Innoviva, Inc.
Annual Report 2017

Plain-text annual report

Use these links to rapidly review the document TABLE OF CONTENTS ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PART IVTable 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 500Brisbane, CA(Address of principal executive offices) 94005(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 LLCSECURITIES 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 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has been subject to such filing requirements 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 File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 contained, to the best of registrant's knowledge, indefinitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment 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 filer and large accelerated filer" in Rule 12b-2 of theExchange Act (Check One): If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standardsprovided pursuant to Section 13(a) of the Exchange Act. o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No 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 the registrant's Common Stock on The Nasdaq GlobalSelect Market on June 30, 2017 was $980,937,011. This calculation does not reflect a determination that persons are affiliates for any other purpose.(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, 2017oro TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Large accelerated filer ý Accelerated filer o Non-accelerated filer o(Do not check if asmaller reporting company) Smaller reporting company oEmerging growth company o On February 16, 2018, there were 101,824,355 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 2018 Annual Meeting of Stockholders, which is expected to be filed not later than120 days after the registrant's fiscal year ended December 31, 2017, are incorporated by reference into Part III of this Annual Report. Except as expressly incorporated by reference, the registrant's Proxy Statementshall not be deemed to be a part of this Annual Report on Form 10-K. Table of ContentsINNOVIVA, INC.2017 Form 10-K Annual Report Table of Contents 2 Page PART I Item 1. Business 4Item 1A. Risk Factors 11Item 1B. Unresolved Staff Comments 34Item 2. Properties 34Item 3. Legal Proceedings 34Item 4. Mine Safety Disclosures 34 PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities 35Item 6. Selected Financial Data 38Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 39Item 7A. Quantitative and Qualitative Disclosures About Market Risk 49Item 8. Financial Statements and Supplementary Data 51Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 85Item 9A. Controls and Procedures 85Item 9B. Other Information 89 PART III Item 10. Directors, Executive Officers and Corporate Governance 89Item 11. Executive Compensation 89Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 89Item 13. Certain Relationships and Related Transactions, and Director Independence 90Item 14. Principal Accountant Fees and Services 90 PART IV Item 15. Exhibits and Financial Statement Schedules 91Item 16. Form 10-K Summary 91Exhibits 92Signatures 97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 (the "Securities Act"). Such forward-looking statements involve substantial risks,uncertainties and assumptions. All statements in this Annual Report on Form 10-K, other than statements of historical fact, including, without limitation,statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, intentions, expectations,goals and objectives may be forward-looking statements. The words "anticipates," "believes," "could," "designed," "estimates," "expects," "goal," "intends,""may," "objective," "plans," "projects," "pursuing," "will," "would" and similar expressions (including the negatives thereof) are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions,expectations or objectives disclosed in our forward-looking statements and the assumptions underlying our forward-looking statements may proveincorrect. Therefore, you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans,intentions, expectations and objectives disclosed in the forward-looking statements that we make. All written and verbal forward-looking statementsattributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in thissection. 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®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA® in the jurisdictions in which these products have been approved; thestrategies, plans and objectives of the company (including the company's growth strategy and corporate development initiatives beyond the existingrespiratory portfolio); the timing, manner, amount and planned growth of anticipated potential capital returns to stockholders (including, withoutlimitation, statements regarding the company's expectations of future purchases under its future share repurchase authorizations and future cashdividends); the status and timing of clinical studies, data analysis and communication of results; the potential benefits and mechanisms of action of productcandidates; expectations for product candidates through development and commercialization; the timing of regulatory approval of product candidates;projections of revenue, expenses and other financial items and risks discussed below in "Risk Factors" in Item 1A of Part I, "Management's Discussion andAnalysis 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-lookingstatements in this Annual Report on Form 10-K are based on current expectations as of the date hereof and we do not assume any obligation to update anyforward-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 medicines to patientsin areas of unmet need by leveraging its significant expertise in the development, commercialization and financial management of bio-pharmaceuticals tomaximize the potential of its respiratory assets partnered with Glaxo Group Limited ("GSK"), including RELVAR®/BREO® ELLIPTA® (fluticasone furoate/vilanterol, "FF/VI"),ANORO® ELLIPTA® (umeclidinium bromide/ vilanterol, "UMEC/VI") and TRELEGY® ELLIPTA® (the combination FF/UMEC/VI).Under the Long-Acting Beta2 Agonist ("LABA") Collaboration Agreement, 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 and royalties fromsales of ANORO™ ELLIPTA™ tier upward at a range from 6.5% to 10%. Innoviva is also entitled to 15% of royalty payments made by GSK under itsagreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC ("TRC") , including TRELEGY® ELLIPTA® andany other product or combination of products that may be discovered or developed in the future under the LABA Collaboration Agreement and the StrategicAlliance Agreement with GSK (referred to herein collectively as the "GSK Agreements"), which have been assigned to TRC other than RELVAR®/BREO®ELLIPTA® and ANORO® ELLIPTA®. Our headquarters are located at 2000 Sierra Point Parkway, Suite 500, Brisbane, CA 94005. The Company was incorporated in Delaware in November1996 under the name, Advanced Medicine, Inc., and began operations in May 1997. It later changed its name to Theravance, Inc. in April 2002. In June 2014,we spun-off our research and development operations. In January 2016, we rebranded and changed our name to Innoviva, Inc.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 compellingmedicines that have the potential to improve the lives of patients by leveraging our unique industry knowledge and capabilities. This patient-centricapproach is central to how Innoviva operates and collaborates with our partner to advance the availability of crucial medicines and treatments. Our corporatestrategy is currently focused on the goal of maximizing stockholder value by, among other things, maximizing the potential value of our respiratory assetspartnered with GSK and optimizing our overall corporate cost of capital, capital allocation and capital return to shareholders.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") and asthma. The collaboration has developed three combination products:•RELVAR®/BREO® ELLIPTA® (FF/VI) (BREO® ELLIPTA® is the proprietary name in the U.S. and Canada and RELVAR® ELLIPTA® isthe proprietary name outside the U.S. and4Table of ContentsCanada), a once-daily combination medicine consisting of a LABA, vilanterol (VI), and an inhaled corticosteroid (ICS), fluticasone furoate(FF),•ANORO® ELLIPTA® (UMEC/VI), a once-daily medicine combining a long-acting muscarinic antagonist ("LAMA"), umeclidinium bromide(UMEC), with a LABA, VI, and •TRELEGY® ELLIPTA® (the combination FF/UMEC/VI), a once-daily combination medicine consisting of an ICS, LAMA and LABA. As a result of the launch and approval of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® in the U.S., Japan and Europe, in accordance withthe LABA Collaboration Agreement, we paid milestone fees to GSK totaling $220.0 million during the year ended December 31, 2014. Although we have nofurther milestone payment obligations to GSK pursuant to the LABA Collaboration Agreement, we continue to have ongoing commercialization activitiesunder the LABA Collaboration Agreement, including participation in the joint steering committee and joint project committee that are expected to continueover the life of the agreements. The milestone fees paid to GSK were recognized as capitalized fees paid to a related party, which are being amortized overtheir 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%. We are also entitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to TRC inconnection with the spin-off of Theravance Biopharma, Inc. ("Theravance Biopharma") in June 2014 (the "Spin-Off"), relating to TRELEGY® ELLIPTA®,which 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 has been funded in full by GSK as ofDecember 31, 2017 and is in Phase II clinical studies stage. GSK is in the process of determining next steps for the program. As a result of the transactionseffected by the Spin-Off, we are only entitled to receive 15% of any contingent payments and royalties payable by GSK from sales of products that may bedeveloped under the Strategic Alliance Agreement, such as MABA, and MABA/FF, while Theravance Biopharma receives 85% of those same payments.Common Stock owned by GSK As of February 16, 2018, GSK beneficially owned approximately 31.4% of our outstanding common stock.Recent Highlights•GSK Net Sales •Fourth quarter 2017 net sales of RELVAR®/BREO® ELLIPTA® by GSK were $405.3 million, up 48% from $273.0 million in thefourth quarter of 2016, with $241.6 million in net sales from the U.S. market and $163.7 million from non-U.S. markets.5Table of Contents•Fourth quarter 2017 net sales of ANORO® ELLIPTA® by GSK were $147.3 million, up 62% from $90.7 million in the fourth quarter of2016, with $103.3 million of sales from the U.S. market and $44.0 million from non-U.S. markets. •Fourth quarter 2017 net sales of TRELEGY® ELLIPTA® by GSK were $2.8 million in the U.S. market. •Product Updates •Announced positive data from a study comparing ANORO® ELLIPTA® and Stiolto Respimat, for symptomatic patients with chronicobstructive pulmonary disease (COPD). •Announced in November 2017 the filing of a supplemental New Drug Application with the U.S. Food and Drug Administration for anexpanded indication for the use of TRELEGY® ELLIPTA® in COPD. •Capital Return Program •Completed in December 2017 the $80.0 million accelerated share repurchase (ASR) program by purchasing 6.1 million shares ofcommon stock at an average price of $13.09 per share. •In 2017, in the aggregate, Innoviva repurchased $97.5 million of common stock or 7.4 million shares (7% of outstanding shares at thebeginning of the year), and repaid $85.9 million of its long term debt.Manufacturing Manufacturing of RELVAR®/BREO® ELLIPTA® (FF/VI), ANORO® ELLIPTA® (UMEC/VI) and TRELEGY® ELLIPTA® 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 and6Table of Contentsperiodic inspections by the FDA. The FDA ensures the quality of approved medicines by carefully monitoring manufacturers' compliance with its currentgood manufacturing practice (cGMP) regulations. The cGMP regulations for drugs contain minimum requirements for the methods, facilities, and controlsused in manufacturing, processing, and packaging of a medicine. The regulations are intended to make sure that a medicine is safe for use, and that it has theingredients and strength it claims to have. Discovery of previously unknown problems with a medicine, manufacturer or facility may result in restrictions onthe 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 and continuing review described above exist with the regulatoryapproval processes in other 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, 2017, we owned 36 issued United States patents and 108 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 making ourcompounds. 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 do7Table of Contentsnot know whether any of our patent applications will result in any issued patents or, if issued, whether the scope of the issued claims will be sufficient toprotect our proprietary position.Competition We anticipate that RELVAR®/BREO®ELLIPTA®(FF/VI), ANORO® ELLIPTA® (UMEC/VI) and TRELEGY® ELLIPTA® (the combinationFF/UMEC/VI), will compete with a number of approved bronchodilator drugs, including each other and drug candidates under development that aredesigned 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, •AirDuo Respiclick® (salmeterol and fluticasone proprionate), a non-substitutable generic version of Advair, marketed by TEVA, •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 outside theU.S. and Sunovion in the U.S., •Incruse® Ellipta® (umeclidinium) and Arnuity® Ellipta® (fluticasone furoate), (we are not entitled to any royalties from either product), •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, and launched in May 2017, •Stiolto (U.S.)/Spiolto (E.U.) Respimat® consists of the LAMA tiotropium combined with the LABA olodaterol, marketed by BoehringerIngelheim for the treatment of COPD, •Bevespi Aerosphere® (consisting of the LAMA glycopyrronium bromide and the LABA formoterol fumarate), marketed by AstraZeneca, •Duaklir® Genuair® (consisting of the LAMA aclidinium bromide and LABA formoterol fumarate), developed by AstraZeneca and approvedin November 2014 in the EU as a maintenance bronchodilator treatment for COPD, •QMF149, indacaterol in combination with an ICS (mometasone), being developed by Novartis for markets outside the U.S. •Trimbow, a fixed-dose, twice daily combination of formoterol, beclomethasone and glycopyrronium manufactured by Chiesi of Italy andindicated for use in COPD, became the first triple therapy/single inhaler product in Europe, launched 4 months ahead of TRELEGY, and •QVM149, a fixed-dose combination of indacaterol, mometasone and glycopyrronium is being developed as a triple therapy/single inhaler forthe treatment of Asthma.8Table of Contents 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 genericversions of Seretide)) which are all available in a wide number of countries in the E.U. Numerous companies like Mylan N.V., Hikma Pharmaceuticals PLC(Hikma), Novartis' Sandoz division and Teva Pharmaceuticals Industries Ltd. (Teva) have publicly stated their intentions to bring generic forms of theICS/LABA drug Advair®, when certain patents covering the Advair® delivery device expired in 2016. In March 2017, Mylan N.V. received a completeresponse letter from the FDA relating to its ANDA for fluticasone propionate 100, 250, 500 mcg and salmeterol 50 mcg inhalation powder. In May 2017,Hikma announced that it received a complete response letter form the FDA relating to its ANDA for fluticasone propionate and salmeterol inhalation powder,and in February 2018, Novartis announced that its generic division Sandoz, had received a complete response letter from FDA in response to its ANDA for athird fluticasone proprionate and salmeterol product. Lastly, Teva announced recently that the FDA approved two of their products for adolescent and adultpatients with asthma, one of which is AirDuo™ RespiClick® (fluticasone propionate and salmeterol inhalation powder),a non-AB substitutable genericversions of Advair®. In general, these manufactures are required to conduct a restricted number of clinical efficacy, pharmacokinetic and device studies todemonstrate equivalence to Advair, per FDA's September 2013 Draft Guidance document. These studies are designed to demonstrate that the generic producthas the same active ingredient(s), dosage form, strength, exposure and clinical efficacy as the branded product. These generic equivalents, which must meetthe same exacting quality standards as branded products, may be significantly less costly to bring to market, and companies that produce generic equivalentsare generally able to offer their products at lower prices. Thus, after the introduction of a generic competitor, a significant percentage of the sales of anybranded product and products that may compete with such branded product is typically lost to the generic product. In addition, in April 2016, the FDA issueddraft guidelines documents covering Fluticasone Furoate/Vilanterol Trifenatate (FF/VI), the active ingredients used in RELVAR®/BREO® ELLIPTA®.Employees As of December 31, 2017, we had 12 employees. None of our employees are represented by a labor union. We consider our employee relations to begood.Executive Officers of the Registrant The following table sets forth the name, age, and position of each of our executive officers as of February 23, 2018:9Name Age Positions HeldEric d'Esparbes(1) 50 Interim Principal Executive Officer and Senior Vice President and ChiefFinancial OfficerGeorge B. Abercrombie, RPh, MBA 63 Senior Vice President, Chief Commercial OfficerTheodore J. Witek, Jr., Dr.P.H. 60 Senior Vice President, Chief Scientific Officer(1)On February 6, 2018, Mr. d'Esparbes was appointed as interim Principal Executive Officer following the resignation of the Company'sChief Executive Officer.Table of Contents Eric d'Esparbes was appointed as interim Principal Executive Officer of Innoviva on February 6, 2018. Mr. d'Esparbes continues to serve as Innoviva'sSenior Vice President and Chief Financial Officer, the position which he has held since joining Innoviva in October 2014. From 2010 to 2014, Mr. d'Esparbesserved as the 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. George B. Abercrombie, RPh, MBA joined Innoviva 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 isa member of the board of directors of BioCryst Pharmaceuticals, Inc., and also serves as a board member of other healthcare-related organizations, includingthe North Carolina GlaxoSmithKline Foundation. Mr. Abercrombie holds an MBA from Harvard Business School and a BS from the University of NorthCarolina at Chapel Hill, School of Pharmacy. 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 Health 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 and serves as a director and Chairman of the board of directors of Ehave, Inc.. Dr. Witekholds a DrPH degree from Columbia University, an MPH from Yale University, and an MBA from 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 May 1, 2017, is available on the corporate governance section of our website at www.inva.com. If the Company makesany substantive amendments to the Code of Business Conduct or grants any waiver from a provision of the Code to any executive officer or director, theCompany will promptly disclose the nature of the amendment or waiver as required by applicable law.Available Information Our web page 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 on10Table of ContentsForm 8-K, our directors' and officers' Section 16 Reports and any amendments to those reports after filing or furnishing such materials to the U.S. Securitiesand Exchange Commission (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 the Innoviva logo are registered trademarks of Innoviva, Inc. Trademarks, tradenames or service marks of other companies appearing in thisreport are the property 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.Royalty revenues from RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® are expected to represent the majority of our foreseeable future revenuesfrom GSK. The amount and timing of revenue from such royalties are unknown and highly uncertain. Our future success depends upon the performance byGSK of its commercial obligations under the GSK Agreements and the commercial success of RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® andTRELEGY® ELLIPTA®. We have no control over GSK's marketing and sales efforts, and GSK might not be successful, which would harm our business andcause 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; •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, includingTRELEGY® ELLIPTA® or products owned by GSK (such as Advair®) but which are not partnered with us and pricing pressure in therespiratory markets targeted by our partnered products; •the size of the market for our partnered products; •the mix of sales of our partnered products; •decisions as to the timing of product launches, pricing and discounts; •GSK reprioritizing its commercial efforts on other products, including TRELEGY® ELLIPTA® 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 third partypayors;11Table of Contents•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; •decisions by GSK with respect to the 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 tothe LABA 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., Hikma Pharmaceuticals PLC (Hikma), Novartis' Sandoz division and Teva Pharmaceuticals Industries Ltd.