awards, net of

repurchase of shares to satisfy

tax withholding

Conversion of convertible

1 unchanged sentence

Stock-based compensation

Balance as of

June 30, 2022

Six Months Ended June 30, 2021

Accumulated Other

Comprehensive

Balance as of June 30, 2022

Distributions to

noncontrolling interests

Derecognition of noncontrolling

interests upon sale of TRC

Derecognition of noncontrolling

interests upon acquisition of

Entasis Therapeutics Holdings Inc.

(“Entasis”) minority 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

Balance as of September 30, 2022

Nine Months Ended September 30, 2021

Treasury Stock

1 unchanged sentence

Stockholders’

Income (Loss)

Balance as of December 31, 2020

1 unchanged sentence

Equity activity of noncontrolling

interest from a consolidated

interests 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

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

Distributions to noncontrolling

Distributions to noncontrolling interests

Equity activity of noncontrolling

interest from a consolidated

interests 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

issuance of common stock units

and stock awards, net of

repurchase of shares to satisfy

tax withholding

Repurchase of common stock

1 unchanged sentence

Balance as of June 30, 2021

Distributions to noncontrolling

Equity activity of noncontrolling

interests 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

Stock-based compensation

Balance as of September 30, 2021

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities

2 unchanged sentences

Depreciation and amortization

Amortization of inventory fair value adjustments included in

cost of products sold

Stock-based compensation

Amortization of debt discount and issuance costs

Amortization of deferred royalty obligation value adjustment

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

Loss on extinguishment of debt

Net gain on sale of TRC

Changes in operating assets and liabilities:

Receivables from collaborative arrangements

Accounts receivable

Receivables from collaboration arrangement

Prepaid expenses

2 unchanged sentences

Accounts payable

Accrued personnel-related expenses and other accrued liabilities

Accrued personnel-related expenses and other

accrued liabilities

Accrued interest payable

Income tax payable

Net cash provided by operating activities

3 unchanged sentences

Sales of equity investments managed by ISP Fund LP

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

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

Purchases of property and equipment

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

Net cash provided by (used in) investing activities

Proceeds from sale of ownership interest in TRC, net

Cash acquired through the consolidation of Entasis

Cash paid for the acquisition of La Jolla Pharmaceutical Company,

net of cash acquired

Net cash (used in) provided by investing activities

Cash flows from financing activities

Distributions to noncontrolling interest

Distributions to noncontrolling interests

Purchase of Entasis minority interest

Repurchase of common stock

4 unchanged sentences

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

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Net cash used in financing activities

Net increase (decrease) in cash, cash equivalents and restricted cash

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Cash, cash equivalents and restricted cash at end of period

Nine Months Ended September 30,

Supplemental Disclosure of Cash Flow Information:

Cash paid for interest

Cash paid for income taxes

Supplemental Disclosure of Non-cash Investing and Financing Activities:

Adoption of ASU 2020-06

Right-of-use asset obtained through the consolidation of

Entasis Therapeutics Holdings, Inc.

Reconciliation of Cash, Cash Equivalents and Restricted Cash:

Cash and cash equivalents

Restricted cash, included in “Other assets”

Total cash, cash equivalents and restricted cash at end of period shown in the

condensed consolidated statements of cash flows

See accompanying notes to condensed consolidated financial statements.

5 unchanged sentences

(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).

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

Our royalty portfolio contains respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR ® /BREO ® ELLIPTA ® (fluticasone furoate/vilanterol, “FF/VI”) and ANORO ® ELLIPTA ® (umeclidinium bromide/ vilanterol, “UMEC/VI”), and up until July 2022, TRELEGY ® ELLIPTA ® (the combination FF/UMEC/VI).

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

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

1 unchanged sentence

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 ® .

We expanded our portfolio of royalties and innovative healthcare assets through the acquisition of Entasis Therapeutics Holdings Inc.

(“Entasis”) on July 11, 2022 and the acquisition of La Jolla Pharmaceutical Company (“La Jolla”) on August 22, 2022.

Our commercial and marketed products include GIAPREZA ® (angiotensin II), approved to increase blood pressure in adults with septic or other distributive shock, and XERAVA ® (eravacycline) for the treatment of complicated intra-abdominal infections in adults.

Our development pipeline includes medicines for the treatment of bacterial infections, such as our lead asset sulbactam-durlobactam (“SUL-DUR”).

Basis of Presentation

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 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 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.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) for interim financial information.

Accordingly, they do not include all of the information and notes required by U.S.

GAAP for complete financial statements.

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

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

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

All intercompany balances and transactions have been eliminated in consolidation.

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

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

Factors Affecting Comparability

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

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

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

Acquisition of La Jolla on August 22, 2022.

Prior Period Immaterial Correction

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.

Subsequent to the issuance of the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2021, the Company identified that (i) purchases of equity investments managed by ISP Fund LP for $ 178.4 million, (ii) sales of equity investments managed by ISP Fund LP for $ 21.4 million, and (iii) purchase and sales of other investments managed by ISP Fund LP, net for $ 267.0 million were incorrectly included 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 nine months ended September 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 for the relevant period.

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.

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

GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes.

Actual results could differ materially from those estimates.

2 unchanged sentences

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

Concentrations of Credit Risk and of Significant Suppliers and Partner

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

We are dependent on third-party manufacturers to supply active pharmaceutical ingredients (“API”) and drug products for research and development and commercial programs.

These programs could be adversely affected by significant interruption in the supply of API or drug products.

Currently, we derive most of our revenues from GSK and our near-term success depends in large part on GSK’s ability to successfully develop and commercialize the products in the respiratory programs partnered with GSK.

Our near-term success depends in large part upon the performance by GSK of its commercial obligations under the GSK Agreements and the commercial success of RELVAR ® /BREO ® ELLIPTA ® and ANORO ® ELLIPTA ® .

If GSK does not devote sufficient resources to the commercialization or development of these products, is unsuccessful in its efforts, or chooses to reprioritize its commercial programs, our business would be materially harmed.

GSK is responsible for all clinical and other product development, regulatory, manufacturing and commercialization activities for products developed under the GSK Agreements, including RELVAR ® /BREO ® ELLIPTA ® and ANORO ® ELLIPTA ® .

Our quarterly royalty revenues may fluctuate due to a variety of factors, many of which are outside of our control.

Our royalty revenues under the GSK Agreements may not meet our, analysts’

or investors’

expectations, due to a number of important factors.

We also started recognizing revenue from product sales as a result of our acquisition of La Jolla.

Hospitals and other healthcare organizations generally purchase our products through a network of specialty distributors.

These specialty distributors, which are located in the U.S., are considered our customers for accounting purposes.

We do not believe that loss of one of these distributors would significantly impact our ability to distribute our products, as we expect that sales volume would be absorbed by new or remaining distributors.

Three of our customers each comprise 10 % or more of our net product sales and they account for 32 %, 32 % and 29 %, respectively, of our net product sales from the time of La Jolla ’

s acquisition to September 30, 2022.

These same customers account for 34 %, 23 % and 35 %, respectively, of our receivables from net product sales, which is included in “Accounts receivables, net”

in our unaudited consolidated balance sheet as of September 30, 2022.

Refer to Item 1A.

“Risk Factors”

disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021 and to the supplemental risk factors detailed in our Form 8-K filed on August 23, 2022 for further detail.

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.

We operate in a single segment, which is to provide capital return to stockholders by maximizing the potential value of our portfolio of royalties and innovative healthcare assets.

Our Chief Operating Decision Maker (“CODM”) is our Chief Executive Officer.

The CODM allocates resources and evaluates the performance of Innoviva at the consolidated level using information about our revenues, operating results and other key financial data as needed.

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

We also generate revenue from net sales of GIAPREZA ® and XERAVA ® .

Our long-term assets are located within the United States.

Variable Interest Entities

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

We evaluate our ownership, contractual and other interest in entities to determine if they are a 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.

Business Combination

When we acquire an entity in a business combination, we recognize the fair value of all assets acquired, liabilities assumed, and any non-controlling interest in the acquiree and establish the acquisition date as the fair value measurement point.

We recognize and measure goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired.

Acquisition-related expenses and related restructuring costs are expensed as incurred.

