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CONSOLIDATED ENTITIES AND ACQUISITIONS | 12 Months Ended
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Dec. 31, 2022
Consolidated Entities |
CONSOLIDATED ENTITIES AND ACQUISITIONS | 5. CONSOLIDATED ENTITIES AND ACQUISITIONS Consolidated Entities Theravance Respiratory Company, LLC Up until July 20, 2022, we consolidated TRC under the VIE model as we determined that TRC was a VIE and we were the primary beneficiary of the entity because we had the power to direct the economically significant activities of TRC and the obligation to absorb losses of, or the right to receive benefits from, TRC. We held 15% ownership interest of TRC. The primary source of revenue for TRC is the royalties generated from the net sales of TRELEGY® ELLIPTA® by GSK. As discussed in Note 3, “Revenue Recognition”, on July 13, 2022, ITH entered into the TRC Equity Purchase Agreement to sell our ownership interest in TRC. Upon the closing of the transaction on July 20, 2022, we received $277.5 million in cash from Royalty Pharma. We are also entitled to receive up to $50.0 million in contingent sales-based milestone payments in the future. In connection with the closing of the transaction, we also received our portion of TRC’s remaining cash balance of $4.4 million from Royalty Pharma rather than through a cash distribution from TRC. Prior to the closing of the transaction and as part of the agreement, TRC distributed its ownership interests and investments in InCarda Therapeutics, Inc., ImaginAb, Inc., Gate Neurosciences, Inc. and Nanolive SA, which had a total carrying value of $39.4 million, to ITH. We accounted for the transaction similar to an upstream sale between a parent and a VIE under ASC 810-10. As such, ITH recorded the transferred investments at their respective carrying values and no gain or loss was recognized in the consolidated statement of income. The summarized financial information for TRC as of December 31, 2021 and for the relevant periods through the sale date in 2022 are presented as follows: Balance sheet
(In thousands) |  | December 31, 2021 |
Assets |  |  |
Cash and cash equivalents |  | $ | 50,713 |
Receivables from collaborative arrangements |  |  | 42,492 |
Prepaid expenses and other current assets |  |  | 71 |
Equity and long-term investments |  |  | 37,695 |
Total assets |  | $ | 130,971 |
Liabilities and LLC Members’ Equity |  |  |
Current liabilities |  | $ | 252 |
LLC members’ equity |  |  | 130,719 |
Total liabilities and LLC members’ equity |  | $ | 130,971 |
Income statements
|  | Year Ended December 31, |
(In thousands) |  | 2022 (1) |  |  | 2021 |  |  | 2020 |
Royalty revenue |  | $ | 72,029 |  |  | $ | 126,688 |  |  | $ | 73,089 |
Revenue from collaborative arrangements |  |  | — |  |  |  | — |  |  |  | 10,000 |
Total net revenue |  |  | 72,029 |  |  |  | 126,688 |  |  |  | 83,089 |
Operating expenses |  |  | 332 |  |  |  | 3,956 |  |  |  | 2,612 |
Income from operations |  |  | 71,697 |  |  |  | 122,732 |  |  |  | 80,477 |
Other income, net |  |  | 10 |  |  |  | — |  |  |  | 38 |
Realized loss |  |  | (39,386 | ) |  |  | — |  |  |  | — |
Income tax expense, net |  |  | 1 |  |  |  | — |  |  |  | — |
Changes in fair values of other equity and long-term investments |  |  | (8,884 | ) |  |  | (1,541 | ) |  |  | 1,147 |
Net income |  | $ | 23,438 |  |  | $ | 121,191 |  |  | $ | 81,662 |
(1) The year ended December 31, 2022 represents the period from January 1, 2022 to July 20, 2022, the date of the sale of our ownership interest in TRC. 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, the 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 the Company's 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 We consolidate ISP Fund LP under the VIE model as we have determined that ISP Fund LP is a VIE and we are the primary beneficiary of the entity via our related party relationships with Sarissa Capital entities. As of December 31, 2022, we continued to hold 100% of the economic interest of Partnership. As of December 31, 2022 and 2021, total assets of the Partnership were $320.6 million and $195.8 million, respectively, of which the majority was attributable to equity, debt and long-term investments. As of December 31, 2022 and 2021, total liabilities of the Partnership w ere $1.6 mill ion and $0.2 million, respectively. The Partnership's assets can only be used to settle its own obligations. During the year ended December 31, 2022, the Partnership incurred $5.2 million in net investment-related expenses, generated $2.0 million interest income, recorded $6.8 million in net realized