Innoviva, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Consolidated Balance Sheets as of December 31, 2022 and December 31, 2021 86 Consolidated Statements of Income for each of the three years in the period ended December 31, 2022 87 Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2022 88 Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2022 89 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2022 90 Notes to Consolidated Financial Statements 92 Reports of Independent Registered Public Accounting Firm (PCAOB ID 34 ) 131 Report of Independent Registered Public Accounting Firm (PCAOB ID 248) 133 85 Table of Contents INNOVIVA, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) December 31, December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 291,049 $ 201,525 Accounts receivable 9,401 — Receivables from collaboration arrangements 54,672 110,711 Inventory 55,897 — Prepaid expenses 29,559 1,367 Other current assets 2,933 70 Total current assets 443,511 313,673 Property and equipment, net 170 12 Equity and long-term investments 403,013 483,845 Capitalized fees paid, net 97,607 111,430 Right-of-use assets 3,265 97 Goodwill 26,713 — Intangible assets 252,919 — Deferred tax assets, net — 17,327 Other assets 4,299 11 Total assets $ 1,231,497 $ 926,395 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 2,939 $ 27 Accrued personnel-related expenses 8,022 619 Accrued interest payable 4,359 4,152 Deferred revenue 2,094 — Convertible subordinated notes due 2023, net of issuance costs 96,193 — Income tax payable 154 — Other accrued liabilities 21,207 1,009 Total current liabilities 134,968 5,807 Long-term debt, net of discount and issuance costs 444,180 394,653 Other long-term liabilities 70,918 — Deferred tax liabilities, net 5,771 — Income tax payable, long-term 9,872 — Commitments and contingencies (Note 13) Stockholders’ equity: Preferred stock: $ 0.01 par value, 230 shares authorized, no shares issued and outstanding — — Common stock: $ 0.01 par value, 200,000 shares authorized, 69,188 and 69,566 issued and outstanding as of December 31, 2022 and December 31, 2021 respectively 692 696 Treasury stock: at cost, 32,005 shares as of December 31, 2022 and December 31, 2021 ( 393,829 ) ( 393,829 ) Additional paid-in capital 1,163,836 1,264,024 Accumulated deficit ( 204,911 ) ( 456,148 ) Total Innoviva stockholders’ equity 565,788 414,743 Noncontrolling interests — 111,192 Total stockholders’ equity 565,788 525,935 Total liabilities and stockholders’ equity $ 1,231,497 $ 926,395 See accompanying notes to consolidated financial statements. 86 Table of Contents INNOVIVA, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Year Ended December 31, 2022 2021 2020 Revenue: Royalty revenue from a related party, net of amortization of capitalized fees paid of $ 13,823 in each of the years ended December 31, 2022, 2021 and 2020 $ 311,645 $ 391,866 $ 326,794 Revenue from collaborative arrangement — — 10,000 Net product sales 19,694 — — Total revenue 331,339 391,866 336,794 Expenses: Cost of products sold (inclusive of amortization of inventory fair value adjustments and excluding amortization of acquired intangible assets) 13,793 — — Selling, general and administrative 63,538 16,187 13,883 Research and development 41,432 576 1,788 Amortization of acquired intangible assets 5,581 — — Gain on sale of Theravance Respiratory Company, LLC (“TRC”) ( 266,696 ) — — Loss on extinguishment of debt 20,662 — — Changes in fair values of equity method investments, net 161,749 ( 84,392 ) ( 49,511 ) Changes in fair value of other equity and long-term investments, net ( 8,462 ) ( 6,638 ) ( 766 ) Interest and dividend income ( 6,369 ) ( 1,839 ) ( 1,524 ) Interest expense 15,789 19,070 18,331 Other expense, net 3,373 3,626 348 Total expenses 44,390 ( 53,410 ) ( 17,451 ) Income before income taxes 286,949 445,276 354,245 Income tax expense, net 66,687 76,439 60,431 Net income 220,262 368,837 293,814 Net income attributable to noncontrolling interests 6,341 102,983 69,412 Net income attributable to Innoviva stockholders $ 213,921 $ 265,854 $ 224,402 Basic net income per share attributable to Innoviva stockholders $ 3.07 $ 3.24 $ 2.21 Diluted net income per share attributable to Innoviva stockholders $ 2.37 $ 2.87 $ 2.02 Shares used to compute Innoviva basic and diluted net income per share: Shares used to compute basic net income per share 69,644 82,062 101,320 Shares used to compute diluted net income per share 95,248 94,310 113,554 See accompanying notes to consolidated financial statements. 87 Table of Contents INNOVIVA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Year Ended December 31, 2022 2021 2020 Net income $ 220,262 $ 368,837 $ 293,814 Reclassifications to net income — — ( 27 ) Comprehensive income 220,262 368,837 293,787 Comprehensive income attributable to noncontrolling interests 6,341 102,983 69,412 Comprehensive income attributable to Innoviva stockholders $ 213,921 $ 265,854 $ 224,375 See accompanying notes to consolidated financial statements. 88 Table of Contents INNOVIVA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) Additional Accumulated Other Total Common Stock Paid-In Comprehensive Accumulated Treasury Stock Noncontrolling Stockholders’ Shares Amount Capital Income (Loss) Deficit Shares Amount Interest Equity Balance as of January 1, 2020 101,288 $ 1,013 $ 1,258,859 $ 27 $ ( 946,404 ) — $ — $ 28,621 342,116 Distributions to noncontrolling interests — — — — — — — ( 30,474 ) ( 30,474 ) Equity activity of noncontrolling interests in a consolidated variable interest entity — — — — — — — 366 366 Exercise of stock options and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding 104 1 343 — — — — — 344 Stock-based compensation — — 1,698 — — — — — 1,698 Net income — — — — 224,402 — — 69,412 293,814 Other comprehensive income — — — ( 27 ) — — — — ( 27 ) Balance as of December 31, 2020 101,392 $ 1,014 $ 1,260,900 $ — $ ( 722,002 ) — $ — $ 67,925 $ 607,837 Distributions to noncontrolling interests — — — — — — — ( 59,457 ) ( 59,457 ) Equity activity of noncontrolling interests in a consolidated variable interest entity — — — — — — — ( 259 ) ( 259 ) Exercise of stock options and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding 179 2 1,107 — — — — — 1,109 Repurchase of common stock ( 32,005 ) ( 320 ) — — — 32,005 ( 393,829 ) — ( 394,149 ) Stock-based compensation — — 2,017 — — — — — 2,017 Net income — — — — 265,854 — — 102,983 368,837 Balance as of December 31, 2021 69,566 $ 696 $ 1,264,024 $ — $ ( 456,148 ) 32,005 $ ( 393,829 ) $ 111,192 $ 525,935 Cumulative adjustment due to adoption of ASU 2020-06 — — ( 65,467 ) — 37,238 — — — ( 28,229 ) Distributions to noncontrolling interests — — — ( 69,811 ) ( 69,811 ) Recognition of noncontrolling interest upon initial consolidation of Entasis — — — — — — — 38,471 38,471 Equity activity of noncontrolling interests in a consolidated variable interest entity — — ( 2 ) ( 2 ) Derecognition of noncontrolling interests upon sale of TRC — — — — 78 — — ( 61,304 ) ( 61,226 ) Derecognition of noncontrolling interests upon acquisition of Entasis noncontrolling interest — — ( 14,153 ) — — — — ( 28,009 ) ( 42,162 ) Exercise of stock options and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding 269 2 286 — — — — — 288 Capped call options associated with convertible senior notes due 2028 — — ( 16,585 ) — — — — — ( 16,585 ) Conversion of convertible subordinated notes due 2023 — — 3 — — — — — 3 Repurchase of common stock ( 647 ) ( 6 ) ( 8,497 ) — — — ( 8,503 ) Stock-based compensation — — 4,225 — — — — 3,122 7,347 Net income — — — — 213,921 — — 6,341 220,262 Balance as of December 31, 2022 69,188 $ 692 $ 1,163,836 $ — $ ( 204,911 ) 32,005 $ ( 393,829 ) $ — $ 565,788 See accompanying notes to consolidated financial statements. 89 Table of Contents INNOVIVA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2022 2021 2020 Cash flows from operating activities Net income $ 220,262 $ 368,837 $ 293,814 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes 25,006 76,432 60,420 Amortization of capitalized fees and depreciation of property and equipment 13,931 13,832 13,840 Amortization of acquired intangible assets 5,581 — — Fair value adjustments included in cost of products sold 10,023 — — Stock-based compensation 7,347 2,017 1,698 Amortization of debt discount and issuance costs 2,055 9,136 8,397 Changes in fair values of equity method investments, net 161,749 ( 84,392 ) ( 49,511 ) Changes in fair values of other equity and long-term investments, net ( 8,462 ) ( 4,917 ) ( 766 ) Loss on extinguishment of debt 20,662 — — Net gain on sale of TRC ( 266,696 ) — — Amortization of discount on short-term investments — — ( 343 ) Amortization of lease guarantee — — ( 135 ) Other non-cash items 3,402 ( 259 ) 21 Changes in operating assets and liabilities: Accounts receivable ( 3,525 ) — — Receivables from collaboration arrangements 13,319 ( 16,780 ) ( 14,504 ) Inventory 280 — — Prepaid expenses ( 21,350 ) 203 ( 678 ) Other assets ( 3,341 ) — — Accounts payable 92 ( 39 ) 56 Accrued personnel-related expenses and other accrued liabilities 11,913 ( 257 ) 804 Accrued interest payable 207 — — Deferred revenue ( 755 ) — — Income tax payable 10,026 — — Net cash provided by operating activities 201,726 363,813 313,113 Cash flows from investing activities Maturities of marketable securities — — 86,000 Purchases of marketable securities — — ( 12,943 ) Purchases of equity and long-term investments ( 58,725 ) ( 66,278 ) ( 87,981 ) Purchases of equity investments managed by ISP Fund LP ( 60,910 ) ( 190,970 ) ( 14,877 ) Purchases of trading security managed by ISP Fund LP ( 50,000 ) — — Sales of equity investments managed by ISP Fund LP 24,281 21,440 — Purchase and sales of other investments managed by ISP Fund LP, net ( 23,371 ) 279,530 ( 285,123 ) Purchases of property and equipment ( 67 ) — ( 13 ) Proceeds from sale of ownership interest in TRC, net 248,191 — — Cash acquired through the consolidation of Entasis 23,070 — — Cash paid for the acquisition of La Jolla, net of cash acquired ( 159,103 ) — — Net cash provided by (used in) investing activities ( 56,634 ) 43,722 ( 314,937 ) Cash flows from financing activities Distributions to noncontrolling interests ( 69,811 ) ( 59,457 ) ( 30,474 ) Purchase of Entasis noncontrolling interest ( 43,910 ) — — Repurchase of common stock ( 8,503 ) ( 394,149 ) — Repurchase of shares to satisfy tax withholding ( 82 ) ( 60 ) ( 92 ) Proceeds from issuances of common stock 370 1,169 436 Net proceeds from the issuance of variable interest entity’s equity — — 345 Payment for repurchase of convertible subordinated notes due 2023 ( 165,131 ) — — Purchases of capped call options associated with convertible senior notes due 2028 ( 21,037 ) — — Proceeds from issuance of convertible senior notes due 2028, net of issuance costs 252,536 — — Net cash used in financing activities ( 55,568 ) ( 452,497 ) ( 29,785 ) Net increase (decrease) in cash and cash equivalents 89,524 ( 44,962 ) ( 31,609 ) Cash and cash equivalents at beginning of period 201,525 246,487 278,096 Cash and cash equivalents at end of period $ 291,049 $ 201,525 $ 246,487 90 Table of Contents Year Ended December 31, 2022 2021 2020 Supplemental Disclosure of Cash Flow Information: Cash paid for interest $ 11,736 $ 9,933 $ 9,933 Cash paid for income taxes $ 53,855 $ — $ — Supplemental Disclosure of Non-cash Investing and Financing Activities: Adoption of ASU 2020-06 $ ( 28,228 ) $ — $ — See accompanying notes to consolidated financial statements. 91 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Operations Innoviva, Inc. (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 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. 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”). As such, we have a wholly owned robust infectious disease and hospital operating platform, as well as other assets in these 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. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Innoviva, our wholly owned subsidiaries and certain variable interest entities (“VIE”) for which we are the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income (loss) attributable to noncontrolling interest in our consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entity by the respective noncontrolling party. Presentation Reclassification Certain amounts in prepaid expenses and other current assets, other assets and changes in fair values of equity and long-term investments, net, reported in the Company's prior year financial statements have been reclassified to conform to the current year presentation. These reclassifications had no net effect on the net income or net cash flows as previously reported. 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”. • 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. Use of Management’s Estimates The preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. Management evaluates its significant accounting policies and estimates on an ongoing basis. We base our estimates on historical experience and other relevant assumptions that we believe to be reasonable under the circumstances. These estimates also form the basis for making judgments about the carrying values of assets and liabilities when these values are not readily apparent from other sources. 