Several valuation methods may be used to determine the fair value of assets acquired and liabilities assumed.

For intangible assets, we typically use the income method.

This method starts with a forecast of all of the expected future net cash flows for each asset.

These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams.

Some of the more significant estimates and assumptions inherent in the income method or other methods include the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry.

Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.

Cash and Cash Equivalents

We consider all highly liquid investments purchased with a maturity of three months or less on the date of purchase to be cash equivalents.

Cash equivalents are carried at cost, which approximates fair value.

Accounts Receivable, Net

Accounts receivable, net are recorded net of estimates for prompt-pay discounts, chargebacks, returns, rebates, and administrative fees.

Allowances for prompt-pay discounts and chargebacks are based on contractual terms.

We estimate the allowance for credit losses based on existing contractual payment terms, actual payment patterns of customers and individual customer circumstances.

Inventory is stated at the lower of cost or estimated net realizable value on a first in, first out basis.

We periodically analyze inventory levels and write down inventory as cost of products sold when the following occurs:

inventory has become obsolete, inventory has a cost basis in excess of its estimated net realizable value, or inventory quantities are in excess of expected product sales .

Goodwill and Intangible Assets

Goodwill is recognized as the excess of the purchase consideration of an acquired entity over the fair value assigned to assets acquired and liabilities assumed in a business combination.

Goodwill and intangible assets with indefinite lives are subject to impairment testing at least annually or more frequently if indicators for potential impairment exist.

Intangible assets with definite lives are amortized on a straight-line basis over the remaining useful life of the intangible asset.

These assets are tested for impairment whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable.

Significant judgments are involved in determining if an indicator of impairment has occurred.

Operating Leases

We account for our leases under ASC 842, Leases .

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

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

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

Equity and Long-Term Investments

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

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

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

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

We may account for the 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.

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 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 .

This measurement alternative allows us to measure the equity investment at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

We also invest in ISP Fund LP, which investments consist of money market funds and equity securities in the healthcare, pharmaceutical and biotechnology industries.

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

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 within 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 method under ASC 321, Investments - Equity Securities .

This measurement alternative method allows us to measure the equity investment at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

We also invest in ISP Fund LP, which investments consist of money market funds and equity and debt securities in the healthcare, pharmaceutical and biotechnology industries.

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

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

7 unchanged sentences

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

Royalty Revenue from Collaboration Arrangement

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.

1 unchanged sentence

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.

We conduct periodic royalty audits to evaluate the information provided by our partner.

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

Revenue from Product Sales

Revenue from product sales is recognized when our customers obtain control of the product and is recorded at the transaction price, net of estimates for variable consideration consisting of chargebacks, discounts, returns, rebates and administrative fees.

Variable consideration is estimated using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible consideration amounts.

Actual amounts of consideration ultimately received may differ from our estimates.

If actual results vary materially from our estimates, we will adjust these estimates, which will affect revenue from product sales and earnings in the period such estimates are adjusted.

These items may include:

Chargebacks are discounts we provide to distributors in the event that the sales prices to end users are below the distributors’

acquisition price.

This may occur due to a direct contract with a health system, a group purchasing organization (“GPO”) agreement or a sale to a government facility.

Chargebacks are estimated based on known chargeback rates and recorded as a reduction of revenue on delivery to our customers.

We offer customers various forms of incentives and consideration, including prompt-pay and other discounts.

We estimate discounts primarily based on contractual terms.

These discounts are recorded as a reduction of revenue on delivery to our customers.

We offer customers a limited right of return, generally for damaged or expired product.

We estimate returns based on an internal analysis, which includes actual experience.

The estimates for returns are recorded as a reduction of revenue on delivery to our customers.

We participate in Medicaid rebate programs, which provide assistance to certain low-income patients based on each individual state’s guidelines regarding eligibility and services.

Under the Medicaid rebate programs, we pay a rebate to each participating state, generally within three months after the quarter in which product was sold.

Additionally, we may offer customer incentives and consideration in the form of volume-based or other rebates.

The estimates for rebates are recorded as a reduction of revenue on delivery to our customers.

Administrative Fees:

We pay administrative fees to GPOs for services and access to data.

Additionally, we pay an Industrial Funding Fee as part of the U.S.

General Services Administration’s Federal Supply Schedules program.

These fees are based on contracted terms and are paid after the quarter in which the product was purchased by the applicable GPO or government agency.

Administrative fees are recorded as a reduction of revenue on delivery to customers.

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

Research and Development Costs

Research and development costs are expensed in the period that services are rendered or goods are received.

Research and development costs consist of salaries and benefits, laboratory supplies and facility costs, as well as fees paid to third parties that conduct certain research and development activities on behalf of the Company’s consolidated variable interest entity, net of certain external research and development costs reimbursed under the collaboration arrangements of the Company’s consolidated variable interest entity.

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

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

Goodwill and Intangible Assets

Goodwill is recognized as the excess of the purchase price of an acquired entity over the fair value of amount assigned to assets acquired and liabilities assumed in a business combination.

Goodwill and intangible assets with indefinite lives is subject to impairment testing at least annually and will be tested for impairment between annual tests if a triggering event occurs, such as changes due to circumstances that would indicate an impairment of the carrying value.

Significant judgments are involved in determining if an indicator of impairment has occurred.

Intangible assets with definite lives are amortized on a straight-line basis over the remaining useful life of the intangible asset.

Operating Leases

We account for our leases in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 842, “Leases”

(“ASC 842”).

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

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

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

Research and development costs consist of salaries and benefits, laboratory supplies, facilities and other overhead costs, research-related manufacturing costs, contract service and clinical-related service costs performed by third party research organizations, research institutions and other outside service providers.

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

Such amounts are recognized as an expense as the related goods are delivered or the related services are performed.

We also utilize significant judgment and estimates to record accruals for estimated ongoing research costs based on the progress of the studies and progress of research manufacturing activities.

Interest Expense on Deferred Royalty Obligation

Interest expense related to the deferred royalty obligation is recognized over the expected repayment term of the deferred royalty obligation using the effective interest method.

The assumptions used in determining the expected repayment term of the deferred royalty obligation require us to make estimates that could impact the effective interest rate.

Each reporting period, we estimate the expected repayment term of the deferred royalty obligation based on forecasted net sales of GIAPREZA ® .

Changes in interest expense resulting from changes in the effective interest rate, if any, are recorded on a prospective basis.

Refer to Note 6, “Financial Instruments and Fair Value Measurements”

for more information.

Accounting Pronouncement Adopted by the Company

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):

In August 2020, the FASB issued Accounting Standards Update (“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.

7 unchanged sentences

for more information.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which requires contract assets and contract liabilities (i.e., deferred revenue) acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers .

During the third quarter of 2022, we elected to early adopt ASU 2021-08 effective July 1, 2022.

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

Net Income Per Share

2 unchanged sentences

Dilutive potential common stock equivalents include the assumed exercise, vesting and issuance of employee stock awards using the treasury stock method, as well as common stock issuable upon assumed conversion of our convertible subordinated notes due 2023 (the “2023 Notes”), our convertible senior notes due 2025 (the “2025 Notes”) and our convertible senior notes due 2028 (the “2028 Notes”) using the if-converted method.

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.

The 2025 Notes are convertible, based on the applicable conversion rate, into cash, shares of our common stock or a combination thereof, at our election.

Our current intent is to settle the principal amount of the 2025 Notes in cash upon conversion.

The impact of the assumed conversion premium to diluted net income per share 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 and six months ended June 30, 2021.

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,

The impact of the assumed conversion premium to diluted net income per share was historically computed using the treasury stock method until the adoption of ASU 2020-06.

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 wa s no dilutive effect of the assumed conversion premium for the three and nine months ended September 30, 2021.

The dilutive EPS of the notes was approximatel y $ 0.37 and $ 0.41 per share, respectively, using the if-converted method for the three and nine months ended September 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 nine months ended September 30, 2022 and 2021:

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands except per share data)

16 unchanged sentences

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 June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

1 unchanged sentence

plan and employee stock purchase plan

Revenue Recognition and Collaborative Arrangements

We recognize royalty revenue on net sales of products with respect to which we have contractual royalty rights in the period in which the royalties are earned.

