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Financial Instruments and Fair Value Measurements | 3 Months Ended
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Mar. 31, 2021
Financial Instruments and Fair Value Measurements |
Financial Instruments and Fair Value Measurements | 5. Financial Instruments and Fair Value Measurements Equity Investment in Armata During the first quarter of 2020, Innoviva acquired 8,710,800 shares of common stock and an equal number of warrants of Armata Pharmaceuticals, Inc. (“Armata”) for $25.0 million in cash. Armata is a clinical stage biotechnology company focused on precisely targeted bacteriophage therapeutics for antibiotic-resistant infections. On January 26, 2021, Innoviva Strategic Opportunities LLC (“ISO”), our wholly owned subsidiary, entered into a securities purchase agreement with Armata to acquire 6,153,847 shares of Armata common stock and warrants to purchase 6,153,847 additional shares of Armata common stock for approximately $20.0 million. The investment was closed in two tranches on January 26, 2021 and March 17, 2021. The investment continues to support Armata’s ongoing advancement of its bacteriophage development programs. The additional investment in the first quarter of 2021 increased Innoviva and ISO’s combined ownership to 59.6%. Armata entered into a voting agreement with the Company and ISO, pursuant to which the Company and ISO agreed not to vote or take any action by written consent with respect to any common shares held by the Company and ISO that represent, in the aggregate, more than 49.5% of the total number of shares of Armata’s common stock issued and outstanding as of the record date for voting on the matters related to election or removal of Armata’s board members. Currently, three of the eight members of Armata’s board of directors are also members of the board of directors of Innoviva. The investment in Armata provides Innoviva and ISO 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 and ISO are not the primary beneficiary of the VIE. We continue to elect 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 purchased in 2020 and 2021 have an exercise price of $2.87 and $3.25 per share, respectively, 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 March 31, 2021, the fair values of Armata’s common stock and warrants were estimated at $71.1 million and $54.2 million, respectively. 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 $125.3 million and $44.0 million was recorded as equity and long-term investments on the consolidated balance sheets as of March 31, 2021 and December 31, 2020, respectively. The changes in the fair values in the amount of $61.2 million and $21.9 million for the three months ended March 31, 2021 and 2020, respectively, were recorded as changes in fair value of equity and long-term investments, net on the consolidated statements of income. Equity Investment in Entasis During the second quarter of 2020, we purchased 14,000,000 shares of common stock as well as warrants to purchase 14,000,000 additional shares of common stock of Entasis Therapeutics, Inc. (“Entasis”) for approximately $35.0 million in cash. Entasis is a clinical-stage biotechnology company focused on the discovery and development of novel antibacterial products. During the third quarter of 2020, we purchased 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. Innoviva has a right to designate two members to Entasis’ board. As of March 31, 2021 and the date hereof, no Innoviva designees are serving on Entasis’ six-member board. As of March 31, 2021, we owned approximately 51.0% of Entasis’s common stock. The investment in Entasis provides Innoviva the ability to have significant influence, but not control over Entasis’ 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 for those warrants acquired in the second quarter of 2020 and an exercise price of $2.675 per share for the warrants acquired in the third quarter of 2020. 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. As of March 31, 2021, the fair values of Entasis’s common stock and warrants were estimated at $40.0 million and $26.6 million, respectively. 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 $66.6 million and $78.0 million was recorded as equity and long-term investments on the consolidated balance sheets as of March 31, 2021 and December 31, 2020, respectively. We recorded $11.5 million unrealized loss from the changes of fair value as changes in fair values of equity and long-term investments, net on the consolidated statements of income for the three months ended March 31, 2021. Equity Investment in InCarda In October, 2020, TRC purchased 20,469,432 shares of Series C preferred stock and warrants to purchase 5,117,358 additional shares of Series C preferred stock of InCarda Therapeutics, Inc. for $15.0 million. $0.8 million was incurred for investment due diligence costs and recorded as part