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Financial Instruments and Fair Value Measurements | 3 Months Ended
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Mar. 31, 2022
Fair Value Disclosures [Abstract] |
Financial Instruments and Fair Value Measurements | 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 as well as warrants to purchase 8,710,800 additional shares of common stock of Armata Pharmaceuticals, Inc. (“Armata”) for approximately $25.0 million in cash. Armata is a clinical stage biotechnology company focused on precisely targeted bacteriophage therapeutics for antibiotic-resistant infections. During the first quarter of 2021, ISO 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. Armata also 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 for voting on the matters related to election or removal of Armata’s board members. The voting agreement will expire the earlier of the second anniversary of the agreement effective date and approval by the FDA of any of Armata’s product candidates for marketing and commercial distribution. During the fourth quarter of 2021, ISO also purchased an additional 1,212,122 shares of Armata common stock for approximately $4.0 million. On February 9, 2022, ISO entered into a securities purchase agreement with Armata to acquire 9,000,000 shares of Armata common stock and warrants to purchase 4,500,000 additional shares of common stock with an exercise price of $5.00 per share for $45.0 million. The investment closed in two tranches on February 9, 2022 and March 31, 2022. The investment is intended to aid Armata in advancing its clinical pipeline and strengthening its bacteriophage platform. On February 9, 2022, Armata also entered a second amended and restated 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 for voting on the matters related to election or removal of Armata’s board members or amend the bylaws of Armata to reduce the maximum number of directors or set the number of directors who may serve on the board of Armata. The voting agreement will expire the earlier of the second anniversary of the agreement effective date and approval by the FDA of any of Armata’s product candidates for marketing and commercial distribution. In addition, as of February 9, 2022, Armata entered into an amended and restated investor rights agreement with the Company and ISO, pursuant to which for as long as the Company and ISO hold at least 12.5% of the outstanding shares of Armata’s common stock on a fully-diluted, the Company and ISO shall have the right to designate two directors to Armata’s board of directors, and for so long as the Company and ISO hold at least 8%, but less than 12.5%, of the outstanding shares of Armata’s common stock on a fully-diluted basis, the Company and ISO shall have the right to designate one director to Armata’s board of directors, subject to certain conditions and qualifications set forth in the amended and restated investor rights agreement. As of March 31, 2022, three of the eight members of Armata’s board of directors are also members of the board of directors of Innoviva. As of March 31, 2022 and December 31, 2021, we owned approximately 69.4% and 59.3%, respectively, of Armata’s common stock. The investments in Armata provide Innoviva and ISO the ability to have significant influence, but not control over Armata’s operations. Armata’s business and affairs are managed under the direction of its board of directors, which Innoviva and ISO do not control. 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, 2021 and 2022 have an exercise price of $2.87, $3.25 and $5.00 per share, respectively. All 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 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, 2022, the fair values of our holdings of Armata common stock and warrants were estimated at $122.6 million and $64.9 million, respectively. As of December 31, 2021, the fair values of our holdings of Armata common stock and warrants were estimated at $88.1 million and $58.6 million, respectively. The total fair value of both financial instruments in the amount of $187.5 million and $146.7 million was recorded as equity and long-term investments on the consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively. We recorded $4.2 million unrealized loss and $61.2 million unrealized gain 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, 2022 and 2021, respectively. The summarized financial information, including the portion we do not own, is presented for Armata on a one quarter lag regardless of the date of our investments as follows: Income Statement Information
|  | For the Three Months Ended December 31, |
(In thousands) |  | 2021 |  |  | 2020 |
Revenue |  | $ | 989 |  |  | $ | 504 |
Loss from operations |  | $ | (6,048 | ) |  | $ | (6,453 | )
Net loss |  | $ | (6,047 | ) |  | $ | (6,624 | )
Equity Investment in InCarda During the third quarter of 2020, TRC purchased 20,469,432 shares of Series C preferred stock and a warrant to purchase 5,117,358 additional shares of Series C preferred stock of InCarda Therapeutics, Inc. (“InCarda”) (the “InCarda 2020 Warrant”) for $15.8 million, which includes $0.8 million of transaction costs. InCarda is a privately held biopharmaceutical company focused on developing inhaled therapies for cardiovascular diseases. The investment is intended to fund the ongoing clinical development of InRhythmTM (flecainide for inhalation), the company’s lead program, for the treatment of a recent-onset episode of paroxysmal atrial fibrillation. TRC has the right to designate one member to InCarda’s board. As of March 31, 2022, one of InCarda’s eight board members was designated by TRC. The InCarda 2020 Warrant is exercisable immediately with an exercise price of $0.7328 per share. In September 2021, TRC and InCarda entered into an amendment to extend the expiration date of the InCarda 2020 Warrant from October 6, 2021 to March 31, 2022. On March 9, 2022, TRC and InCarda entered into an amendment to further extend the expiration date of the InCarda 2020 Warrant from March 31, 2022 to March 31, 2023. The InCarda 2020 Warrant is recorded at fair value and subject to remeasurement at each balance sheet date. On March 9, 2022, TRC entered into a Note and Warrant Purchase Agreement (the “InCarda Agreement”) with InCarda to acquire a convertible promissory note (the “InCarda Convertible Note”) and warrants (the “InCarda 2022 Warrant”) for $0.7 million. The InCarda Convertible Note bears an annual interest rate of 6% and will convert into Series D preferred stock upon a qualified financing, non-qualified financing, or maturity conversion. A qualified financing is defined as the first issuance or series of related issuances by InCarda of its equity securities following March 9, 2022 from which InCarda receives immediately available gross proceeds of at least $10.0 million (excluding the aggregate amount of any notes converted into equity securities pursuant to the conversion of notes or any other debt securities converted into equity securities) (the “Qualified Financing Amount”). A non-qualified financing is defined as the first issuance or series of related issuances by InCarda of its equity securities following March 9, 2022 from which InCarda receives immediately available gross proceeds of less than the Qualified Financing Amount. The InCarda 2022 Warrant entitles TRC to purchase a number of shares of equity securities equal to 100% of the principal amount of the InCarda Convertible Note divided by the number of shares issued in InCarda’s next equity financing, which is defined as the earliest to occur of specific financing events, including capital raises through public offerings. The InCarda 2022 Warrant expires on March 9, 2027. The InCarda Convertible Note and InCarda 2022 Warrant are measured at fair value, but the changes in fair value were immaterial for the period ended March 31, 2022. As of March 31, 2022 and December 31, 2021, TRC held 13.0% of InCarda equity ownership. 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 the InCarda Convertible Note as a trading security, measured at fair value. We account for the investment in InCarda’s Series C preferred stock using the measurement alternative because the securities are not publicly traded and do not have a readily determinable fair value. 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, 2022 and December 31, 2021, we recorded $16.5 million and $15.8 million, respectively, from our investments in InCarda’s Series C preferred stock and InCarda Convertible Note as equity and long-term investments on the consolidated balance sheets. There was no impairment to the value of our investments in InCarda as of March 31, 2022 and December 31, 2021. We use the Black-Scholes-Merton pricing model to estimate the fair value of the InCarda 2020 Warrant 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. Black-Scholes-Merton assumptions used in calculating the estimated fair value of the InCarda 2020 Warrant as of March 31, 2022 and December 31, 2021 were as follows:
|  | March 31, |  |  | December 31, |
(In thousands) |  | 2022 |  |  | 2021 |
Risk-free interest rate |  |  | 1.63 | % |  |  | 0.06 | %
Expected volatility |  |  | 69.37 | % |  |  | 55.44 | %
Expected dividend yield |  |  | — |  |  |  | — |
Expected term (in years) |  |  | 1.00 |  |  |  | 0.25 |
As of March 31, 2022 and December 31, 2021, the fair value of InCarda’s warrants was estimated at $1.0 million and $0.4 million, respectively, and recorded as equity and long-term investments on the consolidated balance sheets. As of March 31, 2022, the fair value of InCarda’s Convertible Note was approximately the purchase price of $0.7 million and recorded as equity and long-term investments on the consolidated balance sheets. During the three months ended March 31, 2022 and 2021, we recorded $0.6 million unrealized gain and $0.5 million unrealized loss, respectively, as changes in fair values of equity and long-term investments, net on the consolidated statements of income. Equity Investment in ImaginAb During the first quarter of 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 March 31, 2022, one of ImaginAb’s five board members is designated by TRC. As of March 31, 2022 and December 31, 2021, TRC held 14.4% and 14.5% of ImaginAb equity ownership, respectively. 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, 2022 and December 31, 2021, $6.4 million was recorded as equity and long-term investments on the consolidated balance sheets and there was no change to the fair value of our investment. Convertible Promissory Note in Gate Neurosciences During the fourth quarter of 2021, TRC entered into a Convertible Promissory Note Purchase Agreement with Gate Neurosciences, Inc. (“Gate”) to acquire a convertible promissory note (the “Gate Convertible Note”) with a principal amount of $15.0 million. Gate is a privately held biopharmaceutical company focused on developing the next generation of targeted nervous system therapies, leveraging precision medicine approaches to develop breakthrough drugs for psychiatric and neurologic diseases. The investment is intended to fund its ongoing development and research. The Gate Convertible Note bears an annual interest rate of 8% and will convert into shares of common stock of Gate upon a qualified event or into shares of shadow preferred stock of Gate (“Shadow Preferred”) upon a qualified financing. A qualifying event can be a qualified initial price offering, a qualified merger, or a merger with a special-purpose acquisition company (“SPAC”). The number of common stock shares to be issued in a qualified event shall be equal to the amount due on the conversion date divided by the lesser of a capped conversion price (the “Capped Conversion Price”) and the qualified event price (the “Qualified Event Price”). The Capped Conversion Price is calculated as $50.0 million divided by the number of shares of common stock outstanding at such time on a fully diluted basis. The Qualified Event Price is the price per share determined by the qualified event. A qualified financing is a sale or series of sales of preferred stock where (i) at least 50 percent of counterparties are not existing shareholders, (ii) net proceeds to Gate are at least $35.0 million, and (iii) the stated or implied equity valuation of Gate is at least $80.0 million. Shadow Preferred means preferred stock having identical rights, preferences and restrictions as the preferred stock that would be issued in a qualified financing. The investment in Gate does not provide TRC the ability to control or have significant influence over Gate’s operations. Based on our evaluation, we determined that Gate is a VIE, but TRC is not the primary beneficiary of the VIE. We have accounted for the Gate Convertible Note as a trading security, measured at fair value using a Monte Carlo simulation model with the probability of certain qualified events and the assumptions of equity value of Gate, risk-free rate, expected stock price volatility of its peer companies, and the time until a financing is raised. TRC has the right to designate one board member to Gate’s board. As of March 31, 2022, TRC has designated a board member to Gate’s board, which currently consists of three directors. As of March 31, 2022 and December 31, 2021, the fair value of the Gate Convertible Note was estimated at $14.9 million and $15.1 million, respectively, and recorded as equity and long-term investments on the consolidated balance sheets. We recorded $0.2 million unrealized loss as changes in fair values of equity and long-term investments, net on the consolidated statement of income for the three months ended March 31, 2022. Equity Investment in Nanolive On February 18, 2022, TRC entered into an investment and shareholders agreement with Nanolive SA ("Nanolive") to purchase 18,750,000 shares of Nanolive Series C preferred stock for $9.8 million (equivalent to 9.0 million CHF). Nanolive SA is a Swiss privately held life sciences company focused on developing breakthrough imaging solutions that accelerate research in growth industries such as drug discovery and cell therapy. $0.7 million was incurred for investment due diligence costs and execution and recorded as part of the equity and long-term investment on the consolidated balance sheets. TRC has the right to designate one member to Nanolive’s board. TRC also has the right to designate another member, who will be mutually acceptable to TRC and another majority common stockholder, to Nanolive’s board. As of March 31, 2022, no Innoviva designees are serving on Nanolive’s seven-member board. As of March 31, 2022, TRC held 16.1% of Nanolive equity ownership. The investment in Nanolive does not provide TRC the ability to control or have significant influence over Nanolive’s operations. Based on our evaluation, we determined that Nanolive is a VIE, but TRC is not the primary beneficiary of the VIE. Because Nanolive’s equity securities are not publicly traded and do not have a readily determinable fair value, we have accounted for our investment in Nanolive’s Series C preferred 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, 2022, $10.6 million was recorded as equity and long-term investments on the consolidated balance sheets and there was no change to the fair value of our investment. Fair Value Measurements Our equity and long-term investments are measured at fair value on a recurring basis and our debt is carried at amortized cost basis. Equity investments accounted for using the measurement alternative are valued using Level 3 inputs.
|  | Estimated Fair Value Measurements as of March 31, 2022 Using: |
|  | Quoted Price in Active Markets for |  |  | Significant Other |  |  | Significant |  |  |  |
|  | Identical |  |  | Observable |  |  | Unobservable |  |  |  |
Types of Instruments |  | Assets |  |  | Inputs |  |  | Inputs |  |  |  |
(In thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Assets |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 103,181 |  |  | $ | — |  |  | $ | — |  |  | $ | 103,181 |
Investments held by ISP Fund LP (1) |  |  | 305,516 |  |  |  | — |  |  |  | 2,060 |  |  |  | 307,576 |
Equity investment - Armata Common Stock |  |  | 122,625 |  |  |  | — |  |  |  | — |  |  |  | 122,625 |
Equity investment - Armata Warrants |  |  | — |  |  |  | 64,894 |  |  |  | — |  |  |  | 64,894 |
Equity investment - InCarda Warrants |  |  | — |  |  |  | — |  |  |  | 1,040 |  |  |  | 1,040 |
Convertible debt investment - InCarda Note |  |  |  |  |  |  |  |  | 652 |  |  |  | 652 |
Convertible debt investment - Gate Note |  |  | — |  |  |  | — |  |  |  | 14,900 |  |  |  | 14,900 |
Total assets measured at estimated fair value |  | $ | 531,322 |  |  | $ | 64,894 |  |  | $ | 18,652 |  |  | $ | 614,868 |
Debt |  |  |  |  |  |  |  |  |  |  |  |
2023 Notes |  | $ | — |  |  | $ | 106,499 |  |  | $ | — |  |  | $ | 106,499 |
2025 Notes |  |  | — |  |  |  | 253,497 |  |  |  | — |  |  |  | 253,497 |
2028 Notes |  |  | — |  |  |  | 260,815 |  |  |  | — |  |  |  | 260,815 |
Total fair value of debt |  | $ | — |  |  | $ | 620,811 |  |  | $ | — |  |  | $ | 620,811 |
(1) The investments held by ISP Fund LP, consisted of $172.1 million in equity investments, which included $2.1 million in a private placement position, $25.2 million in money market funds and $110.3 million in cash. Our total capital contribution of $300.0 million is subject to a 36-month lock-up period from the date of such capital contributions.
|  | Estimated Fair Value Measurements as of December 31, 2021 Using: |
|  | Quoted Price |  |  |  |  |  |  |  |  |  |
|  | in Active |  |  | Significant |  |  |  |  |  |  |
|  | Markets for |  |  | Other |  |  | Significant |  |  |  |
|  | Identical |  |  | Observable |  |  | Unobservable |  |  |  |
Types of Instruments |  | Assets |  |  | Inputs |  |  | Inputs |  |  |  |
(In thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Assets |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 145,132 |  |  | $ | — |  |  | $ | — |  |  | $ | 145,132 |
Investments held by ISP Fund LP (1) |  |  | 193,677 |  |  |  | — |  |  |  | 2,068 |  |  |  | 195,745 |
Equity investment - Armata Common Stock |  |  | 88,101 |  |  |  | — |  |  |  | — |  |  |  | 88,101 |
Equity investment - Armata Warrants |  |  | — |  |  |  | 58,595 |  |  |  | — |  |  |  | 58,595 |
Equity investment - Entasis Common Stock |  |  | 62,794 |  |  |  | — |  |  |  | — |  |  |  | 62,794 |
Equity investment - Entasis Warrants |  |  | — |  |  |  | 40,914 |  |  |  | — |  |  |  | 40,914 |
Equity investment - InCarda Warrants |  |  | — |  |  |  | — |  |  |  | 411 |  |  |  | 411 |
Convertible debt investment - Gate Note |  |  | — |  |  |  | — |  |  |  | 15,100 |  |  |  | 15,100 |
Total assets measured at estimated fair value |  | $ | 489,704 |  |  | $ | 99,509 |  |  | $ | 17,579 |  |  | $ | 606,792 |
Debt |  |  |  |  |  |  |  |  |  |  |  |
2023 Notes |  | $ | — |  |  | $ | 261,769 |  |  | $ | — |  |  | $ | 261,769 |
2025 Notes |  |  | — |  |  |  | 234,498 |  |  |  | — |  |  |  | 234,498 |
Total fair value of debt |  | $ | — |  |  | $ | 496,267 |  |  | $ | — |  |  | $ | 496,267 |
(1) The investments held by ISP Fund LP, consisted of $192.2 million equity investments and $3.5 million money market funds, are subject to a 36-month lock-up period from our initial contribution date, December 11, 2020. The fair values of our equity investments in Armata’s common stock and publicly traded investments held by ISP Fund LP are based on the quoted prices in active markets and are classified as Level 1 financial instruments. The fair values of the warrants of Armata classified within Level 2 are based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. InCarda’s convertible note and warrants, Gate’s convertible note, and private placement positions held by ISP Fund LP and are classified as Level 3 financial instruments as these securities are not publicly traded and the assumptions used in the valuation model for valuing these securities are based on significant unobservable and observable inputs including those of publicly traded peer companies. The fair values of our 2023 Notes, 2025 Notes and 2028 Notes are based on recent trading prices of the respective instruments.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=123874694&loc=d3e19207-110258 + Details
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