Royalties, which may include adjustments of estimates of net sales in prior periods, are recognized net of amortization of capitalized fees associated with any approval and launch milestone payments made to GSK.

Net Revenue from Collaborative Arrangements

Outstanding stock warrant

Revenue Recognition

Net Revenue from Collaboration Arrangement

On July 13, 2022, Innoviva’s wholly-owned subsidiary, Innoviva TRC Holdings, LLC (“ITH”) entered into an equity purchase agreement (“TRC Equity Purchase Agreement”) with Royalty Pharma Investments 2019 ICAV (“Royalty Pharma”) to sell our ownership interest in Theravance Respiratory Company, LLC (“TRC”).

As a result of the sale of our ownership interest in TRC, which was consummated on July 20, 2022, we are no longer entitled to receive 15 % of royalty payments made by GSK stemming from sales of TRELEGY ® ELLIPTA ® .

We retained our royalty rights with respect to RELVAR ® /BREO ® ELLIPTA ® and ANORO ® ELLIPTA ® .

Net revenue recognized under our GSK Agreements was as follows:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Royalties from a related party

- RELVAR/BREO

Royalties from a related party

Total royalties from a related party

2 unchanged sentences

Royalty revenue from GSK

Transactions with GSK were considered related party transactions up until May 2021, when we completed the share repurchase agreement with GSK to buy back all of its shares of common stock in Innoviva.

GSK is no longer considered a related party after the completion of the share repurchase.

Net Product Sales

Our net product sales of $ 5.1 million, consisting of net sales of GIAPREZA ® and XERAVA ® for $ 3.8 million and $ 1.3 million, respectively, were recognized from the date of our acquisition of La Jolla, which occurred on August 22, 2022, to September 30, 2022 .

License and Collaboration Arrangements

Out-License Agreements

Entasis entered into a license and collaboration agreement with Zai Lab (Shanghai) Co., Ltd.

(“Zai Lab”) (Nasdaq:

ZLAB), pursuant to which Zai Lab licensed exclusive rights to durlobactam and SUL-DUR, in the Asia-Pacific region (“the Zai Agreement”).

Under the terms of the Zai Agreement, Zai Lab will fund most of the registrational clinical trial costs in China for SUL-DUR, with the exception of Phase 3 patient drug supply of licensed products.

Zai Lab will conduct development activities and plan and obtain regulatory approval in a specified number of countries in the Asia-Pacific region beyond China after receipt of regulatory approval of a licensed product in China.

Zai Lab is also solely responsible for commercializing licensed products in the Asia-Pacific region and will commercialize licensed products for which it has obtained regulatory approval.

We are obligated to supply Zai Lab with the licensed products for clinical development and, if the licensed product is approved, for commercial use for a certain period unless Zai Lab notifies otherwise.

Zai Lab may take over manufacturing responsibilities for its own commercialization activities within a specified time period following the effective date of the Zai Agreement.

We are eligible to receive up to an aggregate of $ 91.0 million in research and development support payments and development, regulatory and sales milestone payments related to SUL-DUR, imipenem and other combinations with the licensed products.

Zai Lab will pay us a tiered royalty equal to from a high-single digit to low-double digit percentage based on annual net sales of licensed products in the territory, subject to specified reductions for the market entry of competing products, loss of patent coverage of licensed products and for payments owed to third parties for additional rights necessary to commercialize licensed products in the territory.

During the three months ended September 30, 2022, no revenue was recognized under the Zai Agreement.

Payments received for research support and reimbursable clinical trial costs are recorded as a reduction to research and development expense during the period in which the qualifying expenses are incurred.

Such amounts recorded from the date of acquisition of Entasis to September 30, 2022 are not material.

Entasis entered into a collaboration agreement with the Global Antibiotic Research and Development Partnership (“GARDP”) for the development, manufacture and commercialization of the product candidate zoliflodacin in certain countries (“the GARDP Collaboration Agreement”).

Under the terms of the GARDP Collaboration Agreement, GARDP will use commercially reasonable endeavors to perform and fully fund the Phase 3 registrational trial, including the manufacture and supply of the product candidate containing zoliflodacin, in uncomplicated gonorrhea.

We recorded reimbursements from GARDP under this agreement as reduction to research and development expense.

Relevant amounts from the date of acquisition of Entasis to September 30, 2022 are not material.

In addition, under the GARDP Collaboration Agreement, GARDP was granted a worldwide, fully paid, exclusive and royalty-free license, with the right to sublicense, to use our zoliflodacin technology in connection with GARDP’s development, manufacture and commercialization of zoliflodacin in low-income and specified middle-income countries.

We retained commercial rights in all other countries worldwide, including the major markets in North America, Europe and Asia-Pacific.

We also retained the right to use and grant licenses to our zoliflodacin technology to perform our obligations under the GARDP Collaboration Agreement and for any purpose other than gonorrhea or community-acquired indications.

If we believe that the results of the Phase 3 registrational trial of zoliflodacin would be supportive of an application for marketing approval, we are obligated to use our best efforts to file an application for marketing approval with the FDA within six months of the completion of the trial and to use commercially reasonable endeavors to file an application for marketing approval with the European Medicines Agency (“EMA”).

Each party is responsible for using commercially reasonable efforts to obtain marketing authorizations for the product candidate in their respective territories.

Pursuant to the PAION AG (“PAION”) License, La Jolla granted PAION an exclusive license to commercialize GIAPREZA ® and XERAVA ® in the European Economic Area, the United Kingdom and Switzerland (collectively, the “PAION Territory”).

We are entitled to receive potential commercial milestone payments of up to $ 109.5 million and double-digit tiered royalty payments.

Royalties payable in a given jurisdiction under the PAION License will be subject to reduction on account of generic competition and after patent expiration in that jurisdiction.

Pursuant to the PAION License, PAION will be solely responsible for the future development and commercialization of GIAPREZA ® and XERAVA ® in the PAION Territory.

PAION is required to use commercially reasonable efforts to commercialize GIAPREZA ® and XERAVA ® in the PAION Territory.

We have not recognized any revenue from PAION related to commercial milestones from the date of acquisition of La Jolla to September 30, 2022.

Royalty revenue recognized under this agreement from the date of acquisition of La Jolla to September 30, 2022 was not material.

La Jolla also entered into the PAION commercial supply agreement (the “PAION Supply Agreement”) whereby La Jolla will supply PAION a minimum quantity of GIAPREZA ® and XERAVA ® through July 13, 2024.

The PAION supply agreement will automatically renew until the earlier of July 13, 2027, or until a new supply agreement is executed.

During the initial term of the supply agreement, we will be reimbursed for direct and certain indirect manufacturing costs at cost.

We have not recognized any cost reimbursements under this agreement from the date of acquisition of La Jolla to September 30, 2022.

Everest Medicines Limited

Pursuant to the Everest Medicines Limited (“Everest”) License, La Jolla granted Everest an exclusive license to develop and commercialize XERAVA ® for the treatment of complicated intra-abdominal infections (“cIAI”) and other indications in mainland China, Taiwan, Hong Kong, Macau, South Korea, Singapore, the Malaysian Federation, the Kingdom of Thailand, the Republic of Indonesia, the Socialist Republic of Vietnam and the Republic of the Philippines (collectively, the “Everest Territory”).

We are eligible to receive an additional $ 8.0 million regulatory milestone payment and up to an aggregate of $ 20.0 million in sales milestone payments.

We are also entitled to receive tiered royalties from Everest at percentages in the low double digits on sales, if any, in the Everest Territory of products containing eravacycline.

Royalties are payable with respect to each jurisdiction in the Everest Territory until the latest to occur of:

(i) the last-to-expire of specified patent rights in such jurisdiction in the Everest Territory;

(ii) expiration of marketing or regulatory exclusivity in such jurisdiction in the Everest Territory;

or (iii) 10 years after the first commercial sale of a product in such jurisdiction in the Everest Territory.

We have not recognized any revenue from Everest related to regulatory and sales milestones from the date of acquisition of La Jolla to September 30, 2022.

Royalty revenue recognized under this agreement from the date of acquisition of La Jolla to September 30, 2022 was not material.

A new drug application (“NDA”) was submitted with the China National Medical Products Administration (“NMPA”) for XERAVA ® for the treatment of cIAI in patients in China in 2021.