of the equity investment on the consolidated balance sheets. InCarda is a privately held biopharmaceutical company focused on developing inhaled therapies for cardiovascular diseases. As of March 31, 20201 and as of the date hereof, one of InCarda’s eight board members is designated by TRC. As of March 31, 2021, TRC held 13.0% of InCarda‘s outstanding equity. The investment in InCarda 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 account for our investment in the 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 March 31, 2021 and December 31, 2020, the fair value of InCarda’s warrants was estimated at $0.7 million and $1.1 million, respectively, and recorded as equity and long-term investments on the consolidated balance sheets. We recorded $0.5 million unrealized loss from the changes of fair value as changes in fair values of equity and long-term investments, net on the consolidated statements of income for the three months ended March 31, 2021. There was no impairment or other change to the value of InCarda’s Series C preferred stock of $15.8 million as of March 31, 2021. Equity Investment in ImaginAb On March 18, 2021, TRC entered into a securities purchase agreement with ImaginAb, Inc. to purchase 4,051,724 shares of ImaginAb Series C preferred stock for $4.7 million. On the same day, TRC also entered into a securities purchase agreement with one of ImaginAb’s common stockholders to purchase 4,097,157 shares of ImaginAb common stock for $1.3 million. ImaginAb is a privately held biotechnology company focused on clinically managing cancer and autoimmune diseases via molecular imaging. $0.4 million was incurred for investment due diligence costs and execution and recorded as part of the equity investment on the consolidated balance sheets. As of the date hereof, one of ImaginAb’s seven board members is designated by TRC. As of March 31, 2021, TRC held 13.0% of ImaginAb equity ownership. The investment in ImaginAb does not provide TRC the ability to control or have significant influence over ImaginAb’s operations. Based on our evaluation, we determined that ImaginAb is a VIE, but TRC is not the primary beneficiary of the VIE. Because ImaginAb’s equity securities are not publicly traded and do not have a readily determinable fair value, we have accounted for our investment in ImaginAb’s Series C preferred stock and common stock 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. As of March 31, 2021, $6.4 million was recorded as equity and long-term investments on the consolidated balance sheets. 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: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | March 31, 2021
​ | ​ | ​ | ​ | ​ | Gross | ​ | Gross | ​ | ​ | ​
​ | ​ | ​ | ​ | Unrealized | ​ | Unrealized | ​ | Estimated
(In thousands) |  | Amortized Cost |  | Gains |  | Losses |  | Fair Value
Money market funds(1) | ​ | $ | 248,932 | ​ | $ | — | ​ | $ | — | ​ | $ | 248,932
Total | ​ | $ | 248,932 | ​ | $ | — | ​ | $ | — | ​ | $ | 248,932
(1) | Money market funds were included in cash and cash equivalents on the consolidated balance sheets.
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​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | 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.
​ ​ There was no credit loss to the money market funds as of March 31, 2021. 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 March 31, 2021 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 | ​ | $ | 248,932 | ​ | $ | — | ​ | $ | — | ​ | $ | 248,932
Investments held by ISP Fund LP (1) | ​ | ​ | 304,696 | ​ | ​ | — | ​ | ​ | — | ​ | ​ | 304,696
Equity investment - Armata Common Stock | ​ | ​ | 71,053 | ​ | ​ | — | ​ | ​ | — | ​ | ​ | 71,053
Equity investment - Armata Warrants | ​ | ​ | — | ​ | ​ | 54,166 | ​ | ​ | — | ​ | ​ | 54,166
Equity investment - Entasis Common Stock | ​ | ​ | 39,960 | ​ | ​ | — | ​ | ​ | — | ​ | ​ | 39,960
Equity investment - Entasis Warrants | ​ | ​ | — | ​ | ​ | 26,580 | ​ | ​ | — | ​ | ​ | 26,580
Equity investment - InCarda Warrants | ​ | ​ | — | ​ | ​ | — | ​ | ​ | 664 | ​ | ​ | 664
Total assets measured at estimated fair value | ​ | $ | 664,641 | ​ | $ | 80,746 | ​ | $ | 664 | ​ | $ | 746,051
Debt | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
2023 Notes | ​ | $ | — | ​ | $ | 242,336 | ​ | $ | — | ​ | $ | 242,336
2025 Notes | ​ | ​ | — | ​ | ​ | 203,513 | ​ | ​ | — | ​ | ​ | 203,513
Total fair value of debt | ​ | $ | — | ​ | $ | 445,849 | ​ | $ | — | ​ | $ | 445,849
(1) | The investments, which consisted of equity investments of $130.5 million and money market funds of $174.2 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, 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.
​ ​ The fair values of our equity investments in Armata 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 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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