Quarterly Report (10-q)

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-30319

INNOVIVA, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware		94-3265960
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1350 Old Bayshore Highway Suite 400

Burlingame, CA 94010

(Address of Principal Executive Offices)

(650) 238-9600

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.01 per share		INVA		The NASDAQ Global Select Market

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 the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Act.

Large accelerated filer ⌧		Accelerated filer ◻

Non-accelerated filer ◻		Smaller reporting company ☐

		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ⌧

The number of shares of registrant’s common stock outstanding on October 19, 2020 was 101,391,634.

Table of Contents

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019	3
Unaudited Consolidated Statements of Income for the Three and Nine Months ended September 30, 2020 and 2019	4
Unaudited Consolidated Statements of Comprehensive Income for the Three and Nine Months ended September 30, 2020 and 2019	5
Unaudited Consolidated Statements of Stockholders’ Equity for the Three and Nine Months ended September 30, 2020 and 2019	6
Unaudited Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2020 and 2019	8
Notes to Unaudited Consolidated Financial Statements	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3. Quantitative and Qualitative Disclosures About Market Risk	25

Item 4. Controls and Procedures	25

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	26

Item 1A. Risk Factors	26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3. Defaults Upon Senior Securities	26

Item 4. Mine Safety Disclosure	27

Item 5. Other Information	27

Item 6. Exhibits	27

Signatures	28

Exhibits

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INNOVIVA, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)


	September 30,		December 31,
	2020		2019
	(unaudited)		*
Assets
Current assets:
Cash and cash equivalents	$	479,193	$	278,096
Short-term marketable securities		—		72,749
Related party receivables from collaborative arrangements		92,150		79,427
Prepaid expenses and other current assets		698		962
Total current assets		572,041		431,234
Property and equipment, net		33		33
Equity investments		111,745		—
Capitalized fees paid to a related party, net		128,708		139,076
Deferred tax assets, net		109,490		154,171
Other assets		239		312
Total assets	$	922,256	$	724,826

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	623	$	10
Accrued personnel-related expenses		384		647
Accrued interest payable		1,668		4,152
Other accrued liabilities		1,223		562
Total current liabilities		3,898		5,371
Long-term debt, net of discount and issuance costs		383,350		377,120
Other long-term liabilities		136		219
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock: $0.01 par value, 230 shares authorized, no shares issued and outstanding		—		—
Common stock: $0.01 par value, 200,000 shares authorized, 101,391 and 101,288 issued and outstanding as of September 30, 2020 and December 31, 2019, respectively		1,014		1,013
Additional paid-in capital		1,260,447		1,258,859
Accumulated other comprehensive income		—		27
Accumulated deficit		(775,905)		(946,404)
Total Innoviva stockholders’ equity		485,556		313,495
Noncontrolling interest		49,316		28,621
Total stockholders’ equity		534,872		342,116
Total liabilities and stockholders’ equity	$	922,256	$	724,826

*	Consolidated balance sheet as of December 31, 2019 has been derived from audited consolidated financial statements.

See accompanying notes to consolidated financial statements.

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INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenue:
Royalty revenue from a related party, net of amortization of capitalized fees paid to a related party of $3,456 in the three months ended September 30, 2020 and 2019, and $10,368 in the nine months ended September 30, 2020 and 2019	$	88,694	$	65,755	$	236,318	$	185,045
Revenue from collaborative arrangements with a related party		—		—		10,000		—
Total net revenue		88,694		65,755		246,318		185,045

Operating expenses:
Research and development		1,010		—		1,569		—
General and administrative		3,254		4,962		8,413		12,324
Total operating expenses		4,264		4,962		9,982		12,324

Income from operations		84,430		60,793		236,336		172,721

Other income (expense), net		(13)		(115)		85		(122)
Interest income		41		1,624		1,501		4,002
Interest expense		(4,603)		(4,693)		(13,680)		(13,971)
Changes in fair values of equity investments		(29,368)		—		39,245		—
Income before income taxes		50,487		57,609		263,487		162,630
Income tax expense, net		8,866		10,558		44,689		29,499
Net income		41,621		47,051		218,798		133,131
Net income attributable to noncontrolling interest		13,403		7,242		48,299		21,792
Net income attributable to Innoviva stockholders	$	28,218	$	39,809	$	170,499	$	111,339

Basic net income per share attributable to Innoviva stockholders	$	0.28	$	0.39	$	1.68	$	1.10
Diluted net income per share attributable to Innoviva stockholders	$	0.26	$	0.36	$	1.53	$	1.01

Shares used to compute Innoviva basic and diluted net income per share:
Shares used to compute basic net income per share		101,358		101,191		101,306		101,134
Shares used to compute diluted net income per share		113,572		113,415		113,543		113,394

See accompanying notes to consolidated financial statements.