XERAVA ® was approved in Singapore by the Health Science Authority in 2020.

La Jolla also entered into the Everest commercial supply agreement (the “Everest Supply Agreement”) whereby La Jolla will supply Everest a minimum quantity of XERAVA ® through December 31, 2023 and will transfer to Everest certain XERAVA ® -related manufacturing know-how.

We will be reimbursed for direct and certain indirect manufacturing costs at 110 % of cost through December 31, 2023.

We recognized $ 2.8 million partial prepayment for XERAVA ® that is expected to be delivered to Everest as deferred revenue as of September 30, 2022.

In-License Agreements

George Washington University

Pursuant to the George Washington University (“GW”) License, GW exclusively licensed to La Jolla certain intellectual property rights relating to GIAPREZA ® , including the exclusive rights to certain issued patents and patent applications covering GIAPREZA ® .

Under the GW License, we are obligated to use commercially reasonable efforts to develop, commercialize, market and sell GIAPREZA ® .

We are obligated to pay a 6 % royalty on net sales of GIAPREZA ® and 15 % on payments received from sublicensees.

The obligation to pay royalties under this agreement extends through the last-to-expire patent covering GIAPREZA ® .

From the date of acquisition of La Jolla to September 30, 2022, the amounts recognized under this agreement were not material.

Harvard University

Pursuant to the Harvard University (“Harvard”) License, Harvard exclusively licensed to La Jolla certain intellectual property rights relating to tetracycline-based products, including XERAVA ® , including the exclusive rights to certain issued patents and patent applications covering such products.

Under the Harvard License, we are obligated to use commercially reasonable efforts to develop, commercialize, market and sell tetracycline-based products, including XERAVA ® .

For each product covered by the Harvard License, we are obligated to make certain payments for the following:

(i) up to approximately $ 15.1 million upon the achievement of certain clinical development and regulatory milestones;

(ii) a 5 % royalty on direct U.S.

net sales of XERAVA ® ;

(iii) a single-digit tiered royalty on direct ex-U.S.

net sales of XERAVA ® , starting at a minimum royalty rate of 4.5 %, with step-ups to a maximum royalty of 7.5 % based on the achievement of annual net product sales thresholds;

and (iv) 20 % on payments received from sublicensees.

The obligation to pay royalties under this agreement extends through the last-to-expire patent covering tetracycline-based products, including XERAVA ® .

From the date of acquisition of La Jolla to September 30, 2022, amounts recognized under this agreement were not material.

Paratek Pharmaceuticals, Inc.

Pursuant to the Paratek Pharmaceuticals, Inc.

(“Paratek”) License, Paratek non-exclusively licensed to La Jolla certain intellectual property rights relating to XERAVA ® , including non-exclusive rights to certain issued patents and patent applications covering XERAVA ® .

We are obligated to pay Paratek a 2.25 % royalty based on direct U.S.

net sales of XERAVA ® .

Our obligation to pay royalties with respect to the licensed product is retroactive to the date of the first commercial sale of XERAVA ® and shall continue until there are no longer any valid claims of the Paratek patents, which will expire in October 2023 .

From the date of acquisition of La Jolla to September 30, 2022 , amounts recognized under this agreement were not material.

Consolidated Entities and Acquisitions

Consolidated Entities

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

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

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

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

Theravance Respiratory Company, LLC

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

Up until July 20, 2022, we consolidated TRC under the VIE model as we determined that TRC was a VIE and we were the primary beneficiary of the entity.

We held 15 % ownership interest of TRC.

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

As 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”).

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

for more information.

The summarized financial information for TRC is presented as follows:

Balance sheets

As discussed in Note 3, “

Revenue Recognition”, on July 13, 2022, ITH entered into the TRC Equity Purchase Agreement to sell our ownership interest in TRC.

Upon the closing of the transaction on July 20, 2022, we received $ 277.5 million in cash from Royalty Pharma.

We are also entitled to receive up to $ 50.0 million in contingent sales-based milestone payments in the future.

As part of the closing of the transaction, we also received our portion of TRC’s remaining cash balance of $ 4.4 million from Royalty Pharma rather than through a cash distribution from TRC.

Prior to the closing of the transaction and as part of the agreement, TRC distributed its ownership interests and investments in InCarda Therapeutics, Inc., ImaginAb, Inc., Gate Neurosciences, Inc.

and Nanolive SA, which had a total carrying value of $ 39.4 million, to ITH.

The summarized financial information of TRC as of December 31, 2021 and for the relevant periods through the sale date in 2022 are presented as follows:

Balance sheet

(In thousands)

Cash and cash equivalents

Receivables from collaborative arrangements

Receivables from collaboration arrangement

Prepaid expenses and other current assets

5 unchanged sentences

Income statements

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

3 unchanged sentences

Other income, net

Realized loss

Income tax expense, net

Changes in fair values of equity and long-term

Net income (loss)

(1) Three months ended September 30, 2022 represents the period from July 1, 2022 to July 20, 2022, the date of the sale of our ownership interest in TRC.

(2) Nine months ended September 30, 2022 represents the period from January 1, 2022 to July 20, 2022, the date of the sale of our ownership interest in TRC.

We consolidate ISP Fund LP under the VIE model as we have determined that ISP Fund LP is a VIE and we are the primary beneficiary of the entity via our related party relationships with Sarissa Capital entities.

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

capital account in the Partnership.

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

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

In May 2021, Strategic Partners received a distribution of $ 110.0 million from the Partnership to provide funding to Innoviva for a strategic repurchase of shares held by GSK.

On March 30, 2022, Strategic Partners made an additional capital contribution of $ 110.0 million to the Partnership pursuant to the letter agreement entered into between Strategic Partners, the Partnership and Sarissa Capital Fund GP LP on May 20, 2021.

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

As of September 30, 2022, we held approximately 100 % of the economic interest of the Partnership.

As of September 30, 2022 and December 31, 2021, total assets of the Part nership were $ 289.8 million and $ 195.8 million, respectively, of which the majority was attributable to equity, debt and long-term investments.

As of September 30, 2022 and December 31, 2021, total liabilities were $ 0.2 million and $ 0.2 million, respectively .

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

During the three and nine months ended September 30, 2022, we record ed $ 0.3 million and $ 1.0 million, r espectively, of net investment-related expenses incurred by the Partnership, a nd $ 10.5 million and $ 14.9 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 nine months ended September 30, 2021 , we recorded $ 0.2 million and $ 1.5 million, respectively, of net investment-related expenses incurred by the Partnership, and $ 10.1 million and $ 30.6 million, respectively, of net positive changes in fair values of equity and long-term investments on the unaudited condensed consolidated statements of income.

Entasis Therapeutics Holdings Inc.

We started investing in Entasis in 2020 as part of our capital allocation strategy of deploying cash generated from royalty income and investing in different life sciences companies.

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

Entasis is an advanced, late clinical-stage biopharmaceutical company focused on the discovery and development of novel antibacterial products.

During the second quarter of 2020, we purchased 14,000,000 shares of common stock as well as warrants to purchase 14,000,000 additional shares of common stock of Entasis for approximately $ 35.0 million in cash.

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

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

Effective in June 2020, after certain conditions were met with respect to the sales of Entasis equity shares, Innoviva has the 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.

The fair value of Entasis’

common stock is measured based on its closing market price at each balance sheet date.

The warrants have an exercise price of $ 2.50 per share and $ 2.675 per share for those warrants acquired in the second and third quarter of 2020, respectively.

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

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

We use the Black-Scholes-Merton pricing model to estimate the fair value of these warrants.

common stock was measured based on its closing market price at each balance sheet date.

The warrants had 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 had an exercise price of $ 2.00 per share.

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

We used the Black-Scholes-Merton pricing model to estimate the fair value of these warrants.

On February 17, 2022, ISO entered into a securities purchase agreement with Entasis pursuant to which ISO purchased a convertible promissory note for a total purchase price of $ 15.0 million.

The note bears an annual interest rate of 0.59 % and will mature and become payable on August 18, 2022 unless it is converted at a conversion price of $ 1.48 before the maturity date.

The financing is expected to support Entasis’

product development and operations into August 2022.

