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Consolidated Entities | 3 Months Ended
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Mar. 31, 2022
Consolidated Entities |
Consolidated Entities | 4. Consolidated Entities We consolidate the financial results of Theravance Respiratory Company, LLC ("TRC") and Entasis Therapeutics Holdings, Inc. (“Entasis”), 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, we are the primary beneficiary of the entities. We also consolidate the financial results of ISP Fund LP (the “Partnership”), which is our partnership with Sarissa Capital Management LP (“Sarissa Capital”), as we have determined that the Partnership is a VIE and we are its primary beneficiary. Theravance Respiratory Company, LLC We held 15% of the economic interest of TRC as of March 31, 2022 and December 31, 2021. The primary source of revenue for TRC is the royalties generated from the net sales of TRELEGY® ELLIPTA® by GSK. As of March 31, 2022, TRC held equity and long-term investments in InCarda Therapeutics, Inc. (“InCarda”), ImaginAb, Inc. (“ImaginAb”), Gate Neurosciences, Inc. ("Gate") and Nanolive SA ("Nanolive"). Refer to Note 5, “Financial Instruments and Fair Value Measurements,” for more information. The summarized financial information for TRC is presented as follows: Balance sheets
|  | March 31, |  |  | December 31, |
(In thousands) |  | 2022 |  |  | 2021 |
Assets |  |  |  |  |  |
Cash and cash equivalents |  | $ | 74,160 |  |  | $ | 50,713 |
Receivables from collaborative arrangements |  |  | 29,309 |  |  |  | 42,492 |
Prepaid expenses and other current assets |  |  | 84 |  |  |  | 71 |
Equity and long-term investments |  |  | 49,341 |  |  |  | 37,695 |
Total assets |  | $ | 152,894 |  |  | $ | 130,971 |
Liabilities and LLC Members’ Equity |  |  |  |  |  |
Current liabilities |  | $ | 289 |  |  | $ | 252 |
LLC members’ equity |  |  | 152,605 |  |  |  | 130,719 |
Total liabilities and LLC members’ equity |  | $ | 152,894 |  |  | $ | 130,971 |
Income statements
|  | Three Months Ended March 31, |
(In thousands) |  | 2022 |  |  | 2021 |
Royalty revenue from a related party |  | $ | 29,309 |  |  | $ | 22,084 |
Operating expenses |  |  | 198 |  |  |  | 3,281 |
Income from operations |  |  | 29,111 |  |  |  | 18,803 |
Income tax expense, net |  |  | 1 |  |  |  | — |
Changes in fair values of equity and long-term investments |  |  | 429 |  |  |  | (483 | )
Net income |  | $ | 29,541 |  |  | $ | 18,320 |
Entasis Therapeutics Holdings, Inc. We started investing in Entasis in 2020 as part of our capital allocation strategy of deploying cash generated from royalty income and investing in different life sciences companies. Entasis is a clinical-stage biotechnology company focused on the discovery and development of novel antibacterial products. 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 for approximately $35.0 million in cash. 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. Effective in June 2020, after certain conditions were met with respect to the sales of Entasis equity shares, Innoviva has a right to designate two members to Entasis’ board. During the second quarter of 2021, Innoviva’s wholly owned subsidiary, Innoviva Strategic Opportunities, LLC ("ISO") entered into a securities purchase agreement with Entasis to acquire 10,000,000 shares of Entasis common stock and warrants to purchase 10,000,000 additional shares of Entasis common stock for approximately $20.0 million. The fair value of Entasis’ 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 and $2.675 per share for those warrants acquired in the second and third quarter of 2020, respectively. The warrants acquired in the second quarter of 2021 have an exercise price of $2.00 per share. All of 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. On February 17, 2022, ISO entered into a securities purchase agreement with Entasis pursuant to which ISO purchased a convertible promissory note for a total purchase price of $15.0 million. The note bears an annual interest rate of 0.59% and will mature and become payable on August 18, 2022 unless it is converted at a conversion price of $1.48 before the maturity date. The financing is expected to support Entasis’ product development and operations into August 2022. With this financing, we determined that we have both (i) the power to direct the economically significant activities of Entasis and (ii) the obligation to absorb the losses, or the right to receive the benefits, that could potentially be significant to Entasis and therefore, we are the primary beneficiary of Entasis. Accordingly, we consolidated Entasis’ financial position and results of operations effective on February 17, 2022. Our equity interest remained at 59.9% as of February 17, 2022, and the fair values of our holdings of Entasis common stock and warrants were remeasured and estimated at $64.5 million and $31.4 million, respectively. The remeasurement resulted in a $7.7 million loss which was included in changes in fair values of equity and long-term investments, net on the consolidated statement of income. The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date. The Company has completed a preliminary valuation and expects to finalize it as soon as practical, but no later than one year from the acquisition date. The purchase accounting for this transaction is not yet finalized. The following table summarizes the preliminary allocation of the fair values assigned to the assets acquired and liabilities assumed as of the date of the consolidation:
