UNITED STATES
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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 June 30, 2020

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)

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

The Nasdaq Global Market

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 

As of July 31, 2020, the number of the registrant’s outstanding ordinary shares was 63,515,410.

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 June 30, 2020 and December 31, 2019 (unaudited)

3

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2020 and 2019 (unaudited)

4

Condensed Consolidated Statements of Shareholders’ Deficit for the three and six months ended June 30, 2020 and 2019 (unaudited)

5

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (unaudited)

6

Notes to Condensed Consolidated Financial Statements (unaudited)

7

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

20

Item 3. Quantitative and Qualitative Disclosures About Market Risk

36

Item 4. Controls and Procedures

36

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

37

Item 1A. Risk Factors

37

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

71

Item 6. Exhibits

72

Signatures

73

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)

June 30, 

December 31, 

    

2020

    

2019

Assets

Current assets:

Cash and cash equivalents

$

104,735

$

58,064

Short-term marketable securities

 

333,605

 

222,767

Receivables from collaborative arrangements

 

11,413

 

11,996

Receivables from licensing arrangements

10,000

Amounts due from TRC, LLC

35,509

28,574

Other prepaid and current assets

13,124

7,087

Total current assets

 

498,386

 

338,488

Property and equipment, net

 

14,433

 

12,644

Long-term marketable securities

 

 

4,985

Operating lease assets

45,184

46,604

Tax receivable

3,986

3,682

Restricted cash

 

833

 

833

Other assets

1,508

1,590

Total assets

$

564,330

$

408,826

Liabilities and Shareholders' Deficit

Current liabilities:

Accounts payable

$

10,065

$

4,758

Accrued personnel-related expenses

 

26,757

 

28,180

Accrued clinical and development expenses

 

25,229

 

17,587

Accrued interest payable

3,702

5,659

Non-recourse notes due 2033, net

9,851

Operating lease liabilities

8,741

7,762

Deferred revenue

 

25,062

 

31,575

Other accrued liabilities

 

7,018

 

6,331

Total current liabilities

 

106,574

 

111,703

Convertible senior notes due 2023, net

226,427

225,890

Non-recourse notes due 2035, net

375,266

Non-recourse notes due 2033, net

219,300

Long-term operating lease liabilities

47,631

47,725

Long-term deferred revenue

1,154

6,761

Other long-term liabilities

9,614

21,287

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; 63,515 and 57,015 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

 

1

1

Additional paid-in capital

 

1,191,923

1,024,614

Accumulated other comprehensive income

 

280

 

145

Accumulated deficit

 

(1,394,540)

 

(1,248,600)

Total shareholders’ deficit

 

(202,336)

 

(223,840)

Total liabilities and shareholders’ deficit

$

564,330

$

408,826

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

THERAVANCE BIOPHARMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except per share data)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

Revenue:

Collaboration revenue

$

5,488

$

7,493

$

12,120

$

12,831

Licensing revenue

18,500

1,500

18,500

Mylan collaboration agreement

 

9,520

 

157

 

21,250

 

157

Total revenue

 

15,008

 

26,150

 

34,870

 

31,488

Costs and expenses:

Research and development (1)

 

62,404

 

46,399

 

128,417

 

100,217

Selling, general and administrative (1)

 

24,780

 

22,227

 

51,105

 

47,413

Total costs and expenses

 

87,184

 

68,626

 

179,522

 

147,630

Loss from operations

 

(72,176)

 

(42,476)

 

(144,652)

 

(116,142)

Income from investment in TRC, LLC

21,381

8,366

34,896

14,595

Interest expense

(11,391)

(7,901)

(21,332)

(15,759)

Loss on extinguishment of debt

(15,464)

Interest and other income (expense), net

 

(662)

 

2,374

 

798

 

5,169

Loss before income taxes

 

(62,848)

 

(39,637)

 

(145,754)

 

(112,137)

Provision for income tax expense

 

(39)

 

(201)

 

(186)

 

(281)

Net loss

$

(62,887)

$

(39,838)

$

(145,940)

$

(112,418)

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

(232)

165

135

295

Total comprehensive loss

$

(63,119)

$

(39,673)

$

(145,805)

$

(112,123)

Net loss per share:

Basic and diluted net loss per share

$

(1.00)

$

(0.72)

$

(2.39)

$

(2.04)

Shares used to compute basic and diluted net loss per share

 

62,861

 

55,529

 

61,162

 

55,235

(1)Amounts include share-based compensation expense as follows:

Three Months Ended June 30, 

Six Months Ended June 30, 

(In thousands)

    

2020

    

2019

2020

    

2019

Research and development

$

8,098

$

5,720

$

15,963

$

11,880

Selling, general and administrative

 

8,487

 

5,578

 

15,898

 

11,639

Total share-based compensation expense

$

16,585

$

11,298

$

31,861

$

23,519

See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

THERAVANCE BIOPHARMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(Unaudited)

(In thousands)

Accumulated

Additional

Other

Total

Ordinary Shares

Paid-In

Comprehensive

Accumulated

Shareholders'

   

Shares

   

Amount

   

Capital

   

Income (Loss)

   

Deficit

   

Deficit

Balances at March 31, 2020

63,004

$

1

$

1,173,204

$

512

$

(1,331,653)

$

(157,936)

Proceeds from ESPP purchases

168

2,545

2,545

Employee share-based compensation expense

16,585

16,585

Issuance of restricted shares

353

Option exercises

33

733

733

Repurchase of shares to satisfy tax withholding

(43)

(1,144)

(1,144)

Net unrealized loss on marketable securities

(232)

(232)

Net loss

(62,887)

(62,887)

Balances at June 30, 2020

63,515

$

1

$

1,191,923

$

280

$

(1,394,540)

$

(202,336)

Accumulated

Additional

Other

Total

Ordinary Shares

Paid-In

Comprehensive

Accumulated

Shareholders'

   

Shares

   

Amount

   

Capital

   

Income (Loss)

   

Deficit

   

Deficit

Balances at December 31, 2019

57,015

$

1

$

1,024,614

$

145

$

(1,248,600)

$

(223,840)

Net proceeds from sale of ordinary shares

5,500

139,915

139,915

Proceeds from ESPP purchases

168

2,545

2,545

Employee share-based compensation expense

31,861

31,861

Issuance of restricted shares

1,097

Option exercises

41

936

936

Repurchase of shares to satisfy tax withholding

(306)

(7,948)

(7,948)

Net unrealized gain on marketable securities

135

135

Net loss

(145,940)

(145,940)

Balances at June 30, 2020

63,515

$

1

$

1,191,923

$

280

$

(1,394,540)

$

(202,336)

Accumulated

Additional

Other

Total

Ordinary Shares

Paid-In

Comprehensive

Accumulated

Shareholders'

Shares

   

Amount

   

Capital

   

Income (Loss)

   

Deficit

   

Deficit

Balances at March 31, 2019

56,122

$

1

$

971,508

$

(36)

$

(1,084,725)

$

(113,252)

Proceeds from ESPP purchases

145

2,605

2,605

Employee share-based compensation expense

11,298

11,298

Issuance of restricted shares

263

Option exercises

107

2,292

2,292

Repurchase of shares to satisfy tax withholding

(494)

(494)

Net unrealized gain on marketable securities

165

165

Net loss

(39,838)

(39,838)

Balances at June 30, 2019

56,637

$

1

$

987,209

$

129

$

(1,124,563)

$

(137,224)

Accumulated

Additional

Other

Total

Ordinary Shares

Paid-In

Comprehensive

Accumulated

Shareholders'

Shares

   

Amount

   

Capital

   

Income (Loss)

   

Deficit

   

Deficit

Balances at December 31, 2018

55,681

$

1

$

960,721

$

(166)

$

(1,012,145)

$

(51,589)

Proceeds from ESPP purchases

145

2,605

2,605

Employee share-based compensation expense

23,519

23,519

Issuance of restricted shares

689

Option exercises

122

2,545

2,545

Repurchase of shares to satisfy tax withholding

(2,181)

(2,181)

Net unrealized gain on marketable securities

295

295

Net loss

(112,418)

(112,418)

Balances at June 30, 2019

56,637

$

1

$

987,209

$

129

$

(1,124,563)

$

(137,224)

See accompanying notes to condensed consolidated financial statements.

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THERAVANCE BIOPHARMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

Six Months Ended June 30, 

    

2020

    

2019

Operating activities

Net loss

$

(145,940)

$

(112,418)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

 

4,034

 

2,867

Amortization and accretion income, net

(854)

(1,696)

Share-based compensation

 

31,861

 

23,519

Amortization of right-of-use assets

1,420

2,016

Amounts due from TRC, LLC

(6,934)

(14,595)

Interest shortfall on 2035 notes, net

1,093

Loss on extinguishment of debt

15,464

Other

(4)

53

Changes in operating assets and liabilities:

Accounts receivable

 

 

389

Receivables from collaborative and licensing arrangements

 

10,583

 

9,074

Other prepaid and current assets

(6,039)

(2,407)

Tax receivable

(300)

(3,700)

Other assets

(73)

2

Accounts payable

 

6,012

 

(5,491)

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

 

(5,753)

 

(15,580)

Accrued interest payable

(1,957)

2,672

Deferred revenue

(12,120)

(12,826)

Operating lease liabilities

885

(1,371)

Other long-term liabilities

 

175

 

269

Net cash used in operating activities

 

(108,447)

 

(129,223)

Investing activities

Purchases of property and equipment

 

(3,322)

 

(1,796)

Purchases of marketable securities

 

(280,495)

 

(208,028)

Maturities of marketable securities

 

155,703

 

131,368

Proceeds from the sale of marketable securities

19,927

Proceeds from the sale of property and equipment

1

Proceeds from the sale of VIBATIV business, net

 

 

5,000

Net cash used in investing activities

 

(108,186)

 

(73,456)

Financing activities

Proceeds from the sale of ordinary shares, net

139,915

Proceeds from issuance of 2035 notes, net

380,000

Payment of issuance costs on 2035 notes

(5,326)

Payment of redemption premium on 2033 notes

(11,470)

Principal payment on 2033 notes

(235,347)

Proceeds from ESPP purchases

2,545

2,605

Proceeds from option exercises

936

2,545

Repurchase of shares to satisfy tax withholding

(7,948)

(2,181)

Net cash provided by financing activities

 

263,305

 

2,969

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

 

46,671

 

(199,710)

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

 

58,897

 

378,854

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

$

105,568

$

179,144

Supplemental disclosure of cash flow information

Cash paid for interest

$

20,287

$

11,753

Cash paid for income taxes, net

$

14

$

21

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

$

$

49,847

(1)Amounts for the six months ended June 30, 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. The Company’s purpose is to create transformational medicines to improve the lives of patients suffering from serious illnesses. The Company’s research is focused in the areas of inflammation and immunology.

Basis of Presentation

The Company’s condensed consolidated financial information as of June 30, 2020, and the three and six months ended June 30, 2020 and 2019 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 United States (“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, 2019 financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (“SEC”) on February 27, 2020.

The results for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020, or 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.

Furthermore, the estimates used in the preparation of the Company’s condensed consolidated financial statements may change due to the uncertainty and disruption in the global economy and financial markets related to the novel coronavirus (“COVID-19”) pandemic. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including revenue, expenses, clinical trials, and research and development costs, will depend on future developments that are highly uncertain and may be impacted by the emergence of new information concerning the COVID-19 pandemic and the actions taken to contain or treat the disease.

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, 2019.

Recently Adopted Accounting Pronouncements

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

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forecasts that affect 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 became effective on January 1, 2020, and the adoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures primarily due to the high credit quality and short-term maturities of the Company’s marketable securities.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Accordingly, ASU 2018-15 requires a customer in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. ASU 2018-15 became effective on January 1, 2020, and the adoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures. However, the adoption of ASU 2018-15 may result in an increase in capitalized assets related to qualifying cloud computing arrangement implementation costs in the future.

In November 2018, the FASB issued ASU 2018-18, Collaboration Arrangements: Clarifying the Interaction between Topic 808 and Topic 606 (“ASU 2018-18”). The issuance of Topic 606 raised questions about the interaction between the guidance on collaborative arrangements and revenue recognition. ASU 2018-18 addresses this uncertainty by: (i) clarifying that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaboration arrangement participant is a customer; (ii) adding unit of account guidance to assess whether the collaboration arrangement or a part of the arrangement is with a customer; and (iii) precluding a company from presenting transactions with collaboration arrangement participants that are not directly related to sales to third parties together with revenue from contracts with customers. ASU 2018-18 became effective on January 1, 2020, and the Company elected to adopt ASU 2018-18, retrospectively, only for contracts that were not completed as of January 1, 2020. The adoption of ASU 2018-18 did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted

On December 18, 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”) as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards. ASU 2019-12 removes certain exceptions from Topic 740, Income Taxes, including (i) the exception to the incremental approach for intra period tax allocation when there is a loss from continuing operations and income or a gain from other items such as discontinued operations or other comprehensive income; (ii) the exception to accounting for outside basis differences of equity method investments and foreign subsidiaries; and (iii) the exception to limit tax benefit recognized in interim periods in cases when the year-to-date losses exceed anticipated losses. ASU 2019-12 also simplifies GAAP in several other areas of Topic 740 such as (i) franchise taxes and other taxes partially based on income; (ii) step-up in tax basis goodwill considered part of a business combination in which the book goodwill was originally recognized or should be considered a separate transaction; (iii) separate financial statements of entities not subject to tax; and (iv) interim recognition of enactment of tax laws or rate changes. ASU 2019-12 is effective for annual reporting periods and interim periods within those years beginning after December 15, 2020, and early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2019-12 on its condensed consolidated financial statements and related disclosures.

