Innoviva, Inc.
Annual Report 2018

Plain-text annual report

Use these links to rapidly review the document Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PART IV UNITED 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 executiveoffices) 94005(Zip Code)Registrant's telephone number, including area code: (650) 238-9600 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:Title of Each Class Name of Each Exchange On WhichRegisteredCommon Stock $0.01 Par Value The Nasdaq Stock Market LLC SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý No o Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit suchfiles). 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 becontained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ý Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer(Mark One) ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For the fiscal year ended December 31, 2018oro TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For the transition period from to and large accelerated filer" in Rule 12b-2 of the Exchange 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 anynew or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the closing price of theregistrant's Common Stock on The Nasdaq Global Select Market on June 29, 2018 was $904,845,424. This calculation does not reflect a determination thatpersons are affiliates for any other purpose. On February 11, 2019, there were 101,123,024 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 2019 Annual Meeting of Stockholders,which is expected to be filed not later than 120 days after the registrant's fiscal year ended December 31, 2018, are incorporated by reference into Part III ofthis Annual Report. Except as expressly incorporated by reference, the registrant's Proxy Statement shall not be deemed to be a part of this Annual Report onForm 10-K. Large accelerated filer ý Accelerated filer o Non-accelerated filer o Smaller reporting company oEmerging growth company oTable of Contents INNOVIVA, INC.2018 Form 10-K Annual Report Table of Contents 2 Page PART I Item 1. Business 4 Item 1A. Risk Factors 10 Item 1B. Unresolved Staff Comments 31 Item 2. Properties 31 Item 3. Legal Proceedings 32 Item 4. Mine Safety Disclosures 32 PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities 33 Item 6. Selected Financial Data 34 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 36 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 46 Item 8. Financial Statements and Supplementary Data 48 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 80 Item 9A. Controls and Procedures 80 Item 9B. Other Information 83 PART III Item 10. Directors, Executive Officers and Corporate Governance 84 Item 11. Executive Compensation 84 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 84 Item 13. Certain Relationships and Related Transactions, and Director Independence 84 Item 14. Principal Accountant Fees and Services 84 PART IV Item 15. Exhibits and Financial Statement Schedules 85 Item 16. Form 10-K Summary 85 Exhibits 86 Signatures 91 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 and amount of potential capital returns to stockholders; the status and timing of clinical studies, data analysisand communication of results; the potential benefits and mechanisms of action of product candidates; expectations for product candidates throughdevelopment and commercialization; the timing of regulatory approval of product candidates; projections of revenue, expenses and other financial itemsand risks discussed below in "Risk Factors" in Item 1A of Part I, "Management's Discussion and Analysis of Financial Condition and Results of Operations"in Item 7 of Part II and elsewhere in this Annual Report on Form 10-K. Our forward-looking statements in this Annual Report on Form 10-K are based oncurrent expectations as of the date hereof and we do not assume any obligation to update any forward-looking statements on account of new information,future events or otherwise, except as required by law. We encourage you to read Management's Discussion and Analysis of our Financial Condition and Results of Operations and our consolidatedfinancial statements contained in this Annual Report on Form 10-K. We also encourage you to read Item 1A of Part I of this Annual Report on Form 10-K,entitled "Risk Factors," which contains a more complete discussion of the risks and uncertainties associated with our business. In addition to the risksdescribed above and in Item 1A of this report, other unknown or unpredictable factors also could affect our results. Therefore, the information in this reportshould be read together with other reports and documents that we file with the Securities and Exchange Commission ("SEC") from time to time, including onForm 10-Q and Form 8-K, which may supplement, modify, supersede or update those risk factors. As a result of these factors, we cannot assure you that theforward-looking statements in this report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracymay be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation orwarranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.3Table of Contents PART I ITEM 1. BUSINESS Overview Innoviva, Inc. ("Innoviva", the "Company", the "Registrant" or "we" and other similar pronouns) is focused on royalty management. Innoviva's portfolioincludes 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® (the combination FF/UMEC/VI). Under theLong-Acting Beta2 Agonist ("LABA") Collaboration Agreement, Innoviva is entitled to receive royalties from GSK on sales of RELVAR®/BREO®ELLIPTA® as follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion; and royalties fromthe sales of ANORO® ELLIPTA®, which tier upward at a range from 6.5% to 10%. Innoviva is also entitled to 15% of royalty payments made by GSK underits agreements 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 as the "GSK Agreements"), which have been assigned to TRC other than RELVAR®/BREO® ELLIPTA® andANORO® 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 Our corporate strategy is currently focused on the goal of maximizing stockholder value by, among other things, maximizing the potential value of ourrespiratory assets partnered with GSK and optimizing our operations and capital allocation.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® is theproprietary name outside the U.S. and Canada), a once-daily combination medicine consisting of a LABA, vilanterol ("VI"), and an inhaledcorticosteroid ("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 with theLABA Collaboration Agreement, we paid milestone fees to GSK totaling $220.0 million during the year ended December 31, 2014. The4Table of Contentsmilestone fees paid to GSK were recognized as capitalized fees paid to a related party, which are being amortized over their estimated useful livescommencing upon the commercial launch of the products.2004 Strategic Alliance In March 2004, we entered into the Strategic Alliance Agreement with GSK where GSK received an option to license exclusive development andcommercialization rights to product candidates from certain of our discovery programs on predetermined 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 was funded in full by GSK. GSK is inthe process of determining the next steps for the program. As a result of the transactions effected by the spin-off of Theravance Biopharma in June 2014 (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 be developedunder 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 11, 2019, GSK beneficially owned approximately 31.7% of our outstanding common stock.Recent Highlights•GSK Net Sales: •Fourth quarter 2018 net sales of RELVAR®/BREO® ELLIPTA® by GSK were $431.6 million, up 7% from $405.3 million in the fourthquarter of 2017, with $236.4 million in net sales from the U.S. market and $195.2 million from non-U.S. markets. •Fourth quarter 2018 net sales of ANORO® ELLIPTA® by GSK were $186.2 million, up 26% from $147.3 million in the fourth quarterof 2017, with $125.7 million net sales from the U.S. market and $60.5 million from non-U.S. markets. •Fourth quarter 2018 net sales of TRELEGY® ELLIPTA by GSK were $99.0 million with $75.8 million in net sales from the U.S. marketand $23.2 million in net sales from non-U.S. markets. TRELEGY® ELLIPTA® was approved in the U.S. in September 2017. •Product Updates: •In November 2018, the European Commission authorized an expanded label of TRELEGY® ELLIPTA® (the combinationFF/UMEC/VI) for once daily use in patients with moderate to severe COPD not adequately treated with dual bronchodilators or with anICS and a LABA.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.5Table of ContentsOutside the United States, the ability to market a product depends upon receiving a marketing authorization from the appropriate regulatory authorities. Therequirements governing the conduct of clinical studies, marketing authorization, pricing and reimbursement vary widely from country to country. In anycountry, the commercialization of medicines is permitted only if the appropriate regulatory authority is satisfied that our collaborative partner has presentedadequate evidence of the safety, quality and efficacy of such medicines. Once a product is approved, the FDA may withdraw the product approval if compliance with pre- and post-marketing regulatory standards is notmaintained or if safety or quality issues are identified after the product reaches the marketplace. In addition, the FDA may require post-marketing studies,referred to as Phase 4 studies, to monitor the effect of approved products, and may limit further marketing of the product based on the results of these post-marketing studies. The FDA has broad post-market regulatory and enforcement powers, including the ability to suspend or delay issuance of approvals, seizeproducts, withdraw approvals, enjoin violations, and institute criminal prosecution. If regulatory approval for a medicine is obtained, the clearance to market the product will be limited to those diseases and conditions for which themedicine is effective, as demonstrated through clinical studies and included in the medicine's labeling. Even if this regulatory approval is obtained, amarketed medicine, its manufacturer and its manufacturing facilities are subject to continual review and periodic inspections by the FDA. The FDA ensuresthe quality of approved medicines by carefully monitoring manufacturers' compliance with its current good manufacturing practice ("cGMP") regulations.The cGMP regulations for drugs contain minimum requirements for the methods, facilities, and controls used in manufacturing, processing, and packaging ofa medicine. The regulations are intended to make sure that a medicine is safe for use, and that it has the ingredients and strength it claims to have. Discoveryof previously unknown problems with a medicine, manufacturer or facility may result in restrictions on the medicine or manufacturer, including costly recallsor 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 agreements6Table of Contentsto protect our interests. We require all of our employees, consultants and advisors to enter into confidentiality agreements. Where it is necessary to share ourproprietary information or data with outside parties, our policy is to make available only that information and data required to accomplish the desiredpurpose and only pursuant to a duty of confidentiality on the part of those parties. As of December 31, 2018, we owned 38 issued United States patents and 257 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 do not know whether any of our patent applications will result in any issued patents or, if issued, whether the scope of theissued claims will be sufficient to protect our proprietary position.Competition We anticipate that RELVAR®/BREO®ELLIPTA®(FF/VI), 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 are designedto treat asthma and COPD. These include but are not limited to:•Advair®/Seretide™ Diskus®/HFA® (salmeterol and fluticasone propionate as a combination) marketed by GSK, •Symbicort® (formoterol and budesonide as a combination) marketed by AstraZeneca, •AirDuo Respiclick® (salmeterol and fluticasone propionate), 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 the U.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 2017,7Table of Contents•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 approved inNovember 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 four months ahead of TRELEGY, •QVM149, a fixed-dose combination of indacaterol, mometasone and glycopyrronium is in Phase 3 clinical development by Novartis as a tripletherapy/single inhaler for the treatment of asthma, •PT010, a fixed dose combination of formoterol, glycopyrronium and budesonide being developed by AstraZeneca as a triple therapy singleinhaler twice-daily medication for COPD, •QAW039 (fevipiprant), an orally active once-daily prostaglandin D2 inhibitor in Phase 3 development by Novartis for the treatment of asthma,and •Dupixent (dupilamab), an injectable IL-4 and IL-13 inhibitor developed by Sanofi Genzyme and approved by the FDA in October 2018 as anadd-on maintenance therapy in patients with moderate-to-severe asthma aged 12 years and older with an eosinophilic phenotype or with oralcorticosteroid-dependent asthma. In addition, several firms are developing new formulations of Advair/Seretide (salmeterol /fluticasone propionate) 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 Abbreviated New Drug Application ("ANDA") for fluticasone propionate 100, 250, 500 mcg and salmeterol 50mcg inhalation powder. In May 2017, Hikma announced that it received a complete response letter from the FDA relating to its ANDA for fluticasonepropionate and salmeterol inhalation powder, and in February 2018, Novartis announced that its generic division Sandoz had received a complete responseletter from the FDA in response to its ANDA for a third fluticasone propionate and salmeterol product. In January 2019, Mylan announced that the FDAapproved Wixela™ Inhu™ (fluticasone propionate and salmeterol inhalation powder, USP), the first generic of ADVAIR DISKUS®. Lastly, Teva announcedrecently that the FDA approved two of its products for adolescent and adult patients with asthma, one of which is AirDuo™ RespiClick® (fluticasonepropionate and salmeterol inhalation powder), a non-AB substitutable generic version of Advair®. In general, these manufacturers are required to conduct arestricted number of clinical efficacy, pharmacokinetic and device studies to8Table of Contentsdemonstrate equivalence to Advair, per the FDA's September 2013 Draft Guidance Document. These studies are designed to demonstrate that the genericproduct has the same active ingredient(s), dosage form, strength, exposure and clinical efficacy as the branded product. These generic equivalents, whichmust meet the same exacting quality standards as branded products, may be significantly less costly to bring to market, and companies that produce genericequivalents are generally able to offer their products at lower prices. Thus, after the introduction of a generic competitor, a significant percentage of the salesof any branded product and products that may compete with such branded product is typically lost to the generic product. In addition, in April 2016, the FDAissued draft guidelines documents covering Fluticasone Furoate/Vilanterol Trifenatate (FF/VI), the active ingredients used in RELVAR®/BREO® ELLIPTA®.Employees As of December 31, 2018, we had six 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 19, 2019: Geoffrey Hulme was appointed Interim Principal Executive Officer in May 2018. Prior to his hiring, Mr. Hulme served as the owner and manager of SteelValley Capital LLC since 2016 and Steel Valley Advisors LLC, a registered investment adviser, since 2017. Previously, from 1998 to 2015, he worked atAmici Capital, LLC, serving in various roles, including as Director of Research, a portfolio manager and a director of various funds managed by Amici.Mr. Hulme earned a Bachelor of Science degree in Business Administration with a concentration in Finance, summa cum laude, from Villanova University. Marianne Zhen was appointed Chief Accounting Officer in July 2018. Ms. Zhen joined Innoviva in October 2014 as Corporate Controller. Prior tojoining Innoviva, Ms. Zhen served as the Corporate Controller at Steelwedge Software Inc. from 2012 to 2014, Intelmate from 2011 to 2012 andModel N, Inc. from 2007 to 2011. Ms. Zhen earned a Bachelor of Science degree in Business Administration with a concentration in Accounting from SanFrancisco State University. She is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants.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 a waiver from any provision of such 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 on Form 8-K, ourdirectors' and officers' Section 16 Reports and any amendments to those reports after filing or furnishing such materials to the SEC. The information found onour 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 ofInnoviva, Inc. Trademarks, tradenames or service marks of other companies appearing in this report are the property of their respective owners.9Name Age Positions HeldGeoffrey Hulme 52 Interim Principal Executive OfficerMarianne Zhen 50 Chief Accounting OfficerTable of Contents 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. Our quarterly royalty revenues may fluctuate due to a variety of factors, many of which are outside of our control. The amount of royalties and milestonepayments, 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; •reprioritization of GSK's commercial efforts on other products, including TRELEGY® ELLIPTA® or products owned by GSK (such asAdvair®), 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; •timing and amounts of payor rebate adjustments and prior period rebate adjustments; •seasonal fluctuations of demand; •the ability of patients to be able to afford our partnered products or obtain health care coverage that covers our partnered products;10Table of Contents•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; •general economic conditions in the jurisdictions where our partnered products are sold, including microeconomic disruptions or slowdowns;or •if our royalty revenue or operating results fall below the expectations of investors or securities analysts or below any guidance we may provideto the market, the price of our common stock could decline substantially.If the FDA or other applicable regulatory authorities approve generic products, including but not limited to generic forms of Advair®, that compete withRELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®, or generic form of RELVAR®/BREO® ELLIPTA®, the royalties payable to us pursuant to theLABA Collaboration Agreement will be less than anticipated, which in turn would harm our business and the price of our securities could fall. Once an NDA or marketing authorization application outside the United States is approved, the product covered thereby becomes a "listed drug" thatcan, in turn, be cited by potential competitors in support of approval of an ANDA in the United States. Agency regulations and other applicable regulationsand policies provide incentives to manufacturers to create modified, non-infringing versions of a drug to facilitate the approval of an ANDA or otherapplication for generic substitutes in the United States and in nearly every pharmaceutical market around the world. Numerous companies like Mylan N.V.,Hikma, Novartis' Sandoz division and Teva have publicly stated their intentions to bring generic forms of the ICS/LABA drug Advair®, when certain patentscovering the Advair® delivery device expired in 2016. In January 2019, Mylan announced that the FDA approved Wixela™ Inhu™ (fluticasone propionateand salmeterol inhalation powder, USP), the first generic of ADVAIR DISKUS®. In May 2017, Hikma announced that it received a complete response letterfrom the FDA relating to its ANDA for fluticasone propionate and salmeterol inhalation powder, and in February 2018, Novartis announced that its genericdivision Sandoz, had received a complete response letter from the FDA in response to its ANDA for a third fluticasone propionate and salmeterol product.Lastly, Teva announced recently that the FDA approved two of their products for adolescent and adult patients with asthma, one of which is AirDuo™RespiClick® (fluticasone propionate and salmeterol inhalation powder), a non-AB substitutable generic version of Advair®. In general, these manufacturesare required to conduct a restricted number of clinical efficacy, pharmacokinetic and device studies to demonstrate equivalence to Advair, per FDA'sSeptember 2013 Draft Guidance Document. These studies are designed to demonstrate that the generic product has the same active ingredient(s), dosageform, strength, exposure and clinical efficacy as the branded product. These generic equivalents, which must meet the same exacting quality standards asbranded products, may be significantly less costly to bring to market, and companies that produce generic equivalents are generally able to offer theirproducts at lower prices. Thus, after the introduction of a generic competitor, a significant percentage of the sales of any branded product and products thatmay compete with such branded product is typically lost to the generic product. In addition, in April 2016, the FDA issued draft guidelines documentscovering Fluticasone Furoate/Vilanterol Trifenatate (FF/VI), the active ingredients used in RELVAR®/BREO® ELLIPTA®. Accordingly, introduction ofgeneric products that compete against ICS/LABA products, like RELVAR®/BREO® ELLIPTA®, would materially11Table of Contentsadversely impact our future royalty revenue, profitability and cash flows. We cannot yet ascertain what impact these generic products and any futureapproved generic products will have on any sales of RELVAR®/BREO® ELLIPTA® or ANORO® ELLIPTA®, if approved.Reduced prices and reimbursement rates due to the actions of governments, payors, or competition or other healthcare cost containment initiatives such asrestrictions on use, may negatively impact royalties generated under the GSK Agreements. The continuing efforts of governments, pharmaceutical benefit management organizations ("PBMs"), insurance companies, managed care organizationsand other payors of health care costs to contain or reduce costs of health care has adversely affected the price, market access, and total revenues ofRELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA®, and TRELEGY® ELLIPTA® and may continue to adversely affect them in the future. In addition, wehave experienced and expect to continue to experience increased competitive activity, which has resulted in lower overall prices for our products. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (together, "PPACA") andother legislative or regulatory requirements or potential legislative or regulatory actions regarding healthcare and insurance matters, along with the trendtoward managed healthcare in the U.S., could adversely influence the purchase of healthcare products and reduce demand and prices for our partneredproducts. This could harm GSK's ability to market our partnered products and significantly reduce future revenues. For example, when GSK launched BREO®ELLIPTA® for the treatment of COPD in the U.S. in October 2013, GSK experienced significant challenges gaining coverage at some of the largest PBMs,healthcare payors, and providers and lower overall prices than expected. Recent actions by U.S. PBMs in particular have increased discount levels forrespiratory products resulting in lower net sales pricing realized for products in our collaboration. 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.Our current revenues are from royalties derived from sales of our respiratory products partnered with GSK, RELVAR®/BREO® ELLIPTA®, ANORO®ELLIPTA®, and TRELEGY® ELLIPTA®. If the treatment paradigm for the indications our partnered products are approved for change or if GSK isunable to, or does not devote sufficient resources to, maintain or continue increasing sales of these products, our results of operations will be adverselyaffected. 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, in12Table of ContentsNovember 2018, the GOLD guidelines were revised to favorably position bronchodilator monotherapy and LABA/LAMA treatment ahead of ICS/LABA forthe treatment of COPD unless the patient has frequent exacerbations or an eosinophil count greater than 300 per cubic microliter. The use of ICS in COPD isalso recommended for patients requiring triple therapy (LABA, LAMA, ICS). If the treatment paradigms were to change further, causing our partneredproducts to fall out of favor, or if GSK were 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 might need to scale back our operations.If the commercialization of RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® or TRELEGY® ELLIPTA® in the countries in which they have receivedregulatory approval encounters any delays or adverse developments, or perceived delays or adverse developments, or if sales or payor coverage does notmeet 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®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA® in anumber of countries, including the United States, Canada, Japan, the United Kingdom, and Germany, among others. The commercialization of the products incountries where they are already launched and the commercialization launch in new countries are still subject to fluctuating overall pricing levels anduncertain timeframes to obtain payor coverage. Any delays or adverse developments or perceived additional delays or adverse developments with respect tothe commercialization of RELVAR®/ BREO® ELLIPTA®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA® including if sales or payor coverage does notmeet investors', analysts', or our expectations, would 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 would be materially harmed. GSK is responsible for all clinical and other product development, regulatory, manufacturing and commercialization activities for products developedunder the GSK Agreements, including RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA®. Our royalty revenues under theGSK Agreements may not meet our, analysts', or investors' expectations, due to a number of important factors. GSK has a substantial respiratory productportfolio in addition to the partnered products that are covered by the GSK Agreements. GSK may make respiratory product portfolio decisions or statementsabout its portfolio which may be, or may be perceived to be, harmful to the respiratory products partnered with us. For instance, GSK has wide discretion indetermining the efforts and resources that it will apply to the development and commercialization of our partnered products. GSK is currently evaluating thenext steps with respect to the MABA program. 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 toTheravance Biopharma. The timing and amount of royalties that we may receive will depend on, among other things, the efforts, allocation of resources andsuccessful development and commercialization of these product candidates by GSK. In addition, GSK may determine to focus its commercialization effortson its own products or TRELEGY® ELLIPTA®. For example, in January 2015, GSK launched Incruse® (UMEC) in the U.S., which is a LAMA for thetreatment of COPD. GSK may determine to focus its marketing efforts on Incruse, which could have the effect of decreasing the potential market share ofANORO® ELLIPTA® and lowering the royalties we may receive for such product. Alternatively, GSK may decide to market13Table of ContentsTRELEGY® ELLIPTA® to eventually compete directly against sales of RELVAR®/BREO® ELLIPTA®. Following the FDA approval of TRELEGY®ELLIPTA® in September 2017, GSK's diligent efforts obligations regarding commercialization matters now have the objective of focusing on the bestinterests of patients and maximizing the net value of the overall portfolio of products under the GSK Agreements. Since GSK's commercialization effortsfollowing this regulatory approval are guided by a portfolio approach across products in which we have retained our full interest and also products in whichwe now have only a small portion of our former interest, GSK's commercialization efforts may have the effect of reducing the overall value of our remaininginterests in the GSK Agreements in the future. If GSK prioritizes TRELEGY® ELLIPTA®, we will only be entitled to a 15% economic interest of the royaltiespaid pursuant to the GSK Agreements with respect to this product. In the event GSK does not devote sufficient resources to the development orcommercialization of our partnered products or chooses to reprioritize its commercial programs, our business, operations and stock price would be negativelyaffected.Any adverse change in FDA policy or guidance regarding the use of LABAs to treat asthma could significantly harm our royalty revenues and the price ofour securities 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 required 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 and didnot show an increased risk of use of ICS/LABA compared to ICS alone. The FDA subsequently removed the black box warning from the ICS/LABA packageinserts. Although this concern appears to be resolved, it is unknown at this time what, if any, future concerns could impact the use of ICS/LABA and itspotential impact on the prospects for FF/VI. Any adverse change in FDA policy or guidance regarding the use of LABAs to treat asthma could significantlyharm 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, would harmour business 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 the product being withdrawn, approved uses being limited, or new warnings being included. In the event that anyadverse regulatory change were to occur to any of our products, our business would be harmed and the price of our securities could fall.14Table of ContentsAny adverse developments or results or perceived adverse developments or results with respect to the ongoing studies for FF/VI in asthma or COPD, forUMEC/VI in COPD, or any future studies would 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 could be significantlydelayed, they might not be approved by these regulatory authorities, and even if approved they may be subject to restrictive labeling, any of which mightharm our 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 could 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 might 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 cause the price of our securities tofall. GSK has responsibility for obtaining regulatory approval, launching and commercializing RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® fortheir intended uses in the targeted markets around the world. While these products have received regulatory approval and been launched and commercializedin the U.S. and certain other targeted markets, the products face substantial competition from existing products previously developed and commercializedboth by GSK and by other competing pharmaceutical companies and can expect to face additional competition from new15Table of Contentsproducts that are discovered, developed and commercialized by the same pharmaceutical companies and other competitors going forward. For example, salesof Advair®, GSK's approved medicine for both COPD and asthma, continue to be significantly greater than sales of RELVAR®/BREO® ELLIPTA®, and GSKhas indicated publicly that it intends to continue commercializing Advair®. Many of the pharmaceutical companies competing in respiratory markets are international in scope with substantial financial, technical and personnelresources that permit them to discover, develop, obtain regulatory approval and commercialize new products in a highly efficient and low cost manner atcompetitive prices to consumers. In addition, many of these competitors have substantial commercial infrastructure that facilitates commercializing theirproducts in a highly efficient and low cost manner at competitive prices to consumers. The market for products developed for treatment of COPD and asthmacontinues to experience significant innovation and reduced cost in bringing products to market over time. There can be no assurance that RELVAR®/BREO®ELLIPTA® and ANORO® ELLIPTA® will not be replaced by new products that are deemed more effective at lower cost to consumers. The ability ofRELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® to succeed and achieve the anticipated level of sales depends on the commercial and developmentperformance of GSK to achieve and maintain a competitive advantage over other products with the same intended use in the targeted markets. In addition, 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 are 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. GSK also received in April 2018 an expanded labelapproval for TRELEGY® ELLIPTA®, allowing it to be used by U.S. physicians as first line therapy in appropriate COPD patients. A similar expanded uselabel was granted by the European Medicines Agency in September 2018. Innoviva is only entitled to a 15% economic interest in the future payments madeby GSK under the GSK Agreements with respect to this product. If sales of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® are less than anticipated because of existing or future competition in the markets inwhich they are commercialized, including competition from existing and new products that are perceived as lower cost or more effective, our royaltypayments could be less than anticipated, which in turn would harm our business and cause the price of our securities to fall.We and GSK recently received regulatory approval in the U.S. 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 the priceof our securities could fall. The use of triple therapy is supported by the GOLD guidelines in symptomatic patients with severe COPD and a high risk of exacerbations. Prior to theSpin-Off, we were entitled to receive 100% of any royalties payable under the GSK Agreements arising from sales of TRELEGY® ELLIPTA® and any otherproduct or combination of products that may be discovered and developed in the future under the GSK Agreements. As a result of the transactions effected bythe Spin-Off, however, we are now only entitled to receive 15% of any contingent payments and royalties payable by GSK from sales of TRELEGY®ELLIPTA® and any other product or combination of products that may be discovered and developed in the future under the GSK Agreements which wereassigned to TRC, while16Table of ContentsTheravance Biopharma receives 85% of those same payments. The commercial success of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® may beadversely affected if GSK or the respiratory markets view TRELEGY® ELLIPTA® or other combination therapies as more beneficial. GSK's diligent effortsobligations regarding commercialization matters have the objective of focusing on the best interests of patients and maximizing the net value of the overallportfolio of products under the GSK Agreements. Since GSK's commercialization efforts following this regulatory approval are guided by a portfolioapproach across products in which we have retained our full interest and also products in which we now have only a small portion of our former interest,GSK's commercialization efforts may have the effect of reducing the overall value 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 could 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 could be asmuch as the actual lease payments. As of December 31, 2018, the total remaining lease payments, which run through May 2020, were $9.3 million. In theevent that Theravance Biopharma defaults on such obligations, our business and results of operations could 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. The TCJA is a complex revision to the U.S. federal income tax laws with disparate and, in some cases, countervailing impacts on different categories oftaxpayers and industries, and will require subsequent rulemaking and interpretation in a number of areas. The long-term impact of the TCJA on the overalleconomy, the industries in which we operate and our and our partners business cannot be reliably predicted at this early stage of the new law'simplementation. There can be no assurance that the TCJA will not negatively impact our operating results, financial condition, and future businessoperations. The estimated impact of the TCJA is based on our management's current knowledge and assumptions, following consultation with our taxadvisors, and recognized impacts could be materially different from current estimates based on our actual results and our further analysis of the new law. Theimpact of the TCJA on holders of common stock is uncertain and could be materially adverse.17Table of ContentsThis Annual Report does not discuss any such tax legislation or the manner in which it might affect investors in common stock. Investors should consult withtheir own tax advisors with respect to such legislation and the potential tax consequences of investing 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 Code. Transactions involving our common stock, even those outsideour control, such as purchases or sales by investors, within the testing period could result in an ownership change. We have conducted an analysis todetermine whether an ownership change had occurred since inception through September 30, 2018, and concluded that we had undergone two ownershipchanges in prior years. Subsequent changes in our ownership or sale of our stock could have the effect of limiting the use of our net operating losses in thefuture. We have approximately $0.8 billion of net operating loss carryforward as of December 31, 2018. There may be certain annual limitations forutilization based on the above-described ownership change provisions. In addition, we may not be able to have sufficient future taxable income prior to theirexpiration because net operating losses have carryforward periods. As a result of the passage of the TCJA, corporate tax rates in the United States decreased in2018, which resulted in the remeasurement of our deferred tax assets at the new statutory rate and a reduction in the value of our deferred tax assets in 2017.Future changes in federal and state tax laws pertaining to net operating loss carryforwards may also cause limitations or restrictions from us claiming such netoperating losses. If the net operating loss carryforwards become unavailable to us or are fully utilized, our future taxable income will not be shielded fromfederal and state income taxation absent certain U.S. federal and state tax credits, and the funds otherwise available for general corporate purposes would bereduced.If any product candidates in any respiratory program partnered with GSK were not approved by regulatory authorities or are determined to be unsafe orineffective in humans, our business would 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 to18Table of Contentsmarket medicines in foreign countries, separate regulatory approvals must be obtained in each country. The approval procedure varies among countries andcan involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Approval by the FDA does notensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatoryauthorities in other foreign countries or by the FDA. Conversely, failure to obtain approval in one or more country may make approval in other countriesmore 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 could be materially harmed and the price of our securities might 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. 