tbph_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


Form 10-Q


 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to

 

Commission file number:  001-36033

 

THERAVANCE BIOPHARMA, INC.

(Exact Name of Registrant as Specified in its Charter)

 


 

 

 

 

Cayman Islands

    

98-1226628

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

PO Box 309

 

 

Ugland House, South Church Street

 

 

George Town, Grand Cayman, Cayman Islands

 

KY1-1104

(Address of Principal Executive Offices)

 

(Zip Code)

 

(650) 808-6000

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐ 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer ☒

    

Smaller reporting company ☐

Non-accelerated filer ☐

 

Emerging growth company ☐

Accelerated filer ☐

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

Title of each class

    

Trading Symbol

    

Name of each exchange on which registered

Ordinary Share $0.00001 Par Value

 

TBPH

 

NASDAQ Global Market

 

As of April 30, 2019, the number of the registrant’s outstanding ordinary shares was 56,137,175.

 

 

 


 

Table of Contents

THERAVANCE BIOPHARMA, INC.

TABLE OF CONTENTS

 

 

 

 

Page No.

PART I. FINANCIAL INFORMATION 

 

Item 1. Financial Statements 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 (unaudited) 

3

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2019 and 2018 (unaudited) 

4

Condensed Consolidated Statements of Shareholders’ Equity (Deficit) for the three months ended March 31, 2019 and 2018 (unaudited) 

5

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (unaudited) 

6

Notes to Condensed Consolidated Financial Statements (unaudited) 

7

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

18

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

30

Item 4. Controls and Procedures 

30

 

 

PART II. OTHER INFORMATION 

 

Item 1. Legal Proceedings 

30

Item 1A. Risk Factors 

31

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

62

Item 6. Exhibits 

63

Signatures 

64

 

 

2


 

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

THERAVANCE BIOPHARMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

223,235

 

$

378,021

Short-term marketable securities

 

 

210,823

 

 

127,255

Accounts receivable, net of allowances of $0 at March 31, 2019 and December 31, 2018

 

 

113

 

 

620

Receivables from collaborative arrangements

 

 

7,824

 

 

10,053

Prepaid taxes

 

 

310

 

 

310

Other prepaid and current assets 

 

 

24,928

 

 

16,564

Total current assets

 

 

467,233

 

 

532,823

Property and equipment, net

 

 

12,899

 

 

13,176

Long-term marketable securities

 

 

 —

 

 

11,869

Operating lease assets

 

 

48,861

 

 

 —

Restricted cash

 

 

833

 

 

833

Other assets

 

 

1,439

 

 

1,534

Total assets

 

$

531,265

 

$

560,235

 

 

 

 

 

 

 

Liabilities and Shareholders' Deficit

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

5,596

 

$

9,028

Accrued personnel-related expenses

 

 

22,097

 

 

23,803

Accrued clinical and development expenses

 

 

9,207

 

 

11,876

Accrued interest payable

 

 

10,240

 

 

3,086

Non-recourse notes due 2033, net

 

 

8,300

 

 

 —

Deferred revenue

 

 

42,515

 

 

43,402

Other accrued liabilities

 

 

15,587

 

 

7,359

Total current liabilities

 

 

113,542

 

 

98,554

Convertible senior notes due 2023, net

 

 

225,086

 

 

224,818

Non-recourse notes due 2033, net

 

 

221,402

 

 

229,535

Deferred rent

 

 

 —

 

 

7,976

Operating lease liabilities

 

 

48,493

 

 

 —

Long-term deferred revenue

 

 

21,733

 

 

26,179

Other long-term liabilities

 

 

14,261

 

 

24,762

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Deficit

 

 

 

 

 

 

Preferred shares, $0.00001 par value: 230 shares authorized, no shares issued or outstanding

 

 

 —

 

 

 —

Ordinary shares, $0.00001 par value: 200,000 shares authorized; 56,122 and 55,681 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

 1

 

 

 1

Additional paid-in capital

 

 

971,508

 

 

960,721

Accumulated other comprehensive loss

 

 

(36)

 

 

(166)

Accumulated deficit

 

 

(1,084,725)

 

 

(1,012,145)

Total shareholders’ deficit

 

 

(113,252)

 

 

(51,589)

Total liabilities and shareholders’ deficit

 

$

531,265

 

$

560,235

See accompanying notes to condensed consolidated financial statements.