With this financing, we determined that we have both (i) the power to direct the economically significant activities of Entasis and (ii) the obligation to absorb the losses, or the right to receive the benefits, that could potentially be significant to Entasis and therefore, we are the primary beneficiary of Entasis.

The note bore an annual interest rate of 0.59 % and matured and became payable on August 18, 2022 unless it was converted at a conversion price of $ 1.48 before the maturity date.

With this financing, we determined that we had both (i) the power to direct the economically significant activities of Entasis and (ii) the obligation to absorb the losses, or the right to receive the benefits, that could potentially be significant to Entasis and therefore, we were the primary beneficiary of Entasis.

Accordingly, we consolidated Entasis’

1 unchanged sentence

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.

The remeasurement resulted in a $ 7.7 million loss in the first quarter of 2022 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 nine months ended September 30, 2022.

We completed our acquisition of Entasis’

minority interest on July 11, 2022.

No payments were made toward the convertible promissory note through the date of acquisition of Entasis.

In connection with the acquisition, all of the Entasis warrants were replaced with Innoviva warrants (the “Replacement Warrants”) of equivalent value and bearing the same terms.

The Replacement Warrants are classified as equity.

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

The fair values assigned to assets acquired and liabilities assumed as of February 17, 2022 were based on management’s best estimates and assumptions.

After the acquisition in July 2022, we adjusted the purchase price allocation based on new and additional information related to product sales forecast provided by Entasis and deferred tax liabilities.

During the third quarter of 2022, we recorded measurement period adjustments of $ 2.3 million decrease in goodwill, primarily related to a decrease in estimated purchase price of $ 1.4 million, an increase in noncontrolling interests of $ 1.7 million, and an increase in intangible assets of $ 2.5 million.

The cumulative impact of the measurement period adjustments included in the consolidated net income for the three and nine months ended September 30, 2022 was not material.

The Company has completed a preliminary valuation and expects to finalize it as soon as practical, but no later than one year from the acquisition date.

The purchase accounting for this transaction is not yet finalized.

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

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

(In thousands)

10 unchanged sentences

Other current liabilities

Deferred tax liabilities

Total liabilities assumed

Total assets acquired, net

Entasis’

assets can only be used to settle its obligations.

The following table provides the assets and liabilities of Entasis:

The goodwill arising from the acquisition of Entasis is primarily attributable to Entasis’

assembled workforce and the value associated with growing our business more efficiently.

The goodwill from this acquisition is not expected to be deductible for tax purposes .

Refer to Note 7, “Goodwill and Intangible Assets”

for more discussion on the intangible assets recognized as part of this acquisition.

Our unaudited condensed consolidated net income for the three and nine months ended September 30, 2022 included the net loss attributable to noncontrolling interest since the consolidation date until the date of acquisition of $ 2.7 million and $ 13.6 million, respectively.

La Jolla Pharmaceutical Company

On August 22, 2022, ISO acquired La Jolla for a total consideration of $ 206.6 million.

ISO acquired La Jolla at a price of $ 6.23 per share.

La Jolla is dedicated to the commercialization of innovative therapies that improve outcomes in patients suffering from life-threatening diseases.

La Jolla brings to Innoviva an established product portfolio, including GIAPREZA ® (angiotensin II), approved to increase blood pressure in adults with septic or other distributive shock and XERAVA ® (eravacycline) for the treatment of complicated intra-abdominal infections (cIAIs).

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

We have completed a preliminary valuation and expect to finalize it as soon as practicable, but no later than one year from the acquisition date.

The purchase accounting for this transaction is not yet finalized.

We incurred approximately $ 4.9 million in acquisition-related costs in connection with this acquisition and such amount is included in selling, general and administrative expenses for the three and nine months ended September 30, 2022.

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

(In thousands)

June 30, 2022

Current assets:

August 22, 2022

Cash and cash equivalents

Short-term marketable securities

Accounts receivable

Prepaid expenses

Other current assets

Total current assets

Property and equipment, net

1 unchanged sentence

Intangible assets

Current liabilities:

Total assets acquired

Accounts payable

Accrued personnel-related expenses

Deferred revenue, current

Other accrued liabilities

Total current liabilities

Lease liabilities, long-term

Total liabilities

As a result of the consolidation, we recognized a non-controlling interest of $ 38.5 million as of February 17, 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 June 30,

Six Months Ended June 30,

Other long-term liabilities

Total liabilities assumed

Total assets acquired, net

The goodwill arising from the acquisition of La Jolla is primarily attributable to La Jolla’s assembled workforce and the value associated with leveraging the workforce to develop and commercialize new drug products in the future and growing our business more efficiently.

The goodwill from this acquisition is not expected to be deductible for tax purposes .

Refer to Note 7, “Goodwill and Intangible Assets”

for more discussion on the intangible assets recognized as part of this acquisition.

Pro Forma Financial Information

The following table presents certain unaudited pro-forma financial information for the three and nine months ended September 30, 2022 and 2021 as if the consolidation of Entasis and La Jolla occurred on January 1, 2021.

The unaudited pro forma financial information is presented for informational purposes only, and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place on January 1, 2022, or of results that may occur in the future.

The unaudited pro forma financial information combines the historical results of the Entasis and La Jolla with the Company’s consolidated historical results and includes certain adjustments including, but not limited to, fair value adjustments to equity investments in Entasis’

common stock and warrants, fair value adjustments to inventory, amortization of intangible assets, and interest expense on deferred royalty obligations and acquisition-related costs.

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

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”

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.

In May 2021, Strategic Partners received a distribution of $ 110.0 million from the Partnership to provide funding to Innoviva for a strategic repurchase of shares held by GSK.

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

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 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

14 unchanged sentences

In addition, as of February 9, 2022, Armata entered into an amended and restated investor rights agreement with the Company and ISO, pursuant to which for as long as the Company and ISO hold at least 12.5 % of the outstanding shares of Armata ’s common stock on a fully-diluted, the Company and ISO shall have the right to designate two directors to Armata’

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

As of 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.

s board of directors, subject to certain conditions and qualifications set forth in the amended and restated investor rights agreement.

As of September 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 September 30, 2022 and December 31, 2021, the Company and ISO 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.

1 unchanged sentence

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.

We account for both Armata’s common stock and warrants under the equity method using the fair value option.

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

4 unchanged sentences

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

As of June 30, 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 September 30, 2022, the fair values of our holdings of Armata common stock and warrants were estimated at $ 105.8 million and $ 50.6 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 $ 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 total fair value of both financial instruments in the amount of $ 156.4 million and $ 146.7 million was recorded as equity and long-term investments on the unaudited condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively.

During the three and nine months ended September 30, 2022 , we recorded $ 11.7 million unrealized gain and $ 35.3 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 nine months ended September 30, 2021, we recorded $ 11.6 million unrealized loss and $ 25.3 million unrealized gain , 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

Three Months Ended March 31,

Six Months Ended March 31,

Three Months Ended June 30,

Nine Months Ended June 30,

(In thousands)

2 unchanged sentences

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

(“InCarda”) (the “InCarda 2020 Warrant”) for $ 15.8 million, which includes $ 0.8 million of transaction costs.

(“InCarda”) (the “InCarda 2020 Warrant”) for $ 15.8 million, which included $ 0.8 million of transaction costs.

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

The investment is intended to fund the ongoing clinical development of InRhythm TM (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 June 30, 2022 , one of InCarda’s eight board members wa s designated by TRC.

The investment is intended to fund the ongoing clinical development of InRhythm TM (flecainide for inhalation), InCarda’s lead program, for the treatment of a recent-onset episode of paroxysmal atrial fibrillation.

On July 20, 2022, under the terms of the TRC Equity Purchase Agreement, TRC transferred to Innoviva’s wholly-owned subsidiary, Innoviva TRC Holdings, LLC (“ITH”) all of TRC’s ownership interests and investments in InCarda.

ITH has the right to designate one member to InCarda’s board of directors.

As of September 30, 2022 , one of InCarda’s eight board members was designated by ITH.

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

12 unchanged sentences

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.

As of September 30, 2022, we held 8.9 % of InCarda equity ownership.

A s of December 31, 2021, TR C held 13.0 % of InCarda equity ownership.

Our investment in InCarda does not provide us with the ability to control or have significant influence over InCarda’s operations.

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

We account for our investments in InCarda under the measurement alternative.

Under the measurement alternative, the equity investment is initially recorded at its allocated cost, but the carrying value may be adjusted through earnings upon an impairment or when there is an observable price change involving the same or a similar investment with the same issuer.

4 unchanged sentences

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.

As of September 30, 2022, we recorde d $ 6.8 million in fair value of InCarda’s Series C preferred stock and $ 0.5 million in fair value of Series C warrants and Series D warrants (the “InCarda Preferred Stock Warrants”).

As of September 30, 2022 , we recognized $ 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.

As of December 31, 2021 , we recognized $ 15.8 million for the investment in InCarda’s Series C preferred stock using the measurement alternative.

During the three and nine months ended September 30, 2022, we recorded $ 0.2 million in net unrealized gain and $ 8.8 million in net unrealized loss, respectively, as changes in fair values of equity and long-term investments, net on the unaudited condensed consolidated statements of income .

During the three and nine months ended September 30, 2021, we recorded $ 0.1 million unrealized gain and $ 0.6 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

4 unchanged sentences

$ 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.

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.

On July 20, 2022, under the terms of the TRC Equity Purchase Agreement, TRC transferred to ITH all of TRC’s ownership interests and investments in ImaginAb.

As of September 30, 2022 , one of ImaginAb’s five bo ard members was designated by ITH.

As of September 30, 2022 , we held 11.5 % of ImaginAb equity ownership.

As of December 31, 2021 , TRC held 14.5 % of ImaginAb equity ownership.

Our investment in ImaginAb does not provide us with the ability to control or have significant influence over ImaginAb’s operations.

Based on our evaluation, we determined that ImaginAb is a VIE, but we are 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 account for our investment in ImaginAb’s Series C preferred stock and common stock using the measurement alternative.

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.

As of September 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

10 unchanged sentences

Shadow Preferred means preferred stock having identical rights, preferences and restrictions as the preferred stock that would be issued in a qualified financing.

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

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

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

Our investment in Gate does not provide us with the ability to control or have significant influence over Gate’s operations.

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

We have accounted for the Gate Convertible Note as a trading security, measured at fair value using a Monte Carlo simulation model with the probability of certain qualified events and the assumptions of equity value of Gate, risk-free rate, expected stock price, volatility of its peer companies, and the time until a financing is raised.

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

As of 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.

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

As of September 30, 2022, one board member was designated by ITH to Gate’s board, which currently consists of three directors.

As of September 30, 2022 and December 31, 2021, the fair value of the Gate Convertible Note was estimated at $ 15.4 million and $ 15.1 million, respectively, and recorded as equity and long-term investments on the unaudited condensed consolidated balance sheets.

We rec orded $ 0.2 million and $ 0.3 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 nine months ended September 30, 2022.

Equity Investment in Nanolive

2 unchanged sentences

$ 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 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.

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

Because Nanolive’s equity securities are not publicly traded and do not have a readily determinable fair value, we have accounted for our investment in Nanolive’s Series C preferred stock using the measurement alternative.

On July 20, 2022, under the terms of the TRC Equity Purchase Agreement, TRC transferred to ITH all of TRC’s ownership interests and investments in Nanolive.

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

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

As of September 30, 2022 , one of Innoviva designees is serving on Nanolive’s seven -member board.

As of September 30, 2022, we held 15.5 % of Nanolive equity ownership.

Our investment in Nanolive does not provide us with the ability to control or have significant influence over Nanolive’s operations.

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

Because Nanolive’s equity securities are not publicly traded and do not have a readily determinable fair value, we account for our investment in Nanolive’s Series C preferred stock using the measurement alternative.

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.

As of September 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

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

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

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

Our equity and long-term investments and contingent value rights are measured at fair value on a recurring basis and our debt is carried at amortized cost basis.

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

Types of Instruments

1 unchanged sentence

Money market funds

Short-term marketable securities

Investments held by ISP Fund LP (1)

6 unchanged sentences

Total fair value of debt

(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.

Contingent value rights

Total liabilities measured at estimated fair value

(1) The investments held by ISP Fund LP, consisted of $ 246.0 million in equity investments, which included private placement positions and convertible notes of $ 53.2 million, $ 38.7 million in money market funds and $ 5.1 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.

15 unchanged sentences

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 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.

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

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

Goodwill and Intangible Assets

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

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

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

The carrying amount of goodwill as of September 30, 2022 was $ 16.0 million .

We have not recognized any impairment losses related to goodwill during the periods presented.

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

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

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

(In thousands)

Intangible assets with indefinite life

Intangible asset with determinable life

All intangible assets are related to in-process research and development.

The intangible assets with indefinite life consist of antibacterial therapeutic products.

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

The useful 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.

Marketed products

In-process research and development

Collaboration agreement

Intangible assets recognized as a result of the acquisition of Entasis amounted to $ 107.5 million, which consist of Entasis’

in-process research and development related to its antibacterial therapeutic product candidates and a collaboration agreement amounting to $ 72.1 million and $ 35.4 million, respectively.

The useful l ives of these intangible assets will be determined upon commercialization of the underlying product candidates;

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

Intangible assets recognized as a result of the acquisition of La Jolla amounting to $ 152.5 million pertain to product rights and developed technologies on La Jolla’s currently marketed products.

These are intangible assets with determinable lives and are amortized over their estimated useful lives.

We recognized amortization expense of $ 1.5 million for the three and nine months ended September 30, 2022.

Future amortization expense is expected to be $ 3.5 million for the remainder of 2022, $ 13.8 million for each of the years from 2023 to 2026 and $ 78.0 million thereafter.

Balance Sheet Components

Inventory consisted of the following:

September 30,

(in thousands)

Raw materials

Work-in-progress

Finished goods

Total inventory

As of September 30, 2022, total inventory included net fair value adjustments resulting from the acquisition of La Jolla of approximately $ 64.1 million , which will be amortized and recognized as cost of products sold when sales occur in future periods.

Amortization of fair value adjustments recorded as part of cost of products sold amounted to $ 2.7 million for the three and nine months ended September 30, 2022 .

There was no inventory as of December 31, 2021.

Other Accrued Liabilities

Other accrued liabilities consisted of the following:

September 30,

(in thousands)

Accrued contract manufacturing

Accrued clinical

Accrued research

Accrued contract manufacturing expenses

Accrued clinical expenses

Accrued research expenses

Accrued professional services

Current portion of lease liabilities

Liabilities for unsettled security transactions

Accrued license fees and royalties

Total other accrued liabilities

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

Other Long-term Liabilities

Other long-term liabilities consisted of the following:

September 30,

(in thousands)

Long-term portion of lease liabilities

Deferred royalty obligation

Contingent value rights liability

Total other long-term liabilities

There were no other long-term liabilities as of December 31, 2021.

Stock-Based Compensation

Stock- Based Compensation Expense

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,

The following table summarizes stock-based compensation expense, which included the expense associated with Entasis’

equity awards due to consolidation from February 17, 2022 to July 11, 2022 and the expense for Innoviva replacement restricted stock units in connection with the acquisition of Entasis on July 11, 2022, for the three and nine months ended September 30, 2022:

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

General and administrative

Selling, general and administrative

Research and development

1 unchanged sentence

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 June 30,

Six Months Ended June 30,

Nine Months Ended September 30,

Risk-free interest rate

1 unchanged sentence

1.07 % - 1.13 %

Expected term (in years)

38.8 % - 40.5 %

Dividend yield

1 unchanged sentence

$ 6.98 - $ 7.73

There were no grants of stock options during the three months ended September 30, 2022 and 2021.

Our debt consisted of the following:

September 30,

(In thousands)

9 unchanged sentences

The initial conversion rate was 35.9903 shares per $1,000 principal amount of the 2023 Notes, subject to customary anti-dilution adjustment in certain circumstances, which represented an initial conversion price of approximately $ 27.79 per share.

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

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

In connection with the offering of the 2023 Notes, we entered into two privately negotiated capped call option transactions with a single counterparty.

12 unchanged sentences

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 %.

The annual effective interest rate of the 2023 Notes changed from 2.36 % to 2.37 %.

