Innoviva, Inc.
Annual Report 2019

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2019or☐☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from toCommission 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.)1350 Old Bayshore Highway, Suite 400Burlingame, CA (Address of principal executive offices)94010(Zip Code)Registrant’s telephone number, including area code: (650) 238-9600Title of Each Class Trading Symbol(s) Name of Each Exchange On Which RegisteredCommon Stock $0.01 Par ValueINVAThe Nasdaq Stock Market LLCSECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONEIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ⌧ No ◻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 ◻ No ⌧Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past90 days. Yes ⌧ No ◻Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ⌧Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act (Check One):Large accelerated filer ⌧Accelerated filer ◻Non-accelerated filer ◻Smaller reporting company ☐Emerging growth company ☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the closing price of the registrant’sCommon Stock on The Nasdaq Global Select Market on June 28, 2019 was $1,006,059,818. This calculation does not reflect a determination that persons are affiliates for any other purpose. On February 11, 2020, there were 101,300,967 shares of the registrant’s Common Stock outstanding.DOCUMENTS INCORPORATED BY REFERENCESpecified portions of the registrant’s definitive Proxy Statement to be issued in conjunction with the registrant’s 2020 Annual Meeting of Stockholders, which isexpected to be filed not later than 120 days after the registrant’s fiscal year ended December 31, 2019, are incorporated by reference into Part III of this 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 on Form 10-K.Table of Contents2INNOVIVA, INC.2019 Form 10-K Annual ReportTable of ContentsPagePART IItem 1.Business4Item 1A.Risk Factors9Item 1B.Unresolved Staff Comments26Item 2.Properties26Item 3.Legal Proceedings26Item 4.Mine Safety Disclosures27PART IIItem 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities27Item 6.Selected Financial Data28Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations30Item 7A.Quantitative and Qualitative Disclosures About Market Risk38Item 8.Financial Statements and Supplementary Data39Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure67Item 9A.Controls and Procedures67Item 9B.Other Information69PART IIIItem 10.Directors, Executive Officers and Corporate Governance69Item 11.Executive Compensation69Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters69Item 13.Certain Relationships and Related Transactions, and Director Independence69Item 14.Principal Accountant Fees and Services69PART IVItem 15.Exhibits and Financial Statement Schedules70Item 16.Form 10-K Summary70Exhibits71Signatures74Table of Contents3Special Note Regarding Forward-Looking StatementsThis Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Securities Act”). Such forward-looking statements involvesubstantial 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” andsimilar expressions (including the negatives thereof) are intended to identify forward-looking statements, although not all forward-lookingstatements contain these identifying words. We may not actually achieve the plans, intentions, expectations or objectives disclosed in ourforward-looking statements and the assumptions underlying our forward-looking statements may prove incorrect. Therefore, you should notplace undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions, expectationsand objectives disclosed in the forward-looking statements that we make. All written and verbal forward-looking statements attributable to us orany person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.Important factors that we believe could cause actual results or events to differ materially from our forward-looking statements include, butare not limited to, risks related to: lower than expected future royalty revenue from respiratory products partnered with GSK, thecommercialization of RELVAR ®/BREO ® ELLIPTA ® , ANORO ® ELLIPTA ®and TRELEGY ® ELLIPTA ® in the jurisdictions in which theseproducts have been approved; the strategies, plans and objectives of the company (including the company’s growth strategy and corporatedevelopment initiatives beyond the existing respiratory portfolio); the timing, manner and amount of potential capital returns to stockholders;the status and timing of clinical studies, data analysis and communication of results; the potential benefits and mechanisms of action of productcandidates; expectations for product candidates through development and commercialization; the timing of regulatory approval of productcandidates; projections of revenue, expenses and other financial items and 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 AnnualReport on Form 10-K. Our forward-looking statements in this Annual Report on Form 10-K are based on current expectations as of the datehereof and we do not assume any obligation to update any forward-looking statements on account of new information, future events orotherwise, except as required by law.We encourage you to read Management’s Discussion and Analysis of our Financial Condition and Results of Operations and ourconsolidated financial statements contained in this Annual Report on Form 10-K. We also encourage you to read Item 1A of Part I of thisAnnual Report on Form 10-K, entitled “Risk Factors,” which contains a more complete discussion of the risks and uncertainties associatedwith our business. In addition to the risks described above and in Item 1A of this report, other unknown or unpredictable factors also couldaffect our results. Therefore, the information in this report should be read together with other reports and documents that we file with theSecurities and Exchange Commission (“SEC”) from time to time, including on Form 10-Q and Form 8-K, which may supplement, modify,supersede or update those risk factors. As a result of these factors, we cannot assure you that the forward-looking statements in this report willprove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of thesignificant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us orany other person that we will achieve our objectives and plans in any specified time frame, or at all.Table of Contents4PART IITEM 1. BUSINESSOverviewInnoviva, Inc. (“Innoviva”, the “Company”, the “Registrant” or “we” and other similar pronouns) is a company with a portfolio of royaltiesthat include respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR® /BREO® ELLIPTA® (fluticasone furoate/vilanterol, “FF/VI”), ANORO® ELLIPTA® (umeclidinium bromide/ vilanterol, “UMEC/VI”) and TRELEGY® ELLIPTA® (the combinationFF/UMEC/VI). Under the Long-Acting Beta2 Agonist (“LABA”) Collaboration Agreement, Innoviva is entitled to receive royalties from GSKon 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 netsales 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 TheravanceRespiratory Company, LLC (“TRC”), including TRELEGY® ELLIPTA® and any other product or combination of products that may bediscovered or developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred toherein as the “GSK Agreements”), which have been assigned to TRC other than RELVAR® /BREO® ELLIPTA® and ANORO® ELLIPTA®.Our headquarters are located at 1350 Old Bayshore Highway, Suite 400, Burlingame, CA 94010. The Company was incorporated inDelaware in November 1996 under the name Advanced Medicine, Inc., and began operations in May 1997. It later changed its name toTheravance, Inc. in April 2002. In June 2014, we spun-off our research and development operations. In January 2016, we rebranded andchanged our name to Innoviva, Inc.Our StrategyOur corporate strategy is currently focused on the goal of maximizing stockholder value by, among other things, maximizing the potentialvalue of our respiratory assets partnered with GSK and optimizing our operations and capital allocation.Our Relationship with GSKLABA CollaborationIn November 2002, we entered into our LABA Collaboration Agreement with GSK to develop and commercialize once-daily products forthe treatment of 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 the proprietary name outside the U.S. and Canada), a once-daily combination medicine consisting of a LABA, vilanterol(“VI”), and an inhaled corticosteroid (“ICS”), fluticasone furoate (“FF”),●ANORO® ELLIPTA® (“UMEC/VI”), a once-daily medicine combining a long-acting muscarinic antagonist (“LAMA”),umeclidinium bromide (“UMEC”), with a LABA, VI, and●TRELEGY® ELLIPTA® (the combination FF/UMEC/VI), a once-daily combination medicine consisting of an ICS, LAMA andLABA.As a result of the launch and approval of RELVAR® /BREO® ELLIPTA® and ANORO® ELLIPTA® in the U.S., Japan and Europe, inaccordance with the LABA Collaboration Agreement, we paid milestone fees to GSK totaling $220.0 million during the year endedDecember 31, 2014. 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.2004 Strategic AllianceIn March 2004, we entered into the Strategic Alliance Agreement with GSK where GSK received an option to license exclusivedevelopment and commercialization rights to product candidates from certain of our discovery programs on predetermined terms and on anexclusive, worldwide basis. In 2005, GSK licensed our Bifunctional Muscarinic Antagonist-Beta2 Agonist ("MABA") program for the treatmentof COPD, and in October 2011, we and GSK expanded the MABA program by adding six additional Innoviva- discovered preclinical MABAcompounds (the “Additional MABAs”). The development program was funded in full byTable of Contents5GSK. GSK is in the process of determining the next steps for the program. As a result of the transactions effected by the spin-off of TheravanceBiopharma in June 2014 (the “Spin-Off”), the Strategic Alliance Agreement was assigned to TRC, which is entitled to receive any contingentpayments and royalties payable by GSK from sales of products that may be developed under the Strategic Alliance Agreement, such as MABA,and MABA/FF.Common Stock owned by GSKAs of February 11, 2020, GSK beneficially owned approximately 31.6% of our outstanding common stock.Recent Highlights●GSK Net Sales:oFourth quarter 2019 net sales of RELVAR®/BREO® ELLIPTA® by GSK were $354.4 million, down 18% from $431.7 million inthe fourth quarter of 2018, with $137.2 million in net sales from the U.S. market and $217.2 million from non-U.S. markets.oFourth quarter 2019 net sales of ANORO® ELLIPTA® by GSK were $182.7 million, down 2% from $186.2 million in the fourthquarter of 2018, with $116.8 million net sales from the U.S. market and $65.9 million from non-U.S. markets.oFourth quarter 2019 net sales of TRELEGY® ELLIPTA® by GSK were $221.4 million, up significantly from $99.0 million in thefourth quarter of 2018, with $162.4 million in net sales from the U.S. market and $59.0 million in net sales from non-U.S.markets.ManufacturingManufacturing of RELVAR® /BREO® ELLIPTA® (FF/VI), ANORO® ELLIPTA® (UMEC/VI) and TRELEGY® ELLIPTA® (thecombination FF/UMEC/VI) is performed by GSK.Government RegulationThe development and commercialization of products and product candidates pursuant to the GSK Agreements are subject to extensiveregulation by governmental authorities in the United States and other countries. Before marketing in the United States, any medicine mustundergo rigorous preclinical studies and clinical studies and an extensive regulatory approval process implemented by the FDA. Outside theUnited 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 tocountry. In any country, the commercialization of medicines is permitted only if the appropriate regulatory authority is satisfied that ourcollaborative partner has presented adequate 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 standardsis not maintained 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 productbased on the results of these post-marketing studies. The FDA has broad post-market regulatory and enforcement powers, including the abilityto suspend or delay issuance of approvals, seize products, 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 forwhich the medicine is effective, as demonstrated through clinical studies and included in the medicine’s labeling. Even if this regulatoryapproval is obtained, a marketed medicine, its manufacturer and its manufacturing facilities are subject to continual review and periodicinspections by the FDA. The FDA ensures the quality of approved medicines by carefully monitoring manufacturers’ compliance with its currentgood manufacturing practice (“cGMP”) regulations. The cGMP regulations for drugs contain minimum requirements for the methods, facilities,and controls used in manufacturing, processing, and packaging of a medicine. The regulations are intended to make sure that a medicine is safefor use, and that it has the ingredients and strength it claims to have. Discovery of previously unknown problems with a medicine, manufactureror facility may result in restrictions on the medicine or manufacturer, including costly recalls or withdrawal of the medicine from the market.Table of Contents6We and our collaborative partner are also subject to various laws and regulations regarding laboratory practices, the experimental use ofanimals and the use and disposal of hazardous or potentially hazardous substances in connection with the development and commercialization ofproducts and product candidates. In each of these areas, as above, the FDA and other regulatory authorities have broad regulatory andenforcement powers, including the ability to suspend or delay issuance of approvals, seize products, withdraw approvals, enjoin violations, andinstitute criminal prosecution, any one or more of which could have a material adverse effect upon our business, financial condition and resultsof operations.Outside the United States, our collaborative partner’s ability to market partnered products will also depend on receiving marketingauthorizations from the appropriate regulatory authorities. Risks similar to those associated with FDA approval and continuing review describedabove exist with the regulatory approval processes in other countries.Patents and Proprietary RightsWe and our collaborative partner will be able to protect our partnered technology from unauthorized use by third parties only to the extentthat such technology is covered by valid and enforceable patents or is effectively maintained as trade secrets. Our success in the future willdepend in part on us and our collaborative partner obtaining patent protection for our partnered products and product candidates. Accordingly,patents and other proprietary rights are essential 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 businessthat involve proprietary know-how and technology that is not covered by patent applications, we rely on trade secret protection andconfidentiality agreements to protect our interests. We require all of our employees, consultants and advisors to enter into confidentialityagreements. Where it is necessary to share our proprietary information or data with outside parties, our policy is to make available only thatinformation and data required to accomplish the desired purpose and only pursuant to a duty of confidentiality on the part of those parties.As of December 31, 2019, we owned 39 issued United States patents and 298 granted foreign patents, as well as additional pending UnitedStates patent applications and foreign patent applications. The claims in these various patents and patent applications are directed tocompositions of matter, including claims covering product candidates, lead compounds and key intermediates, pharmaceutical compositions,methods of use and processes for making our compounds.United States issued patents and foreign patents generally expire 20 years after filing. Nevertheless, issued patents can be challenged,narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products and threaten ourability to commercialize our product candidates. Our patent position, similar to other companies in our industry, is generally uncertain andinvolves complex legal and factual questions. To maintain our proprietary position, we will need to obtain effective claims and enforce theseclaims once granted. It is possible that, before any of our products can be commercialized, any related patent may expire or remain in force onlyfor a short period following commercialization, thereby reducing any advantage of the patent. Also, we do not know whether any of our patentapplications will result in any issued patents or, if issued, whether the scope of the issued claims will be sufficient to protect our proprietaryposition.CompetitionWe anticipate that RELVAR®/BREO® ELLIPTA® (FF/VI), ANORO® ELLIPTA® (UMEC/VI) and TRELEGY® ELLIPTA® (thecombination FF/UMEC/VI) will compete with a number of approved bronchodilator drugs alone or in combination, including each other anddrug candidates under development that are designed to treat asthma and COPD. These include but are not limited to:●Advair®/Seretide™ Diskus®/HFA® (salmeterol and fluticasone 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 outsidethe U.S. and Sunovion in the U.S.Table of Contents7●Incruse® Ellipta® (umeclidinium) and Arnuity® Ellipta® (fluticasone furoate) (We are not entitled to any royalties from eitherproduct.)●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 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. Inthe U.S., the product was approved in October 2015 at a lower strength as a twice-daily COPD treatment, and was licensed toSunovion in December 2016, and launched in May 2017●Stiolto (U.S.)/Spiolto (E.U.) Respimat®, (tiotropium combined with olodaterol), marketed by Boehringer Ingelheim for the treatmentof COPD●Bevespi Aerosphere®, (glycopyrronium bromide in combination with formoterol fumarate), marketed by AstraZeneca●Duaklir® Genuair®, (aclidinium bromide in combination with formoterol fumarate), developed by AstraZeneca as a maintenancebronchodilator treatment for COPD and approved in November 2014 in the EU and March 2019 in the U.S.●QMF149, (indacaterol in combination with mometasone), being developed by Novartis for markets outside the U.S. and underregulatory review in the E.U. for asthma and in Phase 3 development for COPD●Trimbow, (a fixed-dose, twice daily combination of formoterol, beclomethasone and glycopyrronium) manufactured by Chiesi andindicated for use in COPD●QVM149, (a fixed-dose combination of indacaterol, mometasone and glycopyrronium) being developed by Novartis as a tripletherapy/single inhaler for the treatment of asthma and under regulatory review in the E.U.●PT010, (fixed dose combination of formoterol, glycopyrronium and budesonide) being developed by AstraZeneca as a triple therapysingle inhaler twice-daily medication for COPD and under regulatory review in the U.S.●Nucala, (mepolizumab; an interleukin-5 antagonist monoclonal antibody) developed by GSK for add on maintenance treatment ofsevere asthma in patients 12 years and older and approved in the U.S. in June 2019●Xolair® (omalizumab, an anti-IgE antibody) developed by Genentech for patients 6 years of age and older with moderate to severe persistent asthma uncontrolled by inhaled corticosteroids and approved in 2003. Single-dose pre-filled syringes were approved by the FDA in September 2018. ●Cinqair® (anti-interleukin-5 monoclonal antibody for the add-on maintenance treatment of adults with severe asthma and aneosinophilic phenotype) marketed by TEVA Pharmaceutical Industries Ltd.●Dupixent® (dupilamab, an injectable IL-4 and IL-13 inhibitor developed by Sanofi Genzyme and approved by the FDA in October2018 as an add-on maintenance therapy in patients with moderate-to-severe asthma aged 12 years and older with an eosinophilicphenotype or with oral corticosteroid-dependent asthma●Fasenra® (benralizumab, an injectable anti-IL-5 monoclonal antibody) for the treatment of severe asthma in patients 12 years of age and older marketed by AstraZeneca. Fasenra Pen pre-filled auto-injector was approved by the FDA for self-administration in November 2019.●Singulair® (monteleukast, is an orally active leukotriene receptor antagonist) for the prophylaxis and treatment of asthma in patients 12months of age and older marketed by MerckIn addition, several firms are developing new formulations of Advair/Seretide (salmeterol /fluticasone propionate) and Symbicort(formoterol fumerate/budesonide) which may be marketed as generics or branded generics relative to the existing products from GSK andAstraZeneca, respectively. All of these efforts represent potential competition for any of our partnered products. Efforts haveTable of Contents8intensified following the publication of FDA draft guidance for the approval of fully substitutable versions of Advair and Symbicort in late 2013and mid-2015, respectively. Current examples of these products include the marketed products Duoresp/Biresp from Teva (generic Symbicort),AirFluSal Forspiro by Sandoz, Rolenium by Elpen and Sirdupla by Mylan (all generic versions of Seretide) which are all available in a widenumber of countries in the E.U. Numerous companies like Mylan N.V., Hikma Pharmaceuticals PLC (Hikma), Novartis’ Sandoz division andTeva Pharmaceuticals Industries Ltd. (Teva) have publicly stated their intentions to bring generic forms of the ICS/LABA drug Advair®, whencertain patents covering the Advair® delivery device expired in 2016. In March 2017, Mylan N.V. received a complete response letter from theFDA relating to its Abbreviated New Drug Application (“ANDA”) for fluticasone propionate 100, 250, 500 mcg and salmeterol 50 mcginhalation powder. In May 2017, Hikma announced that it received a complete response letter from the FDA relating to its ANDA forfluticasone propionate and salmeterol inhalation powder, and in February 2018, Novartis announced that its generic division Sandoz hadreceived a complete response letter from the FDA in response to its ANDA for a third fluticasone propionate and salmeterol product. In January2019, Mylan announced that the FDA approved Wixela™ Inhu™ (fluticasone propionate and salmeterol inhalation powder, USP), the firstgeneric of ADVAIR DISKUS®. Teva announced that the FDA approved two of its products for adolescent and adult patients with asthma, oneof which is AirDuo™ RespiClick® (fluticasone propionate and salmeterol inhalation powder), a non-AB substitutable generic version ofAdvair®. In January 2020, Astra Zeneca launched an authorized generic version of Symbicort. In general, these manufacturers are required toconduct a restricted number of clinical efficacy, pharmacokinetic and device studies to demonstrate equivalence to Advair, per the FDA’sSeptember 2013 Draft Guidance Document. These studies are designed to demonstrate that the generic product has the same activeingredient(s), dosage form, strength, exposure and clinical efficacy as the branded product. These generic equivalents, which must meet thesame 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 significantpercentage of the sales of 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 FDA issued draft guidelines documents covering Fluticasone Furoate/Vilanterol Trifenatate (FF/VI), the activeingredients used in RELVAR®/BREO® ELLIPTA®.EmployeesAs of December 31, 2019, we had six employees. None of our employees are represented by a labor union. We consider our employeerelations to be good.Information about our Executive OfficersThe following table sets forth the name, age, and position of each of our executive officers as of February 19, 2020:Name Age Positions HeldGeoffrey Hulme53Interim Principal Executive OfficerMarianne Zhen51Chief Accounting OfficerGeoffrey Hulme was appointed Interim Principal Executive Officer in May 2018. Prior to his hiring, Mr. Hulme served as the owner andmanager of Steel Valley Capital LLC since 2016 and Steel Valley Advisors LLC, a registered investment adviser, since 2017. Previously, from1998 to 2015, he worked at Amici Capital, LLC, serving in various roles, including as Director of Research, a portfolio manager and a directorof various funds managed by Amici. Mr. Hulme earned a Bachelor of Science degree in Business Administration with a concentration inFinance, 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 to joining Innoviva, Ms. Zhen served as the Corporate Controller at Steelwedge Software Inc. from 2012 to 2014, Intelmate from 2011 to2012 and Model N, Inc. from 2007 to 2011. Ms. Zhen earned a Bachelor of Science degree in Business Administration with a concentration inAccounting from San Francisco State University. She is a Certified Public Accountant and a member of the American Institute of CertifiedPublic Accountants.Code of Business ConductThe Company has adopted the Innoviva, Inc. Code of Business Conduct that applies to all directors, officers and employees. The Code ofBusiness Conduct, 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 makes any substantive amendments to the Code of Business Conduct or grants a waiver from any provision of such code to anyexecutive officer or director, the Company will promptly disclose the nature of the amendment or waiver, as required by applicable law.Table of Contents9Available InformationOur web page address is www.inva.com. Our investor relations website is located at http://investor.inva.com. We make available free ofcharge on our investor relations website under “SEC Filings” our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, CurrentReports on Form 8-K, our directors’ and officers’ Section 16 Reports and any amendments to those reports after filing or furnishing suchmaterials to the SEC. The information found on our website is not part of this or any other report that we file with or furnish to the SEC.Innoviva and the Innoviva logo are registered trademarks of Innoviva, Inc. Trademarks, tradenames or service marks of other companiesappearing in this report are the property of their respective owners.ITEM 1A. RISK FACTORSRisks 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 tosuccessfully develop and commercialize 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 respiratoryprograms. Royalty revenues from RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® are expected to represent the majority of ourforeseeable future revenues from GSK. The amount and timing of revenue from such royalties are unknown and highly uncertain. Our futuresuccess depends upon the performance by GSK of its commercial obligations under the GSK Agreements and the commercial success ofRELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA®. We have no control over GSK’s marketing and salesefforts, and GSK might not be successful, which would harm our business and cause 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 royaltiesand milestone payments, if any, we receive will depend on many factors, including the following:●the extent and effectiveness of the sales and marketing and distribution support GSK provides to our partnered products;●market acceptance and demand for our partnered products;●changes in the treatment paradigm or standard of care for COPD or asthma, for instance through changes to the GOLD (GlobalInitiative for Chronic Obstructive Lung Disease) guidelines;●the competitive landscape of generic and branded products and developing therapies that compete with our partnered products,including TRELEGY® ELLIPTA® or products owned by GSK (such as Advair®) but which are not partnered with us and pricingpressure in the respiratory 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 (suchas Advair®), 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-party payors;●timing and amounts of payor rebate adjustments and prior period rebate adjustments;●seasonal fluctuations of demand;Table of Contents10●the ability of patients to be able to afford our partnered products or obtain health care coverage that covers our partnered products;●safety concerns in the marketplace for respiratory therapies in general and with our partnered products in particular;●regulatory developments relating to the manufacture or continued use of our partnered products;●the requirement to conduct additional post-approval studies or trials for our partnered products;●decisions by GSK with respect to the MABA program;●GSK’s ability to obtain regulatory approval of our partnered products in additional countries;●the unfavorable outcome of any potential litigation relating to our partnered products;●general economic conditions in the jurisdictions where our partnered products are sold, including microeconomic disruptions orslowdowns; or●if our royalty revenue or operating results fall below the expectations of investors or securities analysts or below any guidance we mayprovide to the market, the price of our common stock could decline substantially.When the FDA or other applicable regulatory authorities approve generic products, including but not limited to generic forms of Advair,that compete with RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®, or a generic form of RELVAR®/BREO® ELLIPTA®, theroyalties payable to us pursuant to the LABA Collaboration Agreement will be less than anticipated, which in turn would harm our businessand 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 “listeddrug” that can, in turn, be cited by potential competitors in support of approval of an ANDA in the United States. Agency regulations and otherapplicable regulations and policies provide incentives to manufacturers to create modified, non-infringing versions of a drug to facilitate theapproval of an ANDA or other application for generic substitutes in the United States and in nearly every pharmaceutical market around theworld. Numerous companies like