92 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Concentrations of Credit Risk and of Significant Suppliers and Partners Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and 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 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 account for 33 %, 29 % and 28 %, respectively, of our net product sales from the time of our acquisition of La Jolla through December 31, 2022 . These same customers account for 23 %, 37 % and 37 %, respectively, of our receivables from net product sales, which are included in “Accounts receivables, net” on our consolidated balance sheet as of December 31, 2022 . Segment Reporting 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 ® . Refer to Note 3, “Revenue Recognition”, for more information on our revenues for the periods presented. Our long-term assets are located within the United States. 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 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 93 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. 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. Investments in Marketable Securities We invest in short-term investments and marketable securities, primarily corporate notes, government securities, government agencies, and government commercial papers. We limit the amount of credit exposure with any one issuer, industry or geographic area for investments other than instruments backed by the U.S. federal government. We classify our marketable securities as available-for-sale securities and report them at fair value in cash equivalents or short-term marketable securities on the consolidated balance sheets with related unrealized gains and losses included as a component of stockholders’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest income on the consolidated statements of operations. Realized gains and losses, if any, on available-for-sale securities are included in interest income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest and dividend income. We regularly review all of our investments for other-than-temporary declines in estimated fair value. Our review includes the consideration of the cause of the impairment, including the creditworthiness of the security issuers, the number of securities in an unrealized loss position, the severity and duration of the unrealized losses, whether we have the intent to sell the securities and whether it is more likely than not that we will be required to sell the securities before the recovery of their amortized cost basis. When we determine that the decline in estimated fair value of an investment is below the amortized cost basis and the decline is other-than-temporary, we reduce the carrying value of the security and record a loss for the amount of such decline to other expense, net. Accounts Receivable Accounts receivable are recorded net of estimates for prompt-pay discounts, chargebacks, returns and rebates. 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. 94 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Inventory 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. Property and Equipment Property and equipment, which consisted of laboratory equipment, computer equipment, software, office furniture and fixtures, and leasehold improvements, were not material as of December 31, 2022 and 2021, respectively. Property and equipment are stated at cost less accumulated depreciation. Property and equipment are depreciated using the straight-line method as follows: Leasehold improvements Shorter of remaining lease terms or useful life Laboratory equipment, furniture and fixtures 5 - 7 years Software and computer equipment 3 years 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 consolidate them in our consolidated financial statements. If we determine that we do not have control over these companies under either voting or VIE models, we then determine if we have an ability to exercise significant influence via voting interests, board representation or other business relationships. We may account for the investments where we exercise significant influence using either an equity method of accounting or at fair value by electing the fair value option under Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments . If the fair value option is applied to an investment that would otherwise be accounted for under the equity method, we apply it to all our financial interests in the same entity (equity and debt, including guarantees) that are eligible items. All gains and losses from fair value changes, unrealized and realized, are presented as changes in fair values of equity method investments, net, and changes in fair values of other equity and long-term investments, net, on the consolidated statements of income. If we conclude that we do not have an ability to exercise significant influence over an investee, we may elect to account for the equity investment without a readily determinable fair value using the measurement alternative under ASC Topic 312, Investments - Equity Securities . This measurement alternative allows us to measure the equity investment at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. We also invest in ISP Fund LP, which investments consist of money market funds, trading and equity securities in the healthcare, pharmaceutical and biotechnology industries. Pursuant to the Partnership Agreement entered in December 2020, we became a limited partner of this partnership, and our contributions are subject to a 36-month lock-up period which restriction prevents us to have control and access to the contributions and related investments. These investments are classified as long-term investments on the consolidated balance sheets. Fair Value of Financial Instruments We define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. 95 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Our valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. We classify these inputs into the following hierarchy: Level 1 —Quoted prices for identical instruments in active markets. Level 2 —Quoted prices for similar instruments in active markets; quoted prices for identical 3or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Level 3 —Unobservable inputs and little, if any, market activity for the assets. Financial instruments include cash equivalents, accounts receivable, receivables from collaborative arrangements, accounts payable, and accrued liabilities, equity investments and convertible promissory notes. The carrying values of cash equivalents, receivables from collaborative arrangements, accounts payable, and accrued liabilities approximate their estimated fair values due to the relatively short-term nature of these instruments. Capitalized Fees Paid We capitalize fees paid to licensors related to agreements for approved products or commercialized products. We capitalize these fees as capitalized fees paid (“Capitalized Fees”) and amortize them on a straight-line basis over their estimated useful lives upon the commercial launch of the product, shortly after its regulatory approval. The estimated useful lives of these Capitalized Fees are determined on a country-by-country and product-by-product basis, as the later of the expiration or termination of the last patent right covering the compound in such product in such country and 15 years from first commercial sale of such product in such country, unless the Collaboration Agreement is terminated earlier. Consistent with our policy for classification of costs under the research and development collaborative arrangements, the amortization of these Capitalized Fees is recognized as a reduction of royalty revenue. 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. 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 useful life are not amortized and are tested for impairment at least annually on the first day of December of each year or more frequently if indicators for potential impairment exist or whenever events or changes in circumstances indicate that the asset’s carrying asset amount may not be recoverable. Intangible assets with definite useful lives are amortized on a straight-line basis over their respective remaining useful lives and are tested for impairment only if indicators for potential impairment exist or whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. Significant judgment may be involved in determining if an indicator of impairment has occurred. Operating 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. 96 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Revenue Recognition 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. Revenue is recognized when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. Revenue is recognized through a five-step process: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price for the contract; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue as a performance obligation is satisfied. Royalty Revenue 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. 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 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. 97 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Research and Development Expenses Research and development expenses are recognized in the period that services are rendered or goods are received. Research and development expenses 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 expenses 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 12, “Debt”, for more information. Fair Value of Stock‑Based Compensation Awards We use the Black-Scholes-Merton option pricing model to estimate the fair value of options granted under our equity incentive plans and rights to acquire stock granted under our employee stock purchase plan (“ESPP”). The Black-Scholes-Merton option valuation model requires the use of assumptions, including the expected term of the award and the expected stock price volatility. We use the “simplified” method as described in Staff Accounting Bulletin No. 107, “ Share-Based Payment ,” for the expected option term. We use our historical volatility to estimate expected stock price volatility. Restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) are measured based on the fair market values of the underlying stock on the dates of grant. Stock-based compensation expense is calculated based on awards ultimately expected to vest and is reduced for estimated forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates. Our estimated annual forfeiture rates for stock options, RSUs and RSAs are based on our historical forfeiture experience. The estimated fair value of stock options, RSUs and RSAs is expensed on a ratable or straight-line basis over the expected term of the grant or expected term of the vesting. Compensation expense is recorded over the requisite service period based on management’s best estimate as to whether it is probable that the shares awarded are expected to vest. Compensation expense for purchases under the ESPP is recognized based on the fair value of the common stock on the date of offering, less the purchase discount percentage provided for in the plan. Income Taxes We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and the tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The recognition and measurement of tax benefits requires significant judgment. Our judgment might change as new information becomes available. We continue to evaluate our deferred tax assets each reporting period to determine whether adjustments to our valuation allowance are required and deferred tax assets will be realized based on the consideration of all available positive and negative evidence, including the differences between our anticipated and actual future operating results, using a “more likely than not” standard. 98 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we determine whether the factors underlying the sustainability assertion have changed and whether the amount of the recognized tax benefit is still appropriate. Comprehensive Income Comprehensive income is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss) consists of changes in unrealized and realized gains and losses on our marketable securities and the related tax impact of these changes. Related Parties 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. Transactions with GSK are described in Note 3, “Revenue Recognition and Collaborative Arrangements.” Sarissa Capital ow ned 9.6 % of o ur outstanding common stock as of December 31, 2022 . Transactions with Sarissa Capital are described in Note 5, “Consolidated Entities and Acquisitions”. Sarissa Capital is considered to be a related party because two of its principals are members of our board of directors. Accounting Pronouncements 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): 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. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new standard also requires the if-converted method to be used to calculate diluted earnings per share (“EPS”) for convertible instruments. Effective January 1, 2022, we adopted the new standard using the modified retrospective approach and assessed the effect of this adoption on the accounting for our outstanding convertible notes. The effect of the adoption on our 2025 Notes (as defined below) resulted in a decrease to the opening balance of accumulated deficit of $ 37.2 million, a reduction to additional paid-in capital of $ 65.4 million, an increase to the balance of the notes by an aggregate amount of $ 35.6 million, and an increase to deferred tax assets of $ 7.4 million. The dilutive EPS of our 2025 Notes will be computed under the if-converted method going forward. There was no financial impact from the implementation of the standard for our 2023 Notes (as defined below). Refer to Note 12, “Debt”, 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 Topic 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 consolidated financial statements. 