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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 March 31, 2021

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 April 19, 2021 was 101,408,012.

Table of Contents

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of March 31, 2021 (Unaudited) and December 31, 2020

3

Unaudited Consolidated Statements of Income for the Three Months ended March 31, 2021 and 2020

4

Unaudited Consolidated Statements of Comprehensive Income for the Three Months ended March 31, 2021 and 2020

5

Unaudited Consolidated Statements of Stockholders’ Equity for the Three Months ended March 31, 2021 and 2020

6

Unaudited Consolidated Statements of Cash Flows for the Three Months ended March 31, 2021 and 2020

7

Notes to Unaudited Consolidated Financial Statements

8

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

19

Item 3. Quantitative and Qualitative Disclosures About Market Risk

24

Item 4. Controls and Procedures

25

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

25

Item 1A. Risk Factors

26

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

26

Item 3. Defaults Upon Senior Securities

26

Item 4. Mine Safety Disclosure

26

Item 5. Other Information

26

Item 6. Exhibits

27

Signatures

28

Exhibits

2

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INNOVIVA, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

March 31, 

December 31, 

    

2021

    

2020

(unaudited)

*

Assets

Current assets:

Cash and cash equivalents

$

282,890

$

246,487

Related party receivables from collaborative arrangements

 

88,974

 

93,931

Prepaid expenses and other current assets

 

1,069

 

1,640

Total current assets

 

372,933

 

342,058

Property and equipment, net

 

24

 

28

Equity and long-term investments

519,325

438,258

Capitalized fees paid to a related party, net

 

121,797

 

125,253

Deferred tax assets, net

74,023

93,759

Other assets

 

188

 

214

Total assets

$

1,088,290

$

999,570

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable

$

14

$

66

Accrued personnel-related expenses

 

652

 

490

Accrued interest payable

 

1,668

 

4,152

Other accrued liabilities

 

1,470

 

1,402

Total current liabilities

 

3,804

 

6,110

Long-term debt, net of discount and issuance costs

 

387,728

 

385,517

Other long-term liabilities

77

106

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, 101,408 and 101,392 issued and outstanding as of March 31, 2021 and December 31, 2020, respectively

 

1,014

 

1,014

Additional paid-in capital

 

1,261,326

 

1,260,900

Accumulated deficit

 

(627,879)

 

(722,002)

Total Innoviva stockholders’ equity

634,461

539,912

Noncontrolling interest

62,220

67,925

Total stockholders’ equity

 

696,681

 

607,837

Total liabilities and stockholders’ equity

$

1,088,290

$

999,570

*Consolidated balance sheet as of December 31, 2020 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 March 31, 

    

2021

    

2020

Royalty revenue from a related party, net of amortization of capitalized fees paid to a related party of $3,456 in three months ended March 31, 2021 and 2020

$

85,518

$

78,678

Operating expenses:

Research and development

 

49

 

General and administrative

 

5,986

 

2,563

Total operating expenses

 

6,035

 

2,563

Income from operations

 

79,483

 

76,115

Other income (expense), net

(433)

68

Interest income

 

30

 

1,302

Interest expense

 

(4,694)

 

(4,516)

Changes in fair values of equity and long-term investments, net

55,045

21,915

Income before income taxes

129,431

94,884

Income tax expense, net

19,736

15,932

Net income

109,695

78,952

Net income attributable to noncontrolling interest

15,572

13,515

Net income attributable to Innoviva stockholders

$

94,123

$

65,437

Basic net income per share attributable to Innoviva stockholders

$

0.93

$

0.65

Diluted net income per share attributable to Innoviva stockholders

$

0.84

$

0.59

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

Shares used to compute basic net income per share

101,365

101,235

Shares used to compute diluted net income per share

113,624

113,509

See accompanying notes to consolidated financial statements.

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INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

Three Months Ended March 31, 

    

2021

    

2020

Net income

$

109,695

$

78,952

Unrealized gain on marketable securities, net

6

Comprehensive income

109,695

78,958

Comprehensive income attributable to noncontrolling interest

15,572

13,515

Comprehensive income attributable to Innoviva stockholders

$

94,123

$

65,443

See accompanying notes to consolidated financial statements.