The Company has evaluated other recently issued accounting pronouncements and does not currently believe that any of these pronouncements will have a material impact on its condensed 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 outstanding, less ordinary shares subject to forfeiture. Diluted net loss per share is computed by dividing net loss by the weighted-average

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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.

Three Months Ended June 30, 

Six Months Ended June 30, 

(In thousands)

    

2020

    

2019

2020

    

2019

Numerator:

Net loss

$

(62,887)

$

(39,838)

$

(145,940)

$

(112,418)

Denominator:

 

 

Weighted-average common shares outstanding

63,275

56,407

61,676

56,114

Less: weighted-average common shares subject to forfeiture

(414)

(878)

(514)

(879)

Weighted-average common shares used to compute basic and diluted net loss per share

62,861

55,529

61,162

55,235

Basic and diluted net loss per share

$

(1.00)

$

(0.72)

$

(2.39)

$

(2.04)

For the three and six months ended June 30, 2020 and 2019, 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:

Three Months Ended June 30, 

Six Months Ended June 30, 

(In thousands)

    

2020

    

2019

    

2020

    

2019

Share issuances under equity incentive plans and ESPP 

5,713

7,468

5,741

6,227

Share issuances upon the conversion of convertible senior notes

6,676

6,676

6,676

6,676

Total

 

12,389

14,144

12,417

12,903

As of June 30, 2019, there were 468,000 shares subject to performance-based vesting criteria which have been excluded from the ordinary equivalent shares table above, and there were no such shares excluded as of June 30, 2020.

GlaxoSmithKline plc Senior Notes Offering

On June 22, 2020, GSK Finance (No.3) plc (“GSK Finance”), a wholly-owned subsidiary of GlaxoSmithKline plc (“GSK”), issued $280,336,000 of exchangeable senior notes due 2023 (“the GSK Notes”), initially exchangeable into 9,644,792 ordinary shares of Theravance Biopharma currently held by GSK and its affiliates. The GSK Notes are guaranteed by GSK and will be exchangeable at the option of noteholders on any business day on or after September 1, 2020. The GSK Notes will mature on June 22, 2023 and do not bear interest. The GSK Notes were offered at an issue price 108.5% of their principal amount. The initial exchange rate is 34.4044 shares of Theravance Biopharma ordinary shares per $1,000 principal amount of GSK Notes, which is equivalent to an initial exchange price of approximately $29.066 per share, representing a premium of 35% over the volume weighted average price of Theravance Biopharma’s ordinary shares on June 17, 2020.

Upon exchange of the GSK Notes, GSK Finance is expected to deliver its ordinary shares of Theravance Biopharma, but may at its option under certain circumstances, deliver cash or a combination of Theravance Biopharma ordinary shares and cash to noteholders. The GSK Offering involves the expected exchange of substantially all of the existing 9,644,807 ordinary shares of Theravance Biopharma held by GSK and its affiliates. Theravance Biopharma will not be issuing any new ordinary shares in connection with the GSK Offering, and Theravance Biopharma did not receive any proceeds from the GSK Offering.

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3. Revenue

Revenue from Collaborative Arrangements

The Company recognized revenues from its collaborative arrangements as follows:

Three Months Ended June 30, 

Six Months Ended June 30, 

(In thousands)

    

2020

    

2019

2020

    

2019

Janssen

$

5,479

$

7,392

$

12,101

$

12,715

Other

9

101

19

116

Total collaboration revenue

$

5,488

$

7,493

$

12,120

$

12,831

Changes in Deferred Revenue Balances

Changes in the deferred revenue balances arose as a result of the Company recognizing the following revenue from collaborative arrangements during the periods below:

Three Months Ended June 30, 

Six Months Ended June 30, 

(In thousands)

2020

2019

2020

2019

Collaboration revenue recognized in the period from:

Amounts included in deferred revenue at the beginning of the period

$

5,488

$

7,493

$

12,120

$

12,825

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 back-up compounds by paying the Company 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 Phase 3 development and registration activities (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 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 determined it is partially within the scope of Accounting Standards Codification, Topic 606, Revenue from Contracts with Customers (“ASC 606”) as the research and development activities to be performed through the initial Phase 2 development period of the collaborative arrangement are considered to be part of the Company’s ordinary activities. 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, inclusive of the $200.0 million opt-in fee and $700.0 million future development and commercialization milestones, 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.