Mylan N.V., Hikma/Vectura partnership, Novartis’ Sandoz division and Teva have publicly stated theirintentions to bring generic forms of the ICS/LABA drug Advair®, when certain patents covering the Advair® delivery device expired in 2016. Ingeneral, these manufactures are required to conduct a restricted number of clinical efficacy, pharmacokinetic and device studies to demonstrateequivalence to Advair, per FDA’s September 2013 draft guidance document. These studies are designed to demonstrate that the generic producthas 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 thatproduce generic equivalents are generally able to offer their products at lower prices. Thus, after the introduction of a generic competitor, asignificant percentage of the sales of any branded product and products that may compete with such branded product is typically lost to thegeneric product.In January 2019, Mylan announced that the FDA approved Wixela™ Inhu™ (fluticasone propionate and salmeterol inhalation powder,USP), the first generic of ADVAIR DISKUS®. In that same month, Teva announced that the FDA approved two of their products for adolescentand adult patients with asthma, one of which is AirDuo™ RespiClick® (fluticasone propionate and salmeterol inhalation powder), a non-ABsubstitutable generic version of Advair®. In November 2019, Hikma/Vectura announced that it completed and submitted a clinical endpoint study together with other information requested by the FDA in a complete response letter received in 2017. In January 2020, Novartis announced that the Sandoz division was abandoning its generic Advair program after receiving a complete response letter in February 2018. In January 2020, Astra Zeneca also launched an authorized generic version of Symbicort.In April 2016, the FDA issued draft guidance documents covering Fluticasone Furoate/Vilanterol Trifenatate (FF/VI), the activeingredients used in RELVAR®/BREO® ELLIPTA®. Accordingly, introduction of generic products that compete against ICS/LABA products,like RELVAR®/BREO® ELLIPTA®, would materially adversely impact our future royalty revenue, profitability and cash flows. We cannot yetascertain what impact these generic products and any future approved generic products will have on any sales of RELVAR®/BREO®ELLIPTA® or ANORO® ELLIPTA®, if approved.Table of Contents11Reduced prices and reimbursement rates due to the actions of governments, payors, or competition or other healthcare cost containmentinitiatives such as restrictions on use, may negatively impact royalties generated under the GSK Agreements.The continuing efforts of governments, pharmaceutical benefit management organizations (“PBMs”), insurance companies, managed careorganizations and other payors of health care costs to contain or reduce costs of health care has adversely affected the price, market access, andtotal revenues of RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA®, and TRELEGY® ELLIPTA® and may continue to adversely affectthem in the future. In addition, we have experienced and expect to continue to experience increased competitive activity, which has resulted inlower 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”) and other legislative or regulatory requirements or potential legislative or regulatory actions regarding healthcare and insurancematters, along with the trend toward managed healthcare in the U.S., could adversely influence the purchase of healthcare products and reducedemand and prices for our partnered products. This could harm GSK’s ability to market our partnered products and significantly reduce futurerevenues. For example, when GSK launched RELVAR®/BREO® ELLIPTA® for the treatment of COPD in the U.S. in October 2013, GSKexperienced significant challenges gaining coverage at some of the largest PBMs, healthcare payors, and providers and lower overall prices thanexpected. Recent actions by U.S. PBMs in particular have increased discount levels for respiratory products resulting in lower net sales pricingrealized for products in our collaboration. In addition, in certain foreign markets, the pricing of prescription drugs is subject to governmentcontrol and reimbursement may in some cases be unavailable. We believe that pricing pressures will continue and may increase. This may makeit difficult for GSK to sell our partnered products at a price acceptable to us or GSK or to generate revenues in line with our analysts’ orinvestors’ 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 relatedlegislation with new healthcare legislation. There is uncertainty with respect to the impact these potential changes may have, if any, and anychanges will likely take time to unfold, and could have an impact on coverage and reimbursement for healthcare items and services covered byplans that were authorized by PPACA. However, we cannot predict the ultimate content, timing or effect of any healthcare reform legislation orthe 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 amountsthat federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products onceapproved or additional pricing 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 forchange or if GSK is unable to, or does not devote sufficient resources to, maintain or continue increasing sales of these products, ourresults of operations will be adversely affected.We currently depend on royalties from sales of our products partnered with GSK to support our existing operations. The treatment paradigmfor COPD and asthma constantly evolve. For instance, in November 2018, the GOLD guidelines were revised to favorably positionbronchodilator monotherapy and LABA/LAMA treatment ahead of ICS/LABA for the treatment of COPD unless the patient has frequentexacerbations or an eosinophil count greater than 300 per cubic microliter. The use of ICS in COPD is also recommended for patients requiringtriple therapy (LABA, LAMA, ICS). If the treatment paradigms were to change further, causing our partnered products to fall out of favor, or ifGSK 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 the price of our securities could fall.If the commercialization of RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® or TRELEGY® ELLIPTA® in the countries in whichthey have received regulatory approval encounters any delays or adverse developments, or perceived delays or adverse developments, or ifsales or payor coverage does not meet investors’, analysts’, or our expectations, our business will be harmed, and the price of our securitiescould 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 a number of countries, including the United States, Canada, Japan, the United Kingdom, and Germany, amongothers. The commercialization of the products in countries where they are already launched and the commercialization launch in new countriesare still subject to fluctuating overall pricing levels and uncertain timeframes to obtain payor coverage. Any delays or adverse developments orperceived additional delays or adverse developments with respect to the commercialization of RELVAR®/BREO® ELLIPTA®, ANORO®ELLIPTA® and TRELEGY® ELLIPTA®Table of Contents12including if sales or payor coverage does not meet investors’, analysts’, or our expectations, would significantly harm our business and the priceof our securities could fall.We are dependent on GSK for the successful commercialization and development of products under the GSK Agreements. If GSK does notdevote sufficient resources to the commercialization or development of these products, is unsuccessful in its efforts, or chooses to reprioritizeits 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 productsdeveloped under the GSK Agreements, including RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA®. Ourroyalty revenues under the GSK Agreements may not meet our, analysts’, or investors’ expectations, due to a number of important factors. GSKhas a substantial respiratory product portfolio in addition to the partnered products that are covered by the GSK Agreements. GSK may makerespiratory product portfolio decisions or statements about its portfolio which may be, or may be perceived to be, harmful to the respiratoryproducts partnered with us. For instance, GSK has wide discretion in determining the efforts and resources that it will apply to the developmentand commercialization of our partnered products. GSK is currently evaluating the next steps with respect to the MABA program. In the eventthat GSK terminates this or any other development program (other than RELVAR®/BREO® ELLIPTA®, and ANORO® ELLIPTA®) pursuantto agreements entered into in connection with the Spin-Off, the right to such programs would revert to Theravance Biopharma. The timing andamount of royalties that we may receive will depend on, among other things, the efforts, allocation of resources and successful development andcommercialization of these product candidates by GSK. In addition, GSK may determine to focus its commercialization efforts on its ownproducts 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 potentialmarket share of ANORO® ELLIPTA® and lowering the royalties we may receive for such product. Alternatively, GSK may decide to marketTRELEGY® ELLIPTA® to eventually compete directly against sales of RELVAR®/BREO® ELLIPTA®. Following the FDA approval ofTRELEGY® ELLIPTA® in September 2017, GSK’s diligent efforts obligations regarding commercialization matters now have the objective offocusing on the best interests of patients and maximizing the net value of the overall portfolio of products under the GSK Agreements. SinceGSK’s commercialization efforts following 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 effortsmay have the effect of reducing the overall value of our remaining interests in the GSK Agreements in the future. If GSK prioritizesTRELEGY® ELLIPTA®, we will only be entitled to a 15% economic interest of the royalties paid pursuant to the GSK Agreements with respectto this product. In the event GSK does not devote sufficient resources to the development or commercialization of our partnered products orchooses to reprioritize its commercial programs, our business, operations and stock price would be negatively affected.Any adverse change in FDA policy or guidance regarding the use of LABAs to treat asthma could significantly harm our royalty revenuesand the price of our 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 requiremanufacturers to include this warning in the product labels of these drugs, along with taking other steps to reduce the overall use of thesemedicines. The FDA now requires that the product labels for LABA medicines reflect, among other things, that the use of LABAs iscontraindicated without the use of an asthma controller medication such as an inhaled corticosteroid, that LABAs should only be used long termin patients whose asthma cannot be adequately controlled on asthma controller medications, and that LABAs should be used for the shortestduration of time required to achieve control of asthma symptoms and discontinued, if possible, once asthma control is achieved. In addition, inMarch 2010, the FDA held an Advisory Committee to discuss the design of medical research studies (known as “clinical trial design”) toevaluate serious asthma outcomes (such as hospitalizations, a procedure using a breathing tube known as intubation, or death) with the use ofLABAs 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, controlledclinical trials comparing the addition of LABAs to inhaled corticosteroids versus inhaled corticosteroids alone. These post-marketing studieshave been completed and did not show an increased risk of use of ICS/LABA compared to ICS alone. The FDA subsequently removed the blackbox warning from the ICS/LABA package inserts. Although this concern appears to be resolved, it is unknown at this time what, if any, futureconcerns could impact the use of ICS/LABA and its potential impact on the prospects for FF/VI. Any adverse change in FDA policy orguidance regarding the use of LABAs to treat asthma could significantly harm our business and the price of our securities could fall.Table of Contents13Any adverse developments to the regulatory status of either RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® or TRELEGY®ELLIPTA® in the countries in which they have received regulatory approval, including labeling restrictions, safety findings, or any otherlimitation to usage, would harm our 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 ofcountries, it is possible that adverse changes to the regulatory status of these products could occur in the event new safety issues are identified,treatment guidelines are changed, or new studies fail to demonstrate product benefits. A number of notable pharmaceutical products haveexperienced adverse developments during commercialization that have resulted in the product being withdrawn, approved uses being limited, ornew warnings being included. In the event that any adverse regulatory changes were to occur to any of our products, our business would beharmed and the price of our securities could fall.Any adverse developments or results or perceived adverse developments or results with respect to the ongoing studies for FF/VI in asthma orCOPD, for UMEC/VI in COPD, or any future studies would significantly harm our business and the price of our securities could fall, and ifregulatory authorities in those countries in which approval has not yet been granted determine that the ongoing studies for FF/VI in asthmaor COPD or the ongoing studies for UMEC/VI for COPD do not demonstrate adequate safety and efficacy, the continued development ofFF/VI or UMEC/VI or both could be significantly delayed, they might not be approved by these regulatory authorities, and even if approvedthey may be subject to restrictive labeling, any of which might harm 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 inCOPD and asthma, additional studies of FF/VI are underway or may commence in the future. Any adverse developments or perceived adversedevelopments with respect to any prior, current or future studies in these programs could significantly harm our business and the price of oursecurities could fall. For example, in September 2015, GSK and we announced that the Study to Understand Mortality and MorbidITy(SUMMIT) did not meet its primary endpoints, which resulted 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 otherjurisdictions have 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 regulatorysubmissions for the FF/VI program or the UMEC/VI program might significantly harm our business and the price of our securities could fall.Examples of such adverse developments 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 regulatoryauthorities may determine 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, whichis a component 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 or future 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 demonstrateadequate efficacy; or●any change in FDA (or comparable foreign regulatory agency) policy or guidance regarding the use of LABAs to treat asthma or theuse of LABAs combined with a LAMA to treat COPD.RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® face substantial competition for their intended uses in the targeted markets fromproducts discovered, developed, launched and commercialized both by GSK and by other pharmaceutical companies, which could cause theroyalties payable to us pursuant to the LABA Collaboration Agreement to be less than expected, which in turn would harm our business andcause the price of our securities to fall.GSK has responsibility for obtaining regulatory approval, launching and commercializing RELVAR®/BREO® ELLIPTA®, and ANORO®ELLIPTA® for their intended uses in the targeted markets around the world. While these products have received regulatory approval and havebeen launched and commercialized in the U.S. and certain other targeted markets, the products face substantialTable of Contents14competition from existing products previously developed and commercialized both by GSK and by other competing pharmaceutical companiesand can expect to face additional competition from new products that are discovered, developed and commercialized by the samepharmaceutical companies and other competitors going forward. For example, sales of generic Advair®, GSK’s approved medicine for bothCOPD and asthma, continue to have a negative impact on sales of RELVAR®/BREO® ELLIPTA®.Many of the pharmaceutical companies competing in respiratory markets are international in scope with substantial financial, technical andpersonnel resources that permit them to discover, develop, obtain regulatory approval and commercialize new products in a highly efficient andlow cost manner at competitive prices to consumers. In addition, many of these competitors have substantial commercial infrastructure thatfacilitates commercializing their products in a highly efficient and low cost manner at competitive prices to consumers. The market for productsdeveloped for treatment of COPD and asthma continues to experience significant innovation and reduced cost in bringing products to marketover time. There can be no assurance that RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® will not be replaced by new products thatare deemed more effective at lower cost to consumers. The ability of RELVAR®/BREO® ELLIPTA®, and ANORO® ELLIPTA® to succeedand achieve the anticipated level of sales depends on the commercial and development performance of GSK to achieve and maintain acompetitive 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 regardingcommercialization matters has 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 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 formerinterest, GSK’s commercialization efforts may have the effect of reducing the overall value of our remaining interests in the GSK Agreementsin the future. GSK also received in April 2018 an expanded label approval for TRELEGY® ELLIPTA®, allowing it to be used by U.S.physicians as first line therapy in appropriate COPD patients. A similar expanded use label was granted by the European Medicines Agency inSeptember 2018. Innoviva is only entitled to a 15% economic interest in the future payments made by GSK under the GSK Agreements withrespect to this product.If sales of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® are less than anticipated because of existing or future competition inthe markets in which they are commercialized, including competition from existing and new products that are perceived as lower cost or moreeffective, our royalty payments could be less than anticipated, which in turn would harm our business and cause the price of our securities tofall.We and GSK recently received regulatory approval in the U.S. and positive regulatory opinion in Europe for TRELEGY® ELLIPTA® astriple combination treatments for COPD. As a result of the Spin-Off, most of our economic rights in this program and other programs wereassigned to Theravance Biopharma. If these programs are successful and GSK and the respiratory market in general views triplecombination therapy as significantly more beneficial than existing therapies, including RELVAR®/BREO® ELLIPTA® and ANORO®ELLIPTA®, our business could be harmed, and the price of our securities could fall.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 the Spin-Off, we were entitled to receive 100% of any royalties payable under the GSK Agreements arising from sales of TRELEGY®ELLIPTA® and any other product or combination of products that may be discovered and developed in the future under the GSK Agreements.As a result of the transactions effected by the Spin-Off, however, we are now only entitled to receive 15% of any contingent payments androyalties payable by GSK from sales of TRELEGY® ELLIPTA® and any other product or combination of products that may be discovered anddeveloped in the future under the GSK Agreements which were assigned to TRC, while Theravance Biopharma receives 85% of those samepayments. The commercial success of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® may be adversely affected if GSK or therespiratory markets view TRELEGY® ELLIPTA® or other combination therapies as more beneficial. GSK’s diligent efforts obligationsregarding 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 aportfolio approach across products in which we have retained our full interest and also products in which we now have only a small portion ofour former interest, GSK’s commercialization efforts may have the effect of reducing the overall value of our remaining interests in the GSKAgreements 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 and results 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 TheravanceBiopharma were to default on its lease obligations, we would be held liable by the landlord and thus we have in substance guaranteed the leasepayments for these facilities. We would also be responsible for lease-related payments, including utilities,Table of Contents15property taxes, and common area maintenance, which could be as much as the actual lease payments. As of December 31, 2019, the totalremaining lease payments, which run through May 2020, were $2.8 million. In the event that Theravance Biopharma defaults on suchobligations, our business and results of operations could be harmed.Under the terms of a separation and distribution agreement entered into between us and Theravance Biopharma, Theravance Biopharmawill indemnify us from (i) all debts, liabilities and obligations transferred to Theravance Biopharma in connection with the Spin-Off (includingits failure to pay, perform or otherwise promptly discharge any such debts, liabilities or obligations after the Spin-Off), (ii) any misstatement oromission of a material fact in its information statement filed with the SEC, resulting in a misleading statement and (iii) any breach by it ofcertain agreements entered into between the parties in connection with the Spin-Off. Theravance Biopharma’s ability to satisfy these indemnities,if called upon to do so, will depend upon its future financial strength and if we are not able to collect on indemnification rights from TheravanceBiopharma, 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,significantly reforming the U.S. Internal Revenue Code. The TCJA, among other things, includes changes to U.S. federal tax rates, imposessignificant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, puts into effect the migrationfrom a “worldwide” system of taxation 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 differentcategories of taxpayers and industries, and will require subsequent rulemaking and interpretation in a number of areas. The long-term impact ofthe TCJA on the overall economy, the industries in which we operate and our and our partners business cannot be reliably predicted at this earlystage of the new law’s implementation. There can be no assurance that the TCJA will not negatively impact our operating results, financialcondition, and future business operations. The estimated impact of the TCJA is based on our management’s current knowledge and assumptions,following consultation with our tax advisors, and recognized impacts could be materially different from current estimates based on our actualresults and our further analysis of the new law. The impact of the TCJA on holders of common stock is uncertain and could be materiallyadverse. This Annual Report does not discuss any such tax legislation or the manner in which it might affect investors in common stock.Investors should consult with their own tax advisors with respect to such legislation and the potential tax consequences of investing in commonstock.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 inthe U.S. As a part of the overall Spin-Off transaction, the transfer of certain assets by us to Theravance Biopharma and our distribution ofTheravance Biopharma ordinary shares resulted in taxable transfers pursuant to applicable provisions of the Internal Revenue Code of 1986, asamended (the “Code”) and Treasury Regulations. The taxable gain recognized by us attributable to the transfer of certain assets to TheravanceBiopharma will generally equal the excess of the fair market value of each asset transferred over our adjusted tax basis in such asset. Althoughwe will not recognize any gain with respect to the cash we transferred to Theravance Biopharma, we may recognize substantial gain based onthe fair market value of the other assets (other than cash) transferred to Theravance Biopharma. The determination of the fair market value ofthese assets is subjective and could be subject to adjustments or future challenge by the Internal Revenue Service (“IRS”), which could result inan increase in the amount of gain realized by us as a result of the transfer. Our U.S. federal income tax resulting from any gain recognized uponthe transfer of our assets to Theravance Biopharma (including any increased U.S. federal income tax that may result from a subsequentdetermination of higher fair market values for the transferred assets), may be reduced by our net operating loss carryforward. The net operatingloss 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, eventhose outside our control, such as purchases or sales by investors, within the testing period could result in an ownership change. We haveconducted an analysis to determine whether an ownership change had occurred since inception through September 30, 2019, and concluded thatwe had undergone two ownership changes in prior years. Subsequent changes in our ownership or sale of our stock could have the effect oflimiting the use of our net operating losses in the future. We have approximately $0.6 billion of net operating loss carryforward as ofDecember 31, 2019. There may be certain annual limitations for utilization based on the above-described ownership change provisions. Inaddition, we may not be able to have sufficient future taxable income prior to their expiration because net operating losses have carryforwardperiods. As a result of the passage of the TCJA, corporate tax rates in the United States decreased in 2018, which resulted in the remeasurementof our deferred tax assets at the new statutory rate and a reduction in the value of our deferred tax assets in 2017. Future changes in federal andstate tax laws pertaining to net operating loss carryforwards may also cause limitations or restrictions from us claiming such net operatinglosses. IfTable of Contents16the net operating loss carryforwards become unavailable to us or are fully utilized, our future taxable income will not be shielded from federaland state income taxation absent certain U.S. federal and state tax credits, and the funds otherwise available for general corporate purposeswould be reduced.If any product candidates in any respiratory program partnered with GSK were not approved by regulatory authorities or are determined tobe unsafe or ineffective 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 andsimilar foreign regulatory authorities with data from preclinical and clinical studies that demonstrate that the product candidates are safe andeffective for a defined indication before they can be approved for commercial distribution. GSK will not obtain this approval for a partneredproduct candidate unless and until the FDA approves an NDA. The processes by which regulatory approvals are obtained from the FDA tomarket and sell a new product are complex, require a number of years and involve the expenditure of substantial resources. In order to marketmedicines in foreign countries, separate regulatory approvals must be obtained in each country. The approval procedure varies among countriesand can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Approval bythe FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensureapproval by regulatory authorities in other foreign countries or by the FDA. Conversely, failure to obtain approval in one or more country maymake approval in other countries more difficult.Clinical studies involving product candidates partnered with GSK may reveal that those candidates are ineffective, inferior to existingapproved medicines, unacceptably toxic, or that they have other unacceptable side effects. In addition, the results of preclinical studies do notnecessarily predict clinical 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 sufferedsignificant setbacks or failed in later clinical or non-clinical studies. In addition, clinical and non-clinical studies of potential products oftenreveal that it is not possible or practical to continue development efforts for these product candidates. If these studies are substantially delayed orfail to prove the safety and effectiveness of product candidates in development partnered with GSK, GSK may not receive regulatory approvalfor such product candidates and our business and financial condition 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-approvallabeling revisions to include boxed warnings and changes in approved indications over the last several years, as well as growing public andgovernmental scrutiny of safety issues, have created a conservative regulatory environment. The implementation of new laws and regulationsand revisions to FDA clinical trial design guidance have increased uncertainty regarding the approvability of a new drug. Further, there areadditional requirements for approval of new drugs, including advisory committee meetings for new chemical entities, and formal risk evaluationand 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 any product 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 withRELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA®, commercialization of such products may be adverselyaffected by regulatory