What changed in this filing

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Item 1. Financial Statements

2023-05-09 compared with 2022-11-09 · 381 added, 614 removed, 879 unchanged (53% of the section changed)

3 unchanged sentences

(In thousands, except per share data)

September 30,

Current assets:

Cash and cash equivalents

Short-term marketable securities

Accounts receivable, net

4 unchanged sentences

Property and equipment, net

Equity method investments

Equity and long-term investments

Capitalized fees paid to a related party, net

Capitalized fees paid, net

Right-of-use assets

Intangible assets

Deferred tax assets, net

Liabilities and Stockholders’

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Other long-term liabilities

Deferred tax liabilities

Deferred tax liabilities, net

Income tax payable, long-term

Commitments and contingencies (Note 12)

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65,824 and 69,188 issued and outstanding as of

September 30, 2022 and December 31, 2021 respectively

March 31, 2023 and December 31, 2022, respectively

Treasury stock:

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

at cost, 32,005 shares as of March 31, 2023

and December 31, 2022, respectively

1 unchanged sentence

Accumulated deficit

Total Innoviva stockholders’

Noncontrolling interest

Total stockholders’

Total liabilities and stockholders’

* Condensed consolidated balance sheet as of December 31, 2022 has been derived from audited consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

(In thousands, except per share data)

Three Months Ended September 30,

Nine Months Ended September 30,

Royalty revenue from a related party, net

of amortization of capitalized fees paid

to a related party of $ 3,456 in the three

months ended September 30, 2022 and

2021, and $ 10,368 in the nine months

ended September 30, 2022 and 2021

Three Months Ended March 31,

Royalty revenue, net of amortization of

capitalized fees paid of $ 3,456 in the

three months ended March 31, 2023

Net product sales

License revenue

Total revenue

3 unchanged sentences

and amortization of intangible assets)

Cost of license revenue

Selling, general and administrative

1 unchanged sentence

Amortization of acquired intangible assets

Gain on sale of Theravance Respiratory

Company, LLC (“TRC”)

Loss on debt extinguishment

Changes in fair values of equity and

Changes in fair values of equity method

investments, net

Changes in fair values of other equity and

long-term investments, net

1 unchanged sentence

Interest expense

Other expense (income), net

Other expense, net

Total expenses

1 unchanged sentence

Income tax expense, net

Net income (loss) attributable to

Net income attributable to

noncontrolling interests

13 unchanged sentences

(In thousands)

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Comprehensive income

Comprehensive income (loss) attributable to

Comprehensive income attributable to

noncontrolling interests

5 unchanged sentences

(In thousands)

Nine Months Ended September 30, 2022

Three Months Ended March 31, 2023

Treasury Stock

Noncontrolling

Stockholders’

Balance as of January 1, 2023

Cumulative adjustment due to

adoption of ASU 2020-06

Distributions to noncontrolling

Fair value of noncontrolling

interests in a consolidated

variable interest entity

Exercise of stock options and

Issuance of common stock units

and stock awards, net of

repurchase of shares to satisfy

tax withholding

and stock awards, net of repurchase

of shares to satisfy tax withholding

Repurchase of common stock

Stock-based compensation

Capped call options associated

with convertible senior notes

Balance as of March 31, 2023

Distributions to noncontrolling

Equity activity of noncontrolling

interests in a consolidated

variable interest entity

Exercise of stock options and

issuance of common stock units

and stock awards, net of

repurchase of shares to satisfy

tax withholding

Conversion of convertible

subordinated notes due 2023

Stock-based compensation

Balance as of June 30, 2022

Distributions to

noncontrolling interests

Derecognition of noncontrolling

interests upon sale of TRC

Derecognition of noncontrolling

interests upon acquisition of

Entasis Therapeutics Holdings Inc.

(“Entasis”) minority interest

Exercise of stock options and

issuance of common stock units

and stock awards, net of

repurchase of shares to satisfy

tax withholding

Stock-based compensation

Balance as of September 30, 2022

Nine Months Ended September 30, 2021

Three Months Ended March 31, 2022

Treasury Stock

1 unchanged sentence

Stockholders’

Balance as of December 31, 2020

Balance as of January 1, 2022

Cumulative adjustment due to

adoption of ASU 2020-06

Distributions to noncontrolling

Equity activity of noncontrolling

Fair value of noncontrolling

interests in a consolidated

6 unchanged sentences

Stock-based compensation

Capped call options associated

with convertible senior notes

Balance as of March 31, 2022

Distributions to noncontrolling interests

Equity activity of noncontrolling

interests in a consolidated

variable interest entity

Exercise of stock options and

issuance of common stock units

and stock awards, net of

repurchase of shares to satisfy

tax withholding

Repurchase of common stock

Stock-based compensation

Balance as of June 30, 2021

Distributions to noncontrolling

Equity activity of noncontrolling

interests in a consolidated

variable interest entity

Exercise of stock options and

issuance of common stock units

and stock awards, net of

repurchase of shares to satisfy

tax withholding

Stock-based compensation

Balance as of September 30, 2021

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

(In thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities

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

Deferred income tax

Depreciation and amortization

Amortization of inventory fair value adjustments included in

cost of products sold

Deferred income taxes

Amortization of capitalized fees and depreciation of property and equipment

Amortization of acquired intangible assets

Inventory fair value step-up adjustment included in cost of products sold

Stock-based compensation

Amortization of debt discount and issuance costs

Amortization of deferred royalty obligation value adjustment

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

Changes in fair values of equity method investments, net

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

Loss on extinguishment of debt

Net gain on sale of TRC

Accrued interest income added to long-term investments

Other non-cash items

Changes in operating assets and liabilities:

2 unchanged sentences

Prepaid expenses

Other assets, current

Other assets, non-current

Accounts payable

5 unchanged sentences

Cash flows from investing activities

Purchases of equity method investments

Purchases of equity and long-term investments

3 unchanged sentences

Purchases of property and equipment

Proceeds from sale of ownership interest in TRC, net

Cash acquired through the consolidation of Entasis

Cash paid for the acquisition of La Jolla Pharmaceutical Company,

net of cash acquired

Net cash (used in) provided by investing activities

Net cash used in investing activities

Cash flows from financing activities

Distributions to noncontrolling interests

Purchase of Entasis minority interest

Repurchase of common stock

2 unchanged sentences

Payment for repurchase of convertible subordinated notes due 2023

Purchases of capped call options associated with convertible senior notes due 2028

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

Net cash used in financing activities

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

Purchases of capped call options associated with convertible senior notes

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

issuance costs

Net cash (used in) provided by financing activities

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash, cash equivalents and restricted cash at end of period

Nine Months Ended September 30,

Cash and cash equivalents at end of period

Three Months Ended March 31,

Supplemental Disclosure of Cash Flow Information:

Cash paid for interest

Cash paid for income taxes

Supplemental Disclosure of Non-cash Investing and Financing Activities:

Adoption of ASU 2020-06

Reconciliation of Cash, Cash Equivalents and Restricted Cash:

Cash and cash equivalents

Restricted cash, included in “Other assets”

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

condensed consolidated statements of cash flows

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

See accompanying notes to condensed consolidated financial statements.