2. NET INCOME PER SHARE Basic net income per share attributable to Innoviva stockholders is computed by dividing net income attributable to Innoviva stockholders by the weighted-average number of shares of common stock outstanding. Diluted net income per share attributable to Innoviva stockholders is computed by dividing net income attributable to Innoviva stockholders by the weighted-average number of shares of common stock and dilutive potential common stock equivalents then outstanding. Dilutive potential common stock equivalents include the assumed exercise, vesting and issuance of employee stock awards using the treasury stock method, as well as common stock issuable upon assumed conversion of our convertible subordinated notes due 2023 (the “2023 Notes”), our convertible senior notes due 2025 (the “2025 Notes”), and our convertible senior notes due 2028 (the “2028 Notes”) using the if-converted method. 99 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 th e 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 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 was no dilutive effect of the assumed conversion premium for the years ended December 31, 2021 and 2020 respectively. The dilutive EPS of the notes was $ 0.31 per sh are using the if-converted method for the year ended December 31, 2022 as a result of the adoption of ASU 2020-06. The following table shows the computation of basic and diluted net income per share for the years ended December 31, 2022, 2021 and 2020: Year Ended December 31, (In thousands except per share data) 2022 2021 2020 Numerator: Net income attributable to Innoviva stockholders, basic $ 213,921 $ 265,854 $ 224,402 Add: interest expense on 2023 Notes, net of tax effect 2,439 4,736 4,717 Add: interest expense on 2025 Notes, net of tax effect 4,583 — — Add: interest expense on 2028 Notes, net of tax effect 4,626 — — Net income attributable to Innoviva stockholders, diluted $ 225,569 $ 270,590 $ 229,119 Denominator: Weighted-average shares used to compute basic net income per share attributable to Innoviva stockholders 69,644 82,062 101,320 Dilutive effect of 2023 Notes 6,188 12,189 12,189 Dilutive effect of 2025 Notes 11,150 — — Dilutive effect of 2028 Notes 8,158 — — Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan 108 59 45 Weighted-average shares used to compute diluted net income per share attributable to Innoviva stockholders 95,248 94,310 113,554 Net income per share attributable to Innoviva stockholders Basic $ 3.07 $ 3.24 $ 2.21 Diluted $ 2.37 $ 2.87 $ 2.02 Anti‑dilutive Securities The following common stock equivalents were not included in the computation of diluted net income per share because their effect was anti‑dilutive: Year Ended December 31, (In thousands) 2022 2021 2020 Outstanding options and awards granted under equity incentive plan and employee stock purchase plan 648 979 1,193 Outstanding stock warrant 282 — — Total 930 979 1,193 3. 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 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 ® . 100 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Net revenue recognized under our GSK Agreements was as follows: Year Ended December 31, (In thousands) 2022 2021 2020 Royalties - RELVAR/BREO $ 215,034 $ 234,066 $ 221,536 Royalties - ANORO 38,405 44,935 45,992 Royalties - TRELEGY (1) 72,029 126,688 73,089 Total royalties 325,468 405,689 340,617 Less: amortization of capitalized fees paid ( 13,823 ) ( 13,823 ) ( 13,823 ) Royalty revenue 311,645 391,866 326,794 Strategic alliance - MABA program — — 10,000 Total net royalty revenue $ 311,645 $ 391,866 $ 336,794 (1) The year ended December 31, 2022 represents the period from January 1, 2022 to July 20, 2022, the date of the sale of our ownership interest in TRC. LABA Collaboration As a result of the launch and approval of RELVAR ® /BREO ® ELLIPTA ® and ANORO ® ELLIPTA ® in the U.S., Japan and Europe, we paid milestone fees to GSK totaling $ 220.0 million during the year ended December 31, 2014. 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 product. The amortization is recorded as a reduction to the royalties from GSK. We are entitled to receive annual 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. Sales of single‑agent LABA medicines and combination medicines would be combined for the purposes of this royalty calculation. For other products combined with a LABA from the LABA Collaboration, such as ANORO ® ELLIPTA ® , royalties are upward tiering and range from 6.5 % to 10 %. We are also entitled to 15 % of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to TRC in connection with the Spin-Off, including TRELEGY ® ELLIPTA ® , which royalties are upward tiering and range from 6.5 % to 10 %. 2004 Strategic Alliance During the year ended December 31, 2020, we recognized $ 10.0 million in revenue from a termination fee paid in connection with the termination of the Bifunctional Muscarinic Antagonist-Beta2 Agonist (“MABA”) program under the Strategic Alliance Agreement with GSK. 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 were $ 19.7 million, consisting of net sales of GIAPREZA ® and XERAVA ® for $ 14.2 million and $ 5.5 million, respectively. We derived approximately 96 % and 4 % of our net product sales for the same period from customers located in the U.S. and the rest of the world, respectively. 101 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. LICENSE AND COLLABORATION ARRANGEMENTS Out-License Agreements Zai Lab Entasis entered into a license and collaboration agreement with Zai Lab (Shanghai) Co., Ltd. (“Zai Lab”), 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 ar e 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. No revenue was recognized under the Zai Agreement from the acquisition date of Entasis. 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 December 31, 2022 are not material. GARDP 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 December 31, 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. 102 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) PAION AG 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 December 31, 2022. Royalty revenue recognized under this agreement from the date of acquisition of La Jolla to December 31, 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. Amounts recognized under this agreement from the date of acquisition of La Jolla to December 31, 2022 were not material. 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 December 31, 2022. Royalty revenue recognized under this agreement from the date of acquisition of La Jolla to December 31, 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 initially recognized a $ 2.8 million partial prepayment for XERAVA ® as deferred revenue, of which, $ 0.8 million was recognized as revenue for the year ended December 31, 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 December 31, 2022, the amounts recognized under this agreement were not material. 103 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 December 31, 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 December 31, 2022 , amounts recognized under this agreement were not material. 5. CONSOLIDATED ENTITIES AND ACQUISITIONS Consolidated Entities Theravance Respiratory Company, LLC 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 because we had the power to direct the economically significant activities of TRC and the obligation to absorb losses of, or the right to receive benefits from, TRC. 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 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. In connection with 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. We accounted for the transaction similar to an upstream sale between a parent and a VIE under ASC 810-10. As such, 104 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ITH recorded the transferred investments at their respective carrying values and no gain or loss was recognized in the consolidated statement of income. The summarized financial information for 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) December 31, 2021 Assets Cash and cash equivalents $ 50,713 Receivables from collaborative arrangements 42,492 Prepaid expenses and other current assets 71 Equity and long-term investments 37,695 Total assets $ 130,971 Liabilities and LLC Members’ Equity Current liabilities $ 252 LLC members’ equity 130,719 Total liabilities and LLC members’ equity $ 130,971 Income statements Year Ended December 31, (In thousands) 2022 (1) 2021 2020 Royalty revenue $ 72,029 $ 126,688 $ 73,089 Revenue from collaborative arrangements — — 10,000 Total net revenue 72,029 126,688 83,089 Operating expenses 332 3,956 2,612 Income from operations 71,697 122,732 80,477 Other income, net 10 — 38 Realized loss ( 39,386 ) — — Income tax expense, net 1 — — Changes in fair values of other equity and long-term investments ( 8,884 ) ( 1,541 ) 1,147 Net income $ 23,438 $ 121,191 $ 81,662 (1) The year ended December 31, 2022 represents the period from January 1, 2022 to July 20, 2022, the date of the sale of our ownership interest in TRC. ISP Fund LP 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, the 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. 105 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In May 2021, Strategic Partners received a distribution of $ 110.0 million from the Partnership to provide funding to Innoviva for a strategic repurchase of the Company's shares held by GSK. 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 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. As of December 31, 2022 , we continued to hold 100 % of the economic interest of Partnership. As of December 31, 2022 and 2021, total assets of the Partnership were $ 320.6 million and $ 195.8 million, respectively, of which the majority was attributable to equity, debt and long-term investments. As of December 31, 2022 and 2021, total liabilities of the Partnership w ere $ 1.6 mill ion and $ 0.2 million, respectively. The Partnership's assets can only be used to settle its own obligations. During the year ended December 31, 2022, the Partnership incurred $ 5.2 million in net investment-related expenses, generated $ 2.0 million interest income, recorded $ 6.8 million in net realized gains and $ 9.9 million in net unrealized losses as changes in fair values of other equity and long-term investments, net, on the consolidated statements of income. During the year ended December 31, 2021, the Partnership incurred $ 3.6 million in net investment-related expense, generated $ 1.8 million interest and dividend income, and recorded net $ 10.5 million realized gains and net $ 2.4 million unrealized losses as changes in fair values of other equity and long-term investments, net, on the consolidated statements of income. We account for the long-term investments held by ISP Fund LP as equity investments measured at fair value and an investment in convertible notes as trading security. Acquisitions 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 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 had the right to designate two members to Entasis’ board of directors. 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 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 bore an annual interest rate of 0.59 % and was due to mature and become 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’ financial position and results of operations effective on February 17, 2022. 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 $ 7.8 million loss in the first quarter of 2022 which was included in changes in fair values of equity method investments, net, on the consolidated statements of income for the year ended December 31, 2022. 106 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) We completed our acquisition of Entasis’ remaining noncontrolling interest on July 11, 2022. We remeasured our holdings in Entasis as of that date and recognized a $ 1.4 million loss, which was included in changes in fair values of equity method investments, net, on the consolidated statement of income for the year ended December 31, 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 noncontrolling 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 preliminary estimates of fair value of assets acquired and liabilities assumed based on new and additional information related to product sales forecast provided by Entasis and deferred tax liabilities. During the year ended December 31, 2022, we recorded measurement period adjustments of $ 4.7 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 year ended December 31, 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 represents the adjusted fair values of the assets acquired and liabilities assumed by us in the transaction: (In thousands) February 17, 2022 Cash and cash equivalents $ 23,070 Prepaid expenses 5,554 Other current assets 1,959 Property and equipment, net 185 Right-of-use assets 959 Goodwill 10,260 Intangible assets 107,500 Other assets 302 Total assets acquired $ 149,789 Accounts payable $ 1,583 Accrued personnel-related expenses 1,058 Other accrued liabilities 5,096 Deferred tax liabilities 7,336 Total liabilities assumed $ 15,073 Total assets acquired, net $ 134,716 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 8, “Goodwill and Intangible Assets”, for more discussion on the intangible assets recognized as part of this acquisition. Our consolidated net income for the year ended December 31, 2022 included the net loss attributable to noncontrolling interest since the consolidation date until the date of acquisition of $ 13.6 million. 107 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 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. During the year ended December 31, 2022, we recorded measurement period adjustments of $ 3.7 million increase in goodwill, primarily related to a decrease in inventory and intangible assets of $ 7.7 million and $ 1.5 million, respectively, and an increase in deferred tax liabilities of $ 2.6 million, partially offset by a decrease in other long-term liabilities of $ 8.3 million. The cumulative impact of the measurement period adjustments included in the consolidated net income for the year ended December 31, 2022 was not material. 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 approximate ly $ 5.3 million in acquisition-related costs in connection with this acquisition and such amount is included in selling, general and administrative exp enses for the year ended December 31, 2022. The following table summarizes the adjusted allocation of the fair values assigned to the assets acquired and liabilities assumed as of the date of the acquisition: (In thousands) August 22, 2022 Cash and cash equivalents $ 47,415 Short-term marketable securities 471 Accounts receivable 5,876 Inventory 66,200 Prepaid expenses 1,261 Other current assets 907 Property and equipment, net 13 Right-of-use assets 226 Goodwill 16,453 Intangible assets 151,000 Other assets 710 Total assets acquired $ 290,532 Accounts payable $ 1,237 Deferred revenue 2,849 Other accrued liabilities 11,362 Other long-term liabilities 65,944 Deferred tax liabilities 2,581 Total liabilities assumed $ 83,973 Total assets acquired, net $ 206,559 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 8, “Goodwill and Intangible Assets”, for more discussion on the intangible assets recognized as part of this acquisition. 108 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Pro Forma Financial Information The following table presents certain unaudited pro-forma financial information for the years ended December 31, 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, 2021, 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. Year Ended December 31, (In thousands) 2022 2021 Revenue $ 357,880 $ 435,398 Net income $ 204,987 $ 281,719 Net income attributable to Innoviva stockholders $ 214,390 $ 197,535 6. EQUITY AND LONG-TERM INVESTMENTS AND FAIR VALUE MEASUREMENTS Equity Method Investment in Armata During the first quarter of 2020, Innoviva acquired 8,710,800 shares of common stock as well as warrants to purchase 8,710,800 additional shares of common stock of Armata Pharmaceuticals, Inc. (“Armata”) for approximately $ 25.0 million in cash. Armata is a clinical stage biotechnology company focused on precisely targeted bacteriophage therapeutics for antibiotic-resistant infections. During the first quarter of 2021, ISO entered into a securities purchase agreement with Armata to acquire 6,153,847 shares of Armata common stock and warrants to purchase 6,153,847 additional shares of Armata common stock for approximately $ 20.0 million. Armata also entered into a voting agreement with the Company and ISO, pursuant to which the Company and ISO agreed not to vote or take any action by written consent with respect to any common shares held by the Company and ISO that represent, in the aggregate, more than 49.5 % of the total number of shares of Armata’s common stock for voting on the matters related to election or removal of Armata’s board members. The voting agreement will expire the earlier of the second anniversary of the agreement effective date and approval by the FDA of any of Armata’s product candidates for marketing and commercial distribution. During the fourth quarter of 2021, ISO also purchased an additional 1,212,122 shares of Armata common stock for approximately $ 4.0 million. On February 9, 2022, ISO entered into a securities purchase agreement with Armata to acquire 9,000,000 shares of Armata common stock and warrants to purchase 4,500,000 additional shares of common stock with an exercise price of $ 5.00 per share for $ 45.0 million. The investment closed in two tranches on February 9, 2022 and March 31, 2022. The investment is intended to aid Armata in advancing its clinical pipeline and strengthening its bacteriophage platform. On February 9, 2022, Armata also entered a second amended and restated voting agreement with the Company and ISO, pursuant to which the Company and ISO agreed not to vote or take any action by written consent with respect to any common shares held by the Company and ISO that represent, in the aggregate, more than 49.5 % of the total number of shares of Armata’s common stock for voting on the matters related to election or removal of Armata’s board members or amend the bylaws of Armata to reduce the maximum number of directors or set the number of directors who may serve on the board of Armata. The voting agreement will expire the earlier of the second anniversary of the agreement effective date and approval by the FDA of any of Armata’s product candidates for marketing and commercial distribution. In addition, as of February 9, 2022, Armata entered into an amended and restated investor rights agreement with the Company and ISO, pursuant to which for as long as the Company and ISO hold at least 12.5 % of the outstanding shares of Armata’s common stock on a fully-diluted, the Company and ISO shall have the right to designate two directors to Armata’s board of directors, and for so long as the Company and ISO hold at least 8 %, but less than 12.5 %, of the outstanding shares of Armata’s common stock on a fully-diluted basis, the Company and ISO shall have the right to designate one director to Armata’s board of directors, subject to certain conditions and qualifications set forth in the amended and restated investor rights agreement. As of December 31, 2022, three of the eight members of Armata’s board of directors are also members of the board of directors of Innoviva. As of December 31, 2022 and 2021, we owned approximately 69.4 % an d 59.3 %, respectively, of Armata’s common stock. 109 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The investments in Armata provide Innoviva and ISO the ability to have significant influence, but not control over Armata’s operations. Armata’s business and affairs are managed under the direction of its board of directors, which Innoviva and ISO do not control. Based on our evaluation, we determined that Armata is a VIE, but Innoviva and ISO are not the primary beneficiary of the VIE. We have not provided financial or other support that we were not previously contractually required to provide during the periods presented. Our maximum exposure to loss is equal to the amount we invested in the entity. 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. The warrants purchased in 2020, 2021 and 2022 have an exercise price of $ 2.87 , $ 3.25 and $ 5.00 per share, respectively. All warrants are exercisable immediately within five years from the issuance date of the warrants and include a cashless exercise option. We use the Black-Scholes-Merton pricing model to estimate the fair value of these warrants with the following input assumptions: Armata’s closing market price on the valuation date, the risk-free interest rate computed based on the U.S. Treasury yield, the remaining contractual term as the expected term, and the expected stock price volatility calculated based on the historical volatility of the common stock of Armata and its peer companies. As of Dece mber 31, 2022, the fair values of our holdings of Armata common stock and warrants were estimated at $ 31.1 million and $ 8.1 million, respectively. As of December 31, 2021, the fair values of our holdings of Armata common stock and warrants were estimated at $ 88.1 million and $ 58.6 million, respectively. The total fair value of both financial instruments in the amount of $ 39.2 million and $ 146.7 million was recorded as equity and long-term investments on the consolidated balance sheets as of December 31, 2022 and 2021, respectively. We recorded $ 152.5 million unrealized losses and $ 78.7 million unrealized gains as changes in fair values of equity method investments, net, on the consolidated statements of income for the years ended December 31, 2022 and 2021, respectively. The summarized financial information, including the portion we do not own, is presented for Armata on a one quarter lag regardless of the date of our investments as follows: Balance Sheet Information September 30, (In thousands) 2022 2021 Current assets $ 33,245 $ 14,178 Noncurrent assets $ 59,636 $ 28,493 Current liabilities $ 7,004 $ 5,254 Noncurrent liabilities $ 40,300 $ 13,662 Income Statement Information Twelve Months Ended Nine Months Ended September 30, September 30, (In thousands) 2022 2021 2020 Revenue $ 5,446 $ 3,989 $ 319 Loss from operations $ ( 32,666 ) $ ( 24,227 ) $ ( 15,134 ) Net loss $ ( 32,650 ) $ ( 23,732 ) $ ( 15,557 ) 110 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Equity Method Investment in Entasis Prior to the consolidation of Entasis’ financial position and results of operations in February 2022, we accounted for Entasis as an equity method investment. Refer to Note 5, “Consolidated Entities and Acquisitions”, for more information. The summarized financial information, including the portion we did not own, is presented for Entasis on a one quarter lag regardless of the date of our investments as follows: Balance Sheet Information (In thousands) September 30, 2021 Current assets $ 49,746 Noncurrent assets $ 1,020 Current liabilities $ 9,348 Noncurrent liabilities $ 183 Income Statement Information Twelve Months Ended September 30, Six Months Ended September 30, (In thousands) 2021 2020 Loss from operations $ ( 52,323 ) $ ( 26,080 ) Net loss $ ( 125,413 ) $ ( 24,529 ) Equity Investment in InCarda 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 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 InRhythmTM (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 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 December 31, 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. In September 2021, TRC and InCarda entered into an amendment to extend the expiration date of the InCarda 2020 Warrant from October 6, 2021 to March 31, 2022. On March 9, 2022, TRC and InCarda entered into an amendment to further extend the expiration date of the InCarda 2020 Warrant from March 31, 2022 to March 31, 2023 . The InCarda 2020 Warrant is recorded at fair value and subject to remeasurement at each balance sheet date. On March 9, 2022, TRC entered into a Note and Warrant Purchase Agreement (the “InCarda Agreement”) with InCarda to acquire a convertible promissory note (the “InCarda Convertible Note”) and warrants (the “InCarda 2022 Warrant”) for $ 0.7 million. The InCarda Convertible Note bears an annual interest rate of 6 % and will convert into Series D preferred stock upon a qualified financing, non-qualified financing, or maturity conversion. A qualified financing is defined as the first issuance or series of related issuances by InCarda of its equity securities following March 9, 2022 from which InCarda receives immediately available gross proceeds of at least $ 10.0 million (excluding the aggregate amount of any notes converted into equity securities pursuant to the conversion of notes or any other debt securities converted into equity securities) (the “Qualified Financing Amount”). A non-qualified financing is defined as the first issuance or series of related issuances by InCarda of its equity securities following March 9, 2022 from which InCarda receives immediately available gross proceeds of less than the Qualified Financing Amount. The InCarda 2022 Warrant entitles TRC to purchase a number of shares of equity securities equal to 100 % of the principal amount of the InCarda Convertible Note divided by the number of shares issued in InCarda’s next equity financing, which is defined as the earliest to occur of specific financing events, including capital raises through public offerings. The InCarda 2022 Warrant expires on March 9, 2027. The InCarda Convertible Note and InCarda 2022 Warrant are measured at fair value. On June 15, 2022, the principal amount and the accrued interest of the InCarda Convertible Note were converted into equity securities. In addition, TRC participated in InCarda’s Series D preferred stock financing by investing $ 2.3 million. In connection with the new round of financing, InCarda recapitalized its equity structure resulting in TRC owning 4,093,886 shares of InCarda’s common 111 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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-1 preferred stock at $ 0.20 per share. As of December 31, 2022 and 2021, we held 9.0 % and 13.0 % of InCarda equity ownership, respectively. 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 are not the primary beneficiary of the VIE. We have not provided financial or other support that we were not previously contractually required to provide during the periods presented. Our maximum exposure to loss is equal to the amount we invested in the entity. 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. Due to InCarda’s equity recapitalization in the second quarter of 2022, TRC reassessed the value of its investments in InCarda using the Option Pricing Model Backsolve valuation methodology. Key assumptions used in the valuation model include an expected holding period of two years , a risk free interest rate of 3.2 %, a dividend yield of 0.0 % and an estimated volatility of 122.0 %. The estimated volatility is calculated based on the historical volatility of a selected peer group of public companies comparable to InCarda. We recognized an impairment charge of $ 9.0 million as a result of the valuation. There was no impairment or other change to the value of our investments in InCarda as of December 31, 2021. As of December 31, 2022, we recorded $ 6.8 million in fair value of InCarda’s Series C preferred stock and $ 0.6 million in fair value of Series C warrants and Series D warrants (the “InCarda Preferred Stock Warrants”). As of December 31, 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 the InCarda 2020 Warrant. As of December 31, 2021, we recognized $ 15.8 million for the investment in InCarda’s Series C preferred stock using the measurement alternative. We recorded $ 8.7 million and $ 0.7 million unrealized loss as changes in fair values of other equity and long-term investments, net, on the consolidated statements of income for the years ended December 31, 2022 and 2021, respectively. 