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Document and Entity Information - USD ($)	12 Months Ended
Document and Entity Information - USD ($)	Dec. 31, 2018	Feb. 15, 2019	Jun. 30, 2018
Document and Entity Information
Entity Registrant Name	Theravance Biopharma, Inc.
Entity Central Index Key	0001583107
Document Type	10-K
Document Period End Date	Dec. 31, 2018
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	Yes
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Public Float			$ 1,209,092,732
Entity Common Stock, Shares Outstanding		55,579,495
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	FY

CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Current assets:
Cash and cash equivalents	$ 378,021	$ 88,980
Short-term marketable securities	127,255	259,586
Accounts receivable, net of allowances of $0 and $992 at December 31, 2018 and 2017, respectively	620	2,253
Receivables from collaborative arrangements	10,053	7,109
Prepaid taxes	310	291
Other prepaid and current assets	16,564	3,700
Inventories	0	16,830
Total current assets	532,823	378,749
Property and equipment, net	13,176	10,157
Long-term marketable securities	11,869	41,587
Tax receivable		8,191
Restricted cash	833	833
Other assets	1,534	1,883
Total assets	560,235	441,400
Current liabilities:
Accounts payable	9,028	5,924
Accrued personnel-related expenses	23,803	24,136
Accrued clinical and development expenses	11,876	20,657
Other accrued liabilities	10,445	11,710
Deferred revenue	43,402	125
Total current liabilities	98,554	62,552
Convertible senior notes due 2023, net	224,818	223,746
Non-recourse notes due 2033, net	229,535
Deferred rent	7,976	3,668
Long-term deferred revenue	26,179	1,436
Other long-term liabilities	24,762	34,820
Commitments and contingencies (Notes 2, 11 and 13)
Shareholders’ (Deficit) Equity
Preferred shares, $0.00001 par value: 230 shares authorized, no shares issued or outstanding at December 31, 2018 and 2017, respectively
Ordinary shares, $0.00001 par value: 200,000 shares authorized; 55,681 and 54,381 shares issued and outstanding at December 31, 2018 and 2017, respectively	1	1
Additional paid-in capital	960,721	913,650
Accumulated other comprehensive loss	(166)	(733)
Accumulated deficit	(1,012,145)	(797,740)
Total shareholders’ (deficit) equity	(51,589)	115,178
Total liabilities and shareholders’ (deficit) equity	$ 560,235	$ 441,400

CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) shares in Thousands, $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
CONSOLIDATED BALANCE SHEETS
Account receivable, allowance	$ 0	$ 992
Preferred shares, par value (in dollars per share)	$ 0.00001	$ 0.00001
Preferred shares, shares authorized	230	230
Preferred shares, shares issued	0	0
Preferred shares, outstanding shares	0	0
Ordinary shares, par value (in dollars per share)	$ 0.00001	$ 0.00001
Ordinary shares, authorized shares	200,000	200,000
Ordinary shares, shares issued	55,681	54,381
Ordinary shares, outstanding shares	55,681	54,381

CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) shares in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Revenue:
Revenue	$ 60,370	$ 15,386	$ 48,648
Costs and expenses:
Cost of goods sold	715	6,030	2,894
Research and development (1)	201,348	173,887	141,712
Selling, general and administrative (1)	97,058	95,592	84,509
Total costs and expenses	299,121	275,509	229,115
Loss from operations	(238,751)	(260,123)	(180,467)
Income from investment in TRC, LLC (Note 7)	11,182	170
Interest expense	(10,482)	(8,547)	(1,404)
Other-than-temporary impairment loss		(8,000)
Interest and other income, net	11,966	4,789	1,312
Loss before income taxes	(226,085)	(271,711)	(180,559)
Provision for income tax benefit (expense) (Note 12)	10,561	(13,694)	(10,110)
Net loss	(215,524)	(285,405)	(190,669)
Share-based compensation expense	$ 51,313	$ 49,145	$ 41,169
Net loss per share:
Basic and diluted net loss per share (in dollars per share)	$ (3.99)	$ (5.45)	$ (4.26)
Shares used to compute basic and diluted net loss per share (in shares)	53,969	52,352	44,711
Research and development
Costs and expenses:
Share-based compensation expense	$ 25,563	$ 22,691	$ 20,202
Selling, general and administrative
Costs and expenses:
Share-based compensation expense	25,750	26,454	20,967
Product
Revenue:
Revenue	15,304	14,788	17,603
Collaborative revenue
Revenue:
Revenue	41,791	$ 598	$ 31,045
Profit sharing revenue
Revenue:
Revenue	$ 3,275

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Net loss	$ (215,524)	$ (285,405)	$ (190,669)
Other comprehensive income (loss):
Net unrealized gain (loss) on available-for-sale investments, net of tax	567	(480)	(183)
Comprehensive loss	$ (214,957)	$ (285,885)	$ (190,852)

- Definition

The portion of profit or loss for the period, net of income taxes, which is attributable to the parent.

+ References + Details

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) - USD ($) $ in Thousands	Ordinary Shares	Additional Paid-in Capital	Accumulated Other Comprehensive Income (Loss)	Accumulated Deficit	Total
Balance at Dec. 31, 2015		$ 564,691	$ (70)	$ (321,556)	$ 243,065
Balance (in shares) at Dec. 31, 2015	37,981
Increase (Decrease) in Stockholders' Equity
Net proceeds from sale of ordinary shares	$ 1	253,027			253,028
Net proceeds from sale of ordinary shares (in shares)	11,978
Proceeds from ESPP purchases		3,172			3,172
Proceeds from ESPP purchases (in shares)	245
Employee shared-based compensation expense		41,290			41,290
Issuance of restricted shares (in shares)	2,466
Option exercises		4,378			4,378
Option exercises (in shares)	197
Repurchase of shares to satisfy tax withholding		(3,871)			(3,871)
Repurchase of shares to satisfy tax withholding (in shares)	(34)
Excess tax benefit of share-based compensation		21			21
Net unrealized loss on marketable securities			(183)		(183)
Net loss				(190,669)	(190,669)
Balance at Dec. 31, 2016	$ 1	862,708	(253)	(512,225)	350,231
Balance (in shares) at Dec. 31, 2016	52,833
Increase (Decrease) in Stockholders' Equity
Net proceeds from sale of ordinary shares		1			1
Proceeds from ESPP purchases		3,980			3,980
Proceeds from ESPP purchases (in shares)	250
Employee shared-based compensation expense		49,175			49,175
Issuance of restricted shares (in shares)	1,025
Option exercises		6,236			6,236
Option exercises (in shares)	276
Cumulative effect upon the adoption of ASU 2016-09		110		(110)
Repurchase of shares to satisfy tax withholding		(8,560)			(8,560)
Repurchase of shares to satisfy tax withholding (in shares)	(3)
Net unrealized loss on marketable securities			(480)		(480)
Net loss				(285,405)	(285,405)
Balance at Dec. 31, 2017	$ 1	913,650	(733)	(797,740)	$ 115,178
Balance (in shares) at Dec. 31, 2017	54,381				54,381,000
Increase (Decrease) in Stockholders' Equity
Proceeds from ESPP purchases		4,173			$ 4,173
Proceeds from ESPP purchases (in shares)	204
Employee shared-based compensation expense		51,313			51,313
Issuance of restricted shares (in shares)	1,168
Option exercises		1,393			1,393
Option exercises (in shares)	75
Cumulative effect upon the adoption of ASU 2016-09				1,119	1,119
Repurchase of shares to satisfy tax withholding		(9,808)			(9,808)
Repurchase of shares to satisfy tax withholding (in shares)	(147)
Net unrealized loss on marketable securities			567		567
Net loss				(215,524)	(215,524)
Balance at Dec. 31, 2018	$ 1	$ 960,721	$ (166)	$ (1,012,145)	$ (51,589)
Balance (in shares) at Dec. 31, 2018	55,681				55,681,000

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Operating activities
Net loss	$ (215,524)	$ (285,405)	$ (190,669)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	3,166	4,027	3,119
Share-based compensation	51,313	49,145	41,169
Net gain from the sale of VIBATIV business	(6,056)
Other-than-temporary impairment loss		8,000
Inventory write-down		740	303
Excess tax benefits from share-based compensation			(21)
Undistributed earnings from investment in TRC, LLC	(5,152)
Other	(43)	10	182
Changes in operating assets and liabilities:
Accounts receivable	1,633	(1,607)	1,276
Receivables from collaborative arrangements	(2,944)	1,967	26,156
Prepaid taxes		2,788	9,522
Other prepaid and current assets	(2,400)	(1,489)	2,710
Inventories	(1,629)	(7,301)	(3,182)
Tax receivable	8,191	(7,890)
Other assets	45	(354)	184
Accounts payable	3,575	3,796	(16,436)
Accrued personnel-related expenses, accrued clinical and development expenses, and other accrued liabilities	(10,516)	8,353	17,192
Deferred rent	4,308	(298)	(632)
Deferred revenue	69,224	17	448
Other long-term liabilities	(10,058)	24,449	9,690
Net cash used in operating activities	(112,867)	(201,052)	(98,989)
Investing activities
Purchases of property and equipment	(7,240)	(2,406)	(2,135)
Purchases of marketable securities	(183,261)	(288,791)	(237,567)
Maturities of marketable securities	347,192	234,864	91,467
Proceeds from the sale of VIBATIV business, net	20,000
Proceeds from the sales of fixed assets	17
Net cash provided by (used in) investing activities	176,708	(56,333)	(148,235)
Financing activities
Proceeds from sale of ordinary shares, net			253,028
Proceeds from issuance of notes, net	229,441		222,498
Proceeds from ESPP purchases	4,173	3,980	3,172
Proceeds from option exercises	1,393	6,236	4,378
Excess tax benefits from share-based compensation			21
Repurchase of shares to satisfy tax withholding	(9,807)	(8,560)	(3,871)
Net cash provided by financing activities	225,200	1,656	479,226
Net increase (decrease) in cash, cash equivalents, and restricted cash	289,041	(255,729)	232,002
Cash, cash equivalents, and restricted cash at beginning of period	89,813	345,542	113,540
Cash, cash equivalents, and restricted cash at end of period	378,854	89,813	345,542
Supplemental disclosure of cash flow information
Cash paid for interest	7,475	7,454
Cash (received) paid for income taxes, net	$ (7,316)	$ 4,929	$ (9,488)

Organization and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2018

Organization and Summary of Significant Accounting Policies

Organization and Summary of Significant Accounting Policies

1. Organization and Summary of Significant Accounting Policies

Theravance Biopharma, Inc. (“Theravance Biopharma” or the “Company”) is a diversified biopharmaceutical company primarily focused on the discovery, development and commercialization of organ-selective medicines to improve the lives of patients suffering from serious illnesses.

Basis of Presentation

The Company’s consolidated financial statements have been prepared in conformity with US Generally Accepted Accounting Principles ("GAAP"), and the US Securities and Exchange (“SEC”) regulations for annual reporting.

Principles of Consolidation

The consolidated financial statements include the accounts of Theravance Biopharma and its wholly-owned subsidiaries, all of which are denominated in US dollars. All intercompany balances and transactions have been eliminated in consolidation.

Use of Management’s Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, management evaluates its significant accounting policies or estimates. Management based its estimates on historical experience and other relevant assumptions that it believes to be reasonable under the circumstances. These estimates also form the basis for making judgments about the carrying values of assets and liabilities when these values are not readily apparent from other sources.

Segment Reporting

The Company operates in a single segment, which is the discovery (research), development and commercialization of human therapeutics. The Company’s business offerings have similar economics and other characteristics, including the nature of products and manufacturing processes, types of customers, distribution methods and regulatory environment. The Company is comprehensively managed as one business segment by the Company’s Chief Executive Officer and the management team. Product sales are attributed to regions based on ship‑to location and revenue from collaborative arrangements, including royalty revenue, are attributed to regions based on the location of the collaboration partner. Revenue from profit sharing arrangements are attributed to the geographic market in which the products are sold. Capitalized property and equipment is predominantly located in the US.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity of three months or less on the date of purchase to be cash equivalents. Cash equivalents are carried at fair value.

Restricted Cash

Under certain lease agreements and letters of credit, the Company has pledged cash and cash equivalents as collateral. As of December 31, 2018 and 2017, restricted cash related to such agreements was $0.8 million.

Investments in Marketable Securities

The Company invests in marketable securities, primarily corporate notes, government, government agency, and municipal bonds. The Company classifies its marketable securities as available‑for‑sale securities and reports them at fair value in cash equivalents or marketable securities on the consolidated balance sheets with related unrealized gains and losses included as a component of shareholders’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest income on the consolidated statements of operations. Realized gains and losses and declines in value judged to be other‑than‑temporary, if any, on available‑for‑sale securities are included in interest and other income (loss). The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available‑for‑sale are included in interest income.

The Company regularly reviews all of its investments for other‑than‑temporary declines in estimated fair value. The Company’s review includes the consideration of the cause of the impairment, including the creditworthiness of the security issuers, the number of securities in an unrealized loss position, the severity and duration of the unrealized losses, whether the Company has the intent to sell the securities and whether it is more likely than not that the Company will be required to sell the securities before the recovery of their amortized cost basis. When the Company determines that the decline in estimated fair value of an investment is below the amortized cost basis and the decline is other‑than‑temporary, the Company reduces the carrying value of the security and records a loss for the amount of such decline.

