Innoviva, Inc.
Annual Report 2016

Plain-text annual report

Use these links to rapidly review the document Table of Contents Table of Contents1 Table of Contents2Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-KCommission File No. 000-30319INNOVIVA, INC.(Exact name of registrant as specified in its charter)Delaware(State or other jurisdiction ofincorporation or organization) 94-3265960(I.R.S. EmployerIdentification No.)2000 Sierra Point Parkway,Suite 500 Brisbane, CA 94005(Address of principal executiveoffices) (Zip Code)Registrant's telephone number, including area code: (650) 238-9600SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:Title of Each Class Name of Each Exchange On WhichRegisteredCommon Stock $0.01 Par Value The NASDAQ Stock Market LLC SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý 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 1934during 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 filingrequirements for the past 90 days. Yes ý No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). Yes ý No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be(Mark One) ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2016Oro TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ý Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filerand large accelerated filer" in Rule 12b-2 of the Exchange Act (Check One): Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the closing price of theregistrant's Common Stock on The NASDAQ Global Select Market on June 30, 2016 was $832,058,929. This calculation does not reflect a determination thatpersons are affiliates for any other purpose. On February 24, 2017, there were 109,201,168 shares of the registrant's Common Stock outstanding.DOCUMENTS INCORPORATED BY REFERENCE Specified portions of the registrant's definitive Proxy Statement to be issued in conjunction with the registrant's 2017 Annual Meeting of Stockholders,which is expected to be filed not later than 120 days after the registrant's fiscal year ended December 31, 2016, are incorporated by reference into Part III ofthis Annual Report. Except as expressly incorporated by reference, the registrant's Proxy Statement shall not be deemed to be a part of this Annual Report onForm 10-K. Large accelerated filer ý Accelerated filer o Non-accelerated filer o(Do not check if asmaller reporting company) Smaller reporting company oTable of Contents INNOVIVA, INC.2016 Form 10-K Annual Report Table of Contents 2 Page PART I Item 1. Business 4 Item 1A. Risk Factors 10 Item 1B. Unresolved Staff Comments 28 Item 2. Properties 28 Item 3. Legal Proceedings 28 Item 4. Mine Safety Disclosures 29 PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities 29 Item 6. Selected Financial Data 32 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 33 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 43 Item 8. Financial Statements and Supplementary Data 44 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 77 Item 9A. Controls and Procedures 77 Item 9B. Other Information 80 PART III Item 10. Directors, Executive Officers and Corporate Governance 80 Item 11. Executive Compensation 80 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 80 Item 13. Certain Relationships and Related Transactions, and Director Independence 80 Item 14. Principal Accountant Fees and Services 81 PART IV Item 15. Exhibits and Financial Statement Schedules 81 Item 16. Form 10-K Summary 81 Signatures 82 Exhibits Table of Contents Special Note Regarding Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended,and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve substantial risks, uncertainties andassumptions. All statements in this Annual Report on Form 10-K, other than statements of historical facts, including, without limitation, statementsregarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans, intentions, expectations, goals andobjectives may be forward-looking statements. The words "anticipates," "believes," "could," "designed," "estimates," "expects," "goal," "intends," "may,""plans," "projects," "pursuing," "will," "would" and similar expressions (including the negatives thereof) are intended to identify forward-lookingstatements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions, expectations orobjectives disclosed in our forward-looking statements and the assumptions underlying our forward-looking statements may prove incorrect. Therefore, youshould not place undue reliance on our forward- looking statements. Actual results or events could differ materially from the plans, intentions, expectationsand objectives disclosed in the forward-looking statements that we make. All written and verbal forward-looking statements attributable to us or any personacting 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 notlimited to, risks related to: lower than expected future royalty revenue from respiratory products partnered with GSK, the commercialization ofRELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® in the jurisdictions in which these products have been approved; the strategies, plans and objectivesof the company (including the company's growth strategy and corporate development initiatives beyond the existing respiratory portfolio); the timing,manner, amount and planned growth of anticipated potential capital returns to stockholders (including, without limitation, statements regarding thecompany's expectations of future purchases under its capital return programs and future cash dividends); the status and timing of clinical studies, dataanalysis and communication of results; the potential benefits and mechanisms of action of product candidates; expectations for product candidates throughdevelopment and commercialization; the timing of regulatory approval of product candidates; projections of revenue, expenses and other financial itemsand risks discussed below in "Risk Factors" in Item 1A of Part I, "Management's Discussion and Analysis of Financial Condition and Results of Operations"in Item 7 of Part II and elsewhere in this Annual Report on Form 10-K. Our forward-looking statements in this Annual Report on Form 10-K are based oncurrent 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 Management's Discussion and Analysis of our Financial Condition and Results of Operations and our consolidatedfinancial statements contained in this Annual Report on Form 10-K. We also encourage you to read Item 1A of Part I of this Annual Report on Form 10-K,entitled "Risk Factors," which contains a more complete discussion of the risks and uncertainties associated with our business. In addition to the risksdescribed above and in Item 1A of this report, other unknown or unpredictable factors also could affect our results. Therefore, the information in this reportshould be read together with other reports and documents that we file with the Securities and Exchange Commission (SEC) from time to time, including onForm 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 theforward-looking statements in this report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracymay be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation orwarranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.3Table of Contents PART I ITEM 1. BUSINESS Overview Innoviva, Inc. ("Innoviva", the "Company", the "Registrant" or "we" and other similar pronouns) is focused on bringing compelling new medicines topatients in areas of unmet need by leveraging its significant expertise in the development, commercialization and financial management of bio-pharmaceuticals. Innoviva's portfolio is anchored by the respiratory assets partnered with Glaxo Group Limited ("GSK"), including RELVAR®/BREO®ELLIPTA® (fluticasone furoate/ vilanterol, "FF/VI") and ANORO® ELLIPTA® (umeclidinium bromide/ vilanterol, "UMEC/VI"). Under the Long-ActingBeta2 Agonist ("LABA") Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein collectively as the "GSK Agreements"),we are 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 salesand 5% for all annual global net sales above $3.0 billion. For other products combined with a LABA from the LABA collaboration, such as ANORO™ELLIPTA™, royalties are upward tiering and range from 6.5% to 10%. Innoviva is also entitled to 15% of any future payments made by GSK under itsagreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC ("TRC"), relating to the combination FF/UMEC/VIand the Bifunctional Muscarinic Antagonist-Beta2 Agonist ("MABA") program, as monotherapy and in combination with other therapeutically activecomponents under the LABA Collaboration Agreement, which has been assigned to TRC other than RELVAR®/BREO®ELLIPTA® and ANORO®ELLIPTA®. We do not manufacture or sell any of the products commercialized under the GSK Agreements, as it is the exclusive responsibility of GSK. Our headquarters are located at 2000 Sierra Point Parkway, Suite 500, Brisbane, CA 94005. Innoviva was incorporated in Delaware in November 1996under the name, Advanced Medicine, Inc., and began operations in May 1997. The Company changed its name to Theravance, Inc. in April 2002. InJune 2014, we spun-off our research and development activities by distributing the outstanding shares of Theravance Biopharma, Inc. ("TheravanceBiopharma") on a pro-rata basis to our stockholders (the "Spin-Off"), which resulted in Theravance Biopharma becoming an independent, publicly tradedcompany. Following a rebranding exercise, we changed our name to Innoviva, Inc. in January 2016.Our Strategy Innoviva uniquely combines deep pharmaceutical industry expertise and strategic financial management with the goal of maximizing the commercialpotential and royalties we receive from our partnered pharmaceutical products. By channeling our significant expertise in the key field of pharmaceuticalmedicines including product development, commercialization, and financial strategy, Innoviva seeks to become a partner in the delivery of compelling newmedicines that impact public health. We plan to leverage our unique industry knowledge and capabilities to identify medicines that have the potential toimprove the lives of patients. This patient-centric approach is central to how Innoviva operates and collaborates with a partner to advance the availability ofcrucial medicines and treatments. Our corporate strategy is focused on stockholder returns by:1.Maximizing the potential value of our respiratory assets partnered with GSK; 2.Providing capital returns to our investors through repurchases of equity and/or repurchases, redemptions or prepayments of debt; 3.Optimizing our overall corporate cost of capital; and 4.Building a long-term recurring revenue business.Our Relationship with GSKLABA Collaboration In November 2002, we entered into our LABA Collaboration Agreement with GSK to develop and commercialize once-daily products for the treatmentof chronic obstructive pulmonary disease ("COPD") and4Table of Contentsasthma. The collaboration has developed two combination products: (1) RELVAR®/BREO® ELLIPTA® (FF/VI) (BREO® ELLIPTA® is the proprietary namein 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 aLABA, vilanterol (VI), and an inhaled corticosteroid (ICS), fluticasone furoate (FF) and (2) ANORO® ELLIPTA® (UMEC/VI), a once-daily medicinecombining a long-acting muscarinic antagonist ("LAMA"), umeclidinium bromide (UMEC), with a LABA. Under the LABA Collaboration Agreement, GSKand Innoviva are exploring various paths to create triple therapy medications. GSK is now responsible for all direct research and development activitiesassociated with the collaboration. As a result of the launch and approval of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® in the U.S., Japan and Europe, we paid milestone feesto GSK totaling $220.0 million during the year ended December 31, 2014. Although we have no further milestone payment obligations to GSK pursuant tothe LABA Collaboration Agreement, we continue to have ongoing participation as part of the collaboration, including joint steering and joint projectcommittees that are expected to continue over the life of the agreement. The milestone fees paid to GSK were recognized as capitalized fees paid to a relatedparty, which are being amortized over their estimated useful lives commencing upon the commercial launch of the products. We are entitled to receive royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows: 15% on the first $3.0 billion of annual global netsales and 5% for all annual global net sales above $3.0 billion. For other products combined with a LABA from the LABA collaboration, such as ANORO™ELLIPTA™, royalties are upward tiering and range from 6.5% to 10%.2004 Strategic Alliance In March 2004, we entered into the Strategic Alliance Agreement with GSK where GSK received an option to license exclusive development andcommercialization rights to product candidates from certain of our discovery programs on pre-determined terms and on an exclusive, worldwide basis. In2005, GSK licensed our MABA program for the treatment of COPD, and in October 2011, we and GSK expanded the MABA program by adding sixadditional Innoviva-discovered preclinical MABA compounds (the "Additional MABAs"). The development program is funded in full by GSK and iscurrently in Phase II clinical studies. As a result of the transactions effected by the Spin-Off, we are only entitled to receive 15% of any contingent paymentsand royalties payable by GSK from sales of FF/UMEC/VI (and MABA, and MABA/FF) while Theravance Biopharma receives 85% of those same payments.Agreements Entered into with GSK in Connection with the Spin-Off On March 3, 2014, in contemplation of the Spin-Off, we, Theravance Biopharma and GSK entered into a series of agreements clarifying how thecompanies would implement the Spin-Off and operate following the Spin-Off. We, Theravance Biopharma and GSK entered into a three-way masteragreement providing for GSK's consent to the Spin-Off provided certain conditions were met. The amendments to the GSK Agreements do not change the economics or royalty rates under the GSK Agreements, though the assignment of theStrategic Alliance Agreement and portions of the LABA Collaboration Agreement to TRC do change how the economics are allocated between TheravanceBiopharma and us. The amendments to the GSK Agreements do provide that GSK's diligent efforts obligations regarding commercialization matters underboth agreements will change upon regulatory approval in either the United States or the European Union (the "EU") of FF/UMEC/VI or a MABA incombination with FF. Upon such regulatory approval, GSK's diligent efforts obligations as to commercialization matters under the GSK Agreements will havethe objective of focusing on the best interests of patients and maximizing the net value of the overall portfolio of products under the GSK Agreements. SinceGSK's commercialization efforts following such regulatory approval will be guided by a portfolio approach across products in which we will retain our fullinterests upon the Spin-Off and also products in which we have retained only a portion of our interests following the Spin-Off, GSK's commercializationefforts may have the effect of reducing the overall value of our remaining interests in the GSK Agreements following the Spin-Off.5Table of ContentsCommon Stock owned by GSK As of February 24, 2017, GSK beneficially owned approximately 29.3% of our outstanding common stock.Recent Highlights•GSK Net Sales •Fourth quarter 2016 net sales of RELVAR®/BREO® ELLIPTA® by GSK were $273.0 million, up 76% from $154.7 million in thefourth quarter of 2015, with $157.7 million net sales in from the U.S. market and $115.3 million from non-U.S. markets. •Fourth quarter 2016 net sales of ANORO® ELLIPTA® by GSK doubled to $90.7 million, from $45.4 million in the fourth quarter of2015, with $63.3 million of sales from the U.S. market and $27.4 million from non-U.S. markets. •Capital Returns •During the fourth quarter 2016, we repurchased $4.1 million of our convertible subordinated notes due 2023, for a net cash of$3.3 million. •During the fourth quarter 2016, we repurchased $12.5 million of our common stock. Through December 31, 2016, we repurchased$103.7 million in stock since December 2015 at an average price of $10.50 per share.Manufacturing Manufacturing of RELVAR®/BREO® ELLIPTA® (FF/VI) and ANORO™ ELLIPTA™ (UMEC/VI) and for the MABA program is performed by GSK.Government Regulation The development and commercialization of products and product candidates pursuant to the GSK Agreements are subject to extensive regulation bygovernmental authorities in the United States and other countries. Before marketing in the United States, any medicine must undergo rigorous preclinicalstudies and clinical studies and an extensive regulatory approval process implemented by the FDA. Outside the United States, the ability to market a productdepends upon receiving a marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct of clinical studies,marketing authorization, pricing and reimbursement vary widely from country to country. In any country, the commercialization of medicines is permittedonly if the appropriate regulatory authority is satisfied that our collaborative partner has presented adequate evidence of the safety, quality and efficacy ofsuch medicines. Once a product is approved, the FDA may withdraw the product approval if compliance with pre- and post-marketing regulatory standards is notmaintained or if safety or quality issues are identified after the product reaches the marketplace. In addition, the FDA may require post-marketing studies,referred to as Phase 4 studies, to monitor the effect of approved products, and may limit further marketing of the product based on the results of these post-marketing studies. The FDA has broad post-market regulatory and enforcement powers, including the ability to suspend or delay issuance of approvals, seizeproducts, withdraw approvals, enjoin violations, and institute criminal prosecution. If regulatory approval for a medicine is obtained, the clearance to market the product will be limited to those diseases and conditions for which themedicine is effective, as demonstrated through clinical studies and included in the medicine's labeling. Even if this regulatory approval is obtained, amarketed medicine, its manufacturer and its manufacturing facilities are subject to continual review and periodic inspections by the FDA. The FDA ensuresthe quality of approved medicines by carefully monitoring manufacturers' compliance with its cGMP regulations. The cGMP regulations for drugs containminimum requirements for the methods, facilities, and controls used in manufacturing, processing, and packaging of a medicine. The regulations are intendedto make sure that a medicine is safe for use, and that it has the ingredients and strength it claims to have. Discovery of previously unknown problems with amedicine, manufacturer or facility may result in6Table of Contentsrestrictions on the medicine or manufacturer, including costly recalls or withdrawal of the medicine from the market. We and our collaborative partner are also subject to various laws and regulations regarding laboratory practices, the experimental use of animals and theuse and disposal of hazardous or potentially hazardous substances in connection with the development and commercialization of products and productcandidates. In each of these areas, as above, the FDA and other regulatory authorities have broad regulatory and enforcement powers, including the ability tosuspend or delay issuance of approvals, seize products, withdraw approvals, enjoin violations, and institute criminal prosecution, any one or more of whichcould have a material adverse effect upon our business, financial condition and results of operations. Outside the United States, our collaborative partner's ability to market partnered products will also depend on receiving marketing authorizations fromthe appropriate regulatory authorities. Risks similar to those associated with FDA approval described above exist with the regulatory approval processes inother countries.Patents and Proprietary Rights We and our collaborative partner will be able to protect our partnered technology from unauthorized use by third parties only to the extent that suchtechnology is covered by valid and enforceable patents or is effectively maintained as trade secrets. Our success in the future will depend in part on us andour collaborative partner obtaining patent protection for our partnered products and product candidates. Accordingly, patents and other proprietary rights areessential elements of our business. For proprietary know-how that is not patentable, processes for which patents are difficult to enforce and any other elements of our business that involveproprietary know-how and technology that is not covered by patent applications, we rely on trade secret protection and confidentiality agreements to protectour interests. We require all of our employees, consultants and advisors to enter into confidentiality agreements. Where it is necessary to share our proprietaryinformation or data with outside parties, our policy is to make available only that information and data required to accomplish the desired purpose and onlypursuant to a duty of confidentiality on the part of those parties. As of December 31, 2016, we owned 33 issued United States patents and 97 granted foreign patents, as well as additional pending United States patentapplications and foreign patent applications. The claims in these various patents and patent applications are directed to compositions of matter, includingclaims covering product candidates, lead compounds and key intermediates, pharmaceutical compositions, methods of use and processes for makingour compounds. United States issued patents and foreign patents generally expire 20 years after filing. Nevertheless, issued patents can be challenged, narrowed,invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products and threaten our ability to commercialize ourproduct candidates. Our patent position, similar to other companies in our industry, is generally uncertain and involves complex legal and factual questions.To maintain our proprietary position, we will need to obtain effective claims and enforce these claims once granted. It is possible that, before any of ourproducts can be commercialized, any related patent may expire or remain in force only for a short period following commercialization, thereby reducing anyadvantage of the patent. Also, we do not know whether any of our patent applications will result in any issued patents or, if issued, whether the scope of theissued claims will be sufficient to protect our proprietary position.Competition We anticipate that RELVAR®/BREO® ELLIPTA® (FF/VI) and ANORO® ELLIPTA® (UMEC/VI), will compete with a number of approvedbronchodilator drugs and drug candidates under development that are designed to treat asthma and COPD. These include but are not limited to:•Advair®/Seretide™ Diskus®/HFA® (salmeterol and fluticasone proprionate as a combination) marketed by GSK, •Symbicort® (formoterol and budesonide as a combination) marketed by AstraZeneca,7Table of Contents•AirDuo Respiclick® (salmeterol and fluticasone proprionate), a non-substitutable generic version of Advair, marketed by TEVA, was approvedby U.S. FDA in January 2017 and is expected to be launched later in 2017, •Spiriva® Handihaler® and Spiriva Respimat® (tiotropium) marketed by Boehringer Ingelheim, •Dulera® (formoterol and mometasone as a combination) marketed by Merck, •Tudorza® Pressair® (aclidinium) marketed by AstraZeneca and Seebri® Breezehaler® (glycopyrronium) marketed by Novartis were alsolaunched in the year ended December 31, 2012 (Seebri, ex-U.S.), and was licensed to Sunovion for the U.S.market in December 2016, but hasyet to be launched as of January 2017, •Incruse® Ellipta® (umeclidinium) and Arnuity® Ellipta® (fluticasone furoate), launched in January 2015 by GSK in the U.S. (we are notentitled to any royalties from either product), •UMEC/VI/FF being developed by GSK, •Foradil® Aerolizer®/Oxis® Turbuhaler® (formoterol) marketed by a number of companies, •Striverdi® Respimat® (olodaterol) marketed by Boehringer Ingelheim, •Onbrez® Breezehaler® (E.U.)/Arcapta® Neohaler® (U.S.) (indacaterol) marketed by Novartis, •Ultibro® Breezehaler® (E.U.)/Utibron® Neohaler® (U.S.), (indacaterol combined with the LAMA glycopyrronium bromide) developed byNovartis and approved and launched in Europe and Japan in the year ended December 31, 2013 as a once-daily treatment for COPD. In theU.S., the product was approved in October 2015 at a lower strength and as a twice-daily COPD treatment, and was licensed to Sunovion inDecember 2016, but has yet to be launched as of January 2017, •Stiolto (U.S.)/Spiolto (E.U.) Respimat® approved in mid-2015, consists of the LAMA tiotropium combined with the LABA olodaterol,marketed by Boehringer Ingelheim for the treatment of COPD, •Bevespi Aerosphere® (consisting of the LAMA glycopyrronium bromide and the LABA formoterol fumarate), developed by PearlTherapeutics and licensed to AstraZeneca was launched in January 2017, •Duaklir® Genuair® (consisting of the LAMA aclidinium bromide and LABA formoterol fumarate), developed by AstraZeneca and approved inNovember 2014 in the EU as a maintenance bronchodilator treatment for COPD, and •Indacaterol in combination with an ICS (mometasone), being developed by Novartis for markets outside the U.S. In addition, several firms are developing new formulations of Advair/Seretide (salmeterol /fluticasone proprionate) and Symbicort (formoterolfumerate/budesonide) which may be marketed as generics or branded generics relative to the existing products from GSK and AstraZeneca, respectively. Allof these efforts represent potential competition for any of our partnered products. Efforts have intensified following the publication of FDA draft guidance forthe approval of fully substitutable versions of Advair and Symbicort in late 2013 and mid-2015 respectively. Current examples of these products include themarketed products Duoresp/Biresp from Teva (generic Symbicort), AirFluSal Forspiro by Sandoz, Rolenium by Elpen and Sirdupla by Mylan (all genericAdvair) which are all available in a wide number of countries in the E.U. In the US, several competitors are attempting to gain market authorization for ageneric version of Advair in the next one to two years. Chief among these are Mylan and Sandoz (Mylan reported filing of an ANDA with USFDA for theirproduct in December 2015), Vectura and Roxane who own the U.S. rights to AirFluSal, and Teva who is developing both a fully substitutable and non-substitutable generic Advair that are expected to be filed in the next one to two years.Employees As of December 31, 2016, we had 14 employees. None of our employees are represented by a labor union. We consider our employee relations tobe good.8Table of ContentsExecutive Officers of the Registrant The following table sets forth the name, age, and position of each of our executive officers as of February 24, 2017: Michael W. Aguiar was appointed President and Chief Executive Officer of Innoviva, Inc. and became a member of our Board of Directors inAugust 2014. He joined Innoviva as Senior Vice President and Chief Financial Officer in March 2005. Prior to joining Innoviva, Mr. Aguiar served as VicePresident of Finance at Gilead Sciences, Inc., a biopharmaceutical company, since 2002. Prior to Gilead Sciences, Inc., Mr. Aguiar served as Vice President ofFinance at Immunex Corporation, a biopharmaceutical company, from 2001 to 2002. From 1995 to 2001, he was with Honeywell International in a variety ofpositions, including, most recently CFO and Vice President Finance for Honeywell Electronic Materials SBU. Mr. Aguiar earned a B.S. in biology from theUniversity of California, Irvine and an M.B.A. in finance from the University of Michigan. Mr. Aguiar's demonstrated leadership in his field, his prior seniormanagement experience in our industry and his experience as our Chief Executive Officer and as our former Chief Financial Officer contributed to ourconclusion that he should serve as a director. Eric d'Esparbes joined Innoviva, Inc. as Senior Vice President and Chief Financial Officer in October 2014. From 2010 to 2014, Mr. d'Esparbes served asthe Chief Financial Officer of Joule Unlimited, a biotechnology company, where he was responsible for overseeing all of the company's financial, tax,treasury and accounting activities. Prior to Joule Unlimited, he was the Vice President, Finance of AEI Energy ("AEI"), a global emerging markets energycompany, where he was responsible for optimizing the capital structure of AEI's international portfolio of energy assets, and from 2007 to 2010 served asSenior Vice President and Chief Financial Officer at AEI Asia. Mr. d'Esparbes has also served as Chief Financial Officer and other senior financial roles atMeiya Power Company Limited from 1999 to 2007 and senior financial roles at Hydro-Quebéc International from 1993 to 1999. Mr. d'Esparbes earned aBachelor's degree in International Finance from the University of Montreal's Hautes Etudes Commerciales in Montreal, Canada. Michael E. Faerm joined Innoviva, Inc. as Senior Vice President and Chief Business Officer in July 2015. Prior to joining Innoviva, Mr. Faerm spent nineyears as a pharmaceuticals analyst, most recently as the Senior Pharmaceuticals Equity Research Analyst at Wells Fargo Securities, and previously as a SeniorSpecialty Pharmaceuticals Analyst at Credit Suisse. Mr. Faerm has also worked within the biopharmaceutical industry, holding positions in businessdevelopment and strategic financial planning at Forest Laboratories and Regeneron Pharmaceuticals. Previously, he spent four years in investment bankingas a member of Merrill Lynch's global healthcare team, where he focused primarily on mergers and acquisitions and financings of biotechnology andpharmaceuticals companies. He earned an MBA degree from Harvard Business School, an MS in Civil Engineering from Stanford University, and a BS inCivil Engineering from Columbia University. George B. Abercrombie, RPh, MBA joined Innoviva, Inc. in June 2014. Prior to joining Innoviva, Mr. Abercrombie served as the President and ChiefExecutive Officer of Hoffmann-La Roche Inc. from 2001 to 2009, where he was responsible for the US and Canadian business divisions. From 1993 to 2001,Mr. Abercrombie worked at Glaxo and its successor companies, including as Senior Vice President of Commercial Operations for Glaxo Wellcome, Inc. He isthe Chairman of the Board of BioCryst Pharmaceuticals, Inc., and also serves as a board member of numerous other healthcare-related organizations,including Project Hope and the North Carolina GlaxoSmithKline Foundation. Mr. Abercrombie holds an MBA from Harvard Business School and a BS fromthe University of North Carolina at Chapel Hill, School of Pharmacy.9Name Age Positions HeldMichael W. Aguiar(1) 50 President, Chief Executive Officer and DirectorEric d'Esparbes 49 Senior Vice President and Chief Financial OfficerMichael Faerm 50 Senior Vice President and Chief Business OfficerGeorge B. Abercrombie, RPh, MBA 62 Senior Vice President, Chief Commercial OfficerTheodore J. Witek, Jr., Dr.P.H. 59 Senior Vice President, Chief Scientific Officer(1)Member of the Board of DirectorsTable of Contents Theodore J. Witek, Jr., Dr.P.H.joined Innoviva, Inc. in July 2014. Prior to joining Innoviva, Dr. Witek served as President and Chief Executive Officer ofBoehringer Ingelheim in Canada and in Portugal. Joining Boehringer in 1992, Dr. Witek held a number of positions of increasing responsibility, includingleading the global clinical development and launch of several respiratory products, most notably Spiriva®. He also led the Respiratory and Immunologyclinical research groups in the US in 2001, he moved to Germany to lead the operating team for Spiriva® and also served as the Boehringer Co-chair of theJoint Operating Committee with Pfizer in their global alliance. During his tenure in Canada, Dr. Witek served on the board of directors at Rx&D, Canada'sNational Association for Research-Based Pharmaceutical Companies, chairing its Heath Technology Assessment and Public Affairs Committees. He alsoserved over ten years on the Drug/Device Discovery and Development Committee of the American Thoracic Society, serving as Chairman from 2010 to 2012.He is currently appointed to the Ontario Heath Innovation Council, serves as a director and Chairman of the board of directors of Ehave, Inc. and is on theboard of directors of Helix BioPharma Corporation. Dr. Witek holds a DrPH degree from Columbia University, an MPH from Yale University, and an MBAfrom Henley Management College.Code of Business Conduct The Company has adopted the Innoviva, Inc. Code of Business Conduct that applies to all directors, officers and employees. The Code of BusinessConduct, as amended and restated on April 24, 2015, is available on the corporate governance section of our website at www.inva.com. If the Companymakes any substantive amendments to the Code of Business Conduct or grants any waiver from a provision of the Code to any executive officer or director,the Company will promptly disclose the nature of the amendment or waiver as required by applicable law.Available Information Our Internet address is www.inva.com. Our investor relations website is located at http://investor.inva.com. We make available free of charge on ourinvestor relations website under "SEC Filings" our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, ourdirectors' and officers' Section 16 Reports and any amendments to those reports after filing or furnishing such materials to the U.S. Securities and ExchangeCommission (SEC). The information found on our website is not part of this or any other report that we file with or furnish to the SEC. Innoviva and theInnoviva logo are registered trademarks of Innoviva, Inc. Trademarks, tradenames or service marks of other companies appearing in this report are theproperty of their respective owners. ITEM 1A. RISK FACTORS Risks Related to our BusinessFor the foreseeable future we will derive all of our royalty revenues from GSK and our future success depends on GSK's ability to successfully develop andcommercialize the products in the respiratory programs partnered with GSK. Pursuant to the GSK Agreements, GSK is responsible for the development and commercialization of products in the partnered respiratory programs.Although we may receive milestone payments from GSK if certain development milestones are achieved in our MABA program, we believe that royaltyrevenues from RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® will represent the majority of our future revenues from GSK. The amount and timingof revenue from such royalties and milestones are unknown and highly uncertain. Our future success depends upon the performance by GSK of its commercialobligations under the GSK Agreements and the commercial success of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®. We have no control overGSK's marketing and sales efforts, and GSK might not be successful, which would harm our business and cause the price of our securities to fall. The amount of royalties and milestone payments, if any, we receive will depend on many factors, including the following:•the extent and effectiveness of the sales and marketing and distribution support GSK provides to our partnered products;10Table of Contents•market acceptance and demand for our partnered products; •changes in the treatment paradigm or standard of care for COPD or asthma, for instance through changes to the GOLD (Global Initiative forChronic Obstructive Lung Disease) guidelines; •the competitive landscape of generic and branded products and developing therapies that compete with our partnered products, including theclosed triple combination for COPD or products owned by GSK (such as Advair®) but which are not partnered with us and pricing pressure inthe respiratory markets targeted by our partnered products; •the size of the market for our partnered products; •decisions as to the timing of product launches, pricing and discounts; •GSK reprioritizing its commercial efforts on other products, including the closed triple combination for COPD or products owned by GSK(such as Advair®) but which are not partnered with us; •GSK's ability to expand the indications for which our partnered products can be