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INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

Three Months ended March 31, 2021

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Comprehensive

Accumulated

Noncontrolling

Stockholders’

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Interest

    

Equity

Balance as of December 31, 2020

 

101,392

$

1,014

$

1,260,900

$

$

(722,002)

$

67,925

$

607,837

Distributions to noncontrolling interest

 

 

 

 

 

 

(21,285)

 

(21,285)

Equity activity of noncontrolling interest from a consolidated variable interest entity

8

8

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

 

16

 

 

(25)

 

 

 

 

(25)

Stock-based compensation

 

 

 

451

 

 

 

 

451

Net income

 

 

 

 

 

94,123

 

15,572

 

109,695

Balance as of March 31, 2021

 

101,408

$

1,014

$

1,261,326

$

$

(627,879)

$

62,220

$

696,681

Three Months ended March 31, 2020

Accumulated

Additional

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

See accompanying notes to consolidated financial statements.

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INNOVIVA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Three Months Ended March 31, 

    

2021

    

2020

Cash flows from operating activities

Net income

$

109,695

$

78,952

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

Deferred income taxes

19,736

15,932

Depreciation and amortization

 

3,460

 

3,463

Stock-based compensation

 

451

 

435

Amortization of debt discount and issuance costs

2,211

2,032

Amortization of discount on short-term investments

(272)

Amortization of lease guarantee

(81)

Changes in fair values of equity and long-term investments, net

(54,673)

(21,915)

Other non-cash items

8

Changes in operating assets and liabilities:

Receivables from collaborative arrangements

 

4,957

 

(2,707)

Prepaid expenses and other current assets

 

571

 

140

Accounts payable

 

(52)

 

112

Accrued personnel-related expenses and other accrued liabilities

 

227

 

(126)

Accrued interest payable

 

(2,484)

 

(2,484)

Net cash provided by operating activities

 

84,107

73,481

Cash flows from investing activities

Maturities of marketable securities

 

 

54,000

Purchases of marketable securities

 

 

(12,943)

Purchases of equity and long-term investments

 

(26,394)

 

(25,000)

Purchases of property and equipment

 

 

(13)

Net cash provided by (used in) investing activities

 

(26,394)

 

16,044

Cash flows from financing activities

Repurchase of shares to satisfy tax withholding

(25)

(55)

Proceeds from issuances of common stock, net

225

Distributions to noncontrolling interest

(21,285)

(15,810)

Net cash used in financing activities

 

(21,310)

 

(15,640)

Net increase in cash and cash equivalents

 

36,403

 

73,885

Cash and cash equivalents at beginning of period

 

246,487

 

278,096

Cash and cash equivalents at end of period

$

282,890

$

351,981

Supplemental disclosure of cash flow information

Cash paid for interest

$

4,967

$

4,967

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 and other healthcare assets. Our royalty portfolio contains 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, 2021 or any other period.

The accompanying unaudited consolidated financial statements include the accounts of Innoviva, our wholly-owned subsidiaries and certain variable interest entities for which we are the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation. 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, 2020 filed with the Securities and Exchange Commission (“SEC”) on February 25, 2021 (“2020 Form 10-K”).

Variable Interest Entities

We evaluate our ownership, contractual and other interest in entities to determine if they are variable interest entities (“VIE”), 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 in our financial statements.

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Equity Investments

We invest from time to time in equity securities of private or public companies. If we determine that we have control over these companies under either voting or VIE models, we include them in our consolidated financial statements. 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 and long-term 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 using the measurement alternative described in ASC Topic 825. This measurement alternative allows us to measure the equity investment 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.

Accounting Pronouncement Adopted by the Company

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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 adopted Topic 740 effective January 1, 2021. The adoption did not have a material impact on our consolidated financial statements.

In October 2020, the FASB issued ASU 2020-10, Codification Improvements. This ASU improves the codification by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is codified in the disclosure section of the codification. The ASU also clarifies various topics in the codification so that entities can apply guidance more consistently. The ASU is effective for fiscal years beginning after December 15, 2020. We adopted ASU 2020-10 effective January 1, 2021. The adoption did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Standards or Updates Not Yet Adopted

In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which is intended to simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470-20 for convertible instruments. The ASU is effective for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years with early adoption permitted. We are currently in the process of evaluating the effects of the provisions of ASU 2020-06 on our consolidated 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.

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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 months ended March 31, 2021 and 2020, respectively.