gains and $9.9 million in net unrealized losses as changes in fair values of other equity and long-term investments, net, on the consolidated statements of income. During the year ended December 31, 2021, the Partnership incurred $3.6 million in net investment-related expense, generated $1.8 million interest and dividend income, and recorded net $10.5 million realized gains and net $2.4 million unrealized losses as changes in fair values of other equity and long-term investments, net, on the consolidated statements of income. We account for the long-term investments held by ISP Fund LP as equity investments measured at fair value and an investment in convertible notes as trading security. Acquisitions 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 an advanced, late clinical-stage biopharmaceutical 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 had the right to designate two members to Entasis’ board of directors. 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 was measured based on its closing market price at each balance sheet date. The warrants had 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 had an exercise price of $2.00 per share. All of the warrants were exercisable immediately within five years from the issuance date of the warrants and included a cashless exercise option. We used 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 bore an annual interest rate of 0.59% and was due to mature and become payable on August 18, 2022 unless it was converted at a conversion price of $1.48 before the maturity date. With this financing, we determined that we had 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 were the primary beneficiary of Entasis. Accordingly, we consolidated Entasis’ financial position and results of operations effective on February 17, 2022. Our equity ownership 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 $7.8 million loss in the first quarter of 2022 which was included in changes in fair values of equity method investments, net, on the consolidated statements of income for the year ended December 31, 2022. We completed our acquisition of Entasis’ remaining noncontrolling interest on July 11, 2022. We remeasured our holdings in Entasis as of that date and recognized a $1.4 million loss, which was included in changes in fair values of equity method investments, net, on the consolidated statement of income for the year ended December 31, 2022. No payments were made toward the convertible promissory note through the date of acquisition of Entasis. In connection with the acquisition, all of the Entasis warrants were replaced with Innoviva warrants (the “Replacement Warrants”) of equivalent value and bearing the same terms. The Replacement Warrants are classified as equity. We recognized the difference between the acquisition price and the carrying value of the acquired noncontrolling interest on July 11, 2022 in our additional paid-in capital. The fair values assigned to assets acquired and liabilities assumed as of February 17, 2022 were based on management’s best estimates and assumptions. After the acquisition in July 2022, we adjusted the preliminary estimates of fair value of assets acquired and liabilities assumed based on new and additional information related to product sales forecast provided by Entasis and deferred tax liabilities. During the year ended December 31, 2022, we recorded measurement period adjustments of $4.7 million decrease in goodwill, primarily related to a decrease in estimated purchase price of $1.4 million, an increase in noncontrolling interests of $1.7 million, and an increase in intangible assets of $2.5 million. The cumulative impact of the measurement period adjustments included in the consolidated net income for the year ended December 31, 2022 was not material. 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 represents the adjusted fair values of the assets acquired and liabilities assumed by us in the transaction:
(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 |  |  | 959 |
Goodwill |  |  | 10,260 |
Intangible assets |  |  | 107,500 |
Other assets |  |  | 302 |
Total assets acquired |  | $ | 149,789 |
Accounts payable |  | $ | 1,583 |
Accrued personnel-related expenses |  |  | 1,058 |
Other accrued liabilities |  |  | 5,096 |
Deferred tax liabilities |  |  | 7,336 |
Total liabilities assumed |  | $ | 15,073 |
Total assets acquired, net |  | $ | 134,716 |