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THERAVANCE BIOPHARMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

    

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

Product sales

 

$

 —

 

$

3,679

 

Collaboration revenue

 

 

5,338

 

 

4,640

 

Total revenue

 

 

5,338

 

 

8,319

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of goods sold

 

 

 —

 

 

826

 

Research and development (1)

 

 

53,818

 

 

47,765

 

Selling, general and administrative (1)

 

 

25,186

 

 

24,704

 

Total costs and expenses

 

 

79,004

 

 

73,295

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(73,666)

 

 

(64,976)

 

Income from investment in TRC, LLC

 

 

6,229

 

 

686

 

Interest expense

 

 

(7,858)

 

 

(2,137)

 

Interest and other income, net

 

 

2,795

 

 

1,484

 

Loss before income taxes

 

 

(72,500)

 

 

(64,943)

 

Provision for income tax expense

 

 

(80)

 

 

(144)

 

Net loss

 

$

(72,580)

 

$

(65,087)

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on available-for-sale investments

 

 

130

 

 

(120)

 

Total comprehensive loss

 

$

(72,450)

 

$

(65,207)

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(1.32)

 

$

(1.22)

 

Shares used to compute basic and diluted net loss per share

 

 

54,938

 

 

53,256

 

 

 

 

 

 

 

 

 


(1)

Amounts include share-based compensation expense as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

(In thousands)

    

2019

    

2018

    

Research and development

 

$

6,159

 

$

6,559

 

Selling, general and administrative

 

 

6,061

 

 

7,439

 

Total share-based compensation expense

 

$

12,220

 

$

13,998

 

 

 

See accompanying notes to condensed consolidated financial statements.

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THERAVANCE BIOPHARMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

Total

 

 

Ordinary Shares

 

Paid-In

 

Comprehensive

 

Accumulated

 

Shareholders'

 

   

Shares

   

Amount

   

Capital

   

Loss

   

Deficit

   

Deficit

Balances at December 31, 2018

 

55,681

 

$

 1

 

$

960,721

 

$

(166)

 

$

(1,012,145)

 

$

(51,589)

Employee share-based compensation expense

 

 —

 

 

 —

 

 

12,220

 

 

 —

 

 

 —

 

 

12,220

Issuance of restricted shares

 

426

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Option exercises

 

15

 

 

 —

 

 

254

 

 

 —

 

 

 —

 

 

254

Repurchase of shares to satisfy tax withholding

 

 —

 

 

 —

 

 

(1,687)

 

 

 —

 

 

 —

 

 

(1,687)

Net unrealized gain on marketable securities

 

 —

 

 

 —

 

 

 —

 

 

130

 

 

 —

 

 

130

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(72,580)

 

 

(72,580)

Balances at March 31, 2019

 

56,122

 

$

 1

 

$

971,508

 

$

(36)

 

$

(1,084,725)

 

$

(113,252)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

Total

 

 

Ordinary Shares

 

Paid-In

 

Comprehensive

 

Accumulated

 

Shareholders'

 

   

Shares

   

Amount

   

Capital

   

Loss

   

Deficit

   

Equity

Balances at December 31, 2017

 

54,381

 

$

 1

 

$

913,650

 

$

(733)

 

$

(797,740)

 

$

115,178

Employee share-based compensation expense

 

 —

 

 

 —

 

 

13,998

 

 

 —

 

 

 —

 

 

13,998

Issuance of restricted shares

 

415

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Option exercises

 

 2

 

 

 —

 

 

35

 

 

 —

 

 

 —

 

 

35

Cumulative effect upon the adoption of ASC 606

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,119

 

 

1,119

Repurchase of shares to satisfy tax withholding

 

 —

 

 

 —

 

 

(1,715)

 

 

 —

 

 

 —

 

 

(1,715)

Net unrealized loss on marketable securities

 

 —

 

 

 —

 

 

 —

 

 

(120)

 

 

 —

 

 

(120)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(65,087)

 

 

(65,087)

Balances at March 31, 2018

 

54,798

 

$

 1

 

$

925,968

 

$

(853)

 

$

(861,708)

 

$

63,408

 

 

See accompanying notes to condensed consolidated financial statements.

