Innoviva, Inc. 10-K

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock was traded on Nasdaq under the symbol “THRX” from October 5, 2004 until January 8, 2016. Upon changing our corporate name to Innoviva, Inc. on January 7, 2016, we changed the stock ticker symbol to “INVA” effective January 11, 2016. Holders As of February 14, 2023, there were 64 stockholders of record of our common stock. As many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. Purchases of Equity Securities by the Issuer The following table reflects share repurchases of our common stock for the three months ended December 31, 2022: Period Total Number of Shares Purchases Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1) October 1, 2022 to October 31, 2022 — $ — — $ — November 1, 2022 to November 30, 2022 — — — — December 1, 2022 to December 31, 2022 647,394 13.13 647,394 91,496,562 Total 647,394 $ 13.13 647,394 $ 91,496,562 (1) On October 31, 2022, the Board of Directors of Innoviva authorized and approved a stock repurchase program pursuant to which we may purchase up to $100.0 million of our outstanding common stock. The timing and amount of any share repurchases under the share repurchase program will be determined by Innoviva’s management in its discretion based on ongoing assessments of the capital needs of the business, the market price of Innoviva’s common stock, prevailing stock prices, general market conditions and other considerations. Share repurchases under the program may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, in block trades, accelerated share repurchase transactions, exchange transactions, or any combination thereof or by other means in accordance with federal securities laws. This program has no termination date, may be suspended or discontinued at any time at the Company’s discretion and does not obligate the Company to acquire any amount of common stock. Stock Performance Graph The graph set forth below compares the cumulative total stockholder return on our common stock for the period commencing on December 31, 2017 and ending on December 31, 2022, with the cumulative total return of (i) the Nasdaq Composite Index, (ii) the Nasdaq S&P Small Cap 600 Pharma Index and (iii) the Nasdaq Biotechnology Index over the same period. This graph assumes the investment of $100.00 on December 31, 2017 in each of (1) our common stock, (2) the Nasdaq Composite Index, (3) the Nasdaq S&P Small Cap 600 Pharma Index and (4) the Nasdaq Biotechnology Index, and assumes the reinvestment of dividends. The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. Information used in the graph was obtained from sources believed to be reliable including Nasdaq, Bloomberg and Reuters, but we are not responsible for any errors or omissions in such information. Notwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate this Annual Report on Form 10‑K or future filings made by us under those statutes, this Stock Performance Graph section shall not be deemed filed with the SEC and shall not be deemed incorporated by reference into any of those prior filings or into any future filings made by us under those statutes. 70 Table of Contents COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Innoviva, Inc., the Nasdaq Composite Index, Nasdaq Biotechnology Index, and Nasdaq S&P Small Cap 600 Pharma Index. * $100 invested on December 31, 2017 in stock or index, including reinvestment of dividends. ITEM 6. [ Reserved] 71 Table of Contents ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis (“MD&A”) is intended to facilitate an understanding of our business and results of operations. This discussion and analysis should be read in conjunction with our consolidated financial statements and notes included in this Annual Report on Form 10‑K. The information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10‑K, including information with respect to our plans and strategy for our business, our operating expenses, and future payments under our collaboration agreements, includes forward‑looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. You should review the section entitled “Risk Factors” in Item 1A of Part I above for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward‑looking statements contained in the following discussion and analysis. See the section entitled “Special Note Regarding Forward Looking Statements” above for more information. Management Overview Innoviva, Inc. (referred to as “Innoviva”, the “Company”, the “Registrant” 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 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: 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%. 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. Following the acquisitions, 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, and our development pipeline includes medicines for the treatment of bacterial infections, such as our lead asset sulbactam-durlobactam (“SUL-DUR”). As such, we have a wholly owned robust infectious disease and hospital operating platform as well as other assets in these therapeutic areas, such as a large equity stake in Armata Pharmaceuticals, a leader in bacteriophage development with potential use across a range of infectious and other serious diseases. We also have economic interests in other healthcare companies. Our company structure and organization are tailored to our focused activities of managing our respiratory assets partnered with GSK, commercializing our marketed products, developing of our product candidates, optimizing capital allocation, and providing for certain essential reporting and management functions of a public company. As of December 31, 2022, we had 101 employees. Financial Highlights In the year ended December 31, 2022, the net income attributable to Innoviva stockholders was $213.9 million, a decrease of $52.0 million from net income attributable to Innoviva stockholders of $265.9 million in the year ended December 31, 2021. The lower net income was mainly driven by the decrease in fair values of equity and long-term investments, including $153.2 million in unrealized loss, and the decrease in our royalty revenues. These decreases were partially offset by a gain of $266.7 million recognized from the sale of TRC. Cash and cash equivalents totaled $291.0 million, and royalty and product sales receivable was $64.1 million as of December 31, 2022. 