(Teva) have publicly stated their intentions to bring generic forms of the ICS/LABA drug Advair®, when certain patents covering the Advair® deliverydevice expired in 2016. In March 2017, Mylan N.V. received a complete response letter from the FDA relating to its ANDA for fluticasone propionate 100,250, 500 mcg and salmeterol 50 mcg inhalation powder. In May 2017, Hikma announced that it received a complete response letter form the FDA relating toits ANDA for fluticasone propionate and salmeterol inhalation powder, and in February 2018, Novartis announced that its generic division Sandoz, hadreceived a complete response letter from FDA in response to its ANDA for a third fluticasone proprionate and salmeterol product. Lastly, Teva announcedrecently that the FDA approved two of their products for adolescent and adult patients with asthma, one of which is AirDuoTM RespiClick® (fluticasonepropionate and salmeterol inhalation powder) a non-AB substitutable generic versions of Advair®. In general, these manufactures are required to conduct arestricted number of clinical efficacy, pharmacokinetic and device studies to demonstrate equivalence to Advair, per FDA's September 2013 Draft Guidancedocument. These studies are designed to demonstrate that the generic product has the same active ingredient(s), dosage form, strength, exposure and clinicalefficacy as the branded product. These generic equivalents, which must meet the same exacting quality standards as branded products, may be significantlyless costly to bring to market, and companies that produce generic equivalents are generally able to offer their products at lower prices. Thus, after theintroduction of a generic competitor, a significant percentage of the sales of any branded product and products that may compete with such branded productis typically lost to the generic product. In addition, in April 2016, the FDA issued draft guidelines documents covering Fluticasone Furoate/VilanterolTrifenatate (FF/VI), the active ingredients used in RELVAR®/BREO® ELLIPTA®. Accordingly, introduction of generic products that compete against12Table of ContentsICS/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 and any future approved generic products will have on any sales ofRELVAR®/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 launchedBREO® ELLIPTA® for the treatment of COPD in the U.S. in October 2013, GSK experienced significant challenges gaining coverage at some of the largestPBMs, 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. In addition, in certain foreign markets, the pricing ofprescription drugs is subject to government control and reimbursement may in some cases be unavailable. We believe that pricing pressures will continue andmay increase. This may make it difficult for GSK to sell our partnered products at a price acceptable to us or GSK or to generate revenues in line with ouranalysts' or investors' expectations, which may cause the price of our securities to fall. More recently, the current presidential administration and the U.S. Congress have taken actions in an effort 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.The majority of our current revenues are from royalties derived from sales of our respiratory products partnered with GSK, RELVAR®/BREO®ELLIPTA® and ANORO® ELLIPTA®. If the treatment paradigm for the indications our partnered products are approved for change or if GSK is unableto, or does not devote 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. The treatment paradigm for COPDand asthma constantly evolve. For instance, in13Table of ContentsDecember 2016, the GOLD (Global Initiative for Chronic Obstructive Lung Disease) guidelines were revised to favorably position LABA/LAMA treatmentcompared to ICS/LABA for the treatment of COPD. If the treatment paradigms were to change further, causing our partnered products to fall out of favor, or ifGSK was unable, or did not devote sufficient resources, to maintain or continue increasing RELVAR®/ BREO® ELLIPTA® and ANORO® ELLIPTA® sales,our results of operations would likely suffer and we may need to scale back our operations.If the commercialization of RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® or TRELEGY® ELLIPTA® in the countries in which they havereceived regulatory approval encounters any delays or adverse developments, or perceived delays or adverse developments, or if sales or payor coveragedo not meet investors, analysts or 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®,ANORO® ELLIPTA® or TRELEGY® ELLIPTA®. GSK has launched RELVAR®/ BREO® ELLIPTA® and ANORO® ELLIPTA® in a number of countriesincluding the United States (U.S.), Canada, Japan, the United Kingdom, and Germany among others. The commercialization of both products in countrieswhere they are already launched and the commercialization launch in new countries are still subject to fluctuating overall pricing levels and uncertaintimeframes to obtain payor coverage. Any delays or adverse developments or perceived additional delays or adverse developments with respect to thecommercialization of RELVAR®/ BREO® ELLIPTA®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA® including if sales or payor coverage do not meetinvestors, analysts or our expectations, will significantly harm our business 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 TRELEGY® ELLIPTA®, our business will be materially harmed. Although we provide support of marketing and sales work through our participation to the Joint Steering Committee, GSK is responsible for all clinicaland other product development, regulatory, manufacturing and commercialization activities for products developed under the GSK Agreements, includingRELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA®. Our royalty revenues under the GSK Agreements may not meet our,analysts', or investors' expectations, due to a number of important factors. GSK has a substantial respiratory product portfolio in addition to the partneredproducts that are covered by the GSK Agreements. GSK may make respiratory product portfolio decisions or statements about its portfolio which may be, ormay be perceived to be, harmful to the respiratory products partnered with us. For instance, GSK has wide discretion in determining the efforts and resourcesthat it will apply to the development and commercialization of our partnered products. GSK is currently evaluating next steps with respect to the MABAprogram. In the event that GSK terminates this or any other development program (other than RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®)pursuant to agreements entered into in connection with the Spin-Off, the right to such programs would revert to Theravance Biopharma. The timing andamount of royalties that we may receive will depend on, among other things, the efforts, allocation of resources and successful development andcommercialization of these product candidates by GSK. In addition, GSK may determine to focus its commercialization efforts on its own products orTRELEGY® ELLIPTA®. For example, in January 2015, GSK launched Incruse® (Umec) in the U.S., which is a LAMA for the treatment of COPD. GSK maydetermine to focus its marketing efforts on Incruse, which could have the effect of decreasing the potential market share of ANORO® ELLIPTA® andlowering the royalties we may receive for such product. Alternatively, GSK may decide to market Incruse® in combination with RELVAR®/BREO®ELLIPTA® as an open triple therapy alternative to TRELEGY® ELLIPTA®, or market TRELEGY® ELLIPTA® to eventually compete directly against14Table of Contentssales of RELVAR®/BREO® ELLIPTA®. Following the FDA approval of TRELEGY® ELLIPTA® in September 2017, GSK's diligent efforts obligationsregarding commercialization matters now has the objective of focusing on the best interests of patients and maximizing the net value of the overall portfolioof products under the GSK Agreements. Since GSK's commercialization efforts following this regulatory approval is 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 prioritizesTRELEGY® ELLIPTA®, we will only be entitled to a 15% economic interest of the royalties paid pursuant to the GSK Agreements with respect to thisproduct. In the event GSK does not devote sufficient resources to the development or commercialization of our partnered products or chooses to reprioritizeits commercial programs, our business, operations and stock price would be negatively affected.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 Advisory Committee to discuss the design of medical research studies (knownas "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 thesafety of LABAs, it is requiring the manufacturers of currently marketed LABAs to conduct additional randomized, double-blind, controlled clinical trialscomparing the addition of LABAs to inhaled corticosteroids versus inhaled corticosteroids alone. These post-marketing studies have been completed,however, the FDA has not taken any action to remove the required warning from the product labels for LABA medicines. It is unknown at this time what, ifany, effect these or future FDA actions will have on the prospects for FF/VI. The current uncertainty regarding the FDA's position on LABAs for the treatmentof asthma and the lack of consensus expressed at the March 2010 Advisory Committee may result in the FDA requiring additional asthma clinical trials in theU.S. for FF/VI and increase 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 guidancemight significantly impede the discovery, development, production and marketing of FF/VI. Any adverse change in FDA policy or guidance regarding theuse of LABAs 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®, ANORO® ELLIPTA® or TRELEGY® ELLIPTA® in thecountries in which they have received regulatory approval including labeling restrictions, safety findings, or any other limitation to usage, will harm ourbusiness and may cause the price of our securities to fall. Although RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® or TRELEGY® ELLIPTA® are approved and marketed in a number of countries, it ispossible that adverse changes to the regulatory status of these products could occur in the event new safety issues are identified, treatment guidelines arechanged, or new studies fail to demonstrate product benefits. A number of notable pharmaceutical products have experienced adverse developments duringcommercialization that have resulted in the15Table of Contentsproduct being withdrawn, approved uses being limited, or new warnings being included. In the event that any adverse regulatory change was to occur to anyof 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,for UMEC/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 or may commence in the future. Any adverse developments or perceived adverse developments with respectto any prior, current or future studies in these programs will significantly harm our business and the price of our securities could fall. For example, inSeptember 2015, GSK and we announced that the Study to Understand Mortality and MorbidITy (SUMMIT) did not meet its primary endpoints, whichresulted in a significant decline in the 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; •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®for their intended uses in the targeted16Table of Contentsmarkets around the world. While these products have received regulatory approval and been launched and commercialized in the U.S. and certain othertargeted markets, the products face substantial competition from existing products previously developed and commercialized both by GSK and by othercompeting pharmaceutical companies and can expect to face additional competition from new products that are discovered, developed and commercializedby the same pharmaceutical companies and other competitors going forward. For example, sales of Advair®, GSK's approved medicine for both COPD andasthma, continue to be significantly greater than sales of RELVAR®/BREO® ELLIPTA®, and GSK has indicated publicly that it intends to continuecommercializing 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 thatRELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® will not be replaced by new products that are deemed more effective at lower cost to consumers.The ability of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® to succeed and achieve the anticipated level of sales depends on the commercialand development performance of GSK to achieve and maintain a competitive advantage over other products with the same intended use in the targetedmarkets. In addition, following the September 2017 FDA approval of TRELEGY® ELLIPTA®, GSK's diligent efforts obligations regarding commercializationmatters has the objective of focusing on the best interests of patients and maximizing the net value of the overall portfolio of products under the GSKAgreements. Since GSK's commercialization efforts following this regulatory approval is guided by a portfolio approach across products in which we haveretained our full interest and also products in which we now have only a small portion of our former interest, GSK's commercialization efforts may have theeffect of reducing the overall value of our remaining interests in the GSK Agreements in the future. If GSK prioritizes TRELEGY® ELLIPTA®, we wouldonly be entitled to a 15% economic interest in the future payments made by 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 marketsin which 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. We and GSK recently received regulatory approval in the US and positive regulatory opinion in Europe for TRELEGY® ELLIPTA® as triplecombination treatments for COPD. As a result of the Spin-Off, most of our economic rights in this program and other programs were assigned toTheravance Biopharma. If these programs are successful and GSK and the respiratory market in general views triple combination therapy as significantlymore beneficial than existing therapies, including RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®, our business could be harmed, and theprice of our securities could fall. The use of triple therapy is supported by the GOLD ("Global initiative for chronic Obstructive Lung Disease") guidelines in high-risk patients withsevere COPD and a high risk of exacerbations. Prior to the Spin-Off of Theravance Biopharma, Inc. ("Theravance Biopharma") in June 2014 (the "Spin-Off"),we were entitled to receive 100% of any royalties payable under the GSK Agreements arising from sales of TRELEGY® ELLIPTA® and any other product orcombination of products that may be discovered and developed in the future under the GSK Agreements. As a result of the transactions effected by the Spin-Off, however, we are now only entitled to receive 15% of any17Table of Contentscontingent payments and royalties payable by GSK from sales of TRELEGY® ELLIPTA® and any other product or combination of products that may bediscovered and developed in the future under the GSK Agreements which were assigned to TRC while Theravance Biopharma receives 85% of those samepayments. The commercial success of RELVAR®/BREO® ELLIPTA® may be adversely effected if GSK or the respiratory markets view TRELEGY®ELLIPTA® or other combination therapies as more beneficial. GSK's diligent efforts obligations regarding commercialization matters has the objective offocusing on the best interests of patients and maximizing the net value of the overall portfolio of products under the GSK Agreements. Since GSK'scommercialization efforts following this regulatory approval is guided by a portfolio approach across products in which we have retained our full interest andalso products in which we now have only a small portion of our former interest, GSK's commercialization efforts may have the effect of reducing the overallvalue of our remaining interests in the GSK Agreements in the future.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, 2017, the total remaining lease payments, which run through May 2020, were $15.6 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.U.S. federal income tax reform could adversely affect us. On December 22, 2017, U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (TCJA), was signed into law, significantlyreforming the U.S. Internal Revenue Code. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additionallimitations on the deductibility of interest, allows for the expensing of capital expenditures, puts into effect the migration from a "worldwide" system oftaxation to a territorial system and modifies or repeals many business deductions and credits. We continue to examine the impact the TCJA may have on our business. We will evaluate the effect of the TCJA on our net operating losses and ourprojection of taxes. As a result of the passage of the TJCA, corporate tax rates in the United States will decrease in 2018, which resulted in the remeasurementof our deferred tax assets at the new statutory rate and a reduction in the value of our deferred tax assets in 2017. The TCJA is a far-reaching and complex revision to the U.S. federal income tax laws with disparate and, in some cases, countervailing impacts ondifferent categories of taxpayers and industries,18Table of Contentsand will require subsequent rulemaking and interpretation in a number of areas. The long-term impact of the TCJA on the overall economy, the industries inwhich we operate and our and our partners business cannot be reliably predicted at this early stage of the new law's implementation. There can be noassurance that the TCJA will not negatively impact our operating results, financial condition, and future business operations. The estimated impact of theTCJA is based on our management's current knowledge and assumptions, following consultation with our tax advisors, and recognized impacts could bematerially different from current estimates based on our actual results and our further analysis of the new law. The impact of the TCJA on holders of commonstock is uncertain and could be materially adverse. This Annual Report does not discuss any such tax legislation or the manner in which it might affectinvestors in common stock. Investors should consult with their own tax advisors with respect to such legislation and the potential tax consequences ofinvesting in common stock.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 resulted in taxable transfers pursuant to applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code") and TreasuryRegulations. The taxable gain recognized by us attributable to the transfer of certain assets to Theravance Biopharma will generally equal the excess of thefair market value of each asset transferred over our adjusted tax basis in such asset. Although we will not recognize any gain with respect to the cash wetransferred to Theravance Biopharma, we may recognize substantial gain based on the fair market value of the other assets (other than cash) transferred toTheravance Biopharma. The determination of the fair market value of these assets is subjective and could be subject to adjustments or future challenge by theInternal 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 taxresulting from any gain recognized upon the transfer of our assets to Theravance Biopharma (including any increased U.S. federal income tax that may resultfrom a subsequent determination of higher fair market values for the transferred assets), may be reduced by our net operating loss carryforward. The netoperating loss carryforwards available in any year to offset our net taxable income will be reduced following a more than 50% change in ownership duringany period of 36 consecutive months (an "ownership change") as determined under the Internal Revenue Code of 1986 (the "Code"). Transactions involvingour common stock, even those outside our control, such as purchases or sales by investors, within the testing period could result in an ownership change. Wehave conducted an analysis to determine whether an ownership change had occurred since inception through December 31, 2016, and concluded that we hadundergone two ownership changes in prior years. Subsequent changes in our ownership or sale of our stock could have the effect of limiting the use of our netoperating losses in the future. We have approximately $1.0 billion of net operating loss carryforward as of December 31, 2017. 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. As a result of the passage of the Tax Cuts and Job Act, corporate taxrates in the United States will decrease in 2018, resulted in the remeasurement of our deferred tax assets at the new statutory rate and a reduction in the valueof our deferred tax assets in 2017. Future changes in federal and state tax laws pertaining to net operating loss carryforwards may also cause limitations orrestrictions from us claiming such net operating losses. If the net operating loss carryforwards become unavailable to us or are fully utilized, our futuretaxable income will not be shielded from federal and state income taxation absent certain U.S. federal and state tax credits, and the funds otherwise availablefor general corporate purposes would be reduced.19Table of ContentsIf 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. 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®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA®, commercialization of such products may be adversely affected by regulatory actions andoversight. 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.20Table of Contents 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 that may prevent us from licensing or otherwise acquiring rights to suitableroyalty 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 of21Table of Contentsindications of interest and involvement as a bidder in competitive auctions or other processes for the acquisition of income generating assets. Many potentialacquisition targets do not meet our criteria, and for those that do, we may face significant competition for these acquisitions from other financial investorsand enterprises whose cost of capital may be lower than ours. Competition for future asset acquisition opportunities in our markets is competitive and we maybe forced to increase the price we pay for such assets or face reduced potential acquisition opportunities. The success of any future income generating assetacquisitions is based on our ability to make accurate assumptions regarding the valuation, timing and amount of payments, which is highly complex anduncertain. The failure of any of these acquisitions to produce anticipated revenues may materially and adversely affect our financial condition and results ofoperations.We have a significant amount of debt including Term Loans, Convertible Subordinated Notes and Convertible Senior Notes that are senior in capitalstructure and cash flow, respectively, to our common stockholders. Satisfying the obligations relating to our debt could adversely affect the amount ortiming of distributions to our stockholders. As of December 31, 2017, we had approximately $677.2 million in total debt outstanding, comprised primarily of, $243.7 million in principaloutstanding on our term B loan (the "Term B Loan"), $241.0 million in principal that remains outstanding under our convertible subordinated notes, due2023 (the "2023 Notes") and $192.5 million in principal outstanding under our convertible senior notes due 2025 (the "2025 Notes") (the 2023 Notes and2025 Notes hereinafter, the "Notes"). The Notes are unsecured debt and are not redeemable by us prior to the maturity date. Holders of the Notes may requireus to purchase all or any portion of their Notes at 100% of their principal amount, plus any unpaid interest, upon a fundamental change. A fundamentalchange is generally defined to include a merger involving us, an acquisition of a majority of our outstanding common stock, and, under the 2023 Notes, thechange of a majority of our board without the approval of the board. In addition, to the extent we pursue and complete a monetization transaction or atransaction that modifies our corporate structure, the structure of such transaction may qualify as a fundamental change under the Notes, which could triggerthe put rights of the holders of the Notes, in which case we would be required to use a portion of the net proceeds from such transaction to repurchase anyNotes put to us. Our Term B Loan is secured by a lien on substantially all of our and the guarantors' personal property and material real property assets (if any). If wedefault under the terms of the Term B Loan, the lenders may accelerate all of our repayment obligations and take control of our pledged assets, potentiallyrequiring us to renegotiate our agreement on terms less favorable to us or to immediately cease operations. Further, if we are liquidated, the lenders' right torepayment would be senior to the rights of the holders of our common stock. The lenders could declare a default upon the occurrence of any event that theyinterpret as a material adverse effect as defined under the Term B Loan agreement. Any declaration by the lenders of an event of default could significantlyharm our business and prospects and could cause the price of our common stock to decline. If we raise any additional debt financing, the terms of suchadditional debt could further restrict our operating and financial flexibility. 