The goodwill arising from the acquisition of Entasis is primarily attributable to Entasis’ assembled workforce and the value associated with growing our business more efficiently. The goodwill from this acquisition is not expected to be deductible for tax purposes. Refer to Note 8, “Goodwill and Intangible Assets”, for more discussion on the intangible assets recognized as part of this acquisition. Our consolidated net income for the year ended December 31, 2022 included the net loss attributable to noncontrolling interest since the consolidation date until the date of acquisition of $13.6 million. La Jolla Pharmaceutical Company On August 22, 2022, ISO acquired La Jolla for a total consideration of $206.6 million. ISO acquired La Jolla at a price of $6.23 per share. La Jolla is dedicated to the commercialization of innovative therapies that improve outcomes in patients suffering from life-threatening diseases. La Jolla brings to Innoviva an established product portfolio, including GIAPREZA® (angiotensin II), approved to increase blood pressure in adults with septic or other distributive shock and XERAVA® (eravacycline) for the treatment of cIAIs. The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of August 22, 2022. During the year ended December 31, 2022, we recorded measurement period adjustments of $3.7 million increase in goodwill, primarily related to a decrease in inventory and intangible assets of $7.7 million and $1.5 million, respectively, and an increase in deferred tax liabilities of $2.6 million, partially offset by a decrease in other long-term liabilities of $8.3 million. The cumulative impact of the measurement period adjustments included in the consolidated net income for the year ended December 31, 2022 was not material. We have completed a preliminary valuation and expect to finalize it as soon as practicable, but no later than one year from the acquisition date. The purchase accounting for this transaction is not yet finalized. We incurred approximate ly $5.3 million in acquisition-related costs in connection with this acquisition and such amount is included in selling, general and administrative exp enses for the year ended December 31, 2022. The following table summarizes the adjusted allocation of the fair values assigned to the assets acquired and liabilities assumed as of the date of the acquisition:
(In thousands) |  | August 22, 2022 |
Cash and cash equivalents |  | $ | 47,415 |
Short-term marketable securities |  |  | 471 |
Accounts receivable |  |  | 5,876 |
Inventory |  |  | 66,200 |
Prepaid expenses |  |  | 1,261 |
Other current assets |  |  | 907 |
Property and equipment, net |  |  | 13 |
Right-of-use assets |  |  | 226 |
Goodwill |  |  | 16,453 |
Intangible assets |  |  | 151,000 |
Other assets |  |  | 710 |
Total assets acquired |  | $ | 290,532 |
Accounts payable |  | $ | 1,237 |
Deferred revenue |  |  | 2,849 |
Other accrued liabilities |  |  | 11,362 |
Other long-term liabilities |  |  | 65,944 |
Deferred tax liabilities |  |  | 2,581 |
Total liabilities assumed |  | $ | 83,973 |
Total assets acquired, net |  | $ | 206,559 |
The goodwill arising from the acquisition of La Jolla is primarily attributable to La Jolla’s assembled workforce and the value associated with leveraging the workforce to develop and commercialize new drug products in the future and growing our business more efficiently. The goodwill from this acquisition is not expected to be deductible for tax purposes. Refer to Note 8, “Goodwill and Intangible Assets”, for more discussion on the intangible assets recognized as part of this acquisition. Pro Forma Financial Information The following table presents certain unaudited pro-forma financial information for the years ended December 31, 2022 and 2021 as if the consolidation of Entasis and La Jolla occurred on January 1, 2021. The unaudited pro forma financial information is presented for informational purposes only, and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place on January 1, 2021, or of results that may occur in the future. The unaudited pro forma financial information combines the historical results of the Entasis and La Jolla with the Company’s consolidated historical results and includes certain adjustments including, but not limited to, fair value adjustments to equity investments in Entasis’ common stock and warrants, fair value adjustments to inventory, amortization of intangible assets, and interest expense on deferred royalty obligations and acquisition-related costs.
|  | Year Ended December 31, |
(In thousands) |  | 2022 |  |  | 2021 |
Revenue |  | $ | 357,880 |  |  | $ | 435,398 |
Net income |  | $ | 204,987 |  |  | $ | 281,719 |
Net income attributable to Innoviva stockholders |  | $ | 214,390 |  |  | $ | 197,535 |

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