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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2017

OR

o         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)

(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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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

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. o

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

As of November 1, 2017, the number of the registrant’s outstanding ordinary shares was 54,103,378.

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THERAVANCE BIOPHARMA, INC.

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PART I.              FINANCIAL INFORMATION

ITEM 1.            FINANCIAL STATEMENTS

THERAVANCE BIOPHARMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share data)

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)

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

See accompanying notes to condensed consolidated financial statements.

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THERAVANCE BIOPHARMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

See accompanying notes to condensed consolidated financial statements.

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THERAVANCE BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of Operations and Summary of Significant Accounting Policies

Description of Operations

Theravance Biopharma, Inc. (“Theravance Biopharma”, the “Company”, or “we” and other similar pronouns) is a diversified biopharmaceutical company with the core purpose of creating medicines that help improve the lives of patients suffering from serious illness.

Our pipeline of internally discovered product candidates includes potential best-in-class medicines to address the unmet needs of patients being treated for serious conditions primarily in the acute care setting. VIBATIV® (telavancin), our first commercial product, is a once-daily dual-mechanism antibiotic approved in the U.S., Europe and certain other countries for certain difficult-to-treat infections. Revefenacin (TD-4208) is a long-acting muscarinic antagonist (“LAMA”) being developed as a potential once-daily, nebulized treatment for chronic obstructive pulmonary disease (“COPD”). Our neprilysin (“NEP”) inhibitor program is designed to develop selective NEP inhibitors for the treatment of a range of major cardiovascular and renal diseases, including acute and chronic heart failure, hypertension and chronic kidney diseases such as diabetic nephropathy. Our research efforts are focused in the areas of inflammation and immunology, with the goal of designing medicines that provide targeted drug delivery to tissues in the lung and gastrointestinal tract in order to maximize patient benefit and minimize risk. The first program to emerge from this research is designed to develop intestinally restricted pan-Janus kinase (“JAK”) inhibitors for the treatment of a range of inflammatory intestinal diseases.

In addition, we have an economic interest in future payments that may be made by Glaxo Group Limited or one of its affiliates (“GSK”) pursuant to its agreements with Innoviva, Inc. (“Innoviva”) (known as Theravance, Inc. prior to January 7, 2016) relating to certain drug development programs, including Trelegy Ellipta (the combination of fluticasone furoate, umeclidinium, and vilanterol in a single ELLIPTA® inhaler, previously referred to as the Closed Triple), currently approved in the US for the treatment of appropriate COPD patients and in development for the treatment of COPD in several other countries. The product is also currently in development for the treatment of asthma.

Basis of Presentation

Our condensed consolidated financial information as of September 30, 2017, and the three and nine months ended September 30, 2017 and 2016 are unaudited but include all adjustments (consisting only of normal recurring adjustments), which we consider 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 U.S. 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, 2016 financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2017.

On January 1, 2017, we adopted ASU 2016-09, Compensation—Stock Compensation (Topic 718) (“ASU 2016-09”). Under ASU 2016-09, excess tax benefits from share-based compensation are now included on the Consolidated Statements of Cash Flows as an operating activity rather than a financing activity. This change has been applied prospectively as allowed under ASU 2016-09 and prior periods have not been adjusted on the Consolidated Statements of Cash Flows.

Significant Accounting Policies

Other than the below, there have been no material revisions in our significant accounting policies described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.

Share-Based Compensation

In connection with the adoption of ASU 2016-09, we elected to change our accounting policy for recognizing share-based compensation expense by replacing the practice of estimating forfeitures to utilizing actual forfeitures as they occur. The

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change was applied on a modified retrospective basis, and the cumulative effect adjustment recorded to retained earnings, as of January 1, 2017, was immaterial.

Recently Issued Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09” or “Topic 606”), which will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, companies may need to use more judgment and make more estimates than under the currently effective guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. Since ASU 2014-09 was issued, several additional ASUs have been issued and incorporated within Topic 606 to clarify various elements of the guidance.

Topic 606 differs from the current accounting standard in many respects, such as in the accounting for variable consideration, including milestone payments. Since the separation from our former parent, Innoviva, in June 2014, our revenues have been derived from collaboration agreements and product sales. The consideration we are eligible to receive under collaboration agreements includes upfront payments, research and development funding, milestone payments, and royalties. Each collaboration agreement is unique and will need to be assessed separately under the five-step process under Topic 606. As part of our adoption efforts, we have completed the assessment of several collaboration agreements under Topic 606 and the assessment of the remaining collaboration agreements is in process.

Under our current accounting policy, we recognize milestone revenue using the milestone method specified in ASC 605-28, which generally results in the recognition of the milestone payment as revenue in the period that the milestone is achieved. However, under the new accounting standard, it is possible to start to recognize milestone revenue before the milestone is achieved, subject to management’s assessment of whether it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. This aspect of Topic 606 may have a material effect on our financial statements. We also recognize revenues from product sales. Although we have not yet completed our final review of the impact of Topic 606, we currently do not anticipate a material impact on our revenue recognition practices for product sales.

We will adopt Topic 606 in the first quarter of 2018 using the modified retrospective method which consists of applying and recognizing the cumulative effect of Topic 606 at the date of initial application and providing certain additional disclosures as defined per Topic 606. We are in the process of reviewing variable consideration, potential disclosures, and our method of adoption to complete our evaluation of the impact on our consolidated financial statements prior to the end of 2017. In addition, we continue to monitor additional changes, modifications, clarifications or interpretations undertaken by the FASB, which may impact our current conclusions.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 is aimed at making leasing activities more transparent and comparable, and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018 with early adoption permitted. We are currently evaluating the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements and related disclosures.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) (“ASU 2016-16”). ASU 2016-16 requires immediate recognition of income tax consequences of intra-company asset transfers, other than inventory transfers. Existing GAAP prohibits recognition of income tax consequences of intra-company asset transfers whereby the seller defers any net tax effect and the buyer is prohibited from recognizing a deferred tax asset on the difference between the newly created tax basis of the asset in its tax jurisdiction and its financial statement carrying amount as reported in the consolidated financial statements. ASU 2016-16 specifically excludes from its scope intra-company inventory transfers whereby the recognition of tax consequences will take place when the inventory is sold to third parties. Two common examples of assets included in ASU 2016-16’s scope are intellectual property and property, plant and equipment. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years with early adoption is permitted. We expect to adopt ASU 2016-16 in the first quarter of 2018 using the modified retrospective method. Currently, we do not anticipate a material impact on our consolidated financial statements and related disclosures upon adoption due to a full valuation allowance on our deferred tax assets. However, the ultimate impact of adopting ASU 2016-16 will depend on the

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balance of intercompany sales transactions, if any, between our subsidiaries as of the adoption date and our continued full valuation allowance position.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 provides clarity and reduces both diversity in practice and cost and complexity when applying the guidance in Topic 718 to a change to the terms and conditions of a share-based payment award. ASU 2017-09 also provides guidance about the types of changes to the terms or conditions of a share-based payment award that require an entity to apply modification accounting in accordance with Topic 718. The provisions of ASU 2017-09 are effective for all interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We plan to adopt ASU 2017-09 on its effective date and apply the new guidance to evaluate future changes, if any, to the terms and conditions of our share-based payment awards.

We have evaluated other recently issued accounting pronouncements and do not believe that any of these pronouncements will have a significant impact on our 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 and nine months ended September 30, 2017 and 2016, diluted and basic net loss per share was identical since potential ordinary shares were excluded from the calculation, as their effect was anti-dilutive.