Fair Value of Financial Instruments

The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The Company’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company’s market assumptions. The Company classifies these inputs into the following hierarchy:

Level 1 — Quoted prices for identical instruments in active markets.

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model‑derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 — Unobservable inputs and little, if any, market activity for the assets.

Financial instruments include cash equivalents, marketable securities, non-marketable securities, accounts receivable, accounts payable, accrued liabilities, and debt. The Company’s cash equivalents and marketable securities are carried at estimated fair value and remeasured on a recurring basis. The carrying value of accounts receivable, receivables from collaborative arrangements, accounts payable, and accrued liabilities approximate their estimated fair value due to the relatively short‑term nature of these instruments.

Accounts Receivable

Trade accounts receivable are recorded net of allowances for wholesaler chargebacks related to government rebate programs, cash discounts for prompt payment, distribution fees, and sales discounts. Estimates for wholesaler chargebacks for government rebates and cash discounts are based on contractual terms, historical trends and the Company’s expectations regarding the utilization rates for these programs. When appropriate, the Company provides for an allowance for doubtful accounts by reserving for specifically identified doubtful accounts. For the periods presented, the Company did not have any material write‑offs of trade accounts receivable. The Company performs periodic credit evaluations of its customers and generally does not require collateral.

On November 12, 2018, the Company completed the sale of its assets related to the manufacture, marketing and sale of the VIBATIV product to Cumberland Pharmaceuticals Inc. (“Cumberland”) pursuant to the Asset Purchase Agreement dated November 1, 2018. As a result, the remaining accounts receivable balance at December 31, 2018 related to product sales recognized prior to November 12, 2018.

Concentration of Credit Risks

The Company invests in a variety of financial instruments and, by its policy, limits the amount of credit exposure with any one issuer, industry or geographic area for investments other than instruments backed by the US federal government.

Inventories

Inventories consist of raw materials, work‑in‑process and finished goods related to the production of VIBATIV. Raw materials include VIBATIV active pharmaceutical ingredient (“API”) and other raw materials. Work‑in‑process and finished goods include third‑party manufacturing costs and labor and indirect costs the Company incurred in the production process. Included in inventories are raw materials and work‑in‑process that may be used as clinical products, which are charged to research and development (“R&D”) expense when consumed. In addition, under certain prior commercialization agreements, the Company sold VIBATIV packaged in unlabeled vials that were recorded in work‑in‑process. Inventories are stated at the lower of cost or net realizable value. The Company determines the cost of inventory using the average‑cost method for each manufacturing batch.

The Company assesses its inventory levels each reporting period and writes‑down inventory that is expected to be at risk for expiration, that has a cost basis in excess of its expected net realizable value and inventory quantities in excess of expected requirements. In evaluating the sufficiency of its inventory reserves or liabilities for firm purchase commitments, the Company also takes into consideration its firm purchase commitments for future inventory production. If the Company were to decide to cancel its manufacturing commitment, such cancellation would trigger the payment of a cancellation fee. If the Company projects to have excess inventories and that it would be more cost-efficient to pay the cancellation fee, it may accrue the cancellation fee as a liability. The Company’s assessment of excess inventories, including future firm purchase commitments, requires management to utilize judgement in formulating estimates and assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates and assumptions.

When the Company recognizes a loss on such inventory or firm purchase commitments, it establishes a new, lower cost basis for that inventory, and subsequent changes in facts and circumstances will not result in the restoration or increase in that newly established cost basis. If inventory with a lower cost basis is subsequently sold, it will result in higher gross margin for those sales. In 2017, the Company recognized a charge of $3.0 million arising from excess inventory of which $2.25 million was attributed to an expected purchase obligation at the time. In 2018, the Company reversed the expense related to the $2.25 million purchase obligation due to the waiver of its minimum purchase commitment by the third-party manufacturer.

As a result of the VIBATIV sale to Cumberland in November 2018, the Company did not have any inventory as of December 31, 2018.

Property and Equipment

Property, equipment and leasehold improvements are stated at cost, net of accumulated depreciation and depreciated using the straight‑line method as follows:


Leasehold improvements	Shorter of remaining lease terms or useful life
Equipment, furniture and fixtures	5 ‑ 7 years
Software and computer equipment	3 ‑ 5 years

Capitalized Software

The Company capitalizes certain costs related to direct material and service costs for software obtained for internal use. For the year ended December 31, 2017, the Company capitalized costs for the implementation of its new procurement software system of $0.5 million. Upon being placed in service, these costs and other future capitalizable costs related to the internal use software system integration will be depreciated over five years. There was no additional capitalized software costs recorded for the year ended December 31, 2018.

Impairment of Long‑Lived Assets

Long‑lived assets include property and equipment. The carrying value of long‑lived assets is reviewed for impairment whenever events or changes in circumstances indicate that the asset may not be recoverable. An impairment loss is recognized when the total of estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount.

Deferred Rent

Deferred rent consists of the difference between cash payments and the recognition of rent expense on a straight‑line basis for the buildings the Company occupies. Rent expense is recognized ratably over the life of the leases. Because the Company’s facility operating leases provide for rent increases over the terms of the leases, average annual rent expense during the initial years of the leases exceeded the Company’s actual cash rent payments. Also included in deferred rent are lease incentives which are being recognized ratably over the life of the leases.

Revenue Recognition

Prior to January 1, 2018, the Company recognized revenue under Accounting Standards Codification (“ASC”), Topic 605, Revenue Recognition (“ASC 605”). Under ASC 605, revenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Where the revenue recognition criteria was not met, the Company delayed the recognition of revenue by recording deferred revenue until such time that all criteria are met.

Effective January 1, 2018, the Company adopted ASC, Topic 606, Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective method. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, an entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

At contract inception, once the contract is determined to be within the scope of ASC 606, the Company identifies the performance obligations in the contract by assessing whether the goods or services promised within each contract are distinct. The Company then recognizes revenue for the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The Company recorded a reduction to the opening balance of accumulated deficit of approximately $1.1 million and a corresponding reduction in deferred revenue as of January 1, 2018 due to ASC 606’s cumulative adoption impact on the Company’s collaborative arrangements. The Company’s revenue recognized in 2018 would not have been materially different under ASC 605 as compared to ASC 606.

Product Sales

On November 12, 2018, the Company completed the sale of its assets related to the manufacture, marketing and sale of the VIBATIV product to Cumberland pursuant to the Asset Purchase Agreement dated November 1, 2018. Up until that date, the Company sold VIBATIV in the US market by making the drug product available through a limited number of distributors, who sold VIBATIV to healthcare providers. Title and risk of loss transferred upon receipt by these distributors. The Company recognized VIBATIV product sales and related cost of product sales when the distributors obtained control of the drug product, which was at the time title transferred to the distributors.

The Company recorded sales on a net sales basis which includes estimates of variable consideration. The variable consideration results from sales discounts, government‑mandated rebates and chargebacks, distribution fees, estimated product returns and other deductions. The Company reflected such reductions in revenue as either an allowance to the related account receivable from the distributor, or as an accrued liability, depending on the nature of the sales deduction. Sales deductions are based on management’s estimates that considered payor mix in target markets, industry benchmarks and experience to date. In general, these estimates take into consideration a range of possible outcomes which are probability-weighted in accordance with the expected value method in ASC 606. The Company monitored inventory levels in the distribution channel, as well as sales by distributors to healthcare providers, using product‑specific data provided by the distributors. Product return allowances are based on amounts owed or to be claimed on related sales. These estimates take into consideration the terms of the Company’s agreements with customers, historical product returns of, rebates or discounts taken, estimated levels of inventory in the distribution channel, the shelf life of the product, and specific known market events, such as competitive pricing and new product introductions. The Company updates its estimates and assumptions each quarter and if actual future results vary from its estimates, the Company may adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment.

Sales Discounts: The Company offers cash discounts to certain customers as an incentive for prompt payment. The Company expects its customers to comply with the prompt payment terms to earn the cash discount. In addition, the Company offers contract discounts to certain direct customers. The Company estimates sales discounts based on contractual terms, historical utilization rates, as available, and its expectations regarding future utilization rates. The Company accounts for sales discounts by reducing accounts receivable by the expected discount and recognizing the discount as a reduction of revenue in the same period the related revenue is recognized.

Chargebacks and Government Rebates: The Company estimates reductions to product sales for qualifying federal and state government programs including discounted pricing offered to Public Health Service (“PHS”), as well as government‑managed Medicaid programs. The Company’s reduction for PHS is based on actual chargebacks that distributors have claimed for reduced pricing offered to such healthcare providers and our expectation about future utilization rates. The Company’s accrual for Medicaid is based upon statutorily‑defined discounts, estimated payor mix, expected sales to qualified healthcare providers, and the Company’s expectation about future utilization. The Medicaid accrual and government rebates that are invoiced directly to the Company are recorded in other accrued liabilities on the consolidated balance sheets. For qualified programs that can purchase the Company’s products through distributors at a lower contractual government price, the distributors charge back to the Company the difference between their acquisition cost and the lower contractual government price, which the Company records as an allowance against accounts receivable.

Distribution Fees: The Company has contracts with its distributors in the US that include terms for distribution‑related fees. The Company determines distribution‑related fees based on a percentage of the product sales price, and it records the distribution fees as an allowance against accounts receivable.

Product Returns: The Company offers its distributors a right to return product purchased directly from the Company, which is principally based upon the product’s expiration date. The Company’s policy is to accept product returns during the six months prior to and twelve months after the product expiration date on product that has been sold to its distributors. Product return allowances are based on amounts owed or to be claimed on related sales. These estimates take into consideration the terms of our agreements with customers, historical product returns, rebates or discounts taken, estimated levels of inventory in the distribution channel, the shelf life of the product, and specific known market events, such as competitive pricing and new product introductions. The Company records its product return reserves as other accrued liabilities.

Allowance for Doubtful Accounts: The Company records allowances for potentially doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. As of December 31, 2018, there was no allowance for doubtful accounts related to trade accounts receivable.

The following table summarizes activity in each of the product revenue allowance and reserve categories:


	Chargebacks,		Government
	Discounts and		and Other
(In thousands)	Fees		Rebates		Returns		Total
Balance at December 31, 2016	$	779	$	377	$	747	$	1,903
Provision related to current period sales		5,193		580		573		6,346
Adjustment related to prior period sales		(127)		75		561		509
Credit or payments made during the period		(4,853)		(680)		(935)		(6,468)
Balance at December 31, 2017	$	992	$	352	$	946	$	2,290
Provision related to current period sales		6,402		704		521		7,627
Adjustment related to prior period sales		(81)		168		(449)		(362)
Credit or payments made during the period		(6,938)		(932)		(157)		(8,027)
Balance at December 31, 2018	$	375	$	292	$	861	$	1,528

Collaborative Arrangements Under ASC 606 (Effective January 1, 2018)

The Company enters into collaborative arrangements with partners that fall under the scope of ASC, Topic 808, Collaborative Arrangements (“ASC 808”). While these arrangements are in the scope of ASC 808, the Company may analogize to ASC 606 for some aspects of the arrangements. The Company analogizes to ASC 606 for certain activities within the collaborative arrangement for the delivery of a good or service (i.e., a unit of account) that is part of its ongoing major or central operations. Revenue recognized by analogizing to ASC 606 is recorded as “collaboration revenue” whereas, revenue recognized in accordance with ASC 808, is recorded as “profit sharing revenue” in the consolidated statements of operations.

The terms of the Company’s collaborative arrangements typically include one or more of the following: (i) up-front fees; (ii) milestone payments related to the achievement of development, regulatory, or commercial goals; (iii) royalties on net sales of licensed products; (iv) reimbursements or cost-sharing of R&D expenses; and (v) profit/loss sharing arising from co-promotion arrangements. Each of these payments results in collaboration revenues or an offset against R&D expense. Where a portion of non‑refundable up-front fees or other payments received is allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as collaboration revenue when (or as) the underlying performance obligation is satisfied.

As part of the accounting for these arrangements, the Company must develop estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligations. The estimation of the stand-alone selling price may include such estimates as, forecasted revenues or costs, development timelines, discount rates, and probabilities of technical and regulatory success. The Company evaluates each performance obligation to determine if they can be satisfied at a point in time or over time, and it measures the services delivered to the collaborative partner which are periodically reviewed based on the progress of the related program. The effect of any change made to an estimated input component and, therefore revenue or expense recognized, would be recorded as a change in estimate. In addition, variable consideration (e.g., milestone payments) must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

Up-front Fees: If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes collaboration revenues from the transaction price allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing collaboration revenue from the allocated transaction price. For example, when the Company receives up-front fees for the performance of research and development services, or when research and development services are not considered to be distinct from a license, the Company recognizes collaboration revenue for those units of account over time using a measure of progress. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue or expense recognition as a change in estimate.

Milestone Payments: At the inception of each arrangement that includes milestone payments (variable consideration), the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s or the collaborative partner’s control, such as non-operational developmental and regulatory approvals, are generally not considered probable of being achieved until those approvals are received. At the end of each reporting period, the Company re-evaluates the probability of achievement of milestones that are within its or the collaborative partner’s control, such as operational developmental milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenues and earnings in the period of adjustment. Revisions to the Company’s estimate of the transaction price may also result in negative collaboration revenues and earnings in the period of adjustment.