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INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


		Three Months Ended September 30,			Nine Months Ended September 30,
	2020		2019		2020		2019
Net income	$	41,621	$	47,051	$	218,798	$	133,131
Unrealized gain (loss) on marketable securities, net		2		(8)		(27)		28
Comprehensive income		41,623		47,043		218,771		133,159
Comprehensive income attributable to noncontrolling interest		13,403		7,242		48,299		21,792
Comprehensive income attributable to Innoviva stockholders	$	28,220	$	39,801	$	170,472	$	111,367

See accompanying notes to consolidated financial statements.

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INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Nine Months Ended September 30, 2020
						Accumulated
				Additional		Other						Total
	Common Stock			Paid-In		Comprehensive		Accumulated		Noncontrolling		Stockholders’
	Shares	Amount		Capital		Income (Loss)		Deficit		Interest		Equity
Balance as of December 31, 2019	101,288	$	1,013	$	1,258,859	$	27	$	(946,404)	$	28,621	$	342,116
Distributions to noncontrolling interest	—		—		—		—		—		(15,810)		(15,810)
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding	32		—		170		—		—		—		170
Stock-based compensation	—		—		435		—		—		—		435
Net income	—		—		—		—		65,437		13,515		78,952
Other comprehensive income	—		—		—		6		—		—		6
Balance as of March 31, 2020	101,320	$	1,013	$	1,259,464	$	33	$	(880,967)	$	26,326	$	405,869
Equity activity of noncontrolling interest from a consolidated variable interest entity	—		—		—		—		—		350		350
Distributions to noncontrolling interest	—		—		—		—		—		(12,152)		(12,152)
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding	72		2		178		—		—		—		180
Stock-based compensation	—		—		375		—		—		—		375
Net income	—		—		—		—		76,844		21,381		98,225
Other comprehensive income	—		—		—		(35)		—		—		(35)
Balance as of June 30, 2020	101,392	$	1,015	$	1,260,017	$	(2)	$	(804,123)	$	35,905	$	492,812
Equity activity of noncontrolling interest from a consolidated variable interest entity	—		—		—		—		—		8		8
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding	(1)		(1)		(11)		—		—		—		(12)
Stock-based compensation	—		—		441		—		—		—		441
Net income	—		—		—		—		28,218		13,403		41,621
Other comprehensive income	—		—		—		2		—		—		2
Balance as of September 30, 2020	101,391	$	1,014	$	1,260,447	$	—	$	(775,905)	$	49,316	$	534,872

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	Nine Months Ended September 30, 2019
						Accumulated
				Additional		Other						Total
	Common Stock			Paid-In		Comprehensive		Accumulated		Noncontrolling		Stockholders’
	Shares	Amount		Capital		Income (Loss)		Deficit		Interest		Equity
Balance as of December 31, 2018	101,098	$	1,011	$	1,256,267	$	(3)	$	(1,103,692)	$	5,469	$	159,052
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding	85		1		253		—		—		—		254
Stock-based compensation	—		—		605		—		—		—		605
Net income	—		—		—		—		33,790		6,229		40,019
Other comprehensive income	—		—		—		13		—		—		13
Balance as of March 31, 2019	101,183	$	1,012	$	1,257,125	$	10	$	(1,069,902)	$	11,698	$	199,943
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding	89		1		200		—		—		—		201
Stock-based compensation	—		—		474		—		—		—		474
Net income	—		—		—		—		37,740		8,321		46,061
Other comprehensive income	—		—		—		23		—		—		23
Balance as of June 30, 2019	101,272	$	1,013	$	1,257,799	$	33	$	(1,032,162)	$	20,019	$	246,702
Distributions to noncontrolling interest	—		—		—		—		—		(10,553)		(10,553)
Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding	7		—		82		—		—		—		82
Stock-based compensation	—		—		489		—		—		—		489
Net income	—		—		—		—		39,809		7,242		47,051
Other comprehensive income	—		—		—		(8)		—		—		(8)
Balance as of September 30, 2019	101,279	$	1,013	$	1,258,370	$	25	$	(992,353)	$	16,708	$	283,763

See accompanying notes to consolidated financial statements.