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

1 unchanged sentence

Our outstanding 2023 Notes balances consisted of the following:

September 30,

(In thousands)

Liability component

Debt issuance costs, net

Net carrying amount

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,

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

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

15 unchanged sentences

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

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

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

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

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

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

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

Effective January 1, 2022, we adopted ASU 2020-06 using a modified retrospective method, under which financial results reported in prior periods were not adjusted.

The adoption of ASU 2020-06 had a material impact on the 2025 notes.

Prior to the adoption of the standard, we separately account for the liability and equity components of the 2025 Notes by allocating the proceeds between the liability component and the embedded conversion option (“equity component”) due to our ability to settle the conversion obligation of the 2025 Notes in cash, common stock or a combination of cash and common stock, at our option.

Refer to Note 1, “Description of Operations and Summary of Significant Accounting Policies”

for further information.

Prior to the adoption of ASU 2020-06, 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.

The excess of the principal amount of the liability component over its carrying amount (“debt discount”) was amortized to interest expense using the effective interest method over the term of the 2025 Notes.

The equity component was not remeasured as long as it continued to meet the conditions for equity classification.

Additionally, we separated the total issuance costs of $ 5.4 million incurred into liability and equity components in proportion to the allocation of the initial proceeds, resulting in liability issuance costs of $ 3.5 million and equity issuance costs of $ 1.9 million.

Issuance costs attributable to the liability component were amortized on a straight-line basis, which approximated the effective interest rate method, to interest expense over the term of the 2025 Notes.

Issuance costs attributable to the liability component were amortized on a straight-line basis, which approximated the effective interest rate method, to interest expense over the

term of the 2025 Notes.

The issuance costs attributable to the equity component were netted against the equity component in additional paid-in capital.

The effective interest rate of the liability component of the 2025 Notes was 8.87 %.

The annual effective interest rate of the liability component of the 2025 Notes was 8.87 %.

Upon adoption of ASU 2020-06 on January 1, 2022, we combined the liability and equity components of the 2025 Notes assuming that the instrument was accounted for as a single liability from inception to the date of adoption.

1 unchanged sentence

The issuance costs are presented as a deduction from the outstanding principal balance of the 2025 Notes and are amortized on a straight-line basis over the term of the 2025 Notes under the effective interest rate method.

As of January 1, 2022, the effective interest rate on the 2025 Notes was 2.88 %.

As of January 1, 2022, the annual effective interest rate on the 2025 Notes was 2.88 %.

Our outstanding 2025 Notes balances consisted of the following:

September 30,

(In thousands)

Liability component

Debt discount and issuance costs, net

1 unchanged sentence

Equity component, net

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,

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

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

31 unchanged sentences

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 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:

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

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

(In thousands)

June 30, 2022

Liability component

September 30, 2022

Debt issuance costs, net

Net carrying amount

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,

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

Three Months Ended September 30,

Date of Issuance through September 30,

(In thousands)

3 unchanged sentences

Debt Maturities

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

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

(In thousands)

June 30, 2022

September 30, 2022

Years ending December 31:

Remainder of 2022

Deferred Royalty Obligation

As part of our acquisition of La Jolla, we recorded the fair value of its deferred royalty obligation in connection with La Jolla’s royalty financing agreement (“La Jolla Royalty Agreement”) with HealthCare Royalty Partners (“HCR”).

Under the terms of the La Jolla Royalty Agreement, HCR is entitled to receive quarterly royalties on worldwide net sales of GIAPREZA ® until either January 1, 2031 or when the maximum aggregate royalty payments have been made, whichever occurs first.

Quarterly payments to HCR under the Royalty Agreement start at a maximum royalty rate, with step-downs based on the achievement of annual net product sales thresholds.

The current maximum royalty rate is 14 %.

Starting January 1, 2024, the maximum royalty rate may increase by an additional 4 %, if an agreed-upon, cumulative net product sales threshold has not been met.

The La Jolla Royalty Agreement is subject to maximum aggregate royalty payments to HCR of $ 225.0 million.

For the three months ended September 30, 2022 , we recognized interest expense, including amortization of the obligation discount of $ 1.5 million.

The carrying value of the deferred royalty obligation as of September 30, 2022 was $ 79.9 million, net of unamortized obligation discount of $ 0.5 million.

$ 75.4 million of the deferred royalty obligation, including the long-term portion of the accrued interest, was classified as a noncurrent liability and the remaining $ 4.5 million represented the short-term accrued interest.

During the three months ended September 30, 2022 , we made royalty payments to HCR of $ 1.0 million.

The deferred royalty obligation was valued using Level 3 inputs, and its carrying value as of September 30, 2022 approximates fair value.

The fair value of the deferred royalty obligation was calculated as the discounted deferred royalty obligations based on risk-adjusted revenue projections for GIAPREZA ® .

Under the terms of the La Jolla Royalty Agreement, if we are unable to meet certain obligations, including the obligation to use commercially reasonable and diligent efforts to commercialize GIAPREZA ® , HCR would have the right to terminate the La Jolla Royalty Agreement and demand payment of either $ 125.0 million or $ 225.0 million (depending on which obligation we have failed to meet) less aggregate royalties already paid to HCR.

As of September 30, 2022 , inclusive of the aggregate royalties paid to HCR by La Jolla under the La Jolla Royalty Agreement prior to our acquisition, La Jolla paid $ 11.6 million of aggregate royalties to HCR.

In the event that we fail to pay such amount if and when due in a timely manner, HCR would have the right to foreclose on the GIAPREZA ® -related assets.

HCR has no recourse against any asset other than GIAPREZA ® .

Certain contract provisions within the La Jolla Royalty Agreement that could result in an acceleration of amounts due under the La Jolla Royalty Agreement are recognized as embedded derivatives that require bifurcation from the deferred royalty obligation and fair value recognition.

We determined the fair value of each derivative by assessing the probability of each event occurring, as well as the potential repayment amounts and timing of such repayments that would result under various scenarios.

As a result of this assessment, we determined that the fair value of the embedded derivatives is immaterial and, therefore, not recognized as of September 30, 2022 .

We estimate the fair value of the embedded derivatives for each reporting period until either the features lapse or the La Jolla Royalty Agreement is terminated, whichever occurs first.

Any material change in the fair value of the embedded derivatives will be recorded as either a gain or loss on the unaudited condensed consolidated statements of income.

Commitments and Contingencies

Operating Lease

Our operating leases include Entasis’

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 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.

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

The components of lease cost are as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Straight line operating lease costs

Variable lease costs

Total lease costs

Supplemental cash flow information related to leases are as follows:

Nine Months Ended September 30,

(In thousands)

Cash paid for amounts included in the measurement of operating lease liabilities:

Operating lease right-of-use assets obtained in exchange for operating lease obligations

Right-of-use assets obtained through acquisitions

As of September 30, 2022 , our operating leases have weighted-average remaining term of approximately three years and the weighted average discount rate on our operating lease liabilities was 7.5 %.

We have not presented the comparative information above as our operating lease in 2021 was not material.

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

September 30,

(In thousands)

Right-of-use assets

Lease liabilities, current

Lease liabilities, long-term

Current portion of lease liabilities

Long-term portion of lease liabilities

Total lease liabilities

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

Future minimum payments on our operating leases as of September 30, 2022 were as follows:

(In thousands)

June 30, 2022

September 30, 2022

Years ending December 31:

3 unchanged sentences

Total operating lease liabilities

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:

Remainder of 2022

Legal Proceedings

From time to time, the Company is involved in legal proceedings in the ordinary course of its business.

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

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.

We are not currently a party to any material legal proceedings except as discussed below.

As previously disclosed in the Quarterly Report on Form 10-Q filed by La Jolla on August 15, 2022, on February 15, 2022, La Jolla received a paragraph IV notice of certification (the “Notice Letter”) from Gland Pharma Limited (“Gland”) advising that Gland had submitted an Abbreviated New Drug Application (“ANDA”) to the FDA seeking approval to manufacture, use or sell a generic version of GIAPREZA ® in the U.S.

prior to the expiration of U.S.

Patent No.s.:

and 11,219,662 (the “GIAPREZA ® Patents”), which are listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (the “Orange Book”).

The Notice Letter alleges that the GIAPREZA ® Patents are invalid, unenforceable and/or will not be infringed by the commercial manufacture, use or sale of the generic product described in Gland’s ANDA.