112 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Equity Investment in ImaginAb On March 18, 2021, TRC entered into a securities purchase agreement with ImaginAb, Inc. (“ImaginAb”) to purchase 4,051,724 shares of ImaginAb Series C preferred stock for $ 4.7 million. On the same day, TRC also entered into a securities purchase agreement with one of ImaginAb’s common stockholders to purchase 4,097,157 shares of ImaginAb common stock for $ 1.3 million. ImaginAb is a privately held biotechnology company focused on clinically managing cancer and autoimmune diseases via molecular imaging. $ 0.4 million was incurred for investment due diligence costs and execution and recorded as part of the equity and long-term investment on the consolidated balance sheets. 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 December 31, 2022 , one of ImaginAb’s six board members is designated by ITH, and ITH held 12.7 % of ImaginAb’s 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. We have not provided financial or other support that we were not previously contractually required to provide during the periods presented. Our maximum exposure to loss is equal to the amount we invested in the entity. 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. Under the measurement alternative, the equity investment is initially recorded at its allocated cost, but the carrying value may be adjusted through earnings upon an impairment or when there is an observable price change involving the same or a similar investment with the same issuer. As of December 31, 2022 and 2021, $ 6.4 million was recorded as equity and long-term investments on the consolidated balance sheets and there was no change to the fair value of our investment in ImaginAb. Convertible Promissory Note in Gate Neurosciences On November 24, 2021, TRC entered into a Convertible Promissory Note Purchase Agreement with Gate Neurosciences, Inc. (“Gate”) to acquire a convertible promissory note (the “Convertible Note”) with a principal amount of $ 15.0 million. Gate is a privately held biopharmaceutical company focused on developing the next generation of targeted nervous system therapies, leveraging precision medicine approaches to develop breakthrough drugs for psychiatric and neurologic diseases. The investment is intended to fund its ongoing development and research. The Convertible Note bears an annual interest rate of 8 % and will convert into common stock shares upon a qualified event or into shares of shadow preferred stock (“Shadow Preferred”) upon a qualified financing. A qualifying event can be a qualified initial price offering, a qualified merger, or a merger with a special-purpose acquisition company (“SPAC”). Shadow Preferred means preferred stock having identical rights, preferences and restrictions as the preferred stock that would be issued in a qualified financing. The number of common stock shares to be issued in a qualified event shall be equal to the amount due on the conversion date divided by the lesser of a capped conversion price (the “Capped Conversion Price”) and the qualified event price (the “Qualified Event Price”). The Capped Conversion Price is calculated as $50.0 million divided by the number of common stock outstanding at such time on a fully diluted basis. The Qualified Event Price is the price per share determined by the qualified event. A qualified financing is a sale or series of sales of preferred stock where (i) at least 50 percent of counterparties are not existing shareholders, (ii) net proceeds to Gate are at least $35.0 million, and (iii) the stated or implied equity valuation of Gate is at least $80.0 million. 113 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) On July 20, 2022, under the terms of the TRC Equity Purchase Agreement, TRC transferred to ITH its debt investment in Gate. 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. As of December 31, 2022 and 2021, the fair value of the Gate Convertible Note was estimated at $ 15.7 million and $ 15.1 million, respectively, and recorded as equity and long-term investments on the consolidated balance sheets. We recorded $ 0.6 million of unrealized gain and $ 0.8 million of unrealized loss as changes in fair values of other equity and long-term investments, net, on the consolidated statements of income for the years ended December 31, 2022 and 2021, respectively. Equity Investment in Nanolive On February 18, 2022, TRC entered into an investment and shareholders agreement with Nanolive SA (“Nanolive”) to purchase 18,750,000 shares of Nanolive Series C preferred stock for $ 9.8 million (equivalent to 9.0 million CHF). Nanolive SA is a Swiss privately held life sciences company focused on developing breakthrough imaging solutions that accelerate research in growth industries such as drug discovery and cell therapy. $ 0.7 million was incurred for investment due diligence costs and execution and recorded as part of the equity and long-term investment on the consolidated balance sheets. 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 December 31, 2022 , one of Innoviva designees is serving on Nanolive’s seven -member board. As of December 31, 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. We have not provided financial or other support that we were not previously contractually required to provide during the periods presented. Our maximum exposure to loss is equal to the amount we invested in the entity. 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 December 31, 2022 , $ 10.6 million was recorded as equity and long-term investments on the consolidated balance sheets and there was no change to the fair value of our investment. Available-for-Sale Securities The estimated fair value of available-for-sale securities is based on quoted market prices for these or similar investments that were based on prices obtained from a commercial pricing service. Available-for-sale securities are summarized below: December 31, 2022 Gross Gross Amortized Unrealized Unrealized Estimated (In thousands) Cost Gains Losses Fair Value Money market funds (1) $ 263,469 $ — $ — $ 263,469 Total $ 263,469 $ — $ — $ 263,469 (1) Money market funds are included in cash and cash equivalents on the consolidated balance sheets. December 31, 2021 Gross Gross Amortized Unrealized Unrealized Estimated (In thousands) Cost Gains Losses Fair Value Money market funds (1) $ 145,132 $ — $ — $ 145,132 Total $ 145,132 $ — $ — $ 145,132 (1) Money market funds are included in cash and cash equivalents on the consolidated balance sheets. As of December 31, 2022, all investments were money market funds, and there was no credit loss recognized. 114 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Fair Value Measurements Our available-for-sale securities, equity and long-term investments are measured at fair value on a recurring basis and our debt is carried at amortized cost basis. The estimated fair values were as follows: Estimated Fair Value Measurements as of December 31, 2022 Using: Quoted Price in Active Markets for Significant Other Significant Identical Observable Unobservable Types of Instruments Assets Inputs Inputs (In thousands) Level 1 Level 2 Level 3 Total Assets Money market funds $ 263,469 $ — $ — $ 263,469 Investments held by ISP Fund LP (1) 265,982 — 54,578 320,560 Equity investment - Armata Common Stock 31,095 — — 31,095 Equity investment - Armata Warrants — 8,059 — 8,059 Equity investment - InCarda Warrants — — 605 605 Convertible debt investment - Gate Note — — 15,700 15,700 Total assets measured at estimated fair value $ 560,546 $ 8,059 $ 70,883 $ 639,488 Liabilities Debt 2023 Notes $ — $ 96,089 $ — $ 96,089 2025 Notes — 197,807 — 197,807 2028 Notes — 211,768 — 211,768 Total fair value of debt $ — $ 505,664 $ — $ 505,664 Contingent value rights — — 595 595 Total liabilities at estimated fair value $ — $ 505,664 $ 595 $ 506,259 (1) The investments held by ISP Fund LP, consisted of $ 295.4 million in equity investments, which included private placement positions and convertible notes of $ 54.6 million, and $ 25.1 million in money market funds. Our total capital contribution of $ 300.0 million is subject to a 36-month lock-up period from the date of such capital contributions. Estimated Fair Value Measurements as of December 31, 2021 Using: Quoted Price in Active Significant Markets for Other Significant Identical Observable Unobservable Types of Instruments Assets Inputs Inputs (In thousands) Level 1 Level 2 Level 3 Total Assets Money market funds $ 145,132 $ — $ — $ 145,132 Investments held by ISP Fund LP (1) 193,677 — 2,068 195,745 Equity investment - Armata Common Stock 88,101 — — 88,101 Equity investment - Armata Warrants — 58,595 — 58,595 Equity investment - Entasis Common Stock 62,794 — — 62,794 Equity investment - Entasis Warrants — 40,914 — 40,914 Equity investment - InCarda Warrants — — 411 411 Convertible debt investment - Gate Note — — 15,100 15,100 Total assets measured at estimated fair value $ 489,704 $ 99,509 $ 17,579 $ 606,792 Debt 2023 Notes $ — $ 261,769 $ — $ 261,769 2025 Notes — 234,498 — 234,498 Total fair value of debt $ — $ 496,267 $ — $ 496,267 (1) The investments held by ISP Fund LP, consisted of $ 192.2 million equity investments and $ 3.5 million money market funds, are subject to a 36 -month lock-up period from our initial contribution date, December 11, 2020. 115 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The fair values of our equity investments in Armata’s and Entasis’s common stock and public traded investments held by ISP Fund LP are based on the quoted prices in active markets and are classified as Level 1 financial instruments. The fair values of the warrants of Armata and Entasis classified within Level 2 are based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. InCarda’s equity securities, Gate's 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. 7. CAPITALIZED FEES PAID Capitalized fees paid, which consist of registrational and launch-related milestone fees paid to GSK, were as follows: December 31, (In thousands) Amortization period 2022 2021 United States 2013-2030 $ 120,000 $ 120,000 Europe 2013-2029 60,000 60,000 Japan 2013-2029 40,000 40,000 Gross carrying value 220,000 220,000 Accumulated amortization ( 122,393 ) ( 108,570 ) Net carrying value $ 97,607 $ 111,430 These milestone fees are amortized over their estimated useful lives commencing upon the commercial launch of the product in their respective regions with the amortization recorded as a reduction in revenue from collaborative arrangements. As of December 31, 2022, the weighted average remaining amortization period was 7.1 y ears. Additional information regarding these milestone fees is included in Note 3, “Revenue Recognition”. Amortization for each of the years ended December 31, 2022, 2021 and 2020 was $ 13.8 million . The remaining estimated amortization is $ 13.8 million for each of the years from 2023 to 2027 and $ 28.6 million thereafter. 8. GOODWILL AND INTANGIBLE ASSETS Goodwill and intangible assets acquired are recognized at fair value as of the acquisition date. The carrying amount of goodwill as of December 31, 2022 was $ 26.7 million . We have not recognized any impairment losses related to goodwill and intangible assets 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 December 31, 2022 were as follows: Useful Life Gross Accumulated Net Carrying (In thousands) (Years) Amount Amortization Amount Marketed products 8 - 10 $ 151,000 $ ( 5,581 ) $ 145,419 In-process research and development 72,100 — 72,100 Collaboration agreement 35,400 — 35,400 Total $ 258,500 $ ( 5,581 ) $ 252,919 Intangible assets recognized as a result of the acquisition of Entasis amounted to $ 107.5 million, which consisted 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 lives 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 year ended December 31, 2022. 116 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Intangible assets recognized as a result of the acquisition of La Jolla amounting to $ 151.0 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 $ 5.6 million for the year ended December 31, 2022 . Future amortization expense is expected to be $ 15.4 million for each of the years from 2023 to 2027 and $ 68.2 million thereafter. 9. BALANCE SHEET COMPONENTS Inventory Inventory consisted of the following: (In thousands) December 31, 2022 Raw materials $ 5,757 Work-in-process 25,052 Finished goods 25,088 Total inventory $ 55,897 As of December 31, 2022 , total inventory included net fair value adjustments resulting from the acquisition of La Jolla of approximately $ 49.5 million, which will be recognized as cost of products sold when sales occur in future periods. The fair value adjustments recorded as part of cost of products sold amounted to $ 10.0 million for the year ended December 31, 2022 . There was no inventory as of December 31, 2021. Other Accrued Liabilities Other accrued liabilities consisted of the following: December 31, (In thousands) 2022 2021 Accrued contract manufacturing expenses $ 8,382 $ — Accrued clinical expenses 692 — Accrued research expenses 349 — Accrued professional services 3,977 894 Current portion of lease liabilities 1,316 106 Current portion of deferred royalty obligation 2,639 — Accrued license fees and royalties 943 — Other 2,909 9 Total other accrued liabilities $ 21,207 $ 1,009 Other Long-Term Liabilities Other long-term liabilities consisted of the following: (In thousands) December 31, 2022 Long-term portion of deferred royalty obligation $ 67,947 Long-term portion of lease liabilities 2,376 Contingent value rights liability 595 Total other long-term liabilities $ 70,918 There were no other long-term liabilities as of December 31, 2021. 