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 in cash consideration. Entasis brings to Innoviva an infectious disease focused research and development platform anchored by its lead asset SUL-DUR. On July 20, 2022, we completed the sale of our 15% ownership interest in TRC to Royalty Pharma Investments 2019 ICAV (“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. We also received full ownership of equity and other investments that TRC owned prior to the transaction. 72 Table of Contents On August 22, 2022, we completed the acquisition of La Jolla for a net cash price of $150.5 million. 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 in adults. On October 31, 2022, our Board of Directors authorized a new share repurchase program under which we may repurchase up to $100.0 million of Innoviva's outstanding shares of common stock. The timing and amount of any share repurchases under the share repurchase program will be determined by our management in its discretion based on ongoing assessments of the capital needs of the business, the market price of Innoviva’s common stock, prevailing stock prices, general market conditions and other considerations. Share repurchases under the program may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, in block trades, accelerated share repurchase transactions, exchange transactions, or any combination thereof or by other means in accordance with federal securities laws. This program has no termination date, may be suspended or discontinued at any time at our discretion and does not obligate us to acquire any amount of common stock. As of December 31, 2022, we have repurchased and retired 647,394 shares in the open market for total price of approximately $8.5 million. Subsequent to December 31, 2022 and through February 24, 2023, we have repurchased 1,522,947 shares in the open market for a total amount of approximately $19.2 million. All the repurchased shares were retired. Clinical Updates • On November 30, 2022, the U.S. Food and Drug Administration (“FDA”) granted priority review for SUL-DUR, an investigational drug for the treatment of infections caused by Acinetobacter baumannii-calcoaceticus complex (“ABC”), including multi-drug resistant and carbapenem-resistant strains. • The FDA is currently planning to hold an advisory committee meeting to discuss this New Drug Application. The target PDUFA date (or action date) is May 29, 2023. • 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., Entasis Therapeutics, a wholly owned subsidiary of the Company, had six presentations on SUL-DUR, reinforcing the positive safety and efficacy findings from the Company’s pivotal Phase 3 ATTACK trial. • Additionally, at the same annual meeting of the Infectious Disease Society of America, La Jolla Pharmaceutical, another wholly owned subsidiary of the Company, had five abstracts on XERAVA ® focused primarily on its use in combination therapies. • Enrollment in the phase 3 registrational trial for zoliflodacin, a first-in-class oral antibiotic for the treatment of gonorrhea being developed in partnership with GARD-P, remains on track, and study completion is anticipated in 2023. Collaborative Arrangements with GSK LABA Collaboration In November 2002, we entered into the LABA Collaboration Agreement with GSK to develop and commercialize once‑daily LABA products for the treatment of chronic obstructive pulmonary disorder (“COPD”) and asthma (the “LABA Collaboration Agreement”). For the treatment of COPD, the collaboration has developed three combination products: • RELVAR ® /BREO ® ELLIPTA ® (“FF/VI”) (BREO ® ELLIPTA ® is the proprietary name in the U.S. and Canada and RELVAR ® ELLIPTA ® is the proprietary name outside the U.S. and Canada), a once‑daily combination medicine consisting of a LABA, vilanterol (VI), and an inhaled corticosteroid (“ICS”), fluticasone furoate (“FF”), • ANORO ® ELLIPTA ® (“UMEC/VI”), a once‑daily medicine combining a long‑acting muscarinic antagonist (“LAMA”), umeclidinium bromide (“UMEC”), with a LABA, vilanterol (VI), and • TRELEGY ® ELLIPTA ® (the combination FF/UMEC/VI), a once‑daily combination medicine consisting of an ICS, LAMA and LABA. 73 Table of Contents 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 that are expected to continue over the life of the agreement. The milestone fees paid to GSK were recognized as capitalized fees paid, which are being amortized over their estimated useful lives commencing upon the commercial launch of the products. We are entitled to receive royalties from GSK on sales of RELVAR ® /BREO ® ELLIPTA ® as follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion. On sales of ANORO ® ELLIPTA ® , royalties are upward tiering and range from 6.5% to 10%. We no longer receive royalties on sales of TRELEGY ® ELLIPTA ® after we sold our royalty rights along with the sale of our ownership in TRC in July 2022. Strategic Partnership with Sarissa Capital Strategic Advisory Agreement On December 11, 2020, we entered into a Strategic Advisory