Innoviva (INVA) 10-Q 2020 Q2 Quarterly report

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 June 30, 2020

OR

☐ 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 July 20, 2020 was 101,392,431.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2020 (Unaudited) and December 31, 2019	3
Unaudited Consolidated Statements of Income for the Three and Six Months Ended June 30, 2020 and 2019	4
Unaudited Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2020 and 2019	5
Unaudited Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019	6
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019	7
Notes to Unaudited Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	22
Item 4. Controls and Procedures	22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	22
Item 1A. Risk Factors	23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3. Defaults Upon Senior Securities	23
Item 4. Mine Safety Disclosure	23
Item 5. Other Information	23
Item 6. Exhibits	24
Signatures	25
Exhibits

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INNOVIVA, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	June 30,		December 31,
	2020		2019
	(unaudited)		*
Assets
Current assets:
Cash and cash equivalents	$	413,147	$	278,096
Short-term marketable securities		3,999		72,749
Related party receivables from collaborative arrangements		82,402		79,427
Prepaid expenses and other current assets		645		962
Total current assets		500,193		431,234
Property and equipment, net		37		33
Equity investments		128,613		—
Capitalized fees paid to a related party, net		132,164		139,076
Deferred tax assets, net		118,348		154,171
Other assets		264		312
Total assets	$	879,619	$	724,826
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	195	$	10
Accrued personnel-related expenses		291		647
Accrued interest payable		4,152		4,152
Other accrued liabilities		776		562
Total current liabilities		5,414		5,371
Long-term debt, net of discount and issuance costs		381,230		377,120
Other long-term liabilities		163		219
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock: $0.01 par value, 230 shares authorized, 0 shares issued and outstanding		—		—
Common stock: $0.01 par value, 200,000 shares authorized, 101,392 and 101,288 issued and outstanding as of June 30, 2020 and December 31, 2019, respectively		1,015		1,013
Additional paid-in capital		1,260,017		1,258,859
Accumulated other comprehensive income (loss)		(2)		27
Accumulated deficit		(804,123)		(946,404)
Total Innoviva stockholders’ equity		456,907		313,495
Noncontrolling interest		35,905		28,621
Total stockholders’ equity		492,812		342,116
Total liabilities and stockholders’ equity	$	879,619	$	724,826

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

See accompanying notes to consolidated financial statements.

3

INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Royalty revenue from a related party, net of amortization of capitalized fees paid to a related party of $3,456 in the three months ended June 30, 2020 and 2019, and $6,912 in the six months ended June 30, 2020 and 2019	$	68,946	$	64,107	$	147,624	$	119,290
Revenue from collaborative arrangements with a related party		10,000		—		10,000		—
Total net revenue		78,946		64,107		157,624		119,290
Operating expenses:
Research and development		559		—		559		—
General and administrative		2,596		4,347		5,159		7,362
Total operating expenses		3,155		4,347		5,718		7,362
Income from operations		75,791		59,760		151,906		111,928
Other income (expense), net		30		(8)		98		(7)
Interest income		158		1,403		1,460		2,378
Interest expense		(4,561)		(4,661)		(9,077)		(9,278)
Changes in fair values of equity investments		46,698		—		68,613		—
Income before income taxes		118,116		56,494		213,000		105,021
Income tax expense, net		19,891		10,433		35,823		18,941
Net income		98,225		46,061		177,177		86,080
Net income attributable to noncontrolling interest		21,381		8,321		34,896		14,550
Net income attributable to Innoviva stockholders	$	76,844	$	37,740	$	142,281	$	71,530
Basic net income per share attributable to Innoviva stockholders	$	0.76	$	0.37	$	1.40	$	0.71
Diluted net income per share attributable to Innoviva stockholders	$	0.69	$	0.34	$	1.27	$	0.65
Shares used to compute Innoviva basic and diluted net income per share:
Shares used to compute basic net income per share		101,324		101,151		101,280		101,105
Shares used to compute diluted net income per share		113,545		113,391		113,527		113,384

See accompanying notes to consolidated financial statements.

4

INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Net income	$	98,225	$	46,061	$	177,177	$	86,080
Unrealized gain on marketable securities, net		(35)		23		(29)		36
Comprehensive income		98,190		46,084		177,148		86,116
Comprehensive income attributable to noncontrolling interest		21,381		8,321		34,896		14,550
Comprehensive income attributable to Innoviva stockholders	$	76,809	$	37,763	$	142,252	$	71,566

See accompanying notes to consolidated financial statements.

5

INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

	Six months ended June 30, 2020
				Additional		Accumulated 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	—		—		—		—		—		(15,810)		(15,810)
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding	32		—		170		—		—		—		170
Stock-based compensation	—		—		435		—		—		—		435
Net income	—		—		—		—		65,437		13,515		78,952
Other comprehensive income	—		—		—		6		—		—		6
Balance as of March 31, 2020	101,320	$	1,013	$	1,259,464	$	33	$	(880,967)	$	26,326	$	405,869
Equity activity of noncontrolling interest from a consolidated variable interest entity	—		—		—		—		—		350		350
Distributions to noncontrolling interest	—		—		—		—		—		(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		—		—		—		180
Stock-based compensation	—		—		375		—		—		—		375
Net income	—		—		—		—		76,844		21,381		98,225
Other comprehensive income	—		—		—		(35)		—		—		(35)
Balance as of June 30, 2020	101,392	$	1,015	$	1,260,017	$	(2)	$	(804,123)	$	35,905	$	492,812

	Six months ended June 30, 2019
				Additional		Accumulated Other						Total
	Common Stock			Paid-In		Comprehensive		Accumulated		Noncontrolling		Stockholders’
	Shares	Amount		Capital		Income (Loss)		Deficit		Interest		Equity
Balance as of December 31, 2018	101,098	$	1,011	$	1,256,267	$	(3)	$	(1,103,692)	$	5,469	$	159,052
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding	85		1		253		—		—		—		254
Stock-based compensation	—		—		605		—		—		—		605
Net income	—		—		—		—		33,790		6,229		40,019
Other comprehensive income	—		—		—		13		—		—		13
Balance as of March 31, 2019	101,183	$	1,012	$	1,257,125	$	10	$	(1,069,902)	$	11,698	$	199,943
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		—		—		—		201
Stock-based compensation	—		—		474		—		—		—		474
Net income	—		—		—		—		37,740		8,321		46,061
Other comprehensive income	—		—		—		23		—		—		23
Balance as of June 30, 2019	101,272	$	1,013	$	1,257,799	$	33	$	(1,032,162)	$	20,019	$	246,702

See accompanying notes to consolidated financial statements.

6

INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2020		2019
Cash flows from operating activities
Net income	$	177,177	$	86,080
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes		35,823		18,940
Depreciation and amortization		6,921		7,080
Stock-based compensation		810		1,079
Amortization of debt discount and issuance costs		4,110		3,820
Amortization of discount on short-term investments		(336)		(1,124)
Amortization of lease guarantee		(135)		(162)
Changes in fair values of equity investments		(68,613)		—
Other non-cash items		6		—
Changes in operating assets and liabilities:
Receivables from collaborative arrangements		(2,975)		15,723
Prepaid expenses and other current assets		317		390
Accounts payable		185		1,128
Accrued personnel-related expenses and other accrued liabilities		(15)		343
Accrued interest payable		—		(2)
Operating lease liability		—		(144)
Net cash provided by operating activities		153,275		133,151
Cash flows from investing activities
Maturities of marketable securities		82,000		57,875
Purchases of marketable securities		(12,943)		(111,935)
Purchases of equity investments		(60,000)		—
Purchases of property and equipment		(13)		—
Net cash provided by (used in) investing activities		9,044		(54,060)
Cash flows from financing activities
Repurchase of shares to satisfy tax withholding		(72)		(74)
Payments of cash dividends to stockholders		—		(11)
Proceeds from issuances of common stock, net		422		529
Net proceeds from the issuance of variable interest entity's equity		344		—
Distributions to noncontrolling interest		(27,962)		—
Net cash provided by (used in) financing activities		(27,268)		444
Net increase in cash and cash equivalents		135,051		79,535
Cash and cash equivalents at beginning of period		278,096		62,417
Cash and cash equivalents at end of period	$	413,147	$	141,952
Supplemental disclosure of cash flow information
Cash paid for interest	$	4,967	$	5,461

See accompanying notes to consolidated financial statements.

7

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 include respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR^®/BREO^® ELLIPTA^® (fluticasone furoate/ vilanterol, “FF/VI”), ANORO^® ELLIPTA^® (umeclidinium bromide/ vilanterol, “UMEC/VI”) and TRELEGY^® ELLIPTA^® (the combination FF/UMEC/VI). Under the Long-Acting Beta2 Agonist (“LABA”) Collaboration Agreement, Innoviva is entitled to receive royalties from GSK on sales of RELVAR^®/BREO^® ELLIPTA^® as follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion; and royalties from the sales of ANORO^® ELLIPTA^® which tier upward at a range from 6.5% to 10%. Innoviva is also entitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC (“TRC”), including TRELEGY^® ELLIPTA^® and any other product or combination of products that may be discovered or developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the “GSK Agreements”), which have been assigned to TRC other than RELVAR^®/BREO^® ELLIPTA^® and ANORO^® ELLIPTA^®.

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 or any other period.

The accompanying unaudited consolidated financial statements include the accounts of Innoviva and certain variable interest entities for which we are the primary beneficiary. All intercompany transactions have been eliminated. 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 filed with the Securities and Exchange Commission (“SEC”) on February 19, 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”), whether we have a variable interest in those entities and the nature and extent of those interests. Based on our evaluation, if we determine we are the primary beneficiary of a VIE, we consolidate the entity’s financial results into 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.

8

Equity Investments

We invest from time to time in equity securities of private or public companies. If we determine that we do not have control over these companies under either voting or VIE models, we then determine if we have an ability to exercise significant influence via voting interests, board representation or other business relationships. We may account for the equity investments where we exercise significant influence using either an equity method of accounting or at fair value by electing the fair value option 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 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 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 June 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, 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 in the process of evaluating the effects of the provisions of ASU 2019-12 on our 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.

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 six months ended June 30, 2020 and 2019, respectively.

9

The following table shows the computation of basic and diluted net income per share for the three and six months ended June 30, 2020 and 2019:

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands except per share data)	2020		2019		2020		2019
Numerator:
Net income attributable to Innoviva stockholders, basic	$	76,844	$	37,740	$	142,281	$	71,530
Add: interest expense on 2023 Notes		1,184		1,158		2,364		2,325
Net income attributable to Innoviva stockholders, diluted	$	78,028	$	38,898	$	144,645	$	73,855
Denominator:
Weighted-average shares used to compute basic net income per share attributable to Innoviva stockholders		101,324		101,151		101,280		101,105
Dilutive effect of 2023 Notes		12,189		12,189		12,189		12,189
Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan		32		51		58		90
Weighted-average shares used to compute diluted net income per share attributable to Innoviva stockholders		113,545		113,391		113,527		113,384
Net income per share attributable to Innoviva stockholders
Basic	$	0.76	$	0.37	$	1.40	$	0.71
Diluted	$	0.69	$	0.34	$	1.27	$	0.65

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 June 30,		Six Months Ended June 30,
(In thousands)	2020	2019	2020	2019
Outstanding options and awards granted under equity incentive plan and employee stock purchase plan	1,154	1,188	1,124	1,120

3. Revenue Recognition and Collaborative Arrangements

Net Revenue from Collaborative Arrangements

Net revenue recognized under our GSK Agreements was as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2020		2019		2020		2019
Royalties from a related party - RELVAR/BREO	$	45,570	$	47,086	$	101,719	$	89,826
Royalties from a related party - ANORO		11,199		10,635		21,049		19,205
Royalties from a related party - TRELEGY		15,633		9,842		31,768		17,171
Total royalties from a related party		72,402		67,563		154,536		126,202
Less: amortization of capitalized fees paid to a related party		(3,456)		(3,456)		(6,912)		(6,912)
Royalty revenue		68,946		64,107		147,624		119,290
Strategic alliance - MABA program		10,000		—		10,000		—
Total net revenue from GSK	$	78,946	$	64,107	$	157,624	$	119,290

During the three months ended June 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.