The following table shows the computation of basic and diluted net income per share for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31, 

(In thousands except per share data)

     

2021

     

2020

Numerator:

Net income attributable to Innoviva stockholders, basic

 

$

94,123

 

$

65,437

Add: interest expense on 2023 Notes

 

1,204

 

1,180

Net income attributable to Innoviva stockholders, diluted

 

$

95,327

 

$

66,617

Denominator:

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

 

101,365

 

101,235

Dilutive effect of 2023 Notes

 

12,189

 

12,189

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

 

70

 

85

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

 

113,624

 

113,509

Net income per share attributable to Innoviva stockholders

Basic

 

$

0.93

 

$

0.65

Diluted

 

$

0.84

 

$

0.59

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 March 31, 

(In thousands)

    

2021

    

2020

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

$

1,159

 

$

1,094

3. Revenue Recognition and Collaborative Arrangements

Net Revenue from Collaborative Arrangements

Net revenue recognized under our GSK Agreements was as follows:

Three Months Ended March 31, 

(In thousands)

    

2021

    

2020

Royalties from a related party - RELVAR/BREO

$

56,390

$

56,149

Royalties from a related party - ANORO

 

10,500

 

9,850

Royalties from a related party - TRELEGY

22,084

16,135

Total royalties from a related party

 

88,974

 

82,134

Less: amortization of capitalized fees paid to a related party

 

(3,456)

 

(3,456)

Royalty revenue from GSK

$

85,518

$

78,678

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4. Consolidated Entities

We consolidate the financial results of TRC and Pulmoquine Therapeutics, Inc. (“Pulmoquine”), 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”), 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

The primary source of revenue for TRC is the royalties generated from the net sales of TRELEGY® ELLIPTA® by GSK. As of March 31, 2021, TRC held equity investments in InCarda Therapeutics, Inc. (“InCarda”) and ImaginAb, Inc. (“ImaginAb”). 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)

   

2021

2020

Assets

  

Cash and cash equivalents

$

28,444

$

38,081

Receivables from collaborative arrangements

22,084

 

24,946

Prepaid expenses and other current assets

1

 

Equity and long-term investments

22,869

 

16,959

Total assets

73,398

 

79,986

Liabilities and LLC Members' Equity

 

  

Current liabilities

640

 

508

LLC members' equity

72,758

 

79,478

Total liabilities and LLC members' equity

$

73,398

$

79,986

Income statements

    

Three Months Ended March 31,

(In thousands)

   

2021

   

2020

Royalty revenue from a related party

$

22,084

$

16,135

Operating expenses

 

3,281

 

271

Income from operations

 

18,803

 

15,864

Other income (expense), net

 

 

36

Changes in fair values of equity and long-term investments

 

(483)

 

Net income

$

18,320

$

15,900

Pulmoquine Therapeutics, Inc.

In April 2020, we purchased 5,808,550 shares of Series A preferred stock of Pulmoquine for $5.0 million in cash and held 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. As of March 31, 2021, Pulmoquine’s total assets, mainly attributable to cash and cash equivalents, were $3.3 million. Pulmoquine does not currently generate revenue. Total operating expense was de minimis for the three months ended March 31, 2021.

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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.

As of March 31, 2021, we held 100% of the economic interest of the Partnership. As of March 31, 2021, total assets of the Partnership were $304.7 million, of which all were attributable to equity and long-term investments. During the three months ended March 31, 2021, the Partnership incurred $0.4 million investment-related expenses, net of investment-related income and recorded an unrealized gain of $5.8 million from the changes of fair value as changes in fair values of equity and long-term investments, net on the consolidated statements of income.

5. Financial Instruments and Fair Value Measurements

Equity Investment in Armata

During the first quarter of 2020, Innoviva acquired 8,710,800 shares of common stock and an equal number of warrants of Armata Pharmaceuticals, Inc. (“Armata”) for $25.0 million in cash. Armata is a clinical stage biotechnology company focused on precisely targeted bacteriophage therapeutics for antibiotic-resistant infections.

On January 26, 2021, Innoviva Strategic Opportunities LLC (“ISO”), our wholly owned subsidiary, entered into a securities purchase agreement with Armata to acquire 6,153,847 shares of Armata common stock and warrants to purchase 6,153,847 additional shares of Armata common stock for approximately $20.0 million. The investment was closed in two tranches on January 26, 2021 and March 17, 2021. The investment continues to support Armata’s ongoing advancement of its bacteriophage development programs. The additional investment in the first quarter of 2021 increased Innoviva and ISO’s combined ownership to 59.6%. Armata entered into a voting agreement with the Company and ISO, pursuant to which the Company and ISO agreed not to vote or take any action by written consent with respect to any common shares held by the Company and ISO that represent, in the aggregate, more than 49.5% of the total number of shares of Armata’s common stock issued and outstanding as of the record date for voting on the matters related to election or removal of Armata’s board members. Currently, three of the eight members of Armata’s board of directors are also members of the board of directors of Innoviva.