Anti-Dilutive Securities

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

In addition, as of September 30, 2017 and 2016, there were 1,305,000 shares and 1,440,000 shares, respectively, which were subject to performance-based vesting criteria which have been excluded from the ordinary equivalent shares table above.

3. Collaborative Arrangements

Revenue from Collaborative Arrangements

We recognized the following revenues from our collaborative arrangements:

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Mylan

Development and Commercialization Agreement

In January 2015, we established a strategic collaboration with Mylan Ireland Limited (“Mylan”) for the development and, subject to regulatory approval, commercialization of revefenacin (TD-4208), our investigational LAMA in development for the treatment of COPD. We entered into this collaboration to expand the breadth of our revefenacin development program and extend our commercial reach beyond the acute care setting where we currently market VIBATIV.

For the three and nine months ended September 30, 2017, we recognized $25,000 and $77,000, respectively, in revenue primarily from the amortization of previously deferred revenue. For the three and nine months ended September 30, 2016, we recognized $25,000 and $15.1 million of revenue, respectively. The $25,000 resulted from amortization of previously deferred revenue and the $15.1 million resulted primarily from the achievement of 50% enrollment in the Phase 3 twelve-month safety study which triggered a milestone payment to Theravance Biopharma by Mylan.

As of September 30, 2017, we are 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 revefenacin monotherapy and $45.0 million for future potential combination products. Of the $160.0 million associated with monotherapy, $150.0 million relates to commercialization and $10.0 million relates to regulatory actions in the European Union (“EU”). Development and regulatory milestones are deemed to be substantive milestones and will be recognized as revenue in the period upon achievement of each respective milestone. Sales milestones are considered contingent payments and are not deemed to be substantive milestones due to the fact that the achievement of the event underlying the payment predominantly relates to Mylan’s performance of future commercial activities. We do not expect to earn any milestone payments from Mylan in 2017.

Takeda Collaborative Arrangement

In June 2016, we entered into a License and Collaboration Agreement (the “Takeda Agreement”) with Millennium Pharmaceuticals, Inc. (“Millennium”), in order to establish a collaboration for the development and commercialization of TD-8954, a selective 5-HT4 receptor agonist.  Prior to the Takeda Agreement, the Company has developed TD-8954 for potential use in the treatment of gastrointestinal motility disorders, including short-term intravenous use for enteral feeding intolerance (“EFI”) to achieve early nutritional adequacy in critically ill patients at high nutritional risk, an indication for which the compound received U.S. Food and Drug Administration (“FDA”) Fast Track Designation.  Millennium is an indirect wholly-owned subsidiary of Takeda Pharmaceutical Company Limited (TSE: 4502) (collectively with Millennium, “Takeda”). Under the terms of the Takeda Agreement, Takeda is responsible for worldwide development and commercialization of TD-8954. We received an upfront cash payment of $15.0 million and will be eligible to receive success based development, regulatory and sales milestone payments by Takeda. The first $110.0 million of potential milestones are associated with the development, regulatory and commercial launch milestones for EFI or other intravenously dosed indications.  We will also be eligible to receive a tiered royalty on worldwide net sales by Takeda at percentage royalty rates ranging from low double-digits to mid-teens.  The Takeda Agreement was finalized in the third quarter of 2016, and we recognized $15.1 million in revenue for the three months ended September 30, 2016.

Alfasigma (formerly Alfa Wassermann)

Development and Collaboration Agreement

Under an October 2012 development and collaboration agreement for velusetrag, we and Alfasigma S.p.A (“Alfasigma”) (formerly Alfa Wassermann S.p.A.) agreed to collaborate in the execution of a two-part Phase 2 program to test the efficacy, safety and tolerability of velusetrag in the treatment of patients with gastroparesis (a medical condition consisting of a paresis (partial paralysis) of the stomach, resulting in food remaining in the stomach for a longer time than normal). Alfasigma has an exclusive option to develop and commercialize velusetrag in the EU, Russia, China, Mexico and certain other countries, while we retain full rights to velusetrag in the United States, Canada, Japan and certain other countries. As part of this agreement, Alfasigma funded the majority of the costs associated with the Phase 2 gastroparesis program, which consisted of a Phase 2 study focused on gastric emptying and a Phase 2 study focused on symptoms. Now that these studies are complete, Alfasigma has the right to exercise its license option, and if it does so, we would receive a $10.0 million option fee. If velusetrag is successfully developed and commercialized under the agreement with Alfasigma, we are entitled to receive potential future contingent payments totaling up to $53.5 million, and royalties on net sales by Alfasigma ranging from the low teens to 20%.

Reimbursement of R&D Costs

Under certain collaborative arrangements, we are entitled to reimbursement of certain R&D costs. Our policy is to account for the reimbursement payments by our collaboration partners as reductions to R&D expense.

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

4. Investments and Fair Value Measurements

Marketable Securities

Our available-for-sale securities include:

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 our 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. Net unrealized losses were $0.3 million as of September 30, 2017 and December 31, 2016.

As of September 30, 2017, all of the marketable securities had contractual maturities within two years and the weighted average maturity of the marketable securities was approximately nine months. There were no transfers between Level 1 and Level 2 during the periods presented and there have been no changes to our valuation techniques during the three and nine months ended September 30, 2017.

We do not intend to sell the investments that are in an unrealized loss position, and it is unlikely that we will be required to sell the investments before recovery of their amortized cost basis which may be maturity. We have determined that the gross unrealized losses on our marketable securities as of September 30, 2017 were temporary in nature. The gross unrealized loss on marketable securities held for greater than twelve months was immaterial, as of September 30, 2017.

As of September 30, 2017, our accumulated other comprehensive loss on our condensed consolidated balance sheets consisted of net unrealized losses on available-for-sale investments. During the three and nine months ended September 30, 2017, we did not sell any of our marketable securities.

Restricted cash pertained to certain lease agreements and letters of credit where we have pledged cash and cash equivalents as collateral.

We have $230.0 million of 3.25% convertible senior notes outstanding as of September 30, 2017 with an estimated fair value of $280.9 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 September 30, 2017. The inputs to determine fair value of the 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.

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

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

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

As of June 30, 2017, we identified indicators of impairment were present for our investment in non-marketable equity security of TREKtx. In the current quarter, we concluded that the impairment of this investment was other-than-temporary due to TREKtx’s challenges in securing additional funding and, as a result, we recorded an impairment charge. Due to the uncertainty in the recovery of the investment, we recorded an impairment charge for the full carrying value of the investment. The $8.0 million other-than-temporary impairment charge is reported as “Other-than-temporary impairment loss” on the Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2017. As the inputs utilized for the assessment are not based on observable market data, the determination of fair value of this cost-method investment is classified within Level 3 of the fair value hierarchy. To determine the fair value of this investment, we used all available financial information related to the investee, including liquidity, rate of cash use, and ability to secure additional funding.

5. Inventories

Inventory consists of the following:

6. 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:

Performance-Contingent Awards

In the first quarter of 2016, the Compensation Committee of our 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 a five-year period from 2016 to December 31, 2020. The goals that must be met in order for the performance-contingent RSAs and RSUs to vest are strategically important for the Company, and

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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 September 30, 2017, there were 1,305,000 of these performance-contingent RSAs and 135,000 of these performance-contingent RSUs outstanding, and as of September 30, 2016, there were 1,440,000 performance-contingent RSAs and 135,000 performance-contingent RSUs outstanding.

Expense associated with these awards is broken into three separate tranches and may be recognized during the years 2016 to 2020 depending on the probability of meeting the performance conditions. Compensation expense relating to awards subject to performance conditions is recognized if it is considered probable that the performance goals will be achieved. The probability of achievement is reassessed at each quarter-end reporting period. The maximum potential expense associated with the awards could be up to $35.5 million (allocated as $13.3 million for research and development expense and $22.2 million for selling, general and administrative expense) if all of the performance conditions are achieved.

As of September 30, 2017, we determined that the achievement of the requisite performance conditions for the first tranche of the awards is probable due to multiple advancements of programs within our development pipeline over the course of 2017. For the three and nine months ended September 30, 2017, we recognized $0.5 million and $1.4 million of share-based compensation expense from the first tranche of the awards, respectively. We have determined that the remaining second and third tranches are not probable of vesting and, as a result, no compensation expense related to these tranches has been recognized as of September 30, 2017.

In the third quarter of 2017, the Compensation Committee approved the grant of 50,000 performance contingent RSUs to a newly appointed member of senior management.  The RSUs have dual triggers of vesting based upon the achievement of certain corporate operating milestones in specified timelines, as well as a requirement for continued employment. When the performance goals are deemed to be probable of achievement, the recognition of the RSU’s share-based compensation expense will commence.  As of September 30, 2017, we determined that the achievement of the requisite performance conditions of these RSUs have not been met and that they are not probable of vesting (less than 70%) and, as a result, no compensation expense was recognized for the three and nine months ended September 30, 2017.

7. Income Taxes

The income tax provision was $0.9 million and $6.7 million for the three and nine months ended September 30, 2017, respectively, although we incurred operating losses on a consolidated basis. The provision for income tax was primarily due to recording contingent tax liabilities pertaining primarily to uncertain tax positions taken with respect to transfer pricing and tax credits. No provision for income taxes has been recognized on undistributed earnings of our foreign subsidiaries because we consider such earnings to be indefinitely reinvested.

We follow 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 September 30, 2017, our deferred tax assets were offset in full by a valuation allowance.

We record 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. We include any applicable interest and penalties within the provision for income taxes in the condensed consolidated statements of operations.

The difference between the Irish statutory rate and our effective tax rate was primarily due to the valuation allowance on deferred tax assets and the liabilities recorded for the uncertain tax position related to transfer pricing and tax credits.

Our future income tax expense may be affected by such factors as changes in tax laws, our business, regulations, tax rates, interpretation of existing laws or regulations, the impact of accounting for share-based compensation, the impact of accounting for business combinations, our international organization, shifts in the amount of income before tax earned in the U.S. as compared with other regions in the world, the timing and amounts of releases of our valuation allowance and changes in overall levels of income before tax.

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8. Operating Leases

We lease approximately 150,000 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 2020. We have the right to extend the terms of this lease for two additional five-year periods. In April 2017, we entered into a 10-year lease for an office space in Connaught House, Dublin, Ireland (“Connaught House”).  The Connaught House replaces our previously leased Dublin office space and allows us to accommodate future personnel growth. Under the terms of the Connaught House lease, we are leasing approximately 6,100 square feet at an initial base rent of approximately $443,000 per year. Future minimum lease payments under the leases, exclusive of executory costs, as of September 30, 2017, are as follows:

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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, 2016. 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.

Management Overview

Theravance Biopharma, Inc. (“Theravance Biopharma”) is a diversified biopharmaceutical company with the core purpose of creating medicines that help improve the lives of patients suffering from serious illness.

Our pipeline of internally discovered product candidates includes potential best-in-class medicines to address the unmet needs of patients being treated for serious conditions primarily in the acute care setting. VIBATIV® (telavancin), our first commercial product, is a once-daily dual-mechanism antibiotic approved in the U.S., Europe and certain other countries for certain difficult-to-treat infections. Revefenacin (TD-4208) is a long-acting muscarinic antagonist (“LAMA”) being developed as a potential once-daily, nebulized treatment for chronic obstructive pulmonary disease (“COPD”). Our neprilysin (“NEP”) inhibitor program is designed to develop selective NEP inhibitors for the treatment of a range of major cardiovascular and renal diseases, including acute and chronic heart failure, hypertension and chronic kidney diseases such as diabetic nephropathy. Our research efforts are focused in the areas of inflammation and immunology, with the goal of designing medicines that provide targeted drug delivery to tissues in the lung and gastrointestinal tract in order to maximize patient benefit and minimize risk. The first program to emerge from this research is designed to develop intestinally restricted pan-Janus kinase (“JAK”) inhibitors for the treatment of a range of inflammatory intestinal diseases.

In addition, we have an economic interest in future payments that may be made by Glaxo Group Limited or one of its affiliates (“GSK”) pursuant to its agreements with Innoviva, Inc. (“Innoviva”) (known as Theravance, Inc. prior to January 7, 2016) relating to certain drug development programs (the “GSK-Partnered Respiratory Programs”), including Trelegy Ellipta (the combination of fluticasone furoate, umeclidinium, and vilanterol in a single ELLIPTA® inhaler, previously referred to as the Closed Triple), currently approved in the US for the treatment of appropriate COPD patients and in development for the treatment of COPD in several other countries. The product is also currently in development for the treatment of asthma.

Program Highlights

VIBATIV® (telavancin)

VIBATIV is a bactericidal, once-daily injectable antibiotic to treat patients with serious, life-threatening infections due to Staphylococcus aureus and other Gram-positive bacteria, including methicillin-resistant (“MRSA”) strains. VIBATIV is approved in the U.S. for the treatment of adult patients with complicated skin and skin structure infections (“cSSSI”) caused

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by susceptible Gram-positive bacteria and for the treatment of adult patients with hospital-acquired and ventilator-associated bacterial pneumonia (“HABP”/ “VABP”) caused by susceptible isolates of Staphylococcus aureus when alternative treatments are not suitable. VIBATIV is indicated in the European Union (“EU”) for the treatment of adults with nosocomial pneumonia, including ventilator-associated pneumonia, known or suspected to be caused by MRSA when other alternatives are not suitable. VIBATIV is also indicated in Canada and Russia for cSSSI and HABP and VABP caused by Gram-positive bacteria, including MRSA.

Our acute care sales force currently markets VIBATIV in the U.S., and we maintain an independent marketing and medical affairs team. Outside of the U.S., our strategy is to market VIBATIV through a network of partners. To date, we have secured partners for VIBATIV in the following geographies—Canada, Middle East and North Africa, Israel, Russia, China and India. In August 2016, we and Clinigen Group (“Clinigen”) reached a mutual decision for Clinigen to return commercial rights to market and distribute VIBATIV in the EU to Theravance Biopharma. On November 4, 2016, the European Commission approved the transfer of the centralized marketing authorization for VIBATIV from Clinigen to our wholly-owned Irish subsidiary, Theravance Biopharma Ireland Limited. We are in discussion with potential collaborators with the goal of establishing a new strategic commercial partnership in the EU.