Royalties: For arrangements that include sales-based royalties, including commercial milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any material royalty revenue resulting from any of our collaborative arrangements.

Following the sale of VIBATIV to Cumberland in November 2018, VIBATIV royalties earned from Cumberland are included within “interest and other income, net” on the consolidated statements of operations. In addition, the Company’s income earned related to TRELEGY ELLIPTA sales is included within “income from our investment in TRC, LLC” on the consolidated statements of operations.

Reimbursement, cost-sharing and profit-sharing payments: Under certain collaborative arrangements, the Company has been reimbursed for a portion of its R&D expenses or participates in the cost-sharing of such R&D expenses. Such reimbursements and cost-sharing arrangements have been reflected as a reduction of R&D expense in the Company’s consolidated statements of operations, as the Company does not consider performing research and development services for reimbursement to be a part of its ongoing major or central operations.

Collaborative Arrangements under ASC 605 (Effective Prior to January 1, 2018)

Revenue from non‑refundable, up‑front license or technology access payments under license and collaborative arrangements that were not dependent on any future performance by the Company was recognized when such amounts were earned. If the Company had continuing obligations to perform under the arrangement, such fees were recognized over the estimated period of continuing performance obligation.

The Company accounted for multiple element arrangements, such as license and development agreements in which it may have provided several deliverables, in accordance with ASC, Subtopic 605‑25, Multiple Element Arrangements. For new or materially amended multiple element arrangements, the Company identified the deliverables at the inception of the arrangement and each deliverable within a multiple deliverable revenue arrangement was accounted for as a separate unit of accounting if both of the following criteria were met: (1) the delivered item or items had value to the customer on a standalone basis and (2) for an arrangement that included a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) was considered probable and substantially in the Company’s control. The Company allocated revenue to each non‑contingent element based on the relative selling price of each element. When applying the relative selling price method, the Company determined the selling price for each deliverable using vendor‑specific objective evidence (“VSOE”) of selling price, if it existed, or third‑party evidence (“TPE”) of selling price, if it existed. If neither VSOE nor TPE of selling price existed for a deliverable, the Company used the best estimated selling price for that deliverable. Revenue allocated to each element was then recognized based on when the basic four revenue recognition criteria were met for each element.

Where a portion of non‑refundable upfront fees or other payments received were allocated to continuing performance obligations under the terms of a collaborative arrangement, they were recorded as deferred revenue and recognized as revenue ratably over the term of the Company’s estimated performance period under the agreement. The Company determined the estimated performance periods, and they were periodically reviewed based on the progress of the related program. The effect of any change made to an estimated performance period and, therefore revenue recognized, would occur on a prospective basis in the period that the change was made.

Under certain collaborative arrangements, the Company was reimbursed for a portion of its R&D expenses. These reimbursements were reflected as a reduction of R&D expense in the Company’s consolidated statements of operations, as it did not consider performing research and development services to be a customer relationship in the context of those collaborative arrangements. Therefore, the reimbursement of research and development services were recorded as a reduction of R&D expense.

The Company recognized revenue from milestone payments when (i) the milestone event was substantive and its achievability was not reasonably assured at the inception of the agreement and (ii) the Company did not have ongoing performance obligations related to the achievement of the milestone. Milestone payments were considered substantive if all of the following conditions were met: the milestone payment (a) was commensurate with either the Company’s performance to achieve the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (b) related solely to past performance, and (c) was reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.

Research and Development Expenses

Research and development expenses are recorded in the period that services are rendered or goods are received. Research and development expenses consist of salaries and benefits, laboratory supplies and facility costs, as well as fees paid to third parties that conduct certain research and development activities on behalf of the Company, net of certain external research and development expenses reimbursed under the Company’s collaborative arrangements.

As part of the process of preparing financial statements, the Company is required to estimate and accrue certain research and development expenses. This process involves the following:

•identifying services that have been performed on the Company’s behalf and estimating the level of service performed and the associated cost incurred for the service when the Company has not yet been invoiced or otherwise notified of actual cost;

•estimating and accruing expenses in the Company’s financial statements as of each balance sheet date based on facts and circumstances known to it at the time; and

•periodically confirming the accuracy of the Company’s estimates with selected service providers and making adjustments, if necessary.

Examples of estimated research and development expenses that the Company accrues include:

•fees paid to clinical research organizations (“CROs”) in connection with preclinical and toxicology studies and clinical studies;

•fees paid to investigative sites in connection with clinical studies;

•fees paid to contract manufacturing organizations (“CMOs”) in connection with the production of product and clinical study materials; and

•professional service fees for consulting and related services.

The Company bases its expense accruals related to clinical studies on its estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical studies on the Company’s behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors, such as the successful enrollment of patients and the completion of clinical study milestones. The Company’s service providers invoice it monthly in arrears for services performed. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the Company does not identify costs that it has begun to incur or if it underestimates or overestimates the level of services performed or the costs of these services, the Company’s actual expenses could differ from its estimates.

To date, the Company has not experienced significant changes in its estimates of accrued research and development expenses after a reporting period. Such changes in estimates recorded after a reporting period have been less than 1% of the Company’s annual research and development expenses and have not been material. However, due to the nature of estimates, there is no assurance that the Company will not make changes to its estimates in the future as it becomes aware of additional information about the status or conduct of its clinical studies and other research activities. Such changes in estimates will be recognized as research and development expenses in the period that the change in estimate occurs.

Advertising Expenses

The Company expenses the costs of advertising, including promotional expenses, as incurred. Advertising expenses were $1.9 million, $3.2 million and $2.5 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Fair Value of Share‑Based Compensation Awards

The Company uses the Black‑Scholes‑Merton option pricing model to estimate the fair value of options granted under its equity incentive plans and rights to acquire shares granted under its employee share purchase plan (“ESPP”). The Black‑Scholes‑Merton option valuation model requires the use of assumptions, including the expected term of the award and the expected share price volatility. The Company uses the “simplified” method as described in Staff Accounting Bulletin No. 107, Share‑Based Payment, to estimate the expected option term.

Share‑based compensation expense is calculated based on awards ultimately expected to vest and is reduced for actual forfeitures as they occur, as allowed under Accounting Standards Update (“ASU”) 2016-09, Compensation—Stock Compensation (Topic 718) (“ASU 2016‑09”). Prior to the adoption of ASU 2016-09 on January 1, 2017, forfeitures were estimated at the time of grant and revised, if necessary, in subsequent periods if the actual forfeitures differed from those estimates.

Compensation expense for purchases under the ESPP is recognized based on the fair value of the award on the date of offering.

Amortization of Debt Issuance Costs

Debt issuance costs are amortized to interest expense over the estimated life of the related debt based on the effective interest method.

Theravance Respiratory Company, LLC (“TRC”)

Through its equity ownership of TRC, the Company is entitled to receive an 85% economic interest in any future payments that may be made by Glaxo Group or one of its affiliates (“GSK”) relating to the GSK-Partnered Respiratory Programs (net of TRC expenses paid and the amount of cash, if any, expected to be used by TRC pursuant to the TRC LLC Agreement over the next four fiscal quarters). The GSK-Partnered Respiratory Programs consist primarily of the Trelegy Ellipta program and the inhaled Bifunctional Muscarinic Antagonist-Beta2 Agonist (“MABA”) program.

The Company analyzed its ownership, contractual and other interests in TRC to determine if TRC is a variable‑interest entity (“VIE”), whether the Company has a variable interest in TRC and the nature and extent of that interest. The Company determined that TRC is a VIE. The party with the controlling financial interest, the primary beneficiary, is required to consolidate the entity determined to be a VIE. Therefore, the Company also assessed whether the Company is the primary beneficiary of TRC based on the power to direct its activities that most significantly impact its economic performance and the Company’s obligation to absorb its losses or the right to receive benefits from it that could potentially be significant to TRC. Based on the Company’s assessment, it determined that it is not the primary beneficiary of TRC, and, as a result, the Company does not consolidate TRC in its consolidated financial statements. TRC is recognized in the Company’s consolidated financial statements under the equity method of accounting. Income related to the Company’s equity ownership of TRC is reflected in its consolidated statement of operations as non-operating income.

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are anticipated to be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

The Company’s total unrecognized tax benefits of $52.4 million and $41.8 million, as of December 31, 2018 and December 31, 2017, respectively, may reduce the effective tax rate in the period of recognition. As of December 31, 2018, the Company does not believe that it is reasonably possible that its unrecognized tax benefit will significantly decrease in the next twelve months. The Company currently has a full valuation allowance against its deferred tax assets, which would impact the timing of the effective tax rate benefit should any of these uncertain positions be favorably settled in the future.

The Company assesses all material positions, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether the factors underlying the sustainability assertion have changed and whether the amount of the recognized tax benefit is still appropriate.

The recognition and measurement of tax benefits requires significant judgment. The Company has taken certain positions where it believes that its position is greater than 50% likely to be realized upon ultimate settlement and for which no reserve for uncertain tax positions has been recorded. If the Company does not ultimately realize the expected benefit of these positions, it will record additional income tax expenses in future periods. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

Net Loss per Share

Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of outstanding, less ordinary shares subject to forfeiture. Diluted net loss per share is computed by dividing net loss by the weighted-average number of shares outstanding, less ordinary shares subject to forfeiture, plus all additional ordinary shares that would have been outstanding, assuming dilutive potential ordinary shares had been issued for other dilutive securities.

For the years ended December 31, 2018, 2017 and 2016, diluted and basic net loss per share was identical since potential ordinary shares were excluded from the calculation, as their effect was anti‑dilutive.

Anti‑dilutive Securities

The following ordinary equivalent shares were not included in the computation of diluted net loss per share because their effect was anti‑dilutive:


	Year Ended December 31,
(In thousands)	2018	2017	2016
Share issuances under equity incentive plans and ESPP	3,492	3,369	3,709
Restricted shares	2	6	33
Share issuances upon the conversion of convertible senior notes	6,676	6,676	6,676
Total	10,170	10,051	10,418

In addition, there were 978,750 and 1,305,000 shares that are subject to performance‑based vesting criteria which have been excluded from the ordinary equivalent shares table above for the years ended December 31, 2018 and 2017, respectively.

Comprehensive Loss

Comprehensive loss is comprised of net loss and changes in unrealized gains and losses on the Company’s available-for-sale investments.

Related Parties

GSK owned 17.3% of the Company’s ordinary shares outstanding as of December 31, 2018. On March 17, 2016, GSK purchased from the Company 1,301,015 of its ordinary shares for an aggregate purchase price of approximately $23.0 million pursuant to a Share Purchase Agreement between GSK and the Company dated March 14, 2016. The Share Purchase Agreement was entered into pursuant to Section 2.1(d)(ii) of the Governance Agreement between GSK and the Company dated March 3, 2014 (the “Governance Agreement”), which until December 31, 2017 afforded GSK, on a quarterly basis, the opportunity to purchase from the Company ordinary shares sufficient to maintain GSK’s Percentage Interest (as defined in the Governance Agreement) at the same level as prior to any exercise of share options and vesting of restricted shares that occurred during the prior quarter, and pursuant to the Company’s approval to GSK to make additional purchases, which approval was required by Section 2.1(a) of the Governance Agreement. The Governance Agreement expired on December 31, 2017.

Robert V. Gunderson, Jr. is a member of the Company’s board of directors. The Company has engaged Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, of which Mr. Gunderson is a partner, as its primary legal counsel. Fees incurred were $0.5 million, $0.3 million, and $1.1 million for the years ended December 31, 2018, 2017, and 2016, respectively.

Dr. Smaldone Alsup is a member of the Company’s board of directors and is also the Chief Operating Officer and Chief Scientific Officer of NDA Group. The Company engaged NDA Group in 2017 to perform consulting services related to the regulatory plans for one of the Company’s drug candidates. There were no fees incurred for the year ended December 31, 2018 and $0.1 million in fees incurred for the year ended December 31, 2017.

Recently Adopted Accounting Pronouncements

Effective January 1, 2018, the Company adopted ASC, Topic 606, Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018 and recognized the cumulative effect of ASC 606 at the date of initial application. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The Company recorded a reduction to the opening balance of accumulated deficit of approximately $1.1 million and a corresponding reduction in deferred revenue as of January 1, 2018 due to ASC 606’s cumulative adoption impact on its collaborative arrangements. The Company’s product sales revenue under ASC 606 would not have been materially different under the legacy Accounting Standards Codification, Topic 605, Revenue Recognition (“ASC 605”).

Effective January 1, 2018, the Company adopted ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”) using the modified retrospective approach. ASU 2016-16 requires immediate recognition of income tax consequences of intra-company asset transfers, other than inventory transfers. Legacy GAAP prohibited recognition of income tax consequences of intra-company asset transfers whereby the seller defers any net tax effect and the buyer is prohibited from recognizing a deferred tax asset on the difference between the newly created tax basis of the asset in its tax jurisdiction and its financial statement carrying amount as reported in the consolidated financial statements. An example of an inter-company asset transfers included in ASU 2016-16’s scope is intellectual property. The adoption of ASU 2016-16 did not have a material impact on the Company’s balance sheet or statement of operations as its deferred tax assets are fully offset by a valuation allowance.

Effective January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”) that changed the presentation of restricted cash and cash equivalents on the consolidated statements of cash flows. Restricted cash balances are now included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the consolidated statements of cash flows. To conform to the presentation under ASU 2016-18, the Company revised the amounts previously reported on the consolidated statements of cash flows for the comparable prior year periods.

Recently Issued Accounting Pronouncements Not Yet Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016‑02, Leases (Topic 842) (“ASU 2016‑02”). ASU 2016‑02 is aimed at making leasing activities more transparent and comparable, and requires leases with terms greater than one year to be recognized by lessees on their balance sheet as a right‑of‑use asset and corresponding lease liability. ASU 2016‑02 is effective for all interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted, and is required to be adopted using a modified retrospective approach. In July 2018, the FASB issued supplemental adoption guidance that allows for an optional transition method to initially account for the impact of the adoption with a cumulative adjustment to accumulated deficit on the effective date of ASU 2016-02, January 1, 2019, rather than applying the transition provisions in the earliest period presented.

Based on the Company’s assessment of ASU 2016-02, it elected the optional transition method described above and a package of practical expedients that allows entities to not (i) reassess whether any expired or existing contracts are considered or contain leases; (ii) reassess the lease classification for any expired or existing leases; and (iii) reassess initial direct costs for any existing leases. In addition, the Company elected other practical expedients that allow entities to (iv) use hindsight in determining the term of a lease when the lease includes an option to extend the lease term; (v) exclude all leases, on a go forward basis, that have a lease term of 12-month or less; and (vi) combine lease and non-lease components (e.g., office common area maintenance expenses) when recognizing a lease on an entity’s balance sheet on a go forward basis.

The Company will adopt ASU 2016-02 in January 2019, and the Company has substantially completed the evaluation of its existing lease arrangements in order to determine the full impact that the adoption of ASU 2016‑02 will have on its balance sheet, financial statement disclosures, and related internal controls. The most significant impact to the Company’s balance sheet upon adoption will be from recognizing a right-of-use asset and corresponding lease liability related to its office leases in South San Francisco and Dublin, Ireland. The Company currently anticipates that it will record a right-to-use asset and corresponding lease liability ranging between appropriately $47 million to $50 million. Based on the review of the Company’s existing lease arrangements, ASU 2016-02 will not have a material impact on the Company’s results of operations or cash flows.

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 was issued to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Essentially, an entity will not have to account for the effects of a modification if: (1) the fair value of the modified award is the same immediately before and after the modification; (2) the vesting conditions of the modified award are the same immediately before and after the modification; and (3) the classification of the modified award as either an equity instrument or liability instrument is the same immediately before and after the modification. The amendments in ASU 2017-09 will become effective for the Company as of January 1, 2019. Early adoption is permitted, including adoption in any interim period. The adoption of this guidance is not expected to have a material impact upon the Company’s consolidated financial statements and related disclosures.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The Company anticipates its first presentation of changes in stockholders’ equity as required under the new SEC guidance will be included in its Form 10-Q for the three month period ending March 31, 2019.

The Company has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a material impact on its consolidated financial statements and related disclosures.

Collaborative Arrangements

12 Months Ended

Dec. 31, 2018

Collaborative Arrangements

Collaborative Arrangements

2. Collaborative Arrangements

Revenues from Collaboration and Profit Sharing Arrangements

The Company recognized collaboration revenue as follows:


	Year Ended December 31,
(In thousands)	2018		2017		2016
Janssen	$	31,053	$	—	$	—
Alfasigma		10,678		—		—
Mylan		24		102		15,102
R-Pharm		32		491		109
Takeda Pharmaceuticals		—		—		15,075
Various VIBATIV collaborative partners		4		5		259
Other		—		—		500
Total collaboration revenue	$	41,791	$	598	$	31,045

In addition, the Company recognized $3.3 million in profit sharing revenue from its YUPELRI TM (revefenacin) collaborative arrangement with Mylan for the year ended December 31, 2018.

Under the legacy revenue guidance ASC 605, the Company’s collaboration revenue for the year ended December 31, 2018 would not have differed materially.

Changes in Deferred Revenue Balances

The Company recognized the following revenue from collaborative arrangements as a result of changes in its deferred revenue balance during the periods below:


	Year Ended December 31,
(In thousands)	2018
Collaboration revenue recognized in the period from:
Amounts included in deferred revenue at the beginning of the period	$	130
Performance obligations satisfied in the previous period		—

Janssen Biotech

In February 2018, the Company entered into a global co-development and commercialization agreement with Janssen Biotech, Inc. (“Janssen”) for TD-1473 and related back-up compounds for inflammatory intestinal diseases, including ulcerative colitis and Crohn's disease (the “Janssen Agreement”). Under the terms of the Janssen Agreement, the Company received an upfront payment of $100.0 million. The Company has dosed first patients a Phase 2 (DIONE) study in Crohn’s disease and initiated sites in the registrational Phase 2b/3 (RHEA) induction and maintenance study in ulcerative colitis. Following completion of the Phase 2 Crohn’s study and the Phase 2b induction portion of an ulcerative colitis study, Janssen can elect to obtain an exclusive license to develop and commercialize TD-1473 and certain related compounds by paying us a fee of $200.0 million. Upon any such election, the Company and Janssen will jointly develop and commercialize TD-1473 in inflammatory intestinal diseases and share profits in the US and expenses related to a potential Phase 3 program (67% to Janssen; 33% to Theravance Biopharma). The Company would receive royalties on ex-US sales at double-digit tiered percentage royalty rates, and the Company would be eligible to receive up to an additional $700.0 million in development and commercialization milestone payments from Janssen.

The Janssen Agreement is considered to be within the scope of ASC 808, as the parties are active participants and exposed to the risks and rewards of the collaborative activity. The Company evaluated the terms of the Janssen Agreement and have analogized to ASC 606 for the research and development activities to be performed through the initial Phase 2 development period of the collaborative arrangement that are considered to be part of the Company’s ongoing major or central operations. Using the concepts of ASC 606, the Company has identified research and development activities as its only performance obligation. The Company further determined that the transaction price under the arrangement was the $100.0 million upfront payment which was allocated to the single performance obligation.

The $900.0 million in future potential payments is considered variable consideration if Janssen elects to remain in the collaboration arrangement following completion of certain Phase 2 activities, as described above and, as such, was not included in the transaction price, as the potential payments were all determined to be fully constrained under ASC 606. As part of the Company’s evaluation of this variable consideration constraint, it determined that the potential payments are contingent upon developmental and regulatory milestones that are uncertain and are highly susceptible to factors outside of its control. The Company expects that any consideration related to royalties and sales-based milestones will be recognized when the subsequent sales occur.

For the year ended December 31, 2018, the Company recognized $31.1 million as revenue from collaboration arrangements related to the Janssen Agreement. The remaining transaction price of $68.9 million was recorded in deferred revenue on the consolidated balance sheets and is expected to be recognized as collaboration revenue as the research and development services are delivered over the Phase 2 development period. Collaboration revenue is recognized for the research and development services based on a measure of the Company’s efforts toward satisfying the performance obligation relative to the total expected efforts or inputs to satisfy the performance obligation (e.g., costs incurred compared to total budget). For the year ended December 31, 2018, the Company incurred $38.6 million in research and development costs related to the Janssen Agreement. In future reporting periods, the Company will reevaluate the Company’s estimates related to its efforts towards satisfying the performance obligation and may record a change in estimate if deemed necessary.

Alfasigma

Development and Collaboration Agreement

Under an October 2012 development and collaboration agreement for velusetrag, the Company and Alfasigma S.p.A (“Alfasigma”) agreed to collaborate in the execution of a two-part Phase 2 program to test the efficacy, safety and tolerability of velusetrag in the treatment of patients with gastroparesis (a medical condition consisting of a paresis (partial paralysis) of the stomach, resulting in food remaining in the stomach for a longer time than normal) (the “Alfasigma Agreement”). As part of the Alfasigma Agreement, Alfasigma funded the majority of the costs associated with the Phase 2 gastroparesis program, which consisted of a Phase 2 study focused on gastric emptying and a Phase 2 study focused on symptoms. Alfasigma had an exclusive option to develop and commercialize velusetrag in the European Union (“EU”), Russia, China, Mexico and certain other countries, while the Company retained full rights to velusetrag in the US, Canada, Japan and certain other countries.

In April 2018, Alfasigma exercised its exclusive option to develop and commercialize velusetrag, and the Company elected not to pursue further development of velusetrag. As a result, the Company is transferring global rights for velusetrag to Alfasigma under the terms of the existing collaboration agreement. The Company received a $10.0 million option exercise fee and a $1.0 million non-refundable reimbursement from Alfasigma, and the Company is eligible to receive future potential development, regulatory and sales milestone payments of up to $26.8 million, and tiered royalties on global net sales ranging from high single digits to the mid-teens.

The Alfasigma Agreement is considered to be within the scope of ASC 808, as the parties are active participants and exposed to the risks and rewards of the collaborative activity. The Company has historically received reimbursements related to R&D services performed under the Alfasigma Agreement. Performing R&D services for reimbursement is considered to be a collaborative activity under the scope of ASC 808. Reimbursable program costs are accounted for as reductions to R&D expense. For this unit of account, the Company does not recognize revenue or analogize to ASC 606 and, as such, the reimbursable program costs are excluded from the transaction price.

As a result of Alfasigma’s election to exercise its exclusive option to develop and commercialize velusetrag in April 2018, Alfasigma paid the Company a total of $11.0 million, comprised of the $10.0 million option exercise fee and the $1.0 million non-refundable reimbursement. The Company analogized to ASC 606 for the delivery of the following identified performance obligations: (i) delivery of the velusetrag license; (ii) transfer of technical know-how; (iii) delivery of clinical study reports (“CSRs”); (iv) delivery of registration batches, including drug substances; and (v) joint steering committee participation. The Company determined that all of the five performance obligations were distinct, and it allocated the transaction price based on the estimated stand-alone selling prices of each of the performance obligations. The stand-alone selling price of the license was based on a discounted cash flow approach and considered several factors including, but not limited to: discount rate, development timeline, regulatory risks, estimated market demand and future revenue potential.

The Company determined that any potential development or regulatory milestones were to be fully constrained as prescribed under ASC 606. As part of its evaluation of this variable consideration constraint, the Company determined that the potential payments are contingent upon developmental and regulatory milestones that are uncertain and are highly susceptible to factors outside of the Company’s control. In addition, the Company expects that any consideration related to sales-based milestones would be recognized when the subsequent sales occur.

For the year ended December 31, 2018, the Company recognized $10.7 million as revenue from collaboration arrangements related to the Alfasigma Agreement. As of December 31, 2018, $0.3 million was recorded in deferred revenue on the consolidated balance sheets and is expected to be recognized as collaboration revenue over approximately the next four years.

Mylan

Development and Commercialization Agreement

In January 2015, the Company and Mylan Ireland Limited (“Mylan”) established a strategic collaboration (the “Mylan Agreement”) for the development and commercialization of revefenacin, including YUPELRI inhalation solution. The Company entered into the collaboration to expand the breadth of its revefenacin development program and extend its commercial reach beyond the acute care setting.

Under the Mylan Agreement, Mylan paid the Company an up-front fee of $15.0 million for the delivery of the revefenacin license in 2015 and, in 2016, Mylan paid the Company a milestone payment $15.0 million for the achievement of 50% enrollment in the Phase 3 twelve-month safety study. Separately, pursuant to an agreement to purchase ordinary shares entered into on January 30, 2015, Mylan Inc., a subsidiary of Mylan N.V., made a $30.0 million equity investment in the Company, buying 1,585,790 ordinary shares from the Company in February 2015 in a private placement transaction at a price of approximately $18.918 per share, which represented a 10% premium, equal to $4.2 million, over the volume weighted average price per share of the Company’s ordinary shares for the five trading days ending on January 30, 2015.

As of December 31, 2018, the Company is eligible to receive from Mylan additional potential development, regulatory and sales milestone payments totaling up to $205.0 million in the aggregate, with $160.0 million associated with YUPELRI monotherapy, and $45.0 million associated with future potential combination products. Of the $160.0 million associated with monotherapy, $150.0 million relates to sales milestones based on achieving certain levels of net sales and $10.0 million relates to regulatory actions in the EU.

The Mylan Agreement is considered to be within the scope of ASC 808, as the parties are active participants and exposed to the risks and rewards of the collaborative activity. Under the terms of the Mylan Agreement, Mylan was responsible for reimbursement of the Company’s costs related to the registrational program up until the approval of the first new drug application in November 2018. Performing R&D services for reimbursement is considered to be a collaborative activity under the scope of ASC 808. Reimbursable program costs are recognized proportionately with the performance of the underlying services and accounted for as reductions to R&D expense. For this unit of account, the Company did not recognize revenue or analogize to ASC 606 and, as such, the reimbursable program costs are excluded from the transaction price.

The Company analogized to ASC 606 for the accounting for two performance obligations: (1) delivery of the license to develop and commercialize revefenacin; and (2) joint steering committee participation. The Company determined the license to be distinct from the joint steering committee participation. The Company further determined that the transaction price under the arrangement was comprised of the following: (1) $15.0 million up-front license fee received in 2015; (2) $4.2 million premium related to the ordinary share purchase agreement received in 2015; and (3) $15.0 million milestone for 50% enrollment in the Phase 3 twelve-month safety study received in 2016. The total transaction price of $34.2 million was allocated to the two performance obligations based on the Company’s best estimate of the relative stand-alone selling price. For the delivery of the license, the Company based the stand-alone selling price on a discounted cash flow approach and considered several factors including, but not limited to: discount rate, development timeline, regulatory risks, estimated market demand and future revenue potential. For the committee participation, the Company based the stand-alone selling price on the average compensation of its committee members estimated to be incurred over the performance period. The Company expects to recognize collaboration revenue from the committee participation ratably over the performance period of approximately seventeen years.

The future potential milestone amounts were not included in the transaction price, as they were all determined to be fully constrained following the concepts of ASC 606. As part of the Company’s evaluation of the development and regulatory milestones constraint, the Company determined that the achievement of such milestones are contingent upon success in future clinical trials and regulatory approvals which are not within its control and uncertain at this stage. The Company expects that the sales-based milestone payments and royalty arrangements will be recognized when the sales occur or the milestone is achieved. The Company will re-evaluate the transaction price each quarter and as uncertain events are resolved or other changes in circumstances occur.

As of December 31, 2018, $0.3 million was recorded in deferred revenue on the consolidated balance sheets under the Mylan Agreement. This amount reflects revenue allocated to joint steering committee participation and will be recognized as collaboration revenue over the course of the remaining performance period of approximately fourteen years. For the year ended December 31, 2018, the Company recognized $24,000 in collaboration revenue from the recognition of previously deferred revenue under the Mylan collaborative arrangement.

The Company is also entitled to a share of US profits and losses (65% to Mylan; 35% to Theravance Biopharma) received in connection with commercialization of YUPELRI, and the Company is entitled to low double-digit royalties on ex-US net sales (excluding China). Mylan is the principal in the sales transactions, and as a result, the Company will not reflect the product sales in its financial statements. Net amounts payable to or receivable from Mylan each quarter under the profit sharing structure are disaggregated according to their individual components. The reimbursement received from Mylan for the Company’s R&D expense is characterized as a reduction of R&D expense, as the Company does not consider performing research and development services for reimbursement to be a part of its ongoing major or central operations. For the year ended December 31, 2018, the Company recorded $7.5 million as a reduction to R&D expense comprised of $4.5 million related to registrational activities conducted in support of the NDA and $3.0 million related to the YUPELRI profit sharing payments receivable from Mylan which were attributed to R&D services. There were no reductions to R&D expense related to such profit sharing payments for the year ended December 31, 2017.

If in any reporting period, the arrangement results in a receivable from Mylan after the Company’s R&D expenses have been reimbursed, then such a receivable is recognized as profit sharing revenue. For the year ended December 31, 2018, the Company recorded $3.3 million as collaboration profit sharing revenue related to profit sharing payments receivable from Mylan. There was no collaboration profit sharing revenue for the year ended December 31, 2017. If in any reporting period, the arrangement results in a payable to Mylan after the Company’s R&D expenses have been reimbursed, then such payments are recognized as collaboration expenses within operating expenses.

Takeda Pharmaceuticals

License and Collaboration Agreement

In June 2016, the Company entered into a License and Collaboration Agreement with Millennium Pharmaceuticals, Inc., a Delaware corporation (“Millennium”) (the “Takeda Agreement”), in order to establish a collaboration for the development and commercialization of TD-8954 (TAK-954), a selective 5-HT4 receptor agonist. Millennium is an indirect wholly-owned subsidiary of Takeda Pharmaceutical Company Limited (TSE: 4502), a publicly-traded Japanese corporation listed on the Tokyo Stock Exchange (collectively with Millennium, "Takeda").

Under the terms of the Takeda Agreement, Takeda is responsible for worldwide development and commercialization of TD-8954. The Company received an upfront cash payment of $15.0 million and will be eligible to receive success based development, regulatory and sales milestone payments by Takeda. The Company will also be eligible to receive a tiered royalty on worldwide net sales by Takeda at percentage royalty rates ranging from low double-digits to mid-teens.

The Takeda Agreement was finalized in the third quarter of 2016, and the Company recognized $15.1 million in revenue for the year ended December 31, 2016.

Reimbursement of R&D Costs

The following table summarizes the reductions to R&D expenses related to reimbursement payments:


	Year Ended December 31,
(In thousands)	2018		2017		2016
Mylan	$	7,515	$	23,427	$	83,490
Janssen		1,597		—		—
Alfasigma		—		—		7,113
Other		—		113		134
Total reduction to R&D expense	$	9,112	$	23,540	$	90,737

Sale of VIBATIV	12 Months Ended
Sale of VIBATIV	Dec. 31, 2018
Sale of VIBATIV
Sale of VIBATIV	3. Sale of VIBATIV On November 12, 2018, the Company completed the sale of its assets related to the manufacture, marketing and sale of VIBATIV to Cumberland Pharmaceutical Inc. (“Cumberland”) pursuant to the Asset Purchase Agreement dated November 1, 2018 (the “APA”). At the closing of the transaction, the Company received $20.0 million in cash. Pursuant to the terms of the APA, an additional $5.0 million in cash will be paid by the Cumberland to the Company on or before April 1, 2019. In addition, the Company is entitled to receive tiered royalties of up to 20% of US net sales of VIBATIV until such time as royalties cumulatively total $100.0 million. In connection with the closing of the transaction, Cumberland acquired, among other things, (i) intellectual property rights relating to VIBATIV, (ii) active pharmaceutical ingredient for VIBATIV, work-in-process and finished drug product, (iii) the US marketing authorization for VIBATIV, (iv) certain assigned contracts relating to the manufacture and commercialization of VIBATIV, and (v) books and records related to VIBATIV. Cumberland also assumed certain clinical study obligations related to VIBATIV and certain post-closing liabilities and obligations as described in the APA. The Company retained financial responsibility for any liabilities relating to products sold prior to the closing of the transaction, and Cumberland assumed financial responsibility for any liabilities relating to products sold on or after the closing of the transaction. The Company has agreed to provide transition services to Cumberland for limited periods of time following the closing of the transaction. The Company has also agreed for a limited period not to engage in specified activities that would compete with the manufacture, marketing and sale of VIBATIV. The Company recognized a net gain of approximately $6.1 million upon the sale of VIBATIV within “interest and other income, net” on the consolidated statements of operations. The Company will record the royalties receivable from future US net sales by Cumberland within other income. Transition-related costs of approximately $1.1 million were recognized concurrently and included as a reduction to the net gain on the sale.

Segment Information

12 Months Ended

Dec. 31, 2018

Segment Information

Segment Information

4. Segment Information

The Company operates in a single segment, which is the discovery (research), development and commercialization of human therapeutics. The following table summarizes total revenue by geographic region:


	Year Ended December 31,
(In thousands)	2018		2017		2016
US	$	49,239	$	14,272	$	33,179
Europe		11,117		1,109		15,211
Asia		14		5		254
Other		—		—		4
Total revenue	$	60,370	$	15,386	$	48,648

The following table summarizes total revenue from each of the Company’s customers or collaboration partners who individually accounted for 10% or more of the Company’s total revenue (as a percentage of total revenues) during the most recent three years:


	Year Ended December 31,
(% of total revenue)	2018		2017		2016
Janssen	51	%	—		—
Alfasigma	18	%	—		—
Cardinal Health	—		28	%	—
AmerisourceBergen Drug Corp.	—		25	%	—
McKesson Corp.	—		23	%	—
Besse Medical	—		13	%	—
Mylan	—		—		31	%
Takeda	—		—		31	%

Cash, Cash Equivalents, and Restricted Cash

12 Months Ended

Dec. 31, 2018

Cash, Cash Equivalents, and Restricted Cash

Cash, Cash Equivalents, and Restricted Cash

5. Cash, Cash Equivalents, and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amount shown on the consolidated statements of cash flows.


	December 31,
(In thousands)	2018		2017
Cash and cash equivalents	$	378,021	$	88,980
Restricted cash		833		833
Total cash, cash equivalents, and restricted cash shown on the consolidated statements of cash flows	$	378,854	$	89,813

Investments and Fair Value Measurements

12 Months Ended

Dec. 31, 2018

Investments and Fair Value Measurements

Investments and Fair Value Measurements

6. Investments and Fair Value Measurements

Available-for-Sale Securities

The estimated fair value of marketable securities is based on quoted market prices for these or similar investments that were based on prices obtained from a commercial pricing service. The fair value of marketable securities classified within Level 2 is 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.

Available-for-sale securities are summarized below:


		December 31, 2018
				Gross		Gross
		Amortized		Unrealized		Unrealized		Estimated
(In thousands)		Cost		Gains		Losses		Fair Value
US government securities	Level 1	$	48,807	$	—	$	(86)	$	48,721
US government agency securities	Level 2		9,852		2		—		9,854
Corporate notes	Level 2		57,508		6		(88)		57,426
Commercial paper	Level 2		90,919		—		—		90,919
Marketable securities			207,086		8		(174)		206,920
Money market funds	Level 1		294,751		—		—		294,751
Total		$	501,837	$	8	$	(174)	$	501,671


		December 31, 2017
				Gross		Gross
		Amortized		Unrealized		Unrealized		Estimated
(In thousands)		Cost		Gains		Losses		Fair Value
US government securities	Level 1	$	89,896	$	—	$	(342)	$	89,554
US government agency securities	Level 2		50,891		—		(113)		50,778
Corporate notes	Level 2		141,226		2		(280)		140,948
Commercial paper	Level 2		19,893		—		—		19,893
Marketable securities			301,906		2		(735)		301,173
Money market funds	Level 1		69,055		—		—		69,055
Total		$	370,961	$	2	$	(735)	$	370,228

As of December 31, 2018, all of the available-for-sale securities had contractual maturities within two years and the weighted average maturity of marketable securities was approximately four months. There were no transfers between Level 1 and Level 2 during the periods presented, and there have been no changes to the Company’s valuation techniques during the years ended December 31, 2018 and 2017.

In general, the Company invests in debt securities with the intent to hold such securities until maturity at par value. The Company does not intend to sell the investments that are currently in an unrealized loss position, and it is unlikely that it will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. The Company has determined that the gross unrealized losses on its marketable securities, as of December 31, 2018, were temporary in nature and primarily due to increases in short-term interest rates in the capital markets. There were no material unrealized losses on investments which have been in a loss position for more than twelve months as of December 31, 2018.

As of December 31, 2018, the Company’s accumulated other comprehensive loss on its consolidated balance sheets consisted of net unrealized losses on available-for-sale investments. During the years ended December 31, 2018 and 2017, the Company did not sell any of its marketable securities.

Non-Marketable Equity Securities and Other-Than-Temporary Impairment

In September 2015, the Company and Trek Therapeutics, PBC ("TREKtx") entered into a licensing agreement (the "TREKtx Agreement") granting TREKtx an exclusive worldwide license for the development, manufacturing, use, marketing and sale of the Company’s NS5A inhibitor known as TD-6450 as a component in combination hepatitis C virus ("HCV") products (the "HCV Products"). Pursuant to the TREKtx Agreement, the Company received an upfront payment of $8.0 million in the form of TREKtx's Series A preferred stock and would be eligible to receive future royalties based on net sales of the HCV Products. TREKtx is solely responsible for all future costs associated with the supply, manufacture, development, sale and marketing of the licensed compound.

At the date of the acquisition of the investment, the Company estimated the fair value of the consideration received to be $8.0 million based upon the price of similar Series A preferred stock that TREKtx sold to an independent third-party for cash consideration. The Company accounted for this investment using the cost method of accounting and recorded it in other investments on the Company’s consolidated balance sheets. The Company is not considered to be the primary beneficiary of TREKtx and therefore, does not consolidate the financial results of the company into its financial statements. The Company’s equity investments is reviewed at least annually for impairment or whenever events or changes in circumstances indicate that the carrying value of the investment might not be recoverable.

During 2017, the Company identified indicators of impairment were present for its investment in TREKtx. The Company concluded that the impairment of this investment was other-than-temporary due to TREKtx's challenges in securing additional funding and, as a result, the Company recorded an impairment charge. Due to the uncertainty in the recovery of the investment, the Company recorded an impairment charge for the full carrying value of the investment. The $8.0 million other-than-temporary impairment charge was reported as "Other-than-temporary impairment loss" on the consolidated statements of operations for the year ended December 31, 2017. As the inputs utilized for the assessment were not based on observable market data, the determination of fair value of this cost-method investment was classified within Level 3 of the fair value hierarchy. To determine the fair value of this investment, the Company used all available financial information related to the investee, including liquidity, rate of cash use, and ability to secure additional funding.

