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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
☐
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 000-30319
INNOVIVA, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1350 Old Bayshore Highway, Suite 400
Burlingame, CA
(Address of principal executive offices)
94-3265960
(I.R.S. Employer
Identification No.)
94010
(Zip Code)
Title of Each Class
Common Stock $0.01 Par Value
Trading Symbol(s)
INVA
Name of Each Exchange On Which Registered
The Nasdaq Stock Market LLC
Registrant’s telephone number, including area code: (650) 238-9600
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ⌧ 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 the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ⌧ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-
T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ☐
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
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’s
Common Stock on The Nasdaq Global Select Market on June 30, 2020 was $876,605,331. This calculation does not reflect a determination that persons are affiliates for
any other purpose.
On February 12, 2020, there were 101,392,397 shares of the registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the registrant’s definitive Proxy Statement to be issued in conjunction with the registrant’s 2021 Annual Meeting of Stockholders, which is
expected to be filed not later than 120 days after the registrant’s fiscal year ended December 31, 2020, 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 Contents
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
INNOVIVA, INC.
2020 Form 10-K Annual Report
Table of Contents
PART I
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART III
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Exhibits
Signatures
PART IV
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Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Securities Act”). Such forward-looking
statements involve substantial risks, uncertainties and assumptions. All statements in this Annual Report on Form 10-K, other than
statements of historical fact, including, without limitation, statements regarding our strategy, future operations, future financial position,
future revenue, projected costs, prospects, plans, intentions, expectations, goals and objectives may be forward-looking statements. The
words “anticipates,” “believes,” “could,” “designed,” “estimates,” “expects,” “goal,” “intends,” “may,” “objective,” “plans,”
“projects,” “pursuing,” “will,” “would” and similar expressions (including the negatives thereof) are intended to identify forward-
looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans,
intentions, expectations or objectives disclosed in our forward-looking statements and the assumptions underlying our forward-looking
statements may prove incorrect. Therefore, you should not place undue reliance on our forward-looking statements. Actual results or
events could differ materially from the plans, intentions, expectations and objectives disclosed in the forward-looking statements that we
make. All written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to in this section.
Important factors that we believe could cause actual results or events to differ materially from our forward-looking statements
include, but are not limited to, risks related to: lower than expected future royalty revenue from respiratory products partnered with GSK,
the commercialization of RELVAR ®/BREO ® ELLIPTA ®, ANORO ® ELLIPTA ®and TRELEGY ® ELLIPTA ® in the jurisdictions in
which these products have been approved; substantial competition from products discovered, developed, launched and commercialized
both by GSK and by other pharmaceutical companies; the strategies, plans and objectives of the Company (related to the Company’s
growth strategy and corporate development initiatives beyond the Company's existing portfolio); the timing, manner and amount of
capital deployment, including potential capital returns to stockholders; risks related to the Company's growth strategy; 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 Annual Report on
Form 10-K. Our forward-looking statements in this Annual Report on Form 10-K are based on current expectations as of the date hereof
and we do not assume any obligation to update any forward-looking statements on account of new information, future events or
otherwise, except as required by law.
We encourage you to read Management’s Discussion and Analysis of our Financial Condition and Results of Operations and our
consolidated financial statements contained in this Annual Report on Form 10-K. We also encourage you to read Item 1A of Part I of this
Annual Report on Form 10-K, entitled “Risk Factors,” which contains a more complete discussion of the risks and uncertainties
associated with our business. In addition to the risks described above and in Item 1A of this report, other unknown or unpredictable
factors also could affect our results. Therefore, the information in this report should be read together with other reports and documents
that we file with the Securities 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 will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the
inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these
statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time
frame, or at all.
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ITEM 1. BUSINESS
Overview
PART I
Innoviva, Inc. (“Innoviva”, the “Company”, the “Registrant” or “we” and other similar pronouns) is a company with a portfolio of
royalties and other healthcare assets. Our royalty portfolio contains respiratory assets partnered with Glaxo Group Limited (“GSK”),
including RELVAR®/BREO® ELLIPTA® (fluticasone furoate/ vilanterol, “FF/VI”), ANORO® ELLIPTA® (umeclidinium bromide/
vilanterol, “UMEC/VI”) and TRELEGY® ELLIPTA® (the combination FF/UMEC/VI). Under the Long-Acting Beta2 Agonist
(“LABA”) Collaboration Agreement, Innoviva is entitled to receive royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as
follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion; and royalties
from the sales of ANORO® ELLIPTA®, which tier upward at a range from 6.5% to 10%. Innoviva is also entitled to 15% of royalty
payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company,
LLC (“TRC”), including TRELEGY® ELLIPTA® and any other product or combination of products that may be discovered or
developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as
the “GSK Agreements”), which have been assigned to TRC other than RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®.
Our headquarters are located at 1350 Old Bayshore Highway, Suite 400, Burlingame, CA 94010. The Company was incorporated in
Delaware in November 1996 under the name Advanced Medicine, Inc., and began operations in May 1997. It later changed its name to
Theravance, Inc. in April 2002. In June 2014, we spun-off our research and development operations. In January 2016, we rebranded and
changed our name to Innoviva, Inc.
Our Strategy
Our corporate strategy is currently focused on increasing stockholder value by, among other things, maximizing the potential value
of our respiratory assets partnered with GSK, optimizing our operations and augmenting capital allocation. We continue to diversify our
primary royalty management business through actively pursuing opportunistic acquisitions of promising companies and assets in the
healthcare industry and enhancing the returns on our capital.
Our Relationship with GSK
LABA Collaboration
In November 2002, we entered into our LABA Collaboration Agreement with GSK to develop and commercialize once-daily
products for the 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 and
LABA.
As a result of the launch and approval of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® in the U.S., Japan and Europe,
in accordance with the LABA Collaboration Agreement, we paid milestone fees to GSK totaling $220.0 million during the year ended
December 31, 2014. The milestone fees paid to GSK were recognized as capitalized fees paid to a related party, which are being
amortized over their estimated useful lives commencing upon the commercial launch of the products.
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2004 Strategic Alliance
In March 2004, we entered into the Strategic Alliance Agreement with GSK where GSK received an option to license exclusive
development and commercialization rights to product candidates from certain of our discovery programs on predetermined terms and on
an exclusive, worldwide basis. In 2005, GSK licensed our Bifunctional Muscarinic Antagonist-Beta2 Agonist ("MABA") program for
the treatment of COPD, and in October 2011, we and GSK expanded the MABA program by adding six additional Innoviva- discovered
preclinical MABA compounds (the “Additional MABAs”). The development program was funded in full by GSK. As a result of the
transactions effected by the spin-off of Theravance Biopharma in June 2014 (the “Spin-Off”), the Strategic Alliance Agreement was
assigned to TRC, which is entitled to receive any contingent payments and royalties payable by GSK from sales of products that may be
developed under the Strategic Alliance Agreement, such as MABA, and MABA/FF. In June of 2020, GSK terminated the MABA
program and agreed to pay a $10.0 million termination fee to TRC. This fee was recognized as revenue from collaborative arrangements
with a related party on our consolidated statements of income for the year ended December 31, 2020.
Common Stock owned by GSK
As of February 12, 2021, GSK beneficially owned approximately 31.6% of our outstanding common stock.
Recent Highlights
● GSK Net Sales:
o
o
o
Fourth quarter 2020 net sales of RELVAR®/BREO® ELLIPTA® by GSK were $372.8 million, up 5% from $354.4 million
in the fourth quarter of 2019, with $141.0 million in net sales from the U.S. market and $231.8 million from non-U.S.
markets.
Fourth quarter 2020 net sales of ANORO® ELLIPTA® by GSK were $200.9 million, up 10% from $182.7 million in the
fourth quarter of 2019, with $119.4 million net sales from the U.S. market and $81.5 million from non-U.S. markets.
Fourth quarter 2020 net sales of TRELEGY® ELLIPTA® by GSK were $313.6 million, up 42% from $221.4 million in the
fourth quarter of 2019, with $212.9 million in net sales from the U.S. market and $100.7 million in net sales from non-U.S.
markets.
● Capital Allocation:
o During December 2020, the Company entered into a strategic partnership with Sarissa Capital Management LP ("Sarissa
Capital") designed to accelerate the execution of our strategy and enhance returns on our capital. As a part of the
agreement, Sarissa Capital provides Innoviva with a range of advisory services advancing our acquisition strategy. In
addition, the Company's wholly owned subsidiary, Innoviva Strategic Partners LLC, became a limited partner of ISP Fund
LP (the “Partnership”) and made an initial contribution of $300 million for the purposes of investing in “long-only”
securities in the healthcare, pharmaceutical and biotechnology industries. The general partner of the Partnership is an
affiliate of Sarissa Capital, which acts as the investment adviser to the Partnership.
o
In January 2021, the Company entered into an agreement with Armata Pharmaceuticals, Inc. ("Armata"), pursuant to which
it will invest, subject to certain closing conditions, additional $20.0 million in 6.2 million shares of Armata common stock
and an equal number of warrants with $3.25 strike price in two tranches. At the closing of the first tranche, Innoviva
acquired approximately 1.9 million shares of Armata common stock and 1.9 million warrants for an aggregate purchase
price of $6.1 million. Upon closing of the second tranche, Innoviva expects to own approximately 60% of Armata's
outstanding stock.
Manufacturing
Manufacturing of RELVAR®/BREO® ELLIPTA® (FF/VI), ANORO® ELLIPTA® (UMEC/VI) and TRELEGY® ELLIPTA® (the
combination FF/UMEC/VI) is performed by GSK.
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Government Regulation
The development and commercialization of products and product candidates pursuant to the GSK Agreements, or by entities that we
have invested in or acquired, are subject to extensive regulation by governmental authorities in the United States and other countries.
Before marketing in the United States, any medicine must undergo rigorous preclinical studies and clinical studies and an extensive
regulatory approval process implemented by the FDA. Outside the United States, the ability to market a product depends upon receiving
a marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct of clinical studies,
marketing authorization, pricing and reimbursement vary widely from country to country. In any country, the commercialization of
medicines is permitted only if the appropriate regulatory authority is satisfied that our collaborative 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
standards is 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 product based on the results of these post-marketing studies. The FDA has broad post-market regulatory and
enforcement powers, including the ability to suspend or delay issuance of approvals, 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
for which the medicine is effective, as demonstrated through clinical studies and included in the medicine’s labeling. Even if this
regulatory approval is obtained, a marketed medicine, its manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections by the FDA. The FDA ensures the quality of approved medicines by carefully monitoring manufacturers’
compliance with its current good manufacturing practice (“cGMP”) regulations. The cGMP regulations for drugs contain minimum
requirements for the methods, facilities, and controls used in manufacturing, processing, and packaging of a medicine. The regulations
are intended to make sure that a medicine is safe for use, and that it has the ingredients and strength it claims to have. Discovery of
previously unknown problems with a medicine, manufacturer or facility may result in restrictions on the medicine or manufacturer,
including costly recalls or withdrawal of the medicine from the market.
We and our collaborative partner are also subject to various laws and regulations regarding laboratory practices, the experimental use
of animals and the use and disposal of hazardous or potentially hazardous substances in connection with the development and
commercialization of products and product candidates. In each of these areas, as above, the FDA and other regulatory authorities have
broad regulatory and enforcement powers, including the ability to suspend or delay issuance of approvals, seize products, withdraw
approvals, enjoin violations, and institute criminal prosecution, any one or more of which could have a material adverse effect upon our
business, financial condition and results of operations.
Outside the United States, the ability to market products will also depend on receiving marketing authorizations from the appropriate
regulatory authorities. Risks similar to those associated with FDA approval and continuing review described above exist with the
regulatory approval processes in other countries.
Patents and Proprietary Rights
We and our collaborative partner will be able to protect our partnered technology from unauthorized use by third parties only to the
extent that such technology is covered by valid and enforceable patents or is effectively maintained as trade secrets. Our success depends
in part on obtaining patent protection for products and product candidates within our portfolio, including the products partnered with
GSK. Accordingly, patents and other proprietary rights are essential elements of our business.
Our Strategic Partnership with Sarissa Capital
Strategic Advisory Agreement
On December 11, 2020, we entered into a Strategic Advisory Agreement (the “Services Agreement”) with Sarissa Capital
Management LP (“Sarissa Capital”), pursuant to which Sarissa Capital provides a variety of strategic services to us in order to assist us in
the development and execution of our acquisition strategy intended to diversify our assets and the potential sources of revenue. Sarissa
Capital is considered to be a related party due to its investment in Innoviva and its representation on our Board of Directors.
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Partnership Agreement
On December 11, 2020, Innoviva Strategic Partners LLC, our wholly owned subsidiary (“Strategic Partners”), entered into a
subscription agreement and an Amended and Restated Limited Partnership Agreement (the “Partnership Agreement”) pursuant to which
Strategic Partners became a limited partner of ISP Fund LP (the “Partnership”). The general partner of the Partnership is an affiliate of
Sarissa Capital and, pursuant to an investment management agreement, Sarissa Capital acts as the investment adviser to the Partnership.
Strategic Partners made a $300 million initial contribution to the Partnership. The Partnership was formed for the purposes of investing
in “long-only” securities in the healthcare, pharmaceutical and biotechnology industries.
Competition
We anticipate that RELVAR®/BREO® ELLIPTA® (FF/VI), ANORO® ELLIPTA® (UMEC/VI) and TRELEGY® ELLIPTA® (the
combination FF/UMEC/VI) will compete with a number of approved bronchodilator drugs alone or in combination, including each other
and drug candidates under development that are designed to treat asthma and COPD. These include but are not limited to:
● Advair®/Seretide™ Diskus®/HFA® (salmeterol and fluticasone propionate as a combination) marketed by GSK
● Symbicort® (formoterol and budesonide as a combination) marketed by AstraZeneca
● AirDuo Respiclick® (salmeterol and fluticasone propionate), a non-substitutable generic version of Advair, marketed by TEVA
● Spiriva® Handihaler® and Spiriva® Respimat® (tiotropium) marketed by Boehringer Ingelheim
● Dulera® (formoterol and mometasone as a combination) marketed by Merck
● Tudorza® Pressair® (aclidinium) marketed by AstraZeneca and Seebri® Breezehaler® (glycopyrronium) marketed by Novartis
outside the U.S. and Sunovion in the U.S.
● Incruse® Ellipta® (umeclidinium) and Arnuity® Ellipta® (fluticasone furoate) (Innoviva is not entitled to any royalties from
either product.)
● Foradil® Aerolizer®/Oxis® Turbuhaler® (formoterol) marketed by a number of companies
● Striverdi® Respimat® (olodaterol) marketed by Boehringer Ingelheim
● Onbrez® Breezehaler® (E.U.)/Arcapta® Neohaler® (U.S.) (indacaterol) marketed by Novartis
● Ultibro® Breezehaler® (E.U.)/Utibron® Neohaler® (U.S.) (indacaterol combined with glycopyrronium bromide) developed by
Novartis and approved and launched in Europe and Japan in the year ended December 31, 2013 as a once-daily treatment for
COPD. In the U.S., the product was approved in October 2015 at a lower strength as a twice-daily COPD treatment, and was
licensed to Sunovion 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
treatment of 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 maintenance
bronchodilator treatment for COPD and approved in November 2014 in the EU and March 2019 in the U.S.
● QMF149 (indacaterol in combination with mometasone) developed by Novartis for markets outside the U.S. and under
regulatory review in the E.U. for asthma. In Phase 3 development for COPD
● Trimbow (a fixed-dose, twice daily combination of formoterol, beclomethasone and glycopyrronium) manufactured by Chiesi
and indicated for use in COPD
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● Enerzair Breezehaler (QVM149) (a fixed-dose combination of indacaterol, mometasone and glycopyrronium) developed by
Novartis as a triple therapy/single inhaler for the treatment of asthma and approved in the E.U., Canada, and Japan
● Breztri Aerosphere (fixed dose combination of formoterol, glycopyrronium and budesonide) developed by AstraZeneca as a
triple therapy single inhaler twice-daily medication for COPD and approved in the U.S. in July 2020
● Nucala (mepolizumab; an interleukin-5 antagonist monoclonal antibody) developed by GSK for add on maintenance treatment
of severe 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 an
eosinophilic 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
October 2018 as an add-on maintenance therapy in patients with moderate-to-severe asthma aged 12 years and older with an
eosinophilic phenotype 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), an orally active leukotriene receptor antagonist for the prophylaxis and treatment of asthma in
patients 12 months of age and older marketed by Merck
● Tezepelumab®, an injectable monoclonal antibody designed to inhibit thymic stromal lymphopoietin (TSLP), an epithelial
cytokine thought to be critical in the initiation and persistence of airway inflammation. Co-developed by Astra Zeneca and
Amgen for the treatment of severe asthma. Currently under regulatory review.
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In 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
and AstraZeneca, respectively. All of these efforts represent potential competition for any of our partnered products. Efforts have
intensified following the publication of FDA draft guidance for the approval of fully substitutable versions of Advair and Symbicort in
late 2013 and 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 wide number of countries in the E.U. Numerous companies like Mylan N.V., Hikma Pharmaceuticals PLC (Hikma),
Novartis’ Sandoz division and Teva Pharmaceuticals Industries Ltd. (Teva) have publicly stated their intentions to bring generic forms of
the ICS/LABA drug Advair®, when certain patents covering the Advair® delivery device expired in 2016. In March 2017, Mylan N.V.
received a complete response letter from the FDA relating to its Abbreviated New Drug Application (“ANDA”) for fluticasone
propionate 100, 250, 500 mcg and salmeterol 50 mcg inhalation powder. In May 2017, Hikma announced that it received a complete
response letter from the FDA relating to its ANDA for fluticasone propionate and salmeterol inhalation powder, and in February 2018,
Novartis announced that its generic division Sandoz had received a complete response letter from the FDA in response to its ANDA for a
third fluticasone propionate and salmeterol 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® and Sandoz terminated
development of generic Advair. Teva announced that the FDA approved two of its products for adolescent and adult patients with
asthma, one of which is AirDuo™ RespiClick® (fluticasone propionate and salmeterol inhalation powder), a non-AB substitutable
generic version of Advair®. In January 2020, Astra Zeneca launched an authorized generic version of Symbicort. In general, these
manufacturers are required to conduct a restricted number of clinical efficacy, pharmacokinetic and device studies to demonstrate
equivalence to Advair, per the FDA’s September 2013 Draft Guidance Document. These studies are designed to demonstrate that the
generic product has the same active ingredient(s), dosage form, strength, exposure and clinical efficacy as the branded product. These
generic equivalents, which must meet the same exacting quality standards as branded products, may be significantly less costly to bring
to market, and companies that produce generic equivalents are generally able to offer their products at lower prices. Thus, after the
introduction of a generic competitor, a significant percentage 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 active ingredients used in RELVAR®/BREO® ELLIPTA®.
Human Capital Resources
As of December 31, 2020, we had five employees. None of our employees are represented by a labor union. We consider our
employee relations to be good. Our human capital objectives are to attract, recruit and retain top talent to manage the royalty assets with
our partner, GSK, and optimize our operations and capital allocation. To support these objectives, our reward programs include equity
incentive plans, bonus plan, competitive benefits and flexible working arrangements.
Information about our Executive Officers
The following table sets forth the name, age, and position of each of our executive officers as of February 25, 2021:
Name
Pavel Raifeld
Marianne Zhen
Age
Positions Held
37 Chief Executive Officer
52 Chief Accounting Officer
Pavel Raifeld, CFA, was appointed Chief Executive Officer in May 2020. Prior to his appointment, Mr. Raifeld, served on the
investment team at Sarissa Capital Management LP. Earlier, he was a senior member of the healthcare investment banking team at Credit
Suisse Securities (USA) LLC. Previously, Mr. Raifeld worked as a consultant, primarily specializing in advising biopharmaceutical
companies, at McKinsey & Company, Inc. and The Boston Consulting Group Ltd. Mr. Raifeld earned an AB degree from Harvard
University and an MBA degree from Columbia University.
Marianne Zhen, CPA, 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 to 2012 and Model N, Inc. from 2007 to 2011. Ms. Zhen earned a Bachelor of Science degree in Business
Administration with a concentration in Accounting from San Francisco State University. She is a member of the American Institute of
Certified Public Accountants.
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Code of Business Conduct
The Company has adopted the Innoviva, Inc. Code of Business Conduct that applies to all directors, officers and employees. The
Code of Business 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 any executive officer or director, the Company will promptly disclose the nature of the amendment or waiver,
as required by applicable law.
Available Information
Our web page address is www.inva.com. Our investor relations website is located at http://investor.inva.com. We make available free
of charge on our investor relations website under “SEC Filings” our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, our directors’ and officers’ Section 16 Reports and any amendments to those reports after filing or
furnishing such materials 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 companies appearing in this report are the property of their respective owners.
ITEM 1A. RISK FACTORS
Summary of Risk Factors
The Company is subject to a number of risks that if realized could affect its business, financial condition, results of operations, cash
flows and access to liquidity materially. The Company’s business is subject to uncertainties and risks including:
● RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA® face substantial competition for their
intended uses in the targeted markets from products discovered, developed, launched and commercialized both by GSK and by
other pharmaceutical companies, which could cause the royalties payable to us pursuant to the GSK Agreements to be less than
expected, which in turn would harm our business and cause the price of our securities to fall.
● We are dependent on GSK for the successful commercialization of the products developed under the GSK Agreements. If GSK
does not devote sufficient resources to the commercialization of these products, is unsuccessful in its efforts, or chooses to
reprioritize its commercial programs, our business would be materially harmed.
● Any adverse change in FDA policy or guidance regarding the use of LABAs to treat asthma could significantly harm our
royalty revenues and the price of our securities could fall.
● Our debt including our convertible subordinated notes and convertible senior notes are senior in capital structure and cash flow,
respectively, to our common stockholders. Satisfying the obligations relating to our debt could adversely affect our liquidity or
the amount or timing of potential distributions to our stockholders.
● We rely and will continue to rely on outsourcing arrangements for many of our activities, including financial reporting,
accounting, IT and human resources.
● GSK has indicated to us that it believes its consent may be required before we can engage in certain royalty monetization
transactions with third parties, which may inhibit our ability to engage in these transactions.
● We may be unable to or elect not to return capital to our stockholders.
● Our investment into the Partnership could subject us to various risks and uncertainties, any of which could impact our
investment results and could materially and adversely affect our business, financial condition and results of operations.
● The Partnership Agreement limits our ability to withdraw our invested funds from the Partnership.
● Concentration of ownership by GSK may limit your ability to influence corporate matters.
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Risks Related to our Business
Currently, we derive most of our revenues from GSK and our near-term success depends in large part on GSK’s ability to successfully
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
respiratory programs. Royalty revenues from RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® are expected to represent the
majority of our foreseeable future revenues from GSK. The amount and timing of revenue from such royalties are unknown and highly
uncertain. Our near-term success depends in large part upon the performance by GSK of its commercial obligations under the GSK
Agreements and the commercial success of RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA®. We
have no control over GSK’s marketing and sales efforts, and GSK might not be successful, which would harm our business and cause the
price of our securities to fall.
