What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-02-29 compared with 2023-02-28 · 555 added, 570 removed, 989 unchanged (53% of the section changed)

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Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2023

Consolidated Statements of Stockholders’

Equity for each of the three years in the period ended December 31, 2022

Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2023

Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2023

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Property and equipment, net

Equity method investments

Equity and long-term investments

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Intangible assets

Deferred tax assets, net

Liabilities and Stockholders’

Liabilities and Stockholders’ Equity

Current liabilities:

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Commitments and contingencies (Note 13)

Stockholders’

Stockholders’ equity:

Preferred stock:

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

and December 31, 2021

Additional paid-in capital

Accumulated deficit

Total Innoviva stockholders’

Noncontrolling interests

Total stockholders’

Total liabilities and stockholders’

Total stockholders’ equity

Total liabilities and stockholders’ equity

See accompanying notes to consolidated financial statements.

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Year Ended December 31,

Royalty revenue from a related party, net

of amortization of capitalized fees paid

of $ 13,823 in each of the years ended

Royalty revenue, net of amortization of

capitalized fees paid of $ 13,823 in

each of the years ended

December 31, 2023, 2022 and 2021

Revenue from collaborative arrangement

Net product sales

License revenue

Total revenue

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amortization of inventory fair value

adjustments and excluding amortization

of acquired intangible assets)

adjustments, excluding amortization

of intangible assets)

Cost of license revenue

Selling, general and administrative

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Gain on sale of Theravance Respiratory

Company, LLC (“TRC”)

Loss on extinguishment of debt

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investments, net

Changes in fair value of other equity and

Changes in fair value of equity and

long-term investments, net

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Other expense, net

Total expenses

Total expenses, net

Income before income taxes

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Year Ended December 31,

Reclassifications to net income

Comprehensive income

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INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

Accumulated Other

Comprehensive

Treasury Stock

Noncontrolling

Stockholders’

Income (Loss)

Stockholders’

Balance as of January 1, 2021

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repurchase of shares to satisfy tax withholding

Stock-based compensation

Other comprehensive income

Balance as of December 31, 2020

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

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Balance as of December 31, 2022

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 December 31, 2023

See accompanying notes to consolidated financial statements.

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Amortization of acquired intangible assets

Fair value adjustments included in cost of products sold

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

Stock-based compensation

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Changes in fair values of equity method investments, net

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

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

Loss on extinguishment of debt

Net gain on sale of TRC

Amortization of discount on short-term investments

Amortization of lease guarantee

Other non-cash items

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Cash flows from investing activities

Maturities of marketable securities

Purchases of marketable securities

Purchases of equity method investments

Purchases of trading securities

Purchases of equity and long-term investments

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Repurchase of shares to satisfy tax withholding

Proceeds from issuances of common stock

Net proceeds from the issuance of variable interest entity’s equity

Proceeds from issuances of common stock, net

Payment for repurchase of convertible subordinated notes due 2023

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Supplemental Disclosure of Non-cash Investing and Financing Activities:

Accrued interest income converted to long-term investments

Adoption of ASU 2020-06

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Innoviva, Inc.

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

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

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

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

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

(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.

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

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

15 % on the first $ 3.0 billion of annual global net sales and 5 % for all annual global net sales above $ 3.0 billion;

and royalties from the sales of ANORO ® ELLIPTA ® , which tier upward at a range from 6.5 % to 10 %.

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

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

We expanded our portfolio through the acquisition of Entasis Therapeutics Holdings Inc.

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

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

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

As such, we have a wholly owned robust infectious disease and hospital operating platform, as well as other assets in these areas, such as a large equity stake in Armata Pharmaceuticals, a leader in bacteriophage development with potential use across a range of infectious and other serious diseases.

Our new product, XACDURO ® (formerly known as sulbactam-durlobactam or SUL-DUR), was approved by the United States Food and Drug Administration (“FDA”) for the treatment of hospital-acquired and ventilator-associated pneumonias caused by Acinetobacter in adults on May 23, 2023.

We commenced commercial sales of XACDURO ® in the third quarter of 2023.

Our development pipeline includes zoliflodacin, an investigational treatment for uncomplicated gonorrhea that reported positive data in a pivotal Phase 3 clinical trial on November 1, 2023.

As such, we have a wholly owned robust critical care and infectious disease operating platform with a hospital focus anchored by three differentiated products with significant growth potential and a promising drug candidate.

In addition, we own other strategic healthcare assets, such as a large equity stake in Armata Pharmaceuticals, a leader in development of bacteriophages with potential use across a range of infectious and other serious diseases.

We also have economic interests in other healthcare companies.

Principles of Consolidation

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

All intercompany balances and transactions have been eliminated in consolidation.

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Presentation Reclassification

Certain amounts in prepaid expenses and other current assets, other assets and changes in fair values of equity and long-term investments, net, reported in the Company's prior year financial statements have been reclassified to conform to the current year presentation.

These reclassifications had no net effect on the net income or net cash flows as previously reported.

Amounts in equity and long-term investments reported in the Company’ s comparative financial statements have been reclassified to conform to the current year presentation.

Certain reclassifications have been made to the consolidated statement of cash flows for the years ended December 31, 2022 and 2021 to conform to the current year’s presentation.

These reclassifications had no net effect on the net income or net cash flows from operating, investing and financing activities as previously reported.

Factors Affecting Comparability

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

Adoption of Accounting Standards Update (“ASU”) 2020-06 effective January 1, 2022;

• Adoption of Accounting Standards Update 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”) effective January 1, 2022;

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

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• Acquisition of La Jolla on August 22, 2022.

Use of Management’s Estimates

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Use of Management’s Estimates

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

Generally Accepted Accounting Principles (“U.S.

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

Generally Accepted Accounting Principles (“U.S.

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

Actual results could differ materially from those estimates.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Concentrations of Credit Risk and of Significant Suppliers and Partners

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

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

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

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

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

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

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

or investors’

expectations, due to a number of important factors.

We also started recognizing revenue from product sales as a result of our acquisition of La Jolla Hospitals and other healthcare organizations generally purchase our products through a network of specialty distributors.

Our royalty revenues under the GSK Agreements may not meet our, analysts’ or investors’ expectations, due to a number of important factors.

We started recognizing revenue from product sales of GIAPREZA ® and XERAVA ® in 2022 as a result of our acquisition of La Jolla.

In the current year, we also started recognizing revenue from product sales from XACDURO ® , which was commercially launched in the third quarter of 2023.

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

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

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

Three of our customers each account for 33 %, 29 % and 28 %, respectively, of our net product sales from the time of our acquisition of La Jolla through December 31, 2022 .

These same customers account for 23 %, 37 % and 37 %, respectively, of our receivables from net product sales, which are included in “Accounts receivables, net”

on our consolidated balance sheet as of December 31, 2022 .

Three of our customers each account for approximately 31 %, 27 % and 27 %, respectively, of our net product sales for the year ended December 31, 2023 .

These same customers account for 29 %, 19 % and 15 %, respectively, of our receivables from net product sales, which are included in “Accounts receivables, net” in our consolidated balance sheet as of December 31, 2023.

Three of our customers each account for approximately 33 %, 29 % and 28 %, respectively, of our net product sales from the time of our acquisition of La Jolla through December 31, 2022.

These same customers account for 23 %, 37 % and 37 %, respectively, of our receivables from net product sales, which are included in “Accounts receivables, net” in our consolidated balance sheet as of December 31, 2022.

Segment Reporting

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

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

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

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

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

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

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

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

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

Variable Interest Entities

The primary beneficiary of a variable interest entity (“VIE’) is required to consolidate the assets and liabilities of the VIE.

When we obtain a variable interest in another entity, we assess at the inception of the relationship and upon occurrence of certain significant events whether the entity is a VIE and, if so, whether we are the primary beneficiary of the VIE based on our power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

To assess whether we have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, we consider all the facts and circumstances, including our role in establishing the VIE and our ongoing rights and responsibilities.

This assessment includes identifying the activities that most significantly impact the VIE’s economic performance and identifying which party, if any, has power over those activities.

In general, the parties that make the most significant decisions

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

affecting the VIE (management and representation on the Board of Directors) and have the right to unilaterally remove those decision-makers are deemed to have the power to direct the activities of a VIE.

Variable Interest Entities

The primary beneficiary of a variable interest entity (“VIE”) is required to consolidate the assets and liabilities of the VIE.

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.

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

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

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

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

Investments in Marketable Securities

We invest in short-term investments and marketable securities, primarily corporate notes, government securities, government agencies, and government commercial papers.

We limit the amount of credit exposure with any one issuer, industry or geographic area for investments other than instruments backed by the U.S.

federal government.

We classify our marketable securities as available-for-sale securities and report them at fair value in cash equivalents or short-term marketable securities on the consolidated balance sheets with related unrealized gains and losses included as a component of stockholders’

The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest income on the consolidated statements of operations.

Realized gains and losses, if any, on available-for-sale securities are included in interest income.

The cost of securities sold is based on the specific identification method.

Interest and dividends on securities classified as available-for-sale are included in interest and dividend income.

We regularly review all of our investments for other-than-temporary declines in estimated fair value.

Our review includes the consideration of the cause of the impairment, including the creditworthiness of the security issuers, the number of securities in an unrealized loss position, the severity and duration of the unrealized losses, whether we have the intent to sell the securities and whether it is more likely than not that we will be required to sell the securities before the recovery of their amortized cost basis.

When we determine that the decline in estimated fair value of an investment is below the amortized cost basis and the decline is other-than-temporary, we reduce the carrying value of the security and record a loss for the amount of such decline to other expense, net.

Accounts Receivable

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

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Property and Equipment

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Property and equipment are stated at cost less accumulated depreciation.

Property and equipment are depreciated using the straight-line method as follows:

Property and equipment are depreciated using the straight-line method over the estimated useful lives of the respective assets as follows:

Leasehold improvements

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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 under Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments .

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

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

If we conclude that we do not have an ability to exercise significant influence over an investee, we may elect to account for the equity investment without a readily determinable fair value using the measurement alternative under ASC Topic 312, Investments - Equity Securities .

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

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

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

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

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 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 restriction prevents us from having control and access to the contributions and related investments.

The lock-up period for a certain portion of our contributions expired in December 2023.

Strategic Partners did not elect to make a withdrawal in 2023, thereby extending the lock-up period and withdrawal elections into subsequent years.

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

Fair Value of Financial Instruments

We define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Our valuation techniques are based on observable and unobservable inputs.

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We classify these inputs into the following hierarchy:

Level 1 —Quoted prices for identical instruments in active markets.

Level 2 —Quoted prices for similar instruments in active markets;

Level 1 —Quoted prices for identical instruments in active markets.