actions and oversight.Even if GSK receives regulatory approval for product candidates in any respiratory program partnered with GSK, this approval mayinclude limitations on 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 the medicines or put GSK at a competitive disadvantage relative to alternative therapies. These restrictions makeit more difficult to market the approved products.For example, at the joint meeting of the Pulmonary-Allergy Drugs Advisory Committee and Drug Safety and Risk Management AdvisoryCommittee of the FDA regarding the sNDA for BREO® ELLIPTA® as a treatment for asthma, the advisory committee recommended that alarge LABA safety trial with BREO® ELLIPTA® should be required in adults and in 12-17 year olds, similar to the ongoing LABA safety trialsbeing conducted as an FDA Post-Marketing Requirement by each of the manufacturers of LABA containing asthma treatments. The FDA didnot concur with the recommendation. A pediatric program including patients 5-17 years of age is currently ongoing.Table of Contents17In addition, the manufacturing, labeling, packaging, adverse event reporting, advertising, promotion and recordkeeping for the approvedproduct remain subject to extensive and ongoing regulatory requirements. If we or GSK become aware of previously unknown problems with anapproved 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 labelingof the product, withdraw the product from the market or require the contract manufacturer to implement changes to its facilities. GSK is alsosubject to regulation by regional, national, state and local agencies, including the Department of Justice, the Federal Trade Commission, theOffice of Inspector General of the U.S. Department of Health and Human Services and other regulatory bodies, as well as governmentalauthorities in those foreign countries in which any of the product candidates in any respiratory program partnered with GSK are approved forcommercialization. The Federal Food, Drug, and Cosmetic Act, the Public Health Service Act and other federal and state statutes and regulationsgovern to varying degrees the research, development, manufacturing and commercial activities relating to prescription pharmaceutical products,including non-clinical and clinical testing, approval, production, labeling, sale, distribution, import, export, post-market surveillance,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 businessand financial condition 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 beunable to license or acquire rights to suitable royalty-generating products for a number of reasons. In particular, the licensing and acquisition ofpharmaceutical product rights is a competitive area. Several more established companies are also pursuing strategies to license or acquire rightsto royalty-generating products. These established companies may have a competitive advantage over us. Other factors that may prevent us fromlicensing or otherwise acquiring rights to suitable royalty-generating products include the following:●we may be unable to license or acquire the rights on terms that would allow us to make an appropriate return from the product;●companies that perceive us to be their competitors may be unwilling to assign or license their product rights to us; or●we may be unable to identify suitable royalty-generating products.If we are unable to acquire or license rights to suitable royalty-generating product candidates, our business may suffer.We may become engaged in a review of opportunities to acquire income generating assets, whether royalty-based or otherwise, or toacquire companies that hold royalty or other income generating assets. We currently, and generally at any time, have acquisition opportunitiesin various stages of active review. Also, we may engage consultants and advisors to analyze particular opportunities, technical, financial andother confidential information, submission of indications of interest and involvement as a bidder in competitive auctions or other processes forthe acquisition of income generating assets. We may face significant competition for these acquisitions from other financial investors andenterprises whose cost of capital may be lower than ours. Competition for future asset acquisition opportunities in our markets is competitiveand we may be forced to increase the price we pay for such assets or face reduced potential acquisition opportunities. The success of anypotential income-generating asset acquisition is based on our ability to make accurate assumptions regarding the valuation, timing and amount ofpayments, which is highly complex and uncertain. The failure of any potential acquisition to produce anticipated revenues may materially andadversely affect our financial condition and results of operations.Acquisitions or strategic investments we have made or may make could turn out to be unsuccessful.As part of our strategy, we frequently monitor and analyze acquisition or investment opportunities that we believe will create value for ourshareholders.Existing or future acquisitions and investments could involve numerous risks that may prevent us from fully realizing the benefits that weanticipated as a result of the transaction. These risks include the failure to derive any commercial value from the acquired technology, productsand intellectual property including as a result of the failure to obtain regulatory approval or to monetize products once approved, as well as risksfrom lengthy product development and high upfront development costs without guarantee of successful results. Patents and other intellectualproperty rights covering acquired technology and/or intellectual property may not be obtained, and if obtained, may not be sufficient to fullyprotect the technology or intellectual property. We may be subject to liabilities, including unanticipated litigation costs, that are not covered byindemnification protection we may obtain. As we pursue orTable of Contents18consummate a strategic acquisition or investment, we may value the acquired or funded company incorrectly, fail to successfully manage ouroperations as our asset diversity increases, expend unforeseen costs during the acquisition or integration process, or encounter otherunanticipated risks or challenges. Once an investment is made, we may fail to value it accurately, properly account for it in our consolidatedfinancial statements, or successfully divest it or otherwise realize the value which we originally invested or have subsequently reflected in ourconsolidated financial statements. Any failure by us to effectively limit such risks as we implement our acquisitions or strategic investmentscould have a material adverse effect on our business, financial condition or results of operations and may negatively impact our net income andcause the price of our securities to fall.We have a significant amount of debt including our 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 ourliquidity or the amount or timing of potential distributions to our stockholders.As of December 31, 2019, we had $433.5 million in total debt outstanding, comprised primarily of $241.0 million in principal that remainsoutstanding under our convertible subordinated notes due 2023 (the “2023 Notes”) and $192.5 million in principal outstanding under ourconvertible senior notes due 2025 (the “2025 Notes”) (the 2023 Notes and 2025 Notes hereinafter, the “Notes”). The Notes are unsecured debtand are not redeemable by us prior to the maturity date. Holders of the Notes may require us to purchase all or any portion of their Notes at100% of their principal amount, plus any unpaid interest, upon a fundamental change. A fundamental change is generally defined to include amerger involving us, an acquisition of a majority of our outstanding common stock, and, under the 2023 Notes, the change of a majority of ourBoard of Directors without the approval of the Board of Directors. In addition, to the extent we pursue and complete a monetization transactionor 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 suchtransaction to repurchase any Notes put to us.Satisfying the obligations of this debt could adversely affect the amount or timing of any distributions to our stockholders. We may chooseto satisfy, repurchase, or refinance this debt through public or private equity or debt financings if we deem such financings available onfavorable terms. If any or all of the Notes are not converted into shares of our common stock before the maturity date, we will have to pay theholders the full aggregate principal amount of the Notes then outstanding. Any of the above payments could have a material adverse effect onour cash position. If we fail to satisfy these obligations, it may result in a default under the indenture, which could result in a default undercertain of our other debt instruments, if any. Any such default would harm our business 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 anda small group of key employees to operate our business. None of our employees have employment commitments for any fixed period of timeand all may leave our employment at will. If we fail to retain our qualified personnel or to replace them when they leave, our ability to manageour business may be impaired, which may cause the price of our securities to fall.We rely and will continue to rely on outsourcing arrangements for many of our activities, including financial reporting and accounting andhuman resources.As of December 31, 2019, we had only six employees and, as a result, we rely, and expect to continue to rely, on outsourcing arrangementsfor a significant portion of our activities, including financial reporting and accounting and human resources, as well as for certain of ourfunctions as a public company. We may have limited control over these third parties and we cannot guarantee that they will perform theirobligations in an effective and timely manner.Our internal computer systems, or third-parties that we work with, may fail or suffer security breaches, which could result in a materialdisruption of our business.Despite the implementation of security measures, our internal computer systems and those of third-parties with whom we work (includingour collaborative partner) are vulnerable to damage or disruption from computer viruses, software bugs, unauthorized access, natural disasters,terrorism, war, and telecommunication, equipment and electrical failures. In the event we or they were to experience any significant systemfailure, accident or security breach it could cause interruptions in our operations and adversely affect our business, financial condition andresults of operations. Cybersecurity attacks in particular are evolving and include, but are not limited to, malicious software, attempts to gainunauthorized access to data and other electronic security breaches that could lead to disruptions in systems, misappropriation of our confidential,or otherwise protected, information and corruption of data.Table of Contents19Additionally, California recently enacted legislation that has been dubbed the first “GDPR-like” law in the United States. Known as theCalifornia Consumer Privacy Act (“CCPA”), it creates new individual privacy rights for consumers (as that word is broadly defined in the law)and places increased privacy and security obligations on entities handling personal data of consumers or households. Having gone into effectJanuary 1, 2020, the CCPA requires covered companies to provide new disclosures to California consumers, provide such consumers new waysto opt-out of certain sales of personal information, and allow for a new cause of action for data breaches. The CCPA may significantly impactour business activities and require substantial compliance costs that adversely affect business, operating results, prospects and financialcondition.Thus, any access, disclosure or other loss of information, including our data being breached at our partners or third-party providers, couldresult in legal claims or proceedings and liability under laws that protect the privacy of personal information, disrupt our operations and damageour reputation, which could adversely affect our business.If we fail to maintain proper and effective internal control over financial reporting or if the interpretations, estimates or judgments utilizedin preparing our 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 anddisclosure controls and procedures. Under the SEC’s current rules, we are required to perform system and process evaluation and testing of ourinternal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, asrequired by Section 404 of the Sarbanes-Oxley Act. Our independent registered public accounting firm is also required to report on our internalcontrol over financial reporting. Our testing and our independent registered public accounting firm’s testing may reveal deficiencies in ourinternal control over financial reporting that are deemed to be material weaknesses and render our internal control over financial reportingineffective. We have and expect to continue to incur substantial accounting and auditing expense and to expend significant management time incomplying with the requirements of Section 404. If we are not able to maintain compliance with the requirements of Section 404 in a timelymanner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting thatare deemed to be material weaknesses, the market price of our stock could decline and we could be subject to investigations or sanctions by theSEC, FINRA, The Nasdaq Global Select Market or other regulatory authorities. In addition, we could be required to expend significantmanagement time and financial resources to correct any material weaknesses that may be identified or to respond to any regulatoryinvestigations or proceedings.We are also subject to complex tax laws, regulations, accounting principles and interpretations thereof. The preparation of our financialstatements requires us to interpret accounting principles and guidance and make estimates and judgments that affect the reported amounts ofassets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenuegenerated and expenses incurred during the reporting periods. Our interpretations, estimates and judgments are based on our historicalexperience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for thepreparation of our financial statements. U.S. generally accepted accounting principles (“GAAP”) presentation is subject to interpretation by theSEC, the Financial Accounting Standards Board and various other bodies formed to interpret and create appropriate accounting principles andguidance. In the event that one of these bodies disagrees with our accounting recognition, measurement or disclosure or any of our accountinginterpretations, estimates or assumptions, it may have a significant effect on our reported results and may retroactively affect previouslyreported results. The need to restate our financial results could, among other potential adverse effects, result in our incurring substantial costs,affect our ability to timely file our periodic reports until such restatement is completed, divert the attention of our management and employeesfrom managing our business, result in material changes to our historical and future financial results, result in investors losing confidence in ouroperating results, subject us to securities class action litigation, and cause our stock price to decline.As we continue to develop our business, our mix of assets and our sources of income may require that we register with the SEC as an“investment company” 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 investmentcompany pursuant to Sections (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 currently subject to the provisions of the 40 Act, such as compliance with the 40 Act’s registration and reportingrequirements, capital structure requirements, affiliate transaction restrictions, conflict of interest rules, requirements for disinterested directors,and other substantive provisions. Generally, to avoid being a company that is an “investment company” under the 40 Act, it must both (a) notbe or hold itself out as being engaged primarily in the business of investing, reinvesting or trading in securities, and (b) either (i) not be engagedor propose to engage in the business of investing inTable of Contents20securities or own or propose to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S.government securities and cash items) on an unconsolidated basis or (ii) not have more than 45% of the value of its total assets (exclusive ofgovernment securities and cash items) consist of or more than 45% of its net income after taxes (for the last four fiscal quarters combined) bederived from securities. In addition, we would not be an “investment company” if an exception, exemption, or safe harbor under the 40 Actapplies.We monitor our assets and income for compliance with the tests under the 40 Act and seek to conduct our business activities to ensure thatwe do not fall within its definitions of “investment company.” If we were to become an “investment company” and be subject to the strictures ofthe 40 Act, the restrictions imposed by the 40 Act would likely require changes in the way we do business and add significant administrativeburdens to our operations. In order to ensure that we do not fall within the 40 Act, we may need to take various actions which we mightotherwise not pursue. These actions may include restructuring 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 we currently believe that none of the definitions of “investment company” apply to us, we may in the future rely on an exception underthe 40 Act provided by Section 3(c)(5)(A). To qualify for Section 3(c)(5)(A), as interpreted by the staff of the SEC, we would be required tohave at least 55% of our total assets in “notes, drafts, acceptances, open accounts receivable, and other obligations representing part or all of thesales 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 Assets under this exception. If the SEC or its staff in the future adopts a contraryinterpretation or otherwise restricts the conclusions in the staff’s no-action letter such that our royalty interests are no longer Qualifying Assetsfor purposes of Section 3(c)(5)(A), we could be required to register under the 40 Act.The rules and interpretations of the SEC and the courts, relating to the definition of “investment company” are highly complex in numerousrespects. While we currently intend to conduct our operations so that we will not be deemed an investment company, we can give no assurancesthat we will not determine it to be in the Company’s and our stockholders’ interest to register as an “investment company,” not be deemed an“investment company” and not be required to register under the 40 Act.Prolonged economic uncertainties or downturns, as well as unstable market, credit and financial conditions, may exacerbate certain risksaffecting our business 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 economicconditions, and uncertainty as to the general direction of the macroeconomic environment, are beyond our control and may make any necessarydebt or equity financing more difficult, more costly, and more dilutive. While we believe we have adequate capital resources to meet currentworking capital and capital expenditure requirements, a lingering economic downturn or significant increase in our expenses could requireadditional financing at less than attractive rates or on terms that are excessively dilutive to existing stockholders. Failure to secure any necessaryfinancing in a timely manner and on favorable terms could have a material adverse effect on our stock price and could require us to delay orabandon clinical development plans.Sales of our partnered products will be dependent, in large part, on reimbursement from government health administration authorities,private health insurers, distribution partners and other organizations. As a result of negative trends in the general economy in the U.S. or otherjurisdictions in which we may do business, these organizations may be unable to satisfy their reimbursement obligations or may delay payment.In addition, federal and state health authorities may reduce Medicare and Medicaid reimbursements, and private insurers may increase theirscrutiny of claims. A reduction in the availability or extent of reimbursement could negatively affect our or our partners’ product sales andrevenue.In addition, we rely on third parties for several important aspects of our business. During challenging and uncertain economic times and intight credit markets, there may be a disruption or delay in the performance of our third-party contractors, suppliers or partners. If such thirdparties are unable to satisfy their 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 andrequirements and insider trading.We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to complywith applicable regulations, provide accurate information to regulatory authorities, comply with federal and state fraud and abuse laws andregulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, the health care industry issubject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing andTable of Contents21other abusive practices. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and preventthis activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations orother actions or lawsuits stemming from a failure to be in compliance with these laws or regulations. If any such actions are instituted againstus, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business,including the imposition of significant fines or other sanctions.We have incurred litigation and may incur additional litigation.We have been subject to various legal proceedings, and, in the future, we may be exposed to, or threatened with, litigation, claims andproceedings incident to the ordinary course of, or otherwise in connection with, our business. In addition, agreements entered into by ussometimes include indemnification provisions which may subject us to costs and damages in the event of a claim against an indemnified thirdparty.Regardless of the merit of particular claims, litigation may be expensive, time-consuming, disruptive to our operations and distracting tomanagement. In recognition of these considerations, we may enter into agreements or other arrangements to settle litigation and resolve suchdisputes. No assurance can be given that such agreements can be obtained on acceptable terms or that litigation will not occur. These agreementsmay also significantly increase our operating expenses.If one or more legal matters were resolved against us or an indemnified third party in a reporting period for amounts in excess ofmanagement’s expectations, our consolidated financial statements for that reporting period could be materially adversely affected. Further, suchan outcome could result in significant compensatory, punitive or trebled monetary damages, disgorgement of revenue or profits, remedialcorporate measures or injunctive relief against us 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 alltypes of claims that 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 ourbusiness and cause 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 orus that results in a material dispute, allegation of breach, litigation, arbitration, or significant disagreement between the parties may beinterpreted negatively by the market or by our investors, could harm our business and cause the price of our securities to fall. Examples of thesekinds of issues include but are not limited to non-performance of contractual obligations and allegations of non-performance, disagreementsover the relative marketing and sales efforts for our partnered products and other GSK respiratory products, disputes over public statements, andsimilar matters. In addition, while we obtained GSK’s consent to the Spin-Off as structured, GSK could decide to challenge various aspects ofour post-Spin-Off operation of TRC, the limited liability company jointly owned by us and Theravance Biopharma, as violating or allowing it toterminate the GSK Agreements. Although we believe our operation of TRC fully complies with the GSK Agreements and applicable law, therecan be no assurance that we would prevail against any such claims by GSK. Moreover, regardless of the merit of any claims by GSK, we mayincur significant cost and diversion of resources in defending them. In addition, any market or investor uncertainty about the respiratoryprograms 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 toour business or to our other stockholders.Although GSK beneficially owns approximately 31.6% of our outstanding common stock as of December 31, 2019, it is also a strategicpartner with rights and obligations under the GSK Agreements that cause its interests to differ from our interests and those of our otherstockholders. In particular, GSK has a substantial respiratory product portfolio in addition to the partnered products that are covered by the GSKAgreements. GSK may make respiratory product portfolio decisions or statements about its portfolio which may be, or may be perceived to be,harmful to the respiratory products partnered with us. For example, GSK could promote its non-GSK/Innoviva respiratory products or apartnered product for which we are entitled to receive a lower percentage of royalties, delay or terminate the development or commercializationof the respiratory programs covered by the GSK Agreements, or take other actions, such as making public statements, that have a negative effecton our stock price. In this regard and by way of example, sales of Advair ®, GSK’s approved medicine for both COPD and asthma, continue tobe significantly greater than sales of RELVARTable of Contents22®/BREO ® ELLIPTA ®, and GSK has indicated publicly that it intends to continue commercializing Advair ®. Also, given the potential futureroyalty payments which GSK may be obligated to pay under the GSK Agreements, GSK may seek to acquire us in order to reduce thosepayment obligations. The timing of when GSK may seek to acquire us could potentially be when it possesses information regarding the status ofdrug programs covered by the GSK Agreements that has not been publicly disclosed and is not otherwise known to us. As a result of thesediffering interests, 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 ofour other stockholders. In addition, following the FDA regulatory approval of TRELEGY® ELLIPTA® in September 2017, GSK’s diligentefforts obligations as to commercialization matters under the GSK Agreements has had the objective of focusing on the best interests of patientsand maximizing the net value of the overall portfolio of products under the GSK Agreements. Since GSK’s commercialization efforts followingthis regulatory approval have been guided by a portfolio approach across products in which we have retained our full interest and also productsin which we now have only a portion of our former interest, GSK’s commercialization efforts may have the effect of reducing the overall valueof our remaining interests in the products covered by the GSK Agreements in the future. In addition, following the expiration of our governanceagreement with GSK in September 2015, GSK is no longer subject to the restrictions thereunder regarding the voting of the shares of ourcommon 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 bestinterests of patients and maximizing the net value of the overall portfolio of products under the GSK Agreements, which may be harmful toboth our business and our stockholders.Following the FDA approval of TRELEGY® ELLIPTA® in September 2017, GSK’s diligent efforts obligations as to commercializationmatters under the GSK Agreements have had the objective of focusing on the best interests of patients and maximizing the net value of theoverall portfolio of products under the GSK Agreements. As such, GSK may prioritize TRELEGY® ELLIPTA®, and if GSK and the respiratorymarket in general view this triple combination therapy as significantly more beneficial than existing therapies, including RELVAR®/BREO®ELLIPTA® and ANORO® ELLIPTA®, this may be harmful to our business, operations and stock price. If GSK prioritizes TRELEGY®ELLIPTA®, we will only be entitled to a 15% economic interest of the royalties paid pursuant to the commercialization of our partneredproducts or if GSK chooses to reprioritize its commercial programs, our businesses, operations and stock price would be negatively affected.GSK has also indicated to us that it believes its consent may be required before we can engage in certain royalty monetization transactionswith third parties, 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 itsconsent may be required before we can engage in certain transactions designed to monetize the future value of royalties that may be payable tous from GSK under the GSK Agreements. GSK has informed us that it believes that there may be certain covenants included in these types oftransactions that might violate certain provisions of the GSK Agreements. Although we believe that we can structure royalty monetizationtransactions in a manner that fully complies with the requirements of the GSK Agreements without GSK’s consent, a third party in a proposedmonetization 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 interestsin RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® and vilanterol monotherapy and portions of our interests in TRC, and (ii) it will notunreasonably withhold its consent to our requests to grant other covenants, provided among other conditions, that in each case, the covenants arenot granted in favor of a pharmaceutical or biotechnology company with a product either being developed or commercialized for the treatmentof respiratory disease. If we seek GSK’s consent to grant covenants other than pre-agreed covenants, we may not be able to obtain GSK’sconsent on reasonable terms, or at all. If we proceed with a royalty monetization transaction that is not otherwise covered by theGSK Agreement without GSK’s consent, GSK could request that its consent be obtained or seek to enjoin or otherwise challenge the transactionas violating or allowing it to terminate the GSK Agreements. Regardless of the merit of any claims by GSK, we would incur significant cost anddiversion of resources in defending against GSK’s claims or asserting our own claims and GSK may seek concessions from us in order toprovide its consent. Any uncertainty about whether or when we could engage in a royalty monetization transaction, the potential impact on theenforceability of the GSK Agreements or the loss of potential royalties from the respiratory programs partnered with GSK, could impair ourability 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.Table of Contents23GSK’s ownership of a significant percentage of our stock and its ability to acquire additional shares of our stock may create conflicts ofinterest, and may inhibit our management’s ability to continue to operate our business in the manner in which it is currently being operated.As of December 31, 2019, GSK beneficially owned approximately 31.6% of our outstanding common stock. As such, GSK could havesubstantial influence in the election of our directors, delay or prevent a transaction in which stockholders might receive a premium over theprevailing market price for their shares and have significant control over certain changes in our business. The procedures previously governingand restricting GSK offers to our stockholders to acquire outstanding voting stock and the restrictions regarding the voting of shares of ourcommon stock owned by it terminated upon the expiration of the governance agreement in September 2015. Further, pursuant to our Certificateof Incorporation, we renounce our interest in and waive any claim that a corporate or business opportunity taken by GSK constitutes a corporateopportunity of ours unless such corporate or business opportunity is expressly offered to one of our directors who is a director, officer oremployee 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 stockholdersfrom realizing a control premium.As of December 31, 2019, GSK beneficially owned approximately 31.6% of our outstanding common stock. As a result of GSK’ssignificant ownership, other companies may be less inclined to pursue an acquisition of us and therefore we may not have the opportunity to beacquired in a transaction that stockholders might otherwise deem favorable, including transactions in which our stockholders might realize asubstantial 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 ina change in control 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 privatelynegotiated transactions or otherwise, and these sales or transfers could create substantial declines in the price of our securities or, if these sales ortransfers were 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 GSKof a substantial number of 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 ofinterest and our business may be adversely affected.Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to beinfringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which are necessary to build name andbrand recognition among potential partners or customers in our markets of interest. At times, competitors may adopt trademarks or trade namessimilar to ours, thereby impeding our ability to build name and brand identity and possibly leading to market confusion. In addition, there couldbe potential trademark or trade name infringement claims brought by owners of other registered trademarks or trademarks that incorporatevariations of our registered or unregistered trademarks or trade names. There is also a risk that if there is confusion in the marketplace, thereputation, performance and/or actions of such third parties may negatively impact our stock price and our business. We therefore adopted anew brand, Innoviva, in January 2016. Over the long term, if we are unable to establish name and brand recognition based on our trademarksand trade names, then we may not be able to compete effectively and our business may be adversely affected. If we fail to promote andmaintain our brand successfully, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, our businessmay 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 weconduct 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 foreignofficials for the purpose of obtaining or retaining business and requires companies to maintain accurate books and records and internal controls.In addition, we are subject to the anti-bribery laws of other jurisdictions in which we conduct business. Our employees or other agents mayengage in prohibited conduct without our knowledge under our policies and procedures and the FCPA and other anti-bribery laws that we maybe subject to for which we may be held responsible. If our employees or other agents are found to have engaged in such practices, we couldsuffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results ofoperations.Table of Contents24If the efforts of our partner, GSK, to protect the proprietary nature of the intellectual property related to products in any respiratory programpartnered with GSK are not adequate, the future commercialization of any such product could be delayed, limited or prevented, whichwould materially harm our business and the price of our securities could fall.To the extent the intellectual property protection of products in any respiratory program partnered with GSK is successfully challenged orencounter problems with the U.S. Patent and Trademark Office or other comparable agencies throughout the world, the commercialization ofthese products could be delayed, limited or prevented. Any challenge to the intellectual property protection of a late-stage development asset orapproved product arising from any respiratory 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 andproprietary rights of third parties. Third parties may assert that these products are using their proprietary rights without authorization. Inaddition, third parties may obtain patents in the future and claim that use of GSK’s technologies infringes upon these patents. Furthermore,parties making claims against GSK may obtain injunctive or other equitable relief, which could effectively block GSK’s ability to furtherdevelop or commercialize one or more of the product candidates 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 fromthird parties or pay royalties. In addition, even in the absence of litigation, GSK may need to obtain licenses from third parties to advance itsresearch or allow commercialization of the products. GSK may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, ifat all. In that event, GSK would be unable to further develop and commercialize one or more of the products, which could harm our businesssignificantly. In addition, in the future GSK could be required to initiate litigation to enforce its proprietary rights against infringement by thirdparties. Prosecution of these claims to enforce its rights against others would involve substantial litigation expenses. If GSK fails to effectivelyenforce its proprietary rights related to our partnered respiratory programs against others, our business will be harmed, and the price of oursecurities 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, 2019 and December 31, 2019, the high and lowsales prices of our common stock as reported on The Nasdaq Global Select Market varied between $10.03 and $20.54 per share. The stockmarket in general and the market for biotechnology and biopharmaceutical companies in particular have experienced extreme volatility that hasoften been unrelated to the companies’ operating performance, in particular during the last several years. The following factors, in addition tothe other risk factors described in this section, may also have a significant impact on the market price of our securities:●any adverse developments or results or perceived adverse developments or results with respect to the commercialization ofRELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® with GSK, including, without limitation, if payor coverage is lower thananticipated or if sales of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® are less than anticipated because of pricingpressure in the respiratory markets targeted by our partnered products or existing or future competition in the markets in which they arecommercialized, including competition from existing and new products that are perceived as lower cost or more effective, and ourroyalty payments are less than anticipated;●any positive developments or results or perceived positive developments or results with respect to the commercialization ofTRELEGY® ELLIPTA® with GSK, including, if GSK and the respiratory market in general view this triple combination therapy assignificantly more beneficial 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/VIwith GSK, including, without limitation, any difficulties or delays encountered with the regulatory path for FF/VI or any indicationfrom clinical or non-clinical studies, including the large Phase 3b program, that FF/VI is not safe or efficacious or does not sufficientlydifferentiate itself from alternative therapies;●any adverse developments or results or perceived adverse developments or results with respect to the on-going development ofUMEC/VI with GSK, including, without limitation, any difficulties or delays encountered with regard to the regulatory path forUMEC/VI, or any indication from clinical or non-clinical studies that UMEC/VI is not safe or efficacious;Table of Contents25●any adverse developments or perceived adverse developments in the field of LABAs, including any change in FDA (or comparableforeign regulatory authority) policy or guidance (such as the pronouncement in February 2010 warning that LABAs should not be usedalone in the treatment of asthma and related labeling requirements, the impact of the March 2010 FDA Advisory Committee discussingLABA clinical trial design to evaluate serious asthma outcomes or the FDA’s April 2011 announcement that manufacturers ofcurrently marketed LABAs conduct additional clinical studies comparing the addition of LABAs to inhaled corticosteroids versusinhaled corticosteroids alone);●GSK reprioritizing its development or commercial efforts on other products, including TRELEGY® ELLIPTA® or products owned byGSK (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, tosatisfy the obligations 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 inall indications in all major markets;●any adverse developments or perceived adverse developments with respect to our relationship with GSK, including, without limitation,disagreements that may arise between us and GSK;●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 byGSK or other pharmaceutical companies;●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 sellingplans under 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 ownedapproximately 30.6% of our outstanding common stock as of December 31, 2019 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 the recent past, we have returned 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 ofour common stock for a total of $201.2 million. The payment of, or continuation of, capital returns to stockholders is at the discretion of ourBoard of Directors and is dependent upon our financial condition, results of operations, capital requirements, general business conditions, taxtreatment of capital returns, potential future contractual restrictions contained in credit agreements and other agreements and other factorsdeemed relevant by our Board of Directors. Future capital returns may also be affected by, among other factors: our views on potential futurecapital requirements for investments in acquisitions and our working capital and debt maintenance requirements; legal risks; stock or debtrepurchase programs; changes in federal and state income tax laws or corporate laws; and changes to our business model. Our capital returnprograms may change from time to time, and we cannotTable of Contents26provide assurance that we will continue to provide any particular amounts. Our announcement of future capital return programs does notobligate us to repurchase any specific dollar amount of debt or equity or number of shares of common stock. A reduction, suspension or changein 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, 2019, GSK beneficially owned approximately 31.6% of our outstanding common stock and our directors, executiveofficers and investors affiliated with these individuals beneficially owned approximately 0.2% of our outstanding common stock. Based on ourreview of publicly available filings as of December 31, 2019, our four largest stockholders other than GSK and investors affiliated with ourexecutive officers and directors collectively owned approximately 30.8% of our outstanding common stock. These stockholders could controlthe outcome of actions taken by us that require stockholder approval, including a transaction in which stockholders might receive a premiumover the prevailing market price for their shares. Following the expiration of the governance agreement in September 2015, GSK is no longersubject to the restrictions thereunder regarding the voting of the shares of our common stock owned by it.Anti-takeover provisions in our charter and bylaws and in Delaware law could prevent or delay a change in control of our company.Provisions of our Certificate of Incorporation and Bylaws may discourage, delay or prevent a merger or acquisition that stockholders mayconsider favorable, 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 beacted on by stockholders 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 COMMENTSNone.ITEM 2. PROPERTIESOur headquarters consist of a lease of 2,111 square feet of office space in Burlingame, California, which expires in November 2022. We donot own or lease any other properties.ITEM 3. LEGAL PROCEEDINGSIn May 2019, Theravance Biopharma, who is the owner of 85% of the economic interests in TRC, initiated arbitration against the Companyand TRC, relating to a dispute as to the determination by Innoviva (as manager of TRC) to cause TRC to explore potential reinvestmentopportunities for the royalty proceeds received by GSK into initiatives that Innoviva believes will increase the value of TRC and TRELEGY®ELLIPTA®. Theravance Biopharma alleged that in causing TRC to not distribute substantially all royalty proceeds received from GSK,Innoviva breached the limited liability company operating agreement governing TRC (the “Operating Agreement”), as well as the fiduciaryduties applicable to Innoviva as manager of TRC. The hearing in respect of the arbitration was conducted from July 23, 2019 through July 25,2019. Post-arbitration oral argument was heard on August 14, 2019. On September 26, 2019, the arbitrator issued a final decision. The arbitratorruled that Innoviva did not breach the Operating Agreement or its fiduciary duties by withholding royalties or pursuing reinvestmentopportunities. Accordingly, the Company is permitted to continue to pursue development and commercialization initiatives. The arbitrator didconclude that Innoviva breached a provision of the Operating Agreement requiring Innoviva to deliver quarterly financial plans to TheravanceBiopharma. However, the arbitrator concluded that this technical breach did not cause any damages to Theravance Biopharma and the arbitratorawarded limited injunctive relief to expand and clarify the disclosure obligations under the Operating Agreement related to the delivery offinancial plans and the pursuitTable of Contents27of investment opportunities. Finally, the arbitrator ruled that the Company is entitled to indemnification from TRC for 95% of its fees andexpenses incurred in connection with the arbitration.On September 30, 2019, the Company and TRC filed a Verified Complaint in the Court of Chancery of the State of Delaware to confirmthe arbitration award. That matter is still pending.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.PART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIESMarket InformationOur common stock was traded on Nasdaq under the symbol “THRX” from October 5, 2004 until January 8, 2016. Upon changing ourcorporate name to Innoviva, Inc. on January 7, 2016, we changed the stock ticker symbol to “INVA” effective January 11, 2016.HoldersAs of February 11, 2020, there were 74 stockholders of record of our common stock. As many of our shares of common stock are held bybrokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these recordholders.Purchases of Equity Securities by the IssuerThere were no purchases made by the Company of its own equity securities for the year ended December 31, 2019.Stock Performance GraphThe graph set forth below compares the cumulative total stockholder return on our common stock for the period commencing onDecember 31, 2014 and ending on December 31, 2019, with the cumulative total return of (i) the Nasdaq Composite Index, (ii) the Nasdaq S&PSmall Cap 600 Pharma Index and (iii) the Nasdaq Biotechnology Index over the same period. This graph assumes the investment of $100.00 onDecember 31, 2014 in each of (1) our common stock, (2) the Nasdaq Composite Index, (3) the Nasdaq S&P Small Cap 600 Pharma Index and(4) the Nasdaq Biotechnology Index, and assumes the reinvestment of dividends.The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graphbelow is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. Information used inthe graph was obtained from sources believed to be reliable including Nasdaq, Bloomberg and Reuters, but we are not responsible for any errorsor 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, orthe Securities Exchange Act of 1934, as amended, that might incorporate this Annual Report on Form 10-K or future filings made by us underthose statutes, this Stock Performance Graph section shall not be deemed filed with the SEC and shall not be deemed incorporated by referenceinto any of those prior filings or into any future filings made by us under those statutes.Table of Contents28COMPARISON 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* $100 invested on December 31, 2014 in stock or index, including reinvestment of dividends.ITEM 6. SELECTED FINANCIAL DATAThe selected consolidated summary financial data below should be read in conjunction with Part II, Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and Part II, Item 8, “Financial Statements andTable of Contents29Supplementary Data,” in this Annual Report on Form 10-K. The historical results are not necessarily indicative of the results to be expected inany future period.Year Ended December 31,20192018201720162015(In thousands, except per share data)CONSOLIDATED STATEMENTS OF INCOME DATA Net revenue$ 261,016$ 261,004$ 217,217$ 133,569$ 53,949Total operating expenses 14,656 22,753 33,613 24,581 22,369Income from operations 246,360 238,251 183,604 108,988 31,580Interest and other income (expense), net 5,195 (4,042) (5,727) 3,059 1,443Interest expense (18,660) (23,954) (43,601) (52,416) (51,803)Income (loss) before income taxes 232,895 210,255 134,276 59,631 (18,780)Income tax benefit (expense), net(1) (41,902) 196,073 (4) (95) 20Net income (loss) 190,993 406,328 134,272 59,536 (18,760)Net income attributable to noncontrolling interest 33,705 11,272 129 — —Net income (loss) attributable to Innoviva stockholders$ 157,288$ 395,056$ 134,143$ 59,536$ (18,760)Basic net income (loss) per share attributable to Innoviva stockholders$ 1.55$ 3.92$ 1.25$ 0.54$ (0.16)Diluted net income (loss) per share attributable to Innoviva stockholders:$ 1.43$ 3.53$ 1.17$ 0.53$ (0.16)Shares used to compute basic net income (loss) per share attributable toInnoviva stockholders 101,150 100,849 106,945 110,280 115,372Shares used to compute diluted net income (loss) per share attributable toInnoviva stockholders 113,409 113,408 119,866 123,233 115,372Cash dividends declared per common share$ —$ —$ —$ —$ 0.75As of December 31,20192018201720162015(In thousands)CONSOLIDATED BALANCE SHEETS DATA Cash, cash equivalents and marketable securities$ 350,845$ 114,908$ 129,075$ 150,433$ 187,283Working capital 425,863 193,343 165,627 177,997 200,834Total assets 724,826 548,193 367,337 378,996 408,932Long‑term liabilities 377,339 383,441 575,302 711,938 738,086Accumulated deficit (946,404) (1,103,692) (1,498,748) (1,632,891) (1,692,427)Total Innoviva stockholders’ equity (deficit) 313,495 153,583 (242,859) (352,991) (342,645)(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 Contents30ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement’s Discussion and Analysis (“MD&A”) is intended to facilitate an understanding of our business and results of operations.This discussion and analysis should be read in conjunction with our consolidated financial statements and notes included in this Annual Reporton Form 10-K. The information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, includinginformation with respect to our plans and strategy for our business, our operating expenses, and future payments under our collaborationagreements, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties.You should review the section entitled “Risk Factors” in Item 1A of Part I above for a discussion of important factors that could cause actualresults to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion andanalysis. See the section entitled “Special Note Regarding Forward Looking Statements” above for more information.Management OverviewInnoviva, Inc. (“Innoviva”, the “Company”, the “Registrant” or “we” and other similar pronouns) is a company with a portfolio of royaltiesthat include respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR ®/BREO ® ELLIPTA ® (fluticasone furoate/vilanterol, “FF/VI”), ANORO ® ELLIPTA ® (umeclidinium bromide/ vilanterol, “UMEC/VI”) and TRELEGY ® ELLIPTA ® (the combinationFF/UMEC/VI). Under the Long-Acting Beta2 Agonist (“LABA”) Collaboration Agreement, Innoviva is entitled to receive royalties from GSKon 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 netsales above $3.0 billion; and royalties from the sales of ANORO ® ELLIPTA ® which tier upward at a range from 6.5% to 10%. Innoviva is alsoentitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to TheravanceRespiratory Company, LLC (“TRC”), including TRELEGY ® ELLIPTA ® and any other product or combination of products that may bediscovered or developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred toherein as the “GSK Agreements”), which have been assigned to TRC other than RELVAR ®/BREO ® ELLIPTA ® and ANORO ® ELLIPTA ®.Our company structure and organization are tailored to our focused activities of managing our respiratory assets with GSK, the commercialand developmental obligations associated with the GSK Agreements, intellectual property, licensing operations, and providing for certainessential reporting and management functions of a public company. As of December 31, 2019, we had six employees. Our revenues consist ofroyalties and potential milestone payments, if any, from our respiratory partnership agreements with GSK.Financial HighlightsIn the year ended December 31, 2019, the net income attributable to Innoviva stockholders was $157.3 million, a decrease of $237.8million from net income of $395.1 million in the year ended December 31, 2018, primarily due to the $196.1 million income tax benefitrecognized in the year ended December 31, 2018 as compared to the $41.9 million of income tax expense recognized in the year endedDecember 31, 2019 as further described below. Cash, cash equivalents, and marketable securities totaled $350.8 million as of December 31,2019, an increase of $235.9 million from December 31, 2018. The increase was primarily due to cash provided by operating activities of $257.5million.Collaborative Arrangements with GSKLABA CollaborationIn November 2002, we entered into LABA collaboration with GSK to develop and commercialize once-daily LABA products for thetreatment of COPD and asthma (the “LABA Collaboration Agreement”). For the treatment of COPD, the collaboration has developed threecombination products:●RELVAR®/BREO® ELLIPTA® (“FF/VI”) (BREO® ELLIPTA® is the proprietary name in the U.S. and Canada and RELVAR®ELLIPTA® is the proprietary name outside the U.S. and Canada), a once-daily combination medicine consisting of a LABA, vilanterol(VI), and an inhaled corticosteroid (“ICS”), fluticasone furoate (“FF”),●ANORO® ELLIPTA® (“UMEC/VI”), a once-daily medicine combining a long-acting muscarinic antagonist (“LAMA”), umeclidiniumbromide (“UMEC”), with a LABA, vilanterol (VI), andTable of Contents31●TRELEGY® ELLIPTA® (the combination FF/UMEC/VI), a once-daily combination medicine consisting of an ICS, LAMA andLABA.As a result of the launch and approval of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® in the U.S., Japan and Europe, inaccordance with the LABA Collaboration Agreement, we paid milestone fees to GSK totaling $220.0 million during the year endedDecember 31, 2014. Although we have no further milestone payment obligations to GSK pursuant to the LABA Collaboration Agreement, wecontinue to have ongoing commercialization activities under the LABA Collaboration Agreement, including participation in the joint steeringcommittee and joint project committee that are expected to continue over the life of the agreement. The milestone fees paid to GSK wererecognized as capitalized fees paid to a related party, which are being amortized over their estimated useful lives commencing upon thecommercial 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 annualglobal net sales and 5% for all annual global net sales above $3.0 billion. For other products combined with a LABA from the LABAcollaboration, 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 toTRC in connection with the Spin-off including TRELEGY® ELLIPTA®, which royalties are upward tiering and range from 6.5% to 10%.2004 Strategic AllianceIn March 2004, we entered into the Strategic Alliance Agreement with GSK where GSK received an option to license exclusivedevelopment and commercialization rights to product candidates from certain of our discovery programs on pre-determined terms and on anexclusive, worldwide basis. In 2005, GSK licensed our MABA program for the treatment of COPD, and in October 2011, we and GSKexpanded the MABA program by adding six additional Innoviva-discovered preclinical MABA compounds (the “Additional MABAs”). Thedevelopment program was funded in full by GSK. GSK is in the process of determining the next steps for the program. As a result of thetransactions effected by the Spin-Off, the Strategic Alliance Agreement was assigned to TRC, which is entitled to receive any contingentpayments and royalties payable by GSK from sales of products that may be developed under the Strategic Alliance Agreement, such as MABA,and MABA/FF.Critical Accounting Policies and EstimatesOur management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, whichhave been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financialstatements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on ourhistorical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differfrom these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical tounderstanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgmentsand estimates.Revenue RecognitionRevenue is recognized when our customer obtains control of promised goods or services, in an amount that reflects the consideration whichwe expect to receive in exchange for those goods or services. Revenue is recognized through a five-step process: (i) identify the contract with acustomer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price for the contract; (iv) allocate thetransaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) a performance obligation is satisfied. Werecognize our royalty revenue on 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. Royalties are recognized net of amortization of capitalized fees associated with any approval and launchmilestone payments made to GSK.Under the GSK Agreements, we recognized net revenue of $261.0 million for each of the years ended December 31, 2019 and 2018, and $217.2 for the year ended December 31, 2017.Table of Contents32Capitalized Fees paid to a Related PartyWe capitalize fees paid to licensors related to agreements for approved products or commercialized products (“Capitalized Fees”). Ourgross Capitalized Fees of $220.0 million as of December 31, 2019 consist of registrational and launch-related milestone fees paid to GSK. Wecapitalized these fees as capitalized fees paid to a related party and amortize these Capitalized Fees on a straight-line basis over their estimateduseful lives upon the commercial launch of the products. The estimated useful lives of these Capitalized Fees are based on a country-by-countryand product-by-product basis, as the later of the expiration or termination of the last patent right covering the compound in such product in suchcountry and 15 years from first commercial sale of such product in such country, unless the Collaboration Agreement is terminated earlier.Consistent with our policy for classification of costs under the research and development collaborative arrangements, the amortization of theseCapitalized Fees is recognized as a reduction of royalty revenue. Amortization expense for each of the years ended December 31, 2019, 2018,and 2017 was $13.8 million. The remaining estimated amortization expense is $13.8 million for each of the years from 2020 to 2024 and $70.0million thereafter.We review our Capitalized Fees for impairment on a product-by-product basis for each major geographic area when events or changes incircumstances indicate that the carrying amount of such assets may not be recoverable. The recoverability of Capitalized Fees is measured bycomparing the asset’s carrying amount to the expected undiscounted future cash flows that the asset is expected to generate. The determinationof recoverability typically requires various estimates and assumptions, including estimating 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 from near-term forecasted product sales andlong-term projected sales in the corresponding market. Based upon our analyses, no impairment charges have been recorded on the CapitalizedFees as of December 31, 2019.Fair Value of Stock-Based Compensation AwardsWe 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 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 Bulletin No. 107, “Share Based Payment,” for the expected option term. Weuse our historical volatility to estimate expected stock price volatility. The estimated fair value of the option is expensed on a ratable basis overthe 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 valueof service based RSUs and RSAs is expensed on a ratable or straight-line basis over the expected term of the vesting. The fair value ofperformance-contingent RSUs and RSAs is expensed using an accelerated method over the requisite service period based on management’s bestestimate as to whether it is probable that the shares awarded are expected to vest. We assess the probability of the performance indicators beingmet on a continuous basis. The grant date fair value of the RSUs and RSAs with a market condition is determined using a Monte Carlo valuationmodel and the compensation expense is recognized over the implied service period.Stock-based compensation expense was calculated based on awards ultimately expected to vest and was reduced for estimated forfeitures asof the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates. The estimated annualforfeiture rates for stock options, 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 AnnualReport on Form 10-K.Income TaxesWe utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities aredetermined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates andlaws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not thatsome portion or all of a deferred tax asset will not be realized. 