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Innoviva, Inc.

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

(and where context requires, together with its subsidiaries referred to as “Innoviva”, the “Company”, or “we”

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

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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.

Basis of Presentation

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The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2023, and as amended on March 20, 2023.

Presentation Reclassification

Amounts in equity and long-term investments and changes in fair value of equity and long-term investments, net, reported in the Company's comparative 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”.

Accounting consolidation of Entasis on February 17, 2022 and purchase of remaining minority interest in Entasis on July 11, 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 Theravance Respiratory Company, LLC (“TRC”) on July 20, 2022, and

Acquisition of La Jolla on August 22, 2022.

Prior Period Immaterial Correction

Subsequent to the issuance of the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2021, the Company identified that (i) purchases of equity investments managed by ISP Fund LP for $ 178.4 million, (ii) sales of equity investments managed by ISP Fund LP for $ 21.4 million, and (iii) purchase and sales of other investments managed by ISP Fund LP, net for $ 267.0 million were incorrectly included in the unaudited condensed consolidated statement of cash flows within the distribution of equity and long-term investments line item.

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

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

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

Use of Management’s Estimates

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Concentrations of Credit Risk and of Significant Suppliers and Partner

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

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.

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

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

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

s acquisition to September 30, 2022.

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

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

We do not believe that the 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 32 %, 31 % and 30 %, respectively, of our net product sales for the three months ended March 31, 2023.

These same customers account for 38 %, 23 % and 36 %, respectively, of our receivables from net product sales, which are included in “Accounts receivables, net”

in our unaudited consolidated balance sheet as of March 31, 2023.

Refer to Item 1A.

“Risk Factors”

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

disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

Segment Reporting

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

Refer to Note 3, “Revenue Recognition”, for more information on our revenues for the periods presented.

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

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Variable Interest Entities

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

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

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

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 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

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

Accounts Receivable, Net

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

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.

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

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

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

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

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

Goodwill and intangible assets with an 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

We account for our leases under ASC 842, Leases .

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

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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.

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 and long-term investments, net within the unaudited condensed consolidated statements of income.

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 equity and long-term investments, net, within the unaudited condensed consolidated statements of income.

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

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

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

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

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

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

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

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

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 includes 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.

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

Royalty Revenue from Collaboration Arrangement

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.

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Revenue from Product Sales

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

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

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

Administrative Fees:

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

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

General Services Administration’s Federal Supply Schedules program.

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

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

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

Research and Development Costs

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

Research and development costs consist of salaries and benefits, laboratory supplies, 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.

License Revenue

At the inception of a licensing arrangement that includes development and regulatory milestone payments, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price.

We generally include these milestone payments in the transaction price when they are achieved because there is considerable uncertainty in the research and development processes that trigger receipt of these payments under our agreements.

Similarly, we include approval milestone payments in the transaction price once the product is approved by the applicable regulatory agency.

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.

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

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

for more information.

Accounting Pronouncement Adopted by the Company

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

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

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 11, “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 606, Revenue from Contracts with Customers .

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

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

Net Income Per Share

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

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

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

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

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

As the average market price per share of our common stock as reported on The Nasdaq Global Select Market was lower than the initial conversion price of $ 17.26 per share, there wa s no dilutive effect of the assumed conversion premium for the three and nine months ended September 30, 2021.

The dilutive EPS of the notes was approximatel y $ 0.37 and $ 0.41 per share, respectively, using the if-converted method for the three and nine months ended September 30, 2022 as a result of the adoption of ASU 2020-06.

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

Three Months Ended September 30,

Nine Months Ended September 30,

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”) up until its maturity date on January 15, 2023, our convertible senior notes due 2025 (the “2025 Notes”) and our convertible senior notes due 2028 (the “2028 Notes”) using the if-converted method.

The following table shows the computation of basic and diluted net income per share for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

(In thousands except per share data)

Net income attributable to Innoviva stockholders, basic

interest expense on 2023 Notes

interest expense on 2025 Notes

interest expense on 2028 Notes

interest expense on 2023 Notes, net of tax effect

interest expense on 2025 Notes, net of tax effect

interest expense on 2028 Notes, net of tax effect

Net income attributable to Innoviva stockholders, diluted

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands)

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Net Revenue from Collaboration Arrangement

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

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

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Net revenue recognized under our GSK Agreements was as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands)

- RELVAR/BREO

Total royalties from a related party

Total royalties

amortization of capitalized fees

paid to a related party

Royalty revenue from GSK

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

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

Total net royalty revenue

Net Product Sales

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

Our net product sales were $ 11.5 million, consisting of net sales of GIAPREZA ® and XERAVA ® for $ 9.0 million and $ 2.5 million, respectively, for the three months ended March 31, 2023 .

We derived over 99 % of our net product sales for the period from customers located in the U.S.

License Revenue

Refer to the out-license agreement with Everest in Note 4, “License and Collaboration Arrangements”.

License and Collaboration Arrangements

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

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

During the three months ended March 31, 2023, no reve nue was recognized under the Zai Agreement.

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

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

Such amounts recorded for the three months ended March 31, 2023 and 2022 are not material.

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

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

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

Relevant amounts for the three months ended March 31, 2023 and 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.

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

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

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

We have not recognized any revenue from PAION related to commercial milestones from the date of acquisition of La Jolla to March 31, 2023.

Royalty revenue recognized under this agreement for the three months ended March 31, 2023 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.

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

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

We have not recognized any cost reimbursements under this agreement for the three months ended March 31, 2023.

Everest Medicines Limited

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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.

The regulatory milestone was achieved during the three months ended March 31, 2023, and, as a result, we recognized $ 8.0 million in license revenue in our unaudited condensed consolidated statement of income for the period.

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.

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

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

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

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

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

Royalty revenue recognized under this agreement for the three months ended March 31, 2023 was not material.

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

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

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

We initially recognized a $ 2.8 million partial prepayment for XERAVA® as deferred revenue, of which, no revenue was recognized for the three months ended March 31, 2023.

In-License Agreements

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

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

Amounts recognized under this agreement for the three months ended March 31, 2023 were not material.

Harvard University

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

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

F or the three months ended March 31, 2023, we recognized $ 1.6 million in cost of license revenue under this agreement as a result of the license revenue we earned under the out-licensing agreement with Everest for the same period.

Paratek Pharmaceuticals, Inc.

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

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

Amounts recognized under this agreement for the three months ended March 31, 2023 were not material.

Consolidated Entities and Acquisitions

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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.

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.

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

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

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

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

Balance sheet

(In thousands)

Cash and cash equivalents

Receivables from collaboration arrangement

Prepaid expenses and other current assets

Equity and long-term investments

Liabilities and LLC Members’

Current liabilities

LLC members’

Total liabilities and LLC members’

Income statements

Three Months Ended September 30,

Nine Months Ended September 30,

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

(“InCarda"), ImaginAb, Inc.

(“ImaginAb”), Gate Neurosciences, Inc.

(“Gate") and Nanolive SA (“Nanolive”), which had a total carrying value of $ 39.4 million, to ITH.