The investment in Armata provides Innoviva and ISO 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 and ISO are not the primary beneficiary of the VIE. We continue to elect the fair value option to account for both Armata’s common stock and warrants. The fair value of Armata’s common stock is measured based on its closing market price. The warrants purchased in 2020 and 2021 have an exercise price of $2.87 and $3.25 per share, respectively, 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 and its peer companies.

As of March 31, 2021, the fair values of Armata’s common stock and warrants were estimated at $71.1 million and $54.2 million, respectively. As of December 31, 2020, the fair values of Armata’s common stock and warrants were estimated at $26.0 million and $18.0 million, respectively. The total fair value of both financial instruments in the amount of $125.3 million and $44.0 million was recorded as equity and long-term investments on the consolidated balance sheets as of March 31, 2021 and December 31, 2020, respectively. The changes in the fair values in the amount of $61.2 million and $21.9 million for the three months ended March 31, 2021 and 2020, respectively, were recorded as changes in fair value of equity and long-term investments, net on the consolidated statements of income.

Equity Investment in Entasis

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 Therapeutics, Inc. (“Entasis”) for approximately $35.0 million in cash. Entasis is a clinical-stage biotechnology company focused on the discovery and development of novel antibacterial products.

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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. Innoviva has a right to designate two members to Entasis’ board. As of March 31, 2021 and the date hereof, no Innoviva designees are serving on Entasis’ six-member board. As of March 31, 2021, we owned approximately 51.0% of Entasis’s common stock.

The investment in Entasis provides Innoviva the ability to have significant influence, but not control over Entasis’ 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 for those warrants acquired in the second quarter of 2020 and an exercise price of $2.675 per share for the warrants acquired in the third quarter of 2020. 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.

As of March 31, 2021, the fair values of Entasis’s common stock and warrants were estimated at $40.0 million and $26.6 million, respectively. As of December 31, 2020, the fair values of Entasis’s common stock and warrants were estimated at $46.1 million and $31.9 million, respectively. The total fair value of both financial instruments in the amount of $66.6 million and $78.0 million was recorded as equity and long-term investments on the consolidated balance sheets as of March 31, 2021 and December 31, 2020, respectively. We recorded $11.5 million unrealized loss from the changes of fair value as changes in fair values of equity and long-term investments, net on the consolidated statements of income for the three months ended March 31, 2021.

Equity Investment in InCarda

In October, 2020, TRC purchased 20,469,432 shares of Series C preferred stock and warrants to purchase 5,117,358 additional shares of Series C preferred stock of InCarda Therapeutics, Inc. for $15.0 million. $0.8 million was incurred for investment due diligence costs and recorded as part of the equity investment on the consolidated balance sheets. InCarda is a privately held biopharmaceutical company focused on developing inhaled therapies for cardiovascular diseases. As of March 31, 20201 and as of the date hereof, one of InCarda’s eight board members is designated by TRC. As of March 31, 2021, TRC held 13.0% of InCarda‘s outstanding equity.

The investment in InCarda does not provide TRC the ability to control or have significant influence over InCarda's operations. Based on our evaluation, we determined that InCarda is a VIE, but TRC is not the primary beneficiary of the VIE. We account for our investment in the Series C preferred shares in InCarda using the measurement alternative. Under the measurement alternative, the equity investment is initially recorded at its allocated cost, but the carrying value may be adjusted through earnings upon an impairment or when there is an observable price change involving the same or a similar investment with the same issuer. The warrants are recorded at fair value and subject to remeasurement at each balance sheet date. The warrants are exercisable immediately with an exercise price of $0.7328 per share and expire on October 6, 2021, one year from the issuance date. We use the Black-Scholes-Merton pricing model to estimate the fair value of the warrants with the following input assumptions: the exercise price of the warrants, 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 its peer companies.