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 our deferred tax assets. In 2019, we recognized income tax expense of $41.9million.LeasesIn February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016 02, Leases(Topic 842), which requires an entity to recognize right of use assets representing its right to use the underlying asset for the lease term andlease liabilities representing the present value of the future lease payments for both financing and operating leases on its consolidated balancesheets. For a lease with a term of 12 months or less, the standard allows an entity to elect not to recognize aTable of Contents33right-of-use asset and a lease liability and recognize the lease expense on a straight-line basis. We adopted the standard in 2019 and recognized aright-of-use asset and lease liabilities in the amount of $0.3 million, respectively, for the operating lease on our current corporate headquarters atDecember 31, 2019.Accounting for Convertible Senior Notes Due 2025On August 7, 2017, we completed a private placement of $192.5 million aggregate principal amount of our 2025 Notes. Due to our abilityto settle the conversion obligation of the 2025 Notes in cash, common stock or a combination of cash and common stock, at our option, weseparately account for the liability and equity components of the 2025 Notes by allocating the proceeds between the liability component and theembedded conversion option (“equity component”). The carrying amount of the liability component was calculated by measuring the fair valueof a similar liability that does not have an associated convertible feature using the income approach. The allocation was performed in a mannerthat reflected our non-convertible debt borrowing rate for similar debt. The equity component of the 2025 Notes of $67.3 million was recognizedas a debt discount and represents the difference between the proceeds from the issuance of the 2025 Notes and the fair value of the liability ofthe 2025 Notes on the date of issuance. The excess of the principal amount of the liability component over its carrying amount (“debt discount”)is amortized to interest expense using the effective interest method. The equity component is not remeasured as long as it continues to meet theconditions for equity classification.Results of OperationsNet RevenueTotal net revenue, as compared to the prior years, was as follows:Change Year Ended December 31,20192018 (In thousands) 2019 2018 2017 $ % $ % Royalties from a relatedparty — RELVAR/BREO$ 189,424$ 220,162$ 198,726$ (30,738) (14)% $ 21,436 11%Royalties from a related party — ANORO 42,625 41,286 29,036 1,339 3 12,250 42Royalties from a related party — TRELEGY 42,790 13,379 179 29,411 * 13,200 *Total royalties from a related party 274,839 274,827 227,941 12 — 46,886 21Less: amortization of capitalized fees paid to arelated party (13,823) (13,823) (13,823) — — — —Royalty revenue 261,016 261,004 214,118 12 — 46,886 22Strategic alliance — MABA program license — — 3,099 — * (3,099) *Total net revenue from GSK$ 261,016$ 261,004$ 217,217$ 12$ —% $ 43,787 20%* Not MeaningfulTotal net revenue increased slightly for the year ended December 31, 2019, compared to the year ended December 31, 2018. Royalties for RELVAR®/BREO® ELLIPTA® decreased primarily due to increased pricing pressure in the U.S., offset by volume growth in both the U.S. andnon-U.S. markets. The decrease was offset by continued growth in prescriptions and market share for TRELEGY® ELLIPTA®. Royalties forANORO® ELLIPTA® increased slightly year over year.Total net revenue increased for the year ended December 31, 2018, compared to the year ended December 31, 2017, primarily due tocontinuing growth in prescriptions and market share of RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA®.In the fourth quarter of 2017, due to the completion of Innoviva’s performance obligations under the MABA program, we revised theperformance period, which was previously estimated to end in June 2020. The change in this estimate resulted in full recognition of theremaining deferred revenue balance.Research & DevelopmentWe did not incur research & development (“R&D”) expenses during the years ended December 31, 2019 and 2018.$1.4 million R&D expenses for the year ended December 31, 2017 was related to the late-stage partnered respiratory assets with GSK.Table of Contents34General & AdministrativeGeneral and administrative expenses, as compared to the prior years, were as follows: Change Year Ended December 31,20192018 (In thousands) 2019 2018 2017 $ % $ %General and administrative expenses$ 14,656$ 20,053$ 32,258$ (5,397) (27)% $ (12,205) (38)%General and administrative expenses — relatedparty — 2,700 — (2,700)* 2,700** Not MeaningfulGeneral and administrative expenses decreased by $5.4 million for the year ended December 31, 2019, compared to the year endedDecember 31, 2018, mainly attributable to lower personnel-related expenses as a result of lower headcount. The amount for the year endedDecember 31, 2019 included $3.1 million legal and related fees for the arbitration initiated by Theravance Biopharma against the Company andTRC, as further described in Item 3 of Part I of this Form 10-K titled “Legal Proceedings,” of which $3.0 million was accounted for as TRC’sexpenses and consolidated in the Company’s consolidated statements of income.General and administrative expenses decreased by $12.2 million for the year ended December 31, 2018, compared to the year endedDecember 31, 2017. The amount for the year ended December 31, 2018 included $5.7 million cash severance costs in connection with certainmembers of senior management’s separation from the Company and payment of $2.7 million to Sarissa pursuant to a settlement agreement inFebruary 2018. The amount for the year ended December 31, 2017 included $8.1 million of net proxy contest and associated litigation costs.Other Expense, net, and Interest IncomeOther expense, net, and interest income, as compared to the prior years, were as follows: ChangeYear Ended December 31,20192018(In thousands) 2019 2018 2017 $ % $ %Other expense, net$ (345)$ (5,702)$ (7,038)$ 5,357*% $ 1,336*%Interest income 5,540 1,660 1,311 3,880* 349 27* Not MeaningfulOther expense, net for the year ended December 31, 2019, mainly consists of the loss on the extinguishment of debt of $0.2 million inrelation to the remaining principal balance payoff of our Term B Loan. Other expense, net for the year ended December 31, 2018, mainlyconsists of the loss on the extinguishment of debt of $5.7 million in relation to the prepayments of our Term B Loan. Other expense, net for theyear ended December 31, 2017, primarily pertains to the loss on the extinguishment of debt of $7.3 million in relation to our redemptions ofnon-recourse notes due 2029 (the “2029 Notes”).Interest income increased in the year ended December 31, 2019 compared to the years ended December 31, 2018 and 2017, primarily dueto higher cash and investment balances.Table of Contents35Interest ExpenseInterest expense, as compared to the prior years, was as follows: ChangeYear Ended December 31,20192018(In thousands) 2019 2018 2017 $ % $ %Interest expense$ 18,660$ 23,954$ 43,601$ (5,294) (22)% $ (19,647) (45)%Interest expense decreased for the year ended December 31, 2019, compared to the prior years primarily due to the lower averageoutstanding debt balance. See “Liquidity” section below for further information.Income TaxesIncome tax benefit (expense), net, as compared to the prior years, was as follows: ChangeYear Ended December 31,20192018(In thousands) 2019 2018 2017 $ % $ %Income tax benefit (expense), net$ (41,902)$ 196,073$ (4)$ (237,975)*$ 196,077** Not MeaningfulAs of December 31, 2019, 2018 and 2017, we had net operating loss carryforwards for federal income taxes of $0.6 billion, $0.8 billion,and $1.0 billion, respectively. As of December 31, 2019, 2018 and 2017, we had federal research and development tax credit carryforwards of$44.4 million, $44.8 million, and $45.2 million, respectively.For the year ended December 31, 2019, we recognized $41.9 million of income tax expense based on the taxable income generated duringthe year.For the year ended December 31, 2018, we recognized $196.1 million of income tax benefit after we evaluated whether it was more likelythan not that some portion or all deferred tax assets would be realized in the future based on all available positive and negative evidence,including but not limited to our historical operating results and our expectation of future profitability, and concluded that we would be able torealize approximately $190.2 million and $5.9 million benefits of the U.S. federal and state deferred tax assets in the future, respectively.Accordingly, we released our valuation allowance on these deferred tax assets as of December 31, 2018.We had total unrecognized tax benefits of $15.3 million as of December 31, 2019. Total unrecognized tax benefits that, if recognized,would affect our effective tax rate were $8.0 million as of December 31, 2019. Our total unrecognized tax benefits as of December 31, 2018 and2017 were $15.4 million and $15.5 million, respectively.Utilization of net operating loss and tax credit carryforwards is subject to rules, provided by the Internal Revenue Code and similar stateprovisions, 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 United States decreased in 2018, which resulted in the remeasurement of our deferred tax assets at the new statutoryrate and a reduction in the value of our deferred tax assets in 2017. We conducted an analysis through September 30, 2019 to determine whetheran ownership change had occurred since inception. The 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, we estimate that no portion of the netoperating loss or credit carryforwards will expire before becoming available to reduce federal and state income tax liabilities. Annual limitationsmay result in expiration of net operating loss and tax credit carryforwards before some or all of such amounts have been utilized.Table of Contents36Net Income Attributable to Noncontrolling InterestNet income attributable to noncontrolling interest, as compared to the prior years, was as follows: ChangeYear Ended December 31,20192018(In thousands) 2019 2018 2017 $ % $ %Net income attributable to noncontrolling interest$ 33,705$ 11,272$ 129$ 22,433*$ 11,143** Not MeaningfulNet income attributable to noncontrolling interest represents the 85% share of net income in Theravance Respiratory Company, LLC forTheravance Biopharma. The year over year increases were primarily due to the growth in prescriptions and market share for TRELEGY® ELLIPTA®.Liquidity and Capital ResourcesLiquiditySince our inception, we have financed our operations primarily through private placements and public offerings of equity and debtsecurities and payments received under collaborative arrangements. For the year ended December 31, 2019, we generated gross royalty revenuesfrom GSK of $274.8 million. Net cash and cash equivalents, short-term investments and marketable securities totaled $350.8 million, androyalties receivable from GSK totaled $79.4 million, as of December 31, 2019.On August 7, 2017, we completed a private placement of $192.5 million aggregate principal amount of our 2025 Notes. The proceedsinclude the 2025 Notes sold pursuant to the $17.5 million over-allotment option granted by us to the initial purchasers, which option wasexercised in full. The 2025 Notes were sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the SecuritiesAct of 1933, as amended (the “Securities Act”). The 2025 Notes will mature on August 15, 2025, unless repurchased or converted in accordancewith their terms prior to such date. Concurrently with the pricing of the offering, we repurchased and retired 1,317,771 shares of our commonstock for approximately $17.5 million of the net proceeds from the offering, in privately negotiated transactions effected through one of theinitial purchasers or its affiliate, as our agent. The remaining net proceeds from the sale of the 2025 Notes in the offering were used to redeem aportion 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 $250.0 million Term B Loan, the proceeds ofwhich were used to repay the remaining balance of the 2029 Notes. The Term B Loan was fully paid off in December 2019, almost three yearsahead of the maturity in 2022.Adequacy of Cash Resources to Meet Future NeedsWe believe that cash from projected future royalty revenues and our cash, cash equivalents and marketable securities will be sufficient tomeet our anticipated debt service and operating needs for at least the next 12 months based upon current operating plans and financial forecasts.If our current operating plans and financial forecasts change, we may require additional funding sooner in the form of public or private equityofferings or debt financings. Furthermore, if in our view favorable financing opportunities arise, we may seek additional funding at any time.However, future financing may not be available in amounts or on terms acceptable to us, if at all. This could leave us without adequate financialresources to fund our operations as currently planned. In addition, from time to time we may restructure or reduce our debt, including throughtender offers, redemptions, amendments, repurchases or otherwise, all allowable with the terms of our debt agreements.Table of Contents37Cash FlowsCash flows, as compared to the prior years, were as follows: Year Ended December 31, Change(In thousands) 2019 2018 2017 2019 2018Net cash provided by operating activities$ 257,458$ 223,531$ 141,749$ 33,927$ 81,782Net cash provided by (used in) investing activities (18,003) 3,519 (23,236) (21,522) 26,755Net cash used in financing activities (23,776) (237,969) (163,193) 214,193 (74,776)Cash Flows from Operating ActivitiesCash provided by operating activities for the year ended December 31, 2019 was $257.5 million, consisting primarily of our net income of $191.0 million, adjusted for non-cash items such as $41.9 million of deferred income taxes, $13.9 million of depreciation and amortization, $7.8 million amortization of debt discount and issuance costs, $2.1 million of stock-based compensation expense, partially offset by $2.2 million of amortization of discount on short-term investments and a decrease in receivables from collaborative arrangements of $3.9 million.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 million amortization of debt discount and issuance costs, $5.7 million of loss on debt extinguishment and $3.2 million of stock-basedcompensation 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 compensationexpense, $7.3 million of loss on debt extinguishment and $5.1 million amortization of debt discount and debt issuance costs, offset by changesin operating assets and liabilities, including an increase in receivables from collaborative arrangements of $23.7 million and a reduction indeferred revenue of $3.1 million.Cash Flows from Investing ActivitiesNet cash used in investing activities for the year ended December 31, 2019 of $18.0 million was primarily due to $231.9 million inpurchases of marketable securities, partially offset by $213.9 million of proceeds received from maturities of marketable securities.Net cash flows from investing activities for the year ended December 31, 2018 of $3.5 million was primarily due to $75.4 million ofproceeds received from 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 purchasesof marketable securities, partially offset by $44.4 million of proceeds received from the sale and maturities of marketable securities.Cash Flows from Financing ActivitiesNet cash used in financing activities for the year ended December 31, 2019 of $23.8 million was primarily due to $13.8 million payment forpaying off the remaining principal balance of our Term B Loan and $10.6 million distributions to noncontrolling interest.Net cash used in financing activities for the year ended December 31, 2018 of $238.0 million was primarily due to $230.0 million inprepayments on our Term B Loan, $6.0 million distributions to noncontrolling interest and $3.1 million payments for the repurchase of shares tosatisfy 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 principalrepayments of 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 the financing of our Term B Loan and the net proceeds of $187.1 million from issuance of our convertible senior notes due2025.Table of Contents38Off-Balance Sheet ArrangementsIn June 2014, our facility leases in South San Francisco, California were assigned to Theravance Biopharma. However, if TheravanceBiopharma were to default on its lease obligations, we would be held liable by the landlord and thus, we have in substance guaranteed the leasepayments for these facilities. We would also be responsible for lease-related payments including utilities, property taxes, and common areamaintenance, which may be as much as the actual lease payments. As of December 31, 2019, the total remaining lease payments for the durationof the lease, which runs through May 2020, were $2.8 million. The carrying value of this lease guarantee was $0.1 million as of December 31,2019 and is reflected in other long-term liabilities in our consolidated balance sheet.Commitments and ContingenciesWe indemnify our officers and directors for certain events or occurrences, subject to certain limits. We may be subject to contingencies thatmay arise from matters such as product liability claims, legal proceedings, shareholder suits and tax matters. As such, we are unable to estimatethe potential exposure related to these indemnification agreements. We have not recognized any liabilities relating to these agreements as ofDecember 31, 2019.Contractual Obligations and Commercial CommitmentsIn the table below, we set forth our significant enforceable and legally binding obligations and future commitments as of December 31,2019. Payment Due by PeriodLess ThanMore Than(In thousands) Total 1 Year 1 ‑ 3 Years 3 ‑ 5 Years 5 Years2023 Notes$ 258,907$ 5,121$ 10,242$ 243,544$ —2025 Notes 221,376 4,813 9,625 9,625 197,313Facility lease 348 116 232 — —Total$ 480,631$ 10,050$ 20,099$ 253,169$ 197,313ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKInterest Rate RiskWe are exposed to interest rate risk related to our portfolio of investments in debt securities and the debt that we have issued. We accountfor our investments in debt securities at fair value, with unrealized gains or losses recorded as a component of other comprehensive income. Webelieve that our exposure to interest rate risk on our investment portfolio is not material as the average remaining maturity of our investmentportfolio was approximately three months as of December 31, 2019.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 infair 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 ofchanges in interest rates. However, we do disclose the estimated fair value of our debt and we are exposed to changes in fair value that mayoccur as a result of interest rate fluctuations. As of December 31, 2019, based on available pricing information, the fair values of our 2023 Notesand 2025 Notes were estimated to be $243.4 million and $209.0 million, respectively. The 2023 Notes and 2025 Notes bear interest at a fixedrate of 2.125% and 2.5%, respectively. Information about the contractual maturities of our debt is disclosed in the table within the ContractualObligations and Commercial Commitments section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.Table of Contents39ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAPageConsolidated Balance Sheets as of December 31, 2019 and December 31, 201840Consolidated Statements of Income for each of the three years in the period ended December 31, 201941Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 201942Consolidated Statements of Stockholders’ Equity (Deficit) for each of the three years in the period ended December 31, 201943Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 201944Notes to Consolidated Financial Statements45Supplementary Financial Data (unaudited)64Reports of Independent Registered Public Accounting Firm65Table of Contents40INNOVIVA, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except per share data)December 31, 2019 2018AssetsCurrent assets:Cash and cash equivalents$278,096$62,417Short-term marketable securities 72,749 52,491Related party receivables from collaborative arrangements 79,427 83,286Prepaid expenses and other current assets 962 849Total current assets 431,234 199,043Property and equipment, net 33 160Capitalized fees paid to a related party, net 139,076 152,899Deferred tax assets, net154,171196,054Other assets 312 37Total assets$724,826$548,193Liabilities and Stockholders' EquityCurrent liabilities:Accounts payable$10$11Accrued personnel-related expenses 647 470Accrued interest payable 4,152 4,264Other accrued liabilities 562 955Total current liabilities 5,371 5,700Long-term debt, net of discount and issuance costs 377,120 382,855Other long-term liabilities219586Commitments and contingencies (Note 8)Stockholders’ equity:Preferred stock: $0.01 par value, 230 shares authorized, no shares issued and outstanding — —Common stock: $0.01 par value, 200,000 shares authorized, 101,288 and 101,098 issued and outstandingas of December 31, 2019 and 2018, respectively 1,013 1,011Additional paid-in capital 1,258,859 1,256,267Accumulated other comprehensive income (loss) 27 (3)Accumulated deficit (946,404) (1,103,692)Total Innoviva stockholders’ equity313,495153,583Noncontrolling interest28,6215,469Total stockholders’ equity 342,116 159,052Total liabilities and stockholders’ equity$724,826$548,193See accompanying notes to consolidated financial statements.Table of Contents41INNOVIVA, INC.CONSOLIDATED STATEMENTS OF INCOME(In thousands, except per share data)Year Ended December 31, 2019 2018 2017Royalty revenue from a related party, net of amortization of capitalized fees paid to a relatedparty of $13,823 in the years ended December 31, 2019, 2018, and 2017, respectively$261,016$261,004$214,118Revenue from collaborative arrangements from a related party——3,099Total net revenue261,016261,004217,217Operating expenses:Research and development — — 1,355General and administrative 14,656 20,053 32,258General and administrative - related party—2,700—Total operating expenses 14,656 22,753 33,613Income from operations 246,360 238,251 183,604Other expense, net (345) (5,702) (7,038)Interest income 5,540 1,660 1,311Interest expense (18,660) (23,954) (43,601)Income before income taxes232,895210,255134,276Income tax benefit (expense), net(41,902)196,073(4)Net income190,993406,328134,272Net income attributable to noncontrolling interest33,70511,272129Net income attributable to Innoviva stockholders$157,288$395,056$134,143Basic net income per share attributable to Innoviva stockholders$1.55$3.92$1.25Diluted net income per share attributable to Innoviva stockholders$1.43$3.53$1.17Shares used to compute Innoviva basic and diluted net income per share:Shares used to compute basic net income per share 101,150100,849106,945Shares used to compute diluted net income per share 113,409113,408119,866See accompanying notes to consolidated financial statements.Table of Contents42INNOVIVA, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In thousands)Year Ended December 31, 2019 2018 2017Net income$190,993$406,328$134,272Net unrealized income (loss) on marketable securities, net of tax impact of $8, $0, $0respectively3015(19)Comprehensive income191,023406,343134,253Comprehensive income attributable to noncontrolling interest33,70511,272129Comprehensive income attributable to Innoviva stockholders$157,318$395,071$134,124See accompanying notes to consolidated financial statements.Table of Contents43INNOVIVA, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)(In thousands)Innoviva Stockholders' Equity (Deficit)AccumulatedTotalAdditionalOtherStockholders’Common StockPaid-InComprehensiveAccumulatedTreasury StockNoncontrollingEquity Shares Amount Capital Income (loss) Deficit Shares Amount Interest (Deficit)Balance as of December 31, 2016 108,585$1,085$1,282,077$1$(1,632,891)(150)$(3,263)$—$(352,991)Contributions from noncontrolling interest ———————2323Exercise of stock options, and issuance of common stock unitsand stock awards 8919(1,702)—————(1,693)Stock-based compensation ——9,833—————9,833Cash dividend forfeited——7—————7Repurchase of common stock(7,430)(75)(97,425)—————(97,500)Equity component of Covertible Senior Notes due 2025, net ofissuance costs——65,361—————65,361Net income ————134,143——129134,272Other comprehensive loss ———(19)————(19)Balance as of December 31, 2017 102,0461,0191,258,151(18)(1,498,748)(150)(3,263)152(242,707)Distributions to noncontrolling interest ———————(5,955)(5,955)Exercise of stock options, and issuance of common stock unitsand stock awards (798)(8)(1,926)—————(1,934)Stock-based compensation ——3,233—————3,233Cash dividend forfeited——72—————72Retirement of treasury stock(150)—(3,263)——1503,263——Net income ————395,056——11,272406,328Other comprehensive income ———15————15Balance as of December 31, 2018 101,0981,0111,256,267(3)(1,103,692)——5,469159,052Distributions to noncontrolling interest ———————(10,553)(10,553)Exercise of stock options, and issuance of common stock unitsand stock awards 1902536—————538Stock-based compensation ——2,056—————2,056Net income ————157,288——33,705190,993Other comprehensive income ———30————30Balance as of December 31, 2019 101,288$1,013$1,258,859$27$(946,404)—$—$28,621$342,116See accompanying notes to consolidated financial statements.Table of Contents44INNOVIVA, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)Year Ended December 31, 2019 2018 2017Cash flows from operating activitiesNet income$190,993$406,328$134,272Adjustments to reconcile net income to net cash provided by operating activities:Deferred income taxes41,875(196,054)—Depreciation and amortization 13,874 13,872 13,982Stock-based compensation 2,056 3,233 9,833Amortization of debt discount and issuance costs7,7997,7485,116Loss on write-off of property and equipment104——Loss on extinguishment of debt2165,7457,256Amortization of discount on short-term investments(2,229)(256)(105)Amortization of lease guarantee(325)(325)(325)Changes in operating assets and liabilities:Receivables from collaborative arrangements 3,859 (12,746) (23,693)Prepaid expenses and other current assets (113) (95) 12Other assets 27 — —Accounts payable (1) (590) 473Accrued personnel-related expenses and other accrued liabilities (439) (1,677) (81)Accrued interest payable (112) (1,656) (1,908)Other long-term liabilities (126) 4 16Deferred revenue — — (3,099)Net cash provided by operating activities 257,458223,531141,749Cash flows from investing activitiesMaturities of marketable securities 213,924 75,375 44,387Purchases of marketable securities (231,915) (71,856) (67,623)Sales of marketable securities — — —Purchases of property and equipment (12) — —Net cash provided by (used in) investing activities (18,003) 3,519 (23,236)Cash flows from financing activitiesRepurchase of shares to satisfy tax withholding(89)(3,073)(2,128)Payments of principal on senior secured term loans(13,750)(230,000)(6,250)Payments of cash dividends to stockholders (11) (80) (281)Proceeds from issuances of common stock, net6271,139435Proceeds from issuance of convertible senior notes due 2025 — — 192,500Proceeds from senior secured term loans — — 250,000Payments of debt issuance costs and debt discount——(12,803)Payments of principal on non-recourse notes due 2029 — — (487,189)Repurchase of common stock——(97,500)Contributions from (distributions to) noncontrolling interest(10,553)(5,955)23Net cash used in financing activities (23,776) (237,969) (163,193)Net increase (decrease) in cash and cash equivalents 215,679 (10,919) (44,680)Cash and cash equivalents at beginning of period 62,417 73,336 118,016Cash and cash equivalents at end of period $278,096$62,417$73,336Supplemental disclosure of cash flow informationCash paid for interest$10,974$17,861$40,353See accompanying notes to consolidated financial statements.Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS451. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESDescription of OperationsInnoviva (referred to as "Innoviva", the "Company", or "we" and other similar pronouns) is a company with a portfolio of royalties thatinclude 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 combinationFF/UMEC/VI). Under the Long-Acting Beta2 Agonist (“LABA”) Collaboration Agreement, Innoviva is entitled to receive royalties from GSKon 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 netsales above $3.0 billion; and royalties from the sales of ANORO® ELLIPTA® which tier upward at a range from 6.5% to 10%. Innoviva is alsoentitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to TheravanceRespiratory Company, LLC (“TRC”), including TRELEGY® ELLIPTA® and any other product or combination of products that may bediscovered or developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred toherein as the “GSK Agreements”), which have been assigned to TRC other than RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® .Principles of ConsolidationThe accompanying consolidated financial statements include the accounts of Innoviva and its wholly-owned subsidiaries and a variableinterest entity for which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated inconsolidation. For the consolidated variable interest entity, the Company records net income attributable to noncontrolling interest on itsconsolidated statements of income equal to the percentage of ownership interest retained in such entity by the respective noncontrolling party.Use of Management’s EstimatesThe preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requiresmanagement to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanyingnotes. Actual results could differ materially from those estimates. Management evaluates its significant accounting policies and estimates on anongoing basis. We base our estimates on historical experience and other relevant assumptions that we believe to be reasonable under thecircumstances. These estimates also form the basis for making judgments about the carrying values of assets and liabilities when these valuesare not readily apparent from other sources.Certain Risks and ConcentrationsOur financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and marketablesecurities. 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 ReportingWe operate in a single segment, which is to provide capital return to stockholders by maximizing the potential value of our respiratoryassets partnered with GSK. Revenues are generated from our collaborative arrangements and royalty payments from GSK, located in GreatBritain. Our facilities are located within the United States.Variable Interest EntityWe evaluate our ownership, contractual and other interest in entities to determine if they are variable interest entities (“VIE”), whether wehave a variable interest in those entities and the nature and extent of those interests. Based on our evaluation, if we determine we are the primarybeneficiary of a VIE, we consolidate the entity in our financial statements. We consolidate the financial results of TRC, which we havedetermined to be a VIE, because we have the power to direct the economically significant activities of TRC and the obligation to absorb lossesof, or the right to receive benefits from, TRC. As of December 31, 2019 and 2018, $14.4 million and $6.4 million, respectively, of the related-party receivables from collaborative arrangements were attributable to TRC. The cash balance attributable to TRC as of December 31, 2019 was$22.3 million. The primary source of revenue for TRC is the royalties generated from the net sales of TRELEGY® ELLIPTA® by GSK. Total revenue for TRC related to TRELEGY® ELLIPTA® for Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)461. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)the years ended December 31, 2019 and 2018 was $42.8 million and $13.4 million, respectively. Total operating expenses were $3.4 million forthe year ended December 31, 2019, compared to minimal amounts for the year ended December 31, 2018. The expenses incurred in 2019 wereprimarily related to an arbitration initiated by Theravance Biopharma against the Company and TRC, as further described in Item 3 of Part I ofthis Form 10-K titled "Legal Proceedings". Cash and Cash EquivalentsWe consider all highly liquid investments purchased with a maturity of three months or less on the date of purchase to be cash equivalents.Cash equivalents are carried at cost, which approximates fair value.Investments in Marketable SecuritiesWe invest in short-term investments and marketable securities, primarily corporate notes, government securities, government agencies, andgovernment commercial papers. We limit the amount of credit exposure with any one issuer, industry or geographic area for investments otherthan instruments backed by the U.S. federal government. We classify our marketable securities as available-for-sale securities and report them atfair value in cash equivalents or short-term marketable securities on the consolidated balance sheets with related unrealized gains and lossesincluded as a component of stockholders’ deficit. The amortized cost of debt securities is adjusted for amortization of premiums and accretion ofdiscounts to maturity, which is included in interest income on the consolidated statements of operations. Realized gains and losses, if any, onavailable-for-sale securities are included in interest income. The cost of securities sold is based on the specific identification method. Interest anddividends 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 considerationof the cause of the impairment, including the creditworthiness of the security issuers, the number of securities in an unrealized loss position, theseverity and duration of the unrealized losses, whether we have the intent to sell the securities and whether it is more likely than not that we willbe required to sell the securities before the recovery of their amortized cost basis. When we determine that the decline in estimated fair value ofan investment is below the amortized cost basis and the decline is other-than-temporary, we reduce the carrying value of the security and recorda loss for the amount of such decline to other income (expense), net.Fair Value of Financial InstrumentsWe define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal ormost advantageous 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 fromindependent 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 notactive; and model-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, andaccrued liabilities. Cash equivalents and marketable securities are carried at estimated fair value. The carrying values of receivables fromcollaborative arrangements, accounts payable, and accrued liabilities approximate their estimated fair value due to the relatively short-termnature of these instruments.Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)471. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Property and EquipmentProperty and equipment, which consisted of equipment, computer equipment, software, office furniture and fixtures, was immaterial as of December 31, 2019 and 2018, respectively. Property, equipment and leasehold improvements are stated at cost and depreciated using the straight-line method as follows:Leasehold improvements Shorter of remaining lease terms or useful lifeEquipment, furniture and fixtures5 - 7 yearsSoftware and computer equipment 3 yearsCapitalized Fees Paid to a Related PartyWe capitalize fees paid to licensors related to agreements for approved products or commercialized products. We capitalize these fees ascapitalized fees paid to a related party (“Capitalized Fees”) and amortize these Capitalized Fees on a straight-line basis over their estimateduseful lives upon the commercial launch of the product, which has been shortly after regulatory approval of such product. The estimated usefullives of these Capitalized Fees are based on a country-by-country and product-by-product basis, as the later of the expiration or termination ofthe last patent right covering the compound in such product in such country and 15 years from first commercial sale of such product in suchcountry, unless the Collaboration Agreement is terminated earlier. Consistent with our policy for classification of costs under the research anddevelopment collaborative arrangements, the amortization of these Capitalized Fees is recognized as a reduction of royalty revenue. We reviewour 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 theasset’s carrying amount to the expected undiscounted future cash flows that the asset is expected to generate. The determination of recoverabilitytypically requires various estimates and assumptions, including estimating the useful life over which cash flows will occur, their amount, and theasset’s residual value, if any. We derive the required cash flow estimates from near-term forecasted product sales and long-term projected salesin the corresponding market.Revenue RecognitionRevenue is recognized when our customer obtains control of promised goods or services, in an amount that reflects the consideration whichwe expect to receive in exchange for those goods or services. Revenue is recognized through a five-step process: (i) identify the contract with acustomer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price for the contract; (iv) allocate thetransaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) a performance obligation is satisfied.We recognize the royalty revenue on net sales of products with respect to which we have contractual royalty rights in the period in whichthe royalties are earned and reported to us. Royalties are recognized net of amortization of capitalized fees associated with any approval andlaunch milestone payments made to GSK.Fair Value of Stock-Based Compensation AwardsWe use the Black-Scholes-Merton option pricing model to estimate the fair value of options granted under our equity incentive plans andrights to acquire stock granted under our employee stock purchase plan (“ESPP”). The Black-Scholes-Merton option valuation model requiresthe use of assumptions, including the expected term of the award and the expected stock price volatility. We use the “simplified” method asdescribed in Staff Accounting Bulletin No. 107, “Share-Based Payment,” for the expected option term. We use our historical volatility toestimate expected stock price volatility.Restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) are measured based on the fair market values of the underlying stockon the dates of grant.Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)481. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Stock-based compensation expense is calculated based on awards ultimately expected to vest and was reduced for estimated forfeitures atthe time of grant and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates. Our estimated annualforfeiture 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 grantor expected term of the vesting, and the estimated fair value of performance-contingent RSUs and RSAs is expensed using an acceleratedmethod over the term of the award once we have determined that it is probable that performance milestones will be achieved. Compensationexpense for RSUs and RSAs that contain performance conditions is based on the grant date fair value of the award. Compensation expense isrecorded over the requisite service period based on management’s best estimate as to whether it is probable that the shares awarded are expectedto vest. We assess the probability of the performance milestones being met on a continuous basis. The grant date fair value of the RSUs andRSAs with a market condition is determined using a Monte Carlo valuation model and the compensation expense is recognized over the impliedservice period.Compensation expense for purchases under the ESPP is recognized based on the fair value of the common stock on the date of offering, lessthe purchase discount percentage provided for in the plan.Income TaxesWe utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities aredetermined based on differences between financial reporting and the tax basis of assets and liabilities and are measured using enacted tax ratesand laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than notthat some portion or all of a deferred tax asset will not be realized.The recognition and measurement of tax benefits requires significant judgment. Our judgment might change as new information becomesavailable. We will continue to evaluate our deferred tax assets each reporting period to determine whether adjustments to our valuationallowance are required and deferred tax assets will be realized based on the consideration 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 stillsubject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of theposition’s sustainability and is measured at the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement.As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether the factors underlying thesustainability assertion have changed and whether the amount of the recognized tax benefit is still appropriate.Comprehensive IncomeComprehensive income is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss) consists ofchanges in unrealized and realized gains and losses on our marketable securities and the related tax impact of these changes.Related PartiesGSK owned 31.6% of our outstanding common stock as of December 31, 2019. Transactions with GSK are described in Note 3,“Collaborative Arrangements.”Recently Adopted Accounting Standards UpdatesIn February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update ASU 2016-02, Leases,which supersedes the lease recognition requirements in ASC Topic 840, Leases. The standard requires an entity to recognize right-of-use assetsand lease liabilities arising from a lease for both financing and operating leases in the consolidated balance sheets but recognize the impact onthe consolidated statement of operations and cash flows in a similar manner under previous GAAP. TheTable of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)491. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)standard also requires additional qualitative and quantitative disclosures. We adopted the standard in 2019 and recognized a right-of-use assetand lease liabilities in the amount of $0.3 million, respectively, for the operating lease on our current corporate headquarters at December 31,2019.In August 2018, the U.S. Securities and Exchange Commission (the “SEC”) adopted the final rule under SEC Release No. 33-10532,Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated orsuperseded. In addition, the amendments expanded the disclosure requirements relating to the analysis of stockholders’ equity for interimfinancial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet mustbe provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of eachperiod for which a statement of income is required to be filed. This final rule is effective on November 5, 2018. Effective January 1, 2019, theCompany adopted this rule and added a Consolidated Statement of Changes in Stockholders’ Equity (Deficit) in its Form 10-Qs filed during theyear ended December 31, 2019, which presented a reconciliation in a single statement showing the changes in stockholders equity for eachinterim period, as well as each comparable period.Recently Issued Accounting Standards or Updates Not Yet AdoptedIn December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which isintended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic740. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, withearly adoption permitted. We are currently in the process of evaluating the effects of the provisions of ASU 2019-12 on our financial statements.2. NET INCOME PER SHAREBasic net income per share attributable to Innoviva stockholders is computed by dividing net income attributable to Innoviva stockholdersby the weighted-average number of shares of common stock outstanding. Diluted net income per share attributable to Innoviva stockholders iscomputed by dividing net income attributable to Innoviva stockholders by the weighted-average number of shares of common stock and dilutivepotential common stock equivalents then outstanding. Dilutive potential common stock equivalents include the assumed exercise, vesting andissuance of employee stock awards using the treasury stock method, as well as common stock issuable upon assumed conversion of ourconvertible subordinated notes due 2023 (the “2023 Notes”) 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 assumedconversion premium to diluted net income per share is computed using the treasury stock method. As the average market price per share of ourcommon stock as reported on The Nasdaq Global Select Market was lower than the initial conversion price of $17.26 per share, there was nodilutive effect of the assumed conversion premium for the years ended December 31, 2019 and 2018, respectively.Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)502. NET INCOME PER SHARE (Continued)The following table shows the computation of basic and diluted net income per share for the years ended December 31, 2019, 2018 and2017:Year Ended December 31,(In thousands except per share data) 2019 2018 2017Numerator:Net income attributable to Innoviva stockholders, basic$157,288$395,056 $134,143Add: interest expense on 2023 Notes 4,648 5,661 5,647Net income attributable to Innoviva stockholders, diluted$161,936$400,717 $139,790Denominator:Weighted-average shares used to compute basic net income per share attributable to Innovivastockholders 101,150 100,849 106,945Dilutive effect of 2023 Notes 12,189 12,189 12,189Dilutive effect of options and awards granted under equity incentive plan and employee stockpurchase plan 70 370 732Weighted-average shares used to compute diluted net income per share attributable to Innovivastockholders 113,409 113,408 119,866Net income per share attributable to Innoviva stockholdersBasic$1.55$3.92 $1.25Diluted$1.43$3.53 $1.17Anti-dilutive SecuritiesThe following common stock equivalents were not included in the computation of diluted net income per share because their effect wasanti-dilutive:Year Ended December 31, (In thousands) 2019 2018 2017Outstanding options and awards granted under equity incentive plan and employee stock purchaseplan 1,130 1,490 2,1213. REVENUE RECOGNITION AND COLLABORATIVE ARRANGEMENTSRevenue from Collaborative ArrangementsNet revenue recognized under our GSK Agreement was as follows:Year Ended December 31, (In thousands) 2019 2018 2017Royalties from a related party — RELVAR/BREO$189,424$220,162$198,726Royalties from a related party — ANORO 42,625 41,286 29,036Royalties from a related party — TRELEGY42,79013,379179Total royalties from a related party 274,839 274,827 227,941Less: amortization of capitalized fees paid to a related party (13,823) (13,823) (13,823)Royalty revenue 261,016 261,004 214,118Strategic alliance — MABA program license——3,099Total net revenue from GSK$261,016$261,004$217,217Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)513. REVENUE RECOGNITION AND COLLABORATIVE ARRANGEMENTS (Continued)LABA CollaborationAs a result of the launch and approval of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® in the U.S., Japan and Europe, wepaid milestone fees to GSK totaling $220.0 million during the year ended December 31, 2014. The milestone fees paid to GSK were recognizedas capitalized fees paid to a related party, which are being amortized over their estimated useful lives commencing upon the commercial launchof the product. The amortization expense is recorded as a reduction to the royalties from GSK.We are entitled to receive annual royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows: 15% on the first $3.0 billionof annual global net sales and 5% for all annual global net sales above $3.0 billion. Sales of single-agent LABA medicines and combinationmedicines would be combined for the purposes of this royalty calculation. For other products combined with a LABA from the LABACollaboration, 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 toTRC in connection with the Spin-Off, including TRELEGY® ELLIPTA® , which royalties are upward tiering and range from 6.5% to 10%.Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)524. AVAILABLE-FOR-SALE SECURITIES AND FAIR VALUE MEASUREMENTSAvailable-for-Sale SecuritiesThe estimated fair value of available-for-sale securities is based on quoted market prices for these or similar investments that were based onprices obtained from a commercial pricing service. Available-for-sale securities are summarized below:December 31, 2019GrossGrossUnrealizedUnrealizedEstimated(In thousands) Amortized Cost Gains Losses Fair ValueU.S. government securities$53,799$35—$53,834U.S. commercial paper 18,915 — — 18,915Money market funds 233,992 — — 233,992Total$306,706$35$—$306,741December 31, 2018GrossGrossUnrealizedUnrealizedEstimated(In thousands) Amortized Cost Gains Losses Fair ValueU.S. government securities$29,736$—$(3)$29,733U.S. government agencies4,971——4,971U.S. corporate notes 2,875 — — 2,875U.S. commercial paper 22,037 — — 22,037Money market funds 49,358 — — 49,358Total$108,977$—$(3)$108,974As of December 31, 2019, all of the available-for-sale debt securities had contractual maturities within one year, and the average durationof debt securities was approximately three months.Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)534. AVAILABLE-FOR-SALE SECURITIES AND FAIR VALUE MEASUREMENTS (Continued)Fair Value MeasurementsOur available-for-sale securities are measured at fair value on a recurring basis and our debt is carried at amortized cost basis. The estimatedfair values were as follows:Estimated Fair Value Measurements as of December 31, 2019 Using:Quoted Price inSignificantActive Markets OtherSignificantfor IdenticalObservableUnobservableTypes of InstrumentsAssetsInputsInputs(In thousands) Level 1 Level 2 Level 3 TotalAssetsU.S. government securities$—$53,834$—$53,834U.S. commercial paper— 18,915 — 18,915Money market funds233,992——233,992Total assets measured at estimated fair value$233,992$72,749$—$306,741Debt2023 Notes$—$243,394$—$243,3942025 Notes—208,976—208,976Total fair value of debt$—$452,370$—$452,370Estimated Fair Value Measurements as of December 31, 2018 Using:Quoted Price inActive MarketsSignificant OtherSignificantfor IdenticalObservableUnobservableTypes of InstrumentsAssetsInputsInputs(In thousands) Level 1 Level 2 Level 3 TotalAssetsU.S. government securities$—$29,733$—$29,733U.S. government agencies—4,971—4,971U.S. corporate notes— 2,875 — 2,875U.S. commercial paper— 22,037 — 22,037Money market funds49,358——49,358Total assets measured at estimated fair value$49,358$59,616$—$108,974DebtTerm B Loan$—$13,750$—$13,7502023 Notes—258,918—258,9182025 Notes—230,692—230,692Total fair value of debt$—$503,360$—$503,360The 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 marketresearch 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 ourinitial Term B Loan before deducting debt issuance costs approximates fair value at December 31, 2018 as the loan carried a variable interestrate that was tied to the LIBOR rate plus an applicable spread.Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)545. CAPITALIZED FEES PAID TO A RELATED PARTYCapitalized fees paid to a related party, which consist of registrational and launch-related milestone fees paid to GSK, were as follows: December 31, (In thousands) Amortization period 2019 2018United States 2013-2030$120,000$120,000Europe 2013-2029 60,000 60,000Japan 2013-2029 40,000 40,000Gross carrying value 220,000 220,000Accumulated amortization (80,924) (67,101)Net carrying value$139,076$152,899These milestone fees are being amortized over their estimated useful lives commencing upon the commercial launch of the product in theirrespective regions with the amortization expense recorded as a reduction in revenue from collaborative arrangements. As of December 31,2019, the weighted average remaining amortization period is 10.1 years.Additional information regarding these milestone fees is included in Note 3, “Collaborative Arrangements.” Amortization expense for eachof the years ended December 31, 2019, 2018 and 2017 was $13.8 million. The remaining estimated amortization expense is $13.8 million for each of the years from 2020 to 2024 and $70.0 million thereafter. 6. STOCK-BASED COMPENSATIONEquity Incentive PlansIn May 2012, we adopted the 2012 Equity Incentive Plan (the “2012 Plan”). The 2012 Plan provides for the grant of incentive stockoptions, nonstatutory stock options, RSAs, RSUs and Stock Appreciation Rights to employees, non-employee directors and consultants. As ofDecember 31, 2019, total shares remaining available for issuance under the 2012 Plan were 5,043,494.Employee Stock Purchase PlanUnder the 2004 Employee Stock Purchase Plan (the “ESPP”), our employees may purchase common stock through payroll deductions at aprice equal to 85% of the lower of the fair market value of the stock at the beginning of the offering period or at the end of each applicablepurchase period. The ESPP provides for consecutive and overlapping offering periods of 24 months in duration, with each offering periodcomposed of four consecutive six-month purchase periods. The purchase periods end on either May 15 or November 15. ESPP contributions arelimited to a maximum of 15% of an employee’s eligible compensation. The maximum number of shares that an employee may purchase in anypurchase period is 2,500. An employee may not purchase shares with a value greater than $25,000 in any calendar year.As of December 31, 2019, total shares remaining available for issuance under the ESPP were 187,576.Performance-Contingent RSAs and RSUsSince 2011, the Compensation Committee of our Board of Directors (the “Compensation Committee”) has approved grants ofperformance-contingent RSAs and RSUs to senior management and a non-executive officer. Generally, these awards have dual triggers ofvesting based upon the achievement of certain performance goals by a pre-specified date, as well as a requirement for continued employment.Recognition of stock-based compensation expense begins when the performance goals are deemed probable of achievement.Included in these performance-contingent RSAs was the remaining grant of 63,000 special long-term retention and incentive performance-contingent RSAs to senior management in 2011. These awards were released in November 2017 upon vesting.Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)556. STOCK-BASED COMPENSATION (Continued)Market-Based RSAs and RSUs2016 Market-Based RSAs and RSUsOn January 14, 2016, the Compensation Committee approved and granted 282,394 RSAs and 46,294 RSUs to senior management. Theseawards included a market condition based on Relative Total Shareholder Return (“TSR”) and a service condition that required continuedemployment collectively, the “Performance Measures”. The vesting percentages of these awards were calculated based on the two-year TSR with a catch-up provision opportunity measured on January 13, 2019 for RSAs and on September 30, 2018 for RSUs. Two-thirds of amounts earned at the end of year two would vest and be distributed 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 on February 20, 2019 for RSAs and November 20, 2018 for RSUs. The actual payout of shares may range from a minimum of zero shares to a maximum of 328,688 shares granted upon the actual performance against the Performance Measures. The grant date fair value of these awards was determined using a Monte Carlo valuation model. The aggregate value of $2.0 million was to be recognized as compensation expense over the implied service period and would not 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, January12, 2018. RSAs totaling 69,440 and RSUs totaling 30,862 representing two-thirds of the amounts were released on February 20, 2018. In connection with the separation of certain members of senior management from the Company in early February 2018, the Board of Directors agreed to accelerate the vesting and distribution of an aggregate of 118,821 RSAs to these members of senior management. The remaining 59,411 RSAs for these members of senior management were forfeited. As a net result of the vesting acceleration of the RSAs and the forfeiture of those unvested RSAs, an additional $0.7 million compensation expense was recognized in March 2018.In August and September 2018, the remaining 34,721 RSAs and 15,432 RSUs were forfeited due to the additional separation of seniormanagement members, and $0.2 million of previously recognized compensation expense was reversed.2017 Market-Based RSAs and RSUsOn January 17, 2017, the Compensation Committee approved and granted 353,508 RSAs and 53,360 RSUs to senior management. Theseawards included a market condition based on the TSR of Innoviva’s common stock as compared to the TSR of the Nasdaq Biotechnology Index(“Index”) and a service condition that required continued employment collectively, the “Performance Measures II.” The vesting percentages ofthese awards were calculated based on the two-year performance period with a catch-up provision opportunity measured on December 31, 2019 for RSAs and on September 30, 2019 for RSUs. 