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INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities
Net income	$	218,798	$	133,131
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes		44,689		29,499
Depreciation and amortization		10,382		10,400
Stock-based compensation		1,251		1,568
Amortization of debt discount and issuance costs		6,230		5,789
Amortization of discount on short-term investments		(343)		(1,739)
Amortization of lease guarantee		135		(243)
Loss on write-off of property and equipment		—		104
Changes in fair values of equity investments		(39,245)		—
Other non-cash items		14		—
Changes in operating assets and liabilities:
Receivables from collaborative arrangements		(12,723)		14,075
Prepaid expenses and other current assets		264		466
Other assets		—		(11)
Accounts payable		613		24
Accrued personnel-related expenses and other accrued liabilities		252		107
Accrued interest payable		(2,484)		(2,491)
Other long-term liabilities		—		(126)
Net cash provided by operating activities		227,833		190,553
Cash flows from investing activities
Maturities of marketable securities		86,000		160,925
Purchases of marketable securities		(12,943)		(230,922)
Purchases of equity investments		(72,500)		—
Purchases of property and equipment		(13)		—
Net cash provided by (used in) investing activities		544		(69,997)
Cash flows from financing activities
Repurchase of shares to satisfy tax withholding		(83)		(81)
Payments of cash dividends to stockholders		—		(11)
Proceeds from issuances of common stock, net		421		618
Net proceeds from the issuance of variable interest entity's equity		344		—
Distributions to noncontrolling interest		(27,962)		(10,553)
Net cash used in financing activities		(27,280)		(10,027)
Net increase in cash and cash equivalents		201,097		110,529
Cash and cash equivalents at beginning of period		278,096		62,417
Cash and cash equivalents at end of period	$	479,193	$	172,946
Supplemental disclosure of cash flow information
Cash paid for interest	$	9,933	$	10,674

See accompanying notes to consolidated financial statements.

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INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of Operations and Summary of Significant Accounting Policies

Description of Operations

Innoviva Inc. (referred to as "Innoviva", the "Company", or "we" and other similar pronouns) is a company with a portfolio of royalties that includes 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^®.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In our opinion, the unaudited consolidated financial statements have been prepared on the same basis as audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of our financial position, results of operations, comprehensive income and cash flows. The interim results are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2020 or any other period.

The accompanying unaudited consolidated financial statements include the accounts of Innoviva and certain variable interest entities for which we are the primary beneficiary. All intercompany transactions have been eliminated. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income (loss) attributable to noncontrolling interest in our unaudited consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”) on February 19, 2020, and as amended on February 21, 2020 (“2019 Form 10-K”).

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.

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.

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Equity Investments

We invest from time to time in equity securities of private or public companies. 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 a measurement alternative. 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.

As of September 30, 2020, we accounted for our equity investments in common stock and warrants of Armata Pharmaceuticals, Inc. (NYSE American: ARMP) (“Armata ") and Entasis Therapeutics Holdings Inc. (NASDAQ: ETTX) ("Entasis”) at fair value by electing the fair value option and presented the investments as equity investments on the consolidated balance sheets.

Accounting Pronouncement Adopted by the Company

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. ASC 326 must be adopted using a modified retrospective approach with 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 are currently in the process of evaluating the effects of the provisions of ASU 2019-12 on our 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, Debt-Debt with Conversion and Other Options, for convertible instruments. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. We are currently in the process of evaluating the effects of the provisions of ASU 2020-06 on our financial statements.

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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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 three and nine months ended September 30, 2020 and 2019, respectively.

The following table shows the computation of basic and diluted net income per share for the three and nine months ended September 30, 2020 and 2019:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands except per share data)	2020		2019		2020		2019
Numerator:
Net income attributable to Innoviva stockholders, basic	$	28,218	$	39,809	$	170,499	$	111,339
Add: interest expense on 2023 Notes		1,171		1,157		3,535		3,482
Net income attributable to Innoviva stockholders, diluted	$	29,389	$	40,966	$	174,034	$	114,821

Denominator:
Weighted-average shares used to compute basic net income per share attributable to Innoviva stockholders		101,358		101,191		101,306		101,134
Dilutive effect of 2023 Notes		12,189		12,189		12,189		12,189
Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan		25		35		48		71
Weighted-average shares used to compute diluted net income per share attributable to Innoviva stockholders		113,572		113,415		113,543		113,394