10

4. Consolidated Entities

Theravance Respiratory Company, LLC

As of June 30, 2020, and December 31, 2019, $25.6 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 June 30, 2020 was $16.5 million. Total revenue for TRC related to TRELEGY^® ELLIPTA^® was $15.6 million and $9.8 million for the three months ended June 30, 2020 and 2019, respectively, and $31.8 million and $17.2 million for the six months ended June 30, 2020 and 2019, respectively. Total revenue for TRC also included a $10.0 million fee for the termination of the MABA program for the three and six months ended June 30, 2020. Total operating expenses were $0.5 million and $0.8 million for the three and six months ended June 30, 2020, respectively, compared to minimal amounts for the same periods in 2019.

Pulmoquine Therapeutics, Inc.

On April 20, 2020, we entered into a securities purchase agreement with Pulmoquine to purchase 5,808,550 shares of Series A preferred stock for $5.0 million in cash. Upon consummation of the transaction, we owned approximately 90.9% of Pulmoquine's outstanding shares and hold 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”). As of June 30, 2020, total assets including cash balance attributable to Pulmoquine was $4.9 million. Pulmoquine does not currently generate revenue. Total operating expense was $0.6 million for the three and six months ended June 30, 2020.

5. Financial Instruments and Fair Value Measurements

Equity Investment in Armata

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

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

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

As of June 30, 2020, the fair values of Armata’s common stock and warrants were estimated at $34.1 million and $26.2 million, respectively. The total fair value of both financial instruments in the amount of $60.3 million was recorded as equity investments on the consolidated balance sheets as of June 30, 2020. We recorded $13.4 million and $35.3 million of unrealized gains and fair value changes in Armata’s investments as changes in fair values of equity investments, net on the consolidated statements of income for the three and six months ended June 30, 2020, respectively.

11

Equity Investment in Entasis

On April 12, 2020, we entered into a securities purchase agreement with Entasis to purchase 14,000,000 shares of Entasis common stock as well as warrants to purchase 14,000,000 additional shares of its common stock 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 of its pathogen-targeted antibacterial product candidates, which include their global Phase 3 registration trial evaluating a fixed-dose combination 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.

The investment provides Innoviva the ability to have significant influence, but not control, over Entasis's 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, 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: Entasis'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 Entasis's peer companies.

As of June 30, 2020, the fair values of Entasis's common stock and warrants were estimated at $41.4 million and $26.9 million, respectively. The total fair value of both financial instruments in the amount of $68.3 million was recorded as equity investments on the consolidated balance sheets. We recorded $33.3 million of unrealized gains and fair value changes in Entasis's investments as changes in fair values of equity investments, net on the consolidated statements of income for the three and six months ended June 30, 2020.

Available-for-Sale Securities

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

	June 30, 2020
			Gross		Gross
			Unrealized		Unrealized		Estimated
(In thousands)	Amortized Cost		Gains		Losses		Fair Value
U.S. government securities	$	3,993	$	6	$	—	$	3,999
Money market funds		378,472		—		—		378,472
Total	$	382,465	$	6	$	—	$	382,471

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

As of June 30, 2020, all of the available-for-sale debt securities had contractual maturities within one year, and the average duration of debt securities was approximately one month. There was 0 credit loss of these securities as of June 30, 2020.

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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 June 30, 2020 Using:
	Quoted Price in
	Active Markets		Significant Other		Significant
	for Identical		Observable		Unobservable
Types of Instruments	Assets		Inputs		Inputs
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
U.S. government securities	$	—	$	3,999	$	—	$	3,999
Money market funds		378,472		—		—		378,472
Equity investment - Armata Common Stock		34,146		—		—		34,146
Equity investment - Armata Warrants		—		26,181		—		26,181
Equity investment - Entasis Common Stock		41,440		—		—		41,440
Equity investment - Entasis Warrants		—		26,846		—		26,846
Total assets measured at estimated fair value	$	454,058	$	57,026	$	—	$	511,084
Debt
2023 Notes	$	—	$	246,303	$	—	$	246,303
2025 Notes		—		198,997		—		198,997
Total fair value of debt	$	—	$	445,300	$	—	$	445,300

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

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

The fair 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 is included in the consolidated statements of income as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2020		2019		2020		2019
General and administrative	$	375	$	474	$	810	$	1,079

7. Debt

Our debt consists of:

	June 30,		December 31,
(In thousands)	2020		2019
2023 Notes	$	240,984	$	240,984
2025 Notes		192,500		192,500
Total debt		433,484		433,484
Unamortized debt discount and issuance costs		(52,254)		(56,364)
Net long-term debt	$	381,230	$	377,120

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:

	June 30,		December 31,
(In thousands)	2020		2019
Liability component
Principal	$	192,500	$	192,500
Debt discount and issuance costs, net		(50,768)		(54,597)
Net carrying amount	$	141,732	$	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 six months ended June 30, 2020 and 2019:

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2020		2019		2020		2019
Contractual interest expense	$	1,203	$	1,203	$	2,406	$	2,406
Amortization of debt issuance costs		149		136		294		269
Amortization of debt discount		1,786		1,635		3,535		3,236
Total interest and amortization expense	$	3,138	$	2,974	$	6,235	$	5,911

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Debt Maturities

The aggregate scheduled maturities of our long-term debt as of June 30, 2020, are as follows:

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

8. Commitments and Contingencies

Lease

Future minimum operating lease payments on our corporate headquarters as of June 30, 2020 are as follows:

(In thousands)
Years ending December 31:
Remainder of 2020	$	60
2021		123
2022		109
Thereafter		—
Total	$	292

9. Income Taxes

Provisional income tax expense for the three and six months ended June 30, 2020 was $19.9 million and $35.8 million, respectively, compared to $10.4 million and $18.9 million for the same periods in 2019 respectively. The Company’s effective income tax rate for the six months ended June 30, 2020 was 17%, compared to 18% for the same period in 2019. 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 interest.

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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; the strategies, plans and objectives of the Company (including the Company’s growth strategy and corporate development initiatives beyond the existing respiratory portfolio); the timing, manner and amount of potential capital returns to stockholders; the status and timing of clinical studies, data analysis and communication of results; the potential benefits and mechanisms of action of product candidates; expectations for product candidates through development and commercialization; the timing of regulatory approval of product candidates; projections of revenue, expenses and other financial items; the impact of the COVID-19 pandemic; and risks discussed in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”) on February 19, 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 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 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.

16

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 include respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR^®/BREO^® ELLIPTA^® (fluticasone furoate/ vilanterol, “FF/VI”), ANORO^® ELLIPTA^® (umeclidinium bromide/ vilanterol, “UMEC/VI”) and TRELEGY^® ELLIPTA^® (the combination FF/UMEC/VI). Under the Long-Acting Beta2 Agonist (“LABA”) Collaboration Agreement, Innoviva is entitled to receive royalties from GSK on sales of RELVAR^® /BREO^® ELLIPTA^® as follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion; and royalties from the sales of ANORO^® ELLIPTA^® which tier upward at a range from 6.5% to 10%. Innoviva is also entitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to TRC, including TRELEGY^® ELLIPTA^® and any other product or combination of products that may be discovered or developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the “GSK Agreements”), which have been assigned to TRC other than RELVAR^®/BREO^® ELLIPTA^® and ANORO^® ELLIPTA^®.

Our company structure and organization are tailored to our focused activities of managing our respiratory assets with GSK, the commercial and developmental obligations associated with the GSK Agreements, intellectual property, licensing operations, business development activities and providing for certain essential reporting and management functions of a public company. As of June 30, 2020, we had five employees. Our revenues consist of royalties and potential milestone payments, if any, from our respiratory partnership agreements with GSK.

Recent Highlights

● GSK Net Sales:

o Second quarter 2020 net sales of RELVAR^®/BREO^® ELLIPTA^® by GSK were $303.8 million, down 3% from $313.9 million in the second quarter of 2019, with $103.3 million in net sales from the U.S. market and $200.5 million from non-U.S. markets.

o Second quarter 2020 net sales of ANORO^® ELLIPTA^® by GSK were $172.3 million, up 5% from $163.6 million in the second quarter of 2019, with $109.8 million net sales from the U.S. market and $62.5 million from non-U.S. markets.

o Second quarter 2020 net sales of TRELEGY^® ELLIPTA^® by GSK were $240.5 million, up significantly from $151.4 million in the second quarter of 2019, with $174.8 million in net sales from the U.S. market and $65.7 million in net sales from non-U.S. markets.

● Capital Allocation:

o During the second quarter of 2020, the Company invested $35.0 million in 14.0 million shares of Entasis’s common stock and warrants to purchase up to an additional 14.0 million shares of the common stock at $2.50 per share. With this initial investment, Innoviva owned approximately 51% of Entasis’s common stock as of June 30, 2020. Innoviva has a right to designate two members to Entasis’s board.

● Other:

o In May 2020, Pavel Raifeld was named as Chief Executive Officer.

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Collaborative Arrangements with GSK

LABA Collaboration

In November 2002, we entered into our LABA Collaboration Agreement with GSK to develop and commercialize once-daily LABA products for the treatment of chronic obstructive pulmonary disease (“COPD”) and asthma. The collaboration has developed three combination products: (1) RELVAR^®/BREO^® ELLIPTA^® (FF/VI) (BREO^® ELLIPTA^® is the proprietary name in the U.S. and Canada and RELVAR^® ELLIPTA^® is the proprietary name outside the U.S. and Canada), a once-daily combination medicine consisting of a LABA, vilanterol (VI), and an inhaled corticosteroid (ICS), fluticasone furoate (FF), (2) ANORO^® ELLIPTA^® (UMEC/VI), a once-daily medicine combining a long-acting muscarinic antagonist (“LAMA”), umeclidinium bromide (UMEC), with a LABA, VI and (3) TRELEGY^® ELLIPTA^®, fluticasone furoate/umeclidinium/vilanterol (FF/UMEC/VI), a once-daily combination medicine consisting of an ICS, LAMA and LABA.

As a result of the launch and approval of RELVAR^®/BREO^® ELLIPTA^® and ANORO^® ELLIPTA^® in the U.S., Japan and Europe, in accordance with the LABA Collaboration Agreement, we paid milestone fees to GSK totaling $220.0 million during the year ended December 31, 2014. The milestone fees paid to GSK were recognized as capitalized fees paid to a related party, which are being amortized over their estimated useful lives commencing upon the commercial launch of the products.

2004 Strategic Alliance

In March 2004, we entered into the Strategic Alliance Agreement with GSK where GSK received an option to license exclusive development and commercialization rights to product candidates from certain of our discovery programs on pre-determined terms and on an exclusive, worldwide basis. In 2005, GSK licensed our MABA 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 three and six months ended June 30, 2020, respectively.

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. If we determine that we do not have control over these companies under either voting or VIE models, we then determine if we have an ability to exercise significant influence via voting interests, board representation or other business relationships. We may account for the equity investments where we exercise significant influence using either an equity method of accounting or at fair value by electing the fair value option. If the fair value option is applied to an investment that would otherwise be accounted for under the equity method, we apply it to all our financial interests in the same entity (equity and 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 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 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 filed with the SEC on February 19, 2020 provides a more complete discussion of our critical accounting policies and estimates.