Our quarterly royalty revenues may fluctuate due to a variety of factors, many of which are outside of our control. The amount of
royalties and milestone payments, if any, we receive will depend on many factors, including the following:
● the extent and effectiveness of the sales and marketing and distribution support GSK provides to our partnered products;
● market acceptance and demand for our partnered products;
● changes in the treatment paradigm or standard of care for COPD or asthma, for instance through changes to the GOLD (Global
Initiative 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
pricing pressure 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
(such as 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;
● the ability of patients to be able to afford our partnered products or obtain health care coverage that covers our partnered
products;
● safety concerns in the marketplace for respiratory therapies in general and with our partnered products in particular;
● regulatory developments relating to the manufacture or continued use of our partnered products;
● the requirement to conduct additional post-approval studies or trials for our partnered products;
● GSK’s ability to obtain regulatory approval of our partnered products in additional countries;
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● the unfavorable outcome of any potential litigation relating to our partnered products;
● general economic conditions in the jurisdictions where our partnered products are sold, including microeconomic disruptions or
slowdowns; or
● if our royalty revenue or operating results fall below the expectations of investors or securities analysts or below any guidance
we may provide 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®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA® or a generic form of
RELVAR®/BREO® ELLIPTA®, the royalties payable to us pursuant to the GSK Agreements will be less than anticipated, which in
turn would harm our business and the price of our securities could fall.
Once an NDA or marketing authorization application outside the United States is approved, the product covered thereby becomes a
“listed drug” that can, in turn, be cited by potential competitors in support of approval of an ANDA in the United States. Agency
regulations and other applicable regulations and policies provide incentives to manufacturers to create modified, non-infringing versions
of a drug to facilitate the approval of an ANDA or other application for generic substitutes in the United States and in nearly every
pharmaceutical market around the world. Numerous companies like Mylan N.V., Hikma/Vectura partnership, Novartis’ Sandoz division
and Teva have publicly stated their intentions to bring generic forms of the ICS/LABA drug Advair®, when certain patents covering the
Advair® delivery device expired in 2016. In general, these manufactures are required to conduct a restricted number of clinical efficacy,
pharmacokinetic and device studies to demonstrate equivalence to Advair, per FDA’s September 2013 draft guidance document. These
studies are designed to demonstrate that the generic product has the same active ingredient(s), dosage form, strength, exposure and
clinical efficacy as the branded product. These generic equivalents, which must meet the same exacting quality standards as branded
products, may be significantly less costly to bring to market, and companies that produce generic equivalents are generally able to offer
their products at lower prices. Thus, after the introduction of a generic competitor, a significant percentage of the sales of any branded
product and products that may compete with such branded product is typically lost to the generic 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 adolescent and adult patients with asthma, one of which is AirDuo™ RespiClick® (fluticasone propionate and salmeterol
inhalation powder), a non-AB substitutable generic version of Advair®. In January 2020, Astra Zeneca launched an authorized generic
version of Symbicort. In December 2020, Hikma/Vectura announced that it received FDA approval and launched its generic version of
GSK’s Advair Diskus®.
In April 2016, the FDA issued draft guidance documents covering Fluticasone Furoate/Vilanterol Trifenatate (FF/VI), the active
ingredients used in RELVAR®/BREO® ELLIPTA®. Accordingly, introduction of generic products that compete against ICS/LABA
products, like RELVAR®/BREO® ELLIPTA®, would materially adversely impact our future royalty revenue, profitability and cash
flows. We cannot yet ascertain what impact these generic products and any future approved generic products will have on any sales of
RELVAR®/BREO® ELLIPTA® or ANORO® ELLIPTA®, or TRELEGY® ELLIPTA®, if approved.
Reduced prices and reimbursement rates due to the actions of governments, payors, or competition or other healthcare cost
containment initiatives 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 care organizations and other payors of health care costs to contain or reduce costs of health care has adversely affected the
price, market access, and total revenues of RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA®, and TRELEGY® ELLIPTA® and may
continue to adversely affect them in the future. In addition, we have experienced and expect to continue to experience increased
competitive activity, which has resulted in lower overall prices for our products.
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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
insurance matters, along with the trend toward managed healthcare in the U.S., could adversely influence the purchase of healthcare
products and reduce demand and prices for our partnered products. This could harm GSK’s ability to market our partnered products and
significantly reduce future revenues. For example, when GSK launched RELVAR®/BREO® ELLIPTA® for the treatment of COPD in the
U.S. in October 2013, GSK experienced significant challenges gaining coverage at some of the largest PBMs, healthcare payors, and
providers and lower overall prices than expected. Recent actions by U.S. PBMs in particular have increased discount levels for
respiratory products resulting in lower net sales pricing realized for products in our collaboration. In addition, in certain foreign markets,
the pricing of prescription drugs is subject to government control and reimbursement may in some cases be unavailable. We believe that
pricing pressures will continue and may increase. This may make it difficult for GSK to sell our partnered products at a price acceptable
to us or GSK or to generate revenues in line with our analysts’ or investors’ expectations, which may cause the price of our securities to
fall.
More recently, the former presidential administration and the U.S. Congress have taken actions in an effort to replace PPACA and
related legislation with new healthcare legislation. There is uncertainty with respect to any potential changes that may be proposed and
what the impact, if any, will be on our business, including the impact on coverage and reimbursement for healthcare items and services
covered by plans that were authorized by PPACA. However, we cannot predict the ultimate content, timing or effect of any healthcare
reform legislation or the impact of potential legislation on us.
We expect that additional state and federal healthcare reform measures will be considered and potentially adopted, any of which
could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced
demand for our products once approved 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 for change or if GSK is unable to, or does not devote sufficient resources to, maintain or continue increasing
sales of these products, our results of operations will be adversely affected.
We currently depend on royalties from sales of our products partnered with GSK to support our existing operations. The treatment
paradigm for COPD and asthma constantly evolves. For instance, in November 2018, the GOLD guidelines were revised to favorably
position bronchodilator monotherapy and LABA/LAMA treatment ahead of ICS/LABA for the treatment of COPD unless the patient has
frequent exacerbations, or an eosinophil count greater than 300 per cubic microliter. The use of ICS in COPD is also recommended for
patients requiring triple therapy (LABA, LAMA, ICS). If the treatment paradigms were to change further, causing our partnered products
to fall out of favor, or if GSK were unable, or did not devote sufficient resources, to maintain or continue increasing RELVAR®/BREO®
ELLIPTA® and ANORO® ELLIPTA® sales, our results of operations would likely suffer, and the price of our securities could fall.
If the commercialization of RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® or TRELEGY® ELLIPTA® in the countries in
which they have received regulatory approval encounters any delays or adverse developments, or perceived delays or adverse
developments, or if sales or payor coverage does not meet investors’, analysts’, or our expectations, our business will be harmed, and
the price of our securities could fall.
Under our agreements with our collaborative partner GSK, GSK has full responsibility for commercialization of RELVAR®/BREO®
ELLIPTA®, ANORO® ELLIPTA® and 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, among others. The commercialization of the products in countries where they are already launched and the commercialization
launch in new countries are still subject to fluctuating overall pricing levels and uncertain timeframes to obtain payor coverage. Any
delays or adverse developments or perceived additional delays or adverse developments with respect to the commercialization of
RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA® including if sales or payor coverage does not meet
investors’, analysts’, or our expectations, would significantly harm our business and the price of our securities could fall.
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We are dependent on GSK for the successful commercialization and development of products under the GSK Agreements. If GSK
does not devote sufficient resources to the commercialization or development of these products, is unsuccessful in its efforts, or
chooses to reprioritize its commercial programs, our business would be materially harmed.
GSK is responsible for all clinical and other product development, regulatory, manufacturing and commercialization activities for
products developed under the GSK Agreements, including RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® and TRELEGY®
ELLIPTA®. Our royalty revenues under the GSK Agreements may not meet our, analysts’, or investors’ expectations, due to a number of
important factors. GSK has a substantial respiratory product portfolio in addition to the partnered products that are covered by the GSK
Agreements. GSK may make respiratory product portfolio decisions or statements about its portfolio which may be, or may be perceived
to be, harmful to the respiratory products partnered with us. For instance, GSK has wide discretion in determining the efforts and
resources that it will apply to the development and commercialization of our partnered products. In addition, GSK may determine to
focus its commercialization efforts on its own products or TRELEGY® ELLIPTA®. For example, in January 2015, GSK launched
Incruse® (UMEC) in the U.S., which is a LAMA for the treatment of COPD. GSK may determine to focus its marketing efforts on
Incruse, which could have the effect of decreasing the potential market share of ANORO® ELLIPTA® and lowering the royalties we may
receive for such product. Alternatively, GSK may decide to market TRELEGY® ELLIPTA® to eventually compete directly against sales
of RELVAR®/BREO® ELLIPTA®. Following the FDA approval of TRELEGY® ELLIPTA® in September 2017, GSK’s diligent efforts
obligations regarding commercialization matters now have the objective of focusing on the best interests of patients and maximizing the
net value of the overall portfolio of products under the GSK Agreements. Since GSK’s commercialization efforts following this
regulatory approval are guided by a portfolio approach across products in which we have retained our full interest and also products in
which we now have only a small portion of our former interest, GSK’s commercialization efforts may have the effect of reducing the
overall value of our remaining interests in the GSK Agreements in the future. If GSK prioritizes TRELEGY® ELLIPTA®, we will only
be entitled to a 15% economic interest of the royalties paid pursuant to the GSK Agreements with respect to this product. In the event
GSK does not devote sufficient resources to the commercialization of our partnered products or chooses 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
revenues and 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 require
manufacturers to include this warning in the product labels of these drugs, along with taking other steps to reduce the overall use of these
medicines. The FDA now requires that the product labels for LABA medicines reflect, among other things, that the use of LABAs is
contraindicated without the use of an asthma controller medication such as an inhaled corticosteroid, that LABAs should only be used
long term in patients whose asthma cannot be adequately controlled on asthma controller medications, and that LABAs should be used
for the shortest duration of time required to achieve control of asthma symptoms and discontinued, if possible, once asthma control is
achieved. In addition, in March 2010, the FDA held an Advisory Committee to discuss the design of medical research studies (known as
“clinical trial design”) to evaluate serious asthma outcomes (such as hospitalizations, a procedure using a breathing tube known as
intubation, or death) with the use of LABAs in the treatment of asthma in adults, adolescents, and children. Further, in April 2011, the
FDA announced that to further evaluate the safety of LABAs, it required the manufacturers of currently marketed LABAs to conduct
additional randomized, double blind, controlled clinical trials comparing the addition of LABAs to inhaled corticosteroids versus inhaled
corticosteroids alone. These post-marketing studies have been completed and did not show an increased risk of use of ICS/LABA
compared to ICS alone. The FDA subsequently removed the black box warning from the ICS/LABA package inserts. Although this
concern appears to be resolved, it is unknown at this time what, if any, future concerns could impact the use of ICS/LABA and its
potential impact on the prospects for FF/VI. Any adverse change in FDA policy or guidance regarding the use of LABAs to treat asthma
could significantly harm our business and the price of our securities could fall.
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Any 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
other limitation to usage, would harm our business and may cause the price of our securities to fall.
Although RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA® are approved and marketed in a
number of countries, 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 have experienced adverse developments during commercialization that have resulted in the product being
withdrawn, approved uses being limited, or new warnings being included. In the event that any adverse regulatory changes were to occur
to any of our products, our business would be harmed, and the price of our securities could fall.
Any adverse developments or results or perceived adverse developments or results with respect to the ongoing studies for FF/VI in
asthma or COPD, for UMEC/VI in COPD, or any future studies would significantly harm our business and the price of our securities
could fall, and if regulatory authorities in those countries in which approval has not yet been granted determine that the ongoing
studies for FF/VI in asthma or COPD or the ongoing studies for UMEC/VI for COPD do not demonstrate adequate safety and
efficacy, the continued development of FF/VI or UMEC/VI or both could be significantly delayed, they might not be approved by
these regulatory authorities, and even if approved they 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 in COPD and asthma, additional studies of FF/VI are underway or may commence in the future. Any adverse developments or
perceived adverse developments with respect to any prior, current or future studies in these programs could significantly harm our
business and the price of our securities could fall.
Although the FDA, the European Medicines Agency, the Japanese Ministry of Health, Labour and Welfare and Health Canada and
other jurisdictions 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 regulatory
submissions 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 regulatory
authorities 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, which is 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 demonstrate
adequate efficacy; or
● any change in FDA (or comparable foreign regulatory agency) policy or guidance regarding the use of LABAs to treat asthma
or the use of LABAs combined with a LAMA to treat COPD.
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RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® face substantial competition for their intended uses in the targeted markets
from products discovered, developed, launched and commercialized both by GSK and by other pharmaceutical companies, which
could cause the royalties payable to us pursuant to the LABA Collaboration Agreement to be less than expected, which in turn would
harm our business and cause 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 have been launched and commercialized in the U.S. and certain other targeted markets, the products face substantial
competition from existing products previously developed and commercialized both by GSK and by other competing pharmaceutical
companies and can expect to face additional competition from new products that are discovered, developed and commercialized by the
same pharmaceutical companies and other competitors going forward. For example, sales of generic Advair®, GSK’s approved medicine
for both COPD 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 and personnel resources that permit them to discover, develop, obtain regulatory approval and commercialize new products in a
highly efficient and low-cost manner at competitive prices to consumers. In addition, many of these competitors have substantial
commercial infrastructure that facilitates commercializing their products in a highly efficient and low-cost manner at competitive prices
to consumers. The market for products developed for treatment of COPD and asthma continues to experience significant innovation and
reduced cost in bringing products to market over time. There can be no assurance that RELVAR®/BREO® ELLIPTA® and ANORO®
ELLIPTA® will not be replaced by new products that are deemed more effective at lower cost to consumers. The ability of
RELVAR®/BREO® ELLIPTA®, and ANORO® ELLIPTA® to succeed and achieve the anticipated level of sales depends on the
commercial and development performance of GSK to achieve and maintain a competitive advantage over other products with the same
intended use in the targeted markets.
In addition, following the September 2017 FDA approval of TRELEGY® ELLIPTA®, GSK’s diligent efforts obligations regarding
commercialization matters has the objective of focusing on the best interests of patients and maximizing the net value of the overall
portfolio of products under the GSK Agreements. Since GSK’s commercialization efforts following this regulatory approval are guided
by a portfolio approach across products in which we have retained our full interest and also products in which we now have only a small
portion of our former interest, GSK’s commercialization efforts may have the effect of reducing the overall value of our remaining
interests in the GSK Agreements in the future. 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 in September 2018. Innoviva is only entitled to a 15% economic interest in the future payments made
by GSK under the GSK Agreements with respect to this product.
If sales of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® are less than anticipated because of existing or future
competition in the markets in which they are commercialized, including competition from existing and new products that are perceived
as lower cost or more effective, our royalty payments could be less than anticipated, which in turn would harm our business and cause
the price of our securities to fall.
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We and GSK received regulatory approval in the U.S. and positive regulatory opinion in Europe for TRELEGY® ELLIPTA® as triple
combination treatments for COPD. As a result of the Spin-Off, most of our economic rights in this program and other programs were
assigned to Theravance Biopharma. If these programs are successful and GSK and the respiratory market in general views triple
combination therapy as significantly more beneficial than existing therapies, including RELVAR®/BREO® ELLIPTA® and ANORO®
ELLIPTA®, our business could be harmed, and the price of our securities could fall.
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 and royalties payable by GSK from sales of TRELEGY® ELLIPTA® under the GSK Agreements which were
assigned to TRC, while Theravance Biopharma receives 85% of those same payments. The commercial success of RELVAR®/BREO®
ELLIPTA® and ANORO® ELLIPTA® may be adversely affected if GSK or the respiratory markets view TRELEGY® ELLIPTA® or
other combination therapies as more beneficial. GSK’s diligent efforts obligations regarding commercialization matters have the
objective of focusing on the best interests of patients and maximizing the net value of the overall portfolio of products under the GSK
Agreements. Since GSK’s commercialization efforts following this regulatory approval are guided by a portfolio approach across
products in which we have retained our full interest and also products in which we now have only a small portion of our former interest,
GSK’s commercialization efforts may have the effect of reducing the overall value of our remaining interests in the GSK Agreements in
the future.
We may not be able to utilize all of our net operating loss carryforwards.
We have net operating loss carryforwards and other significant U.S. tax attributes that we believe could offset otherwise taxable
income in the U.S. As a part of the overall Spin-Off transaction, the transfer of certain assets by us to Theravance Biopharma and our
distribution of Theravance Biopharma ordinary shares resulted in taxable transfers pursuant to applicable provisions of the Internal
Revenue Code of 1986, as amended (the “Code”) and Treasury Regulations. The taxable gain recognized by us attributable to the transfer
of certain assets to Theravance Biopharma generally equaled the excess of the fair market value of each asset transferred over our
adjusted tax basis in such asset. Although we did not recognize any gain with respect to the cash we transferred to Theravance
Biopharma, we may recognize substantial gain based on the fair market value of the other assets (other than cash) transferred to
Theravance Biopharma. The determination of the fair market value of these assets is subjective and could be subject to adjustments or
future challenge by the Internal Revenue Service (“IRS”), which could result in an increase in the amount of gain realized by us as a
result of the transfer. Our U.S. federal income tax resulting from any gain recognized upon the transfer of our assets to Theravance
Biopharma (including any increased U.S. federal income tax that may result from a subsequent determination of higher fair market
values for the transferred assets), may be reduced by our net operating loss carryforward. The net operating loss carryforwards available
in any year to offset our net taxable income will be reduced following a more than 50% change in ownership during any period of 36
consecutive months (an “ownership change”) as determined under the Code. Transactions involving our common stock, even those
outside our control, such as purchases or sales by investors, within the testing period could result in an ownership change. We have
conducted an analysis to determine whether an ownership change had occurred since inception through September 30, 2020 and
concluded that we had undergone two ownership changes in prior years. Subsequent changes in our ownership or sale of our stock could
have the effect of limiting the use of our net operating losses in the future. We have approximately $0.4 billion of net operating loss
carryforward as of December 31, 2020. There may be certain annual limitations for utilization based on the above-described ownership
change provisions. In addition, we may not be able to have sufficient future taxable income prior to their expiration because net operating
losses have carryforward periods. As a result of the passage of the TCJA, corporate tax rates in the United States decreased in 2018,
which resulted in the remeasurement of our deferred tax assets at the new statutory rate and a reduction in the value of our deferred tax
assets in 2017. Future changes in federal and state tax laws pertaining to net operating loss carryforwards may also cause limitations or
restrictions from us claiming such net operating losses. If the net operating loss carryforwards become unavailable to us or are fully
utilized, our future taxable income will not be shielded from federal and state income taxation absent certain U.S. federal and state tax
credits, and the funds otherwise available for general corporate purposes would be reduced.
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If any product candidates in any respiratory program partnered with GSK were not approved by regulatory authorities or are
determined to be 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
and similar foreign regulatory authorities with data from preclinical and clinical studies that demonstrate that the product candidates are
safe and effective for a defined indication before they can be approved for commercial distribution. GSK will not obtain this approval for
a partnered product candidate unless and until the FDA approves an NDA. The processes by which regulatory approvals are obtained
from the FDA to market and sell a new product are complex, require a number of years and involve the expenditure of substantial
resources. In order to market medicines in foreign countries, separate regulatory approvals must be obtained in each country. The
approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from
that required to obtain FDA approval. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and
approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA.
Conversely, failure to obtain approval in one or more country may make approval in other countries more difficult.
Clinical studies involving product candidates partnered with GSK may reveal that those candidates are ineffective, inferior to
existing approved medicines, unacceptably toxic, or that they have other unacceptable side effects. In addition, the results of preclinical
studies do not necessarily 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 suffered
significant setbacks or failed in later clinical or non-clinical studies. In addition, clinical and non-clinical studies of potential products
often reveal that it is not possible or practical to continue development efforts for these product candidates. If these studies are
substantially delayed or fail to prove the safety and effectiveness of product candidates in development partnered with GSK, GSK may
not receive regulatory approval for 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-
approval labeling revisions to include boxed warnings and changes in approved indications over the last several years, as well as growing
public and governmental scrutiny of safety issues, have created a conservative regulatory environment. The implementation of new laws
and regulations and revisions to FDA clinical trial design guidance have increased uncertainty regarding the approvability of a new drug.
Further, there are additional requirements for approval of new drugs, including advisory committee meetings for new chemical entities,
and formal risk evaluation and mitigation strategy at the FDA’s discretion. These laws, regulations, additional requirements and changes
in interpretation could cause non-approval or further delays in the FDA’s review and approval of 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 with
RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® and TRELEGY® ELLIPTA®, commercialization of such products may be
adversely affected by regulatory actions and oversight.
Even if GSK receives regulatory approval for product candidates in any respiratory program partnered with GSK, this approval may
include 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 make it 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
Advisory Committee of the FDA regarding the sNDA for BREO® ELLIPTA® as a treatment for asthma, the advisory committee
recommended that a large LABA safety trial with BREO® ELLIPTA® should be required in adults and in 12-17 year old’s, similar to the
ongoing LABA safety trials being conducted as an FDA Post-Marketing Requirement by each of the manufacturers of LABA containing
asthma treatments. The FDA did not concur with the recommendation. A pediatric program including patients 5-17 years of age is
currently ongoing.
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In addition, the manufacturing, labeling, packaging, adverse event reporting, advertising, promotion and recordkeeping for the
approved product remain subject to extensive and ongoing regulatory requirements. If we or GSK become aware of previously unknown
problems with an approved product in the U.S. or overseas or at contract manufacturers’ facilities, a regulatory authority may impose
restrictions on the product, the contract manufacturers or on GSK, including requiring it to reformulate the product, conduct additional
clinical studies, change the labeling of the product, withdraw the product from the market or require the contract manufacturer to
implement changes to its facilities. GSK is also subject to regulation by regional, national, state and local agencies, including the
Department of Justice, the Federal Trade Commission, the Office of Inspector General of the U.S. Department of Health and Human
Services and other regulatory bodies, as well as governmental authorities in those foreign countries in which any of the product
candidates in any respiratory program partnered with GSK are approved for commercialization. The Federal Food, Drug, and Cosmetic
Act, the Public Health Service Act and other federal and state statutes and regulations govern 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 to commercialize the product
candidates in any respiratory program partnered with GSK, which could materially and adversely affect our business and financial
condition, and which may cause the price of our securities to fall.
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 our shareholders.
Existing or future acquisitions and investments could involve numerous risks that may prevent us from fully realizing the benefits
that we anticipated as a result of the transaction. These risks include the failure to derive any commercial value from the acquired
technology, products and intellectual property including as a result of the failure to obtain regulatory approval or to monetize products
once approved, as well as risks from lengthy product development and high upfront development costs without guarantee of successful
results. Patents and other intellectual property rights covering acquired technology and/or intellectual property may not be obtained, and
if obtained, may not be sufficient to fully protect the technology or intellectual property. We may be subject to liabilities, including
unanticipated litigation costs, that are not covered by indemnification protection we may obtain. As we pursue or consummate a strategic
acquisition or investment, we may value the acquired or funded company incorrectly, fail to successfully manage our operations as our
asset diversity increases, expend unforeseen costs during the acquisition or integration process, or encounter other unanticipated risks or
challenges. Once an investment is made, we may fail to value it accurately, properly account for it in our consolidated financial
statements, or successfully divest it or otherwise realize the value which we originally invested or have subsequently reflected in our
consolidated financial statements. Any failure by us to effectively limit such risks as we implement our acquisitions or strategic
investments could have a material adverse effect on our business, financial condition or results of operations and may negatively impact
our net income and cause 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
capital structure and cash flow, respectively, to our common stockholders. Satisfying the obligations relating to our debt could
adversely affect our liquidity or the amount or timing of potential distributions to our stockholders.
As of December 31, 2020, we had $433.5 million in total debt outstanding, comprised primarily of $241.0 million in principal that
remains outstanding under our convertible subordinated notes due 2023 (the “2023 Notes”) and $192.5 million in principal outstanding
under our convertible senior notes due 2025 (the “2025 Notes”) (the 2023 Notes and 2025 Notes hereinafter, the “Notes”). The Notes are
unsecured debt and are not redeemable by us prior to the maturity date. Holders of the Notes may require us to purchase all or any
portion of their Notes at 100% of their principal amount, plus any unpaid interest, upon a fundamental change. A fundamental change is
generally defined to include a merger involving us, an acquisition of a majority of our outstanding common stock, and, under the 2023
Notes, the change of a majority of our Board of Directors without the approval of the Board of Directors. In addition, to the extent we
pursue and complete a monetization transaction or a transaction that modifies our corporate structure, the structure of such transaction
may qualify as a fundamental change under the Notes, which could trigger the put rights of the holders of the Notes, in which case we
would be required to use a portion of the net proceeds from such transaction to repurchase any Notes put to us.
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Satisfying the obligations of this debt could adversely affect the amount or timing of any distributions to our stockholders. We may
choose to satisfy, repurchase, or refinance this debt through public or private equity or debt financings if we deem such financings
available on favorable terms. If any or all of the Notes are not converted into shares of our common stock before the maturity date, we
will have to pay the holders the full aggregate principal amount of the Notes then outstanding. Any of the above payments could have a
material adverse effect on our cash position. If we fail to satisfy these obligations, it may result in a default under the indenture, which
could result in a default under certain of our other debt instruments, if any. Any such default would harm 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 and a small group of key employees to operate our business. None of our employees have employment commitments for any fixed
period of time and 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 manage our 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, accounting,
IT and human resources.
As of December 31, 2020, we had only five employees and, as a result, we rely, and expect to continue to rely, on outsourcing
arrangements for a significant portion of our activities, including financial reporting, accounting, IT and human resources, as well as for
certain of our functions as a public company. We may have limited control over these third parties, and we cannot guarantee that they
will perform their obligations in an effective and timely manner.
As we continue to develop our business, including through strategic acquisitions and investments, 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 are not currently, nor do we currently intend to become, registered as an investment company under the 40 Act. We are
primarily engaged, and hold ourselves as being primarily engaged, in the royalty management business and not primarily engaged in the
business of investing, reinvesting or trading in securities. In addition, we monitor our mix of assets to ensure that we do not otherwise
meet the definition of an investment company. Accordingly, we are not subject to the provisions of the 40 Act, such as compliance with
the 40 Act’s registration and reporting requirements, capital structure requirements, affiliate transaction restrictions, conflict of interest
rules, requirements for disinterested directors, and other substantive provisions.
A company will generally be deemed to be an “investment company” for purposes of the Investment Company act of 1940 or the
“40 Act” if:
● it is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting
or trading in securities; or
● absent an applicable exemption or exclusion, it owns or proposes 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.
If the Company were to inadvertently meet the definition of an “investment company” and be required to register with the SEC
under the 40 Act, the restrictions imposed by the 40 Act would likely require changes in the way we do business and add significant
administrative burdens 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 might otherwise not pursue. These actions may include restructuring the Company and/or modifying our mix of assets and
sources of income.
The rules and interpretations of the SEC, the SEC staff, and the courts relating to the definition of an “investment company” under
the 40 Act are highly complex in numerous respects. While we currently intend to conduct our operations so that we will not be deemed
an investment company, we can give no assurances that we will not (i) determine it to be in the Company’s and our stockholders’ interest
to register as an “investment company,” and/or (ii) meet the definition of an “investment company” and be required to register with the
SEC under the 40 Act.
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Prolonged economic uncertainties or downturns, as well as unstable market, credit and financial conditions, may exacerbate certain
risks affecting 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 economic
conditions, and uncertainty as to the general direction of the macroeconomic environment, are beyond our control and may make any
necessary debt or equity financing more difficult, more costly, and more dilutive. While we believe we have adequate capital resources to
meet current working capital and capital expenditure requirements, a lingering economic downturn or significant increase in our
expenses could require additional financing at less than attractive rates or on terms that are excessively dilutive to existing stockholders.
Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our stock
price and could require us to delay or abandon clinical development plans.
Sales of our partnered products will be dependent, in large part, on reimbursement from government health administration
authorities, private health insurers, distribution partners and other organizations. As a result of negative trends in the general economy in
the U.S. or other jurisdictions in which we 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 their scrutiny of claims. A reduction in the availability or extent of reimbursement could negatively affect our or
our partners’ product sales and revenue.
In addition, we rely on third parties for several important aspects of our business. During challenging and uncertain economic times
and in tight credit markets, there may be a disruption or delay in the performance of our third-party contractors, suppliers or partners. If
such third parties are unable to satisfy their commitments to us, our business and results of operations would be adversely affected.
Risks Related to our Alliance with GSK
Because all our current revenues and near-term projected revenues are derived from products under the GSK Agreements, disputes
with GSK could harm our business and cause the price of our securities to fall.
All of our current and near-term projected revenues are derived from products under the GSK Agreements. Any action or inaction by
either GSK or us that results in a material dispute, allegation of breach, litigation, arbitration, or significant disagreement between the
parties may be interpreted negatively by the market or by our investors, could harm our business and cause the price of our securities to
fall. Examples of these kinds of issues include but are not limited to non-performance of contractual obligations and allegations of non-
performance, disagreements over the relative marketing and sales efforts for our partnered products and other GSK respiratory products,
disputes over public statements, and similar matters. In addition, while we obtained GSK’s consent to the Spin-Off as structured,
GSK could decide to challenge various aspects of our post-Spin-Off operation of TRC, the limited liability company jointly owned by us
and Theravance Biopharma, as violating or allowing it to terminate the GSK Agreements. Although we believe our operation of TRC
fully complies with the GSK Agreements and applicable law, there can be no assurance that we would prevail against any such claims by
GSK. Moreover, regardless of the merit of any claims by GSK, we may incur significant cost and diversion of resources in defending
them. In addition, any market or investor uncertainty about the respiratory programs partnered with GSK or the enforceability of the
GSK Agreements could result in significant reduction in the market price of our securities and in other material harm to our business.
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Because GSK is a strategic partner as well as a significant stockholder, it may take actions that in certain cases are materially
harmful to our business or to our other stockholders.
Although GSK beneficially owns approximately 31.6% of our outstanding common stock as of December 31, 2020, it is also a
strategic partner with rights and obligations under the GSK Agreements that cause its interests to differ from our interests and those of
our other stockholders. In particular, GSK has a substantial respiratory product portfolio in addition to the partnered products that are
covered by the GSK Agreements. GSK may make respiratory product portfolio decisions or statements about its portfolio which may be,
or may be perceived to be, harmful to the respiratory products partnered with us. For example, GSK could promote its non-
GSK/Innoviva respiratory products or a partnered product for which we are entitled to receive a lower percentage of royalties, delay or
terminate the development or commercialization of the respiratory programs covered by the GSK Agreements, or take other actions, such
as making public statements, that have a negative effect on our stock price. In this regard and by way of example, sales of Advair ®,
GSK’s approved medicine for both COPD and asthma, continue to be significantly greater than sales of RELVAR ®/BREO ® ELLIPTA ®,
and GSK has indicated publicly that it intends to continue commercializing Advair ®. Also, given the potential future royalty payments
which GSK may be obligated to pay under the GSK Agreements, GSK may seek to acquire us in order to reduce those payment
obligations. The timing of when GSK may seek to acquire us could potentially be when it possesses information regarding the status of
drug programs covered by the GSK Agreements that has not been publicly disclosed and is not otherwise known to us. As a result of
these differing 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 of our other stockholders. In addition, following the FDA regulatory approval of TRELEGY® ELLIPTA® in September
2017, GSK’s diligent efforts obligations as to commercialization matters under the GSK Agreements has had the objective of focusing on
the best interests of patients and maximizing the net value of the overall portfolio of products under the GSK Agreements. Since GSK’s
commercialization efforts following this regulatory approval have been guided by a portfolio approach across products in which we have
retained our full interest and also products in which we now have only a portion of our former interest, GSK’s commercialization efforts
may have the effect of reducing the overall value of our remaining interests in the products covered by the GSK Agreements in the
future. In addition, following the expiration of our governance agreement with GSK in September 2015, GSK is no longer subject to the
restrictions thereunder regarding the voting of the shares of our common stock owned by it.
GSK’s diligent efforts obligations as to commercialization matters under the GSK Agreements have had the objective of focusing on
the best interests of patients and maximizing the net value of the overall portfolio of products under the GSK Agreements, which may
be harmful to both our business and our stockholders.
Following the FDA approval of TRELEGY® ELLIPTA® in September 2017, GSK’s diligent efforts obligations as to
commercialization matters under the GSK Agreements have had the objective of focusing on the best interests of patients and
maximizing the net value of the overall portfolio of products under the GSK Agreements. As such, GSK may prioritize TRELEGY®
ELLIPTA®, and if GSK and the respiratory market 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 partnered products or if GSK chooses to reprioritize its commercial programs, our businesses,
operations and stock price would be negatively affected.
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GSK has also indicated to us that it believes its consent may be required before we can engage in certain royalty monetization
transactions with 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 its consent may be required before we can engage in certain transactions designed to monetize the future value of royalties that may
be payable to us from GSK under the GSK Agreements. GSK has informed us that it believes that there may be certain covenants
included in these types of transactions that might violate certain provisions of the GSK Agreements. Although we believe that we can
structure royalty monetization transactions in a manner that fully complies with the requirements of the GSK Agreements without GSK’s
consent, a third party in a proposed monetization transaction may nonetheless insist that we obtain GSK’s consent for the transaction or
restructure the transaction on less favorable terms. We have obtained GSK’s agreement that (i) we may grant certain pre-agreed
covenants in connection with monetization of our interests in RELVAR®/BREO® ELLIPTA®, ANORO® ELLIPTA® and vilanterol
monotherapy and portions of our interests in TRC, and (ii) it will not unreasonably withhold its consent to our requests to grant other
covenants, provided among other conditions, that in each case, the covenants are not granted in favor of a pharmaceutical or
biotechnology company with a product either being developed or commercialized for the treatment of respiratory disease. If we seek
GSK’s consent to grant covenants other than pre-agreed covenants, we may not be able to obtain GSK’s consent on reasonable terms, or
at all. If we proceed with a royalty monetization transaction that is not otherwise covered by the GSK Agreement without GSK’s consent,
GSK could request that its consent be obtained or seek to enjoin or otherwise challenge the transaction as violating or allowing it to
terminate the GSK Agreements. Regardless of the merit of any claims by GSK, we would incur significant cost and diversion of
resources in defending against GSK’s claims or asserting our own claims and GSK may seek concessions from us in order to provide its
consent. Any uncertainty about whether or when we could engage in a royalty monetization transaction, the potential impact on the
enforceability of the GSK Agreements or the loss of potential royalties from the respiratory programs partnered with GSK, could impair
our ability to pursue a return of capital strategy for our stockholders ahead of our receipt of significant royalties from GSK, result in
significant reduction in the market price of our securities and cause other material harm to our business.
GSK’s ownership of a significant percentage of our stock and its ability to acquire additional shares of our stock may create conflicts
of interest, and 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, 2020, GSK beneficially owned approximately 31.6% of our outstanding common stock. As such, GSK could
have substantial influence in the election of our directors, delay or prevent a transaction in which stockholders might receive a premium
over the prevailing market price for their shares and have significant control over certain changes in our business. The procedures
previously governing and restricting GSK offers to our stockholders to acquire outstanding voting stock and the restrictions regarding the
voting of shares of our common stock owned by it terminated upon the expiration of the governance agreement in September 2015.
Further, pursuant to our Certificate of Incorporation, we renounce our interest in and waive any claim that a corporate or business
opportunity taken by GSK constitutes a corporate opportunity of ours unless such corporate or business opportunity is expressly offered
to one of our directors who is a director, officer or employee of GSK, primarily in his or her capacity as one of our directors.
GSK’s significant ownership position may deter or prevent efforts by other companies to acquire us, which could prevent our
stockholders from realizing a control premium.
As of December 31, 2020, GSK beneficially owned approximately 31.6% of our outstanding common stock. As a result of GSK’s
significant ownership, other companies may be less inclined to pursue an acquisition of us and therefore we may not have the
opportunity to be acquired in a transaction that stockholders might otherwise deem favorable, including transactions in which our
stockholders might realize a substantial premium for their shares.
GSK could sell or transfer a substantial number of shares of our common stock, which could depress the price of our securities or
result in a change 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
privately negotiated transactions or otherwise, and these sales or transfers could create substantial declines in the price of our securities
or, if these sales or transfers were made to a single buyer or group of buyers, could contribute to a transfer of control of our company to a
third party. Sales by GSK of a substantial number of shares, or the expectation of such sales, could cause a significant reduction in the
market price of our common stock.
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Risks Related to Legal and Regulatory Uncertainty
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of
interest and our business may be adversely affected.
Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented, declared generic or
determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which are
necessary to build name and brand recognition among potential partners or customers in our markets of interest. At times, competitors
may adopt trademarks or trade names similar to ours, thereby impeding our ability to build name and brand identity and possibly leading
to market confusion. In addition, there could be potential trademark or trade name infringement claims brought by owners of other
registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. There is also
a risk that if there is confusion in the marketplace, the reputation, performance and/or actions of such third parties may negatively impact
our stock price and our business. We therefore adopted a new brand, Innoviva, in January 2016. Over the long term, if we are unable to
establish name and brand recognition based on our trademarks and trade names, then we may not be able to compete effectively and our
business may be adversely affected. If we fail to promote and maintain our brand successfully, or if we incur substantial expenses in an
unsuccessful attempt to promote and maintain our brand, our business may be harmed.
If the efforts of our partner, GSK, to protect the proprietary nature of the intellectual property related to products in any respiratory
program partnered with GSK are not adequate, the future commercialization of any such product could be delayed, limited or
prevented, which would 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 or encounter problems with the U.S. Patent and Trademark Office or other comparable agencies throughout the world, the
commercialization of these products could be delayed, limited or prevented. Any challenge to the intellectual property protection of a
late-stage development asset or approved 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 and
proprietary rights of third parties. Third parties may assert that these products are using their proprietary rights without authorization. In
addition, 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 further develop 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
from third parties or pay royalties. In addition, even in the absence of litigation, GSK may need to obtain licenses from third parties to
advance its research or allow commercialization of the products. GSK may fail to obtain any of these licenses at a reasonable cost or on
reasonable terms, if at all. In that event, GSK would be unable to further develop and commercialize one or more of the products, which
could harm our business significantly. In addition, in the future GSK could be required to initiate litigation to enforce its proprietary
rights against infringement by third parties. Prosecution of these claims to enforce its rights against others would involve substantial
litigation expenses. If GSK fails to effectively enforce its proprietary rights related to our partnered respiratory programs against others,
our business will be harmed, and the price of our securities could fall.
Risks Related to our Strategic Partnership with Sarissa Capital
Under the Services Agreement with Sarissa Capital, we may rely on Sarissa Capital to assist in our strategic investing activity.
On December 11, 2020, we entered into the Services Agreement pursuant to which Sarissa Capital provides substantial assistance to
us in connection with our acquisition strategy. Pursuant to the terms of the Services Agreement, and subject to the limitations set forth
therein, Sarissa Capital will, among other things: (i) assist Innoviva in the development of an overall acquisition and investment process
and strategy; (ii) advise Innoviva on market trends, market dynamics and merger and acquisition activity; (iii) identify potential
transaction targets; (iv) assist in due diligence of transaction targets and the negotiation and execution of transactions; (v) advise on the
growth and operational plans, performance and integration of target companies once an investment or acquisition is made; and (vi) assist
in the identification of director and officer candidates for target companies. The services are provided by Sarissa Capital personnel and
we have limited or no ability to control the manner upon which the services are provided. In the event that Sarissa Capital fails to
adequately perform the required services, our investment activity operations and financial performance may be negatively impacted.
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Our investment into the Partnership could subject us to various risks and uncertainties, any of which could impact our investment
results and could materially and adversely affect our business, financial condition and results of operations.
Historically, we have invested our cash reserves in short-term investments and marketable securities, primarily corporate notes,
government securities, government agencies, and commercial papers. On December 11, 2020, we entered into the Partnership Agreement
and invested $300 million of our cash reserves to be managed by Sarissa Capital as the investment manager to the Partnership.
While we expect that our revenues will continue to be primarily derived from our royalty management business, as a result of this
investment, we may derive a material portion of our income from assets managed by Sarissa Capital. The investment strategy of Sarissa
Capital will focus on a concentrated portfolio of “long” positions in publicly or privately traded securities (debt or equity) and derivatives
of, and other financial instruments related to, each of the foregoing, specifically in the areas of healthcare, pharmaceuticals and
biotechnology. The risks associated with this investment strategy may be substantially greater than the risks associated with traditional
fixed-income investment strategies or other low-yield strategies.
We have limited rights to remove the general partner of the Partnership and do not have any right to participate in the management
of the Partnership or the investment activity of Sarissa Capital. We are solely dependent on Sarissa Capital’s management of our
investment in the Partnership. We cannot provide assurance that Sarissa Capital will be successful in meeting our investment objectives.
Unexpected market volatility or losses in the Partnership’s securities portfolio could significantly and negatively affect our investment in
the Partnership and therefore our investment results, financial condition or results of operations.
The Partnership Agreement limits our ability to withdraw our invested funds from the Partnership.
Under the terms of the Partnership Agreement, subject to limited exceptions, we are not entitled to withdraw our funds invested in
the Partnership until expiration of a “lock-up” period. Following the expiration of the lock-up period, we are able to make annual
withdrawals subject to 25% gating provision such that we would receive our entire account in the Partnership over four fiscal quarters.
Therefore, we are limited in our ability to obtain liquidity with respect to those funds and are further subjects to market fluctuations with
respect thereto, particularly given the expected concentrated nature of the Partnership’s portfolio.
Sarissa Capital intends to continue to manage other third party capital and is not required to dedicate any minimum amount of time
to the Partnership.
In addition to managing the Partnership, Sarissa Capital, its principals and their affiliates may engage in investment and trading
activities for their own accounts and/or for the accounts of third parties and is not required to afford the Partnership exclusivity or priority
with respect to investment or trading activities. Affiliates of Sarissa Capital manage and expect to continue to manage other client
accounts which have objectives similar to the Partnership. The Partnership Agreement does not include any specific obligations or
requirements concerning allocation of time, effort or investment opportunities to us or impose any restriction on the nature or timing of
investments for accounts that Sarissa Capital or its affiliates may manage.
Risks Related to Ownership of our Common Stock
The 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, 2020 and December 31, 2020, the high
and low sales prices of our common stock as reported on The Nasdaq Global Select Market varied between $7.58 and $15.62 per share.
The stock market in general and the market for biotechnology and biopharmaceutical companies in particular have experienced extreme
volatility that has often been unrelated to the companies’ operating performance, in particular during the last several years. The following
factors, in addition to the other risk factors described in this section, may 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 of
RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® with GSK, including, without limitation, if payor coverage is lower
than anticipated or if sales of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® are less than anticipated because of
pricing pressure in the respiratory markets targeted by our partnered products or existing or future competition in the markets in
which they are commercialized, including competition from existing and new products that are perceived as lower cost or more
effective, and our royalty payments are less than anticipated;
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● any positive developments or results or perceived positive developments or results with respect to the commercialization of
TRELEGY® ELLIPTA® with GSK, including, if GSK and the respiratory market in general view this triple combination
therapy as significantly more beneficial than existing therapies, including RELVAR®/BREO® ELLIPTA® and ANORO®
ELLIPTA®;
● any adverse developments or perceived adverse developments in the field of LABAs, including any change in FDA (or
comparable foreign regulatory authority) policy or guidance (such as the pronouncement in February 2010 warning that LABAs
should not be used alone in the treatment of asthma and related labeling requirements, the impact of the March 2010 FDA
Advisory Committee discussing LABA clinical trial design to evaluate serious asthma outcomes or the FDA’s April 2011
announcement that manufacturers of currently marketed LABAs conduct additional clinical studies comparing the addition of
LABAs to inhaled corticosteroids versus inhaled corticosteroids alone);
● GSK reprioritizing its development or commercial efforts on other products, including TRELEGY® ELLIPTA® or products
owned by GSK (such as Advair®) but that are not partnered with us;
● the occurrence of a fundamental change triggering a put right of the holders of the Notes or our inability, or perceived inability,
to satisfy 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 in all indications in all major markets;
● any adverse developments or perceived adverse developments with respect to our relationship with GSK, including, without
limitation, disagreements that may arise between us and GSK;
● announcements by or regarding GSK generally;
● announcements of patent issuances or denials, technological innovations or new commercial products by GSK;
● publicity regarding actual or potential study results or the outcome of regulatory review relating to products under development
by GSK or other pharmaceutical companies;
● regulatory developments in the U.S. and foreign countries, including recent tax reform and the possibility that the current
presidential administration and the U.S. Congress may replace PPACA and related legislation with new healthcare legislation;
● economic and other external factors beyond our control;
● sales of stock by us or by our stockholders, including sales by certain of our employees and directors whether or not pursuant to
selling plans 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 owned
approximately 31.0% of our outstanding common stock as of December 31, 2020 based on our review of publicly available
filings); and
● potential sales or purchases of our common stock by GSK.
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We may be unable to or elect not to return capital to our stockholders.
The payment of, or continuation of, capital returns to stockholders is at the discretion of our Board of Directors and is dependent
upon our financial condition, results of operations, capital requirements, execution of our strategic initiatives, general business
conditions, tax treatment of capital returns, potential future contractual restrictions contained in our credit agreement and other
agreements and other factors deemed relevant by our Board of Directors. Future capital returns may also be affected by, among other
factors: our views on potential future capital requirements for investments in acquisitions and our working capital and debt maintenance
requirements; legal risks; stock or debt repurchase programs; changes in federal and state income tax laws or corporate laws; and
changes to our business model. Our capital return programs may change from time to time, and we cannot provide assurance that we will
continue to provide any particular amounts. Our announcement of future capital return programs does not obligate us to repurchase any
specific dollar amount of debt or equity or number of shares of common stock. A reduction, suspension or change in our capital return
programs could have a negative effect on our stock price.
Concentration of ownership by GSK may limit your ability to influence corporate matters.
As of December 31, 2020, GSK beneficially owned approximately 31.6% of our outstanding common stock and our directors,
executive officers and investors affiliated with these individuals beneficially owned approximately 0.3% of our outstanding common
stock. Based on our review of publicly available filings as of December 31, 2020, our four largest stockholders other than GSK and
investors affiliated with our executive officers and directors collectively owned approximately 31.3% of our outstanding common stock.
These stockholders could control the outcome of actions taken by us that require stockholder approval, including a transaction in which
stockholders might receive a premium over the prevailing market price for their shares.
Anti-takeover provisions in our charter and bylaws and in Delaware law could prevent or delay a change in control of our company.
Provisions of our Certificate of Incorporation and Bylaws may discourage, delay or prevent a merger or acquisition that stockholders
may consider 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
be acted 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.
General Risks Factors
Our internal computer systems, or third-parties that we work with, may fail or suffer security breaches, which could result in a
material disruption of our business.