The summarized financial information of TRC for the three months ended March 31, 2022 are presented as follows:

Three Months Ended March 31,

(In thousands)

Royalty revenue from a related party

Royalty revenue

Operating expenses

Income from operations

Other income, net

Realized loss

Income tax expense, net

Changes in fair values of equity and long-term

Net income (loss)

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

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

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

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’

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

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

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

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

Our maximum exposure to loss is equal to the amount we invested in the entity.

As of March 31, 2023, we held approximately 100 % of the economic interest of the Partnership.

As of March 31, 2023 and December 31, 2022, total assets of the Part nership were $ 318.5 million and $ 320.6 million, respectively, of which the majority was attributable to equity, debt and long-term investments.

As of March 31, 2023 and December 31, 2022, total liabilities were $ 4.1 million and $ 1.6 million, respectively .

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

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

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

During the three months ended March 31, 2023 and 2022, we record ed $ 0.5 million and $ 0.3 million, r espectively, of net investment-related expenses incurred by the Partnership, a nd $ 4.1 million of net negative changes and $ 2.1 million of net positive changes, respectively, in fair values of equity and long-term investments in the unaudited condensed consolidated statements of income.

Entasis Therapeutics Holdings Inc.

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

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

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

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

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

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’

Our investments in Entasis consisted of shares of common stock and warrants to purchase shares of Entasis common stock.

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.

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

On February 17, 2022, Innoviva Strategic Opportunities, LLC ("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 matured and became payable on August 18, 2022 unless it was converted at a conversion price of $ 1.48 before the maturity date.

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

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

The remeasurement resulted in a $ 7.8 million loss in the first quarter of 2022 which was included in c hanges in fair values of equity method investments, net in the unaudited condensed consolidated statement of income for the period.

We completed our acquisition of Entasis’

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

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

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

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

The purchase accounting for this transaction is not yet finalized.

In February 2023, we recorded a measurement period adjustment of $ 1.2 million increase in goodwill, primarily related to a decrease in intangible assets of $ 0.8 million and an increase in deferred tax liabilities of $ 0.4 million.

The measurement period adjustment did not impact the consolidated net income for the three months ended March 31, 2023 and 2022.

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

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

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

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

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

La Jolla Pharmaceutical Company

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The purchase accounting for this transaction is not yet finalized.

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

We incurred approximately $ 5.3 million in acquisition-related costs in connection with this acquisition during the year ended December 31, 2022.

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

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Other long-term liabilities

Deferred tax liabilities

Total liabilities assumed

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Pro Forma Financial Information

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

The following table presents certain unaudited pro-forma financial information for the three months ended March 31, 2022 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.

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands)

Net income attributable to Innoviva stockholders

Financial Instruments and Fair Value Measurements

Equity and Long-term Investments and Fair Value Measurements

Equity Investment in Armata

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

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

As of September 30, 2022 and December 31, 2021, the Company and ISO owned approximately 69.4 % a nd 59.3 %, respectively, of Armata’s common stock.

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

As of March 31, 2023 , three of the eight members of Armata’s board of directors are also members of the board of directors of Innoviva.

As of March 31, 2023 and December 31, 2022, the Company and ISO owned approximately 69.4 % , of Armata’s common stock.

On January 10, 2023, we entered into a Secured Convertible Credit Agreement (the “Credit Agreement”) with Armata, under which we extended a one-year convertible note (the "Armata Convertible Note") 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 Armata Convertible Note, 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 Armata Convertible Note, 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 Armata Convertible Note is secured by substantially all of the assets of Armata and its domestic and foreign material subsidiaries.

The investments in Armata's common stock and warrants 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 account for both Armata’s common stock and warrants under the equity method using the fair value option.

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 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.

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

As of September 30, 2022, the fair values of our holdings of Armata common stock and warrants were estimated at $ 105.8 million and $ 50.6 million, respectively.

We account for the Armata 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 risk-free rate, volatility of stock price and timing of certain qualified events.

As of March 31, 2023, the fair values of our holdings of Armata common stock, warrants and the Armata Convertible Note were estimated at $ 41.9 million, $ 13.1 million and $ 32.8 million, respectively.

As of December 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.

The total fair value of both financial instruments in the amount of $ 156.4 million and $ 146.7 million was recorded as equity and long-term investments on the unaudited condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively.

During the three and nine months ended September 30, 2022 , we recorded $ 11.7 million unrealized gain and $ 35.3 million unrealized loss, respect ively, as changes in fair values of equity and long-term investments, net on the unaudited condensed consolidated statements of income.

During the three and nine months ended September 30, 2021, we recorded $ 11.6 million unrealized loss and $ 25.3 million unrealized gain , respectively, as changes in fair values of equity and long-term investments, net on the unaudited condensed consolidated statements of income.

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

For the Armata common stock and warrants, we recorded $ 15.8 million in unrealized gain and $ 4.2 million in unrealized loss for the three months ended March 31, 2023 and 2022, respect ively, as changes in fair values of equity method i nvestments, net, in the unaudited condensed consolidated statements of income.

For the Armata Convertible Note, we recorded $ 2.8 million unrealized gain as changes in fair values of equity and long-term investments, net in the unaudited condensed consolidated statement of income for the three months ended March 31, 2023.

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

Income Statement Information

Three Months Ended June 30,

Nine Months Ended June 30,

Three Months Ended December 31,

(In thousands)

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

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

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

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.

As of March 31, 2023 , one of InCarda’s eight board members was designated by ITH.

We did not exercise the InCarda 2020 Warrant which expired in March 2023 and wrote off its carrying value of $ 0.1 million during the three months ended March 31, 2023.

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.

The InCarda 2022 Warrant expires on March 9, 2027 and is 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.

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In connection with the new round of financing, InCarda recapitalized its equity structure resulting in TRC owning 4,093,886 shares of InCarda’s common stock, 37,350 shares of its Series A-1 preferred stock, 20,469,432 shares of its Series C preferred stock, 8,771,780 shares of its Series D-1 preferred stock, 3,369,802 shares of its Series D-2 preferred stock, a warrant to purchase 5,117,358 shares of its Series C preferred stock at $ 0.73 per share and a warrant to purchase 2,490,033 shares of its Series D-1 preferred stock at $ 0.20 per share.

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

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

As of March 31, 2023 and December 31, 2022, we held 9 % of InCarda equity ownership.

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

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

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.

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

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

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

We recognized an impairment charge of $ 9.0 million.

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

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

As of September 30, 2022 , we recognized $ 3.2 million for InCarda’s Series D-1 preferred stock, Series D-2 preferred stock, and common stock using the measurement alternative.

As of December 31, 2021 , we recorded $ 0.4 million in fair value of InCarda’s 2020 Warrants.

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

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

During the three and nine months ended September 30, 2021, we recorded $ 0.1 million unrealized gain and $ 0.6 million of unrealized loss , respectively, as changes in fair values of equity and long-term investments, net on the unaudited condensed consolidated statements of income.

Key assumptions used in the valuation model included 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 was 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 during the second quarter of 2022.

As of March 31, 2023, we recorded $ 6.8 million in fair value of InCarda’s Series C preferred stock and $ 0.5 million in fair value of Series D warrants (the “InCarda Preferred Stock Warrants”).

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 the InCarda Preferred Stock Warrants.

As of March 31, 2023 and 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.