marketed; •a satisfactory efficacy and safety profile as demonstrated in a broad patient population; •acceptance of, and ongoing satisfaction with, our partnered products by the medical community, patients receiving therapy and thirdparty payors; •the ability of patients to be able to afford our partnered products or obtain health care coverage that covers our partnered products; •safety concerns in the marketplace for respiratory therapies in general and with our partnered products in particular; •regulatory developments relating to the manufacture or continued use of our partnered products; •the requirement to conduct additional post-approval studies or trials for our partnered products; •GSK's ability to successfully achieve development milestones with respect to our partnered MABA program; •GSK's ability to obtain regulatory approval of our partnered products in additional countries; •the unfavorable outcome of any potential litigation relating to our partnered products; or •general economic conditions in the jurisdictions where our partnered products are sold, including microeconomic disruptions or slowdowns.If the FDA or other applicable regulatory authorities approve generic products, including but not limited to generic forms of Advair®, that compete withRELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®, or generic form of RELVAR®/BREO® ELLIPTA®, the royalties payable to us pursuant to theLABA Collaboration Agreement will be less than anticipated, which in turn would harm our business and the price of our securities could fall. Once an NDA or marketing authorization application outside the United States is approved, the product covered thereby becomes a "listed drug" thatcan, in turn, be cited by potential competitors in support of approval of an Abbreviated New Drug Application ("ANDA") in the United States. Agencyregulations and other applicable regulations and policies provide incentives to manufacturers to create modified, non-infringing versions of a drug tofacilitate the approval of an ANDA or other application for generic substitutes in the United States and in nearly every pharmaceutical market around theworld. Numerous companies like Mylan N.V., Novartis' Sandoz division and Teva Pharmaceuticals Industries Ltd. have publicly stated their intentions tobring generic forms of the ICS/LABA drug Advair®, when certain patents covering the Advair® delivery device expired in 2016. Mylan N.V. has recentlyannounced that its ANDA for fluticasone propionate 100, 250, 500 mcg and salmeterol 50 mcg inhalation powder has been accepted for filing by the FDAwith a GDUFA goal date of March 28, 2017. Hikma Pharmaceuticals PLC (Hikma) also recently announced that their ANDA for fluticasone propionate andsalmeterol inhalation powder has been accepted for filing by the FDA with a GDUFA goal date of May 10, 2017. In addition, Teva PharmaceuticalIndustries Ltd., (NYSE and TASE:11Table of ContentsTEVA) announced recently that the FDA approved two of their products for adolescent and adult patients with asthma, AirDuo™ RespiClick® (fluticasonepropionate and salmeterol inhalation powder) and ArmonAirTM RespiClick® (fluticasone propionate inhalation powder), which are non-AB generic versionsof Advair®. In general, these manufactures are required to conduct a restricted number of clinical efficacy, pharmacokinetic and device studies to demonstrateequivalence to Advair, per FDA's September 2013 Draft Guidance document. These studies are designed to demonstrate that the generic product has the sameactive ingredient(s), dosage form, strength, exposure and clinical efficacy as the branded product. These generic equivalents, which must meet the sameexacting quality standards as branded products, may be significantly less costly to bring to market, and companies that produce generic equivalents aregenerally able to offer their products at lower prices. Thus, after the introduction of a generic competitor, a significant percentage of the sales of any brandedproduct and products that may compete with such branded product is typically lost to the generic product. In addition, on April 14, 2016, the FDA issueddraft guidelines documents covering Fluticasone Furoate/Vilanterol Trifenatate (FF/VI), the active ingredients used in RELVAR®/BREO® ELLIPTA®.Accordingly, introduction of generic products that compete against ICS/LABA products, like RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®,would materially adversely impact our future royalty revenue, profitability and cash flows. We cannot yet ascertain what impact these generic products andany future approved generic products will have on any sales of RELVAR®/BREO® ELLIPTA® or ANORO® ELLIPTA®, if approved.Reduced prices and reimbursement rates due to the actions of governments, payors, or competition or other healthcare cost containment initiatives such asrestrictions on use, may negatively impact royalties generated under the GSK Agreements. The continuing efforts of governments, pharmaceutical benefit management organizations (PBMs), insurance companies, managed care organizationsand other payors of health care costs to contain or reduce costs of health care has adversely affected the price, market access, and total revenues ofRELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® and may continue to adversely affect them in the future. In addition, we have experienced andexpect to continue to experience increased competitive activity which has resulted in lower overall prices for our products. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (together, "PPACA") andother legislative or regulatory requirements or potential legislative or regulatory actions regarding healthcare and insurance matters, along with the trendtoward managed healthcare in the U.S., could adversely influence the purchase of healthcare products and reduce demand and prices for our partneredproducts. This could harm GSK's ability to market our partnered products and significantly reduce future revenues. For example, when GSK launched BREO®ELLIPTA® for the treatment of COPD in the U.S. in October 2013, GSK experienced significant challenges gaining coverage at some of the largest PBMs,healthcare payors, and providers and lower overall prices than expected. Recent actions by U.S. PBMs in particular have increased discount levels forrespiratory products resulting in lower net sales pricing realized for products in our collaboration. Further, if the ongoing Phase 3b studies with FF/VI do notshow improved outcomes relative to the standard of care, obtaining payor coverage for RELVAR®/BREO® ELLIPTA® could become more difficult in thefuture. In addition, in certain foreign markets, the pricing of prescription drugs is subject to government control and reimbursement may in some cases beunavailable. We believe that pricing pressures will continue and may increase. This may make it difficult for GSK to sell our partnered products at a priceacceptable to us or GSK or to generate revenues in line with our analysts' or investors' expectations, which may cause the price of our securities to fall. More recently, the new presidential administration and the U.S. Congress have indicated that they may seek to replace PPACA and related legislationwith new healthcare legislation. There is uncertainty with respect to the impact these potential changes may have, if any, and any changes will likely taketime to unfold, and could have an impact on coverage and reimbursement for healthcare items and services covered by plans that were authorized by PPACA.However, we cannot predict the ultimate content, timing or effect of any healthcare reform legislation or the impact of potential legislation on us. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federaland state governments will pay for healthcare products and services, which could result in reduced demand for our products once approved or additionalpricing pressures, and may adversely affect our operating results.12Table of ContentsAll of our current revenues are from royalties derived from sales of our respiratory products partnered with GSK, RELVAR®/BREO® ELLIPTA® andANORO® ELLIPTA®. If the treatment paradigm for the indications our partnered products are approved for change or if GSK is unable to, or does notdevote sufficient resources to, maintain or continue increasing sales of these products, our results of operations will be adversely affected. We currently depend on royalties from sales of our products partnered with GSK to support our existing operations. Were the treatment paradigm forCOPD or asthma to change, for instance through changes to the GOLD (Global Initiative for Chronic Obstructive Lung Disease) guidelines, causing ourpartnered products to fall out of favor, or if GSK was unable, or did not devote sufficient resources, to maintain or continue increasing our partnered productsales, our results of operations would likely suffer and we may need to scale back our operations and capital return programs.If the commercialization of RELVAR®/BREO® ELLIPTA® or ANORO® ELLIPTA® in the countries in which they have received regulatory approvalencounters any delays or adverse developments, or perceived delays or adverse developments, or if sales or payor coverage do not meet investors, analystsor our expectations, our business will be harmed, and the price of our securities could fall. Under our agreements with our collaborative partner GSK, GSK has full responsibility for commercialization of RELVAR®/ BREO® ELLIPTA® andANORO® ELLIPTA®. GSK has launched RELVAR®/ BREO® ELLIPTA® in a number of countries including the United States (U.S.), Canada, Japan, theUnited Kingdom, and Germany among others. The commercialization of both products in countries where they are already launched and thecommercialization launch in new countries are still subject to fluctuating overall pricing levels and uncertain timeframes to obtain payor coverage. Anydelays or adverse developments or perceived additional delays or adverse developments with respect to the commercialization of RELVAR®/ BREO®ELLIPTA® and ANORO® ELLIPTA® including if sales or payor coverage do not meet investors, analysts or our expectations, will significantly harm ourbusiness and the price of our securities could fall.We are dependent on GSK for the successful commercialization and development of products under the GSK Agreements. If GSK does not devote sufficientresources to the commercialization or development of these products, is unsuccessful in its efforts, or chooses to reprioritize its commercial programs,including the closed triple product for COPD, our business will be materially harmed. GSK is responsible for all clinical and other product development, regulatory, manufacturing and commercialization activities for products developedunder the GSK Agreements, including RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®. Our royalty revenues under the GSK Agreements may notmeet our, analysts', or investors' expectations, due to a number of important factors. GSK has a substantial respiratory product portfolio in addition to thepartnered products that are covered by the GSK Agreements. GSK may make respiratory product portfolio decisions or statements about its portfolio whichmay be, or may be perceived to be, harmful to the respiratory products partnered with us. For instance, GSK has wide discretion in determining the efforts andresources that it will apply to the commercialization of our partnered products. The timing and amount of royalties that we may receive will depend on,among other things, the efforts, allocation of resources and successful development and commercialization of these product candidates by GSK. In addition,GSK may determine to focus its commercialization efforts on its own products or the closed triple product for COPD following approval, if any. For example,in January 2015, GSK launched Incruse® (Umec) in the U.S., which is a LAMA for the treatment of COPD. GSK may determine to focus its marketing effortson Incruse, which could have the effect of decreasing the potential market share of ANORO® ELLIPTA® and lowering the royalties we may receive for suchproduct. Alternatively, GSK may decide to market Incruse® in combination with RELVAR®/BREO® ELLIPTA® as an open triple therapy in anticipation offuture commercialization of the closed triple therapy for which we only receive limited amount of royalty revenues, and eventually compete directly againstsales of RELVAR®/BREO® ELLIPTA®. For example, GSK filed for regulatory approval of the closed triple combination therapy for COPD in the U.S. inNovember 2016 and in the EU in December 2016. If the closed triple (or MABA /FF) receives regulatory approval in either the U.S. or the EU, GSK's diligentefforts obligations regarding commercialization matters will have the objective of focusing on the best interests of patients and maximizing the net value ofthe overall portfolio of products under the GSK Agreements. Since GSK's commercialization efforts following such regulatory approval will be guided by aportfolio approach13Table of Contentsacross products in which we have retained our full interest and also products in which we now have only a small portion of our former interest, GSK'scommercialization efforts may have the effect of reducing the overall value of our remaining interests in the GSK Agreements in the future. If GSK prioritizesthe closed triple product for COPD following regulatory approval, if any, we will only be entitled to a 15% economic interest of the royalties paid pursuant tothe GSK Agreements with respect to this product. In the event GSK does not devote sufficient resources to the commercialization of our partnered products orchooses to reprioritize its commercial programs, our business, operations and stock price would be negatively affected.If the results of the Salford Lung Study in asthma are negative or do not meet market expectations, or if the data generated from the Salford study indicatesafety concerns, sales of RELVAR®/BREO® ELLIPTA® could be diminished and our ability to generate royalties from such sales could be negativelyaffected, and the price of our securities could fall. GSK is conducting the Salford Lung Study to explore the effectiveness of RELVAR®/BREO® ELLIPTA® compared to other asthma treatments whenused in a broad group of people living and managing their asthma on a day-to-day basis. The Salford Lung Study is a Phase 3 multicenter, randomized open-label study of approximately 2,800 people being treated in primary care who have been diagnosed and receive regular treatment for asthma in Salford and thesurrounding area. The primary endpoint is the proportion of patients whose asthma is under control after 24 weeks receiving RELVAR®/BREO® ELLIPTA®compared to usual maintenance therapy (where asthma control is defined by an ACT score of 20). GSK expects to report results for the Salford Lung Studyin asthma in 2017. If the data derived from the study are negative, do not meet market expectations, or identify other safety or efficacy concerns with RELVAR/BREOELLIPTA, it could result in, among other things:•decreased market acceptance and demand for RELVAR®/BREO® ELLIPTA®; •decrease in the size of the market for RELVAR®/BREO® ELLIPTA®; •safety concerns in the marketplace for RELVAR®/BREO® ELLIPTA®; •shifts in the medical community to new treatment paradigms or standards of care; •changes in the competitive landscape for approved and developing therapies that may compete with RELVAR®/BREO® ELLIPTA®; •GSK's ability to obtain regulatory approval for RELVAR®/BREO® ELLIPTA® in additional jurisdictions; •the unfavorable outcome or other negative effects of any potential litigation relating to RELVAR®/BREO® ELLIPTA®; •additional restrictions on the commercialization of RELVAR®/BREO® ELLIPTA® through changes to the approved RELVAR®/BREO®ELLIPTA® labels; •the imposition of additional post-approval studies or trials; or •the withdrawal of the approvals of RELVAR®/BREO® ELLIPTA®. Our business, operations and stock price would be negatively affected if any of these or similar events occur.Any adverse change in FDA policy or guidance regarding the use of LABAs to treat asthma may significantly harm our business and the price of oursecurities could fall. On February 18, 2010, the FDA announced that LABAs should not be used alone in the treatment of asthma and it will require manufacturers to includethis warning in the product labels of these drugs, along with taking other steps to reduce the overall use of these medicines. The FDA now requires that theproduct labels for LABA medicines reflect, among other things, that the use of LABAs is contraindicated without the use of an asthma controller medicationsuch as an inhaled corticosteroid, that LABAs should only be used long-term in patients whose asthma cannot be adequately controlled on asthma controllermedications, and that LABAs should be used for the shortest duration of time required to achieve control of asthma symptoms and discontinued, if possible,once asthma control is achieved. In addition, in March 2010, the FDA held an Advisory14Table of ContentsCommittee to discuss the design of medical research studies (known as "clinical trial design") to evaluate serious asthma outcomes (such as hospitalizations,a procedure using a breathing tube known as intubation, or death) with the use of LABAs in the treatment of asthma in adults, adolescents, and children.Further, in April 2011, the FDA announced that to further evaluate the safety of LABAs, it is requiring the manufacturers of currently marketed LABAs toconduct additional randomized, double-blind, controlled clinical trials comparing the addition of LABAs to inhaled corticosteroids versus inhaledcorticosteroids alone. Results from these post-marketing studies are expected in 2017. It is unknown at this time what, if any, effect these or future FDAactions will have on the prospects for FF/VI. The current uncertainty regarding the FDA's position on LABAs for the treatment of asthma and the lack ofconsensus expressed at the March 2010 Advisory Committee may result in the FDA requiring additional asthma clinical trials in the U.S. for FF/VI andincrease the overall risk of FF/VI for the treatment of asthma in the U.S. We cannot predict the extent to which new FDA policy or guidance mightsignificantly impede the discovery, development, production and marketing of FF/VI. Any adverse change in FDA policy or guidance regarding the use ofLABAs to treat asthma may significantly harm our business and the price of our securities could fall.Any adverse developments to the regulatory status of either RELVAR®/BREO® ELLIPTA® or ANORO® ELLIPTA® in the countries in which they havereceived regulatory approval including labeling restrictions, safety findings, or any other limitation to usage, will harm our business and may cause theprice of our securities to fall. Although RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® are approved and marketed in a number of countries, it is possible that adversechanges to the regulatory status of these products could occur in the event new safety issues are identified, treatment guidelines are changed, or new studiesfail to demonstrate product benefits. A number of notable pharmaceutical products have experienced adverse developments during commercialization thathave resulted in the product being withdrawn, approved uses being limited, or new warnings being included. In the event that any adverse regulatory changewas to occur to any of our products, our business will be harmed and the price of our securities could fall.Any adverse developments or results or perceived adverse developments or results with respect to the ongoing studies for FF/VI in asthma or COPD, forUMEC/VI in COPD, or any future studies will significantly harm our business and the price of our securities could fall, and if regulatory authorities inthose countries in which approval has not yet been granted determine that the ongoing studies for FF/VI in asthma or COPD or the ongoing studies forUMEC/VI for COPD do not demonstrate adequate safety and efficacy, the continued development of FF/VI or UMEC/VI or both may be significantlydelayed, they may not be approved by these regulatory authorities, and even if approved it may be subject to restrictive labeling, any of which will harmour business, and the price of our securities could fall. Although we have announced the completion of, and reported certain top-line data from, the Phase 3 registrational program for FF/VI in COPD andasthma, additional studies of FF/VI are underway. Any adverse developments or perceived adverse developments with respect to any prior, current or futurestudies in these programs will significantly harm our business and the price of our securities could fall. For example, in September 2015, GSK and weannounced that the Study to Understand Mortality and MorbidITy" (SUMMIT) did not meet its primary endpoints, which resulted in a significant decline inthe price of our stock. Although the FDA, the European Medicines Agency, the Japanese Ministry of Health, Labour and Welfare and Health Canada and other jurisdictionshave approved ANORO® ELLIPTA®, it has not yet been approved in all jurisdictions. Any adverse developments or results or perceived adverse developments or results with respect to other pending or future regulatory submissions for theFF/VI program or the UMEC/VI program will significantly harm our business and the price of our securities could fall. Examples of such adversedevelopments include, but are not limited to:•not every study, nor every dose in every study, in the Phase 3 programs for FF/VI achieved its primary endpoint and regulatory authorities maydetermine that additional clinical studies are required; •safety, efficacy or other concerns arising from clinical or non-clinical studies in these programs having to do with the LABA VI, which is acomponent of FF/VI and UMEC/VI;15Table of Contents•analysts adjusting their sales forecasts downward from previous projections based on results or interpretations of results of prior, current orfuture studies; •safety, efficacy or other concerns arising from clinical or non-clinical studies in these programs; •regulatory authorities determining that the Phase 3 programs in asthma or in COPD raise safety concerns or do not demonstrate adequateefficacy; or •any change in FDA (or comparable foreign regulatory agency) policy or guidance regarding the use of LABAs to treat asthma or the use ofLABAs combined with a LAMA to treat COPD.RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® face substantial competition for their intended uses in the targeted markets from productsdiscovered, developed, launched and commercialized both by GSK and by other pharmaceutical companies, which could cause the royalties payable to uspursuant to the LABA Collaboration Agreement to be less than expected, which in turn would harm our business and the price of our securities could fall. GSK has responsibility for obtaining regulatory approval, launching and commercializing RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® fortheir intended uses in the targeted markets around the world. While these products have received regulatory approval and been launched and commercializedin the U.S. and certain other targeted markets, the products face substantial competition from existing products previously developed and commercializedboth by GSK and by other competing pharmaceutical companies and can expect to face additional competition from new products that are discovered,developed and commercialized by the same pharmaceutical companies and other competitors going forward. For example, sales of Advair®, GSK's approvedmedicine for both COPD and asthma, continue to be significantly greater than sales of RELVAR®/BREO® ELLIPTA®, and GSK has indicated publicly that itintends to continue commercializing Advair®. Many of the pharmaceutical companies competing in respiratory markets are international in scope with substantial financial, technical and personnelresources that permit them to discover, develop, obtain regulatory approval and commercialize new products in a highly efficient and low cost manner atcompetitive prices to consumers. In addition, many of these competitors have substantial commercial infrastructure that facilitates commercializing theirproducts in a highly efficient and low cost manner at competitive prices to consumers. The market for products developed for treatment of COPD and asthmacontinues to experience significant innovation and reduced cost in bringing products to market over time. There can be no assurance that RELVAR®/BREO®ELLIPTA® and ANORO® ELLIPTA® will not be replaced by new products that are deemed more effective at lower cost to consumers. The ability ofRELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® to succeed and achieve the anticipated level of sales depends on the commercial and developmentperformance of GSK to achieve and maintain a competitive advantage over other products with the same intended use in the targeted markets. In addition, GSK made regulatory submissions for the approval of the closed triple combination therapy for COPD in the U.S. and EU at the end of 2016.If the closed triple combination (or MABA /FF) receives regulatory approval in either the U.S. or the EU, GSK's diligent efforts obligations regardingcommercialization matters will have the objective of focusing on the best interests of patients and maximizing the net value of the overall portfolio ofproducts under the GSK Agreements. Since GSK's commercialization efforts following such regulatory approval will be guided by a portfolio approach acrossproducts in which we have retained our full interest and also products in which we now have only a small portion of our former interest, GSK'scommercialization efforts may have the effect of reducing the overall value of our remaining interests in the GSK Agreements in the future. If GSK prioritizesthe closed triple product for COPD following regulatory approval, if any, we would only be entitled to a 15% economic interest in the future payments madeby GSK under the GSK Agreements with respect to this product. If sales of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® are less than anticipated because of existing or future competition in the markets inwhich they are commercialized, including competition from existing and new products that are perceived as lower cost or more effective, our royaltypayments will be less than anticipated, which in turn would harm our business and the price of our securities could fall.16Table of ContentsWe and GSK are developing UMEC/VI/FF (LAMA/LABA/ICS) and MABA/FF as potential triple combination treatments for COPD and, potentially,asthma. As a result of the Spin-Off, most of our economic rights in these programs were assigned to Theravance Biopharma. If these programs aresuccessful and GSK and the respiratory market in general views triple combination therapy as significantly more beneficial than existing therapies,including RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®, our business could be harmed, and the price of our securities could fall. Under our LABA Collaboration Agreement with GSK, we and GSK are exploring various paths to create triple therapy respiratory medications. The useof triple therapy is supported by the GOLD ("Global initiative for chronic Obstructive Lung Disease") guidelines in high-risk patients with severe COPD anda high risk of exacerbations. One potential triple therapy path is the combination of UMEC/VI (two separate bronchodilators) and FF (an inhaledcorticosteroid), to be administered via the ELLIPTA® dry powder inhaler, referred to as UMEC/VI/FF or the "closed triple." Prior to the Spin-Off, we wereentitled to receive 100% of any royalties payable under the GSK Agreements arising from sales of UMEC/VI/FF (as well as MABA and MABA/FF) if suchproducts were successfully developed, approved and commercialized. In June 2016, we and GSK announced positive top-line results from the pivotalphase III FULFIL of the investigational once-daily 'closed' triple combination therapy (FF/UMEC/VI) in patients with COPD. GSK made regulatorysubmissions for the approval of the closed triple combination therapy for COPD in the U.S. and EU at the end of 2016. The commercial success ofRELVAR®/BREO® ELLIPTA® may be adversely effected if GSK or the respiratory markets view this closed triple combination or other combinationtherapies more beneficial. Furthermore, if the closed triple (or MABA /FF) receives regulatory approval in either the U.S. or the EU, GSK's diligent effortsobligations regarding commercialization matters will have the objective of focusing on the best interests of patients and maximizing the net value of theoverall portfolio of products under the GSK Agreements. Since GSK's commercialization efforts following such regulatory approval will be guided by aportfolio approach across products in which we have retained our full interest and also products in which we now have only a small portion of our formerinterest, GSK's commercialization efforts may have the effect of reducing the overall value of our remaining interests in the GSK Agreements in the future. Asa result of the transactions effected by the Spin-Off, however, we are now only entitled to receive 15% of any contingent payments and royalties payable byGSK from sales of FF/UMEC/VI (and MABA, and MABA/FF) while Theravance Biopharma receives 85% of those same payments.In the event that Theravance Biopharma defaults or breaches the agreements we entered into with them in connection with the Spin-Off, our business andresults of operations may be materially harmed. Upon the Spin-Off, our facility leases in South San Francisco, California were assigned to Theravance Biopharma. However, if Theravance Biopharmawere 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 thesefacilities. We would also be responsible for lease-related payments including utilities, property taxes, and common area maintenance, which may be as muchas the actual lease payments. As of December 31, 2016, the total remaining lease payments, which run through May 2020, were $21.7 million. In the eventthat Theravance Biopharma defaults on such obligations, our business and results of operations may be materially harmed. Under the terms of a separation and distribution agreement entered into between us and Theravance Biopharma, Theravance Biopharma will indemnifyus from (i) all debts, liabilities and obligations transferred to Theravance Biopharma in connection with the Spin-Off (including its failure to pay, perform orotherwise promptly discharge any such debts, liabilities or obligations after the Spin-Off), (ii) any misstatement or omission of a material fact in itsinformation statement filed with the SEC, resulting in a misleading statement and (iii) any breach by it of certain agreements entered into between the partiesin connection with the Spin-Off. Theravance Biopharma's ability to satisfy these indemnities, if called upon to do so, will depend upon its future financialstrength and if we are not able to collect on indemnification rights from Theravance Biopharma, our financial condition may be harmed.We may not be able to utilize all of our net operating loss carryforwards. We have net operating loss carryforwards and other significant U.S. tax attributes that we believe could offset otherwise taxable income in the U.S. As apart of the overall Spin-Off transaction, the transfer of certain assets by us to Theravance Biopharma and our distribution of Theravance Biopharma ordinaryshares resulted17Table of Contentsin taxable transfers pursuant to applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code") and Treasury Regulations. The taxablegain recognized by us attributable to the transfer of certain assets to Theravance Biopharma will generally equal the excess of the fair market value of eachasset transferred over our adjusted tax basis in such asset. Although we will not recognize any gain with respect to the cash we transferred to TheravanceBiopharma, we may recognize substantial gain based on the fair market value of the other assets (other than cash) transferred to Theravance Biopharma. Thedetermination of the fair market value of these assets is subjective and could be subject to adjustments or future challenge by the Internal Revenue Service("IRS"), which could result in an increase in the amount of gain realized by us as a result of the transfer. Our U.S. federal income tax resulting from any gainrecognized upon the transfer of our assets to Theravance Biopharma (including any increased U.S. federal income tax that may result from a subsequentdetermination of higher fair market values for the transferred assets), may be reduced by our net operating loss carryforward. The net operating losscarryforwards available in any year to offset our net taxable income will be reduced following a more than 50% change in ownership during any period of36 consecutive months (an "ownership change") as determined under the Internal Revenue Code of 1986 (the "Code"). We have conducted an analysis todetermine whether an ownership change had occurred since inception through December 31, 2015, and concluded that we had undergone two ownershipchanges in prior years. We have approximately $1.1 billion of net operating loss carryforward as of December 31, 2016. There may be certain annuallimitations for utilization based on the above-described ownership change provisions. In addition, we may not be able to have sufficient future taxableincome prior to their expiration because net operating losses have carryforward periods. Future changes in federal and state tax laws pertaining to netoperating loss carryforwards may also cause limitations or restrictions from us claiming such net operating losses. If the net operating loss carryforwardsbecome unavailable to us or are fully utilized, our future taxable income will not be shielded from federal and state income taxation absent certainU.S. federal and state tax credits, and the funds otherwise available for general corporate purposes would be reduced.If any product candidates in any respiratory program partnered with GSK are not approved by regulatory authorities or are determined to be unsafe orineffective in humans, our business will be adversely affected and the price of our securities could fall. The FDA must approve any new medicine before it can be marketed and sold in the U.S. Our partner GSK must provide the FDA and similar foreignregulatory authorities with data from preclinical and clinical studies that demonstrate that the product candidates are safe and effective for a definedindication before they can be approved for commercial distribution. GSK will not obtain this approval for a partnered product candidate unless and until theFDA approves a NDA. The processes by which regulatory approvals are obtained from the FDA to market and sell a new product are complex, require anumber of years and involve the expenditure of substantial resources. In order to market medicines in foreign countries, separate regulatory approvals must beobtained in each country. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval maydiffer from that required to obtain FDA approval. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval byone foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. Conversely, failure to obtainapproval in one or more country may make approval in other countries more difficult. Clinical studies involving product candidates partnered with GSK may reveal that those candidates are ineffective, inferior to existing approvedmedicines, unacceptably toxic, or that they have other unacceptable side effects. In addition, the results of preclinical studies do not necessarily predictclinical success, and larger and later-stage clinical studies may not produce the same results as earlier-stage clinical studies. Frequently, product candidates that have shown promising results in early preclinical or clinical studies have subsequently suffered significant setbacksor failed in later clinical or non-clinical studies. In addition, clinical and non-clinical studies of potential products often reveal that it is not possible orpractical to continue development efforts for these product candidates. If these studies are substantially delayed or fail to prove the safety and effectiveness ofproduct candidates in development partnered with GSK, GSK may not receive regulatory approval for such product candidates and our business and financialcondition will be materially harmed and the price of our securities may fall.18Table of Contents Several well-publicized Complete Response letters issued by the FDA and safety-related product withdrawals, suspensions, post-approval labelingrevisions to include boxed warnings and changes in approved indications over the last several years, as well as growing public and governmental scrutiny ofsafety issues, have created a conservative regulatory environment. The implementation of new laws and regulations and revisions to FDA clinical trial designguidance have increased uncertainty regarding the approvability of a new drug. Further, there are additional requirements for approval of new drugs,including advisory committee meetings for new chemical entities, and formal risk evaluation and mitigation strategy at the FDA's discretion. These laws,regulations, additional requirements and changes in interpretation could cause non-approval or further delays in the FDA's review and approval of anyproduct candidates in any respiratory program partnered with GSK.Even if product candidates in any respiratory program partnered with GSK receive regulatory approval, as is the case with RELVAR®/BREO® ELLIPTA®and ANORO® ELLIPTA®, commercialization of such products may be adversely affected by regulatory actions and oversight. Even if GSK receives regulatory approval for product candidates in any respiratory program partnered with GSK, this approval may include limitationson the indicated uses for which GSK can market the medicines or the patient population that may utilize the medicines, which may limit the market for themedicines or put GSK at a competitive disadvantage relative to alternative therapies. These restrictions make it more difficult to market the approvedproducts. For example, at the joint meeting of the Pulmonary-Allergy Drugs Advisory Committee and Drug Safety and Risk Management Advisory Committee ofthe FDA regarding the sNDA for BREO® ELLIPTA® as a treatment for asthma, the advisory committee recommended that a large LABA safety trial withBREO® ELLIPTA® should be required in adults and in 12-17 year olds, similar to the ongoing LABA safety trials being conducted as an FDA Post-Marketing Requirement by each of the manufacturers of LABA containing asthma treatments. In addition, the manufacturing, labeling, packaging, adverse event reporting, advertising, promotion and recordkeeping for the approved product remainsubject to extensive and ongoing regulatory requirements. If we or GSK become aware of previously unknown problems with an approved product in the U.S.or overseas or at contract manufacturers' facilities, a regulatory authority may impose restrictions on the product, the contract manufacturers or on GSK,including requiring it to reformulate the product, conduct additional clinical studies, change the labeling of the product, withdraw the product from themarket or require the contract manufacturer to implement changes to its facilities. GSK is also subject to regulation by regional, national, state and localagencies, including the Department of Justice, the Federal Trade Commission, the Office of Inspector General of the U.S. Department of Health and HumanServices and other regulatory bodies as well as governmental authorities in those foreign countries in which any of the product candidates in any respiratoryprogram partnered with GSK are approved for commercialization. The Federal Food, Drug, and Cosmetic Act, the Public Health Service Act and other federaland state statutes and regulations govern to varying degrees the research, development, manufacturing and commercial activities relating to prescriptionpharmaceutical products, including non-clinical and clinical testing, approval, production, labeling, sale, distribution, import, export, post-marketsurveillance, advertising, dissemination of information and promotion. Any failure to maintain regulatory approval will limit GSK's ability to commercializethe product candidates in any respiratory program partnered with GSK, which would materially and adversely affect our business and financial condition andwhich may cause the price of our securities to fall.We may not be successful in our efforts to expand our portfolio of royalty generating products. In the future, we may choose to acquire interests in or rights to one or more additional royalty generating products. However, we may be unable to licenseor acquire rights to suitable royalty generating products for a number of reasons. In particular, the licensing and acquisition of pharmaceutical product rightsis a competitive area. Several more established companies are also pursuing strategies to license or acquire rights to royalty generating products. Theseestablished companies may have a competitive advantage over us. Other factors that19Table of Contentsmay prevent us from licensing or otherwise acquiring rights to suitable royalty generating products include the following:•we may be unable to license or acquire the rights on terms that would allow us to make an appropriate return from the product; •companies that perceive us to be their competitors may be unwilling to assign or license their product rights to us; or •we may be unable to identify suitable royalty generating products. If we are unable to acquire or license rights to suitable royalty generating product candidates, our business may suffer. We are engaged in a continual review of opportunities to acquire income generating assets, whether royalty-based or otherwise, or to acquire companiesthat hold royalty or other income generating assets. We currently, and generally at any time, have acquisition opportunities in various stages of active review,including, for example, our engagement of consultants and advisors to analyze particular opportunities, technical, financial and other confidentialinformation, submission of indications of interest and involvement as a bidder in competitive auctions or other processes for the acquisition of incomegenerating assets. Many potential acquisition targets do not meet our criteria, and for those that do, we may face significant competition for theseacquisitions from other financial investors and enterprises whose cost of capital may be lower than ours. Competition for future asset acquisitionopportunities in our markets is competitive and we may be forced to increase the price we pay for such assets or face reduced potential acquisitionopportunities. The success of any future income generating asset acquisitions is based on our ability to make accurate assumptions regarding the valuation,timing and amount of payments, which is highly complex and uncertain. The failure of any of these acquisitions to produce anticipated revenues maymaterially and adversely affect our financial condition and results of operations.We have a significant amount of debt including Convertible Subordinated Notes and Non-Recourse Notes that are senior in capital structure and cashflow, respectively, to our common stockholders. Satisfying the obligations relating to our debt could adversely affect the amount or timing of distributionsto our stockholders. As of December 31, 2016, we had approximately $728.2 million in total debt outstanding, comprised primarily of $241.0 million in principal thatremains outstanding under our convertible subordinated notes, due 2023 (the "2023 Notes") and $487.2 million in principal that remains outstanding underour non-recourse fixed rate term notes due 2029 (the "2029 Notes") (the 2023 Notes and 2029 Notes hereinafter, the "Notes"). The 2023 Notes are unsecureddebt and are not redeemable by us prior to the maturity date. Holders of the Notes may require us to purchase all or any portion of their Notes at 100% of theirprincipal amount, plus any unpaid interest, upon a fundamental change. A fundamental change is generally defined to include a merger involving us, anacquisition of a majority of our outstanding common stock, and the change of a majority of our board without the approval of the board. In addition, to theextent we pursue and complete a monetization transaction or a transaction that modifies our corporate structure, the structure of such transaction may qualifyas a fundamental change under the Notes, which could trigger the put rights of the holders of the Notes, in which case we would be required to use a portionof the net proceeds from such transaction to repurchase any Notes put to us. Our 2029 Notes have rights to 40% of all royalty payments received from GSKrelated to RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® until the notes are paid in full. Satisfying the obligations of this debt could adversely affect the amount or timing of any distributions to our stockholders. We may choose to satisfyrepurchase, or refinance this debt through public or private equity or debt financings if we deem such financings available on favorable terms. If any or all ofthe 2023 Notes are not converted into shares of our common stock before the maturity date, we will have to pay the holders the full aggregate principalamount of the Notes then outstanding. If the 2029 Notes are not refinanced or paid in full, then they will receive 40% of all future economics associated withRELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® until the notes are paid in full. Any of the above payments could have a material adverse effect onour cash position. If we fail to satisfy these obligations, it may result in a default under the indenture,20Table of Contentswhich could result in a default under certain of our other debt instruments, if any. Any such default would harm our business and the price of our securitiescould fall.If we lose key management personnel, or if we fail to retain our key employees, our ability to manage our business will be impaired. We have a small management team and very few employees. We are highly dependent on principal members of our management team and a small groupof key employees to operate our business. Our company is located in northern California, which is headquarters to many other biotechnology andbiopharmaceutical companies and many academic and research institutions. As a result, competition for certain skilled personnel in our market remainsintense. None of our employees have employment commitments for any fixed period of time and they all may leave our employment at will. If we fail toretain our qualified personnel or replace them when they leave, we may be unable to continue our business operations, which may cause the price of oursecurities to fall.We rely and will continue to rely on outsourcing arrangements for many of our activities, including financial reporting and accounting and humanresources. As of December 31, 2016, we had only 14 full-time employees and, as a result, we rely, and expect to continue to rely, on outsourcing arrangements for asignificant portion of our activities, including financial reporting and accounting and human resources, as well as for certain functions as a public company.We may have limited control over these third parties and we cannot guarantee that they will perform their obligations in an effective and timely manner.If we fail to maintain proper and effective internal control over financial reporting or if the interpretations, estimates or judgments utilized in preparingour financial statements prove to be incorrect, our operating results and our ability to operate our business could be harmed. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal control over financial reporting and disclosurecontrols and procedures. Under the SEC's current rules, we are required to perform system and process evaluation and testing of our internal control overfinancial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of theSarbanes-Oxley Act. Our independent registered public accounting firm is also required to report on our internal control over financial reporting. Our testingand our independent registered public accounting firm's testing may reveal deficiencies in our internal control over financial reporting that are deemed to bematerial weaknesses and render our internal control over financial reporting ineffective. We have and expect to continue to incur substantial accounting andauditing expense and to expend significant management time in complying with the requirements of Section 404. If we are not able to maintain compliancewith the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internalcontrol over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject toinvestigations or sanctions by the SEC, FINRA, NASDAQ or other regulatory authorities. In addition, we could be required to expend significantmanagement time and financial resources to correct any material weaknesses that may be identified or to respond to any regulatory investigationsor proceedings. We are also subject to complex tax laws, regulations, accounting principles and interpretations thereof. The preparation of our financial statementsrequires us to interpret accounting principles and guidance and make estimates and judgments that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurredduring the reporting periods. Our interpretations, estimates and judgments are based on our historical experience and on various other factors that we believeare reasonable under the circumstances, the results of which form the basis for the preparation of our financial statements. GAAP presentation is subject tointerpretation by the SEC, the Financial Accounting Standards Board and various other bodies formed to interpret and create appropriate accountingprinciples and guidance. In the event that one of these bodies disagrees with our accounting recognition, measurement or disclosure or any of our accountinginterpretations, estimates or assumptions, it may have a significant effect on our reported results and may retroactively affect21Table of Contentspreviously reported results. The need to restate our financial results could, among other potential adverse effects, result in us incurring substantial costs, affectour ability to timely file our periodic reports until such restatement is completed, divert the attention of our management and employees from managing ourbusiness, result in material changes to our historical and future financial results, result in investors losing confidence in our operating results, subject us tosecurities class action litigation, and cause our stock price to decline.As we continue to develop our business, our mix of assets and our sources of income may require that we register with the SEC as an "investmentcompany" in accordance with the Investment Company Act of 1940. We have not been and have no current intention to register as an "investment company" under the Investment Company Act of 1940, or the 40 Act,because we believe the nature of our assets and the sources of our income currently exclude us from the definition of an investment company pursuant toSections (3)(a)(1)(A), (3)(a)(1)(C) under the 40 Act and Rule 270.3a-1 of Title 17 of the Code of Federal Regulations. Accordingly, we are not currentlysubject to the provisions of the 40 Act, such as compliance with the 40 Act's registration and reporting requirements, capital structure requirements, affiliatetransaction restrictions, conflict of interest rules, requirements for disinterested directors, and other substantive provisions. Generally, to avoid being acompany that is an "investment company" under the 40 Act, it must both: (a) not be or hold itself out as being engaged primarily in the business of investing,reinvesting or trading in securities, and (b) either (i) not be engaged or propose to engage in the business of investing in securities or own or propose toacquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on anunconsolidated basis or (ii) not have more than 45% of the value of its total assets (exclusive of Government securities and cash items) consist of or more than45% of its net income after taxes (for the last four fiscal quarters combined) be derived from securities. In addition, we would not be an "investment company"if an exception, exemption, or safe harbor under the 40 Act applies. We monitor our assets and income for compliance with the tests under the 40 Act and seek to conduct our business activities to ensure that we do not fallwithin its definitions of "investment company." If we were to become an "investment company" and be subject to the strictures of the 40 Act, the restrictionsimposed by the 40 Act would likely require changes in the way we do business and add significant administrative burdens to our operations. In order toensure that we do not fall within the 40 Act, we may need to take various actions which we might otherwise not pursue. These actions may includerestructuring the Company and/or modifying our mixture of assets and income. Specifically, our mixture of debt vs. royalty assets is important to our classification as an "investment company" or not. In this regard, while we currentlybelieve that none of the definitions of "investment company" apply to us, we may in the future rely on an exception under the 40 Act provided bySection 3(c)(5)(A). To qualify for Section 3(c)(5)(A), as interpreted by the staff of the SEC, we would be required to have at least 55% of our total assets in"notes, drafts, acceptances, open accounts receivable, and other obligations representing part or all of the sales price of merchandise, insurance, and services"(or Qualifying Assets). In a no-action letter issued to Royalty Pharma on August 13, 2010, the staff stated that royalty interests are Qualifying Assets underthis exception. If the SEC or its staff in the future adopts a contrary interpretation or otherwise restricts the conclusions in the staff's no-action letter such thatour royalty interests are no longer Qualifying Assets for purposes of Section 3(c)(5)(A), we could be required to register under the 40 Act. The rules and interpretations of the SEC and the courts, relating to the definition of "investment company" are highly complex in numerous respects.While we currently intend to conduct our operations so that we will not be deemed an investment company, we can give no assurances that we will notdetermine it to be in the Company's and our stockholders' interest to register as an "investment company", not be deemed an "investment company" and notbe required to register under the 40 Act.Prolonged economic uncertainties or downturns, as well as unstable market, credit and financial conditions, may exacerbate certain risks affecting ourbusiness and have serious adverse consequences on our business. The global economic downturn and market instability has made the business climate more volatile and more costly. For instance, the United Kingdom'srecent decision to exit the European Union ("Brexit") has provided further uncertainty and potential volatility around European currencies. These economicconditions,22Table of Contentsand uncertainty as to the general direction of the macroeconomic environment, are beyond our control and may make any necessary debt or equity financingmore difficult, more costly, and more dilutive. While we believe we have adequate capital resources to meet current working capital and capital expenditurerequirements, a lingering economic downturn or significant increase in our expenses could require additional financing on less than attractive rates or onterms that are excessively dilutive to existing stockholders. Failure to secure any necessary financing in a timely manner and on favorable terms could have amaterial adverse effect on our stock price and could require us to delay or abandon clinical development plans. Sales of our partnered products will be dependent, in large part, on reimbursement from government health administration authorities, private healthinsurers, distribution partners and other organizations. As a result of negative trends in the general economy in the U.S. or other jurisdictions in which we maydo business, these organizations may be unable to satisfy their reimbursement obligations or may delay payment. In addition, federal and state healthauthorities may reduce Medicare and Medicaid reimbursements, and private insurers may increase their scrutiny of claims. A reduction in the availability orextent of reimbursement could negatively affect our or our partners' product sales and revenue. In addition, we rely on third parties for several important aspects of our business. During challenging and uncertain economic times and in tight creditmarkets, there may be a disruption or delay in the performance of our third party contractors, suppliers or partners. If such third parties are unable to satisfytheir commitments to us, our business and results of operations would be adversely affected.Risks Related to our Alliance with GSKBecause all our current and projected revenues are derived from products under the GSK Agreements, disputes with GSK could harm our business andcause the price of our securities to fall. All of our current and projected revenues are derived from products under the GSK Agreements. Any action or inaction by either GSK or us that results ina material dispute, allegation of breach, litigation, arbitration, or significant disagreement between the parties may be interpreted negatively by the market orby our investors, could harm our business and cause the price of our securities to fall. Examples of these kinds of issues include but are not limited to non-performance of contractual obligations and allegations of non-performance, disagreements over the relative marketing and sales efforts for our partneredproducts and other GSK respiratory products, disputes over public statements, and similar matters. In addition, while we obtained GSK's consent to the Spin-Off as structured, GSK could decide to challenge various aspects of our post-Spin-Off operation of TRC, the limited liability company jointly owned by usand Theravance Biopharma as violating or allowing it to terminate the GSK Agreements. Although we believe our operation of TRC fully complies with theGSK Agreements and applicable law, there can be no assurance that we would prevail against any such claims by GSK. Moreover, regardless of the merit ofany claims by GSK, we may incur significant cost and diversion of resources in defending them. In addition, any market or investor uncertainty about therespiratory programs partnered with GSK or the enforceability of the GSK Agreements could result in significant reduction in the market price of oursecurities and other material harm to our business.Because GSK is a strategic partner as well as a significant stockholder, it may take actions that in certain cases are materially harmful to both ourbusiness or to our other stockholders. Although GSK beneficially owns approximately 29.3% of our outstanding common stock as of February 24, 2017, it is also a strategic partner with rightsand obligations under the GSK Agreements that cause its interests to differ from the interests of us and our other stockholders. In particular, GSK has asubstantial respiratory product portfolio in addition to the partnered products that are covered by the GSK Agreements. GSK may make respiratory productportfolio decisions or statements about its portfolio which may be, or may be perceived to be, harmful to the respiratory products partnered with us. Forexample, GSK could promote its non-GSK/Innoviva respiratory products or a partnered product for which we are entitled to receive a lower percentage ofroyalties, delay or terminate the development or commercialization of the respiratory programs covered by the GSK Agreements, or take other actions, such asmaking public statements, that have a negative effect on our stock price. In this regard and by way of example, sales of Advair®, GSK's approved medicine forboth COPD and asthma, continue to be significantly greater than sales of RELVAR®/BREO® ELLIPTA®, and23Table of ContentsGSK has indicated publicly that it intends to continue commercializing Advair®. Also, given the potential future royalty payments GSK may be obligated topay under the GSK Agreements, GSK may seek to acquire us to reduce those payment obligations. The timing of when GSK may seek to acquire us couldpotentially be when it possesses information regarding the status of drug programs covered by the GSK Agreements that has not been publicly disclosed andis not otherwise known to us. As a result of these differing interests, GSK may take actions that it believes are in its best interest but which might not be in thebest interests of either us or our other stockholders. In addition, upon regulatory approval of the closed triple combination or a MABA/ICS in either the U.S.or the EU, GSK's diligent efforts obligations as to commercialization matters under the GSK Agreements will have the objective of focusing on the bestinterests of patients and maximizing the net value of the overall portfolio of products under the GSK Agreements. Since GSK's commercialization effortsfollowing such regulatory approval will be guided by a portfolio approach across products in which we have retained our full interest and also products inwhich we now have only a portion of our former interest, GSK's commercialization efforts may have the effect of reducing the overall value of our remaininginterests in the products covered by the GSK Agreements in the future. In addition, following the expiration of our governance agreement with GSK inSeptember 2015, GSK is no longer subject to the restrictions thereunder regarding the voting of the shares of our common stock owned by it.GSK has also indicated to us that it believes its consent may be required before we can engage in certain royalty monetization transactions with thirdparties, which may inhibit our ability to engage in these transactions. In the course of our discussions with GSK concerning the Spin-Off of Theravance Biopharma, GSK indicated to us that it believes that its consent may berequired before we can engage in certain transactions designed to monetize the future value of royalties that may be payable to us from GSK under the GSKAgreements. GSK has informed us that it believes that there may be certain covenants included in these types of transactions that might violate certainprovisions of the GSK Agreements. Although we believe that we can structure royalty monetization transactions in a manner that fully complies with therequirements of the GSK Agreements without GSK's consent, a third party in a proposed monetization transaction may nonetheless insist that we obtain GSK'sconsent for the transaction or re-structure the transaction on less favorable terms. We have obtained GSK's agreement that (i) we may grant certain pre-agreedcovenants in connection with monetization of our interests in RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® and vilanterol monotherapy andportions of our interests in TRC, and (ii) it will not unreasonably withhold its consent to our requests to grant other covenants, provided, among otherconditions, that in each case, the covenants are not granted in favor of pharmaceutical or biotechnology company with a product either being developed orcommercialized for the treatment of respiratory disease. If we seek GSK's consent to grant covenants other than pre-agreed covenants, we may not be able toobtain GSK's consent on reasonable terms, or at all. If we proceed with a royalty monetization transaction that is not otherwise covered by the GSKAgreement without GSK's consent, GSK could request that its consent be obtained or seek to enjoin or otherwise challenge the transaction as violating orallowing it to terminate the GSK Agreements. Regardless of the merit of any claims by GSK, we would incur significant cost and diversion of resources indefending against GSK's claims or asserting our own claims and GSK may seek concessions from us in order to provide its consent. Any uncertainty aboutwhether or when we could engage in a royalty monetization transaction, the potential impact on the enforceability of the GSK Agreements or the loss ofpotential royalties from the respiratory programs partnered with GSK, could impair our ability to pursue a return of capital strategy for our stockholders aheadof our receipt of significant royalties from GSK, result in significant reduction in the market price of our securities and cause other material harm toour business.GSK's ownership of a significant percentage of our stock and its ability to acquire additional shares of our stock may create conflicts of interest, and mayinhibit our management's ability to continue to operate our business in the manner in which it is currently being operated. As of February 24, 2017, GSK beneficially owned approximately 29.3% of our outstanding common stock. As such, GSK could have substantialinfluence in the election of our directors, delay or prevent a transaction in which stockholders might receive a premium over the prevailing market price fortheir shares and have significant control over certain changes in our business. The procedures previously governing and restricting GSK offers to ourstockholders to acquire outstanding voting stock and the restrictions regarding the voting of24Table of Contentsshares of our common stock owned by it terminated upon the expiration of the governance agreement in September 2015. Further, pursuant to our Certificateof Incorporation, we renounce our interest in and waive any claim that a corporate or business opportunity taken by GSK constitutes a corporate opportunityof ours unless such corporate or business opportunity is expressly offered to one of our directors who is a director, officer or employee of GSK, primarily in hisor her capacity as one of our directors.GSK's significant ownership position may deter or prevent efforts by other companies to acquire us, which could prevent our stockholders from realizing acontrol premium. As of February 24, 2017, GSK beneficially owned approximately 29.3% of our outstanding common stock. As a result of GSK's significant ownership,other companies may be less inclined to pursue an acquisition of us and therefore we may not have the opportunity to be acquired in a transaction thatstockholders might otherwise deem favorable, including transactions in which our stockholders might realize a substantial premium for their shares.GSK could sell or transfer a substantial number of shares of our common stock, which could depress the price of our securities or result in a change incontrol of our company. GSK is not subject to any contractual restrictions with us on its ability to sell or transfer our common stock on the open market, in privately negotiatedtransactions or otherwise, and these sales or transfers could create substantial declines in the price of our securities or, if these sales or transfers were made to asingle buyer or group of buyers, could contribute to a transfer of control of our company to a third party. Sales by GSK of a substantial number of shares, orthe expectation of such sales, could cause a significant reduction in the market price of our common stock.Risks Related to Legal and Regulatory UncertaintyIf our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and ourbusiness may be adversely affected. Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be infringing onother marks. We may not be able to protect our rights to these trademarks and trade names, which are necessary to build name and brand recognition amongpotential partners or customers in our markets of interest. At times, competitors may adopt trademarks or trade names similar to ours, thereby impeding ourability to build name and brand identity and possibly leading to market confusion. In addition, there could be potential trademark or trade nameinfringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks ortrade names. There was also a risk that if there is confusion in the marketplace, the reputation, performance and/or actions of such third parties may negativelyimpact our stock price and our business. We therefore have, as of January 2016, adopted a new brand, Innoviva. Over the long term, if we are unable toestablish name and brand recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may beadversely affected. If we fail to promote and maintain our brand successfully, or if we incur substantial expenses in an unsuccessful attempt to promote andmaintain our brand, our business may be harmed.If the efforts of our partner, GSK, to protect the proprietary nature of the intellectual property related to products in any respiratory program partneredwith GSK are not adequate, the future commercialization of any such product could be delayed, limited or prevented, which would materially harm ourbusiness and the price of our securities could fall. To the extent the intellectual property protection of products in any respiratory program partnered with GSK are successfully challenged or encounterproblems with the U.S. Patent and Trademark Office or other comparable agencies throughout the world, the commercialization of these products could bedelayed, limited or prevented. Any challenge to the intellectual property protection of a late-stage development asset or approved product arising from anyrespiratory program partnered with GSK could harm our business and cause the price of our securities to fall.25Table of Contents Our commercial success depends in part on products in any respiratory program partnered with GSK not infringing the patents and proprietary rights ofthird parties. Third parties may assert that these products are using their proprietary rights without authorization. In addition, third parties may obtain patentsin the future and claim that use of GSK's technologies infringes upon these patents. Furthermore, parties making claims against GSK may obtain injunctive orother equitable relief, which could effectively block GSK's ability to further develop or commercialize one or more of the product candidates or products inany respiratory program partnered with GSK. In the event of a successful claim of infringement against GSK, it may have to pay substantial damages, obtain one or more licenses from third parties orpay royalties. In addition, even in the absence of litigation, GSK may need to obtain licenses from third parties to advance its research or allowcommercialization of the products. GSK may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, GSK wouldbe unable to further develop and commercialize one or more of the products, which could harm our business significantly. In addition, in the future GSKcould be required to initiate litigation to enforce its proprietary rights against infringement by third parties. Prosecution of these claims to enforce its rightsagainst others would involve substantial litigation expenses. If GSK fails to effectively enforce its proprietary rights related to our partnered respiratoryprograms against others, our business will be harmed, and the price of our securities could fall.Risks Related to Ownership of our Common StockThe price of our securities has been volatile and may continue to be so, and purchasers of our securities could incur substantial losses. The price of our securities has been volatile and may continue to be so. Between January 1, 2016 and December 31, 2016, the high and low sales pricesof our common stock as reported on The NASDAQ Global Select Market varied between $13.77 and $8.23 per share. The stock market in general and themarket for biotechnology and biopharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the companies'operating performance, in particular during the last several years. The following factors, in addition to the other risk factors described in this section, may alsohave a significant impact on the market price of our securities:•any adverse developments or results or perceived adverse developments or results with respect to the commercialization of RELVAR®/BREO®ELLIPTA® and ANORO® ELLIPTA® with GSK, including, without limitation, if payor coverage is lower than anticipated or if sales ofRELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® are less than anticipated because of pricing pressure in the respiratory marketstargeted by our partnered products or existing or future competition in the markets in which they are commercialized, including competitionfrom existing and new products that are perceived as lower cost or more effective, and our royalty payments are less than anticipated; •any positive developments or results or perceived positive developments or results with respect to the development of UMEC/VI/FF with GSK,including, if GSK and the respiratory market in general view this triple combination therapy as significantly more beneficial than existingtherapies, including RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®; •any adverse developments or results or perceived adverse developments or results with respect to the on-going development of FF/VI withGSK, including, without limitation, any difficulties or delays encountered with the regulatory path for FF/VI or any indication from clinical ornon-clinical studies, including the large Phase 3b program, that FF/VI is not safe or efficacious or does not sufficiently differentiate itself fromalternative therapies; •any adverse developments or results or perceived adverse developments or results with respect to the on-going development of UMEC/VI withGSK, including, without limitation, any difficulties or delays encountered with regard to the regulatory path for UMEC/VI, any indicationfrom clinical or non-clinical studies that UMEC/VI is not safe or efficacious; •any adverse developments or perceived adverse developments in the field of LABAs, including any change in FDA (or comparable foreignregulatory authority) policy or guidance (such as the26Table of Contentspronouncement in February 2010 warning that LABAs should not be used alone in the treatment of asthma and related labeling requirements,the impact of the March 2010 FDA Advisory Committee discussing LABA clinical trial design to evaluate serious asthma outcomes or theFDA's April 2011 announcement that manufacturers of currently marketed LABAs conduct additional clinical studies comparing the additionof LABAs to inhaled corticosteroids versus inhaled corticosteroids alone);•GSK reprioritizing its commercial efforts on other products, including the closed triple combination for COPD or products owned by GSK(such as Advair®) but which are not partnered with us; •the occurrence of a fundamental change triggering a put right of the holders of the Notes or our inability, or perceived inability, to satisfy theobligations under the Notes when they become due; •our incurrence of expenses in any particular quarter that are different than market expectations; •changes in the treatment paradigm or standards of care for COPD or asthma; •the extent to which GSK advances (or does not advance) FF/VI, UMEC/VI, UMEC/VI/FF, VI monotherapy and the MABA program throughdevelopment into commercialization in all indications in all major markets; •any adverse developments or perceived adverse developments with respect to our relationship with GSK, including, without limitation,disagreements that may arise between us and GSK; •announcements by or regarding GSK generally; •announcements of patent issuances or denials, technological innovations or new commercial products by GSK; •publicity regarding actual or potential study results or the outcome of regulatory review relating to products under development by GSK; •regulatory developments in the U.S. and foreign countries, including the possibility that the new presidential administration and theU.S. Congress may replace PPACA and related legislation with new healthcare legislation; •economic and other external factors beyond our control; •sales of stock by us or by our stockholders, including sales by certain of our employees and directors whether or not pursuant to selling plansunder Rule 10b5-1 of the Securities Exchange Act of 1934; •relative illiquidity in the public market for our common stock (our four largest stockholders other than GSK collectively owned approximately47.0% of our outstanding common stock as of February 24, 2017 based on our review of publicly available filings); and, •potential sales or purchases of our common stock by GSK.We may be unable to or elect not to continue returning capital to our stockholders We have a corporate goal of returning capital to stockholders and paid quarterly dividends during the third and fourth quarters of 2014 and during thefirst three quarters of 2015. In October 2015, we announced the acceleration of our capital return plan with an up to $150 million share repurchase programapproved by our Board of Directors effective through December 31, 2016, which replaced our quarterly dividends. As of December 31, 2016, we hadrepurchased an aggregate of $103.7 million under the share repurchase program through a combination of a tender offer and open market purchases and$11.6 million of our 2023 Notes. In February 2017, we announced a new capital return plan, the 2017 Capital Return Plan. The 2017 Capital Return Planauthorizes a combination of repurchases of stock and/or repurchases, redemptions or prepayments of debt up to $150 million, through tender offers, openmarket purchases, private transactions, exchange offers or other means through December 31, 2017. The 2017 Capital Return Plan is expected to be fundedusing our working capital. Our announcement of this or future capital return programs does not obligate us to repurchase any specific dollar amount of debtor equity or number of shares of common stock.27Table of Contents The payment of, or continuation of, capital returns to stockholders is at the discretion of our Board of Directors and is dependent upon our financialcondition, results of operations, capital requirements, general business conditions, tax treatment of capital returns, potential future contractual restrictionscontained in credit agreements and other agreements and other factors deemed relevant by our board of directors. Future capital returns may also be affectedby, among other factors: our views on potential future capital requirements for investments in acquisitions and our working capital and debt maintenancerequirements; legal risks; stock or debt repurchase programs; changes in federal and state income tax laws or corporate laws; and changes to our businessmodel. Our capital return programs may change from time to time, and we cannot provide assurance that we will continue to provide any particular amounts.A reduction, suspension or change in our capital return programs could have a negative effect on our stock price.Concentration of ownership will limit your ability to influence corporate matters. As of February 24, 2017, GSK beneficially owned approximately 29.3% of our outstanding common stock and our directors, executive officers andinvestors affiliated with these individuals beneficially owned approximately 2.3% of our outstanding common stock. Based on our review of publiclyavailable filings as of February 24, 2017, our four largest stockholders other than GSK collectively owned approximately 47.0% of our outstanding commonstock. These stockholders could control the outcome of actions taken by us that require stockholder approval, including a transaction in which stockholdersmight receive a premium over the prevailing market price for their shares. Following the expiration of the governance agreement in September 2015, GSK isno longer subject to the restrictions thereunder regarding the voting of the shares of our common stock owned by it.Anti-takeover provisions in our charter and bylaws and in Delaware law could prevent or delay a change in control of our company. Provisions of our Certificate of Incorporation and Bylaws may discourage, delay or prevent a merger or acquisition that stockholders may considerfavorable, including transactions in which you might otherwise receive a premium for your shares. These provisions include:•requiring supermajority stockholder voting to effect certain amendments to our Certificate of Incorporation and Bylaws; •restricting the ability of stockholders to call special meetings of stockholders; •prohibiting stockholder action by written consent; and •establishing advance notice requirements for nominations for election to the Board or for proposing matters that can be acted on bystockholders at meetings. In addition, some provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging with us. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Our headquarters consist of a lease of 8,427 square feet of office space in Brisbane, California, which expires in June 2023. Management believes thatthis facility is currently suitable and adequate to meet the company's anticipated near-term needs. We do not own or lease any other properties. ITEM 3. LEGAL PROCEEDINGS We are not a party to any material legal proceedings.28Table of Contents ITEM 4. MINE SAFETY DISCLOSURES Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES Price Range of Common Stock Our common stock had been traded on NASDAQ under the symbol "THRX" from October 5, 2004 until January 8, 2016. Upon changing our corporatename to Innoviva, Inc. on January 7, 2016, we changed the stock ticker symbol to "INVA" effective January 11, 2016. The following table sets forth the highand low closing prices of our common stock on a per share basis for the periods indicated and as reported on The NASDAQ Global Select Market.Holders As of February 24, 2017, there were 106 stockholders of record of our common stock. As many of our shares of common stock are held by brokers andother institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.29 Market Price DividendsDeclared Calendar Quarter High Low 2016 Fourth Quarter $11.20 $9.37 $ — Third Quarter 13.04 10.84 — Second Quarter 13.77 9.91 — First Quarter 12.85 8.23 — Total $ — 2015 Fourth Quarter $10.87 $7.57 $ — Third Quarter 17.42 6.78 0.25 Second Quarter 19.89 15.18 0.25 First Quarter 20.20 10.68 0.25 Total $0.75 Table of ContentsPurchases of Equity Securities by the Issuer On October 28, 2015, we announced the acceleration of our capital return plan with an up to $150 million share repurchase program effective throughthe end of 2016 approved by our Board of Directors (the "2016 Share Repurchase Program"). In February 2017, we announced a new capital return plan, the2017 Capital Return Plan. The 2017 Capital Return Plan authorizes a combination of repurchases of stock and/or repurchases, redemptions or prepayments ofdebt up to $150 million, through tender offers, open market purchases, private transactions, exchange offers or other means through December 31, 2017. The2017 Capital Return Plan is expected to be funded using our working capital. We are not obligated to repurchase any specific dollar amount of debt or equityor number of shares of common stock under the 2017 Capital Return Plan. We will determine when, if and how to proceed with any repurchase transactionsunder the program, as well as the amount of any such repurchase transactions, based upon, among other things, our evaluation of our liquidity and capitalneeds (including for strategic and other opportunities), our business, results of operations, and financial position and prospects, general financial, economicand market conditions, prevailing market prices for shares of our common stock, corporate, regulatory and legal requirements, and other conditions andfactors deemed relevant by our management and Board of Directors from time to time. Our 2017 Capital Return Plan may be suspended or discontinued atany time. Share repurchase activity related to the 2016 Share Repurchase Program during the fiscal quarter ended December 31, 2016 were as follows:Stock Performance Graph The graph set forth below compares the cumulative total stockholder return on our common stock for the period commencing on December 31, 2011 andending on December 31, 2016, with the cumulative total return of (i) the NASDAQ Composite Index, (ii) the NASDAQ S&P Small Cap 600 Pharma Index and(iii) the NASDAQ Biotechnology Index over the same period. This graph assumes the investment of $100.00 on December 31, 2011 in each of (1) ourcommon stock, (2) the NASDAQ Composite Index, (3) the NASDAQ S&P Small Cap 600 Pharma Index and (4) the NASDAQ Biotechnology Index, andassumes the reinvestment of dividends. The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is notnecessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. Information used in the graph was obtainedfrom sources believed to be reliable including NASDAQ, Bloomberg and Reuters, but we are not responsible for any errors or omissions in such information. Notwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act of 1933, as amended, or the SecuritiesExchange Act of 1934, as amended, that might incorporate this Annual Report on Form 10-K or future filings made by us under those statutes, this StockPerformance Graph section shall not be deemed filed with the SEC and shall not be deemed incorporated by reference into any of those prior filings or intoany future filings made by us under those statutes.30(In thousands, except per share data)Period Total Numberof SharesPurchased Average PricePaidper Share Total Numberof SharesPurchased asPart ofPubliclyAnnouncedPlans orPrograms ApproximateDollar Value ofShares ThatMay Yet BePurchasedUnder thePlans orPrograms October 1, 2016 to October 31, 2016 958,560 $9.79 958,560 November 1, 2016 to November 30, 2016 309,878 $10.14 309,878 December 1, 2016 to December 31, 2016 — $ — — $ — Table of Contents COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Innoviva, Inc., the NASDAQ Composite Index, the S&P Small Cap 600 Pharma Index,and the NASDAQ Biotechnology Index*$100 invested on December 31, 2011 in stock or index, including reinvestment of dividends. The performance chart for Innoviva is adjusted for the June 2014 Spin Off, in which each of ourstockholders received one ordinary share of Theravance Biopharma for every 3.5 shares of our common stock.31Table of Contents ITEM 6. SELECTED FINANCIAL DATA The selected consolidated summary financial data below should be read in conjunction with Part II, Item 7, "Management's Discussion and Analysis ofFinancial Condition and Results of Operations" and Part II, Item 8, "Financial Statements and Supplementary Data", in this Annual Report on Form 10-K. Thehistorical results are not necessarily indicative of the results to be expected in any future period. 32 Year Ended December 31, 2016 2015 2014 2013 2012 (In thousands, except per share data) CONSOLIDATED STATEMENTS OF OPERATIONSDATA Net revenue $133,569 $53,949 $8,433 $4,532 $5,613 Operating expenses: Research and development 1,393 2,619 7,498 9,038 8,153 General and administrative 23,188 19,750 34,864 24,289 22,606 Total operating expenses(2) 24,581 22,369 42,362 33,327 30,759 Income (loss) from operations 108,988 31,580 (33,929) (28,795) (25,146)Interest and other income (expense), net 2,964 1,463 (2,709) 7,510 460 Interest expense (52,416) (51,803) (36,892) (9,348) (6,003) Income (loss) from continuing operations 59,536 (18,760) (73,530) (30,633) (30,689)Income (loss) from discontinued operations(1)(2) — — (94,934) (140,068) 12,147 Net income (loss) $59,536 $(18,760)$(168,464)$(170,701)$(18,542) Basic net income (loss) per share: Continuing operations $0.54 $(0.16)$(0.66)$(0.30)$(0.34)Discontinued operations — — (0.84) (1.37) 0.14 Basic net income (loss) per share $0.54 $(0.16)$(1.50)$(1.67)$(0.20) Diluted net income (loss) per share: Continuing operations $0.53 $(0.16)$(0.66)$(0.30)$(0.34)Discontinued operations — — (0.84) (1.37) 0.14 Diluted net income (loss) per share $0.53 $(0.16)$(1.50)$(1.67)$(0.20) Shares used to compute basic net income (loss) per share 110,280 115,372 112,059 102,425 90,909 Shares used to compute diluted net income (loss) pershare 123,233 115,372 112,059 102,425 90,909 Cash dividends declared per common share $— $0.75 $0.50 $— $— As of December 31, 2016 2015 2014 2013 2012 (In thousands) CONSOLIDATED BALANCE SHEETS DATA Cash, cash equivalents and marketable securities $150,433 $187,283 $283,354 $520,499 $343,683 Working capital 177,997 200,834 238,426 398,794 231,167 Total assets 378,996 408,932 521,654 681,255 368,582 Long-term liabilities 711,938 738,086 731,247 297,729 183,588 Accumulated deficit (1,632,891) (1,692,427) (1,673,667) (1,505,203) (1,334,502)Total stockholders' (deficit) equity (352,991) (342,645) (223,349) 299,122 155,028 (1)On June 1, 2014, we separated our biopharmaceutical research and drug development operations from our late-stage partneredrespiratory assets by transferring our research and drug development operations into our then wholly — owned subsidiary, TheravanceTable of Contents ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis (MD&A) is intended to facilitate an understanding of our business and results of operations. This discussion andanalysis should be read in conjunction with our consolidated financial statements and notes included in this Annual Report on Form 10-K. The informationcontained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans andstrategy for our business, our operating expenses, and future payments under our collaboration agreements, includes forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements arebased upon current expectations that involve risks and uncertainties. You should review the section entitled "Risk Factors" in Item 1A of Part I above for adiscussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statementscontained in the following discussion and analysis. See the section entitled "Special Note Regarding Forward Looking Statements" above for moreinformation.Management Overview Innoviva, Inc. is focused on bringing compelling new medicines to patients in areas of unmet need by leveraging its significant expertise in thedevelopment, commercialization and financial management of bio-pharmaceuticals, to maximize the commercial potential of its respiratory assets partneredwith Glaxo Group Limited ("GSK"), including RELVAR®/BREO® ELLIPTA® (fluticasone furoate/ vilanterol, "FF/VI") and ANORO® ELLIPTA®(umeclidinium bromide/ vilanterol, "UMEC/VI"). Under the Long-Acting Beta2 Agonist ("LABA") Collaboration Agreement and the Strategic AllianceAgreement with GSK (referred to herein collectively as the "GSK Agreements"), we are 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. For other productscombined with a LABA from the LABA collaboration, such as ANORO™ ELLIPTA™, royalties are upward tiering and range from 6.5% to 10%. Innoviva isalso entitled to 15% of any future payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance RespiratoryCompany, LLC ("TRC"). In June 2014, we spun-off our research and development activities by distributing the outstanding shares of TheravanceBiopharma, Inc. ("Theravance Biopharma") on a pro-rata basis to our stockholders (the "Spin-Off"), which resulted in Theravance Biopharma becoming anindependent, publicly traded company. We have designed our company structure and organization to be tailored to our focused activities of managing our respiratory assets with GSK, thecommercial and developmental obligations associated with the GSK Agreements, intellectual property, licensing operations, business development activitiesand providing for certain essential reporting and management functions of a public company. As of December 31, 2016, we had 14 employees. Our revenuesconsist of royalties and potential milestone payments, if any, from our respiratory partnership agreements with GSK.33Biopharma. The results of operations for the former research and drug development operations conducted by us and by TheravanceBiopharma until June 1, 2014 are included above as part of discontinued operations.(2)Stock-based compensation expense included in total operating expenses is as follows: Year Ended December 31, 2016 2015 2014 2013 2012 (In thousands) Research and development $632 $1,036 $2,781 $573 $475 General and administrative 7,665 5,837 12,980 7,325 7,310 Stock-based compensation from continuing operations 8,297 6,873 15,761 7,898 7,785 Stock-based compensation from discontinued operations — — 11,629 17,789 15,998 Total stock-based compensation $8,297 $6,873 $27,390 $25,687 $23,783 Table of ContentsFinancial Highlights In the year ended December 31, 2016, our net income from operations was $59.5 million, an improvement of $78.3 million from a net loss fromcontinuing operations of $18.8 million in the year ended December 31, 2015, primarily due to an increase in net royalty revenue. Cash, cash equivalents, andmarketable securities, totaled $150.4 million on December 31, 2016, a decrease of $36.9 million from December 31, 2015. The decrease was due primarily tothe repurchases of common stock of $78.1 million, repurchases of our 2023 Notes of $11.6 million, payments on principal of our 2029 Notes of $6.8 millionand net purchases of marketable securities of $4.3 million. These outflows were partially offset by cash provided by operating activities of $61.0 million.Capital Return Plans In October 2015, we announced the acceleration of our capital return plan with an up to $150 million share repurchase program effective through the endof 2016, the 2016 Share Repurchase Program. In February 2017, we announced a new capital return plan, the 2017 Capital Return Plan. The 2017 CapitalReturn Plan authorizes a combination of repurchases of stock and/or repurchases, redemptions or prepayments of debt up to $150 million, through tenderoffers, open market purchases, private transactions, exchange offers or other means through December 31, 2017. The 2017 Capital Return Plan is expected tobe funded using our working capital. We are not obligated to repurchase any specific dollar amount of debt or equity or number of shares of common stockunder the 2017 Capital Return Plan. We will determine when, if and how to proceed with any repurchase transactions under the program, as well as theamount of any such repurchase transactions, based upon, among other things, our evaluation of our liquidity and capital needs (including for strategic andother opportunities), our business, results of operations, and financial position and prospects, general financial, economic and market conditions, prevailingmarket prices for shares of our common stock, corporate, regulatory and legal requirements, and other conditions and factors deemed relevant by ourmanagement and Board of Directors from time to time. Our 2017 Capital Return Plan may be suspended or discontinued at any time. There can be noassurance as to the actual volume of any debt or share repurchases in any given period or over the term of the program or as to the manner or terms of any suchtransactions. From January 1, 2016 to December 31, 2016, we purchased 7,201,448 shares of our common stock at an average purchase price of $10.84 per share for atotal value of approximately $78.1 million in the open market pursuant to the 2016 Share Repurchase Program. Overall, under the 2016 Share RepurchaseProgram, we purchased 9,877,684 shares of our common stock at an average purchase price of $10.50 per share for a total value of approximately$103.7 million.Repurchases of Notes Payable During the year ending December 31, 2016, we retired a portion of our 2023 Notes with a face value of $14.1 million and carrying value of $13.9 millionby way of open market purchases. The 2023 Notes were purchased for a total settlement price of $11.6 million resulting in a gain of $2.3 million. As a resultof the partial retirement of our 2023 Notes, we entered into partial termination agreements of our capped call option transaction and received $0.6 millionfrom the counterparty.Collaborative Arrangements with GSKLABA Collaboration In November 2002, we entered into our LABA Collaboration Agreement with GSK to develop and commercialize once-daily LABA products for thetreatment of chronic obstructive pulmonary disease ("COPD") and asthma. The collaboration has developed two 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 proprietaryname outside the U.S. and Canada), a once-daily combination medicine consisting of a LABA, vilanterol (VI), and an inhaled corticosteroid (ICS), fluticasonefuroate (FF) and (2) ANORO® ELLIPTA® (UMEC/VI), a once-daily medicine combining a long-acting muscarinic antagonist ("LAMA"), umeclidiniumbromide (UMEC), with a LABA, VI.34Table of Contents As a result of the launch and approval of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® in the U.S., Japan and Europe, we paid milestone feesto GSK totaling $220.0 million during the year ended December 31, 2014. Although we have no further milestone payment obligations to GSK pursuant tothe LABA Collaboration Agreement, we continue to have ongoing participation as part of the collaboration, including joint steering and joint projectcommittees that are expected to continue over the life of the agreement. The milestone fees paid to GSK were recognized as capitalized fees paid to a relatedparty, which are being amortized over their estimated useful lives commencing upon the commercial launch of the products. We are entitled to receive royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows: 15% on the first $3.0 billion of annual global netsales and 5% for all annual global net sales above $3.0 billion. For other products combined with a LABA from the LABA collaboration, such as ANORO™ELLIPTA™, royalties are upward tiering and range from 6.5% to 10%.2004 Strategic Alliance In March 2004, we entered into the Strategic Alliance Agreement with GSK where GSK received an option to license exclusive development andcommercialization rights to product candidates from certain of our discovery programs on pre-determined terms and on an exclusive, worldwide basis. In2005, GSK licensed our MABA program for the treatment of COPD, and in October 2011, we and GSK expanded the MABA program by adding sixadditional Innoviva-discovered preclinical MABA compounds (the "Additional MABAs"). GSK is responsible for funding all future development,manufacturing and commercialization activities for product candidates in that program. As a result of the Spin-Off, we are only entitled to receive 15% of anycontingent payments and royalties payable by GSK from sales of FF/UMEC/VI (and MABA, and MABA/FF) while Theravance Biopharma receives 85% ofthose same payments. See PART I, ITEM 1. BUSINESS — Our Relationship with GSK — 2004 Strategic Alliance, for more detail regarding the royaltiespayable by GSK under this agreement, if any.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 beenprepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires us to makeestimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of thefinancial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historicalexperience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgmentsabout the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, asthese policies relate to the more significant areas involving management's judgments and estimates.Revenue Recognition Revenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence of an arrangement exists; (2) delivery hasoccurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Where the revenue recognitioncriteria are not met, we defer the recognition of revenue by recording deferred revenue until such time that all criteria are met.Collaborative Arrangements and Multiple Element Arrangements We generate revenue from collaboration and license agreements for the development and commercialization of product candidates. Under the GSKagreements, revenue from non-refundable, upfront fees and development contingent payments were recognized ratably over the expected term of ourperformance of research and development services under the agreements. These upfront or contingent payments received, pending recognition as revenue,were recorded as deferred revenue and recognized over the estimated performance periods. We recognize royalty revenue on licensee net sales of productswith respect to which we35Table of Contentshave royalty rights in the period in which the royalties are earned and reported to us and collectability is reasonably assured. Royalty revenue earned isreduced by amortization expense resulting from the fees paid to GSK, which were recognized as capitalized fees paid to a related party. Under the GSK Agreements, we recognized net revenue of $133.6 million, $53.9 million and $8.4 million for the years ended December 31, 2016, 2015and 2014, respectively. The remaining deferred revenue under the GSK Strategic Alliance Agreement is $3.1 million as of December 31, 2016. Any change inthe estimated performance period, which is predominantly based on GSK's development timeline, will not have a significant impact on the results ofoperations, except for a change in estimated performance period resulting from the termination of the MABA program that would result in immediaterecognition of the deferred revenue.Capitalized Fees paid to a Related Party We capitalize fees paid to licensors related to agreements for approved products or commercialized products ("Capitalized Fees"). Our gross CapitalizedFees of $220.0 million as of December 31, 2016 consist of registrational and launch-related to milestone fees paid to GSK. We capitalized these fees ascapitalized fees paid to a related party and amortize these Capitalized Fees on a straight-line basis over their estimated useful lives upon the commerciallaunch of the products. The estimated useful lives of these Capitalized Fees are based on a country-by-country and product-by-product basis, as the later ofthe expiration or termination of the last patent right covering the compound in such product in such country and 15 years from first commercial sale of suchproduct in such country, unless the agreement is terminated earlier. Consistent with our policy for classification of costs under the research and developmentcollaborative arrangements, the amortization of these Capitalized Fees is recognized as a reduction of royalty revenue. Amortization expense for the yearsended December 31, 2016, 2015 and 2014 were $13.8 million, $13.8 million and $11.1 million, respectively. The remaining estimated amortization expenseis $13.8 million for each of the years from 2017 to 2021 and $111.4 million thereafter. We review our Capitalized Fees for impairment on a product-by-product basis for each major geographic area when events or changes in circumstancesindicate that the carrying amount of such assets may not be recoverable. The recoverability of Capitalized Fees is measured by comparing the asset's carryingamount to the expected undiscounted future cash flows that the asset is expected to generate. The determination of recoverability typically requires variousestimates and assumptions, including estimating the useful life over which cash flows will occur, their amount, and the asset's residual value, if any. Wederive the required cash flow estimates from near-term forecasted product sales and long-term projected sales in the corresponding market. Based upon ouranalyses, no impairment charges have been recorded on the Capitalized Fees as of December 31, 2016.Fair Value of Stock-Based Compensation Awards We use the Black-Scholes-Merton option pricing model to estimate the fair value of options as of the date of grant. The Black-Scholes-Merton optionvaluation model requires the use of assumptions, including the expected term of the award and the expected stock price volatility. We use the "simplified"method as described in Staff Accounting Bulletin No. 107, "Share Based Payment," for the expected option term. We use our historical volatility to estimateexpected stock price volatility. The estimated fair value of the option is expensed on a ratable basis over the expected term of the grant. We determine the fair value of RSUs and RSAs based on the fair market values of the underlying stock on the dates of grant. The fair value of servicebased RSUs and RSAs is expensed on a ratable or straight-line basis over the expected term of the vesting. The fair value of performance-contingent RSUsand RSAs is expensed using an accelerated method over the requisite service period based on management's best estimate as to whether it is probable that theshares awarded are expected to vest. We assess the probability of the performance indicators being met on a continuous basis. The grant date fair value of theRSUs and RSAs with a market condition is determined using a Monte Carlo valuation model and the compensation expense is recognized over the impliedservice period. Stock-based compensation expense was calculated based on awards ultimately expected to vest and was reduced for estimated forfeitures as of the timeof grant and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates. The estimated annual forfeiture rates for stockoptions, RSUs and RSAs are based on our historical forfeiture experience.36Table of Contents For more information, refer to Note 6, "Stock-Based Compensation," to the consolidated financial statements appearing in this Annual Report onForm 10-K.Amortization of Debt Issuance Costs from Non-recourse Notes Payable, due 2029 In April 2014, we entered into certain note purchase agreements relating to the private placement of $450.0 million aggregate principal amount of non-recourse 9% fixed rate term notes due 2029 (the "2029 Notes") issued by our wholly-owned subsidiary. The 2029 Notes are secured exclusively by a securityinterest in a segregated bank account established to receive 40% of royalties due to us under the LABA Collaboration with GSK commencing on April 1,2014 and ending upon the earlier of full repayment of principal or May 15, 2029. The funds in the segregated bank account can only be used to makeprincipal and interest payments on the 2029 Notes. The 2029 Notes bear an annual interest rate of 9%, with interest and principal paid quarterly beginning November 15, 2014. The 2029 Notes may beredeemed at any time prior to maturity, in whole or in part, at specified redemption premiums. Prior to May 15, 2016, in the event that the specified portion ofroyalties received in a quarter was less than the interest accrued for the quarter, the principal amount of the 2029 Notes was increased by the interest shortfallamount for that period. In connection with the issuance of the 2029 Notes, we incurred approximately $15.3 million in transaction costs, which are amortized to interest expenseover the estimated life of the 2029 Notes based on the effective interest method. Since the principal and interest payments on the 2029 Notes are based onroyalties from product sales, which vary from quarter to quarter, the 2029 Notes may be repaid prior to the final maturity date in 2029. To the extent that theinterest or principal payments are greater or less than our initial estimates or the timing of such payments is materially different than our original estimates,we will prospectively adjust the amortization of the debt issuance costs. There are a number of factors that could materially affect the amount and timing ofthe royalty payments due to us under the LABA Collaboration with GSK, most of which are not within our control. Such factors include, but are not limitedto, the competitive landscape for approved products and developing therapies that compete with our partnered products, the ability of patients to be able toafford our partnered products, the size of the market for our partnered products, safety concerns in the marketplace for respiratory therapies in general andwith our partnered products in particular, decisions as to the timing of product launches, pricing and discounts, and other events or circumstances that resultin reduced royalty payments, all of which would result in an impact to the amount of debt issuance costs amortized.Results of OperationsNet Revenue Total net revenue from continuing operations, as compared to the prior years, was as follows:37 Change Year Ended December 31, 2016 2015 (In thousands) 2016 2015 2014 $ % $ % Royalties from a relatedparty — RELVAR/BREO $128,638 $59,188 $16,635 $69,450 117%$42,553 *%Royalties from a related party — ANORO 17,869 7,699 1,782 10,170 132 5,917 * Total royalties from a related party 146,507 66,887 18,417 79,620 119 48,470 * Less: amortization of capitalized fees paid to arelated party (13,823) (13,823) (11,066) — — (2,757) (25) Royalty revenue 132,684 53,064 7,351 79,620 150 45,713 * Strategic alliance — MABA program license 885 885 1,082 — — (197) (18) Total net revenue from GSK $133,569 $53,949 $8,433 $79,620 148%$45,516 *% *Not MeaningfulTable of Contents Total net revenue increased for the year ended December 31, 2016, compared to the year ended December 31, 2015. The increases were primarily due togrowth in prescriptions and market