Despite the implementation of security measures, our internal computer systems and those of third-parties with whom we work
(including our 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 system failure, accident or security breach it could cause interruptions in our operations and adversely affect our business,
financial condition and results of operations. Cybersecurity attacks in particular are evolving and include, but are not limited to,
malicious software, attempts to gain unauthorized 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.
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Additionally, California recently enacted legislation that has been dubbed the first “GDPR-like” law in the United States. Known as
the California 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 effect January 1, 2020, the CCPA requires covered companies to provide new disclosures to California consumers, provide
such consumers new ways to opt-out of certain sales of personal information, and allow for a new cause of action for data breaches. The
CCPA may significantly impact our business activities and require substantial compliance costs that adversely affect business, operating
results, prospects and financial condition.
Thus, any access, disclosure or other loss of information, including our data being breached at our partners or third-party providers,
could result in legal claims or proceedings and liability under laws that protect the privacy of personal information, disrupt our operations
and damage our 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
utilized in 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 and disclosure controls and procedures. Under the SEC’s current rules, we are required to perform system and process
evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal
control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our independent registered public accounting
firm is also required to report on our internal control over financial reporting. Our testing and our independent registered public
accounting firm’s testing may reveal deficiencies in our internal control over financial reporting that are deemed to be material
weaknesses and render our internal control over financial reporting ineffective. We have and expect to continue to incur substantial
accounting and auditing expense and to expend significant management time in complying with the requirements of Section 404. If we
are not able to maintain compliance with the requirements of Section 404 in a timely manner, or if we or our independent registered
public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses,
the market price of our stock could decline and we could be subject to investigations or sanctions by the SEC, FINRA, The Nasdaq
Global Select Market or other regulatory authorities. In addition, we could be required to expend significant management time and
financial resources to correct any material weaknesses that may be identified or to respond to any regulatory investigations or
proceedings.
We are also subject to complex tax laws, regulations, accounting principles and interpretations thereof. The preparation of our
financial statements requires us to interpret accounting principles and guidance and make estimates and judgments that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as
well as the reported revenue generated, and expenses incurred during the reporting periods. Our interpretations, estimates and judgments
are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of
which form the basis for the preparation of our financial statements. U.S. generally accepted accounting principles (“GAAP”)
presentation is subject to interpretation by the SEC, the Financial Accounting Standards Board and various other bodies formed to
interpret and create appropriate accounting principles and guidance. In the event that one of these bodies disagrees with our accounting
recognition, measurement or disclosure or any of our accounting interpretations, estimates or assumptions, it may have a significant
effect on our reported results and may retroactively affect previously reported 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 employees from managing our business, result in material
changes to our historical and future financial results, result in investors losing confidence in our operating results, subject us to securities
class action litigation, and cause our stock price to decline.
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Our employees or third party providers, or employees or third party providers of our portfolio companies may engage in misconduct
or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.
We are exposed to the risk of fraud or other misconduct by employees, third party providers, or employees or third party providers of
our portfolio companies. Misconduct by employees, third party providers, or employees or third party providers of our portfolio
companies could include intentional failures to comply with applicable regulations, provide accurate information to regulatory
authorities, comply with federal and state fraud and abuse laws and regulations, report financial information or data accurately or
disclose unauthorized activities to us. In particular, the health care industry is subject to extensive laws and regulations intended to
prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. It is not always possible to identify and deter misconduct
by employees, third party providers, or employees or third party providers of our portfolio companies, and the precautions we take to
detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from
governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with these laws or regulations. If
any such actions are instituted against us, 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
and proceedings incident to the ordinary course of, or otherwise in connection with, our business. In addition, agreements entered into by
us sometimes include indemnification provisions which may subject us to costs and damages in the event of a claim against an
indemnified third party.
Regardless of the merit of particular claims, litigation may be expensive, time-consuming, disruptive to our operations and
distracting to management. In recognition of these considerations, we may enter into agreements or other arrangements to settle litigation
and resolve such disputes. No assurance can be given that such agreements can be obtained on acceptable terms or that litigation will not
occur. These agreements may 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 of
management’s expectations, our consolidated financial statements for that reporting period could be materially adversely affected.
Further, such an outcome could result in significant compensatory, punitive or trebled monetary damages, disgorgement of revenue or
profits, remedial corporate 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
all types of claims that may arise.
Failure to comply with the U.S. Foreign Corrupt Practices Act, or “FCPA”, as well as the anti-bribery laws of the nations in which
we conduct business, could subject us to penalties and other adverse consequences.
We are subject to the FCPA, which generally prohibits U.S. companies from engaging in bribery or other prohibited payments to
foreign officials for 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 may engage in prohibited conduct without our knowledge under our policies and procedures and the FCPA and other anti-
bribery laws that we may be subject to for which we may be held responsible. If our employees or other agents are found to have
engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our
business, financial condition and results of operations.
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,
imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, puts into effect
the migration from a “worldwide” system of taxation to a territorial system and modifies or repeals many business deductions and
credits.
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The TCJA is a complex revision to the U.S. federal income tax laws with disparate and, in some cases, countervailing impacts on
different categories of taxpayers and industries, and will require subsequent rulemaking and interpretation in a number of areas. The
long-term impact of the TCJA on the overall economy, the industries in which we operate and our and our partners business cannot be
reliably predicted at this early stage of the new law’s implementation. There can be no assurance that the TCJA will not negatively
impact our operating results, financial condition, 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 actual results and our further analysis of the new law. The impact of the TCJA
on holders of common stock is uncertain and could be materially adverse. 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 common stock.
The widespread outbreak of an illness or any other communicable disease, or any other public health crisis, could adversely affect
our business, results of operations and financial condition.
The outbreak of the novel coronavirus (“COVID-19”) has negatively impacted the global economy, disrupted global supply chains,
and created significant volatility and disruption of financial markets. At this time, based on the information available to us, we cannot
accurately predict the extent of the impact, if any, of the COVID-19 pandemic on our royalty revenues derived from GSK upon which we
significantly rely, or on the operations of our equity and other investments. The Company is closely monitoring developments related to
the COVID-19 pandemic to assess its impact on the Company’s business. It is possible that an extended period of global supply chain
and economic disruption could materially affect our results of operations and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters consist of a lease of 2,111 square feet of office space in Burlingame, California, which expires in November 2022.
We do not own or lease any other properties.
ITEM 3. LEGAL PROCEEDINGS
In May 2019, Theravance Biopharma, which is the owner of 85% of the economic interests in TRC, initiated arbitration against the
Company and TRC, relating to a dispute as to the determination by Innoviva (as manager of TRC) to cause TRC to explore potential
reinvestment opportunities for the royalty proceeds received by GSK into initiatives that Innoviva believes will increase the value of
TRC and TRELEGY® ELLIPTA®. Theravance Biopharma alleged that, in causing TRC to not distribute substantially all royalty
proceeds received from GSK, Innoviva breached the limited liability company operating agreement governing TRC (the “Operating
Agreement”), as well as the fiduciary duties applicable to Innoviva as manager of TRC. The hearing in respect of the arbitration was
conducted from July 23, 2019 through July 25, 2019. Post-arbitration oral argument was heard on August 14, 2019. On September 26,
2019, the arbitrator issued a final decision. The arbitrator ruled that Innoviva did not breach the Operating Agreement or its fiduciary
duties by withholding royalties or pursuing reinvestment opportunities. Accordingly, the Company is permitted to continue to pursue
development and commercialization initiatives. The arbitrator did conclude that Innoviva breached a provision of the Operating
Agreement requiring Innoviva to deliver quarterly financial plans to Theravance Biopharma. However, the arbitrator concluded that this
technical breach did not cause any damages to Theravance Biopharma and the arbitrator awarded limited injunctive relief to expand and
clarify the disclosure obligations under the Operating Agreement related to the delivery of financial plans and the pursuit of investment
opportunities (if those opportunities related to TRELEGY® ELLIPTA®). Finally, the arbitrator ruled that the Company is entitled to
indemnification from TRC for 95% of its fees and expenses incurred in connection with the arbitration.
On September 30, 2019, the Company and TRC filed a Verified Complaint in the Court of Chancery of the State of Delaware
(“Court of Chancery”) to confirm the arbitration award. The award was confirmed by the Court of Chancery on May 4, 2020.
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On July 16, 2020, Innoviva and TRC initiated a lawsuit in the Court of Chancery against Theravance Biopharma, seeking a
permanent injunction preventing Theravance Biopharma from interfering with Innoviva's ability to cause TRC to reserve cash to pursue
non-Trelegy related investment opportunities and a declaration that the arbitration award conclusively established that Innoviva, as
manager of TRC, has such authority. The Court of Chancery directed the parties to obtain the arbitrator's opinion as to whether the
arbitration award addressed non-Trelegy related investment opportunities. On July 31, 2020, the arbitrator, while reiterating that Innoviva
has broad authority as manager of TRC, found that his award did not specifically address this situation. Accordingly, on August 5, 2020,
the parties stipulated to the dismissal of the Court of Chancery action.
On October 6, 2020, Theravance Biopharma initiated a new arbitration against the Company and TRC, challenging Innoviva’s
authority as manager of TRC to cause TRC to pursue non-Trelegy related investment opportunities and again alleging that Innoviva is
required to cause TRC to distribute substantially all royalty proceeds from GSK. An arbitration hearing is scheduled for the first quarter
of 2021.
The Company intends to vigorously defend against the allegations in the new arbitration demand, but there can be no assurances that
the defense will be successful.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock was traded on Nasdaq under the symbol “THRX” from October 5, 2004 until January 8, 2016. Upon changing
our corporate name to Innoviva, Inc. on January 7, 2016, we changed the stock ticker symbol to “INVA” effective January 11, 2016.
Holders
As of February 12, 2021, there were 72 stockholders of record of our common stock. As many of our shares of common stock are
held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented
by these record holders.
Purchases of Equity Securities by the Issuer
There were no purchases made by the Company of its own equity securities for the year ended December 31, 2020.
Stock Performance Graph
The graph set forth below compares the cumulative total stockholder return on our common stock for the period commencing on
December 31, 2015 and ending on December 31, 2020, with the cumulative total return of (i) the Nasdaq Composite Index, (ii) the
Nasdaq S&P Small Cap 600 Pharma Index and (iii) the Nasdaq Biotechnology Index over the same period. This graph assumes the
investment of $100.00 on December 31, 2015 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
graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock.
Information used in the graph was obtained from sources believed to be reliable including Nasdaq, Bloomberg and Reuters, but we are
not responsible for any errors or omissions in such information.
Notwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, that might incorporate this Annual Report on Form 10-K or future filings
made by us under those statutes, this Stock Performance Graph section shall not be deemed filed with the SEC and shall not be deemed
incorporated by reference into any of those prior filings or into any future filings made by us under those statutes.
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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Innoviva, Inc., the Nasdaq Composite Index, Nasdaq Biotechnology Index, and Nasdaq S&P Small Cap 600 Pharma Index.
* $100 invested on December 31, 2015 in stock or index, including reinvestment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
We have early adopted the amendment to Regulation S-K Item 301 issued by the SEC effective February 10, 2021, eliminating the
requirements to provide selected financial data and supplementary financial data.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management’s Discussion and Analysis (“MD&A”) is intended to facilitate an understanding of our business and results of
operations. This discussion and analysis should be read in conjunction with our consolidated financial statements and notes included in
this Annual Report on Form 10-K. The information contained in this discussion and analysis or set forth elsewhere in this Annual Report
on Form 10-K, including information with respect to our plans and strategy for our business, our operating expenses, and future
payments under our collaboration agreements, includes forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such 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 actual results to differ materially from the results described in or implied by the forward-
looking statements contained in the following discussion and analysis. See the section entitled “Special Note Regarding Forward
Looking Statements” above for more information.
Management Overview
Innoviva, Inc. (“Innoviva”, the “Company”, the “Registrant” or “we” and other similar pronouns) is a company with a portfolio of
royalties and other healthcare assets. Our royalty portfolio contains respiratory assets partnered with Glaxo Group Limited (“GSK”),
including RELVAR ®/BREO ® ELLIPTA ® (fluticasone furoate/ vilanterol, “FF/VI”), ANORO ® ELLIPTA ® (umeclidinium bromide/
vilanterol, “UMEC/VI”) and TRELEGY ® ELLIPTA ® (the combination FF/UMEC/VI). Under the Long-Acting Beta2 Agonist
(“LABA”) Collaboration Agreement, Innoviva is entitled to receive royalties from GSK on sales of RELVAR®/BREO ® ELLIPTA ® as
follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion; and royalties
from the sales of ANORO ® ELLIPTA ® which tier upward at a range from 6.5% to 10%. Innoviva is also entitled to 15% of royalty
payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory
Company, LLC (“TRC”), including TRELEGY ® ELLIPTA ® and any other product or combination of products that may be discovered
or developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein
as the “GSK Agreements”), which have been assigned to TRC other than RELVAR ®/BREO ® ELLIPTA ® and ANORO ® ELLIPTA ®.
Our company structure and organization are tailored to our focused activities of managing our respiratory assets partnered with
GSK, including the commercial and developmental obligations associated with the GSK Agreements, optimizing capital allocation, and
providing for certain essential reporting and management functions of a public company. As of December 31, 2020, we had five
employees. Our revenues consist of royalties from our respiratory partnership agreements with GSK.
Financial Highlights
In the year ended December 31, 2020, the net income attributable to Innoviva stockholders was $224.4 million, an increase of $67.1
million from net income of $157.3 million in the year ended December 31, 2019, primarily due to the $50.3 million of change in fair
values of equity and other long-term investments recognized in the year ended December 31, 2020 as further described below. Cash, cash
equivalents, and marketable securities totaled $246.5 million, total value of our equity and other long-term investments was $438.3
million, and royalty receivable was $93.9 million as of December 31, 2020.
Collaborative Arrangements with GSK
LABA Collaboration
In November 2002, we entered into LABA collaboration with GSK to develop and commercialize once-daily LABA products for
the treatment of COPD and asthma (the “LABA Collaboration Agreement”). For the treatment of COPD, the collaboration has developed
three combination products:
● RELVAR®/BREO® ELLIPTA® (“FF/VI”) (BREO® ELLIPTA® is the proprietary name in the U.S. and Canada and RELVAR®
ELLIPTA® is 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, vilanterol (VI), and
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● TRELEGY® ELLIPTA® (the combination FF/UMEC/VI), a once-daily combination medicine consisting of an ICS, LAMA and
LABA.
As a result of the launch and approval of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® in the U.S., Japan and Europe, in
accordance with the LABA Collaboration Agreement, we paid milestone fees to GSK totaling $220.0 million during the year ended
December 31, 2014. Although we have no further milestone payment obligations to GSK pursuant to the LABA Collaboration
Agreement, we continue to have ongoing commercialization activities under the LABA Collaboration Agreement, including participation
in the joint steering committee and joint project committee that are expected to continue over the life of the agreement. The milestone
fees paid to GSK were recognized as capitalized fees paid to a related party, which are being amortized over their estimated useful lives
commencing upon the commercial launch of the products.
We are entitled to receive royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows: 15% on the first $3.0 billion of
annual global net sales and 5% for all annual global net sales above $3.0 billion. For other products combined with a LABA from the
LABA collaboration, such as ANORO® ELLIPTA®, royalties are upward tiering and range from 6.5% to 10%.
We are also entitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since
assigned to TRC in connection with the Spin-off including TRELEGY® ELLIPTA®, which royalties are upward tiering and range from
6.5% to 10%.
2004 Strategic Alliance
In March 2004, we entered into the Strategic Alliance Agreement with GSK where GSK received an option to license exclusive
development and commercialization rights to product candidates from certain of our discovery programs on pre-determined terms and on
an exclusive, worldwide basis. In 2005, GSK licensed our MABA program for the treatment of COPD, and in October 2011, we and
GSK expanded the MABA program by adding six additional Innoviva-discovered preclinical MABA compounds (the “Additional
MABAs”). The development program was funded in full by GSK. In June of 2020, GSK terminated the program and agreed to pay a
$10.0 million termination fee to TRC. This fee was recognized as revenue from collaborative arrangements with a related party on our
consolidated statements of income for the year ended December 31, 2020.
Strategic Partnership with Sarissa Capital
Strategic Advisory Agreement
On December 11, 2020, we entered into a Strategic Advisory Agreement (the “Services Agreement”) with Sarissa Capital
Management LP (“Sarissa Capital”), pursuant to which Sarissa Capital provides a variety of strategic services to us in order to assist us in
the development and execution of our acquisition strategy. The services shall be provided free of charge to us. Sarissa Capital is
considered to be a related party due to its investment in Innoviva and its representation on our Board of Directors.
Partnership Agreement
On December 11, 2020, Innoviva Strategic Partners LLC, our wholly owned subsidiary (“Strategic Partners”), entered into a
subscription agreement (the “Subscription Agreement”) and an Amended and Restated Limited Partnership Agreement (the “Partnership
Agreement”) pursuant to which Strategic Partners became a limited partner of ISP Fund LP (the “Partnership”). The general partner of
the Partnership (the “General Partner”) is an affiliate of Sarissa Capital and, pursuant to an investment management agreement, Sarissa
Capital acts as the investment adviser to the Partnership. Strategic Partners made a $300 million initial contribution into the Partnership.
The Partnership was formed for the purposes of investing in “long-only” securities in the healthcare, pharmaceutical and biotechnology
industries. The Partnership Agreement provides for Sarissa Capital to receive a customary one percent management fee from the
Partnership, payable quarterly in advance, measured based on the Net Asset Value of Strategic Partners’ capital account in the
Partnership. In addition, the General Partner is entitled to a customary 10% annual performance allocation based on the Net Profits of the
Partnership during the annual measurement period. The Partnership Agreement includes a lock-up period of thirty-six months after
which Strategic Partners is entitled to make withdrawals from the Partnership as of such lock-up expiration date and each anniversary
thereafter, subject to certain limitations.
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Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements,
which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date
of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates
are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies
discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas
involving management’s judgments and estimates.
Revenue Recognition
Revenue is recognized when our customer obtains control of promised goods or services, in an amount that reflects the consideration
which we expect to receive in exchange for those goods or services. Revenue is recognized through a five-step process: (i) identify the
contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price for the contract;
(iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) a performance
obligation is satisfied. We recognize our royalty revenue on net sales of products with respect to which we have contractual royalty rights
in the period in which the royalties are earned and reported to us. Royalties are recognized net of amortization of capitalized fees
associated with any approval and launch milestone payments made to GSK.
Under the GSK Agreements, we recognized net revenue of $326.8 million for the year ended December 31, 2020 and $261.0 million
for each of the years ended December 31, 2019 and 2018. We also recognized a $10.0 million termination fee related to the MABA
program with GSK as revenue from collaborative arrangements with a related party on our consolidated statements of income for the
year ended December 31, 2020.
Capitalized Fees paid to a Related Party
We capitalize fees paid to licensors related to agreements for certain approved products or commercialized products (“Capitalized
Fees”). Our gross Capitalized Fees of $220.0 million as of December 31, 2020 consist of registrational and launch-related milestone fees
paid to GSK. We capitalized these fees as capitalized fees paid to a related party and amortize these Capitalized Fees on a straight-line
basis over their estimated useful lives upon the commercial launch of the products. The estimated useful lives of these Capitalized Fees
are based on a country-by-country and product-by-product basis, as the later of the expiration or termination of the last patent right
covering the compound in such product in such country and 15 years from first commercial sale of 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 these Capitalized Fees is recognized as a reduction of royalty revenue.
Amortization expense for each of the years ended December 31, 2020, 2019, and 2018 was $13.8 million. The remaining estimated
amortization expense is $13.8 million for each of the years from 2021 to 2025 and $56.3 million thereafter.
We review our Capitalized Fees for impairment on a product-by-product basis for each major geographic area when events or
changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The recoverability of Capitalized Fees
is measured by comparing the asset’s carrying amount to the expected undiscounted future cash flows that the asset is expected to
generate. The determination of 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 and long-term projected sales in the corresponding market. Based upon our analyses, no impairment
charges have been recorded on the Capitalized Fees as of December 31, 2020.
Variable Interest Entities
We evaluate our ownership, contractual and other interest in the entities that we invest in to determine if they are variable interest
entities (“VIEs”), whether we have a variable interest in those entities and the nature and extent of those interests. Such evaluation is
performed continually throughout the entire period when we stay involved with these entities. Based on our evaluation, if we determine
we are the primary beneficiary of a VIE, we consolidate the entity’s financial results into our financial statements.
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We consolidate the financial results of TRC and Pulmoquine Therapeutics, Inc. (“Pulmoquine”), which we have determined to be
VIEs, because we have the power to direct the economically significant activities of these entities and the obligation to absorb losses of,
or the right to receive benefits from them, and we are the primary beneficiary of the entities. We also consolidate the financial results of
ISP Fund LP that we partner with Sarissa Capital because we have determined that the Partnership is a VIE and Strategic Partners is the
primary beneficiary of this VIE.
Equity and Other Long-Term Investments
As part of our capital allocation strategies, we invest from time to time in equity securities of private or public companies. We also
enter into strategic partnerships in order to accelerate the execution of our strategy and enhance returns on our capital. If we determine
that we have control over these companies or partnerships, we consolidate the financial statements of the company or partnership. If we
determine that we do not have control over these companies or partnerships under either voting or VIE models, we then determine if we
have an ability to exercise significant influence via voting interests, board representation or other business relationships.
We may account for the equity investments where we exercise significant influence using either an equity method of accounting or
at fair value by electing the fair value option under Accounting Standards Codification ("ASC") Topic 825, Financial Instruments. If the
fair value option is applied to an investment that would otherwise be accounted for under the equity method, we apply it to all our
financial interests in the same entity (equity and debt, including guarantees) that are eligible items. All gains and losses from fair value
changes, unrealized and realized, are presented as changes in fair values of equity investments, net on the consolidated statements of
income.
If we conclude that we do not have an ability to exercise significant influence over an investee, we may elect to account for an equity
security without a readily determinable fair value using the measurement alternative as prescribed by ASC Topic 825. This measurement
alternative allows us to measure the equity investment at its cost minus impairment, if any, plus or minus changes resulting from
observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
Equity investments in common stock and warrants of Armata Pharmaceuticals, Inc. (NYSE American: ARMP) (“Armata") and
Entasis Therapeutics Holdings Inc. (NASDAQ: ETTX) ("Entasis”) are accounted for at fair value. The equity investments are included in
equity and other long-term investments on the consolidated balance sheets.
In October of 2020, TRC acquired 20,469,432 shares of Series C preferred stock and warrants to purchase 5,117,358 shares of
InCarda Therapeutics Inc. (“InCarda”) in the total amount of $15.0 million. The Series C preferred stock is accounted for using the
measurement alternative and the warrants are recorded at fair value using the Black-Scholes-Merton pricing model. The InCarda Series C
preferred stock and warrants are included in equity and other long-term investments on the consolidated balance sheets.
Investments held in the ISP Fund LP by Strategic Partners pursuant to the Partnership Agreement are accounted for at fair value and
included in equity and other long-term investments on our consolidated balance sheets.
Fair Value of Stock-Based Compensation Awards
We use the Black-Scholes-Merton option pricing model to estimate the fair value of options as of the date of grant. The Black-
Scholes-Merton 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. We use our historical volatility to estimate expected stock price volatility. The estimated fair value of the option is
expensed on a ratable basis over the expected term of the grant.