During the three months ended March 31, 2023 and 2022, we recorded $ 0.1 million in net unrealized loss and $ 0.6 million in net unrealized gain, respectively, as changes in fair values of equity and long-term investments, net in the unaudited condensed consolidated statements of income.

Equity Investment in ImaginAb

During the first quarter of 2021, TRC entered into a securities purchase agreement with ImaginAb, Inc.

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

On March 18, 2021, TRC entered into a securities purchase agreement with 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 investment on the condensed consolidated balance sheets.

$ 0.4 million was incurred for investment due diligence costs and execution and recorded as part of the equity investment in the condensed 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 September 30, 2022 , one of ImaginAb’s five bo ard members was designated by ITH.

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

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

On March 14, 2023, ITH entered into a securities purchase agreement with ImaginAb to purchase 270,568 shares of ImaginAb Series C-2 preferred stock for $ 0.6 million.

As of March 31, 2023, one of ImaginAb’s six board members was designated by ITH.

As of March 31, 2023 and December 31, 2022, we held 12.6 % and 12.7 %, respectively, of ImaginAb equity ownership.

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

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

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

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

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, Series C-2 preferred stock and common stock using the measurement alternative.

As of March 31, 2023 and December 31, 2022, $ 7.0 million and $ 6.4 million, respectively, was recorded as equity and long-term investments in the unaudited condensed consolidated balance sheets and there was no change to the fair value of our investment.

Convertible Promissory Note in Gate Neurosciences

During the fourth quarter of 2021, TRC entered into a Convertible Promissory Note Purchase Agreement with Gate Neurosciences, Inc.

(“Gate”) to acquire a convertible promissory note (the “Gate Convertible Note”) with a principal amount of $ 15.0 million.

On November 24, 2021, TRC entered into a Convertible Promissory Note Purchase Agreement with Gate to acquire a convertible promissory note (the “Gate 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 investment is intended to fund Gate's ongoing development and research.

The Gate Convertible Note bears an annual interest rate of 8 % and will convert into shares of common stock of Gate upon a qualified event or into shares of shadow preferred stock of Gate (“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”).

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A qualified financing is a sale or series of sales of preferred stock where (i) at least 50 percent of counterparties are not existing shareholders, (ii) net proceeds to Gate are at least $35.0 million, and (iii) the stated or implied equity valuation of Gate is at least $80.0 million.

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

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

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

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

On February 2, 2023, ITH entered into a Note Amendment Agreement (the “Note Amendment Agreement”) with Gate to amend the Gate Convertible Note.

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, accrued interest as of the amendment date and additional cash investment of $ 5.0 million.

All other material terms of the Gate Convertible Note were unchanged.

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.

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

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

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

We rec orded $ 0.2 million and $ 0.3 million unrealized gain, respectively, as changes in fair values of equity and long-term investments, net on the unaudited condensed consolidated state ment of income for the three and nine months ended September 30, 2022.

As of March 31, 2023 and December 31, 2022, the fair value of the Gate Convertible Note was estimated at $ 21.5 million and $ 15.7 million, respectively, and recorded as equity and long-term investments in the unaudited condensed consolidated balance sheets.

We rec orded $ 0.7 million and $ 0.2 million unrealized loss, respectively, as changes in fair values of equity and long-term investments, net in the unaudited condensed consolidated state ment of income for the three months ended March 31, 2023 and 2022, 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).

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

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

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

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

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

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

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

As of March 31, 2023 , one of Innoviva designees is serving on Nanolive’s seven -member board.

As of March 31, 2023 and December 31, 2022, we held 15.3 % and 15.5 %, respectively, 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 September 30, 2022, $ 10.6 million was recorded as equity and long-term investments on the unaudited condensed consolidated balance sheets and there was no change to the fair value of our investment.

As of March 31, 2023 and December 31, 2022, $ 10.6 million was recorded as equity and long-term investments in the unaudited condensed 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:

March 31, 2023

(In thousands)

Money market funds (1)

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

December 31, 2022

(In thousands)

Money market funds (1)

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

As of March 31, 2023 , all investments were money market funds, and there was no credit loss recognized.

Fair Value Measurements

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

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

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

Estimated Fair Value Measurements as of March 31, 2023 Using:

Types of Instruments

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Money market funds

Short-term marketable securities

Investments held by ISP Fund LP (1)

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Equity investment - Armata Warrants

Equity investment - InCarda Series C Preferred Stock

Equity investment - InCarda Preferred Stock Warrants

Convertible debt investment - Armata Note

Convertible debt investment - Gate Note

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Total liabilities measured at estimated fair value

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

(1) The investments held by ISP Fund LP consisted of $ 264.9 million in equity investments, which included $ 24.6 million in money market funds, and $ 53.6 million receivable from the maturity of convertible notes.

Our total capital contribution of $ 300 million is subject to a 36-month lock-up period from the date of such capital contributions.

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Equity investment - Armata Warrants

Equity investment - Entasis Common Stock

Equity investment - Entasis Warrants

Equity investment - InCarda Warrants

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Total fair value of debt

(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.

Contingent value rights

Total liabilities at estimated fair value

(1) The investments held by ISP Fund LP consisted of $ 295.4 million 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 contributions of $ 300.0 million is subject to a 36-month lock-up period from the date of such capital contributions.

The fair values of our equity investments in Armata’s common stock and publicly 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 classified within Level 2 are based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications.

InCarda’s equity securities, the Gate Convertible Note, 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.

The fair values of the warrants in Armata classified within Level 2 are based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications.

InCarda’s certain equity securities, the Gate Convertible Note, the Armata 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 2025 Notes and 2028 Notes are based on recent trading prices of the respective instruments.

The fair values of our 2023 Notes, which were fully paid off in January 2023, were also measured based on their trading prices.

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 September 30, 2022 was $ 16.0 million .

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

The carrying amount of goodwill as of March 31, 2023 was $ 27.9 million .

We have no t recognized any impairment losses related to goodwill during the periods presented.

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

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

The carrying basis and accumulated amortization of recognized intangible assets as of March 31, 2023 and December 31, 2022 were as follows:

March 31, 2023

(In thousands)

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Collaboration agreement

December 31, 2022

(In thousands)

Marketed products

In-process research and development

Collaboration agreement

Intangible assets recognized as a result of the acquisition of Entasis amounted to $ 106.7 million, which consist of Entasis’

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

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

thus, no amortization expense of determinable assets was recognized for the three months ended March 31, 2023.

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 $ 1.5 million for the three and nine months ended September 30, 2022.

We recognized amortization expense of $ 3.8 million for the period through March 31, 2023 .

Future amortization expense is expected to be $ 11.6 million for the remainder of 2023, $ 15.4 million for each of the years from 2024 to 2027 and $ 68.4 million thereafter.

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Inventory consisted of the following:

September 30,

(in thousands)

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Total inventory

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

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

There was no inventory as of December 31, 2021.

As of March 31, 2023 , total inventory included net fair value adjustments resulting from the acquisition of La Jolla of approximately $ 42.7 million , which will be amortized and 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 $ 6.8 million for the three months ended March 31, 2023.