On March 29, 2022, La Jolla filed a complaint for patent infringement of the GIAPREZA ® Patents against Gland and certain related entities in the United States District Court for the District of New Jersey in response to Gland’s ANDA filing.

In accordance with the Hatch-Waxman Act, because GIAPREZA ® is a new chemical entity and La Jolla filed a complaint for patent infringement within 45 days of receipt of the Notice Letter, the FDA cannot approve Gland’s ANDA any earlier than 7.5 years from the approval of the GIAPREZA ® NDA unless the District Court finds that all of the asserted claims of the patents-in-suit are invalid, unenforceable and/or not infringed.

We intend to vigorously enforce our intellectual property rights relating to GIAPREZA ® .

Indemnification

In the ordinary course of business, we may provide indemnifications of varying scope and terms to vendors, directors, officers, and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by us, our negligence or willful misconduct, violations of law, or intellectual property infringement claims made by third parties.

In addition, we have entered into indemnification agreements with directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees.

No material demands have been made upon us to provide indemnification under such agreements, and thus, there are no claims that we are aware of that could have a material effect on our unaudited condensed consolidated financial statements.

We also maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors.

To date, we have not incurred any material costs and have not accrued any material liabilities in the condensed consolidated financial statements as a result of these provisions.

We recorded provisional income tax expe nse of $ 57.1 million and $ 63.1 million f or the three and nine months ended September 30, 2022, respectively, compared to provisional income tax expense of $ 20.5 million and $ 65.6 million for the three and nine months ended September 30, 2021, respectively.

The Company’s effective income tax rate for the nine months ended September 30, 2022 wa s 18.3 %, com pared to 16.9 % for the same period in 2021.

The income tax expense for the nine months ended September 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 nine months ended September 30, 2022 was lower than the U.S.

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

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

25 unchanged sentences

lower than expected future royalty revenue from respiratory products partnered with GSK;

the commercialization of RELVAR ® /BREO ® ELLIPTA ® , ANORO ® ELLIPTA ® and TRELEGY ® ELLIPTA ® in the jurisdictions in which these products have been approved;

substantial competition from products discovered, developed, launched and commercialized both by GSK and by other pharmaceutical companies;

the strategies, plans and objectives of the Company (related to the Company’s growth strategy and corporate development initiatives beyond the Company’s existing portfolio);

the commercialization of RELVAR ® /BREO ® ELLIPTA ® and ANORO ® ELLIPTA ® in the jurisdictions in which these products have been approved;

the strategies, plans and objectives of Innoviva (including Innoviva’s growth strategy and corporate development initiatives beyond the existing respiratory portfolio);

the timing, manner, and amount of potential capital returns to shareholders;

the status and timing of clinical studies, data analysis and communication of results;

the potential benefits and mechanisms of action of product candidates;

expectations for product candidates through development and commercialization;

the timing of regulatory approval of product candidates;

and projections of revenue, expenses, and other financial items;

the impact of the novel coronavirus (“COVID-19”);

the timing, manner and amount of capital deployment, including potential capital returns to stockholders;

14 unchanged sentences

Innoviva, Inc.

(“Innoviva”, the “Company”, the “Registrant”

or “we”

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

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:

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

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

Our royalty portfolio contains respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR ® /BREO ® ELLIPTA ® (fluticasone furoate/vilanterol, “FF/VI”) and ANORO ® ELLIPTA ® (umeclidinium bromide/ vilanterol, “UMEC/VI”), and up until July 2022, TRELEGY ® ELLIPTA ® (the combination FF/UMEC/VI).

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

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 ® .

We expanded our portfolio of royalties and innovative healthcare assets through the acquisition of Entasis Therapeutics Holdings Inc.

(“Entasis”) on July 11, 2022 and the acquisition of La Jolla Pharmaceutical Company (“La Jolla”) on August 22, 2022.

Our development pipeline includes medicines for the treatment of bacterial infections, such as our lead asset sulbactam-durlobactam (“SUL-DUR”).

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

Our revenues consist of royalties from our respiratory partnership agreements with GSK.

Recent Highlights

GSK Net Sales:

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.

Third quarter 2022 net sales of RELVAR ® /BREO ® ELLIPTA ® by GSK were $371.1 million, up 3% from $360.6 million in the same quarter of 2021, with $184.5 million in net sales from the U.S.

market and $186.6 million from non-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.

Third quarter 2022 net sales of ANORO ® ELLIPTA ® by GSK were $153.0 million, down 15% from $179.1 million in the same quarter of 2021, with $77.6 million net sales from the U.S.

market and $75.4 million from non-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 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

Corporate Updates:

On July 11, 2022, we completed the purchase of all of the issued and outstanding equity securities of Entasis not already owned by Innoviva for $42.4 million.

Entasis brings to Innoviva an infectious disease focused research and development platform anchored by its lead asset sulbactam-durlobactam (SUL-DUR).

On July 20, 2022, we completed the sale of our 15% ownership interest in TRC to Royalty Pharma for $282.0 million, including payment for our portion of TRC’s cash balance of $4.4 million , and a potential $50.0 million sales-based milestone payments and received full ownership of equity and other investments that TRC owned prior to the transaction.

On August 22, 2022, we completed the acquisition of La Jolla for a net cash price of $150.5 million.

Clinical Updates:

At the annual meeting of the Infectious Disease Society of America which took place from October 19 to October 23, 2022 in Washington, D.C., our wholly-owned subsidiary, Entasis, had six presentations on SUL-DUR data reinforcing the positive safety and efficacy findings from the Company’s pivotal Phase 3 ATTACK trial, while our other wholly-owned subsidiary, La Jolla, had five abstracts on XERAVA ® which focused primarily on its use in combination therapies.

Collaboration Arrangement with GSK

LABA Collaboration

7 unchanged sentences

As a result of the launch and approval of RELVAR ® /BREO ® ELLIPTA ® and ANORO ® ELLIPTA ® in the U.S., Japan and Europe, in accordance with the LABA Collaboration Agreement, we paid milestone fees to GSK totaling $220.0 million during the year ended December 31, 2014.

Although we have no further milestone payment obligations to GSK pursuant to the LABA Collaboration Agreement, we continue to have ongoing commercialization activities under the LABA Collaboration Agreement, including participation in the joint steering committee and joint project committee that are expected to continue over the life of the agreement.

Although we have no further milestone payment obligations to GSK pursuant to the LABA Collaboration Agreement, we continue to have ongoing commercialization activities under the LABA Collaboration Agreement, including participation in the joint steering committee that are expected to continue over the life of the agreement.

The milestone fees paid to GSK were recognized as capitalized fees paid to a related party, which are being amortized over their estimated useful lives commencing upon the commercial launch of the products.

As mentioned above, on July 20, 2022, we sold our ownership interest in TRC, which received royalty payments from GSK stemming from sales of TRELEGY ® ELLIPTA ® .

We retained our royalty rights with respect to RELVAR ® /BREO ® ELLIPTA ® and ANORO ® ELLIPTA ® .

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

GAAP”).

The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods.

1 unchanged sentence

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

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.

Except as discussed below, 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.

Business Combinations

We use the acquisition method of accounting under ASC 805, Business Combinations.

Each acquired company’s operating results are included in our condensed consolidated financial statements starting on the acquisition date.

The purchase price is equivalent to the fair value of consideration transferred.

Tangible and identifiable intangible assets acquired, liabilities assumed and any noncontrolling interest in the acquiree as of the acquisition date are recorded at the acquisition date fair value.

Goodwill is recognized for the excess of purchase price over the net fair value of assets acquired and liabilities assumed.

Amounts allocated to assets and liabilities are based upon fair values.

Such valuations require us to make significant estimates and assumptions, especially with respect to the identifiable intangible assets.

We make estimates of fair value based upon assumptions believed to be reasonable and that of a market participant.

These estimates are based on available historical information as well as future expectations, and the estimates are inherently uncertain.

The separately identifiable intangible assets generally include marketed products, in-process research and development and collaboration agreement.

Revenue Recognition from Product Sales

We started recognizing revenue from product sales as a result of our acquisition of La Jolla.

Prior to recognizing any revenue from product sales, we identify the contract, performance obligations, and transaction price, and allocate the transaction price to the performance obligations.