We determine the fair value of RSUs and RSAs based on the fair market values of the underlying stock on the dates of grant. The
fair value of service based RSUs and RSAs is expensed on a ratable or straight-line basis over the expected term of the vesting. The fair
value of performance-contingent RSUs and RSAs is expensed using an accelerated method over the requisite service period based on
management’s best estimate as to whether it is probable that the shares awarded are expected to vest. We assess the probability of the
performance indicators being met on a continuous basis. The grant date fair value of the RSUs and RSAs with a market condition is
determined using a Monte Carlo valuation model and the compensation expense is recognized over the implied service period.
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Stock-based compensation expense was calculated based on awards ultimately expected to vest and was reduced for estimated
forfeitures as of the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates. The
estimated annual forfeiture rates for stock options, RSUs and RSAs are based on our historical forfeiture experience.
For more information, refer to Note 7, “Stock-Based Compensation,” to the consolidated financial statements appearing in this
Annual Report on Form 10-K.
Income Taxes
We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax
rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more
likely than not that some portion or all of a deferred tax asset will not be realized.
Accounting for Convertible Senior Notes Due 2025
On August 7, 2017, we completed a private placement of $192.5 million aggregate principal amount of our 2025 Notes. Due to our
ability to settle the conversion obligation of the 2025 Notes in cash, common stock or a combination of cash and common stock, at our
option, we separately account for the liability and equity components of the 2025 Notes by allocating the proceeds between the liability
component and the embedded conversion option (“equity component”). The carrying amount of the liability component was calculated
by measuring the fair value of a similar liability that does not have an associated convertible feature using the income approach. The
allocation was performed in a manner that reflected our non-convertible debt borrowing rate for similar debt. The equity component of
the 2025 Notes of $67.3 million was recognized as a debt discount and represents the difference between the proceeds from the issuance
of the 2025 Notes and the fair value of the liability of the 2025 Notes on the date of issuance. The excess of the principal amount of the
liability component over its carrying amount (“debt discount”) is amortized to interest expense using the effective interest method. The
equity component is not remeasured as long as it continues to meet the conditions for equity classification.
Results of Operations
Net Revenue
Total net revenue, as compared to the prior years, was as follows:
(In thousands)
Royalties from a related
party — RELVAR/BREO
Royalties from a related party — ANORO
Royalties from a related party — TRELEGY
Total royalties from a related party
Less: amortization of capitalized fees paid to a
related party
Royalty revenue
Strategic alliance — MABA program
Total net revenue from GSK
* Not Meaningful
Year Ended December 31,
2019
2018
2020
Change
2020
2019
$
%
$
%
$ 221,536
45,992
73,089
340,617
$ 189,424
42,625
42,790
274,839
$ 220,162
41,286
13,379
274,827
$ 32,112
3,367
30,299
65,778
(13,823)
326,794
10,000
$ 336,794
(13,823)
261,016
(13,823)
261,004
—
$ 261,016
$ 261,004
—
65,778
— 10,000
$ 75,778
17 % $ (30,738)
1,339
8
29,411
71
12
24
—
25
—
29 % $
—
12
—
12
(14)%
3
*
—
—
—
—
— %
Total net revenue increased to $336.8 million for the year ended December 31, 2020, compared to the year ended December 31,
2019. Royalties for RELVAR®/BREO® ELLIPTA® increased due to favorable adjustments from better than expected pricing and
continued volume growth in both the U.S. and non-U.S. markets. ANORO® ELLIPTA® maintained its steady volume growth, offset by
the increasing pricing pressure in the U.S. Royalties for TRELEGY®ELLIPTA® were higher due to the continued growth in prescriptions
and market share.
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Total 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. and non-U.S. markets. The decrease was offset by continued growth in prescriptions and market share for TRELEGY®
ELLIPTA®. Royalties for ANORO® ELLIPTA® increased slightly year over year.
Research & Development
Research and development (“R&D”) expenses of $1.8 million for the year ended December 31, 2020 were attributable to
Pulmoquine’s product development efforts.
We did not incur R&D expenses during the years ended December 31, 2019 and 2018.
General & Administrative
General and administrative expenses, as compared to the prior years, were as follows:
(In thousands)
General and administrative
General and administrative - related party
* Not Meaningful
Year Ended December 31,
2019
$ 14,656
2020
$ 13,883
—
—
2018
$ 20,053
2,700
Change
2020
2019
$
$
(773)
—
%
$
%
(5)% $ (5,397)
(2,700)
*
(27)%
*
General and administrative expenses decreased by $0.8 million for the year ended December 31, 2020, compared to the year ended
December 31, 2019, mainly attributable to lower operating expenses incurred. The amount for the year ended December 31, 2020
included $2.1 million fees related to due diligence efforts associated with various investments and $1.7 million legal and related fees for
the arbitration initiated by Theravance Biopharma against the Company and TRC.
General and administrative expenses decreased by $5.4 million for the year ended December 31, 2019, compared to the year ended
December 31, 2018, mainly attributable to lower personnel-related expenses as a result of lower headcount. The amount for the year
ended December 31, 2019 included $3.1 million legal and related fees for the arbitration initiated by Theravance Biopharma against the
Company and TRC, of which $3.0 million was accounted for as TRC’s expenses and consolidated in the Company’s consolidated
statements of income.
The amount for the year ended December 31, 2018 included $5.7 million cash severance costs in connection with certain members
of senior management’s separation from the Company and payment of $2.7 million to Sarissa pursuant to a settlement agreement in
February 2018.
Other Expense, net, and Interest Income
Other expense, net, and interest income, as compared to the prior years, were as follows:
(In thousands)
Other expense, net
Interest income
* Not Meaningful
$
Year Ended December 31,
2019
(345) $ (5,702) $
5,540
2020
(348) $
1,524
1,660
2018
Change
2020
2019
$
%
$
%
(3)
(4,016)
1 % $ 5,357
3,880
(72)
* %
*
Other expense, net for the year ended December 31, 2018, mainly consists of the loss on the extinguishment of debt of $5.7 million
in relation to the prepayments of our Term B Loan.
Interest income decreased for the year ended December 31, 2020, compared to the years ended December 31, 2019 and 2018,
primarily due to lower interest rates resulting from the COVID-19 pandemic.
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Interest Expense
Interest expense, as compared to the prior years, was as follows:
(In thousands)
Interest expense
Year Ended December 31,
2019
$ 18,660
2018
$ 23,954
2020
$ 18,331
Change
2020
2019
$
(329)
$
%
$
%
(2) $ (5,294)
(22)%
Interest expense decreased slightly for the year ended December 31, 2020, compared to the prior years primarily due to the lower
average outstanding debt balance. See “Liquidity” section below for further information.
Changes in Fair Values of Equity and Long-Term Investments
The changes in fair values of equity and long-term investments of $50.3 million for the year ended December 31, 2020 reflect the
net unrealized gain in the stock and warrants of our investments in Armata, Entasis, and InCarda, and those equity investments managed
by ISP Fund LP.
Income Taxes
Income tax benefit (expense), net, as compared to the prior years, was as follows:
(In thousands)
Income tax benefit (expense), net
* Not Meaningful
Year Ended December 31,
2019
$ (60,431) $ (41,902) $ 196,073
2018
2020
Change
2020
2019
$
$ (18,529)
%
44
$
$ (237,975)
%
*
As of December 31, 2020, 2019 and 2018, we had net operating loss carryforwards for federal income taxes of $0.4 billion, $0.6
billion, and $0.8 billion, respectively. As of December 31, 2020, 2019 and 2018, we had federal research and development tax credit
carryforwards of $43.6 million, $44.4 million, and $44.8 million, respectively.
For the year ended December 31, 2020 and 2019, we recognized $60.4 million and $41.9 million of income tax expense,
respectively, based on the taxable income generated during those years.
For the year ended December 31, 2018, we released our valuation allowance on deferred tax assets and recognized $196.1 million of
income tax benefit. We had total unrecognized tax benefits of $15.2 million as of December 31, 2020. Total unrecognized tax benefits
that, if recognized, would affect our effective tax rate were $8.0 million as of December 31, 2020. Our total unrecognized tax benefits as
of December 31, 2019 and 2018 were $15.3 million and $15.4 million, respectively.
Utilization of net operating loss and tax credit carryforwards is subject to rules, provided by the Internal Revenue Code and similar
state provisions, governing annual limitations tied to ownership changes. We conducted an analysis through September 30, 2020 to
determine whether an ownership change had occurred since inception. The study concluded that it is more likely than not that the
Company did not experience an ownership change during the testing period. However, notwithstanding the applicable annual limitations,
we estimate that no portion of the net operating loss or credit carryforwards will expire before becoming available to reduce federal and
state income tax liabilities. Annual limitations may result in expiration of net operating loss and tax credit carryforwards before some or
all of such amounts have been utilized.
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Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest, as compared to the prior years, was as follows:
(In thousands)
Net income attributable to noncontrolling interest
* Not Meaningful
2020
$ 69,412
Year Ended December 31,
2019
$ 33,705
2018
$ 11,272
Change
2020
2019
$
$ 35,707
%
*
$
$ 22,433
%
*
Net income attributable to noncontrolling interest represents the 85% share of net income in Theravance Respiratory Company, LLC
for Theravance Biopharma. The year over year increases were primarily due to the growth in prescriptions and market share for
TRELEGY® ELLIPTA®.
Liquidity and Capital Resources
Liquidity
Since our inception, we have financed our operations primarily through private placements and public offerings of equity and debt
securities and payments received under collaborative arrangements. For the year ended December 31, 2020, we generated gross royalty
revenues from GSK of $340.6 million. Net cash and cash equivalents, short-term investments and marketable securities totaled $246.5
million, and royalties receivable from GSK totaled $93.9 million, as of December 31, 2020.
In January 2013, we completed an underwritten public offering of $287.5 million aggregate principal amount of unsecured
convertible subordinated notes, which will mature on January 15, 2023. In connection with the offering of the 2023 Notes, we entered
into two privately negotiated capped call option transactions with a single counterparty. The capped call option transaction is an
integrated instrument consisting of a call option on our common stock purchased by us with a strike price equal to the initial conversion
price of $27.79 per share for the underlying number of shares and a cap price of $38.00 per share, both of which are subject to
adjustments consistent with the 2023 Notes. 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 was adjusted in total to 50.5818 shares of our common stock per
$1,000 principal amount of the 2023 Notes, which represents a conversion price of approximately $19.77 per share. As a result of the
conversion rate adjustments, the capped call strike price and 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.
On August 7, 2017, we completed a private placement of $192.5 million aggregate principal amount of our 2025 Notes. The
proceeds include the 2025 Notes sold pursuant to the $17.5 million over-allotment option granted by us to the initial purchasers, which
option was exercised in full. The 2025 Notes were sold in a private placement to qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended (the “Securities Act”). The 2025 Notes will mature on August 15, 2025, unless repurchased
or converted in accordance with their terms prior to such date. Concurrently with the pricing of the offering, we repurchased and retired
1,317,771 shares of our common stock for approximately $17.5 million of the net proceeds from the offering, in privately negotiated
transactions effected through one of the initial 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 a portion of the principal outstanding under the 2029 Notes on August 15, 2017.
On August 18, 2017, we entered into a Credit Agreement and completed a financing of the $250.0 million Term B Loan, the
proceeds of which were used to repay the remaining balance of the 2029 Notes. The Term B Loan was fully paid off in December 2019,
almost three years ahead of its maturity in 2022.
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Adequacy of Cash Resources to Meet Future Needs
We believe that cash from projected future royalty revenues and our cash, cash equivalents and marketable securities will be
sufficient to meet our anticipated debt service and operating needs for at least the next 12 months based upon current operating plans and
financial forecasts. If our current operating plans and financial forecasts change, we may require additional funding sooner in the form of
public or private equity offerings or debt financings. Furthermore, if in our view favorable financing opportunities arise, we may seek
additional funding at any time. However, future financing may not be available in amounts or on terms acceptable to us, if at all. This
could leave us without adequate financial resources to fund our operations as currently planned. In addition, from time to time we may
restructure or reduce our debt, including through tender offers, redemptions, amendments, repurchases or otherwise, all allowable with
the terms of our debt agreements.
Cash Flows
Cash flows, as compared to the prior years, were as follows:
(In thousands)
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash used in financing activities
Cash Flows from Operating Activities
2020
$ 313,113
(314,937)
(29,785)
Year Ended December 31,
2019
$ 257,458
(18,003)
(23,776)
2018
$ 223,531
3,519
(237,969)
Change
$
2020
55,655
(296,934)
(6,009)
$
2019
33,927
(21,522)
214,193
Cash provided by operating activities for the year ended December 31, 2020 was $313.1 million, consisting primarily of our net
income of $293.8 million, adjusted for non-cash items such as $60.4 million of deferred income taxes, $13.8 million of depreciation and
amortization, $8.4 million amortization of debt discount and issuance costs, $1.7 million of stock-based compensation expense, partially
offset by a $50.3 million increase in the fair values of our equity investments and an increase in receivables from collaborative
arrangements of $14.5 million.
Cash 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-based compensation expense, partially offset by an increase in receivables from collaborative arrangements of $12.7 million.
Cash Flows from Investing Activities
Net cash used in investing activities for the year ended December 31, 2020 of $314.9 million was primarily due to $400.9 million in
purchases of common stock, warrants, money market funds and other marketable securities, partially offset by $86.0 million of proceeds
received from maturities of marketable securities.
Net cash used in investing activities for the year ended December 31, 2019 of $18.0 million was primarily due to $231.9 million in
purchases 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 of
proceeds received from maturities of marketable securities, partially offset by $71.9 million in purchases of marketable securities.
Cash Flows from Financing Activities
Net cash used in financing activities for the year ended December 31, 2020 of $29.8 million was primarily due to $30.5 million
distributions to noncontrolling interest.
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Net cash used in financing activities for the year ended December 31, 2019 of $23.8 million was primarily due to $13.8 million
payment for paying 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 in
prepayments on our Term B Loan, $6.0 million distributions to noncontrolling interest and $3.1 million payments for the repurchase of
shares to satisfy tax withholding.
Off-Balance Sheet Arrangements
In June 2014, our facility leases in South San Francisco, California were assigned to Theravance Biopharma. However, if
Theravance Biopharma had defaulted on its lease obligations, we would have been held liable by the landlord and thus, we had in
substance guaranteed the lease payments for these facilities, as well as lease-related payments including utilities, property taxes, and
common area maintenance. This lease concluded in May 2020, and we have no further obligations for the lease.
Commitments and Contingencies
We indemnify our officers and directors for certain events or occurrences, subject to certain limits. We may be subject to
contingencies that may arise from matters such as product liability claims, legal proceedings, shareholder suits and tax matters. As such,
we are unable to estimate the potential exposure related to these indemnification agreements. We have not recognized any liabilities
relating to these agreements as of December 31, 2020.
Contractual Obligations and Commercial Commitments
In the table below, we set forth our significant enforceable and legally binding obligations and future commitments as of
December 31, 2020.
(In thousands)
2023 Notes
2025 Notes
Facility lease
Total
Payment Due by Period
Total
$ 253,786
216,563
232
$ 470,581
Less Than
1 Year
$
$
5,121
4,813
123
10,057
1 ‑ 3 Years
$ 248,665
9,625
109
$ 258,399
3 ‑ 5 Years
$
— $
202,125
—
$
$ 202,125
More Than
5 Years
—
—
—
—
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to interest rate risk related to our portfolio of investments in debt securities and the debt that we have issued. We
account for our investments in debt securities at fair value, with unrealized gains or losses recorded as a component of other
comprehensive income. We believe that our exposure to interest rate risk is not material as all investments other than equity investments
were in money market funds as of December 31, 2020.
We account for our 2023 Notes and 2025 Notes on an amortized cost basis and our recognized value of the debt does not reflect
changes in fair value. Also, because our 2023 Notes and 2025 Notes bear interest at a fixed rate, our cash flows are not subject to
variability as a result of changes in interest rates. However, we do disclose the estimated fair value of our debt and we are exposed to
changes in fair value that may occur as a result of interest rate fluctuations. As of December 31, 2020, based on available pricing
information, the fair values of our 2023 Notes and 2025 Notes were estimated to be $239.8 million and $206.1 million, respectively. The
2023 Notes and 2025 Notes bear interest at a fixed rate of 2.125% and 2.5%, respectively. Information about the contractual maturities of
our debt is disclosed in the table within the Contractual Obligations and Commercial Commitments section of Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets as of December 31, 2020 and December 31, 2019
Consolidated Statements of Income for each of the three years in the period ended December 31, 2020
Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2020
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2020
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2020
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Page
44
45
46
47
48
49
70
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INNOVIVA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
2020
2019
Assets
Current assets:
Cash and cash equivalents
Short-term marketable securities
Related party receivables from collaborative arrangements
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Equity and other long-term investments
Capitalized fees paid to a related party, net
Deferred tax assets, net
Other assets
Total assets
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Accrued personnel-related expenses
Accrued interest payable
Other accrued liabilities
Total current liabilities
Long-term debt, net of discount and issuance costs
Other long-term liabilities
Commitments and contingencies (Note 9)
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, 101,392 and 101,288 issued and
outstanding as of December 31, 2020 and December 31, 2019, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total Innoviva stockholders’ equity
Noncontrolling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
44
$
246,487
$
—
93,931
1,640
342,058
28
438,258
125,253
93,759
214
999,570
66
490
4,152
1,402
6,110
385,517
106
$
$
278,096
72,749
79,427
962
431,234
33
—
139,076
154,171
312
724,826
10
647
4,152
562
5,371
377,120
219
—
—
1,014
1,260,900
—
(722,002)
539,912
67,925
607,837
999,570
$
1,013
1,258,859
27
(946,404)
313,495
28,621
342,116
724,826
$
$
$
Table of Contents
INNOVIVA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Royalty revenue from a related party, net of amortization of capitalized fees paid to a
related party of $13,823 in the years ended December 31, 2020, 2019, 2018, respectively
Revenue from collaborative arrangements with a related party
Total net revenue
Operating expenses:
Research and development
General and administrative
General and administrative - related party
Total operating expenses
Income from operations
Other expense, net
Interest income
Interest expense
Changes in fair values of equity investments
Income before income taxes
Income tax benefit (expense), net
Net income
Net income attributable to noncontrolling interest
Net income attributable to Innoviva stockholders
Basic net income per share attributable to Innoviva stockholders
Diluted net income per share attributable to Innoviva stockholders
Shares used to compute Innoviva basic and diluted net income per share:
Shares used to compute basic net income per share
Shares used to compute diluted net income per share
Year Ended December 31,
2019
2018
2020
$ 326,794
10,000
336,794
$ 261,016
—
261,016
$ 261,004
—
261,004
1,788
13,883
—
15,671
321,123
(348)
1,524
(18,331)
50,277
354,245
(60,431)
293,814
69,412
$ 224,402
2.21
$
2.02
$
—
14,656
—
14,656
246,360
(345)
5,540
(18,660)
—
232,895
(41,902)
190,993
33,705
$ 157,288
1.55
$
1.43
$
—
20,053
2,700
22,753
238,251
(5,702)
1,660
(23,954)
—
210,255
196,073
406,328
11,272
$ 395,056
3.92
$
3.53
$
101,320
113,554
101,150
113,409
100,849
113,408
See accompanying notes to consolidated financial statements.
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Table of Contents
INNOVIVA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Unrealized gain on marketable securities, net
Reclassifications to net income
Comprehensive income
Comprehensive income attributable to noncontrolling interest
Comprehensive income attributable to Innoviva stockholders
$
$
$
$
2020
293,814
—
(27)
293,787
69,412
224,375
Year Ended December 31,
2019
190,993
30
—
191,023
33,705
157,318
$
$
2018
406,328
15
—
406,343
11,272
395,071
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
INNOVIVA, INC.
(In thousands)
Common Stock
Additional
Paid-In
Shares Amount Capital
$ 1,019
—
$ 1,258,151
—
102,046
—
Accumulated
Other
Comprehensive Accumulated
Income (Loss)
Treasury Stock
Shares Amount
Noncontrolling
Interest
Total
Stockholders’
Equity
(150)
—
$ (3,263)
—
$
152
(5,955)
$
(242,707)
(5,955)
Deficit
$ (1,498,748)
—
Balance as of December 31, 2017
Distributions to noncontrolling interest
Exercise of stock options, and issuance of common stock
units and stock awards, net of repurchase of shares to
satisfy tax withholding
Stock-based compensation
Cash dividend forfeited
Retirement of treasury stock
Net income
Other comprehensive income
Balance as of December 31, 2018
Distributions to noncontrolling interest
Exercise of stock options, and issuance of common stock
units and stock awards, net of repurchase of shares to
satisfy tax withholding
Stock-based compensation
Net income
Other comprehensive income
Balance as of December 31, 2019
Distributions to noncontrolling interest
Equity activity of noncontrolling interest from a
consolidated variable interest entity
Exercise of stock options, and issuance of common stock
units and stock awards, net of repurchase of shares to
satisfy tax withholding
Stock-based compensation
Net income
Other comprehensive income
Balance as of December 31, 2020
(798)
—
—
(150)
—
—
101,098
—
(8)
—
—
—
—
—
$ 1,011
—
(1,926)
3,233
72
(3,263)
—
—
$ 1,256,267
—
190
—
—
—
101,288
—
2
—
—
—
$ 1,013
—
536
2,056
—
—
$ 1,258,859
—
—
—
—
104
—
—
—
101,392
1
—
—
—
$ 1,014
343
1,698
—
—
$ 1,260,900
$
$
$
$
(18)
—
—
—
—
—
—
15
(3)
—
—
—
—
30
27
—
—
—
—
—
—
395,056
—
$ (1,103,692)
—
—
—
157,288
—
(946,404)
—
$
—
—
—
150
—
—
— $
—
—
—
—
3,263
—
—
— $
—
—
—
—
—
— $
—
—
—
—
—
— $
—
—
—
—
—
—
—
(27)
— $
—
—
224,402
—
(722,002)
—
—
—
—
— $
—
—
—
—
— $
—
—
—
—
11,272
—
5,469
(10,553)
—
—
33,705
—
28,621
(30,474)
366
—
—
69,412
—
67,925
$
$
$
(1,934)
3,233
72
—
406,328
15
159,052
(10,553)
538
2,056
190,993
30
342,116
(30,474)
366
344
1,698
293,814
(27)
607,837
See accompanying notes to consolidated financial statements.
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INNOVIVA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes
Depreciation and amortization
Stock-based compensation
Amortization of debt discount and issuance costs
Loss on write-off of property and equipment
Loss on extinguishment of debt
Amortization of discount on short-term investments
Amortization of lease guarantee
Changes in fair values of equity investments
Other non-cash items
Changes in operating assets and liabilities:
Receivables from collaborative arrangements
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued personnel-related expenses and other accrued liabilities
Accrued interest payable
Other long-term liabilities
Net cash provided by operating activities
Cash flows from investing activities
Maturities of marketable securities
Purchases of marketable securities
Purchases of equity and other long term investments
Purchases of property and equipment
Net cash provided by (used in) investing activities
Cash flows from financing activities
Repurchase of shares to satisfy tax withholding
Payments of principal on senior secured term loans
Payments of cash dividends to stockholders
Proceeds from issuances of common stock, net
Net proceeds from the issuance of variable interest entity's equity
Distributions to noncontrolling interest
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information
Cash paid for interest
Year Ended December 31,
2019
2018
2020
$
293,814
$
190,993
$
406,328
60,420
13,840
1,698
8,397
—
—
(343)
(135)
(50,277)
21
(14,504)
(678)
—
56
804
—
—
313,113
86,000
(12,943)
(387,981)
(13)
(314,937)
41,875
13,874
2,056
7,799
104
216
(2,229)
(325)
—
—
3,859
(113)
27
(1)
(439)
(112)
(126)
257,458
213,924
(231,915)
—
(12)
(18,003)
(92)
—
—
436
345
(30,474)
(29,785)
(31,609)
278,096
246,487
$
(89)
(13,750)
(11)
627
—
(10,553)
(23,776)
215,679
62,417
278,096
9,933
$
10,974
$
$
$
$
(196,054)
13,872
3,233
7,748
—
5,745
(256)
(325)
—
—
(12,746)
(95)
—
(590)
(1,677)
(1,656)
4
223,531
75,375
(71,856)
—
—
3,519
(3,073)
(230,000)
(80)
1,139
—
(5,955)
(237,969)
(10,919)
73,336
62,417
17,861
See accompanying notes to consolidated financial statements.