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 Notes are not converted into shares of our common stock before the maturity date, we will have to pay the holders the full aggregate principal amount ofthe Notes then outstanding. Any of the above payments could have a material adverse effect on our cash position. If we fail to satisfy these obligations, it mayresult in a default under the indenture, which could result in a default under certain of our other debt instruments, if any. Any such default would harm ourbusiness and the price of our securities could fall.22Table of ContentsIf 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. In February 2018, we announced the resignation of our chief executive officer. The Board of Directors plans tocommence a search to identify and hire a new chief executive officer. Our company is located in northern California, which is headquarters to many otherbiotechnology and biopharmaceutical companies and many academic and research institutions. As a result, competition for certain skilled personnel in ourmarket remains intense. None of our employees have employment commitments for any fixed period of time and they all may leave our employment at will.In April 2017, we announced that our Board of Directors had determined to undertake a comprehensive review of all of our costs, including executivecompensation structures. The result of this review has led us to make changes to our compensation structure. If we fail to hire a qualified chief executiveofficer or retain our qualified personnel or replace them when they leave, we may be unable to successfully continue our business operations or grow ourbusiness, which may cause the price of our securities 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, 2017, we had only 12 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. In February 2018, we announced theresignation of our Chief Executive Officer, which reduced our already small employee base and resulted in our Senior Vice President and Chief FinancialOfficer assuming the duties of interim Principal Executive Officer. Having many of the key responsibilities of our business assigned to one individual, ourinterim Principal Executive Officer, Senior Vice President and Chief Financial Officer, may make it difficult in the future to maintain appropriate segregationof duties in the initiating and recording of transactions, which may exacerbate the risk of a material misstatement or lack of disclosure within the annual orinterim financial statements not being prevented or detected. To address this lack of segregation of duties, we have implemented additional oversightprocedures and compensating controls with the goal of mitigating this risk and, although we plan to continue to monitor this matter, we currently do notbelieve that this lack of segregation of duties will have an adverse affect on our internal controls. If we are not able to maintain compliance with the23Table of Contentsrequirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal controlover financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to investigations orsanctions by the SEC, FINRA, Nasdaq or other regulatory authorities. In addition, we could be required to expend significant management time and financialresources to correct any material weaknesses that may be identified or to respond to any regulatory investigations or 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 and various other bodies formed to interpret and create appropriate accounting principles and guidance. In the event that one ofthese bodies disagrees with our accounting recognition, measurement or disclosure or any of our accounting interpretations, estimates or assumptions, it mayhave a significant effect on our reported results and may retroactively affect previously reported results. The need to restate our financial results could, amongother potential adverse effects, result in us incurring substantial costs, affect our ability to timely file our periodic reports until such restatement is completed,divert the attention of our management and employees from managing our business, result in material changes to our historical and future financial results,result in investors losing confidence in our operating results, subject us to securities 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 fall24Table of Contentswithin the 40 Act, we may need to take various actions which we might otherwise not pursue. These actions may include restructuring the Company and/ormodifying 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. These economic conditions, anduncertainty 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.25Table of ContentsOur business could be negatively affected as a result of the actions of activist stockholders, including future proxy contests. Proxy contests have been waged against many companies in the biopharmaceutical industry over the last several years. We have been the subject ofactions taken by activist stockholders. For instance, Sarissa Capital Domestic Fund LP and certain of its affiliates (together, "Sarissa") nominated threedirectors for election to our Board of Directors at our 2017 Annual Meeting. Another proxy contest or an activist campaign launched by activiststockholder(s) would require us to incur significant professional fees (including, but not limited to, legal fees, fees for financial advisors, fees for investorrelations advisors, and proxy solicitation expenses) and the time-consuming nature of our response to any such activity may significantly divert the attentionof management, the Board of Directors and our employees. Further, any perceived uncertainties as to our future direction and control resulting from anyproxy contest or similar actions by activist stockholders could result in the loss of potential business opportunities and may make it more difficult to attractand retain qualified personnel and business partners, any of which could adversely affect our business and operating results. Even if we are successful in any proxy contest, our business could be adversely affected by any such proxy contest because:•responding to proxy contests and other actions by activist stockholders can be costly (resulting in significant professional fees and proxysolicitation expenses) and time-consuming, disrupting operations and diverting the attention of our Board of Directors, management andemployees; •perceived uncertainties as to future direction may result in the loss of potential acquisitions, collaborations or other strategic opportunities,and may make it more difficult to attract and retain qualified personnel and business partners; •if individuals are elected or appointed to our Board of Directors with a specific agenda, it may adversely affect our ability to effectively andtimely implement our strategic plan and create additional value for our stockholders; and •if individuals are elected or appointed to our Board of Directors who do not agree with our strategic plan, the ability of our Board of Directorsto function effectively could be adversely affected, which could in turn adversely affect our business, operating results and financialcondition. Uncertainties related to, or the results of, such actions could cause our stock price to experience periods of volatility. In addition, under certain circumstances arising out of or related to a proxy contest or threatened proxy contest or the nomination of directors by anactivist stockholder, a change in the composition of a majority of our Board of Directors may (1) trigger the requirement that we make an offer to repurchaseall of our outstanding 2023 Notes at a price equal to 100% of the principal and unpaid interest on such Notes, (2) constitute a change in control under theterms of our severance plans, which provide for payment of severance if a covered executive officer is subject to an involuntary termination within 3 monthsprior to or 24 months after a change in control of the Company and (3) constitute a change in control under the terms of certain of the Company's equityaward grants and equity plans for its employees, and depending on the terms of the award or plan, may result in the accelerated vesting of such award. In theevent we were required to offer to repurchase all of the 2023 Notes, which as of December 31, 2017 had an aggregate outstanding principal of approximately$241.0 million, we would be required to obtain additional financing. As of December 31, 2017, we had cash, cash equivalents, and marketable securities of$129.1 million. We cannot assure stockholders that we would be able to timely obtain such financing on commercially reasonable terms, if at all. To theextent that additional capital is raised through the sale of equity or equity-linked securities, the issuance of those securities could result in substantialdilution for our current stockholders and the terms may26Table of Contentsinclude liquidation or other preferences that adversely affect the rights of our current stockholders. Furthermore, the issuance of additional securities, whetherequity or debt, by us, or the possibility of such issuance, may cause the market price of our common stock to decline and existing stockholders may not agreewith our financing plans or the terms of such financings. We also could be required to seek funds through arrangements with partners or otherwise that mayrequire us to relinquish rights to our intellectual property, our product candidates or otherwise agree to terms unfavorable to us. The occurrence of any of theforegoing events could materially adversely affect our business. We cannot predict, and no assurances can be given as to, the outcome or timing of any matters relating to actions by activist stockholders or the ultimateimpact on our business, liquidity, financial condition or results of operations.We have incurred litigation and may incur additional litigation. We have been subject to various legal proceedings, and, in the future, we may be exposed to, or threatened with, litigation, claims and proceedingsincident to the ordinary course of, or otherwise in connection with, our business. In addition, agreements entered into by us sometimes includeindemnification provisions which may subject us to costs and damages in the event of a claim against an indemnified third party. For instance, in March 2017, Sarissa filed a complaint in the Delaware Court of Chancery (the "Court"), demanding that we provide books and recordspursuant to Section 220 of the DGCL (the "220 Litigation") and in April 2017, several Sarissa entities filed a complaint for specific performance alleging thatit had entered into a binding agreement to settle its proxy contest in exchange for the inclusion of each of George W. Bickerstaff, III and Odysseas Kostas,M.D. on our Board of Directors (the "Specific Performance Litigation"). Following trial, in December 2017, the Court issued a final judgement in favor ofSarissa. In the Specific Performance Litigation, we expanded our Board of Directors from six to eight members and added Dr. Kostas and Mr. Bickerstaff asdirectors and Sarissa dismissed the 220 Litigation. Sarissa, or others, could decide to bring additional litigation against us and/or against directors and officers whom we are obliged to indemnify anddefend. Separately, we may be exposed to, or threatened with, future litigation, claims and proceedings incident to the ordinary course of, or otherwise inconnection with, our business. Regardless of the merit of particular claims, litigation may be expensive, time-consuming, disruptive to our operations and distracting to management. Inrecognition of these considerations, we may enter into agreements or other arrangements to settle litigation and resolve such disputes. No assurance can begiven that such agreements can be obtained on acceptable terms or that litigation will not occur. These agreements may also significantly increase ouroperating expenses. If one or more legal matters were resolved against us or an indemnified third party in a reporting period for amounts in excess of management'sexpectations, our consolidated financial statements for that reporting period could be materially adversely affected. Further, such an outcome could result insignificant compensatory, punitive or trebled monetary damages, disgorgement of revenue or profits, remedial corporate measures or injunctive relief againstus that could materially adversely affect our financial condition and operating results. While we maintain insurance coverage for certain types of claims, such insurance coverage may be insufficient to cover all losses or all types of claimsthat may arise.27Table of ContentsWe have determined to undertake a comprehensive review of our costs, including our executive compensation structure, which review may not result inmeaningful cost savings, may have unintended consequences and could negatively impact our business. In April 2017, we announced that our Board of Directors had determined to undertake a fresh, comprehensive review of all of our costs, includingexecutive compensation structures, with the goal that this review would result in meaningful savings in our core operating costs that will benefit our financialperformance. In October 2017, we announced that a special committee of our independent directors and the Compensation Committee of our Board ofDirectors completed a comprehensive review of our spending, including executive and board compensation structures, outside services, travel andentertainment and other expenses. The Compensation Committee of our Board of Directors and the full Board also reviewed and made certain changes toexecutive and board compensation plans. While our cost reduction efforts are expected to reduce our operating costs, we cannot be certain that such effortswill be successful. There can be no assurances that any meaningful cost savings will correlate with an increase in the price of our common stock. Future cost reduction efforts may result in the elimination of certain functional areas and/or reductions of our business operations, including the recentlyannounced management changes, which may limit our ability to effectively manage and grow our business and which could result in the potential decreasein our royalty revenues. It is likely that we will incur short-term costs to implement any longer-term expense reduction initiatives. In addition, in the eventthat the aggregate amount of cost reductions implemented as a result of our review, if any, do not meet investor or analyst expectations, the price of ourcommon stock could 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 31.4% of our outstanding common stock as of December 31, 2017, it is also a strategic partner withrights and 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 by28Table of Contentsthe GSK Agreements. GSK may make respiratory product portfolio decisions or statements about its portfolio which may be, or may be perceived to be,harmful to the respiratory products partnered with us. For example, GSK could promote its non-GSK/Innoviva respiratory products or a partnered product forwhich we are entitled to receive a lower percentage of royalties, delay or terminate the development or commercialization of the respiratory programs coveredby the GSK Agreements, or take other actions, such as making public statements, that have a negative effect on our stock price. In this regard and by way ofexample, sales of Advair®, GSK's approved medicine for both COPD and asthma, continue to be significantly greater than sales of RELVAR®/BREO®ELLIPTA®, and GSK has indicated publicly that it intends to continue commercializing Advair®. Also, given the potential future royalty payments GSKmay be obligated to pay under the GSK Agreements, GSK may seek to acquire us to reduce those payment obligations. The timing of when GSK may seek toacquire us could potentially be when it possesses information regarding the status of drug programs covered by the GSK Agreements that has not beenpublicly disclosed and is not otherwise known to us. As a result of these differing interests, GSK may take actions that it believes are in its best interest butwhich might not be in the best interests of either us or our other stockholders. In addition, following the FDA regulatory approval of TRELEGY® ELLIPTA®in September 2017, GSK's diligent efforts obligations as to commercialization matters under the GSK Agreements has 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 this regulatory approval is guided by a portfolio approach across products in which we have retained our full interest and also products in whichwe 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's diligent efforts obligations as to commercialization matters under the GSK Agreements has the objective of focusing on the best interests of patientsand maximizing the net value of the overall portfolio of products under the GSK Agreements, which may be harmful to both our business and ourstockholders. Following the FDA approval of TRELEGY® ELLIPTA® in September 2017, GSK's diligent efforts obligations as to commercialization matters under theGSK Agreements has the objective of focusing on the best interests of patients and maximizing the net value of the overall portfolio of products under theGSK Agreements. As such, GSK may prioritize TRELEGY® ELLIPTA®, and if GSK and the respiratory market in general view this triple combinationtherapy as significantly more beneficial than existing therapies, including RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®, this may be harmfulto our business, operations and stock price. If GSK prioritizes TRELEGY® ELLIPTA®, we will only be entitled to a 15% economic interest of the royaltiespaid pursuant to the commercialization of our partnered products or chooses to reprioritize its commercial programs, our businesses, operations and stockprice would be negatively affected.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 a29Table of Contentsproposed monetization transaction may nonetheless insist that we obtain GSK's consent for the transaction or re-structure the transaction on less favorableterms. We have obtained GSK's agreement that (i) we may grant certain pre-agreed covenants in connection with monetization of our interests inRELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® and vilanterol monotherapy and portions of our interests in TRC, and (ii) it will not unreasonablywithhold its consent to our requests to grant other covenants, provided, among other conditions, that in each case, the covenants are not granted in favor ofpharmaceutical or biotechnology company with a product either being developed or commercialized for the treatment of respiratory disease. If we seek GSK'sconsent to grant covenants other than pre-agreed covenants, we may not be able to obtain GSK's consent on reasonable terms, or at all. If we proceed with aroyalty monetization transaction that is not otherwise covered by the GSK Agreement without GSK's consent, GSK could request that its consent be obtainedor seek to enjoin or otherwise challenge the transaction as violating or allowing it to terminate the GSK Agreements. Regardless of the merit of any claims byGSK, we would incur significant cost and diversion of resources in defending against GSK's claims or asserting our own claims and GSK may seekconcessions from us in order to provide its consent. Any uncertainty about whether or when we could engage in a royalty monetization transaction, thepotential impact on the enforceability of the GSK Agreements or the loss of potential royalties from the respiratory programs partnered with GSK, couldimpair our ability to pursue a return of capital strategy for our stockholders ahead of our receipt of significant royalties from GSK, result in significantreduction in the market price of our securities and cause other material harm to our 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 December 31, 2017, GSK beneficially owned approximately 31.4% 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 of shares of our common stock owned by it terminated upon theexpiration of the governance agreement in September 2015. Further, pursuant to our Certificate of Incorporation, we renounce our interest in and waive anyclaim that a corporate or business opportunity taken by GSK constitutes a corporate opportunity of ours unless such corporate or business opportunity isexpressly offered to one of our directors who is a director, officer or employee of GSK, primarily in his or 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 December 31, 2017, GSK beneficially owned approximately 31.4% 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 transfers30Table of Contentswere made to a single 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 numberof shares, or the 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. 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.31Table of ContentsRisks 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, 2017 and December 31, 2017, the high and low sales pricesof our common stock as reported on The Nasdaq Global Select Market varied between $10.30 and $14.87 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 ofRELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® with GSK, including, without limitation, if payor coverage is lower thananticipated or if sales of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® are less than anticipated because of pricing pressure in therespiratory markets targeted by our partnered products or existing or future competition in the markets in which they are commercialized,including competition from existing and new products that are perceived as lower cost or more effective, and our royalty payments are lessthan anticipated; •any positive developments or results or perceived positive developments or results with respect to the commercialization of TRELEGY®ELLIPTA® with GSK, including, if GSK and the respiratory market in general view this triple combination therapy as significantly morebeneficial than existing therapies, 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 the pronouncement in February 2010 warning that LABAs should not be used alone in thetreatment of asthma and related labeling requirements, the impact of the March 2010 FDA Advisory Committee discussing LABA clinical trialdesign to evaluate serious asthma outcomes or the FDA's April 2011 announcement that manufacturers of currently marketed LABAs conductadditional clinical studies comparing the addition of LABAs to inhaled corticosteroids versus inhaled corticosteroids alone); •GSK reprioritizing its development or commercial efforts on other products, including TRELEGY® ELLIPTA® 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;32Table of Contents•announcements regarding the cost review undertaken by our Board of Directors and the implementation of any cost-saving measures resultingfrom such review; •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 and TRELEGY® ELLIPTA®, through commercialization in allindications 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; •decisions by GSK with respect to the MABA program; •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 recent tax reform and the possibility that the current presidentialadministration and the U.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, as amended; •relative illiquidity in the public market for our common stock (our three largest stockholders other than GSK collectively ownedapproximately 33.6% of our outstanding common stock as of December 31, 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 Recently, we have focused on returning capital to stockholders and paid quarterly dividends during the third and fourth quarters of 2014 and during thefirst three quarters of 2015. From October 2015 through December 31, 2017, we repurchased an aggregate of 17,307,790 shares of our common stock for atotal of $201.2 million. The payment of, or continuation of, capital returns to stockholders is at the discretion of our Board of Directors and is dependentupon our financial condition, results of operations, capital requirements, general business conditions, tax treatment of capital returns, potential futurecontractual restrictions contained in credit agreements and other agreements and other factors deemed relevant by our Board of Directors. Future capitalreturns may also be affected by, among other factors: our views on potential future capital requirements for investments in acquisitions and our workingcapital and debt maintenance requirements; legal risks; stock or debt repurchase programs; changes in federal and state income tax laws or corporate laws;and changes to our business model. Our capital return programs may change from time to time, and we cannot provide assurance that we will continue toprovide any particular amounts. Our announcement of future capital return programs does not obligate us to repurchase any specific dollar amount of debt orequity or number of shares of common stock. A reduction, suspension or change in our capital return programs could have a negative effect on our stockprice.33Table of ContentsConcentration of ownership will limit your ability to influence corporate matters. As of December 31, 2017, GSK beneficially owned approximately 31.4% of our outstanding common stock and our directors, executive officers andinvestors affiliated with these individuals beneficially owned approximately 2.4% of our outstanding common stock. Based on our review of publiclyavailable filings as of December 31, 2017, our three largest stockholders other than GSK collectively owned approximately 33.6% of our outstandingcommon stock. These stockholders could control the outcome of actions taken by us that require stockholder approval, including a transaction in whichstockholders might receive a premium over the prevailing market price for their shares. Following the expiration of the governance agreement in September2015, GSK is no 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 As disclosed in our Current Report on Form 8-K, filed with the SEC on April 26, 2017, on April 20, 2017, Sarissa filed a Verified Complaint Pursuant toSection 225 of the Delaware General Corporation Law and for Specific Performance in the Delaware Court of Chancery, captioned Sarissa Capital DomesticFund LP, et al. v. Innoviva, Inc., C.A. No. 2017-0309-JRS. Sarissa alleged that it had entered into a binding agreement to settle its proxy contest in exchangefor the inclusion of each of George W. Bickerstaff, III and Odysseas Kostas, M.D. on our Board of Directors and Sarissa sought specific performance of thealleged agreement. Following trial, in December 2017, the Court issued a final judgement in favor of Sarissa, and the Company expanded our Board ofDirectors from six to eight members and added Dr. Kostas and Mr. Bickerstaff as directors. From time to time, we may also be involved in legal proceedings in the ordinary course of business. ITEM 4. MINE SAFETY DISCLOSURES Not applicable.34Table of Contents 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 sales 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 16, 2018, there were 100 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.Purchases of Equity Securities by the Issuer In February 2017, we announced a capital return plan, the 2017 Capital Return Plan. The 2017 Capital Return Plan authorized 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. In May 2017, we redeemed $50.0 million in outstanding principal on our non-recourse notes due 2029 ("2029 Notes") as part of the 2017 Capital ReturnPlan. In August 2017, as part of the 2017 Capital Return Plan, we used approximately $17.5 million of the net proceeds from the offering of our 2025 Notes torepurchase and retire 1,317,771 shares of our common stock concurrently with the pricing of the offering in privately negotiated transactions effectedthrough one of the initial purchasers or its affiliate, as our agent. In October 2017, we entered into an ASR agreement with a financial institution to repurchase $80.0 million of our common stock as a part of the 2017Capital Return Plan. In December 2017, we repurchased 6,112,335 shares of our common stock under the ASR agreement.35 Market Price High Low Calendar Quarter 2017 Fourth Quarter $14.87 $11.47 Third Quarter 14.48 11.88 Second Quarter 14.55 11.02 First Quarter 14.05 10.30 2016 Fourth Quarter $11.34 $8.67 Third Quarter 13.37 10.48 Second Quarter 14.15 9.78 First Quarter 13.21 7.56 Table of Contents Share repurchase activity related to the 2017 Capital Return Plan during the fiscal quarter ended December 31, 2017 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, 2012 andending on December 31, 2017, 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, 2012 in each of (1) our commonstock, (2) the Nasdaq Composite Index, (3) the Nasdaq S&P Small Cap 600 Pharma Index and (4) the Nasdaq Biotechnology Index, and assumes thereinvestment 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.36Period TotalNumberof SharesPurchased Average PricePaidper Share Total Numberof SharesPurchased as Part ofPubliclyAnnouncedPlans orPrograms ApproximateDollar Value ofShares ThatMay Yet BePurchasedUnder thePlans ofPrograms October 1, 2017 to October 31, 2017 — $— — November 1, 2017 to November 30, 2017 — $— — December 1, 2017 to December 31, 2017 6,112,335 $13.09 6,112,335 $— Table of Contents COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Innoviva, Inc. the Nasdaq Composite Index, Nasdaq Biotechnology Index, and Nasdaq S&P Small Cap 600 Pharma Index*$100 invested on December 31, 2012 in stock or index, including reinvestment of dividends. The performance chart for Innoviva is adjusted for theJune 2014 Spin Off, in which each of our stockholders received one ordinary share of Theravance Biopharma, Inc. for every 3.5 shares of our commonstock.37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.38 Year Ended December 31, 2017 2016 2015 2014 2013 (In thousands, except per share data) CONSOLIDATED STATEMENTS OF OPERATIONSDATA Net revenue $217,217 $133,569 $53,949 $8,433 $4,532 Operating expenses: Research and development 1,355 1,393 2,619 7,498 9,038 General and administrative(3) 32,258 23,188 19,750 34,864 24,289 Total operating expenses(2) 33,613 24,581 22,369 42,362 33,327 Income (loss) from operations 183,604 108,988 31,580 (33,929) (28,795)Interest and other income (expense), net (5,731) 2,964 1,463 (2,709) 7,510 Interest expense (43,601) (52,416) (51,803) (36,892) (9,348)Income (loss) from continuing operations 134,272 59,536 (18,760) (73,530) (30,633)Income (loss) from discontinued operations(1)(2) — — — (94,934) (140,068)Net income (loss) 134,272 59,536 (18,760) (168,464) (170,701)Net income attributable to noncontrolling interest 129 — — — — Net income (loss) attributable to Innoviva stockholders $134,143 $59,536 $(18,760)$(168,464)$(170,701)Basic net income (loss) per share attributable to Innovivastockholders Continuing operations $1.25 $0.54 $(0.16)$(0.66)$(0.30)Discontinued operations — — — (0.84) (1.37)Basic net income (loss) per share $1.25 $0.54 $(0.16)$(1.50)$(1.67)Diluted net income (loss) per share attributable toInnoviva stockholders: Continuing operations $1.17 $0.53 $(0.16)$(0.66)$(0.30)Discontinued operations — — — (0.84) (1.37)Diluted net income (loss) per share $1.17 $0.53 $(0.16)$(1.50)$(1.67)Shares used to compute basic net income (loss) per share 106,945 110,280 115,372 112,059 102,425 Shares used to compute diluted net income (loss) pershare 119,866 123,233 115,372 112,059 102,425 Cash dividends declared per common share $— $— $0.75 $0.50 $— 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.39 As of December 31, 2017 2016 2015 2014 2013 (In thousands) CONSOLIDATED BALANCE SHEETSDATA Cash, cash equivalents and marketablesecurities $129,075 $150,433 $187,283 $283,354 $520,499 Working capital 165,627 177,997 200,834 238,426 398,794 Total assets 367,337 378,996 408,932 521,654 681,255 Long-term liabilities 575,302 711,938 738,086 731,247 297,729 Accumulated deficit (1,498,748) (1,632,891) (1,692,427) (1,673,667) (1,505,203)Total Innoviva stockholders' (deficit) equity (242,859) (352,991) (342,645) (223,349) 299,122 (1)On June 1, 2014, we spun off our research and drug development operations to Theravance Biopharma. The results of operations forthe former research and drug development operations 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, 2017 2016 2015 2014 2013 (In thousands) Research and development $697 $632 $1,036 $2,781 $573 General and administrative 9,136 7,665 5,837 12,980 7,325 Stock-based compensation from continuing operations 9,833 8,297 6,873 15,761 7,898 Stock-based compensation from discontinued operations — — — 11,629 17,789 Total stock-based compensation $9,833 $8,297 $6,873 $27,390 $25,687 (3)Year ended December 31, 2017 amount includes $8.1 million net proxy contest and associated litigation costs.Table of ContentsManagement Overview Innoviva, Inc. ("Innoviva", the "Company" or "we") is focused on bringing compelling medicines to patients in areas of unmet need by leveraging itssignificant expertise in the development, commercialization and financial management of bio-pharmaceuticals, to maximize the commercial potential of itsrespiratory assets partnered with Glaxo Group Limited ("GSK"), including RELVAR®/BREO® ELLIPTA® (fluticasone furoate/ vilanterol, "FF/VI"),ANORO® ELLIPTA® (umeclidinium bromide/ vilanterol, "UMEC/VI") and TRELEGY® ELLIPTA® (the combination FF/UMEC/VI). Under the Long-Acting Beta2 Agonist ("LABA") Collaboration Agreement, we are entitled to receive royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® asfollows: 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 products combined with aLABA from the LABA collaboration, such as ANORO™ ELLIPTA™, royalties are upward tiering and range from 6.5% to 10%. Innoviva is also entitled to15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC("TRC"), including TRELEGY® ELLIPTA® and any other product or combination of products that may be discovered or developed in the future under theLABA Collaboration Agreement or the Strategic Alliance Agreement with GSK (referred to herein collectively as the "GSK Agreements") the GSKAgreements, which have been assigned to TRC other than RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®. Our company structure and organization are tailored to our focused activities of managing our respiratory assets with GSK, the commercial anddevelopmental obligations associated with the GSK Agreements, intellectual property, licensing operations, business development activities and providingfor certain essential reporting and management functions of a public company. As of December 31, 2017, we had 12 employees. Our revenues consist ofroyalties and potential milestone payments, if any, from our respiratory partnership agreements with GSK.Financial Highlights In the year ended December 31, 2017, our net income attributable to Innoviva stockholders was $134.1 million, an improvement of $74.6 million from anet income of $59.5 million in the year ended December 31, 2016, primarily due to an increase in net royalty revenue and a decrease in interest expense.Cash, cash equivalents, and marketable securities, totaled $129.1 million on December 31, 2017, a decrease of $21.4 million from December 31, 2016. Thedecrease was due primarily to the repayments and redemptions on our 2029 Notes of $487.2 million, repurchases of common stock of $97.5 million, and netpurchases of marketable securities of $23.2 million. These outflows were partially offset by cash provided by operating activities of $141.8 million, proceedsfrom term loans ("Term B Loan") of $250.0 million, and proceeds from issuance of convertible senior notes due 2025 ("2025 Notes") of $192.5 million.Capital Return Plans In February 2017, we announced a capital return plan, the 2017 Capital Return Plan. The 2017 Capital Return Plan authorized a combination ofrepurchases of stock and/or repurchases, redemptions or prepayments of debt up to $150.0 million, through tender offers, open market purchases, privatetransactions, exchange offers or other means through December 31, 2017. In May 2017, we redeemed $50.0 million in outstanding principal on our 2029 Notes as part of the 2017 Capital Return Plan. In August 2017, as part of the 2017 Capital Return Plan, we used approximately $17.5 million of the net proceeds from the offering of our 2025 Notes torepurchase and retire 1,317,771 shares of our common stock concurrently with the pricing of the offering in privately negotiated transactions effectedthrough one of the initial purchasers or its affiliate, as our agent.40Table of Contents In October 2017, we entered into an ASR agreement with a financial institution to repurchase $80.0 million of our common stock as a part of the 2017Capital Return Plan. In December 2017, we repurchased 6,112,335 shares of our common stock under the ASR agreement.Repayments of Notes Payable and Loan In 2017, we paid down the principal balance of the 2029 Notes with $29.6 million, redeemed $50.0 million of the 2029 Notes under the 2017 CapitalReturn Plan, and used the net proceeds of the Term B Loan and the 2025 Notes to redeem the remaining outstanding balance of the 2029 Notes of$407.6 million. In December 2017, we paid down $6.3 million on the principal balance of the Term B Loan.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 COPD and asthma. The collaboration has developed three combination products: (1) RELVAR®/BREO® ELLIPTA® (FF/VI) (BREO®ELLIPTA® is the proprietary name in the U.S. and Canada and RELVAR® ELLIPTA® is the proprietary name outside the U.S. and Canada), a once-dailycombination medicine consisting of a LABA, vilanterol (VI), and an inhaled corticosteroid (ICS), fluticasone furoate (FF), (2) ANORO® ELLIPTA®(UMEC/VI), a once-daily medicine combining a long-acting muscarinic antagonist ("LAMA"), umeclidinium bromide (UMEC), with a LABA, VI and(3) TRELEGY® ELLIPTA®, fluticasone furoate/umeclidinium/vilanterol (FF/UMEC/VI). As a result of the launch and approval of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® in the U.S., Japan and Europe, in accordance withthe LABA Collaboration Agreement, we paid milestone fees to GSK totaling $220.0 million during the year ended December 31, 2014. Although we have nofurther milestone payment obligations to GSK pursuant to the LABA Collaboration Agreement, we continue to have ongoing commercialization activitiesunder the LABA Collaboration Agreement including participation on the joint steering committee and joint project committee that are expected to continueover the life of the agreement. The milestone fees paid to GSK were recognized as capitalized fees paid to a related party, which are being amortized overtheir 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%. We are also entitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to TRC inconnection with the Spin-Off, including TRELEGY® ELLIPTA® , which 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 has been funded in full by GSK and isin Phase II clinical studies stage. GSK is in the process of determining next steps for the program.41Table of ContentsAs a result of the transactions effected by the Spin-Off, we are only entitled to receive 15% of any contingent payments and royalties payable by GSK fromsales of products that may be developed under the Strategic Alliance Agreement, such as MABA and MABA/FF, while Theravance Biopharma receives 85%of those same payments.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. Under the GSK Agreements, we recognized net revenue of $217.2 million, $133.6 million and $53.9 million for the years ended December 31, 2017,2016 and 2015, respectively. In the fourth quarter of 2017, we completed our performance obligations under the MABA program earlier than previouslyestimated. The performance period was previously estimated to end in June 2020. The change in this estimate resulted in full recognition of the remainingdeferred revenue balance and an increase of $2.2 million in revenue in the fourth quarter of 2017 as compared to the third quarter of 2017.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 million as of December 31, 2017 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, 2017, 2016 and 2015 was $13.8 million, respectively. The remaining estimated amortization expense is $13.8 million for each of theyears from 2018 to 2022 and $97.7 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 such42Table of Contentsassets may not be recoverable. The recoverability of Capitalized Fees is measured by comparing the asset's carrying amount to the expected undiscountedfuture cash flows 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 flow estimates fromnear-term forecasted product sales and long-term projected sales in the corresponding market. Based upon our analyses, no impairment charges have beenrecorded on the Capitalized Fees as of December 31, 2017.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. For more information, refer to Note 6, "Stock-Based Compensation," to the consolidated financial statements appearing in this Annual Report onForm 10-K.Accounting for Convertible Senior Notes Due 2025 On August 7, 2017, we completed a private placement of $192.5 million aggregate principal amount of our 2025 Notes. Due to our ability to settle theconversion obligation of the 2025 Notes in cash, common stock or a combination of cash and common stock, at our option, we separately account for theliability and equity components of the 2025 Notes by allocating the proceeds between the liability component and the embedded conversion option ("equitycomponent"). The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have anassociated convertible feature using the income approach. The allocation was performed in a manner that reflected our non-convertible debt borrowing ratefor similar debt. The equity component of the 2025 Notes of $67.3 million was recognized as a debt discount and represents the difference between theproceeds from the issuance of the 2025 Notes and the fair value of the liability of the 2025 Notes on the date of issuance. The excess of the principal amountof the liability component over its carrying amount ("debt discount") is amortized to interest expense using the effective interest method. The equitycomponent is not re-measured as long as it continues to meet the conditions for equity classification. In connection with the issuance of the 2025 Notes, we incurred approximately $5.4 million of debt issuance costs, which primarily consisted ofplacement, legal and other professional fees, and allocated these costs to the liability and equity components based on the allocation of the proceeds. Of thetotal43Table of Contents$5.4 million of debt issuance costs, $1.9 million were allocated to the equity component and recorded as a reduction to additional paid-in capital and$3.5 million were allocated to the liability component and recorded as a reduction to the carrying amount of the liability component on the consolidatedbalance sheet. The portion allocated to the liability component is amortized to interest expense over the expected life of the 2025 Notes using the effectiveinterest method.Results of OperationsNet Revenue Total net revenue, as compared to the prior years, was as follows: Total net revenue increased for the year ended December 31, 2017, compared to the year ended December 31, 2016, primarily due to growth inprescriptions and market share for both RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®, and initiation of sales by GSK of TRELEGY®ELLIPTA® in the fourth quarter of 2017. In the fourth quarter of 2017, due to the completion of Innoviva's performance obligations under the MABAprogram, we revised the performance period, which was previously estimated to end in June 2020. The change in this estimate resulted in full recognition ofthe remaining deferred revenue balance. Total net revenue increased for the year ended December 31, 2016, compared to the year ended December 31, 2015. The increases were primarily due tohigher sales of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®. The revenue growth during the years ended December 31, 2017 and 2016 may not be indicative of our future revenue growth, if any.Research & Development Research & Development ("R&D") expenses, as compared to the prior years, were as follows:44 Change Year Ended December 31, 2017 2016 (In thousands) 2017 2016 2015 $ % $ % Royalties from a related party—RELVAR/BREO $198,726 $128,638 $59,188 $70,088 54%$69,450 117%Royalties from a related party—ANORO 29,036 17,869 7,699 11,167 62 10,170 132 Royalties from a related party—TRELEGY 179 — — 179 — — — Total royalties from a related party 227,941 146,507 66,887 81,434 56 79,620 119 Less: amortization of capitalized fees paid toa related party (13,823) (13,823) (13,823) — — — — Royalty revenue 214,118 132,684 53,064 81,434 61 79,620 150 Strategic alliance—MABA program license 3,099 885 885 2,214 250 — — Total net revenue from GSK $217,217 $133,569 $53,949 $83,648 63%$79,620 148% Change Year Ended December 31, 2017 2016 (In thousands) 2017 2016 2015 $ % $ % Research and development expenses $1,355 $1,393 $2,619 $(38) (3)%$(1,226) (47)%Table of Contents R&D expenses decreased for the year ended December 31, 2017 compared to the year ended December 31, 2016, and for the year ended December 31,2016 compared to the year ended December 31, 2015, primarily due to reduced activities related to the late-stage partnered respiratory assets with GSK.General & Administrative General and administrative expenses, as compared to the prior years, were as follows: General and administrative expenses increased in the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to netproxy contest and associated litigation costs of $8.1 million. 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.Other Income (Expense), net and Interest Income Other income (expense), net and interest income, as compared to the prior years, were as follows: Other expense, net for the year ended December 31, 2017 primarily pertains to the write-off of unamortized debt issuance costs of $7.3 million in relationto our redemptions of the 2029 Notes. Other income, net for the year ended December 31, 2016 primarily pertains to a realized gain of $2.3 million from therepurchases of our 2023 Notes during the year ended December 31, 2016. Other income, net for the year ended December 31, 2015 primarily relates to arealized gain of $1.2 million on the sale of the remaining ordinary shares of Theravance Biopharma that we held. Interest income increased in the year ended December 31, 2017 as compared to the year ended December 31, 2016, and in the year ended December 31,2016 as compared to the year ended December 31, 2015 primarily due to higher interest generated from our investments in marketable securities.Interest Expense Interest expense, as compared to the prior years, was as follows:45 Change Year Ended December 31, 2017 2016 (In thousands) 2017 2016 2015 $ % $ % General and administrative expenses $32,258 $23,188 $19,750 $9,070 39%$3,438 17% Change Year Ended December 31, 2017 2016 (In thousands) 2017 2016 2015 $ % $ % Other (expense) income, net $(7,042)$2,382 $1,120 $(9,424) * $1,262 113%Interest income 1,311 582 343 729 125% 239 70 *Not Meaningful Change Year Ended December 31, 2017 2016 (In thousands) 2017 2016 2015 $ % $ % Interest expense $43,601 $52,416 $51,803 $(8,815) (17)%$613 1%Table of Contents Interest expense decreased in the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to redemption of our2029 Notes with the net proceeds from the Term B Loan and 2025 Notes, the lower interest rates starting August 2017 under the Term B Loan and 2025 Notescompared to the interest rates of the 2029 Notes, and lower principal balance resulting from repurchase of our 2023 Notes. 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 $43.1 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.Income Taxes As of December 31, 2017 and 2016, we had net operating loss carryforwards for federal income taxes of $1.0 billion and $1.1 billion, respectively. As ofDecember 31, 2017 and 2016, 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. We had unrecognized tax benefits of $15.5 million as of December 31, 2017 and 2016. 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 are subject to rules, provided by the Internal Revenue Code and similar state provisions,governing annual limitations tied to ownership changes. In addition, as a result of the passage of the Tax Cuts and Jobs Act, corporate tax rates in the UnitedStates will decrease in 2018, which resulted in the remeasurement of our deferred tax assets at the new statutory rate and a reduction in the value of ourdeferred tax assets in 2017. We conducted an analysis through 2016 to determine whether an ownership change had occurred since inception. The analysisindicated that two ownership changes occurred in prior years. However, notwithstanding the applicable annual limitations, we estimate that no portion of thenet operating loss or credit carryforwards will expire before becoming available to reduce federal and state income tax liabilities. Annual limitations mayresult in expiration of net operating loss and tax credit carryforwards before some or all of such amounts have been utilized.Net Income Attributable to Noncontrolling Interest This represents the share of net income in Theravance Respiratory Company, LLC for Theravance Biopharma for the year ended December 31, 2017.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, ANORO® ELLIPTA® during 2014 and TRELEGY® ELLIPTA® in fourth quarter of 2017, we have complemented the source of financing with royaltyrevenues from the global net sales of these products by GSK. In the year ended December 31, 2017, we generated gross royalty revenues from GSK of$227.9 million. Net cash and cash equivalents, short-term investments and marketable securities totaled $129.1 million, and royalties receivable from GSKtotaled $70.5 million as of December 31, 2017.46Table of Contents 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. In May 2017, we redeemed $50.0 million on the 2029 Notes. In August 2017, we used the net proceeds of the 2025 Notes and Term B Loan(both described below) to redeem the 2029 Notes in full. On August 7, 2017, we completed a private placement of $192.5 million aggregate principal amount of our 2025 Notes. The proceeds include the 2025Notes sold pursuant to the $17.5 million over-allotment option granted by us to the initial purchasers, which option was exercised in full. The 2025 Noteswere sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act").The 2025 Notes will mature on August 15, 2025, unless repurchased or converted in accordance with their terms prior to such date. Concurrently with thepricing of the offering, we repurchased and retired 1,317,771 shares of our common stock for approximately $17.5 million of the net proceeds from theoffering, in privately negotiated transactions effected through one of the initial purchasers or its affiliate, as our agent. The remaining net proceeds from thesale of the 2025 Notes in the offering were used to redeem a portion of the principal outstanding under the 2029 Notes on August 15, 2017. On August 18, 2017, we entered into a Credit Agreement and completed a financing of $250.0 million Term B Loan, the proceeds of which were used torepay the remaining balance of the 2029 Notes. The Term B Loan will mature on August 18, 2022. Two and a half percent (2.5%) of the initial principalamount is due quarterly beginning December 31, 2017. The remaining outstanding balance is due at maturity. Prepayments, in whole or in part, can be madeat any time without a penalty. The Credit Agreement also provides us the ability to request one or more additional tranches of term loans (or increase anexisting term loan) at any time prior to maturity.Adequacy of Cash Resources to Meet Future Needs We believe that cash from projected future royalty revenues and our cash, cash equivalents and marketable securities will be sufficient to meet ouranticipated debt service and operating needs for at least the next twelve months based upon current operating plans and financial forecasts. If our currentoperating plans and financial forecasts change, we may require additional funding sooner in the form of public or private equity offerings or debt financings.Furthermore, if in our view favorable financing opportunities arise, we may seek additional funding at any time. However, future financing may not beavailable in amounts or on terms acceptable to us, if at all. This could leave us without adequate financial resources to fund our operations as currentlyplanned. In addition, from time to time we may restructure or reduce our debt, including through tender offers, redemptions, amendments, repurchases orotherwise, 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 Cash provided by operating activities for the year ended December 31, 2017 was $141.7 million, consisting primarily of our net income of$134.3 million, adjusted for non-cash items such as47 Year Ended December 31, Change (In thousands) 2017 2016 2015 2017 2016 Net cash provided by operating activities $141,749 $60,984 $10,131 $80,765 $50,853 Net cash (used in) provided by investing activities (23,236) (4,580) 159,168 (18,656) (163,748)Net cash used in financing activities (163,193) (97,568) (106,919) (65,625) 9,351 Table of Contents$14.0 million of depreciation and amortization, $9.8 million for stock-based compensation expense, $7.3 million of loss on debt extinguishment and$5.1 million amortization of debt discount and debt issuance costs, offset by changes in operating assets and liabilities, including an increase in receivablesfrom collaborative arrangements of $23.7 million and a reduction in deferred revenue of $3.1 million. Cash provided by operating activities for the year ended December 31, 2016 was $61.0 million, consisting primarily of our net income of $59.5 million,adjusted for non-cash items such as $14.0 million of depreciation and amortization and $8.3 million for stock-based compensation expense, offset bychanges in operating assets and liabilities, including an increase in receivables from collaborative arrangements of $20.6 million. Cash provided by operating activities for the year ended December 31, 2015 was $10.1 million, consisting primarily of our net loss of $18.8 million,adjusted for non-cash items such as $22.6 million interest expense added to the principal balance of our then 2029 Notes, $13.9 million of depreciation andamortization and $6.9 million for stock-based compensation expense, offset by changes in operating assets and liabilities, including an increase inreceivables from collaborative arrangements of $15.7 million.Cash Flows from Investing Activities Net cash used in investing activities for the year ended December 31, 2017 of $23.2 million was primarily due to $67.6 million in purchases ofmarketable securities, partially offset by $44.4 million of proceeds received from the sale and maturities of marketable securities. 