Net income per share attributable to Innoviva stockholders
Basic	$	0.28	$	0.39	$	1.68	$	1.10
Diluted	$	0.26	$	0.36	$	1.53	$	1.01

Anti-Dilutive Securities

The following common stock equivalents were not included in the computation of diluted net income per share because their effect was anti-dilutive:


	Three Months Ended September 30,		Nine Months Ended September 30,
(In thousands)	2020	2019	2020	2019
Outstanding options and awards granted under equity incentive plan and employee stock purchase plan	1,268	1,144	1,172	1,128

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3. Revenue Recognition and Collaborative Arrangements

Net Revenue from Collaborative Arrangements

Net revenue recognized under our GSK Agreements was as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2020		2019		2020		2019
Royalties from a related party — RELVAR/BREO	$	63,893	$	46,433	$	165,612	$	136,259
Royalties from a related party — ANORO		11,882		11,548		32,931		30,753
Royalties from a related party — TRELEGY		16,375		11,230		48,143		28,401
Total royalties from a related party		92,150		69,211		246,686		195,413
Less: amortization of capitalized fees paid to a related party		(3,456)		(3,456)		(10,368)		(10,368)
Royalty revenue		88,694		65,755		236,318		185,045
Strategic alliance — MABA program		—		—		10,000		—
Total net revenue from GSK	$	88,694	$	65,755	$	246,318	$	185,045

During the nine months ended September 30, 2020, we recognized $10.0 million in revenue in connection with the termination of the Bifunctional Muscarinic Antagonist-Beta2 Agonist (“MABA”) program under the Strategic Alliance Agreement with GSK in June 2020.

4. Consolidated Entities

Theravance Respiratory Company, LLC

As of September 30, 2020, and December 31, 2019, $16.4 million and $14.4 million, respectively, of the related party receivables from collaborative arrangements were attributable to TRC. The cash balance attributable to TRC as of September 30, 2020 was $41.4 million. Total revenue for TRC related to TRELEGY^® ELLIPTA^® was $16.4 million and $11.2 million for the three months ended September 30, 2020 and 2019, respectively, and $48.1 million and $28.4 million for the nine months ended September 30, 2020 and 2019, respectively. Total revenue for TRC also included a $10.0 million fee for the termination of the MABA program for the nine months ended September 30, 2020. Total operating expenses were $0.6 million and $1.4 million for the three and nine months ended September 30, 2020, respectively, compared to $2.8 million and $2.9 million for the same periods in 2019.

Pulmoquine Therapeutics, Inc.

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, such as the novel coronavirus (“COVID-19”). As of September 30, 2020, total assets attributable to Pulmoquine were $4.6 million, including $4.3 million in cash and cash equivalents and $0.3 million in other current assets. Pulmoquine does not currently generate revenue. Total operating expense was $1.1 million and $1.7 million for the three and nine months ended September 30, 2020.

5. Financial Instruments and Fair Value Measurements

Equity Investment in Armata

On January 27, 2020, we entered into a securities purchase agreement 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 $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. After the second closing, we owned approximately 46.7% of Armata’s common stock.

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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 September 30, 2020, the fair values of Armata’s common stock and warrants were estimated at $27.8 million and $20.2 million, respectively. The total fair value of both financial instruments in the amount of $48.0 million was recorded as equity investments on the consolidated balance sheets as of September 30, 2020. We recorded $12.4 million in unrealized loss and $23.0 million in unrealized gain from fair value changes in Armata’s investments as changes in fair values of equity investments, net on the consolidated statements of income for the three and nine months ended September 30, 2020, respectively.

Equity Investment in Entasis

On April 12, 2020, we entered into a securities purchase agreement with Entasis (“April 2020 Entasis Agreement”) 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. 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. After the second closing, we owned approximately 51.3% of Entasis's common stock.

On August 27, 2020, we entered into another securities purchase agreement with Entasis ("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. On September 1, 2020, we completed the purchase and increased our ownership in Entasis's common stock to 52.6%.

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 September 30, 2020, the fair values of Entasis's common stock and warrants were estimated at $38.1 million and $25.7 million, respectively. The total fair value of both financial instruments in the amount of $63.8 million was recorded as equity investments on the consolidated balance sheets. We recorded $17.0 million in unrealized loss and $16.3 million in unrealized gain from fair value changes in Entasis's investments as changes in fair values of equity investments, net on the consolidated statements of income for the three and nine months ended September 30, 2020, respectively.

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Available-for-Sale Securities

The estimated fair value of available-for-sale securities is based on quoted market prices for these or similar investments that were based on prices obtained from a commercial pricing service. Available-for-sale securities are summarized below:


	September 30, 2020
			Gross		Gross
			Unrealized		Unrealized		Estimated
(In thousands)	Amortized Cost		Gains		Losses		Fair Value
Money market funds	$	430,144	$	—	$	—	$	430,144
Total	$	430,144	$	—	$	—	$	430,144


	December 31, 2019
			Gross		Gross
			Unrealized		Unrealized		Estimated
(In thousands)	Amortized Cost		Gains		Losses		Fair Value
U.S. government securities	$	53,799	$	35	$	—	$	53,834
U.S. commercial paper		18,915		—		—		18,915
Money market funds		233,992		—		—		233,992
Total	$	306,706	$	35	$	—	$	306,741

As of September 30, 2020, all investments were money market funds. There was no credit loss as of September 30, 2020.

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Fair Value Measurements

Our available-for-sale securities and equity investments 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:


	Estimated Fair Value Measurements as of September 30, 2020 Using:
	Quoted Price		Significant
	in Active		Other		Significant
	Markets for		Observable		Unobservable
Types of Instruments	Identical Assets		Inputs		Inputs
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	430,144	$	—	$	—	$	430,144
Equity investment - Armata Common Stock		27,787		—		—		27,787
Equity investment - Armata Warrants		—		20,167		—		20,167
Equity investment - Entasis Common Stock		38,093		—		—		38,093
Equity investment - Entasis Warrants		—		25,698		—		25,698
Total assets measured at estimated fair value	$	496,024	$	45,865	$	—	$	541,889
Debt
2023 Notes	$	—	$	230,494	$	—	$	230,494
2025 Notes		—		191,491		—		191,491
Total fair value of debt	$	—	$	421,985	$	—	$	421,985


	Estimated Fair Value Measurements as of December 31, 2019 Using:
	Quoted Price		Significant
	in Active		Other		Significant
	Markets for		Observable		Unobservable
Types of Instruments	Identical Assets		Inputs		Inputs
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
U.S. government securities	$	—	$	53,834	$	—	$	53,834
U.S. commercial paper		—		18,915		—		18,915
Money market funds		233,992		—		—		233,992
Total assets measured at estimated fair value	$	233,992	$	72,749	$	—	$	306,741
Debt
2023 Notes	$	—	$	243,394	$	—	$	243,394
2025 Notes		—		208,976		—		208,976
Total fair value of debt	$	—	$	452,370	$	—	$	452,370

The fair value of our marketable securities classified within Level 2 is based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, including market research publications.

The fair values of our equity investments in Armata and Entasis's common stock are based on their respective closing market prices per share at the reporting date and are classified as Level 1 financial instruments. The fair values of our equity investments in Armata and Entasis's warrants are included within Level 2 as the assumptions used in the valuation model are based on the observable inputs that include their respective closing market prices per share, their respective comparable companies’ market data and the U.S. Treasury yield.

The fair value of our 2023 Notes and of our 2025 Notes is based on recent trading prices of the instruments.

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6. Stock-Based Compensation

Stock-based compensation expense is included in the consolidated statements of income as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2020		2019		2020		2019
General and administrative	$	441	$	489	$	1,251	$	1,568

7. Debt

Our debt consists of:


	September 30,		December 31,
(In thousands)	2020		2019
2023 Notes	$	240,984	$	240,984
2025 Notes		192,500		192,500
Total debt		433,484		433,484
Unamortized debt discount and issuance costs		(50,134)		(56,364)
Net long-term debt	$	383,350	$	377,120

Convertible Senior Notes Due 2025

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 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:


	September 30,		December 31,
(In thousands)	2020		2019
Liability component
Principal	$	192,500	$	192,500
Debt discount and issuance costs, net		(48,788)		(54,597)
Net carrying amount	$	143,712	$	137,903
Equity component, net	$	65,361	$	65,361

The following table sets forth total interest expense recognized related to the 2025 Notes for the three and nine months ended September 30, 2020 and 2019:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2020		2019		2020		2019
Contractual interest expense	$	1,203	$	1,203	$	3,609	$	3,609
Amortization of debt issuance costs		152		139		446		408
Amortization of debt discount		1,828		1,673		5,363		4,909

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