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Operations
Innoviva (referred to as “Innoviva”, the “Company”, or “we” and other similar pronouns) is a company with a portfolio of royalties
and other healthcare assets. Our royalty portfolio contains respiratory assets partnered with Glaxo Group Limited (“GSK”), including
RELVAR®/BREO® ELLIPTA® (fluticasone furoate/ vilanterol, “FF/VI”), ANORO® ELLIPTA® (umeclidinium bromide/ vilanterol,
“UMEC/VI”) and TRELEGY® ELLIPTA® (the combination FF/UMEC/VI). Under the Long-Acting Beta2 Agonist (“LABA”)
Collaboration Agreement, Innoviva is entitled to receive royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows: 15%
on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion; and royalties from the sales of
ANORO® ELLIPTA® which tier upward at a range from 6.5% to 10%. Innoviva is also entitled to 15% of royalty payments made by
GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC (“TRC”),
including TRELEGY® ELLIPTA® and any other product or combination of products that may be discovered or developed in the future
under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the “GSK
Agreements”), which have been assigned to TRC other than RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Innoviva and its wholly owned subsidiaries and
variable interest entities for which we are the primary beneficiary. All intercompany balances and transactions have been eliminated in
consolidation. For the consolidated variable interest entities, we record net income attributable to noncontrolling interest on our
consolidated statements of income equal to the percentage of ownership interest retained in such entity by the respective noncontrolling
party.
Use of Management’s Estimates
The preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”)
requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ materially from those estimates. Management evaluates its significant accounting
policies and estimates on an ongoing basis. We base our estimates on historical experience and other relevant assumptions that we
believe to be reasonable under the circumstances. These estimates also form the basis for making judgments about the carrying values of
assets and liabilities when these values are not readily apparent from other sources.
Certain Risks and Concentrations
Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable
securities and equity investments. Although we deposit our cash with multiple financial institutions, our deposits, at times, may exceed
federally insured limits. Refer to “Segment Reporting” below for concentrations with respect to revenues and geographic locations.
Segment Reporting
We operate in a single segment, which is to provide capital return to stockholders by maximizing the potential value of our
respiratory assets partnered with GSK. Revenues are generated from our collaborative arrangements and royalty payments from GSK,
located in Great Britain. Our facilities are located within the United States.
Variable Interest Entities
We evaluate our ownership, contractual and other interest in entities to determine if they are variable interest entities (“VIE”),
whether we have a variable interest in those entities and the nature and extent of those interests. Based on our evaluation, if we determine
we are the primary beneficiary of a VIE, we consolidate the entity in our financial statements.
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Cash and Cash Equivalents
INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We 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 Securities
We invest in short-term investments and marketable securities, primarily corporate notes, government securities, government
agencies, and government commercial papers. We limit the amount of credit exposure with any one issuer, industry or geographic area
for investments other than instruments backed by the U.S. federal government. We classify our marketable securities as available-for-sale
securities and report them at fair value in cash equivalents or short-term marketable securities on the consolidated balance sheets with
related unrealized gains and losses included as a component of stockholders’ equity. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity, which is included in interest income on the consolidated statements of
operations. Realized gains and losses, if any, on available-for-sale securities are included in interest income. The cost of securities sold is
based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest
income.
We regularly review all of our investments for other-than-temporary declines in estimated fair value. Our review includes the
consideration of the cause of the impairment, including the creditworthiness of the security issuers, the number of securities in an
unrealized loss position, the severity 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 will be required to sell the securities before the recovery of their amortized cost basis. When we determine
that the decline in estimated fair value of an investment is below the amortized cost basis and the decline is other-than-temporary, we
reduce the carrying value of the security and record a loss for the amount of such decline to other income (expense), net.
Equity Investments
We invest from time to time in equity securities of private or public companies. If we determine that we have control over these
companies, we include them in our consolidated financial statements. If we determine that we do not have control over these companies
under either voting or VIE models, we then determine if we have an ability to exercise significant influence via voting interests, board
representation or other business relationships.
We may account for the equity investments where we exercise significant influence using either an equity method of accounting or
at fair value by electing the fair value option under Accounting Standards Codification ("ASC") Topic 825, Financial Instruments. If the
fair value option is applied to an investment that would otherwise be accounted for under the equity method, we apply it to all our
financial interests in the same entity (equity and debt, including guarantees) that are eligible items. All gains and losses from fair value
changes, unrealized and realized, are presented as changes in fair values of equity investments, net on the consolidated statements of
income.
If we conclude that we do not have an ability to exercise significant influence over an investee, we may elect to account for an equity
security without a readily determinable fair value using the measurement alternative described in ASC Topic 825. This measurement
alternative allows us to measure the equity investment at its cost minus impairment, if any, plus or minus changes resulting from
observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
Fair Value of Financial Instruments
We define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date.
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from
independent sources, while unobservable inputs reflect our market assumptions. We classify these inputs into the following hierarchy:
Level 1—Quoted prices for identical instruments in active markets.
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that
are not active; 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, and accrued liabilities. Cash equivalents and marketable securities are carried at estimated fair value. The carrying values of
receivables from collaborative arrangements, accounts payable, and accrued liabilities approximate their estimated fair value due to the
relatively short-term nature of these instruments.
Property and Equipment
Property and equipment, which consisted of equipment, computer equipment, software, office furniture and fixtures, was immaterial
as of December 31, 2020 and 2019, respectively.
Property, equipment and leasehold improvements are stated at cost and depreciated using the straight-line method as follows:
Leasehold improvements
Equipment, furniture and fixtures
Software and computer equipment
Shorter of remaining lease terms or useful life
5 - 7 years
3 years
Capitalized Fees Paid to a Related Party
We capitalize fees paid to licensors related to agreements for approved products or commercialized products. We capitalize these
fees as capitalized fees paid to a related party (“Capitalized Fees”) and amortize them on a straight-line basis over their estimated useful
lives upon the commercial launch of the product, shortly after its regulatory approval. The estimated useful lives of these Capitalized
Fees are determined on a country-by-country and product-by-product basis, as the later of the expiration or termination of the last patent
right covering the compound in such product in such country 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 these Capitalized Fees is recognized as a reduction of royalty revenue. We
review our Capitalized Fees for impairment on a product-by-product basis for each major geographic area when events or changes in
circumstances indicate that the carrying amount of such assets may not be recoverable. The recoverability of Capitalized Fees is
measured by comparing the asset’s carrying amount to the expected undiscounted future cash flows that the asset is expected to generate.
The determination of 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 and long-term projected sales in the corresponding market.
Revenue Recognition
Revenue is recognized when our customer obtains control of promised goods or services, in an amount that reflects the consideration
which we expect to receive in exchange for those goods or services. Revenue is recognized through a five-step process: (i) identify the
contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price for the contract;
(iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) a performance
obligation is satisfied.
We recognize the royalty revenue on net sales of products with respect to which we have contractual royalty rights in the period in
which the royalties are earned and reported to us. Royalties are recognized net of amortization of capitalized fees associated with any
approval and launch milestone payments made to GSK.
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value of Stock-Based Compensation Awards
We use the Black-Scholes-Merton option pricing model to estimate the fair value of options granted under our equity incentive plans
and rights to acquire stock granted under our employee stock purchase plan (“ESPP”). The Black-Scholes-Merton option valuation
model requires the use of assumptions, including the expected term of the award and the expected stock price volatility. We use the
“simplified” method as described in Staff Accounting Bulletin No. 107, “Share-Based Payment,” for the expected option term. We use
our historical volatility to estimate expected stock price volatility.
Restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) are measured based on the fair market values of the
underlying stock on the dates of grant.
Stock-based compensation expense is calculated based on awards ultimately expected to vest and is reduced for estimated forfeitures
at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates. Our estimated
annual forfeiture rates for stock options, RSUs and RSAs are based on our historical forfeiture experience.
The estimated fair value of stock options, RSUs and RSAs is expensed on a ratable or straight-line basis over the expected term of
the grant or expected term of the vesting, and the estimated fair value of performance-contingent RSUs and RSAs is expensed using an
accelerated method over the term of the award once we have determined that it is probable that performance milestones will be achieved.
Compensation expense for RSUs and RSAs that contain performance conditions is based on the grant date fair value of the award.
Compensation expense is recorded over the requisite service period based on management’s best estimate as to whether it is probable that
the shares awarded are expected to vest. We assess the probability of the performance milestones being met on a continuous basis. The
grant date fair value of the RSUs and RSAs with a market condition is determined using a Monte Carlo valuation model and the
compensation expense is recognized over the implied service period.
Compensation expense for purchases under the ESPP is recognized based on the fair value of the common stock on the date of
offering, less the purchase discount percentage provided for in the plan.
Income Taxes
We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and the tax basis of assets and liabilities and are measured using enacted tax
rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more
likely than not that some portion or all of a deferred tax asset will not be realized.
The recognition and measurement of tax benefits requires significant judgment. Our judgment might change as new information
becomes available. We will continue to evaluate our deferred tax assets each reporting period to determine whether adjustments to our
valuation allowance 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
still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial
determination of the position’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 the sustainability assertion have changed and whether the amount of the recognized tax benefit
is still appropriate.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss)
consists of changes in unrealized and realized gains and losses on our marketable securities and the related tax impact of these changes.
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Related Parties
INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
GSK owned 31.6% of our outstanding common stock as of December 31, 2020. Transactions with GSK are described in Note 3,
“Collaborative Arrangements.”
Sarissa Capital owned 6.3% of our outstanding common stock as of December 31, 2020. Transactions with Sarissa Capital are
described in Note 4, “Consolidated Entities”. Sarissa Capital is considered to be a related party because two of its principals are members
of our Board of Directors.
Recently Adopted Accounting Standards Updates
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13
Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments, as clarified in subsequent amendments
to the initial guidance (collectively, “Topic 326”). Topic 326 requires measurement and recognition of expected credit losses for financial
assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecast. We adopted
ASC 326 using a modified retrospective approach which requires a cumulative effect adjustment as of the beginning of the reporting
period in which the guidance is adopted. Topic 326 is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019, with early adoption permitted. We adopted Topic 326 effective January 1, 2020. The adoption did not have a
material impact on our consolidated financial statements.
Recently Issued Accounting Standards or Updates Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which
is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in
Topic 740. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December
15, 2020, with early adoption permitted. We do not expect the adoption of ASU 2019-12 to have a material impact on our consolidated
financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and
Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in
an Entity's Own Equity, which is intended to simplify the accounting for convertible instruments by removing certain separation models
in Subtopic 470-20 for convertible instruments. The ASU is effective for fiscal years beginning after December 15, 2021, and for interim
periods within those fiscal years with early adoption permitted. We are currently in the process of evaluating the effects of the provisions
of ASU 2020-06 on our consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements. ASU 2020-10 contains improvements to the
Codification by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial
statements is codified in the disclosure section of the Codification. The ASU also improves various topics in the Codification so that
entities can apply guidance more consistently on codifications that are varied in nature where the original guidance may have been
unclear. The amendments in ASU 2020-10 are effective for fiscal years beginning after December 15, 2021, and interim periods within
fiscal years beginning after December 15, 2022. Early adoption is permitted. We do not expect the adoption of ASU 2020-10 to have a
material impact on our consolidated financial statements and related disclosures.
2. NET INCOME PER SHARE
Basic net income per share attributable to Innoviva stockholders is computed by dividing net income attributable to Innoviva
stockholders by the weighted-average number of shares of common stock outstanding. Diluted net income per share attributable to
Innoviva stockholders is computed by dividing net income attributable to Innoviva stockholders by the weighted-average number of
shares of common stock and dilutive potential common stock equivalents then outstanding. Dilutive potential common stock equivalents
include the assumed exercise, vesting and issuance of employee stock awards using the treasury stock method, as well as common stock
issuable upon assumed conversion of our convertible subordinated notes due 2023 (the “2023 Notes”) using the if-converted method.
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our convertible senior notes due 2025 (the “2025 Notes”) are convertible, based on the applicable conversion rate, into cash, shares
of our common stock or a combination thereof, at our election. Our current intent is to settle the principal amount of the 2025 Notes in
cash upon conversion. The impact of the assumed conversion premium to diluted net income per share is computed using the treasury
stock method. As the average market price per share of our common stock as reported on The Nasdaq Global Select Market was lower
than the initial conversion price of $17.26 per share, there was no dilutive effect of the assumed conversion premium for the years ended
December 31, 2020, 2019, and 2018 respectively.
The following table shows the computation of basic and diluted net income per share for the years ended December 31, 2020, 2019
and 2018:
(In thousands except per share data)
Numerator:
Net income attributable to Innoviva stockholders, basic
Add: interest expense on 2023 Notes
Net income attributable to Innoviva stockholders, diluted
Denominator:
Weighted-average shares used to compute basic net income per share attributable to
Innoviva stockholders
Dilutive effect of 2023 Notes
Dilutive effect of options and awards granted under equity incentive plan and employee
stock purchase plan
Weighted-average shares used to compute diluted net income per share attributable to
Innoviva stockholders
Net income per share attributable to Innoviva stockholders
Basic
Diluted
Anti-dilutive Securities
Year Ended December 31,
2019
2020
2018
$ 224,402
4,717
$ 229,119
$ 157,288 $ 395,056
5,661
$ 161,936 $ 400,717
4,648
101,320
12,189
101,150
12,189
100,849
12,189
45
70
370
113,554
113,409
113,408
$
$
2.21
2.02
$
$
1.55 $
1.43 $
3.92
3.53
The following common stock equivalents were not included in the computation of diluted net income per share because their effect
was anti-dilutive:
(In thousands)
Outstanding options and awards granted under equity incentive plan and employee stock
purchase plan
Year Ended December 31,
2019
2018
2020
1,193
1,130
1,490
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. REVENUE RECOGNITION AND COLLABORATIVE ARRANGEMENTS
Revenue from Collaborative Arrangements
Net revenue recognized under our GSK Agreements was as follows:
(In thousands)
Royalties from a related party - RELVAR/BREO
Royalties from a related party - ANORO
Royalties from a related party - TRELEGY
Total royalties from a related party
Less: amortization of capitalized fees paid to a related party
Royalty revenue
Strategic alliance - MABA program
Total net revenue from GSK
LABA Collaboration
2020
$ 221,536
45,992
73,089
340,617
(13,823)
326,794
10,000
$ 336,794
Year Ended December 31,
2019
$ 189,424
42,625
42,790
274,839
(13,823)
261,016
—
$ 261,016
2018
$ 220,162
41,286
13,379
274,827
(13,823)
261,004
—
$ 261,004
As a result of the launch and approval of RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA® in the U.S., Japan and Europe,
we paid milestone fees to GSK totaling $220.0 million during the year ended December 31, 2014. The milestone fees paid to GSK were
recognized as capitalized fees paid to a related party, which are being amortized over their estimated useful lives commencing upon the
commercial launch of the 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 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion. Sales of single-agent LABA medicines
and combination medicines would be combined for the purposes of this royalty calculation. For other products combined with a LABA
from the LABA Collaboration, such as ANORO® ELLIPTA®, royalties are upward tiering and range from 6.5% to 10%.
We are also entitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since
assigned to TRC in connection with the Spin-Off, including TRELEGY® ELLIPTA®, which royalties are upward tiering and range from
6.5% to 10%.
2004 Strategic Alliance
During the year ended December 31, 2020, we recognized $10.0 million in revenue from a termination fee paid in connection with
the termination of the Bifunctional Muscarinic Antagonist-Beta2 Agonist (“MABA”) program under the Strategic Alliance Agreement
with GSK.
4. CONSOLIDATED ENTITIES
We consolidate the financial results of TRC and Pulmoquine Therapeutics, Inc. (“Pulmoquine”), which we have determined to be
VIEs. As we have the power to direct the economically significant activities of these entities and the obligation to absorb losses of, or the
right to receive benefits from them, and we are the primary beneficiary of the entities. We also consolidate the financial results of ISP
Fund LP (the “Partnership”), our partnership with Sarissa Capital, as we have determined that the Partnership is a VIE and we are its
primary beneficiary.
Theravance Respiratory Company, LLC
The primary source of revenue for TRC is the royalties generated from the net sales of TRELEGY® ELLIPTA® by GSK. As of
December 31, 2020, TRC held an equity investment in InCarda Therapeutics, Inc. (“InCarda”). Refer to Note 5, “Financial Instruments
and Fair Value Measurements,” for more information.
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The summarized financial information for TRC is presented as follows:
Balance sheets
(In thousands)
Assets
Cash and cash equivalents
Receivables from collaborative arrangements
Prepaid expenses and other current assets
Equity and other long-term investments
Total assets
Liabilities and LLC Members' Equity
Current liabilities
LLC members' equity
Total liabilities and LLC members' equity
Income statements
(In thousands)
Royalty revenue from a related party
Revenue from collaborative arrangements
Total revenue
Operating expenses
Income from operations
Other income (expense), net
Changes in fair values of equity investments
Net Income
Pulmoquine Therapeutics, Inc.
December 31,
2020
2019
38,081
24,946
$
—
16,959
79,986
508
79,478
79,986
$
22,339
14,388
10
—
36,737
3,069
33,668
36,737
Year Ended December 31,
2019
2020
73,089
10,000
83,089
2,612
80,477
38
1,147
81,662
$
$
42,790
—
42,790
3,380
39,410
243
—
39,653
$
$
$
$
On April 20, 2020, we entered into a securities purchase agreement with Pulmoquine to purchase 5,808,550 shares of Series A
preferred stock for $5.0 million in cash. Upon consummation of the transaction, we owned approximately 90.9% of Pulmoquine's
outstanding shares (excluding unvested restricted shares) and hold a majority voting interest. Pulmoquine is a biotechnology company
focused on the research and development of an aerosolized formulation of hydroxychloroquine to treat respiratory infections. As of
December 31, 2020, total assets attributable to Pulmoquine were $3.5 million, including $3.2 million in cash and cash equivalents and
$0.3 million in current assets. Pulmoquine does not currently generate revenue. The net loss for the year ended December 31, 2020, was
$2.2 million, including total operating expenses of $2.0 million.
ISP Fund LP
On December 11, 2020, we entered into a Strategic Advisory Agreement (the “Services Agreement”) with Sarissa Capital
Management LP (“Sarissa Capital”), pursuant to which Sarissa Capital provides a variety of strategic services to us in order to assist us in
the development and execution of our acquisition strategy. The services shall be provided free of charge to us.
Innoviva Strategic Partners LLC, our wholly owned subsidiary (“Strategic Partners”), also entered into a subscription agreement and
an Amended and Restated Limited Partnership Agreement (the “Partnership Agreement”), pursuant to which Strategic Partners became a
limited partner of ISP Fund LP (the “Partnership”). The general partner of the Partnership (“General Partner”) is an affiliate of Sarissa
Capital and, pursuant to an investment management agreement, Sarissa Capital acts as the investment adviser to the Partnership. $300.0
million was contributed to the Partnership for investing in “long” positions in the healthcare, pharmaceutical and biotechnology sectors.
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Partnership Agreement provides for Sarissa Capital to receive a one percent management fee from the Partnership, payable
quarterly in advance, measured based on the Net Asset Value of Strategic Partners’ capital account in the Partnership. In addition,
General Partner is entitled to a 10% annual performance allocation based on the Net Profits of the Partnership during the annual
measurement period. The Partnership Agreement includes a lock-up period of thirty-six months after which Strategic Partners is entitled
to make withdrawals from the Partnership as of such lock-up expiration date and each anniversary thereafter, subject to certain
limitations.
As of December 31, 2020, we held 100% of the economic interest of Partnership. Total assets of the Partnership were $299.3
million, of which all were attributable to equity and other long-term investments. During the year ended December 31, 2020, the
Partnership incurred $0.4 million in net investment-related expense and recorded an unrealized loss of $0.4 million on the equity
investments, which is included in changes in fair values of equity investments on the consolidated statements of income.
5. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Equity Investment in Armata
On January 27, 2020, we entered into a securities purchase agreement with Armata Pharmaceuticals, Inc. (“Armata”) to acquire
8,710,800 shares of Armata’s common stock and warrants to purchase up to 8,710,800 additional shares of its common stock for
approximately $25.0 million in cash. Armata is a clinical stage biotechnology company focused on precisely targeted bacteriophage
therapeutics for antibiotic-resistant infections. The investment is to support Armata’s ongoing advancement of its bacteriophage
development programs including the expected first in human studies related to Armata's lead phage candidate, AP-PA02, targeting
Pseudomonas aeruginosa, as well as AP-SA02, its phage candidate targeting Staphylococcus Aureus.
The investment was closed in two tranches on February 12, 2020 and March 27, 2020. Two of our board members joined Armata’s
board at the first closing and have remained on Armata's board ever since. As of December 31, 2020, we owned approximately 46.6% of
Armata’s common stock.
The investment provides Innoviva the ability to have significant influence, but not control over Armata’s operations. Based on our
evaluation, we determined that Armata is a VIE, but Innoviva is not the primary beneficiary of the VIE. We elected the fair value option
to account for both Armata’s common stock and warrants. The fair value of Armata’s common stock is measured based on its closing
market price. The warrants have an exercise price of $2.87 per share, are exercisable immediately within five years from the issuance
date of the warrants and include a cashless exercise option. We use the Black-Scholes-Merton pricing model to estimate the fair value of
these warrants with the following input assumptions: Armata’s closing market price on the valuation date, the risk-free interest rate
computed based on the U.S. Treasury yield, the remaining contractual term as the expected term, and the expected stock price volatility
calculated based on the historical volatility of the common stock of Armata and its peer companies.
As of December 31, 2020, the fair values of Armata’s common stock and warrants were estimated at $26.0 million and $18.0
million, respectively. The total fair value of both financial instruments in the amount of $44.0 million was recorded as equity and long-
term investments on the consolidated balance sheets as of December 31, 2020. We recorded $19.0 million in unrealized gain from fair
value changes in our investment in Armata securities as changes in fair values of equity, net on the consolidated statements of income for
the year ended December 31, 2020.
Equity Investment in Entasis
On April 12, 2020, we entered into a securities purchase agreement with Entasis Therapeutics, Inc. (“Entasis”) to purchase
14,000,000 shares of Entasis common stock as well as warrants to purchase 14,000,000 additional shares of its common stock for
approximately $35.0 million in cash (the “April 2020 Entasis Agreement”). Entasis is a clinical-stage biotechnology company focused on
the discovery and development of novel antibacterial products. The investment is to support Entasis’s ongoing advancement of its
pathogen-targeted antibacterial product candidates, which include their global Phase 3 registration trial evaluating a fixed-dose
combination of sulbactam and durlobactam (SUL-DUR) against Acinetobacter baumanii infections.
The investment was closed in two tranches on April 22, 2020 and June 11, 2020. Innoviva has a right to designate two members to
Entasis's board.
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On August 27, 2020, we entered into another securities purchase agreement with Entasis (the “August 2020 Entasis Agreement”) to
purchase 4,672,897 shares of Entasis common stock as well as warrants to purchase 4,672,897 additional shares of its common stock for
approximately $12.5 million in cash. As of December 31, 2020, we owned approximately 51.0% of Entasis’s common stock.
The investment provides Innoviva the ability to have significant influence, but not control, over Entasis’s operations. Based on our
evaluation, we determined that Entasis is a VIE, but Innoviva is not the primary beneficiary of the VIE. We elected the fair value option
to account for both Entasis’s common stock and warrants at fair value. The fair value of Entasis’s common stock is measured based on its
closing market price at each balance sheet date. The warrants have an exercise price of $2.50 per share under the April 2020 Entasis
Agreement and an exercise price of $2.675 under the August 2020 Entasis Agreement. The warrants are exercisable immediately within
five years from the issuance date of the warrants and include a cashless exercise option. We use the Black-Scholes-Merton pricing model
to estimate the fair value of these warrants with the following input assumptions: Entasis’s closing market price on the valuation date, the
risk-free interest rate computed based on the U.S. Treasury yield, the remaining contractual term as the expected term, and the expected
stock price volatility calculated based on the historical volatility of the common stock of Entasis and its peer companies.
As of December 31, 2020, the fair values of Entasis’s common stock and warrants were estimated at $46.1 million and $31.9
million, respectively. The total fair value of both financial instruments in the amount of $78.0 million was recorded as equity and long-
term investments on the consolidated balance sheets. We recorded $30.5 million in unrealized gain from fair value changes in our
investment in Entasis securities as changes in fair values of equity, net on the consolidated statements of income for the year ended
December 31, 2020.
Equity Investment in InCarda
On October 6, 2020, TRC entered into a securities purchase agreement with InCarda Therapeutics, Inc. (“InCarda”) to purchase
20,469,432 shares of InCarda Series C preferred stock and warrants to purchase 5,117,358 additional shares of Series C preferred stock
for $15.0 million. InCarda is a privately held biopharmaceutical company focused on developing inhaled therapies for cardiovascular
diseases. The investment is intended to fund the ongoing clinical development of InRhythm™ (flecainide for inhalation), the company’s
lead program, for the treatment of a recent-onset episode of paroxysmal atrial fibrillation. TRC has the right to designate one member to
InCarda’s board. As of December 31, 2020, TRC held 13.4% of InCarda equity ownership.
The investment does not provide TRC the ability to control or have significant influence over InCarda's operations. Based on our
evaluation, we determined that InCarda is a VIE, but TRC is not the primary beneficiary of the VIE. We have accounted for the
investment in Series C preferred shares in InCarda using the measurement alternative. Under the measurement alternative, the equity
investment is initially recorded at its allocated cost, but the carrying value may be adjusted through earnings upon an impairment or
when there is an observable price change involving the same or a similar investment with the same issuer. The warrants are recorded at
fair value and subject to remeasurement at each balance sheet date. The warrants are exercisable immediately with an exercise price of
$0.7328 per share and expire on October 6, 2021, one year from the issuance date. We use the Black-Scholes-Merton pricing model to
estimate the fair value of the warrants with the following input assumptions: the exercise price of the warrants, the risk-free interest rate
computed based on the U.S. Treasury yield, the remaining contractual term as the expected term, and the expected stock price volatility
calculated based on the historical volatility of the common stock of its peer companies.
As of December 31, 2020, the fair value of InCarda’s warrants was estimated at $1.1 million and recorded as equity and long-term
investments on the consolidated balance sheets. We recorded $1.1 million unrealized gains as changes in fair values of equity
investments, net on the consolidated statements of income for the year ended December 31, 2020. There was no impairment or other
change to the value of the Series C preferred stock of $15.0 million as of December 31, 2020.
Summarized Financial Data
As of December 31, 2020, the total changes in fair values of our equity investments in Armata and Entasis exceeded 10% of our
income before income taxes. Rule 4-08(g) of Regulation S-X, according to the SEC guidance, requires summarized financial information
of these entities in an annual report if either the investment, asset or income test as set in the rule exceeds the 10% level individually or in
aggregate. The summarized financial information, including the portion we do not own in these entities, is presented for Armata and
Entasis, respectively, on a one quarter lag regardless of the date of our investments as follows:
Armata Pharmaceuticals, Inc.
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Balance Sheet Information
(In thousands)
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Income Statement Information
(In thousands)
Revenue
Loss from operations
Net loss
Entasis Therapeutics Holdings Inc
Balance Sheet Information
(In thousands)
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Income Statement Information
(In thousands)
Loss from operations
Net loss
Available-for-Sale Securities
September 30,
2020
17,024
28,651
7,070
13,986
$
$
$
$
For the nine months
ended September 30,
2020
319
(15,134)
(15,557)
September 30,
2020
68,398
1,564
6,862
864
$
$
$
$
For the six months
ended September 30,
2020
(26,080)
(24,529)
$
$
$
$
$
The estimated fair value of available-for-sale securities is based on quoted market prices for these or similar investments that were
based on prices obtained from a commercial pricing service. Available-for-sale securities are summarized below:
(In thousands)
Money market funds (1)
Total
Amortized Cost
$
$
204,808
204,808
$
$
December 31, 2020
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
— $
— $
— $
— $
204,808
204,808
(1) Money market funds were included in cash and cash equivalents on the consolidated balance sheets.
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands)
U.S. government securities (1)
U.S. commercial paper (1)
Money market funds (2)
Total
Amortized Cost
$
$
53,799
18,915
233,992
306,706
$
$
December 31, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
35
$
—
—
$
35
— $
—
—
— $
Estimated
Fair Value
53,834
18,915
233,992
306,741
(1) U.S. government securities and U.S. commercial paper were included in short-term marketable securities on the consolidated
balance sheets.
(2) Money market funds were presented in cash and cash equivalents on the consolidated balance sheets.
As of December 31, 2020, all investments were money market funds. There was no credit loss as of December 31, 2020.
Fair Value Measurements
Our securities are measured at fair value on a recurring basis and our debt is carried at amortized cost basis. The estimated fair
values were as follows:
Types of Instruments
(In thousands)
Assets
Money market funds
Investments held by ISP Fund LP (1)
Equity investment - Armata Common Stock
Equity investment - Armata Warrants
Equity investment - Entasis Common Stock
Equity investment - Entasis Warrants
Equity investment - InCarda Warrants
Total assets measured at estimated fair value
Debt
2023 Notes
2025 Notes
Total fair value of debt
Estimated Fair Value Measurements as of December 31, 2020 Using:
Quoted Price
in Active
Markets for
Identical Assets
Level 1
Significant
Other
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
Total
$
$
$
$
204,808
299,288
25,958
—
46,122
—
—
576,176
$
$
— $
—
—
18,049
—
31,882
—
49,931
$
— $ 204,808
299,288
—
25,958
—
18,049
—
46,122
—
31,882
—
1,147
1,147
$ 627,254
1,147
— $
—
— $
239,779
206,135
445,914
$
$
— $ 239,779
206,135
—
— $ 445,914
(1) The investments, which consisted of equity investments of $14.5 million and money market funds of $284.8 million, held by ISP
Fund LP were subject to a 36-month lock-up period from our initial contribution date, December 11, 2020.
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Types of Instruments
(In thousands)
Assets
U.S. government securities
U.S. commercial paper
Money market funds
Total assets measured at estimated fair value
Debt
2023 Notes
2025 Notes
Total fair value of debt
Estimated Fair Value Measurements as of December 31, 2019 Using:
Quoted Price
in Active
Markets for
Identical Assets
Level 1
Significant
Other
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
Total
$
$
$
$
— $
—
233,992
233,992
$
53,834
18,915
—
72,749
— $
—
— $
243,394
208,976
452,370
$
$
$
$
53,834
— $
18,915
—
233,992
—
— $ 306,741
— $ 243,394
208,976
—
— $ 452,370
The fair values of our equity investments in Armata’s and Entasis's common stock and those investments held by ISP Fund LP are
based on the quoted prices in active markets and are classified as Level 1 financial instruments. The fair values of our marketable
securities and the warrants of Armata and Entasis classified within Level 2 are based upon observable inputs that may include benchmark
yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data
including market research publications.
The fair value of InCarda’s warrants is classified as Level 3 financial instruments as InCarda’s securities are not publicly traded and
the assumptions used in the valuation model are based on significant unobservable and observable inputs including those of publicly
traded peer companies.
The fair values of our 2023 Notes and our 2025 Notes are based on recent trading prices of the respective instruments.
6. CAPITALIZED FEES PAID TO A RELATED PARTY
Capitalized fees paid to a related party, which consist of registrational and launch-related milestone fees paid to GSK, were as
follows:
(In thousands)
United States
Europe
Japan
Gross carrying value
Accumulated amortization
Net carrying value
Amortization period
2013-2030
2013-2029
2013-2029
December 31,
2020
$ 120,000
60,000
40,000
220,000
(94,747)
$ 125,253
2019
$ 120,000
60,000
40,000
220,000
(80,924)
$ 139,076
These milestone fees are amortized over their estimated useful lives commencing upon the commercial launch of the product in their
respective regions with the amortization expense recorded as a reduction in revenue from collaborative arrangements. As of December
31, 2020, the weighted average remaining amortization period was 9.1 years.
Additional information regarding these milestone fees is included in Note 3, “Collaborative Arrangements.” Amortization expense
for each of the years ended December 31, 2020, 2019 and 2018 was $13.8 million. The remaining estimated amortization expense is
$13.8 million for each of the years from 2021 to 2025 and $56.3 million thereafter.
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. STOCK-BASED COMPENSATION
Equity Incentive Plans
In May 2012, we adopted the 2012 Equity Incentive Plan (the “2012 Plan”). The 2012 Plan provides for the grant of incentive stock
options, nonstatutory stock options, RSAs, RSUs and Stock Appreciation Rights to employees, non-employee directors and consultants.
As of December 31, 2020, total shares remaining available for issuance under the 2012 Plan were 4,851,655.
Employee Stock Purchase Plan
Under the 2004 Employee Stock Purchase Plan (the “ESPP”), our employees may purchase common stock through payroll
deductions at a price equal 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 applicable purchase period. The ESPP provides for consecutive and overlapping offering periods of 24 months in duration, with
each offering period composed of four consecutive six-month purchase periods. The purchase periods end on either May 15 or
November 15. ESPP contributions are limited to a maximum of 15% of an employee’s eligible compensation. The maximum number of
shares that an employee may purchase in any purchase period is 2,500. An employee may not purchase shares with a value greater than
$25,000 in any calendar year.
As of December 31, 2020, total shares remaining available for issuance under the ESPP were 181,699.
Director Compensation Program
Our non-employee directors receive compensation for services provided as a director. Each member of our Board of Directors who
is not an employee receives both cash and equity compensation for services as a director, member of a committee of the Board of
Directors, lead independent director and chairman, as applicable.
Each of our independent directors receives periodic automatic grants of equity awards under a program implemented under the 2012
Plan. These grants are non-discretionary. Only our independent directors or affiliates of such directors are eligible to receive automatic
grants under the 2012 Plan. Under the program, each individual who first became a non-employee director will, on the date such
individual joins the Board of 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 The Nasdaq Global Select Market, rounded down to the nearest whole share (the “Initial RSUs”), plus a one-
time grant of RSUs covering a number of shares of our common stock calculated as $225,000 ($250,000 prior to the October 2017
Amendments) divided by our common stock closing share price on the date of grant as reported on The Nasdaq Global Select Market,
which would be pro-rated for the number of whole months remaining until the anniversary of the prior year’s stockholders’ meeting,
rounded down to the nearest whole share (the “Pro Rata RSUs”). The Initial RSUs vest in two equal annual installments, while Pro Rata
RSUs vest in a single installment at the sooner of the next 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
is automatically granted an RSU covering a number of shares of our common stock calculated as $225,000 ($250,000 prior to the
October 2017 Amendments) divided by our common stock closing share price on the date of grant as reported on The Nasdaq Global
Select Market, rounded down to the nearest whole share. These RSUs will vest at the sooner of the next annual stockholder meeting or
the one-year anniversary of grant, subject to the non-employee director’s 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 that the number of shares of our common stock subject to each award has been reduced.
These RSUs will vest in full upon the director’s death, the occurrence of a change in control or, with respect to awards made after
the October 2017 Amendments, the director’s disability before the director’s service terminates. Director RSUs carry dividend equivalent
rights to be credited with an amount equal to all cash dividends paid on the underlying shares of common stock while unvested. Dividend
equivalents are subject to the same terms and conditions, including vesting, as the RSUs to which they attach and are paid in cash upon
vesting.
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock-Based Compensation Expense
Stock-based compensation expense is included in the consolidated statements of income as follows:
(In thousands)
General and administrative
Year Ended December 31,
2019
$ 2,056
2018
$ 3,233
2020
$ 1,698
Stock-based compensation expense included in the consolidated statements of income by award type is as follows:
(In thousands)
Stock options
RSUs
RSAs
Market-based RSUs (PSUs)
Market-based RSAs (PSAs)
ESPP
Total stock-based compensation expense
Year Ended December 31,
2019
2018
2020
$
— $
$
242
1,149
273
—
—
34
$ 1,698
1,431
615
—
—
10
$ 2,056
305
1,650
1,920
(224)
(464)
46
$ 3,233
For the year ended December 31, 2018, $1.7 million of stock-based compensation was reversed for the forfeited market-based
awards due to the separation of senior management members.
As of December 31, 2020, the unrecognized stock-based compensation cost and the estimated weighted-average amortization period
were as follows:
(In thousands)
Stock options
RSUs
RSAs
Total unrecognized compensation cost
Compensation Awards
Unrecognized Weighted-Average
Compensation
Cost
Amortization
Period (Years)
$
$
1,328
351
369
2,048
3.4
0.3
2.4
The following table summarizes equity award activity under the 2012 Plan and prior plans and related information:
(In thousands, except per share data)
Balance as of December 31, 2019
Granted
Exercised
Released RSUs/RSAs
Forfeited
Balance as of December 31, 2020
Weighted-
Average
Exercise
Price of
Outstanding
Options
24.18
14.10
12.30
—
24.43
22.28
Number of
outstanding
options
$
1,087
250
(30)
—
(152)
1,155
Number of
outstanding
RSUs
$
94
85
—
(94)
—
85
Weighted-
Average
Fair Value
per Share
at Grant
13.94
13.30
—
13.94
—
13.30
Number of
outstanding
RSAs
$
78
31
—
(28)
(51)
30
Weighted-
Average
Fair Value
per Share
at Grant
14.46
14.30
—
13.92
14.56
14.61
As of December 31, 2020, the aggregate intrinsic value of the options outstanding and options exercisable was nil. All outstanding
options were exercisable. The weighted average remaining contractual term was 3.69 years.
The total intrinsic value of the options exercised was $0.1 million, $0.2 million, and $0.4 million for the years ended December 31,
2020, 2019 and 2018, respectively. The total estimated fair value of options vested was not material for the year ended December 31,
2020 and 2019, and $0.8 million for the year ended December 31, 2018, respectively.
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The total estimated fair value of RSUs vested was $1.3 million, $1.4 million, and $2.6 million in the years ended December 31,
2020, 2019 and 2018, respectively.
The total estimated fair value of RSAs vested was $0.6 million, $0.9 million, and $7.6 million in the years ended December 31,
2020, 2019 and 2018, respectively.
Valuation Assumptions
The weighted-average assumptions used in calculating the estimated value of our stock options on the date of grant as follows:
Risk-free interest rate
Expected term (in years)
Volatility
Dividend yield
Weighted-average estimated fair value of stock options granted
There were no grants of stock options during the years ended December 31, 2019 and 2018.
8. DEBT
Our debt consists of:
(In thousands)
2023 Notes
2025 Notes
Total debt
Unamortized debt discount and issuance costs
Net long-term debt
Convertible Senior Notes Due 2025
Year Ended
December 31, 2020
0.4 %
6.11
46.9 %
0 %
6.28
$
December 31,
2020
$ 240,984
192,500
433,484
(47,967)
$ 385,517
2019
$ 240,984
192,500
433,484
(56,364)
$ 377,120
On August 7, 2017, we completed a private placement of $192.5 million aggregate principal amount of our 2025 Notes. The
proceeds include the 2025 Notes sold pursuant to the $17.5 million over-allotment option granted by us to the initial purchasers, which
option was exercised in full. The 2025 Notes were sold in a private placement to qualified institutional buyers pursuant to Rule 144A
under the Securities Act. The 2025 Notes are senior unsecured obligations and bear interest at a rate of 2.5% per year, payable semi-
annually in arrears on February 15 and August 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 2025 Notes (which is equivalent to an initial conversion price of approximately $17.26 per share), representing a 30.0%
conversion premium over the last reported sale price of the Company’s common stock on August 1, 2017, which was $13.28 per share.
The conversion rate is subject to customary anti-dilution adjustments in certain circumstances. The 2025 Notes will mature on August
15, 2025, unless repurchased or converted in 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 only upon the occurrence of specified events and during certain periods. From, and
including, February 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date,
the 2025 Notes will be convertible at any time.
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In accordance with accounting guidance for debt with conversion and other options, we separately account for the liability and
equity components of the 2025 Notes by allocating the proceeds between the liability component and the embedded conversion option
(“equity component”) due to our ability to settle the conversion obligation of the 2025 Notes in cash, common stock or a combination of
cash and common stock, at our option. The carrying amount of the liability component was calculated by measuring the fair value of a
similar liability that does not have an associated convertible feature using the income approach. The allocation was performed in a
manner that reflected our non-convertible debt borrowing rate for similar debt. The equity component of the 2025 Notes of $67.3 million
was recognized as a debt discount and represents the difference between the proceeds from the issuance of the 2025 Notes and the fair
value of the liability of the 2025 Notes on the date of issuance. The excess of the principal amount of the liability component over its
carrying amount (“debt discount”) is amortized to interest expense using the effective interest method over the term of the 2025 Notes.
The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
Our outstanding 2025 Notes balances consisted of the following:
(In thousands)
Liability component
Principal
Debt discount and issuance costs, net
Net carrying amount
Equity component, net
December 31,
2020
2019
$ 192,500
(46,766)
$ 145,734
65,361
$
$ 192,500
(54,597)
$ 137,903
65,361
$
The following table sets forth total interest expense recognized related to the 2025 Notes for the years ended December 31, 2020,
2019 and 2018:
(In thousands)
Contractual interest expense
Amortization of debt issuance costs
Amortization of debt discount
Total interest and amortization expense
Convertible Subordinated Notes Due 2023
$
$
Year Ended December 31,
2019
4,813
551
6,618
$ 11,982
2018
4,799
505
6,071
$ 11,375
2020
4,813
601
7,230
$ 12,644
$
In January 2013, we completed an underwritten public offering of $287.5 million aggregate principal amount of unsecured
convertible subordinated notes, which will mature on January 15, 2023. The financing raised proceeds, net of issuance costs, of
approximately $281.2 million, less $36.8 million to purchase two privately negotiated capped call option transactions in connection with
the issuance of the notes. The 2023 Notes bear interest at the rate of 2.125% per year that is payable semi-annually in arrears in cash on
January 15 and July 15 of each year, beginning on July 15, 2013.
The 2023 Notes were convertible, at the option of the holder, into shares of our common stock at an initial conversion rate of
35.9903 shares per $1,000 principal amount of the 2023 Notes, subject to adjustment in certain circumstances, which represents an initial
conversion price 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
single counterparty. The capped call option transaction is an integrated instrument consisting of a call option on our common stock
purchased by us with a strike price equal to the initial conversion price of $27.79 per share for the underlying number of shares and a cap
price of $38.00 per share, both of which are subject to adjustments consistent with the 2023 Notes. The cap component is economically
equivalent to a call option sold 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 the capped call coincides with the due date of the convertible debt. Upon settlement, we would receive from
our hedge counterparty a number of shares of our common shares that would range from zero, if the stock price was below $27.79 per
share, to a maximum of 2,779,659 shares, if the stock price is above $38.00 per share. However, if the market price of our 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.
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 of the 2023 Notes, which represents a conversion price of approximately $19.77 per share. As a result of the conversion
rate adjustments, the capped call strike price and 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.
Debt Maturities
The aggregate scheduled maturities of our long-term debt as of December 31, 2020 are as follows:
(In thousands)
Years ending December 31:
2021 to 2022
2023
2024
2025
Total
9. COMMITMENTS AND CONTINGENCIES
Operating Lease
$
$
—
240,984
—
192,500
433,484
In 2014, our facility leases in South San Francisco, California were assigned to Theravance Biopharma, Inc. However, if Theravance
Biopharma, Inc. were to default on its lease obligations, we had in substance guaranteed the lease payments for these facilities. This lease
concluded in May 2020, and we have no further obligations for the lease.
In 2019, we entered into an operating lease in Burlingame, California for approximately 2,111 rentable square feet. The new lease
commenced in November 2019 with a term of thirty-six calendar months.
Minimum lease payments on our corporate headquarters as of December 31, 2020 are as follows:
(In thousands)
Years ending December 31:
2021
2022
Thereafter
Total
Indemnifications and Other Contingencies
$
$
123
109
—
232
We indemnify our officers and directors for certain events or occurrences, subject to certain limits. We believe the fair value of these
indemnification agreements is minimal. We may be subject to contingencies that may arise from matters such as product liability claims,
legal proceedings, shareholder suits and tax matters. We have not recognized any liabilities relating to these matters as of December 31,
2020.
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. INCOME TAXES
Income tax benefit (expense) consists of the following:
(In thousands)
Current
State
Deferred
Federal
State
Total income tax benefit (expense), net
Year Ended December 31,
2019
2018
2020
$
(11)
$
(26)
$
19
(60,408)
(12)
(60,420)
$ (60,431)
(41,567)
(309)
(41,876)
$ (41,902)
190,195
5,859
196,054
$ 196,073
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)
Expected tax at federal statutory rate
State income tax, net of federal benefit
Non-deductible executive compensation
Noncontrolling interest
Other
Change in valuation allowance
Income tax expense (benefit), net
2020
$ 74,392
(26)
—
2019
$ 48,908
325
—
(14,577)
839
(197)
$ 60,431
(7,078)
326
(579)
$ 41,902
$
2018
44,154
(5,878)
747
(2,367)
310
(233,039)
$ (196,073)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and
deferred tax liabilities are as follows:
(In thousands)
Deferred tax assets
Net operating loss carryforwards
Research and development tax credit carryforwards
Other
Total deferred tax assets before valuation allowance
Valuation allowance
Total deferred tax assets
Deferred tax liabilities
Debt issuance discount and other
Unrealized Gain on Investment
Net deferred tax assets
As of December 31,
2019
2020
$ 121,839
55,211
1,100
178,150
(63,423)
114,727
$ 172,359
55,966
1,412
229,737
(63,620)
166,117
(10,596)
(10,372)
$ 93,759
(11,946)
—
$ 154,171
We record deferred tax assets if the realization of such assets is more likely than not to occur. Significant management judgment is
required in determining whether a valuation allowance against the deferred tax assets is required. We have considered all available
evidence, both positive and negative, such as our historical operating results and predictability of future taxable income, in making such
determination. We are also required to exercise significant management’s judgment in forecasting future taxable income. Specifically, we
evaluate the following criteria when considering a valuation allowance:
● the history of tax net operating losses in recent years;
● predictability of operating results;
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
● profitability for a sustained period of time; and
● level of profitability on a quarterly basis.
