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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                   

Commission File Number: 000-30319

INNOVIVA, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware

94-3265960

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification No.)

1350 Old Bayshore Highway Suite 400

Burlingame, CA 94010

(Address of Principal Executive Offices)

(650238-9600

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, par value $0.01 per share

INVA

The NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes    No  

The number of shares of registrant’s common stock outstanding on July 20, 2020 was 101,392,431.

Table of Contents

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of June 30, 2020 (Unaudited) and December 31, 2019

3

Unaudited Consolidated Statements of Income for the Three and Six Months Ended June 30, 2020 and 2019

4

Unaudited Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2020 and 2019

5

Unaudited Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019

6

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019

7

Notes to Unaudited Consolidated Financial Statements

8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3. Quantitative and Qualitative Disclosures About Market Risk

22

Item 4. Controls and Procedures

22

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

22

Item 1A. Risk Factors

23

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

23

Item 3. Defaults Upon Senior Securities

23

Item 4. Mine Safety Disclosure

23

Item 5. Other Information

23

Item 6. Exhibits

24

Signatures

25

Exhibits

2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INNOVIVA, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

    

June 30, 

    

December 31, 

2020

2019

(unaudited)

*

Assets

Current assets:

Cash and cash equivalents

$

413,147

$

278,096

Short-term marketable securities

 

3,999

 

72,749

Related party receivables from collaborative arrangements

 

82,402

 

79,427

Prepaid expenses and other current assets

 

645

 

962

Total current assets

 

500,193

 

431,234

Property and equipment, net

 

37

 

33

Equity investments

128,613

Capitalized fees paid to a related party, net

 

132,164

 

139,076

Deferred tax assets, net

118,348

154,171

Other assets

 

264

 

312

Total assets

$

879,619

$

724,826

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable

$

195

$

10

Accrued personnel-related expenses

 

291

 

647

Accrued interest payable

 

4,152

 

4,152

Other accrued liabilities

 

776

 

562

Total current liabilities

 

5,414

 

5,371

Long-term debt, net of discount and issuance costs

 

381,230

 

377,120

Other long-term liabilities

 

163

 

219

Commitments and contingencies (Note 8)

Stockholders’ equity:

Preferred stock: $0.01 par value, 230 shares authorized, no shares issued and outstanding

Common stock: $0.01 par value, 200,000 shares authorized, 101,392 and 101,288 issued and outstanding as of June 30, 2020 and December 31, 2019, respectively

 

1,015

 

1,013

Additional paid-in capital

 

1,260,017

 

1,258,859

Accumulated other comprehensive income (loss)

 

(2)

 

27

Accumulated deficit

 

(804,123)

 

(946,404)

Total Innoviva stockholders’ equity

456,907

313,495

Noncontrolling interest

35,905

28,621

Total stockholders’ equity

 

492,812

 

342,116

Total liabilities and stockholders’ equity

$

879,619

$

724,826

*Consolidated balance sheet as of December 31, 2019 has been derived from audited consolidated financial statements.

See accompanying notes to consolidated financial statements.

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INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

Royalty revenue from a related party, net of amortization of capitalized fees paid to a related party of $3,456 in the three months ended June 30, 2020 and 2019, and $6,912 in the six months ended June 30, 2020 and 2019

$

68,946

$

64,107

$

147,624

$

119,290

Revenue from collaborative arrangements with a related party

10,000

10,000

Total net revenue

78,946

64,107

157,624

119,290

Operating expenses:

Research and development

559

559

General and administrative

 

2,596

 

4,347

 

5,159

 

7,362

Total operating expenses

 

3,155

 

4,347

 

5,718

 

7,362

Income from operations

 

75,791

 

59,760

 

151,906

 

111,928

Other income (expense), net

 

30

 

(8)

 

98

 

(7)

Interest income

 

158

 

1,403

 

1,460

 

2,378

Interest expense

 

(4,561)

 

(4,661)

 

(9,077)

 

(9,278)

Changes in fair values of equity investments

46,698

68,613

Income before income taxes

118,116

56,494

213,000

105,021

Income tax expense, net

19,891

10,433

35,823

18,941

Net income

98,225

46,061

177,177

86,080

Net income attributable to noncontrolling interest

21,381

8,321

34,896

14,550

Net income attributable to Innoviva stockholders

$

76,844

$

37,740

$

142,281

$

71,530

Basic net income per share attributable to Innoviva stockholders

$

0.76

$

0.37

$

1.40

$

0.71

Diluted net income per share attributable to Innoviva stockholders

$

0.69

$

0.34

$

1.27

$

0.65

Shares used to compute Innoviva basic and diluted net income per share:

Shares used to compute basic net income per share

101,324

101,151

101,280

101,105

Shares used to compute diluted net income per share

113,545

113,391

113,527

113,384

See accompanying notes to consolidated financial statements.

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INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

Net income

$

98,225

$

46,061

$

177,177

$

86,080

Unrealized gain on marketable securities, net

 

(35)

 

23

 

(29)

 

36

Comprehensive income

98,190

46,084

177,148

86,116

Comprehensive income attributable to noncontrolling interest

21,381

8,321

34,896

14,550

Comprehensive income attributable to Innoviva stockholders

$

76,809

$

37,763

$

142,252

$

71,566

See accompanying notes to consolidated financial statements.

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INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

Six months ended June 30, 2020

Additional

Accumulated Other

Total

Common Stock

Paid-In

Comprehensive

Accumulated

Noncontrolling

Stockholders’

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Interest

    

Equity

Balance as of December 31, 2019

 

101,288

1,013

1,258,859

27

$

(946,404)

$

28,621

$

342,116

Distributions to noncontrolling interest

 

 

 

 

 

 

(15,810)

 

(15,810)

Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding

 

32

 

 

170

 

 

 

 

170

Stock-based compensation

 

 

 

435

 

 

 

 

435

Net income

 

 

 

 

 

65,437

 

13,515

 

78,952

Other comprehensive income

 

 

 

 

6

 

 

 

6

Balance as of March 31, 2020

 

101,320

$

1,013

$

1,259,464

$

33

$

(880,967)

$

26,326

$

405,869

Equity activity of noncontrolling interest from a consolidated variable interest entity

350

350

Distributions to noncontrolling interest

 

 

 

 

 

 

(12,152)

 

(12,152)

Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding

 

72

 

2

 

178

 

 

 

 

180

Stock-based compensation

 

 

 

375

 

 

 

 

375

Net income

 

 

 

 

 

76,844

 

21,381

 

98,225

Other comprehensive income

 

 

 

 

(35)

 

 

 

(35)

Balance as of June 30, 2020

 

101,392

$

1,015

$

1,260,017

$

(2)

$

(804,123)

$

35,905

$

492,812

Six months ended June 30, 2019

Additional

Accumulated Other

Total

Common Stock

Paid-In

Comprehensive

Accumulated

Noncontrolling

Stockholders’

    

Shares

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Interest

    

Equity

Balance as of December 31, 2018

101,098

$

1,011

$

1,256,267

$

(3)

$

(1,103,692)

$

5,469

$

159,052

Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding

85

1

253

254

Stock-based compensation

605

605

Net income

33,790

6,229

40,019

Other comprehensive income

13

13

Balance as of March 31, 2019

101,183

$

1,012

$

1,257,125

$

10

$

(1,069,902)

$

11,698

$

199,943

Exercise of stock options, and issuance of common stock units and stock awards, net of repurchase of shares to satisfy tax withholding

89

1

200

201

Stock-based compensation

474

474

Net income

37,740

8,321

46,061

Other comprehensive income

23

23

Balance as of June 30, 2019

101,272

$

1,013

$

1,257,799

$

33

$

(1,032,162)

$

20,019

$

246,702

See accompanying notes to consolidated financial statements.

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INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Six Months Ended June 30, 

    

2020

    

2019

Cash flows from operating activities

Net income

$

177,177

$

86,080

Adjustments to reconcile net income to net cash provided by operating activities:

Deferred income taxes

35,823

18,940

Depreciation and amortization

 

6,921

 

7,080

Stock-based compensation

 

810

 

1,079

Amortization of debt discount and issuance costs

4,110

3,820

Amortization of discount on short-term investments

(336)

(1,124)

Amortization of lease guarantee

(135)

(162)

Changes in fair values of equity investments

(68,613)

Other non-cash items

6

Changes in operating assets and liabilities:

Receivables from collaborative arrangements

 

(2,975)

 

15,723

Prepaid expenses and other current assets

 

317

 

390

Accounts payable

 

185

 

1,128

Accrued personnel-related expenses and other accrued liabilities

 

(15)

 

343

Accrued interest payable

 

 

(2)

Operating lease liability

(144)

Net cash provided by operating activities

 

153,275

 

133,151

Cash flows from investing activities

Maturities of marketable securities

 

82,000

 

57,875

Purchases of marketable securities

 

(12,943)

 

(111,935)

Purchases of equity investments

(60,000)

Purchases of property and equipment

(13)

Net cash provided by (used in) investing activities

9,044

 

(54,060)

Cash flows from financing activities

Repurchase of shares to satisfy tax withholding

(72)

(74)

Payments of cash dividends to stockholders

(11)

Proceeds from issuances of common stock, net

422

529

Net proceeds from the issuance of variable interest entity's equity

344

Distributions to noncontrolling interest

(27,962)

Net cash provided by (used in) financing activities

 

(27,268)

 

444

Net increase in cash and cash equivalents

 

135,051

 

79,535

Cash and cash equivalents at beginning of period

 

278,096

 

62,417

Cash and cash equivalents at end of period

$

413,147

$

141,952

Supplemental disclosure of cash flow information

Cash paid for interest

$

4,967

$

5,461

See accompanying notes to consolidated financial statements.