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For the three and six months ended June 30, 2020, the Company recognized $5.5 million and $12.1 million, respectively, as revenue from collaboration arrangements related to the Janssen Agreement. The remaining transaction price of $25.7 million, related to the $100.0 million upfront payment, 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). Consequently, delays in trial activity and/or changes to the total budget will impact the timing and amount of revenue recognized in any given reporting period. For the three and six months ended June 30, 2020, the Company incurred $9.0 million and $19.2 million, respectively, in research and development costs related to the Janssen Agreement. For the three and six months ended June 30, 2019, the Company incurred $9.0 million and $17.7 million, respectively, in research and development costs related to the Janssen Agreement. In future reporting periods, the Company will reevaluate the estimates related to its efforts towards satisfying the performance obligation and may record a change in estimate if deemed necessary.

Mylan

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 upfront fee of $15.0 million for the delivery of the revefenacin license in 2015 and, in 2016, Mylan paid the Company a milestone payment of $15.0 million for the achievement of 50% enrollment in the related Phase 3 twelve-month safety study.

As of June 30, 2020, excluding the aggregate $30.0 million payment noted above, the Company is eligible to receive from Mylan potential global (ex-China and adjacent territories) 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 European Union (“EU”). The $45.0 million associated with future potential combination products relates solely to development and regulatory actions.

The Mylan Agreement is considered to be within the scope of ASC 808 and partially within the scope of ASC 606, as the parties are active participants and exposed to the risks and rewards of the collaborative activity with a unit of account provided to Mylan as a customer. 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, 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 determined the license to develop and commercialize revefenacin to be a unit of account for which Mylan is a customer and a separate performance obligation. The joint steering committee participation was also determined to be a performance obligation for which the Company analogized to ASC 606 to recognize revenue. Using the concepts from ASC 606, the Company further determined that the transaction price under the arrangement was comprised of the following: (1) $15.0 million upfront license fee received in 2015; (2) $4.2 million premium received in 2015 related to an ordinary share purchase agreement with Mylan; 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 prices. 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

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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 for the Mylan Agreement 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 is 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 June 30, 2020, $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 which will be recognized as collaboration revenue over the course of the remaining performance period of approximately twelve years.

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 tiered royalties on ex-US net sales. Mylan is the principal in the sales transactions, and as a result, the Company does not reflect the product sales in its financial statements.

Following the US Food and Drug Administration (“FDA”) approval of YUPELRI in November 2018, net amounts payable to or receivable from Mylan each quarter under the profit-sharing structure are disaggregated according to their individual components. In accordance with the applicable accounting guidance, amounts receivable from Mylan in connection with the commercialization of YUPELRI are recorded within the condensed consolidated statements of operations as revenue from “Mylan collaboration agreement” irrespective of whether the overall collaboration is profitable. Amounts payable to Mylan in connection with the commercialization of YUPELRI are recorded within the condensed consolidated statements of operations as a collaboration loss within selling, general and administrative expenses. Any reimbursement from Mylan attributed to the 65% cost-sharing of the Company’s R&D expenses 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 ordinary activities.

The following YUPELRI-related amounts were recognized in the Company’s condensed consolidated statements of operations:

Three Months Ended June 30, 

Six Months Ended June 30, 

(In thousands)

2020

2019

2020

2019

Mylan collaboration agreement - Amounts receivable from Mylan

$

9,520

$

157

$

21,250

$

157

Collaboration loss - Amounts payable to Mylan

$

$

181

$

$

1,582

Reimbursement of R&D Expense

As noted above, under certain collaborative arrangements the Company is entitled to reimbursement of certain R&D expenses. Activities under collaborative arrangements for which the Company is entitled to reimbursement are considered to be collaborative activities under the scope of ASC 808. For these units of account, the Company does not analogize to ASC 606 or recognize revenue. The Company records reimbursement payments received from its collaboration partners as reductions to R&D expense.

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

Three Months Ended June 30, 

Six Months Ended June 30, 

(In thousands)

    

2020

    

2019

2020

    

2019

Janssen

$

1,563

$

784

$

2,770

$

2,195

Mylan

351

31

1,622

234

Total reduction to R&D expense

$

1,914

$

815

$