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THERAVANCE BIOPHARMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

    

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(72,580)

 

$

(65,087)

 

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,316

 

 

1,007

 

Amortization and accretion income, net

 

 

(629)

 

 

(107)

 

Share-based compensation

 

 

12,220

 

 

13,998

 

Amortization of right-of-use assets

 

 

986

 

 

 —

 

Undistributed earnings from investment in TRC, LLC

 

 

(6,229)

 

 

(493)

 

Other

 

 

16

 

 

(397)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

507

 

 

280

 

Receivables from collaborative arrangements

 

 

2,229

 

 

4,264

 

Other prepaid and current assets

 

 

(2,135)

 

 

(1,578)

 

Inventories

 

 

 —

 

 

(371)

 

Tax receivable

 

 

 —

 

 

5,092

 

Accounts payable

 

 

(3,440)

 

 

(449)

 

Accrued personnel-related expenses, accrued clinical and development expenses, and
     other accrued liabilities

 

 

(7,284)

 

 

(5,076)

 

Deferred rent

 

 

 —

 

 

2,104

 

Deferred revenue

 

 

(5,333)

 

 

95,371

 

Long-term portion of lease liabilities

 

 

(910)

 

 

 —

 

Other long-term liabilities

 

 

73

 

 

1,267

 

Net cash (used in) provided by operating activities

 

 

(81,193)

 

 

49,825

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,220)

 

 

(2,771)

 

Purchases of marketable securities

 

 

(148,138)

 

 

(54,839)

 

Maturities of marketable securities

 

 

77,198

 

 

46,299

 

Proceeds from the sale of fixed assets

 

 

 —

 

 

17

 

Net cash used in investing activities

 

 

(72,160)

 

 

(11,294)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Proceeds from option exercises

 

 

254

 

 

35

 

Repurchase of shares to satisfy tax withholding

 

 

(1,687)

 

 

(1,715)

 

Net cash used in financing activities

 

 

(1,433)

 

 

(1,680)

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash, cash equivalents, and restricted cash 

 

 

(154,786)

 

 

36,851

 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

378,854

 

 

89,813

 

Cash, cash equivalents, and restricted cash at end of period 

 

$

224,068

 

$

126,664

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid for interest

 

$

 —

 

$

 —

 

Cash received (paid) for income taxes, net

 

$

 —

 

$

4,473

 

Right-of-use assets obtained in exchange for lease obligations (1)

 

$

49,847

 

$

 —

 


(1)

Amounts for the three months ended March 31, 2019 include the transition adjustment for the adoption of ASC 842.

See accompanying notes to condensed consolidated financial statements.

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THERAVANCE BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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. Our purpose is to create transformational medicines to improve the lives of patients suffering from serious illnesses. Our research is focused in the areas of inflammation and immunology.

 

Basis of Presentation

 

The Company’s condensed consolidated financial information as of March 31, 2019, and the three months ended March 31, 2019 and 2018 is unaudited but includes all adjustments (consisting only of normal recurring adjustments), which are considered necessary for a fair presentation of the financial position at such date and of the operating results and cash flows for those periods, and have been prepared in accordance with US generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated December 31, 2018 financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2019.

 

The results for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019, for any other interim period or for any future period. These condensed consolidated financial statements include the accounts of the Company and its subsidiaries, and intercompany transactions and balances have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures in the condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on assumptions believed to be reasonable under the circumstances. Actual results could differ materially from those estimates.

 

Significant Accounting Policies

 

Other than the recently adopted accounting pronouncements below, there have been no material revisions in the Company’s significant accounting policies described in Note 1 to the consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2018.

 

Recently Adopted Accounting Pronouncements

 

Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases  (Topic 842) (“ASU 2016-02”) under the required modified retrospective approach. ASU 2016‑02 was 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. 

 

The Company elected the optional transition method to initially account for the impact of the adoption with a cumulative adjustment to accumulated deficit, if any, on the effective date of ASU 2016-02 of January 1, 2019, rather than applying the transition provisions in the earliest period presented, and the Company elected a package of practical expedients that allowed 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 allowed entities to (i) use hindsight in determining the term of a lease when the lease includes an option to extend the lease term; (ii) exclude all leases, on a go forward basis, that have a

7


 

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lease term of 12-month or less; and (iii) 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.

 

As a result of the adoption of ASU 2016-02, on January 1, 2019, the Company recorded a right-of-use operating lease asset of $48.3 million and an operating lease liability of $56.3 million related to its office leases in South San Francisco, California and Dublin, Ireland. The lease liability included $8.0 million related to deferred rent liabilities. The adoption of ASU 2016-02 did not have an impact on the Company’s results of operations, lease expense, or cash flows.

 

Effective January 1, 2019, the Company adopted ASU 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 provided 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 adoption of ASU 2017-09 did not have a material impact upon the Company’s condensed consolidated financial statements and related disclosures as of January 1, 2019.

 

Effective January 1, 2019, the Company adopted the new 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 has included condensed consolidated statements of shareholders’ equity (deficit) in this Form 10-Q for the three month periods ended March 31, 2019 and 2018.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13"). This guidance requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The measurement of expected credit losses is based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability. ASU 2016-13 also eliminates the concept of “other-than-temporary” impairment when evaluating available-for-sale debt securities and instead focuses on determining whether any impairment is a result of a credit loss or other factors. An entity will recognize an allowance for credit losses on available-for-sale debt securities rather than an other-than-temporary impairment that reduces the cost basis of the investment. ASU 2016-13 is effective for annual reporting periods and interim periods within those years beginning after December 15, 2019. The Company does not currently expect ASU 2016-13 to have a material impact on its consolidated financial statements and related disclosures based on the historical high credit quality of the Company’s financial instruments.

 

The Company is currently evaluating other recently issued accounting pronouncements and does not currently believe that any of those pronouncements will have a material impact on its consolidated financial statements and related disclosures.

 

 

2. 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 three months ended March 31, 2019 and 2018, diluted and basic net loss per share was identical since

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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:

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

(In thousands)

    

2019

    

2018

Share issuances under equity incentive plans and ESPP 

 

5,481

 

3,916

Restricted shares

 

 1

 

 5

Share issuances upon the conversion of convertible senior notes

 

6,676

 

6,676

    Total

 

12,158

 

10,597

 

In addition, there were 468,000 and 1,305,000 shares that are subject to performance‑based vesting criteria which have been excluded from the ordinary equivalent shares table above as of March 31, 2019 and 2018, respectively.

 

3. Collaborative Arrangements

 

Revenue from Collaborative Arrangements

 

The Company recognized revenues from its collaborative arrangements as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

(In thousands)

    

2019

    

2018

Janssen

 

$

5,323

 

$

4,613

Other

 

 

15

 

 

27

Total collaboration revenue

 

$

5,338

 

$

4,640

 

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:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

(In thousands)

 

2019

 

2018

Collaboration revenue recognized in the period from:

 

 

 

 

 

 

Amounts included in deferred revenue at the beginning of the period

 

$

5,333

 

$

16

Performance obligations satisfied in 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 is conducting a Phase 2 (DIONE) study of TD-1473 in Crohn’s disease and a Phase 2b/3 (RHEA) induction and maintenance study of TD-1473 in ulcerative colitis. Following the initial Phase 2 development period, including the completion of the Phase 2 Crohn’s study and the Phase 2b induction portion of the 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.

 

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The Janssen Agreement is considered to be within the scope of Accounting Standards Codification, Topic 808, Collaborative Arrangements (“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 Accounting Standards Codification, Topic 606, Revenue from Contracts with Customers (“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 the initial Phase 2 development period, 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 three months ended March 31, 2019 and 2018, the Company recognized $5.3 million and $4.6 million, respectively, as revenue from collaboration arrangements related to the Janssen Agreement. The remaining transaction price of $63.6 million was recorded in deferred revenue on the condensed consolidated balance sheets and is expected to be recognized as collaboration revenue as the research and development services are delivered over the initial 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 three months ended March 31, 2019 and 2018, the Company incurred $8.6 million and $6.5 million, respectively, 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.

 

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® (revefenacin) inhalation solution. The Company entered into the collaboration to expand the breadth of its revefenacin development program and extend its commercial reach beyond the hospital 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 March 31, 2019, 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

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new drug application in November 2018, thereafter, R&D expenses are shared. 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 March 31, 2019, $0.3 million was recorded in deferred revenue on the condensed 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 thirteen years. The Company recognized approximately $6,000 in each three month period ended March 31, 2019 and 2018 as 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). In China, the Company retains all rights to revefenacin in any dosage form. 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 three months ended March 31, 2019 and 2018, the Company recorded $0.2 million and $1.9 million, respectively, as reductions to R&D expense related to the YUPELRI cost sharing payments with Mylan which were attributed to R&D services.

 

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. 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. For the three months ended March 31, 2019, the arrangement resulted in a payable of $1.4 million to Mylan after the Company’s R&D expenses had been reimbursed and, consequently, this amount was recognized within operating expenses.

 

Reimbursement of R&D Expense

 

Under certain collaborative arrangements, we are entitled to reimbursement of certain R&D expense. Activities

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under collaborative arrangements for which we are entitled to reimbursement are considered to be collaborative activities under the scope of ASC 808. For these units of account, we do not analogize to ASC 606 or recognize revenue. We record reimbursement payments received from our collaboration partners as reductions to R&D expense.

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

(In thousands)

    

2019

    

2018

    

Janssen

 

$

1,411

 

$

 —

 

Mylan

 

 

203

 

 

1,850

 

Total reduction to R&D expense

 

$

1,614

 

$

1,850

 

 

 

4. Cash, Cash Equivalents, and Restricted Cash

 

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

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

(In thousands)

 

2019

 

2018

 

Cash and cash equivalents

 

$

223,235

 

$

125,831

 

Restricted cash

 

 

833

 

 

833

 

Total cash, cash equivalents, and restricted cash shown on the
condensed consolidated statements of cash flows

 

$

224,068

 

$

126,664

 

 

 

5. 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

    

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

(In thousands)

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

US government securities

 

Level 1

 

$

61,422

 

$

24

 

$

(41)

 

$

61,405

US government agency securities

 

Level 2

 

 

19,882

 

 

 3

 

 

 —

 

 

19,885

Corporate notes

 

Level 2

 

 

42,462

 

 

25

 

 

(4)

 

 

42,483

Commercial paper

 

Level 2

 

 

217,453

 

 

 7

 

 

(50)

 

 

217,410

Marketable securities

 

 

 

 

341,219

 

 

59

 

 

(95)

 

 

341,183

Money market funds

 

Level 1

 

 

84,136

 

 

 —

 

 

 —

 

 

84,136

Total

 

 

 

$

425,355

 

$

59

 

$

(95)

 

$

425,319

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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

 

As of March 31, 2019, all of the available-for-sale securities had contractual maturities within one year and the weighted average maturity of marketable securities was approximately five 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 three months ended March 31, 2019.

 

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 March 31, 2019, were temporary in nature, and there were no material unrealized losses on investments which have been in a loss position for more than twelve months as of March 31, 2019.

 

As of March 31, 2019, the Company’s accumulated other comprehensive loss on its condensed consolidated balance sheets consisted of net unrealized losses on available-for-sale investments. During the three months ended March 31, 2019 and 2018, the Company did not sell any of its marketable securities.

 

6. Long-Term Debt

 

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 Non-Recourse 2033 Notes are secured by all of the Issuer’s rights, 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. (“Innoviva”) and GSK, as amended from time to time (net of the amount of cash, if any, expected to be used in TRC 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 are 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 without a default or event of default occurring. The terms of the Notes also provide that the Company, at its option, may satisfy the quarterly interest payment obligations by making a capital contribution to the Issuer, but not for more than four (4) consecutive quarterly interest payment dates or for

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more than six (6) quarterly interest payment dates during the term of the Notes. 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. The portion of the Non-Recourse 2033 Notes classified as a current liability is based on the amount of royalties received, or receivable, as of March 31, 2019, that are expected to be used to make a principal repayment on the Non-Recourse 2033 Notes. Please refer to Note 12 for further information concerning the withholding of royalty payments by Innoviva due to us under the TRC LLC Agreement.

 

In order to comply with Regulation RR – Credit Risk Retention (17 C.F.R. Part 246), 5.0% of the principal amount of the Non-Recourse 2033 Notes were retained by Theravance Biopharma R&D, Inc. and eliminated in the Company’s condensed consolidated financial statements.

As of March 31, 2019, the net principal amount and estimated fair market value of the Non-Recourse 2033 Notes was $237.5 million. 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.

 

3.25% Convertible Senior Notes Due 2023

The Company has $230.0 million of 3.250% convertible senior notes due in 2023 (“Convertible Senior 2023 Notes”) outstanding as of March 31, 2019 with an estimated fair value of $221.8 million. The estimated fair value was primarily based upon the underlying price of Theravance Biopharma’s publicly traded shares and other observable inputs as of March 31, 2019. 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.

 

7. Leases

 

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 (“SSF Lease”) and includes a tenant improvement allowance with a remaining balance of $16.3 million, as of March 31, 2019 that expires in May 2022. The Company’s Irish subsidiary leases approximately 6,100 square feet of office space in Dublin, Ireland that ends in April 2027 (“Dublin Lease”). In addition, the Company leases equipment for clinical research studies with an estimated duration of approximately 21-months ending in 2021.

