Innoviva, Inc.

Please provide an analysis that reconciles the increase in Equity and Long-Term Investments of $80.57 million presented on your consolidated Balance Sheet to the corresponding change in fair value of $11.12 million presented on your Consolidated Statement of Income. Also, reconcile related fair value amounts as of December 31, 2023 on page 121 to corresponding amounts on your consolidated balance sheet and provide a summary of individual investments held by the ISP Fund at each balance sheet date. Revise your disclosure accordingly.

(In thousands)

Activities in equity and long term investments:

Purchases of trading securities ⁽¹⁾

Purchases of equity and long-term investments ⁽²⁾

Changes in fair values, net

Other ⁽³⁾

Net increase in equity and long term investments

Equity and long term investments at beginning of period

Equity and long term investments at end of period

Purchases of trading securities included an Armata Convertible Note of $30.0 million in January 2023, an Armata Term Loan of $25.0 million in July 2023, $0.1 million closing costs associated with Armata investments, and an additional Gate Convertible Note totaling $12.7 million (comprising $10.0 million in cash and $2.7 million in accrued interest) in February and October 2023. These investments are disclosed in footnote 6, ‘Equity and Long-term Investments and Fair Value Measurements,’ on pages 116 and 120, respectively.

Equity and long-term investment purchases included ImaginAb Series C-2 preferred stock, with a total investment of $1.2 million made in March and September 2023. These investments are disclosed in footnote 6, ‘Equity and Long-term Investments and Fair Value Measurements,’ on page 119.

Other items included net cash generated from the operations of ISP Fund LP, whose assets can only be used to settle its own obligations. During 2023, the partnership generated $6.3 million in interest income, incurred $4.3 million in investment-related expenses, and made net cash payments of $1.6 million. ISP Fund LP’s activities are disclosed in footnote 5, ‘Consolidated Entities and Acquisitions,’ on pages 111 and 112.

Types of Instruments

(In thousands)

Assets

Money market funds ⁽¹⁾

Investments held by ISP Fund LP

Equity investment - Armata Common Stock

Equity investment - Armata Warrants

Convertible debt investment - Armata Note

Term loan investment - Armata Term Loan

Convertible debt investment - Gate Note

Equity investment - InCarda Series D Warrants ⁽²⁾

Total assets measured using fair value method

Equity investment - InCarda Series C Preferred Stock

Equity investment - InCarda Series D-1 Preferred Stock, Series D-2

Preferred Stock, and Common Stock

Equity investment - ImaginAb Series C Preferred Stock, Series C-2

Preferred Stock, and Common Stock

Equity investment - Nanolive Series C Preferred Stock

Total assets measured using measurement alternative method

Total assets

Money market funds are included in the $193.5 million of cash and cash equivalents on the consolidated balance sheets.

This investment is not reflected in the fair value measurement table due to its immateriality.

(In thousands)

Common stock - publicly traded healthcare companies

United States

Ireland

United Kingdom

Total common stock

Preferred stocks - privately held healthcare companies

United States

Warrants - privately held healthcare companies

United States

Convertible note - privately held healthcare companies

United States

Money market fund and cash

Total investments held by ISP Fund LP

You state that Armata Pharmaceuticals is a VIE but Innoviva and ISO are not the primary beneficiaries and as a result you have reported its common stock and warrants under the equity method using the fair value option. In this regard, fair values for your holdings of Armata common stock, warrants, a convertible note and term loan totaled $195.4 million as of December 31, 2023. Please describe and quantify the methods and assumptions used to value your investments in Armata, including your consideration of Armata’s market capitalization. Refer us to the technical guidance upon which you relied.

Common stock – under the fair value option, the investment is measured based on Armata’s closing market price at the end of each reporting period. As of December 31, 2023, 25,076,769 shares of common stock were valued at $81.2 million based on the closing market price of $3.24 per share. We base this measurement in accordance with ASC 820-10-35-36B, which states, in part, that “if there is a quoted price in an active market (that is, a Level 1 input) for an asset or a liability, a reporting entity shall use that quoted price without adjustment when measuring fair value.” The fair value is not adjusted for a control premium since each individual share of Armata common stock is a separate unit of account classified as Level 1 within the fair value hierarchy. At December 31, 2023, Armata’s market capitalization was approximately $117.0 million, based on the outstanding shares of its common stock.

Warrants – a Black-Scholes-Merton pricing model is used to estimate the fair value of the warrants. The warrants purchased in 2020, 2021 and 2022 have an exercise price of $2.87, $3.25 and $5.00 per share, respectively. All warrants totaling 19,364,647 are exercisable immediately within five years from the issuance date of the warrants. At December 31, 2023, the warrants were valued at $35.3 million using the following inputs in the model:

Armata’s closing market price of $3.24 per share

Risk-free interest rates between 3.9% and 4.5% computed based on the published U.S. Treasury yield

Expected terms between 1.1 and 3.3 years based on when the Company expects the warrants to be exercised, which corresponds to the remaining contractual period

Estimated volatilities between 96.8% and 124.4% based on the historical volatility of Armata’s common stock.

Convertible note – this trading security is measured at fair value using a Monte Carlo simulation model, which incorporates estimates of the probability of certain qualified events. As of December 31, 2023, the note, purchased for $30.0 million in January 2023, was valued at $51.9 million using the following inputs in the model:

Armata’s closing market price of $3.24 per share

Risk-free interest rate of 4.8% based on the published U.S. Treasury yield

A discount rate of 50.0%, estimated based on the implied transaction date yield, adjusted for changes in market yields of the instruments with comparable credit risks

Estimated volatility of 65%, calculated using Armata’s own historical stock price volatility of 127% and adjusted downward to account for the illiquidity of the conversion feature

Estimates of the timing and probability of certain qualified events between 0.8 to 1.0 years.

Term loan – this trading security is measured at fair value using an income approach. As of December 31, 2023, the loan, purchased for $25.0 million in July 2023, was valued at $27.0 million based on the discounted value of expected future cash flows, using a discount rate of 11.5%, which was estimated based on the implied transaction date yield, adjusted for changes in market yields of the instruments with comparable credit risks.

Please explicitly state that no changes were made to your internal control over financial reporting.

Stephen Basso

Chief Financial Officer

Pavel Raifeld (Innoviva, Inc.)