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Consolidated Entities and Acquisitions | 9 Months Ended
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Sep. 30, 2023
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. As part of 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. (“InCarda”), ImaginAb, Inc. (“ImaginAb”), Gate Neurosciences, Inc. (“Gate”) and Nanolive SA (“Nanolive”), which had a total carrying value of $39.4 million, to ITH. The summarized financial information of TRC for the three and nine months ended September 30, 2022 are presented as follows:
|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
(In thousands) |  | 2022 |  |  | 2022 |
Royalty revenue |  | $ | — |  |  | $ | 72,029 |
Operating expenses |  |  | (5 | ) |  |  | 332 |
Income (loss) from operations |  |  | 5 |  |  |  | 71,697 |
Other income, net |  |  | — |  |  |  | 10 |
Realized loss |  |  | (39,386 | ) |  |  | (39,386 | )
Income tax expense, net |  |  | — |  |  |  | 1 |
Changes in fair values of equity and long-term investments |  |  | — |  |  |  | (8,884 | )
Net income (loss) |  | $ | (39,381 | ) |  | $ | 23,438 |
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. 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. Our maximum exposure to loss is equal to the amount we invested in the entity. As of September 30, 2023, we held approximately 100% of the economic interest of the Partnership. As of September 30, 2023 and December 31, 2022, total assets of the Part nership were $298.6 million and $320.6 million, respectively, of which the majority was attributable to equity, debt and long-term investments. As of September 30, 2023 and December 31, 2022, total liabilities were $1.1 million and $1.6 million, respectively. The partnership’s assets can only be used to settle its own obligations. During the three and nine months ended September 30, 2023, we recorded $1.1 million and $1.2 million, respectively, of net investment-related income earned by the Partnership, and $22.4 million and $22.7 million of net negative changes, respectively, in fair values of equity and long-term investments in the unaudited condensed consolidated statements of income. During the three and nine months ended September 30, 2022, we recorded $0.3 million and $1.0 million, respectively, of net investment-related expenses incurred by the Partnership, and $10.5 million and $14.9 million, respectively, of net negative changes in fair values of equity and long-term investments in the unaudited condensed consolidated statements of income. 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. 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. Our investments in Entasis consisted of shares of common stock and warrants to purchase shares of Entasis common stock. The fair value of Entasis’ common stock was measured based on its closing market price at each balance sheet date. We used the Black-Scholes-Merton pricing model to estimate the fair value of the warrants. On February 17, 2022, Innoviva Strategic Opportunities, LLC (“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 c hanges in fair values of equity method investments, net, in the unaudited condensed consolidated statement of income for the period. We completed our acquisition of Entasis’ minority interest on July 11, 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 minority 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 purchase price allocation based on new and additional information related to product sales forecast provided by Entasis and deferred tax liabilities. In February 2023, we recorded a measurement period adjustment of $1.2 million increase in goodwill, primarily related to a decrease in intangible assets of $0.8 million and an increase in deferred tax liabilities of $0.4 million. The measurement period adjustment did not impact the consolidated net income for the periods presented. 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 |  |  | 11,493 |
Intangible assets |  |  | 106,700 |
Other assets |  |  | 302 |
Total assets acquired |  | $ | 150,222 |
Accounts payable |  | $ | 1,583 |
Accrued personnel-related expenses |  |  | 1,058 |
Other current liabilities |  |  | 5,096 |
Deferred tax liabilities |  |  | 7,769 |
Total liabilities assumed |  | $ | 15,506 |
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 7, “Goodwill and Intangible Assets” for more discussion on the intangible assets recognized as part of this acquisition. 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 and nine months ended September 30, 2022 included the net loss attributable to Innoviva stockholders since the consolidation date of $2.7 million and $13.6 million, respectively, from the results of operations of Entasis. 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 brought 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 complicated intra-abdominal infections (cIAIs). We incurred approximately $5.3 million in acquisition-related costs in connection with this acquisition during the year ended December 31, 2022. The fair values assigned to assets acquired and liabilities assumed as of August 22, 2022 were based on management’s best estimates and assumptions. In June 2023, we recorded a measurement period adjustment of $13.1 million decrease in goodwill, primarily related to an increase in deferred tax assets of $10.5 million and a decrease in deferred tax liabilities of $2.6 million. In August 2023, we recorded a measurement period adjustment of $3.0 million increase in goodwill, primarily related to a decrease in deferred tax assets of $2.4 million and an increase in deferred tax liabilities of $0.6 million. T he following table represents the adjusted fair values of the assets acquired and liabilities assumed by us in the transaction:
(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 |  |  | 6,411 |
Intangible assets |  |  | 151,000 |
Deferred tax assets |  |  | 7,461 |
Other assets |  |  | 710 |
Total assets acquired |  | $ | 287,951 |
Accounts payable |  | $ | 1,237 |
Deferred revenue, current |  |  | 2,849 |
Other accrued liabilities |  |  | 11,362 |
Other long-term liabilities |  |  | 65,944 |
Total liabilities assumed |  | $ | 81,392 |
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 7, “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 three and nine months ended September 30, 2022 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.
|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
(In thousands) |  | 2022 |  |  | 2022 |
Revenue |  | $ | 72,830 |  |  | $ | 292,077 |
Net income |  | $ | 223,082 |  |  | $ | 273,301 |
Net income attributable to Innoviva stockholders |  | $ | 274,407 |  |  | $ | 282,704 |

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