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INNOVIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of Operations and Summary of Significant Accounting Policies

Description of Operations

Innoviva Inc. (referred to as "Innoviva", the "Company", or "we" and other similar pronouns) is a company with a portfolio of royalties that include respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR®/BREO® ELLIPTA® (fluticasone furoate/ vilanterol, “FF/VI”), ANORO® ELLIPTA® (umeclidinium bromide/ vilanterol, “UMEC/VI”) and TRELEGY® ELLIPTA® (the combination FF/UMEC/VI). Under the Long-Acting Beta2 Agonist (“LABA”) Collaboration Agreement, Innoviva is entitled to receive royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion; and royalties from the sales of ANORO® ELLIPTA® which tier upward at a range from 6.5% to 10%. Innoviva is also entitled to 15% of royalty payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC (“TRC”), including TRELEGY® ELLIPTA® and any other product or combination of products that may be discovered or developed in the future under the LABA Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the “GSK Agreements”), which have been assigned to TRC other than RELVAR®/BREO® ELLIPTA® and ANORO® ELLIPTA®.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In our opinion, the unaudited consolidated financial statements have been prepared on the same basis as audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of our financial position, results of operations, comprehensive income and cash flows. The interim results are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2020 or any other period.

The accompanying unaudited consolidated financial statements include the accounts of Innoviva and certain variable interest entities for which we are the primary beneficiary. All intercompany transactions have been eliminated. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income (loss) attributable to noncontrolling interest in our unaudited consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”) on February 19, 2020, and as amended on February 21, 2020 (“2019 Form 10-K”).

Variable Interest Entities

We evaluate our ownership, contractual and other interest in the entities that we invest in to determine if they are variable interest entities (“VIEs”), whether we have a variable interest in those entities and the nature and extent of those interests. Based on our evaluation, if we determine we are the primary beneficiary of a VIE, we consolidate the entity’s financial results into our financial statements.

We consolidate the financial results of TRC and Pulmoquine Therapeutics, Inc. (“Pulmoquine”), which we have determined to be VIEs, because 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, and we are the primary beneficiary of the entities.

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Table of Contents

Equity Investments

We invest from time to time in equity securities of private or public companies. If we determine that we do not have control over these companies under either voting or VIE models, we then determine if we have an ability to exercise significant influence via voting interests, board representation or other business relationships. We may account for the equity investments where we exercise significant influence using either an equity method of accounting or at fair value by electing the fair value option under Accounting Standards Codification ("ASC") Topic 825, Financial Instruments. If the fair value option is applied to an investment that would otherwise be accounted for under the equity method, we apply it to all our financial interests in the same entity (equity and debt, including guarantees) that are eligible items. All gains and losses from fair value changes, unrealized and realized, are presented as changes in fair values of equity investments, net on the consolidated statements of income.

If we conclude that we do not have an ability to exercise significant influence over an investee, we may elect to account for an equity security without a readily determinable fair value at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

As of June 30, 2020, we accounted for our equity investments in common stock and warrants of Armata Pharmaceuticals, Inc. (NYSE American: ARMP) (“Armata ") and Entasis Therapeutics Holdings Inc. (NASDAQ: ETTX) ("Entasis”) at fair value by electing the fair value option and presented the investments as equity investments on the consolidated balance sheets.

Accounting Pronouncement Adopted by the Company

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13 Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, as clarified in subsequent amendments to the initial guidance (collectively, Topic 326). Topic 326 requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecast. ASC 326 must be adopted using a modified retrospective approach with a cumulative effect adjustment as of the beginning of the reporting period in which the guidance is adopted. Topic 326 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We adopted Topic 326 effective January 1, 2020. The adoption did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Standards or Updates Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We are currently in the process of evaluating the effects of the provisions of ASU 2019-12 on our financial statements.