Theravance Respiratory Company, LLC	12 Months Ended
Theravance Respiratory Company, LLC	Dec. 31, 2018
Theravance Respiratory Company, LLC
Theravance Respiratory Company, LLC	7. Theravance Respiratory Company, LLC (“TRC”) Prior to the June 2014 spin-off from Innoviva, Inc. (the “Spin-Off”), the Company’s former parent company, Innoviva, Inc. (“Innoviva”), assigned to TRC, a Delaware limited liability company formed by Innoviva, its strategic alliance agreement with GSK and all of its rights and obligations under its collaboration agreement with GSK other than with respect to RELVAR® ELLIPTA®/BREO® ELLIPTA®, ANORO® ELLIPTA® and vilanterol monotherapy. Through the Company’s 85% equity interests in TRC, the Company is entitled to receive an 85% economic interest in any future payments made by GSK under the strategic alliance agreement and under the portion of the collaboration agreement assigned to TRC (net of TRC expenses paid and the amount of cash, if any, expected to be used by TRC pursuant to the TRC LLC Agreement over the next four fiscal quarters). The drug programs assigned to TRC include Trelegy Ellipta and the MABA program, as monotherapy and in combination with other therapeutically active components, such as an inhaled corticosteroid (“ICS”), and any other product or combination of products that may be discovered and developed in the future under the GSK agreements. In May 2014, the Company entered into the TRC LLC Agreement with Innoviva that governs the operation of TRC. Under the TRC LLC Agreement, Innoviva is the manager of TRC, and the business and affairs of TRC are managed exclusively by the manager, including (i) day to day management of the drug programs in accordance with the existing GSK agreements; (ii) preparing an annual operating plan for TRC; and (iii) taking all actions necessary to ensure that the formation, structure and operation of TRC complies with applicable law and partner agreements. The Company is responsible for its proportionate share of TRC’s administrative expenses incurred by Innoviva. The Company analyzed its ownership, contractual and other interests in TRC to determine if it is a variable‑interest entity (“VIE”), whether the Company has a variable interest in TRC and the nature and extent of that interest. The Company determined that TRC is a VIE. The party with the controlling financial interest, the primary beneficiary, is required to consolidate the entity determined to be a VIE. Therefore, the Company also assessed whether it is the primary beneficiary of TRC based on the power to direct TRC’s activities that most significantly impact TRC’s economic performance and its obligation to absorb TRC’s losses or the right to receive benefits from TRC that could potentially be significant to TRC. Based on the Company’s assessment, the Company determined that it is not the primary beneficiary of TRC, and, as a result, the Company does not consolidate TRC in its consolidated financial statements. TRC is recognized in the Company’s consolidated financial statements under the equity method of accounting, and the value of the Company’s equity investment in TRC was $5.4 million and $0.2 million as of December 31, 2018 and 2017, respectively. These amounts are comprised of undistributed earnings from the Company’s investment in TRC which are recorded within “other prepaid and current assets” on the consolidated balance sheets. Pursuant to the TRC operating agreement, the cash from the TRELEGY ELLIPTA royalties, net of any expenses, is distributed to the equity holders quarterly. For the years ended December 31, 2018 and 2017, the Company recognized $11.2 million and $0.2 million, respectively, in income from its investment in TRC which was generated by royalty payments from GSK to TRC arising from the net sales of Trelegy Ellipta.

Long-Term Debt

12 Months Ended

Dec. 31, 2018

Long-Term Debt

Long-Term Debt

8. Long-Term Debt

Long-term debt consists of the following liability components:


	December 31,
(In thousands)	2018		2017
3.25% Convertible notes due 2023
Principal amount	$	230,000	$	230,000
Unamortized debt issuance costs		(5,182)		(6,254)
9.0% Non-recourse notes due 2033
Principal amount, net of 5% retained by the Company		237,500		—
Unamortized debt issuance costs		(7,965)		—
Total long-term debt	$	454,353	$	223,746

Long-term debt interest expense consists of the following components:


	Year Ended December 31,
(In thousands)	2018		2017		2016
Stated coupon interest	$	9,316	$	7,475	$	1,225
Amortization of debt issuance costs		1,166		1,072		179
Total long-term debt interest expense	$	10,482	$	8,547	$	1,404

3.25% Convertible Senior Notes Due 2023

In November 2016, the Company completed an underwritten public offering of $230.0 million of 3.25% convertible senior notes, due 2023 (the "Convertible Senior 2023 Notes") for net proceeds of approximately $222.5 million. The Company incurred approximately $7.5 million in debt issuance costs, which are being amortized to interest expense over the estimated life of the Convertible Senior 2023 Notes. The Convertible Senior 2023 Notes bear an annual interest rate of 3.25%, payable semi-annually in arrears, on November 1 and May 1 of each year, which commenced on May 1, 2017.

The Convertible Senior 2023 Notes are senior unsecured obligations and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Convertible Senior 2023 Notes; equal in right of payment to any of the Company’s indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.

The Convertible Senior 2023 Notes will mature on November 1, 2023, unless earlier redeemed or repurchased by the Company or converted. Holders may convert their Convertible Senior 2023 Notes into ordinary shares at an initial conversion rate of 29.0276 shares for each $1,000 principal amount of Convertible Senior 2023 Notes, which is equivalent to an initial conversion price of approximately $34.45 per share, subject to adjustment, in certain circumstances (including upon the occurrence of a fundamental change), at any time prior to the close of business on the second business day immediately preceding the maturity date. Upon the occurrence of a fundamental change involving the Company, holders of the Convertible Senior 2023 Notes may require the Company to repurchase all or a portion of their Convertible Senior 2023 Notes for cash at a redemption price equal to 100% of the principal amount of the Convertible Senior 2023 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, in some circumstances, the conversion rate of the Convertible Senior 2023 Notes will increase with a make whole premium for conversions in connection with certain fundamental changes.

The debt issuance costs related to the Convertible Senior 2023 Notes offering were capitalized as deferred financing costs and presented as a reduction of the carrying value of the financial liability on the Company’s consolidated balance sheets at December 31, 2018 and 2017.

The estimated fair value of the Convertible Senior 2023 Notes was $235.0 million and $251.0 million at December 31, 2018 and 2017, respectively. The estimated fair value was primarily based upon the underlying price of Theravance Biopharma’s publicly traded shares and other observable inputs as of December 31, 2018 and 2017. The inputs to determine fair value of the Convertible Senior 2023 Notes are categorized as Level 2 inputs. Level 2 inputs include quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

9.0% Non-Recourse Notes Due 2033

In November 2018, the Company entered into note purchase agreements relating to the private placement of $250.0 million aggregate principal amount of 9.0% non-recourse notes, due on or before 2033 (the "Non-Recourse 2033 Notes") issued by the Company’s wholly-owned subsidiary, Triple Royalty Sub LLC (the “Issuer”). The Issuer was formed in October 2018 and is governed as a special purpose bankruptcy remote entity under Delaware law by the Amended and Restated Limited Liability Agreement, dated as of November 30, 2018, entered into by Theravance Biopharma R&D, Inc., a wholly-owned subsidiary of the Company, as the initial sole equity member of the Issuer.

The Non-Recourse 2033 Notes are secured by all of the Issuer’s right, title and interest as a holder of certain membership interests (the “Issuer Class C Units”) in TRC. The primary source of funds to make payments on the Non-Recourse 2033 Notes will be the 63.75% economic interest of the Issuer (evidenced by the Issuer Class C Units) in any future payments made by GSK under the collaboration agreement, dated as of November 14, 2002, by and between Innoviva, Inc. and GSK, as amended from time to time (net of the amount of cash, if any, expected to be used in TRC LLC pursuant to the TRC LLC Agreement over the next four fiscal quarters) relating to the Trelegy Ellipta program. The sole source of principal and interest payments for the Non-Recourse 2033 Notes are the future royalty payments generated from the TRELEGY ELLIPTA program, and as a result, the holders of the Non-Recourse 2033 Notes have no recourse against the Company even if the TRELEGY ELLIPTA payments are insufficient to cover the principal and interest payments for the Non-Recourse 2033 Notes.

The Non-Recourse 2033 Notes are not convertible into Company equity and have no security interest in nor rights under any agreement with GSK. The Non-Recourse 2033 Notes may be redeemed at any time prior to maturity, in whole or in part, at specified redemption premiums. The Non-Recourse 2033 Notes bear an annual interest rate of 9.0%, with interest and principal paid quarterly beginning April 15, 2019. Prior to October 15, 2020, in the event that the distributions received by the Issuer from TRC in a quarter is less than the interest accrued for the quarter, the principal amount of the Non-Recourse 2033 Notes will increase by the interest shortfall amount for that period. Since the principal and interest payments on the Non-Recourse 2033 Notes are ultimately based on royalties from Trelegy ELLIPTA product sales, which will vary from quarter to quarter, the Non-Recourse 2033 Notes may be repaid prior to the final maturity date in 2033.

In order to comply with Regulation RR – Credit Risk Retention (17 C.F.R. Part 246), 5% of the principal amount of the Non-Recourse 2033 Notes were retained by Theravance Biopharma R&D, Inc. and eliminated in the Company’s consolidated financial statements. Excluding the $12.5 million of retained Non-Recourse 2033 Notes and other fees related to the transaction, net proceeds of the offering were approximately $229.4 million. The Company incurred approximately $8.1 million in debt issuance costs, which were capitalized as deferred financing costs and are being amortized to interest expense over the estimated life of the Non-Recourse 2033 Notes.

The estimated fair value of the Non-Recourse 2033 Notes, net, was $237.5 million at December 31, 2018. The inputs to determine fair value of the Non-Recourse 2033 Notes are categorized as Level 2 inputs. Level 2 inputs include quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Inventories

12 Months Ended

Dec. 31, 2018

Inventories

Inventories

9. Inventories

As a result of the VIBATIV sale to Cumberland in November 2018, the Company did not have any inventory as of December 31, 2018. Inventory as of December 31, 2017 consisted of the following:


	December 31,
(In thousands)	2017
Raw materials	$	11,729
Work-in-process		66
Finished goods		5,035
Total inventories	$	16,830

Property and Equipment

12 Months Ended

Dec. 31, 2018

Property and Equipment

Property and Equipment

10. Property and Equipment

Property and equipment are held predominantly in the US and consist of the following:


	December 31,
(In thousands)	2018		2017
Computer equipment	$	2,522	$	1,866
Software		3,577		3,432
Furniture and fixtures		3,759		3,759
Laboratory equipment		31,164		28,371
Leasehold improvements		21,849		19,444
Subtotal		62,871		56,872
Less: accumulated depreciation		(49,695)		(46,715)
Property and equipment, net	$	13,176	$	10,157

For the years ended December 31, 2018, 2017 and 2016, depreciation expense for property and equipment was $3.0 million, $2.5 million and $2.2 million, respectively.

Share-Based Compensation

12 Months Ended

Dec. 31, 2018

Share-Based Compensation

Share-Based Compensation

11. Share-Based Compensation

Theravance Biopharma Equity Plans

The Company has three equity compensation plans — its 2013 Equity Incentive Plan (the “2013 EIP”), its 2013 Employee Share Purchase Plan (the “2013 ESPP”) and its 2014 New Employee Equity Incentive Plan (the “2014 NEEIP”). At inception, the Company was authorized to issue 5,428,571 ordinary shares under the 2013 EIP, 857,142 ordinary shares under the 2013 ESPP, and 750,000 ordinary shares under the 2014 NEEIP.

The 2013 EIP provides for the issuance of share-based awards, including restricted shares, restricted share units, options, share appreciation rights (“SARs”) and other equity-based awards, to Company employees, officers, directors and consultants. As of January 1 of each year, commencing on January 1, 2015 and ending on (and including) January 1, 2023, the aggregate number of ordinary shares that may be issued under the 2013 EIP shall automatically increase by a number equal to the least of 5% of the total number of ordinary shares outstanding on December 31 of the prior year, 3,428,571 ordinary shares, or a number of ordinary shares determined by the Company’s board of directors. Options may be granted with an exercise price not less than the fair market value of the ordinary shares on the grant date. Under the terms of the Company’s 2013 EIP, options granted to employees generally have a maximum term of 10 years and vest over a four-year period from the date of grant; 25% vest at the end of one year, and 75% vest monthly over the remaining three years. The Company may grant options with different vesting terms from time to time. Unless an employee’s termination of service is due to disability or death, upon termination of service, any unexercised vested options will generally be forfeited at the end of three months or the expiration of the option, whichever is earlier.

Under the 2013 ESPP, the Company’s officers and employees may purchase ordinary shares through payroll deductions at a price equal to 85% of the lower of the fair market value of the ordinary share at the beginning of the offering period or at the end of each applicable purchase period. As of January 1 of each year, commencing on January 1, 2015 and ending on (and including) January 1, 2033, the aggregate number of ordinary shares that may be issued under the 2013 ESPP shall automatically increase by a number equal to the least of 1% of the total number of ordinary shares outstanding on December 31 of the prior year, 571,428 ordinary shares or a number of ordinary shares determined by the Company’s board of directors. The ESPP generally provides for consecutive and overlapping offering periods of 24 months in duration, with each offering period generally composed of four consecutive six-month purchase periods. The purchase periods end on either May 15 or November 15. ESPP contributions are limited to a maximum of 15% of an employee’s eligible compensation.

The 2013 ESPP also includes a feature that provides for the existing offering period to terminate and for participants in that offering period to automatically be enrolled in a new offering period when the fair market value of an ordinary share at the beginning of a subsequent offering period falls below the fair market value of an ordinary share on the first day of such offering period.

The 2014 NEEIP provides for the issuance of share-based awards, including restricted shares, restricted share units, non-qualified options and SARs, to the Company’s employees. Options may be granted with an exercise price not less than the fair market value of the ordinary shares on the grant date. Under the terms of the 2014 NEEIP, options granted to employees generally have a maximum term of 10 years and vest over a four-year period from the date of grant; 25% vest at the end of one year, and 75% vest monthly over the remaining three years. The Company may grant options with different vesting terms from time to time. Unless an employee’s termination of service is due to disability or death, upon termination of service, any unexercised vested options will generally be forfeited at the end of three months or the expiration of the option, whichever is earlier.

Innoviva’s Equity Plans

Prior to the Spin-Off, the Company’s employees may have received Innoviva stock-based compensation awards, and, therefore, the following disclosures include information regarding stock-based compensation expense allocated to Theravance Biopharma that relates to Innoviva stock-based equity awards.

At the time of the Spin-Off, Innoviva had one active stock-based incentive plan under which it granted stock-based awards to employees, officers and consultants, the 2012 Equity Incentive Plan. All outstanding stock options and restricted stock units (“RSUs”) held by (1) Innoviva employees who became the Company’s employees, and (2) members of the board of directors of Innoviva who became members of the Company’s board of directors, in connection with the Spin-Off were adjusted for the Spin-Off. Such awards, along with outstanding restricted stock awards (“RSAs”) held by Innoviva employees who became the Company’s employees in connection with the Spin-Off, will continue to vest and remain outstanding based on continuing employment or service with the Company.

The 2012 Equity Incentive Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, stock unit awards and SARs to employees, non-employee directors and consultants. Stock options were granted with an exercise price not less than the fair market value of the common stock on the grant date. Stock options granted to employees generally have a maximum term of 10 years and vest over a four year period from the date of grant; 25% vest at the end of one year, and 75% vest monthly over the remaining three years. However, Innoviva granted options with different vesting terms from time to time. Unless an employee’s termination of service is due to disability or death, upon termination of service, any unexercised vested options will be forfeited at the end of three months or the expiration of the option, whichever is earlier.

Innoviva Performance-Contingent Restricted Stock Awards

In connection with performance-contingent RSAs granted to members of the Company’s senior management by Innoviva’s board of directors prior to the Spin-Off in 2014, the Company recognized $1.0 million in share-based compensation expense for the year ended December 31, 2016. The expense recognition pertaining to these RSAs was completed in 2016.

Employee Share Option Exchange Program

On August 28, 2015, the Company gave eligible share option holders of the Company and its subsidiaries the opportunity to exchange some or all of their outstanding options granted under the 2013 EIP or the 2014 NEEIP before August 4, 2015, whether vested or unvested, for RSUs (the “Exchange Program”). The Exchange Program was designed to restore the intended employee retention and incentive value of the equity awards.

In accordance with the terms of the Exchange Program, employees who held options that had an exercise price above the market price of the Company’s ordinary shares at the offer expiration date were eligible to exchange two shares subject to eligible options for one RSU granted under the terms of the 2013 EIP. The RSUs granted under the Exchange Program vests over a three or four year service period depending on the grant date of the original option exchanged. The Company’s executive officers and members of the board of directors were not eligible to participate in the Exchange Program.

The Exchange Program closed on September 25, 2015, and the Company exchanged 1,975,009 outstanding options for 987,496 RSUs with a fair value of $12.43 per share. The exchange of options for RSUs was considered a modification to the terms of the original equity award. As such, the Exchange Program resulted in incremental share-based compensation costs of $1.4 million to be recognized, concurrently with the unamortized original compensation costs of the exchanged option awards, ratably over the new vesting period of three years. For the years ended December 31, 2018, 2017, and 2016, the Company recognized $0.3 million, $0.5 million, and $0.5 million, respectively, of the $1.4 million in incremental share-based compensation costs.

Performance-Contingent Awards

In the first quarter of 2016, the Compensation Committee of the Company’s board of directors (“Compensation Committee”) approved the grant of 1,575,000 performance-contingent RSAs and 135,000 performance-contingent restricted share units RSUs to senior management. The vesting of such awards is dependent on the Company meeting its critical operating goals and objectives during a five-year period from 2016 to December 31, 2020. The goals that must be met in order for the performance-contingent RSAs and RSUs to vest are strategically important for the Company, and the Compensation Committee believes the goals, if achieved, will increase shareholder value. The awards have dual triggers of vesting based upon the achievement of these goals and continued employment. As of December 31, 2018, there were 978,750 of these performance-contingent RSAs and 101,250 of these performance-contingent RSUs outstanding, and as of December 31, 2017, there were 1,305,000 performance-contingent RSAs and 135,000 performance-contingent RSUs outstanding.

Expense associated with these awards is broken into three separate tranches and may be recognized during the years 2016 to 2020 depending on the probability of meeting the performance conditions. Compensation expense relating to awards subject to performance conditions is recognized if it is considered probable that the performance goals will be achieved. The probability of achievement is reassessed at each quarter-end reporting period.

The performance conditions associated with the first tranche of these awards were completed in the second quarter of 2018, and the Company recognized $1.7 million and $2.6 million of share-based compensation expense for the years ended December 31, 2018 and 2017, respectively, associated with these awards.

For years ended December 31, 2018 and 2017, the Company recognized $2.6 million and $6.3 million, respectively, of share-based compensation expense related to its assessment of the probability that the performance conditions associated with the second tranche of these awards was considered to be probable of vesting. As of December 31, 2018, the Company determined that the remaining third tranche was not probable of vesting and, as a result, no compensation expense related to the third tranche has been recognized to date.

The maximum potential expense associated with the remaining second and third tranches could be up to $17.8 million (allocated as $7.4 million for research and development expense and $10.4 million for selling, general and administrative expense) if the performance conditions for the second and third tranches are achieved.

In 2017, the Compensation Committee approved the grant of 50,000 performance-contingent RSUs to a newly appointed member of senior management. The RSUs have dual triggers of vesting based upon the achievement of certain corporate operating milestones in specified timelines, as well as a requirement for continued employment. Share-based compensation expense related to this grant is broken into two separate tranches and recognized when the associated performance goals are deemed to be probable of achievement. The maximum expense associated with the first tranche was $0.8 million. In 2017, the Company recognized $0.4 million in share-based compensation expense as it determined that the performance conditions associated with the first tranche were probable of vesting, and in 2018, the Company recognized the remaining $0.4 million of share-based compensation expense as the performance conditions associated with the first tranche of this award were met. The Company has determined that the second tranche was not probable of vesting as of December 31, 2018 and, as a result, no compensation expense related to the second tranche has been recognized to date.

Share-Based Compensation Expense

The allocation of share-based compensation expense included in the consolidated statements of operations was as follows:


	Year Ended December 31,
(In thousands)	2018		2017		2016
Research and development	$	25,563	$	22,691	$	20,202
Selling, general and administrative		25,750		26,454		20,967
Total share-based compensation expense	$	51,313	$	49,145	$	41,169

Share-based compensation expense included in the consolidated statements of operations by award type was as follows:


	Year Ended December 31,
(In thousands)	2018		2017		2016
Innoviva equity:
Options	$	280	$	2,973	$	3,973
RSUs		—		224		1,547
RSAs		457		660		2,597
Performance RSAs		—		1		1,005
Theravance Biopharma equity:
Options		8,441		7,969		7,591
RSUs		34,077		25,959		20,946
Performance RSAs and RSUs		4,707		9,224		1,808
ESPP		3,351		2,135		1,702
Total share-based compensation expense	$	51,313	$	49,145	$	41,169

Total share-based compensation expense capitalized to inventory was not material for any of the periods presented.

As of December 31, 2018, the unrecognized share-based compensation cost, net of actual forfeitures, and the estimated weighted‑average amortization period, using the straight-line attribution method, was as follows:


	Unrecognized		Weighted‑Average
	Compensation		Amortization Period
(In thousands, except amortization period)	Cost		(Years)
Innoviva equity:
Options	$	—	—
RSAs		64	0.23
Theravance Biopharma equity:
Options		18,147	2.84
RSUs		62,718	2.49
Performance RSAs and RSUs (1)		3,604	1.14
ESPP		2,322	1.03
Total	$	86,855

(1)

Represents unrecognized share-based compensation cost associated with the Theravance Biopharma performance-contingent awards described above that are probable of vesting.

Compensation Awards

The following table summarizes option activity under the 2013 EIP and 2014 NEEIP for the years ended December 31, 2018, 2017 and 2016:


	Number of Shares	Weighted-Average
	Subject	Exercise Price
	to Outstanding Options	of Outstanding Options
Outstanding at December 31, 2015	2,311,164	$	23.07
Granted	474,675		24.06
Exercised	(197,328)		22.18
Forfeited	(357,716)		19.83
Outstanding at December 31, 2016	2,230,795	$	23.88
Granted	720,350		32.60
Exercised	(275,776)		22.61
Forfeited	(166,800)		25.70
Outstanding at December 31, 2017	2,508,569	$	26.40
Granted	755,800		27.10
Exercised	(74,692)		18.65
Forfeited	(126,508)		27.95
Outstanding at December 31, 2018	3,063,169	$	26.70

As of December 31, 2018, 2017, and 2016, the aggregate intrinsic value of the options outstanding was $5.1 million, $8.0 million and $18.1 million, respectively. As of December 31, 2018, the aggregate intrinsic value of the options exercisable was $3.9 million. The total estimated fair value of options vested (excluding vested options that have expired) was $8.4 million, $8.2 million, and $7.7 million in 2018, 2017, and 2016, respectively.

The following table summarizes total RSU and RSA activity (including performance RSUs and RSAs) for the years ended December 31, 2018, 2017 and 2016:


	Number of Shares	Number of Shares
	Subject to	Outstanding Subject to
	Outstanding RSUs	Performance Conditions (RSAs)
Outstanding at December 31, 2015	2,988,041	—
Granted	2,344,034	1,575,000
Released	(1,185,905)	—
Forfeited	(537,052)	(135,000)
Outstanding at December 31, 2016	3,609,118	1,440,000
Granted	1,165,578	—
Released	(1,420,485)	—
Forfeited	(456,453)	(135,000)
Outstanding at December 31, 2017	2,897,758	1,305,000
Granted	1,772,263	—
Released	(1,405,294)	(326,250)
Forfeited	(195,324)	—
Outstanding at December 31, 2018	3,069,403	978,750

As of December 31, 2018, the aggregate intrinsic value of the RSUs and RSAs outstanding was $78.5 million and $25.0 million, respectively. The total estimated fair value of RSUs vested was $31.6 million, $25.1 million, and $21.4 million in 2018, 2017, and 2016, respectively.

Valuation Assumptions

The range of assumptions used to estimate the fair value of options granted and rights granted under the 2013 ESPP was as follows:


	Year Ended December 31,
	2018		2017		2016
Options
Risk-free interest rate		2.3% - 3.0%		2.0% - 2.1%		1.1% - 1.9%
Expected term (in years)		6.0		6.0		6.0
Volatility		53% - 54%		54% - 56%		53% - 73%
Dividend yield		—		—		—
Weighted-average estimated fair value	$	14.32	$	17.29	$	13.28
2013 ESPP
Risk-free interest rate		2.1% - 2.8%		0.9% - 1.7%		0.4% - 1.0%
Expected term (in years)		0.5 - 2.0		0.5 - 2.0		0.5 - 2.0
Volatility		42% - 53%		41% - 56%		54% - 65%
Dividend yield		—		—		—
Weighted-average estimated fair value	$	9.13	$	7.09	$	9.63

Income Taxes

12 Months Ended

Dec. 31, 2018

Income Taxes

Income Taxes

12. Income Taxes

Theravance Biopharma was incorporated in the Cayman Islands in July 2013 under the name Theravance Biopharma, Inc. as a wholly-owned subsidiary of Innoviva and began operations subsequent to the Spin-Off with wholly-owned subsidiaries in the Cayman Islands, US, United Kingdom, and Ireland. Effective July 1, 2015, Theravance Biopharma became an Irish tax resident, therefore, the loss before income taxes of Theravance Biopharma, the parent company, are included in Ireland in the tables below.

The components of the loss before income taxes were as follows:


	Year Ended December 31,
(In thousands)	2018		2017		2016
Income (loss) before provision for income taxes:
Cayman Islands	$	14,838	$	(163,770)	$	(185,099)
United States		(69,695)		(33,374)		(18,441)
Ireland		(171,134)		(74,472)		23,323
United Kingdom		(94)		(95)		(342)
Total	$	(226,085)	$	(271,711)	$	(180,559)

The components of provision for income tax benefit (expense) were as follows:


	Year Ended December 31,
(In thousands)	2018			2017			2016
Provision for income tax benefit (expense):
Current:
Cayman Islands	$	—		$	—		$	—
United States		10,563			(13,091)			(9,859)
Ireland		—			(566)			(219)
United Kingdom		(2)			(37)			(32)
Subtotal		10,561			(13,694)			(10,110)
Deferred		—			—			—
Total	$	10,561		$	(13,694)		$	(10,110)
Effective tax rate		4.67	%		(5.04)	%		(5.60)	%

The provision for income tax benefit (expense) was $10.6 million, ($13.7) million, and ($10.1) million for the years ended December 31, 2018, 2017, and 2016 respectively.

The 2018 benefit for income taxes was primarily due to additional tax loss generated in 2017 by the US entity as a result of the finalization of transfer pricing policy, current year US research and development credit, and the release of previously recorded contingent tax liabilities due to the lapse of the statute of limitations. The provision for income tax recorded in 2017 and 2016 primarily resulted from contingent tax liabilities related to uncertain tax positions taken with respect to transfer pricing and tax credits.

No provision for income taxes has been recognized on undistributed earnings of the Company’s foreign subsidiaries because it considers such earnings to be indefinitely reinvested. In the event of a distribution of these earnings in the form of dividends or otherwise, the Company may be liable for income taxes, subject to an adjustment, if any, for foreign tax credits and foreign withholdings taxes payable to certain foreign tax authorities. As of December 31, 2018, there were no undistributed earnings.