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.Cash Flows from Financing Activities Net cash used in financing activities for the year ended December 31, 2017 of $163.2 million was primarily due to $487.2 million principal repaymentsof our 2029 Notes and $97.5 million repurchases of our common stock. These outflows were partially offset by the net proceeds of $242.6 million from thefinancing of our Term B Loan and the net proceeds of $187.1 million from issuance of our convertible senior notes due 2025. Net cash used in financing activities for the year ended December 31, 2016 of $97.6 million was primarily due to $78.1 million repurchases of commonstock, $11.6 million repurchases of our 2023 Notes, and $6.8 million repayments on principal of our 2029 Notes. 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 repurchases of common stock, partially offset by $6.0 million of proceeds received from the issuance of our commonstock.Off-Balance Sheet Arrangements In June 2014, our facility leases in South San Francisco, California were assigned to Theravance Biopharma. However, if Theravance Biopharma were todefault on its lease obligations, we would be held liable by the landlord and thus, we have in substance guaranteed the lease payments for these facilities. Wewould also be responsible for lease-related payments including utilities, property taxes,48Table of Contentsand common area maintenance, which may be as much as the actual lease payments. As of December 31, 2017, the total remaining lease payments for theduration of the lease, which runs through May 2020, were $15.6 million. The carrying value of this lease guarantee was $0.8 million as of December 31, 2017and is reflected in other long-term liabilities in our consolidated balance sheet.Commitments 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, 2017.Contractual Obligations and Commercial Commitments In the table below, we set forth our significant enforceable and legally binding obligations and future commitments as of December 31, 2017. 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, 2017 and 2016, as the average remaining maturity of ourinvestment portfolio was three months and one month as of the respective dates. Our debt portfolio includes the senior secured term loans under the Term B Loan which bear interest at a variable rate based on LIBOR plus 4.5% or acertain alternate base rate plus 3.5%. We are exposed to market risks related to fluctuations in interest rates on these loans. As of December 31, 2017, thestated interest rate for the Term B Loan, based on LIBOR, was 5.94%. An increase in the LIBOR of 50 basis points would increase our annual interest expenseby $1.2 million based on the outstanding balance of $243.8 million as of December 31, 2017.49 Payment Due by Period (In thousands) Total Less Than1 Year 1 - 3 Years 3 - 5 Years More Than5 Years 2023 Notes $240,984 $— $— $— $240,984 2025 Notes 192,500 — — — 192,500 Term B Loan* 243,750 25,000 50,000 168,750 — Facility leases 2,281 392 819 869 201 Total $679,515 $25,392 $50,819 $169,619 $433,685 *Two and one half percent (2.5%) of the initial principal amount is due quarterly beginning December 31, 2017. The remainingoutstanding balance is due at maturity. Additionally, the Credit Agreement stipulates an annual principal payment of a percentage ofExcess Cash Flow ("ECF") to repay the term loans. The percentage of the ECF scales upwards on a tiered basis from 0% to 50%, basedon our leverage ratio, as calculated pursuant to the Credit Agreement, as of the last day of the applicable fiscal year. The first ECFapplication date will be measured as of the end of fiscal year 2018.Table of Contents We account for our 2023 Notes and 2025 Notes on an amortized cost basis and our recognized value of the debt does not reflect changes in fair value.Also, because our 2023 Notes and 2025 Notes bear interest at a fixed 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 and we are exposed to changes in fair value that may occur as a result of interest ratefluctuations. As of December 31, 2017, based on available pricing information, the respective fair values of our 2023 Notes and 2025 Notes were estimated tobe $241.3 million and $206.0 million, respectively. The 2023 Notes and 2025 Notes bear interest at a fixed rate of 2.125% and 2.5%, respectively.Information about the contractual maturities of our debt is disclosed in the table within the Contractual Obligations and Commercial Commitments section ofItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.50Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 51 PageConsolidated Balance Sheets as of December 31, 2017 and December 31, 2016 52Consolidated Statements of Operations for each of the three years in the period ended December 31, 2017 53Consolidated Statements of Comprehensive Income (Loss) for each of the three years in the period ended December 31,2017 54Consolidated Statements of Stockholders' Deficit for each of the three years in the period ended December 31, 2017 55Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2017 56Notes to Consolidated Financial Statements 57Supplementary Financial Data (unaudited) 83Report of Independent Registered Public Accounting Firm 84Table of Contents INNOVIVA, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) See accompanying notes to consolidated financial statements.52 December 31, 2017 2016 Assets Current assets: Cash and cash equivalents $73,336 $118,016 Short-term marketable securities 55,739 32,417 Related party receivables from collaborative arrangements 70,540 46,847 Prepaid expenses and other current assets 754 766 Total current assets 200,369 198,046 Property and equipment, net 209 368 Capitalized fees paid to a related party, net 166,722 180,545 Other assets 37 37 Total assets $367,337 $378,996 Liabilities and Stockholders' Deficit Current liabilities: Accounts payable $601 $128 Accrued personnel-related expenses 1,721 2,361 Accrued interest payable 5,920 7,828 Other accrued liabilities 1,500 1,095 Current portion of long-term debt 25,000 7,752 Deferred revenue, current — 885 Total current liabilities 34,742 20,049 Long-term debt, net of current portion, discount and issuance costs 574,362 708,341 Other long-term liabilities 940 1,383 Deferred revenue — 2,214 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, 102,046 and 108,585 sharesissued as of December 31, 2017 and 2016, respectively 1,019 1,085 Treasury stock: 150 shares as of December 31, 2017 and 2016 (3,263) (3,263)Additional paid-in capital 1,258,151 1,282,077 Accumulated other comprehensive (loss) income (18) 1 Accumulated deficit (1,498,748) (1,632,891)Total Innoviva stockholders' deficit (242,859) (352,991)Noncontrolling interest 152 — Total stockholders' deficit (242,707) (352,991)Total liabilities and stockholders' deficit $367,337 $378,996 Table of Contents INNOVIVA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) See accompanying notes to consolidated financial statements.53 Year Ended December 31, 2017 2016 2015 Royalty revenue from a related party, net of amortization for capitalized fees paid toa related party of $13,823 in the year ended December 31, 2017, 2016, and 2015,respectively $214,118 $132,684 $53,064 Revenue from collaborative arrangements from a related party 3,099 885 885 Total net revenue 217,217 133,569 53,949 Operating expenses: Research and development 1,355 1,393 2,619 General and administrative 32,258 23,188 19,750 Total operating expenses 33,613 24,581 22,369 Income from operations 183,604 108,988 31,580 Other (expense) income, net (7,042) 2,382 1,120 Interest income 1,311 582 343 Interest expense (43,601) (52,416) (51,803)Net income (loss) 134,272 59,536 (18,760)Net income attributable to noncontrolling interest 129 — — Net income (loss) attributable to Innoviva stockholders $134,143 $59,536 $(18,760)Basic net income (loss) per share attributable to Innoviva stockholders $1.25 $0.54 $(0.16)Diluted net income (loss) per share attributable to Innoviva stockholders $1.17 $0.53 $(0.16)Shares used to compute Innoviva basic and diluted net income (loss) per share: Shares used to compute basic net income (loss) per share 106,945 110,280 115,372 Shares used to compute diluted net income (loss) per share 119,866 123,233 115,372 Cash dividends declared per common share $— $— $0.75 Table of Contents INNOVIVA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands) See accompanying notes to consolidated financial statements.54 Year Ended December 31, 2017 2016 2015 Net income (loss) $134,272 $59,536 $(18,760)Other comprehensive income (loss): Unrealized (loss) gain on marketable securities, net (19) 3 1,305 Less: realized gain on marketable securities, net — — (1,220)Comprehensive income (loss) 134,253 59,539 (18,675)Comprehensive income attributable to noncontrolling interest 129 — — Comprehensive income (loss) attributable to Innoviva stockholders $134,124 $59,539 $(18,675)Table of Contents INNOVIVA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (In thousands) See accompanying notes to consolidated financial statements.55 Innoviva Stockholders' Deficit Common Stock AccumulatedOtherComprehensiveIncome (loss) Treasury Stock AdditionalPaid-InCapital AccumulatedDeficit NoncontrollingInterest TotalStockholders'Deficit Shares Amount Shares Amount Balance as ofDecember 31, 2014 116,445 $1,164 $1,452,504 $(87)$(1,673,667) (150)$(3,263)$— $(223,349)Exercise of stock options,and issuance of commonstock units and stockawards 740 8 (488) — — — — — (480)Issuance of common stockin private placement to arelated party 424 4 6,524 — — — — — 6,528 Stock-based compensation — — 6,873 — — — — — 6,873 Repurchase of commonstock (2,676) (27) (25,609) — — — — — (25,636)Cash dividends declared,$0.75 per common share — — (87,906) — — — — — (87,906)Net loss — — — — (18,760) — — — (18,760)Other comprehensiveincome — — — 85 — — — — 85 Balance as ofDecember 31, 2015 114,933 1,149 1,351,898 (2) (1,692,427) (150) (3,263) — (342,645)Exercise of stock options,and issuance of commonstock units and stockawards 853 8 (674) — — — — — (666)Partial termination ofcapped call optionsassociated withrepurchases of convertiblenotes due 2023 — — 578 — — — — — 578 Stock-based compensation — — 8,297 — — — — — 8,297 Repurchase of commonstock (7,201) (72) (78,022) — — — — — (78,094)Net income — — — — 59,536 — — — 59,536 Other comprehensiveincome — — — 3 — — — — 3 Balance as ofDecember 31, 2016 108,585 1,085 1,282,077 1 (1,632,891) (150) (3,263) — (352,991)Contributions fromnoncontrolling interest — — — — — — — 23 23 Exercise of stock options,and issuance of commonstock units and stockawards 891 9 (1,702) — — — — — (1,693)Stock-based compensation — — 9,833 — — — — — 9,833 Cash dividend forfeited — — 7 — — — — — 7 Repurchase of commonstock (7,430) (75) (97,425) — — — — — (97,500)Equity component ofCovertible Senior Notesdue 2025, net of issuancecosts — — 65,361 — — — — — 65,361 Net income — — — — 134,143 — — 129 134,272 Other comprehensive loss — — — (19) — — — — (19)Balance as ofDecember 31, 2017 102,046 $1,019 $1,258,151 $(18)$(1,498,748) (150)$(3,263)$152 $(242,707)Table of Contents INNOVIVA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) See accompanying notes to consolidated financial statements.56 Year Ended December 31, 2017 2016 2015 Cash flows from operating activities Net income (loss) $134,272 $59,536 $(18,760)Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 13,982 13,954 13,933 Stock-based compensation 9,833 8,297 6,873 Amortization of debt discount and issuance costs 5,116 2,847 2,943 Loss (gain) on extinguishment of debt 7,256 (2,342) — Amortization of discount on short-term investments (105) (9) 583 Amortization of lease guarantee (325) (190) — Interest added to the principal balance of non-recourse notes due 2029 — 855 22,635 Realized gain on sale of marketable securities, net — — (1,220)Other non-cash items — — (3)Changes in operating assets and liabilities: Receivables from collaborative arrangements (23,693) (20,619) (15,678)Prepaid expenses and other current assets 12 48 320 Other assets — (19) — Accounts payable 473 (690) 818 Payable to Theravance Biopharma, Inc., net — — (1,056)Accrued personnel-related expenses and other accrued liabilities (81) 276 (725)Accrued interest payable (1,908) (83) 360 Other long-term liabilities 16 8 (7)Deferred revenue (3,099) (885) (885)Net cash provided by operating activities 141,749 60,984 10,131 Cash flows from investing activities Maturities of marketable securities 44,387 88,422 137,621 Purchases of marketable securities (67,623) (95,719) (86,523)Sales of marketable securities — 2,995 108,077 Purchases of property and equipment — (278) (7)Net cash (used in) provided by investing activities (23,236) (4,580) 159,168 Cash flows from financing activities Proceeds from senior secured term loans 250,000 — — Proceeds from issuance of convertible senior notes due 2025 192,500 — — Payments of debt issuance costs and debt discount (12,803) — — Payments of principal on non-recourse notes due 2029 (487,189) (6,828) — Repurchase of shares to satisfy tax withholding (2,128) (1,079) (2,192)Payments of principal on senior secured term loans (6,250) — — Payments of cash dividends to stockholders (281) (960) (87,331)Proceeds from issuances of common stock, net 435 385 8,240 Repurchase of common stock (97,500) (78,094) (25,636)Repurchase of convertible subordinated notes due 2023 — (11,570) — Proceeds from capped-call options — 578 — Contributions from noncontrolling interest 23 — — Net cash used in financing activities (163,193) (97,568) (106,919)Net (decrease) increase in cash and cash equivalents (44,680) (41,164) 62,380 Cash and cash equivalents at beginning of period 118,016 159,180 96,800 Cash and cash equivalents at end of period $73,336 $118,016 $159,180 Supplemental disclosure of cash flow information Cash paid for interest $40,353 $48,797 $25,863 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESDescription of Operations Innoviva, Inc. (referred to as "Innoviva", the "Company", or "we" and other similar pronouns) is focused on bringing compelling medicines to patients inareas 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"), ANORO® ELLIPTA® (umeclidinium bromide/ vilanterol, "UMEC/VI") and TRELEGY® ELLIPTA® (thecombination FF/UMEC/VI). Under the Long-Acting Beta2 Agonist ("LABA") Collaboration Agreement, Innoviva is eligible to receive the associated royaltyrevenues from RELVAR®/BREO®ELLIPTA® and ANORO® ELLIPTA®. Innoviva is also entitled to 15% of royalty payments made by GSK under itsagreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC ("TRC"), relating to TRELEGY® ELLIPTA® andany other product or combination of products that may be discovered and developed in the future under the LABA Collaboration Agreement and theStrategic Alliance Agreement with GSK (referred to herein as the "GSK Agreements"), which have been assigned to TRC other than RELVAR®/BREO®ELLIPTA® and ANORO® ELLIPTA®.Principles of Consolidation The accompanying consolidated financial statements include the accounts of Innoviva and its wholly owned subsidiaries and a variable interest entityfor which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation. For the consolidatedvariable interest entity, the Company records net income attributable to noncontrolling interest on its consolidated statements of operations equal to thepercentage of ownership interest retained in such entity by the respective noncontrolling party.Use of Management's Estimates The preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles ("GAAP") requires managementto make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results coulddiffer materially from those estimates. Management evaluates its significant accounting policies and estimates on an ongoing basis. We base our estimates onhistorical experience and other relevant assumptions that we believe to be reasonable under the circumstances. These estimates also form the basis for makingjudgments about the carrying values of assets and liabilities when these values are not readily apparent from other sources.Certain Risks and Concentrations Our 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 "Segment Reporting"below for concentrations with respect to revenues and geographic locations.Segment Reporting We operate in a single segment, which is to provide capital return to stockholders by maximizing the potential value of our respiratory assets partneredwith GSK. Revenues are generated from our57Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)collaborative arrangements and royalty payments from GSK, located in Great Britain. Our facilities are located within the United States.Variable Interest Entity We evaluate our ownership, contractual and other interest in entities to determine if they are variable-interest entities ("VIE"), whether we have a variableinterest in those entities and the nature and extent of those interests. Based on our evaluations, if we determine we are the primary beneficiary of such VIEs,we consolidate such entities into our financial statements. We consolidate the financial results of TRC, which we have determined to be a VIE, because wehave the power to direct the economically significant activities of TRC and the obligation to absorb losses of, or the right to receive benefits from, TRC. Thefinancial position and results of operations of TRC are not material for the periods presented.Cash and Cash Equivalents We 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 Securities We invest in short-term investments and marketable securities, primarily corporate notes, government securities, government agencies, and governmentcommercial papers. We limit the amount of credit exposure with any one issuer, industry or geographic area for investments other than instruments backed bythe U.S. federal government. We classify our marketable securities as available-for-sale securities and report them at fair value in cash equivalents or short-term marketable securities on the consolidated balance sheets with related unrealized gains and losses included as a component of stockholders' deficit. Theamortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest income on theconsolidated statements of operations. Realized gains and losses, if any, on available-for-sale securities are included in interest income. The cost of securitiessold is based on the specific identification method. Interest and dividends on securities classified 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 the causeof the impairment, including the creditworthiness of the security issuers, the number of securities in an unrealized loss position, the severity and duration ofthe 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 sell the securitiesbefore the recovery of their amortized cost basis. When we determine that the decline in estimated fair value of an investment is below the amortized costbasis and the 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.58Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Fair Value of Financial Instruments We 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 independent sources,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, receivables from collaborative arrangements, accounts payable, and accruedliabilities. Cash equivalents and marketable securities are carried at estimated fair value. The carrying value of receivables from collaborative arrangements,accounts payable, and accrued liabilities approximate their estimated fair value due to the relatively short-term nature of these instruments.Property and Equipment Property and equipment as of December 31, 2017 and 2016, which consisted of equipment, computer equipment, software, office furniture and fixture,amounted to $0.2 million and $0.4 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, 2017, 2016 and 2015 was $0.2 million, $0.1 million and $0.1 million, respectively.Capitalized Software We capitalize certain costs related to direct material and service costs for software obtained for internal use. Capitalized software costs are depreciatedover three years.Capitalized Fees Paid to a Related Party We capitalize fees paid to licensors related to agreements for approved products or commercialized products. We capitalize these fees as capitalized feespaid to a related party ("Capitalized Fees") and amortize these Capitalized Fees on a straight-line basis over their estimated useful lives upon the commerciallaunch of the product, which has been shortly after regulatory approval of such product.59Leasehold improvements Shorter of remaining lease terms or useful lifeEquipment, furniture and fixtures 5 - 7 yearsSoftware 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)The estimated useful lives of these Capitalized Fees are based on a country-by-country and product-by-product basis, as the later of the expiration ortermination of the last patent right covering the compound in such product in such country and 15 years from first commercial sale of such product in suchcountry, unless the agreement is terminated earlier. Consistent with our policy for classification of costs under the research and development collaborativearrangements, the amortization of these Capitalized Fees are recognized as a reduction of royalty revenue. We review our Capitalized Fees for impairment ona product-by-product basis for each major geographic area when events or changes in circumstances indicate that the carrying amount of such assets may notbe recoverable. The recoverability of Capitalized Fees is measured by comparing the asset's carrying amount to the expected undiscounted future cash flowsthat the asset is expected to generate. The determination of recoverability typically requires various estimates and assumptions, including estimating theuseful life over which cash flows will occur, their amount, and the asset's residual value, if any. We derive the required cash flow estimates from near-termforecasted product sales and long-term projected sales in the corresponding market.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 Revenue 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, such fees arerecognized 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 of our performance ofresearch and development services under the agreements. These upfront or contingent payments received, pending recognition as revenue, are recorded asdeferred revenue. We periodically review the estimated performance period of our contracts based on the progress of our programs. The effect of any changemade to an estimated performance period and, therefore revenue recognized, would occur on a prospective basis in the period that the change was made. The remaining deferred revenue under the GSK Strategic Alliance Agreement was fully recognized during the year ending December 31, 2017 becausethere is no remaining performance obligation for Innoviva under the MABA program.Royalties We 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 fees associatedwith any approval and launch milestone payments made to GSK.60Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Allowance for Doubtful Accounts We 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, 2017, there were no allowances for doubtful accounts and we have not had any write-offs historically.Fair Value of Stock-Based Compensation Awards We 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 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 BulletinNo. 