share for both RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®. The revenue growth during the year endedDecember 31, 2016 as compared to the year ended December 31, 2015 may not be indicative of our future revenue growth, if any. Total net revenue increased for the year ended December 31, 2015, compared to the year ended December 31, 2014. The increases were primarily due tohigher sales of RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® not having been commercially launched until April 2014 and the approval inApril 2015 of BREO® ELLIPTA® (FF/VI) as a once-daily inhaled treatment of asthma in patients aged 18 years and older in the U.S.Research & Development Research & Development ("R&D") expenses from continuing operations, as compared to the prior years, were as follows: R&D expenses decreased for the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily due to reduced activitiesrelated to the late-stage partnered respiratory assets with GSK. R&D expenses from continuing operations decreased for the year ended December 31, 2015 compared to the year ended December 31, 2014 primarilydue to fewer costs incurred and due to higher stock-based compensation in the year ended December 31, 2014. Stock-based compensation expense washigher during the year ended December 31, 2014 due to the achievement of performance conditions under a specified long-term retention and incentiveequity awarded to certain employees in the year ended December 31, 2011.General & Administrative General and administrative expenses from continuing operations, as compared to the prior years, were as follows: General and administrative expenses increased in the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily due to therecognition of stock-based compensation expenses related to pre-Spin-Off legacy performance-contingent RSAs and higher employee costs. General and administrative expenses from continuing operations decreased in the year ended December 31, 2015 compared to the year endedDecember 31, 2014 primarily due to lower stock-based compensation expense and reduced overhead costs, mostly related to the reduced size of ouroperations following the Spin-Off in 2014. For the year ended December 31, 2014, stock-based compensation expense and employee-related costs werehigher primarily due to the probable achievement of performance conditions under a special long-term retention and incentive equity and cash bonusawarded to certain employees in the year ended December 31, 2011.38 Change Year Ended December 31, 2016 2015 (In thousands) 2016 2015 2014 $ % $ % Research and development expenses $1,393 $2,619 $7,498 $(1,226) (47)%$(4,879) (65)% Change Year Ended December 31, 2016 2015 (In thousands) 2016 2015 2014 $ % $ % General and administrative expenses $23,188 $19,750 $34,864 $3,438 17% $(15,114) (43)%Table of ContentsOther Income (Expense), net and Interest Income Other income (expense), net and interest income, as compared to the prior years, were as follows: Other income (expense), net increased in the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily due to realizedgain of $2.3 million from the repurchases of our 2023 Notes during the year ended December 31, 2016. Interest income increased in the year ended December 31, 2016 as compared to the year ended December 31, 2015 primarily due to higher interestgenerated from our investments in marketable securities. Other income (expense), net increased in the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily related to arealized gain of $1.2 million on the sale of all of the ordinary shares of Theravance Biopharma that we held as of December 31, 2014 in the first quarterof 2015. Interest income decreased in the year ended December 31, 2015 as compared to the year ended December 31, 2014 primarily due to the full year effect oflower average cash balances resulting from the cash contribution to Theravance Biopharma in June 2014 and capital return programs in 2015. Other income (expense), net in the year ended December 31, 2014 includes a charge of $3.8 million recognized for the unrealized loss as of December 31,2014 on Theravance Biopharma, Inc. ordinary shares owned by us.Interest Expense Interest expense, as compared to the prior years, was as follows: Interest expense increased in the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily due to higher outstandingaverage principal balance on our 2029 Notes, of which $0.9 million was added in the first two quarters of 2016 and $43.2 million was added during the yearsended December 31, 2015 and 2014 in the form of payment in kind ("PIK"). See "Liquidity" section below for further information. Interest expense increased in the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily due to the issuance of our2029 Notes in April 2014, and a subsequent increase of $43.2 million in the form of PIK to the outstanding principal balance, of which $22.7 million and$20.5 million was added during the years ended December 31, 2015 and 2014, respectively. See "Liquidity" section below for further information.Income Taxes As of December 31, 2016 and 2015, we had net operating loss carryforwards for federal income taxes of $1.1 billion and $1.2 billion, respectively. As ofDecember 31, 2016 and 2015, we had federal research and development tax credit carryforwards of $45.2 million. We recorded a valuation allowance tooffset in full the benefit related to our deferred tax assets because realization of these benefits is uncertain.39 Change Year Ended December 31, 2016 2015 (In thousands) 2016 2015 2014 $ % $ % Other income (expense), net $2,382 $1,120 $(3,272)$1,262 113% $4,392 (134)%Interest income 582 343 563 $239 70% $(220) (39) Change Year Ended December 31, 2016 2015 (In thousands) 2016 2015 2014 $ % $ % Interest expense $52,416 $51,803 $36,892 $613 1% $14,911 40% Table of Contents We had unrecognized tax benefits of $15.5 million as of December 31, 2016 and 2015. None of our currently unrecognized tax benefits would affect oureffective income tax rate if recognized, due to the valuation allowance that currently offsets our deferred tax assets. Utilization of net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitationsprovided by the Internal Revenue Code and similar state provisions. We conducted an analysis through 2015 to determine whether an ownership change hadoccurred since inception. The analysis indicated that two ownership changes occurred in prior years. However, notwithstanding the applicable annuallimitations, we estimate that no portion of the net operating loss or credit carryforwards will expire before becoming available to reduce federal and stateincome tax liabilities. Annual limitations may result in expiration of net operating loss and tax credit carryforwards before some or all of such amounts havebeen utilized.Discontinued Operations On June 1, 2014, we separated our research and drug development businesses from our late-stage partnered respiratory assets. The significant componentsof the research and drug development operations, which are presented as discontinued operations on the consolidated statements of operations, wereas follows: There was no impact of the discontinued operations after the Spin-Off to our revenues and expenses for the year ended December 31, 2016 and 2015. Net revenues for the year ended December 31, 2014 includes revenue from collaborative arrangements, and products sales for which revenue recognitioncommenced in the first quarter of 2014, both of which were transferred to Theravance Biopharma as a part of the Spin-Off. Loss from discontinued operations for the year ended December 31, 2014 primarily relates to R&D expenses incurred prior to June 1, 2014 in addition toexternal legal and accounting fees in connection with our separation strategy and the additional stock-based compensation and cash bonus expenserecognized due to the achievement of performance conditions under a special long-term retention and incentive equity and cash bonus awarded to certainemployees in the year ended December 31, 2011, both of which we started to incur in the year ended December 31, 2013.Liquidity and Capital ResourcesLiquidity Since our inception, we have financed our operations primarily through private placements and public offerings of equity and debt securities andpayments received under collaborative arrangements. Since the start of the commercialization of RELVAR®/ BREO® ELLIPTA® in the fourth quarter of2013 and ANORO® ELLIPTA® during 2014, we have complemented the source of financing with royalty revenues from the global net sales of these productsby GSK. In the year ended December 31, 2016, we generated gross royalty revenues from GSK of $146.5 million. Net cash and cash equivalents, short-terminvestments and marketable securities totaled $150.4 million, and royalties receivable from GSK totaled $46.8 million as of December 31, 2016. In February 2017, we announced a new capital return plan, the 2017 Capital Return Plan. The 2017 Capital Return Plan authorizes a combination ofrepurchases of stock and/or repurchases, redemptions or prepayments of debt up to $150 million, through tender offers, open market purchases, privatetransactions, exchange offers or other means through December 31, 2017. The 2017 Capital Return Plan is expected to be funded using our working capital.We are not obligated to repurchase any specific dollar amount of debt or equity or number of shares of common stock under the 2017 Capital Return Plan.We will determine when, if and how to proceed with any repurchase transactions under the program, as well as the amount of any such repurchasetransactions,40(In thousands) Year EndedDecember 31, 2014 Net revenue $3,129 Income (loss) from discontinued operations (94,934)Table of Contentsbased upon, among other things, our evaluation of our liquidity and capital needs (including for strategic and other opportunities), our business, results ofoperations, and financial position and prospects, general financial, economic and market conditions, prevailing market prices for shares of our common stock,corporate, regulatory and legal requirements, and other conditions and factors deemed relevant by our management and Board of Directors from time to time.Our 2017 Capital Return Plan may be suspended or discontinued at any time. In April 2014, we entered into certain note purchase agreements relating to the private placement of $450.0 million aggregate principal amount of our2029 Notes. The 2029 Notes are secured exclusively by a security interest in a segregated bank account established to receive 40% of the royalties fromglobal net sales and ending upon the earlier of full repayment of principal or May 15, 2029 due to us under the LABA Collaboration Agreement with GSK.As of December 31, 2016, the remaining balance of the 2029 Notes was $487.2 million.Adequacy of Cash Resources to Meet Future Needs We believe that our cash, cash equivalents and marketable securities will be sufficient to meet our anticipated operating needs for at least the next twelvemonths based upon current operating plans and financials forecasts. If our current operating plans and financial forecasts change, we may require additionalfunding sooner in the form of public or private equity offerings or debt financings. Furthermore, if in our view favorable financing opportunities arise, wemay 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 leaveus without adequate financial resources to fund our operations as currently planned. In addition, we regularly explore debt restructuring and/or reductionalternatives, including through tender offers, redemptions, repurchases or otherwise, all consistent with the terms of our debt agreements.Cash Flows Cash flows, as compared to the prior years, were as follows:Cash Flows from Operating Activities Net cash provided by operating activities for the year ended December 31, 2016 of $61.0 million was primarily due to:•$125.9 million provided by gross receipt of royalties from a related party (GSK) after adjusting for a $20.6 million increase in receivables fromcollaborative arrangements; •$15.9 million used for operating expenses, after adjusting for $8.4 million of non-cash related items, consisting primarily of stock-basedcompensation expense; and •$48.8 million used for interest payments on the 2023 Notes and 2029 Notes. Net cash provided by operating activities for the year ended December 31, 2015 of $10.1 million was primarily due to:•$51.2 million provided by gross receipt of royalties from a related party after adjusting for a $15.7 million increase in receivables fromcollaborative arrangements; •$15.4 million used for operating expenses, after adjusting for $7.0 million of non-cash related items, consisting primarily of stock-basedcompensation expense; and41 Year Ended December 31, Change (In thousands) 2016 2015 2014 2016 2015 Net cash provided by (used in) operating activities $60,984 $10,131 $(130,723)$50,853 $140,854 Net cash (used in) provided by investing activities (4,580) 159,168 (65,060) (163,748) 224,228 Net cash (used in) provided by financing activities (97,568) (106,919) 149,073 9,351 (255,992)Table of Contents•$25.9 million used for interest payments on the 2023 Notes and 2029 Notes. Net cash used in operating activities for the year ended December 31, 2014 of $130.7 million was primarily due to:•$100.5 million used for operating expenses; •$15.9 million decrease in payable to Theravance Biopharma; •$4.8 million increase in interest payments on convertible subordinated notes payable; •$1.9 million used to increase inventories, all incurred prior to the Spin-Off; •$7.7 million decrease in accounts payable primarily due to the timing of payments and our ongoing operations being significantly smaller dueto the Spin-Off; and •$3.2 million from the decrease in deferred revenue.Cash Flows from Investing Activities Net cash used in investing activities for the year ended December 31, 2016 of $4.6 million was primarily due to $95.7 million in purchases of marketablesecurities, partially offset by $91.4 million of proceeds received from the sale and maturities of marketable securities. Net cash provided by investing activities for the year ended December 31, 2015 of $159.2 million was primarily due to $245.7 million of proceedsreceived from the sale and maturities of marketable securities, partially offset by $86.5 million in purchases of marketable securities. Net cash used in investing activities in the year ended December 31, 2014 of $65.1 million was primarily due to $135.0 million used for payments toGSK for registrational and launch-related milestone fees, partially offset by $69.7 million from the sale and maturities of marketable securities, netof purchases.Cash Flows from Financing Activities Net cash used in financing activities for the year ended December 31, 2016 of $97.6 million was primarily due to $78.1 million paid for the repurchasesof common stock, $11.6 million repurchases of our 2023 Notes, and payments on principal of our 2029 Notes of $6.8 million. Net cash used in financing activities for the year ended December 31, 2015 of $106.9 million was primarily due to $87.3 million of cash dividends paidto our stockholders and $25.6 million paid for the repurchases of common stock, partially offset by $6.0 million of proceeds received from the issuance of ourcommon stock. Net cash provided by financing activities in the year ended December 31, 2014 of $149.1 million was primarily due to net proceeds of $434.7 millionreceived from the private placement of our 2029 Notes and $48.9 million received from the issuance of our common stock. These increases were partiallyoffset by $277.5 million of cash and cash equivalents contributed to Theravance Biopharma in connection with the Spin-Off and payments of cash dividendsof $57.0 million to our stockholders.Off-Balance Sheet Arrangements Upon the Spin-Off, our facility leases in South San Francisco, California were assigned to Theravance Biopharma. However, if Theravance Biopharmawere 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 thesefacilities. We would also be responsible for lease-related payments including utilities, property taxes, and common area maintenance, which may be as muchas the actual lease payments. As of December 31, 2016, the total remaining lease payments for the duration of the lease, which runs through May 2020, were$21.7 million. The carrying value of this lease guarantee was $1.1 million as of December 31, 2016 and is reflected in other long-term liabilities in ourconsolidated balance sheet.42Table of ContentsCommitments and Contingencies We indemnify our officers and directors for certain events or occurrences, subject to certain limits. We may be subject to contingencies that may arisefrom matters such as product liability claims, legal proceedings, shareholder suits and tax matters, as such, we are unable to estimate the potential exposurerelated to these indemnification agreements. We have not recognized any liabilities relating to these agreements as of December 31, 2016.Contractual Obligations and Commercial Commitments In April 2014, we entered into certain note purchase agreements relating to the private placement of $450.0 million aggregate principal amount of the2029 Notes. Since issuance, $44.0 million of interest expense has been added to the principal balance of the 2029 Notes, of which $0.9 million, $22.7 millionand $20.5 million was added during the years ended December 31, 2016, 2015, and 2014, respectively. During the year ended December 31, 2016, theprincipal balance of the 2029 Notes was paid down by $6.8 million with the payments received from the royalty revenues generated in the previous quartersended June 30 and September 30, 2016. In the table below, we set forth our significant enforceable and legally binding obligations and future commitments as of December 31, 2016. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk We are exposed to interest rate risk related to our portfolio of investments in debt securities and the debt that we have issued. We account for ourinvestments in debt securities at fair value, with unrealized gains or losses recorded as a component of other comprehensive income. We believe that ourexposure to interest rate risk on our investment portfolio is immaterial as of December 31, 2016 and 2015, as the average remaining maturity of ourinvestment portfolio was one month as of both dates. We account for our debt on an amortized cost basis and our recognized value of the debt does not reflect changes in fair value. Also, because our debt isfixed rate, our cash flows are not subject to variability as a result of changes in interest rates. However, we do disclose the estimated fair value of our debt andwe are exposed to economic unrealized gains or losses that may occur as a result of interest rate fluctuations. As of December 31, 2016, the fair value of our2023 Notes was estimated to be $202.1 million, based on available pricing information. The 2023 Notes bear interest at a fixed rate of 2.125%. As ofDecember 31, 2016, the fair value of the 2029 Notes was estimated to be $487.2 million, based on available pricing information. The 2029 Notes bear interestat a fixed rate of 9% per annum. Information about the contractual maturities of our debt is disclosed in the table within the Contractual Obligations andCommercial Commitments section of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.43 Payment Due by Period (In thousands) Total Less Than1 Year 1 - 3 Years 3 - 5 Years More Than5 Years 2023 Notes $274,270 $5,121 $10,242 $10,242 $248,665 2029 Notes 487,189 * * * * Facility leases** 2,661 380 795 844 642 Total $764,120 $5,501 $11,037 $11,086 $249,307 *The 2029 Notes are secured by a security interest in a segregated bank account established to receive 40% of royalties due to us underthe LABA Collaboration with GSK. Since the principal and interest payments on the 2029 Notes are based on royalties from productsales recorded by GSK, which can vary from quarter to quarter and are unknown to us, these amounts are not included in the abovetable on a period by period basis. See Note 7, "Debt" of the accompanying consolidated financial statements for further information. **On June 10, 2016, we executed a lease for our new corporate headquarters in Brisbane, California. The term of the new lease isseven years, subject to our right to extend the lease. In connection with entering into the new lease on June 10, 2016, we terminatedour sublease by and between us and Theravance Biopharma, dated June 2, 2014 (the "Gateway Sublease"). The Gateway Sublease wasset to expire on May 31, 2020.Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 44 Page Consolidated Balance Sheets as of December 31, 2016 and December 31, 2015 45 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2016 46 Consolidated Statements of Comprehensive Income (Loss) for each of the three years in the period endedDecember 31, 2016 47 Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period endedDecember 31, 2016 48 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2016 49 Notes to Consolidated Financial Statements 50 Supplementary Financial Data (unaudited) 75 Report of Independent Registered Public Accounting Firm 76 Table of Contents INNOVIVA, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) See accompanying notes to consolidated financial statements.45 December 31, 2016 2015 Assets Current assets: Cash and cash equivalents $118,016 $159,180 Short-term marketable securities 32,417 28,103 Related party receivables from collaborative arrangements 46,847 26,228 Prepaid expenses and other current assets 766 814 Total current assets 198,046 214,325 Property and equipment, net 368 221 Capitalized fees paid to a related party, net 180,545 194,368 Other assets 37 18 Total assets $378,996 $408,932 Liabilities and Stockholders' Deficit Current liabilities: Accounts payable $128 $818 Accrued personnel-related expenses 2,361 1,659 Accrued interest payable 7,828 7,911 Other accrued liabilities 1,095 2,218 Non-recourse notes, due 2029, current 7,752 — Deferred revenue 885 885 Total current liabilities 20,049 13,491 Convertible subordinated notes, due 2023, net of issuance costs 237,597 250,992 Non-recourse notes, due 2029, net of issuance costs 470,744 482,139 Other long-term liabilities 1,383 1,856 Deferred revenue 2,214 3,099 Commitments and contingencies (Notes 9) Stockholders' Deficit: Preferred stock: $0.01 par value, 230 shares authorized, no shares issued and outstanding — — Common stock: $0.01 par value, 200,000 shares authorized, 108,585 and 114,933 sharesissued as of December 31, 2016 and 2015, respectively 1,085 1,149 Treasury stock: 150 shares at December 31, 2016 and 2015 (3,263) (3,263)Additional paid-in capital 1,282,077 1,351,898 Accumulated other comprehensive income (loss) 1 (2)Accumulated deficit (1,632,891) (1,692,427) Total stockholders' deficit (352,991) (342,645) Total liabilities and stockholders' deficit $378,996 $408,932 Table of Contents INNOVIVA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) See accompanying notes to consolidated financial statements.46 Year Ended December 31, 2016 2015 2014 Royalty revenue from a related party, net of amortization for capitalized fees paid toa related party of $13,823, $13,823 and $11,066 in the year ended December 31,2016, 2015, and 2014 $132,684 $53,064 $7,351 Revenue from collaborative arrangements from a related party, net 885 885 1,082 Total net revenue 133,569 53,949 8,433 Operating expenses: Research and development 1,393 2,619 7,498 General and administrative 23,188 19,750 34,864 Total operating expenses 24,581 22,369 42,362 Income (loss) from operations 108,988 31,580 (33,929)Other income (expense), net 2,382 1,120 (3,272)Interest income 582 343 563 Interest expense (52,416) (51,803) (36,892) Income (loss) from continuing operations $59,536 $(18,760)$(73,530)Loss from discontinued operations (Notes 1 and 12) — — (94,934) Net income (loss) $59,536 $(18,760)$(168,464) Basic net income (loss) per share: Continuing operations $0.54 $(0.16)$(0.66)Discontinued operations — — $(0.84) Basic net income (loss) per share $0.54 $(0.16)$(1.50) Diluted net income (loss) per share: Continuing operations $0.53 $(0.16)$(0.66)Discontinued operations — — $(0.84) Diluted net income (loss) per share $0.53 $(0.16)$(1.50) Shares used to compute basic and diluted net income (loss) per share: Shares used to compute basic net income (loss) per share 110,280 115,372 112,059 Shares used to compute diluted net income (loss) per share 123,233 115,372 112,059 Cash dividends declared per common share $— $0.75 $0.50 Table of Contents INNOVIVA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands) See accompanying notes to consolidated financial statements.47 Year Ended December 31, 2016 2015 2014 Net income (loss) $59,536 $(18,760)$(168,464)Other comprehensive income (loss): Unrealized gain (loss) on marketable securities, net 3 1,305 (4,001)Less: realized gain on marketable securities, net — (1,220) — Add: Reclassification adjustents for other-than temporary impairment lossincluded in net loss — — 3,752 Comprehensive income (loss) $59,539 $(18,675)$(168,713) Table of Contents INNOVIVA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (In thousands) See accompanying notes to consolidated financial statements.48 AccumulatedOtherComprehensiveIncome(loss) Common Stock Treasury Stock TotalStockholders'Equity(Deficit) AdditionalPaid-InCapital AccumulatedDeficit Shares Amount Shares Amount Balance as of December 31,2013 111,516 $1,115 $1,803,048 $162 $(1,505,203) — $— $299,122 Exercise of stock options, andissuance of common stockunits, stock awards andpurchase plan 1,744 17 10,813 — — — — 10,830 Issuance of common stock inprivate placement to a relatedparty 1,665 17 38,078 — — — — 38,095 Stock-based compensation — — 27,485 — — — — 27,485 Conversion of convertiblesubordinated notes due 2023 1,520 15 31,756 — — — — 31,771 Repurchase of common stock — — 3,263 — — (150) (3,263) — Guarantee issued in connectionwith distribution to TheravanceBiopharma, Inc. related to leaseagreements — — (1,300) — — — — (1,300)Distribution to TheravanceBiopharma, Inc. — — (402,787) — — — — (402,787)Cash dividends declared, $0.50per common share — — (57,852) — — — — (57,852)Net loss — — — — (168,464) — — (168,464)Other comprehensive loss — — — (249) — — — (249) Balance as of December 31,2014 116,445 1,164 1,452,504 (87) (1,673,667) (150) (3,263) (223,349)Exercise of stock options, andissuance of common stockunits and stock awards 740 8 (488) — — — — (480)Issuance of common stock inprivate placement to a relatedparty 424 4 6,524 — — — — 6,528 Stock-based compensation — — 6,873 — — — — 6,873 Repurchase of common stock (2,676) (27) (25,609) — — — — (25,636)Cash dividends declared, $0.75per common share — — (87,906) — — — — (87,906)Net loss — — — — (18,760) — — (18,760)Other comprehensive income — — — 85 — — — 85 Balance as of December 31,2015 114,933 1,149 1,351,898 (2) (1,692,427) (150) (3,263) (342,645)Exercise of stock options, andissuance of common stockunits and stock awards 853 8 (674) — — — — (666)Partial termination of capped calloptions associated withrepurchases of convertible notesdue 2023 — — 578 — — — — 578 Stock-based compensation — — 8,297 — — — — 8,297 Repurchase of common stock (7,201) (72) (78,022) — — — — (78,094)Net income — — — — 59,536 — — 59,536 Other comprehensive income — — — 3 — — — 3 Balance as of December 31,2016 108,585 $1,085 $1,282,077 $1 $(1,632,891) (150)$(3,263)$(352,991) Table of Contents INNOVIVA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) See accompanying notes to consolidated financial statements.49 Year Ended December 31, 2016 2015 2014 Cash flows from operating activities Net income (loss) $59,536 $(18,760)$(168,464)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 13,954 13,933 12,175 Stock-based compensation 8,297 6,873 27,390 Amortization of premium (discount) on short term investment (9) 583 1,742 Interest added to the principal balance of the non-recourse term notes due 2029 855 22,635 20,527 Gain on repurchase of convertible subordinated notes due 2023 (2,342) — — Amortization of debt issuance costs 2,847 2,943 2,408 Other-than-temporary impairment loss on marketable securities — — 3,752 Realized gain on sale of marketable securities, net — (1,220) — Amortization of lease guarantee (190) — — Other non-cash items — (3) (2)Changes in operating assets and liabilities: Accounts receivable — — 74 Receivables from collaborative arrangements (20,619) (15,678) (7,371)Prepaid expenses and other current assets 48 320 (338)Inventories — — (1,908)Other assets (19) — 1,549 Accounts payable (690) 818 (7,695)Payable to Theravance Biopharma, Inc., net — (1,056) (15,916)Accrued personnel-related expenses and other accrued liabilities 276 (725) (491)Accrued interest payable (83) 360 4,751 Other long-term liabilities 8 (7) 275 Deferred revenue (885) (885) (3,181) Net cash provided by (used in) operating activities 60,984 10,131 (130,723) Cash flows from investing activities Maturities of marketable securities 88,422 137,621 339,359 Purchases of marketable securities (95,719) (86,523) (276,914)Sales of marketable securities 2,995 108,077 7,211 Purchases of property and equipment (278) (7) (689)Capitalized fees paid to a related party — — (135,000)Change in restricted cash — — 833 Payments received on notes receivable — — 140 Net cash (used in) provided by investing activities (4,580) 159,168 (65,060) Cash flows from financing activities Repurchase of common stock (78,094) (25,636) — Repurchase of convertible subordinated notes due 2023 (11,570) — — Payment of principal on non-recourse notes due 2029 (6,828) — — Payments of cash dividends to stockholders (960) (87,331) (56,988)Repurchase of shares to satisfy tax withholding (1,079) (2,192) (5,664)Proceeds from capped-call options 578 — — Cash and cash equivalents contributed to Theravance Biopharma, Inc. — — (277,541)Proceeds from issuance of notes payable, net of debt issuance costs — — 434,677 Proceeds from issuances of common stock, net 385 8,240 54,589 Net cash (used in) provided by financing activities (97,568) (106,919) 149,073 Net (decrease) increase in cash and cash equivalents (41,164) 62,380 (46,710)Cash and cash equivalents at beginning of period 159,180 96,800 143,510 Cash and cash equivalents at end of period $118,016 $159,180 $96,800 Supplemental disclosure of cash flow information Cash paid for interest $48,797 $25,863 $9,208 Supplemental disclosure of noncash information Contribution of net assets, excluding cash and cash equivalents to Theravance Biopharma, Inc. $— $— $125,337 Conversion of convertible subordinated notes to common stock $— $— $32,391 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESDescription of OperationsInnoviva, Inc. (referred to as "Innoviva", the "Company", or "we" and other similar pronouns) is focused on bringing compelling new medicines topatients in areas of unmet need by leveraging its significant expertise in the development, commercialization and financial management of bio-pharmaceuticals. Innoviva's portfolio is anchored by the respiratory assets partnered with Glaxo Group Limited ("GSK"), includingRELVAR®/BREO® ELLIPTA® (fluticasone furoate/ vilanterol, "FF/VI") and ANORO® ELLIPTA® (umeclidinium bromide/ vilanterol, "UMEC/VI").Under the Long-Acting Beta2 Agonist ("LABA") Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the"GSK Agreements"), Innoviva is eligible to receive the associated royalty revenues from RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®.Innoviva is also entitled to 15% of any future payments made by GSK under its agreements originally entered into with us, and since assigned toTheravance Respiratory Company, LLC ("TRC"), relating to the combination FF/UMEC/VI and the Bifunctional Muscarinic Antagonist — Beta2Agonist ("MABA") program, as monotherapy and in combination with other therapeutically active components, such as an inhaled corticosteroid, andany other product or combination of products that may be discovered and developed in the future under the LABA Collaboration Agreement ("LABACollaboration"), which has been assigned to TRC other than RELVAR®/BREO®ELLIPTA® and ANORO® ELLIPTA®.Business SeparationOn June 1, 2014, we separated our biopharmaceutical research and drug development operations from our late-stage partnered respiratory assets bytransferring our research and drug development operations into our then wholly-owned subsidiary, Theravance Biopharma, Inc. ("TheravanceBiopharma") (the "Spin-Off"). The Spin-Off resulted in Theravance Biopharma operating as an independent, publicly traded company.The results of operations for the former research and drug development operations conducted by us and by Theravance Biopharma until June 1, 2014are included as part of this report as discontinued operations. Refer to Notes 11 and 12, "Spin-Off of Theravance Biopharma, Inc.," and "DiscontinuedOperations" for further information.Principles of ConsolidationThe consolidated financial statements include the accounts of Innoviva and its wholly owned subsidiaries. All intercompany balances andtransactions have been eliminated in consolidation.Use of Management's EstimatesThe preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles ("GAAP") requiresmanagement to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.Actual results could differ materially from those estimates. Management evaluates its significant accounting policies and estimates on an ongoingbasis. We base our estimates on historical experience and other relevant assumptions that we believe to be reasonable under the circumstances. Theseestimates also form the basis for making judgments about the carrying values of assets and liabilities when these values are not readily apparent fromother sources.50Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Certain Risks and ConcentrationsOur financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and marketable securities.Although we deposit our cash with multiple financial institutions, our deposits, at times, may exceed federally insured limits. Refer to "SegmentReporting" below for concentrations with respect to revenues and geographic locations.Segment ReportingWe operate in a single segment, which is to provide capital return to stockholders by maximizing the potential value of our respiratory assetspartnered with GSK. Revenues are generated from our collaborative arrangements and royalty payments from GSK, located in Great Britain. Ourfacilities are located within the United States.Variable Interest EntitiesWe evaluate our ownership, contractual and other interest in entities to determine if they are variable-interest entities ("VIE"), whether we have avariable interest in those entities and the nature and extent of those interests. Based on our evaluations, if we determine we are the primary beneficiaryof such VIEs, we consolidate such entities into our financial statements. We consolidate the financial results of TRC, which we have determined to bea VIE, because we have the power to direct the economically significant activities of TRC and the obligation to absorb losses of, or the right toreceive benefits from, TRC. The financial position and results of operations of TRC are not material for the periods presented.Cash and Cash EquivalentsWe consider all highly liquid investments purchased with a maturity of three months or less on the date of purchase to be cash equivalents. Cashequivalents are carried at cost, which approximates fair value.Investments in Marketable SecuritiesWe invest in short-term investments and marketable securities, primarily corporate notes, government, government agency, and municipal bonds. Welimit the amount of credit exposure with any one issuer, industry or geographic area for investments other than instruments backed by the U.S. federalgovernment. We classify our marketable securities as available-for-sale securities and report them at fair value in cash equivalents, short-terminvestments or marketable securities on the consolidated balance sheets with related unrealized gains and losses included as a component ofstockholders' equity (deficit). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity,which is included in interest income on the consolidated statements of operations. Realized gains and losses, if any, on available-for-sale securitiesare included in interest income. The cost of securities sold is based on the specific identification method. Interest and dividends on securitiesclassified as available-for-sale are included in interest income.We regularly review all of our investments for other-than-temporary declines in estimated fair value. Our review includes the consideration of thecause of the impairment, including the creditworthiness of the security issuers, the number of securities in an unrealized loss position, the severity andduration of the unrealized losses, whether we have the intent to sell the securities and whether it is more likely than not that we will be required to sellthe securities before the recovery of their amortized cost basis. When we determine that the decline in estimated fair value of an investment is belowthe amortized cost basis and the51Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)decline is other-than-temporary, we reduce the carrying value of the security and record a loss for the amount of such decline to other income(expense), net.Fair Value of Financial InstrumentsWe define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.Our valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independentsources, while unobservable inputs reflect our market assumptions. We classify these inputs into the following hierarchy:Level 1 — Quoted prices for identical instruments in active markets.Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; andmodel-derived valuations whose inputs are observable or whose significant value drivers are observable.Level 3 — Unobservable inputs and little, if any, market activity for the assets.Financial instruments include cash equivalents, marketable securities, accounts receivable, receivables from collaborative arrangements, accountspayable, and accrued liabilities. Cash equivalents and marketable securities are carried at estimated fair value. The carrying value of accountsreceivable, receivables from collaborative arrangements, accounts payable, and accrued liabilities approximate their estimated fair value due to therelatively short-term nature of these instruments.Property and EquipmentProperty and equipment as of December 31, 2016 and 2015, which consisted of computer equipment, software. office furniture and fixture, amountedto $0.4 million and $0.2 million, respectively.Property, equipment and leasehold improvements are stated at cost and depreciated using the straight-line method as follows:Depreciation expense for the years ended December 31, 2016, 2015 and 2014 was $0.1 million, $0.1 million and $1.1 million. Depreciation expensefor property and equipment used by our former research and drug development operations is classified within discontinued operations in theconsolidated statements of operations for the year ended December 31, 2014. The change in accumulated depreciation is net of asset retirements.Capitalized SoftwareWe capitalize certain costs related to direct material and service costs for software obtained for internal use. Capitalized software costs are depreciatedover three years.52 Leasehold improvements Shorter of remaining lease terms or useful life Equipment, furniture and fixtures 5 - 7 years Software and computer equipment 3 yearsTable of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Capitalized Fees Paid to a Related PartyWe capitalize fees paid to licensors related to agreements for approved products or commercialized products. We capitalize these fees as capitalizedfees paid to a related party ("Capitalized Fees") and amortize these Capitalized Fees on a straight-line basis over their estimated useful lives upon thecommercial launch of the product, which has been shortly after regulatory approval of such product. The estimated useful lives of these CapitalizedFees are based on a country-by-country and product-by-product basis, as the later of the expiration or termination of the last patent right covering thecompound in such product in such country and 15 years from first commercial sale of such product in such country, unless the agreement isterminated earlier. Consistent with our policy for classification of costs under the research and development collaborative arrangements, theamortization of these Capitalized Fees are recognized as a reduction of royalty revenue. We review our Capitalized Fees for impairment on a product-by-product basis for each major geographic area when events or changes in circumstances indicate that the carrying amount of such assets may not berecoverable. The recoverability of Capitalized Fees is measured by comparing the asset's carrying amount to the expected undiscounted future cashflows that the asset is expected to generate. The determination of recoverability typically requires various estimates and assumptions, includingestimating the useful life over which cash flows will occur, their amount, and the asset's residual value, if any. We derive the required cash flowestimates from near-term forecasted product sales and long-term projected sales in the corresponding market.Revenue RecognitionRevenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence of an arrangement exists; (2) delivery hasoccurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Where the revenuerecognition criteria are not met, we defer the recognition of revenue by recording deferred revenue until such time that all criteria are met.Collaborative Arrangements and Multiple-Element ArrangementsRevenue from nonrefundable, up-front license or technology access payments under license and collaborative arrangements that are not dependent onany future performance by us is recognized when such amounts are earned. If we have continuing obligations to perform under the arrangement, suchfees are recognized over the estimated period of continuing performance obligation. For our arrangements with GSK, we recognize revenue from non-refundable, upfront fees and development contingent payments in the same manner as the final deliverable, which is ratably over the expected term ofour performance of research and development services under the agreements. These upfront or contingent payments received, pending recognition asrevenue, are recorded as deferred revenue. We periodically review the estimated performance period of our contracts based on the progress of ourprograms. The effect of any change made to an estimated performance period and, therefore revenue recognized, would occur on a prospective basis inthe period that the change was made.We account for contingent payments in accordance with Financial Accounting Standards Board (the "FASB") Subtopic Accounting StandardsCodification ("ASC") 605-28 "Revenue Recognition — Milestone Method." We recognize revenue from milestone payments when (i) the milestoneevent is substantive and its achievability was not reasonably assured at the inception of the agreement and (ii) we do not have ongoing performanceobligations related to the achievement of the milestone. Milestone payments are considered substantive if all of the following conditions are met: themilestone payment (a) is commensurate with either our performance to achieve the milestone or the enhancement of the value of the53Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)delivered item or items as a result of a specific outcome resulting from our performance to achieve the milestone, (b) relates solely to past performance,and (c) is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.RoyaltiesWe recognize royalty revenue on licensee net sales of products with respect to which we have contractual royalty rights in the period in which theroyalties are earned and reported to us and collectability is reasonably assured. Royalties are recognized net of amortization of capitalized feesassociated with any approval and launch milestone payments made to GSK.Product RevenuesWe currently have no product revenues following the Spin-Off.Prior to the Spin-Off, we recognized revenues from product sales when there was persuasive evidence that an arrangement existed, title and risk of losstransferred, the price was fixed and determinable, and collectability was reasonably assured. Product sales were recognized net of estimatedallowances, discounts, sales returns, chargebacks and rebates. Such amounts are presented within discontinued operations in the consolidatedstatements of operations.Allowance for Doubtful AccountsWe maintain a policy to record allowances for potentially doubtful accounts for estimated losses resulting from the inability of our customers to makerequired payments. As of December 31, 2016, there were no allowances for doubtful accounts and we have not had any write-offs historically.Fair Value of Stock-Based Compensation AwardsWe use the Black-Scholes-Merton option pricing model to estimate the fair value of options granted under our equity incentive plans and rights toacquire stock granted under our employee stock purchase plan ("ESPP"). The Black-Scholes-Merton option valuation model requires the use ofassumptions, including the expected term of the award and the expected stock price volatility. We use the "simplified" method as described in StaffAccounting Bulletin No. 107, "Share-Based Payment," for the expected option term. We use our historical volatility to estimate expected stock pricevolatility.Restricted Stock Units ("RSUs") and Restricted Stock Awards ("RSAs") are measured based on the fair market values of the underlying stock on thedates of grant.Stock-based compensation expense was calculated based on awards ultimately expected to vest and was reduced for estimated forfeitures at the timeof grant and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates. Our estimated annual forfeiture rates forstock options, RSUs and RSAs are based on our historical forfeiture experience.The estimated fair value of stock options, RSUs and RSAs is expensed on a ratable or straight-line basis over the expected term of the grant orexpected term of the vesting and the estimated fair value of performance-contingent RSUs and RSAs is expensed using an accelerated method overthe term of the award once we have determined that it is probable that performance milestones will be achieved. Compensation expense for RSUs andRSAs that contain performance conditions is based on the grant date fair value of the award. Compensation expense is recorded over the requisiteservice period based on management's best estimate as to whether it is probable that the shares awarded are expected to vest. We54Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)assess the probability of the performance milestones being met on a continuous basis. The grant date fair value of the RSUs and RSAs with a marketcondition is determined using a Monte Carlo valuation model and the compensation expense is recognized over the implied service period.Compensation expense for purchases under the ESPP is recognized based on the fair value of the common stock on the date of offering, less thepurchase discount percentage provided for in the plan.Amortization of Debt Issuance Costs from Non-recourse Notes Payable, due 2029In April 2014, we entered into certain note purchase agreements relating to the private placement of $450.0 million aggregate principal amount ofnon-recourse 9% fixed rate term notes due 2029 (the "2029 Notes") issued by our wholly-owned subsidiary.We incurred approximately $15.3 million in transaction costs in connection with issuance of 2029 Notes, which we amortize to interest expense overthe estimated life of the 2029 Notes based on the effective interest method. Since the principal and interest payments on the 2029 Notes are based onroyalties from product sales, which will vary from quarter to quarter, the 2029 Notes may be repaid prior to the final maturity date in 2029. Wecontinue to assess, on an ongoing basis, our estimates on royalties from products sales as it relates to its impact on payments of principal and intereston the 2029 Notes. To the extent that the interest or principal payments are greater or less than our initial estimates or the timing of such payments ismaterially different than our original estimates, we prospectively adjust the amortization of the debt issuance costs.Income TaxesWe utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined basedon differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effectwhen the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferredtax asset will not be realized.None of our currently unrecognized tax benefits would affect our effective income tax rate if recognized, due to the valuation allowance that currentlyoffsets our deferred tax assets. We do not anticipate the total amount of unrecognized income tax benefits relating to uncertain tax positions existingas of December 31, 2016 will significantly increase or decrease in the next 12 months.We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject toassessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position'ssustainability and is measured at the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. As of eachbalance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether: the factors underlying the sustainabilityassertion have changed and whether the amount of the recognized tax benefit is still appropriate.The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a taxbenefit might change as new information becomes available.55Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Comprehensive Income (Loss)Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) consists ofchanges in unrealized and realized gains and losses on our marketable securities.Related PartiesGSK owned 29.5% of our outstanding common stock as of December 31, 2016. Transactions with GSK are described in Note 3, "CollaborativeArrangements".In filings with the Securities and Exchange Commission, BlackRock, Inc., a global provider of investment, advisory and risk management solutions,reported beneficial ownership of more than 5% of our outstanding common stock as of December 31, 2016 and 2015, respectively. We use an externalasset manager, not affiliated with BlackRock, Inc., to manage a portion of our cash and investments portfolio. We had $64.3 million and$148.7 million invested in BlackRock Liquidity Money Market Fund as of December 31, 2016 and 2015, respectively, through our external assetmanager. The money market fund invests in U.S. Treasury bills, notes, trust receipts and direct obligations of the U.S. Treasury and repurchaseagreements relating to direct treasury obligations.Prior to the Spin-Off, Robert V. Gunderson, Jr. was one of our directors. We have engaged Gunderson Dettmer Stough Villeneuve Franklin &Hachigian, LLP, of which Mr. Gunderson is a partner, as our primary legal counsel. Fees incurred in the ordinary course of business were, $1.3 millionin the year ended December 31, 2014. As Mr. Gunderson was not one of our directors for the years ended December 31, 2016 and 2015, he is no longerconsidered a related party.Recently Issued Accounting Pronouncements Not Yet AdoptedIn April 2016, the FASB issued ASU 2016-10 to clarify the implementation guidance on licensing and the identification of performance obligationsconsideration included in ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which is also known as ASC 606, was issued inMay 2014 and outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers andsupersedes most current revenue recognition guidance, including industry-specific guidance. In March 2016, the FASB issued ASU 2016-08 toprovide amendments to clarify the implementation guidance on principal versus agent considerations. ASU 2014-09 guidance is effective for thefiscal years and interim reporting periods beginning after December 15, 2017 (as amended through ASU 2015-14 issued in August 2015), with earlyadoption permitted. Companies can elect a full retrospective method to recast prior-period financial statements or a modified retrospective method torecognize the cumulative effect as an adjustment to the retained earnings in the initial year. We plan to implement the standard in the first quarter of2018 on a modified retrospective basis and do not anticipate that this standard will have a material impact on our accounting for royalty revenues. Weare continuing to assess the potential impacts of the standard on the accounting for other revenues associated with the collaboration agreements.In February 2016, the FASB issued ASU 2016-02, Leases, which supersedes the lease recognition requirements in ASC Topic 840, Leases. Thestandard requires an entity to recognize right-of-use assets and lease liabilities arising from a lease for both financing and operating leases in theconsolidated balance sheets but recognize the impact on the consolidated statement of operations and cash flows in a similar manner under currentGAAP. The standard also requires additional qualitative and quantitative disclosures. The standard is effective for us at the beginning January 1, 2019and requires transition under a modified retrospective method. The most significant impact of the update to us is that we will be required to56Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)recognize a "right-of-use" asset and lease liability for the operating lease agreement that was not previously included on the balance sheet under theexisting lease guidance. We anticipate that the treatment of the lease on our consolidated statement of operations and cash flows will be the same.Recently Adopted Accounting PronouncementIn April 2015, the FASB issued ASU 2015-03, Interest — Imputation of Interest ("ASU 2015-03"), to simplify the presentation of debt issuance costs.This standard amended existing guidance to require the presentation of debt issuance costs associated with term loans in the balance sheet as adeduction from the carrying amount of the related debt liability instead of a deferred charge. We adopted ASU 2015-03 on January 1, 2016. Uponadoption of ASU 2015-03, we applied the guidance retrospectively to all periods presented and classified our debt issuance costs, which prior toadoption were included in other assets in the condensed consolidated financial statements, as a deduction to the respective long-term portion of our2023 Notes and 2029 Notes.In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), to simplify theaccounting for the taxes related to stock based compensation, requiring excess tax benefits and deficiencies to be recognized as a component ofincome tax expense rather than equity. This guidance also requires excess tax benefits and deficiencies to be presented as an operating activity on thestatement of cash flows and allows an entity to make an accounting policy election to either estimate expected forfeitures or to account for them asthey occur. We adopted ASU 2016-09 in the first quarter of 2016, which resulted in an increase in our deferred tax assets related to the tax effect onstock-based compensation in our net operating losses. The adoption did not have a material effect on our financial statements because our deferred taxassets are subject to a full valuation allowance. We elected to account for forfeitures as they occur, rather than estimate expected forfeitures.2. NET INCOME (LOSS) PER SHAREBasic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common shares outstanding.Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common shares anddilutive potential common share equivalents then outstanding. Dilutive potential common share equivalents include the assumed exercise, vestingand issuance of employee stock awards using the treasury stock method, as well as common shares issuable upon assumed conversion of ourconvertible debt using the if-converted method.57Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)2. NET INCOME (LOSS) PER SHARE (Continued)The following table shows the computation of basic and diluted net income (loss) per share for the years ended December 31, 2016, 2015 and 2014:Anti-dilutive SecuritiesThe following common share equivalents were not included in the computation of diluted net income (loss) per share because their effect was anti-dilutive:58 Year Ended December 31, (In thousands except per share data) 2016(1) 2015 2014 Numerator: Income (loss) from continuing operations, basic $59,536 $(18,760)$(73,530) Loss from discontinued operations, basic — — (94,934) Net income (loss), attributable to common stockholders, basic 59,536 (18,760) (168,464) Add: Interest expense on 2023 Notes 5,790 — — Net income (loss) attributable to common stockholders, diluted $65,326 $(18,760)$(168,464) Denominator: Weighted-average shares used to compute basic net income (loss) per share 110,280 115,372 112,059 Dilutive effect of 2023 Notes 12,541 — — Dilutive effect of options and awards granted under equity incentive plan andemployee stock purchase plan 412 — — Weighted-average shares used to compute diluted net income (loss) per share 123,233 115,372 112,059 Net income (loss) per share Basic $0.54 $(0.16)$(1.50) Diluted $0.53 $(0.16)$(1.50) Year Ended December 31, (In thousands) 2016(1) 2015(2) 2014 Outstanding options and awards granted under equity incentive plan and employeestock purchase plan 4,073 6,934 8,011 Shares issuable upon conversion of 2023 Notes — 12,904 12,329 4,073 19,838 20,340 (1)Includes 2.9 million options, 0.1 million restricted stock units ("RSUs"), and 0.2 million unvested restricted stock awards ("RSAs") retained by former employees whowere transferred to Theravance Biopharma in connection with the Spin-Off. Subsequent to the Spin-Off, stock-based compensation expense associated with the awardsheld by Theravance Biopharma employees granted prior to the Spin-Off is recognized by Theravance Biopharma. Under Anti-Dilutive Securities, 2.8 million options wereexcluded from the diluted net income per share calculation as their effect was anti-dilutive. (2)Includes 4.1 million options, 0.4 million restricted stock units, and 1.0 million unvested RSAs retained by former employees who were transferred to TheravanceBiopharma in connection with the Spin-Off. All of these awards were excluded from the diluted net loss per share calculation as their effect was anti-dilutive.Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)3. COLLABORATIVE ARRANGEMENTSNet Revenue from Collaborative ArrangementsNet revenue from collaborative arrangements from continuing operations relates to our collaborative arrangement with GSK. Net revenue from othercollaborative arrangements is reflected as discontinued operations in the consolidated statements of operations. Refer to Notes 1, 11 and 12,"Description of Operations and Summary of Significant Accounting Policies," "Spin-Off of Theravance Biopharma, Inc." and "DiscontinuedOperations" for further information.Net revenue recognized under our GSK Agreements was as follows:LABA CollaborationIn November 2002, we entered into our LABA Collaboration Agreement with GSK to develop and commercialize once-daily LABA products for thetreatment of chronic obstructive pulmonary disease ("COPD") and asthma.As a result of the launch and approval of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® in the U.S., Japan and Europe, we paid milestonefees to GSK totaling $220.0 million during the year ended December 31, 2014. Although we have no further milestone payment obligations to GSKpursuant to the LABA Collaboration Agreement, we continue to have ongoing participation as part of the collaboration, including joint steering andjoint project committees that are expected to continue over the life of the agreements. The milestone fees paid to GSK were recognized as capitalizedfees paid to a related party, which are being amortized over their estimated useful lives commencing upon the commercial launch of the product. Theamortization expense is recorded as a reduction to the royalties from GSK.We are entitled to receive annual royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows: 15% on the first $3.0 billion of annualglobal net sales and 5% for all annual global net sales above $3.0 billion. Sales of single-agent LABA medicines and combination medicines wouldbe combined for the purposes of this royalty calculation. For other products combined with a LABA from the LABA Collaboration, such as ANORO®ELLIPTA®, royalties are upward tiering and range from 6.5% to 10%.2004 Strategic AllianceIn March 2004, we entered into the Strategic Alliance Agreement with GSK where GSK received an option to license exclusive development andcommercialization 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 sixadditional Innoviva-discovered preclinical MABA compounds (the "Additional MABAs"). The development program is fully funded by GSK and isstill currently in early stages of Phase II trials. As a result of the transactions effected by the Spin-Off, we are only entitled to receive 15% of any59 Year Ended December 31, (In thousands) 2016 2015 2014 Royalties from a related party — RELVAR/BREO $128,638 $59,188 $16,635 Royalties from a related party — ANORO 17,869 7,699 1,782 Total royalties from a related party 146,507 66,887 18,417 Less: amortization of capitalized fees paid to a related party (13,823) (13,823) (11,066) Royalty revenue 132,684 53,064 7,351 Strategic alliance — MABA program license 885 885 1,082 Total net revenue from GSK $133,569 $53,949 $8,433 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)3. COLLABORATIVE ARRANGEMENTS (Continued)contingent payments and royalties payable by GSK from sales of FF/UMEC/VI (and MABA, and MABA/FF) while Theravance Biopharma receives85% of those same payments.GSK Contingent Payments and RevenueThe potential future contingent payments receivable related to the MABA program of up to $363.0 million are not deemed substantive milestonesdue to the fact that the achievement of the event underlying the payment predominantly relates to GSK's performance of future development,manufacturing and commercialization activities for product candidates after licensing the program. The Company is entitled to 15% of any milestonepayments.4. AVAILABLE-FOR-SALE SECURITIES AND FAIR VALUE MEASUREMENTSAvailable-for Sale SecuritiesThe classification of available-for-sale securities in the consolidated balance sheets is as follows:The estimated fair value of available-for-sale securities is based on quoted market prices for these or similar investments that were based on pricesobtained from a commercial pricing service. Available-for-sale securities are summarized below: As of December 31, 2016, all of the available-for-sale debt securities had contractual maturities within one year and the average duration of debtsecurities was approximately one month.60 December 31, (In thousands) 2016 2015 Cash and cash equivalents $116,396 $148,673 Short-term marketable securities 32,417 28,103 Total $148,813 $176,776 December 31, 2016 (In thousands) Amortized Cost GrossUnrealizedGains GrossUnrealizedLosses EstimatedFair Value U.S. government agencies $12,428 $1 $— $12,429 U.S. commercial paper 72,065 — — 72,065 Money market funds 64,319 — — 64,319 Total $148,812 $1 $— $148,813 December 31, 2015 (In thousands) Amortized Cost GrossUnrealizedGains GrossUnrealizedLosses EstimatedFair Value U.S. government agencies $14,406 $— $(1)$14,405 U.S. corporate notes 2,702 — (1) 2,701 U.S. commercial paper 10,997 — — 10,997 Money market funds 148,673 — — 148,673 Total $176,778 $— $(2)$176,776 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)4. AVAILABLE-FOR-SALE SECURITIES AND FAIR VALUE MEASUREMENTS (Continued)During the year ended December 31, 2015, we recognized a gain of $1.2 million from the sale of all of the ordinary shares of Theravance Biopharmathat we held as of December 31, 2014, which is included in other income (expense), net in the condensed consolidated statement of operations. Inaddition, we sold other available-for-sale securities totaling $100.4 million, and the related realized gains and losses were not significant during yearended December 31, 2015.We recognized an unrealized loss of $3.8 million on our Theravance Biopharma equity securities as of December 31, 2014, which was determined tobe other-than-temporary and charged to other income (expense), net on the consolidated statements of operations.Fair Value MeasurementsOur available-for-sale securities are measured at fair value on a recurring basis and our debt is carried at the amortized cost basis. The estimated fairvalues were as follows: 61 Estimated Fair Value Measurements as of December 31, 2016Using: Quoted Price inActive Marketsfor IdenticalAssets Significant OtherObservableInputs SignificantUnobservableInputs Types of Instruments(In thousands) Level 1 Level 2 Level 3 Total Assets U.S. government agencies $— $12,429 $— $12,429 U.S. commercial paper — 72,065 — 72,065 Money market funds 64,319 — — 64,319 Total assets measured at estimated fair value $64,319 $84,494 $— $148,813 Liabilities Convertible subordinated notes due 2023 $— $202,125 $— $202,125 Non-recourse notes due 2029 — 487,189 — 487,189 Total fair value of liabilities $— $689,314 $— $689,314 Estimated Fair Value Measurements as of December 31, 2015Using: Quoted Price inActive Marketsfor IdenticalAssets Significant OtherObservableInputs SignificantUnobservableInputs Types of Instruments(In thousands) Level 1 Level 2 Level 3 Total Assets U.S. government agencies $— $14,405 $— $14,405 U.S. corporate notes — 2,701 — 2,701 U.S. commercial paper — 10,997 — 10,997 Money market funds 148,673 — — 148,673 Total assets measured at estimated fair value $148,673 $28,103 $— $176,776 Liabilities Convertible subordinated notes due 2023 $— $189,100 $— $189,100 Non-recourse notes due 2029 — 470,970 — 470,970 Total fair value of liabilities $— $660,070 $— $660,070 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)4. AVAILABLE-FOR-SALE SECURITIES AND FAIR VALUE MEASUREMENTS (Continued)The fair value of our marketable securities classified within Level 2 is based upon observable inputs that may include benchmark yields, reportedtrades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market researchpublications.The fair value of our 2023 Notes and 2029 Notes is based on recent trading prices of the instruments.5. CAPITALIZED FEES PAID TO A RELATED PARTYWe capitalize fees paid to licensors related to agreements for approved products or commercialized products. We capitalize these fees as capitalizedfees paid to a related party ("Capitalized Fees") and amortize these Capitalized Fees on a straight-line basis over their estimated useful lives upon thecommercial launch of the product, which is expected to be shortly after regulatory approval of such product. The estimated useful lives of theseCapitalized Fees are based on a country-by-country and product-by-product basis, as the later of the expiration or termination of the last patent rightcovering the compound in such product in such country and 15 years from first commercial sale of such product in such country, unless the agreementis terminated earlier. Capitalized fees paid to a related party, which consist of registrational and launch-related milestone fees paid to GSK, wereas follows:These milestone fees are being amortized over their estimated useful lives commencing upon the commercial launch of the product in their respectiveregions with the amortization expense recorded as a reduction in revenue from collaborative arrangements. As of December 31, 2016, the weightedaverage remaining amortization period is 13.1 years.Additional information regarding these milestone fees is included in Note 3, "Collaborative Arrangements." Amortization expense for the years endedDecember 31, 2016, 2015 and 2014 were $13.8 million, $13.8 million and $11.1 million. The remaining estimated amortization expense is$13.8 million for each of the years from 2017 to 2021 and $111.4 million thereafter.6. STOCK-BASED COMPENSATIONEquity Incentive PlansIn May 2012, we adopted the 2012 Equity Incentive Plan (the "2012 Plan"). The 2012 Plan provides for the grant of incentive stock options,nonstatutory stock options, restricted stock awards, stock unit awards and SARs to employees, non-employee directors and consultants. As ofDecember 31, 2016, total shares remaining available for issuance under the 2012 Plan were 3,573,436.Employee Stock Purchase PlanUnder the 2004 Employee Stock Purchase Plan (the "ESPP"), our employees may purchase common stock through payroll deductions at a price equalto 85% of the lower of the fair market value of the stock at the beginning of the offering period or at the end of each applicable purchase period. TheESPP provides for62 (In thousands) Amortization period December 31,2016 December 31,2015 United States 2013 - 2030 $120,000 $120,000 Europe 2013 - 2029 60,000 60,000 Japan 2013 - 2029 40,000 40,000 Gross carrying value 220,000 220,000 Accumulated amortization (39,455) (25,632) Net carrying value $180,545 $194,368 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6. STOCK-BASED COMPENSATION (Continued)consecutive and overlapping offering periods of 24 months in duration, with each offering period composed of four consecutive six-month purchaseperiods. The purchase periods end on either May 15 or November 15. ESPP contributions are limited to a maximum of 15% of an employee's eligiblecompensation. The maximum number of shares that an employee may purchase in any purchase period is 2,500. An employee may not purchaseshares with a value greater than $25,000 in any calendar year.As of December 31, 2016, total shares remaining available for issuance under the ESPP were 237,627.Performance-Contingent RSAs and RSUsSince 2011, the Compensation Committee of our Board of Directors (the "Compensation Committee") has approved grants of performance-contingentRSAs to senior management and a non-executive officer. Generally, these awards have dual triggers of vesting based upon the achievement of certainperformance goals by a pre-specified date, as well as a requirement for continued employment. Recognition of stock-based compensation expensebegins when the performance goals are deemed probable of achievement.Included in these performance-contingent RSAs is the grant of 1,290,000 special long-term retention and incentive performance-contingent RSAs tosenior management in 2011. The awards have dual triggers of vesting based upon the achievement of certain performance conditions over a six-yeartimeframe from 2011 through December 31, 2016 and require continued employment. As of March 31, 2014, we determined that the achievement ofthe requisite performance conditions for vesting of the first tranche of these awards was probable and the total stock-based compensation expense of$7.0 million for the first tranche was fully recognized through May 2014. In connection with the Spin-Off, our Compensation Committee approvedthe modification of the remaining tranches related to these awards as the performance conditions associated with the remaining portions of theseawards were unlikely to be consistent with the new strategies of each company following the Spin-Off. The remaining 63,000 RSAs for which service-based vesting was not triggered at the time of the Spin-Off remain subject to new performance conditions (as well as the original service conditions).In addition, the RSAs for which both the performance and service-based conditions were not achieved prior to the Spin-Off were entitled to thepro rata dividend distribution made by the Company on June 2, 2014 of one ordinary share of Theravance Biopharma for every 3.5 shares of theCompany's common stock subject to their awards, which will also be subject to the same new performance and service conditions as the original RSAsto which they relate. During the year ended December 31, 2016, we determined that the achievement of the requisite performance conditions was metand, as a result, $1.3 million compensation cost was recognized for the remaining equity awards.On January 14, 2016, the Compensation Committee approved and granted 282,394 RSAs and 46,294 RSUs to senior management. These awardsinclude a market condition based on Relative Total Shareholder Return ("TSR") and a service condition that requires continued employment,collectively the "Performance Measures". The vesting percentages of these awards are calculated based on the two-year TSR with a catch-up provisionopportunity measured on January 13, 2019 for RSAs and on September 30, 2018 for RSUs. Two-thirds of amounts earned at the end of year two willvest and be distributed on February 20, 2018, while the final one-third earned after two years as well as the catch-up amount earned