117 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. STOCK‑BASED COMPENSATION Equity Incentive Plans In May 2012, we adopted the 2012 Equity Incentive Plan (the “2012 Plan”). The 2012 Plan provides for the grant of incentive stock options, nonstatutory stock options, RSAs, RSUs and Stock Appreciation Rights to employees, non-employee directors and consultants. As of December 31, 2022 , total shares remaining available for issuance under the 2012 Plan were 3,838,270 . Employee Stock Purchase Plan Under the 2004 Employee Stock Purchase Plan (the “ESPP”), our employees may purchase common stock through payroll deductions at a price equal to 85 % of the lower of the fair market value of the stock at the beginning of the offering period or at the end of each applicable purchase period. The ESPP provides for consecutive and overlapping offering periods of 24 months in duration, with each offering period composed of four consecutive six-month purchase periods. The purchase periods end on either May 15 or November 15. ESPP contributions are limited to a maximum of 15 % of an employee’s eligible compensation. The maximum number of shares that an employee may purchase in any purchase period is 2,500 . An employee may not purchase shares with a value greater than $ 25,000 in any calendar year. As of December 31, 2022 , total shares remaining available for issuance under the ESPP were 160,995 . Director Compensation Program Our non-employee directors receive compensation for services provided as a director. Each member of our board of directors who is not an employee receives both cash and equity compensation for services as a director, member of a committee of the board of directors, lead independent director and chairman, as applicable. In October 2017, both the cash and equity components of the compensation program were amended, effective immediately (the “October 2017 Amendments”). Each of our independent directors receives periodic automatic grants of equity awards under a program implemented under the 2012 Plan. These grants are non‑discretionary. Only our independent directors or affiliates of such directors are eligible to receive automatic grants under the 2012 Plan. Under the program, each individual who first became a non-employee director will, on the date such individual joins the board of directors, automatically be granted a one‑time grant of RSUs covering a number of shares of our common stock calculated as $ 125,000 ($ 250,000 prior to the October 2017 Amendments) divided by our common stock closing share price on the date of grant as reported on The Nasdaq Global Select Market, rounded down to the nearest whole share (the “Initial RSUs”), plus a one‑time grant of RSUs covering a number of shares of our common stock calculated as $ 225,000 ($ 250,000 prior to the October 2017 Amendments) divided by our common stock closing share price on the date of grant as reported on The Nasdaq Global Select Market, which would be pro-rated for the number of whole months remaining until the anniversary of the prior year’s stockholders’ meeting, rounded down to the nearest whole share (the “Pro Rata RSUs”). The Initial RSUs vest in two equal annual installments, while Pro Rata RSUs vest in a single installment at the sooner of the next annual stockholder meeting or the one-year grant anniversary, in each case subject to the non-employee director’s continuous service through the applicable vesting date. Annually, upon his or her re‑election to the board of directors at the Annual Meeting of Stockholders, each non-employee director is automatically granted an RSU covering a number of shares of our common stock calculated as $ 225,000 ($ 250,000 prior to the October 2017 Amendments) divided by our common stock closing share price on the date of grant as reported on The Nasdaq Global Select Market, rounded down to the nearest whole share. These RSUs will vest at the sooner of the next annual stockholder meeting or the one-year anniversary of grant, subject to the non-employee director’s continuous service through the applicable vesting date. Following the amendment to our non-employee director compensation program, both the annual RSUs and Initial RSUs described above remained unchanged with the exception that the number of shares of our common stock subject to each award has been reduced. These RSUs will vest in full upon the director’s death, the occurrence of a change in control or, with respect to awards made after the October 2017 Amendments, the director’s disability before the director’s service terminates. Director RSUs carry dividend equivalent rights to be credited with an amount equal to all cash dividends paid on the underlying shares of common stock while unvested. Dividend equivalents are subject to the same terms and conditions, including vesting, as the RSUs to which they attach and are paid in cash upon vesting. 118 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Stock‑Based Compensation Expense Stock‑based compensation expense is included in the consolidated statements of income as follows: Year Ended December 31, (In thousands) 2022 2021 2020 Selling, general and administrative $ 5,305 $ 2,017 $ 1,698 Research and development 2,042 — — Total $ 7,347 $ 2,017 $ 1,698 Stock‑based compensation expense included in the consolidated statements of income by award type is as follows: Year Ended December 31, (In thousands) 2022 2021 2020 Stock options $ 3,057 $ 490 $ 242 RSUs 4,053 1,280 1,149 RSAs 194 200 273 ESPP 43 47 34 Total stock-based compensation expense $ 7,347 $ 2,017 $ 1,698 As of December 31, 2022, the unrecognized stock-based compensation cost and the estimated weighted-average amortization period were as follows: (In thousands) Unrecognized Compensation Cost Weighted-Average Amortization Period (Years) Stock options $ 3,550 2.9 RSUs 4,776 2.2 RSAs 388 2.6 Total unrecognized compensation expense $ 8,714 Compensation Awards The following table summarizes equity award activity under the 2012 Plan and prior plans and related information: (In thousands, except per share data) Number of outstanding options Weighted-Average Exercise Price of Outstanding Options Number of outstanding RSUs Weighted-Average Fair Value per Share at Grant Number of outstanding RSAs Weighted-Average Fair Value per Share at Grant Balance as of December 31, 2021 766 $ 20.79 116 $ 12.82 29 $ 13.35 Granted 492 $ 14.92 676 $ 11.06 15 $ 16.67 Exercised ( 15 ) $ 17.11 — $ — — $ — Released RSUs and RSAs — $ — ( 233 ) $ 9.90 ( 14 ) $ 13.51 Forfeited ( 295 ) $ 28.01 ( 41 ) $ 8.80 — $ — Balance as of December 31, 2022 948 $ 15.56 518 $ 12.16 30 $ 14.97 Vested and expected to vest as of December 31, 2022 948 $ 15.56 518 $ 12.16 — $ — As of December 31, 2022 , the aggregate intrinsic value of options outstanding and options exercisable was no t material . As of December 31, 2021, the aggregate intrinsic value of the options outstanding was $ 1.3 million and the aggregate intrinsic value of options exercisable was immaterial. As of December 31, 2022, 290 options were exercisable. The weighted average remaining contractual term of options outstanding was 8.01 years and 4.43 years as of December 31, 2022 and 2021, respectively. 119 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The total intrinsic value of the options exercised was no t material as of December 31, 2022. The total intrinsic value of the options exercised was $ 0.2 million and $ 0.1 million for the years ended December 31, 2021 and 2020, respectively. The total estimated fair value of options vested was $ 0.6 million for the year ended December 31, 2021. The total estimated fair value of options vested was no t material for the year ended December 31, 2022 and 2020, respectively. The total estimated fair value of RSUs vested was $2.3 million, $1.1 million and $1.3 million for the year December 31, 2022, 2021 and 2020. The total estimated fair value of RSAs vested was not material for the year ended December 31, 2022, 2021, and 2020. Valuation Assumptions The weighted-average assumptions used in calculating the estimated value of our stock options on the date of grant as follows: Year Ended December 31, 2022 2021 2020 Risk-free interest rate 3.6 % 1.1 % 0.4 % Expected term (in years) 6.04 6.11 6.11 Volatility 38.6 % 44.9 % 46.9 % Dividend yield 0.0 % 0.0 % 0.0 % Weighted-average estimated fair value of stock options granted $ 6.43 $ 5.84 $ 6.28 11. Stockholders’ Equity 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 our 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 our 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 647,394 shares in the open market at an average price of $ 13.13 per share for a total amount 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 at an average price of $ 12.63 per share for a total amount of approximately $ 19.2 million. All the repurchased shares were retired. 12. DEBT Our debt consists of: December 31, (In thousands) 2022 2021 2023 Notes $ 96,204 $ 240,984 2025 Notes 192,500 192,500 2028 Notes 261,000 — Total debt 549,704 433,484 Less: Unamortized debt discount and issuance costs ( 9,331 ) ( 38,831 ) Total debt, net 540,373 394,653 Less: Current portion of long-term debt, net 96,193 — Total long-term debt, net $ 444,180 $ 394,653 Convertible Subordinated Notes Due 2023 In January 2013, we completed an underwritten public offering of $ 287.5 million aggregate principal amount of unsecured convertible subordinated notes, with maturity date of January 15, 2023. The financing raised proceeds, net of issuance costs, of approximately $ 281.2 million, less $ 36.8 million to purchase two privately negotiated capped call option transactions in connection 120 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) with the issuance of the notes. The 2023 Notes bear interest at the rate of 2.125 % per year that is payable semi-annually in arrears in cash on January 15 and July 15 of each year, beginning on July 15, 2013. The 2023 Notes were convertible, at the option of the holder, into shares of our common stock at an initial conversion rate of 35.9903 shares per $1,000 principal amount of the 2023 Notes, subject to adjustment in certain circumstances, which represents an initial conversion price of approximately $ 27.79 per share. In connection with the offering of the 2023 Notes, we entered into two privately negotiated capped call option transactions with a single counterparty. The capped call option transaction is an integrated instrument consisting of a call option on our common stock purchased by us with a strike price equal to the initial conversion price of $ 27.79 per share for the underlying number of shares and a cap price of $ 38.00 per share, both of which are subject to adjustments consistent with the 2023 Notes. The cap component is economically equivalent to a call option sold by us for the underlying number of shares with an initial strike price of $ 38.00 per share. As an integrated instrument, the settlement of the capped call coincides with the due date of the convertible debt. Upon settlement, we would receive from our hedge counterparty a number of shares of our common shares that would range from zero , if the stock price was below $ 27.79 per share, to a maximum of 2,779,659 shares, if the stock price is above $38.00 per share. However, if the market price of our common stock, as measured under the terms of the capped call transactions, exceeds $38.00 per share, there is no incremental anti-dilutive benefit from the capped call. As a result of the partial conversion by certain holders of the 2023 Notes in July 2014, and dividends declared and paid in 2014 and 2015, the conversion rate with respect to our 2023 Notes was adjusted in total to 50.5818 shares of our common stock per $1,000 principal amount of the 2023 Notes, which represents a conversion price of approximately $ 19.77 per share. As a result of the conversion rate adjustments, the capped call strike price and cap price were also adjusted to $ 19.77 and $ 27.04 , respectively. For the year ended December 31, 2016, we retired a portion of our 2023 Notes with a face value of $ 14.1 million and carrying value of $ 13.9 million by way of purchase in the open market. On March 7, 2022, we used $ 165.6 million from the sale of the 2028 Notes to repurchase 60 % of the 2023 Notes with a face value of $ 144.8 million. The carrying value of the repurchased 2023 Notes was $ 144.5 million. Accrued interest was $ 0.4 million and unamortized debt issuance costs were $ 0.3 million on the date of repurchase. We recognized a loss on the extinguishment of the 2023 Notes of $ 20.7 million in other expense, net, in the consolidated statement of operations. The repurchase reduced the outstanding principal balance to $ 96.2 million and unamortized debt issuance costs to $ 0.2 million. The 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. The outstanding principal balance was reduced slightly to $ 96.2 million. Our outstanding 2023 Notes balances consisted of the following: December 31, (In thousands) 2022 2021 Principal $ 96,204 $ 240,984 