107, "Share-Based Payment," for the expected option term. We use our historical volatility to estimate expected stock price volatility. Restricted stock units ("RSUs") and restricted stock awards ("RSAs") are measured based on the fair market values of the underlying stock on the dates ofgrant. Stock-based compensation expense is calculated based on awards ultimately expected to vest and was reduced for estimated forfeitures at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates. Our estimated annual forfeiture rates for stock 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 or expectedterm of the vesting and the estimated fair value of performance-contingent RSUs and RSAs is expensed using an accelerated method over the term of theaward once we have determined that it is probable that performance milestones will be achieved. Compensation expense for RSUs and RSAs that containperformance conditions is based on the grant date fair value of the award. Compensation expense is recorded over the requisite service period based onmanagement's best estimate as to whether it is probable that the shares awarded are expected to vest. We assess the probability of the performance milestonesbeing met on a continuous basis. The grant date fair value of the RSUs and RSAs with a market condition is determined using a Monte Carlo valuation modeland 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 the purchasediscount percentage provided for in the plan.Amortization of Debt Issuance Costs from Non-Recourse Notes 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 the 2029 (the "2029 Notes") issued by our wholly-owned subsidiary. We incurred approximately $15.3 million in transaction costs in connection with issuance of the 2029 Notes, which we amortized to interest expenseover the estimated life of the 2029 Notes based on the effective interest method. In May 2017, we redeemed $50 million on the 2029 Notes. In August 2017,we redeemed the remaining principal balance of $407.6 million with the net proceeds from the convertible senior notes due 2025 (the "2025 Notes") andTerm B Loan. With the redemptions of the61Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)2029 Notes, we recorded $7.3 million loss on the extinguishment and presented it as part of Other income (expense), net in our consolidated statements ofoperations.Income Taxes We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based ondifferences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when thedifferences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will notbe 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 existing as ofDecember 31, 2017 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 each balancesheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether: the factors underlying the sustainability assertion havechanged 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 tax benefitmight change as new information becomes available.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 Parties GSK owned 31.4% of our outstanding common stock as of December 31, 2017. 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 10% of our outstanding common stock as of December 31, 2017. We use an external asset manager, not affiliatedwith BlackRock, Inc., to manage a portion of our cash and investments portfolio. We had $64.3 million invested in BlackRock Liquidity Money MarketFund as of December 31, 2016 through our external asset manager. The money market fund invests in U.S. Treasury bills, notes, trust receipts and directobligations of the U.S. Treasury and repurchase agreements relating to direct treasury obligations. We had no investment in this fund as of December 31,2017.62Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Recently Issued Accounting Pronouncements Not Yet Adopted In 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 in May2014 and outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes mostcurrent revenue recognition guidance, including industry-specific guidance. In March 2016, the FASB issued ASU 2016-08 to provide amendments to clarifythe implementation guidance on principal versus agent considerations. This standard is effective for us on January 1, 2018. We implemented the standard onJanuary 1, 2018 on a modified retrospective basis to contracts which are not completed as of this date. This standard will not have a material impact on ourconsolidated financial statements as we do not have any unrecognized transaction price, other than sales-based royalty revenue, or any remainingperformance obligations under our collaboration agreements as of the initial adoption date. In February 2016, the FASB issued ASU 2016-02, Leases, which supersedes the lease recognition requirements in ASC Topic 840, Leases. The standardrequires an entity to recognize right-of-use assets and lease liabilities arising from a lease for both financing and operating leases in the consolidated balancesheets but recognize the impact on the consolidated statement of operations and cash flows in a similar manner under current GAAP. The standard alsorequires additional qualitative and quantitative disclosures. The standard is effective for us at the beginning January 1, 2019 and requires transition under amodified retrospective method. The most significant impact of the update to us is that we will be required to recognize a "right-of-use" asset and leaseliability for the operating lease agreement that was not previously included on the balance sheet under the existing lease guidance. We anticipate that therewill be no material impact on our consolidated statement of operations from the adoption of ASU 2016-02.2. NET INCOME (LOSS) PER SHARE Basic net income (loss) per share attributable to Innoviva stockholders is computed by dividing net income (loss) attributable to Innoviva stockholderby the weighted-average number of shares of common stock outstanding. Diluted net income (loss) per share attributable to Innoviva stockholders iscomputed by dividing net income (loss) attributable to Innoviva stockholders by the weighted-average number of shares of common stock and dilutivepotential common stock equivalents then outstanding. Dilutive potential common stock equivalents include the assumed exercise, vesting and issuance ofemployee stock awards using the treasury stock method, as well as common stock issuable upon assumed conversion of our 2023 convertible debt using theif-converted method. Our 2025 Notes are convertible, based on the applicable conversion rate, into cash, shares of our common stock or a combination thereof, at our election.Our current intent is to settle the principal amount of the 2025 Notes in cash upon conversion. The impact of the assumed conversion premium to diluted netincome per share is computed using the treasury stock method. As the average market price per share of our common stock as reported on The Nasdaq GlobalSelect Market was lower than the initial conversion price of $17.26 per share, there was no dilutive effect of the assumed conversion premium for the yearended December 31, 2017.63 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, 2017, 2016 and 2015:Anti-dilutive Securities The following common share equivalents were not included in the computation of diluted net income (loss) per share because their effect was anti-dilutive:64 Year Ended December 31, (In thousands except per share data) 2017 2016 2015 Numerator: Net income (loss) attributable to Innoviva stockholders, basic $134,143 $59,536 $(18,760)Add: interest expense on 2023 Notes 5,647 5,790 — Net income (loss) attributable to Innoviva stockholders, diluted $139,790 $65,326 $(18,760)Denominator: Weighted-average shares used to compute basic net income (loss) per shareattributable to Innoviva stockholders 106,945 110,280 115,372 Dilutive effect of 2023 Notes 12,189 12,541 — Dilutive effect of options and awards granted under equity incentive plan andemployee stock purchase plan 732 412 — Weighted-average shares used to compute diluted net income (loss) per shareattributable to Innoviva stockholders 119,866 123,233 115,372 Net income (loss) per share attributable to Innoviva stockholders Basic $1.25 $0.54 $(0.16)Diluted $1.17 $0.53 $(0.16) Year Ended December 31, (In thousands) 2017 2016 2015 Outstanding options and awards granted under equity incentive plan andemployee stock purchase plan 2,121 4,073 6,934 Shares issuable upon conversion of 2023 Notes — — 12,904 2,121 4,073 19,838 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)3. COLLABORATIVE ARRANGEMENTSRevenue from Collaborative Arrangements Net revenue recognized under our GSK Agreement was as follows:LABA 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 milestonefees to GSK totaling $220.0 million during the year ended December 31, 2014. Although we have no further milestone payment obligations to GSK pursuantto the 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 product. The amortization expense isrecorded 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 would becombined 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%. We are also entitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to TRC inconnection with the Spin-Off, including TRELEGY® ELLIPTA®, which royalties are upward tiering and range from 6.5% to 10%.65 Year Ended December 31, (In thousands) 2017 2016 2015 Royalties from a related party—RELVAR/BREO $198,726 $128,638 $59,188 Royalties from a related party—ANORO 29,036 17,869 7,699 Royalties from a related party—TRELEGY 179 — — Total royalties from a related party 227,941 146,507 66,887 Less: amortization of capitalized fees paid to a related party (13,823) (13,823) (13,823)Royalty revenue 214,118 132,684 53,064 Strategic alliance—MABA program license 3,099 885 885 Total net revenue from GSK $217,217 $133,569 $53,949  Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)4. AVAILABLE-FOR-SALE SECURITIES AND FAIR VALUE MEASUREMENTSAvailable-for Sale Securities The estimated fair value of available-for-sale securities is based on quoted market prices for these or similar investments that were based on pricesobtained from a commercial pricing service. Available-for-sale securities are summarized below: As of December 31, 2017, all of the available-for-sale debt securities had contractual maturities within one year and the average duration of debtsecurities was approximately three months.66 December 31, 2017 (In thousands) AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses EstimatedFair Value U.S. government securities $9,943 $— $(1)$9,942 U.S. government agencies 9,987 — (2) 9,985 U.S. corporate notes 10,881 — (15) 10,866 U.S. commercial papers 29,945 — — 29,945 Money market funds 61,971 — — 61,971 Total $122,727 $— $(18)$122,709 December 31, 2016 (In thousands) AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses EstimatedFair Value U.S. government agencies $12,428 $1 $— $12,429 U.S. commercial papers 72,065 — — 72,065 Money market funds 64,319 — — 64,319 Total $148,812 $1 $— $148,813 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)4. AVAILABLE-FOR-SALE SECURITIES AND FAIR VALUE MEASUREMENTS (Continued)Fair Value Measurements Our 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: The fair value of our marketable securities classified within Level 2 is based upon observable inputs that may include benchmark yields, reported trades,broker/dealer quotes, issuer spreads,67 Estimated Fair Value Measurements as ofDecember 31, 2017 Using: Quoted Price inActive Marketsfor IdenticalAssets Significant OtherObservableInputs SignificantUnobservableInputs Types of Instruments(In thousands) Level 1 Level 2 Level 3 Total Assets U.S. government securities $— $9,942 $— $9,942 U.S. government agencies — 9,985 — 9,985 U.S. corporate notes — 10,866 — 10,866 U.S. commercial papers — 29,945 — 29,945 Money market funds 61,971 — — 61,971 Total assets measured at estimated fair value $61,971 $60,738 $— $122,709 Liabilities Term B Loan $— $243,750 $— $243,750 2023 Notes — 241,259 — 241,259 2025 Notes — 205,975 — 205,975 Total fair value of liabilities $— $690,984 $— $690,984 Estimated Fair Value Measurements as ofDecember 31, 2016 Using: 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 papers — 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 2023 Notes $— $202,125 $— $202,125 2029 Notes — 487,189 — 487,189 Total fair value of liabilities $— $689,314 $— $689,314 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)4. AVAILABLE-FOR-SALE SECURITIES AND FAIR VALUE MEASUREMENTS (Continued)two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The fair value of our convertible subordinated notes due 2023 (the "2023 Notes"), of our 2025 Notes and of our previously outstanding 2029 Notes isbased on recent trading prices of the instruments. The carrying amount of our initial Term B Loan before deducting debt issuance costs approximates fairvalue as the loan carries a variable interest rate that is tied to the LIBOR rate plus an applicable spread.5. CAPITALIZED FEES PAID TO A RELATED PARTY Capitalized fees paid to a related party, which consist of registrational and launch-related milestone fees paid to GSK, were as 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, 2017, the weighted averageremaining amortization period is 12.1 years. Additional information regarding these milestone fees is included in Note 3, "Collaborative Arrangements." Amortization expense for the years endedDecember 31, 2017, 2016 and 2015 was $13.8 million, respectively. The remaining estimated amortization expense is $13.8 million for each of the yearsfrom 2018 to 2022 and $97.7 million thereafter.6. STOCK-BASED COMPENSATIONEquity Incentive Plans In 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, RSAs, RSUs and SARs to employees, non-employee directors and consultants. As of December 31, 2017, total shares remainingavailable for issuance under the 2012 Plan were 3,411,107.Employee Stock Purchase Plan Under the 2004 Employee Stock Purchase Plan (the "ESPP"), our employees may purchase common stock through payroll deductions at a price equal to85% 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.68 December 31, Amortization period (In thousands) 2017 2016 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 (53,278) (39,455)​Net carrying value $166,722 $180,545 ​​​Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6. STOCK-BASED COMPENSATION (Continued)The ESPP provides for consecutive and overlapping offering periods of 24 months in duration, with each offering period composed of four consecutive six-month purchase periods. The purchase periods end on either May 15 or November 15. ESPP contributions are limited to a maximum of 15% of an employee'seligible compensation. 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, 2017, total shares remaining available for issuance under the ESPP were 205,979.Performance-Contingent RSAs and RSUs Since 2011, the Compensation Committee of our Board of Directors (the "Compensation Committee") has approved grants of performance-contingentRSAs and RSUs to senior management and a non-executive officer. Generally, these awards have dual triggers of vesting based upon the achievement ofcertain performance 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 remaining grant of 63,000 special long-term retention and incentive performance-contingentRSAs to senior 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 service to the Company. During the year ended December 31, 2016, we determinedthat the achievement of the requisite performance conditions was met. These awards were released in November 2017 upon vesting.Market-Based RSAs and RSUs On January 14, 2016, the Compensation Committee approved and granted 282,394 RSAs and 46,294 RSUs to senior management. These awards includea 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 provision opportunity measuredon January 13, 2019 for RSAs and on September 30, 2018 for RSUs. Two-thirds of amounts earned at the end of year two will vest and be distributed onFebruary 20, 2018, while the final one-third earned after two years as well as the catch-up amount earned will vest and be distributed on February 20, 2019 forRSAs and November 20, 2018 for RSUs. The actual payout of shares may range from a minimum of zero shares to a maximum of 328,688 shares granted uponthe actual performance against the Performance Measures. The grant date fair value of these awards is determined using a Monte Carlo valuation model. Theaggregate value of $2.0 million is recognized as compensation expense over the implied service period and will not be reversed if the market condition is notmet. On January 17, 2017, the Compensation Committee approved and granted 353,508 RSAs and 53,360 RSUs to senior management. These awards includea market condition based on the TSR of Innoviva's common stock as compared to the TSR of the Nasdaq Biotechnology Index ("Index") and a servicecondition that requires continued employment, collectively the "Performance Measures II". The vesting percentages of these awards are calculated based onthe two-year performance period with a catch-up provision opportunity measured on December 31, 2019 for RSAs and on September 30, 201969Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6. STOCK-BASED COMPENSATION (Continued)for RSUs. Two-thirds of amounts earned at the end of year two will vest and be distributed on February 20, 2019, while the final one-third earned after twoyears as well as the catch-up amount earned will vest and be distributed on February 20, 2020 for RSAs and November 20, 2019 for RSUs. The actual payoutof shares may range from a minimum of zero shares to a maximum of 406,868 shares granted upon the actual performance against the Performance MeasuresII. The grant date fair value of these awards was determined using a Monte Carlo valuation model. The aggregate value of $3.2 million is recognized ascompensation expense over the implied service period and will not be reversed if the market condition is not met.Director Compensation Program Our non-employee directors receive compensation for services provided as a director. Each member of our Board of Directors who is not an employeereceives both cash and equity compensation for services as a director, member of a committee of the Board of Directors, lead independent director andchairman, as applicable. In October 2017, both the cash and equity components of the compensation program were amended, effective immediately (the"October 2017 Amendments"). Each of our independent directors receives periodic automatic grants of equity awards under a program implemented under the 2012 Plan. These grantsare non-discretionary. Only our independent directors or affiliates of such directors are eligible to receive automatic grants under the 2012 Plan. Under theprogram, each individual who first became a non-employee director will, on the date such individual joins the Board of Directors, automatically be granted aone-time grant of RSUs covering a number of shares of our common stock calculated as $125,000 ($250,000 prior to the October 2017 Amendments) dividedby our common stock closing share price on the date of grant as reported on The Nasdaq Global Select Market, rounded down to the nearest whole share (the"Initial RSUs"), plus a one-time grant of RSUs covering a number of shares of our common stock calculated as $225,000 ($250,000 prior to the October 2017Amendments) divided by our common stock closing share price on the date of grant as reported on The Nasdaq Global Select Market, which would be pro-rated for 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 the next annualstockholder meeting or the one-year grant anniversary, in each case subject to the non-employee director's continuous service through the applicable vestingdate. Annually, upon his or her re-election to the Board at the Annual Meeting of Stockholders, each non-employee director is automatically granted an RSUcovering a number of shares of our common stock calculated as $225,000 ($250,000 prior to the October 2017 Amendments) divided by our common stockclosing share price on the date of grant as reported on The Nasdaq Global Select Market, rounded down to the nearest whole share. Annual RSUs will vest atthe sooner of the next annual stockholder meeting or the one-year anniversary of grant, subject to the non-employee director's continuous service through theapplicable vesting date. Following the amendment to our non-employee director compensation program, both the annual equity awards and initial equityawards described above remained unchanged with the exception that the number of shares of our Common Stock subject to each award has been reduced.70 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6. STOCK-BASED COMPENSATION (Continued) These RSUs will vest in full upon the director's death, the occurrence of a Change in Control or, with respect to awards made after the October 2017Amendments, the director's disability before the director's service terminates. Director RSUs carry dividend equivalent rights to be credited with an amountequal to all cash dividends paid on the underlying shares of common stock while unvested. Dividend equivalents are subject to the same terms andconditions, including vesting, as the RSUs to which they attach and are paid in cash upon vesting.Stock-Based Compensation Expense 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, 2017, the unrecognized stock-based compensation cost and the estimated weighted-average amortization period were as follows:71 Year Ended December 31, (In thousands) 2017 2016 2015 Research and development $697 $632 $1,036 General and administrative 9,136 7,665 5,837 Total stock-based compensation expense $9,833 $8,297 $6,873 Year Ended December 31, (In thousands) 2017 2016 2015 Stock options $593 $632 $789 RSUs 2,282 1,920 2,492 RSAs 4,497 3,492 2,850 Performance-based RSAs 242 1,293 613 Market-based RSUs 291 112 — Market-based RSAs 1,855 693 — ESPP 73 155 129 Total stock-based compensation expense $9,833 $8,297 $6,873 (In thousands) UnrecognizedCompensationCost Weighted-AverageAmortizationPeriod (Years) Stock options $305 0.5 RSUs 1,487 0.9 RSAs 7,764 2.4 Market-based RSUs 285 0.9 Market-based RSAs 1,943 1.0 Total unrecognized compensation cost $11,784 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6. STOCK-BASED COMPENSATION (Continued)Compensation Awards The following table summarizes equity award activity under the 2012 Plan and Prior Plans and related information: As of December 31, 2017, the aggregate intrinsic value of the options outstanding was $0.4 million and the aggregate intrinsic value of the optionsexercisable was $0.4 million. The total intrinsic value of the options exercised was not material in the years ended December 31, 2017 and 2016, and was $0.5 million in the yearended December 31, 2015. The total estimated fair value of options vested was $3.8 million in the year ended December 31, 2017, $4.7 million in the yearended December 31, 2016 and $10.0 million in the year ended December 31, 2015. The total estimated fair value of RSUs and PSUs vested was $2.6 million in the year ended December 31, 2017, $3.9 million in the year endedDecember 31, 2016 and $5.6 million in the year ended December 31, 2015. The total estimated fair value of RSAs and PSAs vested was $6.3 million in the year ended December 31, 2017, $14.7 million in the year endedDecember 31, 2016 and $22.3 million in the year ended December 31, 2015.Valuation Assumptions There were no stock options granted for the years ended December 31, 2017, 2016 or 2015.72(In thousands, except pershare data) Number ofoutstandingoptions Weighted-AverageExercise Priceof OutstandingOptions Number ofoutstandingRSUs and PSUs Weighted-Average FairValue per Shareat Grant Number ofoutstandingRSAs and PSAs Weighted-Average FairValue per Shareat Grant Balance as ofDecember 31, 2016 2,900 $23.72 413 $15.29 1,125 $13.67 Granted — — 255 11.38 774 9.53 Exercised (16) 11.81 — — — — Released RSUs/RSAs — — (278) 15.88 (412) 14.87 Forfeited (1,244) 23.63 (20) 12.62 (39) 13.19 Balance as ofDecember 31, 2017 1,640 23.90 370 11.57 1,448 9.95 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6. STOCK-BASED COMPENSATION (Continued) We based the range of weighted-average estimated values of rights granted under the ESPP, as well as the weighted-average assumptions used incalculating these values, on estimates as of the date of grant, as follows:7. DEBT Our debt consists of:Senior Secured Term Loans On August 18, 2017, we entered into a credit agreement (the "Credit Agreement") and completed a financing of $250.0 million Term B Loan, the netproceeds of which were used to repay the remaining balance of our 2029 Notes. The Term B Loan will mature on August 18, 2022. Two and one half percent(2.5%) of the initial principal amount is due quarterly beginning December 31, 2017. The remaining outstanding