Supplemental New Drug Application (sNDA) for Concurrent Staphylococcus aureus Bacteremia

In May 2016, we announced approval of our sNDA by the Food and Drug Administration (“FDA”) allowing for the addition of new clinical data to the VIBATIV label concerning concurrent bacteremia in cases of HABP/VABP and cSSSI. The sNDA submission was based on the combined data from our previously conducted pivotal trials of VIBATIV in its two approved indications—cSSSI (ATLAS I and ATLAS II) and HABP/VABP (ATTAIN I and ATTAIN II). The trials were large, multi-center, multi-national, double-blind, randomized Phase 3 clinical studies enrolling and treating 3,370 adult patients, including a portion of patients with concurrent bacteremia. Importantly, these studies involved two of the largest cohorts of patients ever studied in these diseases and included one of the largest cohorts of patients with MRSA infections studied to date. Separately, we are conducting a Phase 3 registrational study in patients with Staphylococcus aureus bacteremia.

Phase 3 Registrational Study in Staphylococcus aureus Bacteremia

As part of our effort to explore additional settings in which VIBATIV may offer patients therapeutic benefit, in February 2015, we initiated a Phase 3 registrational study for the treatment of patients with Staphylococcus aureus bacteremia. The 250-patient registrational study is a multi-center, randomized, open-label study designed to evaluate the non-inferiority of telavancin in treating Staphylococcus aureus bacteremia as compared to standard therapy. Key secondary outcome measures of the study include an assessment of the duration of bacteremia post-randomization and the incidence of development of metastatic complications, as compared to standard therapy. We expect to complete the study in 2018 or 2019.

Telavancin Observational Use Registry (“TOURTM”) Study

Initiated in February 2015, the 1,000-patient TOURTM study is designed to assess the manner in which VIBATIV is used by healthcare practitioners to treat patients. By broadly collecting and examining data related to VIBATIV treatment patterns, as well as clinical effectiveness and safety outcomes in medical practice, we aim to create an expansive knowledge base to guide optimal clinical use and future development of the drug. In February 2017, we announced that enrollment in the TOURTM study was complete. Final results from the study will be available once all patient data is collected, verified and analyzed. This study is providing information about the use of VIBATIV in real-world clinical settings, including reports of positive clinical responses in patients with bacteremia, endocarditis, osteomyelitis, skin and respiratory infections. We will continue to update future TOURTM analyses as additional data becomes available.

Janssen Pharmaceutica License Agreement

In 2002, we entered into a License Agreement with Janssen Pharmaceutica N.V. (“Janssen”) pursuant to which we have licensed rights under certain patents owned by Janssen covering an excipient used in the formulation of telavancin. Pursuant to the terms of this license agreement, we are obligated to pay royalties to Janssen of 2.5-5% of any net commercial sales of VIBATIV (telavancin). The license will terminate in 2019 on the later of 10 years from first commercial sale of VIBATIV and the date of expiration of the last applicable Janssen patent covering VIBATIV. The license is terminable by us upon prior written notice to Janssen or upon an uncured breach or a liquidation event of one of the parties.

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Long-Acting Muscarinic Antagonist—Revefenacin (TD-4208)

Revefenacin is an investigational LAMA in development for the treatment of COPD. We believe that revefenacin may become a valuable addition to the COPD treatment regimen and that it represents a significant commercial opportunity. Our market research indicates there is an enduring population of COPD patients in the U.S. that either need or prefer nebulized delivery for maintenance therapy. LAMAs are a cornerstone of maintenance therapy for COPD, but existing LAMAs are only available in handheld devices that may not be suitable for every patient. Revefenacin has the potential to be a best-in-class once-daily single-agent product for COPD patients who require, or prefer, nebulized therapy. The therapeutic profile of revefenacin, together with its physical characteristics, suggest that this LAMA could serve as a foundation for combination products and for delivery in metered dose inhaler and dry powder inhaler (“MDI”/”DPI”) products.

Mylan Collaboration

In January 2015, Mylan Ireland Limited (“Mylan”) and we established a strategic collaboration for the development and, subject to regulatory approval, commercialization of revefenacin. Partnering with a world leader in nebulized respiratory therapies enables us to expand the breadth of our revefenacin development program and extend our commercial reach beyond the acute care setting where we currently market VIBATIV. Funding of the Phase 3 development program by Mylan preserves our capital position and enhances our financial flexibility to advance other high-value pipeline assets alongside revefenacin.

Under the terms of the Mylan Development and Commercialization Agreement (the “Mylan Agreement”), Mylan and we are co-developing nebulized revefenacin for COPD and other respiratory diseases. We are leading the U.S. Phase 3 development program and Mylan is responsible for reimbursement of our costs related to the registrational program up until the approval of the first new drug application (“NDA”), after which costs will be shared. If a product developed under the collaboration is approved in the U.S., Mylan will lead commercialization and we will retain the right to co-promote the product in the U.S. under a profit-sharing arrangement (65% Mylan/35% Theravance Biopharma). Outside the U.S. (excluding China), Mylan will be responsible for development and commercialization and will pay us a tiered royalty on net sales at percentage royalty rates ranging from low double-digits to mid-teens.

Under the Mylan Agreement, Mylan paid us an initial payment of $15.0 million in cash in the second quarter of 2015. Also, pursuant to an ordinary share purchase agreement entered into on January 30, 2015, Mylan Inc., the indirect parent corporation of Mylan, made a $30.0 million equity investment in us, buying 1,585,790 ordinary shares from us in early February 2015 in a private placement transaction at a price of approximately $18.918 per share, which represented a 10% premium over the volume weighted average price per share of our ordinary shares for the five trading days ending on January 30, 2015. In February 2016, we earned a $15.0 million development milestone payment for achieving 50% enrollment in the Phase 3 twelve-month safety study. As of September 30, 2017, we are 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 revefenacin monotherapy and $45.0 million for future potential combination products. Of the $160.0 million associated with monotherapy, $150.0 million relates to commercialization and $10.0 million relates to regulatory actions in the EU. We do not expect to earn any milestone payments from Mylan in 2017.

We retain worldwide rights to revefenacin delivered through other dosage forms, such as a MDI/DPI, while Mylan has certain rights of first negotiation with respect to our development and commercialization of revefenacin delivered other than via a nebulized inhalation product.  In China, we retain all rights to revefenacin in any dosage form.

Phase 3 Program in COPD

In September 2015, we announced, with our partner Mylan, the initiation of the Phase 3 development program for revefenacin for the treatment of COPD. The Phase 3 development program, designed to support the registration of the product in the U.S., includes two replicate three-month efficacy studies and a single twelve-month safety study. The two efficacy studies examined two doses (88 mcg and 175 mcg) of revefenacin inhalation solution administered once-daily via nebulizer in patients with moderate to severe COPD. The Phase 3 efficacy studies were replicate, randomized, double-blind, placebo-controlled, parallel-group trials designed to provide pivotal efficacy and safety data for once-daily revefenacin over a dosing period of 12 weeks, with a primary endpoint of trough forced expiratory volume in one second (FEV1) on day 85. The Phase 3 safety study was an open-label, active comparator study of 12 months duration.

In October 2016, we announced positive top-line results from the two replicate Phase 3 efficacy studies of revefenacin in more than 1,250 moderate to very severe COPD patients, and in May 2017 we reported additional data from these studies. Both Phase 3 efficacy studies met their primary endpoints, demonstrating statistically significant improvements over placebo in trough FEV1 after 12 weeks of dosing for each of the revefenacin doses studied (88 mcg once daily and 175 mcg once daily). The studies also demonstrated that the 88 mcg and 175 mcg doses of revefenacin were generally well-tolerated, with comparable rates of adverse events and serious adverse events across all treatment groups (active and

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placebo). In July 2017, we announced positive top-line results from the twelve-month safety study in 1,055 COPD patients. Data demonstrated that both the 88 mcg and 175 mcg doses of revefenacin were generally well-tolerated, with low rates of adverse events (AEs) and serious adverse events (SAEs), comparable to those seen with the active comparator. Together, the three studies enrolled approximately 2,305 patients. We expect to file a NDA for revefenacin with the FDA in the fourth quarter of 2017, supported by data from the two replicate Phase 3 efficacy studies and twelve-month safety study.

In March 2017, we initiated a Phase 3b study of revefenacin in patients with low peak inspiratory flow rate (“PIFR”), designed to support commercialization if revefenacin is approved. The study is not required for the planned NDA submission for revefenacin in COPD in the fourth quarter of 2017. We expect to complete this study in the first quarter of 2018.

Velusetrag (TD-5108)

Velusetrag is an oral, investigational medicine developed for gastrointestinal motility disorders. It is a highly selective agonist with high intrinsic activity at the human 5-HT4 receptor. Velusetrag, which was granted Fast Track designation by the FDA for the treatment of symptoms associated with idiopathic and diabetic gastroparesis, is being developed in collaboration with Alfasigma S.p.A. (“Alfasigma”) (formerly Alfa Wassermann S.p.A.).  Positive top-line results from the initial Phase 2 proof-of-concept study under this partnership, which evaluated gastric emptying, safety and tolerability of multiple doses of velusetrag, were announced in April 2014.

In early August 2017, we announced positive top-line results from a 12-week, Phase 2b study of velusetrag characterizing the impact on symptoms and gastric emptying of three oral doses of velusetrag (5, 15 and 30 mg) compared to placebo administered once daily over 12 weeks of therapy. Results from the study demonstrated statistically significant improvements in gastroparesis symptoms and gastric emptying for patients receiving 5 mg of velusetrag as compared to placebo. Patients in the 15 and 30 mg velusetrag study arms demonstrated statistically significant improvements in gastric emptying, but they did not experience statistically significant improvements in gastroparesis symptoms. Velusetrag was shown to be generally well-tolerated, with 5 mg and placebo having comparable rates of adverse events and serious adverse events. We are preparing to meet with regulators to discuss the next phase of development for velusetrag, including validation of our proprietary patient reported outcome instrument (PRO) used to measure symptoms of gastroparesis.

TD-9855

TD-9855 is an investigational norepinephrine and serotonin reuptake inhibitor (“NSRI”). TD-9855 completed a Phase 2 study in patients with fibromyalgia, demonstrating statistically significant and clinically meaningful improvements in pain and core symptoms at the highest dose tested compared to placebo. We are assessing the potential use of TD-9855 in neurogenic orthostatic hypotension (“nOH”), and in May 2016, we initiated a Phase 2a study of TD-9855 in this indication. The Phase 2a study was designed to evaluate postural changes in blood pressure, symptom reduction, and safety and tolerability of single ascending doses in patients with nOH. Based on encouraging treatment responses in the majority of patients enrolled to date, we announced in February 2017 our plan to amend the study design to allow those patients who respond to continue dosing for up to 20 weeks to assess the durability of their response. We expect to complete the extended Phase 2a study by the first half of 2018. In parallel with the Phase 2a study, we plan to seek regulatory support for an orphan drug designation and an expedited development pathway for TD-9855 in nOH.

Intestinally Restricted Pan-Janus Kinase (JAK) Inhibitor Program (TD-1473 and TD-3504)

JAK inhibitors function by inhibiting the activity of one or more of the Janus kinase family of enzymes (JAK1, JAK2, JAK3, TYK2) that play a key role in cytokine signaling. Inhibiting these JAK enzymes interferes with the JAK/STAT signaling pathway and, in turn, modulates the activity of a wide range of pro-inflammatory cytokines. JAK inhibitors are currently approved for the treatment of rheumatoid arthritis and myelofibrosis and have demonstrated therapeutic benefit for patients with ulcerative colitis. However, these products are known to have side effects based on their systemic exposure. Our goal is to develop an orally administered, intestinally restricted pan-JAK inhibitor specifically designed to distribute adequately and predominantly to the tissues of the intestinal tract, treating inflammation in those tissues while minimizing systemic exposure. We are focused on utilizing targeted JAK inhibitors for potential treatment of a range of inflammatory intestinal diseases, including ulcerative colitis. TD-1473 is our lead JAK inhibitor, and we are preparing to initiate a large induction and maintenance study in ulcerative colitis with this compound in 2018. TD-3504 is a back-up compound.

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TD-1473

Phase 1 Single Ascending Dose (SAD) and Multiple Ascending Dose (MAD) Studies

In June 2016, we completed a Phase 1 clinical study of TD-1473, an internally-discovered JAK inhibitor that has demonstrated a high affinity for each of the JAK family of enzymes. The primary objective of the study was to evaluate the safety and tolerability of single ascending and multiple ascending doses of TD-1473 in healthy volunteers. A key secondary objective of the trial was to characterize the pharmacokinetics of TD-1473, including the determination of the amount of TD-1473 that entered systemic circulation following oral administration. Data from the study demonstrated TD-1473 to be generally well tolerated. Study results also demonstrated that systemic exposures of TD-1473 were low relative to that reported for tofacitinib, a JAK inhibitor currently in development for ulcerative colitis. At steady state, the plasma exposures of TD-1473 were significantly lower than the plasma exposure of tofacitinib.

Furthermore, subjects exhibited high stool concentrations of TD-1473, which were comparable to concentrations associated with efficacy in preclinical colitis models. Preclinical studies also demonstrated penetration of TD-1473 into the intestinal wall and membrane. The data generated from the study met our target pharmacokinetic profile and support clinical progression of the compound.

Previously announced findings from a preclinical model of colitis evaluating TD-1473 and tofacitinib demonstrated that both compounds significantly reduced disease activity scores. However, at doses providing similar preclinical efficacy, the systemic exposure of TD-1473 was much lower than that of tofacitinib and TD-1473 did not reduce systemic immune cell counts, in contrast to tofacitinib. Based on these preclinical findings, we believe that TD-1473 represents a potential breakthrough approach to treating ulcerative colitis without the risk generally associated with systemically active therapies.

Phase 1b Study

In late 2016, we announced dosing of the first patient in a Phase 1b clinical study of TD-1473 in patients with moderate to severe ulcerative colitis. The Phase 1b exploratory study in 40 patients is designed to evaluate the safety, tolerability, and pharmacokinetics (PK) of TD-1473 over a 28-day treatment period.  In addition, the study incorporates biomarker analysis and clinical, endoscopic, and histologic assessments to evaluate biological effect.

In early August 2017, we announced encouraging data from the first cohort of patients in the Phase 1b study. Data from the first cohort demonstrated evidence of localized biological activity for TD-1473 after four weeks of treatment, based on a compilation of clinical, endoscopic, and biomarker assessments. Pharmacokinetic data demonstrated minimal systemic exposure, and there was no evidence of systemic immunosuppression. We expect data from the remaining two cohorts in the Phase 1b study in 2018.

TD-3504

TD-3504, the backup compound in our intestinally restricted pan-JAK inhibitor program, is an innovative prodrug of tofacitinib, an investigational JAK inhibitor in development for ulcerative colitis. TD-3504 is chemically distinct from TD-1473 and is designed to release active tofacitinib into the intestinal tract.