Level 2 —Quoted prices for similar instruments in active markets;

quoted prices for identical 3or similar instruments in markets that are not active;

and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 —Unobservable inputs and little, if any, market activity for the assets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Financial instruments include cash equivalents, accounts receivable, receivables from collaborative arrangements, accounts payable, and accrued liabilities, equity investments and convertible promissory notes.

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We capitalize fees paid to licensors related to agreements for approved products or commercialized products.

We capitalize these fees as capitalized fees paid (“Capitalized Fees”) and amortize them on a straight-line basis over their estimated useful lives upon the commercial launch of the product, shortly after its regulatory approval.

The estimated useful lives of these Capitalized Fees are determined on a country-by-country and product-by-product basis, as the later of the expiration or termination of the last patent right covering the compound in such product in such country and 15 years from first commercial sale of such product in such country, unless the Collaboration Agreement is terminated earlier.

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We review our Capitalized Fees for impairment on a product-by-product basis for each major geographic area when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

The recoverability of Capitalized Fees is measured by comparing the asset’s carrying amount to the expected undiscounted future cash flows that the asset is expected to generate.

The determination of recoverability typically requires various estimates and assumptions, including estimating the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any.

The recoverability of Capitalized Fees is measured by comparing the asset’s carrying amount to the expected undiscounted future cash flows that the asset is expected to generate.

We derive the required cash flow estimates from near-term forecasted product sales and long-term projected sales in the corresponding market.

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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 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.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revenue Recognition

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Revenue is recognized through a five-step process:

(i) identify the contract with a customer;

(i) identify the contract with the customer;

(ii) identify the performance obligations in the contract;

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Royalty Revenue

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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:

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.

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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.

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

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 recognize these milestone payments as revenues 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 recognize regulatory approval milestone payments as revenues once the product is approved by the applicable regulatory agency.

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

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

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

Interest Expense on Deferred Royalty Obligation

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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 12, “Debt”, for more information.

Fair Value of Stock‑Based Compensation Awards

We use the Black-Scholes-Merton option pricing model to estimate the fair value of options granted under our equity incentive plans and rights to acquire stock granted under our employee stock purchase plan (“ESPP”).

Refer to Note 12, “Debt”, for more information.

Fair Value of Stock‑Based Compensation Awards

The Black-Scholes-Merton option valuation model requires the use of assumptions, including the expected term of the award and the expected stock price volatility.

We use the “simplified”

method as described in Staff Accounting Bulletin No.

107, “

Share-Based Payment ,”

for the expected option term.

We use the “simplified” method as described in Staff Accounting Bulletin No.

107, “ Share-Based Payment ,” for the expected option term.

We use our historical volatility to estimate expected stock price volatility.

Restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) are measured based on the fair market values of the underlying stock on the dates of grant.

Stock-based compensation expense is calculated based on awards ultimately expected to vest and is reduced for estimated forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates.

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The estimated fair value of stock options, RSUs and RSAs is expensed on a ratable or straight-line basis over the expected term of the grant or expected term of the vesting.

Compensation expense is recorded over the requisite service period based on management’s best estimate as to whether it is probable that the shares awarded are expected to vest.

Compensation expense for purchases under the ESPP is recognized based on the fair value of the common stock on the date of offering, less the purchase discount percentage provided for in the plan.

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Our judgment might change as new information becomes available.

We continue to evaluate our deferred tax assets each reporting period to determine whether adjustments to our valuation allowance are required and deferred tax assets will be realized based on the consideration of all available positive and negative evidence, including the differences between our anticipated and actual future operating results, using a “more likely than not”

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We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities.

Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement.

As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we determine whether the factors underlying the sustainability assertion have changed and whether the amount of the recognized tax benefit is still appropriate.

Comprehensive Income

Comprehensive income is comprised of net income and other comprehensive income (loss).

Other comprehensive income (loss) consists of changes in unrealized and realized gains and losses on our marketable securities and the related tax impact of these changes.

Related Parties

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

Transactions with GSK are described in Note 3, “Revenue Recognition and Collaborative Arrangements.”

Sarissa Capital ow ned 11.5 % of o ur outstanding common stock as of December 31, 2023 .

Transactions with Sarissa Capital are described in Note 5, “Consolidated Entities and Acquisitions”.

Sarissa Capital is considered to be a related party because two of its principals are members of our board of directors.

Accounting Pronouncements Adopted by the Company

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

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

Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives.

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

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

The effect of the adoption on our 2025 Notes (as defined below) resulted in a decrease to the opening balance of accumulated deficit of $ 37.2 million, a reduction to additional paid-in capital of $ 65.4 million, an increase to the balance of the notes by an aggregate amount of $ 35.6 million, and an increase to deferred tax assets of $ 7.4 million.

The dilutive EPS of our 2025 Notes will be computed under the if-converted method going forward.

There was no financial impact from the implementation of the standard for our 2023 Notes (as defined below).

Refer to Note 12, “Debt”, for more information.

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

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

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

Recently Issued Accounting Pronouncements Not Yet Adopted

In October 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-06, Disclosure Improvements:

Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative .

The amendment modifies the disclosure or presentation requirements for a variety of topics.

The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective.

The Company does not expect the adoption of the amendments to have a significant impact on its financial statements.

In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures (Topic 280).

This ASU update requires enhanced segment disclosures, primarily related to significant segment expenses.

The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods beginning after December 15, 2024.

The Company does not expect the adoption of the amendments to have a significant impact on its financial statements.

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740) .

The ASU requires the disclosure of income taxes paid disaggregated by jurisdiction and enhanced disclosures for the entity’s effective tax rate reconciliation as well as other income tax related disclosures.

The ASU is effective on a prospective basis for annual periods beginning after December 15, 2024.

The Company does not expect the adoption of the amendments to have a significant impact on its 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.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

As the average market price per share of our common stock as reported on The Nasdaq Global Select Market was lower than the initial conversion price of $ 17.26 per share, there was no dilutive effect of the assumed conversion premium for the years ended December 31, 2021 and 2020 respectively.

The dilutive EPS of the notes was $ 0.31 per sh are using the if-converted method for the year ended December 31, 2022 as a result of the adoption of ASU 2020-06.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table shows the computation of basic and diluted net income per share for the years ended December 31, 2023, 2022 and 2021:

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Net income per share attributable to Innoviva stockholders

Anti‑dilutive Securities

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

Anti‑dilutive Securities

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

Year Ended December 31,

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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 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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amortization of capitalized

Royalty revenue

Strategic alliance - MABA program

Total net royalty revenue

Total royalty revenue

(1) The year ended December 31, 2022 represents the period from January 1, 2022 to July 20, 2022, the date of the sale of our ownership interest in TRC.

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15 % on the first $ 3.0 billion of annual global net sales and 5 % for all annual global net sales above $ 3.0 billion.

Sales of single‑agent LABA medicines and combination medicines would be combined for the purposes of this royalty calculation.

For other products combined with a LABA from the LABA Collaboration, such as ANORO ® ELLIPTA ® , royalties are upward tiering and range from 6.5 % to 10 %.

We are also entitled to 15 % of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to TRC in connection with the Spin-Off, including TRELEGY ® ELLIPTA ® , which royalties are upward tiering and range from 6.5 % to 10 %.

2004 Strategic Alliance

During the year ended December 31, 2020, we recognized $ 10.0 million in revenue from a termination fee paid in connection with the termination of the Bifunctional Muscarinic Antagonist-Beta2 Agonist (“MABA”) program under the Strategic Alliance Agreement with GSK.

We are also entitled to 15 % of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to TRC in connection with the Spin-Off, including TRELEGY ® ELLIPTA ® through July 20, 2022, which royalties were upward tiering and ranged from 6.5 % to 10 %.

Net Product Sales

Net product sales we recognized from the date of acquisition of La Jolla, which occurred on August 22, 2022, to December 31, 2022 were $ 19.7 million, consisting of net sales of GIAPREZA ® and XERAVA ® for $ 14.2 million and $ 5.5 million, respectively.

Net product sales were $ 60.6 million, consisting of net sales of GIAPREZA ® , XERAVA ® , and XACDURO ® for $ 41.3 million, $ 17.3 million, and $ 2.0 million, respectively.

We derived approximately 91 % and 9 % of our net product sales for the same period from customers located in the U.S.

and the rest of the world, respectively.

From the date of acquisition of La Jolla to December 31, 2022, net product sales were $ 19.7 million, consisting of net sales of GIAPREZA ® and XERAVA ® for $ 14.2 million and $ 5.5 million, respectively.

We derived approximately 96 % and 4 % of our net product sales for the same period from customers located in the U.S.

and the rest of the world, respectively.

License Revenue

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

INNOVIVA, INC.

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

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

(“Zai Lab”) (Nasdaq:

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

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

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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.

No revenue was recognized under the Zai Agreement from the acquisition date of Entasis.

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

Such amounts recorded from the date of acquisition of Entasis to December 31, 2022 are not material.

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”).

Such amounts recorded for the year ended December 31, 2023 and from the date of acquisition of Entasis to December 31, 2022 are not material.

Following the approval of XACDURO ® by the FDA in May 2023, we recognized $ 3.0 million in license revenue for the year ended December 31, 2023.

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

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

Relevant amounts from the date of acquisition of Entasis to December 31, 2022 are not material.

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

Relevant amounts for the year ended December 31, 2023 and from the date of acquisition of Entasis to December 31, 2022 are not material.

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

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

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

Royalty revenue recognized under this agreement from the date of acquisition of La Jolla to December 31, 2022 was not material.

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

Royalty revenue recognized under this agreement for the year ended December 31, 2023 and from the date of acquisition of La Jolla to December 31, 2022 are not material.

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

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

We recognized $ 1.3 million in cost reimbursements under this agreement for the year ended December 31, 2023.

Amounts recognized under this agreement from the date of acquisition of La Jolla to December 31, 2022 were not material.

PAION AG and PAION Deutschland GmbH filed for insolvency in Germany on October 27, 2023 and the insolvency proceedings were opened on January 1, 2024.

PAION announced on December 22, 2023 that it concluded negotiations with Humanwell Healthcare Group and entered into an agreement on the sale of the essential business operations of PAION AG and PAION Deutschland GmbH with the approval of the insolvency administrator in both procedures.

La Jolla did not oppose the sale and is in discussions with the acquirer regarding the continued business relationship.

Everest Medicines Limited

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

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

Under the Everest License, we recognized $ 8.0 million in license revenue for the year ended December 31, 2023 as a result of an achievement of a regulatory milestone during the period.

We are eligible to receive additional sales milestone payments of up to an aggregate of $ 20.0 million.

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 December 31, 2022.

Royalty revenue recognized under this agreement from the date of acquisition of La Jolla to December 31, 2022 was not material.

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

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

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

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

We initially recognized a $ 2.8 million partial prepayment for XERAVA ® as deferred revenue, of which, $ 0.8 million was recognized as revenue for the year ended December 31, 2022.

Royalty revenue recognized under this agreement for the year ended December 31, 2023 was $ 1.4 million.

Royalty revenue recognized from the date of acquisition of La Jolla to December 31, 2022 is not material.

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

We recognized $ 2.4 million and $ 0.8 million in revenue under this agreement for the year ended December 31, 2023 and from the acquisition of La Jolla to December 31, 2022, respectively.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In-License Agreements

George Washington University

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

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

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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 December 31, 2022, the amounts recognized under this agreement were not material.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We recognized $ 2.5 million for the year ended December 31, 2023 under this agreement.

Amounts recognized f rom the date of acquisition of La Jolla to December 31, 2022 were not material.

Harvard University

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

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

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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 ® .

For the year ended December 31, 2023, we recognized $ 1.2 million as 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.

From the date of acquisition of La Jolla to December 31, 2022, amounts recognized under this agreement were not material.

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Pursuant to the Paratek Pharmaceuticals, Inc.

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

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

net sales of XERAVA ® .

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

From the date of acquisition of La Jolla to December 31, 2022 , amounts recognized under this agreement were not material.

For the year ended December 31, 2023 and from the date of acquisition of La Jolla to December 31, 2022, amounts recognized under this agreement were not material.

Business Transfer and Subscription Agreement with AstraZeneca

Entasis entered into a Business Transfer and Subscription Agreement with AstraZeneca, AstraZeneca UK Limited and AstraZeneca Pharmaceuticals LP (collectively, “AstraZeneca”) (the “AstraZeneca Agreement”) in 2015, which was amended and restated through 2018, pursuant to which Entasis obtained, among other things, worldwide rights to durlobactam and zoliflodacin.

Under the AstraZeneca Agreement, we are obligated to pay AstraZeneca a one-time milestone payment of $ 5.0 million within three months of achieving a specified cumulative net sales milestone for durlobactam.

We are also obligated to pay AstraZeneca a one-time milestone payment of $ 10.0 million within two years of achieving the first commercial sale of zoliflodacin.

Additionally, we are obligated to pay AstraZeneca tiered, single-digit royalties on the annual worldwide net sales of durlobactam and, the lesser of tiered, single-digit royalties on the worldwide annual net sales of zoliflodacin and a specified share of the royalties we receive from sublicensees of zoliflodacin.

Royalties on sales of zoliflodacin do not include sales by GARDP in low-income and specified middle-income countries as discussed above.

Our obligation to make these royalty payments expires with respect to each product on a country-by-country basis upon the later of (i) the 10-year anniversary of the first commercial sale of a product in each such country or (ii) when the last patent right covering a product expires in each such country.

Royalty expense on durlobactam arising from our net sales of XACDURO ® for the year ended December 31, 2023 was immaterial.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATED ENTITIES AND ACQUISITIONS

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

As discussed in Note 3, “Revenue Recognition”, on July 13, 2022, ITH entered into the TRC Equity Purchase Agreement to sell our ownership interest in TRC.

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

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

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

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

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

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

(“ImaginAb”), Gate Neurosciences (“Gate”), Inc.

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

We accounted for the transaction similar to an upstream sale between a parent and a VIE under ASC 810-10.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

ITH recorded the transferred investments at their respective carrying values and no gain or loss was recognized in the consolidated statement of income.

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

Balance sheet

(In thousands)

December 31, 2021

Cash and cash equivalents

Receivables from collaborative arrangements

Prepaid expenses and other current assets

Equity and long-term investments

Liabilities and LLC Members’

Current liabilities

LLC members’

Total liabilities and LLC members’

As such, ITH recorded the transferred investments at their respective carrying values and no gain or loss was recognized in the consolidated statement of income.

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

Income statements

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Royalty revenue

Revenue from collaborative arrangements

Total net revenue

Operating expenses

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Income tax expense, net

Changes in fair values of other equity and

Changes in fair values of equity and

long-term investments

(1) The year ended December 31, 2022 represents the period from January 1, 2022 to July 20, 2022, the date of the sale of our ownership interest in TRC.

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.

In December 2020, Innoviva Strategic Partners LLC, our wholly owned subsidiary (“Strategic Partners”), contributed $ 300.0 million to ISP Fund LP (the “Partnership”) for investing in “long” positions in the healthcare, pharmaceutical and biotechnology sectors and became a limited partner.

The general partner of the Partnership (“General Partner”) is an affiliate of Sarissa Capital.

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

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

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

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

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

The lock-up period for the initial contribution of $ 190.0 million, which excludes the amount discussed below, expired in December 2023.

Strategic Partners did not elect to make a withdrawal in 2023, thereby extending the lock-up period and withdrawal elections into subsequent years.

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

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

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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.

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

ISP Fund LP is determined to be an investment company under ASC 946, Financial Services – Investment Companies , as it meets all fundamental characteristics of an investment company, and its activities are consistent with those of an investment company.

Since ISP Fund LP is subject to investment company industry specific guidance, we have retained the industry-specific guidance applied by the Partnership.

In addition, as our investment in the Partnership is a passive investment for the Company and is not part of our main operations, the investments are presented as part of “Equity and long-term investments” in our consolidated balance sheets.

We report in our consolidated statements of income any investment gains and losses by the Partnership as part of “Changes in fair value of equity and long-term investments, net”, any interest and dividend income as part of “Interest and dividend income” and any investment expenses as part of “Other expense, net”.

As of December 31, 2023 , we continued to hold 100 % of the economic interest of Partnership.

As of December 31, 2022 and 2021, total assets of the Partnership were $ 320.6 million and $ 195.8 million, respectively, of which the majority was attributable to equity, debt and long-term investments.

As of December 31, 2023 and 2022, total assets of the Partnership were $ 311.8 million and $ 320.6 million, respectively, of which the majority was attributable to equity and long-term investments.

As of December 31, 2023 and 2022, total liabilities of the Partnership w ere $ 0.1 mill ion and $ 1.6 million, respectively.

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

During the year ended December 31, 2022, the Partnership incurred $ 5.2 million in net investment-related expenses, generated $ 2.0 million interest income, recorded $ 6.8 million in net realized gains and $ 9.9 million in net unrealized losses as changes in fair values of other equity and long-term investments, net, on the consolidated statements of income.

During the year ended December 31, 2021, the Partnership incurred $ 3.6 million in net investment-related expense, generated $ 1.8 million interest and dividend income, and recorded net $ 10.5 million realized gains and net $ 2.4 million unrealized losses as changes in fair values of other equity and long-term investments, net, on the consolidated statements of income.

We account for the long-term investments held by ISP Fund LP as equity investments measured at fair value and an investment in convertible notes as trading security.

During the year ended December 31, 2023, the Partnership incurred $ 4.3 million in net investment-related expenses, generated $ 6.3 million interest income, recorded $ 2.4 million in net realized losses and $ 6.7 million in net unrealized losses as changes in fair values of equity and long-term investments, net, in the consolidated statement of income.

During the year ended December 31, 2022, the Partnership incurred $ 5.2 million in net investment-related expenses, generated $ 2.0 million interest income, recorded $ 6.8 million in net realized gains and $ 9.9 million in net unrealized losses as changes in fair values of equity and long-term investments, net, in the consolidated statement of income.

During the year ended December 31, 2021, the Partnership incurred $ 3.6 million in net investment-related expense, generated $ 1.8 million interest and dividend income, and recorded net $ 10.5 million realized gains and net $ 2.4 million unrealized losses as changes in fair values of equity and long-term investments, net, in the consolidated statement of income.

We account for the long-term investments held by ISP Fund LP as of December 31, 2023 and 2022 as equity investments measured at fair value and the investment in convertible notes as of December 31, 2022 as trading security.

Entasis Therapeutics Holdings Inc.

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

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

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

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

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

board of directors.

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

The fair value of Entasis’

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

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

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

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

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

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

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

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

Our investment 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.

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

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 was due to mature and become payable on August 18, 2022 unless it was converted at a conversion price of $ 1.48 before the maturity date.

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

Accordingly, we consolidated Entasis’

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

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

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

The remeasurement resulted in a $ 7.8 million loss in the first quarter of 2022 which was included in changes in fair values of equity method investments, net, on the consolidated statements of income for the year ended December 31, 2022.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We completed our acquisition of Entasis’

remaining noncontrolling interest on July 11, 2022.

We remeasured our holdings in Entasis as of that date and recognized a $ 1.4 million loss, which was included in changes in fair values of equity method investments, net, on the consolidated statement of income for the year ended December 31, 2022.

The remeasurement resulted in a $ 7.8 million loss in the first quarter of 2022 which was included in changes in fair values of equity method investments, net, in the consolidated statement of income for the year ended December 31, 2022.

We completed our acquisition of Entasis’ minority interest on July 11, 2022.

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

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

The Replacement Warrants are classified as equity.

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

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

After the acquisition in July 2022, we adjusted the preliminary estimates of fair value of assets acquired and liabilities assumed based on new and additional information related to product sales forecast provided by Entasis and deferred tax liabilities.

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

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

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

During the year ended December 31, 2022, we recorded measurement period adjustments of $ 4.7 million decrease in goodwill, primarily related to a decrease in estimated purchase price of $ 1.4 million, an increase in noncontrolling interests of $ 1.7 million, and an increase in intangible assets of $ 2.5 million.

The cumulative impact of the measurement period adjustments included in the consolidated net income for the year ended December 31, 2022 was not material.

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

The purchase accounting for this transaction is not yet finalized.

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 year ended December 31, 2023.

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

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Total assets acquired, net

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

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

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

Refer to Note 8, “Goodwill and Intangible Assets”, for more discussion on the intangible assets recognized as part of this acquisition.

Our consolidated net income for the year ended December 31, 2022 included the net loss attributable to noncontrolling interest since the consolidation date until the date of acquisition of $ 13.6 million.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The goodwill arising from the acquisition of Entasis is primarily attributable to Entasis’ assembled workforce and the value associated with growing our business more efficiently.

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

Refer to Note 8, “Goodwill and Intangible Assets”, for more discussion on the intangible assets recognized as part of this acquisition.

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

La Jolla Pharmaceutical Company

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

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

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

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

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

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

During the year ended December 31, 2022, we recorded measurement period adjustments of $ 3.7 million increase in goodwill, primarily related to a decrease in inventory and intangible assets of $ 7.7 million and $ 1.5 million, respectively, and an increase in deferred tax liabilities of $ 2.6 million, partially offset by a decrease in other long-term liabilities of $ 8.3 million.

The cumulative impact of the measurement period adjustments included in the consolidated net income for the year ended December 31, 2022 was not material.

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

The purchase accounting for this transaction is not yet finalized.

We incurred approximate ly $ 5.3 million in acquisition-related costs in connection with this acquisition and such amount is included in selling, general and administrative exp enses for the year ended December 31, 2022.

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

In June 2023, we recorded a measurement period adjustment of $ 13.1 million decrease in goodwill, primarily related to an increase in deferred tax assets of $ 10.5 million and a decrease in deferred tax liabilities of $ 2.6 million.

In August 2023, we recorded a measurement period adjustment of $ 3.0 million increase in goodwill, primarily related to a decrease in deferred tax assets of $ 2.4 million and an increase in deferred tax liabilities of $ 0.6 million.

The cumulative impact of the measurement period adjustments included did not impact the consolidated net income for the year ended December 31, 2023.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(In thousands)

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Intangible assets

Deferred tax assets

Total assets acquired

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Other long-term liabilities

Deferred tax liabilities

Total liabilities assumed

Total assets acquired, net

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

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

Refer to Note 8, “Goodwill and Intangible Assets”, for more discussion on the intangible assets recognized as part of this acquisition.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Refer to Note 8, “Goodwill and Intangible Assets”, for more discussion on the intangible assets recognized as part of this acquisition.

Pro Forma Financial Information

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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.

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

The unaudited pro forma financial information combines the historical results of the Entasis and La Jolla with the Company’s consolidated historical results and includes certain adjustments including, but not limited to, fair value adjustments to equity investments in Entasis’ common stock and warrants, fair value adjustments to inventory, amortization of intangible assets, and interest expense on deferred royalty obligations and acquisition-related costs.

Year Ended December 31,

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Net income attributable to Innoviva stockholders

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

EQUITY AND LONG-TERM INVESTMENTS AND FAIR VALUE MEASUREMENTS

Equity Method Investment in Armata

Equity and Other Investments in Armata

During the first quarter of 2020, Innoviva acquired 8,710,800 shares of common stock as well as warrants to purchase 8,710,800 additional shares of common stock of Armata Pharmaceuticals, Inc.

(“Armata”) for approximately $ 25.0 million in cash.

Armata is a clinical stage biotechnology company focused on precisely targeted bacteriophage therapeutics for antibiotic-resistant infections.

During the first quarter of 2021, ISO entered into a securities purchase agreement with Armata to acquire 6,153,847 shares of Armata common stock and warrants to purchase 6,153,847 additional shares of Armata common stock for approximately $ 20.0 million.

Armata also entered into a voting agreement with the Company and ISO, pursuant to which the Company and ISO agreed not to vote or take any action by written consent with respect to any common shares held by the Company and ISO that represent, in the aggregate, more than 49.5 % of the total number of shares of Armata’s common stock for voting on the matters related to election or removal of Armata’s board members.

The voting agreement will expire the earlier of the second anniversary of the agreement effective date and approval by the FDA of any of Armata’s product candidates for marketing and commercial distribution.

During the fourth quarter of 2021, ISO also purchased an additional 1,212,122 shares of Armata common stock for approximately $ 4.0 million.

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The investment is intended to aid Armata in advancing its clinical pipeline and strengthening its bacteriophage platform.

On February 9, 2022, Armata also entered a second amended and restated voting agreement with the Company and ISO, pursuant to which the Company and ISO agreed not to vote or take any action by written consent with respect to any common shares held by the Company and ISO that represent, in the aggregate, more than 49.5 % of the total number of shares of Armata’s common stock for voting on the matters related to election or removal of Armata’s board members or amend the bylaws of Armata to reduce the maximum number of directors or set the number of directors who may serve on the board of Armata.

In addition, as of February 9, 2022, Armata entered into an amended and restated investor rights agreement with the Company and ISO, pursuant to which for as long as the Company and ISO hold at least 12.5 % of the outstanding shares of Armata’s common stock on a fully-diluted, the Company and ISO shall have the right to designate two directors to Armata’s board of directors, and for so long as the Company and ISO hold at least 8 %, but less than 12.5 %, of the outstanding shares of Armata’s common stock on a fully-diluted basis, the Company and ISO shall have the right to designate one director to Armata’s board of directors, subject to certain conditions and qualifications set forth in the amended and restated investor rights agreement.

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

As of December 31, 2022 and 2021, we owned approximately 69.4 % an d 59.3 %, respectively, of Armata’s common stock.

On July 10, 2023, Armata entered into an amendment to the amended and restated investor rights agreement with the Company and ISO, pursuant to which the Company and ISO agreed that the voting agreement will expire on the earlier of the fifth anniversary of the original agreement's effective date, January 26, 2021, or the approval by the FDA of any of Armata’s product candidates for marketing and commercial distribution.

A s of December 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 December 31, 2023 and 2022, we 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 invested in 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.

On July 10, 2023, ISO and Armata executed an amendment to the Armata Convertible Note extending the maturity date from January 10, 2024 to January 10, 2025.

On July 10, 2023, ISO and Armata entered into a Credit and Security Agreement (the “Credit and Security Agreement"), under which we extended a term loan to Armata (the “Armata Term Loan”) in an aggregate amount of $ 25.0 million.

The Armata Term Loan is subject to an interest rate of 14 % per annum and is due to mature on January 10, 2025 .

The Credit and Security Agreement is secured by substantially all of the assets of Armata and its domestic and foreign material subsidiaries.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Armata’s business and affairs are managed under the direction of its board of directors, which Innoviva and ISO do not control.

Based on our evaluation, we determined that Armata is a VIE, but Innoviva and ISO are not the primary beneficiary of the VIE.

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 beneficiaries of the VIE.

We have not provided financial or other support that we were not previously contractually required to provide during the periods presented.

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

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

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

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.

The warrants purchased in 2020, 2021 and 2022 have an exercise price of $ 2.87 , $ 3.25 and $ 5.00 per share, respectively.

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We use the Black-Scholes-Merton pricing model to estimate the fair value of these warrants with the following input assumptions:

Armata’s closing market price on the valuation date, the risk-free interest rate computed based on the U.S.

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

As of Dece mber 31, 2022, the fair values of our holdings of Armata common stock and warrants were estimated at $ 31.1 million and $ 8.1 million, respectively.

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.

We account for the Armata Term Loan as a trading security, measured at fair value using an income approach based on the discounted value of expected future cash flows.

As of December 31, 2023, the fair values of our holdings of Armata common stock, warrants, the Armata Convertible Note and the Armata Term Loan were estimated at $ 81.2 million, $ 35.3 million, $ 51.9 million and $ 27.0 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 $ 39.2 million and $ 146.7 million was recorded as equity and long-term investments on the consolidated balance sheets as of December 31, 2022 and 2021, respectively.

We recorded $ 152.5 million unrealized losses and $ 78.7 million unrealized gains as changes in fair values of equity method investments, net, on the consolidated statements of income for the years ended December 31, 2022 and 2021, respectively.

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

For the Armata common stock and warrants, we recorded $ 77.4 million unrealized gains, $ 152.5 million unrealized losses and $ 78.7 million unrealized gains as changes in fair values of equity method investments, net, in the consolidated statements of income for the years ended December 31, 2023, 2022 and 2021, respectively.

For the Armata Convertible Note and Term Loan, we recorded $ 21.8 million and $ 2.0 million unrealized gain, respectively, as changes in fair values of equity and long-term investments, net, in the consolidated statement of income for year ended December 31, 2023.

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

Balance Sheet Information

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Twelve Months Ended

Nine Months Ended

September 30,

(In thousands)

Loss from operations

Equity Method Investment in Entasis

Prior to the consolidation of Entasis’ financial position and results of operations in February 2022, we accounted for Entasis as an equity method investment.

Refer to Note 5, “Consolidated Entities and Acquisitions”, for more information.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Equity Method Investment in Entasis

Prior to the consolidation of Entasis’

financial position and results of operations in February 2022, we accounted for Entasis as an equity method investment.

Refer to Note 5, “Consolidated Entities and Acquisitions”, for more information.

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

Balance Sheet Information

(In thousands)

September 30, 2021

Current assets

Noncurrent assets

Current liabilities

Noncurrent liabilities

Income Statement Information

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September 30,

Ended September 30,

(In thousands)

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

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

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

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

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

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

As of December 31, 2022, one of InCarda’s eight board members was designated by ITH.

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

In September 2021, TRC and InCarda entered into an amendment to extend the expiration date of the InCarda 2020 Warrant from October 6, 2021 to March 31, 2022.

On March 9, 2022, TRC and InCarda entered into an amendment to further extend the expiration date of the InCarda 2020 Warrant from March 31, 2022 to March 31, 2023 .

The InCarda 2020 Warrant is recorded at fair value and subject to remeasurement at each balance sheet date.

On March 9, 2022, TRC entered into a Note and Warrant Purchase Agreement (the “InCarda Agreement”) with InCarda to acquire a convertible promissory note (the “InCarda Convertible Note”) and warrants (the “InCarda 2022 Warrant”) for $ 0.7 million.

The InCarda Convertible Note bears an annual interest rate of 6 % and will convert into Series D preferred stock upon a qualified financing, non-qualified financing, or maturity conversion.

A qualified financing is defined as the first issuance or series of related issuances by InCarda of its equity securities following March 9, 2022 from which InCarda receives immediately available gross proceeds of at least $ 10.0 million (excluding the aggregate amount of any notes converted into equity securities pursuant to the conversion of notes or any other debt securities converted into equity securities) (the “Qualified Financing Amount”).

A non-qualified financing is defined as the first issuance or series of related issuances by InCarda of its equity securities following March 9, 2022 from which InCarda receives immediately available gross proceeds of less than the Qualified Financing Amount.

The InCarda 2022 Warrant entitles TRC to purchase a number of shares of equity securities equal to 100 % of the principal amount of the InCarda Convertible Note divided by the number of shares issued in InCarda’s next equity financing, which is defined as the earliest to occur of specific financing events, including capital raises through public offerings.

The InCarda 2022 Warrant expires on March 9, 2027.

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

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

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

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

As of December 31, 2023, no ITH designee is serving on InCarda’s six -member board.

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

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.

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

In connection with the new round of financing, InCarda recapitalized its equity structure resulting in TRC owning 4,093,886 shares of InCarda’s common

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

stock, 37,350 shares of its Series A-1 preferred stock, 20,469,432 shares of its Series C preferred stock, 8,771,780 shares of its Series D-1 preferred stock, 3,369,802 shares of its Series D-2 preferred stock, a warrant to purchase 5,117,358 shares of its Series C preferred stock at $ 0.73 per share and a warrant to purchase 2,490,033 shares of its Series D-1 preferred stock at $ 0.20 per share.