18

Results of Operations

Net Revenue

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

	Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
(In thousands)	2020		2019		$		%		2020		2019		$		%
Royalties from a related party - RELVAR/BREO	$	45,570	$	47,086	$	(1,516)	(3)	%	$	101,719	$	89,826	$	11,893	13	%
Royalties from a related party - ANORO		11,199		10,635		564	5	%		21,049		19,205		1,844	10	%
Royalties from a related party - TRELEGY		15,633		9,842		5,791	59	%		31,768		17,171		14,597	85	%
Total royalties from a related party		72,402		67,563		4,839	7	%		154,536		126,202		28,334	22	%
Less: amortization of capitalized fees paid to a related party		(3,456)		(3,456)		—	0	%		(6,912)		(6,912)		—	0	%
Royalty revenue		68,946		64,107		4,839	8	%		147,624		119,290		28,334	24	%
Strategic alliance -MABA program		10,000		—		10,000	*			10,000		—		10,000	*
Total net revenue from GSK	$	78,946	$	64,107	$	14,839	23	%	$	157,624	$	119,290	$	38,334	32	%

* Not Meaningful

Total net revenue increased to $78.9 million and $157.6 million for the three and six months ended June 30, 2020, compared to $64.1 million and $119.3 million, respectively, for the same period a year ago. Royalties for RELVAR^®/BREO^® ELLIPTA^® were lower primarily due to the increasing pricing pressure in the U.S., offset by the 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.

Research & Development

Research and development expenses of $0.6 million for the three and six months ended June 30, 2020 were attributable to Pulmoquine’s product development efforts.

General & Administrative

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

	Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
(In thousands)	2020		2019		$		%		2020		2019		$		%
General and administrative expenses	$	2,596	$	4,347	$	(1,751)	(40)	%	$	5,159	$	7,362	$	(2,203)	(30)	%

General and administrative expenses for the three and six months ended June 30, 2020 decreased compared to the same periods in 2019, attributable to overall lower operating expenses incurred.

Other Income, net and Interest Income

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

	Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
(In thousands)	2020		2019		$		%		2020		2019		$		%
Other income (expense), net	$	30	$	(8)	$	38	*		$	98	$	(7)	$	105	*
Interest income		158	$	1,403		(1,245)	(89)	%		1,460	$	2,378		(918)	(39)	%

* Not Meaningful

Interest income decreased for the three and six months ended June 30, 2020, as compared to the same periods a year ago primarily due to lower interest rates impacted by the COVID-19 pandemic.

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Interest Expense

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

	Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
(In thousands)	2020		2019		$		%		2020		2019		$		%
Interest expense	$	4,561	$	4,661	$	(100)	(2)	%	$	9,077	$	9,278	$	(201)	(2)	%

Interest expense decreased slightly for the three and six months ended June 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

During the quarter ended June 30, 2020, Innoviva invested $35.0 million in 14,000,000 shares of Entasis’s common stock as well as warrants to purchase up to an additional 14,000,000 shares of the common stock at $2.50 per share. As a result of this initial investment, Innoviva owned approximately 51% of Entasis’s common stock as of June 30, 2020. The total fair value of Entasis’s common stock and warrants was estimated at $68.3 million. We recorded $33.3 million as unrealized gains and 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 six months ended June 30, 2020, respectively.

As of June 30, 2020, the total fair value of Armata’s common stock and warrants was estimated at $60.3 million. We recorded $13.4 million and $35.3 million as unrealized gains and 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 six months ended June 30, 2020, respectively.

Provision for Income Taxes

The provisional income tax expense for the three and six months ended June 30, 2020 was $19.9 million and $35.8 million with an effective income tax rate of 17%, respectively, compared to $10.4 million and $18.9 million, respectively, with an effective interest rate of 18% 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, was as follows:

	Three Months Ended June 30,				Change			Six Months Ended June 30,				Change
(In thousands)	2020		2019		$		%	2020		2019		$		%
Net income attributable to noncontrolling interest	$	21,381	$	8,321	$	13,060	*	$	34,896	$	14,550	$	20,346		*

* Not Meaningful

This represents the 85% share of net income in Theravance Respiratory Company, LLC for Theravance Biopharma for the three and six months ended June 30, 2020 and 2019. The increase was primarily due to the increase in the growth in prescriptions and market share for TRELEGY^® ELLIPTA^®.

