What changed in this filing

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Item 1. Financial Statements

2024-05-08 compared with 2023-11-01 · 351 added, 848 removed, 580 unchanged (67% of the section changed)

3 unchanged sentences

(In thousands, except per share data)

September 30,

Current assets:

Cash and cash equivalents

Accounts receivable, net

Accounts receivable

Receivables from collaboration arrangement

8 unchanged sentences

Intangible assets

Deferred tax assets

Liabilities and Stockholders’

Liabilities and Stockholders’ Equity

Current liabilities:

3 unchanged sentences

Deferred revenue

Convertible subordinated notes due 2023, net of issuance costs

Income tax payable

Other accrued liabilities

5 unchanged sentences

Commitments and contingencies (Note 12)

Stockholders’

Stockholders’ equity:

Preferred stock:

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62,797 and 63,307 issued and outstanding as of

September 30, 2023 and December 31, 2022, respectively

March 31, 2024 and December 31, 2023, respectively

Treasury stock:

at cost, 32,005 shares as of September 30, 2023

at cost, 32,005 shares as of March 31, 2024

and December 31, 2023

Additional paid-in capital

Accumulated deficit

Total stockholders’

Total liabilities and stockholders’

Retained earnings (accumulated deficit)

Total stockholders’ equity

Total liabilities and stockholders’ equity

* Condensed consolidated balance sheet has been derived from audited consolidated financial statements as of December 31, 2023.

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INNOVIVA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In thousands, except per share data)

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Royalty revenue, net of amortization of capitalized fees

paid of $ 3,456 in the three months ended September 30, 2023

and 2022, and $ 10,368 in the nine months ended

September 30, 2023 and 2022

paid of $ 3,456 in the three months ended

March 31, 2024 and 2023

Net product sales

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amortization of inventory fair value

adjustments, excluding depreciation

and amortization of intangible assets)

adjustments, excluding amortization

of intangible assets)

Cost of license revenue

2 unchanged sentences

Amortization of acquired intangible assets

Gain on sale of Theravance Respiratory

Company, LLC (“TRC”)

Loss on debt extinguishment

Changes in fair values of equity method

investments, net

Changes in fair values of other equity and

Changes in fair values of equity and

long-term investments, net

2 unchanged sentences

Other expense, net

Total expenses

Total expenses, net

Income before income taxes

Income tax expense, net

Net income (loss) attributable to

noncontrolling interests

Net income attributable to

Innoviva stockholders

Basic net income per share attributable to

Innoviva stockholders

Diluted net income per share attributable

to Innoviva stockholders

Shares used to compute Innoviva basic and diluted

Net income and comprehensive income

Net income per share:

Shares used to compute basic net income per share

Shares used to compute diluted net income per share

See accompanying notes to condensed consolidated financial statements.

INNOVIVA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

Three Months Ended September 30,

Nine Months Ended September 30,

Comprehensive income

Comprehensive income (loss) attributable to

noncontrolling interests

Comprehensive income attributable to

Innoviva stockholders

Shares used to compute net income per share:

See accompanying notes to condensed consolidated financial statements.

INNOVIVA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

Nine Months Ended September 30, 2023

Three Months Ended March 31, 2024

Treasury Stock

Stockholders’

Balance as of January 1, 2024

Exercise of stock options and

issuance of common stock units

and stock awards, net of repurchase

of shares to satisfy tax withholding

and stock awards, net of

repurchase of shares to satisfy

tax withholding

Repurchase of common stock

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Balance as of March 31, 2024

Issuance of common stock units

and stock awards, net of repurchase

of shares to satisfy tax withholding

Repurchase of common stock

Stock-based compensation

Balance as of June 30, 2023

Three Months Ended March 31, 2023

Treasury Stock

Stockholders’

Balance as of January 1, 2023

Issuance of common stock units

3 unchanged sentences

Stock-based compensation

Balance as of September 30, 2023

Nine Months Ended September 30, 2022

Treasury Stock

Noncontrolling

Stockholders’

Balance as of January 1, 2022

Cumulative adjustment due to

adoption of ASU 2020-06

Distributions to noncontrolling

Fair value of noncontrolling

interests in a consolidated

variable interest entity

Exercise of stock options and

issuance of common stock units

and stock awards, net of

repurchase of shares to satisfy

tax withholding

Stock-based compensation

Capped call options associated

with convertible senior notes

Balance as of March 31, 2023

Distributions to noncontrolling

Equity activity of noncontrolling

interests in a consolidated

variable interest entity

Exercise of stock options and

issuance of common stock units

and stock awards, net of

repurchase of shares to satisfy

tax withholding

Conversion of convertible

subordinated notes due

Stock-based compensation

Balance as of June 30, 2022

Distributions to noncontrolling

Derecognition of noncontrolling

interests upon sale of TRC

Derecognition of noncontrolling

interests upon acquisition of

Entasis Therapeutics Holdings Inc.

(“Entasis”) minority interest

Exercise of stock options and

issuance of common stock units

and stock awards, net of

repurchase of shares to satisfy

tax withholding

Stock-based compensation

Balance as of September 30, 2022

See accompanying notes to condensed consolidated financial statements.

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(In thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities

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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

Loss on extinguishment of debt

Net gain on sale of TRC

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

Accrued interest income added to long-term investments

5 unchanged sentences

Accounts payable

Accrued personnel-related expenses and other

accrued liabilities

Accrued personnel-related expenses and other accrued liabilities

Accrued interest payable

3 unchanged sentences

Cash flows from investing activities

Purchases of equity method investments

Purchases of trading securities

4 unchanged sentences

Purchases of property and equipment

Proceeds from sale of ownership interest in TRC, net

Cash acquired through the consolidation of Entasis

Cash paid for the acquisition of La Jolla Pharmaceutical Company,

net of cash acquired

Sale of property and equipment

Net cash used in investing activities

Cash flows from financing activities

Distributions to noncontrolling interests

Purchase of Entasis minority interest

Repurchase of common stock

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Payment for repurchase of convertible subordinated notes due 2023

Purchases of capped call options associated with convertible senior notes

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

issuance costs

Net cash used in financing activities

Net (decrease) increase in cash and cash equivalents

Net decrease in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Nine Months Ended September 30,

Three Months Ended March 31,

Supplemental Disclosure of Cash Flow Information:

Cash paid for interest

Cash paid for income taxes

Supplemental Disclosure of Non-cash Investing and Financing Activities:

Adoption of ASU 2020-06

Reconciliation of Cash, Cash Equivalents and Restricted Cash:

Cash and cash equivalents

Restricted cash, included in “Other assets”

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

condensed consolidated statements of cash flows

Accrued interest income converted to long-term investments

See accompanying notes to condensed consolidated financial statements.

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Innoviva, Inc.

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

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

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

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

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

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

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

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

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

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

Our new product, XACDURO ® (formerly known as sulbactam-durlobactam or SUL-DUR), was approved by the United States Food and Drug Administration (“FDA”) on May 23, 2023 and we commenced commercial sales of XACDURO ® in the third quarter of 2023.

Our development pipeline includes medicines for the treatment of bacterial infections.

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

We 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) approved for the treatment of complicated intra-abdominal infections in adults.

Our third 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 growth potential and a late-stage 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.

Basis of Presentation

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

GAAP”) for interim financial information.

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

GAAP”) for interim financial information.

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

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The interim results are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2024, or any other periods.

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

All intercompany balances and transactions have been eliminated in consolidation.

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

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

Presentation Reclassification

Amounts in equity and long-term investments and changes in fair value of equity and long-term investments, net, reported in the Company's comparative financial statements have been reclassified to conform to the current year presentation.

Certain reclassifications have been made to the condensed consolidated statement of cash flows for the nine months ended September 30,

2022 to conform to the current year’s presentation.

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

Factors Affecting Comparability

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

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

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

Acquisition of La Jolla on August 22, 2022.

Use of Management’s Estimates

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (“SEC”) on February 29, 2024, and as amended on March 5, 2024 and March 22, 2024.

Use of Management’s Estimates

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

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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.

Currently, we derive most of our revenues from GSK.

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

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

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

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

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

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

or investors’

expectations due to a number of important factors.

We also started recognizing revenue from product sales of GIAPREZA ® and XERAVA ® as a result of our acquisition of La Jolla and XACDURO ® , which was commercially launched in September 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 the loss of one of these distributors would significantly impact our ability to distribute our products, as we expect that sales volume would be absorbed by new or remaining distributors.

Three of our customers each account for 27 %, 28 % and 26 %, respectively, of our net product sales for the three months ended September 30, 2023 , and 32 %, 28 % and 27 %, respectively, for the nine months ended September 30, 2023 .

These same customers account for 29 %, 28 % and 14 %, respectively, of our receivables from net product sales, which are included in “Accounts receivables, net”

in our unaudited condensed consolidated balance sheet as of September 30, 2023.

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

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

Additionally, we generate revenue from product sales of XACDURO ® , which was commercially launched in September 2023.

In the U.S., hospitals and other healthcare organizations generally acquire our products through a network of specialty distributors, which are regarded as our customers for accounting purposes.

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

Three of our customers each account for 36 %, 26 % and 24 %, respectively, of our net product sales for the three months ended March 31, 2024 .

These same customers account for 37 %, 21 % and 12 %, respectively, of our receivables from net product sales, which are included in “Accounts receivables” in our unaudited condensed consolidated balance sheet as of March 31, 2024.

Refer to Item 1A.

“Risk Factors”

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

“Risk Factors” disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.

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.

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 ® .

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

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

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

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

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.

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.

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This assessment requires us to apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE.

Business Combination

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

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

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

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

For intangible assets, we typically use the income method.

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

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

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

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

Cash and Cash Equivalents

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Accounts Receivable

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

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

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

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

Goodwill and intangible assets with an indefinite useful life are not amortized and are tested for impairment at least annually on the first day of December of each year or more frequently if indicators for potential impairment exist or whenever events or changes in circumstances indicate that the asset’s carrying asset amount may not be recoverable.

Intangible assets with definite useful lives are amortized on a straight-line basis over their respective remaining useful lives and are tested for impairment only if indicators for potential impairment exist or whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable.

Significant judgment may be involved in determining if an indicator of impairment has occurred.

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

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

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

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

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 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.

We 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 unaudited condensed consolidated balance sheets.

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

Refer to Note 11, “Debt”

for more information.

Refer to Note 11, “Debt” for more information.

Related Party

Sarissa Capital owned 11.6 % of our outstanding common stock as of March 31, 2024.

Transactions with Sarissa Capital are described in Note 5, “Consolidated Entity”.

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

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

Basic net income per share attributable to Innoviva stockholders is computed by dividing net income attributable to Innoviva stockholders by the weighted-average number of shares of common stock outstanding.

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

Dilutive potential common stock equivalents include the assumed exercise, vesting and issuance of employee stock awards using the treasury stock method, as well as common stock issuable upon assumed conversion of our convertible subordinated notes due 2023 (the “2023 Notes”) up until its maturity date on January 15, 2023, our convertible senior notes due 2025 (the “2025 Notes”) and our convertible senior notes due 2028 (the “2028 Notes”) using the if-converted method.

The following table shows the computation of basic and diluted net income per share for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended September 30,

Nine Months Ended September 30,

Basic net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding.

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

The following table shows the computation of basic and diluted net income per share for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

(In thousands except per share data)

Net income attributable to Innoviva stockholders, basic

Net income, basic

interest expense on 2023 Notes, net of tax effect

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interest expense on 2028 Notes, net of tax effect

Net income attributable to Innoviva stockholders, diluted

Net income, diluted

Weighted-average shares used to compute basic net income

per share attributable to Innoviva stockholders

Dilutive effect of 2023 Notes

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Weighted-average shares used to compute diluted net income

per share attributable to Innoviva stockholders

Net income per share attributable to Innoviva stockholders

Net income per share

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:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands)

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Net Revenue from Collaboration Arrangement

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

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

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

Net revenue recognized under our GSK Agreements was as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands)

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Total royalties

amortization of capitalized fees

amortization of capitalized fees paid

Total net royalty revenue

Net Product Sales

Our net product sales were $ 13.7 million, consisting of net sales of GIAPREZA ® , XERAVA ® , and XACDURO ® for $ 8.0 million, $ 5.1 million, and $ 0.6 million, respectively, for the three months ended September 30, 2023 .

Our net product sales were $ 40.9 million, consisting of net sales of GIAPREZA ® , XERAVA ® , and XACDURO ® for $ 28.2 million, $ 12.1 million, and $ 0.6 million, respectively, for the nine months ended September 30, 2023 .

We derived over 86 % and 93 % of our net product sales from customers located in the U.S for the three and nine months ended September 30, 2023, respectively.

For the comparative periods in 2022, our net product sales amounted to $ 5.1 million, consisting of $ 3.8 million in net sales of GIAPREZA ® and $ 1.3 million in net sales of XERAVA ® .

These sales were recognized from the date of our acquisition of La Jolla, which took place on August 22, 2022, through September 30, 2022.

Our net product sales were $ 19.1 million, consisting of net sales of GIAPREZA ® , XERAVA ® , and XACDURO ® for $ 12.1 million, $ 4.8 million and $ 2.2 million, respectively, for the three months ended March 31, 2024 .

We derived over 91 % of our net product sales from customers located in the U.S for the period.

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

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

License Revenue

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

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

License and Collaboration Arrangements

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

(“Zai Lab”) (Nasdaq:

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

(“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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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 for the three and nine months ended September 30, 2023 and 2022 were not material.

Following the approval of XACDURO ® by the FDA in May 2023, we recognized $ 3.0 million in license revenue for the nine months ended September 30, 2023.

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 three months ended March 31, 2024 and 2023 were not material.

On April 24, 2024, we entered into an amendment to the Zai Agreement, pursuant to which Zai Lab shall share certain costs estimated at approximately $ 8.1 million associated with supply chain activities for manufacturing XACDURO ® .

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 for the three and nine months ended September 30, 2023 and 2022 were 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 three months ended March 31, 2024 and 2023 were 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.

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”).

PAION Pharma GmbH

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

We have not recognized any revenue from PAION related to commercial milestones from the date of acquisition of La Jolla to September 30, 2023.

Royalty revenue recognized under this agreement for the three and nine months ended September 30, 2023 was not material.

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

We have not recognized any revenue from PAION related to commercial milestones from the date of acquisition of La Jolla to March 31, 2024.

Royalty revenue recognized under this agreement for the three months ended March 31, 2024 and 2023 was 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 $ 1.0 million in cost reimbursements under this agreement for the three and nine months ended September 30, 2023.

We did no t recognize any cost reimbursements under this agreement for the three months ended March 31, 2024 and 2023.

PAION filed for insolvency in Germany on October 27, 2023 and the insolvency proceedings commenced 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 with the approval of the insolvency administrator in both procedures.

In early 2024, the sale of business operations of PAION was completed and starting February 2024, PAION has continued its business as a subsidiary of the Humanwell Healthcare Group as an independent company under the name PAION Pharma GmbH.

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”).

Under the Everest License, we recognized $ 8.0 million in license revenue for the nine months ended September 30, 2023 as a result of our achievement of a regulatory milestone during the period.

Under the Everest License, we recognized $ 8.0 million in license revenue for the three months ended March 31, 2023 as a result of our 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.

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

Royalty revenue recognized under this agreement for the three and nine months ended September 30, 2023 was not material.

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

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

We recognized a $ 0.9 million and $ 1.6 million in revenue under this agreement for the three and nine months ended September 30, 2023, respectively.

Royalty revenue recognized for the three months ended March 31, 2024 and 2023 was not material.

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

Under the Everest Supply Agreement, we are reimbursed for direct and certain indirect manufacturing costs at 110 % of cost.

R evenue recognized under this agreement for the three months ended March 31, 2024 and 2023 was not material.

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 ® .

Amounts recognized under this agreement for the three and nine months ended September 30, 2023 were $ 0.5 million and $ 1.7 million, respectively.

Amounts recognized under this agreement for the three months ended March 31, 2024 and 2023 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 nine months ended September 30, 2023 , we recognized $ 1.6 million in cost of license revenue under this agreement as a result of the license revenue we earned under the out-licensing agreement with Everest for the same period.

Amounts recognized under this agreement for the three months ended March 31, 2024 were not material.

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

Paratek Pharmaceuticals, Inc.

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 expires in October 2023 .

Amounts recognized under this agreement for the three and nine months ended September 30, 2023 were not material.

Consolidated Entities and Acquisitions

Consolidated Entities

Theravance Respiratory Company, LLC

Up until July 20, 2022, we consolidated TRC under the VIE model as we determined that TRC was a VIE and we were the primary beneficiary of the entity because we had the power to direct the economically significant activities of TRC and the obligation to absorb losses of, or the right to receive benefits from, TRC.

We held 15 % ownership interest of TRC.

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

As discussed in Note 3, “

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

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

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

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

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

(“InCarda”), ImaginAb, Inc.

(“ImaginAb”), Gate Neurosciences, Inc.

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

The summarized financial information of TRC for the three and nine months ended September 30, 2022 are presented as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Royalty revenue

Operating expenses

Income (loss) from operations

Other income, net

Realized loss

Income tax expense, net

Changes in fair values of equity and long-term

Net income (loss)

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.

Our obligation to pay royalties with respect to the licensed product was retroactive to the date of the first commercial sale of XERAVA ® and continued until there were no longer any valid claims of the Paratek patents, which expired in October 2023 .

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

The royalty expense in respect of durlobactam arising from our net sales of XACDURO ® for the three months ended March 31, 2024 was not material.

Consolidated Entity

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

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

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

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

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.

The lock-up period for the initial contribution of $ 190.0 million, which excludes the $ 110.0 million 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.

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

As of September 30, 2023, we held approximately 100 % of the economic interest of the Partnership.

As of September 30, 2023 and December 31, 2022, total assets of the Part nership were $ 298.6 million and $ 320.6 million, respectively, of which the majority was attributable to equity, debt and long-term investments.

As of September 30, 2023 and December 31, 2022 , total liabilities were $ 1.1 million and $ 1.6 million, respectively.

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

During the three and nine months ended September 30, 2023 , we recorded $ 1.1 million and $ 1.2 million, respectively, of net investment-related income earned by the Partnership, and $ 22.4 million and $ 22.7 million of net negative changes, respectively, in fair values of equity and long-term investments in the unaudited condensed consolidated statements of income.

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

Entasis Therapeutics Holdings Inc.

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

Entasis is 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’

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

The fair value of Entasis’

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

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

On February 17, 2022, Innoviva Strategic Opportunities, LLC (“ISO”) entered into a securities purchase agreement with Entasis pursuant to which ISO purchased a convertible promissory note for a total purchase price of $ 15.0 million.

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

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

Accordingly, we consolidated Entasis’

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

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

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

We completed our acquisition of Entasis’

minority interest on July 11, 2022.

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

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

The Replacement Warrants are classified as equity.

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

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

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

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 periods presented.

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

(In thousands)

February 17, 2022

Cash and cash equivalents

Prepaid expenses

Other current assets

Property and equipment, net

Right-of-use assets

Intangible assets

Total assets acquired

Accounts payable

Accrued personnel-related expenses

Other current liabilities

Deferred tax liabilities

Total liabilities assumed

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 7, “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.

Our consolidated net income for the three and nine months ended September 30, 2022 included the net loss attributable to Innoviva stockholders since the consolidation date of $ 2.7 million and $ 13.6 million, respectively, from the results of operations of Entasis.

La Jolla Pharmaceutical Company

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

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

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

La Jolla 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.

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.

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

(In thousands)

August 22, 2022

Cash and cash equivalents

Short-term marketable securities

Accounts receivable

Prepaid expenses

Other current assets

Property and equipment, net

Right-of-use assets

Intangible assets

Deferred tax assets

Total assets acquired

Accounts payable

Deferred revenue, current

Other accrued liabilities

Other long-term liabilities

Total liabilities assumed

Total assets acquired, net

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

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

Refer to Note 7, “Goodwill and Intangible Assets”

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

Pro Forma Financial Information

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

The unaudited pro forma financial information is presented for informational purposes only, and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place on January 1, 2021, or of results that may occur in the future.

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

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

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Net income attributable to Innoviva stockholders

Equity and Long-term Investments and Fair Value Measurements

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 condensed consolidated balance sheets.

We report in our condensed consolidated statements of income and comprehensive 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 March 31, 2024, we continued to hold approximately 100 % of the economic interest of the Partnership.

As of March 31, 2024 and December 31, 2023, total assets of the Part nership were $ 287.2 million and $ 311.8 million, respectively, of which the majority was attributable to equity and long-term investments.

As of March 31, 2024 and December 31, 2023 , total liabilities were $ 1.8 million and $ 0.1 million, respectively.

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

During the three months ended March 31, 2024 , we recorded $ 0.2 million of net investment-related expense incurred by the Partnership and $ 26.2 million of net negative changes in fair values of equity and long-term investments in the unaudited condensed consolidated statements of income and comprehensive income.

During the three months ended March 31, 2023, we recorded $ 0.5 million of net investment-related expenses incurred by the Partnership and $ 4.1 million of net negative changes in fair values of equity and long-term investments in the unaudited condensed consolidated statements of income and comprehensive income.

Equity and Other Investments and Fair Value Measurements

Equity Investment in Armata

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

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

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

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

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

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

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

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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.

The voting agreement will expire the earlier of the second anniversary of the agreement effective da te and approval by the FDA of any of Armata’

s product candidates for marketing and commercial distribution.

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.

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.

As of September 30, 2023 , three of the seven members of Armata’s board of directors are also members of the board of directors of Innoviva.

As of September 30, 2023 and December 31, 2022, the Company and ISO owned approximately 69.4 % , of Armata’s common stock.

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

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

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

As of March 31, 2024 , three of the seven members of Armata’s board of directors are also members of the board of directors of Innoviva.

As of March 31, 2024 and December 31, 2023, the Company and ISO owned approximately 69.4 % , of Armata’s common stock.

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

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

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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.

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.

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

The Armata July 2023 Term Loan is subject to an interest rate of 14 % per annum and is due to mature on January 10, 2025 .

The July 2023 Credit and Security Agreement is secured by substantially all of the assets of Armata and its domestic and foreign material subsidiaries.

On March 4, 2024, ISO and Armata entered into a Credit and Security Agreement (the “March 2024 Credit and Security Agreement”), under which we extended a term loan to Armata (the “Armata March 2024 Term Loan”) in an aggregate amount of $ 35.0 million.

The Armata March 2024 Term Loan is subject to an interest rate of 14 % per annum and is due to mature on June 4, 2025 .

The March 2024 Credit and Security Agreement is secured by substantially all of the assets of Armata and its domestic and foreign material subsidiaries.

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

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

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

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

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

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

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.

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 September 30, 2023, the fair values of our holdings of Armata common stock, warrants, the Armata Convertible Note and the Armata Term Loan were estimated at $ 75.2 million, $ 31.8 million, $ 49.7 million and $ 26.2 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.

For the Armata common stock and warrants, we recorded $ 72.0 million and $ 67.9 million in unrealized gain for the three and nine months ended September 30, 2023, respectively, as changes in fair values of equity method investments, net, in the unaudited condensed consolidated statements of income.

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

For the Armata Convertible Note, we recorded $ 18.5 million and $ 19.6 million unrealized gain as changes in fair values of equity and long-term investments, net, in the unaudited condensed consolidated statement of income for three and nine months ended September 30, 2023, respectively.

For the Armata Term Loan, we recorded $ 1.1 million unrealized gain as changes in fair values of equity and long-term investments, net, in the unaudited condensed consolidated statement of income for three and nine months ended September 30, 2023.

We account for the Armata July 2023 Term Loan and the Armata March 2024 Term Loan as trading securities, measured at fair value using income approach based on the discounted value of expected future cash flows.

As of March 31, 2024, the fair values of our holdings of Armata common stock, warrants, the Armata Convertible Note, the Armata July 2023 Term Loan and the Armata March 2024 Term Loan were estimated at $ 104.8 million, $ 47.1 million, $ 64.3 million, $ 27.4 million, and $ 35.5 million, respectively.

As of December 31, 2023, the fair values of our holdings of Armata common stock, warrants, the Armata Convertible Note and the Armata July 2023 Term Loan were estimated at $ 81.2 million, $ 35.3 million, $ 51.9 million and $ 27.0 million , respectively.

For the Armata common stock and warrants, we recorded $ 35.3 million and $ 15.8 million in unrealized gain for the three months ended March 31, 2024 and 2023, respectively, as changes in fair values of equity method i nvestments, net, in the unaudited condensed consolidated statements of income and comprehensive income.

For the Armata Convertible Note, we recorded $ 12.4 million and $ 2.8 million unrealized gain as changes in fair values of equity and long-term investments, net, in the unaudited condensed consolidated statements of income and comprehensive income for three months ended March 31, 2024 and 2023, respectively.

For the July 2023 Armata Term Loan, we recorded $ 0.4 million unrealized gain as changes in fair values of equity and long-term investments, net, in the unaudited condensed consolidated statements of income and comprehensive income for three months ended March 31, 2024 .

For the March 2024 Armata Term Loan, we recorded $ 0.5 million unrealized gain as changes in fair values of equity and long-term investments, net, in the unaudited condensed consolidated statements of income and comprehensive income for three months ended March 31, 2024.

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

Income Statement Information

Three Months Ended June 30,

Nine Months Ended June 30,

Three Months Ended December 31,

(In thousands)

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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 InRhythm TM (flecainide for inhalation), InCarda’s lead program, for the treatment of a recent-onset episode of paroxysmal atrial fibrillation.

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

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

As of September 30, 2023 , no ne of InCarda’s six board members was designated by ITH.

We did not exercise the InCarda 2020 Warrant which expired in March 2023 and wrote off its carrying value of $ 0.1 million during the nine months ended September 30, 2023.

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

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

As of March 31, 2024 , none of InCarda’s six board members was designated by ITH.

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

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

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 2022 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 stock, 37,350 shares of its Series A-1 preferred stock, 20,469,432 shares of its Series C preferred stock, 8,771,780 shares of its Series D-1 preferred stock, 3,369,802 shares of its Series D-2 preferred stock, a warrant to purchase 5,117,358 shares of its Series C preferred stock at $ 0.73 per share and a warrant to purchase 2,490,033 shares of its Series D-1 preferred stock at $ 0.20 per share.

As of September 30, 2023 and December 31, 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.

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

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.

On January 17, 2024, ITH purchased a secured convertible promissory note (the “InCarda Convertible Note”) from InCarda for a total purchase price of $ 0.4 million.

The InCarda Convertible Note bears an annual interest rate of 8 % and shall be due and payable upon the earlier to occur of certain events defined in the InCarda Convertible Note.

The InCarda Convertible Note will convert into equity securities or shadow equity securities of InCarda depending upon the occurrence of a qualified event or a qualified financing event as also defined in the InCarda Convertible Note.

The InCarda Convertible Note is secured by certain intellectual property rights of InCarda.

As of March 31, 2024 and December 31, 2023 , we held 8.1 % of InCarda equity ownership.

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

Based on our evaluation, we determined that InCarda is a VIE, but we 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.

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

With the exception of the InCarda Convertible Note and the InCarda Series D Warrants , we account for our investments in InCarda under the measurement alternative.

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

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

Key assumptions used in the valuation model 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, TRC reassessed the value of its investments in InCarda using the Option Pricing Model methodology.

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 %.

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We recognized an impairment charge of $ 9.0 million during the second quarter of 2022.

As of September 30, 2023 , we recorded $ 4.8 million in fair value of InCarda’s Series C preferred stock and $ 0.2 million in fair value of Series D warrants (the “InCarda Preferred Stock Warrants”).

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

As of September 30, 2023 and December 31, 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.

Du ring the three months ended September 30, 2023 , there was no change in the carrying amount of our investment.

During the nine months ended September 30, 2023, we recorded a $ 3.0 million net unrealized loss, as a change in fair values of equity and long-term investments, net, in the unaudited condensed consolidated statements of income.

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

We account for the InCarda Convertible Note as a trading security, measured at fair value.

As of March 31, 2024 and December 31, 2023 , we recorded as equity and long-term investments in the unaudited condensed consolidated balance sheets $ 4.8 million in fair value of InCarda’s Series C preferred stock and $ 0.1 million in fair value of the InCarda Series D Warrants.

As of March 31, 2024 and December 31, 2023 , we recognized as equity and long-term investments in the unaudited condensed consolidated balance sheets $ 2.7 million, for InCarda’s Series D-1 preferred stock, Series D-2 preferred stock, and common stock using the measurement alternative.

As of March 31, 2024, we recorded $ 0.4 million in fair value of the InCarda Convertible Note as equity and long-term investments in the unaudited condensed consolidated balance sheet.

During the three months ended March 31, 2024 , there was immaterial change in the carrying amount of our investments.

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

Equity Investment in ImaginAb

On March 18, 2021, TRC entered into a securities purchase agreement with ImaginAb, to purchase 4,051,724 shares of ImaginAb Series C preferred stock for $ 4.7 million.

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

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

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

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

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 September 30, 2023 , one of ImaginAb’s six board members was designated by ITH.

As of September 30, 2023 and December 31, 2022, we held 11.8 % 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.

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.

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 rate 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.

As of March 31, 2024 , one of ImaginAb’s six board members was designated by ITH.

As of March 31, 2024 and December 31, 2023, we held 11.8 % and 12.4 %, 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, Series C-2 preferred stock and common stock using the measurement alternative.

As of September 30, 2023 and December 31, 2022, $ 7.6 million and $ 6.4 million, respectively, was recorded as equity and long-term investments in the unaudited condensed consolidated balance sheets and there was no change in the carrying amount of our investments.

We account for the ImaginAb Convertible Note as a trading security, measured at fair value using a Monte Carlo simulation model with the probability of certain qualified events and the assumptions of risk-free rate, volatility of stock price and timing of certain qualified events.

As of March 31, 2024 and December 31, 2023, our investment in ImaginAb’s Series C preferred stock, Series C-2 preferred stock and common stock amounted to $ 7.6 million and recorded as equity and long-term investments in the unaudited condensed consolidated balance sheets.

As of March 31, 2024, we recorded $ 2.9 million in fair value of the ImaginAb Convertible Note as equity and long-term investments in the unaudited condensed consolidated balance sheet.

During the three months ended March 31, 2024, we recorded $ 0.2 million in net unrealized loss on the ImaginAb Convertible Note as changes in fair values of equity and long-term investments, net in the unaudited condensed consolidated statements of income and comprehensive income.

There was no change in the carrying amount of our equity investments in ImaginAb.

Convertible Promissory Note in Gate Neurosciences

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 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 shares of common stock outstanding at such time on a fully diluted basis.

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

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 (the “Note Amendment Agreement”) with Gate to amend the Gate Convertible Note.

Pursuant to the Note Amendment Agreement, the principal amount of the Gate Convertible Note was increased from $ 15.0 million to $ 21.5 million, which represents the original principal, accrued interest as of the amendment date and an additional cash investment of $ 5.0 million.

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 (the “Note Amendment Agreement”) with Gate to amend the Gate Convertible Note.

Pursuant to the Note Amendment Agreement, the principal amount of the Gate Convertible Note was increased from $ 15.0 million to $ 21.5 million, which represents the original principal and accrued interest as of the first 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 principal and 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.

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 third 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 September 30, 2023 and December 31, 2022, the fair value of the Gate Convertible Note was estimated at $ 22.3 million and $ 15.7 million, respectively, and recorded as equity and long-term investments in the unaudited condensed consolidated balance sheets.

We rec orded $ 0.1 million and $ 0.8 million unrealized gain as changes in fair values of equity and long-term investments, net in the unaudited condensed consolidated state ment of income for the three and nine months ended September 30, 2023, respectively.

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

As of March 31, 2024 and December 31, 2023, the fair value of the Gate Convertible Note was estimated at $ 33.2 million and $ 28.0 million, respectively, and recorded as equity and long-term investments in the unaudited condensed consolidated balance sheets.

We rec orded $ 0.6 million and $ 0.7 million unrealized loss as changes in fair values of equity and long-term investments, net in the unaudited condensed consolidated state ments of income and comprehensive income for the three months ended March 31, 2024 and 2023, respectively.

Equity Investment in Nanolive

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

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

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 September 30, 2023 , one of Innoviva designees is serving on Nanolive’s seven -member board.

As of September 30, 2023 and December 31, 2022, we held 15.3 % and 15.5 %, respectively, of Nanolive equity ownership.

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

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 March 31, 2024 , no Innoviva designee is serving on Nanolive’s seven -member board.

As of March 31, 2024 and December 31, 2023, we held 15.3 % of Nanolive equity ownership.

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

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

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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 September 30, 2023 and December 31, 2022, $ 10.6 million was recorded as equity and long-term investments in the unaudited condensed consolidated balance sheets and there was no change to the carrying amount of our investment.

As of March 31, 2024 and December 31, 2023, $ 10.6 million was recorded as equity and long-term investments in the unaudited condensed consolidated balance sheets and there was no change to the carrying amount of our investment.

Available-for-Sale Securities

The estimated fair value of available-for-sale securities is based on quoted market prices for these or similar investments that were based on prices obtained from a commercial pricing service.

The estimated fair value of available-for-sale securities is based on quoted market prices for these investments that were based on prices obtained from a commercial pricing service.

Available-for-sale securities are summarized below:

September 30, 2023

March 31, 2024

(In thousands)

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

As of September 30, 2023 , all investments were money market funds, and there was no credit loss recognized.

As of March 31, 2024 and December 31, 2023, all investments were money market funds, and there was no credit loss recognized.

Fair Value Measurements

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 September 30, 2023 Using:

Estimated Fair Value Measurements as of March 31, 2024 Using:

Types of Instruments

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Equity investment - Armata Warrants

Equity investment - InCarda Warrants

Convertible debt investment - Armata Note

Term loan investment - Armata Term Loan

Term loan investment - Armata July 2023 Term Loan

Term loan investment - Armata March 2024 Term Loan

Convertible debt investment - InCarda Note

Convertible debt investment - ImaginAb Note

Convertible debt investment - Gate Note

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Total liabilities measured at estimated fair value

(1) The investments held by ISP Fund LP consisted of $ 298.5 million in equity investments, which included $ 36.9 million in money market funds, and $ 57.1 million receivable from the maturity of convertible notes.

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

(1) The investments held by ISP Fund LP consisted of $ 225.7 million in equity investments, which included private placement positions of $ 61.6 million, and $ 61.4 million in money market funds, cash and interest receivable.

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, 2023 Using:

5 unchanged sentences

Equity investment - Armata Warrants

Equity investment - InCarda Warrants

Convertible debt investment - Armata Note

Term loan investment - Armata July 2023 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 equity investments, which included private placement positions and convertible notes of $ 54.6 million, and $ 25.1 million in money market funds.

Our total capital contributions of $ 300 .0 million is subject to a 36-month lock-up period from the date of such capital contributions.

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

(1) The investments held by ISP Fund LP, consisted of $ 248.5 million in equity investments, which included private placement p ositions 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 s ubsequent years.

There were no transfers between Level 1, Level 2 or Level 3 during the periods presented.

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

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 Gate Convertible Note, the Armata Convertible Note, the Armata July 2023 Term Loan, the Armata March 2024 Term Loan, the InCarda Convertible Note, the InCarda Warrants, the ImaginAb Convertible Note, private placement positions 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.

There are uncertainties on the fair value measurement of the instruments classified under Level 3 due to the use of unobservable inputs and interrelationships between these unobservable inputs, which could result in higher or lower fair value measurements.

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.

Goodwill and Intangible Assets

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

The carrying amount of goodwill as of September 30, 2023 and December 31, 2022 was $ 17.9 million and $ 26.7 million, respectively .

We recognized goodwill of $ 11.5 million and $ 6.4 million from our acquisitions of Entasis and La Jolla, respectively, in 2022.

The carrying amount of goodwill

as of March 31, 2024 and December 31, 2023 was $ 17.9 million .

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

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

The carrying basis and accumulated amortization of recognized intangible assets as of September 30, 2023 and December 31, 2022 were as follows:

September 30, 2023

The carrying basis and accumulated amortization of recognized intangible assets as of March 31, 2024 and December 31, 2023 were as follows:

March 31, 2024

(In thousands)

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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.

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.

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

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 $ 6.5 million and $ 15.3 million for the three and nine months ended September 30, 2023 , respectively.

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

We recognized amortization expense of $ 6.4 million and $ 3.8 million for the three months ended March 31, 2024 and 2023, respectively.

Future amortization expense is expected to be $ 19.4 million for the remainder of 2024, $ 25.8 million for each of the years from 2025 to 2028 and $ 98.7 million thereafter.

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Inventory consisted of the following:

September 30,

(in thousands)

Raw materials

Work-in-progress

Work-in-process

Finished goods

Total inventory

As of September 30, 2023 and December 31, 2022, total inventory included net fair value adjustments resulting from the acquisition of La Jolla of approximately $ 31.0 million and $ 49.5 million, respectively , which will be amortized and recognized as cost of products sold when sales occur in future periods.

The fair value adjustments recorded as part of cost of products sold amounted to $ 5.4 million and $ 19.2 million for the three and nine months ended September 30, 2023 , respectively.

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

As of March 31, 2024 and December 31, 2023 , total inventory included net fair value adjustments resulting from the acquisition of La Jolla of approximately $ 16.1 million and $ 23.0 million, respectively , which will be amortized and recognized as cost of products sold when sales occur in future periods.

The fair value adjustments recorded as part of cost of products sold amounted to $ 6.8 million for the three months ended March 31, 2024 and 2023.

Other Accrued Liabilities

Other accrued liabilities consisted of the following:

September 30,

(in thousands)

Accrued contract manufacturing expenses

Accrued clinical expenses

Accrued research expenses

Accrued clinical and research expenses

Accrued professional services

Current portion of lease liabilities

Current portion of deferred royalty obligations

Royalty obligation payable

Accrued license fees and royalties

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Other long-term liabilities consisted of the following:

September 30,

(in thousands)

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The following table summarizes stock-based compensation expense:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands)

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Risk-free interest rate

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3.7 % - 4.0 %

1.60 % - 3.03 %

Expected term (in years)

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38.1 % - 38.5 %

38.8 % - 40.5 %

Dividend yield

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$ 5.40 - $ 5.42

$ 6.98 - $ 7.73

(1) There were no options granted for the three months ended September 30, 2022.

Stockholders' Equity

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

The 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 management to repurchase shares of the Company’s 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.

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

For the nine months ended September 30, 2023 , we have repurchased 5,051,730 shares in the open market at an average price of $ 11.97 per share for a total amount of approximately $ 60.5 million.

For the three months ended March 31, 2024 , we have repurchased 634,107 shares in the open market at an average price of $ 15.24 per share for a total amount of approximately $ 9.7 million.

All the repurchased shares were retired.

Subsequent to September 30, 2023 and through October 26, 2023, we have repurchased 447,838 shares in the open market at an average price of $ 13.07 per share for a total amount of approximately $ 5.9 million.

Subsequent to March 31, 2024 and through April 25, 2024, we completed the program by repurchasing 352,821 shares in the open market at an average price of $ 14.91 per share for a total amount of approximately $ 5.3 million.

Our debt consists of the following:

September 30,

(In thousands)

Unamortized debt discount and issuance costs

Total debt, net

Current portion of long-term debt, net

Total long-term debt, net

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

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

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

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Contractual interest expense

Amortization of debt issuance costs

Total interest and amortization expense

The remaining balance of $ 96.2 million was fully paid upon the maturity date.

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.

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Our outstanding 2025 Notes balances consisted of the following:

September 30,

(In thousands)

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Net carrying amount

The following table sets forth total interest expense recognized related to the 2025 Notes for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended September 30,

Nine Months Ended September 30,

The following table sets forth total interest expense recognized related to the 2025 Notes for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

(In thousands)

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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.

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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Our outstanding 2028 Notes balance consisted of the following:

September 30,

(In thousands)

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Net carrying amount

The following table sets forth total interest expense recognized related to the 2028 Notes for the three and nine months ended September 30, 2023 and 2022:

Three months ended September 30,

Nine months ended September 30,

The following table sets forth total interest expense recognized related to the 2028 Notes for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

(In thousands)

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Debt Maturities

The aggregate scheduled maturities of our convertible debt as of September 30, 2023 were as follows:

The aggregate scheduled maturities of our convertible debt as of March 31, 2024 were as follows:

(In thousands)

September 30, 2023

March 31, 2024

Years ending December 31:

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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.

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

The current maximum royalty rate is 14 %.

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

The maximum royalty rate through December 31, 2013 was 14 %.

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 aggregate royalty payments to HCR of $ 225.0 million.

For the three and nine months ended September 30, 2023 , we recognized interest expense of $ 1.2 million and $ 3.7 million, respectively .

For the three and nine months ended September 30, 2022 , we recognized interest expense of $ 1.5 million.

The carrying value of the deferred royalty obligation as of September 30, 2023 was $ 70.1 million, $ 66.1 million of which was classified as part of other long-term liabilities and the remaining $ 4.0 mil lion was classified as other accrued liabilities in the condensed consolidated balance sheet.

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

During the nine months ended September 30, 2023 , we made royalty payments to HCR of $ 4.3 million.

The deferred royalty obligation was valued using Level 3 inputs, and its carrying value as of September 30, 2023 approximates fair value.

For the three months ended March 31, 2024 and 2023 , we recognized interest expense of $ 2.7 million and $ 1.2 million, respectively.

The carrying value of the deferred royalty obligation as of March 31, 2024 and December 31, 2023 was $ 70.1 million and $ 69.9 million, respectively (refer to Note 8 “Balance Sheet Components”) .

During the three months ended March 31, 2024 , we made royalty payments to HCR of $ 1.9 million.

The deferred royalty obligation was valued using Level 3 inputs, and its carrying value as of March 31, 2024 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 ® .

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

As of September 30, 2023 , inclusive of the aggregate royalties paid to HCR by La Jolla under the La Jolla Royalty Agreement prior to our acquisition, La Jolla paid $ 17.0 million of aggregate royalties to HCR.

As of March 31, 2024 , inclusive of the aggregate royalties paid to HCR by La Jolla under the La Jolla Royalty Agreement prior to our acquisition, La Jolla paid $ 20.0 million of aggregate royalties to HCR.

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

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

As a result of this assessment, we determined that the fair value of the embedded derivatives is immaterial and, therefore, not recognized as of September 30, 2023 and 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 March 31, 2024 and December 31, 2023.

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.

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The components of lease cost are as follows:

Three Months Ended September 30,

Nine months ended September 30,

Three months ended March 31,

(In thousands)

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Supplemental cash flow information related to leases are as follows:

Nine months ended September 30,

Three months ended March 31,

(In thousands)

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

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

Right-of-use assets obtained through acquisitions

As of September 30, 2023, our operating leases have weighted-average remainin g term of approximately 2.5 years and the weighted average discount rate on our operating lease liabilities was 7.5 %.

Future minimum payments on our operating leases as of September 30, 2023 were as follows:

As of March 31, 2024, our operating leases have weighted-average remainin g term of approximately 2.1 years and the weighted average discount rate on our operating lease liabilities was 7.5 %.

Future minimum payments on our operating leases as of March 31, 2024 were as follows:

(In thousands)

March 31, 2024

Years ending December 31:

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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 “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 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.

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 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, 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.

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

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

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 ® .

The parties have completed claim construction briefing, and a claim construction hearing is set for November 9, 2023.

Fact discovery is set to conclude on December 8, 2023 and expert discovery will be complete by April 19, 2024.

Fact discovery closed on March 31, 2024 and expert discovery will be complete by August 2, 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 September 30, 2023.

Indemnification

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

We recorded a provision for income tax expe nse of $ 3.9 million and $ 14.7 million f or the three and nine months ended September 30, 2023 , respectively, compared to the recorded provision for income tax expense of $ 57.1 million and $ 63.1 million for the three and nine months ended September 30, 2022, respectively.

The Company’s effective income tax rate for the nine months ended September 30, 2023 was 10.6 % compared to 18.3 % for the same period in 2022.

The income tax expense for the nine months ended September 30, 2023 and 2022 was determined based upon estimates of the Company’s effective income tax rates in various jurisdictions.

Our effective tax rate for the nine months ended September 30, 2023 was lower than the U.S.

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

Subsequent Events

On October 6, 2023, ITH entered into a Second Note Amendment Agreement (the “Second Note Amendment Agreement”) with Gate to amend the Gate Convertible Note.

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 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.

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

Forward-Looking Statements

The information in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended.

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

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

The words “anticipates,”

“believes,”

“could,”

“designed,”

“estimates,”

“expects,”

“goal,”

“intends,”

“may,”

“objective,”

“plans,”

“projects,”

“pursuing,”

“will,”

“would”

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

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

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

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

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

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

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

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

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

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

the potential benefits and mechanisms of action of product candidates;

expectations for product candidates through development and commercialization;

the timing of regulatory approval of product candidates;

and projections of revenue, expenses and other financial items;

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

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

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

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

in this Item 2 of Part I.

All forward-looking statements in this Quarterly Report on Form 10-Q are based on current expectations as of the date hereof and we do not assume any obligation to update any forward-looking statements on account of new information, future events or otherwise, except as required by law.

We encourage you to read our unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.

We also encourage you to read Item 1A of Part I of our 2022 Form 10-K and Item 1A of Part II of our Quarterly Reports on Form 10-Q entitled “Risk Factors,”

which contain a more complete discussion of the risks and uncertainties associated with our business.

In addition to the risks described above and in Item 1A of Part I of our 2022 Form 10-K and Item 1A of Part II of this report, other unknown or unpredictable factors also could affect our results.

Therefore, the information in this report should be read together with other reports and documents that we file with the SEC from time to time, including on Form 10-K, Form 10-Q and Form 8-K, which may supplement, modify, supersede or update those risk factors.

As a result of these factors, we cannot assure you that the forward-looking statements in this report will prove to be accurate.

Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material.

In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.

Executive Summary

Innoviva, Inc.

(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.

TRELEGY ® ELLIPTA ® (the combination FF/UMEC/VI).

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

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

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

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

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

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

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

Our development pipeline includes medicines for the treatment of bacterial infections.

We also have economic interests in other healthcare companies.

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

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

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

Third Quarter 2023 and Recent Highlights:

GSK Net Sales

Third quarter 2023 net sales of RELVAR ® /BREO ® ELLIPTA ® by GSK were $303.9 million with $109.5 million in net sales from the U.S.

market and $194.4 million from non-U.S.

Third quarter 2023 net sales of ANORO ® ELLIPTA ® by GSK were $175.8 million with $89.2 million net sales from the U.S.

market and $86.6 million from non-U.S.

Corporate Updates

During the third quarter of 2023, Innoviva repurchased 856,750 shares of its outstanding common stock for $11.0 million.

On July 10, 2023, Innoviva’s wholly owned subsidiary, Innoviva Strategic Opportunities, entered into a credit and security agreement with Armata Pharmaceuticals, Inc.

ARMP) (“Armata”) and invested $25.0 million to advance Armata’s pipeline of therapeutic phage candidates and support the buildout of its state-of-the art cGMP manufacturing facility.

On August 21, 2023, Innoviva appointed Stephen Basso as Chief Financial Officer.

Clinical Updates

In September 2023, Innoviva’s wholly owned subsidiary, Innoviva Specialty Therapeutics, launched XACDURO ® (sulbactam for injection;

durlobactam for injection), co-packaged for intravenous use in patients 18 years of age and older for the treatment of hospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia (HABP/VABP) caused by susceptible isolates of Acinetobacter baumannii-calcoaceticus complex ( Acinetobacter ).

XACDURO ® is the first and only pathogen-targeted antibiotic and a significant advancement in the way healthcare professionals treat Acinetobacter.

In November 2023, in collaboration with The Global Antibiotic Research & Development Partnership (GARDP), we announced that zoliflodacin, a first-in-class antibiotic, met its primary endpoint in a global pivotal phase 3 clinical trial for the treatment of uncomplicated gonorrhea, a prevalent disease affecting over 80 million patients a year globally with rapidly rising antimicrobial resistance concerns.

Study investigators found that oral zoliflodacin demonstrated statistical non-inferiority of microbiological cure at the urogenital site when compared to treatment with intramuscular injection of ceftriaxone and oral azithromycin, a current global standard of care regimen.

In the study, zoliflodacin demonstrated a

favorable safety profile and was generally well tolerated, with the majority of adverse events being mild-to-moderate.

There were no discontinuations reported due to adverse events, serious adverse events, or deaths.

Collaboration Arrangement with GSK

LABA Collaboration

In November 2002, we entered into the LABA collaboration with GSK to develop and commercialize once-daily LABA products for the treatment of chronic obstructive pulmonary disorder (“COPD”) and asthma (the “LABA Collaboration Agreement”).

For the treatment of COPD, the collaboration has developed three combination products:

RELVAR ® /BREO ® ELLIPTA ® (“FF/VI”) (BREO ® ELLIPTA ® is the proprietary name in the U.S.

and Canada and RELVAR ® ELLIPTA ® is the proprietary name outside the U.S.

and Canada), a once-daily combination medicine consisting of a LABA, vilanterol (VI), and an inhaled corticosteroid (“ICS”), fluticasone furoate (“FF”),

ANORO ® ELLIPTA ® (“UMEC/VI”), a once-daily medicine combining a long-acting muscarinic antagonist (“LAMA”), umeclidinium bromide (“UMEC”), with a LABA, vilanterol (VI), and

TRELEGY ® ELLIPTA ® (the combination FF/UMEC/VI), a once-daily combination medicine consisting of an ICS, LAMA and LABA.

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

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

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

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

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

Critical Accounting Policies and Estimates

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

GAAP”).

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

Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

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

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

Factors Affecting Comparability

Our historical financial condition and results of operations for the periods presented may not be comparable, either between periods or going forward due to the factors described below.

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

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

Acquisition of La Jolla on August 22, 2022.

Refer to Note 5, “Consolidated Entities and Acquisitions”

to our accompanying unaudited consolidated financial statement for more information.

Results of Operations

Royalty Revenue

Total royalty revenue, net, as compared to the prior year period, was as follows:

Three Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

- RELVAR/BREO

Total royalties

amortization of capitalized fees

Total net royalty revenue

*Not Meaningful

Total net royalty revenue decreased to $53.6 million and $172.7 million for the three and nine months ended September 30, 2023, compared to $62.2 million and $260.4 million, respectively, for the same period a year ago.

The decrease of total net royalty revenue was primarily due to the sale of our ownership interest in TRC, which received royalties stemming from sales of TRELEGY ® ELLIPTA ® in 2022.

Net Product Sales

Net product sales recognized for the three months ended September 30, 2023 was $13.7 million, consisting of net sales of GIAPREZA ® , XERAVA ® , and XACDURO ® for $8.0 million, $5.1 million, and $0.6 million, respectively.

Net product sales recognized for the nine months ended September 30, 2023 was $40.9 million, consisting of net sales of GIAPREZA ® , XERAVA ® and XACDURO® for $28.2 million, $12.1 million and $0.6 million, respectively.

For the comparative periods in 2022, our net product sales amounted to $5.1 million, consisting of $3.8 million in net sales of GIAPREZA ® and $1.3 million in net sales of XERAVA ® .

These sales were recognized from the date of our acquisition of La Jolla, which took place on August 22, 2022, through September 30, 2022.

License Revenue

We recognized $8.0 million in license revenue for the first quarter of 2023 as a result of achievement of a regulatory milestone under our license agreement with Everest.

We also recognized $3.0 million in license revenue for the second quarter of 2023 as a result of achievement of a regulatory milestone under our license and collaboration agreement with Zai Lab.

Research and Development

Research and development expenses, as compared to the prior year period, were as follows:

Three Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

Research and development

Research and development expenses consist of the following:

Three Months Ended

September 30,

Nine Months Ended

September 30,

(in thousands)

Compensation and related personnel costs

External services

Facilities related

Total research and development expense

*Not Meaningful

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

product development efforts for XACDURO ® , were $4.0 million and $31.6 million, for the three and nine months ended September 30, 2023, respectively.

Research and development expenses for the three and nine months ended September 30, 2022 were attributable to the product development efforts of Entasis from February 17, 2022.

Research and development expenses for the three months ended September 30, 2023 decreased compared to the same period in 2022.

The decrease was primarily a result of the FDA approval of XACDURO ® in May 2023 and personnel transfers from the research development function to general and administrative function after the FDA approval.

Selling, General & Administrative

Selling, general and administrative expenses, as compared to the prior year period, were as follows:

Three Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

Selling, general and administrative

Selling, general and administrative expenses increased for the three and nine months ended September 30, 2023, compared to the same period in 2022 mainly due to the personnel transfers from the research development function to general and administrative function after the FDA approval of XACDURO ® .

Interest and dividend income and other expense, net

Interest and dividend income and other expense, net, as compared to the prior year period, were as follows:

Three Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

Interest and dividend income

Other expense, net

*Not Meaningful

Interest and dividend income increased for the three and nine months ended September 30, 2023, compared to the same periods a year ago due to higher interest rates and higher average balances of our cash equivalents, money market funds and other interest-bearing investments.

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

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

Interest Expense

Interest expense, as compared to the prior year period, was as follows:

Three Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

Interest expense

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

Interest expense for the nine months ended September 30, 2023 included the amount on the 2023 Notes until the notes were fully paid off on January 15, 2023.

Interest expense for the three and nine months ended September 30, 2022 included the amount on the 2028 Notes from March 7, 2022, the date of issuance, through September 30, 2022.

The increase for the nine months ended September 30, 2023, compared to the nine months ended September 30, 222, was mainly due to interest expense on our deferred royalty obligation and a higher average debt balance.

Interest expense for the three months ended September 30, 2022 was higher compared to the three months ended September 30, 2023 primarily due to interest expense on our 2023 Notes which matured and were fully paid in January 2023.

Loss on Debt Extinguishment

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

Gain on Sale of TRC

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

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

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

Changes in fair values of equity

method investments, net

Changes in fair values of other

equity and long-term

investments, net

*Not Meaningful

The changes in fair values of equity method investments for the three and nine months ended September 30, 2023 were more favorable mainly due to Armata's higher stock prices during this period.

We recorded $72.0 million and $67.9 million in unrealized gain for the three and nine months ended September 30, 2023, respectively, related to our equity method investments in Armata.

During the three and nine months ended September 30, 2022, we recorded $11.7 million unrealized gain and $35.3 million unrealized loss, respectively, related to our equity method investments in Armata.

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

We recorded $19.6 million and $20.7 million in unrealized gain for the three and nine months ended September 30, 2023, respectively, related to other long-term investments we made in Armata in 2023.

Provision for Income Taxes

We recorded a provision for income tax expense of $3.9 million and $14.7 million for the three and nine months ended September 30, 2023, compared to a provision for income tax benefit of $57.1 million and for income tax expense of $63.1 million for the three and nine months ended September 30, 2022, respectively.

The effective income tax rate for the nine months ended September 30, 2023 and 2022 was 10.6% and 18.3%, respectively.

Net Income (Loss) Attributable to Noncontrolling Interest

Net income (loss) attributable to noncontrolling interest represents $(33.5) million and $19.9 million for the three and nine months ended September 30, 2022, respectively, for the 85% share of net income (loss) in TRC for Theravance Biopharma and $(2.7) million and $(13.6) million for the three and nine months ended September 30, 2022, respectively, for the 40% share of net loss in Entasis.

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

Liquidity and Capital Resources

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

For the nine months ended September 30, 2023, we generated gross royalty revenues from GSK of $183.0 million, net product sales of $40.9 million and license revenue of $11.0 million.

Net cash and cash equivalents totaled $180.0 million, royalties receivables from GSK totaled $57.0 million and accounts receivable associated with our product sales totaled $10.8 million as of September 30, 2023.

Adequacy of Cash Resources to Meet Future Needs

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

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

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

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

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

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

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

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

Nine Months Ended September 30,

(In thousands)

Net cash provided by operating activities

Net cash used in investing activities

Net cash used in financing activities

Cash Flows from Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2023 was $107.8 million, consisting primarily of our net income of $118.2 million, adjusted for net non-cash items, which included $19.2 million of amortization of inventory fair value step-up adjustment, $10.4 million of amortization of capital fees and depreciation of property and equipment, $15.3 million of amortization of acquired intangible assets, partially offset by $63.0 million of net changes in fair value of our investments and $5.0 million net changes in operating assets and liabilities.

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

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

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

Cash Flows from Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2023 of $61.6 million primarily consisted of $60.1 million in purchases of trading securities, $1.2 million in purchases of equity and long-term investments, $24.9 million in purchases of equity investments managed by ISP Fund LP, and $14.7 million from purchase and sales of other investments managed by ISP Fund LP.

The use of cash for investing activities was partially offset by net proceeds of $39.6 million from the sales of equity investments managed by ISP Fund LP.

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

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

Cash Flows from Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2023 of $157.3 million was primarily due to the payments of $96.2 million upon maturity of the 2023 Notes in January 2023 and $61.1 million for the repurchase of common stock under our current stock repurchase program.

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

minority interest.

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

Contractual Obligations

As of September 30, 2023, our notes payable obligation included $192.5 million related to our 2025 Notes and $261.0 million related to our 2028 Notes, which are due in 2025 and 2028, respectively.

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

Refer to Note 11, “Debt”

to the Condensed Consolidated Financial Statements for more information.

Our short-term and long-term obligations also include contractual payments related to our operating leases were $3.5 million, with approximately $0.4 million payable through December 31, 2023, approximately $1.4 million payable in each of the years 2024 and 2025, and $0.3 million thereafter.

Refer to Note 12, “Commitments and Contingencies”

to the condensed consolidated financial statements for more information.

As part of our acquisition of La Jolla, we recognized its deferred royalty obligation in connection with La Jolla Royalty Agreement with HCR.

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

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

The current maximum royalty rate is 14%.

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

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

Additionally, we have certain contingent payment obligations under various in-license agreements which we are required to make royalty payments or milestone payments upon successful completion and achievement of certain milestones.

Refer to Note 4, “License and Collaboration Arrangements”

to the Condensed Consolidated Financial Statements for more information.

We also enter into agreements in the normal course of business with vendors for manufacturing, clinical trials and preclinical studies, and other services and products for operating purposes.

We recorded a provision for income tax expe nse of $ 8.6 million and $ 6.3 million f or the three months ended March 31, 2024 and 2023, respectively.

The Company’s effective income tax rate for the three months ended March 31, 2024 was 19.0 % compared to 15.3 % for the same period in 2023.

The income tax expense for the three months ended March 31, 2024 and 2023 was determined based upon estimates of the Company’s effective income tax rates in various jurisdictions.

Our effective tax rate for the three months ended March 31, 2024 was lower than the expense computed at the U.S.

federal statutory income tax rate due primarily to foreign-derived intangible income tax deduction and R&D credit, partially offset by non-deductible expenses and state income taxes.

Subsequent Event

On April 11, 2024, we entered into a Commercial Supply Agreement with Corden Pharma CHENÔVE SAS (“Corden”), under which we engaged Corden to manufacture and supply certain products related to XACDURO ® and to perform certain services and studies.

Under the agreement, we committed to minimum purchase commitments aggregating to approximately $ 30.0 million through December 31, 2027.

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

What changed 10-Q

Item 1. Financial Statements