As of March 31, 2021 and December 31, 2020, the fair value of InCarda’s warrants was estimated at $0.7 million and $1.1 million, respectively, and recorded as equity and long-term investments on the consolidated balance sheets. We recorded $0.5 million unrealized loss from the changes of fair value as changes in fair values of equity and long-term investments, net on the consolidated statements of income for the three months ended March 31, 2021. There was no impairment or other change to the value of InCarda’s Series C preferred stock of $15.8 million as of March 31, 2021.

Equity Investment in ImaginAb

On March 18, 2021, TRC entered into a securities purchase agreement with ImaginAb, Inc. to purchase 4,051,724 shares of ImaginAb Series C preferred stock for $4.7 million. On the same day, TRC also entered into a securities purchase agreement with one of ImaginAb’s common stockholders to purchase 4,097,157 shares of ImaginAb common stock for $1.3 million. ImaginAb is a privately held biotechnology company focused on clinically managing cancer and autoimmune diseases via molecular imaging. $0.4 million was incurred for investment due diligence costs and execution and recorded as part of the equity investment on the consolidated balance sheets. As of the date hereof, one of ImaginAb’s seven board members is designated by TRC. As of March 31, 2021, TRC held 13.0% of ImaginAb equity ownership.

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The investment in ImaginAb does not provide TRC the ability to control or have significant influence over ImaginAb’s operations. Based on our evaluation, we determined that ImaginAb is a VIE, but TRC is not the primary beneficiary of the VIE. Because ImaginAb’s equity securities are not publicly traded and do not have a readily determinable fair value, we have accounted for our investment in ImaginAb’s Series C preferred stock and common stock using the measurement alternative. Under the measurement alternative, the equity investment is initially recorded at its allocated cost, but the carrying value may be adjusted through earnings upon an impairment or when there is an observable price change involving the same or a similar investment with the same issuer. As of March 31, 2021, $6.4 million was recorded as equity and long-term investments on the consolidated balance sheets.

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:

March 31, 2021

Gross

Gross

Unrealized

Unrealized

Estimated

(In thousands)

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Money market funds(1)

$

248,932

$

$

$

248,932

Total

$

248,932

$

$

$

248,932

(1)Money market funds were included in cash and cash equivalents on the consolidated balance sheets.

December 31, 2020

Gross

Gross

Unrealized

Unrealized

Estimated

(In thousands)

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Money market funds (1)

$

204,808

$

$

$

204,808

Total

$

204,808

$

$

$

204,808

(1)Money market funds were included in cash and cash equivalents on the consolidated balance sheets.

There was no credit loss to the money market funds as of March 31, 2021.

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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 March 31, 2021 Using:

Quoted Price

Significant

in Active 

Other

Significant

Markets for 

Observable

Unobservable

Types of Instruments

Identical Assets

Inputs

Inputs

(In thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

Money market funds

$

248,932

$

$

$

248,932

Investments held by ISP Fund LP (1)

304,696

304,696

Equity investment - Armata Common Stock

71,053

71,053

Equity investment - Armata Warrants

54,166

54,166

Equity investment - Entasis Common Stock

39,960

39,960

Equity investment - Entasis Warrants

26,580

26,580

Equity investment - InCarda Warrants

664

664

Total assets measured at estimated fair value

$

664,641

$

80,746

$

664

$

746,051

Debt

2023 Notes

$

$

242,336

$

$

242,336

2025 Notes

203,513

203,513

Total fair value of debt

$

$

445,849

$

$

445,849

(1)The investments, which consisted of equity investments of $130.5 million and money market funds of $174.2 million, held by ISP Fund LP were subject to a 36-month lock-up period from our initial contribution date, December 11, 2020.

Estimated Fair Value Measurements as of December 31, 2020 Using:

Quoted Price

Significant

in Active 

Other

Significant

Markets for 

Observable

Unobservable

Types of Instruments

Identical Assets

Inputs

Inputs

(In thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

Money market funds

$

204,808

$

$

$

204,808

Investments held by ISP Fund LP (1)

299,288

299,288

Equity investment - Armata Common Stock

25,958

 

 

 

25,958

Equity investment - Armata Warrants

 

18,049

 

 

18,049

Equity investment - Entasis Common Stock

46,122

 

 

 

46,122

Equity investment - Entasis Warrants

 

31,882

 

 

31,882

Equity investment - InCarda Warrants

1,147

1,147

Total assets measured at estimated fair value

$

576,176

$

49,931

$

1,147

$

627,254

Debt

2023 Notes

$

$

239,779

$

$

239,779

2025 Notes

206,135

206,135

Total fair value of debt

$