Liquidity and Capital Resources

Liquidity

Since our inception, we have financed our operations primarily through private placements and public offerings of equity and debt securities and payments received under collaborative arrangements. For the six months ended June 30, 2020, we generated gross royalty revenues from GSK of $154.5 million and a $10.0 million fee from the termination of the MABA program. Net cash and cash equivalents, short term investments and marketable securities totaled $417.1 million, and receivables from GSK totaled $82.4 million as of June 30, 2020.

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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:

	Six Months Ended June 30,
(In thousands)	2020		2019		Change
Net cash provided by operating activities	$	153,275	$	133,151	$	20,124
Net cash provided by (used in) investing activities		9,044		(54,060)		63,104
Net cash provided by (used in) financing activities		(27,268)		444		(27,712)

Cash Flows from Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2020 was $153.3 million, consisting primarily of our net income of $177.2 million, adjusted for net non-cash items such as $35.8 million of deferred income taxes, $7.0 million of depreciation and amortization and $68.6 million increase in the fair values of our equity investments.

Net cash provided by operating activities for the six months ended June 30, 2019 was $133.2 million, consisting primarily of our net income of $86.1 million, adjusted for non-cash items such as $18.9 million of deferred income taxes, $7.1 million of depreciation and amortization and $3.8 million amortization of debt discount and issuance costs, as well as a decrease in receivables from collaborative arrangements of $15.7 million.

Cash Flows from Investing Activities

Net cash provided by investing activities for the six months ended June 30, 2020 of $9.0 million was primarily due to $82.0 million received from maturities of marketable securities, partially offset by $12.9 million in purchases of marketable securities and $60.0 million for our investments in Armata and Entasis.

Net cash used in investing activities for the six months ended June 30, 2019 of $54.1 million was primarily due to $111.9 million in purchases of marketable securities, partially offset by $57.9 million proceeds received from maturities of marketable securities.

Cash Flows from Financing Activities

Net cash used in financing activities for the six months ended June 30, 2020 of $27.3 million was primarily due to $28.0 million distributions to noncontrolling interest.

Net cash provided by financing activities for the six months ended June 30, 2019 of $0.4 million was primarily due to $0.5 million net proceeds from issuance of common stock.

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

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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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

We conducted an evaluation as of June 30, 2020, under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures, which are defined under SEC rules as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within required time periods. Based upon that evaluation, our 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

There were no material changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

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On September 30, 2019, the Company and TRC filed a Verified Complaint in the Court of Chancery of the State of Delaware to confirm the arbitration award. The award was confirmed by the Court of Chancery on May 4, 2020.

Item 1A. Risk Factors

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

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

In December 2019, an outbreak of COVID-19 began in Wuhan, Hubei Province, China. In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption of financial markets. At this time, based on the information available to us, we can not predict the extent of the impact, if any, of the COVID-19 pandemic on our royalty revenues derived from GSK upon which we significantly rely, or on the operations of our equity and other investments. It is possible that an extended period of global supply chain and economic disruption could materially affect our results of operations and financial condition.

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

None.

Item 3: Defaults Upon Senior Securities

None.

Item 4: Mine Safety Disclosures

None.

Item 5: Other Information

None.

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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	Offer Letter between Innoviva, Inc. and Pavel Raifeld, dated May 20, 2020	8-K	10.1	05/26/2020
10.2	Transition Agreement between Innoviva, Inc. and Geoffrey L. Hulme, dated June 11, 2020	8-K	10.1	06/12/2020
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
99.1	Form of Indemnification Agreement between Innoviva, Inc. and its executive officers	8-K	99.1	05/26/2020
101	Interactive Data File (Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2020) formatted in iXBRL (Inline eXtensible Business Reporting Language).
104	Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101).

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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: July 29, 2020	/s/ Pavel Raifeld
	Pavel Raifeld
	Chief Executive Officer
	(Principal Executive Officer)
Date: July 29, 2020	/s/ Marianne Zhen
	Marianne Zhen
	Chief Accounting Officer
	(Principal Financial Officer)

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