Neprilysin (NEP) Inhibitor Program (TD-0714 and TD-1439)

Neprilysin (“NEP”) is an enzyme that degrades natriuretic peptides. These peptides play a protective role in controlling blood pressure and preventing cardiovascular tissue remodeling. Inhibiting NEP may result in clinical benefit for patients, including diuresis, control of blood pressure, and reversing maladaptive changes in the heart and vascular tissue in patients with congestive heart failure. Our primary objective is to develop a NEP inhibitor that could be used across a broad population of patients with cardiovascular and renal diseases, including acute and chronic heart failure and chronic kidney disease, including diabetic nephropathy. We aim to create a platform for multiple combination products with our NEP inhibitor with features that are differentiated from currently available products. Our NEP inhibitor program consists of two compounds (TD-0714 and TD-1439), each of which demonstrated characteristics in line with our target product profile in Phase 1 studies in healthy volunteers.

TD-0714

Phase 1 Single Ascending Dose (SAD) and Multiple Ascending Dose (MAD) Studies

In March 2016, we completed a Phase 1 randomized, double-blind, placebo-controlled, single ascending dose (“SAD”) study in healthy volunteers of our most advanced NEP inhibitor compound, TD-0714. The study was designed to assess the safety, tolerability and pharmacokinetics of TD-0714, as well as measure biomarker evidence of target engagement and the amount of the drug that is eliminated via the kidneys. Results from the SAD study of TD-0714 demonstrate that the

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compound achieved maximal and sustained levels of target engagement for 24 hours after a single-dose, supporting the drug’s potential for once-daily dosing. Target engagement was measured by dose-related increases in the levels of cyclic GMP (cGMP, a well-precedented biomarker of NEP engagement). TD-0714 also demonstrated very low levels of renal elimination, as evidenced by intravenous microtracer testing technology, and a favorable tolerability profile.

In October 2016, we completed a Phase 1 randomized, double-blind, placebo-controlled, multiple ascending dose (“MAD”) study in healthy volunteers of TD-0714. The findings from the MAD study were consistent with the Phase 1 randomized, double-blind, placebo-controlled, SAD study in healthy volunteers we completed in March 2016, demonstrating sustained target engagement, low levels of renal elimination, and a favorable tolerability profile.

TD-1439

TD-1439 is a second NEP inhibitor compound, which is structurally distinct from TD-0714. In the first half of 2017, we announced favorable results from Phase 1 SAD and a Phase 1 MAD studies of TD-1439. In both Phase 1 studies, TD-1439 demonstrated characteristics which met our target product profile, including sustained 24-hour target engagement, low levels of renal elimination and a favorable tolerability profile.

We are currently evaluating next steps for both compounds in our NEPi clinical program. The results from the Phase 1 programs provide confidence for future efficacy studies of either compound in a broad range of cardiovascular and renal diseases, including in patients with compromised renal function.

Selective 5-HT4 Agonist (TD-8954)

Takeda Collaborative Arrangement

In June 2016, we entered into a License and Collaboration Agreement with Millennium Pharmaceuticals, Inc., a Delaware corporation (“Millennium”) (the “Takeda Agreement”), in order to establish a collaboration for the development and commercialization of TD-8954 (TAK-954), a selective 5-HT4 receptor agonist. TD-8954 is being developed for potential use in the treatment of gastrointestinal motility disorders, including short-term intravenous use for enteral feeding intolerance (“EFI”) to achieve early nutritional adequacy in critically ill patients at high nutritional risk, an indication for which the compound received FDA Fast Track designation. Millennium is an indirect wholly-owned subsidiary of Takeda Pharmaceutical Company Limited (TSE: 4502), a publicly-traded Japanese corporation listed on the Tokyo Stock Exchange (collectively with Millennium, “Takeda”). Under the terms of the Takeda Agreement, Takeda will be responsible for worldwide development and commercialization of TD-8954. We received an upfront cash payment of $15.0 million and will be eligible to receive success-based development, regulatory and sales milestone payments by Takeda. The first $110.0 million of potential milestones are associated with the development, regulatory and commercial launch milestones for EFI or other intravenously dosed indications. We will also be eligible to receive a tiered royalty on worldwide net sales by Takeda at percentage royalty rates ranging from low double-digits to mid-teens.

Other Programs

Economic Interest in GSK-Partnered Respiratory Programs

We are entitled to receive an 85% economic interest in any future payments that may be made by GSK (pursuant to its agreements with Innoviva) relating to the GSK-Partnered Respiratory Programs , which Innoviva partnered with GSK and assigned to Theravance Respiratory Company, LLC (“TRC”) in connection with Innoviva’s separation of its biopharmaceutical operations into its then wholly-owned subsidiary Theravance Biopharma. The GSK-Partnered Respiratory Programs consist primarily of the Trelegy Ellipta program and the Inhaled Bifunctional Muscarinic Antagonist-Beta2 Agonist (“MABA”) program, each of which are described in more detail below. We are entitled to this economic interest through our equity ownership in TRC. Our economic interest does not include any payments associated with RELVAR® ELLIPTA®/BREO® ELLIPTA®, ANORO® ELLIPTA® or vilanterol monotherapy. The following information regarding the Closed Triple and the MABA program is based solely upon publicly available information and may not reflect the most recent developments under the programs.

Trelegy Ellipta (the combination of fluticasone furoate/umeclidinium bromide/vilanterol, previously referred to as the Closed Triple)

Trelegy Ellipta seeks to provide the activity of an inhaled corticosteroid (FF) plus two bronchodilators (UMEC, a LAMA, and VI, a long-acting beta2 agonist, or LABA) in a single delivery device administered once-daily. We are entitled to receive an 85% economic interest in the royalties payable by GSK to TRC on worldwide net sales, which royalties are upward-tiering from 6.5% to 10%.

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Innoviva and GSK conducted two global pivotal Phase 3 studies of Trelegy Ellipta in COPD, the IMPACT study and the FULFIL study. The IMPACT study, which enrolled 10,355 COPD patients, was initiated in July 2014. In September 2017, GSK and Innoviva disclosed positive headline results from the IMPACT study, in which data demonstrated statistically significant reductions in the annual rate of on-treatment moderate/severe exacerbations for Trelegy Ellipta (100/62.5/25mcg) when compared with two, once-daily dual COPD therapies RELVAR® ELLIPTA®/BREO® ELLIPTA® (FF/VI), an ICS/LABA combination, and ANORO® ELLIPTA® (UMEC/VI), a LAMA/LABA combination. In addition, statistically significant improvements were observed across all pre-specified key secondary endpoints and associated treatment comparisons. The FULFIL study, which enrolled 1,810 COPD patients, was initiated in February 2015. In June 2016, GSK and Innoviva disclosed positive top-line results from the FULFIL study, in which data demonstrated superiority of Trelegy Ellipta as compared to twice-daily SYMBICORT® TURBOHALER® (budesonide/formoterol) in improving lung function and health-related quality of life in COPD patients. In September 2017, GSK and Innoviva announced the U.S. FDA approved Trelegy Ellipta for the long-term, once-daily, maintenance treatment of appropriate patients with COPD. In December 2016, GSK and Innoviva announced the filing of a Marketing Authorization Application (“MAA”) in the EU for a Trelegy Ellipta product for patients with COPD. In September 2017, the companies announced receipt of a positive opinion from the European Medicines Agency’s Committee for Medicinal Products for Human Use, recommending marketing authorization for a Trelegy Ellipta product. Additionally, in December 2016, GSK and Innoviva announced the initiation of the Phase 3 (CAPTAIN) study of Trelegy Ellipta in patients with asthma. The CAPTAIN study is expected to be completed in 2018.

Inhaled Bifunctional Muscarinic Antagonist-Beta2 Agonist (MABA)

GSK961081 (‘081), also known as batefenterol, is an investigational, single-molecule bifunctional bronchodilator with both muscarinic antagonist and beta2 receptor agonist activity that was discovered by us when we were part of Innoviva.

If a single-agent MABA medicine containing ‘081 is successfully developed and commercialized, we are entitled to receive an 85% economic interest in the royalties payable by GSK to TRC on worldwide net sales, which royalties range between 10% and 20% of annual global net sales up to $3.5 billion, and 7.5% for all annual global net sales above $3.5 billion. If a MABA medicine containing ‘081 is commercialized only as a combination product, such as ‘081/FF, the royalty rate is 70% of the rate applicable to sales of the single-agent MABA medicine. If a MABA medicine containing ‘081 is successfully developed and commercialized in multiple regions of the world, TRC is eligible to receive contingent milestone payments from GSK. The agreements allow for total milestones of up to $125.0 million for a single-agent medicine and an incremental $125.0 million for a combination medicine. Of these amounts, $112.0 million in potential milestones remain for a single-agent medicine, and $122.0 million remain for a combination medicine. In each case, we would be entitled to receive an 85% economic interest in any such payments.

Theravance Respiratory Company, LLC (“TRC”)

Our equity interest in TRC is the mechanism by which we are entitled to the 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 by Innoviva. The drug programs assigned to TRC include all Trelegy Ellipta products and the MABA program, as monotherapy and in combination with other therapeutically active components, such as an inhaled corticosteroid (“ICS”), as well as any other product or combination of products that may be discovered and developed in the future under these GSK agreements.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Other than below, there have been no material changes to the critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the year ended December 31, 2016.

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Investments in Non-Marketable Equity Securities

Non-marketable equity securities are recorded at cost in long-term assets, and we periodically review our non-marketable equity securities for impairment by determining whether impairment indicators are present. Common impairment indicators include a significant adverse change in the regulatory or economic environment in which the investee entity operates, inadequacies in the ability of the investee to raise cash to fund operating activities, or other working capital deficiencies.

If we conclude that a non-marketable equity security is impaired, we determine whether such impairment is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline in value is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable and that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Factors we consider to make such determination include the duration and severity of the impairment, the reason for the decline in value and the potential recovery period and our intent to sell. If any impairment is considered other-than-temporary, we will write-down the asset to its fair value and record the corresponding charge as “Other-than-temporary impairment loss”.

As of June 30, 2017, we identified indicators of impairment were present for our investment in non-marketable equity security of TREKtx. In the current quarter, we concluded that the impairment of this investment was other-than-temporary due to TREKtx’s challenges in securing additional funding and, as a result, we recorded an impairment charge. Due to the uncertainty in the recovery of the investment, we recorded an impairment charge for the full carrying value of the investment. The $8.0 million other-than-temporary impairment charge is reported as “Other-than-temporary impairment loss” on the Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2017. As the inputs utilized for the assessment are not based on observable market data, the determination of fair value of this cost-method investment is classified within Level 3 of the fair value hierarchy. To determine the fair value of this investment, we used all available financial information related to the investee, including liquidity, rate of cash use, and ability to secure additional funding.

Results of Operations

Product Sales and Revenue from Collaborative Arrangements

Product sales and revenue from collaborative arrangements, as compared to the comparable period in the prior year, were as follows:

Revenue from product sales increased by $0.2 million for the three months ended September 30, 2017 and decreased by $1.9 million for the nine months ended September 30, 2017, compared to the same periods in 2016. The $0.2 million increase for the three months ended September 30, 2017 was primarily due to increased global sales of $0.5 million which was partially offset by a $0.3 million decrease attributed to the impact of generic daptomycin in the U.S. outpatient market. The $1.9 million decrease for the nine months ended September 30, 2017 resulted primarily from reduced volume attributed to the impact of generic daptomycin in the U.S. outpatient market.

Revenue from collaborative arrangements decreased by $15.0 million and $30.2 million for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016.  The $15.0 million decrease for the three months ended September 30, 2017 was primarily attributed to a $15.1 million upfront payment from a collaboration arrangement with Takeda in the third quarter of 2016. The $30.2 million decrease for the nine months ended September 30, 2017 was primarily attributed to the $15.1 million Takeda upfront payment, as described above, and a $15.0 million milestone payment received from Mylan in 2016 for the achievement of 50% enrollment in the Phase 3 twelve-month safety study for revefenacin.

Cost of Goods Sold

Cost of goods sold, as compared to the comparable period in the prior year, was as follows:

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Cost of goods sold increased by $0.7 million and $1.2 million for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. The $0.7 million increase for the three months ended September 30, 2017 was primarily due to increased sales volume and lower costs of goods sold in the comparable period in 2016 due to sale of VIBATIV vials that were previously written off.  The $1.2 million increase for the nine months ended September 30, 2017 was also primarily due to lower cost of goods sold in the comparable period in 2016 due to sale of VIBATIV vials that were previously written off.

Research and Development

Our research and development (“R&D”) expenses consist primarily of employee-related costs, external costs, and various allocable expenses. We budget total R&D expenses on an internal department level basis, and we manage and report our R&D activities across the following four cost categories:

1)                                     Employee-related costs, which include salaries, wages and benefits;

2)                                     Share-based compensation, which includes expenses associated with our equity plans;

3)                                     External-related costs, which include clinical trial related expenses, other contract research fees, consulting fees, and contract manufacturing fees; and

4)                                     Facilities and other, which include laboratory and office supplies, depreciation and other allocated expenses, which include general and administrative support functions, insurance and general supplies.

The following table summarizes our R&D expenses incurred, net of reimbursements from collaboration partners, during the periods presented:

R&D expenses increased by $7.4 million and $23.1 million for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. The increases were primarily related to increases in employee-related and external-related costs as we continue to fund advancement across all stages of our development pipeline, including the conduct of the Phase 3b PIFR study of revefenacin and the Phase 1b study of the JAK inhibitor program. Included in the increase of employee-related costs was accrual of our long-term retention and incentive cash bonus awards granted to certain employees in 2016. The payout of such awards is dependent on the company meeting its critical operating goals and objectives during a five-year period from 2016 to December 31, 2020.

Under certain of our collaborative arrangements, we receive partial reimbursement of employee-related costs and external costs, which have been reflected as a reduction of R&D expenses of $5.8 million and $21.3 million for the three months ended September 30, 2017 and 2016, respectively, and $17.7 million and $82.3 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease in expense reimbursements for both periods was primarily attributed to the completion of the two replicate three-month efficacy studies and the long term safety study for revefenacin, a program we are co-developing with Mylan.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, as compared to the comparable period in the prior year, were as follows:

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Selling, general and administrative expenses increased by $0.7 million and $1.9 million for the three and nine months ended September 30, 2017, respectively compared to the same period in 2016, primarily due to increase in employee-related costs associated with the accrual of our long-term retention and incentive cash bonus awards granted to certain employees in 2016. This increase was partially offset by a reduction in external expenses related to our commercialization activities. Share-based compensation within selling, general and administrative expenses was $5.7 million and $5.0 million for the three months ended September 30, 2017 and 2016, respective, and $16.3 million and $16.1 million for the nine months ended September 30, 2017 and 2016, respectively.