Other Accrued Liabilities

Other accrued liabilities consisted of the following:

September 30,

(in thousands)

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Current portion of lease liabilities

Current portion of deferred royalty obligations

Accrued license fees and royalties

Total other accrued liabilities

Amount in “Other”

as of March 31, 2023 includes $ 3.8 million in ISP Fund LP’s liability for unsettled securities transactions.

Other Long-term Liabilities

Other long-term liabilities consisted of the following:

September 30,

(in thousands)

Long-term portion of deferred royalty obligation

Long-term portion of lease liabilities

Deferred royalty obligation

Contingent value rights liability

Total other long-term liabilities

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

Stock-Based Compensation

Stock- Based Compensation Expense

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

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

Three Months Ended September 30,

Nine Months Ended September 30,

The following table summarizes stock-based compensation expense:

Three Months Ended March 31,

(In thousands)

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

Nine Months Ended September 30,

Three Months Ended March 31,

Risk-free interest rate

3.7 % - 4.0 %

1.07 % - 1.13 %

Expected term (in years)

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$ 5.40 - $ 5.42

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

Our debt consisted of the following:

September 30,

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.

For the three months ended March 31, 2023 , we have repurchased 3,419,476 shares in the open market at an average price of $ 11.79 per share for a total amount of approximately $ 40.3 million.

All the repurchased shares were retired.

Subsequent to March 31, 2023 and through May 2, 2023, we have repurchased 524,863 shares in the open market at an average price of $ 11.70 per share for a total amount of approximately $ 6.1 million.

Our debt consists of the following:

(In thousands)

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Convertible Subordinated Notes Due 2023

In January 2013, we completed an underwritten public offering of $ 287.5 million aggregate principal amount of our 2023 Notes, which will mature on 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 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.

At the option of the holders, the 2023 Notes may be converted into fully paid and non-assessable shares of our common stock prior to the close of the business on the second business day immediately preceding the final maturity date.

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

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

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

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.

During 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 unaudited condensed consolidated statement of operations.

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

The 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:

September 30,

(In thousands)

Debt issuance costs, net

Net carrying amount

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

Three Months Ended September 30,

Nine Months Ended September 30,

In January 2013, we completed an underwritten public offering of $ 287.5 million aggregate principal amount of our 2023 Notes, which matured on January 15, 2023.

The remaining balance of the 2023 Notes in the amount of $ 96.2 million was fully paid upon the maturity date in January 2023.

The following table sets forth total interest expense recognized related to the 2023 Notes:

Three Months Ended March 31,

(In thousands)

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

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

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 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 %.

The annual effective interest rate on the 2025 Notes is 2.88 %.

Our outstanding 2025 Notes balances consisted of the following:

September 30,

(In thousands)

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Net carrying amount

Equity component, net

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

Three Months Ended September 30,

Nine Months Ended September 30,

The following table sets forth total interest expense recognized related to the 2025 Notes for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

(In thousands)

1 unchanged sentence

Amortization of debt issuance costs

Amortization of debt discount

Total interest and amortization expense

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

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

Our outstanding 2028 Notes balance consisted of the following:

(In thousands)

September 30, 2022

Debt issuance costs, net

Net carrying amount

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

Three Months Ended September 30,

Date of Issuance through September 30,

The following table sets forth total interest expense recognized related to the 2028 Notes:

Three Months Ended March 31,

(In thousands)

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Debt Maturities

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

The aggregate scheduled maturities of our convertible debt as of March 31, 2023 were as follows:

(In thousands)

September 30, 2022

March 31, 2023

Years ending December 31:

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

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

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

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

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

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

For the three months ended March 31, 2023, we recognized interest expense of $ 1.2 million.

The carrying value of the deferred royalty obligation as of M arch 31, 2023 was $ 70.3 million, $ 67.1 million of which was classified as part of other long-term liabilities and the remaining $ 3.2 mil lion was classified as other accrued liabilities in the condensed consolidated balance sheet.

The carrying value of the deferred royalty obligation as of December 31, 2022 was $ 70.6 million, $ 67.9 million of which was classified as part of other long-term liabilities and the remaining $ 2.7 million was classified as other accrued liabilities in the condensed

consolidated balance sheet.

During the three months ended March 31, 2023, we made royalty payments to HCR of $ 1.4 million.

The deferred royalty obligation was valued using Level 3 inputs, and its carrying value as of March 31, 2023 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 for the current period is 7.19 %.

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

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

As of March 31, 2023 , inclusive of the aggregate royalties paid to HCR by La Jolla under the La Jolla Royalty Agreement prior to our acquisition, La Jolla paid $ 14.1 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.

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

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

As a result of this assessment, we determined that the fair value of the embedded derivatives is immaterial and, therefore, not recognized as of March 31, 2023 and 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 unaudited condensed consolidated statements of income.

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

Commitments and Contingencies

2 unchanged sentences

The components of lease cost are as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands)

2 unchanged sentences

Total lease costs

Supplemental cash flow information related to leases are as follows:

Nine Months Ended September 30,

(In thousands)

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

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

Right-of-use assets obtained through acquisitions

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

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

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

September 30,

(In thousands)

Right-of-use assets

Current portion of lease liabilities

Long-term portion of lease liabilities

Total lease liabilities

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

As of March 31, 2023, our operating leases have weighted-average remainin g term of approximately 2.6 years and the weighted average discount rate on our operating lease liabilities was 7.6 %.

We have not presented the comparative information above as our operating lease in the first quarter of 2022 was not material.

Future minimum payments on our operating leases as of March 31, 2023 were as follows:

(In thousands)

September 30, 2022

March 31, 2023

Years ending December 31:

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

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

On February 15, 2022, La Jolla received a paragraph IV notice of certification (the “Notice Letter”) from Gland Pharma Limited (“Gland”) advising that Gland had submitted an Abbreviated New Drug Application (“ANDA”) to the FDA seeking approval to manufacture, use or sell a generic version of GIAPREZA® in the U.S.

prior to the expiration of U.S.

Patent No.s.:

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

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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 March 31, 2023.

Indemnification

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

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

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

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

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

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

We recorded a provision for income tax expe nse of $ 6.3 million and $ 6.9 million f or the three months ended March 31, 2023 and 2022, respectively.

The Company’s effective income tax rate for the three months ended March 31, 2023 and 2022 was 15.3 %.

The income tax expense for the three months ended March 31, 2023 and 2022 was determined based upon estimates of the Company’s effective income tax rates in various jurisdictions.

Our effective tax rate for the three months ended March 31, 2023 was lower than the benefit computed at the U.S.

federal statutory income tax rate due primarily to non-deductible expenses.

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

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Such forward-looking statements involve substantial risks, uncertainties, and assumptions.

All statements contained herein that are not of historical fact, including, without limitation, statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, intentions, expectations, goals and objectives, may be forward-looking statements.

All statements contained herein, other than statements of historical fact, including, without limitation, statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, intentions, expectations, goals and objectives may be forward‑looking statements.

The words “anticipates,”

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“projects,”

“pursue,”

“pursuing,”

“will,”

“would”

and similar expressions (including the negatives thereof) are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

We may not actually achieve the plans, intentions, expectations or objectives disclosed in our forward-looking statements and the assumptions underlying our forward-looking statements may prove incorrect.

