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. 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., ImaginAb, Inc., Gate Neurosciences, Inc. and Nanolive SA, which had a total carrying value of $39.4 million, to ITH.

The summarized financial information of TRC as of December 31, 2021 and for the relevant periods through the sale date in 2022 are presented as follows:

Balance sheet


	December 31,
(In thousands)	2021
Assets
Cash and cash equivalents	$	50,713
Receivables from collaboration arrangement		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


	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands)	2022 (1)			2021		2022 (2)			2021
Royalty revenue from a related party	$	—		$	35,585	$	72,029		$	84,055
Operating expenses		(5	)		194		332			3,811
Income from operations		5			35,391		71,697			80,244
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		—			148		(8,884	)		(589	)
Net income (loss)	$	(39,381	)	$	35,539	$	23,438		$	79,655

(1)

Three months ended September 30, 2022 represents the period from July 1, 2022 to July 20, 2022, the date of the sale of our ownership interest in TRC.

(2)

Nine months ended September 30, 2022 represents the period from January 1, 2022 to July 20, 2022, the date of the sale of our ownership interest in TRC.

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.

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 September 30, 2022, we held approximately 100% of the economic interest of the Partnership. As of September 30, 2022 and December 31, 2021, total assets of the Partnership were $289.8 million and $195.8 million, respectively, of which the majority was attributable to equity, debt and long-term investments. As of September 30, 2022 and December 31, 2021, total liabilities were $0.2 million and $0.2 million, respectively. The partnership’s assets can only be used to settle its own obligations. 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 on the unaudited condensed consolidated statements of income. During the three and nine months ended September 30, 2021, we recorded $0.2 million and $1.5 million, respectively, of net investment-related expenses incurred by the Partnership, and $10.1 million and $30.6 million, respectively, of net positive changes in fair values of equity and long-term investments on the unaudited condensed consolidated statements of income.

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 has the 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 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 matured and became 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 $7.7 million loss in the first quarter of 2022 which was included in changes in fair values of equity and long-term investments, net on the unaudited condensed consolidated statement of income for the nine months ended September 30, 2022.

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.

During the third quarter of 2022, we recorded measurement period adjustments of $2.3 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 three and nine months ended September 30, 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		3,284
Intangible assets		107,500
Other assets		302
Total assets acquired	$	142,813

Accounts payable	$	1,583
Accrued personnel-related expenses		1,057
Other current liabilities		5,097
Deferred tax liabilities		360
Total liabilities assumed	$	8,097

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.

Our unaudited condensed consolidated net income for the three and nine months ended September 30, 2022 included the net loss attributable to noncontrolling interest since the consolidation date until the date of acquisition of $2.7 million and $13.6 million, respectively.

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 complicated intra-abdominal infections (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. 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 approximately $4.9 million in acquisition-related costs in connection with this acquisition and such amount is included in selling, general and administrative expenses for the three and nine months ended September 30, 2022.

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 acquisition:


(In thousands)	August 22, 2022
Cash and cash equivalents	$	47,415
Short-term marketable securities		471
Accounts receivable		5,876
Inventory		73,900
Prepaid expenses		1,261
Other current assets		907
Property and equipment, net		13
Right-of-use assets		226
Goodwill		12,711
Intangible assets		152,500
Other assets		710
Total assets acquired	$	295,990

Accounts payable	$	1,237
Deferred revenue, current		2,849
Other accrued liabilities		11,062
Other long-term liabilities		74,283
Total liabilities assumed	$	89,431

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 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, 2022, 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		2021		2022		2021
Revenue	$	72,830	$	111,176	$	292,077	$	347,696
Net income	$	221,473	$	45,109	$	266,797	$	183,252
Net income attributable to Innoviva stockholders	$	272,797	$	19,892	$	276,200	$	129,803