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. The FDA did not concur with the recommendation. A pediatricprogram including patients 5-17 years of age is currently ongoing.19Table of Contents 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 would limit GSK's ability tocommercialize the product candidates in any respiratory program partnered with GSK, which could materially and adversely affect our business and financialcondition and which may cause the price of our securities to fall.We may not be successful in our strategic efforts. 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 tolicense or acquire rights to suitable royalty-generating products for a number of reasons. In particular, the licensing and acquisition of pharmaceuticalproduct rights is a competitive area. Several more established companies are also pursuing strategies to license or acquire rights to royalty-generatingproducts. These established companies may have a competitive advantage over us. Other factors that may prevent us from licensing or otherwise acquiringrights to suitable royalty-generating products include the following:•we may be unable to license or acquire the rights on terms that would allow us to make an appropriate return from the product; •companies that perceive us to be their competitors may be unwilling to assign or license their product rights to us; or •we may be unable to identify suitable royalty-generating products. If we are unable to acquire or license rights to suitable royalty-generating product candidates, our business may suffer. We may become engaged in a 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.Also, we may engage consultants and advisors to analyze particular opportunities, technical, financial and other confidential information, submission ofindications of interest and involvement as a bidder in competitive auctions or other processes for the acquisition of income generating assets. We may facesignificant competition for these acquisitions from other financial investors and enterprises whose cost of capital may be lower than ours. Competition forfuture asset acquisition opportunities in our markets is competitive and we may be forced to increase the price we pay for such assets or face reduced potentialacquisition opportunities. The success of any potential income-generating asset acquisition is based on our ability to make accurate assumptions regardingthe valuation, timing and amount of payments, which is highly complex and uncertain. The failure of any potential acquisition to20Table of Contentsproduce anticipated revenues may materially and adversely affect our financial condition and results of operations.We have a significant amount of debt including our term loan, 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, 2018, we had approximately $447.2 million in total debt outstanding, comprised primarily of $241.0 million in principal thatremains outstanding under our convertible subordinated notes due 2023 (the "2023 Notes"), $192.5 million in principal outstanding under our convertiblesenior notes due 2025 (the "2025 Notes") (the 2023 Notes and 2025 Notes hereinafter, the "Notes") and $13.8 million in principal outstanding on our term Bloan (the "Term B Loan"). The Notes are unsecured debt and are not redeemable by us prior to the maturity date. Holders of the Notes may require us topurchase all or any portion of their Notes at 100% of their principal amount, plus any unpaid interest, upon a fundamental change. A fundamental change isgenerally defined to include a merger involving us, an acquisition of a majority of our outstanding common stock, and, under the 2023 Notes, the change of amajority of our Board of Directors without the approval of the Board of Directors. In addition, to the extent we pursue and complete a monetizationtransaction or a transaction that modifies our corporate structure, the structure of such transaction may qualify as a fundamental change under the Notes,which could trigger the put rights of the holders of the Notes, in which case we would be required to use a portion of the net proceeds from such transaction torepurchase any Notes 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 satisfy,repurchase, 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.If we lose key management personnel, or if we fail to retain our key employees, our ability to manage our business may 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. None of our employees have employment commitments for any fixed period of time and all may leave ouremployment at will. If we fail to retain our qualified personnel or to replace them when they leave, our ability to manage our business may be impaired, whichmay cause the price of our securities to fall.21Table of ContentsWe 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, 2018, we had only six 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 of our functions as a publiccompany. We may have limited control over these third parties and we cannot guarantee that they will perform their obligations in an effective and timelymanner.Our internal computer systems, or third-parties that we work with, may fail or suffer security breaches, which could result in a material disruption of ourbusiness. Despite the implementation of security measures, our internal computer systems and those of third-parties with whom we work (including ourcollaborative partner) are vulnerable to damage or disruption from computer viruses, software bugs, unauthorized access, natural disasters, terrorism, war, andtelecommunication, equipment and electrical failures. In the event we or they were to experience any significant system failure, accident or security breach itcould cause interruptions in our operations and adversely affect our business, financial condition and results of operations. Cybersecurity attacks in particularare evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches thatcould lead to disruptions in systems, misappropriation of our confidential, or otherwise protected, information and corruption of data.If we fail to maintain proper and effective internal control over financial reporting or if the interpretations, estimates or judgments utilized in preparingour financial statements prove to be incorrect, our operating results and our ability to operate our business could be harmed. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal control over financial reporting and disclosurecontrols and procedures. Under the SEC's current rules, we are required to perform system and process evaluation and testing of our internal control overfinancial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of theSarbanes-Oxley Act. Our independent registered public accounting firm is also required to report on our internal control over financial reporting. Our testingand our independent registered public accounting firm's testing may reveal deficiencies in our internal control over financial reporting that are deemed to bematerial weaknesses and render our internal control over financial reporting ineffective. We have and expect to continue to incur substantial accounting andauditing expense and to expend significant management time in complying with the requirements of Section 404. If we are not able to maintain compliancewith the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internalcontrol over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject toinvestigations or sanctions by the SEC, FINRA, The Nasdaq Global Select Market or other regulatory authorities. In addition, we could be required to expendsignificant management time and financial resources to correct any material weaknesses that may be identified or to respond to any regulatory investigationsor proceedings. We are also subject to complex tax laws, regulations, accounting principles and interpretations thereof. The preparation of our financial statementsrequires us to interpret accounting principles and guidance and make estimates and judgments that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurredduring the reporting periods. Our interpretations, estimates and judgments are based on our historical experience and on various other factors that we believeare reasonable under the circumstances, the results of which form the basis for22Table of Contentsthe preparation of our financial statements. U.S. generally accepted accounting principles ("GAAP") presentation is subject to interpretation by the SEC, theFinancial Accounting Standards Board and various other bodies formed to interpret and create appropriate accounting principles and guidance. In the eventthat one of these bodies disagrees with our accounting recognition, measurement or disclosure or any of our accounting interpretations, estimates orassumptions, it may have a significant effect on our reported results and may retroactively affect previously reported results. The need to restate our financialresults could, among other potential adverse effects, result in our incurring substantial costs, affect our ability to timely file our periodic reports until suchrestatement is completed, divert the attention of our management and employees from managing our business, result in material changes to our historical andfuture financial results, result in investors losing confidence in our operating results, subject us to securities class action litigation, and cause our stock priceto decline.As we continue to develop our business, our mix of assets and our sources of income may require that we register with the SEC as an "investmentcompany" in accordance with the Investment Company Act of 1940. We have not been and have no current intention to register as an "investment company" under the Investment Company Act of 1940 or the "40 Act",because we believe the nature of our assets and the sources of our income currently exclude us from the definition of an investment company pursuant toSections (3)(a)(1)(A), (3)(a)(1)(C) under the 40 Act and Rule 270.3a-1 of Title 17 of the Code of Federal Regulations. Accordingly, we are not currentlysubject to the provisions of the 40 Act, such as compliance with the 40 Act's registration and reporting requirements, capital structure requirements, affiliatetransaction restrictions, conflict of interest rules, requirements for disinterested directors, and other substantive provisions. Generally, to avoid being acompany that is an "investment company" under the 40 Act, it must both (a) not be or hold itself out as being engaged primarily in the business of investing,reinvesting or trading in securities, and (b) either (i) not be engaged or propose to engage in the business of investing in securities or own or propose toacquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on anunconsolidated basis or (ii) not have more than 45% of the value of its total assets (exclusive of government securities and cash items) consist of or more than45% of its net income after taxes (for the last four fiscal quarters combined) be derived from securities. In addition, we would not be an "investment company"if an exception, exemption, or safe harbor under the 40 Act applies. We monitor our assets and income for compliance with the tests under the 40 Act and seek to conduct our business activities to ensure that we do not fallwithin its definitions of "investment company." If we were to become an "investment company" and be subject to the strictures of the 40 Act, the restrictionsimposed by the 40 Act would likely require changes in the way we do business and add significant administrative burdens to our operations. In order toensure that we do not fall within the 40 Act, we may need to take various actions which we might otherwise not pursue. These actions may includerestructuring the Company and/or modifying our mixture of assets and income. Specifically, our mixture of debt versus royalty assets is important to our classification as an "investment company" or not. In this regard, while wecurrently believe 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 SEC staff stated that royalty interests are Qualifying Assetsunder this exception. If the SEC or its staff in the future adopts a contrary interpretation or otherwise restricts the23Table of Contentsconclusions in the staff's no-action letter such that our royalty interests are no longer Qualifying Assets for purposes of Section 3(c)(5)(A), we could berequired 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 at 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.Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insidertrading. We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply withapplicable regulations, provide accurate information to regulatory authorities, comply with federal and state fraud and abuse laws and regulations, reportfinancial information or data accurately or disclose unauthorized activities to us. In particular, the health care industry is subject to extensive laws andregulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. It is not always possible to identify and deteremployee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks orlosses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with these laws orregulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have asignificant impact on our business, including the imposition of significant fines or other sanctions.24Table of ContentsWe 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. 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.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 in 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 our business orto our other stockholders. Although GSK beneficially owns approximately 31.7% of our outstanding common stock as of December 31, 2018, it is also a strategic partner withrights and obligations under the GSK Agreements that cause its interests to differ from our interests and those of our other stockholders. In particular, GSK hasa substantial respiratory product portfolio in addition to the partnered products that are covered by the GSK Agreements. GSK may make respiratory productportfolio decisions or statements25Table of Contentsabout 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 for which we are entitled to receive a lower percentage of royalties, delay or terminate thedevelopment or commercialization of the respiratory programs covered by the GSK Agreements, or take other actions, such as making public statements, thathave a negative effect on our stock price. In this regard and by way of example, 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 commercializingAdvair®. Also, given the potential future royalty payments which GSK may be obligated to pay under the GSK Agreements, GSK may seek to acquire us inorder to reduce those payment obligations. The timing of when GSK may seek to acquire us could potentially be when it possesses information regarding thestatus of drug programs covered by the GSK Agreements that has not been publicly disclosed and is not otherwise known to us. As a result of these differinginterests, GSK may take actions that it believes are in its best interest but which might not be in our best interest or the best interest of our other stockholders.In addition, following the FDA regulatory approval of TRELEGY® ELLIPTA® in September 2017, GSK's diligent efforts obligations as to commercializationmatters under the GSK Agreements has had the objective of focusing on the best interests of patients and maximizing the net value of the overall portfolio ofproducts under the GSK Agreements. Since GSK's commercialization efforts following this regulatory approval have been guided by a portfolio approachacross products in which we have retained our full interest and also products in which we now have only a portion of our former interest, GSK'scommercialization efforts may have the effect of reducing the overall value of our remaining interests in the products covered by the GSK Agreements in thefuture. In addition, following the expiration of our governance agreement with GSK in September 2015, GSK is no longer subject to the restrictionsthereunder 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 have had the objective of focusing on the best interests ofpatients and 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 have had the objective of focusing on the best interests of patients and maximizing the net value of the overall portfolio of products underthe GSK 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 harmful toour business, operations and stock price. If GSK prioritizes TRELEGY® ELLIPTA®, we will only be entitled to a 15% economic interest of the royalties paidpursuant to the commercialization of our partnered products or chooses to reprioritize its commercial programs, our businesses, operations and stock pricewould 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 a26Table of Contentsproposed monetization transaction may nonetheless insist that we obtain GSK's consent for the transaction or restructure 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 of apharmaceutical 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, 2018, GSK beneficially owned approximately 31.7% 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, 2018, GSK beneficially owned approximately 31.7% 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 transfers27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 is 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 adopted a new brand, Innoviva, in January 2016. Over the long term, if we are unable to establish nameand brand recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected.If we fail to promote and maintain our brand successfully, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand,our business may be harmed.Failure to comply with the U.S. Foreign Corrupt Practices Act, or "FCPA", as well as the anti-bribery laws of the nations in which we conduct business,could subject us to penalties and other adverse consequences. We are subject to the FCPA, which generally prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for thepurpose of obtaining or retaining business and requires companies to maintain accurate books and records and internal controls. In addition, we are subject tothe anti-bribery laws of other jurisdictions in which we conduct business. Our employees or other agents may engage in prohibited conduct without ourknowledge under our policies and procedures and the FCPA and other anti-bribery laws that we may be subject to for which we may be held responsible. Ifour employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a materialadverse effect on our business, financial condition and results of operations.