Therefore, you should not place undue reliance on our forward-looking statements.

Actual results or events could differ materially from the plans, intentions, expectations and objectives disclosed in the forward-looking statements that we make.

All written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

Important factors that we believe could cause actual results or events to differ materially from our forward-looking statements include, but are not limited to, risks related to:

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

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

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

and similar expressions (including the negatives thereof) are intended to identify forward‑looking statements, although not all forward‑looking statements contain these identifying words.

We may not actually achieve the plans, intentions, expectations or objectives disclosed in our forward‑looking statements and the assumptions underlying our forward‑looking statements may prove incorrect.

Therefore, you should not place undue reliance on our forward‑looking statements.

Actual results or events could differ materially from the plans, intentions, expectations and objectives disclosed in the forward‑looking statements that we make.

All written and verbal forward‑looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

Important factors that we believe could cause actual results or events to differ materially from our forward‑looking statements include, but are not limited to, risks related to:

lower than expected future royalty revenue from respiratory products partnered with GSK, the commercialization of RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA®, GIAPREZA®and XERAVA® in the jurisdictions in which these products have been approved;

the strategies, plans and objectives of the Company (including the Company's growth strategy and corporate development initiatives);

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

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

risks related to the Company’s growth strategy;

projections of revenue, expenses and other financial items and risks discussed in “Risk Factors”

and risks related to the Company’s growth strategy and risks discussed in “Risk Factors”

in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2023, and as amended on March 20, 2023 (“2022 Form 10-K”), and Item 1A of Part II of our Quarterly Reports on Form 10-Q and below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

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Innoviva, Inc.

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

(and where context requires, together with its subsidiaries referred to as “Innoviva”, the “Company”, or “we”

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

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

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

Under the Long-Acting Beta2 Agonist (“LABA”)

Collaboration Agreement, Innoviva is entitled to receive royalties from GSK on sales of RELVAR ® /BREO ® ELLIPTA ® as follows:

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;

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(“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 commercial and marketed products include GIAPREZA ® (angiotensin II), approved to increase blood pressure in adults with septic or other distributive shock, and XERAVA ® (eravacycline) approved 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”).

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

Recent Highlights

We also have economic interests in other healthcare companies.

Our corporate strategy is currently focused on increasing stockholder value by, among other things, maximizing the potential value of our respiratory assets partnered with GSK, optimizing our operations and augmenting capital allocation.

We continue to diversify our royalty management business through actively pursuing opportunistic acquisitions of promising companies and assets in the healthcare industry and enhancing the returns on our capital.

In particular, our recent acquisitions of Entasis and La Jolla created a robust hospital and infectious disease platform.

First Quarter 2023 and Recent Highlights:

GSK Net Sales

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

First quarter 2023 net sales of RELVAR ® /BREO ® ELLIPTA ® by GSK were $339.2 million with $122.4 million in net sales from the U.S.

market and $216.8 million from non-U.S.

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

First quarter 2023 net sales of ANORO ® ELLIPTA ® by GSK were $145.1 million with $62.2 million net sales from the U.S.

market and $82.9 million from non-U.S.

Corporate Updates

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

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

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

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

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

Innoviva’s recently established subsidiary, Innoviva Specialty Therapeutics, which integrated Entasis and La Jolla and, in conjunction with these affiliates, markets GIAPREZA ® and XERAVA ® as well as advances the development and commercialization of SUL-DUR and zoliflodacin.

On January 10, 2023, the Company’s wholly owned subsidiary, Innoviva Strategic Opportunities LLC, invested $30.0 million in a convertible promissory note of Armata Pharmaceuticals, Inc.

to support the clinical development of its multiple innovative bacteriophage assets as well as advanced biologics cGMP manufacturing capabilities.

On February 2, 2023, the Company’s wholly owned subsidiary, Innoviva TRC Holding LLC, invested $5.0 million in a convertible promissory note of Gate Neurosciences Inc.

to support the clinical development of its differentiated pipeline of neuropsychiatric therapeutics.

During the first quarter of 2023, Innoviva repurchased approximately 3.4 million shares of its outstanding common stock for $40.3 million.

In January 2023, Innoviva paid off the remaining principal balance of $96.2 million of the 2023 Notes.

Clinical Updates

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

On April 17, 2023, the FDA’s Antimicrobial Drugs Advisory Committee ("AMDAC") unanimously voted 12-0 in support of approval of SUL-DUR based on a favorable benefit-risk assessment for the treatment of adults with hospital-acquired bacterial pneumonia ("HABP") and ventilator-associated bacterial pneumonia ("VABP") caused by susceptible strains of Acinetobacter baumannii-calcoaceticus complex (Acinetobacter).

The SUL-DUR New Drug Application ("NDA"), filed by Entasis was accepted and granted Priority Review by the FDA in November 2022, with a Prescription Drug User Fee Act ("PDUFA") target action date of May 29, 2023.

Phase 3 Zoliflodacin study on track to complete enrollment in second half of 2023.

Zoliflodacin is a novel, first-in-class oral antibiotic in development for the treatment of uncomplicated gonorrhea.

Collaboration Arrangement with GSK

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

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

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

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

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

Except as discussed below, we believe there have been no significant changes in our critical accounting policies as described in the Form 10-K for the year ended December 31, 2021 filed with the SEC on February 28, 2022, and as amended on March 17, 2022.

Business Combinations

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

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

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

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

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

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

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

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

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

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

Revenue Recognition from Product Sales

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

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

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

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

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

These items may include:

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

acquisition price.

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

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

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

We estimate discounts primarily based on contractual terms.

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

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

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

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

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

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

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

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

Administrative Fees:

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

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

General Services Administration’s Federal Supply Schedules program.

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

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

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

We believe there have been no significant changes in our critical accounting policies as described in the Form 10-K for the year ended December 31, 2022 filed with the SEC on February 28, 2023, and as amended on March 20, 2023.

Factors Affecting Comparability

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Three Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

- RELVAR/BREO

Total royalties from a related party

Total royalties

amortization of capitalized fees

paid to a related party

Royalty revenue from GSK

Total net royalty revenue

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Total net royalty revenue decreased to $62.2 million and $260.4 million for the three and nine months ended September 30, 2022, compared to $97.9 million and $284.2 million, respectively, for the same period a year ago.

The decrease of total net royalty revenue for the three and nine months ended September 30, 2022, compared to the same periods a year ago was primarily due to the sale of our ownership interest in TRC, which received royalties stemming from sales of TRELEGY ® ELLIPTA ® .

For the three months ended September 30, 2022, there was a decrease in the net sales of ANORO ® ELLIPTA ® due to pricing pressures and foreign currency changes in the U.S.

market offset by a slight increase in the net sales of RELVAR ® /BREO ® ELLIPTA ® due to U.S.

net sales growth compensating for foreign currency changes and a slowdown in non-U.S.

Total net royalty revenue decreased to $56.9 million for the three months ended March 31, 2023, compared to $90.1 million for the same period a year ago.

The decrease of total net royalty revenue for the three months ended March 31, 2023, compared to the same period a year ago was primarily due to the sale of our ownership interest in TRC, which received royalties stemming from sales of TRELEGY ® ELLIPTA ® .