For 2018 and 2017, as a result of the Company becoming an Irish tax resident effective July 1, 2015, the tax rates reflect the Irish statutory rate of 25%. The differences between the Irish statutory income tax rate and the Company’s effective tax rates were as follows:


	Year Ended December 31,
	2018		2017		2016
Provision at statutory income tax rate	25.00	%	25.00	%	25.00	%
Foreign rate differential	(7.51)		(18.17)		(23.11)
Share-based compensation	0.28		1.52		(0.27)
Non-deductible executive compensation	(0.72)		(1.03)		(1.07)
Uncertain tax positions	(4.00)		(6.55)		(8.55)
Research and development tax credit carryforwards	1.79		1.21		1.93
Federal tax reform - Tax rate change	—		(4.66)		—
Foreign exchange loss	8.52		—		—
Change in valuation allowance	(18.82)		(5.15)		(0.89)
Other	0.13		2.79		1.36
Effective tax rate	4.67	%	(5.04)	%	(5.60)	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities were as follows:


	December 31,
(In thousands)	2018			2017
Deferred tax assets:
Net operating loss carryforwards	$	33,396	$	15,834
Capital loss carryforwards		19,409		—
Research and development tax credit carryforwards		8,508		6,504
Fixed assets and intangibles		285,821		3,746
Share-based compensation		12,479		11,140
Accruals		8,343		5,293
Other		—		248
Subtotal		367,956		42,765
Valuation allowance		(367,748)		(42,613)
Total deferred tax assets		208		152

Deferred tax liabilities:
Prepaid assets		(208)		(152)
Total deferred tax liabilities		(208)		(152)

Net deferred tax assets/liabilities	$	—	$	—

Realization of deferred tax assets is dependent upon future taxable income in the respective jurisdictions, if any, the timing and the amount of which are uncertain. Accordingly, the deferred tax assets have been fully offset by a valuation allowance.

On January 1, 2018, the Company adopted ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”) using the modified retrospective approach. ASU 2016-16 requires immediate recognition of income tax consequences of intra-company asset transfers, other than inventory transfers. Legacy GAAP prohibited recognition of income tax consequences of intra-company asset transfers whereby the seller defers any net tax effect and the buyer is prohibited from recognizing a deferred tax asset on the difference between the newly created tax basis of the asset in its tax jurisdiction and its financial statement carrying amount as reported in the consolidated financial statements. An example of an inter-company asset transfers included in ASU 2016-16’s scope is intellectual property. On October 2, 2017, Theravance Biopharma R&D, Inc. (Cayman Islands) transferred its economic interests in certain intellectual property to Theravance Biopharma Ireland Limited. The transfer was classified as an intra-company sale of assets for both financial reporting and income tax purposes. The Company recorded a deferred tax asset of $282.7 million fully offset by a valuation allowance as a result of the sale of intellectual property. The adoption of this pronouncement did not have a material impact on the Company’s balance sheet or statement of operations.

The valuation allowance as of December 31, 2018 increased from $42.6 million (the valuation allowance as of December 31, 2017) to $367.7 million, primarily as a result of additional tax loss generated in various jurisdictions during the current year, the transfer of intellectual property to Ireland, and a capital loss carryforward generated in Ireland. Valuation allowances require an assessment of both positive and negative evidence when determining whether it is more likely than not that the deferred tax assets are recoverable. As required, the Company prepares its assessment of the realizability of deferred tax assets on a jurisdiction-by-jurisdiction basis.

As of December 31, 2018, the Company had $101.8 million of US federal net operating loss carryforwards and $10.6 million of federal research and development tax credit carryforwards which expire beginning in 2035. After the enactment of the Tax Cut and Jobs Act (the “Tax Act”) in December 2017, the operating losses of $56.9 million generated in 2018 have an indefinite carryforward life, but are limited to 80% of taxable income when utilized. The Company had state net operating loss carryforwards of $76.6 million which generally begin to expire in 2034 and state research and development credit carryforwards of $13.3 million to be carried forward indefinitely.

The Company also had Irish net operating loss carryforwards of $210.7 million with no expiration date and capital loss carryforwards of $58.8 million to be carried forward indefinitely.

Utilization of net operating loss and tax credit carryforwards may be subject to an annual limitation due to ownership change limitations provided by the Internal Revenue Code and similar state provisions. Annual limitations may result in expiration of net operating loss and tax credit carryforwards before some or all of such amounts have been utilized.

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The amount of tax expense related to interest or penalties was immaterial for the years ended December 31, 2018 and 2017.

Uncertain Tax Positions

A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits were as follows:


(In thousands)
Unrecognized tax benefits as of December 31, 2016	$	23,254
Gross decrease in tax positions for prior years		(51)
Gross increase in tax positions for current year		18,591
Unrecognized tax benefits as of December 31, 2017		41,794
Gross decrease in tax positions for prior years		(685)
Gross increase in tax positions for current year		11,295
Unrecognized tax benefits as of December 31, 2018	$	52,404

The total unrecognized tax benefits of $52.4 million and $41.8 million, as of December 31, 2018 and December 31, 2017, respectively, may reduce the effective tax rate in the period of recognition. As of December 31, 2018, the Company does not believe that it is reasonably possible that its unrecognized tax benefit will significantly decrease in the next twelve months. The Company currently has a full valuation allowance against its deferred tax assets, which would impact the timing of the effective tax rate benefit should any of these uncertain positions be favorably settled in the future.

The Company is subject to taxation in Ireland, the US, and various other jurisdictions. The tax years 2015 and forward remain open to examination in Ireland, tax years 2015 and forward remain open to examination in the US, and the tax years 2012 and forward remain open to examination in other jurisdictions.

US Tax Reform

In December 2017, the US government enacted the Tax Act. The Tax Act significantly revises the US corporate income tax laws by, amongst other things, reducing the corporate income tax rate from 35% to 21% and implementing a modified territorial tax system that includes a one-time repatriation tax on accumulated undistributed foreign earnings.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allowed the Company to record provisional amounts for the Tax Act during a measurement period not to extend beyond one year of the enactment date, with further clarifications made recently with the issuance of amendments to SAB 118. The Company has completed its assessment of the Tax Act and did not have any significant adjustments to its provisional amount of $12.4 million related to the reduction in the corporate income tax rate from 35% to 21%.

The Company’s future income tax expense may be affected by such factors as changes in tax laws, its business, regulations, tax rates, interpretation of existing laws or regulations, the impact of accounting for share-based compensation, the impact of accounting for business combinations, its international organization, shifts in the amount of income before tax earned in the US as compared with other regions in the world, and changes in overall levels of income before tax.

Commitments and Contingencies

12 Months Ended

Dec. 31, 2018

Commitments and Contingencies

Commitments and Contingencies

13. Commitments and Contingencies

Operating Leases and Subleases

The Company leases approximately 170,000 square feet of office and laboratory space in two buildings in South San Francisco, California, under a non-cancelable operating lease that ends in May 2030. In addition, the Company’s Irish subsidiary leases approximately 6,100 square feet of office space in Dublin, Ireland. Future minimum lease payments under the leases, exclusive of executory costs, as of December 31, 2018, are as follows:


(In thousands)
Years ending December 31:
2019	$	7,817
2020		6,547
2021		9,501
2022		9,766
Thereafter		80,281
Total	$	113,912

Rent expense (net of sublease income) and sublease income associated with operating leases were as follows:


	Year Ended December 31,
(In thousands)	2018		2017		2016
Rent expense, net	$	9,965	$	7,740	$	6,865
Sublease income	$	73	$	209	$	244

Performance-Contingent Awards

In 2016, the Company granted long-term retention RSAs and RSUs to members of senior management and incentive cash bonus awards to certain employees. The vesting and payout of such awards is dependent on the Company meeting its critical operating goals and objectives during a five-year period from 2016 to December 31, 2020. These goals are strategically important for the Company, and it believes the goals, if achieved, will increase shareholder value. The awards have dual triggers of vesting based upon the achievement of these goals and continued employment, and they are broken into three separate tranches.

The Company determined that achievement of the requisite performance conditions for the first tranche were completed as of June 30, 2018. The maximum potential remaining expense associated with the second and third tranches of this program is $17.8 million related to share-based compensation expense and $21.0 million related to cash bonus expense, which would be recognized in increments based on achievement of the performance conditions. With the completed achievement of the first tranche’s requisite performance conditions and the second tranche being probable due to achievement of certain performance conditions and multiple advancements of programs within the Company’s development pipeline, the Company recognized $4.3 million in share-based compensation expense and $5.4 million in cash bonus expense for the year ended December 31, 2018. For the year ended December 31, 2017, the Company recognized $8.9 million in share-based compensation expense and $18.2 million in cash bonus expense. The Company determined that the remaining third tranche was not probable of vesting and, as a result, no compensation expense related to this tranche has been recognized to date.

Guarantees and Indemnifications

The Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits. The Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recognized any liabilities relating to these agreements as of December 31, 2018.

Subsequent Events	12 Months Ended
Subsequent Events	Dec. 31, 2018
Subsequent Events
Subsequent Events	14. Subsequent Events In January 2019, the Company announced a reduction in workforce to align with its focus on continued execution of key strategic programs, and advancement of selected late-stage research programs toward clinical development. The Company reduced its overall headcount by approximately 50 individuals, with the affected employees primarily focused on early research or the infrastructure in support of VIBATIV which was sold by the Company to Cumberland Pharmaceuticals Inc. in November 2018. The workforce reduction is expected to be substantially completed in the first quarter of 2019. As a result of the workforce reduction, the Company expects to record severance related charges totaling approximately $3.5 million to $4.0 million including compensation expense that will continue to be made to affected employees during any minimum statutory notice periods. A significant majority of the cash payments relating to personnel-related restructuring charges will be paid during the first quarter of 2019. The charges that the Company expects to incur in connection with the workforce reduction are estimates and subject to a number of assumptions, and actual results may differ materially. The Company may incur additional costs not currently contemplated due to events associated with or resulting from the workforce reduction.

SUPPLEMENTARY FINANCIAL DATA (UNAUDITED)

12 Months Ended

Dec. 31, 2018

SUPPLEMENTARY FINANCIAL DATA (UNAUDITED)

SUPPLEMENTARY FINANCIAL DATA (UNAUDITED)

(In thousands, except per share data)

The following table presents certain unaudited consolidated quarterly financial information for the eight quarters in the periods ended December 31, 2018 and 2017. This information has been prepared on the same basis as the audited consolidated financial statements and includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the unaudited quarterly results of operations set forth herein.


	For the Quarters Ended
	March 31,		June 30,		September 30,		December 31,
2018
Total revenue	$	8,319	$	23,476	$	12,838	$	15,737
Costs and expenses		73,295		72,180		75,288		78,358
Loss from operations		(64,976)		(48,704)		(62,450)		(62,621)
Net loss		(65,087)		(40,818)		(59,433)		(50,186)
Basic and diluted net loss per share	$	(1.22)	$	(0.76)	$	(1.10)	$	(0.92)
2017
Total revenue	$	3,087	$	3,509	$	4,275	$	4,515
Costs and expenses		61,916		68,630		61,272		83,691
Loss from operations		(58,829)		(65,121)		(56,997)		(79,176)
Net loss		(65,319)		(66,287)		(66,877)		(86,922)
Basic and diluted net loss per share	$	(1.27)	$	(1.27)	$	(1.27)	$	(1.64)

Organization and Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2018

Organization and Summary of Significant Accounting Policies

Basis of Presentation

Principles of Consolidation

Use of Management's Estimates

Use of Management’s Estimates

Segment Reporting

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity of three months or less on the date of purchase to be cash equivalents. Cash equivalents are carried at fair value.

Restricted Cash

Investments in Marketable Securities

Fair Value of Financial Instruments

Level 1 — Quoted prices for identical instruments in active markets.

Level 3 — Unobservable inputs and little, if any, market activity for the assets.

Accounts Receivable

Concentration of Credit Risks

Inventories

As a result of the VIBATIV sale to Cumberland in November 2018, the Company did not have any inventory as of December 31, 2018.

Property and Equipment

Property, equipment and leasehold improvements are stated at cost, net of accumulated depreciation and depreciated using the straight‑line method as follows:


Leasehold improvements	Shorter of remaining lease terms or useful life
Equipment, furniture and fixtures	5 ‑ 7 years
Software and computer equipment	3 ‑ 5 years

Capitalized Software

Impairment of Long-Lived Assets

Impairment of Long‑Lived Assets

Deferred Rent

Revenue Recognition

Product Sales

The following table summarizes activity in each of the product revenue allowance and reserve categories:


	Chargebacks,		Government
	Discounts and		and Other
(In thousands)	Fees		Rebates		Returns		Total
Balance at December 31, 2016	$	779	$	377	$	747	$	1,903
Provision related to current period sales		5,193		580		573		6,346
Adjustment related to prior period sales		(127)		75		561		509
Credit or payments made during the period		(4,853)		(680)		(935)		(6,468)
Balance at December 31, 2017	$	992	$	352	$	946	$	2,290
Provision related to current period sales		6,402		704		521		7,627
Adjustment related to prior period sales		(81)		168		(449)		(362)
Credit or payments made during the period		(6,938)		(932)		(157)		(8,027)
Balance at December 31, 2018	$	375	$	292	$	861	$	1,528