Agreement (the “Services Agreement”) with Sarissa Capital Management LP (“Sarissa Capital”), pursuant to which Sarissa Capital provides a variety of strategic services to us in order to assist us in the development and execution of our acquisition strategy. The services are provided free of charge to us. Sarissa Capital is considered to be a related party due to its investment in Innoviva's common stock and its representation on our board of directors. Partnership Agreement On December 11, 2020, Innoviva Strategic Partners LLC (“Strategic Partners”), our wholly owned subsidiary, entered into a subscription agreement (the “Subscription Agreement”) and an Amended and Restated Limited Partnership Agreement (the “Partnership Agreement”) pursuant to which Strategic Partners became a limited partner of ISP Fund LP (the “Partnership”). The general partner of the Partnership (the “General Partner”) is an affiliate of Sarissa Capital and, pursuant to an investment management agreement, Sarissa Capital acts as the investment adviser to the Partnership. Strategic Partners made a $300.0 million initial contribution into the Partnership. The Partnership was formed for the purposes of investing in equity securities in the healthcare, pharmaceutical and biotechnology industries. The Partnership Agreement provides for Sarissa Capital to receive a customary one percent management fee from the Partnership, payable quarterly in advance, measured based on the Net Asset Value of Strategic Partners’ capital account in the Partnership. In addition, the General Partner is entitled to a customary 10% annual performance allocation 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 Innoviva common 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. Critical Accounting Policies and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. 74 Table of Contents Business Combinations We use the acquisition method of accounting under Accounting Standards Codification (“ASC”) Topic 805, Business Combinations . Each acquired company’s operating results are included in our 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. Significant estimates and assumptions may involve projected future revenues, earnings, cash flows, estimated probabilities of certain milestone achievements, discount rates, asset lives, among other items. Our estimates may also impact our deferred tax assets and liabilities. Unanticipated events and circumstances may occur that may affect the accuracy and validity of such assumptions, estimates or actual results. Our 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 Royalties We recognize the royalty revenue on net sales of products with respect to which we have contractual royalty rights in the period in which the royalties are earned. The net sales reports provided by our partner are based on its methodology and assumptions to estimate rebates and returns, which it monitors and adjusts regularly in light of contractual and legal obligations, historical trends, past experience and projected market conditions. Our partner may make significant adjustments to its sales based on actual results recorded, which could cause our royalty revenue to fluctuate. We 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. 75 Table of Contents Revenue Recognition from Product Sales We started recognizing revenue from product sales as a result of our acquisition of La Jolla. We apply the guidance on principal versus agent considerations under ASC Topic 606, Revenue from Contracts with Customers , to determine the appropriate treatment for the transactions between us and third parties. The classification of transactions under our arrangements is determined based on the nature and contractual terms of the arrangement along with the nature of the operations of the participants. Any consideration related to activities in which we are considered the principal, which includ es being in control of the good or service before such good or service is transferred to the customer, are accounted for as product sales. 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. 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 and rebates. 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: 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. • Discounts: 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. • Returns: 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. • Rebates: 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. We continue to assess our estimates of variable consideration as we accumulate additional historical data and will adjust these estimates accordingly. Capitalized Fees Paid We review our Capitalized Fees for impairment on a product‑by‑product basis for each major geographic area when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The recoverability of Capitalized Fees is measured by comparing the asset’s carrying amount to the expected undiscounted future cash flows that the asset is expected to generate. The determination of recoverability typically requires various estimates and assumptions, including estimating the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. We derive the required cash flow estimates from near‑term forecasted product sales and long‑term projected sales in the corresponding market. Based upon our analyses of past, current and future sales and trends, there have been no indicators of impairment and no impairment charges have been recorded on the Capitalized Fees as of December 31, 2022. 