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 may28Table of Contentsobtain patents in the future and claim that use of GSK's technologies infringes upon these patents. Furthermore, parties making claims against GSK mayobtain injunctive or other equitable relief, which could effectively block GSK's ability to further develop or commercialize one or more of the productcandidates or products in any respiratory program partnered with GSK. In the event of a successful claim of infringement against GSK, it may have to pay substantial damages, obtain one or more licenses from third parties orpay royalties. In addition, even in the absence of litigation, GSK may need to obtain licenses from third parties to advance its research or allowcommercialization of the products. GSK may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, GSK wouldbe unable to further develop and commercialize one or more of the products, which could harm our business significantly. In addition, in the future GSKcould be required to initiate litigation to enforce its proprietary rights against infringement by third parties. Prosecution of these claims to enforce its rightsagainst others would involve substantial litigation expenses. If GSK fails to effectively enforce its proprietary rights related to our partnered respiratoryprograms against others, our business will be harmed, and the price of our securities could fall.Risks Related to Ownership of our Common StockThe price of our securities has been volatile and may continue to be so, and purchasers of our securities could incur substantial losses. The price of our securities has been volatile and may continue to be so. Between January 1, 2018 and December 31, 2018, the high and low sales pricesof our common stock as reported on The Nasdaq Global Select Market varied between $13.26 and $18.60 per share. The stock market in general and themarket for biotechnology and biopharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the companies'operating performance, in particular during the last several years. The following factors, in addition to the other risk factors described in this section, may alsohave a significant impact on the market price of our securities:•any adverse developments or results or perceived adverse developments or results with respect to the commercialization of RELVAR®/BREO®ELLIPTA® and ANORO® ELLIPTA® with GSK, including, without limitation, if payor coverage is lower than anticipated or if sales ofRELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® are less than anticipated because of pricing pressure in the respiratory marketstargeted by our partnered products or existing or future competition in the markets in which they are commercialized, including competitionfrom existing and new products that are perceived as lower cost or more effective, and our royalty payments are less than anticipated; •any positive developments or results or perceived positive developments or results with respect to the 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 ongoing 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, or any indicationfrom clinical or non-clinical studies that UMEC/VI is not safe or efficacious;29Table of Contents•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 that are not partnered with us; •the occurrence of a fundamental change triggering a put right of the holders of the Notes or our inability, or perceived inability, to satisfy theobligations under the Notes when they become due; •our incurrence of expenses in any particular quarter that are different than market expectations; •changes in the treatment paradigm or standards of care for COPD or asthma; •the extent to which GSK advances (or does not advance) FF/VI, UMEC/VI 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 four largest stockholders other than GSK collectively owned approximately26.9% of our outstanding common stock as of December 31, 2018 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. In recent years, we have focused on returning capital to stockholders and paid quarterly dividends during the third and fourth quarters of 2014 andduring the first three quarters of 2015. From October 2015 through December 31, 2017, we repurchased an aggregate of 17,307,790 shares of our commonstock for a total of $201.2 million. The payment of, or continuation of, capital returns to stockholders is at the discretion of our Board of Directors and isdependent upon our financial condition, results of30Table of Contentsoperations, capital requirements, general business conditions, tax treatment of capital returns, potential future contractual restrictions contained in creditagreements and other agreements and other factors deemed relevant by our Board of Directors. Future capital returns may also be affected by, among otherfactors: our views on potential future capital requirements for investments in acquisitions and our working capital and debt maintenance requirements; legalrisks; stock or debt repurchase programs; changes in federal and state income tax laws or corporate laws; and changes to our business model. Our capitalreturn programs may change from time to time, and we cannot provide assurance that we will continue to provide any particular amounts. Our announcementof future capital return programs does not obligate us to repurchase any specific dollar amount of debt or equity or number of shares of common stock. Areduction, suspension or change in our capital return programs could have a negative effect on our stock price.Concentration of ownership will limit your ability to influence corporate matters. As of December 31, 2018, GSK beneficially owned approximately 31.7% of our outstanding common stock and our directors, executive officers andinvestors affiliated with these individuals beneficially owned approximately 4.6% of our outstanding common stock. Based on our review of publiclyavailable filings as of December 31, 2018, our three largest stockholders other than GSK and investors affiliated with our executive officers and directorscollectively owned approximately 22.4% of our outstanding common stock. These stockholders could control the outcome of actions taken by us thatrequire stockholder approval, including a transaction in which stockholders might receive a premium over the prevailing market price for their shares.Following the expiration of the governance agreement in September 2015, GSK is no longer subject to the restrictions thereunder regarding the voting of theshares 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 of directors 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. We have initiated the processof optimizing our headquarters space, which could include subleasing. We do not own or lease any other properties.31Table of Contents ITEM 3. LEGAL PROCEEDINGS We are not a party to any material legal proceedings. ITEM 4. MINE SAFETY DISCLOSURES Not applicable.32Table of Contents PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES Market Information Our common stock was traded on Nasdaq under the symbol "THRX" from October 5, 2004 until January 8, 2016. Upon changing our corporate name toInnoviva, Inc. on January 7, 2016, we changed the stock ticker symbol to "INVA" effective January 11, 2016.Holders As of February 11, 2019, there were 79 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 There were no purchases made by the Company of its own equity securities for the year ended December 31, 2018.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, 2013 andending on December 31, 2018, 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, 2013 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.33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, 2013 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. 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 Annual34Table of ContentsReport on Form 10-K. The historical results are not necessarily indicative of the results to be expected in any future period. 35 Year Ended December 31, 2018 2017 2016 2015 2014 (In thousands, except per share data) CONSOLIDATED STATEMENTS OF OPERATIONSDATA Net revenue $261,004 $217,217 $133,569 $53,949 $8,433 Total operating expenses 22,753 33,613 24,581 22,369 42,362 Income (loss) from operations 238,251 183,604 108,988 31,580 (33,929)Interest and other income (expense), net (4,042) (5,727) 3,059 1,443 (2,711)Interest expense (23,954) (43,601) (52,416) (51,803) (36,892)Income (loss) from continuing operations before income taxes 210,255 134,276 59,631 (18,780) (73,532)Income tax benefit (expense), net(1) 196,073 (4) (95) 20 2 Net income from continuing operations 406,328 134,272 59,536 (18,760) (73,530)Loss from discontinued operations(2) — — — — (94,934)Net income (loss) 406,328 134,272 59,536 (18,760) (168,464)Net income attributable to noncontrolling interest 11,272 129 — — — Net income (loss) attributable to Innoviva stockholders $395,056 $134,143 $59,536 $(18,760)$(168,464)Basic net income (loss) per share attributable to Innovivastockholders Continuing operations $3.92 $1.25 $0.54 $(0.16)$(0.66)Discontinued operations — — — — (0.84)Basic net income (loss) per share $3.92 $1.25 $0.54 $(0.16)$(1.50)Diluted net income (loss) per share attributable to Innovivastockholders: Continuing operations $3.53 $1.17 $0.53 $(0.16)$(0.66)Discontinued operations — — — — (0.84)Diluted net income (loss) per share $3.53 $1.17 $0.53 $(0.16)$(1.50)Shares used to compute basic net income (loss) per shareattributable to Innoviva stockholders 100,849 106,945 110,280 115,372 112,059 Shares used to compute diluted net income (loss) per shareattributable to Innoviva stockholders 113,408 119,866 123,233 115,372 112,059 Cash dividends declared per common share $— $— $— $0.75 $0.50 As of December 31, 2018 2017 2016 2015 2014 (In thousands) CONSOLIDATED BALANCE SHEETS DATA Cash, cash equivalents and marketable securities $114,908 $129,075 $150,433 $187,283 $283,354 Working capital 193,343 165,627 177,997 200,834 238,426 Total assets 548,193 367,337 378,996 408,932 521,654 Long-term liabilities 383,441 575,302 711,938 738,086 731,247 Accumulated deficit (1,103,692) (1,498,748) (1,632,891) (1,692,427) (1,673,667)Total Innoviva stockholders' equity (deficit) 153,583 (242,859) (352,991) (342,645) (223,349)(1)In the year ended December 31, 2018, we recorded an income tax benefit of $196.1 million primarily due to the release of a valuationallowance on our deferred tax assets.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 discussionand analysis should be read in conjunction with our consolidated financial statements and notes included in this Annual Report on Form 10-K. Theinformation contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to ourplans and strategy for our business, our operating expenses, and future payments under our collaboration agreements, includes forward-looking statementswithin 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. Suchstatements are based upon current expectations that involve risks and uncertainties. You should review the section entitled "Risk Factors" in Item 1A of Part Iabove for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-lookingstatements contained in the following discussion and analysis. See the section entitled "Special Note Regarding Forward Looking Statements" above formore information.Management Overview Innoviva, Inc. ("Innoviva", the "Company", the "Registrant" or "we" and other similar pronouns) is focused on royalty management. Innoviva's portfolioincludes 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® (the combination FF/UMEC/VI). Under theLong-Acting Beta2 Agonist ("LABA") Collaboration Agreement, Innoviva is entitled to receive royalties from GSK on sales of RELVAR®/BREO®ELLIPTA® as follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion; and royalties fromthe sales of ANORO® ELLIPTA® which tier upward at a range from 6.5% to 10%. Innoviva is also entitled to 15% of royalty payments made by GSK underits agreements 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 as the "GSK Agreements"), which have been assigned to TRC other than RELVAR®/BREO® ELLIPTA® andANORO® 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, and providing for certain essential reporting andmanagement functions of a public company. As of December 31, 2018, we had six employees. Our revenues consist of royalties and potential milestonepayments, if any, from our respiratory partnership agreements with GSK.Financial Highlights In the year ended December 31, 2018, the net income attributable to Innoviva stockholders was $395.1 million, an improvement of $261.0 million fromnet income of $134.1 million in the year ended December 31, 2017, primarily due to an income tax benefit of $196.1 million, an increase in net royaltyrevenue, reduction in operating expenses and a decrease in interest expense. Cash, cash equivalents, and marketable securities totaled $114.9 million as ofDecember 31, 2018, a decrease of $14.2 million36(2)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.Table of Contentsfrom December 31, 2017. The decrease was primarily due to the principal repayments of $230.0 million on our Term B Loan. These outflows were partiallyoffset by cash provided by operating activities of $223.5 million.Collaborative Arrangements with GSKLABA Collaboration In November 2002, we entered into LABA collaboration with GSK to develop and commercialize once-daily LABA products for the treatment of COPDand asthma (the "LABA Collaboration Agreement"). For the treatment of COPD, 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® is theproprietary name outside the U.S. and Canada), a once-daily combination medicine consisting of a LABA, vilanterol (VI), and an inhaledcorticosteroid ("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 with theLABA 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 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 was funded in full by GSK. GSK is inthe process of determining the next steps for the program. As a result of the transactions effected by the Spin-Off, we are only entitled to receive 15% of anycontingent payments and royalties payable by GSK from sales 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.37Table of ContentsCritical 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. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reportedrevenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors thatwe believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that theaccounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areasinvolving management's judgments and estimates.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. Through September 30, 2018, we maintained a full valuation allowance on our deferred tax assets. In the fourth quarter of 2018, we recorded an income tax benefit of approximately $196.1 million related to the reversal of a valuation allowance on ourdeferred tax assets. This non-cash income tax benefit is non-recurring and relates primarily to $0.8 billion of U.S. federal net operating losses, and certainfederal R&D credits which are expected to be utilized in the future. We expect to recognize income tax expense in 2019 and future periods, primarily basedon the 21% federal tax rate, but we do not expect to use cash to pay U.S. federal or California income taxes until after we utilize the available deferred taxassets. The valuation allowance was released on the majority of our deferred tax assets based on our assessment of our historical trend of taxable income inrecent years and our projection of future taxable income. The recognition and measurement of income tax benefits requires significant judgment. Ourjudgment might change as new information becomes available. We will continue to evaluate our deferred tax assets each reporting period to determinewhether adjustments to our valuation allowance are required. Deferred tax assets will be recognized based on the consideration of all available positive andnegative evidence, including the differences between our anticipated and actual future operating results, using a "more likely than not" standard.Revenue Recognition In May 2014, the FASB issued a new comprehensive revenue recognition standard, ASC 606. We adopted this standard on January 1, 2018 on amodified retrospective basis. Under the new guidance, revenue is recognized when our customer obtains control of promised goods or services, in an amountthat reflects the consideration which we expect to receive in exchange for those goods or services. Revenue is recognized through a five-step process:(i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price for the contract;(iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) a performance obligation is satisfied. The adoption of ASC 606 did not have a material impact on our consolidated financial statements as we do not have any unrecognized transaction price,other than sales-based royalty revenue, or any38Table of Contentsremaining performance obligations under our collaboration agreements. We continue to recognize the royalty revenue on licensee net sales of products withrespect to which we have contractual royalty rights in the period in which the royalties are earned and reported to us. Royalties are recognized net ofamortization of capitalized fees associated with any approval and launch milestone payments made to GSK. Under the GSK Agreements, we recognized net revenue of $261.0 million, $217.2 million and $133.6 million for the years ended December 31, 2018,2017 and 2016, respectively.Capitalized Fees paid to a Related Party We capitalize fees paid to licensors related to agreements for approved products or commercialized products ("Capitalized Fees"). Our gross CapitalizedFees of $220.0 million as of December 31, 2018 consist of registrational and launch-related 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 each of theyears ended December 31, 2018, 2017 and 2016 was $13.8 million. The remaining estimated amortization expense is $13.8 million for each of the years from2019 to 2023 and $83.9 million thereafter. We review our Capitalized Fees for impairment on a product-by-product basis for each major geographic area when events or changes in circumstancesindicate that the carrying amount of such assets may not be recoverable. The recoverability of Capitalized Fees is measured by comparing the asset's carryingamount to the expected undiscounted future cash flows that the asset is expected to generate. The determination of recoverability typically requires variousestimates and assumptions, including estimating the useful life over which cash flows will occur, their amount, and the asset's residual value, if any. Wederive the required cash flow estimates from near-term forecasted product sales and long-term projected sales in the corresponding market. Based upon ouranalyses, no impairment charges have been recorded on the Capitalized Fees as of December 31, 2018.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.39Table of Contents 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 remeasured as long as it continues to meet the conditions for equity classification.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, 2018, compared to the year ended December 31, 2017 and the year ended December 31,2016, primarily due to continuing growth in40 Change Year Ended December 31, 2018 2017 (In thousands) 2018 2017 2016 $ % $ % Royalties from a related party—RELVAR/BREO $220,162 $198,726 $128,638 $21,436 11%$70,088 54%Royalties from a related party—ANORO 41,286 29,036 17,869 12,250 42 11,167 62 Royalties from a related party—TRELEGY 13,379 179 — 13,200 * 179 *Total royalties from a related party 274,827 227,941 146,507 46,886 21 81,434 56 Less: amortization of capitalized fees paid to arelated party (13,823) (13,823) (13,823) — — — — Royalty revenue 261,004 214,118 132,684 46,886 22 81,434 61 Strategic alliance—MABA program license — 3,099 885 (3,099) * 2,214 250 Total net revenue from GSK $261,004 $217,217 $133,569 $43,787 20%$83,648 63%*Not MeaningfulTable of Contentsprescriptions 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 MABA program, werevised the performance period, which was previously estimated to end in June 2020. The change in this estimate resulted in full recognition of the remainingdeferred revenue balance. The revenue growth during the years ended December 31, 2018 and 2017 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: We did not incur R&D expenses during the year ended December 31, 2018. R&D expenses for the years ended December 31, 2017 and 2016 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 for the year ended December 31, 2018 were $20.1 million compared with $32.3 million in the year endedDecember 31, 2017, a decrease of $12.2 million. The amount for the year ended December 31, 2017 included $8.1 million of net proxy contest and associatedlitigation costs. General and administrative expenses for the year ended December 31, 2018 included $5.7 million cash severance costs in connection withcertain members of senior management's separation from the Company and payment of $2.7 million to Sarissa pursuant to a settlement agreement in February2018. The rest of the decrease in general and administrative expenses in the year ended December 31, 2018 is mainly attributable to lower personnel-relatedexpenses, including net reversal of stock-based compensation expenses, as a result of lower headcount. 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.41 Change Year Ended December 31, 2018 2017 (In thousands) 2018 2017 2016 $ % $ % Research and development expenses $— $1,355 $1,393 $(1,355) *$(38) (3)%*Not Meaningful Change Year Ended December 31, 2018 2017 (In thousands) 2018 2017 2016 $ % $ % General and administrative expenses $20,053 $32,258 $23,188 $(12,205) (38)%$9,070 39%General and administrative expenses-related party 2,700 — — 2,700 — — — Table of ContentsOther Income (Expense), net and Interest Income Other income (expense), net and interest income, as compared to the prior years, were as follows: Other expense, net for the year ended December 31, 2018, mainly consists of the loss on the extinguishment of debt of $5.7 million in relation to theprepayments of our Term B Loan. Other expense, net for the year ended December 31, 2017, primarily pertains to the loss on the extinguishment of debt of$7.3 million in relation to our redemptions of non-recourse notes due 2029 (the "2029 Notes"). Other income, net for the year ended December 31, 2016primarily pertains to a realized gain of $2.3 million from the repurchases of our 2023 Notes during the year ended December 31, 2016. Interest income increased in the year ended December 31, 2018 compared to the year ended December 31, 2017, and the year ended December 31, 2016,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: Interest expense decreased for the year ended December 31, 2018, compared to the prior year primarily due to the lower average outstanding debtbalance resulting from $230.0 million in prepayments on our Term B Loan in 2018. 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 using the net proceeds from the Term B Loan and 2025 Notes, the lower interest rates starting August 2017 under the Term B Loan and 2025Notes compared to the interest rates of the 2029 Notes, and lower principal balance resulting from repurchase of our 2023 Notes.Income Taxes Income tax benefit (expense), net, as compared to the prior years, was as follows:42 Change Year Ended December 31, 2017 2016 (In thousands) 2018 2017 2016 $ % $ % Other income (expense), net $(5,702)$(7,038)$2,477 $1,336 *$(9,515) *Interest income 1,660 1,311 582 349 27% 729 125%*Not Meaningful Change Year Ended December 31, 2017 2016 (In thousands) 2018 2017 2016 $ % $ % Interest expense $23,954 $43,601 $52,416 $(19,647) (45)%$(8,815) (17)% Change Year Ended December 31, 2017 2016 (In thousands) 2018 2017 2016 $ % $ % Income tax benefit (expense), net $196,073 $(4)$(95)$196,077 *$91 **Not MeaningfulTable of Contents As of December 31, 2018, 2017 and 2016, we had net operating loss carryforwards for federal income taxes of $0.8 billion, $1.0 billion and $1.1 billion,respectively. As of December 31, 2018, 2017 and 2016, we had federal research and development tax credit carryforwards of $44.8 million, $45.2 million,and $45.2 million, respectively. For the year ended December 31, 2018, we evaluated whether it was more likely than not that some portion or all deferred tax assets will be realized inthe future based on all available positive and negative evidence, including but not limited to our historical operating results and our expectation of futureprofitability, and concluded that we will be able to realize approximately $190.2 million and $5.9 million benefits of the U.S. federal and state deferred taxassets in the future, respectively. Accordingly, we released our valuation allowance on these deferred tax assets as of December 31, 2018. See Note 9, IncomeTaxes in our audited financial statements for additional information. For the years ended December 31, 2017 and 2016, we recorded a valuation allowance tooffset in full the benefit related to our deferred tax assets because realization of these benefits was uncertain. We had unrecognized tax benefits of $15.4 million as of December 31, 2018. Total unrecognized tax benefits that, if recognized, would affect oureffective tax rate, were $8.0 million as of December 31, 2018. Our total unrecognized tax benefits as of December 31, 2017 and 2016 were $15.5 million. Utilization of net operating loss and tax credit carryforwards is 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 decreased in 2018, which resulted in the remeasurement of our deferred tax assets at the new statutory rate and a reduction in the value of our deferredtax assets in 2017. We conducted an analysis through September 30, 2018 to determine whether an ownership change had occurred since inception. Theanalysis indicated that two ownership changes occurred in prior years. However, notwithstanding the applicable annual limitations, we estimate that noportion of the net operating loss or credit carryforwards will expire before becoming available to reduce federal and state income tax liabilities. Annuallimitations may result 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 Net income attributable to noncontrolling interest, as compared to the prior years, was as follows: This represents the 85% share of net income in Theravance Respiratory Company, LLC for Theravance Biopharma for the years ended December 31,2018 and 2017. The increase was primarily due to the increase in the growth in prescriptions and market share for TRELEGY® ELLIPTA®.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. For the year ended December 31, 2018, we generated gross royalty revenues from GSK of43 Change Year Ended December 31, 2017 2016 (In thousands) 2018 2017 2016 $ % $ % Net income attributable to noncontrolling interest $11,272 $129 $— $11,143 *$129 **Not MeaningfulTable of Contents$274.8 million. Net cash and cash equivalents, short-term investments and marketable securities totaled $114.9 million, and royalties receivable from GSKtotaled $83.3 million, as of December 31, 2018. 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 the $250.0 million Term B Loan, the proceeds of which were usedto repay 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 was originally due quarterly beginning December 31, 2017. The remaining outstanding balance is due at maturity. Prepayments, in whole or in part,can be made at any time without a penalty. The Credit Agreement also provides us the ability to request one or more additional tranches of term loans (orincrease an existing term loan) at any time prior to maturity. In December 2017, February 2018 and August 2018, we repaid the principal balance of the TermB Loan by $6.3 million, $120.0 million and $110.0 million, respectively. The outstanding principal balance of the Term B Loan as of December 31, 2018was $13.8 million.Adequacy of Cash Resources to Meet Future Needs We believe that cash from projected future royalty revenues and our cash, cash equivalents and marketable securities will be sufficient to meet ouranticipated debt service and operating needs for at least the next 12 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:44 Year Ended December 31, Change (In thousands) 2018 2017 2016 2017 2016 Net cash provided by operating activities $223,531 $141,749 $60,984 $81,782 $80,765 Net cash provided by (used in) investing activities 3,519 (23,236) (4,580) 26,755 (18,656)Net cash used in financing activities (237,969) (163,193) (97,568) (74,776) (65,625)Table of ContentsCash Flows from Operating Activities Cash provided by operating activities for the year ended December 31, 2018 was $223.5 million, consisting primarily of our net income of$406.3 million, adjusted for non-cash items such as $196.1 million of deferred income taxes, $13.9 million of depreciation and amortization, $7.7 millionamortization of debt discount and issuance costs, $5.7 million of loss on debt extinguishment and $3.2 million of stock-based compensation expense,partially offset by an increase in receivables from collaborative arrangements of $12.7 million. 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 as $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 andliabilities, including an increase in receivables from 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 Flows from Investing Activities Net cash flows from investing activities for the year ended December 31, 2018 of $3.5 million was primarily due to $75.4 million of proceeds receivedfrom maturities of marketable securities, partially offset by $71.9 million in purchases of marketable securities. 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.Cash Flows from Financing Activities Net cash used in financing activities for the year ended December 31, 2018 of $238.0 million was primarily due to $230.0 million in prepayments on ourTerm B Loan, $6.0 million distributions to noncontrolling interest and $3.1 million payments for the repurchase of shares to satisfy tax withholding. 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.45Table of ContentsOff-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, and common area maintenance, which may be as much as the actuallease payments. As of December 31, 2018, the total remaining lease payments for the duration of the lease, which runs through May 2020, were $9.3 million.The carrying value of this lease guarantee was $0.5 million as of December 31, 2018 and is reflected in other long-term liabilities in our consolidated balancesheet.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, 2018.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, 2018. 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 not material as the average remaining maturity of our investment portfolio was three months as ofDecember 31, 2018. 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, 2018, thestated interest rate for the Term B Loan, based on LIBOR, was 7.15%. However, the outstanding principal balance of the Term B Loan has been significantlyreduced from $243.8 million as of December 31, 2017 to $13.8 million as of December 31, 2018. An increase in the LIBOR of 50 basis46 Payment Due by Period (In thousands) Total Less Than1 Year 1 - 3 Years 3 - 5 Years More Than5 Years 2023 Notes $264,028 $5,121 $10,242 $248,665 $— 2025 Notes 226,188 4,813 9,625 9,625 202,125 Term B Loan* 13,750 — — 13,750 — Facility lease 1,889 403 844 642 — Total $505,855 $10,337 $20,711 $272,682 $202,125 *The Term B Loan balances reflect the principal repayment obligations and do not include the interest payments as the loan bearsinterest at a varying rate of three-month LIBOR plus a 4.5% margin.Table of Contentspoints would not materially impact our annual interest expense based on the outstanding balance of $13.8 million as of December 31, 2018. 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, 2018, based on available pricing information, the fair values of our 2023 Notes and 2025 Notes were estimated to be$258.9 million and $230.7 million, respectively. The 2023 Notes and 2025 Notes bear interest at a fixed rate of 2.125% and 2.5%, respectively. Informationabout the contractual maturities of our debt is disclosed in the table within the Contractual Obligations and Commercial Commitments section of Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations.47Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 48 Page Consolidated Balance Sheets as of December 31, 2018 and December 31, 2017 49 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2018 50 Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31,2018 51 Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period endedDecember 31, 2018 52 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2018 53 Notes to Consolidated Financial Statements 54 Supplementary Financial Data (unaudited) 78 Report of Independent Registered Public Accounting Firm 79  Table of ContentsINNOVIVA, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except per share data) See accompanying notes to consolidated financial statements.49 December 31, 2018 2017 Assets Current assets: Cash and cash equivalents $62,417 $73,336 Short-term marketable securities 52,491 55,739 Related party receivables from collaborative arrangements 83,286 70,540 Prepaid expenses and other current assets 849 754 Total current assets 199,043 200,369 Property and equipment, net 160 209 Capitalized fees paid to a related party, net 152,899 166,722 Deferred tax assets 196,054 — Other assets 37 37 Total assets $548,193 $367,337 Liabilities and Stockholders' Equity (Deficit) Current liabilities: Accounts payable $11 $601 Accrued personnel-related expenses 470 1,721 Accrued interest payable 4,264 5,920 Other accrued liabilities 955 1,500 Current portion of long-term debt — 25,000 Total current liabilities 5,700 34,742 Long-term debt, net of current portion, discount and issuance costs 382,855 574,362 Other long-term liabilities 586 940 Commitments and contingencies (Note 8) Stockholders' equity (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, 101,098 issued andoutstanding as of December 31, 2018 and 102,046 shares issued as of December 31,2017 1,011 1,019 Treasury stock: 150 shares as of December 31, 2017 — (3,263)Additional paid-in capital 1,256,267 1,258,151 Accumulated other comprehensive loss (3) (18)Accumulated deficit (1,103,692) (1,498,748)Total Innoviva stockholders' equity (deficit) 153,583 (242,859)Noncontrolling interest 5,469 152 Total stockholders' equity (deficit) 159,052 (242,707)Total liabilities and stockholders' equity (deficit) $548,193 $367,337  Table of ContentsINNOVIVA, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data) See accompanying notes to consolidated financial statements.50 Year Ended December 31, 2018 2017 2016 Royalty revenue from a related party, net of amortization of capitalized fees paid to arelated party of $13,823 in the years ended December 31, 2018, 2017, and 2016,respectively $261,004 $214,118 $132,684 Revenue from collaborative arrangements from a related party — 3,099 885 Total net revenue 261,004 217,217 133,569 Operating expenses: Research and development — 1,355 1,393 General and administrative 20,053 32,258 23,188 General and administrative—related party 2,700 — — Total operating expenses 22,753 33,613 24,581 Income from operations 238,251 183,604 108,988 Other income (expense), net (5,702) (7,038) 2,477 Interest income 1,660 1,311 582 Interest expense (23,954) (43,601) (52,416)Income before income taxes 210,255 134,276 59,631 Income tax benefit (expense), net 196,073 (4) (95)Net income 406,328 134,272 59,536 Net income attributable to noncontrolling interest 11,272 129 — Net income attributable to Innoviva stockholders $395,056 $134,143 $59,536 Basic net income per share attributable to Innoviva stockholders $3.92 $1.25 $0.54 Diluted net income per share attributable to Innoviva stockholders $3.53 $1.17 $0.53 Shares used to compute Innoviva basic and diluted net income per share: Shares used to compute basic net income per share 100,849 106,945 110,280 Shares used to compute diluted net income per share 113,408 119,866 123,233  Table of ContentsINNOVIVA, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In thousands) See accompanying notes to consolidated financial statements.51 Year Ended December 31, 2018 2017 2016 Net income $406,328 $134,272 $59,536 Unrealized income (loss) on marketable securities, net 15 (19) 3 Comprehensive income 406,343 134,253 59,539 Comprehensive income attributable to noncontrolling interest 11,272 129 — Comprehensive income attributable to Innoviva stockholders $395,071 $134,124 $59,539  Table of ContentsINNOVIVA, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(In thousands) Innoviva Stockholders' Equity (Deficit) Common Stock Treasury Stock AdditionalPaid-InCapital Accumulated OtherComprehensiveIncome (loss) AccumulatedDeficit NoncontrollingInterest TotalStockholders'Equity (Deficit) Shares Amount Shares Amount Balance as ofDecember 31,2015 114,933 $1,149 $1,351,898 $(2)$(1,692,427) (150)$(3,263)$— $(342,645)Exercise of stockoptions, andissuance ofcommon stockunits andstock awards 853 8 (674) — — — — — (666)Partialtermination ofcapped calloptionsassociatedwithrepurchases ofconvertiblenotes due2023 — — 578 — — — — — 578 Stock-basedcompensation — — 8,297 — — — — — 8,297 Repurchase ofcommon stock (7,201) (72) (78,022) — — — — — (78,094)Net income — — — — 59,536 — — — 59,536 Othercomprehensiveincome — — — 3 — — — — 3 Balance as ofDecember 31,2016 108,585 1,085 1,282,077 1 (1,632,891) (150) (3,263) — (352,991)Contributionsfromnoncontrollinginterest — — — — — — — 23 23 Exercise of stockoptions, andissuance ofcommon stockunits andstock awards 891 9 (1,702) — — — — — (1,693)Stock-basedcompensation — — 9,833 — — — — — 9,833 Cash dividendforfeited — — 7 — — — — — 7 Repurchase ofcommon stock (7,430) (75) (97,425) — — — — — (97,500)Equitycomponent ofCovertibleSenior Notesdue 2025, netof issuancecosts — — 65,361 — — — — — 65,361 Net income — — — — 134,143 — — 129 134,272 Othercomprehensiveloss — — — (19) — — — — (19)Balance as ofDecember 31,2017 102,046 1,019 1,258,151 (18) (1,498,748) (150) (3,263) 152 (242,707)Distributions tononcontrollinginterest — — — — — — — (5,955) (5,955)Exercise of stockoptions, andissuance ofcommon stockunits andstock awards (798) (8) (1,926) — — — — — (1,934)Stock-basedcompensation — — 3,233 — — — — — 3,233 Cash dividendforfeited — — 72 — — — — — 72 Retirement oftreasury stock (150) — (3,263) — — 150 3,263 — — Net income — — — — 395,056 — — 11,272 406,328 Othercomprehensiveincome — — — 15 — — — — 15 See accompanying notes to consolidated financial statements.52Balance as ofDecember 31,2018 101,098 $1,011 $1,256,267 $(3)$(1,103,692) — $— $5,469 $159,052  Table of ContentsINNOVIVA, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) See accompanying notes to consolidated financial statements.53 Year Ended December 31, 2018 2017 2016 Cash flows from operating activities Net income $406,328 $134,272 $59,536 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes (196,054) — — Depreciation and amortization 13,872 13,982 13,954 Stock-based compensation 3,233 9,833 8,297 Amortization of debt discount and issuance costs 7,748 5,116 2,847 Loss (gain) on extinguishment of debt 5,745 7,256 (2,342)Amortization of discount on short-term investments (256) (105) (9)Amortization of lease guarantee (325) (325) (190)Interest added to the principal balance of non-recourse notes due 2029 — — 855 Changes in operating assets and liabilities: Receivables from collaborative arrangements (12,746) (23,693) (20,619)Prepaid expenses and other current assets (95) 12 48 Other assets — — (19)Accounts payable (590) 473 (690)Accrued personnel-related expenses and other accrued liabilities (1,677) (81) 276 Accrued interest payable (1,656) (1,908) (83)Other long-term liabilities 4 16 8 Deferred revenue — (3,099) (885)Net cash provided by operating activities 223,531 141,749 60,984 Cash flows from investing activities Maturities of marketable securities 75,375 44,387 88,422 Purchases of marketable securities (71,856) (67,623) (95,719)Sales of marketable securities — — 2,995 Purchases of property and equipment — — (278)Net cash provided by (used in) investing activities 3,519 (23,236) (4,580)Cash flows from financing activities Repurchase of shares to satisfy tax withholding (3,073) (2,128) (1,079)Payments of principal on senior secured term loans (230,000) (6,250) — Payments of cash dividends to stockholders (80) (281) (960)Proceeds from issuances of common stock, net 1,139 435 385 Proceeds from issuance of convertible senior notes due 2025 — 192,500 — Proceeds from senior secured term loans — 250,000 — 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 common stock — (97,500) (78,094)Repurchase of convertible subordinated notes due 2023 — — (11,570)Proceeds from capped-call options — — 578 Contributions from (distributions to) noncontrolling interest (5,955) 23 — Net cash used in financing activities (237,969) (163,193) (97,568)Net decrease in cash and cash equivalents (10,919) (44,680) (41,164)Cash and cash equivalents at beginning of period 73,336 118,016 159,180 Cash and cash equivalents at end of period $62,417 $73,336 $118,016 Supplemental disclosure of cash flow information Cash paid for interest $17,861 $40,353 $48,797 Table of Contents INNOVIVA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESDescription of Operations Innoviva is focused on royalty management. Innoviva's portfolio includes the respiratory assets partnered with Glaxo Group Limited ("GSK"), includingRELVAR®/BREO® ELLIPTA® (fluticasone furoate/ vilanterol, "FF/VI"), ANORO® ELLIPTA® (umeclidinium bromide/ vilanterol, "UMEC/VI") andTRELEGY® ELLIPTA® (the combination FF/UMEC/VI). Under the Long-Acting Beta2 Agonist ("LABA") Collaboration Agreement, Innoviva is entitled toreceive 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 allannual global net sales above $3.0 billion; and royalties from the sales of ANORO® ELLIPTA® which tier upward at a range from 6.5% to 10%. Innoviva isalso entitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance RespiratoryCompany, LLC ("TRC"), including TRELEGY® ELLIPTA® and any other product or combination of products that may be discovered or developed in thefuture under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the "GSK Agreements"), which havebeen 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 our54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 evaluation, if we determine we are the primary beneficiary of a VIE, weconsolidate the entity in our financial statements. We consolidate the financial results of TRC, which we have determined to be a VIE, because we have thepower to direct the economically significant activities of TRC and the obligation to absorb losses of, or the right to receive benefits from, TRC. As ofDecember 31, 2018 and 2017, $6.4 million and $0.2 million, respectively, of the related-party receivables from collaborative arrangements were attributableto TRC. The primary source of revenue for TRC is the royalties generated from the net sales of TRELEGY® ELLIPTA® by GSK. Total revenue for TRCrelated to TRELEGY® ELLIPTA® for the years ended December 31, 2018 and 2017 was $13.4 million and $0.2 million, respectively.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.55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 values 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, 2018 and 2017, which consisted of equipment, computer equipment, software, office furniture and fixtures,amounted to $0.2 million. Property, equipment and leasehold improvements are stated at cost and depreciated using the straight-line method as follows: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. The estimated useful lives of these Capitalized Fees are based on acountry-by-country and product-by-product basis, as the later of the expiration or termination of the last patent right covering the compound in such productin such country and 15 years from first commercial sale of such product in such country, unless the agreement is terminated earlier. Consistent with our policyfor classification of costs under the research and development collaborative arrangements, the amortization of these Capitalized Fees is recognized as areduction of royalty revenue. We review our Capitalized Fees for56Leasehold 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)impairment on a product-by-product basis for each major geographic area when events or changes in circumstances indicate that the carrying amount of suchassets 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.Revenue Recognition In May 2014, the FASB issued a new comprehensive revenue recognition standard, ASC 606. We adopted this standard on January 1, 2018 on amodified retrospective basis. Under the new guidance, revenue is recognized when our customer obtains control of promised goods or services, in an amountthat reflects the consideration which we expect to receive in exchange for those goods or services. Revenue is recognized through a five-step process:(i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price for the contract;(iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) a performance obligation is satisfied. The adoption of ASC 606 did not have a material impact on our consolidated financial statements as we do not have any unrecognized transaction price,other than sales-based royalty revenue, or any remaining performance obligations under our collaboration agreements. We continue to recognize the royaltyrevenue on licensee net sales of products with respect to which we have contractual royalty rights in the period in which the royalties are earned and reportedto us. Royalties are recognized net of amortization of capitalized fees associated with any approval and launch milestone payments made to GSK.Collaborative Arrangements and Multiple-Element Arrangements Revenue from non-refundable, 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 such 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 was no remaining performance obligation for Innoviva under the MABA program.57Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)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.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.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 the tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect whenthe differences 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 willnot be realized. The recognition and measurement of tax benefits requires significant judgment. Our judgment might change as new information becomes available. Wewill continue to evaluate our deferred tax58Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)assets each reporting period to determine whether adjustments to our valuation allowance are required and deferred tax assets will be realized based on theconsideration of all available positive and negative evidence, including the differences between our anticipated and actual future operating results, using a"more likely than not" standard. 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.Comprehensive Income Comprehensive income is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss) consists of changes inunrealized and realized gains and losses on our marketable securities.Related Parties GSK owned 31.7% of our outstanding common stock as of December 31, 2018. Transactions with GSK are described in Note 3, "CollaborativeArrangements."Recently Issued Accounting Pronouncement Not Yet Adopted 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 recognize approximately $1.5 million "right-of-use" asset andlease liability for the operating lease agreement that was not previously included on the balance sheet under the existing lease guidance. We anticipate thatour consolidated statement of operations and cash flows will not materially be affected by the adoption of the new standard.2. NET INCOME PER SHARE Basic net income per share attributable to Innoviva stockholders is computed by dividing net income attributable to Innoviva stockholders by theweighted-average number of shares of common stock outstanding. Diluted net income per share attributable to Innoviva stockholders is computed bydividing net income attributable to Innoviva stockholders by the weighted-average number of shares of common stock and dilutive potential common stockequivalents then outstanding. Dilutive potential common stock equivalents include the assumed exercise, vesting and issuance of employee stock awards59Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)2. NET INCOME PER SHARE (Continued)using the treasury stock method, as well as common stock issuable upon assumed conversion of our convertible subordinated notes due 2023 (the "2023Notes") using the if-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 yearsended December 31, 2018 and 2017. The following table shows the computation of basic and diluted net income per share for the years ended December 31, 2018, 2017 and 2016:Anti-dilutive Securities The following common stock equivalents were not included in the computation of diluted net income per share because their effect was anti-dilutive:60 Year Ended December 31, (In thousands except per share data) 2018 2017 2016 Numerator: Net income attributable to Innoviva stockholders, basic $395,056 $134,143 $59,536 Add: interest expense on 2023 Notes 5,661 5,647 5,790 Net income attributable to Innoviva stockholders, diluted $400,717 $139,790 $65,326 Denominator: Weighted-average shares used to compute basic net income per share attributableto Innoviva stockholders 100,849 106,945 110,280 Dilutive effect of 2023 Notes 12,189 12,189 12,541 Dilutive effect of options and awards granted under equity incentive plan andemployee stock purchase plan 370 732 412 Weighted-average shares used to compute diluted net income per shareattributable to Innoviva stockholders 113,408 119,866 123,233 Net income per share attributable to Innoviva stockholders Basic $3.92 $1.25 $0.54 Diluted $3.53 $1.17 $0.53 Year Ended December 31, (In thousands) 2018 2017 2016 Outstanding options and awards granted under equity incentive plan and employee stockpurchase plan 1,490 2,121 4,073 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)3. REVENUE RECOGNITION AND COLLABORATIVE ARRANGEMENTS Revenue is recognized when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect toreceive in exchange for those goods or services. Revenue is recognized through a five-step process: (i) identify the contract with a customer; (ii) identify theperformance obligations in the contract; (iii) determine the transaction price for the contract; (iv) allocate the transaction price to the performance obligationsin the contract; and (v) recognize revenue when (or as) a performance obligation is satisfied. We recognize the royalty revenue on licensee net sales ofproducts with respect to which we have contractual royalty rights in the period in which the royalties are earned and reported to us. Royalties are recognizednet of amortization of capitalized fees associated with any approval and launch milestone payments made to GSK.Revenue 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 milestone feesto GSK totaling $220.0 million during the year ended December 31, 2014. The milestone fees paid to GSK were recognized as capitalized fees paid to arelated party, which are being amortized over their estimated useful lives commencing upon the commercial launch of the product. The amortization expenseis recorded as a reduction to the royalties from GSK. We are entitled to receive annual royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows: 15% on the first $3.0 billion of annual globalnet sales and 5% for all annual global net sales above $3.0 billion. Sales of single-agent LABA medicines and combination medicines would be combined forthe purposes of this royalty calculation. For other products combined with a LABA from the LABA Collaboration, such as ANORO® ELLIPTA®, royalties areupward 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%.61 Year Ended December 31, (In thousands) 2018 2017 2016 Royalties from a related party—RELVAR/BREO $220,162 $198,726 $128,638 Royalties from a related party—ANORO 41,286 29,036 17,869 Royalties from a related party—TRELEGY 13,379 179 — Total royalties from a related party 274,827 227,941 146,507 Less: amortization of capitalized fees paid to a related party (13,823) (13,823) (13,823)Royalty revenue 261,004 214,118 132,684 Strategic alliance—MABA program license — 3,099 885 Total net revenue from GSK $261,004 $217,217 $133,569  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, 2018, all of the available-for-sale debt securities had contractual maturities within one year, and the average duration of debtsecurities was approximately three months.62 December 31, 2018 (In thousands) Amortized Cost GrossUnrealizedGains GrossUnrealizedLosses EstimatedFair Value U.S. government securities $29,736 $— $(3)$29,733 U.S. government agencies 4,971 — — 4,971 U.S. corporate notes 2,875 — — 2,875 U.S. commercial paper 22,037 — — 22,037 Money market funds 49,358 — — 49,358 Total $108,977 $— $(3)$108,974 December 31, 2017 (In thousands) Amortized Cost 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 paper 29,945 — — 29,945 Money market funds 61,971 — — 61,971 Total $122,727 $— $(18)$122,709 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 amortized cost basis. The estimated fair valueswere as follows: 63 Estimated Fair Value Measurements as of December 31, 2018 Using: Quoted Price inActive Marketsfor IdenticalAssets Significant OtherObservableInputs SignificantUnobservableInputs Types of Instruments Level 1 Level 2 Level 3 Total (In thousands) Assets U.S. government securities $— $29,733 $— $29,733 U.S. government agencies — 4,971 — 4,971 U.S. corporate notes — 2,875 — 2,875 U.S. commercial paper — 22,037 — 22,037 Money market funds 49,358 — — 49,358 Total assets measured at estimated fair value $49,358 $59,616 $— $108,974 Debt Term B Loan $— $13,750 $— $13,750 2023 Notes — 258,918 — 258,918 2025 Notes — 230,692 — 230,692 Total fair value of debt $— $503,360 $— $503,360 Estimated Fair Value Measurements as of December 31, 2017 Using: Quoted Price inActive Marketsfor IdenticalAssets Significant OtherObservableInputs SignificantUnobservableInputs Types of Instruments Level 1 Level 2 Level 3 Total (In thousands) 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 paper — 29,945 — 29,945 Money market funds 61,971 — — 61,971 Total assets measured at estimated fair value $61,971 $60,738 $— $122,709 Debt Term B Loan $— $243,750 $— $243,750 2023 Notes — 241,259 — 241,259 2025 Notes — 205,975 — 205,975 Total fair value of debt $— $690,984 $— $690,984 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)4. AVAILABLE-FOR-SALE SECURITIES AND FAIR VALUE MEASUREMENTS (Continued) The fair value of our marketable securities classified within Level 2 is based upon observable inputs that may include benchmark yields, reported trades,broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The fair value of our 2023 Notes and of our 2025 Notes is based on recent trading prices of the instruments. The carrying amount of our initial Term BLoan before deducting debt issuance costs approximates fair value as the loan carries a variable interest rate that is tied to the LIBOR rate plus an applicablespread.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, 2018, the weighted averageremaining amortization period is 11.1 years. Additional information regarding these milestone fees is included in Note 3, "Collaborative Arrangements." Amortization expense for each of the yearsended December 31, 2018, 2017 and 2016 was $13.8 million. The remaining estimated amortization expense is $13.8 million for each of the years from 2019to 2023 and $83.9 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 Stock Appreciation Rights to employees, non-employee directors and consultants. As of December 31, 2018,total shares remaining available for issuance under the 2012 Plan were 5,134,462.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 value64 December 31, (In thousands) Amortization period 2018 2017 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 (67,101) (53,278)Net carrying value $152,899 $166,722 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6. STOCK-BASED COMPENSATION (Continued)of the stock at the beginning of the offering period or at the end of each applicable purchase period. The ESPP provides for consecutive and overlappingoffering periods of 24 months in duration, with each offering period composed of four consecutive six-month purchase periods. The purchase periods end oneither May 15 or November 15. ESPP contributions are limited to a maximum of 15% of an employee's eligible compensation. The maximum number ofshares that an employee may purchase in any purchase period is 2,500. An employee may not purchase shares with a value greater than $25,000 in anycalendar year. As of December 31, 2018, total shares remaining available for issuance under the ESPP were 194,051.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 RSUs2016 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 awardsincluded a market condition based on Relative Total Shareholder Return ("TSR") and a service condition that required continued employment collectively,the "Performance Measures". The vesting percentages of these awards were calculated based on the two-year TSR with a catch-up provision opportunitymeasured on January 13, 2019 for RSAs and on September 30, 2018 for RSUs. Two-thirds of amounts earned at the end of year two would vest and bedistributed on February 20, 2018, while the final one-third earned after two years as well as the catch-up amount earned would vest and be distributed onFebruary 20, 2019 for RSAs and November 20, 2018 for RSUs. The actual payout of shares may range from a minimum of zero shares to a maximum of328,688 shares granted upon the actual performance against the Performance Measures. The grant date fair value of these awards was determined using aMonte Carlo valuation model. The aggregate value of $2.0 million was to be recognized as compensation expense over the implied service period and wouldnot be reversed if the market condition was not met. In February 2018, the Compensation Committee certified the maximum achievement of the TSR as of the first measurement date, January 12, 2018. RSAstotaling 69,440 and RSUs totaling 30,862 representing two-thirds of the amounts were released on February 20, 2018. In connection with the65Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6. STOCK-BASED COMPENSATION (Continued)separation of certain members of senior management from the Company in early February 2018, the Board of Directors agreed to accelerate the vesting anddistribution of an aggregate of 118,821 RSAs to these members of senior management. The remaining 59,411 RSAs for these members of senior managementwere forfeited. As a net result of the vesting acceleration of the RSAs and the forfeiture of those unvested RSAs, an additional $0.7 million compensationexpense was recognized in 2018. In August and September 2018, the remaining 34,721 RSAs and 15,432 RSUs were forfeited due to the additional separation of senior managementmembers, and $0.2 million of previously recognized compensation expense was reversed.2017 Market-Based RSAs and RSUs On January 17, 2017, the Compensation Committee approved and granted 353,508 RSAs and 53,360 RSUs to senior management. These awardsincluded a market condition based on the TSR of Innoviva's common stock as compared to the TSR of the Nasdaq Biotechnology Index ("Index") and aservice condition that required continued employment collectively, the "Performance Measures II." The vesting percentages of these awards were calculatedbased on the two-year performance period with a catch-up provision opportunity measured on December 31, 2019 for RSAs and on September 30, 2019 forRSUs. Two-thirds of amounts earned at the end of year two would vest and be distributed on February 20, 2019, while the final one-third earned after twoyears as well as the catch-up amount earned would vest and be distributed on February 20, 2020 for RSAs and November 20, 2019 for RSUs. The actualpayout of shares may range from a minimum of zero shares to a maximum of 406,868 shares granted upon the actual performance against the PerformanceMeasures II. The grant date fair value of these awards was determined using a Monte Carlo valuation model. The aggregate value of $3.2 million was to berecognized as compensation expense over the implied service period and was subject to forfeiture. In connection with the separation of certain members of senior management from the Company during 2018, all of the 2017 market-based RSAs andRSUs were forfeited and $1.3 million previously recognized compensation expense was reversed.2018 Market-Based RSAs and RSUs On March 2, 2018, the Compensation Committee approved and granted 111,668 RSAs and 49,630 RSUs to senior management. These awards included amarket condition based on the TSR of Innoviva's common stock over a three-year performance period from the date of grant for the RSAs and from the date ofgrant until September 30, 2020 for RSUs, and a service condition that required continued employment. The grant date fair value of these awards wasdetermined using a Monte Carlo valuation model. The aggregate value of $1.7 million was to be recognized as compensation expense over the impliedservice period and would not be reversed if the market condition was not met, but with the exception of such person's continued employment with theCompany. In connection with the separation of the senior management members from the Company during 2018, all of the 2018 market-based RSAs and RSUs wereforfeited.66 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6. STOCK-BASED COMPENSATION (Continued)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 of Directors at the Annual Meeting of Stockholders, each non-employee director is automaticallygranted an RSU covering a number of shares of our common stock calculated as $225,000 ($250,000 prior to the October 2017 Amendments) divided by ourcommon stock closing share price on the date of grant as reported on The Nasdaq Global Select Market, rounded down to the nearest whole share. TheseRSUs will vest at the sooner of the next annual stockholder meeting or the one-year anniversary of grant, subject to the non-employee director's continuousservice through the applicable vesting date. Following the amendment to our non-employee director compensation program, both the annual RSUs andInitial RSUs described above remained unchanged with the exception that the number of shares of our common stock subject to each award has been reduced. 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.67Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6. STOCK-BASED COMPENSATION (Continued)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: For the year ended December 31, 2018, $1.7 million of stock-based compensation was reversed for the forfeited market-based awards due to theseparation of senior management members. As of December 31, 2018, the unrecognized stock-based compensation cost and the estimated weighted-average amortization period were as follows:68 Year Ended December 31, (In thousands) 2018 2017 2016 Research and development $— $697 $632 General and administrative 3,233 9,136 7,665 Total stock-based compensation expense $3,233 $9,833 $8,297 Year Ended December 31, (In thousands) 2018 2017 2016 Stock options $305 $593 $632 RSUs 1,650 2,282 1,920 RSAs 1,920 4,497 3,492 Performance-based RSAs — 242 1,293 Market-based RSUs (PSUs) (224) 291 112 Market-based RSAs (PSAs) (464) 1,855 693 ESPP 46 73 155 Total stock-based compensation expense $3,233 $9,833 $8,297 (In thousands) UnrecognizedCompensationCost Weighted-AverageAmortizationPeriod (Years) RSUs $682 0.6 RSAs 761 2.2 Total unrecognized compensation cost $1,443 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, 2018, the aggregate intrinsic value of the options outstanding and options exercisable was $0.8 million. The total intrinsic value of the options exercised was $0.4 million for the year ended December 31, 2018 and was not material in the years endedDecember 31, 2017 and 2016. The total estimated fair value of options vested was $0.8 million, $3.8 million and $4.7 million in the years endedDecember 31, 2018, 2017 and 2016, respectively. The total estimated fair value of RSUs and PSUs vested was $2.6 million in the year ended December 31, 2018 and 2017, and $3.9 million in the yearended December 31, 2016. The total estimated fair value of RSAs and PSAs vested was $7.6 million, $6.3 million and $14.7 million in the years ended December 31, 2018, 2017and 2016, respectively.7. DEBT Our debt consists of:69(In thousands, except per share data) Number ofoutstandingoptions Weighted-AverageExercisePrice ofOutstandingOptions Number ofoutstandingRSUs and PSUs Weighted-AverageFair Valueper Shareat Grant Number ofoutstandingRSAs and PSAs Weighted-AverageFair Valueper Shareat Grant Balance as of December 31, 2017 1,655 $23.89 370 $11.57 1,448 $10.61 Granted — — 177 14.29 202 13.11 Exercised (84) 12.22 — — — — Released RSUs/RSAs — — (224) 13.33 (444) 12.49 Forfeited (334) 26.43 (218) 10.07 (1,129) 10.00 Balance as of December 31, 2018 1,237 24.00 105 15.54 77 15.37 December 31, (In thousands) 2018 2017 Term B Loan $13,750 $243,750 2023 Notes 240,984 240,984 2025 Notes 192,500 192,500 Total debt 447,234 677,234 Unamortized debt discount and issuance costs (64,379) (77,872)Current portion of Term B Loan — (25,000)Net long-term debt $382,855 $574,362 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)7. DEBT (Continued)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 then outstanding 2029 Notes. The Term B Loan will mature on August 18, 2022. Two andone-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, in whole or in part, can be made at any time without a penalty. The Credit Agreement also provides us the ability to request one or moreadditional tranches of term loans (or increase an existing term loan) at any time prior to maturity. Interest on each term loan, at our option, may bear a varyingrate of LIBOR plus 4.5% 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 B Loan is unconditionally guaranteed by one of our wholly-owned subsidiaries, and will be required to be guaranteed by each of oursubsequently acquired or organized direct and indirect restricted wholly-owned domestic subsidiaries whose assets or net revenues exceed 5% of theconsolidated assets or net revenues, as the case may be, of our and our restricted subsidiaries (the "Guarantors"). Other domestic restricted subsidiaries, subjectto certain customary exceptions, will be required to become Guarantors to the extent that domestic restricted subsidiaries excluded from such guaranteeobligation represent, in the aggregate, more than 10% of the consolidated assets and more than 10% of our consolidated net revenues. These loans are seniorsecured obligations, collateralized by a lien on substantially all of our and the Guarantors' personal property and material real property assets (if any). 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 term of the loan using the effective interest method. As a result of the prepayments in 2018,$5.7 million of debt issuance costs were written off as a loss on the extinguishment of debt, which is presented as part of other income (expense), net in ourconsolidated statements of operations.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. The 2025 Notes are senior unsecuredobligations and bear interest at a rate of 2.5% per year, payable semi-annually in arrears on February 15 and August 15 of each year, beginning onFebruary 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 Notes70Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)7. DEBT (Continued)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 2025 Notes will be convertible at anytime. 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. The remainingnet proceeds from the sale of the 2025 Notes in the offering were used to repay a portion of the principal outstanding under the 2029 Notes on August 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 over the term of the 2025 Notes. The equity component is notremeasured as long as it continues to meet the conditions for equity classification. Our outstanding 2025 Notes balances consisted of the following:71 December 31, (In thousands) 2018 2017 Liability component Principal $192,500 $192,500 Debt discount and issuance costs, net (61,766) (68,342)Net carrying amount $130,734 $124,158 Equity component, net $65,361 $65,361 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)7. DEBT (Continued) The following table sets forth total interest expense recognized related to the 2025 Notes for the years ended December 31, 2018 and 2017: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. As a result of the partial conversion by certain holders of the 2023 Notes in July 2014, and dividends declared and paid in 2014 and 2015, theconversion rate with respect 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 a conversion price of approximately $19.77 per share. As a result of the conversion rate adjustments, the capped call strike price and capprice were also adjusted to $19.77 and $27.04, respectively.72 Year EndedDecember 31, (In thousands) 2018 2017 Contractual interest expense $4,799 $1,925 Amortization of debt issuance costs 505 189 Amortization of debt discount 6,071 2,268 Total interest and amortization expense $11,375 $4,382 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)7. DEBT (Continued) 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 income (expense), net in the consolidated statements of operations. As a result of the partial retirement of our 2023 Notes, we entered into apartial 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.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 2029Notes. During the years ended December 31, 2017 and 2016, 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 repaid $50.0 million on the 2029 Notes. In August 2017, we repaid the remaining principal balance of $407.6 million with the net proceeds from the 2025 Notes and Term B Loan. In connectionwith the sale of the 2029 Notes in 2014, we incurred approximately $15.3 million in debt issuance costs, which were being amortized to interest expense overthe term of the 2029 Notes. With the repayment of the 2029 Notes in 2017, we wrote off $7.3 million of unamortized debt issuance costs which is included inother income (expense), net in our consolidated statements of operations.Debt Maturities The aggregate scheduled maturities of our long-term debt as of December 31, 2018 are as follows:73(In thousands) Years ending December 31: 2019 to 2021 $— 2022 13,750 2023 240,984 Thereafter 192,500 Total $447,234 Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)8. COMMITMENTS AND CONTINGENCIESOperating 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, 2018,the total remaining lease payments, which run through May 2020, were $9.3 million. The carrying value of this lease guarantee was $0.5 million as ofDecember 31, 2018 and is reflected in other long-term liabilities in our consolidated balance sheet. Amortization on the lease guarantee commenced in 2016and amortization amount were for the years ended December 31, 2018, 2017 and 2016 were $0.3 million, $0.3 million and $0.2 million, respectively. Minimum lease payments on our corporate headquarters as of December 31, 2018 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, 2018.9. INCOME TAXES Income tax benefit (expense) consists of the following:74(In thousands) Years ending December 31: 2019 $403 2020 416 2021 428 2022 441 2023 201 Thereafter — Total $1,889 Year Ended December 31, (In thousands) 2018 2017 2016 Current State $19 $(4)$(95)Deferred Federal 190,195 — — State 5,859 — — 196,054 — — Total income tax benefit (expense), net $196,073 $(4)$(95) Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)9. INCOME TAXES (Continued) 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: We record deferred tax assets if the realization of such assets is more likely than not to occur. Significant management judgment is required indetermining whether a valuation allowance against the deferred tax assets is required. We have considered all available evidence, both positive and negative,such as our historical operating results and predictability of future taxable income, in making such determination. We are also required to exercise significantmanagement's judgment in forecasting future taxable income. Specifically, we evaluate the following criteria when considering a valuation allowance:•the history of tax net operating losses in recent years; •predictability of operating results; •profitability for a sustained period of time; and •level of profitability on a quarterly basis.75 Year Ended December 31, (In thousands) 2018 2017 2016 Expected tax at federal statutory rate $44,154 $46,997 $20,871 State income tax, net of federal benefit (5,878) 4 — Non-deductible executive compensation 747 987 925 Noncontrolling interest (2,367) — — Other 310 (1,506) (122)Impact of tax reform rate change — 124,017 — Change in valuation allowance (233,039) (170,495) (21,579)Income tax expense (benefit), net $(196,073)$4 $95 As of December 31, (In thousands) 2018 2017 Deferred tax assets Net operating loss carryforwards $215,497 $257,000 Research and development tax credit carryforwards 56,231 57,000 Other 1,647 3,000 Total deferred tax assets before valuation allowance 273,375 317,000 Valuation allowance (64,199) (303,000)Total deferred tax assets 209,176 14,000 Deferred tax liabilities Debt issuance discount and other (13,122) (14,000)Net deferred tax assets $196,054 $— Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)9. INCOME TAXES (Continued) As of December 31, 2018, we had cumulative net income before tax for the three years then ended. Based on our historical operating performance andestimated future taxable income, we have concluded that it is more likely than not that we will be able to realize approximately $190.2 million and$5.9 million benefits of the U.S. federal and state deferred tax assets in the future, respectively. As of December 31, 2017 and in earlier periods, the deferred tax assets were fully offset by a valuation allowance. The valuation allowance decreased by$181.2 million in the year ended December 31, 2017 primarily related to net operating losses utilization during 2017 and remeasurement of the deferred taxassets and liabilities due to enactment of the Tax Cuts and Jobs Act (the "TCJA"). As of December 31, 2018, we had federal net operating loss carryforwards of approximately $0.8 billion, which will expire from 2027 through 2035, andfederal research and development tax credit carryforwards of approximately $44.8 million, which will expire from 2019 through 2034. We also had state netoperating loss carryforwards of approximately $653.0 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. We conducted an Internal Revenue Code of 1986, as amended, Section 382 ("Section 382") analysis through September 30, 2018 to determine whetheran ownership change had occurred since inception. The Section 382 study concluded that it is more likely than not that the Company did not experience anownership change during the testing period. However, notwithstanding the applicable annual limitations, no portion of the net operating loss or creditcarryforwards is expected to expire before becoming available to reduce federal and state income tax liabilities as a result of those identified ownershipchanges. If we undergo another ownership change, the utilization of the pre-ownership change net operating loss carryforwards or pre-ownership change taxattributes, such as research tax credits, to offset the post-ownership change income may be subject to an annual limitation, pursuant to Sections 382 and 383of the Internal Revenue Code of 1986, as amended. Similar rules may apply under state tax laws. Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2018 and 2017, we had noaccrued interest or penalties. 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, effective January 1, 2018, made broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federalcorporate tax rate from 35% to 21%, and creating a new limitation on deductible interest expense. 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).SAB 118 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 reasonable76Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)9. INCOME TAXES (Continued)estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate andtherefore continues to apply ASC 740, based on the provisions of the tax laws that were in effect immediately prior to the TCJA being enacted. We completedour analysis during the measurement period and there were no measurement period adjustments recognized during the reporting period.Uncertain Tax Positions A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits are as follows (in thousands): Our total unrecognized tax benefits as of December 31, 2018 were $15.4 million. Total unrecognized tax benefits that, if recognized, would affect oureffective tax rate, were $8.0 million as of December 31, 2018. We do not anticipate the total amount of unrecognized income tax benefits relating touncertain tax positions existing as of December 31, 2018 will significantly increase or decrease in the next 12 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.77(In thousands) Unrecognized tax benefits as of December 31, 2017, 2016 and 2015 $15,488 Gross decrease in tax portions for 2018 (75)Unrecognized tax benefits as of December 31, 2018 $15,413 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 31,2018. 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. 78 For the Quarters Ended March 31 June 30 September 30 December 31 2018 Net revenue $52,380 $67,086 $61,680 $79,858 Total operating expenses 11,685 4,411 4,019 2,638 Income from operations 40,695 62,675 57,661 77,220 Income tax benefit, net — — — 196,073 Net income 30,330 56,616 50,167 269,215 Net income attributable to noncontrolling interest 749 1,990 3,078 5,455 Net income attributable to Innoviva stockholders $29,581 $54,626 $47,089 $263,760 Basic net income per share $0.29 $0.54 $0.47 $2.61 Diluted net income per share $0.27 $0.49 $0.43 $2.34 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 Income tax expense, net — — — (4)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  Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo 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, 2018 and 2017, the relatedconsolidated statements of operations, comprehensive income, stockholders' equity (deficit), and cash flows, for each of the three years in the period endedDecember 31, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of thethree years in the period ended December 31, 2018, 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, 2018, 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 19, 2019 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 1996.San Jose, CaliforniaFebruary 19, 201979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, 2018, under the supervision and with the participation of our management, including our interimprincipal executive officer and chief accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures, which aredefined under SEC rules as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company inthe reports that it files under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and reported within required timeperiods. 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, 2018. Our independent registered public accounting firm, Ernst & Young LLP, has audited our internal control over financial reporting as of December 31,2018. 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 accounting officer, does not expect that our disclosure controls and proceduresor our 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 and80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 31,2018 which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.81Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To 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, 2018, 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, 2018, 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, 2018 and 2017, the related consolidated statements of operations, comprehensive income, stockholders'equity (deficit), and cash flows, for each of the three years in the period ended December 31, 2018 and related notes and our report dated February 19, 2019expressed 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. 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 19, 201982Table of Contents ITEM 9B. OTHER INFORMATION None83Table of Contents 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, 2018. 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, 2018. 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, 2018.Securities Authorized for Issuance under Equity Compensation Plans The following table provides certain information with respect to all of our equity compensation plans in effect as of December 31, 2018: 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, 2018. 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, 2018.84Plan Category Number of securities tobe issued upon exerciseof outstanding optionsand vesting ofoutstanding restrictedstock units andrestricted stock awards Weighted-averageexercise price ofoutstanding options Number of securitiesremaining available forfuture issuance underequity compensation plans(excluding securitiesreflected in column (a)) (a) (b) (c) Equity compensation plans approved by securityholders 1,322,894(1)$24.18(3) 5,307,970(4)Equity compensation plans not approved bysecurity holders 18,648(2) 12.02(3) — Total 1,341,542(1)(2)$24.00(3) 5,307,970(4)(1)Includes 1,218,309 shares issuable upon exercise of outstanding options and 104,585 shares issuable upon vesting of outstandingRSUs and RSAs. (2)Includes 18,648 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 194,051 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.85 Page Consolidated Balance Sheets as of December 31, 2018 and 2017 49 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2018 50 Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31,2018 51 Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period endedDecember 31, 2018 52 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2018 53 Notes to Consolidated Financial Statements 54 Report of Independent Registered Public Accounting Firm 79 Table of Contents Exhibits 86 Incorporated by ReferenceExhibitNumber 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. with andinto 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% ConvertibleSenior Notes due 2025, dated as of August 7, 2017, between Innoviva and TheBank of New York Mellon Trust Company, N.A., as trustee 8-K 4.1 8/7/17 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 Directors February 10,2010 and approved by stockholders April 27, 2010 and forms of equity 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, between theregistrant 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 Contents87 Incorporated by ReferenceExhibitNumber 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 the registrantand 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 Group Limited,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 forms ofequity 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 Agreement amongthe 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 the registrantand each current member of the Board of Directors outstanding as ofDecember 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 (executiveofficer form) 10-Q 10.36 3/30/12Table of Contents88 Incorporated by ReferenceExhibitNumber 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 directors February 8,2012 and approved by stockholders May 16, 2012 and forms of equity award 10-Q 10.38 6/30/12 10.40 Base Capped Call Transaction, dated January 17, 2013 8-K 10.1 1/23/13 10.41 Additional Capped Call Transaction, dated January 18, 2013 8-K 10.2 1/23/13 10.43 Master Agreement by and among Theravance, Inc., Theravance Biopharma, 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. andGlaxo 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 Theravance Biopharma,dated June 2, 2014. 8-K 10.2 6/5/14 10.55 Tax Matters Agreement between Theravance and Theravance Biopharma, datedJune 2, 2014. 8-K 10.3 6/5/14 10.56 Employee Matters Agreement between Theravance and Theravance Biopharma,dated June 1, 2014. 8-K 10.4 6/5/14 10.57 Theravance Respiratory Company, LLC Limited Liability Company Agreementbetween 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 Contents89 Incorporated by ReferenceExhibitNumber 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 (Renamed 2009Severance 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 LLC andU.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., MorganStanley Senior Funding, Inc., as administrative agent and collateral agent, theother 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) 10-K 10.76 2/23/2018 10.77+ Offer Letter with Eric d'Esparbes, dated February 6, 2018 8-K 10.1 2/7/2018 10.78+ Second Amendment to 2009 Severance Plan 10-Q 10.81 7/26/2018Table of Contents90 Incorporated by ReferenceExhibitNumber Description Form Exhibit FilingDate/PeriodEnd Date 10.79+ Offer Letter with Geoffrey Hulme, dated May 18, 2018 10-Q 10.82 7/26/2018 10.80+ Offer Letter with Marianne Zhen, dated September 7, 2018 8-K 10.1 9/11/2018 21.1 List of Subsidiaries 23.1 Consent of Independent Registered Public Accounting Firm 24.1 Power of Attorney (see signature page to this Annual Report on Form 10-K) 31.1 Certification of Principal Executive Officer Pursuant to Rule 13a-14 under theSecurities Exchange Act of 1934 31.2 Certification of Principal Financial Officer Pursuant to Rule 13a-14 under theSecurities Exchange Act of 1934 32 Certifications Pursuant to 18 U.S.C. Section 1350 101 The following materials from Registrant's Annual Report on Form 10-K for theyear ended December 31, 2018, formatted in Extensible Business ReportingLanguage (XBRL) includes: (i) Consolidated Balance Sheets as of December 31,2018 and 2017, (ii) Consolidated Statements of Income for the years endedDecember 31, 2018, 2017 and 2016, (iii) Consolidated Statements ofComprehensive Income for the years ended December 31, 2018, 2017 and 2016,(iv) Consolidated Statements of Stockholders' Equity (Deficit) for the yearsended December 31, 2018, 2017 and 2016, (v) Consolidated Statements of CashFlows for years ended December 31, 2018, 2017 and 2016, and (vi) Notes toConsolidated 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 Geoffrey Hulme, 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.91 INNOVIVA, INC.Date: February 19, 2019 By: /s/ GEOFFREY HULMEGeoffrey HulmeInterim Principal Executive OfficerSignature Title Date /s/ GEOFFREY HULMEGeoffrey Hulme Interim Principal Executive Officer (PrincipalExecutive Officer) February 19, 2019/s/ MARIANNE ZHENMarianne Zhen Chief Accounting Officer (PrincipalAccounting Officer) February 19, 2019/s/ ODYSSEAS KOSTAS, M.D.Odysseas Kostas, M.D. Chairman of the Board February 19, 2019/s/ GEORGE BICKERSTAFF, IIIGeorge Bickerstaff, III Director February 19, 2019Table of Contents92Signature Title Date /s/ MARK DIPAOLO, ESQ.Mark DiPaolo, Esq. Director February 19, 2019/s/ JULES HAIMOVITZJules Haimovitz. Director February 19, 2019/s/ SARAH SCHLESINGER, M.D.Sarah Schlesinger, M.D. Director February 19, 2019QuickLinks -- Click here to rapidly navigate through this document Exhibit 21.1 Subsidiary Theravance Respiratory Company, LLC Delaware Theravance Respiratory Company, LLCAdvanced Medicine East, Inc. Delaware Advanced Medicine East, Inc.QuickLinksExhibit 21.1QuickLinks -- Click here to rapidly navigate through this document Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the following Registration Statements:(1)Registration Statement on Form S-8 No 333-119559 of Theravance, Inc. pertaining to the 2004 Equity Incentive Plan and the 2004 EmployeeStock Purchase Plan, (2)Registration Statement on Form S-8 No 333-123716 of Theravance, Inc. pertaining to the Shares Acquired Under Written CompensationAgreements, (3)Registration Statement on Form S-8 No 333-129669 of Theravance, Inc. pertaining to the 2004 Employee Stock Purchase Plan, (4)Registration Statement on Form S-8 No 333-142707 of Theravance, Inc. pertaining to the 2004 Equity Incentive Plan, (5)Registration Statement on Form S-8 No 333-150753 of Theravance, Inc. pertaining to the 2008 New Employee Equity Incentive Plan and the2004 Employee Stock Purchase Plan, (6)Registration Statement on Form S-8 No 333-159042 of Theravance, Inc. pertaining to the 2004 Employee Stock Purchase Plan, (7)Registration Statement on Form S-3 No 333-160761 of Theravance, Inc. and the related Prospectus, (8)Registration Statement on Form S-8 No 333-161065 of Theravance, Inc. pertaining to the 2008 New Employee Equity Incentive Plan, (9)Registration Statement on Form S-8 No 333-166546 of Theravance, Inc. pertaining to the 2004 Equity Incentive Plan, (10)Registration Statement on Form S-8 No 333-173923 of Theravance, Inc. pertaining to the 2004 Employee Stock Purchase Plan, (11)Registration Statement on Form S-8 No 333-181763 of Theravance, Inc. pertaining to the 2012 Equity Incentive Plan, (12)Registration Statement on Form S-3 No 333-186058 of Theravance, Inc. and the related Prospectus, and (13)Registration Statement on Form S-8 No 333-197950 of Theravance, Inc. pertaining to the 2012 Equity Incentive Plan, the Amended andRestated 2008 New Employee Equity Incentive Plan, the 2004 Equity Incentive Plan and the 1997 Stock Planof our reports dated February 19, 2019, 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, 2018./s/ Ernst & Young LLPSan Jose, CaliforniaFebruary 19, 2019QuickLinksExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMQuickLinks -- Click here to rapidly navigate through this document Exhibit 31.1 Certification of Principal Executive OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Geoffrey Hulme, 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 19, 2019 /s/ GEOFFREY HULMEGeoffrey HulmeInterim Principal Executive Officer(Principal Executive Officer)QuickLinksExhibit 31.1Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002QuickLinks -- Click here to rapidly navigate through this document Exhibit 31.2 Certification of Principal Accounting OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Marianne Zhen, 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 19, 2019 /s/ MARIANNE ZHENMarianne ZhenChief Accounting Officer(Principal Accounting Officer)QuickLinksExhibit 31.2Certification of Principal Accounting 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 ACCOUNTING OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Geoffrey Hulme, 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, 2018 fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as amended and that information contained in such Annual Report on Form 10-K fairly presents in all material respects thefinancial condition of Innoviva, Inc. at the end of the periods covered by such Annual Report on Form 10-K and results of operations of Innoviva, Inc. for theperiods covered by such Annual Report on Form 10-K. I, Marianne Zhen, 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, 2018 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 19, 2019 By: /s/ GEOFFREY HULMEGeoffrey HulmeInterim Principal Executive Officer(Principal Executive Officer)Date: February 19, 2019 By: /s/ MARIANNE ZHENMarianne ZhenChief Accounting Officer(Principal Accounting Officer)QuickLinksExhibit 32CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL ACCOUNTING 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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