(In thousands) |  | February 17, 2022 |
Cash and cash equivalents |  | $ | 23,070 |
Prepaid expenses |  |  | 5,554 |
Other current assets |  |  | 1,959 |
Property and equipment, net |  |  | 185 |
Right-of-use assets |  |  | 527 |
Goodwill |  |  | 5,544 |
Intangible assets |  |  | 105,000 |
Other assets |  |  | 302 |
Total assets acquired |  | $ | 142,141 |
Accounts payable |  | $ | 1,583 |
Accrued personnel-related expenses |  |  | 1,057 |
Other current liabilities |  |  | 5,096 |
Total liabilities assumed |  | $ | 7,736 |
Total assets acquired, net |  | $ | 134,405 |
Entasis’ assets can only be used to settle its obligations. The following table provides the assets and liabilities of Entasis:
(In thousands) |  | March 31, 2022 |
Assets |  |  |
Current assets: |  |  |
Cash and cash equivalents |  | $ | 33,547 |
Prepaid expenses |  |  | 4,490 |
Other current assets |  |  | 1,841 |
Total current assets |  |  | 39,878 |
Property and equipment, net |  |  | 183 |
Right-of-use assets |  |  | 3,724 |
Goodwill |  |  | 5,544 |
Intangible assets |  |  | 105,000 |
Other assets |  |  | 303 |
Total assets |  | $ | 154,632 |
Liabilities |  |  |
Current liabilities: |  |  |
Accounts payable |  | $ | 1,781 |
Accrued personnel-related expenses |  |  | 1,529 |
Other accrued liabilities |  |  | 5,824 |
Total current liabilities |  |  | 9,134 |
Lease liabilities, long-term |  |  | 3,299 |
Total liabilities |  | $ | 12,433 |
As a result of the consolidation, we recognized a non-controlling interest of $38.5 million as of February 17, 2022. Our consolidated net income for the three months ended March 31, 2022 included the net loss since the consolidation date of $4.5 million for Entasis. The following table sets forth the pro-forma consolidated results of operations for the three months ended March 31, 2022 and 2021 as if the consolidation of Entasis occurred on January 1, 2021. The unaudited supplemental pro forma information includes adjustments for (i) increases in fair value related to the equity investments in Entasis’ common stock and warrants of $7.8 million and $11.5 million for the three months ended March 31, 2022 and 2021, respectively, and (ii) an increase for acquisition-related costs of $0.1 million for the three months ended March 31, 2021 and a corresponding decrease related to such costs for the three months ended March 31, 2022, as if the expenses were incurred in 2021 instead of 2022. The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the consolidation had taken place on the dates noted above, or of results that may occur in the future.
|  | Three Months Ended March 31, |
(In thousands) |  | 2022 |  |  | 2021 |
Revenue |  | $ | 90,059 |  |  | $ | 85,518 |
Net income |  | $ | 38,027 |  |  | $ | 110,350 |
Net income attributable to Innoviva stockholders |  | $ | 19,033 |  |  | $ | 99,067 |
ISP Fund LP In December 2020, Innoviva Strategic Partners LLC, our wholly owned subsidiary (“Strategic Partners”), contributed $300.0 million to ISP Fund LP (the “Partnership”) for investing in “long” positions in the healthcare, pharmaceutical and biotechnology sectors and became a limited partner. The general partner of the Partnership (“General Partner”) is an affiliate of Sarissa Capital. The Partnership Agreement provides for Sarissa Capital to receive management fees 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 an annual performance fee 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. In May 2021, Strategic Partners received a distribution of $110.0 million from the Partnership to provide funding to Innoviva for a strategic repurchase of shares held by GSK. On March 30, 2022, Strategic Partners made an additional capital contribution of $110.0 million to the Partnership pursuant to the letter agreement entered into between Strategic Partners, the Partnership and Sarissa Capital Fund GP LP on May 20, 2021. The capital contribution is subject to a 36-month lock up period from the contribution date. As of March 31, 2022, we held approximately 100% of the economic interest of the Partnership. As of March 31, 2022 and December 31, 2021, total assets of the Partnership were $307.6 million and $195.8 million, respectively, of which all were attributable to equity and long-term investments, and total liabilities were $0.1 million and $0.2 million, respectively. The partnership’s assets can only be used to settle its own obligations. During the three months ended March 31, 2022 and 2021, we recorded $0.3 million and $0.4 million, respectively, of net investment-related expenses incurred by the Partnership, and $2.1 million and $5.8 million, respectively, of net positive changes in fair values of equity and long-term investments on the consolidated statements of income.

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