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

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

As of December 31, 2023 and 2022, we held 8.1 % and 9.0 % of InCarda equity ownership, respectively.

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

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

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

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

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

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

We recognized an impairment charge of $ 9.0 million as a result of the valuation.

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

As of December 31, 2022, we recorded $ 6.8 million in fair value of InCarda’s Series C preferred stock and $ 0.6 million in fair value of Series C warrants and Series D warrants (the “InCarda Preferred Stock Warrants”).

As of December 31, 2022, we recognized $ 3.2 million for InCarda’s Series D-1 preferred stock, Series D-2 preferred stock, and common stock using the measurement alternative.

As of December 31, 2021, we recorded $ 0.4 million in fair value of the InCarda 2020 Warrant.

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

We recorded $ 8.7 million and $ 0.7 million unrealized loss as changes in fair values of other equity and long-term investments, net, on the consolidated statements of income for the years ended December 31, 2022 and 2021, respectively.

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 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.

Due to certain changes in InCarda’s business operations during the second quarter of 2023, ITH reassessed the value of its investments in InCarda using the Option Pricing Model methodology.

Key assumptions used in the valuation model included an expected holding period of two years , a risk-free interest rate of 4.9 %, a dividend yield of 0.0 % and an estimated volatility of 114.2 %.

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 $ 2.9 million during the second quarter of 2023.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2023, we recorded $ 4.8 million in fair value of InCarda’s Series C preferred stock and $ 0.1 million in fair value of Series D 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 Series C warrants and Series D warrants .

As of December 31, 2023 and 2022, we recognized $ 2.7 million and $ 3.2 million, respectively, for InCarda’s Series D-1 preferred stock, Series D-2 preferred stock, and common stock using the measurement alternative.

We recorded $ 3.1 million, $ 8.7 million, and $ 0.7 milli on unrealized loss as changes in fair values of equity and long-term investments, net, in the consolidated statements of income for the years ended December 31, 2023, 2022, 2021, respectively.

Equity Investment in ImaginAb

On March 18, 2021, TRC entered into a securities purchase agreement with ImaginAb, Inc.

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

On the same day, TRC also entered into a securities purchase agreement with one of ImaginAb’s common stockholders to purchase 4,097,157 shares of ImaginAb common stock for $ 1.3 million.

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

On the same day, TRC also entered into a securities purchase agreement with one of ImaginAb’s common stockholders to purchase 4,097,157 shares of ImaginAb common stock for $ 1.3 million.

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

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

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

As of December 31, 2022 , one of ImaginAb’s six board members is designated by ITH, and ITH held 12.7 % of ImaginAb’s equity ownership.

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

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

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

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

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.

On September 14, 2023, ITH entered into a securities purchase agreement with ImaginAb to purchase another 405,852 shares of ImaginAb Series C-2 preferred stock for $ 0.6 million.

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

As of December 31, 2023 and 2022, we held 12.4 % 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.

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

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

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

As of December 31, 2023 and 2022, $ 7.6 million and $ 6.4 million, respectively, was recorded as equity and long-term investments in the consolidated balance sheets, respectively, and there was no change to the fair value of our investment in ImaginAb.

Convertible Promissory Note in Gate Neurosciences

On November 24, 2021, TRC entered into a Convertible Promissory Note Purchase Agreement with Gate Neurosciences, Inc.

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

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

A qualifying event can be a qualified initial price offering, a qualified merger, or a merger with a special-purpose acquisition company (“SPAC”).

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”).

The Capped Conversion Price is calculated as $50.0 million divided by the number of common stock outstanding at such time on a fully diluted basis.

The Capped Conversion Price is calculated as $50.0 million divided by the number of shares of common stock outstanding at such time on a fully diluted basis.

The Qualified Event Price is the price per share determined by the qualified event.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

On July 20, 2022, under the terms of the TRC Equity Purchase Agreement, TRC transferred to ITH its debt investment in Gate.

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.

On February 2, 2023, ITH entered into a 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 an additional cash investment of $ 5.0 million.

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

On October 6, 2023, ITH entered into a Second Note Amendment Agreement with Gate to amend the Note Amendment Agreement.

Pursuant to the Second Note Amendment Agreement, the principal amount of the Gate Convertible Note was increased from $ 21.5 million to $ 27.7 million, which represents the amended principal as of February 2, 2023, accrued interest as of the second amendment date and an 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.

As of December 31, 2022 and 2021, the fair value of the Gate Convertible Note was estimated at $ 15.7 million and $ 15.1 million, respectively, and recorded as equity and long-term investments on the consolidated balance sheets.

We recorded $ 0.6 million of unrealized gain and $ 0.8 million of unrealized loss as changes in fair values of other equity and long-term investments, net, on the consolidated statements of income for the years ended December 31, 2022 and 2021, respectively.

As of December 31, 2023 and 2022, the fair value of the Gate Convertible Note was estimated at $ 28.0 million and $ 15.7 million, respectively, and recorded as equity and long-term investments in the consolidated balance sheets.

We recorded $ 0.4 million of unrealized loss, $ 0.6 million of unrealized gain, and $ 0.8 million of unrealized loss as changes in fair values of other equity and long-term investments, net, in the consolidated statements of income for the years ended December 31, 2023, 2022 and 2021, respectively.

Equity Investment in Nanolive

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

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 therapy.

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

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

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

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

As of December 31, 2022 , one of Innoviva designees is serving on Nanolive’s seven -member board.

As of December 31, 2022 , we held 15.5 % of Nanolive equity ownership.

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

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

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

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

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

As of December 31, 2023 , no Innoviva designee is serving on Nanolive’s six -member board.

As of December 31, 2023 and 2022 , we held 15.3 % and 15.5 % of Nanolive equity ownership, respectively.

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.

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

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

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

As of December 31, 2023 and 2022, $ 10.6 million of investment in Nanolive was recorded as equity and long-term investments in the consolidated balance sheets, and there was no change to the carrying amount of our investment.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Available-for-Sale Securities

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Money market funds (1)

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

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

December 31, 2022

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Money market funds (1)

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

As of December 31, 2022, all investments were money market funds, and there was no credit loss recognized.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

As of December 31, 2023 and 2022, all available-for-sale securities were money market funds, and there was no credit loss recognized.

Fair Value Measurements

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

The estimated fair values were as follows:

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 December 31, 2023 Using:

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Equity investment - Armata Warrants

Equity investment - InCarda Warrants

Convertible debt investment - Armata Note

Term loan investment - Armata Term Loan

Convertible debt investment - Gate Note

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Total liabilities at estimated fair value

(1) The investments held by ISP Fund LP, consisted of $ 295.4 million in equity investments, which included private placement positions and convertible notes of $ 54.6 million, and $ 25.1 million in money market funds.

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

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(1) The investments held by ISP Fund LP, consisted of $ 248.5 million in equity investments, which included private placement positions of $ 60.6 million, and $ 62.9 million in money market funds.

A certain portion of the total capital contribution of $ 300.0 million is no longer subject to a 36-month lock-up period from the date of such capital contribution.

However, we did no t elect to make a withdrawal in 2023, thereby extending the lock-up period and withdrawal elections into subsequent years.

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

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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

Our total capital contribution of $ 300.0 million was 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 in 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.

The InCarda Warrants, the Gate Convertible Note, the Armata Convertible Note, the Armata Term Loan, 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 based on their trading prices.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The fair values of our equity investments in Armata’s and Entasis’s common stock and public traded investments held by ISP Fund LP are based on the quoted prices in active markets and are classified as Level 1 financial instruments.

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

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

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

CAPITALIZED FEES PAID

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These milestone fees are amortized over their estimated useful lives commencing upon the commercial launch of the product in their respective regions with the amortization recorded as a reduction in revenue from collaborative arrangements.

As of December 31, 2022, the weighted average remaining amortization period was 7.1 y ears.

Additional information regarding these milestone fees is included in Note 3, “Revenue Recognition”.

As of December 31, 2023, the weighted average remaining amortization period wa s 6.2 years.

Additional information regarding these milestone fees is included in Note 3, “Revenue Recognition”.

Amortization for each of the years ended December 31, 2023, 2022 and 2021 was $ 13.8 million .

The remaining estimated amortization is $ 13.8 million for each of the years from 2023 to 2027 and $ 28.6 million thereafter.

The remaining estimated amortization is $ 13.8 million for each of the years from 2024 to 2027, $ 13.7 million for the year 2028, and $ 14.8 million thereafter.

GOODWILL AND INTANGIBLE ASSETS

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

The carrying amount of goodwill as of December 31, 2022 was $ 26.7 million .

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

The carrying amount of goodwill as of December 31, 2023 and 2022 was $ 17.9 million and $ 26.7 million, respectively.

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

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

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

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

December 31, 2023

(In thousands)

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Collaboration agreement

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

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

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

thus, no amortization expense of determinable assets was recognized during the year ended December 31, 2022.

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 consisted of Entasis’ in-process research and development related to its antibacterial therapeutic product candidates and a collaboration agreement amounting to $ 71.3 million and $ 35.4 million, respectively.

Following the FDA approval of XACDURO ® in May 2023, we started amortizing $ 68.7 million of the then in-process research and development as a marketed product, as well as the collaboration agreement, over their estimated useful lives.

The useful life of the remaining in-process research and development of $ 2.6 million will be determined upon commercialization of the underlying product candidate;

thus, no amortization expense for this intangible asset was recognized for the periods presented.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Intangible assets recognized as a result of the acquisition of La Jolla amounting to $ 151.0 million pertain to product rights and developed technologies on La Jolla’s currently marketed products.

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

We recognized amortization expense of $ 5.6 million for the year ended December 31, 2022 .

We recognized amortization expense of $ 21.8 million and $ 5.6 million for the years ended December 31, 2023 and 2022, respectively.

Future amortization expense is expected to be $ 25.8 million for each of the years from 2024 to 2028 and $ 98.7 million thereafter.

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(In thousands)

December 31, 2022

Raw materials

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Total inventory

As of December 31, 2022 , total inventory included net fair value adjustments resulting from the acquisition of La Jolla of approximately $ 49.5 million, which will be recognized as cost of products sold when sales occur in future periods.

The fair value adjustments recorded as part of cost of products sold amounted to $ 10.0 million for the year ended December 31, 2022 .

There was no inventory as of December 31, 2021.

As of December 31, 2023 and 2022, total inventory included net fair value adjustments resulting from the acquisition of La Jolla of approximately $ 23.0 million and $ 49.5 million, respectively , which will be recognized as cost of products sold when sales occur in future periods.

The fair value adjustments recorded as part of cost of products sold amounted to $ 27.2 million and $ 10.0 million for the years ended December 31, 2023 and 2022.

Other Accrued Liabilities

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Current portion of lease liabilities

Royalty obligation payable

Current portion of deferred royalty obligation

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(In thousands)

December 31, 2022

Long-term portion of deferred royalty obligation

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Total other long-term liabilities

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

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

STOCK‑BASED COMPENSATION

Equity Incentive Plans

In May 2012, we adopted the 2012 Equity Incentive Plan (the “2012 Plan”).

The 2012 Plan provides for the grant of incentive stock options, nonstatutory stock options, RSAs, RSUs and Stock Appreciation Rights to employees, non-employee directors and consultants.

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Employee Stock Purchase Plan

Under the 2004 Employee Stock Purchase Plan (the “ESPP”), our employees may purchase common stock through payroll deductions at a price equal to 85 % of the lower of the fair market value of the stock at the beginning of the offering period or at the end of each applicable purchase period.

The ESPP provides for consecutive and overlapping offering periods of 24 months in duration, with each offering period composed of four consecutive six-month purchase periods.

The purchase periods end on either May 15 or November 15.

ESPP contributions are limited to a maximum of 15 % of an employee’s eligible compensation.

Under the 2004 Employee Stock Purchase Plan (the “2004 ESPP”), our employees may purchase common stock through payroll deductions at a price equal to 85 % of the lower of the fair market value of the stock at the beginning of the offering period or at the end of each applicable purchase period.

The 2004 ESPP provided for consecutive and overlapping offering periods of 24 months in duration, with each offering period composed of four consecutive six-month purchase periods.

The purchase periods ended on either May 15 or November 15.

The 2004 ESPP contributions were limited to a maximum of 15 % of an employee’s eligible compensation.

The maximum number of shares that an employee may purchase in any purchase period was 2,500 .

An employee may not purchase shares with a value greater than $ 25,000 in any calendar year.

On April 13, 2023, the Board of Directors adopted the 2023 ESPP (the “2023 ESPP”).

The 2023 ESPP, which supersedes the 2004 ESPP, was approved by the Company’s stockholders on May 22, 2023.

Under the 2023 ESPP, eligible employees may purchase common stock through payroll deductions at a price equal to 85 % of the lower of the fair market value of the stock at the beginning or end of each applicable purchase period.

The 2023 ESPP provides for offering periods of six months , which ends on either May 15 or November 15.

The 2023 ESPP contributions are limited to a maximum of 15 % of an employee’s eligible compensation.

The maximum number of shares that an employee may purchase in any purchase period is 2,500 .

An employee may not purchase shares with a value greater than $ 25,000 in any calendar year.

A total of 2.5 million shares of our common stock was reserved and available for issuance under the 2023 ESPP.

As of December 31, 2023 , total shares remaining available for issuance under the 2023 ESPP were 2,500,000 .

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Each member of our board of directors who is not an employee receives both cash and equity compensation for services as a director, member of a committee of the board of directors, lead independent director and chairman, as applicable.

In October 2017, both the cash and equity components of the compensation program were amended, effective immediately (the “October 2017 Amendments”).

Each of our independent directors receives periodic automatic grants of equity awards under a program implemented under the 2012 Plan.

These grants are non‑discretionary.

Only our independent directors or affiliates of such directors are eligible to receive automatic grants under the 2012 Plan.

Under the program, each individual who first became a non-employee director will, on the date such individual joins the board of directors, automatically be granted a one‑time grant of RSUs covering a number of shares of our common stock calculated as $ 125,000 ($ 250,000 prior to the October 2017 Amendments) divided by our common stock closing share price on the date of grant as reported on The Nasdaq Global Select Market, rounded down to the nearest whole share (the “Initial RSUs”), plus a one‑time grant of RSUs covering a number of shares of our common stock calculated as $ 225,000 ($ 250,000 prior to the October 2017 Amendments) divided by our common stock closing share price on the date of grant as reported on The Nasdaq Global Select Market, which would be pro-rated for the number of whole months remaining until the anniversary of the prior year’s stockholders’

meeting, rounded down to the nearest whole share (the “Pro Rata RSUs”).

The Initial RSUs vest in two equal annual installments, while Pro Rata RSUs vest in a single installment at the sooner of the next annual stockholder meeting or the one-year grant anniversary, in each case subject to the non-employee director’s continuous service through the applicable vesting date.

Annually, upon his or her re‑election to the board of directors at the Annual Meeting of Stockholders, each non-employee director is automatically granted an RSU covering a number of shares of our common stock calculated as $ 225,000 ($ 250,000 prior to the October 2017 Amendments) divided by our common stock closing share price on the date of grant as reported on The Nasdaq Global Select Market, rounded down to the nearest whole share.

These RSUs will vest at the sooner of the next annual stockholder meeting or the one-year anniversary of grant, subject to the non-employee director’s continuous service through the applicable vesting date.

Following the amendment to our non-employee director compensation program, both the annual RSUs and Initial RSUs described above remained unchanged with the exception that the number of shares of our common stock subject to each award has been reduced.

These RSUs will vest in full upon the director’s death, the occurrence of a change in control or, with respect to awards made after the October 2017 Amendments, the director’s disability before the director’s service terminates.

Director RSUs carry dividend equivalent rights to be credited with an amount equal to all cash dividends paid on the underlying shares of common stock while unvested.

Dividend equivalents are subject to the same terms and conditions, including vesting, as the RSUs to which they attach and are paid in cash upon vesting.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock‑Based Compensation Expense

Stock‑based compensation expense is included in the consolidated statements of income as follows:

Director RSUs carry dividend equivalent rights to be credited with an amount equal to all cash dividends paid on the underlying shares of common stock while unvested.

Dividend equivalents are subject to the same terms and conditions, including vesting, as the RSUs to which they attach and are paid in cash upon vesting.

Stock‑Based Compensation Expense

Stock‑based compensation expense is included in the consolidated statements of income as follows:

Year Ended December 31,

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Research and development

Stock‑based compensation expense included in the consolidated statements of income by award type is as follows:

Year Ended December 31,

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as of December 31, 2023

As of December 31, 2022 , the aggregate intrinsic value of options outstanding and options exercisable was no t material .

As of December 31, 2021, the aggregate intrinsic value of the options outstanding was $ 1.3 million and the aggregate intrinsic value of options exercisable was immaterial.

As of December 31, 2022, 290 options were exercisable.

The weighted average remaining contractual term of options outstanding was 8.01 years and 4.43 years as of December 31, 2022 and 2021, respectively.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The total intrinsic value of the options exercised was no t material as of December 31, 2022.

The total intrinsic value of the options exercised was $ 0.2 million and $ 0.1 million for the years ended December 31, 2021 and 2020, respectively.

The total estimated fair value of options vested was $ 0.6 million for the year ended December 31, 2021.

The total estimated fair value of options vested was no t material for the year ended December 31, 2022 and 2020, respectively.

The total estimated fair value of RSUs vested was $2.3 million, $1.1 million and $1.3 million for the year December 31, 2022, 2021 and 2020.

As of December 31, 2023 , the aggregate intrinsic value of options outstanding and options exercisable was $ 3.6 million and $ 0.8 million, respectively .

As of December 31, 2022, the aggregate intrinsic value of options outstanding and options exercisable was not material.

As of December 31, 2023, 519,165 options were exercisable.

The weighted average remaining contractual term of options outstanding was 7.96 years and 8.01 years as of December 31, 2023 and 2022, respectively.

The total intrinsic value of the options exercised was no t material for the year ended December 31, 2023, 2022 and 2021.

The total estimated fair value of options vested was $ 1.9 million and $ 0.6 million for the years ended December 31, 2023 and 2021, respectively.

The total estimated fair value of options vested was no t material for the year ended December 31, 2022.

The total estimated fair value of RSUs vested was $ 3.9 million, $ 2.3 million and $ 1.1 million for the years December 31, 2023, 2022 and 2021.

The total estimated fair value of RSAs vested was not material for the year ended December 31, 2023, 2022, and 2021.

Valuation Assumptions

The weighted-average assumptions used in calculating the estimated value of our stock options on the date of grant as follows:

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

Year Ended December 31,

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Weighted-average estimated fair value of stock options granted

Stockholders’

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.

Stockholders’ Equity

On October 31, 2022, our board of directors authorized a share repurchase program under which we may repurchase up to $ 100.0 million of our outstanding shares of common stock.

The repurchase program authorizes the repurchase by the Company of its common stock in open market transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) 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.

The authorization permits the Company to repurchase shares of its common stock from time to time at management’s discretion.

Repurchases may also be made pursuant to a trading plan under Rule 10b5-1 under the Exchange Act, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions.

The actual means and timing of any shares purchased under the program will depend on a variety of factors, including 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.

This program has no termination date, may be suspended or discontinued at any time at our discretion, and does not obligate us to acquire any amount of common stock.

As of December 31, 2022, we have repurchased 647,394 shares in the open market at an average price of $ 13.13 per share for a total amount of approximately $ 8.5 million.

From program inception through December 31, 2022, we repurchased 647,394 shares in the open market at an average price of $ 13.13 per share for a total amount of approximately $ 8.5 million.

For the year ended December 31, 2023, we repurchased 6,173,565 shares in the open market at an average price of $ 12.39 per share for a total amount of approximately $ 76.5 million.

Subsequent to December 31, 2023 and through February 15, 2024, we have repurchased 131,826 shares in the open market at an average price of $ 15.93 per share for a total amount of approximately $ 2.1 million.

All the repurchased shares were retired.

Our debt consists of:

All of the repurchased shares were retired.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 unsecured convertible subordinated notes, with maturity date of January 15, 2023.

The financing raised proceeds, net of issuance costs, of approximately $ 281.2 million, less $ 36.8 million to purchase two privately negotiated capped call option transactions in connection

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

with the issuance of the notes.

The 2023 Notes bear interest at the rate of 2.125 % per year that is payable semi-annually in arrears in cash on January 15 and July 15 of each year, beginning on July 15, 2013.

The 2023 Notes were convertible, at the option of the holder, into shares of our common stock at an initial conversion rate of 35.9903 shares per $1,000 principal amount of the 2023 Notes, subject to adjustment in certain circumstances, which represents an initial conversion price of approximately $ 27.79 per share.

In 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 2023 Notes bore interest at the rate of 2.125 % per year that is payable semi-annually in arrears in cash on January 15 and July 15 of each year, beginning on July 15, 2013.

The 2023 Notes were convertible, at the option of the holder, into shares of our common stock at an initial conversion rate of 35.9903 shares per $1,000 principal amount of the 2023 Notes, subject to adjustment in certain circumstances, which represented an initial conversion price of approximately $ 27.79 per share.

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

The capped call option transaction is an integrated instrument consisting of a call option on our common stock purchased by us with a strike price equal to the initial conversion price of $ 27.79 per share for the underlying number of shares and a cap price of $ 38.00 per share, both of which are subject to adjustments consistent with the 2023 Notes.

The cap component is economically equivalent to a call option sold by us for the underlying number of shares with an initial strike price of $ 38.00 per share.

As an integrated instrument, the settlement of the capped call coincides with the due date of the convertible debt.

Upon settlement, we would receive from our hedge counterparty a number of shares of our common shares that would range from zero , if the stock price was below $ 27.79 per share, to a maximum of 2,779,659 shares, if the stock price is above $38.00 per share.

However, if the market price of our common stock, as measured under the terms of the capped call transactions, exceeds $38.00 per share, there is no incremental anti-dilutive benefit from the capped call.

As a result of the partial conversion by certain holders of the 2023 Notes in July 2014, and dividends declared and paid in 2014 and 2015, the conversion rate with respect to our 2023 Notes was adjusted in total to 50.5818 shares of our common stock per $1,000 principal amount of the 2023 Notes, which represents a conversion price of approximately $ 19.77 per share.

The capped call option transaction was 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 were subject to adjustments consistent with the 2023 Notes.

The cap component was 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 coincided with the due date of the convertible debt.

However, if the market price of our common stock, as measured under the terms of the capped call transactions, exceeded $38.00 per share, there was 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 represented 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.

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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:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Our outstanding 2023 Notes balance consisted of the following as of December 31, 2022:

(In thousands)

December 31, 2022

Debt issuance costs, net

Net carrying amount

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 for the years ended December 31, 2023, 2022 and 2021:

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Total interest and amortization expense

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The 2023 Notes were fully paid upon their maturity date in January 2023.

Convertible Senior Notes Due 2025

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

The initial conversion rate for the 2025 Notes is 57.9240 shares of our common stock per $1,000 principal amount of the 2025 Notes (which is equivalent to an initial conversion price of approximately $ 17.26 per share), representing a 30.0 % conversion premium over the last reported sale price of the Company’s common stock on August 1, 2017, which was $ 13.28 per share.

The conversion rate is subject to customary anti-dilution adjustments in certain circumstances.

The 2025 Notes will mature on August 15, 2025 , unless repurchased or converted in accordance with their terms prior to such date.

Prior to February 15, 2025, the 2025 Notes will be convertible at the option of the holders only upon the occurrence of specified events and during certain periods.

Prior to February 15, 2025, the 2025 Notes will be convertible at the option of the holders only upon the occurrence of specified events and during certain periods, as described below.

From, and including, February 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, the 2025 Notes will be convertible at any time.

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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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

Refer to Note 1, “Description of Operations and Summary of Significant Accounting Policies”, for further information.

Prior to the adoption of ASU 2020-06, we separately accounted for the liability and equity components of the 2025 Notes by allocating the proceeds between the liability component and the embedded conversion option (“equity component”) due to our ability to settle the conversion obligation of the 2025 Notes in cash, common stock or a combination of cash and common stock, at our option.

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

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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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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.

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

Beginning January 1, 2022, the annual effective interest rate on the 2025 Notes is 2.88 %.

Our outstanding 2025 Notes balances consisted of the following:

(In thousands)

Liability component

Debt discount and issuance costs, net

Net carrying amount

Equity component, net

The following table sets forth total interest expense recognized related to the 2025 Notes for the years ended December 31, 2023, 2022 and 2021:

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The 2028 Notes were sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act.

The net proceeds from the sale of the $261.0 million aggregate principal amount of 2028 Notes were approximately $ 252.6 million after deducting the initial purchasers’

discounts and commissions and our estimated offering expenses.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The net proceeds from the sale of the $ 261.0 million aggregate principal amount of 2028 Notes were approximately $ 252.6 million after deducting the initial purchasers’ discounts and commissions and our estimated offering expenses.

We used approximately $ 21.0 million of the net proceeds from the offering to fund the cost of entering into the capped call transactions described below.

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Prior to September 15, 2027, the 2028 Notes will be convertible at the option of the holders only upon the occurrence of specified events and during certain periods, and will be convertible on or after September 15, 2027, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2028 Notes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Holders of the 2028 Notes may convert all or a portion of their 2028 Notes prior to the close of business on September 15, 2027, only under the following circumstances:

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The cap price of the capped call transaction is initially $ 33.9850 per share and is subject to certain adjustments under the terms of the capped call transactions.

The capped call transactions cover, subject to customary adjustments, the number of shares of common stock initially underlying the 2028 Notes.

The capped call transactions cover, subject to customary adjustments, the number of shares of common stock initially

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

underlying the 2028 Notes.

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

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

Our outstanding 2028 Notes balance consisted of the following:

Our outstanding 2028 Notes balance consisted of th e following:

(In thousands)

December 31, 2022

Liability component

Debt discount and issuance costs, net

Net carrying amount

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

The following table sets forth total interest expense recognized related to the 2028 Notes for the year ended December 31, 2023 and from the issuance through December 31, 2022:

Date of Issuance through

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December 31, 2023

December 31, 2022

Contractual interest expense

Amortization of debt issuance costs

Amortization of debt discount and issuance costs

Total interest and amortization expense

Debt Maturities

The aggregate scheduled maturities of our long-term debt as of December 31, 2022 are as follows:

The aggregate scheduled maturities of our convertible debt as of December 31, 2023 are as follows:

(In thousands)

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Deferred Royalty Obligation

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

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

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The current maximum royalty rate is 14 %.

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

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

Starting January 1, 2024, the maximum royalty rate was increased to 18 % based on the terms of the Agreement.

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

For the years ended December 31, 2023, we recognized interest expense of $ 6.5 million on the deferred royalty obligation.

From the date of our acquisition of La Jolla through December 31, 2022, we recognized interest expense of $ 1.8 million on the deferred royalty obligation.

The carrying value of the deferred royalty obligation and accrued interest as of December 31, 2022 was $ 70.6 million, $ 67.9 million of which was classified as part of other long-term liabilities on the consolidated balance sheet and the remaining $ 2.7 million was classified as other accrued liabilities on the consolidated balance sheet.

The carrying value of the deferred royalty obligation as of December 31, 2023 and 2022 was $ 69.9 million and $ 70.6 million, respectively, (refer to Note 9 “Balance Sheet Components ” ).

During the year ended December 31, 2023, we made royalty payments to HCR of $ 5.4 million.

From the date of acquisition of La Jolla through December 31, 2022, we made royalty payments to HCR of $ 1.0 million.

The deferred royalty obligation was valued using Level 3 inputs, and its carrying value as of December 31, 2022 approximates fair value.

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

The annual effective interest rate of the deferred royalty obligation was 7.34 %.

The deferred royalty obligation was valued using Level 3 inputs, and its carrying value as of December 31, 2023 and 2022 approximates fair value.

The fair value of the deferred royalty obligation was calculated as the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

discounted deferred royalty obligations based on revenue projections for GIAPREZA ® .

As of December 31, 2023, the annual effective interest rate of the deferred royalty obligation is 16.46 %.

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.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

As a result of this assessment, we determined that the fair value of the embedded derivatives is not material and, therefore, not recognized as of December 31, 2022.

As a result of this assessment, we determined that the fair value of the embedded derivatives is immaterial and, therefore, not recognized as of December 31, 2023 and 2022.

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

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

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

COMMITMENTS AND CONTINGENCIES

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In 2019, we entered into an operating lease for our headquarters in Burlingame, California for approximately 2,111 rentable square feet.

The lease commenced in November 2019 with a term of thirty-six calendar months, which was subsequently amended to expire in December 2023.

The lease commenced in November 2019 with an initial term of thirty-six calendar months, which was subsequently amended to expire in December 2027.

The components of lease costs are as follows:

Year Ended December 31,

(In thousands)

December 31, 2022

Straight line operating lease costs

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Supplemental cash flow information related to leases are as follows:

Year Ended December 31,

(In thousands)

December 31, 2022

Cash paid for amounts included in the measurement of

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Right-of-use assets obtained through acquisitions

As of December 31, 2022, our operating leases have a weighted-average remaining lease term of 2.8 years and the weighted-average incremental borrowing rate used to determine the operating lease right-of-use assets and lease liabilities was 7.5 %.

As of December 31, 2023, our operating leases have weighted-average remaining term of approximately 2.3 years and the weighted-average discount rate on our operating lease liabilities was 7.6 %.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We have not presented the comparative information above for the years ended December 31, 2021 and 2020 as our operating lease during those years was not material.

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

(In thousands)

Right-of-use assets

Current portion of lease liabilities included within

Other accrued liabilities

Long-term portion of lease liabilities included within

Other long-term liabilities

Total lease liabilities

We have not presented the comparative information above for the year ended December 31, 2021 as our operating lease during this year was not material.

Future minimum lease payments on our operating leases as of December 31, 2023 are as follows:

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

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

On February 15, 2022, La Jolla received a paragraph IV notice of certification (the “First 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.

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

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

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

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

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

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

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

On February 22, 2023, La Jolla received a paragraph IV notice of certification (the “Second Notice Letter”) from Gland advising that Gland had amended its ANDA filing to include a paragraph IV certification alleging that all claims of the newly-issued and Orange Book-listed U.S.

11,559,559 (“the ’559 Patent”), which covers GIAPREZA®, are invalid, unenforceable and/or not infringed.

On March 22, 2023, La Jolla filed a First Amended Complaint in this litigation adding Gland’s marketing and distribution partners for its ANDA angiotensin II product, Fresenius Kabi USA LLC and Fresenius Kabi SwissBiosim GmbH (collectively, the “Fresenius Kabi Defendants”), as co-defendants.

On April 7, 2023, La Jolla filed a Second Amended Complaint in response to the Second Notice Letter, adding claims that the manufacture, use, sale, offer for sale, or import of Gland’s ANDA angiotensin II product will infringe the ’559 Patent.

On November 14, 2023, La Jolla filed a Third Amended Complaint adding additional infringement claims against the Fresenius Kabi Defendants.

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

Fact discovery is set to conclude on February 29, 2024 and expert discovery will be complete by July 12, 2024.

A trial date has not yet been set in this matter.

Given the early stage of this matter, we cannot reasonably estimate a potential future loss or a range of potential future losses, if any, and have not recorded a contingent liability accrual as of December 31, 2023.

Indemnifications and Other Contingencies

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

third parties.

Indemnifications and Other Contingencies

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

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

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

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

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Federal and state research credits

Section 250 deduction

Noncontrolling interest

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Change in valuation allowance

Income tax expense (benefit), net

Total income tax expense, net

INNOVIVA, INC.

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Inventory fair value adjustment

Net deferred tax assets (liabilities)

Net deferred tax liabilities

We record deferred tax assets if the realization of such assets is more likely than not to occur.

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We have considered all available evidence, both positive and negative, such as our historical operating results and predictability of future taxable income, in making such determination.

We are also required to exercise significant management’s judgment in forecasting future taxable income.

Specifically, we evaluate the following criteria when considering a valuation allowance:

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As of December 31, 2023, we had federal net operating loss carryforwards of approximately $ 543.5 million , which will expire beginning 2034.

As of December 31, 2022, we also had state net operating loss carryforwards of approximately $ 955.3 million , which will expire beginning 2029 and state research tax credits of approximately $ 33.3 million , which do not expire.

As of December 31, 2023, we also had state net operating loss carryforwards of approximately $ 1.0 billion , which will expire beginning 2029 and state research tax credits of approximately $ 33.3 million , which do not expire.

Utilization of net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code and similar state provisions.

Annual limitations may result in expiration of net operating loss and tax credit carryforwards before some or all of such amounts have been utilized.

We conducted an Internal Revenue Code of 1986, as amended, Section 382 (“Section 382”) analysis of the Company through December 31, 2022 to determine whether an ownership change had occurred since inception.

The Section 382 study concluded that it is more likely than not that the Company did not experience an ownership change during the testing period.

However, notwithstanding the applicable annual limitations, no portion of our net operating loss or credit carryforwards is expected to expire before becoming available to reduce federal and state income tax liabilities as a result of those identified ownership changes.

If we undergo another ownership change, the utilization of the pre-ownership change net operating loss carryforwards or pre-ownership change tax attributes, such as research tax credits, to offset the post-ownership change income may be subject to an annual limitation, pursuant to Sections 382 and 383 of the Internal Revenue Code of 1986, as amended.

If we ever undergo an ownership change, the utilization of the pre-ownership change net operating loss carryforwards or pre-ownership change tax attributes, such as research tax credits, to offset the post-ownership change income may be subject to an annual limitation, pursuant to Sections 382 and 383 of the Internal Revenue Code of 1986, as amended.

Similar rules may apply under state tax laws.

As a result of the acquisition of Entasis, we conducted a study of Entasis’ ownership changes and estimated that we will be able to utilize $ 155.6 million of its federal net operating losses, which are subject to annual limitations.

INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As a result of the acquisition of Entasis, we conducted a study of Entasis’

ownership changes and estimated that we will be able to utilize $ 157.4 million of its federal net operating losses, which are subject to annual limitations.

As a result of the acquisition of La Jolla, we also performed a preliminary analysis of its ownership changes and estimated that we will be able to utilize $ 254.0 million of its federal net operating losses, which are subject to annual limitations.

As a result of the acquisition of La Jolla, we also performed an analysis of its ownership changes and estimated that we will be able to utilize $ 309.5 million of its federal net operating losses, which are subject to annual limitations.

Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense.

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Unrecognized tax benefits as of December 31, 2021

Net decrease in tax portions for 2021

Net increase in tax portions for 2022

Unrecognized tax benefits as of December 31, 2022

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The tax years 2006 through 2013, 2015 and forward remain open to examination by the federal and most state tax authorities due to net operating loss and overall credit carryforward positions.

In December 2021, the Organization for Economic Cooperation and Development (“OECD”) enacted model rules for a new global minimum tax framework (“BEPS Pillar Two”), and various governments around the world have enacted, or are in the process of enacting legislation.

We are in the process of evaluating whether and when these new rules may come into effect and apply to us.

We plan to treat the tax if any as a period cost.

We do not believe that the Pillar Two rules apply to us yet.

As such, the potential future quantitative impact of the enacted or substantively enacted legislation is not yet reasonably estimable.

SUBSEQUENT EVENTS

On January 10, 2023, we entered into a Secured Convertible Credit Agreement (the “Credit Agreement”) with Armata, under which we extended a one-year term loan facility in an aggregate amount of $ 30.0 million at an interest rate of 8.0 % per annum.

Pursuant to the Credit Agreement, the balance on the loan, including all accrued and unpaid interest thereon, will convert into shares of Armata's common stock upon the occurrence of a qualified financing, as defined in the Credit Agreement.

Any portion of the balance on the loan, including all accrued and unpaid interest thereon, may also be converted into shares of Armata's common stock at our option once a registration statement covering the resale of such securities has been declared effective by the SEC.

The loan is secured by substantially all of the assets of Armata and its domestic and foreign material subsidiaries.

On February 2, 2023, ITH entered into a Note Amendment Agreement (the "Note Amendment Agreement") with Gate to amend the Convertible Promissory Note Purchase Agreement entered into in November 2021 between TRC and Gate to acquire the Gate Convertible Note (refer to Note 6, “Equity and Long-Term Investments and Fair Value Measurements”).

On February 13, 2024, ITH entered into a Third Note Amendment Agreement with Gate to amend the Gate Convertible Note.

Pursuant to the Third Note Amendment Agreement, the principal amount of the Gate Convertible Note was increased from $ 27.7 million to $ 33.5 million, which represents the principal and accrued interest as of the amendment date and an additional cash investment of $ 5.0 million.

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

On February 23, 2024, ITH purchased a subordinated convertible promissory note (the “ImaginAb Convertible Note”) from ImaginAb for a total purchase price of $ 2.7 million.

The ImaginAb Convertible Note bears an annual interest of 10 % and shall be due and payable upon the earlier to occur of January 31, 2025 and certain events defined in the ImaginAb Convertible Note.

Under certain circumstances, the ImaginAb Convertible Note is convertible at the option of ITH into ImaginAb’s equity securities at defined conversion prices.

The ImaginAb Convertible Note is subordinate to certain existing indebtedness of ImaginAb as defined in the ImaginAb Convertible Note.

REP ORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Innoviva, Inc.

and subsidiaries (the "Company") as of December 31, 2022, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows, for the year ended December 31, 2022, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control —

Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, effective January 1, 2022, the Company adopted Accounting Standards Update 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , using the modified retrospective approach.

We have audited the accompanying consolidated balance sheets of Innoviva, Inc.

and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 29, 2024, expressed an unqualified opinion on the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

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The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Consolidated Entities and Equity and Long-term Investments –

Primary Beneficiary Determination for Variable Interest Entities –

Refer to Notes 1, 5, and 6 to the consolidated financial statements

Consolidated Entities and Equity and Long-term Investments—Primary Beneficiary Determination for Variable Interest Entity—Refer to Notes 1, 5, and 6 to the consolidated financial statements.

Critical Audit Matter Description

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The Company evaluates its interests in these entities to determine whether they meet the definition of a variable interest entity (VIE) or a voting interest entity (VOE) and whether the Company is required to consolidate these entities.

A VIE is consolidated by its primary beneficiary, which is the party that has both 1) the power to direct the activities that most significantly impact the economic performance of the VIE and 2) a variable interest that absorbs losses or receives benefits from the VIE that could potentially be significant to the VIE.

To determine whether a variable

interest that the Company holds could potentially be significant to the VIE, the Company considers both qualitative and quantitative factors regarding the nature, size and form of the Company's involvement with the VIE.

To determine whether a variable interest that the Company holds could potentially be significant to the VIE, the Company considers both qualitative and quantitative factors regarding the nature, size, and form of the Company’s involvement with the VIE.

The Company will reconsider whether an entity is a VIE and whether the Company is the primary beneficiary of the entity upon the occurrence of certain types of events.

The determination of the primary beneficiary of a VIE requires significant management judgment.

As of December 31, 2022, the carrying values of the Company’s consolidated VIEs’

total assets and total liabilities were $320.6 million and $1.6 million, respectively.

Additionally, as of December 31, 2022 the carrying value of the Company’s investments in unconsolidated VIEs was $377.9 million.

We identified the primary beneficiary determination for the Company’s VIEs as a critical audit matter due to the complexity of the accounting principles related to the determination of the primary beneficiary of a VIE and the significant judgment required by management in evaluating the Company’s role in establishing the VIE, their ongoing rights and responsibilities and identifying which party, if any, has power over those activities.

This required a high degree of auditor judgment and an increased extent of effort, including the involvement of professionals with consolidation accounting expertise, when performing audit procedures to evaluate the Company’s determination of whether it is the primary beneficiary for its VIEs.

The determination of the primary beneficiary of a VIE requires significant management judgement.

We identified the primary beneficiary determination for the Company’s VIEs as a critical audit matter due to the complexity of the accounting principles related to the determination of the primary beneficiary of a VIE and the significant judgment required by management in evaluating the agreements and structure of the investments in determining the primary beneficiary of a VIE.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the primary beneficiary determination for VIEs included the following, among others:

We tested the effectiveness of controls over the Company’s primary beneficiary determination for its VIEs, including management’s determination of the party that has the power to direct the activities that most significantly impact the economic performance of the VIE and a variable interest that absorbs losses or receives benefits from the VIE that could potentially be significant to the VIE.

We evaluated the appropriateness of the Company’s accounting conclusions for consolidated and unconsolidated VIEs through the following:

o Evaluated the investment structures and terms of the agreements, including reading the purchase agreements and other related documents which govern the formation and activities of the entity (the Contractual Arrangements).

• We tested the effectiveness of controls over the Company’s primary beneficiary determination for its VIEs, including management’s determination of the party that has the power to direct the activities that most significantly impact the economic performance of the VIE and a variable interest that could potentially be significant to the VIE.

• We evaluated the appropriateness of the Company’s accounting conclusions for consolidated and unconsolidated VIEs through the following:

o Evaluated the investment structures and terms of the agreements, including reading the purchase agreements and other related documents.

o Tested whether the Company appropriately determined the primary beneficiary by evaluating the contractual arrangements of the entity to determine if the Company has the power to direct activities that most significantly impact the economic performance of the VIE and if the Company has the obligation to absorb losses of the entity or the right to receive benefits from the entity that could be significant to the VIE.

o For certain VIEs, with the assistance of professionals with expertise in consolidation accounting, evaluated the appropriateness of the Company’s determination of the primary beneficiary of the VIE.

o Evaluated the Company’s disclosures related to the primary beneficiary determination of its consolidated entities and unconsolidated VIEs.

o Evaluated the Company’s disclosures related to the primary beneficiary determination of its consolidated entities and equity and long-term investments.

/s/ Deloitte & Touche LLP

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Opinion on the financial statements

We have audited the accompanying consolidated balance sheet of Innoviva, Inc.

(a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’

equity, and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have audited the consolidated balance sheet of Innoviva, Inc.

(a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2021 (not presented herein), the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.