76 Table of Contents Variable Interest Entities The primary beneficiary of a variable interest entity (“VIE’) is required to consolidate the assets and liabilities of the VIE. When we obtain a variable interest in another entity, we assess at the inception of the relationship and upon occurrence of certain significant events whether the entity is a VIE and, if so, whether we are the primary beneficiary of the VIE based on our power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. To determine whether a variable interest that we hold could potentially be significant to the VIE, we consider both qualitative and quantitative factors regarding the nature, size and form of our involvement with the VIE. To assess whether we have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, we consider all the facts and circumstances, including our role in establishing the VIE and our ongoing rights and responsibilities. This assessment includes identifying the activities that most significantly impact the VIE’s economic performance and identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE (management and representation on the Board of Directors) and have the right to unilaterally remove those decision-makers are deemed to have the power to direct the activities of a VIE. To assess whether we have the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, we consider all of our economic interests that are deemed to be variable interests in the VIE. This assessment requires us to apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Equity and Long-Term Investments We hold Series C preferred stock and preferred stock warrants in InCarda Therapeutics Inc. (“InCarda”), a privately held, clinical-stage biopharmaceutical company. The Series C preferred stock and warrants are classified as Level 3 financial instruments and recorded at fair value subject to remeasurement at each balance sheet date. We use the Black-Scholes-Merton pricing model to estimate the fair value of the warrants with the following input assumptions: the exercise price of the warrants, the risk-free interest rate computed based on the U.S. Treasury yield, the remaining contractual term as the expected term, and the expected stock price volatility calculated based on the historical volatility of the common stock of its public peer companies. Our other Level 3 financial instruments include the Gate Neurosciences Inc. (“Gate”) convertible promissory note and private placement positions held by ISP Fund LP 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. We measure the Gate convertible promissory note 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. Valuations models applied for the private placement positions held by ISP Fund LP may include the Black-Scholes-Merton pricing model, the Monte Carlo simulation model and other applicable valuation models. Key assumptions involve inputs to the Black-Scholes-Merton pricing model, probability rates of certain events and scenarios applied in the Monte Carlo simulation model and discount rates, as appropriate. The Monte Carlo simulation model also incorporates assumptions made based on transaction details such as the security's stock price, the expected term, maturity, risk-free interest rates and dividend yield, as well as volatility. 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 described below. • Adoption of Accounting Standards Update (“ASU”) 2020-06 effective January 1, 2022; • Accounting consolidation of Entasis on February 17, 2022 and purchase of remaining noncontrolling interest in Entasis on July 11, 2022; • Sale of our 15% ownership interest in TRC on July 20, 2022; and • Acquisition of La Jolla on August 22, 2022. Refer to Note 1, “Description of Operations and Summary of Significant Accounting Policies”, to the Consolidated Financial Statements for more information related to the adoption of ASU 2020-06. Refer to Note 5, “Consolidated Entities and Acquisitions”, to the Consolidated Financial Statements for more information related to our acquisitions of Entasis and La Jolla and the sale of our ownership interest in TRC. 77 Table of Contents Results of Operations Net Revenue Royalty Revenue Total net revenue from GSK, as compared to the prior years, was as follows: Change Year Ended December 31, 2022 2021 (In thousands) 2022 2021 2020 $ % $ % Royalties - RELVAR/BREO $ 215,034 $ 234,066 $ 221,536 $ (19,032 ) (8 )% $ 12,530 6 % Royalties - ANORO 38,405 44,935 45,992 (6,530 ) (15 )% (1,057 ) (2 )% Royalties - TRELEGY 72,029 126,688 73,089 (54,659 ) (43 )% 53,599 73 % Total royalties 325,468 405,689 340,617 (80,221 ) (20 )% 65,072 19 % Less: amortization of capitalized fees paid (13,823 ) (13,823 ) (13,823 ) — * — * Royalty revenue 311,645 391,866 326,794 (80,221 ) (20 )% 65,072 20 % Strategic alliance - MABA program — — 10,000 — * (10,000 ) * Total net royalty revenue $ 311,645 $ 391,866 $ 336,794 $ (80,221 ) (20 )% $ 55,072 16 % * Not Meaningful Total net revenue decreased to $311.6 million for the year ended December 31, 2022, compared to the year ended December 31, 2021. The decrease in total net royalty revenue was primarily due to the sale of our ownership interest in TRC, which received royalties stemming from sales of TRELEGY ® ELLIPTA ® . Royalties for RELVAR ® /BREO ® ELLIPTA ® and ANORO ® ELLIPTA ® decreased due to pricing pressures in the U.S. market and foreign currency rate changes. Total net revenue increased to $391.9 million for the year ended December 31, 2021, compared to the year ended December 31, 2020. Royalties for RELVAR ® /BREO ® ELLIPTA ® increased due to favorable adjustments, increased patient adherence and continued volume growth in certain markets. ANORO ® ELLIPTA ® decreased slightly mainly due to the increasing pricing pressure in the U.S. Royalties for TRELEGY ® ELLIPTA ® were higher due to the continued growth in triple therapy class and expanded sales in new markets. Net Product Sales Net product sales we recognized from the date of acquisition of La Jolla, which occurred on August 22, 2022, to December 31, 2022 was $19.7 million, consisting of net sales of GIAPREZA ® and XERAVA ® for $14.2 million and $5.5 million, respectively. We derived approximately 96% of our net product sales for the same period from customers located in the U.S. and 4% for the rest of the world. Research & Development Research and development expenses, as compared to the prior year period, were as follows: Change Year Ended December 31, 2022 2021 (In thousands) 2022 2021 2020 $ % $ % Research and development $ 41,432 $ 576 $ 1,788 $ 40,856 * $ (1,212 ) (68 )% * Not Meaningful 78 Table of Contents Research and development expenses consisted of the following: Change Year Ended December 31, 2022 2021 (In thousands) 2022 2021 2020 $ % $ % External services $ 24,666 $ 576 $ 1,788 $ 24,090 * $ (1,212 ) (68 )% Compensation and related personnel costs 13,863 — — 13,863 * — * Facilities related 2,255 — — 2,255 * — * Other 648 — — 648 * — * Total research and development expense $ 41,432 $ 576 $ 1,788 $ 40,856 * $ (1,212 ) (68 )% * Not Meaningful Research and development expenses for the year ended December 31, 2022 were mainly attributable to Entasis’ product development efforts for our lead product candidate, SUL-DUR. External services costs consist primarily of fees paid to consultants, contractors and contract manufacturing organizations. Research and development expenses for the years ended December 31, 2021 and 2020 were attributable to the product development efforts of Pulmoquine Therapeutics Inc., which was dissolved at the end of 2021. Selling, General & Administrative Selling, general and administrative expenses, as compared to the prior years, were as follows: Change Year Ended December 31, 2022 2021 (In thousands) 2022 2021 2020 $ % $ % Selling, general and administrative $ 63,538 $ 16,187 $ 13,883 $ 47,351 293 % $ 2,304 17 % Selling, general and administrative expenses increased by $47.4 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, mainly attributable to the consolidation of Entasis' operating expenses starting February 17, 2022 and the consolidation of La Jolla’s operating expenses starting August 22, 2022. Selling, general and administrative expenses increased by $2.3 million for the year ended December 31, 2021, compared to the year ended December 31, 2020, mainly attributable to increased business development activities and higher legal expenses incurred for the arbitration between Theravance Biopharma, the Company and TRC. The legal costs for the years ended December 31, 2021 and 2020 were $3.3 million and $1.7 million, respectively. Interest and Dividend Income and Other Expense, Net Interest and dividend income and other expense, net, as compared to the prior years, were as follows: Change Year Ended December 31, 2022 2021 (In thousands) 2022 2021 2020 $ % $ % Interest and dividend income $ (6,369 ) $ (1,839 ) $ (1,524 ) $ (4,530 ) 246 % $ (315 ) 21 % Other expense, net 3,373 3,626 348 (253 ) (7 )% 3,278 * * Not Meaningful Interest and dividend income increased for the year ended December 31, 2022, compared to the year ended December 31, 2021, due to higher interest rates and higher average balances of our cash equivalents, money market funds and other interest-bearing investments. Other expense, net, primarily consisted of expenses incurred by ISP Fund LP. Interest and dividend income increased for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to higher returns on investments, including those managed by ISP Fund LP. 79 Table of Contents Interest Expense Interest expense, as compared to the prior years, was as follows: Change Year Ended December 31, 2022 2021 (In thousands) 2022 2021 2020 $ % $ % Interest expense $ 15,789 $ 19,070 $ 18,331 $ (3,281 ) (17 )% $ 739 4 % The change in interest expense for the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily due to the adoption of ASU 2020-06, which simplifies the accounting for convertible debt instruments. As a result of the adoption, the debt discount associated with the cash settlement feature of our convertible senior notes due 2025 (the “2025 Notes”) was adjusted to zero as of January 1, 2022. Interest expense for the year ended December 31, 2022 included the contractual interest expense and the amortization of debt issuance costs for our convertible subordinated notes due 2023 (the “2023 Notes”), the 2025 Notes and our convertible senior notes due 2028 (the “2028 Notes”). Interest expense for the year ended December 31, 2021 included the amortization of debt discount in addition to the contractual interest expense and the amortization of debt issuance costs for our 2023 Notes and 2025 Notes. The decrease in interest expense as a result of the adoption of ASU 2020-06 was partially offset by a higher debt balance and interest expense incurred for the deferred royalty obligation from the acquisition of La Jolla. Interest expense increased slightly for the year ended December 31, 2021, compared to the year ended December 31, 2020, due to more debt discount and issuance costs being recognized through amortization. Loss on Debt Extinguishment We recognized a loss of $20.7 million due to the total premium payment of $20.4 million and the write-off of $0.3 million debt issuance costs in connection with the repurchase of $144.8 million aggregate principal amount of our 2023 Notes in March 2022. Gain on Sale of TRC We recognized a net gain of $266.7 million due to the sale of our ownership interest in TRC to Royalty Pharma, consummated on July 20, 2022. Changes in Fair Values of Equity Method Investments and Other