balance is due at maturity. Prepayments, inwhole or in part, can be made at any time without a penalty. The Credit Agreement also provides us the ability to request one or more additional tranches ofterm loans (or increase an existing term loan) at any time prior to maturity. Interest on each term loan, at our option, may bear a varying rate of LIBOR plus4.5% or a certain alternate base rate plus 3.5%. The initial term loan bears interest at a varying rate of three-month LIBOR plus 4.5%. Interest is due quarterly,beginning November 20, 2017. The term loans under the Credit Agreement are unconditionally guaranteed by one of our wholly-owned subsidiaries, and will be required to beguaranteed by each of our subsequently acquired or73 Year Ended December 31, 2017 2016 2015Employee stock purchase plan issuances Risk-free interest rate 1.4% - 1.7% 0.4% - 1.0% 0.1% - 0.9%Expected term (in years) 0.5 - 2 0.5 - 2 0.5 - 2Volatility 35% - 44% 39% - 66% 44% - 69%Dividend yield 0% 0% 0% - 6%Weighted-average estimated fair value of ESPP sharesgranted $3.90 $4.47 $4.52 December 31, (In thousands) 2017 2016 Senior secured term loans $243,750 $— Convertible subordinated notes due 2023 240,984 240,984 Convertible senior notes due 2025 192,500 — Non-recourse notes due 2029 — 487,189 Total debt 677,234 728,173 Unamortized debt discount and issuance costs (77,872) (12,080)Current portion of senior secured term loan (25,000) — Current portion of non-recourse notes due 2029 — (7,752)Net long-term debt $574,362 $708,341 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)7. DEBT (Continued)organized direct and indirect restricted wholly-owned domestic subsidiaries whose assets or net revenues exceed 5% of the consolidated assets or netrevenues, as the case may be, of our and our restricted subsidiaries (the "Guarantors"). Other domestic restricted subsidiaries, subject to certain customaryexceptions, will be required to become Guarantors to the extent that domestic restricted subsidiaries excluded from such guarantee obligation represent, inthe aggregate, more than 10% of the consolidated assets and more than 10% of our consolidated net revenues. These loans are senior secured obligations,collateralized by a lien on substantially all of our and the Guarantors' personal property and material real property assets (if any). Additionally, the Credit Agreement stipulates an annual principal payment of a percentage of Excess Cash Flow ("ECF"), as described therein, to repaythe term loans. The percentage of the ECF scales upwards on a tiered basis from 0% to 50%, based on our leverage ratio, as calculated pursuant to the CreditAgreement, as of the last day of the applicable fiscal year. The first ECF application date will be measured as of the end of fiscal year 2018. In connection with the financing of the Term B Loan, we incurred $2.5 million in original interest discount and $4.9 million in debt issuance costs,which are being amortized to interest expense over the estimated life of the loan using the effective interest method. As of December 31, 2017, the principalbalance of the Term B Loan was $243.8 million, of which $25.0 million was classified as a short-term liability.Convertible Senior Notes Due 2025 On August 7, 2017, we completed a private placement of $192.5 million aggregate principal amount of our 2025 Notes. The proceeds include the 2025Notes sold pursuant to the $17.5 million over-allotment option granted by us to the initial purchasers, which option was exercised in full. The 2025 Noteswere sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act").The 2025 Notes are senior unsecured obligations and bear interest at a rate of 2.5% per year, payable semi-annually in arrears on February 15 and August 15of each year, beginning on February 15, 2018. The 2025 Notes are convertible, based on the applicable conversion rate, into cash, shares of our common stock or a combination thereof, at our election.The initial conversion rate for the 2025 Notes is 57.9240 shares of our common stock per $1,000 principal amount of the 2025 Notes (which is equivalent toan initial conversion price of approximately $17.26 per share), representing a 30.0% conversion premium over the last reported sale price of the Company'scommon stock on August 1, 2017, which was $13.28 per share. The conversion rate is subject to customary anti-dilution adjustments in certaincircumstances. The 2025 Notes will mature on August 15, 2025, unless repurchased or converted in accordance with their terms prior to such date. Prior toFebruary 15, 2025, the 2025 Notes will be convertible at the option of the holders only upon the occurrence of specified events and during certain periods.From, and including, February 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, the 2025Notes will be convertible at any time. Concurrently with the pricing of the offering, we repurchased and retired 1,317,771 shares of our common stock for approximately $17.5 million of thenet proceeds from the offering, in privately negotiated transactions effected through one of the initial purchasers or its affiliate, as our agent. The74Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)7. DEBT (Continued)remaining net proceeds from the sale of the 2025 Notes in the offering were used to redeem a portion of the principal outstanding under the 2029 Notes onAugust 15, 2017. In accordance with accounting guidance for debt with conversion and other options, we separately account for the liability and equity components of the2025 Notes by allocating the proceeds between the liability component and the embedded conversion option ("equity component") due to our ability tosettle the conversion obligation of the 2025 Notes in cash, common stock or a combination of cash and common stock, at our option. The carrying amount ofthe liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature using the incomeapproach. The allocation was performed in a manner that reflected our non-convertible debt borrowing rate for similar debt. The equity component of the2025 Notes of $67.3 million was recognized as a debt discount and represents the difference between the proceeds from the issuance of the 2025 Notes andthe fair value of the liability of the 2025 Notes on the date of issuance. The excess of the principal amount of the liability component over its carryingamount ("debt discount") is amortized to interest expense using the effective interest method. The equity component is not re-measured as long as itcontinues to meet the conditions for equity classification. Our outstanding 2025 Notes balances as December 31, 2017 consisted of the following: In connection with the issuance of the 2025 Notes, we incurred approximately $5.4 million of debt issuance costs, which primarily consisted ofplacement, legal and other professional fees, and allocated these costs to the liability and equity components based on the allocation of the proceeds. Of thetotal $5.4 million of debt issuance costs, $1.9 million were allocated to the equity component and recorded as a reduction to additional paid-in capital and$3.5 million were allocated to the liability component and recorded as a reduction to the carrying amount of the liability component on the consolidatedbalance sheet. The portion allocated to the liability component is amortized to interest expense over the expected life of the 2025 Notes using the effectiveinterest method. The following table sets forth total interest expense recognized related to the 2025 Notes from the date of issuance through December 31, 2017:75(In thousands) December 31,2017 Liability component Principal $192,500 Debt discount and issuance costs, net (68,342)Net carrying amount $124,158 Equity component, net $65,361 (In thousands) December 31,2017 Contractual interest expense $1,925 Amortization of debt issuance costs 189 Amortization of debt discount 2,268 Total interest and amortization expense $4,382 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)7. DEBT (Continued)Convertible Subordinated Notes Due 2023 In 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 financing raised proceeds, net of issuance costs, of approximately $281.2 million, less $36.8 million topurchase two privately-negotiated capped call option transactions in connection with the issuance of the notes. The 2023 Notes bear interest at the rate of2.125% 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. 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 $1,000principal amount of the 2023 Notes, subject to adjustment in certain circumstances, which represents an initial conversion price of approximately $27.79 pershare. In connection with the offering of the 2023 Notes, we entered into two privately-negotiated capped call option transactions with a single counterparty.The capped call option transaction is an integrated instrument consisting of a call option on our common stock purchased by us with a strike price equal tothe initial conversion price of $27.79 per share for the underlying number of shares and a cap price of $38.00 per share, both of which are subject toadjustments consistent with the 2023 Notes. The cap component is economically equivalent to a call option sold by us for the underlying number of shareswith an initial strike price of $38.00 per share. As an integrated instrument, the settlement of the capped call coincides with the due date of the convertibledebt. Upon settlement, we would receive from our hedge counterparty a number of shares of our common shares that would range from zero, if the stock pricewas below $27.79 per share, to a maximum of 2,779,659 shares, if the stock price is above $38.00 per share. However, if the market price of our commonstock, as measured under the terms of the capped call transactions, exceeds $38.00 per share, there is no incremental anti-dilutive benefit from the cappedcall. The partial conversion by certain holders of the 2023 Notes in July 2014, and dividends declared and paid in 2014 and 2015, the conversion rate withrespect to our 2023 Notes was adjusted in total to 50.5818 shares of our common stock per $1,000 principal amount of the 2023 Notes, which represents aconversion price of approximately $19.77 per share. As a result of the conversion rate adjustments, the capped call strike price and cap price were alsoadjusted accordingly to $19.77 and $27.04, respectively. 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 million byway 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 isincluded in Other (expense) income, net in the consolidated statement of operations. As a result of the partial retirement of our 2023 Notes, we entered intopartial termination agreement of the capped call option transaction described above. The partial termination agreement of the capped call option transactionenabled us to receive $0.6 million from the counterparty, which was recorded as an increase in additional paid-in capital in our consolidated balance sheetsas of December 31, 2016.76 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)7. DEBT (Continued)Non-Recourse Notes 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 fixed rate term notes due 2029. The 2029 Notes had an annual interest rate of 9%, and prior to May 15, 2016, in the event that the specified portionof royalties received in a quarter was less than the interest accrued for the quarter, the principal amount of the 2029 Notes increased by the interest shortfallamount for that period, and considered as payment in kind ("PIK"). In total, $44.0 million of interest expense was added to the principal balance of the 2029Note. During the years ended December 31, 2017 and 2016, respectively, the principal balance of the 2029 Notes was paid down by $29.6 million and$6.8 million, respectively, with the payments received from the royalty revenues. In May 2017, we redeemed $50.0 million on the 2029 Notes. In August 2017, we redeemed the remaining principal balance of $407.6 million with the net proceeds from the 2025 Notes and Term B Loan. Inconnection with the sale of the 2029 Notes in 2014, we incurred approximately $15.3 million in debt issuance costs, which were being amortized to interestexpense over the estimated life of the 2029 Notes. With the redemptions of the 2029 Notes in 2017, we wrote off $7.3 million of unamortized debt issuancecosts which is included in Other income (expense), net in our consolidated statements of operations.Debt Maturities The aggregate scheduled maturities of our long-term debt as of December 31, 2017 are as follows:8. STOCKHOLDERS' DEFICITShare Repurchase Program In February 2017, we announced a new capital return plan, the 2017 Capital Return Plan. The 2017 Capital Return Plan authorized a combination ofrepurchases of stock and/or repurchases, redemptions or prepayments of debt up to $150.0 million, through tender offers, open market purchases, privatetransactions, exchange offers or other means through December 31, 2017. In August 2017, we repurchased 1,317,771 shares of our common stock forapproximately $17.5 million of the net proceeds from the offering of the 2025 Notes. In October 2017, we entered into an accelerated share repurchase (ASR)agreement with a financial institution to repurchase $80.0 million of our common77(In thousands) December 31,2017 Years ending December 31: 2018 $25,000 2019 25,000 2020 25,000 2021 25,000 2022 143,750 Thereafter 433,484 Total $677,234 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)8. STOCKHOLDERS' DEFICIT (Continued)stock under the 2017 Capital Return Plan. In December 2017, we repurchased of 6,112,335 shares of our common stock under the ASR agreement. Thefollowing table shows our share repurchase activity and related information on the ASR: On 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 share of notless than $8.50 and not greater than $9.25, which was contingent upon satisfaction of customary conditions. The October 2015 TO expired on December 1,2015. The following table shows our share repurchase activity and related information on the October 2015 TO: Additionally, as part of the 2016 Share Repurchase Program, we repurchased shares of our common stock in the open market, which were retired uponrepurchase, during the periods presented as follows:9. COMMITMENTS AND CONTINGENCIES As disclosed in our Current Report on Form 8-K, filed with the SEC on April 26, 2017, on April 20, 2017, Sarissa Capital Domestic Fund LP and certainof its affiliates (together, "Sarissa") filed a Verified Complaint Pursuant to Section 225 of the Delaware General Corporation Law and for Specific Performancein the Delaware Court of Chancery, captioned Sarissa Capital Domestic Fund LP, et al. v. Innoviva, Inc., C.A. No. 2017-0309-JRS. Sarissa alleged that it hadentered into a binding agreement to settle its proxy contest in exchange for the inclusion of each of George W. Bickerstaff, III and Odysseas Kostas, M.D. onour Board of Directors and Sarissa sought specific performance of the alleged agreement. Following trial, in December 2017, the Court issued a finaljudgement in favor of Sarissa, and the Company expanded our Board of Directors from six to eight members and added Dr. Kostas and Mr. Bickerstaff asdirectors.78(In thousands except per share data) Purchase period end date December 2017 Shares repurchased and retired 6,112 Amount $80,000 Average price per share $13.09 (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 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 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)9. COMMITMENTS AND CONTINGENCIES (Continued) From time to time, we may also be involved in legal proceedings in the ordinary course of business.Operating Lease and Lease Guarantee In 2014, our facility leases in South San Francisco, California were assigned to Theravance Biopharma, Inc. However, if Theravance Biopharma, Inc. wereto default on its lease obligations, we have in substance guaranteed the lease payments for these facilities. We would also be responsible for lease-relatedpayments including utilities, property taxes, and common area maintenance, which may be as much as the actual lease payments. As of December 31, 2017,the total remaining lease payments, which run through May 2020, were $15.6 million. The carrying value of this lease guarantee was $0.8 million as ofDecember 31, 2017 and is reflected in other long-term liabilities in our consolidated balance sheet. Amortization on the lease guarantee commenced in 2016and amortization amount for the years ended December 31, 2017 and 2016 was $0.3 million and $0.2 million, respectively. Minimum lease payments on our corporate headquarters as of December 31, 2017 are as follows:Guarantees and Indemnifications We 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, 2017.79(In thousands) Years ending December 31: 2018 $392 2019 403 2020 416 2021 428 2022 441 Thereafter 201 Total $2,281 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)10. INCOME TAXES The impacts of the differences between the expected U.S. federal statutory income tax to our income tax expense are as follows: Deferred 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 and deferred tax liabilities are as follows: Realization of deferred tax assets is dependent on future taxable income. Accordingly, the deferred tax assets have been fully offset by a valuationallowance. The valuation allowance decreased by $181.2 million in the year ended December 31, 2017, increased by $20.6 million in the year endedDecember 31, 2016, and increased by $4.7 million in the year ended December 31, 2015. The decrease in the valuation allowance in the year ended December 31, 2017 was primarily related to net operating losses utilization during 2017, andremeasurement of the deferred tax assets and liabilities due to enactment of Tax Cuts and Jobs Act. The increase in the valuation allowance in the year endedDecember 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 benefits of $46.9 million in net operating loss carryforwards.80 Year Ended December 31, (In thousands) 2017 2016 2015 Expected tax at federal statutory rate $46,997 $20,871 $(6,372)State income tax, net of federal benefit 4 — — Non-deductible executive compensation 987 925 306 Other (1,506) (122) 170 Impact of tax reform rate change 124,017 — — Change in valuation allowance (170,495) (21,579) 5,896 Income tax expense $4 $95 $— As of December 31, (In thousands) 2017 2016 Deferred tax assets Net operating loss carryforwards $257,000 $417,000 Deferred revenues — 1,000 Research and development tax credit carryforwards 57,000 53,000 Other 3,000 13,000 Total deferred tax assets before valuation allowance 317,000 484,000 Valuation allowance (303,000) (484,000)Total deferred tax assets 14,000 — Deferred tax liabilities Debt issuance discount and other (14,000) — Net deferred tax assets $— $— Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)10. INCOME TAXES (Continued) As of December 31, 2017, we had federal net operating loss carryforwards of approximately $1.0 billion, which will expire from 2026 through 2035, andfederal research and development tax credit carryforwards of approximately $45.2 million, which will expire from 2018 through 2034. We also had state netoperating loss carryforwards of approximately $654.2 million expiring in the years 2028 through 2035 and state research tax credits of approximately$32.3 million, which do not expire. 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, 2017 and 2016, we had noaccrued interest or penalties. The Company conducted a 382 analysis through December 31, 2016 to determine whether an ownership change had occurred since inception. TheSection 382 study concluded that it is more likely than not that the Company did not experience an ownership change during the testing period. However,notwithstanding the applicable annual limitations, no portion of the net operating loss or credit carryforwards are expected to expire before becomingavailable to reduce federal and state income tax liabilities as a result of those identified ownership changes. If we undergo another ownership change, theutilization of the pre-ownership change net operating loss carryforwards or pre-ownership change tax attributes, such as research tax credits, to offset the post-ownership change income may be subject to an annual limitation, pursuant to Section 382 and 383 of the Internal Revenue Code of 1986, as amended.Similar rules may apply under state tax laws. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act").The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35% to21%, and creating a new limitation on deductible interest expense. The Tax Act reduces the corporate tax rate to 21%, effective January 1, 2018. The staff of the SEC has recognized the complexity of reflecting the impacts of the TCJA, and, on December 22, 2017, issued guidance in StaffAccounting Bulletin 118 ("SAB 118"). SAB 118 clarifies accounting for income taxes under ASC Topic 740, Income Taxes ("ASC 740"), if information is notyet available or complete and provides for up to a one-year period in which to complete the required analyses and accounting (the measurement period). SAB118 describes three scenarios (or "buckets") associated with a company's status of accounting for income tax reform: (1) a company is complete with itsaccounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimateas a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply ASC 740, based on the provisionsof the tax laws that were in effect immediately prior to the TCJA being enacted. The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities. The Company has recorded a netdecrease related to federal deferred tax assets and deferred tax liabilities of $124.0 million, with an offsetting change in valuation allowance of$124.0 million for the year ended December 31, 2017. The ultimate impact may differ from provisional amounts, possibly materially, due to, among otherthings, additional analysis, changes in interpretations81Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)10. INCOME TAXES (Continued)and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act.The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.Uncertain Tax Positions A 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 effective taxrate. We currently have a full valuation allowance against our deferred tax assets, which would impact the timing of the effective tax rate benefit, should anyof these uncertain positions be favorably settled in the future. We do not believe it is reasonably possible that our unrecognized tax benefits will significantlychange 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 and moststate tax authorities due to net operating loss and overall credit carryforward positions.11. SUBSEQUENT EVENTS On February 12, 2018, the Company entered into an agreement with Sarissa Capital Management LP, and certain of its affiliates (collectively, the"Sarissa Group") related to the Company's 2018 Annual Meeting of Stockholders (the "2018 Meeting"). The agreement provided for, among other things, theconcurrent appointment of three designees of the Sarissa Group as members of the Company's Board of Directors and an agreement to recommend andnominate a five-person slate of directors for election at the 2018 Annual Meeting composed of the three new directors and two current directors of theCompany and pay the Sarissa Group $2.7 million, which is considered a related party transaction under GAAP as two of Sarissa Capital's principals are themembers of the Company's Board of Directors. As previously disclosed on a Current Report on Form 8-K filed with the SEC on February 7, 2018, the Company announced the (i) appointment of Ericd'Esparbes as the Company's interim Principal Executive Officer, effective February 6, 2018, following the resignation of the Company's former President andChief Executive Officer at the request of the Board of Directors; and (ii) the resignation of its former chief business officer effective February 7, 2018.82Unrecognized tax benefits as of December 31, 2014 $15,459 Gross increase in tax portions for 2015 29 Unrecognized tax benefits as of December 31, 2017, 2016 and 2015 $15,488 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 31,2017. 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. 83 For the Quarters Ended March 31 June 30 September 30 December 31 2017 Net revenue $40,492 $58,562 $48,643 $69,520 Total operating expenses (11,149) (10,732) (8,621) (3,111)Income from operations 29,343 47,830 40,022 66,409 Net income 16,845 35,146 23,767 58,514 Net income attributable to noncontrolling interest — — — 129 Net income attributable to Innoviva stockholders $16,845 $35,146 $23,767 $58,385 Basic net income per share $0.16 $0.33 $0.22 $0.55 Diluted net income per share $0.15 $0.30 $0.21 $0.50 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 (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 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Innoviva, Inc.Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Innoviva, Inc. (the "Company") as of December 31, 2017 and 2016, the relatedconsolidated statements of operations, comprehensive income (loss), stockholders' deficit, and cash flows, for each of the three years in the period endedDecember 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in allmaterial respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of thethree years in the period ended December 31, 2017, in conformity with US generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company'sinternal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 23, 2018 expressed an unqualifiedopinion thereon.Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financialstatements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Companyin accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performingprocedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond tothose risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits alsoincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of thefinancial statements. We believe that our audits provide a reasonable basis for our opinion./s/ Ernst & Young LLPWe have served as the Company's auditor since 1996San Jose, CaliforniaFebruary 23, 201884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, 2017, under the supervision and with the participation of our management, including our principalexecutive officer and principal 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 principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls andprocedures were effective at the reasonable assurance levels.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 principal executive officer and principal financial officer, weconducted an 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, 2017. Our independent registered public accounting firm, Ernst & Young LLP, has audited our internal control over financial reporting as of December 31,2017. 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 principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures orour internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact thatthere are resource constraints, and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in all control systems,no evaluation of controls can provide absolute assurance that all control issues and85Table of Contentsinstances of fraud, if any, within Innoviva have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Changes in Internal Control over Financial Reporting There 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 31,2017 which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. As previously disclosed, on February 6, 2018, our Chief Executive Officer resigned and our Chief Financial Officer assumed the position of interimPrincipal Executive Officer in addition to his position of Chief Financial Officer pending a search for a new Chief Executive Officer. As a result, there was alack of segregation of duties between the position of principal executive officer and principal financial officer over the period subsequent to February 6,2018. To address this lack of segregation of duties, management ensured that additional oversight procedures were performed to ensure the financialstatements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.Accordingly, we believe the financial statements included in this report present fairly, in all material respects, our financial condition, results of operationsand cash flows for the periods presented. Management will continue to evaluate this segregation of duties for future periods.86Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Stockholders and the Board of Directors of Innoviva, Inc.Opinion on Internal Control over Financial Reporting We have audited Innoviva, Inc.'s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In ouropinion, Innoviva, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, basedon the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidatedbalance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss),stockholders' deficit, and cash flows, for each of the three years in the period ended December 31, 2017 and related notes and our report dated February 23,2018 expressed an unqualified opinion thereon.Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectivenessof internal 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 are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial Reporting 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.87Table of Contents 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./s/ Ernst & Young LLPSan Jose, CaliforniaFebruary 23, 201888Table of Contents ITEM 9B. OTHER INFORMATION On February 21, 2018, the Company entered into a separation letter with Mr. Faerm (the "CBO Separation Letter"), which, among other things, providesthat, pursuant to the Severance Plan and in exchange for a mutual release of all claims, the Company will (i) pay Mr. Faerm a lump sum payment of$456,505.08, which is equal to 12 months of his base salary plus one-twelfth of his current target bonus and (ii) continue his health and welfare benefits forthe shorter of 12 months, the expiration of his coverage under COBRA or the date when he obtains new employment offering comparable health insurancecoverage. In addition, the Company agreed to pay Mr. Faerm $100,000 in lieu of his 2017 performance bonus that he would have been entitled to if heremained an employee of the Company through the payment date and accelerate the vesting of an aggregate of 47,728 shares of its common stock underlyingrestricted stock awards previously awarded to Mr. Faerm, which would have vested on February 20, 2018 if he remained an employee through such date. 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 2018 Annual Meeting of Stockholders to be filedwith the SEC within 120 days after the end of our fiscal year ended December 31, 2017. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference from our proxy statement for our 2018 Annual Meeting of Stockholders to be filedwith the SEC within 120 days after the end of our fiscal year ended December 31, 2017. 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 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end ofour fiscal year ended December 31, 2017.89Table of ContentsSecurities 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, 2017: 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 2018 Annual Meeting of Stockholders to be filedwith the SEC within 120 days after the end of our fiscal year ended December 31, 2017. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this Item is incorporated by reference from our proxy statement for our 2018 Annual Meeting of Stockholders to be filedwith the SEC within 120 days after the end of our fiscal year ended December 31, 2017.90Plan Category Number of securities to be issued uponexercise of outstanding options andvesting of outstanding restricted stockunits and restricted stock awards Weighted-averageexercise price ofoutstanding options Number of securities remainingavailable for future issuance underequity compensation plans (excludingsecurities reflected in column (a)) (a) (b) (c) Equity compensation plansapproved by securityholders 1,956,470(1)$24.34(3) 3,597,491(4)Equity compensation plansnot approved by securityholders 53,493(2) 10.79(3) — Total 2,009,963(1)(2)$23.90(3) 3,597,491(4)(1)Includes 1,586,719 shares issuable upon exercise of outstanding options and 369,751 shares issuable upon vesting of outstandingRSUs and RSAs. (2)Includes 53,493 shares issuable upon exercise of outstanding options and no outstanding RSUs. (3)Does not take into account outstanding RSUs and RSAs as these awards have no exercise price. (4)Includes 205,979 shares of common stock available under our Employee Stock Purchase Plan.Table of Contents 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.91 Page Consolidated Balance Sheets as of December 31, 2017 and 2016 52 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2017 53 Consolidated Statements of Comprehensive Income (Loss) for each of the three years in the period endedDecember 31, 2017 54 Consolidated Statements of Stockholders' Deficit for each of the three years in the period ended December 31, 2017 55 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2017 56 Notes to Consolidated Financial Statements 57 Report of Independent Registered Public Accounting Firm 84 Table of Contents Exhibits 92 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 Merging LABA Merger Sub, Inc. withand into Theravance, Inc., as filed with the Secretary of State of the State ofDelaware, 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 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 4.1 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 4.1 4/21/14 4.8 Indenture (including form of Note) with respect to Innoviva's 2.50%Convertible Senior Notes due 2025, dated as of August 7, 2017, betweenInnoviva and The Bank of New York Mellon Trust Company, N.A., as trustee 8-K 4.1 8/7/2017 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 10.5 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 Table of Contents93 Incorporated by Reference ExhibitNumber Description Form Exhibit FilingDate/PeriodEnd Date 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 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 10.50 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 Table of Contents94 Incorporated by Reference ExhibitNumber Description Form Exhibit FilingDate/PeriodEnd Date 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 directorsFebruary 8, 2012 and approved by stockholders May 16, 2012 and forms ofequity 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 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 Table of Contents95 Incorporated by Reference ExhibitNumber Description Form Exhibit FilingDate/PeriodEnd Date 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 12/31/14 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 (Renamed2009 Severance Plan) 8-K 10.2 7/29/15 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 10-K 10.72 12/31/2016 10.73 Credit Agreement, dated as of August 18, 2017, among Innoviva, Inc.,Morgan Stanley Senior Funding, Inc., as administrative agent and collateralagent, the other agents party thereto and the lenders referred to therein 8-K 10.1 8/21/2017 10.74 Assignment Agreement, dated as of August 18, 2017, by and betweenInnoviva, Inc. and LABA Royalty Sub LLC, Innoviva, Inc. and U.S. BankNational Association 8-K 10.2 8/21/2017 10.75 Termination Agreement, dated as of August 18, 2017, by and among LABARoyalty Sub LLC, Innoviva, Inc. and U.S. Bank National Association 8-K 10.3 8/21/2017 10.76 Form of Notice of Performance-Based Restricted Stock Award and RestrictedStock Award Agreement under 2012 Equity Incentive Plan (director form) 21.1 List of Subsidiaries 23.1 Consent of Independent Registered Public Accounting Firm Table of Contents96 Incorporated by Reference ExhibitNumber Description Form Exhibit FilingDate/PeriodEnd Date 24.1 Power of Attorney (see signature page to this Annual Report on Form 10-K) 31 Certification of Principal Executive Officer and Principal Financial OfficerPursuant to Rule 13a-14 under the Securities 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, 2017, formatted in Extensible BusinessReporting Language (XBRL) includes: (i) Consolidated Balance Sheets as ofDecember 31, 2017 and 2016, (ii) Consolidated Statements of Income for theyears ended December 31, 2017, 2016 and 2015, (iii) ConsolidatedStatements of Comprehensive Loss for the years ended December 31, 2017,2016 and 2015, (iv) Consolidated Statements of Stockholders' Equity for theyears ended December 31, 2017, 2016 and 2015, (v) ConsolidatedStatements of Cash Flows for years ended December 31, 2017, 2016 and2015, 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 theSecurities and Exchange Commission. The omitted information has been filed separately with the Securities and ExchangeCommission pursuant to Innoviva, Inc.'s application for confidential treatment.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 Eric d'Esparbes, as their trueand lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for such person and in his or her name, place and stead, in any and allcapacities, to sign any and all amendments to the Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents inconnection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do andperform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she could do inperson, hereby ratifying and confirming all that said attorney-in-fact and agent, or his 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.97 INNOVIVA, INC.Date: February 23, 2018 By: /s/ ERIC D'ESPARBESEric d'EsparbesInterim Principal Executive OfficerSignature Title Date /s/ ERIC D'ESPARBESEric d'Esparbes Interim Principal Executive Officer and SeniorVice President, Chief Financial Officer(Principal Executive Officer, PrincipalFinancial Officer and Principal AccountingOfficer) February 23, 2018/s/ WILLIAM H. WALTRIPWilliam H. Waltrip Chairman of the Board February 23, 2018/s/ GEORGE BICKERSTAFF, IIIGeorge Bickerstaff, III Director February 23, 2018/s/ BARBARA DUNCANBarbara Duncan Director February 23, 2018Table of Contents98Signature Title Date /s/ CATHERINE J. FRIEDMANCatherine J. Friedman Director February 23, 2018/s/ JULES HAIMOVITZJules Haimovitz. Director February 23, 2018/s/ PATRICK G. LEPOREPatrick G. LePore Director February 23, 2018/s/ PAUL PEPEPaul Pepe Director February 23, 2018/s/ SARAH SCHLESINGER, M.D.Sarah Schlesinger, M.D. Director February 23, 2018Exhibit 10.76 INNOVIVA, INC. 2012 EQUITY INCENTIVE PLAN NOTICE OF RESTRICTED STOCK UNIT AWARD (b) You have been granted the number of restricted stock units indicated below by Innoviva, Inc. (the “Company”) on the following terms: Name:«Name» Restricted Stock Unit Award Details: Date of Grant:«DateGrant»Restricted Stock Units:«NumberofRSUs» Each restricted stock unit (the “restricted stock unit”) represents the right to receive one share of the Company’s Common Stock subject to the terms andconditions contained in the Restricted Stock Unit Agreement. Vesting Schedule: Vesting is dependent upon continuous service as an Outside Director (“Service”) throughout the vesting period. [For Initial Grants: The restricted stockunits will vest in two equal annual installments on each of the first and second anniversaries of the Date of Grant, provided that you remain in continuousService through each such date.] [For Pro-Rata and Annual Grants: The restricted stock units will vest in full on the earlier of (i) the one year anniversary ofthe Date of Grant or (ii) the date of the Company’s 20 Annual Meeting of Stockholders, provided that, in either event, you remain in continuous Servicethrough such date.] You and the Company agree that your right to receive the restricted stock units is granted under and governed by the terms and conditions of the Plan and ofthe Restricted Stock Unit Agreement that is attached to and made a part of this document. Capitalized terms not defined herein have the meaning ascribed tosuch terms in the Plan. You agree that the Company may deliver by email all documents relating to the Plan or this award (including, without limitation, prospectuses required bythe Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including, withoutlimitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a web site maintainedby the Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by email. RECIPIENT:INNOVIVA, INC. By: Title:Print Name  INNOVIVA, INC. 2012 EQUITY INCENTIVE PLAN:RESTRICTED STOCK UNIT AGREEMENT Payment for UnitsNo payment is required for the restricted stock units you are receiving. Nature of UnitsYour restricted stock units are bookkeeping entries. They represent only the Company’s unfunded andunsecured promise to issue shares of Common Stock on a future date. As a holder of restricted stock units, youhave no rights other than the rights of a general creditor of the Company. Settlement of UnitsEach of your restricted stock units will be settled when it vests (unless you and the Company have agreed to alater settlement date pursuant to procedures that the Company may prescribe at its discretion). At the time of settlement, you will receive one share of the Company’s Common Stock for each vestedrestricted stock unit. VestingThe restricted stock units that you are receiving will vest as shown in the Notice of Restricted Stock UnitAward. In addition, all of the restricted stock units will vest in full if the Company is subject to a “Change in Control”(as defined in the Plan) before your continuous Service terminates or upon your death or Disability. No additional restricted stock units vest after your Service has terminated for any reason. For purposes of this Agreement, “Service” means your continuous service as an Outside Director, and“Disability” means that you are unable to engage in any substantial gainful activity by reason of anymedically determinable physical or mental impairment which can be expected to result in death or which canbe expected to last for a continuous period of not less than 12 months. ForfeitureIf your Service terminates for any reason, then your restricted stock units that have not vested before thetermination date and do not vest as a result of the termination pursuant to this Agreement or as set forth on theNotice of Restricted Stock Unit Award will be forfeited immediately. This means that the restricted stock unitswill immediately revert to the Company. You receive no payment for restricted stock units that are forfeited.The Company determines when your Service terminates for all purposes of your restricted stock units. Stock CertificatesNo shares of Common Stock shall be issued to you prior to the date on which the restricted stock units vest.Upon vesting, a stock certificate for the shares representing your vested restricted stock units shall be  released to you or the Company shall cause to be issued in book-entry form, registered in your name or in thename of your legal representatives, beneficiaries or heirs, as the case may be, the number of shares of CommonStock representing your vested restricted stock units. No fractional shares shall be issued. No Stockholder RightsThe restricted stock units do not entitle you to any of the rights of a stockholder of Common Stock (except asset forth below under “Dividend Equivalent Rights”). Upon settlement of the restricted stock units into sharesof Common Stock, you will obtain full voting and other rights as a stockholder of the Company. Dividend Equivalent RightsIn the event the Company pays a cash dividend on shares of the Company’s Common Stock prior to thevesting and settlement of these restricted stock units, the Company shall credit you with a dollar amountequal to (i) the per share cash dividend paid by the Company on one share of Common Stock multiplied by(ii) the total number of shares of Common Stock underlying the unvested restricted stock units that areoutstanding on the record date for that dividend (a “Dividend Equivalent Right”). Any Dividend EquivalentRights credited pursuant to the preceding sentence shall be subject to the same terms and conditions,including vesting, as the restricted stock units to which they relate; provided, however, that they will be paidin cash upon vesting of the underlying restricted stock units. No crediting of Dividend Equivalent Rightsshall be made with respect to any restricted stock units which, as of the record date for that dividend, haveeither vested and settled or were forfeited in accordance with this Agreement. Units RestrictedYou may not sell, transfer, pledge or otherwise dispose of any restricted stock units or rights under thisAgreement other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, youmay designate a beneficiary or beneficiaries to receive any property distributable with respect to the restrictedstock units upon your death. A beneficiary designation must be filed with the Company on the proper form. TaxesNo shares will be distributed to you unless you have made arrangements acceptable to the Company to payany withholding taxes that may be due as a result of the vesting and/or settlement of this award. Unless you and the Company have agreed to a deferred settlement date (pursuant to procedures that theCompany may prescribe at its discretion), settlement of these restricted stock units is intended to be exemptfrom the application of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”),pursuant to the “short-term deferral exemption” in Treasury Regulation 1.409A-1(b)(4) and shall beadministered and interpreted in a manner that complies with such exemption. Restrictions on IssuanceThe Company will not issue shares to you if the issuance of shares at that time would violate any law orregulation.  Restrictions on ResaleYou agree not to sell any shares of Common Stock you receive under this Agreement at a time whenapplicable laws, regulations, Company trading policies (including the Company’s Insider Trading Policy, acopy of which can be found on the Company’s intranet) or an agreement between the Company and itsunderwriters prohibit a sale. This restriction will apply as long as your Service continues and for such periodof time after the termination of your Service as the Company may specify. No Retention RightsYour award or this Agreement does not give you the right to be retained by the Company (or a Parent,Subsidiary or Affiliate) in any capacity. The Company and its Parents, Subsidiaries and Affiliates reserve theright to terminate your Service at any time, with or without cause. Nor shall this Agreement in any way beconstrued or interpreted so as to affect adversely or otherwise impair the right of the Company or thestockholders to remove you from the Board at any time in accordance with the provisions of applicable law. Recoupment PolicyThis award, and the shares acquired upon settlement of this award, shall be subject to any Companyrecoupment policy in effect from time to time. AdjustmentsIn the event of a stock split, a stock dividend or a similar change in Common Stock, the number of restrictedstock units may be adjusted pursuant to the Plan. Applicable LawThis Agreement will be interpreted and enforced with respect to issues of contract law under the laws of theState of Delaware (without regard to its choice-of-law provisions). The Plan and Other AgreementsThe text of the Plan is incorporated in this Agreement by reference. A copy of the Plan is available on theCompany’s intranet or by request to the Finance Department. Capitalized terms not otherwise defined hereinshall have the meanings ascribed to such terms in the Plan. This Agreement, the Notice of Restricted Stock Unit Award, and the Plan constitute the entire understandingbetween you and the Company regarding this award. Any prior agreements, commitments or negotiationsconcerning this award are superseded. This Agreement may be amended only by another written agreementbetween the parties. BY ACCEPTING THIS RESTRICTED STOCK UNIT AWARD, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 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 Employee StockPurchase Plan, (2)Registration Statement on Form S-8 No 333-123716 of Theravance, Inc. pertaining to the Shares Acquired Under Written Compensation Agreements, (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 the 2004Employee 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 and Restated2008 New Employee Equity Incentive Plan, the 2004 Equity Incentive Plan and the 1997 Stock Planof our reports dated February 23, 2018, with respect to the consolidated financial statements of Innoviva, Inc. and the effectiveness of internal control overfinancial reporting of Innoviva, Inc. included in this Annual Report (Form 10-K) of Innoviva, Inc. for the year ended December 31, 2017./s/ Ernst & Young LLPSan Jose, CaliforniaFebruary 23, 2018QuickLinksExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMQuickLinks -- Click here to rapidly navigate through this document Exhibit 31 Certification of Principal Executive Officer and Principal 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 by thisreport; 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 23, 2018 /s/ ERIC D'ESPARBESEric d'EsparbesInterim Principal Executive Officer and Senior VicePresident and Chief Financial Officer(Principal Executive Officer and Principal FinancialOfficer)QuickLinksExhibit 31Certification of Principal Executive Officer and Principal 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 PRINCIPAL EXECUTIVE OFFICERAND PRINCIPAL FINANCIAL OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 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, 2017 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 23, 2018 By: /s/ ERIC D'ESPARBESEric d'EsparbesInterim Principal Executive Officer and SeniorVice President and Chief Financial Officer(Principal Executive Officer and PrincipalFinancial Officer)QuickLinksExhibit 32CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, ASADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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