will vest and bedistributed on February 20, 2019 for RSAs and November 20, 2018 for RSUs. The actual payout of shares may range from a minimum of zero shares toa maximum of 328,688 shares granted upon the actual performance against the Performance Measures. The grant date fair value of these awards isdetermined using a Monte Carlo valuation model. The aggregate value of $2.0 million is recognized as compensation expense over the impliedservice period and will not be reversed if the market condition is not met.63Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6. STOCK-BASED COMPENSATION (Continued)Director Compensation ProgramOur non-employee directors receive compensation for services provided as a director. Each member of our Board of Directors who is not an employeereceives an annual cash retainer for services as a director, member of a committee of the Board of Directors, lead independent director and chairman,as applicable.Each of our independent directors receives periodic automatic grants of equity awards under a program implemented under the 2012 Plan. Thesegrants are non-discretionary. Only our independent directors or affiliates of such directors are eligible to receive automatic grants under the 2012 Plan.Under the program, as amended following the Spin-Off, each individual who first becomes a non-employee director will, on the date such individualjoins the Board of Directors, automatically be granted a one-time grant of RSUs covering a number of shares of our common stock calculated as$250,000 divided by our common stock closing share price on the date of grant as reported on The NASDAQ Global Select Market, rounded down tothe nearest whole share (the "Initial RSUs"), plus a one-time grant of RSUs covering a number of shares of our common stock calculated as $250,000divided by our common stock closing share price on the date of grant as reported on The NASDAQ Global Select Market, which would be pro-ratedfor the number of whole months remaining until the anniversary of the prior year's stockholders' meeting, rounded down to the nearest whole share(the "Pro Rata RSUs"). The Initial RSUs vest in two equal annual installments, while Pro-Rata RSUs vest in a single installment at the sooner of thenext annual stockholder meeting or the one-year grant anniversary, in each case subject to the non-employee director's continuous service through theapplicable vesting date.Annually, upon his or her re-election to the Board at the Annual Meeting of Stockholders, each non-employee director is automatically granted anRSU covering a number of shares of our common stock calculated as $250,000 divided by our common stock closing share price on the date of grantas reported on The NASDAQ Global Select Market, rounded down to the nearest whole share. Annual RSUs will vest at the sooner of the next annualstockholder meeting or the one-year anniversary of grant, subject to the non-employee director's continuous service through the applicablevesting date.These RSUs will vest in full upon the director's death or the occurrence of a Change in Control before the director's service terminates. All directorRSUs will be settled in shares of our common stock on the vesting date. Director RSUs will carry dividend equivalent rights to be credited with anamount equal to all cash dividends paid on the underlying shares of common stock while unvested. Dividend equivalents will be subject to the sameterms and conditions, including vesting, as the RSUs to which they attach and will be paid in cash upon vesting.Stock-Based Compensation ExpenseIn connection with the Spin-Off of Theravance Biopharma, all outstanding shares of Theravance Biopharma were distributed to our stockholders as apro-rata dividend distribution on June 2, 2014 by issuing one ordinary share of Theravance Biopharma for every 3.5 shares held of Innoviva commonstock to stockholders of record on May 15, 2014. Outstanding stock options and RSUs that were not eligible for the dividend distribution wereadjusted for the Spin-Off of Theravance Biopharma. The number of shares and exercise price for all outstanding stock options were adjusted and thenumber of shares for all outstanding RSUs was adjusted. All other terms of these grants remain the same; provided, however, that the vesting andexpiration of these grants are based on the holder's continuing employment or service with us or Theravance Biopharma, as applicable.64Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6. STOCK-BASED COMPENSATION (Continued)Although the anti-dilution adjustments were required pursuant to the terms of each stock plan, the anti-dilution adjustments were calculated using avolume-weighted average stock price, rather than the stock price as of the date of the dividend distribution, which resulted in incrementalcompensation expense. The accounting impact of the adjustment to the outstanding stock options and RSUs that occurred in connection with theSpin-Off of Theravance Biopharma was measured by comparing of the fair values of the modified stock options and RSUs to our employees anddirectors immediately before and after the adjustment. As a result, we recognized incremental stock-based compensation expense of $1.2 million inthe second quarter of 2014, of which $0.9 million is included in discontinued operations. All remaining unrecognized stock-based compensationexpense associated with this adjustment will be recognized by Theravance Biopharma as it pertains to stock options and RSUs held by individualsnow employed by Theravance Biopharma or one if its affiliates.Stock-based compensation expense is included in the consolidated statements of operations as follows:Stock-based compensation expense included in the consolidated statements of operations by award type is as follows:As of December 31, 2016, the unrecognized stock-based compensation cost, net of expected forfeitures for awards expected to vest, includingperformance-contingent RSAs for which the performance milestones65 Year Ended December 31, (In thousands) 2016 2015 2014 Research and development $632 $1,036 $2,781 General and administrative 7,665 5,837 12,980 Stock-based compensation from continuing operations 8,297 6,873 15,761 Stock-based compensation from discontinued operations — — 11,629 Total stock-based compensation expense $8,297 $6,873 $27,390 Year Ended December 31, (In thousands) 2016 2015 2014 Stock options $632 $789 $4,658 RSUs 1,920 2,492 4,564 RSAs 3,492 2,850 7,575 Performance-based RSUs — — 3 Performance-based RSAs 1,293 613 10,580 Market-based RSUs 112 — — Market-based RSAs 693 — — ESPP 155 129 10 Total stock-based compensation expense $8,297 $6,873 $27,390 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6. STOCK-BASED COMPENSATION (Continued)were determined to be probable of achievement, and the estimated weighted-average amortization period, using the straight-line attribution method,was as follows:Compensation AwardsThe following table summarizes equity award activity under the 2012 Plan and Prior Plans and related information:As of December 31, 2016, the aggregate intrinsic value of the options outstanding was $0.1 million and the aggregate intrinsic value of the optionsexercisable was $0.1 million.The total intrinsic value of the options exercised was $38,000 in the year ended December 31, 2016, $0.5 million in the year ended December 31,2015 and $17.5 million in the year ended December 31, 2014. The total estimated fair value of options vested was $4.7 million in the year endedDecember 31, 2016, $10.0 million in the year ended December 31, 2015 and $5.7 million in the year ended December 31, 2014.66 (In thousands) UnrecognizedCompensationCost Weighted-AverageAmortizationPeriod(Years) Stock options $899 1.5 RSUs 1,539 1.1 RSAs 8,076 2.6 Performance-based RSAs 242 0.9 Market-based RSUs 156 1.4 Market-based RSAs 1,000 1.5 Total stock-based compensation expense $11,912 (In thousands, except per share data) Number ofoutstandingoptions Weighted-AverageExercisePrice ofOutstandingOptions Number ofoutstandingRSUs andPSUs Weighted-AverageFairValue perShare atGrant Number ofoutstandingRSAs andPSAs Weighted-AverageFairValue perShare atGrant Balance as of December 31, 2015 4,262 $23.00 459 $18.34 1,305 $18.00 Granted — — 237 11.32 645 10.36 Exercised (19) 9.09 — — — — Released RSUs/RSAs — — (269) 16.93 (809) 17.86 Forfeited (1,343) 21.65 (14) 16.75 (16) 21.61 Balance as of December 31, 2016 2,900 23.72 413 15.29 1,125 13.67 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6. STOCK-BASED COMPENSATION (Continued)Valuation AssumptionsWe based the range of weighted-average estimated values of employee stock option grants and rights granted under the ESPP, as well as the weighted-average assumptions used in calculating these values, on estimates as of the date of grant, as follows:7. DEBTOur debt consists of:Convertible Subordinated Notes Due 2023In January 2013, we completed an underwritten public offering of $287.5 million aggregate principal amount of unsecured convertible subordinatednotes, which will mature on January 15, 2023 (the "2023 Notes"). The financing raised proceeds, net of issuance costs, of approximately$281.2 million, less $36.8 million to purchase two privately-negotiated capped call option transactions in connection with the issuance of the notes.The 2023 Notes bear interest at the rate of 2.125% per year that is payable semi-annually in arrears in cash on January 15 and July 15 of each year,beginning on July 15, 2013.67 Year EndedDecember 31,2014 Employee stock options(1) Risk-free interest rate 1.6% - 2.1% Expected term (in years) 5 - 6 Volatility 52% - 60% Dividend yield 3% - 4% Weighted-average estimated fair value of stock options granted $15.63(1)There were no stock options granted for the years ended December 31, 2016 and 2015. Year Ended December 31, 2016 2015 2014 Employee stock purchase plan issuances Risk-free interest rate 0.4% - 1.0% 0.1% - 0.9% 0.1% - 0.5% Expected term (in years) 0.5 - 2 0.5 - 2 0.5 - 2 Volatility 39% - 66% 44% - 69% 43% - 55% Dividend yield 0% 0% - 6% 8% Weighted-average estimated fair value of ESPP shares granted $4.47 $4.52 $4.49 December 31, (In thousands) 2016 2015 Convertible subordinated notes due 2023 $240,984 $255,109 Non-recourse notes due 2029 487,189 493,162 Total debt 728,173 748,271 Unamortized debt issuance cost (12,080) (15,140) Current portion of non-recourse notes due 2029 (7,752) — Net long-term debt $708,341 $733,131 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)7. DEBT (Continued)The 2023 Notes were convertible, at the option of the holder, into shares of our common stock at an initial conversion rate of 35.9903 shares per$1,000 principal amount of the 2023 Notes, subject to adjustment in certain circumstances, which represents an initial conversion price ofapproximately $27.79 per share.In connection with the offering of the 2023 Notes, we entered into two privately-negotiated capped call option transactions with a singlecounterparty. The capped call option transaction is an integrated instrument consisting of a call option on our common stock purchased by us with astrike price equal to the initial conversion price of $27.79 per share for the underlying number of shares and a cap price of $38.00 per share, both ofwhich are subject to adjustments consistent with the 2023 Notes. The cap component is economically equivalent to a call option sold by us for theunderlying number of shares with an initial strike price of $38.00 per share. As an integrated instrument, the settlement of the capped call coincideswith the due date of the convertible debt. Upon settlement, we would receive from our hedge counterparty a number of shares of our common sharesthat would range from zero, if the stock price was below $27.79 per share, to a maximum of 2,779,659 shares, if the stock price is above $38.00 pershare. However, if the market price of our common stock, as measured under the terms of the capped call transactions, exceeds $38.00 per share, thereis no incremental anti-dilutive benefit from the capped call.Following the Spin-Off of Theravance Biopharma in June 2014, the partial conversion by certain holders of the 2023 Notes in July 2014, anddividends declared and paid in 2014 and 2015, the conversion rate with respect to our 2023 Notes was adjusted in total to 50.5818 shares of ourcommon stock per $1,000 principal amount of the 2023 Notes, which represents a conversion price of approximately $19.77 per share. As a result ofthe conversion rate adjustments, the capped call strike price and cap price were also adjusted accordingly to $19.77 and $27.04.For the year ending December 31, 2016, we retired a portion of our 2023 Notes with a face value of $14.1 million and carrying value of $13.9 millionby way of purchase in the open market. The 2023 Notes were purchased for a total settlement price of $11.6 million resulting in a gain of $2.3 million,which is included in other income (expense), net in the condensed consolidated statement of operations. As a result of the partial retirement of our2023 Notes, we entered into partial termination agreement of the capped call option transaction described above. The partial termination agreement ofthe capped call option transaction enabled us to receive $0.6 million from the counterparty, which was recorded as an increase in additional paid-incapital in our condensed consolidated balance sheets as of December 31, 2016.Non-Recourse Notes Due 2029In April 2014, we entered into certain note purchase agreements relating to the private placement of $450.0 million aggregate principal amount ofnon-recourse fixed rate term notes due 2029 (the "2029 Notes") issued by our wholly-owned subsidiary.The 2029 Notes are secured by a security interest in a segregated bank account established to receive 40% of royalties due to us under the LABACollaboration with GSK commencing on April 1, 2014 and ending upon the earlier of full repayment of principal or May 15, 2029. The amounts inthe segregated bank account can only be used to make interest and principal payments on the 2029 Notes. As of December 31, 2016 and 2015, thebalance of the segregated bank account was not material.The 2029 Notes bear an annual interest rate of 9%, with interest and principal paid quarterly beginning November 15, 2014. The 2029 Notes may beredeemed at any time prior to maturity, in whole or in part, at specified redemption premiums. Prior to May 15, 2016, in the event that the specifiedportion of royalties received in a quarter is less than the interest accrued for the quarter, the principal amount of the 2029 Notes increased by theinterest shortfall amount for that period, and considered as payment in kind ("PIK"). Since issuance, $44.0 million of interest expense has been addedto the principal balance of the 2029 Note, of which $0.9 million and $22.7 million was added during the years ended December 31, 201668Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)7. DEBT (Continued)and 2015, respectively. During the year ended December 31, 2016, the principal balance of the 2029 Notes was paid down by $6.8 million with thepayments received from the royalty revenues generated in the previous quarters ended June 30 and September 30, 2016. Since the principal andinterest payments on the 2029 Notes are based on royalties from product sales recorded by GSK, which will vary from quarter to quarter and areunknown to us, the 2029 Notes may be repaid prior to the final maturity date in 2029. The 2029 Notes can be prepaid subject to a prepaymentpremium of 5% until April 17, 2016, 2.5% thereafter until April 17, 2017, and without premium afterwards.In connection with the sale of the 2029 Notes, we incurred approximately $15.3 million in debt issuance costs, which are being amortized to interestexpense over the estimated life of the 2029 Notes.As of December 31, 2016, the principal balance of the 2029 Notes was $487.2 million, which will be partially paid down by $7.8 million in the nextquarterly payment expected to be made in February 2017. This payment is based on our royalty revenues of $46.8 million for the three months endedDecember 31, 2016.8. SHAREHOLDERS' DEFICITDividendsOn February 20, 2015, our Board of Directors declared a quarterly dividend of $0.25 per share of common stock to stockholders of record as of theclose of business on March 12, 2015. This dividend was paid on March 31, 2015. On April 24, 2015, our Board of Directors declared a quarterlydividend of $0.25 per share of common stock to stockholders of record as of the close of business on June 12, 2015. This dividend was paid onJune 30, 2015. On July 24, 2015, our Board of Directors declared a quarterly dividend of $0.25 per share of common stock to stockholders of record asof the close of business on September 10, 2015. This dividend was paid to our stockholders on September 30, 2015. During the year endedDecember 31, 2015, we paid an aggregate of $87.3 million in dividends. Unvested RSAs and certain unvested RSUs as of the record date are alsoentitled to dividends, which will only be paid when the RSAs and such RSUs vest and are released. For further information on the impact of the cashdividend payments on the 2023 Notes, refer to Note 7, "Debt".On October 16, 2014, our Board of Directors declared a quarterly dividend of $0.25 per share of common stock to stockholders of record as of theclose of business on November 25, 2014. This dividend was paid on December 31, 2014. On July 25, 2014, our Board of Directors declared a quarterlydividend of $0.25 per share of common stock to stockholders of record as of the close of business on August 28, 2014. This dividend was paid onSeptember 18, 2014.Share Repurchase ProgramOn October 28, 2015, we announced the 2016 Share Repurchase Program. As a component of the Share Repurchase Program, on October 30, 2015, wecommenced a "modified Dutch auction" tender offer (the "October 2015 TO") to purchase up to $75 million of our common stock, at a price per shareof not less than $8.50 and not greater than $9.25, which will be contingent upon satisfaction of customary conditions. The October 2015 TO expiredon December 1, 2015. The following table shows our share repurchase activity and related information on the October 2015 TO:69 (In thousands except per share data) Purchase period end date December 2015 Shares repurchased and retired 2,576 Amount $24,641 Average price per share $9.56Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)8. SHAREHOLDERS' DEFICIT (Continued)Additionally, as part of the 2016 Share Repurchase Program, we repurchased shares of its common stock in the open market, which were retired uponrepurchase, during the periods presented as follows:9. COMMITMENTS AND CONTINGENCIESOperating Lease and Lease GuaranteeUpon the Spin-Off, our facility leases in South San Francisco, California were assigned to Theravance Biopharma. However, if Theravance Biopharmawere to default on its lease obligations, we have in substance guaranteed the lease payments for these facilities. We would also be responsible forlease-related payments including utilities, property taxes, and common area maintenance, which may be as much as the actual lease payments. As ofDecember 31, 2016, the total remaining lease payments, which run through May 2020, were $21.7 million. The carrying value of this lease guaranteewas $1.1 million as of December 31, 2016 and is reflected in other long-term liabilities in our consolidated balance sheet. Amortization on the leaseguarantee commenced in 2016 and amortization expense for the year ended December 31, 2016 was $0.2 million.On June 10, 2016, we executed a lease for our new corporate headquarters in Brisbane, California. The term of the new lease is seven years, subject toour right to extend the lease. Minimum lease payments under the new lease are as follows as of December 31, 2016:In connection with entering into the new lease, we terminated our sublease by and between us and Theravance Biopharma, dated June 2, 2014(the "Gateway Sublease"). The Gateway Sublease was set to expire on May 31, 2020. On June 10, 2016, we executed a Sublease TerminationAgreement with Theravance Biopharma to terminate the Gateway Sublease (the "Gateway Sublease Termination Agreement"). No termination fee waspayable to Theravance Biopharma as a result of this Gateway Sublease Termination Agreement.Guarantees and IndemnificationsWe indemnify our officers and directors for certain events or occurrences, subject to certain limits. We believe the fair value of these indemnificationagreements is minimal. Accordingly, we have not recognized any liabilities relating to these agreements as of December 31, 2016.70 December 31, (In thousands except per share data) 2016 2015 Shares repurchased and retired 7,201 100 Amount $78,095 $995 Average price per share $10.84 $9.95 (In thousands) Years ending December 31: 2017 $380 2018 392 2019 403 2020 416 2121 428 Thereafter 642 Total $2,661 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)10. INCOME TAXESDeferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes. Significant components of our deferred tax assets are as follows:The differences between the U.S. federal statutory income tax rate to our effective tax rate are as follows:Realization of deferred tax assets is dependent on future taxable income, if any, the timing and the amount of which are uncertain. Accordingly, thedeferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $20.6 million in the year endedDecember 31, 2016, increased by $4.7 million in the year ended December 31, 2015, and decreased by $103.8 million in the year endedDecember 31, 2014.The increase in the valuation allowance in the year ended December 31, 2016 was primarily due to early adoption of the FASB issued ASU 2016-09,Improvements to Employee Share-Based Payment Accounting, ("ASU 2016-09"), for which we recognized additional excess stock option tax benefitsof $46.9 million in net operating loss carryforwards.The increase in the valuation allowance in the year ended December 31, 2015 was primarily a result of net operating loss carryforwards.As of December 31, 2016, we had federal net operating loss carryforwards of approximately $1.1 billion, which will expire from 2025 through 2035,and federal research and development tax credit carryforwards of approximately $45.2 million, which will expire from 2018 through 2034. We alsohad state net operating loss carryforwards of approximately $674.3 million expiring in the years 2017 through 2035 and state research tax credits ofapproximately $32.3 million, which do not expire.71 As of December 31, (In thousands) 2016 2015 Deferred tax assets Net operating loss carryforwards $417,000 $392,000 Deferred revenues 1,000 1,000 Research and development tax credit carryforwards 53,000 53,000 Other 13,000 17,000 Total deferred tax assets 484,000 463,000 Valuation allowance (484,000) (463,000) Net deferred tax assets $— $— As of December 31, 2016 2015 2014 U.S. federal income tax rate 35.00% 34.00% 35.00% Non-deductible executive compensation 1.55 (1.94) (0.16) Stock-based compensation 0.09 (0.23) (1.11) Federal and state research credits — — 12.66 Effect of Spin-Off Transaction — — (203.20) Other (0.29) (0.56) (4.04) Change in valuation allowance (36.19) (31.27) 160.85 Effective tax rate 0.16% —% —% Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)10. INCOME TAXES (Continued)The net operating loss deferred tax asset balances as of December 31, 2016 include excess tax benefits from stock option exercises due to earlyadoption of ASU 2016-09.Utilization of net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitationsprovided by the Internal Revenue Code and similar state provisions. Annual limitations may result in expiration of net operating loss and tax creditcarryforwards before some or all of such amounts have been utilized.Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2016 and 2015, we hadno accrued interest or penalties.We conducted an analysis through the year ended December 31, 2015 to determine whether an ownership change had occurred since inception. Theanalysis indicated that two ownership changes occurred in prior years. However, notwithstanding the applicable annual limitations, no portion of thenet operating loss or credit carryforwards are expected to expire before becoming available to reduce federal and state income tax liabilities as a resultof those identified ownership changes. If we undergo another ownership change, the utilization of the pre-ownership change net operating losscarryforwards or pre-ownership change tax attributes, such as research tax credits, to offset the post-ownership change income may be subject to anannual limitation, pursuant to Section 382 and 383 of the Internal Revenue Code of 1986, as amended. Similar rules may apply under state tax laws.Uncertain Tax PositionsA reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits are as follows (in thousands):In the event that we are able to recognize these uncertain positions, most of the $15.5 million of the unrecognized benefit would reduce our effectivetax rate. We currently have a full valuation allowance against our deferred tax assets, which would impact the timing of the effective tax rate benefit,should any of these uncertain positions be favorably settled in the future. We do not believe it is reasonably possible that our unrecognized taxbenefits will significantly change within the next twelve months.We are subject to taxation in the U.S. and various state jurisdictions. The tax years 1999 and forward remain open to examination by the federal andmost state tax authorities due to net operating loss and overall credit carryforward positions.11. SPIN-OFF OF THERAVANCE BIOPHARMA, INC.On June 1, 2014, we separated our late-stage partnered respiratory assets from our biopharmaceutical research and drug development operations. Wecontributed the assets and certain liabilities from the research and drug development operations and $393.0 million of cash, cash equivalents andmarketable securities to Theravance Biopharma. All outstanding shares of Theravance Biopharma were then72 Unrecognized tax benefits as of December 31, 2013 $57,420 Gross decrease for tax positions for prior years (42,650) Gross increase in tax portions for 2014 689 Unrecognized tax benefits as of December 31, 2014 15,459 Gross increase in tax portions for 2015 29 Unrecognized tax benefits as of December 31, 2016 and 2015 $15,488 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)11. SPIN-OFF OF THERAVANCE BIOPHARMA, INC. (Continued)distributed to our stockholders of record on May 15, 2014 as a pro-rata dividend distribution of one ordinary share of Theravance Biopharma forevery 3.5 shares held of our common stock.On June 1, 2014, we entered into a Separation and Distribution Agreement with Theravance Biopharma that set forth the terms and conditions of theseparation of Theravance Biopharma from us. The Separation and Distribution Agreement sets forth a framework for the relationship between us andTheravance Biopharma following the separation regarding principal transactions necessary to separate Theravance Biopharma from us. Thisagreement also sets forth other provisions that govern certain aspects of our relationship with Theravance Biopharma after the completion of theseparation from us and provides for the allocation of assets, liabilities and obligations between Theravance Biopharma and us in connection withthe Spin-Off.In addition, we entered into other definitive agreements in connection with the Spin-Off, including (1) a Transition Services Agreement pursuant towhich Theravance Biopharma and we will provide each other with a variety of administrative services, including financial, tax, accounting,information technology, legal and human resources services, for a period of time of up to 12 months following the Spin-Off, (2) a Tax MattersAgreement that generally governs the parties' respective rights, responsibilities and obligations after the separation with respect to taxes, (3) theGateway Sublease and (4) an Employee Matters Agreement that allocates liabilities and responsibilities relating to employee compensation, benefitplans, programs and other related matters in connection with the separation, including the treatment of outstanding incentive awards and certainretirement and welfare benefit obligations. These arrangements contain the provisions related to the Spin-Off and the distribution of TheravanceBiopharma's ordinary shares to our stockholders.Due to the Spin-Off, the leases for the facilities in South San Francisco, California, which formerly served as our headquarters, were assigned toTheravance Biopharma. We would be held liable by the landlord if Theravance Biopharma defaults under its lease obligations, and thus, we have insubstance guaranteed the payments under the lease agreements for these facilities. See Note 9, "Commitments and Contingencies" for furtherinformation on this lease guarantee.Theravance Biopharma's historical results of operations have been presented as discontinued operations in our consolidated statement of operationsfor the year ended December 31, 2014. See Note 12, "Discontinued Operations," for further information.12. DISCONTINUED OPERATIONSOn June 1, 2014, we separated our research and drug development businesses from our late-stage partnered respiratory assets. For further informationon the Spin-Off, refer to Notes 1 and 11, "Description of Operations and Summary of Significant Accounting Policies" and "Spin-Off of TheravanceBiopharma, Inc.". The significant components of the research and drug development operations, which are presented as discontinued operations onthe consolidated statements of operations for the year ended December 31, 2014, were as follows:73 (In thousands) Net revenues(1) $3,129 Loss from discontinued operations(2) (94,934)(1)Net revenues primarily consist of revenue from collaborative arrangements and product sales. Revenue from collaborative arrangements was recognized from our agreementwith R-Pharm CJSC, which was transferred to Theravance Biopharma as a part of the Spin — Off. Product sales were generated from sales of VIBATIV in theU.S. through a limited number of distributors, and title and risk of loss transfer upon receipt by these distributors. Healthcare providers ordered VIBATIV throughTable of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)12. DISCONTINUED OPERATIONS (Continued)There was no impact of the discontinued operations after the Spin-Off to our revenues and expenses for the year ended December 31, 2016 and 2015.74these distributors. Commencing in the first quarter of 2014, revenue on the sale of VIBATIV was recorded on a sell-through basis, once the distributors sold the productto healthcare providers. Product sales were recorded net of estimated government-mandated rebates and chargebacks, distribution fees, estimated product returns and otherdeductions.(2)Included in the loss from discontinued operations for the year ended December 31, 2014 are external legal and accounting fees in connection with our separation strategywhich we started to incur in the year ended December 31, 2013 and the additional stock-based compensation and cash bonus expense recognized due to the achievement ofperformance conditions under a special long-term retention and incentive equity and cash bonus awarded to certain employees in the year ended December 31, 2011, whichwe started to incur in the year ended December 31, 2014.Table of Contents SUPPLEMENTARY FINANCIAL DATA (UNAUDITED)(In thousands, except per share data) The following table presents certain unaudited consolidated quarterly financial information for the eight quarters in the period ended December 31,2016. This information has been prepared on the same basis as the audited consolidated financial statements and includes all adjustments (consisting only ofnormal recurring adjustments) necessary to present fairly the unaudited quarterly results of operations set forth herein. 75 For the Quarters Ended March 31 June 30 September 30 December 31 2016 Net revenue $24,176 $32,472 $33,309 $43,612 Total operating expenses(1) (6,644) (6,595) (5,391) (5,951)Income from operations 17,532 25,877 27,918 37,661 Net income $4,435 $14,597 $15,033 $25,471 Basic net income per share $0.04 $0.13 $0.14 $0.24 Diluted net income per share $0.04 $0.13 $0.13 $0.22 For the Quarters Ended March 31 June 30 September 30 December 31 2015 Net revenue $6,896 $10,655 $13,562 $22,836 Total operationg expenses(1) (6,151) (5,547) (5,128) (5,543)Income from operations 745 5,108 8,434 17,293 Net income (loss) $(10,667)$(7,810)$(4,584)$4,301 Basic and diluted net income (loss) per share $(0.09)$(0.07)$(0.04)$0.04 Cash dividends declared per common share $0.25 $0.25 $0.25 $— (1)Amounts were computed independently for each quarter, and the sum of the quarters may not total the annual amounts.Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Stockholders of Innoviva, Inc. We have audited the accompanying consolidated balance sheets of Innoviva, Inc. as of December 31, 2016 and 2015, and the related consolidatedstatements of operations, comprehensive income (loss), stockholders' equity (deficit) and cash flows for each of the three years in the period endedDecember 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on thesefinancial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Innoviva, Inc. as ofDecember 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,2016, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Innoviva Inc.'s internalcontrol over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2017 expressed an unqualified opinionthereon./s/ ERNST & YOUNG LLPSan Jose, CaliforniaFebruary 28, 201776Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures. We conducted an evaluation as of December 31, 2016, under the supervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, which are definedunder 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 thereports 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 Financial Officer concluded that, as of such date, our disclosure controls and procedureswere effective.Management's Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of theExchange Act. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that inreasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expendituresare being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conductedan evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the Internal Control — IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management's assessment includedevaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, andour overall control environment. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as ofDecember 31, 2016. Our independent registered public accounting firm, Ernst & Young LLP, has audited our internal control over financial reporting as of December 31,2016. Their attestation report on the audit of our internal control over financial reporting is included below.Limitations on the Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or ourinternal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide onlyreasonable, 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 areresource constraints, and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, noevaluation 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.77Table of ContentsChanges in Internal Control over Financial Reporting There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) identified in connection with theevaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act, which occurred during the fourth fiscal quarter of the year ended December 31,2016 which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.78Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of Innoviva, Inc. We have audited Innoviva, Inc.'s internal control over financial reporting as of December 31, 2016, based on criteria established in InternalControl — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).Innoviva, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures aswe considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internalcontrol over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately andfairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the companyare being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financialstatements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. In our opinion, Innoviva, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based onthe COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheets of Innoviva, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders'equity (deficit) and cash flows for each of the three years in the period ended December 31, 2016 of Innoviva, Inc. and our report dated February 28, 2017,expressed an unqualified opinion thereon./s/ ERNST & YOUNG LLPSan Jose, CaliforniaFebruary 28, 201779Table of Contents ITEM 9B. OTHER INFORMATION None PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this Item is incorporated by reference from our proxy statement for our 2017 Annual Meeting of Stockholders to be filedwith the SEC within 120 days after the end of our fiscal year ended December 31, 2016. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference from our proxy statement for our 2017 Annual Meeting of Stockholders to be filedwith the SEC within 120 days after the end of our fiscal year ended December 31, 2016. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Other than with respect to the Securities Authorized for Issuance under Equity Compensation Plans below, the information required by this Item isincorporated by reference from our proxy statement for our 2017 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end ofour fiscal year ended December 31, 2016.Securities Authorized for Issuance under Equity Compensation Plans The following table provides certain information with respect to all of our equity compensation plans in effect as of December 31, 2016: ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this Item is incorporated by reference from our proxy statement for our 2017 Annual Meeting of Stockholders to be filedwith the SEC within 120 days after the end of our fiscal year ended December 31, 2016.80Plan Category Number ofsecurities tobe issuedupon exerciseof outstandingoptions Weighted-averageexercise priceof outstandingoptions Number ofsecuritiesremainingavailable forfuture issuanceunder equitycompensationplans(excludingsecuritiesreflectedin column (a)) (a) (b) (c) Equity compensation plans approved by security holders 3,259,943(1)$23.96(3) 3,791,468(4)Equity compensation plans not approved by security holders 53,595(2) 10.79(3) — Total 3,313,538(1)(2)$23.72(3) 3,791,468(4) (1)Includes 2,846,876 shares issuable upon exercise of outstanding options and 413,067 shares issuable upon vesting of outstanding restricted stock units and restricted stock awards. (2)Includes 53,595 shares issuable upon exercise of outstanding options and no outstanding restricted stock units. (3)Does not take into account outstanding restricted stock units and restricted stock awards as these awards have no exercise price. (4)Includes 237,627 shares of common stock available under our Employee Stock Purchase Plan.Table of Contents ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this Item is incorporated by reference from our proxy statement for our 2017 Annual Meeting of Stockholders to be filedwith the SEC within 120 days after the end of our fiscal year ended December 31, 2016. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)The following documents are filed as part of this Annual Report on Form 10-K: 1.Financial Statements: The following financial statements and schedules of the Registrant are contained in Part II, Item 8, "Financial Statements and Supplementary Data" ofthis Annual Report on Form 10-K:2.Financial Statement Schedules: All schedules have been omitted because of the absence of conditions under which they are required or because the required information, where material,is shown in the financial statements, financial notes or supplementary financial information.(b)Exhibits required by Item 601 of Regulation S-K The information required by this Item is set forth on the exhibit index that follows the signature page of this report. ITEM 16. FORM 10-K SUMMARY None.81 Page Consolidated Balance Sheets as of December 31, 2016 and 2015 45 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2016 46 Consolidated Statements of Comprehensive Income (Loss) for each of the three years in the period endedDecember 31, 2016 47 Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period endedDecember 31, 2016 48 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2016 49 Notes to Consolidated Financial Statements 50 Report of Independent Registered Public Accounting Firm 76 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael W. Aguiar and Ericd'Esparbes, each of whom may act without joinder of the other, as their true and lawful attorneys-in-fact and agents, each with full power of substitution andresubstitution, for such person and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to the Annual Report onForm 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission,granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done inand about the premises, as fully to all intents and purposes as he or she could do in person, hereby ratifying and confirming all that said attorneys-in-fact andagents, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.82 INNOVIVA, INC.Date: February 28, 2017 By: /s/ MICHAEL W. AGUIARMichael W. AguiarChief Executive OfficerSignature Title Date /s/ MICHAEL W. AGUIARMichael W. Aguiar Chief Executive Officer (Principal ExecutiveOfficer) February 28, 2017/s/ ERIC D'ESPARBESEric d'Esparbes Senior Vice President, Chief Financial Officer(Principal Financial Officer and PrincipalAccounting Officer) February 28, 2017/s/ WILLIAM WALTRIPWilliam H. Waltrip Chairman of the Board February 28, 2017/s/ BARBARA DUNCANBarbara Duncan Director February 28, 2017/s/ CATHERINE J. FRIEDMANCatherine J. Friedman Director February 28, 2017Table of Contents83Signature Title Date /s/ PATRICK G. LEPOREPatrick G. LePore Director February 28, 2017/s/ PAUL PEPEPaul Pepe Director February 28, 2017/s/ JAMES L. TYREEJames L. Tyree Director February 28, 2017Table of Contents Exhibits Incorporated by Reference ExhibitNumber Description Form Exhibit FilingDate/PeriodEnd Date 3.1 Amended and Restated Certificate of Incorporation S-1 3.3 7/26/04 3.2 Certificate of Amendment of Restated Certificate of Incorporation 10-Q 3.4 3/31/07 3.3 Certificate of Ownership and Merger, as filed with the Secretary of State of theState of Delaware, effective on January 7, 2016 8-K 3.1 1/8/16 3.4 Amended and Restated Bylaws, amended and restated as of February 8, 2017 8-K 3.1 2/9/17 3.7 Certificate of Ownership and Merger Merging LABA Merger Sub, Inc. withand into Theravance, Inc. 8-K 3.7 1/8/16 4.1 Specimen certificate representing the common stock of the registrant 10-K 4.1 12/31/06 4.4 Indenture dated as of January 24, 2013 by and between Theravance, Inc. andThe Bank of New York Mellon Trust Company, N.A., as trustee 8-K 4.4 1/25/13 4.5 Form of 2.125% Convertible Subordinated Note Due 2023 (included inExhibit 4.4) 4.6 Indenture, dated April 17, 2014. 8-K 10.1 4/21/14 4.7 Form of 9.0% Convertible Subordinated Note Due 2029 8-K 10.2 4/21/14 10.1+1997 Stock Plan S-1 10.1 6/10/04 10.2+Long-Term Stock Option Plan S-1 10.2 6/10/04 10.3+2004 Equity Incentive Plan, as amended by the Board of DirectorsFebruary 10, 2010 and approved by stockholders April 27, 2010 and forms ofequity award 10-K 10.3 12/31/11 10.4 Employee Stock Purchase Plan, as amended April 27, 2010 10-Q 10.4 6/30/10 10.5+Change in Control Severance Plan, as amended and restated on July 27, 2007 10-Q 10.8 6/30/08 10.6 Amended and Restated Lease Agreement, 951 Gateway Boulevard, betweenthe registrant and HMS Gateway Office L.P., dated January 1, 2001 S-1 10.8 6/10/04 10.7 Lease Agreement, 901 Gateway Boulevard, between the registrant and HMSGateway Office L.P., dated January 1, 2001 S-1 10.9 6/10/04 10.8 Collaboration Agreement between the registrant and Glaxo Group Limited,dated as of November 14, 2002 10-Q 10.1 6/30/14 10.9+Form of Indemnification Agreement for directors and officers of the registrant S-1 10.11 6/10/04 10.11 Amended and Restated Investors' Rights Agreement by and among theregistrant and the parties listed therein, dated as of May 11, 2004 S-1 10.13 6/10/04 10.13*Strategic Alliance Agreement between the registrant and Glaxo GroupLimited, dated as of March 30, 2004 10-K 10.13 12/31/13 10.18+Form of Notice of Grant and Stock Option Agreement under 2004 EquityIncentive Plan 10-K 10.30 12/31/04 Table of Contents Incorporated by Reference ExhibitNumber Description Form Exhibit FilingDate/PeriodEnd Date 10.19+Form of Notice of Restricted Stock Award and Restricted Stock Agreementunder 2004 Equity Incentive Plan (form in effect through 2010) 10-Q 10.31 6/30/07 10.20+Description of Cash Bonus Program, as amended 10-K 10.22 12/31/09 10.24+Amended and Restated 2008 New Employee Equity Incentive Plan and formsof equity award 10-K 10.24 12/31/11 10.27+Amendment to Change in Control Severance Plan effective December 16,2009 10-K 10.47 12/31/09 10.28+2009 Change in Control Severance Plan adopted December 16, 2009 10-K 10.48 12/31/09 10.29 First Amendment to Lease for 901 Gateway Boulevard effective as of June 1,2010 between ARE-901/951 Gateway Boulevard, LLC and the registrant 10-Q 10.51 6/30/10 10.30 First Amendment to Lease for 951 Gateway Boulevard effective as of June 1,2010 between ARE-901/951 Gateway Boulevard, LLC and the registrant 10-Q 10.51 6/30/10 10.32 Second Amendment to Amended and Restated Governance Agreementamong the registrant, Glaxo Group Limited, GlaxoSmithKline plc andGlaxoSmithKline LLC, dated as of November 29, 2010 8-K 10.2 11/29/10 10.33+Form of Amendment to Restricted Stock Unit Agreements between theregistrant and each current member of the Board of Directors outstanding asof December 31, 2010 10-K 10.45 12/31/10 10.34*Amendment to Strategic Alliance Agreement dated October 3, 2011 10-K 10.34 12/31/11 10.35 Common Stock Purchase Agreement, dated April 2, 2012, by and amongTheravance, Inc., Glaxo Group Limited and GlaxoSmithKline LLC 8-K 10.1 4/2/12 10.36+Form of Notice of Performance-Contingent Restricted Stock Award andRestricted Stock Award Agreement under 2004 Equity Incentive Plan(executive officer form) 10-Q 10.36 3/30/12 10.37+Form of Notice of Performance-Contingent Restricted Stock Award andRestricted Stock Award Agreement under 2004 Equity Incentive Plan 10-Q 10.37 3/30/12 10.38+2012 Equity Incentive Plan, as approved by the board of directors February 8,2012 and approved by stockholders May 16, 2012 and forms of equity award 10-Q 10.38 6/30/12 10.40 Base Capped Call Transaction dated January 17, 2013 8-K 10.1 1/23/13 10.41 Additional Capped Call Transaction dated January 18, 2013 8-K 10.2 1/23/13 10.43 Master Agreement by and among Theravance, Inc., TheravanceBiopharma, Inc. and Glaxo Group Limited, dated March 3, 2014 8-K/A 10.1 3/6/14 10.44*Collaboration Agreement Amendment by and between Theravance, Inc. andGlaxo Group Limited dated March 3, 2014 8-K/A 10.2 3/6/14 10.45*Strategic Alliance Agreement Amendment by and between Theravance, Inc.and Glaxo Group Limited dated March 3, 2014 8-K/A 10.3 3/6/14 10.46 Form of Note Purchase Agreement, dated April 17, 2014. 8-K 1.1 4/21/14 Table of Contents Incorporated by Reference ExhibitNumber Description Form Exhibit FilingDate/PeriodEnd Date 10.47 Sale and Contribution Agreement, dated April 17, 2014. 8-K 10.1 4/21/14 10.48 Servicing Agreement, dated April 17, 2014. 8-K 10.2 4/21/14 10.49 Account Control Agreement, dated April 17, 2014. 8-K 10.3 4/21/14 10.50 Limited Liability Agreement of LABA Royalty Sub LLC, dated April 17,2014. 8-K 10.4 4/21/14 10.51 Annex A — Rules of Construction and Defined Terms, dated April 17, 2014. 8-K 10.5 4/21/14 10.53 Separation and Distribution Agreement between Theravance and TheravanceBiopharma, dated June 1, 2014 8-K 10.1 6/5/14 10.54 Transition Services Agreement between Theravance and TheravanceBiopharma, dated June 2, 2014. 8-K 10.2 6/5/14 10.55 Tax Matters Agreement between Theravance and Theravance Biopharma,dated June 2, 2014. 8-K 10.3 6/5/14 10.56 Employee Matters Agreement between Theravance and TheravanceBiopharma, dated June 1, 2014. 8-K 10.4 6/5/14 10.57 Theravance Respiratory Company, LLC Limited Liability CompanyAgreement between Theravance and Theravance Biopharma, dated May 31,2014. 8-K 10.5 6/5/14 10.58+Equity Award Amendments for Employees VP Level or above remaining atTheravance, Inc. 10-Q 10.2 6/30/14 10.59+Policy for Non-Employee Director Stock Options (effective June 2, 2014) 10-Q 10.3 6/30/14 10.60+Offer Letter with Ted Witek dated May 2, 2014 10-Q 10.4 6/30/14 10.61+Offer Letter with George Abercrombie dated May 30, 2014 10-Q 10.5 6/30/14 10.62+Offer Letter with Michael W. Aguiar dated August 5, 2014 10-Q 10.1 9/30/14 10.63+Offer Letter with Eric d'Esparbes dated September 8, 2014 10-K 10.63 12/31/15 10.64 Amendment / Clarification to Transition Services Agreement betweenTheravance and Theravance Biopharma, dated March 2, 2015 10-Q 10.64 3/31/15 10.65+First Amendment to 2009 Change In Control Severance Plan (Renamed 2009Severance Plan) 10-Q 10.2 6/30/15 10.67+Offer Letter with Michael Faerm dated May 27, 2015 10-K 10.67 12/31/15 10.68 Office Lease Agreement by and between Innoviva, Inc. and 2000 Sierra PointParkway LLC dated June 10, 2016 10-Q 10.68 6/30/16 10.69 Sublease Termination Agreement by and between Innoviva, Inc. andTheravance Biopharma US, Inc. dated June 10, 2016 10-Q 10.69 6/30/16 10.70 Partial Termination Agreement by and between Innoviva, Inc. and Bank ofAmerica, N.A., dated May 16, 2016 10-Q 10.70 6/30/16 10.71 Amended and Restated Indenture by and between LABA Royalty Sub LLCand U.S. Bank National Association dated August 3, 2016 10-Q 10.71 9/30/16 10.72 Partial Termination Agreement by and between Innoviva, Inc. and Bank ofAmerica, N.A., dated December 13, 2016 Table of Contents Incorporated by Reference ExhibitNumber Description Form Exhibit FilingDate/PeriodEnd Date 21.1 List of Subsidiaries 23.1 Consent of Independent Registered Public Accounting Firm 24.1 Power of Attorney (see signature page to this Annual Report on Form 10-K) 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14 under theSecurities Exchange Act of 1934 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14 under theSecurities Exchange Act of 1934 32 Certifications Pursuant to 18 U.S.C. Section 1350 101 The following materials from Registrant's Annual Report on Form 10-K forthe year ended December 31, 2016, formatted in Extensible BusinessReporting Language (XBRL) includes: (i) Consolidated Balance Sheets as ofDecember 31, 2016 and 2015, (ii) Consolidated Statements of Income for theyears ended December 31, 2016, 2015and 2014, (iii) ConsolidatedStatements of Comprehensive Loss for the years ended December 31, 2016,2015and 2014, (iv) Consolidated Statements of Stockholders' Equity for theyears ended December 31, 2016, 2015and 2014, (v) Consolidated Statementsof Cash Flows for years ended December 31, 2016, 2015and 2014, and(vi) Notes to Consolidated Financial Statements. +Management contract or compensatory plan or arrangement required to be filed pursuant to Item 15(b) of Form 10-K. *Confidential treatment has been granted for certain portions which are omitted in the copy of the exhibit electronically filed with the Securities and Exchange Commission. Theomitted information has been filed separately with the Securities and Exchange Commission pursuant to Innoviva, Inc.'s application for confidential treatment.QuickLinks -- Click here to rapidly navigate through this document Exhibit 10.72 PARTIAL TERMINATION AGREEMENTdated as of December 13, 2016Between INNOVIVA, INC. and BANK OF AMERICA, N.A. THIS PARTIAL TERMINATION AGREEMENT (this "Agreement") with respect to the Capped Call Confirmations (as defined below) is made as ofDecember 13, 2016, between Innoviva, Inc. ("Company") and Bank of America, N.A. ("Dealer"). WHEREAS, Company issued $287,500,000 principal amount of 2.125% Convertible Senior Notes due 2023 (the "Convertible Notes") pursuant to anIndenture dated as of January 24, 2013 between Company and The Bank of New York Mellon Trust Company, N.A., as trustee; WHEREAS, in connection with the issuance of the Convertible Notes, Company and Dealer entered into a Base Capped Call Transaction (TransactionReference Number: 138120785) (the "Base Capped Call Transaction") pursuant to an ISDA confirmation dated as of January 17, 2013, which supplements,forms a part of, and is subject to an agreement in the form of the 2002 ISDA Master Agreement, pursuant to which Company purchased from Dealer250,000 call options (as amended, modified, terminated or unwound from time to time, the "Base Capped Call Confirmation"); WHEREAS, in connection with the exercise of the over-allotment option by the initial purchasers of the Convertible Notes, Company and Dealer enteredinto an Additional Capped Call Transaction (Transaction Reference Number: 138123249) (the "Additional Capped Call Transaction" and, together with theBase Capped Call Transaction, the "Capped Call Transactions") pursuant to an ISDA confirmation dated as of January 18, 2013, which supplements, forms apart of, and is subject to an agreement in the form of the 2002 ISDA Master Agreement, pursuant to which Company purchased from Dealer an additional37,500 call options (as amended, modified, terminated or unwound from time to time, the "Additional Capped Call Confirmation" and, together with theBase Capped Call Confirmation, the "Capped Call Confirmations"); WHEREAS, on July 31, 2014, the Base Capped Call Confirmation was amended to reflect a partial termination of 32,391 options, leaving217,609 options outstanding under the Base Capped Call Transaction following such partial termination and except as expressly modified therein, theCapped Call Confirmations remained in full and effect; WHEREAS, on May 11, 2016, the Additional Capped Call Confirmation was amended to reflect a partial termination of 10,000 options, leaving27,500 options outstanding under the Additional Capped Call Transaction following such partial termination and except as expressly modified therein, theCapped Call Confirmations remained in full and effect; and WHEREAS, in connection with a repurchase by Company of 4,125 Convertible Notes in $1,000 principal amount denominations (such number ofConvertible Notes in $1,000 principal amount denominations, the "Repurchase Number"), Company has requested partial termination of the AdditionalCapped Call Transaction; NOW, THEREFORE, in consideration of their mutual covenants herein contained, the parties hereto, intending to be legally bound, hereby mutuallycovenant and agree as follows: 1. Defined Terms. Any capitalized term not otherwise defined herein shall have the meaning set forth for such term in the Capped CallConfirmations. 2. Partial Termination. Notwithstanding anything to the contrary in the Capped Call Confirmations, Company and Dealer agree that, effectiveon the date hereof and following the partial termination contemplated hereby, the Number of Options remaining outstanding under the AdditionalCapped Call Transaction shall be reduced to 23,375, and in connection therewith Dealer shall be required to pay to Company the Cash SettlementAmount on the Payment Date pursuant to Sections 3 and 4 below. 3. Payments and Deliveries. On the third Scheduled Trading Day following the Averaging Date (as defined below) or, if such day is not aClearance System Business Day, on the next Clearance System Business Day immediately following such day (the "Payment Date"), Dealer shall payto Company in immediately available funds cash in an amount equal to the Cash Settlement Amount. The "Cash Settlement Amount" shall mean anamount in US Dollars determined by Dealer according to the table set forth in Schedule A attached hereto (using linear interpolation or commerciallyreasonable extrapolation byDealer, as applicable, to determine the Cash Settlement Amount for any VWAP Price not specifically appearing in Schedule A). 4. Valuation. "Averaging Date" means December 14, 2016; provided, however, that if such date is a Disrupted Day in whole, such date shallnot constitute the Averaging Date, and the Averaging Date shall occur on the Scheduled Trading Day after the date that would otherwise be theAveraging Date. "VWAP Price" means the per Share volume-weighted average price as displayed under the heading "Bloomberg VWAP" onBloomberg page INVA AQR (or any successor thereto) in respect of the period from 9:30 am to 4:00 pm (New York City time) on theAveraging Date (or if such volume-weighted average price is unavailable, the market value of one Share on the Averaging Date for such time period,as determined by Dealer in a good faith, commercially reasonable manner). Notwithstanding the foregoing, if (i) the Averaging Date is a DisruptedDay in part or (ii) Dealer determines in its commercially reasonable judgment that an additional Averaging Date is reasonably necessary to preserveDealer's hedge unwind activity hereunder in light of existing liquidity conditions or to enable Dealer to effect sales of Shares in connection with itshedge unwind activity hereunder in a manner that would be in compliance with applicable legal, regulatory or self-regulatory requirements, or withinternal policies and procedures, then the VWAP Price for such additional Averaging Date shall be the volume-weighted average price per Share onsuch Scheduled Trading Day on the Exchange for such time period, as determined by Dealer in a commercially reasonable manner and the CashSettlement Amount shall be adjusted by Dealer in its good faith, commercially reasonable discretion to account for such disruption and/or extension. 5. Representations and Warranties of Company. Company represents and warrants to Dealer on the date hereof that: (a) it has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliverthis Agreement and to perform its obligations under this Agreement and has taken all necessary action to authorize such execution, deliveryand performance; (b) such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutionaldocuments, any order or judgment of any court or other agency of government applicable to it or any of its assets or any material contractualrestriction binding on or affecting it or any of its assets; (c) all governmental and other consents that are required to have been obtained by it with respect to this Agreement have been obtainedand are in full force and effect and all conditions of any such consents have been complied with; (d) its obligations under this Agreement constitute its legal, valid and binding obligations, enforceable in accordance with theirrespective terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors' rights generallyand subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding inequity or at law)); (e) each of it and its Affiliates is not in possession of any material nonpublic information regarding Company or the Shares; and (f) it is not entering into this Agreement or purchasing to create actual or apparent trading activity in the Shares (or any securityconvertible into or exchangeable for the Shares) or to raise or depress or otherwise manipulate the price of the Shares (or any securityconvertible into or exchangeable for the Shares) or otherwise in violation of the Securities Exchange Act of 1934, as amended. 6. Representations and Warranties of Dealer. Dealer represents and warrants to Company on the date hereof that: (a) it has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliverthis Agreement and to perform its obligations under this Agreement and has taken all necessary action to authorize such execution, deliveryand performance;2 (b) such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutionaldocuments, any order or judgment of any court or other agency of government applicable to it or any of its assets or any material contractualrestriction binding on or affecting it or any of its assets; (c) all governmental and other consents that are required to have been obtained by it with respect to this Agreement have been obtainedand are in full force and effect and all conditions of any such consents have been complied with; and (d) its obligations under this Agreement constitute its legal, valid and binding obligations, enforceable in accordance with theirrespective terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors' rights generallyand subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding inequity or at law)). 7. Account for Payment to Company: 8. Governing Law. This Agreement and any dispute arising hereunder shall be governed by and construed in accordance with the laws of theState of New York (without reference to choice of law doctrine). 9. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if allof the signatures thereto and hereto were upon the same instrument. 10. No Reliance, etc. Company confirms that it has relied on the advice of its own counsel and other advisors (to the extent it deemsappropriate) with respect to any legal, tax, accounting, or regulatory consequences of this Agreement, that it has not relied on Dealer or its Affiliates inany respect in connection therewith, and that it will not hold Dealer or its Affiliates accountable for any such consequences. 11. Agreements and Acknowledgements Regarding Hedging. Company acknowledges and agrees that: (a) on the Averaging Date, Dealer and its Affiliates may buy or sell Shares or other securities or buy or sell options or futures contracts orenter into swaps or other derivative securities in order to adjust its hedge position with respect to this Agreement; (b) Dealer and its Affiliates also may be active in the market for Shares other than in connection with hedging activities in relation tothis Agreement; (c) Dealer shall make its own determination as to whether, when or in what manner any hedging or market activities in Company'ssecurities shall be conducted and shall do so in a manner that it deems appropriate to hedge its price and market risk with respect to the VWAPPrice; and (d) any market activities of Dealer and its Affiliates with respect to Shares may affect the market price and volatility of Shares, as well asthe VWAP Price, each in a manner that may be adverse to Company. 12. Indemnification. In the event that Dealer or any of its Affiliates becomes involved in any capacity in any action, proceeding orinvestigation brought by or against any person in connection with any matter referred to in this Agreement, Company shall reimburse Dealer or suchAffiliate for its reasonable legal and other out-of-pocket expenses (including the reasonable cost of any investigation and preparation) incurred inconnection therewith within 90 days of receipt of written notice of such expenses, and shall indemnify and hold Dealer or such Affiliate harmlessagainst any losses, claims, damages or liabilities to which Dealer or such Affiliate is subject to in connection with any such action, proceeding orinvestigation; provided, however, Company shall not indemnify Dealer or its Affiliates for any such losses, claims, damages, liabilities or expensesthat result from, or relate to, the willful misconduct, fraud, gross negligence or bad faith of, or violation of applicable law or breach of this Agreementby, Dealer or any of its affiliates. If for any reason the foregoing indemnification is unavailable to Dealer or such Affiliate or insufficient to hold itharmless, then Company shall contribute to the amount paid or payable by Dealer or such Affiliate3as a result of such losses, claims, damages or liabilities (i) in such proportion as is reasonably appropriate to reflect the relative benefits received byCompany on the one hand and Dealer or such Affiliate on the other hand in the matters contemplated by this Agreement or (ii) if the allocationprovided by clause (i) above is not permitted by applicable law, in such proportion as is reasonably appropriate to reflect not only the relative benefitsreceived by Company on the one hand and Dealer or such Affiliate on the other hand in the matters contemplated by this Agreement but also therelative fault of Company and Dealer or such Affiliate with respect to such losses, claims, damages or liabilities and any other relevant equitableconsiderations. The reimbursement, indemnity and contribution obligations of Company under this Section 12 shall be in addition to any liabilitythat Company may otherwise have, shall extend upon the same terms and conditions to the partners, directors, officers, agents, employees andcontrolling persons (if any), as the case may be, of Dealer and its Affiliates and shall be binding upon and inure to the benefit of any successors,assigns, heirs and personal representatives of Company, Dealer, any such Affiliate and any such person. Company also agrees that neither Dealer norany of such Affiliates, partners, directors, officers, agents, employees or controlling persons shall have any liability to Company for or in connectionwith any matter referred to in this Agreement except to the extent that any losses, claims, damages, liabilities or expenses incurred by Company resultfrom, or relate to, willful misconduct, fraud, the gross negligence or bad faith of, or violation of applicable law by, Dealer or any of its Affiliates or abreach by Dealer of any of its covenants or obligations hereunder. The foregoing provisions shall survive any termination or completion of thetransactions contemplated by this Agreement. 13. No Other Changes. Except as expressly set forth herein, all of the terms and conditions of the Additional Capped Call Confirmation shallremain in full force and effect and are hereby confirmed in all respects.[Signature Page Follows]4 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first written above. [Signature Page to Termination Agreement] Bank of America, N.A. By: /s/ CHRISTOPHER A. HUTMAKER Name: Christopher A. Hutmaker Title: Managing Director Innoviva, Inc. By: /s/ ERIC D'ESPARBES Name: Eric d'Esparbes Title: CFO Schedule A The Cash Settlement Amount shall be determined by Dealer according to the table below. Dealer may (but is not obligated to) adjust the table above upon the occurrence of any event or condition that would have allowed Dealer or theCalculation Agent to adjust the terms of the Capped Call Transactions under the Capped Call Confirmations. Any such adjustment shall be made solelypursuant to, and in accordance with, the terms and conditions of the Capped Call Confirmations.A-1VWAP Price Cash Settlement Amount $11.70 $208,117 $11.50 $203,575 $11.30 $199,018 $11.10 $194,456 $10.90 $189,880 $10.70 $185,303 $10.50 $180,712 $10.30 $176,114 $10.10 $171,509 $9.90 $166,900 $9.70 $162,286 QuickLinksExhibit 10.72PARTIAL TERMINATION AGREEMENT dated as of December 13, 2016 Between INNOVIVA, INC. and BANK OF AMERICA, N.A.Schedule AQuickLinks -- Click here to rapidly navigate through this document Exhibit 21.1 Subsidiary LABA Royalty Sub LLC Delaware LABA Royalty Sub LLCTheravance Respiratory Company, LLC Delaware Theravance Respiratory Company, LLCAdvanced Medicine East, Inc. Delaware Advanced Medicine East, Inc.QuickLinksExhibit 21.1QuickLinks -- Click here to rapidly navigate through this document Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the following Registration Statements:(1)Registration Statement on Form S-8 No 333-119559 of Theravance, Inc. pertaining to the 2004 Equity Incentive Plan and the 2004 EmployeeStock Purchase Plan, (2)Registration Statement on Form S-8 No 333-123716 of Theravance, Inc. pertaining to the Shares Acquired Under Written CompensationAgreements, (3)Registration Statement on Form S-8 No 333-129669 of Theravance, Inc. pertaining to the 2004 Employee Stock Purchase Plan, (4)Registration Statement on Form S-8 No 333-142707 of Theravance, Inc. pertaining to the 2004 Equity Incentive Plan, (5)Registration Statement on Form S-8 No 333-150753 of Theravance, Inc. pertaining to the 2008 New Employee Equity Incentive Plan and the2004 Employee Stock Purchase Plan, (6)Registration Statement on Form S-8 No 333-159042 of Theravance, Inc. pertaining to the 2004 Employee Stock Purchase Plan, (7)Registration Statement on Form S-3 No 333-160761 of Theravance, Inc. and the related Prospectus, (8)Registration Statement on Form S-8 No 333-161065 of Theravance, Inc. pertaining to the 2008 New Employee Equity Incentive Plan, (9)Registration Statement on Form S-8 No 333-166546 of Theravance, Inc. pertaining to the 2004 Equity Incentive Plan, (10)Registration Statement on Form S-8 No 333-173923 of Theravance, Inc. pertaining to the 2004 Employee Stock Purchase Plan, (11)Registration Statement on Form S-8 No 333-181763 of Theravance, Inc. pertaining to the 2012 Equity Incentive Plan, (12)Registration Statement on Form S-3 No 333-186058 of Theravance, Inc. and the related Prospectus, and (13)Registration Statement on Form S-8 No 333-197950 of Theravance, Inc. pertaining to the 2012 Equity Incentive Plan, the Amended andRestated 2008 New Employee Equity Incentive Plan, the 2004 Equity Incentive Plan and the 1997 Stock Planof our reports dated February 28, 2017, with respect to the consolidated financial statements and schedules of Innoviva, Inc. and the effectiveness of internalcontrol over financial reporting of Innoviva, Inc. included in this Annual Report (Form 10-K) of Innoviva, Inc. for the year ended December 31, 2016./s/ ERNST & YOUNG LLPSan Jose, CaliforniaFebruary 28, 2017QuickLinksExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMQuickLinks -- Click here to rapidly navigate through this document Exhibit 31.1 Certification of Chief Executive OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Michael W. Aguiar, certify that:1.I have reviewed this Annual Report on Form 10-K of Innoviva, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered bythis report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and 5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting.Date: February 28, 2017 /s/ MICHAEL W. AGUIARMichael W. AguiarChief Executive Officer(Principal Executive Officer)QuickLinksExhibit 31.1Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002QuickLinks -- Click here to rapidly navigate through this document Exhibit 31.2 Certification of Chief Financial OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Eric d'Esparbes, certify that:1.I have reviewed this Annual Report on Form 10-K of Innoviva, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered bythis report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and 5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting.Date: February 28, 2017 /s/ ERIC D'ESPARBESEric d'EsparbesSenior Vice President andChief Financial Officer(Principal Financial Officer)QuickLinksExhibit 31.2Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002QuickLinks -- Click here to rapidly navigate through this document Exhibit 32 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICERAND CHIEF FINANCIAL OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Michael W. Aguiar, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the AnnualReport of Innoviva, Inc. on Form 10-K for the fiscal year ended December 31, 2016 fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as amended and that information contained in such Annual Report on Form 10-K fairly presents in all material respects thefinancial condition of Innoviva, Inc. at the end of the periods covered by such Annual Report on Form 10-K and results of operations of Innoviva, Inc. for theperiods covered by such Annual Report on Form 10-K. I, Eric d'Esparbes, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the AnnualReport of Innoviva, Inc. on Form 10-K for the fiscal year ended December 31, 2016 fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as amended and that information contained in such Annual Report on Form 10-K fairly presents in all material respects thefinancial condition of Innoviva, Inc. at the end of the periods covered by such Annual Report on Form 10-K and results of operations of Innoviva, Inc. for theperiods covered by such Annual Report on Form 10-K. A signed original of this written statement required by Section 906 has been provided to Innoviva, Inc. and will be retained by it and furnished to theSecurities and Exchange Commission or its staff upon request.Date: February 28, 2017 By: /s/ MICHAEL W. AGUIARMichael W. AguiarChief Executive OfficerDate: February 28, 2017 By: /s/ ERIC D'ESPARBESEric d'EsparbesSenior Vice President and Chief Financial OfficerQuickLinksExhibit 32CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTEDPURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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