Debt issuance costs, net ( 11 ) ( 620 ) Net carrying amount $ 96,193 $ 240,364 The following table sets forth total interest expense recognized related to the 2023 Notes for the years ended December 31, 2022, 2021 and 2020: Year Ended December 31, (In thousands) 2022 2021 2020 Contractual interest expense $ 2,617 $ 5,121 $ 5,121 Amortization of debt issuance costs 302 580 567 Total interest and amortization expense $ 2,919 $ 5,701 $ 5,688 121 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The 2023 Notes were fully paid upon their maturity date in January 2023. Convertible Senior Notes Due 2025 On August 7, 2017, we completed a private placement of $ 192.5 million aggregate principal amount of our 2025 Notes. The proceeds include the 2025 Notes sold pursuant to the $ 17.5 million over-allotment option granted by us to the initial purchasers, which option was exercised in full. The 2025 Notes were sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 2025 Notes are senior unsecured obligations and bear interest at a rate of 2.5 % per year, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2018. The 2025 Notes are convertible, based on the applicable conversion rate, into cash, shares of our common stock or a combination thereof, at our election. The initial conversion rate for the 2025 Notes is 57.9240 shares of our common stock per $1,000 principal amount of the 2025 Notes (which is equivalent to an initial conversion price of approximately $ 17.26 per share), representing a 30.0 % conversion premium over the last reported sale price of the Company’s common stock on August 1, 2017, which was $ 13.28 per share. The conversion rate is subject to customary anti-dilution adjustments in certain circumstances. The 2025 Notes will mature on August 15, 2025 , unless repurchased or converted in accordance with their terms prior to such date. Prior to February 15, 2025, the 2025 Notes will be convertible at the option of the holders only upon the occurrence of specified events and during certain periods. From, and including, February 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, the 2025 Notes will be convertible at any time. Holders of the 2025 Notes may convert all or a portion of their 2025 Notes prior to the close of business on February 15, 2025 only under the following circumstances: • after September 30, 2017, if our closing common stock price for 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 our closing common stock price and the conversion rate of the 2025 Notes on such day; and, • 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 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. 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 accounted for the liability and equity components of the 2025 Notes by allocating the proceeds between the liability component and the embedded conversion option (“equity component”) due to our ability to settle the conversion obligation of the 2025 Notes in cash, common stock or a combination of cash and common stock, at our option. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature using the income approach. The allocation was performed in a manner that reflected our non-convertible debt borrowing rate for similar debt. The equity component of the 2025 Notes of $ 67.3 million was recognized as a debt discount and represents the difference between the proceeds from the issuance of the 2025 Notes and the fair value of the liability of the 2025 Notes on the date of issuance. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) 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 122 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 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. We similarly combined the liability and equity components of the issuance costs. The issuance costs are presented as a deduction from the outstanding principal balance of the 2025 Notes and are amortized on a straight-line basis over the term of the 2025 Notes under the effective interest rate method. As of January 1, 2022, the annual effective interest rate on the 2025 Notes was 2.88 %. Our outstanding 2025 Notes balances consisted of the following: December 31, (In thousands) 2022 2021 Liability component Principal $ 192,500 $ 192,500 Debt discount and issuance costs, net ( 1,917 ) ( 38,211 ) Net carrying amount $ 190,583 $ 154,289 Equity component, net $ — $ 65,361 The following table sets forth total interest expense recognized related to the 2025 Notes for the years ended December 31, 2022, 2021 and 2020: Year Ended December 31, (In thousands) 2022 2021 2020 Contractual interest expense $ 4,813 $ 4,813 $ 4,813 Amortization of debt issuance costs 692 657 601 Amortization of debt discount — 7,898 7,230 Total interest and amortization expense $ 5,505 $ 13,368 $ 12,644 Convertible Senior Notes Due 2028 In March 2022, we completed a private placement of $ 261.0 million aggregate principal amount of our 2028 Notes, which will mature on March 15, 2028 . The proceeds include the 2028 Notes sold pursuant to the $ 45.0 million over-allotment option granted by us to the initial purchasers, of which $ 36.0 million was exercised. The 2028 Notes were sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The net proceeds from the sale of the $261.0 million aggregate principal amount of 2028 Notes were approximately $ 252.6 million after deducting the initial purchasers’ discounts and commissions and our estimated offering expenses. We used approximately $ 21.0 million of the net proceeds from the offering to fund the cost of entering into the capped call transactions described below. In addition, we used $ 165.6 million of the remaining net proceeds to repurchase $ 144.8 million aggregate principal amount of the 2023 Notes in separate and individually negotiated transactions with certain holders of the 2023 Notes, which closed concurrently with the issuance of the 2028 Notes. We expect to use the remaining net proceeds for general corporate purposes. The 2028 Notes bear interest at an annual rate of 2.125 % that is payable semi-annually in arrears in cash on March 15 and September 15 of each year, beginning on September 15, 2022. The 2028 Notes are convertible, based on the applicable conversion rate, into cash, shares of our common stock or a combination thereof, at our election. The initial conversion rate was 38.1432 shares per $1,000 principal amount of the 2028 Notes, subject to customary anti-dilution adjustment in certain circumstances, which represented an initial conversion price of approximately $ 26.22 per share. Prior to September 15, 2027, the 2028 Notes will be convertible at the option of the holders only upon the occurrence of specified events and during certain periods, and will be convertible on or after September 15, 2027, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2028 Notes. 123 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Holders of the 2028 Notes may convert all or a portion of their 2028 Notes prior to the close of business on September 15, 2027, only under the following circumstances: • after March 31, 2022, if our closing common stock price for at least 20 days out of the most recent 30 consecutive trading days of the preceding quarter is greater than 130 % of the current conversion price of the 2028 Notes; • for five consecutive business days, if the average trading price per $1,000 of Notes during the prior 10 consecutive trading days is less than 98 % of the product of our closing common stock price and the conversion rate of the 2028 Notes on such day; and, • upon the occurrence of specified corporate events, including certain distributions, the occurrence of a fundamental changes (as defined in the indenture governing the 2028 Notes) or a transaction resulting in our common stock converting into other securities or property or assets. On or after September 15, 2027, holders of the 2028 Notes may convert their 2028 Notes at any time until the close of the business on the second day immediately preceding the maturity date of the 2028 Notes. The 2028 Notes will be redeemable, in whole or in part, at our option at any time, and from time to time, on or after March 20, 2025, and on or before the 75th scheduled trading day immediately before the maturity date but only if the last reported sale price per share of our common stock exceeds 130% of the conversion price for a specified period of time. The redemption price will be equal to the principal amount of the 2028 Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, calling any 2028 Note for redemption will constitute a make-whole fundamental change (as defined in the indenture governing the 2028 Notes) with respect to that 2028 Note, in which case the conversion rate applicable to the conversion of that 2028 Note will be increased in certain circumstances if it is converted after it is called for redemption. If we undergo a fundamental change, subject to certain conditions, holders may require us to purchase for cash all or any portion of their 2028 Notes. The fundamental change purchase price will be 100 % of the principal amount of the 2028 Notes to be purchased plus any accrued and unpaid interest to, but excluding, the fundamental change purchase date. The indenture governing the 2028 Notes contains customary terms and covenants, including a merger covenant and that upon certain events of default occurring and continuing, either the Trustee or the holders of at least 25% of the aggregate principal amount of the outstanding Notes may declare 100% of the principal of, and accrued and unpaid interest, if any, on, all the Notes to be due and payable immediately. In connection with the offering of the 2028 Notes, we entered into privately negotiated capped call transactions. The cap price of the capped call transaction is initially $ 33.9850 per share and is subject to certain adjustments under the terms of the capped call transactions. The capped call transactions cover, subject to customary adjustments, the number of shares of common stock initially underlying the 2028 Notes. The capped call transactions are expected generally to reduce potential dilution to our common stock upon conversion of the 2028 Notes or at our election (subject to certain conditions) offset any cash payments we are required to make in excess of the aggregate principal amount of converted 2028 Notes, as the case may be, with such reduction or offset subject to a cap. The annual effective interest rate on the 2028 Notes is 2.70 %. Our outstanding 2028 Notes balance consisted of the following: (In thousands) December 31, 2022 Liability component Principal $ 261,000 Debt discount and issuance costs, net ( 7,403 ) Net carrying amount $ 253,597 124 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table sets forth total interest expense recognized related to the 2028 Notes from the issuance through December 31, 2022: Date of Issuance through (In thousands) December 31, 2022 Contractual interest expense $ 4,514 Amortization of debt issuance costs 1,061 Total interest and amortization expense $ 5,575 Debt Maturities The aggregate scheduled maturities of our long-term debt as of December 31, 2022 are as follows: (In thousands) Amount Year ending December 31, 2023 $ 96,204 2024 — 2025 192,500 2026 — 2027 — Thereafter 261,000 Total $ 549,704 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. From the date of our acquisition of La Jolla through December 31, 2022, we recognized interest expense of $ 1.8 million on the deferred royalty obligation. The carrying value of the deferred royalty obligation and accrued interest as of December 31, 2022 was $ 70.6 million, $ 67.9 million of which was classified as part of other long-term liabilities on the consolidated balance sheet and the remaining $ 2.7 million was classified as other accrued liabilities on the consolidated balance sheet. From the date of acquisition of La Jolla through December 31, 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 December 31, 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 ® . The annual effective interest rate of the deferred royalty obligation was 7.34 %. 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 December 31, 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 $ 12.7 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 ® . 125 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 not material and, therefore, not recognized as of December 31, 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 consolidated statements of income. 13. COMMITMENTS AND CONTINGENCIES Operating Lease We have operating leases for our corporate headquarters, office spaces and laboratory facilities. Our operating leases include a facility lease consisting of 20,062 square feet of office and laboratory space in Waltham, Massachusetts. Effective April 2022, we exercised our renewal option for to extend the lease term for three additional years through December 2025. In 2019, we entered into an operating lease for our headquarters in Burlingame, California for approximately 2,111 rentable square feet. The lease commenced in November 2019 with a term of thirty-six calendar months, which was subsequently amended to expire in December 2023. The components of lease costs are as follows: Year Ended (In thousands) December 31, 2022 Straight line operating lease costs $ 1,585 Variable lease costs 155 Total lease costs $ 1,740 Supplemental cash flow information related to leases are as follows: Year Ended (In thousands) December 31, 2022 Cash paid for amounts included in the measurement of operating lease liabilities: $ 790 Operating lease right-of-use assets obtained in exchange for operating lease obligations 3,323 Right-of-use assets obtained through acquisitions 1,185 As of December 31, 2022, our operating leases have a weighted-average remaining lease term of 2.8 years and the weighted-average incremental borrowing rate used to determine the operating lease right-of-use assets and lease liabilities was 7.5 %. 