UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~September 30, 2020~~March 31, 2021

☐ 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.)

1350 Old Bayshore Highway Suite 400

Burlingame, CA 94010

(Address of Principal Executive Offices)

(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 ⌧ No ◻

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 ⌧ No ◻

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

Large accelerated filer ⌧		Accelerated filer ◻

Non-accelerated filer ◻		Smaller reporting company ☐

		Emerging growth company ☐

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. ◻

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

The number of shares of registrant’s common stock outstanding on ~~October~~April 19, ~~2020~~2021 was 101,408,012~~101,391,634.~~.

Table of Contents

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of ~~September 30, 2020~~March 31, 2021 (Unaudited) and December 31, ~~2019~~2020	3
Unaudited Consolidated Statements of Income for the Three ~~and Nine~~ Months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~	4
Unaudited Consolidated Statements of Comprehensive Income for the Three ~~and Nine~~ Months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~	5
Unaudited Consolidated Statements of Stockholders’ Equity for the Three ~~and Nine~~ Months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~	6
Unaudited Consolidated Statements of Cash Flows for the ~~Nine~~Three Months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~	87
Notes to Unaudited Consolidated Financial Statements	98

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1819

Item 3. Quantitative and Qualitative Disclosures About Market Risk	2524

Item 4. Controls and Procedures	25

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	2625

Item 1A. Risk Factors	26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3. Defaults Upon Senior Securities	26

Item 4. Mine Safety Disclosure	2726

Item 5. Other Information	2726

Item 6. Exhibits	27

Signatures	28

Exhibits

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INNOVIVA, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)


	September 30,		December 31,		March 31,		December 31,
	2020		2019		2021		2020
	(unaudited)		*		(unaudited)		*
Assets
Current assets:
Cash and cash equivalents	$	479,193	$	278,096	$	282,890	$	246,487
Short-term marketable securities		0		72,749
Related party receivables from collaborative arrangements		92,150		79,427		88,974		93,931
Prepaid expenses and other current assets		698		962		1,069		1,640
Total current assets		572,041		431,234		372,933		342,058
Property and equipment, net		33		33		24		28
Equity investments		111,745		0
Equity and long-term investments						519,325		438,258
Capitalized fees paid to a related party, net		128,708		139,076		121,797		125,253
Deferred tax assets, net		109,490		154,171		74,023		93,759
Other assets		239		312		188		214
Total assets	$	922,256	$	724,826	$	1,088,290	$	999,570

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	623	$	10	$	14	$	66
Accrued personnel-related expenses		384		647		652		490
Accrued interest payable		1,668		4,152		1,668		4,152
Other accrued liabilities		1,223		562		1,470		1,402
Total current liabilities		3,898		5,371		3,804		6,110
Long-term debt, net of discount and issuance costs		383,350		377,120		387,728		385,517
Other long-term liabilities		136		219		77		106
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock: $0.01 par value, 230 shares authorized, 0 shares issued and outstanding		0		0		0		0
Common stock: $0.01 par value, 200,000 shares authorized, 101,391 and 101,288 issued and outstanding as of September 30, 2020 and December 31, 2019, respectively		1,014		1,013
Common stock: $0.01 par value, 200,000 shares authorized, 101,408 and 101,392 issued and outstanding as of March 31, 2021 and December 31, 2020, respectively						1,014		1,014
Additional paid-in capital		1,260,447		1,258,859		1,261,326		1,260,900
Accumulated other comprehensive income		0		27
Accumulated deficit		(775,905)		(946,404)		(627,879)		(722,002)
Total Innoviva stockholders’ equity		485,556		313,495		634,461		539,912
Noncontrolling interest		49,316		28,621		62,220		67,925
Total stockholders’ equity		534,872		342,116		696,681		607,837
Total liabilities and stockholders’ equity	$	922,256	$	724,826	$	1,088,290	$	999,570

*	Consolidated balance sheet as of December 31, ~~2019~~2020 has been derived from audited consolidated financial statements.

See accompanying notes to consolidated financial statements.

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INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020
Revenue:
Royalty revenue from a related party, net of amortization of capitalized fees paid to a related party of $3,456 in the three months ended September 30, 2020 and 2019, and $10,368 in the nine months ended September 30, 2020 and 2019	$	88,694	$	65,755	$	236,318	$	185,045
Revenue from collaborative arrangements with a related party		0		0		10,000		0
Total net revenue		88,694		65,755		246,318		185,045

Royalty revenue from a related party, net of amortization of capitalized fees paid to a related party of $3,456 in three months ended March 31, 2021 and 2020									$	85,518	$	78,678
Operating expenses:
Research and development		1,010		0		1,569		0		49		0
General and administrative		3,254		4,962		8,413		12,324		5,986		2,563
Total operating expenses		4,264		4,962		9,982		12,324		6,035		2,563

Income from operations		84,430		60,793		236,336		172,721		79,483		76,115

Other income (expense), net		(13)		(115)		85		(122)		(433)		68
Interest income		41		1,624		1,501		4,002		30		1,302
Interest expense		(4,603)		(4,693)		(13,680)		(13,971)		(4,694)		(4,516)
Changes in fair values of equity investments		(29,368)		0		39,245		0
Changes in fair values of equity and long-term investments, net										55,045		21,915
Income before income taxes		50,487		57,609		263,487		162,630		129,431		94,884
Income tax expense, net		8,866		10,558		44,689		29,499		19,736		15,932
Net income		41,621		47,051		218,798		133,131		109,695		78,952
Net income attributable to noncontrolling interest		13,403		7,242		48,299		21,792		15,572		13,515
Net income attributable to Innoviva stockholders	$	28,218	$	39,809	$	170,499	$	111,339	$	94,123	$	65,437

Basic net income per share attributable to Innoviva stockholders	$	0.28	$	0.39	$	1.68	$	1.10	$	0.93	$	0.65
Diluted net income per share attributable to Innoviva stockholders	$	0.26	$	0.36	$	1.53	$	1.01	$	0.84	$	0.59

Shares used to compute Innoviva basic and diluted net income per share:
Shares used to compute basic net income per share		101,358		101,191		101,306		101,134		101,365		101,235
Shares used to compute diluted net income per share		113,572		113,415		113,543		113,394		113,624		113,509

See accompanying notes to consolidated financial statements.

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INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


		Three Months Ended September 30,			Nine Months Ended September 30,				Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020
Net income	$	41,621	$	47,051	$	218,798	$	133,131	$	109,695	$	78,952
Unrealized gain (loss) on marketable securities, net		2		(8)		(27)		28
Unrealized gain on marketable securities, net										0		6
Comprehensive income		41,623		47,043		218,771		133,159		109,695		78,958
Comprehensive income attributable to noncontrolling interest		13,403		7,242		48,299		21,792		15,572		13,515
Comprehensive income attributable to Innoviva stockholders	$	28,220	$	39,801	$	170,472	$	111,367	$	94,123	$	65,443

See accompanying notes to consolidated financial statements.

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INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

Nine Months Ended September 30, 2020

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Comprehensive

Accumulated

Noncontrolling

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

0

0

0

0

0

(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

0

170

0

0

0

170
Stock-based compensation

0

0

435

0

0

0

435
Net income

0

0

0

0

65,437

13,515

78,952
Other comprehensive income

0

0

0

6

0

0

6
Balance as of March 31, 2020

101,320

$
1,013

$
1,259,464

$
33

$
(880,967)

$
26,326

$
405,869
Equity activity of noncontrolling interest from a consolidated variable interest entity

0

0

0

0

0

350

350
Distributions to noncontrolling interest

0

0

0

0

0

(12,152)

(12,152)
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding

72

2

178

0

0

0

180
Stock-based compensation

0

0

375

0

0

0

375
Net income

0

0

0

0

76,844

21,381

98,225
Other comprehensive income

0

0

0

(35)

0

0

(35)
Balance as of June 30, 2020

101,392

$
1,015

$
1,260,017

$
(2)

$
(804,123)

$
35,905

$
492,812
Equity activity of noncontrolling interest from a consolidated variable interest entity

0

0

0

0

0

8

8
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding

(1)

(1)

(11)

0

0

0

(12)
Stock-based compensation

0

0

441

0

0

0

441
Net income

0

0

0

0

28,218

13,403

41,621
Other comprehensive income

0

0

0

2

0

0

2
Balance as of September 30, 2020

101,391

$
1,014

$
1,260,447

$
0

$
(775,905)

$
49,316

$
534,872

~~Table of Contents~~


	Three Months ended March 31, 2021
						Accumulated
				Additional		Other						Total
	Common Stock			Paid-In		Comprehensive		Accumulated		Noncontrolling		Stockholders’
	Shares	Amount		Capital		Income (Loss)		Deficit		Interest		Equity
Balance as of December 31, 2020	101,392	$	1,014	$	1,260,900	$	0	$	(722,002)	$	67,925	$	607,837
Distributions to noncontrolling interest	0		0		0		0		0		(21,285)		(21,285)
Equity activity of noncontrolling interest from a consolidated variable interest entity	0		0		0		0		0		8		8
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding	16		0		(25)		0		0		0		(25)
Stock-based compensation	0		0		451		0		0		0		451
Net income	0		0		0		0		94,123		15,572		109,695
Balance as of March 31, 2021	101,408	$	1,014	$	1,261,326	$	0	$	(627,879)	$	62,220	$	696,681


	Nine Months Ended September 30, 2019													Three Months ended March 31, 2020
						Accumulated													Accumulated
				Additional		Other						Total					Additional		Other						Total
	Common Stock			Paid-In		Comprehensive		Accumulated		Noncontrolling		Stockholders’		Common Stock			Paid-In		Comprehensive		Accumulated		Noncontrolling		Stockholders’
	Shares	Amount		Capital		Income (Loss)		Deficit		Interest		Equity		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		0		0		0		254
Stock-based compensation	0		0		605		0		0		0		605
Net income	0		0		0		0		33,790		6,229		40,019
Other comprehensive income	0		0		0		13		0		0		13
Balance as of March 31, 2019	101,183	$	1,012	$	1,257,125	$	10	$	(1,069,902)	$	11,698	$	199,943
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding	89		1		200		0		0		0		201
Stock-based compensation	0		0		474		0		0		0		474
Net income	0		0		0		0		37,740		8,321		46,061
Other comprehensive income	0		0		0		23		0		0		23
Balance as of June 30, 2019	101,272	$	1,013	$	1,257,799	$	33	$	(1,032,162)	$	20,019	$	246,702
Balance as of December 31, 2019														101,288	$	1,013	$	1,258,859	$	27	$	(946,404)	$	28,621	$	342,116
Distributions to noncontrolling interest	0		0		0		0		0		(10,553)		(10,553)	0		0		0		0		0		(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	7		0		82		0		0		0		82	32		0		170		0		0		0		170
Stock-based compensation	0		0		489		0		0		0		489	0		0		435		0		0		0		435
Net income	0		0		0		0		39,809		7,242		47,051	0		0		0		0		65,437		13,515		78,952
Other comprehensive income	0		0		0		(8)		0		0		(8)	0		0		0		6		0		0		6
Balance as of September 30, 2019	101,279	$	1,013	$	1,258,370	$	25	$	(992,353)	$	16,708	$	283,763
Balance as of March 31, 2020														101,320	$	1,013	$	1,259,464	$	33	$	(880,967)	$	26,326	$	405,869

See accompanying notes to consolidated financial statements.

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INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended September 30,				Three Months Ended March 31,
	2020		2019		2021		2020
Cash flows from operating activities
Net income	$	218,798	$	133,131	$	109,695	$	78,952
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes		44,689		29,499		19,736		15,932
Depreciation and amortization		10,382		10,400		3,460		3,463
Stock-based compensation		1,251		1,568		451		435
Amortization of debt discount and issuance costs		6,230		5,789		2,211		2,032
Amortization of discount on short-term investments		(343)		(1,739)		0		(272)
Amortization of lease guarantee		135		(243)		0		(81)
Loss on write-off of property and equipment		0		104
Changes in fair values of equity investments		(39,245)		0
Changes in fair values of equity and long-term investments, net						(54,673)		(21,915)
Other non-cash items		14		0		8		0
Changes in operating assets and liabilities:
Receivables from collaborative arrangements		(12,723)		14,075		4,957		(2,707)
Prepaid expenses and other current assets		264		466		571		140
Other assets		0		(11)
Accounts payable		613		24		(52)		112
Accrued personnel-related expenses and other accrued liabilities		252		107		227		(126)
Accrued interest payable		(2,484)		(2,491)		(2,484)		(2,484)
Other long-term liabilities		0		(126)
Net cash provided by operating activities		227,833		190,553		84,107		73,481
Cash flows from investing activities
Maturities of marketable securities		86,000		160,925		0		54,000
Purchases of marketable securities		(12,943)		(230,922)		0		(12,943)
Purchases of equity investments		(72,500)		0
Purchases of equity and long-term investments						(26,394)		(25,000)
Purchases of property and equipment		(13)		0		0		(13)
Net cash provided by (used in) investing activities		544		(69,997)		(26,394)		16,044
Cash flows from financing activities
Repurchase of shares to satisfy tax withholding		(83)		(81)		(25)		(55)
Payments of cash dividends to stockholders		0		(11)
Proceeds from issuances of common stock, net		421		618		0		225
Net proceeds from the issuance of variable interest entity's equity		344		0
Distributions to noncontrolling interest		(27,962)		(10,553)		(21,285)		(15,810)
Net cash used in financing activities		(27,280)		(10,027)		(21,310)		(15,640)
Net increase in cash and cash equivalents		201,097		110,529		36,403		73,885
Cash and cash equivalents at beginning of period		278,096		62,417		246,487		278,096
Cash and cash equivalents at end of period	$	479,193	$	172,946	$	282,890	$	351,981
Supplemental disclosure of cash flow information
Cash paid for interest	$	9,933	$	10,674	$	4,967	$	4,967

See accompanying notes to consolidated financial statements.

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INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of Operations and Summary of Significant Accounting Policies

Description of Operations

Innoviva Inc. (referred to as "Innoviva", the "Company", or "we" and other similar pronouns) is a company with a portfolio of royalties ~~that includes~~and other healthcare assets. Our royalty portfolio contains 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^®.

Basis of Presentation

The accompanying unaudited 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 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, ~~2020~~2021 or any other period.

The accompanying unaudited consolidated financial statements include the accounts of Innoviva, our wholly-owned subsidiaries and certain variable interest entities for which we are the primary beneficiary. All intercompany balances and transactions have been ~~eliminated.~~eliminated in consolidation. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income (loss) attributable to noncontrolling interest in our unaudited 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 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, ~~2019~~2020 filed with the Securities and Exchange Commission (“SEC”) on February ~~19,~~ 25, 2021 (“2020 ~~and as amended on February 21, 2020 (“2019~~ Form 10-K”).

Variable Interest Entities

We evaluate our ownership, contractual and other interest in ~~the~~ entities ~~that we invest in~~ to determine if they are variable interest entities (“~~VIEs”~~VIE”), whether we have a variable interest in those entities and the nature and extent of those interests. ~~Such evaluation is performed continually throughout the entire period when we stay involved with these entities.~~ Based on our evaluation, if we determine we are the primary beneficiary of a VIE, we consolidate the ~~entity’s financial results into~~entity in our financial statements.

We consolidate the financial results of TRC and Pulmoquine Therapeutics, Inc. (“Pulmoquine”), which we have determined to be VIEs, because we have the power to direct the economically significant activities of these entities and the obligation to absorb losses of, or the right to receive benefits from them, and we are the primary beneficiary of the entities.

Table of Contents

Equity Investments

We invest from time to time in equity securities of private or public companies. If we determine that we have control over these companies under either voting or VIE models, we include them in our consolidated financial statements. If we determine that we do not have control over these companies under either voting or VIE models, we then determine if we have an ability to exercise significant influence via voting interests, board representation or other business relationships.

We may account for the equity investments where we exercise significant influence using either an equity method of accounting or at fair value by electing the fair value option under Accounting Standards Codification ("ASC") Topic 825, Financial Instruments. If the fair value option is applied to an investment that would otherwise be accounted for under the equity method, we apply it to all our financial interests in the same entity (equity and debt, including guarantees) that are eligible items. All gains and losses from fair value changes, unrealized and realized, are presented as changes in fair values of equity and long-term investments, net on the consolidated statements of income.