 

The SSF Lease contains two options to extend the term of the lease for successive periods of five years each and the Dublin Lease contains a lease termination option in April 2024 at the Company’s discretion. The two options to extend the SSF Lease and the option to terminate the Dublin Lease were not recognized in the determination of the Company’s right-of-use assets and lease liabilities below.

 

The Company has evaluated its leases and determined that they were all operating leases. The present values of the remaining lease payments and corresponding right-of-use assets were as follows, and the difference between the lease assets and lease liabilities amounts was due to deferred rent payments that are payable in future periods.

 

 

 

 

 

 

 

(In thousands)

Classification

    

March 31, 2019

    

Assets

 

 

 

 

 

 Operating lease assets

Operating lease assets

 

$

48,861

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Current:

 

 

 

 

 

 Operating lease liabilities

Other accrued liabilities

 

$

8,420

 

Non-current:

 

 

 

 

 

 Operating lease liabilities

Operating lease liabilities

 

 

48,493

 

Total operating lease liabilities

 

 

$

56,913

 

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Lease expense was included within operating expenses in the condensed consolidated statements of operations as follows:

 

 

 

 

 

 

 

 

 

Three Months

 

 

 

 

Ended

 

(In thousands)

Classification

    

March 31, 2019

    

Operating lease expense

Selling, general and administrative expenses

 

$

2,543

 

Operating lease expense

Research and development expenses

 

 

238

 

Total operating lease expense (1)

 

 

$

2,781

 

 

(1)

Includes short-term leases which were immaterial.

 

As of March 31, 2019, the maturities of our lease liabilities were as follows:

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

Nine months ending December 31, 2019

 

 

$

6,612

Years ending December 31:

 

 

 

 

 2020

 

 

 

7,253

 2021

 

 

 

9,492

 2022

 

 

 

9,757

 2023

 

 

 

10,035

 Thereafter

 

 

 

70,208

Total operating lease payments

 

 

$

113,357

Less: Estimated tenant improvement allowance

 

 

 

(16,318)

Less: Imputed interest

 

 

 

(40,126)

Present value of operating lease liabilities

 

 

$

56,913

 

Cash paid for amounts included in the measurement of lease liabilities for the three months ended March 31, 2019 was $2.2 million and was included in net cash used in operating activities in the condensed consolidated statements of cash flows. As of March 31, 2019, the weighted average remaining lease term was 10.9 years, and the weighted average discount rate used to determine the lease liabilities was 8.65%. The Company’s discount rate was primarily derived from the 9.0% interest rate on its Non-Recourse 2033 Notes issued in November 2018 and did not involve any significant assumptions.

 

8. Theravance Respiratory Company, LLC (“TRC”)

 

Prior to the June 2014 spin-off from Innoviva, the Company’s former parent company, 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, and communicated to the Company, by Innoviva.

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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 condensed consolidated financial statements. TRC is recognized in the Company’s condensed consolidated financial statements under the equity method of accounting, and the value of the Company’s equity investment in TRC was $11.7 million and $5.4 million as of March 31, 2019 and December 31, 2018, respectively. This amount includes undistributed earnings from the Company’s investment in TRC which are recorded within “other prepaid and current assets” on the condensed consolidated balance sheets, net of the Company’s proportionate share of TRC’s administrative expenses incurred, and communicated to the Company, by Innoviva. 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 three months ended March 31, 2019 and 2018, the Company recognized $6.2 million and $0.7 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.

 

9.  Share-Based Compensation

 

Share-Based Compensation Expense Allocation

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

(In thousands)

    

2019

    

2018

    

Research and development

 

$

6,159

 

$

6,559

 

Selling, general and administrative

 

 

6,061

 

 

7,439

 

Total share-based compensation expense

 

$

12,220

 

$

13,998

 

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 restricted share awards (“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 the 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 March 31, 2019, there were 877,500 of these performance-contingent RSAs and 101,250 of these performance-contingent RSUs outstanding, and as of March 31, 2018, there were 1,305,000 of these performance-contingent RSAs and 135,000 of these 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 $1.1 million of share-based compensation expense for the three months ended March 31, 2018 associated with the first tranche of these awards.