Equity and Long-Term Investments Changes in fair values of equity method investments, net, and other equity and long-term investments, net, as compared to the prior years, were as follows: Change Year Ended December 31, 2022 2021 (In thousands) 2022 2021 2020 $ % $ % Changes in fair values of equity method investments, net $ 161,749 $ (84,392 ) $ (49,511 ) $ 246,141 (292 )% $ (34,881 ) 70 % Changes in fair values of other equity and long-term investments, net $ (8,462 ) $ (6,638 ) $ (766 ) $ (1,824 ) 27 % $ (5,872 ) 767 % The changes in fair values of equity method investments and other equity and long-term investments year over year reflect the realized gains and losses and net unrealized gains and losses in our strategic investments in Armata, InCarda, and Gate, and those investments managed by ISP Fund LP. The changes in fair values of equity method investments are attributed mainly to changes in the fair value of our investments in Armata and Entasis. We recorded $152.5 million in unrealized losses, $78.7 million in unrealized gains and $19.0 million in unrealized gains associated with our Armata investments for the years ended December 31, 2022, 2021 and 2020, respectively. The unrealized gains or losses on our investments in Armata is driven primarily by the share price changes of its publicly traded security. The amounts for the years ended December 31, 2022, 2021 and 2020 also include $9.2 million in unrealized losses, $5.7 million in unrealized gains and $30.5 million in unrealized gains, respectively, we recorded from our then investments in Entasis. Refer to Note 6, “Equity and Long-Term Investments and Fair Value Measurements”, to the Consolidated Financial Statements for more information. 80 Table of Contents The changes in fair values of other equity and long-term investments year over year reflect the realized gains and losses and net unrealized gains and losses in our strategic investments in InCarda, Gate, and those investments managed by ISP Fund LP. Income Taxes Income tax expense, net, as compared to the prior years, was as follows: Change Year Ended December 31, 2022 2021 (In thousands) 2022 2021 2020 $ % $ % Income tax expense, net $ 66,687 $ 76,439 $ 60,431 $ (9,752 ) (13 )% $ 16,008 26 % As of December 31, 2022, 2021 and 2020, we had net operating loss carryforwards for federal income taxes of $411.5 million, $92.9 million and $361.5 million, respectively. As of December 31, 2022, 2021 and 2020, we also had state net operating loss carryforwards of approximately $955.3 million, $648.6 million and $650.7 million, respectively, which will expire beginning 2029. As of December 31, 2022, 2021 and 2020, we had federal research and development tax credit carryforwards of nil, $42.1 million, and $43.6 million, respectively. As of December 31, 2022, we had state research and development tax credits of $33.3 million. For the year ended December 31, 2022, 2021 and 2020, we recognized $66.7 million, $76.4 million and $60.4 million of income tax expense, respectively, mainly based on the taxable income generated during those years. We had total unrecognized tax benefits of $16.3 million as of December 31, 2022. Our total unrecognized tax benefits as of December 31, 2021 and December 31, 2020 were $14.9 million and $15.2 million, respectively. Utilization of net operating loss and tax credit carryforwards is subject to rules, provided by the Internal Revenue Code and similar state provisions, governing annual limitations tied to ownership changes. We conducted an analysis of the Company through December 31, 2022 to determine whether an ownership change had occurred since inception. The study concluded that it is more likely than not that the Company did not experience an ownership change during the testing period. However, notwithstanding the applicable annual limitations, we estimate that no portion of our net operating loss or credit carryforwards will expire before becoming available to reduce federal and state income tax liabilities. Annual limitations may result in expiration of net operating loss and tax credit carryforwards before some or all of such amounts have been utilized. If we undergo another ownership change, the utilization of the pre-ownership change net operating loss carryforwards or pre-ownership change tax attributes, such as research tax credits, to offset the post-ownership change income may be subject to an annual limitation, pursuant to Sections 382 and 383 of the Internal Revenue Code of 1986, as amended. Similar rules may apply under state tax laws. As a result of the acquisition of Entasis, we conducted a study of Entasis’ ownership changes and estimated that we will be able to utilize $157.4 million of its federal net operating losses, which are subject to annual limitations. As a result of the acquisition of La Jolla, we also performed a preliminary analysis of its ownership changes and estimated that we will be able to utilize $254.0 million of its federal net operating losses, which are subject to annual limitations. Net Income Attributable to Noncontrolling Interests Net income attributable to noncontrolling interests, as compared to the prior years, was as follows: Change Year Ended December 31, 2022 2021 (In thousands) 2022 (1) 2021 2020 $ % $ % Net income attributable to noncontrolling interest $ 6,341 $ 102,983 $ 69,412 $ (96,642 ) (94 )% $ 33,571 48 % (1) The year ended December 31, 2022 represents the period from the initial date of consolidation of Entasis on February 17, 2022 to the date of the acquisition of Entasis on July 11, 2022, and the period from January 1, 2022 through the date of the sale of our ownership interest in TRC on July 20, 2022. Net income attributable to noncontrolling interests for the year ended December 31, 2022 was $6.3 million compared to $103.0 million, a decrease of $96.6 million, which was mainly due to lower net income attributable to the sale of our ownership interest in TRC, offset with net loss attributable to Entasis’ noncontrolling interest. 