If we conclude that we do not have an ability to exercise significant influence over an investee, we may elect to account for an equity security without a readily determinable fair value using athe measurement ~~alternative.~~alternative described in ASC Topic 825. This measurement alternative allows us to measure the equity investment at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

As of September 30, 2020, we accounted for our equity investments in common stock and warrants of Armata Pharmaceuticals, Inc. (NYSE American: ARMP) (“Armata ") and Entasis Therapeutics Holdings Inc. (NASDAQ: ETTX) ("Entasis”) 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 ~~June 2016,~~December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. ~~2016-13~~ ~~Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments~~, as clarified in subsequent amendments to the initial guidance (collectively, Topic 326). Topic 326 requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecast. ASC 326 must be adopted using a modified retrospective approach with a cumulative effect adjustment as of the beginning of the reporting period in which the guidance is adopted. Topic 326 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We adopted Topic 326 effective January 1, 2020. The adoption did not have a material impact on our consolidated financial statements.

~~Recently Issued Accounting Standards or Updates Not Yet Adopted~~

~~In December 2019, the FASB issued ASU~~ 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We ~~are currently~~adopted Topic 740 effective January 1, 2021. The adoption did not have a material impact on our consolidated financial statements.

In October 2020, the FASB issued ASU 2020-10, Codification Improvements. This ASU improves the codification by ensuring that all guidance that requires or provides an option for an entity to provide information in the ~~process of evaluating~~notes to financial statements is codified in the ~~effects~~disclosure section of the ~~provisions of~~codification. The ASU ~~2019-12~~also clarifies various topics in the codification so that entities can apply guidance more consistently. The ASU is effective for fiscal years beginning after December 15, 2020. We adopted ASU 2020-10 effective January 1, 2021. The adoption did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Standards or Updates Not Yet Adopted

In August 2020, the FASB issued ASU 2020-06, "Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own ~~Equity"~~Equity, which is intended to simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470-20 ~~Debt-Debt with Conversion and Other Options,~~ for convertible instruments. The ~~pronouncement~~ASU is effective for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years ~~beginning after December 15, 2021,~~ with early adoption permitted. We are currently in the process of evaluating the effects of the provisions of ASU 2020-06 on our consolidated financial statements.

2. Net Income Per Share

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

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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 was lower than the initial conversion price of $17.26 per share, there was 0 dilutive effect of the assumed conversion premium for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively.

The following table shows the computation of basic and diluted net income per share for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
(In thousands except per share data)	2020		2019		2020		2019		2021		2020
Numerator:
Net income attributable to Innoviva stockholders, basic	$	28,218	$	39,809	$	170,499	$	111,339	$	94,123	$	65,437
Add: interest expense on 2023 Notes		1,171		1,157		3,535		3,482		1,204		1,180
Net income attributable to Innoviva stockholders, diluted	$	29,389	$	40,966	$	174,034	$	114,821	$	95,327	$	66,617

Denominator:
Weighted-average shares used to compute basic net income per share attributable to Innoviva stockholders		101,358		101,191		101,306		101,134		101,365		101,235
Dilutive effect of 2023 Notes		12,189		12,189		12,189		12,189		12,189		12,189
Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan		25		35		48		71		70		85
Weighted-average shares used to compute diluted net income per share attributable to Innoviva stockholders		113,572		113,415		113,543		113,394		113,624		113,509

Net income per share attributable to Innoviva stockholders
Basic	$	0.28	$	0.39	$	1.68	$	1.10	$	0.93	$	0.65
Diluted	$	0.26	$	0.36	$	1.53	$	1.01	$	0.84	$	0.59

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 September 30,		Nine Months Ended September 30,		Three Months Ended March 31,
(In thousands)	2020	2019	2020	2019	2021		2020
Outstanding options and awards granted under equity incentive plan and employee stock purchase plan	1,268	1,144	1,172	1,128	$	1,159	$	1,094

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3. Revenue Recognition and Collaborative Arrangements

Net Revenue from Collaborative Arrangements

Net revenue recognized under our GSK Agreements was as follows:

Three Months Ended September 30,

Nine Months Ended September 30,
(In thousands)

2020

2019

2020

2019
Royalties from a related party — RELVAR/BREO

$
63,893

$
46,433

$
165,612

$
136,259
Royalties from a related party — ANORO

11,882

11,548

32,931

30,753
Royalties from a related party — TRELEGY

16,375

11,230

48,143

28,401
Total royalties from a related party

92,150

69,211

246,686

195,413
Less: amortization of capitalized fees paid to a related party

(3,456)

(3,456)

(10,368)

(10,368)
Royalty revenue

88,694

65,755

236,318

185,045
Strategic alliance  — MABA program

0

0

10,000

0
Total net revenue from GSK

$
88,694

$
65,755

$
246,318

$
185,045


	Three Months Ended March 31,
(In thousands)	2021		2020
Royalties from a related party - RELVAR/BREO	$	56,390	$	56,149
Royalties from a related party - ANORO		10,500		9,850
Royalties from a related party - TRELEGY		22,084		16,135
Total royalties from a related party		88,974		82,134
Less: amortization of capitalized fees paid to a related party		(3,456)		(3,456)
Royalty revenue from GSK	$	85,518	$	78,678

During the nine months ended September 30, 2020, we recognized $10.0 million in revenue in connection with the termination of the Bifunctional Muscarinic Antagonist-Beta2 Agonist (“MABA”) program under the Strategic Alliance Agreement with GSK in June 2020.

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4. Consolidated Entities

We consolidate the financial results of TRC and Pulmoquine Therapeutics, Inc. (“Pulmoquine”), which we have determined to be VIEs. As we have the power to direct the economically significant activities of these entities and the obligation to absorb losses of, or the right to receive benefits from them, we are the primary beneficiary of the entities. We also consolidate the financial results of ISP Fund LP (the “Partnership”), our partnership with Sarissa Capital Management LP (“Sarissa Capital”), as we have determined that the Partnership is a VIE and we are its primary beneficiary.

Theravance Respiratory Company, LLC

AsThe primary source of September 30, 2020, and December 31, 2019, $16.4 million and $14.4 million, respectively, of the related party receivables from collaborative arrangements were attributable to TRC. The cash balance attributable to TRC as of September 30, 2020 was $41.4 million. Total revenue for TRC ~~related to~~is the royalties generated from the net sales of TRELEGY^® ELLIPTA^® ~~was $16.4 million~~by GSK. As of March 31, 2021, TRC held equity investments in InCarda Therapeutics, Inc. (“InCarda”) and ~~$11.2 million~~ImaginAb, Inc. (“ImaginAb”). Refer to Note 5, “Financial Instruments and Fair Value Measurements,” for ~~the three months ended September 30, 2020 and 2019, respectively, and $48.1 million and $28.4 million for the nine months ended September 30, 2020 and 2019, respectively. Total revenue~~more information.

The summarized financial information for TRC also included a $10.0 million fee for the termination of the MABA program for the nine months ended September 30, 2020. Total operating expenses were $0.6 million and $1.4 million for the three and nine months ended September 30, 2020, respectively, compared to $2.8 million and $2.9 million for the same periods in 2019.is presented as follows:

Balance sheets


	March 31,		December 31,
(In thousands)	2021		2020
Assets
Cash and cash equivalents	$	28,444	$	38,081
Receivables from collaborative arrangements		22,084		24,946
Prepaid expenses and other current assets		1		0
Equity and long-term investments		22,869		16,959
Total assets		73,398		79,986

Liabilities and LLC Members' Equity
Current liabilities		640		508
LLC members' equity		72,758		79,478
Total liabilities and LLC members' equity	$	73,398	$	79,986

Income statements


	Three Months Ended March 31,
(In thousands)	2021		2020
Royalty revenue from a related party	$	22,084	$	16,135
Operating expenses		3,281		271
Income from operations		18,803		15,864
Other income (expense), net		0		36
Changes in fair values of equity and long-term investments		(483)		0
Net income	$	18,320	$	15,900

Pulmoquine Therapeutics, Inc.

OnIn April ~~20,~~ 2020, we ~~entered into a securities purchase agreement with Pulmoquine to purchase~~purchased 5,808,550 shares of Series A preferred stock of Pulmoquine for $5.0 million in ~~cash. Upon consummation of the transaction, we owned approximately 90.9% of Pulmoquine's outstanding shares (excluding unvested restricted shares)~~cash and ~~hold~~held a majority voting interest. Pulmoquine is a biotechnology company focused on the research and development of an aerosolized formulation of hydroxychloroquine to treat respiratory ~~infections, such as the novel coronavirus (“COVID-19”).~~infections. As of ~~September 30, 2020,~~March 31, 2021, Pulmoquine’s total assets, mainly attributable to ~~Pulmoquine were $4.6 million, including $4.3 million in~~ cash and cash equivalents, ~~and $0.3 million in other current assets.~~were $3.3 million. Pulmoquine does not currently generate revenue. Total operating expense was ~~$1.1 million and $1.7 million~~de minimis for the three ~~and nine~~ months ended ~~September 30, 2020.~~March 31, 2021.

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ISP Fund LP

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

As of March 31, 2021, we held 100% of the economic interest of the Partnership. As of March 31, 2021, total assets of the Partnership were $304.7 million, of which all were attributable to equity and long-term investments. During the three months ended March 31, 2021, the Partnership incurred $0.4 million investment-related expenses, net of investment-related income and recorded an unrealized gain of $5.8 million from the changes of fair value as changes in fair values of equity and long-term investments, net on the consolidated statements of income.

5. Financial Instruments and Fair Value Measurements

Equity Investment in Armata

~~On January 27,~~During the first quarter of 2020, ~~we entered into a securities purchase agreement to acquire~~Innoviva acquired 8,710,800 shares of ~~Armata’s~~ common stock and ~~warrants to purchase up to 8,710,800 additional shares~~an equal number of ~~its common stock~~warrants of Armata Pharmaceuticals, Inc. (“Armata”) for $25.0 million in ~~cash.~~cash. Armata is a clinical stage biotechnology company focused on precisely targeted bacteriophage therapeutics for antibiotic-resistant infections.

On January 26, 2021, Innoviva Strategic Opportunities LLC (“ISO”), our wholly owned subsidiary, 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. The investment iswas closed in 2 tranches on January 26, 2021 and March 17, 2021. The investment continues to support Armata’s ongoing advancement of its bacteriophage development ~~programs including~~programs. The additional investment in the ~~expected~~ first quarter of 2021 increased Innoviva and ISO’s combined ownership to 59.6%. Armata 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 ~~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~~the aggregate, more than 49.5% of ~~our board members joined Armata’s board. After~~ the ~~second closing, we owned approximately 46.7%~~total number of shares of Armata’s common ~~stock.~~stock issued and outstanding as of the record date for voting on the matters related to election or removal of Armata’s board members. Currently, 3 of the 8 members of Armata’s board of directors are also members of the board of directors of Innoviva.

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The investment in Armata provides Innoviva and ISO 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 isand ISO are not the primary beneficiary of the VIE. We ~~elected~~continue to elect the fair value option to account for both Armata’s common stock and warrants. The fair value of Armata’s common stock is measured based on its closing market price. The warrants purchased in 2020 and 2021 have an exercise price of $2.87 and $3.25 per share, respectively, are exercisable immediately within five years from the issuance date of the warrants and include a cashless exercise option. We use the Black-Scholes-Merton pricing model to estimate the fair value of these warrants with the following input assumptions: Armata’s closing market price on the valuation date, the risk-free interest rate computed based on the U.S. Treasury yield, the remaining contractual term as the expected term, and the expected stock price volatility calculated based on the historical volatility of the common stock of Armata and its peer companies.

As of ~~September 30,~~March 31, 2021, the fair values of Armata’s common stock and warrants were estimated at $71.1 million and $54.2 million, respectively. As of December 31, 2020, the fair values of Armata’s common stock and warrants were estimated at ~~$27.8~~$26.0 million and ~~$20.2~~$18.0 million, respectively. The total fair value of both financial instruments in the amount of ~~$48.0~~$125.3 million and $44.0 million was recorded as equity and long-term investments on the consolidated balance sheets as of ~~September 30, 2020. We recorded $12.4 million in unrealized loss~~March 31, 2021 and ~~$23.0 million in unrealized gain from fair value~~December 31, 2020, respectively. The changes in ~~Armata’s investments~~the fair values in the amount of $61.2 million and $21.9 million for the three months ended March 31, 2021 and 2020, respectively, were recorded as changes in fair ~~values~~value of equity and long-term investments, net on the consolidated statements of ~~income for the three and nine months ended September 30, 2020, respectively.~~income.

Equity Investment in Entasis

~~On April 12,~~During the second quarter of 2020, we ~~entered into a securities purchase agreement with Entasis (“April 2020 Entasis Agreement”) to purchase~~purchased 14,000,000 shares of ~~Entasis~~ common stock as well as warrants to purchase 14,000,000 additional shares of ~~its~~ common stock of Entasis Therapeutics, Inc. (“Entasis”) for approximately $35.0 million in cash. Entasis is a clinical-stage biotechnology company focused on the discovery and development of novel antibacterial products. ~~The investment is to support Entasis's ongoing advancement~~

Table of ~~its pathogen-targeted antibacterial product candidates, which include their global Phase 3 registration trial evaluating a fixed-dose combination~~Contents

During the third quarter of ~~sulbactam and durlobactam (SUL-DUR) against~~ ~~Acinetobacter baumanii~~ ~~infections.~~

The investment was closed in 2 tranches on April 22, 2020 and June 11, 2020. Innoviva has a right to designate 2 members to Entasis's board. After the second closing, we owned approximately 51.3% of Entasis's common stock.

~~On August 27,~~ 2020, we ~~entered into another securities purchase agreement with Entasis ("August 2020 Entasis Agreement") to purchase~~purchased 4,672,897 shares of Entasis common stock as well as warrants to purchase 4,672,897 additional shares of its common stock for approximately $12.5 million in cash. ~~On September 1, 2020,~~Innoviva has a right to designate 2 members to Entasis’ board. As of March 31, 2021 and the date hereof, 0 Innoviva designees are serving on Entasis’ six-member board. As of March 31, 2021, we ~~completed the purchase and increased our ownership in Entasis's~~owned approximately 51.0% of Entasis’s common ~~stock to 52.6%.~~stock.

The investment in Entasis provides Innoviva the ability to have significant influence, but not control over ~~Entasis's~~Entasis’ operations. Based on our evaluation, we determined that Entasis is a VIE, but Innoviva is not the primary beneficiary of the VIE. We elected the fair value option to account for both Entasis's common stock and warrants at fair value. The fair value of Entasis's common stock is measured based on its closing market price at each balance sheet date. The warrants have an exercise price of $2.50 per share ~~under~~for those warrants acquired in the ~~April~~ second quarter of 2020 ~~Entasis Agreement~~ and an exercise price of $2.675 ~~under~~per share for the ~~August 2020 Entasis Agreement.~~warrants acquired in the third quarter of 2020. The warrants are exercisable immediately within five years from the issuance date of the warrants and include a cashless exercise option. We use the Black-Scholes-Merton pricing model to estimate the fair value of these warrants.

As of March 31, 2021, the fair values of Entasis’s common stock and warrants were estimated at $40.0 million and $26.6 million, respectively. As of December 31, 2020, the fair values of Entasis’s common stock and warrants were estimated at $46.1 million and $31.9 million, respectively. The total fair value of both financial instruments in the amount of $66.6 million and $78.0 million was recorded as equity and long-term investments on the consolidated balance sheets as of March 31, 2021 and December 31, 2020, respectively. We recorded $11.5 million unrealized loss from the changes of fair value as changes in fair values of equity and long-term investments, net on the consolidated statements of income for the three months ended March 31, 2021.

Equity Investment in InCarda

In October, 2020, TRC purchased 20,469,432 shares of Series C preferred stock and warrants to purchase 5,117,358 additional shares of Series C preferred stock of InCarda Therapeutics, Inc. for $15.0 million. $0.8 million was incurred for investment due diligence costs and recorded as part of the equity investment on the consolidated balance sheets. InCarda is a privately held biopharmaceutical company focused on developing inhaled therapies for cardiovascular diseases. As of March 31, 20201 and as of the date hereof, 1 of InCarda’s 8 board members is designated by TRC. As of March 31, 2021, TRC held 13.0% of InCarda‘s outstanding equity.

The investment in InCarda does not provide TRC the ability to control or have significant influence over InCarda's operations. Based on our evaluation, we determined that InCarda is a VIE, but TRC is not the primary beneficiary of the VIE. We account for our investment in the Series C preferred shares in InCarda using the measurement alternative. Under the measurement alternative, the equity investment is initially recorded at its allocated cost, but the carrying value may be adjusted through earnings upon an impairment or when there is an observable price change involving the same or a similar investment with the same issuer. The warrants are recorded at fair value and subject to remeasurement at each balance sheet date. The warrants are exercisable immediately with an exercise price of $0.7328 per share and expire on October 6, 2021, one year from the issuance date. We use the Black-Scholes-Merton pricing model to estimate the fair value of the warrants with the following input assumptions: ~~Entasis's closing market~~the exercise price onof the ~~valuation date,~~warrants, 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 ~~Entasis and~~ its peer companies.

As of ~~September 30,~~March 31, 2021 and December 31, 2020, the fair ~~values~~value of ~~Entasis's common stock and~~InCarda’s warrants ~~were~~was estimated at ~~$38.1~~$0.7 million and ~~$25.7~~$1.1 million, ~~respectively. The total fair value of both financial instruments in the amount of $63.8 million was~~respectively, and recorded as equity and long-term investments on the consolidated balance sheets. We recorded ~~$17.0~~$0.5 million in unrealized loss ~~and $16.3 million in unrealized gain~~ from the changes of fair value ~~changes in Entasis's investments~~ as changes in fair values of equity and long-term investments, net on the consolidated statements of income for the three ~~and nine~~ months ended ~~September 30, 2020, respectively.~~March 31, 2021. There was 0 impairment or other change to the value of InCarda’s Series C preferred stock of $15.8 million as of March 31, 2021.

Equity Investment in ImaginAb

On March 18, 2021, TRC entered into a securities purchase agreement with ImaginAb, Inc. to purchase 4,051,724 shares of ImaginAb Series C preferred stock for $4.7 million. On the same day, TRC also entered into a securities purchase agreement with one of ImaginAb’s common stockholders to purchase 4,097,157 shares of ImaginAb common stock for $1.3 million. ImaginAb is a privately held biotechnology company focused on clinically managing cancer and autoimmune diseases via molecular imaging. $0.4 million was incurred for investment due diligence costs and execution and recorded as part of the equity investment on the consolidated balance sheets. As of the date hereof, 1 of ImaginAb’s 7 board members is designated by TRC. As of March 31, 2021, TRC held 13.0% of ImaginAb equity ownership.

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The investment in ImaginAb does not provide TRC the ability to control or have significant influence over ImaginAb’s operations. Based on our evaluation, we determined that ImaginAb is a VIE, but TRC is not the primary beneficiary of the VIE. Because ImaginAb’s equity securities are not publicly traded and do not have a readily determinable fair value, we have accounted for our investment in ImaginAb’s Series C preferred stock and common stock using the measurement alternative. Under the measurement alternative, the equity investment is initially recorded at its allocated cost, but the carrying value may be adjusted through earnings upon an impairment or when there is an observable price change involving the same or a similar investment with the same issuer. As of March 31, 2021, $6.4 million was recorded as equity and long-term investments on the consolidated balance sheets.

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:


	September 30, 2020								March 31, 2021
			Gross		Gross						Gross		Gross
			Unrealized		Unrealized		Estimated				Unrealized		Unrealized		Estimated
(In thousands)	Amortized Cost		Gains		Losses		Fair Value		Amortized Cost		Gains		Losses		Fair Value
Money market funds(1)	$	430,144	$	0	$	0	$	430,144	$	248,932	$	0	$	0	$	248,932
Total	$	430,144	$	0	$	0	$	430,144	$	248,932	$	0	$	0	$	248,932

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


	December 31, 2019								December 31, 2020
			Gross		Gross						Gross		Gross
			Unrealized		Unrealized		Estimated				Unrealized		Unrealized		Estimated
(In thousands)	Amortized Cost		Gains		Losses		Fair Value		Amortized Cost		Gains		Losses		Fair Value
U.S. government securities	$	53,799	$	35	$	0	$	53,834
U.S. commercial paper		18,915		0		0		18,915
Money market funds		233,992		0		0		233,992
Money market funds ⁽¹⁾									$	204,808	$	0	$	0	$	204,808
Total	$	306,706	$	35	$	0	$	306,741	$	204,808	$	0	$	0	$	204,808

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

~~As of September 30, 2020, all investments were~~

There was no credit loss to the money market ~~funds. There was 0 credit loss~~funds as of ~~September 30, 2020.~~March 31, 2021.

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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 September 30, 2020 Using:								Estimated Fair Value Measurements as of March 31, 2021 Using:
	Quoted Price		Significant						Quoted Price		Significant
	in Active		Other		Significant				in Active		Other		Significant
	Markets for		Observable		Unobservable				Markets for		Observable		Unobservable
Types of Instruments	Identical Assets		Inputs		Inputs				Identical Assets		Inputs		Inputs
(In thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	430,144	$	0	$	0	$	430,144	$	248,932	$	0	$	0	$	248,932
Investments held by ISP Fund LP ⁽¹⁾										304,696		0		0		304,696
Equity investment - Armata Common Stock		27,787		0		0		27,787		71,053		0		0		71,053
Equity investment - Armata Warrants		0		20,167		0		20,167		0		54,166		0		54,166
Equity investment - Entasis Common Stock		38,093		0		0		38,093		39,960		0		0		39,960
Equity investment - Entasis Warrants		0		25,698		0		25,698		0		26,580		0		26,580
Equity investment - InCarda Warrants										0		0		664		664
Total assets measured at estimated fair value	$	496,024	$	45,865	$	0	$	541,889	$	664,641	$	80,746	$	664	$	746,051
Debt
2023 Notes	$	0	$	230,494	$	0	$	230,494	$	0	$	242,336	$	0	$	242,336
2025 Notes		0		191,491		0		191,491		0		203,513		0		203,513
Total fair value of debt	$	0	$	421,985	$	0	$	421,985	$	0	$	445,849	$	0	$	445,849

(1)	The investments, which consisted of equity investments of $130.5 million and money market funds of $174.2 million, held by ISP Fund LP were subject to a 36-month lock-up period from our initial contribution date, December 11, 2020.


	Estimated Fair Value Measurements as of December 31, 2019 Using:								Estimated Fair Value Measurements as of December 31, 2020 Using:
	Quoted Price		Significant						Quoted Price		Significant
	in Active		Other		Significant				in Active		Other		Significant
	Markets for		Observable		Unobservable				Markets for		Observable		Unobservable
Types of Instruments	Identical Assets		Inputs		Inputs				Identical Assets		Inputs		Inputs
(In thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
U.S. government securities	$	0	$	53,834	$	0	$	53,834
U.S. commercial paper		0		18,915		0		18,915
Money market funds		233,992		0		0		233,992	$	204,808	$	0	$	0	$	204,808
Investments held by ISP Fund LP ⁽¹⁾										299,288		0		0		299,288
Equity investment - Armata Common Stock										25,958		0		0		25,958
Equity investment - Armata Warrants										0		18,049		0		18,049
Equity investment - Entasis Common Stock										46,122		0		0		46,122
Equity investment - Entasis Warrants										0		31,882		0		31,882
Equity investment - InCarda Warrants										0		0		1,147		1,147
Total assets measured at estimated fair value	$	233,992	$	72,749	$	0	$	306,741	$	576,176	$	49,931	$	1,147	$	627,254
Debt
2023 Notes	$	0	$	243,394	$	0	$	243,394	$	0	$	239,779	$	0	$	239,779
2025 Notes		0		208,976		0		208,976		0		206,135		0		206,135
Total fair value of debt	$	0	$	452,370	$	0	$	452,370	$	0	$	445,914	$	—	$	445,914

(1)	The investments, which consisted of equity investments of $14.5 million and money market funds of $284.8 million, held by ISP Fund LP were subject to a 36-month lock-up period from our initial contribution date, December 11, 2020.

The fair ~~value~~values of our ~~marketable securities~~equity investments in Armata and Entasis's common stock and those investments held by ISP Fund LP are based on the quoted prices in active markets and are classified as Level 1 financial instruments. The fair values of the warrants of Armata and Entasis classified within Level 2 isare 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 values of our equity investments in Armata and Entasis's common stock are based on their respective closing market prices per share at the reporting date and are classified as Level 1 financial instruments. The fair values of our equity investments in Armata and Entasis's warrants are included within Level 2 as the assumptions used in the valuation model are based on the observable inputs that include their respective closing market prices per share, their respective comparable companies’ market data and the 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.~~

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~~6. Stock-Based Compensation~~

~~Stock-based compensation expense~~The fair value of InCarda’s warrants is ~~included~~classified as Level 3 financial instruments as InCarda’s securities are not publicly traded and the assumptions used in the ~~consolidated statements~~valuation model are based on significant unobservable and observable inputs including those of ~~income as follows:~~publicly traded peer companies.

Three Months Ended September 30,

Nine Months Ended September 30,
(In thousands)

2020

2019

2020

2019
General and administrative

$
441

$
489

$
1,251

$
1,568

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

6. Stock-Based Compensation

Stock- Based Compensation Expense

Stock-based compensation expense was included in the consolidated statements of income as follows:


	Three Months Ended March 31,
(In thousands)	2021		2020
General and administrative	$	451	$	435

Valuation Assumptions

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


	Three Months Ended
	March 31, 2021
Risk-free interest rate		1.1	%
Expected term (in years)		6.11
Volatility		45.6	%
Dividend yield		0.0	%
Weighted-average estimated fair value of stock options granted	$	5.42

There were 0 grants of stock options during the three months ended March 31, 2020.

7. Debt

Our debt consists of:


	September 30,		December 31,		March 31,		December 31,
(In thousands)	2020		2019		2021		2020
2023 Notes	$	240,984	$	240,984	$	240,984	$	240,984
2025 Notes		192,500		192,500		192,500		192,500
Total debt		433,484		433,484		433,484		433,484
Unamortized debt discount and issuance costs		(50,134)		(56,364)		(45,756)		(47,967)
Net long-term debt	$	383,350	$	377,120	$	387,728	$	385,517

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:~~

September 30,

December 31,
(In thousands)

2020

2019
Liability component


Principal

$
192,500

$
192,500
Debt discount and issuance costs, net

(48,788)

(54,597)
Net carrying amount

$
143,712

$
137,903
Equity component, net

$
65,361

$
65,361

~~The following table sets forth total interest expense recognized related to the 2025 Notes for the three and nine months ended September 30, 2020 and 2019:~~

Three Months Ended September 30,

Nine Months Ended September 30,
(In thousands)

2020

2019

2020

2019
Contractual interest expense

$
1,203

$
1,203

$
3,609

$
3,609
Amortization of debt issuance costs

152

139

446

408
Amortization of debt discount

1,828

1,673

5,363

4,909
Total interest and amortization expense

$
3,183

$
3,015

$
9,418

$
8,926

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Our outstanding 2025 Notes balances consisted of the following:


	March 31,		December 31,
(In thousands)	2021		2020
Liability component
Principal	$	192,500	$	192,500
Debt discount and issuance costs, net		(44,697)		(46,766)
Net carrying amount	$	147,803	$	145,734
Equity component, net	$	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, 2021 and 2020:


	Three Months Ended March 31,
(In thousands)	2021		2020
Contractual interest expense	$	1,203	$	1,203
Amortization of debt issuance costs		159		145
Amortization of debt discount		1,911		1,749
Total interest and amortization expense	$	3,273	$	3,097

Debt Maturities

The aggregate scheduled maturities of our long-term debt as of ~~September 30, 2020, are~~March 31, 2021 were as follows:


(In thousands)
Years ending December 31:
2020 to 2022	$	0
2021 to 2022			$	0
2023		240,984		240,984
2024		0		0
Thereafter		192,500
2025				192,500
Total	$	433,484	$	433,484

8. Commitments and Contingencies

Operating Lease

Future minimum operating lease payments on our corporate headquarters as of ~~September 30, 2020 are~~March 31, 2021 were as follows:


(In thousands)
Years ending December 31:
Remainder of 2020	$	30
2021		123
Remainder of 2021			$	92
2022		109		109
2023				0
Thereafter		0		0
Total	$	262	$	201

Legal Proceedings

From time to time, the Company is involved in legal proceedings in the ordinary course of its business. Currently, we believe that no litigation or arbitration, either individually or in the aggregate, to which we are presently a party is likely to have a material adverse effect on our operating results or financial position.

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9. Income Taxes

Provisional income tax expense for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020 was ~~$8.9~~$19.7 million and ~~$44.7~~$15.9 million, ~~respectively, compared to $10.6 million and $29.5 million for the same periods in 2019~~ respectively. The Company’s effective income tax rate for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 was ~~17%~~15.2%, compared to ~~18%~~16.8% for the same period in ~~2019.~~2020. The ~~difference between~~income tax expense for the ~~Company’s~~three months ended March 31, 2021 and 2020 was determined based upon estimates of the Company's effective income tax rates in various jurisdictions. Our effective income tax rate ~~and~~for the three months ended March 31, 2021 was lower than the U.S. federal statutory income tax rate of 21% isdue primarily ~~attributable~~ to ~~state income tax,~~ non-deductible expenses and noncontrolling interest.

~~10. Subsequent Events~~

~~In early October 2020, TRC invested $15.0 million in the equity securities of a privately held biopharmaceutical company.~~

1718

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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; substantial competition from products discovered, developed, launched and commercialized both by GSK and by other pharmaceutical companies; the strategies, plans and objectives of the Company ~~(including~~(related to the Company’s growth strategy and corporate development initiatives beyond the Company’s existing ~~respiratory~~ portfolio); the timing, manner and amount of capital deployment, including potential capital returns to stockholders; risks related to 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;Company’s growth strategy; projections of revenue, expenses and other financial ~~items; the impact of the COVID-19 pandemic;~~items 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, ~~2019~~2020 filed with the Securities and Exchange Commission (“SEC”) on February ~~19,~~ 25, 2021, (“2020 ~~and as amended on February 21, 2020 (“2019~~ 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 ~~2019~~2020 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 ~~2019~~2020 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.

1819

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OVERVIEW

Executive Summary

Innoviva, Inc. (“Innoviva”, the “Company”, the “Registrant” or “we” and other similar pronouns) is a company with a portfolio of royalties ~~that includes~~and other healthcare assets. Our royalty portfolio contains 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 ~~TRC,~~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 partnered with GSK, ~~the commercial~~optimizing our operations 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 September 30, 2020, we had five employees.augmenting capital allocation. Our revenues consist of royalties ~~and potential milestone payments, if any,~~ from our respiratory partnership agreements with GSK.

~~Table of Contents~~

Recent Highlights

●

GSK Net Sales:

~~Third~~First quarter ~~2020~~2021 net sales of RELVAR^®/BREO^® ELLIPTA^® by GSK were ~~$426.0~~$375.9 million, up ~~38%~~slightly from ~~$309.5~~$374.3 million in the ~~third~~same quarter of ~~2019,~~2020, with ~~$219.2~~$154.6 million in net sales from the U.S. market and ~~$206.8~~$221.3 million from non-U.S. markets.

~~Third~~First quarter ~~2020~~2021 net sales of ANORO^® ELLIPTA^® by GSK were ~~$182.8~~$161.5 million, up 3%7% from ~~$177.7~~$151.6 million in the ~~third~~same quarter of ~~2019,~~2020, with ~~$111.5~~$88.4 million net sales from the U.S. market and ~~$71.3~~$73.1 million from non-U.S. markets.

~~Third~~First quarter ~~2020~~2021 net sales of TRELEGY^® ELLIPTA^® by GSK were ~~$251.9~~$339.8 million, up ~~46%~~37% from ~~$172.8~~$248.2 million in the ~~third~~same quarter of ~~2019,~~2020, with ~~$165.3~~$237.5 million in net sales from the U.S. market and ~~$86.6~~$102.3 million in net sales from non-U.S. markets.

●

Capital Allocation:

During the ~~third~~first quarter of ~~2020,~~2021, the ~~Company~~Company’s wholly owned subsidiary, Innoviva Strategic Opportunities LLC, invested ~~an additional $12.5~~$20.0 million ~~in 4.7~~to acquire 6.2 million shares of ~~Entasis's~~Armata's common stock and warrants to purchase up to an additional ~~4.7~~6.2 million shares of the common stock at ~~$2.675~~$3.25 per share. With this additional investment, Innoviva collectively owned approximately ~~52.6%~~59.6% of ~~Entasis's~~Armata's common stock as of ~~September 30, 2020. Innoviva has a right to designate two members to Entasis's board.~~March 31, 2021.

●

New Director:

On March 9, 2021, the Company appointed Deborah L. Birx, M.D., to its Board of Directors, where she serves as an independent director. Dr. Birx is a world renowned medical expert and leader who most recently served as the response coordinator of the White House Coronavirus Task Force. Dr. Birx’s career highlights also include having served as Ambassador-at-Large, when she assumed the role of the Coordinator of the United States Government Activities to Combat HIV/AIDS and U.S. Special Representative for Global Health Diplomacy. Dr. Birx also served as the U.S. Global AIDS Coordinator where she oversaw the President’s Emergency Plan for AIDS Relief (PEPFAR) at the Centers for Disease Control and Prevention and as the Director of the U.S. Military HIV Research Program (USMHRP) at the Walter Reed Army Institute of Research.

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Collaborative Arrangements with GSK

LABA Collaboration

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

●

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. 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 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 was funded in full by GSK. In June of 2020, GSK terminated the program and agreed to pay a $10.0 million termination fee to TRC. This fee was recognized as revenue from collaborative arrangements with a related party on our consolidated statements of income for the nine months ended September 30, 2020.

~~Table of Contents~~

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.

As part of our capital allocation strategies, we invest from time to time in equity securities of private or public companies. We also enter into strategic partnerships in order to accelerate the execution of our strategy and enhance returns on our capital. If we determine that we have control over these companies or partnerships, we consolidate the financial statements of these companies or partnerships. If we determine that we do not have control over these companies or partnerships 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.~~option under Accounting Standards Codification ("ASC") Topic 825, Financial Instruments. If the fair value option is applied to an investment that would otherwise be accounted for under the equity method, we apply it to all our financial interests in the same entity (equity and debt, including guarantees) that are eligible items. All gains and losses from fair value changes, unrealized and realized, are presented as changes in fair values of equity and long-term investments, net on the consolidated statements of income.

If we conclude that we do not have an ability to exercise significant influence over an investee, we may elect to account for an equity security without a readily determinable fair value using athe measurement ~~alternative.~~alternative as prescribed by ASC Topic 825. This measurement alternative allows us to measure the equity investment at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

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, ~~2019~~2020 filed with the SEC on February ~~19, 2020, and as amended on February 21, 2020~~25, 2021 provides a more complete discussion of our critical accounting policies and estimates.

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Results of Operations

Net Revenue

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

Three Months Ended September 30,

Change

Nine Months Ended September 30,

Change

(In thousands)

2020

2019

$

%

2020

2019

$

%

Royalties from a related party - RELVAR/BREO

$
63,893

$
46,433

$
17,460

38
%
$
165,612

$
136,259

$
29,353

22
%
Royalties from a related party - ANORO

11,882

11,548

334

3
%

32,931

30,753

2,178

7
%
Royalties from a related party - TRELEGY

16,375

11,230

5,145

46
%

48,143

28,401

19,742

70
%
Total royalties from a related party

92,150

69,211

22,939

33
%

246,686

195,413

51,273

26
%
Less: amortization of capitalized fees paid to a related party

(3,456)

(3,456)

—

0
%

(10,368)

(10,368)

—

0
%
Royalty revenue

88,694

65,755

22,939

35
%

236,318

185,045

51,273

28
%
Strategic alliance -MABA program

—

—

—

*

10,000

—

10,000

*

Total net revenue from GSK

$
88,694

$
65,755

$
22,939

35
%
$
246,318

$
185,045

$
61,273

33
%


	Three Months Ended March 31,				Change
(In thousands)	2021		2020		$		%
Royalties from a related party - RELVAR/BREO	$	56,390	$	56,149	$	241	0	%
Royalties from a related party - ANORO		10,500		9,850		650	7	%
Royalties from a related party - TRELEGY		22,084		16,135		5,949	37	%
Total royalties from a related party		88,974		82,134		6,840	8	%
Less: amortization of capitalized fees paid to a related party		(3,456)		(3,456)		—	0	%
Royalty revenue from GSK	$	85,518	$	78,678	$	6,840	9	%

* Not Meaningful

Total net revenue increased to ~~$88.7 million and $246.3~~$85.5 million for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, compared to ~~$65.8~~$78.7 million ~~and $185.0 million, respectively,~~ for the same period a year ~~ago. Royalties for RELVAR~~^®~~/BREO~~^® ~~ELLIPTA~~^® ~~increased~~ago primarily due to favorable adjustments ~~from better than expected pricing~~ and ~~continued volume growth in both U.S. and non-U.S. markets. ANORO~~^® ~~ELLIPTA~~^® ~~maintained its steady volume growth, offset by~~ the ~~increasing pricing pressure in the U.S. Royalties for TRELEGY~~^® ~~ELLIPTA~~^® ~~were higher due to the continued~~ growth in prescriptions ~~and market share.~~for our respiratory products.

~~Table of Contents~~

Research & Development

Research and development (“R&D”) expenses ~~of $1.0 million and $1.6 million for the three and nine months ended September 30, 2020 were~~ attributable to Pulmoquine’s product development ~~efforts.~~efforts were de minimis for the three months ended March 31, 2021. We did not incur any R&D expenses during the three months ended March 31, 2020.

General & Administrative

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


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change				Three Months Ended March 31,				Change
(In thousands)	2020		2019		$		%		2020		2019		$		%		2021		2020		$		%
General and administrative expenses	$	3,254	$	4,962	$	(1,708)	(34)	%	$	8,413	$	12,324	$	(3,911)	(32)	%
General and administrative																	$	5,986	$	2,563	$	3,423	*

*Not Meaningful

General and administrative expenses for the three ~~and nine~~ months ended ~~September 30, 2020 decreased~~March 31, 2021 increased compared to the same ~~periods~~period in ~~2019, attributable~~2020 mainly due to ~~overall lower operating expenses incurred. The amount for the three months ended September 30, 2019 includes $2.8~~$3.1 million legal and related ~~fees~~expenses incurred for the arbitration initiated by Theravance Biopharma against the Company and TRC. These arbitration related legal fees were recognized in TRC’s statement of income.

Other Income, net and Interest Income

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


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change				Three Months Ended March 31,				Change
(In thousands)	2020		2019		$		%		2020		2019		$		%		2021		2020		$		%
Other income (expense), net	$	(13)	$	(115)	$	102	(89)	%	$	85	$	(122)	$	207	*		$	(433)	$	68	$	(501)	*
Interest income		41	$	1,624		(1,583)	(97)	%		1,501	$	4,002		(2,501)	(62)	%	$	30	$	1,302	$	(1,272)	(98)	%

*Not Meaningful

Interest income decreased for the three ~~and nine~~ months ended ~~September 30, 2020, as~~March 31, 2021 compared to the same ~~periods~~period a year ago primarily due to lower interest rates impacted by the COVID-19 pandemic.

~~Interest Expense~~

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

Three Months Ended September 30,

Change

Nine Months Ended September 30,

Change

(In thousands)

2020

2019

$

%

2020

2019

$

%

Interest expense

$
4,603

$
4,693

$
(90)

(2)
%
$
13,680

$
13,971

$
(291)

(2)
%

~~Interest expense decreased slightly for the three and nine months ended September 30, 2020, compared to the same periods a year ago primarily due to the lower average outstanding debt balance.~~

~~Changes in Fair Values of Equity Investments~~

The decrease in fair values of equity investments of $29.4 million was mainly due to the lower stock prices of our invested companies, Armata Pharmaceuticals Inc. ("Armata") and Entasis Therapeutics Holdings, Inc. ("Entasis") as of September 30, 2020, compared to the stock prices at the previous quarter ended June 30, 2020. For the nine ended September 30, 2020, the changes in the fair values of equity investments of $39.2 million represent the net unrealized gains of our investments in Armata and Entasis.

As of September 30, 2020, the total fair value of Armata’s common stock and warrants that we own was estimated at $48.0 million. We recorded $12.4 million in unrealized loss and $23.0 million in unrealized gain from fair value changes and presented it in the changes in fair values of equity investments on the consolidated statements of income for the three and nine months ended September 30, 2020, respectively.

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AsInterest Expense

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


	Three Months Ended March 31,				Change
(In thousands)	2021		2020		$		%
Interest expense	$	4,694	$	4,516	$	(178)	4	%

Interest expense includes the amortization of ~~September 30, 2020,~~debt discount and issuance costs for our convertible notes. The increase in interest expense was mainly due to more debt discount and issuance costs being recognized through amortization.

Changes in Fair Values of Equity and Long-Term Investments

Changes in fair values of equity and long-term investments, as compared to the total fair value of Entasis’s common stock and warrants was estimated at $63.8 million. We recorded $17.0 million in unrealized loss and $16.3 million in unrealized gain from fair value changes and presented it in theprior year period, were as follows:


	Three Months Ended March 31,				Change
(In thousands)	2021		2020		$		%
Changes in fair values of equity and long-term investments	$	55,045	$	21,915	$	33,130	*

*Not Meaningful

The changes in fair values of $55.0 million for the quarter ended March 31, 2021 reflect the net unrealized gain in the stock and warrants of our investments in Armata, Entasis, and InCarda, and those equity investments ~~on the consolidated statements~~managed by ISP Fund LP. The changes in fair value of ~~income~~$21.9 million for the ~~three and nine months~~quarter ended ~~September 30,~~March 31, 2020 ~~respectively.~~reflect the net changes in our initial investment in Armata.

Provision for Income Taxes

The provisional income tax expense for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 was ~~$8.9 million and $44.7~~$19.7 million with an effective income tax rate of ~~17%~~15.2%, ~~respectively,~~ compared to ~~$10.6~~$15.9 million ~~and $29.5 million, respectively,~~ with an effective interest rate of ~~18%~~16.8% in the same period a year ago. The difference between the Company's effective income tax rate and the U.S. federal statutory income tax rate of 21% is primarily attributable to state income tax, non-deductible expenses and noncontrolling interests.

Net Income Attributable to Noncontrolling Interest

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

Three Months Ended September 30,

Change

Nine Months Ended September 30,

Change
(In thousands)

2020

2019

$

%

2020

2019

$

%
Net income attributable to noncontrolling interest

$
13,403

$
7,242

$
6,161

85
%
$
48,299

$
21,792

$
26,507

*


	Three Months Ended March 31,				Change
(In thousands)	2021		2020		$		%
Net income attributable to noncontrolling interest	$	15,572	$	13,515	$	2,057	15	%

* Not Meaningful

This represents the 85% share of net income in Theravance Respiratory Company, LLC for Theravance Biopharma for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020. 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 ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, we generated gross royalty revenues from GSK of ~~$246.7 million and a $10.0 million fee from the termination of the MABA program.~~$89.0 million. Net cash and cash equivalents, short term investments and marketable securities totaled ~~$479.2~~$282.9 million, and receivables from GSK totaled ~~$92.2~~$89.0 million as of ~~September 30, 2020.~~March 31, 2021.

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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 allowable with the terms of our debt agreements.

Cash Flows

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


	Nine Months Ended September 30,						Three Months Ended March 31,
(In thousands)	2020		2019		Change		2021		2020		Change
Net cash provided by operating activities	$	227,833	$	190,553	$	37,280	$	84,107	$	73,481	$	10,626
Net cash provided by (used in) investing activities		544		(69,997)		70,541		(26,394)		16,044		(42,438)
Net cash used in financing activities		(27,280)		(10,027)		(17,253)		(21,310)		(15,640)		(5,670)

Cash Flows from Operating Activities

Net cash provided by operating activities for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 was ~~$227.8~~$84.1 million, consisting primarily of our net income of ~~$218.8~~$109.7 million, adjusted for net non-cash items such as ~~$44.7~~$19.7 million of deferred income taxes and ~~$10.4~~$3.5 million of depreciation and amortization, partially offset by ~~$39.2~~$54.7 million increase in the fair values of our equity investments, ~~and $12.7 million~~an increase in receivables from collaborative ~~arrangements.~~arrangements of $5.0 million and a reduction in accrued interest payable of $2.5 million.

Net cash provided by operating activities for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 was ~~$190.6~~$73.5 million, consisting primarily of our net income of ~~$133.1~~$79.0 million, adjusted for net non-cash items ~~such as $29.5~~of $0.4 million, ~~of deferred income taxes, $10.4 million of depreciation and amortization and $5.8 million amortization of debt discount and issuance costs, as well as a decrease~~an increase in receivables from collaborative arrangements of ~~$14.1~~$2.7 million and a reduction in accrued interest payable of $2.5 million.

Cash Flows from Investing Activities

Net cash used in investing activities for the three months ended March 31, 2021 of $26.4 million was primarily due to our investments in Armata and ImaginAb.

Net cash provided by investing activities for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 of ~~$0.5~~$16.0 million was primarily due to ~~$86.0~~$54.0 million received from maturities of marketable securities, partially offset by $12.9 million in purchases of marketable securities and ~~$72.5~~$25.0 million for our investments in ~~Armata and Entasis.~~

Net cash used in investing activities for the nine months ended September 30, 2019 of $70.0 million was primarily due to $230.9 million in purchases of marketable securities, partially offset by $160.9 million proceeds received from maturities of marketable securities.Armata.

Cash Flows from Financing Activities

Net cash used in financing activities for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 of ~~$27.3~~$21.3 million was primarily due to ~~$28.0 million in~~ distributions to noncontrolling interest.

Net cash used in financing activities for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 of ~~$10.0~~$15.6 million was primarily due to ~~$10.6~~$15.8 million in distributions to noncontrolling interest.

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~~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. This lease concluded in May 2020, and we have no further obligations for the lease.

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, ~~2019.~~2020.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

We conducted an evaluation as of ~~September 30, 2020,~~March 31, 2021, 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 Chief Executive Officer and Chief Accounting Officer, concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance levels.

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

Internal control measures have been designed and continually evaluated for our equity investment and capital allocation process since our initial investment occurred in the first quarter ended March 31, 2020. There have been no ~~other~~ material changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended ~~September 30, 2020~~March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. LegalProceedings

In May 2019, Theravance Biopharma, which 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 (if those opportunities related to TRELEGY^® ELLIPTA^®). 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 (“Court of Chancery”) to confirm the arbitration award. The award was confirmed by the Court of Chancery on May 4, 2020.

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On July 16, 2020, Innoviva and TRC initiated a lawsuit in the Court of Chancery against Theravance Biopharma, seeking a permanent injunction preventing Theravance Biopharma from interfering with Innoviva's ability to cause TRC to reserve cash to pursue non-Trelegy related investments opportunities and a declaration that the arbitration award conclusively established that Innoviva, as manager of TRC, has such authority. The Court of Chancery directed the parties to obtain the arbitrator's opinion as to whether the arbitration award addressed non-Trelegy related investment opportunities. On July 31, 2020, the arbitrator, while reiterating that Innoviva has broad authority as manager of TRC, found that ~~his~~this award did not specifically address this situation. Accordingly, on August 5, 2020, the parties stipulated to the dismissal of the Court of Chancery action.

On October 6, 2020, Theravance Biopharma initiated a new arbitration against the Company and TRC, challenging Innoviva’s authority as manager of TRC to cause TRC to pursue non-Trelegy related investment opportunities and again alleging that Innoviva is required to cause TRC to distribute substantially all royalty proceeds from GSK. AnThe hearing in respect of the arbitration ~~hearing~~was conducted from February 16, 2021 through February 19, 2021. Post-arbitration oral argument was heard on March 8, 2021. On March 30, 2021, the arbitrator issued a final decision. The arbitrator ruled that Innoviva did not breach the Operating Agreement or its fiduciary duties by withholding royalties to pursue non-Trelegy-related investment opportunities. Additionally, the arbitrator ruled that the Company is ~~scheduled~~entitled to indemnification from TRC for 100% of its fees and expenses reasonably incurred in connection with the ~~first quarter of 2021.~~arbitration.

~~The~~On April 15, 2021, the Company ~~intends to vigorously defend against the allegations~~filed a Verified Complaint in the ~~new~~Court of Chancery to confirm the arbitration ~~demand, but there can be no assurances that~~award. Theravance Biopharma must respond to the ~~defense will be successful.~~Verified Complaint by May 19, 2021.

Item 1A. Risk Factors

Our business is subject to a number of risks, including those ~~previously reported~~identified in Item 1A of Part I of our ~~2019~~2020 Form 10-K and in Item 1A of Part II of our Form 10-Q for the three months ended March 31, 2020 (the "Q1 10-Q"). Except for the risk factors set forth in the Q1 10-Q and as set forth under “Item 1. Legal Proceedings” above, there10-K. There have been no ~~other~~ material changes to the risk factors described in our ~~2019~~2020 Form ~~10-K.~~10-K.

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

None.

Item 3: Defaults Upon Senior Securities

None.

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Item 4: Mine Safety Disclosures

None.

Item 5: Other Information

None.

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Item 6. Exhibits

(a)	Index to Exhibits


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

10.1	Indemnification Agreement, dated as of March 9, 2021, by and between Innoviva, Inc. and Deborah L. Birx, M.D.

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 ~~September 30, 2020)~~March 31, 2021) 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).

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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: ~~October~~April 28, ~~2020~~2021	/s/ Pavel Raifeld
	Pavel Raifeld
	Chief Executive Officer
	(Principal Executive Officer)

Date: ~~October~~April 28, ~~2020~~2021	/s/ Marianne Zhen
	Marianne Zhen
	Chief Accounting Officer
	(Principal Financial Officer)