2. Net Income Per Share

Basic net income per share attributable to Innoviva stockholders is computed by dividing net income attributable to Innoviva stockholders by the weighted-average number of shares of common stock outstanding. Diluted net income per share attributable to Innoviva stockholders is computed by dividing net income attributable to Innoviva stockholders by the weighted-average number of shares of common stock and dilutive potential common stock equivalents then outstanding. Dilutive potential common stock equivalents include the assumed exercise, vesting and issuance of employee stock awards using the treasury stock method, as well as common stock issuable upon assumed conversion of our convertible subordinated notes due 2023 (the “2023 Notes”) using the if converted method.

Our convertible senior notes due 2025 (the “2025 Notes”) are convertible, based on the applicable conversion rate, into cash, shares of our common stock or a combination thereof, at our election. Our current intent is to settle the principal amount of the 2025 Notes in cash upon conversion. The impact of the assumed conversion premium to diluted net income per share is computed using the treasury stock method. As the average market price per share of our common stock as reported on The Nasdaq Global Select Market was lower than the initial conversion price of $17.26 per share, there was no dilutive effect of the assumed conversion premium for the three and six months ended June 30, 2020 and 2019, respectively.

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The following table shows the computation of basic and diluted net income per share for the three and six months ended June 30, 2020 and 2019:

Three Months Ended June 30, 

Six Months Ended June 30, 

(In thousands except per share data)

    

2020

    

2019

    

2020

    

2019

Numerator:

Net income attributable to Innoviva stockholders, basic

$

76,844

$

37,740

$

142,281

$

71,530

Add: interest expense on 2023 Notes

1,184

1,158

2,364

2,325

Net income attributable to Innoviva stockholders, diluted

$

78,028

$

38,898

$

144,645

$

73,855

Denominator:

Weighted-average shares used to compute basic net income per share attributable to Innoviva stockholders

 

101,324

 

101,151

 

101,280

 

101,105

Dilutive effect of 2023 Notes

12,189

12,189

12,189

12,189

Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan

32

51

58

90

Weighted-average shares used to compute diluted net income per share attributable to Innoviva stockholders

 

113,545

 

113,391

 

113,527

 

113,384

Net income per share attributable to Innoviva stockholders

Basic

$

0.76

$

0.37

$

1.40

$

0.71

Diluted

$

0.69

$

0.34

$

1.27

$

0.65

Anti-Dilutive Securities

The following common stock equivalents were not included in the computation of diluted net income per share because their effect was anti-dilutive:

Three Months Ended June 30, 

Six Months Ended June 30, 

(In thousands)

    

2020

    

2019

    

2020

    

2019

Outstanding options and awards granted under equity incentive plan and employee stock purchase plan

 

1,154

1,188

1,124

1,120

3. Revenue Recognition and Collaborative Arrangements

Net Revenue from Collaborative Arrangements

Net revenue recognized under our GSK Agreements was as follows:

Three Months Ended June 30, 

Six Months Ended June 30, 

(In thousands)

    

2020

    

2019

    

2020

    

2019

Royalties from a related party - RELVAR/BREO

$

45,570

$

47,086

$

101,719

$

89,826

Royalties from a related party - ANORO

11,199

10,635

21,049

19,205

Royalties from a related party - TRELEGY

15,633

9,842

31,768

17,171

Total royalties from a related party

72,402

67,563

154,536

126,202

Less: amortization of capitalized fees paid to a related party

 

(3,456)

 

(3,456)

 

(6,912)

 

(6,912)

Royalty revenue

68,946

64,107

147,624

119,290

Strategic alliance - MABA program

10,000

10,000

Total net revenue from GSK

$

78,946

$

64,107

$

157,624

$

119,290

During the three months ended June 30, 2020, we recognized $10.0 million in revenue in connection with the termination of the Bifunctional Muscarinic Antagonist-Beta2 Agonist (“MABA”) program under the Strategic Alliance Agreement with GSK.

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4. Consolidated Entities

Theravance Respiratory Company, LLC

As of June 30, 2020, and December 31, 2019, $25.6 million and $14.4 million, respectively, of the related party receivables from collaborative arrangements were attributable to TRC. The cash balance attributable to TRC as of June 30, 2020 was $16.5 million. Total revenue for TRC related to TRELEGY® ELLIPTA® was $15.6 million and $9.8 million for the three months ended June 30, 2020 and 2019, respectively, and $31.8 million and $17.2 million for the six months ended June 30, 2020 and 2019, respectively. Total revenue for TRC also included a $10.0 million fee for the termination of the MABA program for the three and six months ended June 30, 2020. Total operating expenses were $0.5 million and $0.8 million for the three and six months ended June 30, 2020, respectively, compared to minimal amounts for the same periods in 2019.

Pulmoquine Therapeutics, Inc.

On April 20, 2020, we entered into a securities purchase agreement with Pulmoquine to purchase 5,808,550 shares of Series A preferred stock for $5.0 million in cash. Upon consummation of the transaction, we owned approximately 90.9% of Pulmoquine's outstanding shares and hold a majority voting interest. Pulmoquine is a biotechnology company focused on the research and development of an aerosolized formulation of hydroxychloroquine to treat respiratory infections, such as the novel coronavirus (“COVID-19”). As of June 30, 2020, total assets including cash balance attributable to Pulmoquine was $4.9 million. Pulmoquine does not currently generate revenue. Total operating expense was $0.6 million for the three and six months ended June 30, 2020.

5. Financial Instruments and Fair Value Measurements

Equity Investment in Armata

On January 27, 2020, we entered into a securities purchase agreement to acquire 8,710,800 shares of Armata’s common stock and warrants to purchase up to 8,710,800 additional shares of its common stock for $25.0 million in cash. Armata is a clinical stage biotechnology company focused on precisely targeted bacteriophage therapeutics for antibiotic-resistant infections. The investment is to support Armata’s ongoing advancement of its bacteriophage development programs including the expected first in human studies related to Armata's lead phage candidate, AP-PA02, targeting Pseudomonas aeruginosa, as well as AP-SA02, its phage candidate targeting Staphylococcus Aureus.

The investment was closed in two tranches on February 12, 2020 and March 27, 2020. Two of our board members joined Armata’s board. After the second closing, we owned approximately 46.7% of Armata’s common stock.

The investment provides Innoviva 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 is not the primary beneficiary of the VIE. We elected the fair value option to account for both Armata’s common stock and warrants at fair value. The fair value of Armata’s common stock is measured based on its closing market price. The warrants have an exercise price of $2.87 per share, 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’s peer companies.

As of June 30, 2020, the fair values of Armata’s common stock and warrants were estimated at $34.1 million and $26.2 million, respectively. The total fair value of both financial instruments in the amount of $60.3 million was recorded as equity investments on the consolidated balance sheets as of June 30, 2020. We recorded $13.4 million and $35.3 million of unrealized gains and fair value changes in Armata’s investments as changes in fair values of equity investments, net on the consolidated statements of income for the three and six months ended June 30, 2020, respectively.

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Equity Investment in Entasis

On April 12, 2020, we entered into a securities purchase agreement with Entasis to purchase 14,000,000 shares of Entasis common stock as well as warrants to purchase 14,000,000 additional shares of its common stock for approximately $35.0 million in cash. Entasis is a clinical-stage biotechnology company focused on the discovery and development of novel antibacterial products. The investment is to support Entasis's ongoing advancement of its pathogen-targeted antibacterial product candidates, which include their global Phase 3 registration trial evaluating a fixed-dose combination of sulbactam and durlobactam (SUL-DUR) against Acinetobacter baumanii infections.

The investment was closed in two tranches on April 22, 2020 and June 11, 2020. Innoviva has a right to designate two members to Entasis's board. After the second closing, we owned approximately 51.3% of Entasis's common stock.

The investment provides Innoviva the ability to have significant influence, but not control, over Entasis's 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, 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: Entasis'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 Entasis's peer companies.

As of June 30, 2020, the fair values of Entasis's common stock and warrants were estimated at $41.4 million and $26.9 million, respectively. The total fair value of both financial instruments in the amount of $68.3 million was recorded as equity investments on the consolidated balance sheets. We recorded $33.3 million of unrealized gains and fair value changes in Entasis's investments as changes in fair values of equity investments, net on the consolidated statements of income for the three and six months ended June 30, 2020.

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:

June 30, 2020

    

    

Gross

    

Gross

    

Unrealized

Unrealized

Estimated

(In thousands)

Amortized Cost

Gains

Losses

Fair Value

U.S. government securities

$

3,993

$

6

$

$

3,999

Money market funds

 

378,472

 

 

 

378,472

Total

$

382,465

$

6

$

$

382,471

December 31, 2019

    

    

Gross

    

Gross

    

Unrealized

Unrealized

Estimated

(In thousands)

Amortized Cost

Gains

Losses

Fair Value

U.S. government securities

$

53,799

$

35

$

$

53,834

U.S. commercial paper

 

18,915

 

 

 

18,915

Money market funds

 

233,992

 

 

 

233,992

Total

$

306,706

$

35

$

$

306,741

As of June 30, 2020, all of the available-for-sale debt securities had contractual maturities within one year, and the average duration of debt securities was approximately one month. There was no credit loss of these securities as of June 30, 2020.

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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 June 30, 2020 Using:

Quoted Price in

Active Markets

Significant Other

Significant