81 Table of Contents Net income attributable to noncontrolling interests during the years ended December 31, 2021 and 2020 represents the 85% share of net income in Theravance Respiratory Company, LLC for Theravance Biopharma. The year over year increase from 2020 to 2021 was primarily due to the growth in prescriptions and market share for TRELEGY ® ELLIPTA ® . Liquidity and Capital Resources Liquidity Since our inception, we have financed our operations primarily through private placements and public offerings of equity and debt securities and payments received under collaborative arrangements. For the year ended December 31, 2022, we generated gross royalty revenues of $325.5 million and net product sales revenues of $19.7 million. Cash and cash equivalents totaled $291.0 million, royalties receivable from GSK totaled $54.7 million and accounts receivable associated with our product sales totaled $9.4 million, as of December 31, 2022. As of December 31, 2022, we had three outstanding convertible notes, the 2023 Notes, the 2025 Notes and the 2028 Notes, in an aggregate principal amount of $549.7 million, of which $96.2 million matured and was fully paid in January 2023. The remainder amounts of $192.5 million and $261.0 million will become due in August 2025 and March 2028, respectively. Future interest payments associated with these notes total $46.0 million. On October 31, 2022, our Board of Directors authorized a new share repurchase program under which we may repurchase up to $100.0 million of Innoviva's outstanding shares of common stock. As of December 31, 2022, we have repurchased Innoviva common stock in the open market for total price of approximately $8.5 million. This program has no termination date, may be suspended or discontinued at any time at our discretion and does not obligate us to acquire any amount of common stock. 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 Innoviva common 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 contributions will then be subject to a 36-month lock up period from the contribution date. Adequacy of Cash Resources to Meet Future Needs We believe that our cash and cash equivalents will be sufficient to meet our anticipated debt service and operating needs, as well our ongoing share repurchase program, for at least the next 12 months based upon current operating plans and financial forecasts. Our long-term capital requirements will depend on many factors including the amount of our royalty revenues, sales growth of our currently marketed products, timing of regulatory approval of our product candidates and outcome of our acquisitions and strategic investments. If our current operating plans and financial forecasts change, we may require additional funding sooner in the form of public or private equity offerings or debt financings. Furthermore, if in our view favorable financing opportunities arise, we may seek additional funding in the form of public or private equity offerings or debt financings at any time. However, future financing may not be available in amounts or on terms acceptable to us, if at all. This could leave us without adequate financial resources to fund our operations as currently planned. In addition, from time to time we may restructure or reduce our debt, including through privately negotiated repurchases, tender offers, redemptions, amendments, or otherwise, all allowable with the terms of our debt agreements. Cash Flows Cash flows, as compared to the prior years, were as follows: Year Ended December 31, Change (In thousands) 2022 2021 2020 2022 2021 Net cash provided by operating activities $ 201,726 $ 363,813 $ 313,113 $ (162,087 ) $ 50,700 Net cash provided by (used in) investing activities (56,634 ) 43,722 (314,937 ) (100,356 ) 358,659 Net cash used in financing activities (55,568 ) (452,497 ) (29,785 ) 396,929 (422,712 ) 82 Table of Contents Cash Flows from Operating Activities Cash provided by operating activities for the year ended December 31, 2022 was $201.7 million, consisting primarily of our net income of $220.3 million and net changes in operating assets and liabilities of $6.9 million, partially offset by net non-cash items of $25.4 million. Non-cash items included a net gain of $266.7 million recognized on the sale of TRC, partially offset by total non-cash charges of $241.3 million. Non-cash charges included a $153.3 million net decrease in fair values of equity method investments and other equity and long-term investments, $25.0 of deferred income taxes, $13.9 million of amortization of capitalized fees and depreciation of property and equipment and $5.6 million in amortization of acquired intangible assets, $20.7 million in loss on the extinguishment of debt, $7.3 million in stock-based compensation expense, $10.0 million in inventory fair value adjustments included in cost of products sold and $2.1 million in the amortization of debt discount and issuance costs. The changes in operating assets and liabilities included an increase in prepaid expenses of $21.4 million, a decrease in receivables from collaboration arrangements of $13.3 million and increases of $11.9 million and $10.0 million in accrued personnel-related expenses and other accrued liabilities and in income tax payable, respectively. Cash provided by operating activities for the year ended December 31, 2021 was $363.8 million, consisting primarily of our net income of $368.8 million, adjusted for non-cash items such as $76.4 million of deferred income taxes, $13.8 million of depreciation and amortization, $9.1 million amortization of debt discount and issuance costs, $2.0 million of stock-based compensation expense, partially offset by a $89.3 million net increase in fair values of equity method investments and other equity and long-term investments and an increase in receivables from collaborative arrangements of $16.8 million. Cash provided by operating activities for the year ended December 31, 2020 was $313.1 million, consisting primarily of our net income of $293.8 million, adjusted for non-cash items such as $60.4 million of deferred income taxes, $13.8 million of depreciation and amortization, $8.4 million amortization of debt discount and issuance costs, $1.7 million of stock-based compensation expense, partially offset by a $50.3 million increase in fair values of equity method investments and other equity and long-term investments and an increase in receivables from collaborative arrangements of $14.5 million. Cash Flows from Investing Activities Net cash used in investing activities for the year ended December 31, 2022 of $56.6 million included $159.1 million in cash paid for the acquisition of La Jolla, net of cash acquired, $58.7 million in purchases of equity and long-term investments, $60.9 million in purchases of equity investments managed by ISP Fund LP, $50.0 million in purchases of a trading security managed by ISP Fund LP and $23.4 million in net purchases and sales of other investments managed by ISP Fund LP. Net cash used in investing activities was partially offset by $248.2 million in net proceeds from the sale of our ownership interest in TRC, $24.3 million in sales of equity investments managed by ISP Fund LP and $23.1 million in cash acquired through the consolidation of Entasis. Net cash provided by investing activities for the year ended December 31, 2021 of $43.7 million was primarily due to $110.0 million net cash inflow from $301.0 million sales and $191.0 million purchases of equity and other investments managed by ISP Fund LP, offset by $66.3 million in purchases of various investment instruments including, but not limited to, common stock, warrants, convertible debt investment, money market funds and other securities. Net cash used in investing activities for the year ended December 31, 2020 of $314.9 million was primarily due to $300.0 million in the purchases of equity and other investments managed by ISP Fund LP and $100.9 million in purchases of common stock, warrants, money market funds, and other securities, offset by $86.0 million of proceeds received from maturities of marketable securities. Cash Flows from Financing Activities Net cash used in financing activities for the year ended December 31, 2022 of $55.6 million included $165.1 million for the repurchase of convertible subordinated notes due 2023, $69.8 million in distributions to noncontrolling interest, $43.9 million for the purchase of Entasis noncontrolling interest, $21.0 million for purchases of capped call options associated with our 2028 Notes and $8.5 million for the repurchase of common stock. Net cash used in financing activities was partially offset by $252.5 million in net proceeds from the issuance of our 2028 Notes. Net cash used in financing activities for the year ended December 31, 2021 of $452.5 million was primarily due to a $394.1 million repurchase of our common stock from GSK and $59.5 million in distributions to noncontrolling interest. Net cash used in financing activities for the year ended December 31, 2020 of $29.8 million was primarily due to $30.5 million distributions to noncontrolling interest. 83 Table of Contents Contractual Obligations In March 2022, we completed a private placement of $261.0 million aggregate principal amount of unsecured convertible senior notes, the 2028 Notes, which will mature on March 15, 2028. Under the terms of the 2028 Notes, we will make interest payments of approximately 2.125% of outstanding principal. The principal balance of $261.0 million will become due in March 2028. As of December 31, 2022, our notes payable obligation also included $96.2 million related to our 2023 Notes, which matured and was fully paid in January 2023 and $192.5 million related to our 2025 Notes which are due in 2025. Under the term of the 2025 Notes, we will make interest payments of 2.5% of outstanding principal. Refer to Note 12, “Debt” to the Consolidated Financial Statements for more information. Our short-term and long-term obligations also include contractual payments related to our operating leases amounting to $4.1 million, with approximately $1.5 million payable through December 31, 2023 and approximately $1.3 million payable in each of the years 2024 and 2025. Refer to Note 13, “Commitments and Contingencies” to the Consolidated Financial Statements for more information. As part of our acquisition of La Jolla, we recognized its deferred royalty obligation in connection with La Jolla Royalty Agreement with HCR. Under the terms of the 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. Additionally, we have certain contingent payment obligations under various in-license agreements which we are required to make royalty payments or milestone payments upon successful completion and achievement of certain milestones. Refer to Note 4, “License and Collaboration Arrangements” to the Consolidated Financial Statements for more information. We also enter into agreements in the normal course of business with vendors for manufacturing, clinical trials and preclinical studies, and other services and products for operating purposes.