126 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) We have not presented the comparative information above for the years ended December 31, 2021 and 2020 as our operating lease during those years was not material. The following table summarizes our operating leases as presented on the consolidated balance sheets: December 31, (In thousands) 2022 2021 Assets Right-of-use assets $ 3,265 $ 97 Liabilities Current portion of lease liabilities included within Other accrued liabilities $ 1,316 $ 106 Long-term portion of lease liabilities included within Other long-term liabilities 2,376 — Total lease liabilities $ 3,692 $ 106 Future minimum lease payments on our operating leases as of December 31, 2022 are as follows: (In thousands) Amount Year ending December 31, 2023 $ 1,542 2024 1,269 2025 1,289 Total undiscounted lease payments 4,100 Less: imputed interest ( 408 ) Total operating lease liabilities $ 3,692 Legal Proceedings From time to time, the Company is involved in legal proceedings in the ordinary course of its business. We are not currently a party to any material legal proceedings except as discussed below. 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 Nos.: 9,220,745; 9,572,856; 9,867,863; 10,028,995; 10,335,451; 10,493,124; 10,500,247; 10,548,943; 11,096,983; 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 ® . Given the early stage of this matter, we cannot reasonably estimate a potential future loss or a range of potential future losses, if any, and have not recorded a contingent liability accrual as of December 31, 2022. Indemnifications and Other Contingencies 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 127 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 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, as of December 31, 2022, we have not accrued any liabilities in the consolidated financial statements as a result of these provisions. 14. INCOME TAXES Income tax expense consists of the following: Year Ended December 31, (In thousands) 2022 2021 2020 Current Federal $ 40,822 $ — $ — State 464 7 11 Total current 41,286 7 11 Deferred Federal 26,026 70,893 60,408 State ( 625 ) 5,539 12 Total deferred 25,401 76,432 60,420 Total income tax expense, net $ 66,687 $ 76,439 $ 60,431 The impacts of the differences between the expected U.S. federal statutory income tax to our income tax expense are as follows: Year Ended December 31, (In thousands) 2022 2021 2020 Expected tax at federal statutory rate $ 58,928 $ 93,507 $ 74,392 State income tax, net of federal benefit ( 1,414 ) 848 ( 26 ) Federal and state research credits ( 2,453 ) 1,260 — Noncontrolling interest 7,468 ( 21,626 ) ( 14,577 ) Impact of consolidation and deconsolidation of subsidiaries ( 8,897 ) — — Other ( 125 ) 1,129 839 Change in valuation allowance 13,180 1,321 ( 197 ) Income tax expense (benefit), net $ 66,687 $ 76,439 $ 60,431 128 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and deferred tax liabilities are as follows: December 31, (In thousands) 2022 2021 Deferred tax assets Net operating loss carryforwards $ 149,646 $ 64,813 Research and development tax credit carryforwards 21,230 53,467 Unrealized loss on investment, net 6,032 — Deferred royalty obligation, net 17,404 — Other 8,527 743 Total deferred tax assets before valuation allowance 202,839 119,023 Valuation allowance ( 144,808 ) ( 64,744 ) Total deferred tax assets 58,031 54,279 Deferred tax liabilities Depreciation and amortization ( 50,587 ) ( 9,158 ) Unrealized gain on investment, net — ( 27,794 ) Inventory fair value adjustment ( 12,410 ) — Other ( 805 ) — Net deferred tax assets (liabilities) $ ( 5,771 ) $ 17,327 We record deferred tax assets if the realization of such assets is more likely than not to occur. Significant management judgment is required in determining whether a valuation allowance against the deferred tax assets is required. We have considered all available evidence, both positive and negative, such as our historical operating results and predictability of future taxable income, in making such determination. We are also required to exercise significant management’s judgment in forecasting future taxable income. Specifically, we evaluate the following criteria when considering a valuation allowance: • the history of tax net operating losses in recent years; • predictability of operating results; • profitability for a sustained period of time; and • level of profitability on a quarterly basis. As of December 31, 2022, we had federal net operating loss carryforwards of approximately $ 411.5 million , which will expire beginning 2032. As of December 31, 2022, we also had state net operating loss carryforwards of approximately $ 955.3 million , which will expire beginning 2029 and state research tax credits of approximately $ 33.3 million , which do not expire. Utilization of net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code and similar state provisions. Annual limitations may result in expiration of net operating loss and tax credit carryforwards before some or all of such amounts have been utilized. We conducted an Internal Revenue Code of 1986, as amended, Section 382 (“Section 382”) analysis of the Company through December 31, 2022 to determine whether an ownership change had occurred since inception. The Section 382 study concluded that it is more likely than not that the Company did not experience an ownership change during the testing period. However, notwithstanding the applicable annual limitations, no portion of our net operating loss or credit carryforwards is expected to expire before becoming available to reduce federal and state income tax liabilities as a result of those identified ownership changes. 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. 129 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2022 and 2021, we had no accrued interest or penalties due to the Company's net operating losses available to offset any tax adjustments. Uncertain Tax Positions A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits are as follows: (In thousands) Amount Unrecognized tax benefits as of December 31, 2019 $ 15,342 Net decrease in tax portions for 2020 ( 157 ) Unrecognized tax benefits as of December 31, 2020 15,185 Net decrease in tax portions for 2021 ( 313 ) Unrecognized tax benefits as of December 31, 2021 14,872 Net increase in tax portions for 2022 1,452 Unrecognized tax benefits as of December 31, 2022 $ 16,324 We are subject to taxation in the U.S. and various state jurisdictions. The tax years 2004 through 2013, 2015 and forward remain open to examination by the federal and most state tax authorities due to net operating loss and overall credit carryforward positions. 15. SUBSEQUENT EVENTS On January 10, 2023, we entered into a Secured Convertible Credit Agreement (the “Credit Agreement”) with Armata, under which we extended a one-year term loan facility in an aggregate amount of $ 30.0 million at an interest rate of 8.0 % per annum. Pursuant to the Credit Agreement, the balance on the loan, including all accrued and unpaid interest thereon, will convert into shares of Armata's common stock upon the occurrence of a qualified financing, as defined in the Credit Agreement. Any portion of the balance on the loan, including all accrued and unpaid interest thereon, may also be converted into shares of Armata's common stock at our option once a registration statement covering the resale of such securities has been declared effective by the SEC. The loan is secured by substantially all of the assets of Armata and its domestic and foreign material subsidiaries. On February 2, 2023, ITH entered into a Note Amendment Agreement (the "Note Amendment Agreement") with Gate to amend the Convertible Promissory Note Purchase Agreement entered into in November 2021 between TRC and Gate to acquire the Gate Convertible Note (refer to Note 6, “Equity and Long-Term Investments and Fair Value Measurements”). Pursuant to the Note Amendment Agreement, the principal amount of the Gate Convertible Note was increased from $ 15.0 million to $ 21.5 million, which represents the original principal and accrued interests as of the amendment date. All other material terms of the Gate Convertible Note were unchanged. 130 REP ORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Innoviva, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Innoviva, Inc. and subsidiaries (the "Company") as of December 31, 2022, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows, for the year ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting. Change in Accounting Principle As discussed in Note 1 to the financial statements, effective January 1, 2022, the Company adopted Accounting Standards Update 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 , using the modified retrospective approach. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Consolidated Entities and Equity and Long-term Investments – Primary Beneficiary Determination for Variable Interest Entities – Refer to Notes 1, 5, and 6 to the consolidated financial statements Critical Audit Matter Description The Company invests in equity and debt securities of private and public companies. The Company evaluates its interests in these entities to determine whether they meet the definition of a variable interest entity (VIE) or a voting interest entity (VOE) and whether the Company is required to consolidate these entities. A VIE is consolidated by its primary beneficiary, which is the party that has both 1) the power to direct the activities that most significantly impact the economic performance of the VIE and 2) a variable interest that absorbs losses or receives benefits from the VIE that could potentially be significant to the VIE. To determine whether a variable 131 interest that the Company holds could potentially be significant to the VIE, the Company considers both qualitative and quantitative factors regarding the nature, size and form of the Company's involvement with the VIE. 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. The Company will reconsider whether an entity is a VIE and whether the Company is the primary beneficiary of the entity upon the occurrence of certain types of events. The determination of the primary beneficiary of a VIE requires significant management judgment. As of December 31, 2022, the carrying values of the Company’s consolidated VIEs’ total assets and total liabilities were $320.6 million and $1.6 million, respectively. Additionally, as of December 31, 2022 the carrying value of the Company’s investments in unconsolidated VIEs was $377.9 million. We identified the primary beneficiary determination for the Company’s VIEs as a critical audit matter due to the complexity of the accounting principles related to the determination of the primary beneficiary of a VIE and the significant judgment required by management in evaluating the Company’s role in establishing the VIE, their ongoing rights and responsibilities and identifying which party, if any, has power over those activities. This required a high degree of auditor judgment and an increased extent of effort, including the involvement of professionals with consolidation accounting expertise, when performing audit procedures to evaluate the Company’s determination of whether it is the primary beneficiary for its VIEs. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the primary beneficiary determination for VIEs included the following, among others: • We tested the effectiveness of controls over the Company’s primary beneficiary determination for its VIEs, including management’s determination of the party that has the power to direct the activities that most significantly impact the economic performance of the VIE and a variable interest that absorbs losses or receives benefits from the VIE that could potentially be significant to the VIE. • We evaluated the appropriateness of the Company’s accounting conclusions for consolidated and unconsolidated VIEs through the following: o Evaluated the investment structures and terms of the agreements, including reading the purchase agreements and other related documents which govern the formation and activities of the entity (the Contractual Arrangements). o Tested whether the Company appropriately determined the primary beneficiary by evaluating the Contractual Arrangements of the entity to determine if the Company has the power to direct activities that most significantly impact the economic performance of the VIE, and if the Company has the obligation to absorb losses of the entity or the right to receive benefits from the entity that could be significant to the VIE. o For certain VIEs, with the assistance of professionals with expertise in consolidation accounting, evaluated the appropriateness of the Company's determination of the primary beneficiary of the VIE. o Evaluated the Company’s disclosures related to the primary beneficiary determination of its consolidated entities and unconsolidated VIEs. /s/ Deloitte & Touche LLP San Jose, California February 28, 2023 We have served as the Company's auditor since 2022. 132 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Innoviva, Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheet of Innoviva, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ GRANT THORNTON LLP We served as the Company’s auditor from 2019 to 2021. San Francisco, California February 28, 2022 133 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.