As of December 31, 2020, we recognized $60.4 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, 2020, we had federal net operating loss carryforwards of approximately $0.4 billion, of which approximately
$2.0 million can be carried forward indefinitely and the remaining will expire from 2032 through 2035. We also had federal research and
development tax credit carryforwards of approximately $43.6 million, which will expire beginning 2021. We also had state net operating
loss carryforwards of approximately $650.7 million expiring in the beginning of 2029 and state research tax credits of approximately
$32.2 million, which do not expire.
Utilization of net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to ownership
change limitations provided by the Internal Revenue Code and similar state provisions. Annual limitations may result in expiration of net
operating loss and 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, 2020 to
determine whether an ownership change had occurred since inception. The Section 382 study concluded that it is more likely than not
that the Company did not experience an ownership change during the testing period. However, notwithstanding the applicable annual
limitations, no portion of the net operating loss or credit carryforwards is expected to expire before becoming available to reduce federal
and state income tax liabilities as a result of those identified ownership changes. If we undergo another ownership change, the utilization
of the pre-ownership change net operating loss carryforwards or pre-ownership change tax attributes, such as research tax credits, to
offset the post-ownership change income may be subject to an annual limitation, pursuant to Sections 382 and 383 of the Internal
Revenue Code of 1986, as amended. Similar rules may apply under state tax laws.
Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2020
and 2019, we had no accrued interest or penalties.
Uncertain Tax Positions
A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits are as follows:
(In thousands)
Unrecognized tax benefits as of December 31, 2017
Gross decrease in tax portions for 2018
Unrecognized tax benefits as of December 31, 2018
Gross decrease in tax portions for 2019
Unrecognized tax benefits as of December 31, 2019
Net decrease in tax portions for 2020
Unrecognized tax benefits as of December 31, 2020
$
$
15,488
(75)
15,413
(71)
15,342
(157)
15,185
Our total unrecognized tax benefits as of December 31, 2020 were $15.2 million. Total unrecognized tax benefits that, if recognized,
would affect our effective tax rate, were $8.0 million as of December 31, 2020.
We are subject to taxation in the U.S. and various state jurisdictions. The tax years 2004 through 2013, 2015 and forward remain
open to examination by the federal and most state tax authorities due to net operating loss and overall credit carryforward positions.
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INNOVIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. SUBSEQUENT EVENTS
On January 26, 2021, we entered into a securities purchase agreement with Armata to acquire approximately $20 million in Armata
common stock and warrants in two tranches. The first tranche consisting of approximately 1.9 million shares of common stock and
warrants to purchase an equal number of shares of common stock for an aggregate purchase price of $6.1 million was consummated
simultaneously with the execution of the agreement. The second tranche consisting of approximately 4.3 million shares of common stock
and warrants to purchase an equal number of shares of common stock for an aggregate purchase price of $13.9 million will be
consummated upon satisfaction of certain closing conditions, which is expected to occur in the first quarter of 2021. The investment is to
support Armata’s ongoing advancement of its bacteriophage development programs, including its FDA cleared first-in-human study,
SWARM-P.a., which is evaluating its lead phage product candidate, AP-PA02, as a potential treatment for Pseudomonas aeruginosa
airway infections in cystic fibrosis patients. In addition, Armata expects to initiate a second clinical trial related to another product
candidate, AP-SA02, a phage targeting Staphylococcus aureus, in patients with complicated bacteremia later this year.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Innovia, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Innoviva, Inc. (a Delaware corporation) and subsidiaries (the
“Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in
stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively
referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated
financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the 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, 2020, based on criteria established in the 2013
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”), and our report dated February 25, 2021 expressed an unqualified opinion.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or
fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our
audits provide a reasonable basis for our opinion.
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Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the
critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Determination of VIEs and Primary Beneficiaries
As described further in notes 4 and 5 to the financial statements, certain of the Company’s investments have complex structures and
agreements which must be evaluated for consolidation, including determining whether the investee is a variable interest entity (“VIE”).
An entity is considered to be a VIE if (a) the entity cannot finance its operations without subordinated financial support from other
parties, (b) the entity’s at-risk equity holders lack the characteristics of a controlling financial interest, (c) the entity is structured with
non-substantive voting rights, or (d) the equity holders do not have the obligation to bear potential losses or the right to receive potential
gains. If an entity has at least one of these characteristics, it is considered a VIE, and is consolidated by its primary beneficiary. This
accounting assessment is performed at the inception of the investment and upon the occurrence of reconsideration events, as defined in
accounting principles generally accepted in the United States of America, and requires significant judgment by management. We
identified this accounting assessment of VIEs as a critical audit matter.
The principal consideration for our determination that the initial accounting assessment or reconsideration accounting assessment of
VIEs for the Company’s investments is a critical audit matter is that they require significant judgement by management to interpret the
impact of complex agreements on the VIE and primary beneficiary determinations. The assessment made by management of whether an
entity’s at-risk equity holders lack the characteristics of a controlling financial interest and the Company’s interest in that entity qualifies
as that entity’s primary beneficiary is a complex and judgmental determination. Therefore, a high degree of auditor judgement,
subjectivity and effort in performing procedures is required to evaluate evidence obtained related to the initial or continuous assessment
of VIEs.
Our audit procedures related to consolidation and primary beneficiary assessments included the following, among others:
·
·
We tested the effectiveness of controls related to the initial accounting assessment of the investments and the continuous
reassessment for reconsideration events, as required by the accounting framework.
We evaluated the Company’s accounting analysis for all significant investments by performing procedures including, but
not limited to:
o
o
Obtaining an understanding of the composition and governance of the entity, its board of directors, and
management to evaluate whether management’s assessment of the VIE considerations are based on the facts.
Reading the purchase agreements and other related documents and evaluating the structures and terms of the
agreements to verify if the investments should be classified as VIEs by evaluating management’s assessment
of whether an entity meets the criteria of a VIE.
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o
o
o
Considering whether the Company appropriately determined the primary beneficiary by evaluating the
investment arrangements of the entity to determine if the Company has the power to direct activities, and if
the Company has the obligation to absorb losses of the entity or the right to receive benefits from the entity
that could be significant to the VIE.
Evaluating whether or not the Company consolidated the balances at the appropriate amounts for those
entities where the Company has determined it is the primary beneficiary.
Evaluating the evidence obtained in other areas of the audit to determine if there were additional
reconsideration events that had not been identified by the Company, including, among others, reading board
minutes and confirming the terms of certain agreements, if any.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2019.
San Francisco, California
February 25, 2021
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Innoviva, Inc.
Opinion on the Financial Statements
We have audited the consolidated statements of operations, comprehensive income, stockholders' equity (deficit), and cash flows, of
Innoviva, Inc. (the “Company”) for the year ended December 31, 2018, and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all material respects, the results of the Company’s operations and
its cash flows the years ended December 31, 2018, in conformity with US generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements 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 with the US 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
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit
provides a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor from 1996 to 2019.
San Jose, California
February 25, 2021
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
We conducted an evaluation as of December 31, 2020, under the supervision and with the participation of our management,
including our chief executive officer and chief accounting officer, of the effectiveness of the design and operation of our disclosure
controls and procedures, which are defined under SEC rules as controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (Exchange
Act) is recorded, processed, summarized and reported within required time periods. Based upon that evaluation, our principal executive
officer and principal financial 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 Reporting
Our 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 of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide
reasonable assurance that transactions 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) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the
Internal 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
financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on this evaluation,
our management concluded that our internal control over financial reporting was effective as of December 31, 2020.
Our independent registered public accounting firm, Grant Thornton LLP, has audited our internal control over financial reporting as
of December 31, 2020. Their attestation report on the audit of our internal control over financial reporting is included below.
Limitations on the Effectiveness of Controls
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within Innoviva have been detected. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
Internal control measures have been designed and continually evaluated for our equity and other long-term investments and the
related capital allocation processes for the year ended December 31, 2020. There was no other change in our internal control over
financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) identified in connection with the evaluation required by paragraph
(d) of Rule 13a-15 of the Exchange Act, which occurred during the fourth fiscal quarter of the year ended December 31, 2020 which has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Innoviva, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Innoviva, Inc. (a Delaware corporation) and subsidiaries (the
“Company”) as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2020, 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, 2020, and our report dated
February 25, 2021 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control
over Financial 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 with the 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
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial 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 assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition 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,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
San Francisco, California
February 25, 2021
75
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ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated by reference from our proxy statement for our 2021 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2020.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from our proxy statement for our 2021 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2020.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Other than with respect to the Securities Authorized for Issuance under Equity Compensation Plans below, the information required
by this Item is incorporated by reference from our proxy statement for our 2021 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of our fiscal year ended December 31, 2020.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides certain information with respect to all of our equity compensation plans in effect as of December 31,
2020:
Plan Category
Equity compensation plans approved by security holders
Number of securities to
be issued upon exercise
of outstanding options
and vesting of
outstanding restricted
stock units and
Weighted‑average
exercise price of
restricted stock awards outstanding options
(a)
1,239,744 (1) $
(b)
22.28 (2)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
5,033,354 (3)
(1)
Includes 1,155,159 shares issuable upon exercise of outstanding options and 84,585 shares issuable upon vesting of outstanding
RSUs and RSAs.
(2) Does not take into account outstanding restricted stock units as these awards have no exercise price.
(3)
Includes 181,699 shares of common stock available under our Employee Stock Purchase Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference from our proxy statement for our 2021 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2020.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference from our proxy statement for our 2021 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2020.
76
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. Financial Statements:
The following financial statements and schedules of the Registrant are contained in Part II, Item 8, “Financial Statements and
Supplementary Data” of this Annual Report on Form 10-K:
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Income for each of the three years in the period ended December 31, 2020
Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2020
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2020
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2020
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Page
44
45
46
47
48
49
70
2. Financial Statement Schedules:
All schedules have been omitted because of the absence of conditions under which they are required or because the required
information, where material, is shown in the financial statements, financial notes or supplementary financial information.
(b) Exhibits required by Item 601 of Regulation S-K:
The information required by this Item is set forth on the exhibit index that follows the signature page of this report.
ITEM 16. FORM 10-K SUMMARY
None.
77
Table of Contents
Exhibits
Exhibit
Number
Description
3.1 Amended and Restated Certificate of Incorporation
3.2
3.3
Certificate of Amendment of Restated Certificate of Incorporation
Certificate of Ownership and Merger Merging LABA Merger Sub, Inc. with
and into Theravance, Inc., as filed with the Secretary of State of the State of
Delaware, effective on January 7, 2016
3.4 Amended and Restated Bylaws, amended and restated as of February 8,
4.1
4.2
4.3
4.4
2017
Specimen certificate representing the common stock of the registrant
Indenture, dated as of January 24, 2013 by and between Theravance, Inc.
and The Bank of New York Mellon Trust Company, N.A., as trustee
Form of 2.125% Convertible Subordinated Note Due 2023 (included in
Exhibit 4.4)
Indenture (including form of Note) with respect to Innoviva’s 2.50%
Convertible Senior Notes due 2025, dated as of August 7, 2017, between
Innoviva and The Bank of New York Mellon Trust Company, N.A., as
trustee
4.5 Description of Registrant’s Securities Registered Pursuant to Section 12 of
10.1
10.2
the Securities Exchange Act of 1934
Employee Stock Purchase Plan, as amended April 27, 2010
Collaboration Agreement between the registrant and Glaxo Group Limited,
dated as of November 14, 2002
10.3 Amended and Restated Investors’ Rights Agreement by and among the
registrant and the parties listed therein, dated as of May 11, 2004
Strategic Alliance Agreement between the registrant and Glaxo Group
Limited, dated as of March 30, 2004
10.4*
10.5+ Description of Cash Bonus Program, as amended
10.6+ Amendment to Change in Control Severance Plan effective December 16,
10.7+
10.8
2009
2009 Change in Control Severance Plan adopted December 16, 2009
Second Amendment to Amended and Restated Governance Agreement
among the registrant, Glaxo Group Limited, GlaxoSmithKline plc and
GlaxoSmithKline LLC, dated as of November 29, 2010
10.9 Amendment to Strategic Alliance Agreement, dated October 3, 2011
10.10+
10.14*
10.15*
2012 Equity Incentive Plan, as approved by the board of directors
February 8, 2012 and approved by stockholders May 16, 2012 and forms of
equity award
Base Capped Call Transaction, dated January 17, 2013
10.11
10.12 Additional Capped Call Transaction, dated January 18, 2013
10.13 Master Agreement by and among Theravance, Inc., Theravance
Biopharma, Inc. and Glaxo Group Limited, dated March 3, 2014
Collaboration Agreement Amendment by and between Theravance, Inc.
and Glaxo Group Limited, dated March 3, 2014
Strategic Alliance Agreement Amendment by and between
Theravance, Inc. and Glaxo Group Limited, dated March 3, 2014
Transition Services Agreement between Theravance and Theravance
Biopharma, dated June 2, 2014.
Tax Matters Agreement between Theravance and Theravance Biopharma,
dated June 2, 2014.
Employee Matters Agreement between Theravance and Theravance
Biopharma, dated June 1, 2014.
10.16
10.18
10.17
78
Incorporated by Reference
Form Exhibit
3.3
3.4
3.1
S-1
10-Q
8-K
Filing
Date/Period
End Date
7/26/2004
3/31/2007
1/8/2016
8-K
10-K
8-K
3.1
4.1
4.1
2/9/2017
12/31/2006
1/25/2013
8-K
4.1
8/7/2017
10-K
10-Q
10-Q
4.9
2/19/2020
10.4
10.1
6/30/2010
6/30/2014
S-1
10.13
6/10/2004
10-K
10.13
12/31/2013
10-K
10-K
10-K
8-K
10-K
10-Q
8-K
8-K
8-K/A
8-K/A
8-K/A
8-K
8-K
8-K
10.22
10.47
10.48
10.2
12/31/2009
12/31/2009
12/31/2009
11/29/2010
10.34
10.38
12/31/2011
6/30/2012
10.1
10.2
10.1
10.2
10.3
10.2
10.3
10.4
1/23/2013
1/23/2013
3/6/2014
3/6/2014
3/6/2014
6/5/2014
6/5/2014
6/5/2014
Table of Contents
Exhibit
Number
10.19
Description
Theravance Respiratory Company, LLC Limited Liability Company
Agreement between Theravance and Theravance Biopharma, dated May 31,
2014.
10.22
10.21+
10.20 Amendment/Clarification to Transition Services Agreement between
Theravance and Theravance Biopharma, dated March 2, 2015
First Amendment to 2009 Change In Control Severance Plan (Renamed
2009 Severance Plan)
Form of Notice of Performance-Based Restricted Stock Award and
Restricted Stock Award Agreement under 2012 Equity Incentive Plan
(director form)
Second Amendment to 2009 Severance Plan
10.23+
10.24+ Offer Letter with Marianne Zhen, dated September 7, 2018
10.25+ Offer Letter between Innoviva, Inc. and Pavel Raifeld, dated May 20, 2020.
10.26
Strategic Advisory Agreement, dated as of December 11, 2020, by and
between Sarissa Capital Management LP and Innoviva, Inc.
Incorporated by Reference
Form Exhibit
10.5
8-K
Filing
Date/Period
End Date
6/5/2014
10-Q
10.64
3/31/2015
8-K
10.2
7/29/2015
10-K
10.76
2/23/2018
10-Q
8-K
8-K
8-K
10.81
10.1
10.1
10.1
7/26/2018
9/11/2018
5/26/2020
12/14/2020
10.27 Amended and Restated Limited Partnership Agreement of ISP Fund LP,
8-K
10.2
12/14/2020
dated as of December 11, 2020, by and among ISP Fund LP, Sarissa Capital
Fund GP LP, Innoviva Strategic Partners LLC and the other parties named
therein.
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm
Consent of Independent Registered Public Accounting Firm
Power of Attorney (see signature page to this Annual Report on Form 10-
K)
Certification of Principal Executive Officer Pursuant to Rule 13a-14 under
the Securities Exchange Act of 1934
Certification of Principal Financial Officer Pursuant to Rule 13a-14 under
the Securities Exchange Act of 1934
Certifications Pursuant to 18 U.S.C. Section 1350
The following materials from Registrant’s Annual Report on Form 10-K for
the year ended December 31, 2020, formatted in Extensible Business
Reporting Language (XBRL) includes: (i) Consolidated Balance Sheets as
of December 31, 2020 and 2019, (ii) Consolidated Statements of Income for
the years ended December 31, 2020, 2019 and 2018, (iii) Consolidated
Statements of Comprehensive Income for the years ended December 31,
2020, 2019 and 2018, (iv) Consolidated Statements of Stockholders’ Equity
(Deficit) for the years ended December 31, 2020, 2019 and 2018,
(v) Consolidated Statements of Cash Flows for years ended December 31,
2020, 2019 and 2018, and (vi) Notes to Consolidated Financial Statements.
Cover Page Interactive Data File (embedded within the Inline XBRL
document and included in Exhibit 101)
21.1
23.1
23.2
24.1
31.1
31.2
32
101
104
+ Management contract or compensatory plan or arrangement required to be filed pursuant to Item 15(b) of Form 10-K.
* Confidential treatment has been granted for certain portions which are omitted in the copy of the exhibit electronically filed with the
Securities and Exchange Commission. The omitted information has been filed separately with the Securities and Exchange
Commission pursuant to Innoviva, Inc.’s application for confidential treatment.
79
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 25, 2021
INNOVIVA, INC.
By:
/s/ PAVEL RAIFELD
Pavel Raifeld
Chief Executive Officer
80
Table of Contents
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Pavel
Raifeld, as their true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for such person and in his
or her name, place and stead, in any and all capacities, to sign any and all amendments to the Annual Report on Form 10-K, and to file
the same, with all exhibits thereto and other documents 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 the premises, 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 and agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ PAVEL RAIFELD
Pavel Raifeld
/s/ MARIANNE ZHEN
Marianne Zhen
Chief Executive Officer
(Principal Executive Officer)
Chief Accounting Officer (Principal
Financial Officer)
February 25, 2021
February 25, 2021
/s/ GEORGE BICKERSTAFF, III
George Bickerstaff, III
/s/ ODYSSEAS KOSTAS, M.D.
Odysseas Kostas, M.D.
/s/ MARK DIPAOLO, ESQ.
Mark DiPaolo, Esq.
/s/ JULES HAIMOVITZ
Jules Haimovitz.
/s/ SARAH SCHLESINGER, M.D.
Sarah Schlesinger, M.D.
Chairman of the Board
February 25, 2021
Director
Director
Director
Director
81
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
LIST OF SUBSIDIARIES
Exhibit 21.1
Name
Theravance Respiratory Company, LLC
Advanced Medicine East, Inc
Pulmoquine Therapeutics, Inc.
Innoviva Strategic Partners LLC
Innoviva Royalty Sub LLC
Innoviva TRC Holdings LLC
Innoviva Strategic Opportunities LLC
Jurisdiction Ownership Interest
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
(1)
100
(2)
100
100
100
100
%
%
%
%
%
(1) The Company owns 15% of the economic interests in Theravance Respiratory Company, LLC ("TRC") but has the power to
direct TRC's economically significant activities and the obligation to absorb losses of, or the right to receive benefits from them.
Accordingly, TRC's financial results are consolidated in the Company’s financial statements.
(2) As of December 31, 2020, the Company owned 91% of the outstanding equity and 56% of the voting power in Pulmoquine
Therapeutics, Inc. ("Pulmoquine"). Pulmoquine's financial results are consolidated in the Company’s financial statements.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated February 25, 2021, with respect to the consolidated financial statements and internal control over
financial reporting included in the Annual Report of Innoviva, Inc. on Form 10-K for the year ended December 31, 2020. We consent 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. 333-150753, File No. 333-159042, File No. 333-173923, File No. 333-181763, and File No. 333-197950).
Exhibit 23.1
/s/ GRANT THORNTON LLP
San Francisco, California
February 25, 2021
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement on Form S-8 No 333-119559 of Theravance, Inc. pertaining to the 2004 Equity Incentive Plan
and the 2004 Employee Stock Purchase Plan,
(2) Registration Statement on Form S-8 No 333-129669 of Theravance, Inc. pertaining to the 2004 Employee Stock
Purchase Plan,
(3) Registration Statement on Form S-8 No 333-150753 of Theravance, Inc. pertaining to the 2008 New Employee Equity
Incentive Plan and the 2004 Employee Stock Purchase Plan,
(4) Registration Statement on Form S-8 No 333-159042 of Theravance, Inc. pertaining to the 2004 Employee Stock
Purchase Plan,
(5) Registration Statement on Form S-8 No 333-173923 of Theravance, Inc. pertaining to the 2004 Employee Stock
Purchase Plan,
(6) Registration Statement on Form S-8 No 333-181763 of Theravance, Inc. pertaining to the 2012 Equity Incentive Plan,
and
(7) Registration Statement on Form S-8 No 333-197950 of Theravance, Inc. pertaining to the 2012 Equity Incentive Plan,
the Amended and Restated 2008 New Employee Equity Incentive Plan, the 2004 Equity Incentive Plan and the 1997
Stock Plan
of our report dated February 19, 2019, with respect to the consolidated financial statements of Innoviva, Inc. for the year ended
December 31, 2018, included in this Annual Report (Form 10-K) of Innoviva, Inc. for the year ended December 31, 2020.
/s/ Ernst & Young LLP
San Jose, California
February 25, 2021
Exhibit 31.1
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Pavel Raifeld, certify that:
1. I have reviewed this Annual Report on Form 10-K of Innoviva, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects 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 (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known 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
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial 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
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 25, 2021
/s/ PAVEL RAIFELD
Pavel Raifeld
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
Certification of Principal Accounting Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Marianne Zhen, certify that:
1. I have reviewed this Annual Report on Form 10-K of Innoviva, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects 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 (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known 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
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial 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
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date:February 25, 2021
/s/ MARIANNE ZHEN
Marianne Zhen
Chief Accounting Officer
(Principal Financial Officer)
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER
AND PRINCIPAL ACCOUNTING OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
I, Pavel Raifeld, 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, 2020 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and that information contained in such
Annual Report on Form 10-K fairly presents in all material respects the financial condition of Innoviva, Inc. at the end of the periods
covered by such Annual Report on Form 10-K and results of operations of Innoviva, Inc. for the periods covered by such Annual Report
on Form 10-K.
Date: February 25, 2021
By:
/s/ PAVEL RAIFELD
Pavel Raifeld
Chief 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, 2020 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and that information contained in such
Annual Report on Form 10-K fairly presents in all material respects the financial condition of Innoviva, Inc. at the end of the periods
covered by such Annual Report on Form 10-K and results of operations of Innoviva, Inc. for the periods covered by such Annual Report
on Form 10-K.
Date: February 25, 2021
By:
/s/ MARIANNE ZHEN
Marianne Zhen
Chief Accounting Officer
(Principal Financial Officer)
A signed original of this written statement required by Section 906 has been provided to Innoviva, Inc. and will be retained by it
and furnished to the Securities and Exchange Commission or its staff upon request.