Interest Expense

NM: Not Meaningful

Interest expense for the three and nine months ended September 30, 2017 increased to $2.1 million and $6.4 million, respectively, due to the November 2016 issuance of $230.0 million principal amount of 3.250% convertible senior notes due 2023. We had no interest-bearing debt for the comparable periods in 2016.

Other-Than-Temporary Impairment Loss

NM: Not Meaningful

For the three and nine months ended September 30, 2017, we recognized an impairment loss of $8.0 million on our investment in TREKtx, a non-marketable equity security, which we determined to be other-than-temporary.  We had no such loss recorded in the comparable periods in 2016.

Provision for Income Taxes

Our effective tax rate for the nine months ended September 30, 2017 was approximately (3.5)%. Although we incurred operating losses on a consolidated basis, the provision for income taxes was due to the uncertain tax positions taken with respect to transfer pricing and tax credits.

Liquidity and Capital Resources

We have financed our operations primarily through public offering of equity and debt securities, private placements of equity, revenue from collaboration arrangements and revenue from product sales. As of September 30, 2017, we had approximately $434.4 million in cash and investments in marketable securities. Also, as of September 30, 2017, we had outstanding $230.0 million in aggregate principal amount of 3.250% convertible senior notes due 2023.

We expect to continue to incur net losses over the next several years as we continue our drug discovery efforts and incur significant preclinical and clinical development costs related to our current product candidates and commercialization and development costs relating to VIBATIV. In particular, to the extent we advance our product candidates into and through later-stage clinical studies without a partner, we will incur substantial expenses. We expect the clinical development of our key development programs will require significant investment in order to continue to advance in clinical development. In the past, we have received a number of significant payments from collaboration agreements and other significant transactions. In the future, we expect to receive revenues from product sales and potential substantial payments from future collaboration transactions if the drug candidates in our pipeline achieve positive clinical or regulatory outcomes. In addition, we also expect to begin receiving investment income arising from our economic interest in royalties payable by GSK to TRC. Our current

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business plan is also subject to significant uncertainties and risks as a result of, among other factors, the sales levels of VIBATIV, clinical program outcomes, whether, when and on what terms we are able to enter into new collaboration arrangements, expenses being higher than anticipated, unplanned expenses, cash receipts being lower than anticipated, and the need to satisfy contingent liabilities, including litigation matters and indemnification obligations.

Adequacy of cash resources to meet future needs

We expect our cash and cash equivalents and marketable securities will fund our operations for at least the next 12 months based on current operating plans and financial forecasts.

If our current operating plans or financial forecasts change, we may require additional funding sooner in the form of public or private equity offerings, debt financings or additional collaborations and licensing arrangements. However, future financing may not be available in amounts or on terms acceptable to us, if at all.

Without adequate financial resources to fund our operations as presently conducted, we may be required to relinquish rights to our technologies, product candidates or territories, or grant licenses on terms that are not favorable to us, in order to raise additional funds through collaborations or licensing arrangements. We may also have to sequence pre-clinical and clinical studies as opposed to conducting them concomitantly in order to conserve resources, or delay, reduce or eliminate one or more of our research or development programs and reduce overall overhead expenses. In addition, we may have to make reductions in our workforce and may be prevented from continuing our discovery, development and commercialization efforts and exploiting other corporate opportunities.

Cash Flows

Cash flows, as compared to the comparable period in the prior year, were as follows:

Cash flows used in operating activities

Net cash used in operating activities was $156.9 million for the nine months ended September 30, 2017, consisting primarily of net loss of $198.5 million, adjusted for non-cash items such as $31.4 million for share-based compensation expense, $8.0 million for other-than-temporary impairment loss on our non-marketable equity securities and $1.4 million of net cash outflow related to changes in operating assets and liabilities for the nine months ended September 30, 2017.

Net cash used in operating activities was $70.9 million for the nine months ended September 30, 2016, consisting primarily of net loss of $123.3 million, adjusted for non-cash items such as $31.1 million for share-based compensation expense, and $19.3 million of net cash inflow related to changes in operating assets and liabilities. The $19.3 million net cash inflow related to changes in operating assets and liabilities included $9.6 million in net tax refunds during the nine months period ended September 30, 2016.

Cash flows used in investing activities

Net cash used in investing activities was $97.6 million for the nine months ended September 30, 2017, consisting primarily of net cash outflows resulting from the purchases and maturities of marketable securities of $95.4 million.

Net cash used in investing activities was $102.0 million for the nine months ended September 30, 2016, consisting of outflows related to net purchases and maturities of marketable securities of $100.3 million and by purchases of property, equipment, and capitalized software of $1.7 million.

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Cash flows provided by financing activities

Net cash provided by financing activities was $1.0 million for the nine months ended September 30, 2017, consisting of net cash inflows of $8.4 million from the proceeds from employee option exercises and employee stock plan purchases which was partially offset by the sale of shares to satisfy tax withholding obligations of $7.3 million.

Net cash provided by financing activities was $146.8 million for the nine months ended September 30, 2016, consisting primarily of $107.9 million related to the sale of ordinary shares through our public equity offering, $23.0 million related to the sale of ordinary shares to GSK, and $14.3 million through our at-the-market offering program.

Commitments and Contingencies

We indemnify our officers and directors for certain events or occurrences, subject to certain limits. We believe the fair value of these indemnification agreements is minimal. Accordingly, we have not recognized any liabilities relating to these agreements as of September 30, 2017.

In 2016, we granted a long-term retention and incentive restricted share awards (“RSAs”) and restricted share units (“RSUs”) to members of senior management and a long-term retention and incentive cash bonus awards to certain employees. The vesting and payout of such awards is dependent on the company meeting its critical operating goals and objectives during a five-year period from 2016 to December 31, 2020. These goals are strategically important for the company, and we believe the goals, if achieved, will increase shareholder value. The awards have dual triggers of vesting based upon the achievement of these goals and continued employment, and they are broken into three separate tranches. The maximum potential expense associated with all three tranches of this program is $35.5 million related to share-based compensation expense and $54.2 million related to cash bonus expense, which would be recognized in increments based on achievement of the performance conditions. The maximum potential expense associated with the first tranche of the program is $6.1 million in share-based compensation expense and $13.6 million in cash bonus expense. We have determined that achievement of the requisite performance conditions for the first tranche of the awards is probable due to multiple advancements of programs within our development pipeline, and as a result, we have recognized $3.2 million in share-based compensation and $7.3 million in cash bonus expense, as of September 30, 2017.

Off-Balance Sheet Arrangements

There have been no material changes in our off-balance sheet arrangements from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 1, 2017.

Contractual Obligations and Commercial Commitments

In the table below, we set forth our enforceable and legally binding, significant obligations and future commitments, as well as obligations related to all contracts that we are likely to continue, regardless of the fact that they were cancelable as of September 30, 2017. Some of the figures that we include in this table are based on management’s estimate and assumptions about these obligations, including their duration. Because these estimates and assumptions are necessarily subjective, the obligations we will actually pay in future periods may vary from those reflected in the table.