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The performance conditions associated with the second tranche of these awards were completed in the first quarter of 2019. For the three months ended March 31, 2019 and 2018, the Company recognized $0.8 million and $0.9 million, respectively, of share-based compensation expense related to the second tranche of these awards. The maximum remaining expense associated with the second tranche is $2.8 million (allocated as $1.2 million for research and development expense and $1.6 million for selling, general and administrative expense).

 

As of March 31, 2019, 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 third tranche could be up to $14.2 million (allocated as $5.9 million for research and development expense and $8.3 million for selling, general and administrative expense) if the performance conditions are achieved.

 

In the fourth quarter of 2018, the Compensation Committee approved a grant of 3,000 performance-contingent RSUs to an employee. These RSUs have a maximum compensation expense of $75,000 which will be recognized when its single performance milestone is deemed to be probable of achievement. These 3,000 performance-contingent RSUs expire by December 31, 2020.

 

In the first quarter of 2019, the Compensation Committee approved a grant of 60,000 performance-contingent RSUs and incentive cash bonus awards to certain employees. These awards have dual triggers of vesting based upon the achievement of certain performance milestones in specified timeframes, as well as a requirement for continued employment. The compensation expense related to these awards is broken into two separate performance milestones and recognized when the associated performance milestones are deemed to be probable of achievement. The maximum share-based compensation expense associated with 60,000 performance-contingent RSUs’ first and second performance milestones are $0.8 million each for a total of $1.6 million.  The maximum compensation expense associated with the cash bonus’ first and second performance milestones are $75,000 and $225,000, respectively, for a total of $300,000. The 60,000 performance-contingent RSUs and cash bonus milestones expire by December 31, 2021, and December 31, 2020, respectively.

 

As of March 31, 2019, the Company has determined that the performance milestones for the awards granted in the fourth quarter of 2018 and the first quarter of 2019 were not probable of achievement and, as a result, no compensation expense related to these awards has been recognized to date.

 

10. Income Taxes

 

The income tax provision was a $0.1 million expense for the three months ended March 31, 2019. The expense for the three months ended March 31, 2019 was primarily attributed to recording contingent tax liabilities for 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.

 

The Company follows the accounting guidance related to accounting for income taxes which requires that a company reduce its deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of its deferred tax assets will not be realized. As of March 31, 2019, the Company’s deferred tax assets were offset in full by a valuation allowance.

 

The Company records liabilities related to uncertain tax positions in accordance with the income tax guidance which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Resolution of one or more of these uncertain tax positions in any period may have a material impact on the results of operations for that period. The Company includes any applicable interest and penalties within the provision for income taxes in the condensed consolidated statements of operations.

 

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,

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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.

 

11. Reduction in Workforce

 

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 51 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 was substantially completed in the first quarter of 2019, and the Company recorded severance related charges totaling approximately $3.9 million including compensation expense made to affected employees through any minimum statutory notice periods. As of March 31, 2019, the Company had paid total severance of $3.4 million. The severance related charges are presented on the condensed consolidated statements of operations within research and development expenses and selling, general and administrative expenses for the three months ended March 31, 2019.

 

12. Subsequent Events

 

In May 2019, the Company announced that it had initiated an arbitration against Innoviva and TRC because Innoviva has caused TRC not to make any distributions to the Company with respect to its 85% economic interest in TRC for the quarter ended December 31, 2018, which distributions were due March 31, 2019, and Innoviva’s statement to the Company that it intends to cause TRC to withhold making further cash distributions through calendar year 2019.

 

 

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

You should read the following discussion in conjunction with our condensed financial statements (unaudited) and related notes included elsewhere in this report. This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”), as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, that involve risks and uncertainties. All statements in this report, other than statements of historical facts, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans, intentions, expectations and objectives are forward-looking statements. The words “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “designed,” “developed,” “drive,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “mission,” “opportunities,” “plan,” “potential,” “predict,” “project,” “pursue,” “seek,” “should,” “target,” “will,” “would,” and similar expressions (including the negatives thereof) are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements reflect our current views with respect to future events or our future financial performance, are based on assumptions, and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We may not actually achieve the plans, intentions, expectations or objectives disclosed in our forward-looking statements and the assumptions underlying our forward-looking statements may prove incorrect. Therefore, you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions, expectations and objectives disclosed in the forward-looking statements that we make. Factors that we believe could cause actual results or events to differ materially from our forward-looking statements include, but are not limited to, those discussed in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2018. Our forward-looking statements in this report are based on current expectations and we do not assume any obligation to update any forward-looking statements for any reason, even if new information becomes available in the future.

 

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