For the three months ended March 31, 2023, there was a decrease in the net sales of RELVAR ® /BREO ® ELLIPTA ® due to pricing pressures in the U.S.

market and foreign currency rate changes.

Net Product Sales

Net product sales we recognized from the date of acquisition of La Jolla to September 30, 2022 was $5.1 million, consisting of net sales of GIAPREZA ® and XERAVA ® for $3.8 million and $1.3 million, respectively.

Net product sales we recognized for the three months ended March 31, 2023 was $11.5 million, consisting of net sales of GIAPREZA ® and XERAVA ® for $9.0 million and $2.5 million, respectively.

License Revenue

We recognized $8.0 million in license revenue for the three months ended March 31, 2023 as a result of achievement of a regulatory milestone under our license agreement with Everest.

Research and Development

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September 30,

Nine Months Ended

September 30,

(In thousands)

Research and development

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Research and development expenses consist of the following:

Three Months Ended

September 30,

Nine Months Ended

September 30,

(in thousands)

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Total research and development expense

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Research and development expenses, which is mainly attributable to Entasis’

product development efforts for SUL-DUR, were $11.7 million and $31.4 million, respectively, for the three and nine months ended September 30, 2022.

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

Research and development expenses, which are mainly attributable to Entasis’

product development efforts for SUL-DUR, were $12.6 million, for the three months ended March 31, 2023.

Research and development expenses for the three months ended March 31, 2022 were attributable to the product development efforts of Entasis from February 17, 2022 to March 31, 2022.

Selling, General & Administrative

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September 30,

Nine Months Ended

September 30,

(In thousands)

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Selling, general and administrative expenses increased for the three and nine months ended September 30, 2022, compared to the same period in 2021 mainly due to the consolidation of Entasis’

Selling, general and administrative expenses increased for the three months ended March 31, 2023, compared to the same period in 2022 mainly due to the consolidation of Entasis’

operating expenses starting February 17, 2022 and the consolidation of La Jolla’s operating expenses starting August 22, 2022.

This increase was inclusive of $1.6 million and $2.5 million of sales and marketing expenses for the three and nine months ended September 30, 2022.

Interest and dividend income and other expense, net

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Three Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

Interest and dividend income

Other expense (income), net

Other expense, net

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Interest and dividend income increased for the three and nine months ended September 30, 2022, compared to the same periods a year ago due to higher interest rates and higher average balances of our cash equivalents, money market funds and other interest-bearing investments.

Interest and dividend income increased for the three months ended March 31, 2023, compared to the same periods a year ago due to higher interest rates and higher average balances of our cash equivalents, money market funds and other interest-bearing investments.

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

Other expense, net was partially offset by grant income of $0.6 million and $1.3 million during the three and nine months ended September 30, 2022.

There was no grant income during 2021.

Interest Expense

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September 30,

Nine Months Ended

September 30,

(In thousands)

Interest expense

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

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

Interest expense for the three and nine months ended September 30, 2021 included the amortization of debt discount in addition to the contractual interest expense and the amortization of debt issuance costs for our 2023 Notes and 2025 Notes.

The increase for the three months ended September 30, 2022, compared to September 30, 2021, was mainly due to a higher debt balance and interest expense incurred for the deferred royalty obligation from the acquisition of La Jolla.

The interest expense included the contractual interest expense and the amortization of debt issuance costs for our 2023 Notes, 2025 Notes and 2028 Notes, as well as effective interest expense on our deferred royalty obligation.

Interest expense for the three months ended March 31, 2023 included the amount on the 2023 Notes until the notes were fully paid off on January 15, 2023.

Interest expense for the three months ended March 31, 2022 included the amount on the 2028 Notes from March 7, 2022, the date of issuance, through March 31, 2022.

The increase for the three months ended March 31, 2023, compared to March 31, 2022, was mainly due to interest expense on our deferred royalty obligation and a higher average debt balance.

Loss on Debt Extinguishment

We recognized a loss of $20.7 million due to the total premium payment of $20.4 million and the write-off of $0.3 million debt issuance costs in connection with the repurchase of $144.8 million aggregate principal amount of our 2023 Notes in March 2022.

Gain on Sale of TRC

We recognized a net gain of $266.7 million due to the sale of our ownership interest in TRC to Royalty Pharma, consummated on July 20, 2022.

Changes in Fair Values of Equity and Long-Term Investments

Changes in Fair Values of Equity Method Investments and Equity and Long-Term Investments

Changes in fair values of equity and long-term investments, as compared to the prior year period, were as follows:

Three Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

Changes in fair values of equity and

long-term investments, net

Changes in fair values of equity

method investments, net

Changes in fair values of other

equity and long-term

investments, net

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

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

The changes in fair values of equity method investments for the three months ended March 31, 2023 posted a gain compared to a loss position during the same period in 2022 mainly due to Armata’s higher stock price in 2023.

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

Provision for Income Taxes

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

The effective income tax rate for the nine months ended September 30, 2022 and 2021 was 18.3% and 16.9%, respectively.

Net Income (Loss) Attributable to Noncontrolling Interest

Net income attributable to noncontrolling interest, as compared to the prior periods, was as follows:

Three Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

Net income (loss) attributable to

noncontrolling interests

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(1) Three months ended September 30, 2022 represents the period from July 1, 2022 through the date of the acquisition of Entasis on July 11, 2022, and the period from July 1, 2022 through the date of the sale of our ownership interest in TRC on July 20, 2022.

(2) Nine months ended September 30, 2022 represents the period from the initial date of consolidation of Entasis on February 17, 2022 to the date of the acquisition of Entasis on July 11, 2022, and the period from January 1, 2022 the date of the sale of our ownership interest in TRC on July 20, 2022.

Net income (loss) attributable to noncontrolling interest represents $(33.5) million, which loss was mainly due to the distribution of TRC’s equity and debt investments to Innoviva at zero cost prior to the sale of TRC, and $19.9 million for the 85% share of net income in TRC for Theravance Biopharma and $(2.7) million and $(13.6) million for the 40% share of net loss in Entasis for the three and nine months ended September 30, 2022, respectively.

The net income attributable to noncontrolling interest for the three and nine months ended September 30, 2021 represents the 85% share of net income in TRC for Theravance Biopharma.

We recorded a provision for income tax expense of $6.3 million for the three March 31, 2023, compared to provision for income tax expense of $6.9 million for the three months ended March 31, 2022.

The effective income tax rate for the three months ended March 31, 2023 and 2022 was 15.3%.

Net Income Attributable to Noncontrolling Interest

Net income attributable to noncontrolling interest for the three months ended March 31, 2022 represented $25.1 million for the 85% share of net income in Theravance Respiratory Company, LLC for Theravance Biopharma and $3.0 million for the 40% share of net loss in Entasis Therapeutics Holdings, Inc.

There is no noncontrolling interest in any of our subsidiaries in 2023.

Liquidity and Capital Resources

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

For the nine months ended September 30, 2022, we generated gross royalty revenues from GSK of $270.8 million and net product sales revenues of $5.1 million.

Net cash and cash equivalents totaled $300.8 million, and receivables from GSK totaled $65.6 million as of September 30, 2022.

For the three months ended March 31, 2023, we generated gross royalty revenues from GSK of $60.3 million, net product sales of $11.5 million and license revenue of $8.0 million.

Net cash and cash equivalents totaled $144.0 million, royalties receivables from GSK totaled $60.3 million and accounts receivable associated with our product sales and license revenue totaled $15.5 million as of March 31, 2023.

Adequacy of Cash Resources to Meet Future Needs

We believe that cash from projected future royalty revenues and our cash, cash equivalents and marketable securities will be sufficient to meet our anticipated debt service and operating needs for at least the next 12 months based upon current operating plans and financial forecasts.

We believe that our cash and cash equivalents will be sufficient to meet our anticipated debt service and operating needs, as well our ongoing share repurchase program, for at least the next 12 months based upon current operating plans and financial forecasts.

Our long-term capital requirements will depend on many factors including the amount of our royalty revenues, sales growth of our currently marketed products, timing of regulatory approval of our product candidates and outcome of our acquisitions and strategic investments.

If our current operating plans and financial forecasts change, we may require additional funding sooner in the form of public or private equity offerings or debt financings.

Furthermore, if in our view favorable financing opportunities arise, we may seek additional funding at any time.

Furthermore, if in our view favorable financing opportunities arise, we may seek additional funding in the form of public or private equity offerings or debt financings at any time.

However, future financing may not be available in amounts or on terms acceptable to us, if at all.

This could leave us without adequate financial resources to fund our operations as currently planned.

In addition, from time to time we may restructure or reduce our debt, including through tender offers, redemptions, amendments, repurchases or otherwise, all allowable with the terms of our debt agreements.

In addition, from time to time we may restructure or reduce our debt, including through privately negotiated repurchases, tender offers, redemptions, amendments, or otherwise, all allowable with the terms of our debt agreements.

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

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands)

Net cash provided by operating activities

Net cash (used in) provided by investing activities

Net cash used in financing activities

Net cash used in investing activities

Net cash (used in) provided by financing activities

Cash Flows from Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2022 was $192.8 million, consisting primarily of our net income of $288.6 million, adjusted for net non-cash items, which included a net gain of $266.7 million on the sale of TRC.

Other non-cash items included $29.3 million of deferred income tax, $12.5 million of depreciation and amortization, $20.7 million of loss on extinguishment of debt, and $66.4 million decrease in the fair value of our equity and long-term investments.

Net non-cash items were partially offset by increases of $3.6 million in other assets, non-current and $0.9 million in accounts receivable and decreases of $1.9 million in accrued interest payable and $1.7 million in accrued personnel-related expenses and other accrued liabilities.

Net cash provided by operating activities for the nine months ended September 30, 2021 was $265.4 million, consisting primarily of our net income of $323.2 million, adjusted for net non-cash items such as $65.6 million of deferred income taxes, $10.4 million of depreciation and amortization, and $6.8 million of amortization of debt discount and issuance costs, partially offset by an increase of $132.5 million in the fair value of our equity and long-term investments, net and an increase in receivables from collaboration arrangements of $7.3 million.

Net cash provided by operating activities for the three months ended March 31, 2023 was $25.7 million, consisting primarily of our net income of $34.9 million, adjusted for net non-cash items, which included $13.7 million of net changes in fair value of our investments, $6.8 million of amortization of inventory fair value step-up adjustment, $3.5 million of amortization of capitalized fees and depreciation of property and equipment and $3.8 million of amortization of acquired intangible assets partially offset by increases of $6.1 million in accounts receivable, $5.6 million in receivables from collaboration arrangement and decreases of $3.5 million in accrued interest payable.

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

Cash Flows from Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2022 of $48.0 million primarily consisted of $150.5 million of cash used for the acquisition of La Jolla, $93.0 million in purchases of equity investments managed by ISP Fund LP, $41.3 million in purchases and sales of other investments managed by ISP Fund LP and $58.7 million in purchases of equity and long-term investments.

The use of cash for investing activities was partially offset by net proceeds of $248.2 million from the sale of our ownership interest of TRC, $24.3 million from the sale of equity investments managed by ISP Fund LP and $23.1 million of cash acquired through the consolidation of Entasis.

Net cash provided by investing activities for the nine months ended September 30, 2021 of $63.6 million primarily was due to $21.4 million of sales of equity investments managed by ISP Fund LP and $267.0 million of purchase and sales of other investments managed by ISP Fund LP, net, partially offset by $178.4 million of purchases of equity investments managed by ISP Fund LP and $46.4 million investments of Armata, ImaginAb and Entasis.

Net cash used in investing activities for the three months ended March 31, 2023 of $35.7 million primarily consisted of $35.7 million in purchases of equity and other long-term investments and $3.9 million in purchases of equity investments managed by ISP Fund LP.

The use of cash for investing activities was partially offset by net proceeds of $3.9 million from the sale of equity and other investments managed by ISP Fund LP.

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

Cash Flows from Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2022 of $45.6 million was primarily due to a payment of $165.1 million for the repurchase of the 2023 Notes and $21.0 million for the purchases of capped call options associated with the 2028 Notes, $69.8 million in distributions to noncontrolling interests and $42.4 million for the purchase of Entasis’

minority interest.

The use of cash for financing activities was partially offset by $252.5 million in net proceeds from the issuance of the convertible senior notes due 2028.

Net cash used in financing activities for the nine months ended September 30, 2021 of $440.4 million was primarily due to $394.1 million used for our common stock repurchase from GSK and $46.4 million distributions to noncontrolling interest.

Net cash used in financing activities for the three months ended March 31, 2023 of $137.0 million was primarily due to the payments of $96.2 million upon maturity of the 2023 Notes in January 2023 and $40.7 million for the repurchase of common stock under our current stock repurchase program.

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

Contractual Obligations

In March 2022, we completed a private placement of $261.0 million aggregate principal amount of unsecured convertible senior notes, the 2028 Notes, which will mature on March 15, 2028.

Under the terms of the 2028 Notes, we will make interest payments of approximately $2.9 million during the year 2022 and $5.5 million in each of the years from 2023 through 2027.

The principal balance of $261.0 million will become due in March 2028.

As of September 30, 2022, our notes payable obligation also included $96.2 million related to our 2023 Notes which are due in 2023 and $192.5 million related to our 2025 Notes which are due in 2025.

As of March 31, 2023, our notes payable obligation included $192.5 million related to our 2025 Notes and $261.0 million related to our 2028 Notes, which are due in 2025 and 2028, respectively.

Under the terms of the 2025 Notes and 2028 Notes, we will make interest payments of 2.5% and 2.125%, respectively, of outstanding principal.

Refer to Note 11, “Debt”

to the Consolidated Financial Statements for more information.

Our short-term and long-term obligations also include contractual payments related to our operating leases were $4.4 million, with approximately $0.3 million payable through December 31, 2022 and approximately $1.3 million to $1.5 million payable in each of the years from 2023 to 2025.

Our short-term and long-term obligations also include contractual payments related to our operating leases were $3.7 million, with approximately $1.2 million payable through December 31, 2023 and approximately $1.3 million payable in each of the years 2024 and 2025.

Refer to Note 12, “Commitments and Contingencies”

11 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements