UNITED STATES

~~UNITED STATES~~

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) O

x~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF~~F THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2019~~2020

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

For the transition period from to

Commission File Number: 000-30319

INNOVIVA, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware		94-3265960
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

~~2000 Sierra Point Parkway,~~1350 Old Bayshore Highway Suite ~~500~~400

~~Brisbane,~~ Burlingame, CA ~~94005~~94010

(Address of Principal Executive Offices)

~~(650)~~ (650) 238-9600

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.01 per share		INVA		The NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x⌧ No o◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x⌧ No o◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company,” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the ~~Exchange~~ Act.

Large accelerated filer x⌧		Accelerated filer o◻

Non-accelerated filer o◻		Smaller reporting company o☐

		Emerging growth company o☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the ~~Exchange~~ Act). Yes o◻ No x⌧

The number of shares of registrant’s common stock outstanding on April ~~26, 2019~~20, 2020 was ~~101,262,314.~~101,320,233.

Table of Contents

TABLE OF CONTENTS

PART ~~I —~~I. FINANCIAL INFORMATION

Item 1. Financial Statements

~~Condensed~~ Consolidated Balance Sheets as of March 31, ~~2019~~2020 (Unaudited) and December 31, ~~2018~~2019	3
Unaudited ~~Condensed~~ Consolidated Statements of ~~Operations~~Income for the Three Months Ended March 31, ~~2019~~2020 and ~~2018~~2019	4
Unaudited ~~Condensed~~ Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, ~~2019~~2020 and ~~2018~~2019	5
Unaudited ~~Condensed~~ Consolidated Statements of Stockholders’ Equity ~~(Deficit)~~ for the Three Months Ended March 31, ~~2019~~2020 and ~~2018~~2019	6
Unaudited ~~Condensed~~ Consolidated Statements of Cash Flows for the Three Months Ended March 31, ~~2019~~2020 and ~~2018~~2019	7
Notes to Unaudited ~~Condensed~~ Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3. Quantitative and Qualitative Disclosures About Market Risk	20

Item 4. Controls and Procedures	20

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	21

Item ~~4. Controls and Procedures~~1A. Risk Factors	21

~~PART II. OTHER INFORMATION~~

~~Item 1. Legal Proceedings~~	22

~~Item 1A. Risk Factors~~	22

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	22

Item 3. Defaults Upon Senior Securities	22

Item 4. Mine Safety Disclosure	22

Item 5. Other Information	22

Item 6. Exhibits	22

Signatures	2322

Exhibits

Table of Contents

PART ~~I —~~I. FINANCIAL INFORMATION

Item 1. Financial Statements

~~INNOVIVA, INC.~~

~~CONDENSED~~ INNOVIVA, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

March 31,

December 31,

2019

2018

(unaudited)

*

Assets

Current assets:

Cash and cash equivalents

$
65,151

$
62,417

Short-term marketable securities

127,027

52,491

Related party receivables from collaborative arrangements

58,639

83,286

Prepaid expenses and other current assets

702

849

Total current assets

251,519

199,043

Property and equipment, net

148

160

Operating lease right-of-use asset

1,421

—

Capitalized fees paid to a related party, net

149,443

152,899

Deferred tax assets

187,546

196,054

Other assets

37

37

Total assets

$
590,114

$
548,193

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

$
144

$
11

Accrued personnel-related expenses

325

470

Accrued interest payable

1,775

4,264

Other accrued liabilities

1,258

955

Operating lease liability, current portion

308

—

Total current liabilities

3,810

5,700

Long-term debt, net of discount and issuance costs

384,744

382,855

Operating lease liability, net of current portion

1,238

—

Other long-term liabilities

379

586

Commitments and contingencies

Stockholders’ equity:

Preferred stock: $0.01 par value, 230 shares authorized, no shares issued and outstanding

—

—

Common stock: $0.01 par value, 200,000 shares authorized, 101,183 and 101,098 issued and outstanding as of March 31, 2019 and December 31, 2018, respectively

1,012

1,011

Additional paid-in capital

1,257,125

1,256,267

Accumulated other comprehensive income (loss)

10

(3
)
Accumulated deficit

(1,069,902
)
(1,103,692
)
Total Innoviva stockholders’ equity

188,245

153,583

Noncontrolling interest

11,698

5,469

Total stockholders’ equity

199,943

159,052

Total liabilities and stockholders’ equity

$
590,114

$
548,193


	March 31,		December 31,
	2020		2019
	(unaudited)		*
Assets
Current assets:
Cash and cash equivalents	$	351,981	$	278,096
Short-term marketable securities		31,970		72,749
Related party receivables from collaborative arrangements		82,134		79,427
Prepaid expenses and other current assets		822		962
Total current assets		466,907		431,234
Property and equipment, net		42		33
Equity investments		46,915		—
Capitalized fees paid to a related party, net		135,620		139,076
Deferred tax assets, net		138,239		154,171
Other assets		288		312
Total assets	$	788,011	$	724,826

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	122	$	10
Accrued personnel-related expenses		274		647
Accrued interest payable		1,668		4,152
Other accrued liabilities		734		562
Total current liabilities		2,798		5,371
Long-term debt, net of discount and issuance costs		379,152		377,120
Other long-term liabilities		192		219
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock: $0.01 par value, 230 shares authorized, 0 shares issued and outstanding		—		—
Common stock: $0.01 par value, 200,000 shares authorized, 101,320 and 101,288 issued and outstanding as of March 31, 2020 and December 31, 2019, respectively		1,013		1,013
Additional paid-in capital		1,259,464		1,258,859
Accumulated other comprehensive income		33		27
Accumulated deficit		(880,967)		(946,404)
Total Innoviva stockholders’ equity		379,543		313,495
Noncontrolling interest		26,326		28,621
Total stockholders’ equity		405,869		342,116
Total liabilities and stockholders’ equity	$	788,011	$	724,826

*	Consolidated balance sheet as of December 31, 2019 has been derived from audited consolidated financial statements.

*Condensed consolidated balance sheet as of December 31, 2018 has been derived from audited consolidated financial statements.

See accompanying notes to ~~condensed~~ consolidated financial statements.

Table of Contents

INNOVIVA, INC.

~~INNOVIVA, INC.~~

~~CONDENSED~~ CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~INCOME

(In thousands, except per share data)

(Unaudited)

Three Months Ended March 31,

2019

2018

Royalty revenue from a related party, net of amortization of capitalized fees paid to a related party of $3,456 in the three months ended March 31, 2019 and 2018

$
55,183

$
52,380

Operating expenses:

General and administrative

3,015

8,985

General and administrative - related party

—

2,700

Total operating expenses

3,015

11,685

Income from operations

52,168

40,695

Other income (expense), net

1

(3,099
)
Interest income

975

391

Interest expense

(4,617
)
(7,657
)
Income before income taxes

48,527

30,330

Income tax expense, net

8,508

—

Net income

40,019

30,330

Net income attributable to noncontrolling interest

6,229

749

Net income attributable to Innoviva stockholders

$
33,790

$
29,581

Basic net income per share attributable to Innoviva stockholders

$
0.33

$
0.29

Diluted net income per share attributable to Innoviva stockholders

$
0.31

$
0.27

Shares used to compute Innoviva basic and diluted net income per share:

Shares used to compute basic net income per share

101,059

100,604

Shares used to compute diluted net income per share

113,376

113,566


	Three Months Ended March 31,
	2020		2019

Royalty revenue from a related party, net of amortization of capitalized fees paid to a related party of $3,456 in the three months ended March 31, 2020 and 2019	$	78,678	$	55,183

Operating expenses:
General and administrative		2,563		3,015
Total operating expenses		2,563		3,015

Income from operations		76,115		52,168

Other income, net		68		1
Interest income		1,302		975
Interest expense		(4,516)		(4,617)
Changes in fair values of equity investments		21,915		—
Income before income taxes		94,884		48,527
Income tax expense, net		15,932		8,508
Net income		78,952		40,019
Net income attributable to noncontrolling interest		13,515		6,229
Net income attributable to Innoviva stockholders	$	65,437	$	33,790

Basic net income per share attributable to Innoviva stockholders	$	0.65	$	0.33
Diluted net income per share attributable to Innoviva stockholders	$	0.59	$	0.31

Shares used to compute Innoviva basic and diluted net income per share:
Shares used to compute basic net income per share		101,235		101,059
Shares used to compute diluted net income per share		113,509		113,376

See accompanying notes to ~~condensed~~ consolidated financial statements.

Table of Contents

INNOVIVA, INC.

~~INNOVIVA, INC.~~

~~CONDENSED~~ CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

Three Months Ended March 31,

2019

2018

Net income

$
40,019

$
30,330

Unrealized gain (loss) on marketable securities, net

13

(4
)
Comprehensive income

40,032

30,326

Comprehensive income attributable to noncontrolling interest

6,229

749

Comprehensive income attributable to Innoviva stockholders

$
33,803

$
29,577


	Three Months Ended March 31,
	2020		2019

Net income	$	78,952	$	40,019
Unrealized gain on marketable securities, net		6		13
Comprehensive income		78,958		40,032
Comprehensive income attributable to noncontrolling interest		13,515		6,229
Comprehensive income attributable to Innoviva stockholders	$	65,443	$	33,803

See accompanying notes to ~~condensed~~ consolidated financial statements.

Table of Contents

INNOVIVA, INC.

~~INNOVIVA, INC.~~

~~CONDENSED~~ CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ~~(DEFICIT)~~

(In thousands)

(Unaudited)

Three months ended March 31, 2019

Common Stock

Additional Paid-In

Accumulated Other
Comprehensive

Accumulated

Noncontrolling

Total
Stockholders’

Shares

Amount

Capital

Income (Loss)

Deficit

Interest

Equity

Balance as of December 31, 2018

101,098

$
1,011

$
1,256,267

$
(3
)
$
(1,103,692
)
$
5,469

$
159,052

Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding

85

1

253

—

—

—

254

Stock-based compensation

—

—

605

—

—

—

605

Net income

—

—

—

—

33,790

6,229

40,019

Other comprehensive income

—

—

—

13

—

—

13

Balance as of March 31, 2019

101,183

$
1,012

$
1,257,125

$
10

$
(1,069,902
)
$
11,698

$
199,943


	Three months ended March 31, 2020
						Accumulated Other
	Common Stock			Additional Paid-In		Comprehensive		Accumulated		Noncontrolling		Total Stockholders’
	Shares	Amount		Capital		Income (Loss)		Deficit		Interest		Equity
Balance as of December 31, 2019	101,288	$	1,013	$	1,258,859	$	27	$	(946,404)	$	28,621	$	342,116
Distributions to noncontrolling interest	—		—		—		—		—		(15,810)		(15,810)
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding	32		—		170		—		—		—		170
Stock-based compensation	—		—		435		—		—		—		435
Net income	—		—		—		—		65,437		13,515		78,952
Other comprehensive income	—		—		—		6		—		—		6
Balance as of March 31, 2020	101,320	$	1,013	$	1,259,464	$	33	$	(880,967)	$	26,326	$	405,869

Three months ended March 31, 2018

Common Stock

Additional Paid-In

Accumulated Other
Comprehensive

Accumulated

Treasury Stock

Noncontrolling

Total
Stockholders’

Shares

Amount

Capital

Loss

Deficit

Shares

Amount

Interest

Deficit

Balance as of December 31, 2017

102,046

$
1,019

$
1,258,151

$
(18
)
$
(1,498,748
)
(150
)
$
(3,263
)
$
152

$
(242,707
)
Distributions to noncontrolling interest

—

—

—

—

—

—

—

(90
)
(90
)
Exercise of stock options, and issuance of common stock units and stock awards, net of cancellation of stock awards and repurchase of shares to satisfy tax withholding

(571
)
(5
)
(2,492
)
—

—

—

—

—

(2,497
)
Stock-based compensation

—

—

2,169

—

—

—

—

—

2,169

Cash dividend forfeited

—

—

52

—

—

—

—

—

52

Net income

—

—

—

—

29,581

—

—

749

30,330

Other comprehensive loss

—

—

—

(4
)
—

—

—

—

(4
)
Balance as of March 31, 2018

101,475

$
1,014

$
1,257,880

$
(22
)
$
(1,469,167
)
(150
)
$
(3,263
)
$
811

$
(212,747
)


	Three months ended March 31, 2019
						Accumulated Other
	Common Stock			Additional Paid-In		Comprehensive		Accumulated		Noncontrolling		Total Stockholders’
	Shares	Amount		Capital		Income (Loss)		Deficit		Interest		Equity
Balance as of December 31, 2018	101,098	$	1,011	$	1,256,267	$	(3)	$	(1,103,692)	$	5,469	$	159,052
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding	85		1		253		—		—		—		254
Stock-based compensation	—		—		605		—		—		—		605
Net income	—		—		—		—		33,790		6,229		40,019
Other comprehensive income	—		—		—		13		—		—		13
Balance as of March 31, 2019	101,183	$	1,012	$	1,257,125	$	10	$	(1,069,902)	$	11,698	$	199,943

See accompanying notes to ~~condensed~~ consolidated financial statements.

Table of Contents

INNOVIVA, INC.

~~INNOVIVA, INC.~~

~~CONDENSED~~ CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Three Months Ended March 31,

2019

2018

Cash flows from operating activities

Net income

$
40,019

$
30,330

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

Deferred income taxes

8,508

—

Depreciation and amortization

3,539

3,468

Stock-based compensation

605

2,169

Amortization of debt discount and issuance costs

1,889

2,092

Amortization of discount on short-term investments

(356
)
(100
)
Amortization of lease guarantee

(81
)
(81
)
Loss on extinguishment of debt

—

3,137

Changes in operating assets and liabilities:

Receivables from collaborative arrangements

24,647

14,705

Prepaid expenses and other current assets

147

(196
)
Accounts payable

133

(535
)
Accrued personnel-related expenses and other accrued liabilities

166

(1,702
)
Accrued interest payable

(2,489
)
(3,375
)
Operating lease liability

(72
)
—

Other long-term liabilities

—

2

Net cash provided by operating activities

76,655

49,914

Cash flows from investing activities

Maturities of marketable securities

27,875

31,875

Purchases of marketable securities

(102,042
)
(5,362
)
Net cash provided by (used in) investing activities

(74,167
)
26,513

Cash flows from financing activities

Repurchase of shares to satisfy tax withholding

(65
)
(2,611
)
Payments of principal on senior secured term loans

—

(120,000
)
Payments of cash dividends to stockholders

(8
)
(38
)
Proceeds from issuances of common stock, net

319

114

Distributions to noncontrolling interest

—

(90
)
Net cash provided by (used in) financing activities

246

(122,625
)
Net increase (decrease) in cash and cash equivalents

2,734

(46,198
)
Cash and cash equivalents at beginning of period

62,417

73,336

Cash and cash equivalents at end of period

$
65,151

$
27,138

Supplemental disclosure of cash flow information

Cash paid for interest

$
5,218

$
8,941


	Three Months Ended March 31,
	2020		2019
Cash flows from operating activities
Net income	$	78,952	$	40,019
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes		15,932		8,508
Depreciation and amortization		3,463		3,539
Stock-based compensation		435		605
Amortization of debt discount and issuance costs		2,032		1,889
Amortization of discount on short-term investments		(272)		(356)
Amortization of lease guarantee		(81)		(81)
Changes in fair values of equity investments		(21,915)		—
Changes in operating assets and liabilities:
Receivables from collaborative arrangements		(2,707)		24,647
Prepaid expenses and other current assets		140		147
Accounts payable		112		133
Accrued personnel-related expenses and other accrued liabilities		(126)		166
Accrued interest payable		(2,484)		(2,489)
Operating lease liability		—		(72)
Net cash provided by operating activities		73,481		76,655
Cash flows from investing activities
Maturities of marketable securities		54,000		27,875
Purchases of marketable securities		(12,943)		(102,042)
Purchases of equity investments		(25,000)		—
Purchases of property and equipment		(13)		—
Net cash provided by (used in) investing activities		16,044		(74,167)
Cash flows from financing activities
Repurchase of shares to satisfy tax withholding		(55)		(65)
Payments of cash dividends to stockholders		—		(8)
Proceeds from issuances of common stock, net		225		319
Distributions to noncontrolling interest		(15,810)		—
Net cash provided by (used in) financing activities		(15,640)		246
Net increase in cash and cash equivalents		73,885		2,734
Cash and cash equivalents at beginning of period		278,096		62,417
Cash and cash equivalents at end of period	$	351,981	$	65,151
Supplemental disclosure of cash flow information
Cash paid for interest	$	4,967	$	5,218

See accompanying notes to ~~condensed~~ consolidated financial statements.

Table of Contents

INNOVIVA, INC.

~~INNOVIVA, INC.~~

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of Operations and Summary of Significant Accounting Policies

Description of Operations

Innoviva Inc. (referred to as ~~“Innoviva”~~"Innoviva", the ~~“Company”~~"Company", or ~~“we”~~"we" and other similar pronouns) is ~~focused on royalty management. Innoviva’s~~a company with a portfolio ~~includes the~~of royalties that include respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR^®/BREO^®ELLIPTA^® (fluticasone furoate/ vilanterol, “FF/VI”), ANORO^® ELLIPTA^®~~(umeclidinium~~ (umeclidinium bromide/ vilanterol, “UMEC/VI”) and TRELEGY^® ELLIPTA^® (the combination FF/UMEC/VI). Under the Long-Acting ~~Beta~~2Beta2 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 ~~and~~ ANORO^® ELLIPTA^® which tier upward at a range from 6.5% to 10%. Innoviva is also entitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC (“TRC”), including TRELEGY^® ELLIPTA^® and any other product or combination of products that may be discovered or developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the “GSK Agreements”), which have been assigned to TRC other than RELVAR^®/BREO^® ELLIPTA^® and ANORO^® ELLIPTA^®.

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 (“US GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In our opinion, the unaudited ~~condensed~~ consolidated financial statements have been prepared on the same basis as audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of our financial position, results of operations, comprehensive income and cash flows. The interim results are not necessarily indicative of the results of operations to be expected for the year ending December 31, ~~2019~~2020 or any other period.

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, ~~2018~~2019 filed with the Securities and Exchange Commission (“SEC”) on February 19, 2020, and as amended on February 21, 2020 (“2019 ~~(“2018~~ Form 10-K”).

Variable Interest Entity

We evaluate our ownership, contractual and other interest in entities to determine if they are variable interest entities (“VIE”), whether we have a variable interest in those entities and the nature and extent of those interests. Based on our evaluation, if we determine we are the primary beneficiary of a VIE, we consolidate the entity into our financial statements. We consolidate the financial results of TRC, which we have determined to be a VIE, because we have 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. As of March 31, ~~2019~~2020, and December 31, ~~2018, $7.3~~2019, $16.1 million and ~~$6.4~~$14.4 million, respectively, of the related party receivables from collaborative arrangements were attributable to TRC. The cash balance attributable to TRC as of March 31, 2020 was $15.3 million. The primary source of revenue for TRC is the royalties generated from the net sales of TRELEGY^® ELLIPTA^® by GSK. Total revenue for TRC related to TRELEGY® ELLIPTA® was $16.1 million and $7.3 million for the three months ended March 31, 2020 and 2019, respectively. Total operating expenses were $0.3 million for the three months ended March 31, 2020, compared to minimal amounts for the same period in 2019.

Equity Investments

We invest from time to time in equity securities of private or public companies. 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 equity investments where we exercise significant influence using either an equity method of accounting or at fair value by electing the fair value option. 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 ~~2018 was $7.3 million~~debt, including guarantees) that are eligible items. All gains and ~~$1.0 million, respectively.~~losses from fair value changes, unrealized and realized, are presented as changes in fair values of equity investments, net on the consolidated statements of income.

Table of Contents

If we conclude that we do not have an ability to exercise significant influence over an investee, we may elect to account for an equity security without a readily determinable fair value 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.

As of March 31, 2020, we accounted for our equity investments in common stock and warrants of Armata Pharmaceuticals, Inc. (NYSE American: ARMP) (“Armata”) at fair value by electing the fair value option and presented the investments as equity investments on the consolidated balance sheets.

Accounting Pronouncement Adopted by the Company

In ~~February~~June 2016, the Financial Accounting Standards Board ~~(the “FASB”~~(“FASB”) issued Accounting Standards Update (“ASU”) ~~2016 02,~~No. 2016-13 ~~Leases~~Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments ~~(Topic 842)~~, ~~which~~as clarified in subsequent amendments to the initial guidance (collectively, Topic 326). Topic 326 requires ~~an entity to recognize right~~measurement and recognition of ~~use~~expected credit losses for financial assets ~~representing its right to use~~held at the ~~underlying asset for the lease term~~reporting date based on historical experience, current conditions and ~~lease liabilities representing the present value~~reasonable and supportable forecast. ASC 326 must be adopted using a modified retrospective approach with a cumulative effect adjustment as of the ~~future lease payments~~beginning of the reporting period in which the guidance is adopted. Topic 326 is effective for ~~both financing~~fiscal years, and ~~operating leases on its consolidated balance sheets. For a lease~~interim periods within those fiscal years, beginning after December 15, 2019, with ~~a term of 12 months or less, the standard allows an entity to elect not to recognize a right-of-use asset and a lease liability and recognize the lease expense on a straight-line basis.~~early adoption permitted. We adopted ~~the standard on the~~Topic 326 effective ~~date of~~ January 1, 2019 using the alternative transition approach. This approach is similar to a prospective transition, which requires the application of ASC 842 at the effective date with a cumulative-effect adjustment recognized through retained earnings. Under this approach, we do not present the adjusted comparative periods. Our pro-rata share of common area expenses are recorded as lease expense when incurred since they are variable and considered nonlease components under the standard. The most significant impact of the adoption to us is that we recognized a right of use asset in the amount of $1.5 million and lease liabilities in

~~the total amount of $1.6 million at January 1, 2019 for the operating lease on our corporate headquarters.~~2020. The adoption did not have a material impact on our ~~retained earnings and~~ consolidated ~~statements of operations and cash flows.~~

~~In August 2018, the U.S. Securities and Exchange Commission (the “SEC”) adopted the final rule under SEC Release No. 33-10532,~~ ~~Disclosure Update and Simplification~~, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements relating to the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of income is required to be filed. This final rule is effective on November 5, 2018. Effective January 1, 2019, the Company adopted SEC Release No. 33-10532. In accordance with the new guidance, the Company has added a Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit) in its Form 10-Q and elected to present a reconciliation in a single statement that shows the changes in stockholders equity for each interim period, as well as each comparable period.

2. Net Income Per Share

Basic net income per share attributable to Innoviva stockholders is computed by dividing net income attributable to Innoviva stockholders by the weighted-average number of shares of common stock outstanding. Diluted net income per share attributable to Innoviva stockholders is computed by dividing net income attributable to Innoviva stockholders by the weighted-average number of shares of common stock and dilutive potential common stock equivalents then outstanding. Dilutive potential common stock equivalents include the assumed exercise, vesting and issuance of employee stock awards using the treasury stock method, as well as common stock issuable upon assumed conversion of our convertible subordinated notes due 2023 (the “2023 Notes”) using the ~~if-converted~~if converted method.

Our convertible senior notes due 2025 (the “2025 Notes”) are convertible, based on the applicable conversion rate, into cash, shares of our common stock or a combination thereof, at our election. Our current intent is to settle the principal amount of the 2025 Notes in cash upon conversion. The impact of the assumed conversion premium to diluted net income per share is computed using the treasury stock method. As the average market price per share of our common stock as reported on The Nasdaq Global Select Market ~~during the relevant periods~~ was lower than the initial conversion price of $17.26 per share, there was no0 dilutive effect of the assumed conversion premium for the three months ended March 31, ~~2019.~~2020 and 2019, respectively.

Table of Contents

The following table shows the computation of basic and diluted net income per share for the three months ended March 31, ~~2019~~2020 and ~~2018:~~2019:

Three Months Ended March 31,

(In thousands except per share data)

2019

2018

Numerator:

Net income attributable to Innoviva stockholders, basic

$
33,790

$
29,581

Add: interest expense on 2023 Notes

1,415

1,412

Net income attributable to Innoviva stockholders, diluted

$
35,205

$
30,993

Denominator:

Weighted-average shares used to compute basic net income per share attributable to Innoviva stockholders

101,059

100,604

Dilutive effect of 2023 Notes

12,189

12,189

Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan

128

773

Weighted-average shares used to compute diluted net income per share attributable to Innoviva stockholders

113,376

113,566

Net income per share attributable to Innoviva stockholders

Basic

$
0.33

$
0.29

Diluted

$
0.31

$
0.27


	Three Months Ended March 31,
(In thousands except per share data)	2020		2019
Numerator:
Net income attributable to Innoviva stockholders, basic	$	65,437	$	33,790
Add: interest expense on 2023 Notes		1,180		1,415
Net income attributable to Innoviva stockholders, diluted	$	66,617	$	35,205

Denominator:
Weighted-average shares used to compute basic net income per share attributable to Innoviva stockholders		101,235		101,059
Dilutive effect of 2023 Notes		12,189		12,189
Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan		85		128
Weighted-average shares used to compute diluted net income per share attributable to Innoviva stockholders		113,509		113,376

Net income per share attributable to Innoviva stockholders
Basic	$	0.65	$	0.33
Diluted	$	0.59	$	0.31

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:

	Three Months Ended March 31,

			Three Months Ended March 31,
(In thousands)	2019	2018	2020	2019
Outstanding options and awards granted under equity incentive plan and employee stock purchase plan	1,053	1,492	1,094	1,053

3. Revenue Recognition and Collaborative Arrangements

Revenue is recognized when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. Revenue is recognized through a five-step process: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price for the contract; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) a performance obligation is satisfied. We recognize the royalty revenue on licensee net sales of products with respect to which we have contractual royalty rights in the period in which the royalties are earned and reported to us. Royalties are recognized net of amortization of capitalized fees associated with any approval and launch milestone payments made to GSK.

Net Revenue from Collaborative Arrangements

Net revenue recognized under our GSK Agreements was as follows:

	Three Months Ended March 31,

							Three Months Ended March 31,
(In thousands)	2019			2018			2020		2019
Royalties from a related party - RELVAR/BREO	$	42,740		$	46,160		$	56,149	$	42,740
Royalties from a related party - ANORO	8,570			8,724				9,850		8,570
Royalties from a related party - TRELEGY	7,329			952				16,135		7,329
Total royalties from a related party	58,639			55,836				82,134		58,639
Less: amortization of capitalized fees paid to a related party	(3,456		)	(3,456		)		(3,456)		(3,456)
Royalty revenue from GSK	$	55,183		$	52,380		$	78,678	$	55,183

Table of Contents

4. ~~Available-for-Sale Securities~~Financial Instruments and Fair Value Measurements

Equity Investment in Armata

On January 27, 2020, we entered into a securities purchase agreement to acquire 8,710,800 shares of Armata’s common stock and warrants to purchase up to 8,710,800 additional shares of its common stock for $25.0 million in cash. Armata is a clinical stage biotechnology company focused on precisely targeted bacteriophage therapeutics for antibiotic-resistant infections. The investment is to support Armata’s ongoing advancement of its bacteriophage development programs including the expected first in human studies related to Armata's lead phage candidate, AP-PA02, targeting Pseudomonas aeruginosa, as well as AP-SA02, its phage candidate targeting Staphylococcus Aureus.

The investment was closed in 2 tranches on February 12, 2020 and March 27, 2020. NaN of our board members joined Armata’s board. After the second closing, we own approximately 46.7% of Armata’s common stock.

The investment provides Innoviva the ability to have significant influence, but not control over Armata’s operations. Based on our evaluation, we determined that Armata is a VIE, but Innoviva is not the primary beneficiary of the VIE. We elected the fair value option under Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments, to account for both Armata’s common stock and warrants at fair value. The fair value of Armata’s common stock is measured based on its closing market price. The warrants have an exercise price of $2.87 per share, are exercisable immediately within five years from the issuance date of the warrants, and include a cashless exercise option. We use the Black-Scholes-Merton pricing model to estimate the fair value of these warrants with the following input assumptions: Armata’s closing market price on the valuation date, the risk-free interest rate computed based on the U.S. Treasury yield, the remaining contractual term as the expected term, and the expected stock price volatility calculated based on the historical volatility of the common stock of Armata’s peer companies.

As of March 31, 2020, the fair values of Armata’s common stock and warrants were estimated at $27.0 million and $19.9 million, respectively. The total fair value of both financial instruments in the amount of $46.9 million was recorded as equity investments on the consolidated balance sheets. We recorded $21.9 million of unrealized gains and fair value changes in Armata’s investments as changes in fair values of equity investments, net on the consolidated statements of income for the three months ended March 31, 2020.

Available-for-Sale Securities

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

March 31, 2019

(In thousands)

Amortized Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value

U.S. government securities

$
68,691

$
9

$
—

$
68,700

U.S. government agencies

24,768

1

—

24,769

U.S. commercial paper

41,550

—

—

41,550

Money market funds

45,253

—

—

45,253

Total

$
180,262

$
10

$
—

$
180,272

	December 31, 2018

										March 31, 2020
												Gross		Gross
												Unrealized		Unrealized		Estimated
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gains		Losses		Fair Value
U.S. government securities	$	29,736	$	—	$	(3	)	$	29,733	$	13,958	$	41	$	—	$	13,999
U.S. government agencies	4,971		—		—			4,971
U.S. corporate notes	2,875		—		—			2,875
U.S. commercial paper	22,037		—		—			22,037			48,964		—		—		48,964
Money market funds	49,358		—		—			49,358			285,309		—		—		285,309
Total	$	108,977	$	—	$	(3	)	$	108,974	$	348,231	$	41	$	—	$	348,272


	December 31, 2019
			Gross		Gross
			Unrealized		Unrealized		Estimated
(In thousands)	Amortized Cost		Gains		Losses		Fair Value
U.S. government securities	$	53,799	$	35	$	—	$	53,834
U.S. commercial paper		18,915		—		—		18,915
Money market funds		233,992		—		—		233,992
Total	$	306,706	$	35	$	—	$	306,741

As of March 31, ~~2019,~~2020, all of the available-for-sale debt securities had contractual maturities within one year, and the ~~weighted~~ average ~~maturity~~duration of ~~marketable~~debt securities was approximately ~~four months.~~one month. There was 0 credit loss of these securities as of March 31, 2020.

Table of Contents

Fair Value Measurements

Our available-for-sale securities and equity investments are measured at fair value on a recurring basis and our debt is carried at amortized cost basis. The estimated fair values were as follows:

Estimated Fair Value Measurements as of March 31, 2019 Using:

Types of Instruments

Quoted Price in
Active Markets
for Identical
Assets

Significant Other
Observable
Inputs

Significant
Unobservable
Inputs

(In thousands)

Level 1

Level 2

Level 3

Total

Assets

U.S. government securities

$
—

$
68,700

$
—

$
68,700

U.S. government agencies

—

24,769

—

24,769

U.S. commercial paper

—

41,550

—

41,550

Money market funds

45,253

—

—

45,253

Total assets measured at estimated fair value

$
45,253

$
135,019

$
—

$
180,272

Debt

Term B Loan

$
—

$
13,750

$
—

$
13,750

2023 Notes

—

245,353

—

245,353

2025 Notes

—

205,911

—

205,911

Total fair value of debt

$
—

$
465,014

$
—

$
465,014

	Estimated Fair Value Measurements as of December 31, 2018 Using:

									Estimated Fair Value Measurements as of March 31, 2020 Using:
									Quoted Price in
									Active Markets		Significant Other		Significant
									for Identical		Observable		Unobservable
Types of Instruments	Quoted Price in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs				Assets		Inputs		Inputs
(In thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
U.S. government securities	$	—	$	29,733	$	—	$	29,733	$	—	$	13,999	$	—	$	13,999
U.S. government agencies	—		4,971		—		4,971
U.S. corporate notes	—		2,875		—		2,875
U.S. commercial paper	—		22,037		—		22,037			—		48,964		—		48,964
Money market funds	49,358		—		—		49,358			285,309		—		—		285,309
Equity investment - Armata Common Stock										27,003		—		—		27,003
Equity investment - Armata Warrants										—		19,912		—		19,912
Total assets measured at estimated fair value	$	49,358	$	59,616	$	—	$	108,974	$	312,312	$	82,875	$	—	$	395,187
Debt
Term B Loan	$	—	$	13,750	$	—	$	13,750
2023 Notes	—		258,918		—		258,918		$	—	$	216,886	$	—	$	216,886
2025 Notes	—		230,692		—		230,692			—		191,538		—		191,538
Total fair value of debt	$	—	$	503,360	$	—	$	503,360	$	—	$	408,424	$	—	$	408,424


	Estimated Fair Value Measurements as of December 31, 2019 Using:
	Quoted Price in
	Active Markets		Significant Other		Significant
	for Identical		Observable		Unobservable
Types of Instruments	Assets		Inputs		Inputs
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
U.S. government securities	$	—	$	53,834	$	—	$	53,834
U.S. commercial paper		—		18,915		—		18,915
Money market funds		233,992		—		—		233,992
Total assets measured at estimated fair value	$	233,992	$	72,749	$	—	$	306,741
Debt
2023 Notes	$	—	$	243,394	$	—	$	243,394
2025 Notes		—		208,976		—		208,976
Total fair value of debt	$	—	$	452,370	$	—	$	452,370

The fair value of our marketable securities classified within Level 2 is 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 fair value of our equity investment in Armata’s commons stock is based on Armata’s closing market price per share at the reporting date and is a Level 1 financial instrument. The fair value of our equity investment in Armata’s warrants is classified within Level 2 as the assumptions used in the valuation model are based on the observable inputs that include Armata’s closing market price, its comparable companies’ market data and U.S. Treasury yield.

The fair value of our 2023 Notes and of our 2025 Notes is based on recent trading prices of the instruments. The carrying amount of our initial senior secured term loan (the “Term B Loan”) before deducting debt issuance costs approximates fair value as the loan carries a variable interest rate that is tied to the LIBOR rate plus an applicable spread.

5. Stock-Based Compensation

~~Market-Based RSAs and RSUs~~

~~2016 Market-Based RSAs and RSUs~~

On January 14, 2016, the Compensation Committee approved and granted 282,394 RSAs and 46,294 RSUs to senior management. These awards include a market condition based on Total Shareholder Return (“TSR”) and a service condition that requires continued employment.

In February 2018, the Compensation Committee certified the maximum achievement of the TSR as of the first measurement date, January 12, 2018. RSAs totaling 69,440 and RSUs totaling 30,862 representing two-thirds of the amounts were released on February 20, 2018. In connection with the separation of certain members of senior management from the Company in early February 2018, the Board of Directors agreed to accelerate the vesting and distribution of an aggregate of 118,821 RSAs to these members of senior management. The remaining 59,411 RSAs for these members of senior management were forfeited. As a net result of the vesting acceleration of the RSAs and the forfeiture of those unvested RSAs, an additional $0.7 million compensation expense was recognized during the three months ended March 31, 2018.

In August and September 2018, the remaining 34,722 RSAs and 15,432 RSUs were forfeited due to the additional separation of senior management members, and $0.2 million of previously recognized compensation expense was reversed.

~~2017 Market-Based RSAs and RSUs~~

On January 17, 2017, the Compensation Committee approved and granted 353,508 RSAs and 53,360 RSUs to senior management. These awards include a market condition based on the TSR of Innoviva’s common stock as compared to the TSR of NASDAQ Biotechnology Index (“Index”) and a service condition that requires continued employment.

In connection with the separation of certain members of senior management from the Company in February 2018, an aggregate of 233,448 RSAs were forfeited, and $0.8 million of previously recognized compensation expense was reversed during the three months ended March 31, 2018.

In August and September 2018, the remaining 120,060 RSAs and 53,360 RSUs were forfeited due to the additional separation of senior management members, and $0.9 million of previously recognized compensation expense was reversed.

~~2018 Market-Based RSAs and RSUs~~

On March 2, 2018, the Compensation Committee approved and granted 111,668 RSAs and 49,630 RSUs to senior management. These awards include a market condition based on the TSR of Innoviva’s common stock over a three-year performance period from the date of grant for the RSAs and from the date of grant until September 30, 2020 for RSUs, and a service condition that requires continued employment. The grant date fair value of these awards was determined using a Monte Carlo valuation model. The aggregate value of $1.7 million was to be recognized as compensation expense over the implied service period and would not be reversed if the market condition was not met, but with the exception of such person’s continued employment with the Company.

In August and September 2018, all of 111,668 RSAs and 49,630 RSUs were forfeited, and $0.2 million of previously recognized compensation expense was reversed due to the separation of these senior management members.

~~Stock-Based Compensation Expense~~

Stock-based compensation expense is included in the ~~condensed~~ consolidated statements of ~~operations~~income as follows:


	Three Months Ended March 31,
(In thousands)	2020		2019
General and administrative	$	435	$	605

Three Months Ended March 31,

(In thousands)

2019

2018

General and administrative

$
605

$
2,169

Table of ~~March 31, 2019, unrecognized stock-based compensation cost was as follows:~~Contents

(In thousands)

Unrecognized
Compensation
Cost

RSUs

$
327

RSAs

1,317

Total unrecognized compensation cost

$
1,644

6. Debt

Our debt consists of:

	March 31,			December 31,

							March 31,		December 31,
(In thousands)	2019			2018			2020		2019
Term B Loan	$	13,750		$	13,750
2023 Notes	240,984			240,984			$	240,984	$	240,984
2025 Notes	192,500			192,500				192,500		192,500
Total debt	447,234			447,234				433,484		433,484
Unamortized debt discount and issuance costs	(62,490		)	(64,379		)		(54,332)		(56,364)
Net long-term debt	$	384,744		$	382,855		$	379,152	$	377,120

~~Prepayments of Senior Secured Term Loans~~

On February 28 and August 1, 2018, we prepaid the principal balance of the Term B Loan by $120.0 million and $110.0 million, respectively. With the prepayments, we incurred a loss on the extinguishment of debt of $3.1 million and $2.6 million, respectively, representing unamortized debt issuance costs. The loss on the extinguishment of debt is presented as part of other expense, net in our consolidated statements of operations. As of March 31, 2019, the outstanding principal balance of the Term B Loan was $13.8 million.

Convertible Senior Notes Due 2025

In accordance with accounting guidance for debt with conversion and other options, we separately account for the liability and equity components of the 2025 Notes by allocating the proceeds between the liability component and the embedded conversion

option (“equity component”) due to our ability to settle the conversion obligation of the 2025 Notes in cash, common stock or a combination of cash and common stock, at our option. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature using the income approach. The allocation was performed in a manner that reflected our non-convertible debt borrowing rate for similar debt. The equity component of the 2025 Notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the 2025 Notes and the fair value of the liability of the 2025 Notes on the date of issuance. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense using the effective interest method over the term of the 2025 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

Our outstanding 2025 Notes balances consisted of the following:

	March 31,			December 31,

							March 31,		December 31,
(In thousands)	2019			2018			2020		2019
Liability component
Principal	$	192,500		$	192,500		$	192,500	$	192,500
Debt discount and issuance costs, net	(60,032		)	(61,766		)		(52,703)		(54,597)
Net carrying amount	$	132,468		$	130,734		$	139,797	$	137,903
Equity component, net	$	65,361		$	65,361		$	65,361	$	65,361

The following table sets forth total interest expense recognized related to the 2025 Notes for the three months ended March 31, ~~2019~~2020 and ~~2018:~~2019:

	Three Months Ended March 31,

					Three Months Ended March 31,
(In thousands)	2019		2018		2020		2019
Contractual interest expense	$	1,203	$	1,190	$	1,203	$	1,203
Amortization of debt issuance costs	133		123			145		133
Amortization of debt discount	1,601		1,479			1,749		1,601
Total interest and amortization expense	$	2,937	$	2,792	$	3,097	$	2,937

Table of Contents

Debt Maturities

The aggregate scheduled maturities of our long-term debt as of March 31, ~~2019,~~2020, are as follows:


(In thousands)
Years ending December 31:
2019 to 2021	$	—
2022	13,750
2020 to 2022			$	—
2023	240,984			240,984
2024				—
Thereafter	192,500			192,500
Total	$	447,234	$	433,484

~~7. Related Party Transaction~~

On February 12, 2018, the Company entered into an agreement with Sarissa Capital Management LP, and certain of its affiliates (collectively, the “Sarissa Group”) related to the Company’s 2018 Annual Meeting of Stockholders (the “2018 Annual Meeting”). The agreement provided for, among other things, the concurrent appointment of three designees of the Sarissa Group as members of the Company’s Board of Directors and an agreement to recommend and nominate a five-person slate of directors for election at the 2018 Annual Meeting composed of the three new directors and two current directors of the Company and partially reimburse the Sarissa Group $2.7 million for expenses, which reimbursement obligation relating to the 2018 Annual Meeting arose upon execution of the agreement. The Sarissa Group is considered to be a related party due to its representation on the Board of Directors.

7. Commitments and Contingencies

Lease

Future minimum operating lease payments on our corporate headquarters as of March 31, 2020 are as follows:


(In thousands)
Years ending December 31:
Remainder of 2020	$	90
2021		123
2022		109
Thereafter		—
Total	$	322

8. Income Taxes

Provisional income tax expense for the three months ended March 31, 2020 and 2019 was $15.9 million and $8.5 million, respectively. The Company’s effective income tax rate for the three months ended March 31, 2020 was 16.8%, compared to ~~a minimal amount~~17.5% for the same period in ~~2018 as a full valuation allowance was maintained on the Company’s gross deferred taxes.~~2019. The difference between the Company’s effective income tax rate ~~of 17.5% for the three months ended March 31, 2019~~ and the U.S. federal statutory income tax rate of ~~21%~~21% is primarily attributable to state income tax, non-deductible expenses and noncontrolling interest.

9. ~~Lease~~Subsequent Events

~~We have an operating lease for our corporate headquarters with~~On April 12, 2020, Innoviva and Entasis Therapeutics Holdings Inc. (“Entasis”), a remaining lease term of approximately 4.2 years. The lease includes a five-year renewal option at our sole discretion. The total operating lease expense for this lease was $0.1 million for the three months ended March 31, 2019 and 2018, respectively. Cash paid for amount included in the measurement of operating lease liabilities was $0.1 million for the three months ended March 31, 2019. The lease liabilities were measured using a discount rate of 7.15% basedclinical-stage biotechnology company focused on the ~~most recent borrowing rate~~discovery and development of novel antibacterial products, entered into a securities purchase agreement pursuant to which Innoviva will purchase up to approximately $35.0 million in Entasis common stock and warrants upon satisfaction of certain closing conditions. This transaction is expected to occur in 2 tranches during the second quarter of 2020. Innoviva will be entitled to appoint 2 directors to serve on Entasis's Board of Directors for ~~our senior secured Term B Loan.~~so long as Innoviva and its affiliates hold at least 15% of the outstanding shares of Entasis’ common stock on a fully-diluted basis, or 1 director for so long as Innoviva and its affiliates hold at least 8% of the outstanding shares of Entasis’ common stock on a fully-diluted basis.

~~Future minimum lease payments on our corporate headquarters as~~

Table of ~~March 31, 2019 are as follows:~~Contents

(In thousands)

Years ending December 31:

Remainder of 2019

$
304

2020

416

2021

428

2022

441

2023

201

Total future minimum lease payments

1,790

Imputed interest

(244
)
Total

$
1,546

Reported as of March 31, 2019

Operating lease liability, current portion

$
308

Operating lease liability, net of current portion

1,238

Total

$
1,546

Item 2. 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 that are not of historical fact, including, without limitation, statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, intentions, expectations, goals and objectives, may be forward-looking statements. The words “anticipates,” “believes,” “could,” “designed,” “estimates,” “expects,” “goal,” “intends,” “may,” “objective,” “plans,” “projects,” “pursue,” “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^® and TRELEGY^® ELLIPTA^® 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 beyond the existing respiratory portfolio); the timing, manner and amount of potential

capital returns to stockholders; 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; projections of revenue, expenses and other financial items; the impact of the COVID-19 pandemic; 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, ~~2018~~2019 filed with the Securities and Exchange Commission (“SEC”) on February 19, 2020 (“2019 ~~(“2018~~ 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 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 ~~2018~~2019 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 ~~2018~~2019 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.

Table of Contents

OVERVIEW

~~OVERVIEW~~Executive Summary

~~Executive Summary~~

Innoviva, Inc. (“Innoviva”, the “Company”, the “Registrant” or “we”) and other similar pronouns) is ~~focused on royalty management. Innoviva’s~~a company with a portfolio ~~includes the~~of royalties that include respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR^®/BREO^® ELLIPTA^® (fluticasone furoate/ vilanterol, “FF/VI”), ANORO^® ELLIPTA^® (umeclidinium bromide/ vilanterol, “UMEC/VI”) and TRELEGY^® ELLIPTA^® (the combination FF/UMEC/VI). 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%. Innoviva is also entitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC (“TRC”), including TRELEGY^® ELLIPTA^® and any other product or combination of products that may be discovered or developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the “GSK Agreements”), which have been assigned to TRC other than RELVAR^®/BREO^® ELLIPTA^® and ANORO^® ELLIPTA^®.

Our company structure and organization are tailored to our focused activities of managing our respiratory assets with GSK, the commercial and developmental obligations associated with the GSK Agreements, intellectual property, licensing operations, business development activities and providing for certain essential reporting and management functions of a public company. As of March 31, ~~2019,~~2020, we had ~~six~~five employees. Our revenues consist of royalties and potential milestone payments, if any, from our respiratory partnership agreements with GSK.

Recent Highlights

· ~~GSK Net Sales:~~

· ~~First quarter 2019~~
● GSK Net Sales:

First quarter 2020 net sales of RELVAR^®/BREO^® ELLIPTA^® by GSK were $374.3 million, up 31% from $284.9 million in the first quarter of 2019, with $147.5 million in net sales from the U.S. market and $226.8 million from non-U.S. markets.

First quarter 2020 net sales of ANORO^® ELLIPTA^® by GSK were $151.6 million, up 15% from $131.8 million in the first quarter of 2019, with $81.8 million net sales from the U.S. market and $69.8 million from non-U.S. markets.

First quarter 2020 net sales of TRELEGY^® ELLIPTA^® by GSK were $248.2 million, up significantly from $112.7 million in the first quarter of 2019, with $172.4 million in net sales from the U.S. market and $75.8 million in net sales from non-U.S. markets.

●

Capital Allocation:

On April 12, 2020, Innoviva, Inc. entered into a securities purchase agreement with Entasis Therapeutics, Inc. (NASDAQ: ETTX), pursuant to which it will purchase, upon satisfaction of certain closing conditions, approximately $35.0 million of Entasis common stock and warrant securities.

During the first quarter of 2020, Innoviva invested $25.0 million in 8,710,800 shares of common stock and warrants to purchase up to 8,710,800 additional shares of common stock of Armata Pharmaceutical Inc.

Table of ~~RELVAR~~®~~/BREO~~® ~~ELLIPTA~~® ~~by GSK were $284.9 million, down 7% from $307.7 million in the first quarter of 2018, with $100.1 million in net sales from the U.S. market and $184.8 million from non-U.S. markets.~~Contents

· ~~First quarter 2019 net sales of ANORO~~® ~~ELLIPTA~~® ~~by GSK were $131.8 million, down 2% from $134.2 million in the first quarter of 2018, with $75.7 million net sales from the U.S. market and $56.1 million from non-U.S. markets.~~

· ~~First quarter 2019 net sales of TRELEGY~~® ~~ELLIPTA~~® ~~by GSK were $112.7 million, up significantly from $14.6 million in the first quarter of 2018, with $85.1 million in net sales from the U.S. market and $27.6 million in net sales from non-U.S. markets.~~

· ~~Product Updates:~~

· ~~The Pharmaceuticals and Medical Devices Agency of Japan approved TRELEGY~~® ~~ELLIPTA~~® ~~(fluticasone furoate/umeclidinium/vilanterol ‘FF/UMEC/VI’) for the treatment of chronic obstructive pulmonary disease (COPD). TRELEGY~~® ~~ELLIPTA~~® ~~is the first triple therapy in a single inhaler approved in Japan.~~

Collaborative Arrangements ~~wit~~hwith GSK

LABA Collaboration

In November 2002, we entered into our LABA Collaboration Agreement with GSK to develop and commercialize once-daily LABA products for the treatment of chronic obstructive pulmonary disease (“COPD”) and asthma. The collaboration has developed three combination products: (1) 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), (2) ANORO^® ELLIPTA^® (UMEC/VI), a once-daily medicine combining a long-acting muscarinic antagonist (“LAMA”), umeclidinium bromide (UMEC), with a LABA, VI and (3) TRELEGY^® ELLIPTA^®, fluticasone furoate/umeclidinium/vilanterol (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. The milestone fees paid to GSK were recognized as capitalized fees paid to a related party, which are being amortized over their estimated useful lives commencing upon the commercial launch of the products.

2004 Strategic Alliance

In March 2004, we entered into the Strategic Alliance Agreement with GSK where GSK received an option to license exclusive development and commercialization rights to product candidates from certain of our discovery programs on pre-determined terms and on an exclusive, worldwide basis. In 2005, GSK licensed our ~~MABA~~Bifunctional Muscarinic Antagonist-Beta2 Agonist ("MABA") program for the treatment of COPD, and in October 2011, we and GSK expanded the MABA program by adding six additional Innoviva-discovered preclinical MABA compounds (the “Additional MABAs”). The development program ~~has been~~was funded in full by GSK. GSK is in the process of determining the next steps for the program. For a detailed discussion of our alliance with GSK, see Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our ~~2018~~2019 Form 10-K.

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 (“US 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.

~~In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016 02,~~ ~~Leases~~ ~~(Topic 842), which requires an entity~~As part of our capital allocation strategies, we invest from time to ~~recognize right~~time in equity securities of use assets representing its right to use the underlying asset for the lease term and lease liabilities representing the present value of the future lease payments for both financing and operating leases on its consolidated balance sheets. For a lease with a term of 12 monthsprivate or less, the standard allows an entity to elect not to recognize a right-of-use asset and a lease liability and recognize the lease expense on a straight-line basis. We adopted the standard on the effective date of January 1, 2019 using the alternative transition approach. This approach is similar to a prospective transition, which requires the application of ASC 842 at the effective date with a cumulative-effect adjustment recognized through retained earnings. Under this approach,public companies. If we determine that we do not ~~present~~have control over these companies under either voting or variable interest entity (“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 ~~adjusted comparative periods. Our pro-rata share~~equity investments where we exercise significant influence using either an equity method of ~~common area expenses are recorded as lease expense when incurred since they are variable and considered nonlease components~~accounting or at fair value by electing the fair value option. If the fair value option is applied to an investment that would otherwise be accounted for under the ~~standard. The most significant impact of the adoption~~equity method, we apply it to ~~us is that we recognized a right of use asset~~all our financial interests in the ~~amount~~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 ~~$1.5 million and lease liabilities in~~equity investments, net on the ~~total amount of $1.6 million at January 1, 2019 for the operating lease on our corporate headquarters. The adoption did not have a material impact on our retained earnings and~~ consolidated statements of ~~operations and cash flows.~~income.

There were no other significant changes to our critical accounting policies and estimates. Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 filed with the SEC on February 19, ~~2019~~2020 provides a more complete discussion of our critical accounting policies and estimates.

Table of Contents

Results of Operations

Net Revenue

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

	Three Months Ended March 31,						Change

												Three Months Ended March 31,				Change
(In thousands)	2019			2018			$			%		2020		2019		$		%
Royalties from a related party - RELVAR/BREO	$	42,740		$	46,160		$	(3,420	)	(7	)%	$	56,149	$	42,740	$	13,409	31	%
Royalties from a related party - ANORO	8,570			8,724			(154		)	(2	)%		9,850		8,570		1,280	15	%
Royalties from a related party - TRELEGY	7,329			952			6,377			*			16,135		7,329		8,806	120	%
Total royalties from a related party	58,639			55,836			2,803			5	%		82,134		58,639		23,495	40	%
Less: amortization of capitalized fees paid to a related party	(3,456		)	(3,456		)	—			—			(3,456)		(3,456)		—	—
Royalty revenue from GSK	$	55,183		$	52,380		$	2,803		5	%	$	78,678	$	55,183	$	23,495	43	%

*Not meaningful

Total net revenue increased to ~~$55.2~~$78.7 million for the three months ended March 31, ~~2019,~~2020, compared to ~~$52.4~~$55.2 million, for the same period a year ago primarily due to the growth in prescriptions for our royalty products and ~~market share quarter over quarter~~a one-time favorable rebate adjustment for ~~TRELEGY~~sales of RELVAR^® ~~ELLIPTA~~®~~, offset with the lower royalties for RELVAR~~®/BREO^® ELLIPTA^® ~~and ANORO~~® ~~ELLIPTA~~® ~~primarily due to increasing pricing pressure~~ in the U.S.

General & Administrative

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

	Three Months Ended March 31,				Change

										Three Months Ended March 31,				Change
(In thousands)	2019		2018		$			%		2020		2019		$		%
General and administrative expenses	$	3,015	$	8,985	$	(5,970	)	(66	)%	$	2,563	$	3,015	$	(452)	(15)	%
General and administrative expenses - related party	—		2,700		(2,700		)	—

General and administrative expenses for the three months ended March 31, ~~2019 were $3.0 million~~2020 decreased compared ~~with $11.7 million~~to the same period in the three months ended March 31, 2018, a decrease of $8.7 million. The amount for the three months ended March 31, 2018 included $3.2 million cash severance payments in connection with certain members of senior management’s separation from the Company and payment of $2.7 million to Sarissa to partially reimburse expenses pursuant to a settlement agreement in February 2018. The rest of the decrease in general and administrative expenses in the three months ended March 31, 2019, ~~is mainly~~ attributable to overall lower ~~personnel-related~~operating expenses ~~as a result of lower headcount.~~incurred.

Other Income, ~~(Expense),~~ net and Interest Income

Other income, ~~(expense),~~ net and interest income, as compared to the prior year period, were as follows:

Three Months Ended March 31,

Change

(In thousands)

2019

2018

$

%

Other income (expense), net

$
1

$
(3,099
)
$
3,100

*

Interest income

975

391

584

149
%


	Three Months Ended March 31,				Change
(In thousands)	2020		2019		$		%
Other income, net	$	68	$	1	$	67		*
Interest income		1,302		975		327		34%

*Not ~~meaningful~~Meaningful

~~Other~~Interest income ~~(expense), net~~increased for the three months ended March 31, ~~2018, mainly consists of the loss on the extinguishment of debt of $3.1 million in relation to the $120.0 million prepayment of our Term B Loan.~~

~~Interest income increased for the~~ ~~three months ended March 31, 2019,~~2020, as compared to the same period a year ago primarily due to higher ~~interest generated from our investments in marketable securities.~~cash and investment balances.

Interest Expense

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

	Three Months Ended March 31,				Change

										Three Months Ended March 31,				Change
(In thousands)	2019		2018		$			%		2020		2019		$		%
Interest expense	$	4,617	$	7,657	$	(3,040	)	(40	)%	$	4,516	$	4,617	$	(101)	(2)	%

Interest expense decreased slightly for the three months ended March 31, ~~2019,~~2020, compared to the same period a year ago primarily due to the lower average outstanding debt balance. ~~See “Liquidity” section below for further information.~~

Table of Contents

Changes in Fair Values of Equity Investments

During the quarter ended March 31, 2020, Innoviva invested $25.0 million in 8,710,800 shares of Armata’s common stock and warrants to purchase up to an additional 8,710,800 shares of the common stock at $2.87 per share. As a result of this initial investment, Innoviva owns approximately 46.7% of Armata’s common stock as of March 31, 2020. The total fair value of the common stock and warrants was estimated at $46.9 million. During the quarter ended March 31, 2020, $21.9 million was recognized as unrealized gains and fair value changes and is presented in changes in fair values of equity investments on the consolidated statements of income.

Provision for Income Taxes

The provisional income tax expense for the three months ended March 31, ~~2019~~2020 was ~~$8.5~~$15.9 million with an effective income tax rate of ~~17.5%~~16.8%, compared to $8.5 million with an ~~immaterial amount~~effective interest rate of 17.5% in the same period a year ~~ago as a full valuation allowance was maintained on our gross deferred taxes.~~ago.

Net Income Attributable to Noncontrolling Interest

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

	Three Months Ended March 31,				Change

									Three Months Ended March 31,				Change
(In thousands)	2019		2018		$		%		2020		2019		$		%
Net income attributable to noncontrolling interest	$	6,229	$	749	$	5,480	732	%	$	13,515	$	6,229	$	7,286		117	%

This represents the 85% share of net income in Theravance Respiratory Company, LLC for Theravance Biopharma for the three months ended March 31, ~~2019~~2020 and ~~2018.~~2019. The increase was primarily due to the increase in the growth in prescriptions and market share for TRELEGY^® ELLIPTA^®.

Liquidity and Capital Resources

Liquidity

Since our inception, we have financed our operations primarily through private placements and public offerings of equity and debt securities and payments received under collaborative arrangements. For the three months ended March 31, ~~2019,~~2020, we generated gross royalty revenues from GSK of ~~$58.6~~$82.1 million. Net cash and cash equivalents, short term investments and marketable securities totaled ~~$192.2~~$384.0 million, and royalties receivable from GSK totaled ~~$58.6~~$82.1 million as of March 31, ~~2019.~~2020.

On August 18, 2017, we entered into a Credit Agreement and completed a financing of the $250.0 million Term B Loan. The Term B Loan will mature on August 18, 2022. Two and a half percent (2.5%) of the initial principal amount was originally due quarterly beginning December 31, 2017. The remaining outstanding balance is due at maturity. Prepayments, in whole or in part, can be made at any time without a penalty. The Credit Agreement also provides us the ability to request one or more additional tranches of term loans (or increase an existing term loan) at any time prior to maturity. In December 2017, February 2018 and August 2018, we repaid the principal balance of the Term B Loan by $6.3 million, $120.0 million and $110.0 million, respectively. The outstanding principal balance of the Term B Loan as of March 31, 2019 was $13.8 million.

Adequacy of Cash Resources to Meet Future Needs

We believe that cash from projected future royalty revenues and our cash, cash equivalents and marketable securities will be sufficient to meet our anticipated debt service and operating needs for at least the next 12 months based upon current operating plans and financial forecasts. If our current operating plans and financial forecasts change, we may require additional funding sooner in the form of public or private equity offerings or debt financings. Furthermore, if in our view favorable financing opportunities arise, we may seek additional funding at any time. However, future financing may not be available in amounts or on terms acceptable to us, if at all. This could leave us without adequate financial resources to fund our operations as currently planned. In addition, from time to time we may restructure or reduce our debt, including through tender offers, redemptions, amendments, repurchases or otherwise, all ~~consistent~~allowable with the terms of our debt agreements.

Cash Flows

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

	Three Months Ended March 31,

										Three Months Ended March 31,
(In thousands)	2019			2018			Change			2020		2019		Change
Net cash provided by operating activities	$	76,655		$	49,914		$	26,741		$	73,481	$	76,655	$	(3,174)
Net cash provided by (used in) investing activities	(74,167		)	26,513			(100,680		)		16,044		(74,167)		90,211
Net cash provided by (used in) financing activities	246			(122,625		)	122,871				(15,640)		246		(15,886)

Table of Contents

Cash Flows from Operating Activities

~~Cash~~Net cash provided by operating activities for the three months ended March 31, 2020 was $73.5 million, consisting primarily of our net income of $79.0 million, adjusted for net non-cash items of $0.4 million, an increase in receivables from collaborative arrangements of $2.7 million and a reduction in accrued interest payable of $2.5 million.

Net cash provided by operating activities for the three months ended March 31, 2019 was $76.7 million, consisting primarily of our net income of $40.0 million, adjusted for non-cash items such as $8.5 million of deferred income taxes, $3.5 million of depreciation and amortization and $1.9 million amortization of debt discount and issuance costs, as well as decrease in receivables from collaborative arrangements of $24.6 million, partially offset by a reduction in accrued interest payable of $2.5 million.

Cash Flows from Investing Activities

~~Cash~~Net cash provided by ~~operating~~investing activities for the three months ended March 31, ~~2018~~2020 of $16.0 million was ~~$49.9~~primarily due to $54.0 million ~~consisting primarily~~received from maturities of our net income of $30.3 million, adjusted for non-cash items such as $3.5 million of depreciation and amortization, $3.1 million of loss on extinguishment of debt and $2.2 million of stock-based compensation expense, as well as changes in operating assets and liabilities, including a decrease in receivables from collaborative arrangements of $14.7 million,marketable securities, partially offset by ~~a reduction~~$12.9 million in ~~accrued interest payable~~purchases of ~~$3.4 million.~~

~~Cash Flows from Investing Activities~~

marketable securities and $25.0 million for our investments in Armata.

Net cash ~~flows~~ used in investing activities for the three months ended March 31, 2019 of $74.2 million was primarily due to $102.0 million in purchases of marketable securities, partially offset by $27.9 million proceeds received from maturities of marketable securities.

Cash Flows from Financing Activities

Net cash ~~flows from investing~~used in financing activities for the three months ended March 31, ~~2018~~2020 of ~~$26.5~~$15.6 million was primarily due to ~~$31.9~~$15.8 million ~~proceeds received from maturities of marketable securities, partially offset by $5.4 million in purchases of marketable securities.~~distributions to noncontrolling interest.

~~Cash Flows from Financing Activities~~

Net cash provided by financing activities for the three months ended March 31, 2019 of $0.2 million was primarily due to $0.3 million net proceeds from issuance of common stock.

Net cash used in financing activities for the three months ended March 31, 2018 of $122.6 million was primarily due to $120.0 million prepayment on our Term B Loan and $2.6 million paid for the repurchase of shares to satisfy tax withholding.

Off-Balance Sheet Arrangements

In June 2014, our facility leases in South San Francisco, California were assigned to Theravance Biopharma, Inc. (“Theravance Biopharma”) in connection with the spin-off of Theravance Biopharma. However, if Theravance Biopharma were to default on its lease obligations, we would be held liable by the landlord and thus, we have in substance guaranteed the lease payments for these facilities. We would also be responsible for lease-related payments including utilities, property taxes, and common area maintenance, which may be as much as the actual lease payments. As of March 31, ~~2019,~~2020, the total remaining lease payments for the duration of the lease, which runs through May 2020, were ~~$7.7~~$1.1 million. The carrying value of this lease guarantee was ~~$0.4 million~~immaterial as of March 31, ~~2019 and is reflected in other long-term liabilities in our condensed consolidated balance sheet.~~

~~Contractual Obligations and Commercial Commitments~~

~~In the table below, we set forth our significant enforceable and legally binding obligations and future commitments as of March 31, 2019.~~2020.

Payment Due by Period

Less Than

More Than

(In thousands)

Total

1 Year

1 - 3 Years

3 - 5 Years

5 Years

2023 Notes

$
261,468

$
5,121

$
10,242

$
246,105

$
—

2025 Notes

223,781

4,813

9,625

9,625

199,718

Term B Loan*

13,750

—

—

13,750

—

Facility lease

1,790

406

850

534

—

Total

$
500,789

$
10,340

$
20,717

$
270,014

$
199,718

* The Term B Loan balances reflect the principal repayment obligations and do not include the interest payments as the loan bears interest at a varying rate of three-month LIBOR plus 4.5% margin.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

There have been no significant changes in our market risk or how our market risk is managed compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

We conducted an evaluation as of March 31, ~~2019,~~2020, under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures, which are defined under SEC rules as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within required time periods. Based upon that evaluation, our Interim Principal Executive Officer and Chief Accounting Officer, concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance levels.

Table of Contents

Limitations on the Effectiveness of Controls

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all frauds. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Innoviva have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There were no material changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended March 31, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LegalProceedings

In May 2019, Theravance Biopharma, who is the owner of 85% of the economic interests in TRC, initiated arbitration against the Company and TRC, relating to a dispute as to the determination by Innoviva (as manager of TRC) to cause TRC to explore potential reinvestment opportunities for the royalty proceeds received by GSK into initiatives that Innoviva believes will increase the value of TRC and TRELEGY^® ELLIPTA^®. Theravance Biopharma alleged that in causing TRC to not distribute substantially all royalty proceeds received from GSK, Innoviva breached the limited liability company operating agreement governing TRC (the “Operating Agreement”), as well as the fiduciary duties applicable to Innoviva as manager of TRC. The hearing in respect of the arbitration was conducted from July 23, 2019 through July 25, 2019. Post-arbitration oral argument was heard on August 14, 2019. On September 26, 2019, the arbitrator issued a final decision. The arbitrator ruled that Innoviva did not breach the Operating Agreement or its fiduciary duties by withholding royalties or pursuing reinvestment opportunities. Accordingly, the Company is permitted to continue to pursue development and commercialization initiatives. The arbitrator did conclude that Innoviva breached a provision of the Operating Agreement requiring Innoviva to deliver quarterly financial plans to Theravance Biopharma. However, the arbitrator concluded that this technical breach did not cause any damages to Theravance Biopharma and the arbitrator awarded limited injunctive relief to expand and clarify the disclosure obligations under the Operating Agreement related to the delivery of financial plans and the pursuit of investment opportunities. Finally, the arbitrator ruled that the Company is entitled to indemnification from TRC for 95% of its fees and expenses incurred in connection with the arbitration.

On September 30, 2019, the Company and TRC filed a Verified Complaint in the Court of Chancery of the State of Delaware to confirm the arbitration award. That matter is still pending.

~~We are not a party to any material legal proceedings.~~

Item 1A. Risk Factors

Our business is subject to a number of risks, including those identified in Item 1A of Part I of our ~~2018~~2019 Form 10-K. ~~There~~Except as set forth under “Item 1. Legal Proceedings” above and as discussed below, there have been no other material changes to the risk factors described in our ~~2018~~2019 Form 10-K, which is incorporated by reference herein.

The widespread outbreak of an illness or any other communicable disease, or any other public health crisis, could adversely affect our business, results of operations and financial condition.

We could be negatively affected by the widespread outbreak of an illness or any other communicable disease, or any other public health crisis that results in economic and trade disruptions, including the disruption of global supply chains. In December 2019, an outbreak of COVID-19 began in Wuhan, Hubei Province, China. In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption of financial markets. At this time, based on the information available to us, we cannot yet predict the extent of the impact of the COVID-19 pandemic on our royalty revenues derived from GSK upon which we significantly rely; however, it is possible that an extended period of global supply chain and economic disruption could materially affect such revenues and therefore our results of operations and financial condition.

Table of Contents

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3: Defaults Upon Senior Securities

None.

Item 4: Mine Safety Disclosures

None.

Item 5: Other Information

None.

Item 6. Exhibits

~~(a)~~ ~~Index to Exhibits~~

(a) Index to Exhibits


Exhibit Number	Description	Form	Exhibit	Incorporated by Reference Filing Date/Period End Date

31.1	Certification of Principal Executive Officer pursuant to Rules 13a-14 pursuant to the Securities Exchange Act of 1934

31.2	Certification of Principal Financial Officer pursuant to Rules 13a-14 pursuant to the Securities Exchange Act of 1934

32	Certifications Pursuant to 18 U.S.C. Section 1350

101	Interactive Data File (Quarterly Report on Form 10-Q, for the quarterly period ended March 31, ~~2019)~~2020) formatted in iXBRL (Inline eXtensible Business Reporting Language).

104	Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Innoviva, Inc.

Date: ~~May 1, 2019~~April 29, 2020	/s/ Geoffrey Hulme
	Geoffrey Hulme
	Interim Principal Executive Officer
	(Principal Executive Officer)

Date: ~~May 1, 2019~~April 29, 2020	/s/ Marianne Zhen
	Marianne Zhen
	Chief Accounting Officer
	(Principal Financial Officer)