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 two years 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 actual payout of shares may range from a minimum of zero shares to a maximum of 406,868 shares granted upon the actual performance against the Performance Measures 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 be recognized 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-basedRSAs and RSUs were forfeited and $1.3 million previously recognized compensation expense was reversed.2018 Market-Based RSAs and RSUsOn March 2, 2018, the Compensation Committee approved and granted 111,668 RSAs and 49,630 RSUs to senior management. Theseawards included a market 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 of grant until September 30, 2020 for RSUs, and a service condition that required continued employment. The grant date fair value of these awards was determined using a Monte Carlo valuation model. The aggregate value of $1.7 million was to be recognized as compensation expense over the implied service period and would not be reversed if the market condition was not met, but with the exception of such person’s continued employment with the Company.Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)566. STOCK-BASED COMPENSATION (Continued)In connection with the separation of the senior management members from the Company during 2018, all of the 2018 market-based RSAsand RSUs were forfeited.Director Compensation ProgramOur non-employee directors receive compensation for services provided as a director. Each member of our Board of Directors who is notan employee receives both cash and equity compensation for services as a director, member of a committee of the Board of Directors, leadindependent director and chairman, as applicable. In October 2017, both the cash and equity components of the compensation program wereamended, 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 grants are non-discretionary. Only our independent directors or affiliates of such directors are eligible to receive automatic grants underthe 2012 Plan. Under the program, each individual who first became a non-employee director will, on the date such individual joins the Boardof Directors, automatically be granted a one-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) divided by our common stock closing share price on the date of grant as reported on TheNasdaq Global Select Market, rounded down to the nearest whole share (the “Initial RSUs”), plus a one-time grant of RSUs covering a numberof shares of our common stock calculated as $225,000 ($250,000 prior to the October 2017 Amendments) divided by our common stock closingshare price on the date of grant as reported on The Nasdaq Global Select Market, which would be pro-rated for the number of whole monthsremaining until the anniversary of the prior year’s stockholders’ meeting, rounded down to the nearest whole share (the “Pro Rata RSUs”). TheInitial RSUs vest in two equal annual installments, while Pro Rata RSUs vest in a single installment at the sooner of the next annual stockholder meeting or the one-year grant anniversary, in each case subject to the non-employee director’s continuous service through the applicable vesting date. Annually, upon his or her re-election to the Board of Directors at the Annual Meeting of Stockholders, each non-employee director isautomatically granted an RSU covering a number of shares of our common stock calculated as $225,000 ($250,000 prior to the October 2017Amendments) divided by our common stock closing share price on the date of grant as reported on The Nasdaq Global Select Market, roundeddown to the nearest whole share. These RSUs will vest at the sooner of the next annual stockholder meeting or the one-year anniversary ofgrant, subject to the non-employee director’s continuous service through the applicable vesting date. Following the amendment to our non-employee director compensation program, both the annual RSUs and Initial RSUs described above remained unchanged with the exception thatthe number of shares of our common stock subject to each award has been reduced.These RSUs will vest in full upon the director’s death, the occurrence of a change in control or, with respect to awards made after theOctober 2017 Amendments, the director’s disability before the director’s service terminates. Director RSUs carry dividend equivalent rights tobe credited with an amount equal to all cash dividends paid on the underlying shares of common stock while unvested. Dividend equivalents aresubject to the same terms and conditions, including vesting, as the RSUs to which they attach and are paid in cash upon vesting.Stock-Based Compensation ExpenseStock-based compensation expense is included in the consolidated statements of operations as follows:Year Ended December 31, (In thousands) 2019 2018 2017Research and development$—$—$697General and administrative 2,056 3,233 9,136Total stock-based compensation expense$2,056$3,233$9,833Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)576. STOCK-BASED COMPENSATION (Continued)Stock-based compensation expense included in the consolidated statements of operations by award type is as follows:Year Ended December 31, (In thousands) 2019 2018 2017Stock options$—$305$593RSUs 1,431 1,650 2,282RSAs 615 1,920 4,497Performance-based RSAs — — 242Market-based RSUs (PSUs)—(224)291Market-based RSAs (PSAs)—(464)1,855ESPP 10 46 73Total stock-based compensation expense$2,056$3,233$9,833For the year ended December 31, 2018, $1.7 million of stock-based compensation was reversed for the forfeited market-based awards dueto the separation of senior management members.As of December 31, 2019, the unrecognized stock-based compensation cost and the estimated weighted-average amortization period wereas follows:UnrecognizedWeighted-AverageCompensationAmortization(In thousands) Cost Period (Years)RSUs$376 0.3RSAs 942 2.5Total unrecognized compensation cost$1,318Compensation AwardsThe following table summarizes equity award activity under the 2012 Plan and prior plans and related information:Weighted-AverageWeighted-Weighted-ExerciseAverageAverageNumber ofPrice ofNumber ofFair ValueNumber ofFair ValueoutstandingOutstandingoutstandingper Shareoutstandingper Share(In thousands, except per share data) options Options RSUs and PSUs at Grant RSAs and PSAs at GrantBalance as of December 31, 20181,237$24.00105$15.5477$15.37Granted——8113.725315.08Exercised(45)12.27————Released RSUs/RSAs——(92)15.55(52)16.43Forfeited(105)27.14————Balance as of December 31, 20191,08724.189413.947814.46As of December 31, 2019, the aggregate intrinsic value of the options outstanding and options exercisable was $0.1 million. Alloutstanding options were exercisable. The weighted average remaining contractual term was 2.89 years.The total intrinsic value of the options exercised was $0.2 million for the year ended December 31, 2019 and $0.4 million for the yearended December 31, 2018. It was not material in the year ended December 31, 2017. The total estimated fair value of options vested was nil,$0.8 million and $3.8 million in the years ended December 31, 2019, 2018 and 2017, respectively.The total estimated fair value of RSUs vested was $1.4 million in the year ended December 31, 2019, and $2.6 million in the year endedDecember 31, 2018 and 2017.The total estimated fair value of RSAs vested was $0.9 million, $7.6 million and $6.3 million in the years ended December 31, 2019, 2018and 2017, respectively.Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)587. DEBTOur debt consists of:December 31, (In thousands) 2019 2018Term B Loan$—$13,7502023 Notes240,984240,9842025 Notes192,500192,500Total debt433,484447,234Unamortized debt discount and issuance costs(56,364)(64,379)Net long-term debt$377,120$382,855Senior Secured Term LoansOn August 18, 2017, we entered into a credit agreement (the “Credit Agreement”) and completed a financing of $250.0 million Term BLoan, the net proceeds of which were used to repay the remaining balance of our then outstanding 2029 Notes. The Term B Loan was set tomature on August 18, 2022. Two and one-half percent (2.5%) of the initial principal amount was due quarterly beginning December 31, 2017.The remaining outstanding balance was due at maturity. Prepayments, in whole or in part, can be made at any time without a penalty. The initialterm loan beared interest at a varying rate of three-month LIBOR plus 4.5%. Interest was due quarterly, beginning November 20, 2017. The Term B Loan was unconditionally guaranteed by one of our wholly-owned subsidiaries. These loans were senior secured obligations,collateralized by a lien on substantially all of our and our subsidiary’s personal property and material real property assets (if any). The lien wasremoved when the loans were fully paid off in December 2019.In connection with the financing of the Term B Loan, we incurred $2.5 million in original interest discount and $4.9 million in debtissuance costs, which were being amortized to interest expense over the term of the loan using the effective interest method. As a result of theprepayments of $230.0 million in 2018, $5.7 million of debt issuance costs were written off as a loss on the extinguishment of debt, which ispresented as part of other income (expense), net in our consolidated statements of operations. In December 2019, we repaid the remainingprincipal balance of $13.8 million and wrote off the remaining unamortized debt issuance costs.Convertible Senior Notes Due 2025On August 7, 2017, we completed a private placement of $192.5 million aggregate principal amount of our 2025 Notes. The proceedsinclude the 2025 Notes sold pursuant to the $17.5 million over-allotment option granted by us to the initial purchasers, which option wasexercised in full. The 2025 Notes were sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the SecuritiesAct. The 2025 Notes are senior unsecured obligations and bear interest at a rate of 2.5% per year, payable semi-annually in arrears on February15 and August 15 of each year, beginning on February 15, 2018.The 2025 Notes are convertible, based on the applicable conversion rate, into cash, shares of our common stock or a combination thereof,at our election. The initial conversion rate for the 2025 Notes is 57.9240 shares of our common stock per $1,000 principal amount of the 2025Notes (which is equivalent to an initial conversion price of approximately $17.26 per share), representing a 30.0% conversion premium over thelast reported sale price of the Company’s common stock on August 1, 2017, which was $13.28 per share. The conversion rate is subject tocustomary anti-dilution adjustments in certain circumstances. The 2025 Notes will mature on August 15, 2025, unless repurchased or convertedin accordance with their terms prior to such date. Prior to February 15, 2025, the 2025 Notes will be convertible at the option of the holders onlyupon the occurrence of specified events and during certain periods. From, and including, February 15, 2025, until the close of business on thesecond scheduled trading day immediately preceding the maturity date, the 2025 Notes will be convertible at any time.Concurrently with the pricing of the offering, we repurchased and retired 1,317,771 shares of our common stock for approximately $17.5million of the net proceeds from the offering, in privately negotiated transactions effected through one of the initial purchasers or its affiliate, asour agent. The remaining net proceeds from the sale of the 2025 Notes in the offering were used to repay a portion of the principal outstandingunder the 2029 Notes on August 15, 2017.Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)597. DEBT (Continued)In accordance with accounting guidance for debt with conversion and other options, we separately account for the liability and equitycomponents of the 2025 Notes by allocating the proceeds between the liability component and the embedded conversion option (“equitycomponent”) due to our ability to settle the conversion obligation of the 2025 Notes in cash, common stock or a combination of cash andcommon stock, at our option. The carrying amount of the liability component was calculated by measuring the fair value of a similar liabilitythat does not have an associated convertible feature using the income approach. The allocation was performed in a manner that reflected ournon-convertible debt borrowing rate for similar debt. The equity component of the 2025 Notes of $67.3 million was recognized as a debtdiscount and represents the difference between the proceeds from the issuance of the 2025 Notes and the fair value of the liability of the 2025Notes on the date of issuance. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) isamortized to interest expense using the effective interest method over the term of the 2025 Notes. The equity component is not remeasured aslong as it continues to meet the conditions for equity classification.Our outstanding 2025 Notes balances consisted of the following:December 31, (In thousands) 2019 2018Liability component Principal$192,500$192,500Debt discount and issuance costs, net (54,597) (61,766)Net carrying amount$137,903$130,734Equity component, net$65,361$65,361The following table sets forth total interest expense recognized related to the 2025 Notes for the years ended December 31, 2019 and 2018:Year Ended December 31, (In thousands) 2019 2018Contractual interest expense$4,813$4,799Amortization of debt issuance costs 551 505Amortization of debt discount 6,618 6,071Total interest and amortization expense$11,982$11,375Convertible Subordinated Notes Due 2023In January 2013, we completed an underwritten public offering of $287.5 million aggregate principal amount of unsecured convertiblesubordinated notes, which will mature on January 15, 2023. The financing raised proceeds, net of issuance costs, of approximately $281.2million, less $36.8 million to purchase two privately negotiated capped call option transactions in connection with the issuance of the notes. The2023 Notes bear interest at the rate of 2.125% per year that is payable semi-annually in arrears in cash on January 15 and July 15 of each year,beginning on July 15, 2013.The 2023 Notes were convertible, at the option of the holder, into shares of our common stock at an initial conversion rate of 35.9903shares per $1,000 principal amount of the 2023 Notes, subject to adjustment in certain circumstances, which represents an initial conversionprice of approximately $27.79 per share.In connection with the offering of the 2023 Notes, we entered into two privately negotiated capped call option transactions with a singlecounterparty. The capped call option transaction is an integrated instrument consisting of a call option on our common stock purchased by uswith a strike price equal to the initial conversion price of $27.79 per share for the underlying number of shares and a cap price of $38.00 pershare, both of which are subject to adjustments consistent with the 2023 Notes. The cap component is economically equivalent to a call optionsold by us for the underlying number of shares with an initial strike price of $38.00 per share. As an integrated instrument, the settlement of thecapped call coincides with the due date of the convertible debt. Upon settlement, we would receive from our hedge counterparty a number ofshares of our common shares that would range from zero, if the stock price was below $27.79 per share, to a maximum of 2,779,659 shares, ifthe stock price is above $38.00 per share. However, if the marketTable of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)607. DEBT (Continued)price of our common stock, as measured under the terms of the capped call transactions, exceeds $38.00 per share, there is no incremental anti-dilutive benefit from the capped call.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,the conversion rate with respect to our 2023 Notes was adjusted in total to 50.5818 shares of our common stock per $1,000 principal amount ofthe 2023 Notes, which represents a conversion price of approximately $19.77 per share. As a result of the conversion rate adjustments, thecapped call strike price and cap price were also adjusted to $19.77 and $27.04, respectively.For the year ending December 31, 2016, we retired a portion of our 2023 Notes with a face value of $14.1 million and carrying value of$13.9 million by way of purchase in the open market. The 2023 Notes were purchased for a total settlement price of $11.6 million resulting in again of $2.3 million, which is included in other income (expense), net in the consolidated statements of operations. As a result of the partialretirement of our 2023 Notes, we entered into a partial termination agreement of the capped call option transaction described above. The partialtermination agreement of the capped call option transaction enabled us to receive $0.6 million from the counterparty, which was recorded as anincrease in additional paid-in capital in our consolidated balance sheets as of December 31, 2016.Non-Recourse Notes Due 2029In April 2014, we entered into certain note purchase agreements relating to the private placement of $450.0 million aggregate principalamount 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 theevent that the specified portion of royalties received in a quarter was less than the interest accrued for the quarter, the principal amount of the2029 Notes increased by the interest shortfall amount for that period, and considered as payment in kind (“PIK”). In total, $44.0 million ofinterest expense was added to the principal balance of the 2029 Notes.In connection with the sale of the 2029 Notes in 2014, we incurred approximately $15.3 million in debt issuance costs, which were beingamortized to interest expense over the term of the 2029 Notes. The 2029 Notes were repaid in full in 2017 with the net proceeds from the 2025Notes and Term B Loan. With the repayment of the 2029 Notes in 2017, we wrote off $7.3 million of unamortized debt issuance costs which isincluded in other income (expense), net in our consolidated statements of operations.Debt MaturitiesThe aggregate scheduled maturities of our long-term debt as of December 31, 2019 are as follows:(In thousands) Years ending December 31:2020 to 2022$—2023 240,9842024 —Thereafter 192,500Total$433,4848. COMMITMENTS AND CONTINGENCIESOperating Lease and Lease GuaranteeIn 2014, our facility leases in South San Francisco, California were assigned to Theravance Biopharma, Inc. However, if TheravanceBiopharma, Inc. were to default on its lease obligations, we have in substance guaranteed the lease payments for these facilities. We would alsobe 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, 2019, the total remaining lease payments, which run through May 2020, were $2.8 million. The carryingvalue of this lease guarantee was $0.1 million as of December 31, 2019 and is reflected in other accrued liabilities in our consolidated balancesheet. Amortization on the lease guarantee commenced in 2016 and amortization expense for each of the years ended December 31, 2019, 2018and 2017 was $0.3 million.Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)618. COMMITMENTS AND CONTINGENCIES (Continued)In 2019, we terminated the operating lease for our corporate headquarters in Brisbane, California and entered into a new operating lease inBurlingame, California for approximately 2,111 rentable square feet. The new lease commenced in November 2019 with a term of thirty sixcalendar months.Minimum lease payments on our corporate headquarters as of December 31, 2019 are as follows:(In thousands) Years ending December 31:2020$11620211232022109Thereafter—Total$348Guarantees and IndemnificationsWe indemnify our officers and directors for certain events or occurrences, subject to certain limits. We believe the fair value of theseindemnification agreements is minimal. Accordingly, we have not recognized any liabilities relating to these agreements as of December 31,2019.9. INCOME TAXESIncome tax benefit (expense) consists of the following:Year Ended December 31,(In thousands) 2019 2018 2017Current State$(26)$19$(4)Deferred Federal (41,567) 190,195 —State (309) 5,859 — (41,876) 196,054 —Total income tax benefit (expense), net$(41,902)$196,073$(4)The impacts of the differences between the expected U.S. federal statutory income tax to our income tax expense are as follows:Year Ended December 31,(In thousands) 2019 2018 2017Expected tax at federal statutory rate$48,908$44,154$46,997State income tax, net of federal benefit 325 (5,878) 4Non-deductible executive compensation — 747 987Noncontrolling interest(7,078)(2,367)—Other 326 310 (1,506)Impact of tax reform rate change——124,017Change in valuation allowance (579) (233,039) (170,495)Income tax expense (benefit), net$41,902$(196,073)$4Table of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)629. INCOME TAXES (Continued)Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and deferred taxliabilities are as follows:As of December 31, (In thousands) 2019 2018Deferred tax assetsNet operating loss carryforwards$172,359$215,497Research and development tax credit carryforwards 55,966 56,231Other 1,412 1,647Total deferred tax assets before valuation allowance 229,737 273,375Valuation allowance (63,620) (64,199)Total deferred tax assets166,117209,176Deferred tax liabilitiesDebt issuance discount and other(11,946)(13,122)Net deferred tax assets$154,171$196,054We record deferred tax assets if the realization of such assets is more likely than not to occur. Significant management judgment is requiredin determining whether a valuation allowance against the deferred tax assets is required. We have considered all available evidence, bothpositive and negative, such as our historical operating results and predictability of future taxable income, in making such determination. We arealso required to exercise significant management’s judgment in forecasting future taxable income. Specifically, we evaluate the followingcriteria 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.As of December 31, 2018, we had cumulative net income before tax for the three years then ended. Based on our historical operating performance and estimated future taxable income, we concluded that it was more likely than not that we would 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, 2019, we recognized $41.9 million income tax expense and reduced the deferred tax assets by the same amount based on the taxable income generated during the year.As of December 31, 2019, we had federal net operating loss carryforwards of approximately $0.6 billion, which will expire from 2030through 2035, and federal research and development tax credit carryforwards of approximately $44.4 million, which will expire from 2020through 2034. We also had state net operating loss carryforwards of approximately $649.3 million expiring in the years 2028 through 2035 andstate 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 changelimitations provided by the Internal Revenue Code and similar state provisions. Annual limitations may result in expiration of net operating lossand tax credit carryforwards 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, 2019 todetermine whether an ownership change had occurred since inception. The Section 382 study concluded that it is more likely than not that theCompany did not experience an ownership change during the testing period. However, notwithstanding the applicable annual limitations, noportion of the net operating loss or credit carryforwards is expected to expire before becoming available to reduce federal and state income taxliabilities as a result of those identified ownership changes. If we undergo another ownership change, the utilization of the pre-ownership changenet operating loss carryforwards or pre-ownership change tax attributes, such asTable of ContentsINNOVIVA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)639. INCOME TAXES (Continued)research tax credits, to offset the post-ownership change income may be subject to an annual limitation, pursuant to Sections 382 and 383 of theInternal 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, 2019 and2018, we had no accrued interest or penalties.Uncertain Tax PositionsA reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits are as follows (in thousands):(In thousands)Unrecognized tax benefits as of December 31, 2017 and 2016 $15,488Gross decrease in tax portions for 2018(75)Unrecognized tax benefits as of December 31, 2018$15,413Gross decrease in tax portions for 2019 (71)Unrecognized tax benefits as of December 31, 2019$15,342Our total unrecognized tax benefits as of December 31, 2019 were $15.3 million. Total unrecognized tax benefits that, if recognized, wouldaffect our effective tax rate, were $8.0 million as of December 31, 2019. We do not anticipate the total amount of unrecognized income taxbenefits relating to uncertain tax positions existing as of December 31, 2019 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 2004 through 2013, 2015 and forward remain open toexamination by the federal and most state tax authorities due to net operating loss and overall credit carryforward positions.10. SUBSEQUENT EVENTSOn January 27, 2020, Innoviva and Armata Pharamaceuticals, Inc. (“Armata”), a clinical-stage biotechnology company focused on thedevelopment of precisely targeted bacteriophage therapeutics for the treatment of antibiotic-resistant infections, entered into a securitiespurchase agreement pursuant to which Innoviva will purchase up to approximately $25 million in Armata common stock and warrants uponsatisfaction of certain closing conditions. This transaction is expected to occur in two tranches during the first quarter of 2020. The investment isto support Armata’s ongoing advancement of its bacteriophage development programs including the expected first in human studies related toArmata's lead phage candidate, AP-PA02, targeting Pseudomonas aeruginosa, as well as AP-SA02, its phage candidate targetingStaphylococcus Aureus. Innoviva will be entitled to appoint two directors to serve on Armata's Board of Directors for so long as Innoviva andits affiliates hold at least 12.5% of the outstanding shares of a common stock of Armata on a fully-diluted basis.Table of Contents64SUPPLEMENTARY 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 endedDecember 31, 2019. This information has been prepared on the same basis as the audited consolidated financial statements and includes alladjustments (consisting only of normal recurring adjustments) necessary to present fairly the unaudited quarterly results of operations set forthherein.For the Quarters Ended March 31 June 30 September 30 December 312019Net revenue$55,183$64,107$65,755$75,971Total operating expenses3,0154,3474,9622,332Income from operations52,16859,76060,79373,639Income tax expense, net(8,508)(10,433)(10,558)(12,403)Net income40,01946,06147,05157,862Net income attributable to noncontrolling interest6,2298,3217,24211,913Net income attributable to Innoviva stockholders$33,790$37,740$39,809$45,949Basic net income per share$0.33$0.37$0.39$0.45Diluted net income per share$0.31$0.34$0.36$0.42For the Quarters EndedMarch 31June 30September 30December 312018Net revenue$52,380$67,086$61,680$79,858Total operating expenses11,6854,4114,0192,638Income from operations40,69562,67557,66177,220Income tax benefit, net———196,073Net income30,33056,61650,167269,215Net income attributable to noncontrolling interest7491,9903,0785,455Net income attributable to Innoviva stockholders$29,581$54,626$47,089$263,760Basic net income per share$0.29$0.54$0.47$2.61Diluted net income per share$0.27$0.49$0.43$2.34Table of Contents65REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Stockholders and the Board of Directors of Innoviva, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheet of Innoviva, Inc. (a Delaware corporation) and subsidiaries (the“Company”) as of December 31, 2019, the related consolidated statements of income, comprehensive income, stockholder’s equity (deficit),and cash flows for the year ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In ouropinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and theresults of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted inthe United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our reportdated February 19, 2020 expressed an unqualified opinion.Basis for OpinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on theCompany’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to beindependent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of theSecurities 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 toobtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our auditincluded performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, andperforming procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis forour opinion.Critical Audit MattersCritical audit matters are matters arising from the current period audit of the financial statements that were communicated or requiredto be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2)involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.GRANT THORNTON LLP/s/ GRANT THORNTON LLPSan Francisco, CAFebruary 19, 2020Table of Contents66REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Stockholders and the Board of Directors of Innoviva, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheet of Innoviva, Inc. (the "Company") as of December 31, 2018, the related consolidated statements of operations, comprehensive income, stockholders' equity (deficit), and cash flows, for the years ended December 31, 2018 and 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows the years ended December 31, 2018 and 2017, in conformity with US generally accepted accounting principles. Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on theCompany's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to beindependent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of theSecurities 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 toobtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our auditsincluded performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, andperforming procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts anddisclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis forour opinion./s/ Ernst & Young LLPWe have served as the Company's auditor from 1996 to 2019.San Jose, CaliforniaFebruary 19, 2019Table of Contents67ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENot applicable.ITEM 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and Procedures.We conducted an evaluation as of December 31, 2019, under the supervision and with the participation of our management, including ourinterim principal executive officer and chief accounting officer, of the effectiveness of the design and operation of our disclosure controls andprocedures, which are defined under SEC rules as controls and other procedures of a company that are designed to ensure that informationrequired to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (Exchange Act) is recorded,processed, summarized and reported within required time periods. Based upon that evaluation, our principal executive officer and principalfinancial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance levels.Management’s Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance ofrecords that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) providereasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have amaterial effect on the financial statements.Under the supervision and with the participation of our management, including our principal executive officer and principal financialofficer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in theInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission(2013 framework). Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financialreporting controls, process documentation, accounting policies, and our overall control environment. Based on this evaluation, our managementconcluded that our internal control over financial reporting was effective as of December 31, 2019.Our independent registered public accounting firm, Grant Thornton LLP, has audited our internal control over financial reporting as ofDecember 31, 2019. Their attestation report on the audit of our internal control over financial reporting is included below.Limitations on the Effectiveness of ControlsOur management, including our principal executive officer and principal accounting officer, does not expect that our disclosure controlsand procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, thedesign of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within Innoviva have been detected. Also, projections of any evaluation of effectiveness to future periods aresubject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.Changes in Internal Control over Financial ReportingThere was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) identified inconnection with the evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act, which occurred during the fourth fiscal quarter ofthe year ended December 31, 2019 which has materially affected, or is reasonably likely to materially affect, our internal control over financialreporting.Table of Contents68REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Stockholders and the Board of Directors of Innoviva, Inc.Opinion on Internal Control over Financial ReportingWe have audited the internal control over financial reporting of Innoviva, Inc. (a Delaware corporation) and subsidiaries (the“Company”) as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)(“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2019, and our report datedFebruary 19, 2020 expressed an unqualified opinion on those financial statements.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control overFinancial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance withthe U.S. federal securities laws and the applicable 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 toobtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our auditincluded obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or procedures may deteriorate.GRANT THORNTON LLP/s/ GRANT THORNTON LLPSan Francisco, CAFebruary 19, 2020Table of Contents69ITEM 9B. OTHER INFORMATIONNonePART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by this Item is incorporated by reference from our proxy statement for our 2019 Annual Meeting of Stockholdersto be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2019.ITEM 11. EXECUTIVE COMPENSATIONThe information required by this Item is incorporated by reference from our proxy statement for our 2019 Annual Meeting of Stockholdersto be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2019.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERSOther than with respect to the Securities Authorized for Issuance under Equity Compensation Plans below, the information required by thisItem is incorporated by reference from our proxy statement for our 2019 Annual Meeting of Stockholders to be filed with the SEC within120 days after the end of our fiscal year ended December 31, 2019.Securities Authorized for Issuance under Equity Compensation PlansThe following table provides certain information with respect to all of our equity compensation plans in effect as of December 31, 2019: Number of securities to be issued upon exerciseNumber of securities of outstanding optionsremaining available for and vesting offuture issuance under outstanding restrictedWeighted‑averageequity compensation plans stock units andexercise price of(excluding securitiesPlan Category restricted stock awards outstanding options reflected in column (a)) (a)(b)(c)Equity compensation plans approved by security holders 1,181,499(1) $ 24.18(2) 5,210,527(3) (1)Includes 1,087,369 shares issuable upon exercise of outstanding options and 94,130 shares issuable upon vesting of outstanding RSUs andRSAs.(2)Does not take into account outstanding restricted stock units as these awards have no exercise price.(3)Includes 187,576 shares of common stock available under our Employee Stock Purchase Plan.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this Item is incorporated by reference from our proxy statement for our 2019 Annual Meeting of Stockholdersto be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2019.ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this Item is incorporated by reference from our proxy statement for our 2019 Annual Meeting of Stockholdersto be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2019.Table of Contents70PART IVITEM 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 andSupplementary Data” of this Annual Report on Form 10-K:PageConsolidated Balance Sheets as of December 31, 2019 and 201840Consolidated Statements of Income for each of the three years in the period ended December 31, 201941Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 201942Consolidated Statements of Stockholders’ Equity (Deficit) for each of the three years in the period ended December 31, 201943Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 201944Notes to Consolidated Financial Statements45Reports of Independent Registered Public Accounting Firm652. 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 SUMMARYNone.Table of Contents71ExhibitsIncorporated by ReferenceExhibitNumber Description Form Exhibit FilingDate/PeriodEnd Date3.1Amended and Restated Certificate of IncorporationS-13.37/26/20043.2Certificate of Amendment of Restated Certificate of Incorporation10-Q3.43/31/20073.3Certificate of Ownership and Merger Merging LABA Merger Sub, Inc. withand into Theravance, Inc., as filed with the Secretary of State of the State ofDelaware, effective on January 7, 20168-K3.11/8/20163.4Amended and Restated Bylaws, amended and restated as of February 8, 20178-K3.12/9/20174.1Specimen certificate representing the common stock of the registrant10-K4.112/31/20064.4Indenture, dated as of January 24, 2013 by and between Theravance, Inc. andThe Bank of New York Mellon Trust Company, N.A., as trustee8-K4.11/25/20134.5Form of 2.125% Convertible Subordinated Note Due 2023 (included inExhibit 4.4)4.6Indenture, dated April 17, 20148-K4.14/21/20144.8Indenture (including form of Note) with respect to Innoviva’s 2.50%Convertible Senior Notes due 2025, dated as of August 7, 2017, betweenInnoviva and The Bank of New York Mellon Trust Company, N.A., as trustee8-K4.18/7/20174.9Description of Registrant’s Securities Registered Pursuant to Section 12 of theSecurities Exchange Act of 193410-K4.92/19/202010.1+1997 Stock PlanS-110.16/10/200410.2+Long-Term Stock Option PlanS-110.26/10/200410.3+2004 Equity Incentive Plan, as amended by the Board of DirectorsFebruary 10, 2010 and approved by stockholders April 27, 2010 and forms ofequity award10-K10.312/31/201110.4Employee Stock Purchase Plan, as amended April 27, 201010-Q10.46/30/201010.5+Change in Control Severance Plan, as amended and restated on July 27, 200710-Q10.56/30/200810.6Amended and Restated Lease Agreement, 951 Gateway Boulevard, betweenthe registrant and HMS Gateway Office L.P., dated January 1, 2001S-110.86/10/200410.7Lease Agreement, 901 Gateway Boulevard, between the registrant and HMSGateway Office L.P., dated January 1, 2001S-110.96/10/200410.8Collaboration Agreement between the registrant and Glaxo Group Limited,dated as of November 14, 200210-Q10.16/30/201410.9+Form of Indemnification Agreement for directors and officers of the registrantS-110.116/10/200410.11Amended and Restated Investors’ Rights Agreement by and among theregistrant and the parties listed therein, dated as of May 11, 2004S-110.136/10/200410.13*Strategic Alliance Agreement between the registrant and Glaxo Group Limited,dated as of March 30, 200410-K10.1312/31/201310.18+Form of Notice of Grant and Stock Option Agreement under 2004 EquityIncentive Plan10-K10.3012/31/200410.19+Form of Notice of Restricted Stock Award and Restricted Stock Agreementunder 2004 Equity Incentive Plan (form in effect through 2010)10-Q10.316/30/200710.20+Description of Cash Bonus Program, as amended10-K10.2212/31/200910.24+Amended and Restated 2008 New Employee Equity Incentive Plan and formsof equity award10-K10.2412/31/201110.27+Amendment to Change in Control Severance Plan effective December 16, 200910-K10.4712/31/200910.28+2009 Change in Control Severance Plan adopted December 16, 200910-K10.4812/31/2009Table of Contents72Incorporated by ReferenceExhibitNumber Description Form Exhibit FilingDate/PeriodEnd Date10.29First Amendment to Lease for 901 Gateway Boulevard effective as of June 1,2010 between ARE-901/951 Gateway Boulevard, LLC and the registrant10-Q10.506/30/201010.30First Amendment to Lease for 951 Gateway Boulevard effective as of June 1,2010 between ARE-901/951 Gateway Boulevard, LLC and the registrant10-Q10.516/30/201010.32Second Amendment to Amended and Restated Governance Agreement amongthe registrant, Glaxo Group Limited, GlaxoSmithKline plc andGlaxoSmithKline LLC, dated as of November 29, 20108-K10.211/29/201010.33+Form of Amendment to Restricted Stock Unit Agreements between theregistrant and each current member of the Board of Directors outstanding as ofDecember 31, 201010-K10.4512/31/201010.34*Amendment to Strategic Alliance Agreement, dated October 3, 201110-K10.3412/31/201110.35Common Stock Purchase Agreement, dated April 2, 2012, by and amongTheravance, Inc., Glaxo Group Limited and GlaxoSmithKline LLC8-K10.14/2/201210.36+Form of Notice of Performance-Contingent Restricted Stock Award andRestricted Stock Award Agreement under 2004 Equity Incentive Plan(executive officer form)10-Q10.363/30/201210.37+Form of Notice of Performance-Contingent Restricted Stock Award andRestricted Stock Award Agreement under 2004 Equity Incentive Plan10-Q10.373/30/201210.38+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 award10-Q10.386/30/201210.40Base Capped Call Transaction, dated January 17, 20138-K10.11/23/201310.41Additional Capped Call Transaction, dated January 18, 20138-K10.21/23/201310.43Master Agreement by and among Theravance, Inc., TheravanceBiopharma, Inc. and Glaxo Group Limited, dated March 3, 20148-K/A10.13/6/201410.44*Collaboration Agreement Amendment by and between Theravance, Inc. andGlaxo Group Limited, dated March 3, 20148-K/A10.23/6/201410.45*Strategic Alliance Agreement Amendment by and between Theravance, Inc.and Glaxo Group Limited, dated March 3, 20148-K/A10.33/6/201410.46Form of Note Purchase Agreement, dated April 17, 20148-K1.14/21/201410.47Sale and Contribution Agreement, dated April 17, 20148-K10.14/21/201410.48Servicing Agreement, dated April 17, 20148-K10.24/21/201410.49Account Control Agreement, dated April 17, 20148-K10.34/21/201410.50Limited Liability Agreement of LABA Royalty Sub LLC, dated April 17, 20148-K10.44/21/201410.51Annex A—Rules of Construction and Defined Terms, dated April 17, 2014.8-K10.54/21/201410.53Separation and Distribution Agreement between Theravance and TheravanceBiopharma, dated June 1, 20148-K10.16/5/201410.54Transition Services Agreement between Theravance and TheravanceBiopharma, dated June 2, 2014.8-K10.26/5/201410.55Tax Matters Agreement between Theravance and Theravance Biopharma,dated June 2, 2014.8-K10.36/5/201410.56Employee Matters Agreement between Theravance and TheravanceBiopharma, dated June 1, 2014.8-K10.46/5/201410.57Theravance Respiratory Company, LLC Limited Liability CompanyAgreement between Theravance and Theravance Biopharma, dated May 31,2014.8-K10.56/5/201410.58+Equity Award Amendments for Employees VP Level or above remaining atTheravance, Inc.10-Q10.26/30/201410.59+Policy for Non-Employee Director Stock Options (effective June 2, 2014)10-Q10.36/30/2014Table of Contents73Incorporated by ReferenceExhibitNumber Description Form Exhibit FilingDate/PeriodEnd Date10.64Amendment/Clarification to Transition Services Agreement betweenTheravance and Theravance Biopharma, dated March 2, 201510-Q10.643/31/201510.65+First Amendment to 2009 Change In Control Severance Plan (Renamed 2009Severance Plan)8-K10.27/29/201510.70Partial Termination Agreement by and between Innoviva, Inc. and Bank ofAmerica, N.A., dated May 16, 201610-Q10.706/30/201610.71Amended and Restated Indenture by and between LABA Royalty Sub LLC andU.S. Bank National Association, dated August 3, 201610-Q10.719/30/201610.72Partial Termination Agreement by and between Innoviva, Inc. and Bank ofAmerica, N.A., dated December 13, 201610-K10.7212/31/201610.74Assignment Agreement, dated as of August 18, 2017, by and betweenInnoviva, Inc. and LABA Royalty Sub LLC, Innoviva, Inc. and U.S. BankNational Association8-K10.28/21/201710.75Termination Agreement, dated as of August 18, 2017, by and among LABARoyalty Sub LLC, Innoviva, Inc. and U.S. Bank National Association8-K10.38/21/201710.76Form of Notice of Performance-Based Restricted Stock Award and RestrictedStock Award Agreement under 2012 Equity Incentive Plan (director form)10-K10.762/23/201810.78+Second Amendment to 2009 Severance Plan10-Q10.817/26/201810.79+Offer Letter with Geoffrey Hulme, dated May 18, 201810-Q10.827/26/201810.80+Offer Letter with Marianne Zhen, dated September 7, 20188-K10.19/11/201821.1List of Subsidiaries23.1Consent of Independent Registered Public Accounting Firm23.2Consent of Independent Registered Public Accounting Firm24.1Power of Attorney (see signature page to this Annual Report on Form 10-K)31.1Certification of Principal Executive Officer Pursuant to Rule 13a-14 under theSecurities Exchange Act of 193431.2Certification of Principal Financial Officer Pursuant to Rule 13a-14 under theSecurities Exchange Act of 193432Certifications Pursuant to 18 U.S.C. Section 1350101The 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 ofDecember 31, 2018 and 2017, (ii) Consolidated Statements of Income for theyears ended December 31, 2018, 2017 and 2016, (iii) Consolidated Statementsof Comprehensive Income for the years ended December 31, 2018, 2017 and2016, (iv) Consolidated Statements of Stockholders’ Equity (Deficit) for theyears ended December 31, 2018, 2017 and 2016, (v) Consolidated Statementsof Cash Flows for years ended December 31, 2018, 2017 and 2016, and(vi) Notes to Consolidated Financial Statements.104Cover Page Interactive Data File (embedded within the Inline XBRL documentand included in Exhibit 101)+ 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 Exchange Commissionpursuant to Innoviva, Inc.’s application for confidential treatment.Table of Contents74SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.INNOVIVA, INC.Date: February 19, 2020By:/s/ GEOFFREY HULMEGeoffrey HulmeInterim Principal Executive Officer Exhibit 4.9DESCRIPTION OF THE REGISTRANT’S SECURITIES AREREGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934As of December 31, 2019, Innoviva, Inc. had one class of securities registered under Section 12 of theSecurities Exchange Act of 1934, as amended: common stock, $0.01 par value per share.The following summary describes our common and the material provisions of our amended and restatedcertificate of incorporation and our amended and restated bylaws. Because the following is only a summary, it doesnot contain all of the information that may be important to you, and is qualified in its entirety by the full text of ouramended and restated certificate of incorporation and amended and restated bylaws, copies of which are on file withthe SEC and included as exhibits to our Annual Report on Form 10-K for the year ended December 31, 2019. Youshould refer to the text of these documents for a complete description. Unless the context requires otherwise,references in this exhibit to “Innoviva,” the “Company,” “we,” “us,” and “our” refer to Innoviva, Inc. together withits consolidated subsidiaries.Our authorized capital stock consists of 230,230,000 shares, with a par value of $0.01 per share, of which:·200,000,000 shares are designated as common stock;·30,000,000 shares are designated as Class A common stock; and·230,000 shares are designated as preferred stock.At December 31, 2019, we had outstanding 101,288,382 shares of common stock, no shares of Class Acommon stock and no shares of preferred stock. Under the terms of our amended and restated certificate ofincorporation, we may no longer issue shares of Class A common stock.Common StockVoting RightsUnless otherwise provided for in our certificate of incorporation or required by applicable law, on all matterssubmitted to our stockholders for vote, our common stockholders are entitled to one vote per share, voting togetheras a single class.DividendsSubject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders ofcommon stock shall be entitled to share equally in any dividends that our board of directors may determine to payfrom time to time. In the event a dividend is paid in the form of shares of common stock or rights to acquire shares ofcommon stock, the holders of common stock shall receive common stock, or rights to acquire common stock, as theTable of Contents75POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints GeoffreyHulme, as their true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for such person and in his or hername, place and stead, in any and all capacities, to sign any and all amendments to the Annual Report on Form 10-K, and to file the same, withall exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about thepremises, as fully to all intents and purposes as he or she could do in person, hereby ratifying and confirming all that said attorney-in-fact andagent, 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 behalfof the registrant and in the capacities and on the dates indicated.Signature Title Date/s/ GEOFFREY HULMEGeoffrey HulmeInterim Principal Executive Officer(Principal Executive Officer)February 19, 2020/s/ MARIANNE ZHENMarianne ZhenChief Accounting Officer (PrincipalAccounting Officer)February 19, 2020/s/ ODYSSEAS KOSTAS, M.D.Odysseas Kostas, M.D.Chairman of the BoardFebruary 19, 2020/s/ GEORGE BICKERSTAFF, IIIGeorge Bickerstaff, IIIDirectorFebruary 19, 2020/s/ MARK DIPAOLO, ESQ.Mark DiPaolo, Esq.DirectorFebruary 19, 2020/s/ JULES HAIMOVITZJules Haimovitz.DirectorFebruary 19, 2020/s/ SARAH SCHLESINGER, M.D.Sarah Schlesinger, M.D.DirectorFebruary 19, 2020case may be.  LiquidationUpon our liquidation, dissolution or winding-up, the holders of common stock shall be entitled to share equallyall assets remaining after the payment of any liabilities and the liquidation preferences on any outstanding preferredstock.No Preemptive, Redemption or Conversion RightsThe common stock is not subject to redemption or retirement, is not subject to sinking fund provisions, does nothave any conversion rights and is not subject to call. The common stock does not have preemptive or other rights tosubscribe for additional shares of any class of our stock.Voting Rights for the Election of DirectorsOur board of directors is not classified. Our certificate of incorporation and bylaws provide that our board ofdirectors may consist of any number of directors, greater than or equal to one, provided that at any time that GSK'spercentage ownership of our voting stock is 50.1% or greater, the authorized number of directors on our board ofdirectors will be no less than nine, or any greater number that is divisible by three. As of February 11, 2020, GSKbeneficially owned approximately 31.6 % of our outstanding common stock.Directors are elected by a majority of the votes cast at any meeting of the stockholders for the election ofdirectors at which a quorum is present. Our amended and restated certificate of incorporation does not provide forcumulative voting in the election of directors.Our board has the ability to fill vacancies on our board.No Action by Written Consent; Special Stockholder MeetingsOur amended and restated certificate of incorporation and amended and restated bylaws do not provide for theright of stockholders to act by written consent without a meeting. In addition, our bylaws provide that specialmeetings of the stockholders can only be called by the Chairman of our board of directors, the president, our board ofdirectors or the request of stockholders holding at least 66/3% of the outstanding common stock.- 2 -Exhibit 21.1 Subsidiary Theravance Respiratory Company, LLC Delaware Theravance Respiratory Company, LLCAdvanced Medicine East, Inc. Delaware Advanced Medicine East, Inc. Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our reports dated February 19, 2020, with respect to the consolidated financial statements and internal controlover financial reporting included in the Annual Report of Innoviva, Inc. on Form 10-K for the year ended December 31, 2019. Weconsent to the incorporation by reference of said reports in the Registration Statements of Innoviva, Inc. on Forms S-8 (File No.333- 119559, File No. 333-129669, File No. 333-142707, File No. 333-150753, File No. 333-159042, File No. 333-166546, FileNo. 333-173923, File No. 333-181763, and File No. 333-197950). GRANT THORNTON LLP/s/ GRANT THORNTON LLPSan Francisco, CAFebruary 19, 2020 Exhibit 23.2CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe 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 EquityIncentive Plan and the 2004 Employee Stock Purchase Plan,(2) Registration Statement on Form S‑8 No 333‑129669 of Theravance, Inc. pertaining to the 2004 EmployeeStock Purchase Plan,2(3) Registration Statement on Form S‑8 No 333‑142707 of Theravance, Inc. pertaining to the 2004 EquityIncentive Plan,(4) Registration Statement on Form S‑8 No 333‑150753 of Theravance, Inc. pertaining to the 2008 NewEmployee Equity Incentive Plan and the 2004 Employee Stock Purchase Plan,(5) Registration Statement on Form S‑8 No 333‑159042 of Theravance, Inc. pertaining to the 2004 EmployeeStock Purchase Plan,(6) Registration Statement on Form S‑8 No 333‑166546 of Theravance, Inc. pertaining to the 2004 EquityIncentive Plan,(7) Registration Statement on Form S‑8 No 333‑173923 of Theravance, Inc. pertaining to the 2004 EmployeeStock Purchase Plan,(8) Registration Statement on Form S‑8 No 333‑181763 of Theravance, Inc. pertaining to the 2012 EquityIncentive Plan, and(9) Registration Statement on Form S‑8 No 333‑197950 of Theravance, Inc. pertaining to the 2012 EquityIncentive Plan, the Amended and Restated 2008 New Employee Equity Incentive Plan, the 2004 EquityIncentive Plan and the 1997 Stock Planof our report dated February 19, 2019, with respect to the consolidated financial statements of Innoviva, Inc. as of December31, 2018 and for the years ended December 31, 2018 and 2017, included in this Annual Report (Form 10‑K) of Innoviva,Inc. for the year ended December 31, 2019./s/ Ernst & Young LLPSan Jose, CaliforniaFebruary 18, 2020Exhibit 31.1Certification of Principal Executive OfficerPursuant to Section 302 of the Sarbanes‑Oxley Act of 2002I, 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 necessaryto make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to theperiod covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial 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 (asdefined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange ActRules 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 underour supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, 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 designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external 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 conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based onsuch evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materiallyaffected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing theequivalent functions):a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reportingwhich are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financialinformation; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting. Date: February 19, 2020/s/ GEOFFREY HULME Geoffrey Hulme Interim Principal Executive Officer (Principal Executive Officer) Exhibit 31.2Certification of Principal Accounting OfficerPursuant to Section 302 of the Sarbanes‑Oxley Act of 2002I, 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 necessaryto make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to theperiod covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial 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 (asdefined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange ActRules 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 underour supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, 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 designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external 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 conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based onsuch evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materiallyaffected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing theequivalent functions):a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reportingwhich are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financialinformation; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting. Date: February 19, 2020/s/ MARIANNE ZHEN Marianne Zhen Chief Accounting Officer (Principal Accounting Officer) Exhibit 32CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICERAND PRINCIPAL ACCOUNTING OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES‑OXLEY ACT OF 2002I, 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 Annual Report of Innoviva, Inc. on Form 10‑K for the fiscal year ended December 31, 2019 fully complies with the requirements ofSection 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and that information contained in such Annual Report onForm 10‑K fairly presents in all material respects the financial condition of Innoviva, Inc. at the end of the periods covered by such AnnualReport on Form 10‑K and results of operations of Innoviva, Inc. for the periods covered by such Annual Report on Form 10‑K. Date: February 19, 2020By:/s/ GEOFFREY HULME Geoffrey Hulme Interim Principal Executive Officer (Principal Executive Officer) 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 Annual Report of Innoviva, Inc. on Form 10‑K for the fiscal year ended December 31, 2019 fully complies with the requirements ofSection 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and that information contained in such Annual Report onForm 10‑K fairly presents in all material respects the financial condition of Innoviva, Inc. at the end of the periods covered by such AnnualReport on Form 10‑K and results of operations of Innoviva, Inc. for the periods covered by such Annual Report on Form 10‑K. Date: February 19, 2020By:/s/ MARIANNE ZHEN Marianne Zhen Chief Accounting Officer (Principal Accounting Officer) A signed original of this written statement required by Section 906 has been provided to Innoviva, Inc. and will be retained by it andfurnished to the Securities and Exchange Commission or its staff upon request. 

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