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FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS | 12 Months Ended
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Dec. 31, 2020
FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS |
FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS | 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. 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. Balance Sheet Information ​
​ | ​ | ​ | ​
​ |  | September 30,
(In thousands) | ​ | 2020
Current assets | ​ | $ | 17,024
Noncurrent assets | ​ | $ | 28,651
Current liabilities | ​ | $ | 7,070
Noncurrent liabilities | ​ | $ | 13,986
​ Income Statement Information ​
​ | ​ | ​ | ​
​ |  | For the nine months
​ | ​ | ended September 30,
(In thousands) | ​ | 2020
Revenue | ​ | $ | 319
Loss from operations | ​ | $ | (15,134)
Net loss | ​ | $ | (15,557)
​ Entasis Therapeutics Holdings Inc ​ Balance Sheet Information ​
​ | ​ | ​ | ​
​ |  | September 30,
(In thousands) | ​ | 2020
Current assets | ​ | $ | 68,398
Noncurrent assets | ​ | $ | 1,564
Current liabilities | ​ | $ | 6,862
Noncurrent liabilities | ​ | $ | 864
​ Income Statement Information ​
​ | ​ | ​ | ​
​ |  | For the six months
​ | ​ | ended September 30,
(In thousands) | ​ | 2020
Loss from operations | ​ | $ | (26,080)
Net loss | ​ | $ | (24,529)
​ 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: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | December 31, 2020
​ | ​ | ​ | ​ | ​ | Gross | ​ | Gross | ​ | ​ | ​
​ | ​ | ​ | ​ | Unrealized | ​ | Unrealized | ​ | Estimated
(In thousands) |  | Amortized Cost |  | Gains |  | Losses |  | Fair Value
Money market funds (1) | ​ | $ | 204,808 | ​ | $ | — | ​ | $ | — | ​ | $ | 204,808
Total | ​ | $ | 204,808 | ​ | $ | — | ​ | $ | — | ​ | $ | 204,808
(1) | Money market funds were included in cash and cash equivalents on the consolidated balance sheets.
​ ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | December 31, 2019
​ | ​ | ​ | ​ | ​ | Gross | ​ | Gross | ​ | ​ | ​
​ | ​ | ​ | ​ | Unrealized | ​ | Unrealized | ​ | Estimated
(In thousands) |  | Amortized Cost |  | Gains |  | Losses |  | Fair Value
U.S. government securities (1) | ​ | $ | 53,799 | ​ | $ | 35 | ​ | $ | — | ​ | $ | 53,834
U.S. commercial paper (1) | ​ |  | 18,915 | ​ |  | — | ​ |  | — | ​ |  | 18,915
Money market funds (2) | ​ |  | 233,992 | ​ |  | — | ​ |  | — | ​ |  | 233,992
Total | ​ | $ | 306,706 | ​ | $ | 35 | ​ | $ | — | ​ | $ | 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: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Estimated Fair Value Measurements as of December 31, 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 | ​ | $ | 204,808 | ​ | $ | — | ​ | $ | — | ​ | $ | 204,808
Investments held by ISP Fund LP (1) | ​ | ​ | 299,288 | ​ | ​ | — | ​ | ​ | — | ​ | ​ | 299,288
Equity investment - Armata Common Stock | ​ | ​ | 25,958 | ​ | ​ | — | ​ | ​ | — | ​ | ​ | 25,958
Equity investment - Armata Warrants | ​ | ​ | — | ​ | ​ | 18,049 | ​ | ​ | — | ​ | ​ | 18,049
Equity investment - Entasis Common Stock | ​ | ​ | 46,122 | ​ | ​ | — | ​ | ​ | — | ​ | ​ | 46,122
Equity investment - Entasis Warrants | ​ | ​ | — | ​ | ​ | 31,882 | ​ | ​ | — | ​ | ​ | 31,882
Equity investment - InCarda Warrants | ​ | ​ | — | ​ | ​ | — | ​ | ​ | 1,147 | ​ | ​ | 1,147
Total assets measured at estimated fair value | ​ | $ | 576,176 | ​ | $ | 49,931 | ​ | $ | 1,147 | ​ | $ | 627,254
Debt | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
2023 Notes | ​ | $ | — | ​ | $ | 239,779 | ​ | $ | — | ​ | $ | 239,779
2025 Notes | ​ | ​ | — | ​ | ​ | 206,135 | ​ | ​ | — | ​ | ​ | 206,135
Total fair value of debt | ​ | $ | — | ​ | $ | 445,914 | ​ | $ | — | ​ | $ | 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.
​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | 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 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.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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