ILLUMINA INC

Strategic Investments

Marketable Equity Securities

Our short-term investments consist of marketable equity securities. As of June 30, 2024 and December 31, 2023, the fair value of our marketable equity securities totaled $74 million and $6 million, respectively. The increase in our marketable equity securities relates to the investment we retained in GRAIL subsequent to the Spin-Off, which was initially recorded as $397 million, representing 14.5% of GRAIL’s net assets disposed of at Spin-Off. Refer to note 2. GRAIL Spin-Off for further details. Subsequent to the Spin-Off, we recorded an unrealized loss of $328 million in Q2 2024 and YTD 2024 based on the fair value of our investment in GRAIL as of quarter-end.

Gains and losses recognized in other (expense) income, net on our marketable equity securities were as follows:

Non-Marketable Equity Securities

As of June 30, 2024 and December 31, 2023, the aggregate carrying amounts of our non-marketable equity securities without readily determinable fair values, included in other assets, were $28 million.

Venture Funds

We invest intwo venture capital investment funds (the Funds) with capital commitments of $100 million, callable through April 2026, and up to $150 million, callable through July 2029, respectively, of which $3 million (plus recallable distributions of approximately $10 million) and up to $52 million, respectively, remained callable as of June 30, 2024. Our investments in the Funds are accounted for as equity-method investments. The aggregate carrying amounts of the Funds, included in other assets, were $189 million and $168 million as of June 30, 2024 and December 31, 2023, respectively. We recorded an unrealized loss of $2 million and an unrealized gain of $3 million in Q2 2024 and YTD 2024, respectively, and unrealized losses of $2 million and $14 million in Q2 2023 and YTD 2023, respectively, in other (expense) income, net.

Revenue recognized from transactions with our strategic investees was $4 million and $7 million for Q2 2024 and YTD 2024, respectively, and $28 million and $64 million for Q2 2023 and YTD 2023, respectively.

Fair Value Measurements

The following table presents the hierarchy for assets and liabilities measured at fair value on a recurring basis:

Our marketable equity securities are measured at fair value based on quoted trade prices in active markets. Our deferred compensation plan assets consist primarily of investments in life insurance contracts carried at cash surrender value, which reflects the net asset value of the underlying publicly traded mutual funds. We perform control procedures to corroborate the fair value of our holdings, including comparing valuations obtained from our investment service provider to valuations reported by our asset custodians, validating pricing sources and models, and reviewing key model inputs, if necessary.

Helix Contingent Value Right

In conjunction with the deconsolidation of Helix Holdings I, LLC (Helix) in April 2019, we received a contingent value right with a 7-year term that entitles us to consideration dependent upon the outcome of Helix’s future financing and/or liquidity events. We elected the fair value option to measure the contingent value right received from Helix. Historically, we estimated the fair value of the contingent value right using a Monte Carlo simulation. Estimates and assumptions used in the Monte Carlo simulation included probabilities related to the timing and outcome of future financing and/or liquidity events, assumptions regarding collectability and volatility, and an estimated equity value of Helix. During Q2 2024, discussions took place to settle the contingent value right early. Accordingly, the fair value of the contingent value right, as of June 30, 2024, was derived using a discounted cash flow model. Estimates and assumptions used in the discounted cash flow model include an estimated settlement amount, a term based on the expected payment period, and a discount rate. These unobservable inputs, including those used in the Monte Carlo simulation, represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value. On July 31, 2024, we received cash of $82.5 million to settle the contingent value right. Changes in the fair value of the Helix contingent value right, included in other (expense) income, net during YTD 2024 were as follows:

Contingent Consideration Liabilities

We reassess the fair value of contingent consideration related to acquisitions on a quarterly basis. Changes in the fair value of contingent consideration subsequent to the acquisition date are recognized in selling, general and administrative expense. The contingent value rights issued as part of the GRAIL acquisition entitle the holders to receive future cash payments on a quarterly basis (Covered Revenue Payments) representing a pro rata portion of certain GRAIL-related revenues (Covered Revenues) each year for a 12-year period. As defined in the Contingent Value Rights Agreement, this will reflect a 2.5% payment right to the first $1 billion of revenue each year for 12 years. Revenue above $1 billion each year will be subject to a 9% contingent payment right during this same period. Covered Revenues for Q4 2023 and Q1 2024 were $57 million in aggregate and Covered Revenues for Q4 2022 and Q1 2023 were $42 million in aggregate, driven primarily by sales of GRAIL’s Galleri test. Covered Revenue Payments relating to such periods were approximately $535,000 and $400,000 in YTD 2024 and YTD 2023, respectively. We use a Monte Carlo simulation to estimate the fair value of contingent consideration related to the GRAIL acquisition. Estimates and assumptions used in the Monte Carlo simulation include forecasted revenues for GRAIL, a revenue risk premium, a revenue volatility estimate, an operational leverage ratio and a counterparty credit spread. These unobservable inputs represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value. The fair value of our contingent consideration liability related to GRAIL was $131 million and $387 million as of June 30, 2024 and December 31, 2023, respectively, of which $130 million and $385 million, respectively, was included in other long-term liabilities, with the remaining balances included in accrued liabilities. The significant decrease in the liability was due to an increase in the revenue risk premium assumption used in Q2 2024 as a result of reconciling GRAIL’s long-range revenue forecast to observed market values of GRAIL based on GRAIL’s when-issued trading activity in June 2024.

Changes in the estimated fair value of our contingent consideration liabilities during YTD 2024 were as follows: