Innoviva, Inc.
Annual Report 2011

Plain-text annual report

Use these links to rapidly review the document Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PART IV Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2011 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 No. 0-30319 THERAVANCE, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 94-3265960 (I.R.S. Employer Identification No.) 901 Gateway Boulevard, South San Francisco, California (Address of principal executive offices) 94080 (Zip Code) Registrant's telephone number, including area code: 650-808-6000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of Each Class Common Stock $0.01 Par Value Name of Each Exchange On Which Registered Nasdaq Global Market SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No o Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ☒ 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 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 205 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 and post such files). Yes ☒ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒ Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check One): Large accelerated filer ☒ Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company 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 ☒ The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the closing price of the Common Stock on the Nasdaq Global Market on June 30, 2011 was $961,098,794. On February 17, 2012, there were 86,149,162 shares of the registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Specified portions of the registrant's definitive Proxy Statement to be issued in conjunction with the registrant's 2012 Annual Meeting of Stockholders, which is expected to be filed not later than 120 days after the registrant's fiscal year ended December 31, 2011, are incorporated by reference into Part III of this Annual Report. Except as expressly incorporated by reference, the registrant's Proxy Statement shall not be deemed to be a part of this Annual Report on Form 10-K. Table of Contents THERAVANCE, INC. 2011 Form 10-K Annual Report Table of Contents PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Item 5. PART II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Item 10. Item 11. Item 12. Item 13. Item 14. PART III Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Exhibits and Financial Statement Schedules Item 15. Signatures Exhibits PART IV 2 3 15 34 34 34 34 35 38 39 55 56 89 89 92 92 92 92 92 92 93 94 Table of Contents Special Note regarding Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve substantial risks, uncertainties and assumptions. All statements in this Annual Report on Form 10-K, 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 could be forward-looking statements. The words "anticipates," "believes," "designed," "estimates," "expects," "goal," "intends," "may," "plans," "projects," "pursuing," "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. 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 below in "Risk Factors" in Item 1A, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 and elsewhere in this Annual Report on Form 10-K. Our forward-looking statements in this Annual Report on Form 10-K are based on current expectations and we do not assume any obligation to update any forward-looking statements. ITEM 1. BUSINESS Overview PART I Theravance is a biopharmaceutical company with a pipeline of internally discovered product candidates and strategic collaborations with pharmaceutical companies. We are focused on the discovery, development and commercialization of small molecule medicines across a number of therapeutic areas including respiratory disease, bacterial infections, and central nervous system (CNS)/pain. Our key programs include: RELOVAIR™, LAMA/LABA ('719/vilanterol (VI)) and MABA (Bifunctional Muscarinic Antagonist-Beta2 Agonist), each partnered with GlaxoSmithKline plc (GSK), and our oral Peripheral Mu Opioid Receptor Antagonist (PµMA) program. By leveraging our proprietary insight of multivalency to drug discovery, we are pursuing a best-in-class strategy designed to discover superior medicines in areas of significant unmet medical need. Our headquarters are located at 901 Gateway Boulevard, South San Francisco, California 94080. Theravance was incorporated in Delaware in November 1996 under the name Advanced Medicine, Inc. and began operations in May 1997. The Company changed its name to Theravance, Inc. in April 2002. Our strategy focuses on the discovery, development and commercialization of medicines with superior efficacy, convenience, tolerability and/or safety. Our proprietary approach combines chemistry and biology to discover new product candidates using our expertise in multivalency. Multivalency refers to the simultaneous attachment of a single molecule to multiple binding sites on one or more biological targets. When compared to monovalency, whereby a molecule attaches to only one binding site, multivalency can significantly increase a compound's potency, duration of action and/or selectivity. Multivalent compounds generally consist of several individual small molecules, at least one of which is biologically active when bound to its target, joined by linking components. In addition, we believe that we can enhance the probability of successfully developing and commercializing medicines by identifying at least two structurally different product candidates, whenever practicable, in each therapeutic program. 3 Table of Contents In total, our research and development expenses, including stock-based compensation expense, incurred for all of our therapeutic programs in 2011, 2010, and 2009 were $103.5 million, $75.1 million and $77.5 million, respectively. We have entered into the following respiratory collaboration arrangements with GSK: In November 2002, we entered into our long-acting beta2 agonist (LABA) collaboration with GSK to develop and commercialize once-daily LABA products for the treatment of chronic obstructive pulmonary disease (COPD) and asthma. For the treatment of COPD, the collaboration is developing combination products, RELOVAIR™ and the LAMA/LABA '719/VI. For the treatment of asthma, the collaboration is developing RELOVAIR™. RELOVAIR™ is an investigational once-daily inhaled corticosteroid (ICS)/LABA combination treatment, comprising fluticasone furoate and vilanterol (FF/VI). '719/VI is an investigational once-daily combination medicine consisting of the long-acting muscarinic antagonist (LAMA) GSK573719 ('719) and the LABA, VI. In March 2004, we entered into our strategic alliance agreement with GSK under which GSK received an option to license certain of our discovery programs on pre-determined terms and on an exclusive, worldwide basis. In 2005, GSK licensed our MABA program under this agreement and in October 2011, we and GSK expanded the MABA program by adding six additional Theravance-discovered preclinical MABA compounds. Astellas Pharma Inc. (Astellas) recently exercised its right to terminate our 2005 collaboration arrangement for the development and commercialization of VIBATIV® (telavancin), a bactericidal, once-daily injectable antibiotic developed by us for the treatment of Gram-positive infections, including methicillin- resistant Staphylococcus aureus. The U.S. Food and Drug Administration (FDA) has approved VIBATIV® for the treatment of complicated skin and skin structure infections (cSSSI) caused by susceptible Gram-positive bacteria, including both methicillin-resistant (MRSA) and methicillin-susceptible (MSSA) strains of Staphylococcus aureus, in adult patients. VIBATIV® is also approved in Canada for the treatment of cSSSI in adult patients. In September 2011, the European Commission granted marketing authorization for VIBATIV® 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. However, in February 2012 the Committee for Medicinal Products for Human Use (CHMP) recommended to the European Commission that it suspend this marketing authorization because the single-source VIBATIV® drug product supplier does not meet the Good Manufacturing Practice (GMP) requirements to allow the manufacture of VIBATIV®. We currently are focused on evaluating commercialization alternatives for VIBATIV®, including re-partnering, and re-establishing consistent VIBATIV® product supply. Due to the supplier's manufacturing issues, VIBATIV® is currently subject to critical product shortages and regional supply outages in the U.S. If the issues at the manufacturer are not promptly resolved, obtaining supply would require identifying and qualifying an alternative manufacturer, which could take 12 to 24 months. Our Programs Our drug discovery efforts are based on the principles of multivalency. Multivalency involves the simultaneous attachment of a single molecule to multiple binding sites on one or more biological targets. We have applied our expertise in multivalency to discover product candidates and lead compounds in a wide variety of therapeutic areas. We have conducted extensive research in both relevant laboratory and animal models to demonstrate that by applying the design principles of multivalency, we can achieve significantly stronger and more selective attachment of our compounds to a variety of intended biological targets. We believe that medicines that attach more strongly and selectively to their targets will be superior to many medicines by substantially improving potency, duration of action and/or safety. 4 Table of Contents Prior to entering into human clinical studies, a product candidate undergoes preclinical studies which include formulation development or safety testing in animal models. The table below summarizes the status of our most advanced product candidates for internal development or co-development. Key: • • • • • • • • • • • ADHD: Attention Deficit Hyperactivity Disorder CNS: Central Nervous System COPD: Chronic Obstructive Pulmonary Disease GI: Gastrointestinal GP-Ceph: Glycopeptide-Cephalosporin ICS: Inhaled Corticosteroid LABA: Long-Acting Beta2 Agonist LAMA: Long-Acting Muscarinic Antagonist MABA: Bifunctional Muscarinic Antagonist-Beta2 Agonist MARIN: Monoamine Reuptake Inhibitor PµMA: Peripheral Mu Opioid Receptor Antagonist In the table above: • Development Status indicates the most advanced stage of development that has been completed or is in process. 5 Table of Contents • • • • • Phase 1 indicates initial clinical safety testing in healthy volunteers, or studies directed toward understanding the mechanisms of action of the drug. Phase 2 indicates further clinical safety testing and preliminary efficacy testing in a limited patient population. Phase 3 indicates evaluation of clinical efficacy and safety within an expanded patient population. Filed indicates that a New Drug Application or European Marketing Authorization Application has been submitted to and accepted for filing by the FDA or European Medicines Agency, respectively. We consider programs in which at least one compound has successfully completed a Phase 2a study showing efficacy and tolerability as having achieved Proof-of-Concept. Our Relationship with GlaxoSmithKline LABA collaboration with GSK In November 2002, we entered into our LABA collaboration with GSK to develop and commercialize once-daily LABA products for the treatment of COPD and asthma. For the treatment of COPD, the collaboration is developing combination products, RELOVAIR™ and the LAMA/LABA '719/VI. For the treatment of asthma, the collaboration is developing RELOVAIR™. RELOVAIR™ is an investigational once-daily combination medicine consisting of a LABA, VI, previously referred to as GW642444 or '444, and an ICS, fluticasone furoate (FF). The LAMA/LABA, '719/VI, is an investigational once-daily combination medicine consisting of the LAMA, '719, and the LABA, VI. The RELOVAIR™ program is aimed at developing a once-daily combination LABA/ICS to succeed GSK's Advair®/Seretide™ (salmeterol and fluticasone as a combination) franchise, which reported 2011 sales of approximately $8.1 billion, and to compete with Symbicort® (formoterol and budesonide as a combination), which reported 2011 sales of approximately $3.1 billion. '719/VI, which is also a combination product, is targeted as an alternative treatment option to Spiriva® (tiotropium), a once-daily, single-mechanism bronchodilator, which reported 2010 sales of approximately $3.8 billion. The current lead product candidates in the LABA collaboration, VI and FF, were discovered by GSK. In the event that VI is successfully developed and commercialized, we will be obligated to make milestone payments to GSK which could total as much as $220.0 million if both a single-agent and a combination product or two different combination products are launched in multiple regions of the world. If global regulatory authorities accept the applications for RELOVAIR™, which we anticipate will be filed by GSK beginning in mid-2012, a portion of these potential milestone payments could be payable to GSK within the next two years. We are entitled to annual royalties from GSK of 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion. Sales of single-agent LABA medicines and combination medicines would be combined for the purposes of this royalty calculation. For other products combined with a LABA from the LABA collaboration, such as '719/VI, royalties are upward tiering and range from the mid-single digits to 10%. However, if GSK is not selling a LABA/ICS combination product at the time that the first other LABA combination is launched, then the royalties described above for the LABA/ICS combination medicine would be applicable. In connection with the LABA collaboration, in 2002, Glaxo Group Limited, an affiliate of GSK, purchased shares of our Series E preferred stock for an aggregate purchase price of $40.0 million. 6 Table of Contents 2004 Strategic Alliance with GSK In March 2004, we entered into our strategic alliance with GSK. Under this alliance, GSK received an option to license exclusive development and commercialization rights to product candidates from certain of our discovery programs on pre-determined terms and on an exclusive, worldwide basis. Upon GSK's decision to license a program, GSK is responsible for funding all future development, manufacturing and commercialization activities for product candidates in that program. In addition, GSK is obligated to use diligent efforts to develop and commercialize product candidates from any program that it licenses. If the program is successfully advanced through development by GSK, we are entitled to receive clinical, regulatory and commercial milestone payments and royalties on any sales of medicines developed from the program. If GSK chooses not to license a program, we retain all rights to the program and may continue the program alone or with a third party. In 2005, GSK licensed our MABA program for the treatment of COPD, and in October 2011, we and GSK expanded the MABA program by adding six additional Theravance-discovered preclinical MABA compounds (the "Additional MABAs"). GSK's development, commercialization, milestone and royalty obligations under the strategic alliance remain the same with respect to '081, the lead compound in the MABA program. GSK is obligated to use diligent efforts to develop and commercialize at least one MABA within the MABA program, but may terminate progression of any or all Additional MABAs at any time and return them to us, at which point we may develop and commercialize such Additional MABAs alone or with a third party. Both GSK and we have agreed not to conduct any MABA clinical studies outside of the strategic alliance so long as GSK is in possession of the Additional MABAs. If a single-agent MABA medicine containing '081 is successfully developed and commercialized, we are entitled to receive royalties from GSK of 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 a MABA/ICS, the royalty rate is 70% of the rate applicable to sales of the single-agent MABA medicine. For single-agent MABA medicines containing an Additional MABA, we are entitled to receive royalties from GSK of between 10% and 15% of annual global net sales up to $3.5 billion, and 10% for all annual global net sales above $3.5 billion. For combination products containing an Additional MABA, such as a MABA/ICS, the royalty rate is 50% 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, we could earn total milestone payments up to $125.0 million for a single-agent medicine and up to $250.0 million for both a single-agent and a combination medicine. If a MABA medicine containing an Additional MABA is successfully developed and commercialized in multiple regions of the world, we could earn total milestone payments up to $129.0 million. In connection with the expansion of the MABA program, GSK relinquished its option right on our MonoAmine Reuptake Inhibitor (MARIN) program and Angiotensin Receptor-NEP Inhibitor (ARNI) program. GSK has no further option rights on any of our research or development programs under the strategic alliance. In May 2004, GlaxoSmithKline LLC, an affiliate of GSK, purchased 6,387,096 shares of our Class A common stock for an aggregate purchase price of $108.9 million and, upon the closing of our initial public offering on October 8, 2004, GlaxoSmithKline LLC purchased an additional 433,757 shares of Class A common stock for an aggregate purchase price of $6.9 million. In November 2010 Glaxo Group Limited, an affiliate of GSK, purchased 5,750,000 shares of our Common Stock for an aggregate purchase price of $129.4 million. 7 Table of Contents GSK Conversion of our Class A Common Stock and Purchases of Common Stock under our Governance Agreement with GSK In July 2011, GSK converted all of the shares of our Class A common stock held by its affiliates into 9,401,499 shares of our common stock on a one share- for-one share basis in accordance with the terms of our restated certificate of incorporation. In addition, Glaxo Group Limited purchased shares of our common stock pursuant to its periodic "top-up" rights under our governance agreement with GSK dated June 4, 2004, as amended, as follows: Purchase dates February 24, 2011 May 3, 2011 August 2, 2011 November 1, 2011 Program Highlights Respiratory Programs with GSK RELOVAIR™ Through December 31, 2011 Common Stock Shares Purchased Aggregate Amounts (in thousands) 152,278 $ 261,299 $ 102,466 $ 58,411 $ 3,609 6,689 2,020 1,298 RELOVAIR™ is an investigational once-daily ICS/LABA combination treatment, comprising FF/VI, currently in development for the treatment of patients with COPD or asthma. In January 2012, we and GSK announced that GSK intends to commence global regulatory filings in COPD and asthma beginning in mid-2012 based upon the initial outcomes from pivotal Phase 3 studies for once-daily RELOVAIR™ in COPD and asthma. For asthma, GSK will continue discussions with the FDA on the regulatory requirements for a U.S. asthma indication. LAMA/LABA Combination (GSK573719/Vilanterol or '719/VI) Enrollment is complete for the seven ongoing studies in the Phase 3 program for the once-daily LAMA/LABA dual bronchodilator '719/VI. '719/VI combines two bronchodilators currently under development—'719, a LAMA and VI, a LABA. These two molecules provide two mechanisms of bronchodilation for patients with COPD: antagonism of acetylcholine muscarinic receptors and agonism of beta2 adrenoreceptors. The LAMA/LABA Phase 3 program, which will evaluate over 5,000 patients with COPD globally, consists of a 52-week study to evaluate the long term safety and tolerability of '719 (125mcg) alone, as well as the combination '719/VI (125/25mcg), two large 6-month pivotal studies that will compare improvements in lung function between '719/VI, its components and placebo, two 6-month studies to compare the combination with its components and tiotropium and two studies to assess the effect of '719/VI on exercise endurance. The Phase 3 program will investigate two doses of '719 (125mcg and 62.5mcg) and two doses of the combination '719/VI (125/25mcg and 62.5/25mcg). Inhaled Bifunctional Muscarinic Antagonist-Beta2 Agonist (MABA) GSK961081 ('081), the lead compound in the MABA program with GSK, is a single molecule bifunctional bronchodilator with both muscarinic antagonist and beta2 receptor agonist activity. In February 2012, we announced topline results from a Phase 2b COPD study with '081. 8 Table of Contents In October 2011, we and GSK amended the 2004 Strategic Alliance Agreement to expand the MABA program. We granted to GSK an exclusive license to develop and commercialize additional preclinical MABA compounds discovered by Theravance. We received an upfront license payment of $1.0 million and have the potential to receive clinical, regulatory and commercial milestone payments as well as royalties on worldwide net sales if one of these MABA compounds is successfully commercialized. In connection with this amendment, we regained full rights to our MonoAmine Reuptake INhibitor (MARIN) program, which is currently in Phase 2 development, and our Angiotensin Receptor-NEP Inhibitor (ARNI) program in preclinical development. Bacterial Infections Program VIBATIV® (telavancin) for injection On January 6, 2012, Astellas exercised its right to terminate our VIBATIV® collaboration agreement and we regained full global rights to VIBATIV®, our once-daily injectable lipoglycopeptide antibiotic approved in the U.S. and Canada. We currently are focusing our efforts on evaluating commercialization alternatives for VIBATIV®, including re-partnering, and re-establishing consistent VIBATIV® product supply. Central Nervous System (CNS)/Pain Program Oral Peripheral Mu Opioid Receptor Antagonist (PµMA)—TD-1211 Enrollment is progressing in the Phase 2b program, which will assess the safety, tolerability and clinical activity of TD-1211 in patients with opioid-induced constipation. This program is evaluating several doses and dose regimens to provide information for the design of the Phase 3 program. TD-1211 is an investigational once-daily, orally-administered, peripherally selective, multivalent inhibitor of the mu opioid receptor designed to alleviate gastrointestinal side effects of opioid therapy without affecting analgesia. MonoAmine Reuptake INhibitor (MARIN)—TD-9855 In December 2011, we announced the initiation of an Attention-Deficit/Hyperactivity Disorder (ADHD) Phase 2 proof-of-concept study with TD-9855, the lead compound in our MARIN program. This Phase 2 study will evaluate the safety and efficacy of two different doses of TD-9855 in adult male patients with ADHD. TD-9855 is an investigational norepinephrine and serotonin reuptake inhibitor (NSRI) discovered by Theravance for the treatment of CNS conditions such as ADHD and chronic pain. Theravance Respiratory Program Long-Acting Muscarinic Antagonist (LAMA)—TD-4208 In November 2011, we announced positive topline results from a Phase 2a single-dose COPD study of TD-4208, an investigational inhaled LAMA, discovered by Theravance. In this study, TD-4208 met the primary endpoint by demonstrating a statistically significant mean change from baseline in peak forced expiratory volume in one second (FEV1) compared to placebo, and was generally well tolerated. Other Programs In addition to the programs listed above, we have other clinical-stage programs for bacterial infections, cognitive disorders and gastrointestinal motility. 9 Table of Contents TD-1792 is our investigational heterodimer antibiotic that combines the antibacterial activities of a glycopeptide and a beta-lactam in one molecule. The goal of our program with TD-1792 is to develop a next-generation antibiotic for the treatment of serious infections caused by Gram-positive bacteria. In cognitive disorders, we are evaluating compound TD-5108 as a potential treatment for Alzheimer's disease. TD-5108 has successfully completed a Phase 1 study assessing CNS penetration. Our Gastrointestinal (GI) Motility Dysfunction program is dedicated to finding new medicines for GI motility disorders such as chronic idiopathic constipation (CIC) and other disorders related to reduced gastrointestinal motility. Our lead compound in this area is TD-5108, a highly selective 5-HT4 receptor agonist that has successfully completed a 400 patient Phase 2 proof-of-concept study in CIC. The back-up compound in this program, TD-8954, has completed single-ascending and multiple-ascending dose Phase 1 studies. Multivalency Our proprietary approach combines chemistry and biology to discover new product candidates using our expertise in multivalency. Multivalency refers to the simultaneous attachment of a single molecule to multiple binding sites on one or more biological targets. When compared to monovalency, whereby a molecule attaches to only one binding site, multivalency can significantly increase a compound's potency, duration of action and/or selectivity. Multivalent compounds generally consist of several individual small molecules, at least one of which is biologically active when bound to its target, joined by linking components. Our approach is based on an integration of the following insights: many targets have multiple binding sites and/or exist in clusters with similar or different targets; biological targets with multiple binding sites and/or those that exist in clusters lend themselves to multivalent drug design; molecules that simultaneously attach to multiple binding sites can exhibit considerably greater potency, duration of action and/or selectivity than molecules that attach to only one binding site; and greater potency, duration of action and/or selectivity provides the basis for superior therapeutic effects, including enhanced convenience, tolerability and/or safety compared to conventional drugs. • • • • Our Strategy Our objective is to discover, develop and commercialize new medicines with superior efficacy, convenience, tolerability and/or safety. The key elements of our strategy are to: Apply our expertise in multivalency to discover and develop superior medicines in areas of significant unmet medical need. We intend to continue to concentrate our efforts on discovering and developing product candidates where: • • • existing drugs have levels of efficacy, convenience, tolerability and/or safety that are insufficient to meet an important medical need; we believe our expertise in multivalency can be applied to create superior product candidates that are more potent, longer acting and/or more selective than currently available medicines; there are established animal models that can be used to provide us with evidence as to whether our product candidates have the potential to provide superior therapeutic benefits relative to current medicines; and 10 Table of Contents • there is a relatively large commercial opportunity. Identify two structurally different product candidates in each therapeutic program whenever practicable. We believe that we can increase the likelihood of successfully bringing superior medicines to market by identifying, whenever practicable, two product candidates for development in each program. Our second product candidates are typically in a different structural class from the first product candidate. Applying this strategy can reduce our dependence on any one product candidate and provide us with the potential opportunity to commercialize two compounds in a given area. Partner with leading pharmaceutical companies. Our strategy is to seek collaborations with leading pharmaceutical companies to accelerate development and commercialization of our product candidates at the strategically appropriate time. The LABA collaboration and our strategic alliance with GSK are examples of these types of partnerships. Leverage the extensive experience of our people. We have an experienced senior management team with many years of experience discovering, developing and commercializing new medicines with companies such as Bristol-Myers Squibb Company, Gilead Sciences, Merck & Co. and Pfizer. Improve, expand and protect our technical capabilities. We have created a substantial body of know-how and trade secrets in the application of our multivalent approach to drug discovery. We believe this is a significant asset that distinguishes us from our competitors. We expect to continue to make substantial investments in drug discovery using multivalency and other technologies to maintain what we believe are our competitive advantages. Manufacturing Though we have limited in-house active pharmaceutical ingredient (API) production capabilities, we rely primarily on a number of third parties, including contract manufacturing organizations and our collaborative partners, to produce our active pharmaceutical ingredient and drug product. Manufacturing of compounds in the RELOVAIR™, '719/VI, and MABA programs is handled by GSK, and we are now responsible for manufacture of VIBATIV® as a result of the termination of the VIBATIV® collaboration agreement with Astellas. We believe that we have in-house expertise to manage a network of third-party manufacturers. We believe that we will be able to continue to negotiate third- party manufacturing arrangements on commercially reasonable terms and that it will not be necessary for us to obtain internal manufacturing capacity in order to develop or commercialize our products. However, if we are unable to obtain contract manufacturing or obtain such manufacturing on commercially reasonable terms, or if manufacturing is interrupted at one of our suppliers, whether due to regulatory or other reasons, we may not be able to develop or commercialize our products as planned. Due to manufacturing issues at the single-source supplier of VIBATIV® drug product, VIBATIV® is currently subject to critical product shortages and regional supply outages in the U.S. If the issues at the manufacturer are not promptly resolved, obtaining supply would require identifying and qualifying an alternative manufacturer, which could take 12 to 24 months. Government Regulation The development and commercialization of our product candidates and our ongoing research are subject to extensive regulation by governmental authorities in the United States and other countries. Before marketing in the United States, any medicine we develop must undergo rigorous preclinical studies and clinical studies and an extensive regulatory approval process implemented by the FDA under the Federal Food, Drug, and Cosmetic Act. Outside the United States, our ability to market a product depends upon receiving a marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct of clinical studies, marketing authorization, pricing and 11 Table of Contents reimbursement vary widely from country to country. In any country, however, we will be permitted to commercialize our medicines only if the appropriate regulatory authority is satisfied that we have presented adequate evidence of the safety, quality and efficacy of our medicines. Before commencing clinical studies in humans in the United States, we must submit to the FDA an Investigational New Drug application that includes, among other things, the results of preclinical studies. If the FDA accepts the Investigational New Drug submission, clinical studies are usually conducted in three phases and under FDA oversight. These phases generally include the following: Phase 1. The product candidate is introduced into healthy human volunteers and is tested for safety, dose tolerance and pharmacokinetics. Phase 2. The product candidate is introduced into a limited patient population to assess the efficacy of the drug in specific, targeted indications, assess dosage tolerance and optimal dosage, and identify possible adverse effects and safety risks. Phase 3. If a compound is found to be potentially effective and to have an acceptable safety profile in Phase 2 evaluations, the clinical study will be expanded to further demonstrate clinical efficacy, optimal dosage and safety within an expanded patient population. The results of product development, preclinical studies and clinical studies must be submitted to the FDA as part of a new drug application, or NDA. The NDA also must contain extensive manufacturing information. NDAs for new chemical entities are subject to performance goals defined in the Prescription Drug User Fee Act (PDUFA) which suggests a goal for FDA action within 6 months for applications that are granted priority review and 10 months for applications that receive standard review. For a product candidate no active ingredient of which has been previously approved by the FDA, the FDA must either refer the product candidate to an advisory committee for review or provide in the action letter on the application for the product candidate a summary of the reasons why the product candidate was not referred to an advisory committee prior to approval. In addition, under the 2009 Food and Drug Administration Amendments Act, the FDA has authority to require submission of a formal Risk Evaluation and Management Strategy (REMS) to ensure safe use of the product. At the end of the review period, the FDA communicates an approval of the NDA or issues a complete response listing the application's deficiencies. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-marketing regulatory standards is not maintained or if safety or quality issues are identified after the product reaches the marketplace. In addition, the FDA may require post-marketing studies, referred to as Phase 4 studies, to monitor the effect of approved products, and may limit further marketing of the product based on the results of these post-marketing studies. The FDA has broad post-market regulatory and enforcement powers, including the ability to suspend or delay issuance of approvals, seize products, withdraw approvals, enjoin violations, and institute criminal prosecution. If we obtain regulatory approval for a medicine, this clearance to market the product will be limited to those diseases and conditions for which the medicine is effective, as demonstrated through clinical studies and included in the medicine's labeling. Even if this regulatory approval is obtained, a marketed medicine, its manufacturer and its manufacturing facilities are subject to continual review and periodic inspections by the FDA. The FDA ensures the quality of approved medicines by carefully monitoring manufacturers' compliance with its current Good Manufacturing Practice (cGMP) regulations. The cGMP regulations for drugs contain minimum requirements for the methods, facilities, and controls used in manufacturing, processing, and packing of a medicine. The regulations are intended to make sure that a medicine is safe for use, and that it has the ingredients and strength it claims to have. Discovery of previously unknown problems with a medicine, manufacturer or facility may result in restrictions on the medicine or manufacturer, including costly recalls or withdrawal of the medicine from the market. 12 Table of Contents We are also subject to various laws and regulations regarding laboratory practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances in connection with our research. In each of these areas, as above, the FDA and other regulatory authorities have broad regulatory and enforcement powers, including the ability to suspend or delay issuance of approvals, seize products, withdraw approvals, enjoin violations, and institute criminal prosecution, any one or more of which could have a material adverse effect upon our business, financial condition and results of operations. Outside the United States our ability to market our products will also depend on receiving marketing authorizations from the appropriate regulatory authorities. Risks similar to those associated with FDA approval described above exist with the regulatory approval processes in other countries. Patents and Proprietary Rights We will be able to protect our technology from unauthorized use by third parties only to the extent that our technology is covered by valid and enforceable patents or is effectively maintained as trade secrets. Our success in the future will depend in part on obtaining patent protection for our product candidates. Accordingly, patents and other proprietary rights are essential elements of our business. Our policy is to seek in the United States and selected foreign countries patent protection for novel technologies and compositions of matter that are commercially important to the development of our business. For proprietary know- how that is not patentable, processes for which patents are difficult to enforce and any other elements of our drug discovery process that involve proprietary know-how and technology that is not covered by patent applications, we rely on trade secret protection and confidentiality agreements to protect our interests. We require all of our employees, consultants and advisors to enter into confidentiality agreements. Where it is necessary to share our proprietary information or data with outside parties, our policy is to make available only that information and data required to accomplish the desired purpose and only pursuant to a duty of confidentiality on the part of those parties. As of December 31, 2011, we owned 271 issued United States patents and 907 granted foreign patents, as well as additional pending United States patent applications and foreign patent applications. The claims in these various patents and patent applications are directed to compositions of matter, including claims covering product candidates, lead compounds and key intermediates, pharmaceutical compositions, methods of use and processes for making our compounds along with methods of design, synthesis, selection and use relevant to multivalency in general and to our research and development programs in particular. In particular, we own the following U.S. patents which are listed in the FDA Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book) for telavancin: U.S. Patent No. 6,635,618 B2, expiring on September 22, 2021; U.S. Patent No. 6,858,584 B2, expiring on August 24, 2022; U.S. Patent No. 6,872,701 B2, expiring on June 5, 2021; U.S. Patent No. 7,008,923 B2, expiring on May 6, 2021; U.S. Patent No. 7,208,471 B2, expiring on May 1, 2021; U.S. Patent No. 7,351,691 B2, expiring on May 1, 2021; U.S. Patent No. 7,531,623 B2, expiring on January 1, 2027; U.S. Patent No. 7,544,364 B2, expiring on May 1, 2021; and U.S. Patent No. 7,700,550 B2, expiring on May 1, 2021. On October 15, 2010, we filed patent term extension (PTE) applications in the United States Patent and Trademark Office (USPTO) for U.S. Patent Nos. 6,635,618 B2; 6,872,701 B2; and 7,208,471 B2. These PTE applications are currently pending and if granted, we will be permitted to extend the term of one of these patents for the period determined by the USPTO. United States issued patents and foreign patents generally expire 20 years after filing. The patent rights relating to telavancin owned by us currently consist of United States patents that expire between 2019 and 2027, additional pending United States patent applications and counterpart patents and patent applications in a number of jurisdictions, including Europe. Nevertheless, issued patents can be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products and threaten our ability to commercialize our product candidates. Our 13 Table of Contents patent position, similar to other companies in our industry, is generally uncertain and involves complex legal and factual questions. To maintain our proprietary position we will need to obtain effective claims and enforce these claims once granted. It is possible that, before any of our products can be commercialized, any related patent may expire or remain in force only for a short period following commercialization, thereby reducing any advantage of the patent. Also, we do not know whether any of our patent applications will result in any issued patents or, if issued, whether the scope of the issued claims will be sufficient to protect our proprietary position. We have entered into a License Agreement with Janssen Pharmaceutica (Janssen) pursuant to which we have licensed rights under certain patents owned by Janssen covering an excipient used in the formulation of telavancin. We believe that the general and financial terms of the agreement with Janssen are ordinary course terms. Pursuant to the terms of this license agreement, we are obligated to pay royalties and milestone payments to Janssen based on any commercial sales of telavancin. 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. Competition Our objective is to discover, develop and commercialize new medicines with superior efficacy, convenience, tolerability and/or safety. We expect that any medicines that we commercialize with our collaborative partners or on our own will compete with existing and future market-leading medicines. Many of our potential competitors have substantially greater financial, technical and personnel resources than we have. In addition, many of these competitors have significantly greater commercial infrastructures than we have. Our ability to compete successfully will depend largely on our ability to leverage our experience in drug discovery and development to: • • • • • discover and develop medicines that are superior to other products in the market; attract qualified scientific, product development and commercial personnel; obtain patent and/or other proprietary protection for our medicines and technologies; obtain required regulatory approvals; and successfully collaborate with pharmaceutical companies in the discovery, development and commercialization of new medicines. LABA Collaboration with GSK. We anticipate that, if approved, any product from our LABA collaboration with GSK, including RELOVAIR™ and the LAMA/LABA '719/VI, will compete with a number of approved bronchodilator drugs and drug candidates under development that are designed to treat asthma and COPD. These include but are not limited to Advair®/Seretide® (salmeterol and fluticasone as a combination) marketed by GSK, Foradil®/Oxis® (formoterol) marketed by a number of companies, Symbicort® (formoterol and budesonide as a combination) marketed by AstraZeneca, Dulera® (formoterol and mometasone as a combination) marketed by Merck, and Spiriva® (tiotropium) marketed by Boehringer-Ingelheim and Pfizer. Onbrez® (indacaterol) is marketed in multiple international markets by Novartis and was approved as a single-agent by the FDA during 2011 with launch reportedly planned for early 2012. For markets outside of the United States, Novartis is developing indacaterol in combination with an ICS (mometasone). In addition, indacaterol combined with a muscarinic antagonist is being developed by Novartis. Boehringer-Ingelheim is developing a combination product with tiotropium and the long-acting beta agonist olodaterol for the treatment of COPD. In addition, several firms are reported to be developing new formulations of salmeterol-fluticasone and formoterol- budesonide which may be marketed as generics or branded generics relative to the existing products from GSK and AstraZeneca, respectively. All of these efforts represent potential competition for any product from our LABA collaboration. 14 Table of Contents VIBATIV® (telavancin). VIBATIV® competes with vancomycin, a generic drug that is manufactured by a variety of companies, as well as other drugs marketed to treat complicated skin and skin structure infections caused by Gram-positive bacteria. Currently marketed products include but are not limited to Cubicin® (daptomycin) marketed by Cubist Pharmaceuticals, Zyvox® (linezolid) and Tygacil® (tigecycline) both marketed by Pfizer, and Teflaro® (ceftaroline) marketed by Forest Laboratories. To compete effectively with these medicines, and in particular with the relatively inexpensive generic option of vancomycin, we will need to demonstrate to physicians that, based on experience, clinical data, side-effect profiles and other factors, VIBATIV® is preferable to vancomycin and other existing or subsequently-developed anti-infective drugs in certain clinical situations. In addition, as the principles of multivalent medicine design become more widely known and appreciated based on patent and scientific publications and regulatory filings, we expect the field to become highly competitive. Pharmaceutical companies, biotechnology companies and academic and research institutions may seek to develop product candidates based upon the principles underlying our multivalent technologies. Employees As of December 31, 2011, we had 222 employees, 171 of which were engaged primarily in research and development activities. None of our employees are represented by a labor union. We consider our employee relations to be good. Available Information Our Internet address is www.theravance.com. Our investor relations website is located at http://ir.theravance.com. We make available free of charge on our investor relations website under "SEC Filings" our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, our directors' and officers' Section 16 Reports and any amendments to those reports as soon as reasonably practicable after filing or furnishing such materials to the U.S. Securities and Exchange Commission (SEC). The information found on our website is not part of this or any other report that we file with or furnish to the SEC. Theravance and the Theravance logo are registered trademarks of Theravance, Inc. Trademarks, tradenames or service marks of other companies appearing in this report are the property of their respective owners. ITEM 1A. RISK FACTORS In addition to the other information in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating our business and us. Risks Related to our Business If regulatory authorities determine that the RELOVAIR™ Phase 3 program in asthma or chronic obstructive pulmonary disease (COPD) does not demonstrate safety and efficacy, the RELOVAIR™ program will be significantly delayed or terminated, our business will be harmed, and the price of our securities could fall. The RELOVAIR™ Phase 3 registrational program for COPD concluded in late 2011 and we currently expect the RELOVAIR™ Phase 3 registrational program for asthma to conclude in the first half of 2012. The RELOVAIR™ Phase 3b program for COPD commenced in February 2011. In early 2012, we and GSK reported topline results from the Phase 3 registrational program for COPD and all but one study from the Phase 3 registrational program for asthma. In connection with reporting these topline results, GSK announced its intention (i) to submit in 2012 regulatory applications in the U.S. and Europe for COPD and an application in Europe for asthma, and (ii) to continue discussions with the U.S. Food and Drug Administration (FDA) on the regulatory requirements for a U.S. asthma indication. Any adverse developments or results or perceived adverse developments or results with 15 Table of Contents respect to the RELOVAIR™ program will significantly harm our business and could cause the price of our securities to fall. Examples of such adverse developments include, but are not limited to: • • • • • • not every study in the Phase 3 programs with RELOVAIR™ achieved its primary endpoint, and the FDA and/or other regulatory authorities may determine that additional clinical studies are required; inability to gain, or delay in gaining, regulatory approval for the new delivery device used in these programs; safety or other concerns arising from non-clinical or clinical studies in these programs. For example, GSK is investigating reports of fatal pneumonia with RELOVAIR™ primarily at the highest dose; safety or other concerns arising from the ongoing long-acting muscarinic antagonist (LAMA)/long-acting beta2 agonist (LABA) Phase 3 program having to do with the LABA vilanterol, or VI, which is also a component of RELOVAIR™; regulatory authorities determining that the Phase 3 program in asthma or COPD raises safety concerns or does not demonstrate efficacy; or any change in FDA policy or guidance regarding the use of LABAs to treat asthma. On February 18, 2010, the FDA announced that LABAs should not be used alone in the treatment of asthma and will require manufacturers to include this warning in the product labels of these drugs, along with taking other steps to reduce the overall use of these medicines. The FDA now requires that the product labels for LABA medicines reflect, among other things, that the use of LABAs is contraindicated without the use of an asthma controller medication such as an inhaled corticosteroid, that LABAs should only be used long-term in patients whose asthma cannot be adequately controlled on asthma controller medications, and that LABAs should be used for the shortest duration of time required to achieve control of asthma symptoms and discontinued, if possible, once asthma control is achieved. In addition, on March 10 and 11, 2010, the FDA held an Advisory Committee to discuss the design of medical research studies (known as "clinical trial design") to evaluate serious asthma outcomes (such as hospitalizations, a procedure using a breathing tube known as intubation, or death) with the use of LABAs in the treatment of asthma in adults, adolescents, and children. Further, in April 2011, the FDA announced that to further evaluate the safety of LABAs, it is requiring the manufacturers of currently marketed LABAs to conduct additional randomized, double-blind, controlled clinical trials comparing the addition of LABAs to inhaled corticosteroids versus inhaled corticosteroids alone. Results from these post-marketing studies are expected in 2017. It is unknown at this time what, if any, effect these or future FDA actions will have on the development of RELOVAIR™. The current uncertainty regarding the FDA's position on LABAs for the treatment of asthma and the lack of consensus expressed at the March 2010 Advisory Committee may result in increased time and cost of the asthma clinical trials in the United States for RELOVAIR™ and increase the overall risk of the RELOVAIR™ asthma program in the United States. If the '719/VI Phase 3 program for the treatment of COPD does not demonstrate safety and efficacy, the '719/VI program will be significantly delayed or terminated, our business will be harmed, and the price of our securities could fall. The '719/VI Phase 3 program with the combination of the LABA, VI, and the LAMA GSK573719, or '719, for the treatment of COPD commenced in February 2011. Any adverse developments or results or perceived adverse developments or results with respect to the '719/VI program will significantly 16 Table of Contents harm our business and could cause the price of our securities to fall. Examples of such adverse developments include, but are not limited to: • • • • • • the FDA and/or other regulatory authorities determining that additional clinical studies are required with respect to the Phase 3 program in COPD; inability to gain, or delay in gaining, regulatory approval for the new delivery device used in the program; safety or other concerns arising from ongoing non-clinical or clinical studies in this program; safety or other concerns arising from the RELOVAIR™ Phase 3 programs having to do with the LABA, VI, which is also a component of '719/VI; the Phase 3 program in COPD raising safety concerns or not demonstrating efficacy; or any change in FDA policy or guidance regarding the use of LABAs combined with a LAMA to treat COPD. If the MABA program for the treatment of COPD does not demonstrate safety and efficacy, the MABA program will be significantly delayed or terminated, our business will be harmed, and the price of our securities could fall. The lead compound, GSK961081 ('081), in the bifunctional muscarinic antagonist-beta2 agonist (MABA) program with GSK recently completed a Phase 2b study and a Phase 1 study in combination with fluticasone propionate (FP), an inhaled corticosteroid (ICS), and a number of Phase 3-enabling non-clinical studies are ongoing. We announced topline results from the Phase 2b COPD study in February 2012 and progression into Phase 3 is dependent upon successful completion of the Phase 3-enabling studies. Any adverse developments or results or perceived adverse developments or results with respect to these studies will harm our business and could cause the price of our securities to fall. Examples of such adverse developments include, but are not limited to: • • • • the FDA and/or other regulatory authorities determining that any of these studies do not demonstrate adequate safety or efficacy, or that additional non-clinical or clinical studies are required with respect to the MABA program; inability to gain, or delay in gaining, regulatory approval for the delivery device used in the program; safety or other concerns arising from the Phase 3-enabling non-clinical studies; or any change in FDA policy or guidance regarding the use of MABAs to treat COPD. Our collaboration agreement for VIBATIV® was terminated in early 2012, VIBATIV® was returned to us, and we have no experience selling or distributing products and no internal capability to do so. Generally, our strategy is to engage pharmaceutical or other healthcare companies with an existing sales and marketing organization and distribution system to market, sell and distribute our products. We may not be able to establish these sales and distribution relationships on acceptable terms, or at all. With VIBATIV®, which was returned to us by Astellas in January 2012, and any of our product candidates that receive regulatory approval in the future and are not covered by our current agreements with GSK or AstraZeneca, we will need a partner in order to commercialize such products unless we establish a sales and marketing organization with appropriate technical expertise and supporting infrastructure and distribution capability. At present, we have no sales personnel and a 17 Table of Contents limited number of marketing personnel. Factors that may inhibit our efforts to commercialize our products without strategic partners or licensees include: • • • • significant costs and expenses associated with creating an independent sales and marketing organization with appropriate technical expertise and supporting infrastructure and distribution capability; our unproven ability to recruit and retain adequate numbers of effective sales and marketing personnel; the unproven ability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our products; and the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines. If we are not able to partner with a third party and are not successful in recruiting sales and marketing personnel or in building a sales and marketing organization with appropriate technical expertise and supporting infrastructure and distribution capability, we will have difficulty commercializing VIBATIV® and other product candidates, which would adversely affect our business and financial condition and which could cause the price of our securities to fall. With regard to all of our programs, any delay in commencing or completing clinical studies for product candidates and any adverse results from clinical or non-clinical studies or regulatory obstacles product candidates may face, would harm our business and could cause the price of our securities to fall. Each of our product candidates must undergo extensive non-clinical and clinical studies as a condition to regulatory approval. Non-clinical and clinical studies are expensive, take many years to complete and study results may lead to delays in further studies or decisions to terminate programs. For example, we had planned to commence the Phase 2b study in our MABA program with GSK in 2009, but the program was delayed until late 2010. The commencement and completion of clinical studies for our product candidates may be delayed and programs may be terminated due to many factors, including, but not limited to: • • • • • • • • • lack of effectiveness of product candidates during clinical studies; adverse events, safety issues or side effects relating to the product candidates or their formulation into medicines; inability to raise additional capital in sufficient amounts to continue our development programs, which are very expensive; the need to sequence clinical studies as opposed to conducting them concomitantly in order to conserve resources; our inability to enter into partnering arrangements relating to the development and commercialization of our programs and product candidates; our inability or the inability of our collaborators or licensees to manufacture or obtain from third parties materials sufficient for use in non-clinical and clinical studies; governmental or regulatory delays and changes in regulatory requirements, policy and guidelines; failure of our partners to advance our product candidates through clinical development; delays in patient enrollment and variability in the number and types of patients available for clinical studies; 18 Table of Contents • • • difficulty in maintaining contact with patients after treatment, resulting in incomplete data; varying regulatory requirements or interpretations of data among the FDA and foreign regulatory authorities; and a regional disturbance where we or our collaborative partners are enrolling patients in clinical trials, such as a pandemic, terrorist activities or war, political unrest or a natural disaster. If our product candidates that we develop on our own or through collaborative partners are not approved by regulatory authorities, including the FDA, we will be unable to commercialize them. The FDA must approve any new medicine before it can be marketed and sold in the United States. We must provide the FDA and similar foreign regulatory authorities with data from preclinical and clinical studies that demonstrate that our product candidates are safe and effective for a defined indication before they can be approved for commercial distribution. We will not obtain this approval for a product candidate unless and until the FDA approves a NDA. The processes by which regulatory approvals are obtained from the FDA to market and sell a new product are complex, require a number of years and involve the expenditure of substantial resources. In order to market our medicines in foreign jurisdictions, we must obtain separate regulatory approvals in each country. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. Conversely, failure to obtain approval in one or more jurisdictions may make approval in other jurisdictions more difficult. Clinical studies involving our product candidates may reveal that those candidates are ineffective, inferior to existing approved medicines, unacceptably toxic, or that they have other unacceptable side effects. In addition, the results of preclinical studies do not necessarily predict clinical success, and larger and later-stage clinical studies may not produce the same results as earlier-stage clinical studies. Frequently, product candidates that have shown promising results in early preclinical or clinical studies have subsequently suffered significant setbacks or failed in later clinical studies. In addition, clinical studies of potential products often reveal that it is not possible or practical to continue development efforts for these product candidates. If our clinical studies are substantially delayed or fail to prove the safety and effectiveness of our product candidates in development, we may not receive regulatory approval of any of these product candidates and our business and financial condition will be materially harmed and the price of our securities may fall. If telavancin is not approved for nosocomial pneumonia (NP) in the United States, the commercialization of VIBATIV® in the U.S. will continue to be adversely affected and the price of our securities could fall. Our first New Drug Application (NDA), for VIBATIV® (telavancin) for the treatment of complicated skin and skin structure infections (cSSSI) caused by susceptible Gram-positive bacteria in adult patients, was approved by the FDA in September 2009. In January 2009, we submitted a second telavancin NDA to the FDA for the NP indication based on data from our two Phase 3 studies referred to as the ATTAIN studies. These studies were conducted in accordance with the then current draft FDA guidelines and met their primary efficacy endpoint of clinical cure. During the fourth quarter of 2010 the FDA issued new draft guidance for antibacterial clinical trial design for the treatment of NP with a focus on mortality as the primary efficacy endpoint. In late 2010, we received a Complete Response Letter from the FDA indicating that the ATTAIN studies do not meet the new draft guidance and that additional clinical studies will be required for approval. We do not plan to conduct additional clinical studies for NP, but we do intend to continue to engage with FDA concerning the NP 19 Table of Contents NDA. Lack of FDA approval for use of telavancin to treat NP has adversely affected and may continue to adversely affect commercialization of this medicine in the United States. If any product candidates, in particular those in any respiratory program with GSK, are determined to be unsafe or ineffective in humans, our business will be adversely affected and the price of our securities could fall. Although our first product, VIBATIV®, is approved in the U.S. and Canada, none of our other product candidates have been approved by regulatory authorities. We are uncertain whether any of our other product candidates will prove effective and safe in humans or meet applicable regulatory standards. In addition, our approach to applying our expertise in multivalency to drug discovery may not result in the creation of successful medicines. The risk of failure for our product candidates is high. For example, in late 2005, we discontinued our overactive bladder program based upon the results of our Phase 1 studies with compound TD-6301, and GSK discontinued development of TD-5742, the first LAMA compound licensed from us, after completing a single-dose Phase 1 study. The data supporting our drug discovery and development programs is derived solely from laboratory experiments, non-clinical studies and clinical studies. A number of other compounds remain in the lead identification, lead optimization, preclinical testing or early clinical testing stages. Several well-publicized Complete Response letters issued by the FDA and safety-related product withdrawals, suspensions, post-approval labeling revisions to include boxed warnings and changes in approved indications over the last several years, as well as growing public and governmental scrutiny of safety issues, have created an increasingly conservative regulatory environment. The implementation of new laws and regulations, and revisions to FDA clinical trial design guidance, have increased uncertainty regarding the approvability of a new drug. Further, there are additional requirements for approval of new drugs, including advisory committee meetings for new chemical entities, and formal risk evaluation and mitigation strategy (REMS) at the FDA's discretion. These new laws, regulations, additional requirements and changes in interpretation could cause non-approval or further delays in the FDA's review and approval of our product candidates. There is currently a single manufacturer for VIBATIV® product supply and we rely on a single source of supply for a number of our product candidates; accordingly, our business will be harmed if these manufacturers are not able to satisfy demand and alternative sources are not available. There is currently a single source of supply of telavancin API and a single source of supply of VIBATIV® drug product. If, for any reason, these third parties are unable or unwilling to perform, or if their performance does not meet regulatory requirements, including maintaining current good manufacturing practice (cGMP) compliance, we may not be able to locate alternative manufacturers, enter into acceptable agreements with them or obtain sufficient quantities of API and drug product in a timely manner. Any inability to acquire sufficient quantities of API and drug product in a timely manner from current or future sources could further adversely affect the commercialization of VIBATIV® and could cause the price of our securities to fall. During the fourth quarter of 2011, the third party manufacturer of VIBATIV® drug product notified the FDA of an ongoing investigation related to its production equipment and processes. The notification included all products manufactured at the third party manufacturer's facility which remain within expiry, including batches of manufactured but unreleased VIBATIV®. In November 2011, Astellas (our former VIBATIV® collaboration partner) voluntarily placed a hold on distribution of VIBATIV® to wholesalers, and cancelled pending orders for VIBATIV® with this manufacturer. VIBATIV® drug product previously manufactured by, and still on-site at, this manufacturer will not become available for sale in the U.S. unless and until the batches are released. We cannot predict when or if the manufactured batches of VIBATIV® will be released. In addition, in August 2011 the third party manufacturer of VIBATIV® drug product announced its intention to transition out of the 20 Table of Contents contract manufacturing services business over the next several years. Additional VIBATIV® drug product will need to be manufactured to meet longer-term U.S. demand as well as demand from the E.U. and Canada. In February 2012 the Committee for Medicinal Products for Human Use (CHMP) recommended to the European Commission that it suspend marketing authorization for VIBATIV® because the single-source VIBATIV® drug product supplier does not meet the GMP requirements to allow the manufacture of VIBATIV®. No VIBATIV® drug product intended to meet E.U. specifications has as yet been manufactured. Identifying and qualifying an alternative manufacturer for VIBATIV® drug product may take 12 to 24 months. If the VIBATIV® drug product on-site at the third party manufacturer is not released in the near future, the commercialization of VIBATIV® in the U.S. will continue to be adversely affected, and if supplemental or alternative commercial manufacture of VIBATIV® drug product cannot be arranged on a timely basis, the commercial introduction of VIBATIV® in the E.U. and Canada will be materially delayed. In each such case, our business will be harmed and the price of our securities could fall. With respect to our programs other than VIBATIV®, we have limited in-house production capabilities for non-clinical and early clinical study purposes, and depend primarily on a number of third-party API and drug product manufacturers. We may not have long-term agreements with these third parties and our agreements with these parties may be terminable at will by either party at any time. If, for any reason, these third parties are unable or unwilling to perform, or if their performance does not meet regulatory requirements, we may not be able to locate alternative manufacturers or enter into acceptable agreements with them. Any inability to acquire sufficient quantities of API and drug product in a timely manner from these third parties could delay clinical studies, prevent us from developing our product candidates in a cost-effective manner or on a timely basis. In addition, manufacturers of our API and drug product are subject to the FDA's cGMP regulations and similar foreign standards and we do not have control over compliance with these regulations by our manufacturers. Our manufacturing strategy presents the following additional risks: • • • • because of the complex nature of our compounds, our manufacturers may not be able to successfully manufacture our APIs and/or drug products in a cost effective and/or timely manner and changing manufacturers for our APIs or drug products could involve lengthy technology transfer and validation activities for the new manufacturer; the processes required to manufacture certain of our APIs and drug products are specialized and available only from a limited number of third- party manufacturers; some of the manufacturing processes for our APIs and drug products have not been scaled to quantities needed for continued clinical studies or commercial sales, and delays in scale-up to commercial quantities could delay clinical studies, regulatory submissions and commercialization of our product candidates; and because some of the third-party manufacturers are located outside of the U.S., there may be difficulties in importing our APIs and drug products or their components into the U.S. as a result of, among other things, FDA import inspections, incomplete or inaccurate import documentation or defective packaging. Even if our product candidates receive regulatory approval, as VIBATIV® has, commercialization of such products may be adversely affected by regulatory actions and oversight. Even if we receive regulatory approval for our product candidates, this approval may include limitations on the indicated uses for which we can market our medicines or the patient population that may utilize our medicines, which may limit the market for our medicines or put us at a competitive disadvantage relative to alternative therapies. For example, VIBATIV®'s U.S. labeling contains a boxed 21 Table of Contents warning regarding the risks of use of VIBATIV® during pregnancy. Products with boxed warnings are subject to more restrictive advertising regulations than products without such warnings. In addition, the VIBATIV® labeling that was approved for the E.U. in 2011 specifies that VIBATIV® should be used only in situations where it is known or suspected that other alternatives are not suitable. These restrictions could make it more difficult to market VIBATIV®. Further, in February 2012 the CHMP recommended to the European Commission that it suspend marketing authorization for VIBATIV® because the single-source VIBATIV® drug product supplier does not meet the GMP requirements to allow the manufacture of VIBATIV®. With VIBATIV® approved in certain countries, we are subject to continuing regulatory obligations, such as safety reporting requirements and additional post-marketing obligations, including regulatory oversight of promotion and marketing. In addition, the manufacturing, labeling, packaging, adverse event reporting, advertising, promotion and recordkeeping for the approved product remain subject to extensive and ongoing regulatory requirements. If we become aware of previously unknown problems with an approved product in the U.S. or overseas or at contract manufacturers' facilities, a regulatory authority may impose restrictions on the product, the contract manufacturers or on us, including requiring us to reformulate the product, conduct additional clinical studies, change the labeling of the product, withdraw the product from the market or require the contract manufacturer to implement changes to its facilities. For example, during the fourth quarter of 2011, the third party manufacturer of VIBATIV® drug product notified the FDA of an ongoing investigation related to its production equipment and processes. The notification included all products manufactured at the third party manufacturer's facility which remain within expiry, including batches of manufactured but unreleased VIBATIV®. Astellas (our former VIBATIV® collaboration partner) subsequently placed a voluntary hold on distribution of VIBATIV® to wholesalers and cancelled pending orders for VIBATIV® with this manufacturer. With this supply interruption and the termination of our VIBATIV® collaboration agreement with Astellas, commercialization of VIBATIV® has essentially stopped, we will likely experience a significant drop in the sales of the product and the reputation of VIBATIV® in the marketplace may suffer. We are also subject to regulation by regional, national, state and local agencies, including the Department of Justice, the Federal Trade Commission, the Office of Inspector General of the U.S. Department of Health and Human Services and other regulatory bodies with respect to VIBATIV®, as well as governmental authorities in those foreign countries in which any of our product candidates are approved for commercialization. The Federal Food, Drug, and Cosmetic Act, the Public Health Service Act and other federal and state statutes and regulations govern to varying degrees the research, development, manufacturing and commercial activities relating to prescription pharmaceutical products, including non-clinical and clinical testing, approval, production, labeling, sale, distribution, import, export, post-market surveillance, advertising, dissemination of information and promotion. If we or any third parties that provide these services for us are unable to comply, we may be subject to regulatory or civil actions or penalties that could significantly and adversely affect our business. Any failure to maintain regulatory approval will limit our ability to commercialize our product candidates, which would materially and adversely affect our business and financial condition, which may cause our stock price to decline. We have incurred operating losses in each year since our inception and expect to continue to incur substantial losses for the foreseeable future. We have been engaged in discovering and developing compounds and product candidates since mid-1997. Our first approved product, VIBATIV®, was launched by our partner Astellas in the U.S. in November 2009, and to date we have received only modest revenues from VIBATIV® sales. We may never generate sufficient revenue from the sale of medicines or royalties on sales by our partners to achieve profitability. As of December 31, 2011, we had an accumulated deficit of approximately $1.3 billion. 22 Table of Contents We expect to incur substantial expenses as we continue our drug discovery and development efforts, particularly to the extent we advance our product candidates into and through clinical studies, which are very expensive. As a result, we expect to continue to incur substantial losses for the foreseeable future. We are uncertain when or if we will be able to achieve or sustain profitability. Failure to become and remain profitable would adversely affect the price of our securities and our ability to raise capital and continue operations. If we fail to obtain the capital necessary to fund our operations, we may be unable to develop our product candidates or commercialize VIBATIV® and we could be forced to share our rights to commercialize our product candidates with third parties on terms that may not be favorable to us. We need large amounts of capital to support our research and development efforts. If we are unable to secure capital to fund our operations we will not be able to continue our discovery and development efforts and we might have to enter into strategic collaborations that could require us to share commercial rights to our medicines to a greater extent than we currently intend. Based on our current operating plans, milestone and royalty forecasts and spending assumptions, we believe that our cash and cash equivalents and marketable securities will be sufficient to meet our anticipated operating needs for at least the next twelve months. We are likely to require additional capital to fund operating needs thereafter. Although we have no current intention to do so, if we were to conduct additional studies to support the telavancin NP NDA, or if we were to build the sales and marketing, distribution and compliance infrastructure to commercialize VIBATIV® without a partner, our capital needs would increase substantially. We intend to continue development of our pipeline. A Phase 2b program is underway in our PµMA program and we initiated a Phase 2 study for MARIN in late 2011. We also intend to invest in other assets in our pipeline, including our Hepatitis C virus (HCV) and cardiovascular programs in late-stage discovery, and conduct a number of other non-clinical and earlier-stage clinical studies in other programs. Further, pursuant to the terms of the recent termination of our collaboration agreement with Astellas, we may purchase up to $11.0 million of VIBATIV® inventory during 2012. In addition, under our LABA collaboration with GSK, in the event that vilanterol (VI), which is the current lead LABA product candidate in RELOVAIR™ and LAMA/LABA ('719/VI) and which was discovered by GSK, is approved and launched in multiple regions of the world as both a single agent and a combination product or two different combination products, we will be obligated to pay GSK milestone payments that could total as much as $220.0 million and we would not be entitled to receive any further milestone payments from GSK. Future financing to meet our capital needs may not be available in sufficient amounts or on terms acceptable to us, if at all. Even if we are able to raise additional capital, such financing may result in significant dilution to existing security holders. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to make reductions in our workforce and may be prevented from continuing our discovery and development efforts and exploiting other corporate opportunities. This could harm our business, prospects and financial condition and cause the price of our securities to fall. VIBATIV® may not be accepted by physicians, patients, third party payors, or the medical community in general, and this risk is aggravated by the current critical product shortages and regional supply outages. The commercial success of VIBATIV® depends upon its acceptance by physicians, patients, third party payors and the medical community in general. We cannot be sure that VIBATIV® will be accepted by these parties. VIBATIV® competes with vancomycin, a relatively inexpensive generic drug that is manufactured by a variety of companies, and a number of existing antibacterials manufactured and marketed by major pharmaceutical companies and others, and may compete against new antibacterials that are not yet on the market. Even if the medical community accepts that VIBATIV® is safe and efficacious for its indicated use, physicians may restrict the use of VIBATIV® due to the current product shortages stemming from the manufacturing issues at the drug product supplier, the recent termination of our VIBATIV® collaboration agreement with Astellas, or otherwise. If we are 23 Table of Contents unable to demonstrate to physicians that, based on experience, clinical data, side-effect profiles and other factors, VIBATIV® is preferable to vancomycin and other antibacterial drugs, we may never generate meaningful revenue from VIBATIV® which could cause the price of our securities to fall. The degree of market acceptance of VIBATIV® depends on a number of factors, including, but not limited to: • • • • • • • • the demonstration of the clinical efficacy and safety of VIBATIV®; the experiences of physicians, patients and payors with the use of VIBATIV® in the U.S.; potential negative perceptions of physicians related to our inability to obtain FDA approval of our NP NDA, the product shortages stemming from the manufacturing issues at the drug product supplier or the recent termination of our VIBATIV® collaboration agreement with Astellas; potential negative perceptions of physicians related to the recent CHMP recommendation to the European Commission that it suspend marketing authorization for VIBATIV® because the single-source VIBATIV® drug product supplier does not meet the GMP requirements to allow the manufacture of VIBATIV®; the advantages and disadvantages of VIBATIV® compared to alternative therapies; our ability to educate the medical community about the safety and effectiveness of VIBATIV®; the reimbursement policies of government and third party payors; and the market price of VIBATIV® relative to competing therapies. If our partners do not satisfy their obligations under our agreements with them, or if they terminate our partnerships with them, as Astellas did with our VIBATIV® collaboration agreement in January 2012, we may not be able to develop or commercialize our partnered product candidates as planned. We entered into our LABA collaboration agreement with GSK in November 2002, our strategic alliance agreement with GSK in March 2004, and our VIBATIV® collaboration agreement with Astellas in November 2005. In connection with these agreements, we have granted to these parties certain rights regarding the use of our patents and technology with respect to compounds in our development programs, including development and marketing rights. Under our GSK agreements, GSK has full responsibility for development and commercialization of RELOVAIR™, LAMA/LABA ('719/VI) and any product candidates in the MABA program. Any future milestone payments or royalties to us from these programs will depend on the extent to which GSK advances the product candidate through development and, if approved, commercialization. Astellas terminated the VIBATIV® agreement in January 2012. Our partners might not fulfill all of their obligations under these agreements, and, in certain circumstances, they may terminate our partnership with them, as Astellas did in January 2012. In either event, we may be unable to assume the development and commercialization of the product candidates covered by the agreements or enter into alternative arrangements with a third party to develop and commercialize such product candidates. In addition, with the exception of product candidates in our LABA collaboration and the MABA program under the strategic alliance, our partners generally are not restricted from developing and commercializing their own products and product candidates that compete with those licensed from us. If a partner elected to promote its own products and product candidates in preference to those licensed from us, future payments to us could be reduced and our business and financial condition would be materially and adversely affected. Accordingly, our ability to receive any revenue from the product candidates covered by these agreements is dependent on the efforts of the partner. We could also become involved in disputes with a partner, which could lead to 24 Table of Contents delays in or termination of our development and commercialization programs and time-consuming and expensive litigation or arbitration. If a partner terminates or breaches its agreements with us, or otherwise fails to complete its obligations in a timely manner, the chances of successfully developing or commercializing product candidates under the collaboration could be materially and adversely affected. For example, Astellas terminated the VIBATIV® collaboration agreement in January 2012, and both due to the termination and the current product shortages and regional supply outages stemming from the manufacturing issues at the third party VIBATIV® drug product supplier, the commercialization of VIBATIV® in the U.S. has essentially stopped and the commercial introduction of VIBATIV® in the E.U. and Canada has been delayed. If we are unable to enter into future collaboration arrangements or if any such collaborations with third parties are unsuccessful, we will be unable to fully develop and commercialize VIBATIV® and our product candidates and our business will be adversely affected. We have active collaborations with GSK for RELOVAIR™, LAMA/LABA ('719/VI) and the MABA program and we have licensed our anesthesia compound to AstraZeneca AB (AstraZeneca). Additional collaborations will be needed to fund later-stage development of our product candidates that have not been licensed to a collaborator, and to commercialize these product candidates if approved by the necessary regulatory authorities. Each of TD-5108, our lead compound in the 5-HT4 program, TD-1792, our investigational antibiotic, TD-1211, the lead compound in our PµMA program for opioid-induced constipation and TD-4208, our LAMA compound, has successfully completed a Phase 2 proof-of-concept study. In addition, in connection with the expansion of the MABA program under the strategic alliance with GSK in October 2011, GSK relinquished its right to option our MARIN and ARNI programs. Also, we now have full rights to VIBATIV® as a result of the termination of our collaboration agreement with Astellas in January 2012. We currently intend to seek third parties with which to pursue collaboration arrangements for the development and commercialization of our development programs and for the future commercialization of VIBATIV®. Collaborations with third parties regarding these programs or our other programs may require us to relinquish material rights, including revenue from commercialization of our medicines, on terms that are less attractive than our current arrangements or to assume material ongoing development obligations that we would have to fund. These collaboration arrangements are complex and time-consuming to negotiate, and if we are unable to reach agreements with third- party collaborators, we may fail to meet our business objectives and our financial condition may be adversely affected. We face significant competition in seeking third-party collaborators, especially in the current uncertain economy, which is driving many biotechnology and biopharmaceutical companies to seek to sell or license their assets. We may be unable to find third parties to pursue product collaborations on a timely basis or on acceptable terms. Furthermore, for any collaboration, we may not be able to control the amount of time and resources that our partners devote to our product candidates and our partners may choose to pursue alternative products. Our inability to successfully collaborate with third parties would increase our development costs and would limit the likelihood of successful commercialization of our product candidates which may cause our stock price to decline. We depend on third parties in the conduct of our clinical studies for our product candidates. We depend on independent clinical investigators, contract research organizations and other third-party service providers in the conduct of our non-clinical and clinical studies for our product candidates. We rely heavily on these parties for execution of our non-clinical and clinical studies, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that our clinical studies are conducted in accordance with good clinical practices (GCPs) and other regulations as required by the FDA and foreign regulatory authorities, and the applicable protocol. Failure by these 25 Table of Contents parties to comply with applicable regulations, GCPs and protocols in conducting studies of our product candidates can result in a delay in our development programs or non-approval of our product candidates by regulatory authorities. The FDA enforces good clinical practices and other regulations through periodic inspections of trial sponsors, clinical research organizations (CROs), principal investigators and trial sites. For example, in connection with the FDA's review of our telavancin NDAs, the FDA conducted inspections of Theravance and certain of our study sites, clinical investigators and CROs. If we or any of the third parties on which we have relied to conduct our clinical studies are determined to have failed to comply with GCPs, the study protocol or applicable regulations, the clinical data generated in our studies may be deemed unreliable. This could result in non-approval of our product candidates by the FDA, or we or the FDA may decide to conduct additional audits or require additional clinical studies, which would delay our development programs, could result in significant additional costs and could cause the price of our securities to fall. We face substantial competition from companies with more resources and experience than we have, which may result in others discovering, developing, receiving approval for or commercializing products before or more successfully than we do. Our ability to succeed in the future depends on our ability to demonstrate and maintain a competitive advantage with respect to our approach to the discovery and development of medicines. Our objective is to discover, develop and commercialize new small molecule medicines with superior efficacy, convenience, tolerability and/or safety. We expect that any medicines that we commercialize with our collaborative partners will compete with existing or future market-leading medicines. Many of our potential competitors have substantially greater financial, technical and personnel resources than we have. In addition, many of these competitors have significantly greater commercial infrastructures than we have. Our ability to compete successfully will depend largely on our ability to leverage our experience in drug discovery and development to: • • • • • discover and develop medicines that are superior to other products in the market; attract and retain qualified personnel; obtain patent and/or other proprietary protection for our medicines and technologies; obtain required regulatory approvals; and successfully collaborate with pharmaceutical companies in the discovery, development and commercialization of new medicines. Established pharmaceutical companies may invest heavily to quickly discover and develop or in-license novel compounds that could make our product candidates obsolete. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA approval or discovering, developing and commercializing medicines before we do. Other companies are engaged in the discovery of medicines that would compete with the product candidates that we are developing. Any new medicine that competes with a generic or proprietary market leading medicine must demonstrate compelling advantages in efficacy, convenience, tolerability and/or safety in order to overcome severe price competition and be commercially successful. VIBATIV® must demonstrate these advantages, as it competes with vancomycin, a relatively inexpensive generic drug that is manufactured by a number of companies, and a number of existing antibacterial drugs marketed by major and other pharmaceutical companies. If we are not able to compete effectively against our current and future competitors, our business will not grow, our financial condition and operations will suffer and the price of our securities could fall. 26 Table of Contents As the principles of multivalency become more widely known, we expect to face increasing competition from companies and other organizations that pursue the same or similar approaches. Novel therapies, such as gene therapy or effective vaccines for infectious diseases, may emerge that will make both conventional and multivalent medicine discovery efforts obsolete or less competitive. If we lose key management or scientific personnel, or if we fail to retain our key employees, our ability to discover and develop our product candidates will be impaired. We are highly dependent on principal members of our management team and scientific staff to operate our business. Our company is located in northern California, which is headquarters to many other biotechnology and biopharmaceutical companies and many academic and research institutions. As a result, competition for certain skilled personnel in our market remains intense. None of our employees have employment commitments for any fixed period of time and they all may leave our employment at will. If we fail to retain our qualified personnel or replace them when they leave, we may be unable to continue our development and commercialization activities, which may cause our stock price to decline. Our business and operations would suffer in the event of system failures. Although we have security measures in place, our internal computer systems and those of our CROs and other service providers are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. We have not experienced any material system failure, accident or security breach to date, but if such an event were to occur, it could result in a material disruption to our business. For example, the loss of clinical trial data from completed or ongoing clinical trials of our product candidates could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. If a disruption or security breach results in a loss of or damage to our data or regulatory applications, or inadvertent disclosure of confidential or proprietary information, we could incur liability, the further development of our product candidates could be delayed and the price of our securities could fall. Our principal facility is located near known earthquake fault zones, and the occurrence of an earthquake, extremist attack or other catastrophic disaster could cause damage to our facilities and equipment, which could require us to cease or curtail operations. Our principal facility is located in the San Francisco Bay Area near known earthquake fault zones and therefore is vulnerable to damage from earthquakes. In October 1989, a major earthquake struck this area and caused significant property damage and a number of fatalities. We are also vulnerable to damage from other types of disasters, including power loss, attacks from extremist organizations, fire, floods, communications failures and similar events. If any disaster were to occur, our ability to operate our business could be seriously impaired. In addition, the unique nature of our research activities and of much of our equipment could make it difficult for us to recover from this type of disaster. We may not have adequate insurance to cover our losses resulting from disasters or other similar significant business interruptions and we do not plan to purchase additional insurance to cover such losses due to the cost of obtaining such coverage. Any significant losses that are not recoverable under our insurance policies could seriously impair our business and financial condition, which could cause the price of our securities to fall. 27 Table of Contents Risks Related to our Alliance with GSK GSK's ownership of a significant percentage of our stock and its ability to acquire additional shares of our stock may create conflicts of interest, and may inhibit our management's ability to continue to operate our business in the manner in which it is currently being operated. As of February 17, 2012, GSK beneficially owned approximately 18.4% of our outstanding capital stock, and GSK has the right to acquire stock from us to maintain its percentage ownership of our capital stock. GSK could have substantial influence in the election of our directors, delay or prevent a transaction in which stockholders might receive a premium over the prevailing market price for their shares and have significant control over certain changes in our business. In addition, GSK may make an offer to our stockholders to acquire outstanding voting stock that would bring GSK's percentage ownership of our voting stock to no greater than 60%, provided that: • • • • the offer includes no condition as to financing; the offer is approved by a majority of our independent directors; the offer includes a condition that the holders of a majority of the shares of the voting stock not owned by GSK accept the offer by tendering their shares in the offer; and the shares purchased will be subject to the same provisions of the governance agreement as are the shares of voting stock currently held by GSK. If pursuant to the provision described above GSK's ownership of us becomes greater than 50.1%, then on or prior to September 1, 2012 GSK is allowed to make an offer to our stockholders to merge with us or otherwise acquire outstanding voting stock that would bring GSK's percentage ownership of our voting stock to 100%, provided that; • • • • the offer includes no condition as to financing; the offer is approved by a majority of our independent directors; the offer includes a condition that the holders of a majority of the shares of the voting stock not owned by GSK accept the offer by tendering their shares in the offer; and the offer is for the greater of (a) the fair market value per share on the date immediately preceding the date of the first public announcement of the offer or (b) $162.75 per share (as adjusted to take into account stock dividends, stock splits, recapitalizations and the like). Furthermore, if pursuant to the provision described above GSK's ownership of us is greater than 50.1%, then after September 1, 2012, GSK is allowed to make an offer to our stockholders to acquire outstanding voting stock that would bring GSK's percentage ownership of our voting stock to 100%, provided that; • • • the offer includes no condition as to financing; the offer is approved by a majority of our independent directors; and the offer includes a condition that the holders of a majority of the shares of the voting stock not owned by GSK accept the offer by tendering their shares in the offer. Further, pursuant to our certificate of incorporation, we renounce our interest in and waive any claim that a corporate or business opportunity taken by GSK constitutes a corporate opportunity of ours unless such corporate or business opportunity is expressly offered to one of our directors who is a director, officer or employee of GSK, primarily in his or her capacity as one of our directors. 28 Table of Contents GSK's rights under the governance agreement may deter or prevent efforts by other companies to acquire us, which could prevent our stockholders from realizing a control premium. Our governance agreement with GSK requires us to exempt GSK from our stockholder rights plan, affords GSK certain rights to offer to acquire us in the event third parties seek to acquire our stock and contains other provisions that could deter or prevent another company from seeking to acquire us. For example, GSK may offer to acquire 100% of our outstanding stock from stockholders in certain circumstances, such as if we are faced with a hostile acquisition offer or if our board of directors acts in a manner to facilitate a change in control of us with a party other than GSK. As a result of these rights, other companies may be less inclined to pursue an acquisition of us and therefore we may not have the opportunity to be acquired in a transaction that stockholders might otherwise deem favorable, including transactions in which our stockholders might realize a substantial premium for their shares. GSK could sell or transfer a substantial number of shares of our common stock, which could depress the price of our securities or result in a change in control of our company. Under our governance agreement with GSK, GSK currently may sell or transfer our common stock only pursuant to a public offering registered under the Securities Act or pursuant to Rule 144 of the Securities Act. Beginning in September 2012, GSK will have no contractual restrictions on its ability to sell or transfer our common stock on the open market, in privately negotiated transactions or otherwise, and these sales or transfers could create substantial declines in the price of our securities or, if these sales or transfers were made to a single buyer or group of buyers, could contribute to a transfer of control of our company to a third party. Risks Related to Legal and Regulatory Uncertainty If our efforts to protect the proprietary nature of the intellectual property related to our technologies are not adequate, we may not be able to compete effectively in our market. We rely upon a combination of patents, patent applications, trade secret protection and confidentiality agreements to protect the intellectual property related to our technologies. Any involuntary disclosure to or misappropriation by third parties of this proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market. The status of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and is very uncertain. As of December 31, 2011, we owned 271 issued United States patents and 907 granted foreign patents, as well as additional pending United States and foreign patent applications. Our patent applications may be challenged or fail to result in issued patents and our existing or future patents may be invalidated or be too narrow to prevent third parties from developing or designing around these patents. If the sufficiency of the breadth or strength of protection provided by our patents with respect to a product candidate is threatened, it could dissuade companies from collaborating with us to develop, and threaten our ability to commercialize, the product candidate. Further, if we encounter delays in our clinical trials or in obtaining regulatory approval of our product candidates, the patent lives of the related product candidates would be reduced. In addition, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable, for processes for which patents are difficult to enforce and for any other elements of our drug discovery and development processes that involve proprietary know-how, information and technology that is not covered by patent applications. Although we require our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information and technology to enter into confidentiality agreements, we cannot be certain that this know-how, information and technology will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information 29 Table of Contents and techniques. Further, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent material disclosure of the intellectual property related to our technologies to third parties, we will not be able to establish or, if established, maintain a competitive advantage in our market, which could materially adversely affect our business, financial condition and results of operations, which could cause the price of our securities to fall. Litigation or third-party claims of intellectual property infringement would require us to divert resources and may prevent or delay our drug discovery and development efforts. Our commercial success depends in part on us and our partners not infringing the patents and proprietary rights of third parties. Third parties may assert that we or our partners are using their proprietary rights without authorization. There are third party patents that may cover materials or methods for treatment related to our product candidates. At present, we are not aware of any patent claims with merit that would adversely and materially affect our ability to develop our product candidates, but nevertheless the possibility of third party allegations cannot be ruled out. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. Furthermore, parties making claims against us or our partners may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, obtain one or more licenses from third parties or pay royalties. In addition, even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates, and we have done so from time to time. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize one or more of our product candidates, which could harm our business significantly. In addition, in the future we could be required to initiate litigation to enforce our proprietary rights against infringement by third parties. Prosecution of these claims to enforce our rights against others would involve substantial litigation expenses and divert substantial employee resources from our business. If we fail to effectively enforce our proprietary rights against others, our business will be harmed, which may cause our stock price to decline. If the efforts of our partner, GSK, to protect the proprietary nature of the intellectual property related to the assets in the LABA collaboration, including RELOVAIR™ and LAMA/LABA ('719/VI), are not adequate, the future commercialization of any medicines resulting from the LABA collaboration could be delayed or prevented, which would materially harm our business and could cause the price of our securities to fall. The risks identified in the two preceding risk factors also apply to the intellectual property protection efforts of our partner, GSK. To the extent the intellectual property protection of any of the assets in the LABA collaboration are successfully challenged or encounter problems with the United States Patent and Trademark Office or other comparable agencies throughout the world, the future commercialization of these potential medicines could be delayed or prevented. Any challenge to the intellectual property protection of a late-stage development asset arising from the LABA collaboration could harm our business and cause the price of our securities to fall. 30 Table of Contents Product liability lawsuits could divert our resources, result in substantial liabilities and reduce the commercial potential of our medicines. The risk that we may be sued on product liability claims is inherent in the development and commercialization of pharmaceutical products. Side effects of, or manufacturing defects in, products that we or our partners develop or commercialize could result in the deterioration of a patient's condition, injury or even death. Once a product is approved for sale and commercialized, the likelihood of product liability lawsuits tends to increase. Claims may be brought by individuals seeking relief for themselves or by individuals or groups seeking to represent a class. These lawsuits may divert our management from pursuing our business strategy and may be costly to defend. In addition, if we are held liable in any of these lawsuits, we may incur substantial liabilities and may be forced to limit or forgo further commercialization of the applicable products. Although we maintain general liability and product liability insurance, this insurance may not fully cover potential liabilities. In addition, inability to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercial production and sale of our products, which could adversely affect our business. Product liability claims could also harm our reputation, which may adversely affect our and our partners' ability to commercialize our products successfully, which could cause the price of our securities to fall. Government restrictions on pricing and reimbursement, as well as other healthcare payor cost-containment initiatives, may negatively impact our ability to generate revenues. The continuing efforts of the government, insurance companies, managed care organizations and other payors of health care costs to contain or reduce costs of health care may adversely affect one or more of the following: • • • our or our collaborators' ability to set a price we believe is fair for our products, if approved; our ability to generate revenues and achieve profitability; and the availability of capital. The Patient Protection and Affordable Care Act and other potential legislative or regulatory action regarding healthcare and insurance matters, along with the trend toward managed healthcare in the United States, could influence the purchase of healthcare products and reduce demand and prices for our products, if approved. This could harm our or our collaborators' ability to market our potential medicines and generate revenues. Cost containment measures that health care payors and providers are instituting and the effect of the Patient Protection and Affordable Care Act and further agency regulations that are likely to emerge in connection with the passage of this act could significantly reduce potential revenues from the sale of any product candidates approved in the future. In addition, in certain foreign markets, the pricing of prescription drugs is subject to government control and reimbursement may in some cases be unavailable. We believe that pricing pressures at the state and federal level, as well as internationally, will continue and may increase, which may make it difficult for us to sell our potential medicines that may be approved in the future at a price acceptable to us or our collaborators, which may cause our stock price to decline. If we use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages. Our research and development activities involve the controlled use of potentially hazardous substances, including chemical, biological and radioactive materials. In addition, our operations produce hazardous waste products. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. We may incur significant additional costs to comply with these and other applicable laws in the future. Also, even if we are in compliance with 31 Table of Contents applicable laws, we cannot completely eliminate the risk of contamination or injury resulting from hazardous materials and we may incur liability as a result of any such contamination or injury. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources. We do not have any insurance for liabilities arising from hazardous materials. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development and production efforts, which could harm our business, which could cause the price of our securities to fall. Risks Related to Ownership of our Common Stock The price of our securities has been extremely volatile and may continue to be so, and purchasers of our securities could incur substantial losses. The price of our securities has been extremely volatile and may continue to be so. The stock market in general and the market for biotechnology and biopharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the companies' operating performance, in particular during the last few years. The following factors, in addition to the other risk factors described in this section, may also have a significant impact on the market price of our securities: • • • • • • any adverse developments or results or perceived adverse developments or results with respect to the development of RELOVAIR™ with GSK, including, without limitation, any difficulties or delays encountered with regard to the regulatory path for RELOVAIR™, delays in completing the Phase 3 program in asthma or any indication from the Phase 3 programs that RELOVAIR™ is not safe or efficacious (for example, the investor reaction to the topline results from the RELOVAIR™ Phase 3 registrational programs announced in early 2012); any adverse developments or results or perceived adverse developments or results with respect to the LAMA/LABA ('719/VI) program with GSK, including, without limitation, any difficulties or delays encountered with regard to the regulatory path for '719/VI, delays in completing the Phase 3 studies or any indication from these studies that '719/VI is not safe or efficacious; any adverse developments or results or perceived adverse developments or results with respect to the MABA program with GSK, including, without limitation, any difficulties or delays encountered with regard to the regulatory path for '081 or any indication from ongoing non-clinical studies of '081 that the compound is not safe or efficacious; any further adverse developments with respect to the commercialization of VIBATIV®, including, without limitation, the uncertainties surrounding drug product manufacture and supply and how, when and where VIBATIV® will be commercialized; any further adverse developments or perceived adverse developments with respect to our telavancin NP NDA, which the FDA has determined cannot be approved without data from additional clinical studies; any adverse developments or perceived adverse developments in the field of LABAs, including any change in FDA policy or guidance (such as the pronouncement in February 2010 warning that LABAs should not be used alone in the treatment of asthma and related labeling requirements, the impact of the March 2010 FDA Advisory Committee discussing LABA clinical trial design to evaluate serious asthma outcomes or the FDA's April 2011 announcement that manufacturers of currently marketed LABAs conduct additional clinical studies comparing the addition of LABAs to inhaled corticosteroids versus inhaled corticosteroids alone); 32 Table of Contents • • • • • • • • • • • • • • • GSK's decisions whether or not to purchase from us, on a quarterly basis, sufficient shares of common stock to maintain its ownership percentage taking into account our preceding quarter's option exercise and equity vesting activity; any announcements of developments with, or comments by, the FDA or other regulatory authorities with respect to products we or our partners have under development or have commercialized, such as the cGMP compliance issues that the single-source drug product supplier for VIBATIV® is facing with U.S. and foreign regulatory authorities; our incurrence of expenses in any particular quarter that are different than market expectations; the extent to which GSK advances (or does not advance) RELOVAIR™, the LAMA/LABA program and the MABA program through development into commercialization; any adverse developments or perceived adverse developments with respect to our relationship with GSK, including, without limitation, disagreements that may arise between us and GSK concerning the public announcement of data (both timing and content) from the Phase 3 programs with RELOVAIR™ and '719/VI and the MABA program; any adverse developments or perceived adverse developments with respect to our partnering efforts with VIBATIV®, our 5-HT4, PµMA, MARIN and ARNI programs, TD-1792 or TD-4208; announcements regarding GSK generally; announcements of patent issuances or denials, technological innovations or new commercial products by us or our competitors; developments concerning any collaboration we may undertake with companies other than GSK; publicity regarding actual or potential study results or the outcome of regulatory review relating to products under development by us, our partners or our competitors; regulatory developments in the United States and foreign countries; economic and other external factors beyond our control; sales of stock by us or by our stockholders, including sales by certain of our employees and directors whether or not pursuant to selling plans under Rule 10b5-1 of the Securities Exchange Act of 1934; relative illiquidity in the public market for our common stock (our six largest stockholders other than GSK collectively owned approximately 50.9% of our outstanding capital stock as of February 17, 2012); and potential sales or purchases of our capital stock by GSK. Concentration of ownership will limit your ability to influence corporate matters. As of February 17, 2012, GSK beneficially owned approximately 18.4% of our outstanding capital stock and our directors, executive officers and investors affiliated with these individuals beneficially owned approximately 6.58% of our outstanding capital stock. Based on our review of publicly available filings as of February 17, 2012, our six largest stockholders other than GSK collectively owned approximately 50.9% of our outstanding capital stock. These stockholders could control the outcome of actions taken by us that require stockholder approval, including a transaction in which stockholders might receive a premium over the prevailing market price for their shares. 33 Table of Contents Anti-takeover provisions in our charter and bylaws, in our rights agreement and in Delaware law could prevent or delay a change in control of our company. Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions include: • • • • requiring supermajority stockholder voting to effect certain amendments to our certificate of incorporation and bylaws; restricting the ability of stockholders to call special meetings of stockholders; prohibiting stockholder action by written consent; and establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings. In addition, our board of directors has adopted a rights agreement that may prevent or delay a change in control of us. Further, some provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging with us. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Our headquarters are located in South San Francisco, CA, and consist of two leased buildings of approximately 110,000 and 40,000 square feet. The lease expires in May 2020 and we may extend the terms for two additional five-year periods. The current annual rental expense under these leases is approximately $6.7 million. As security for performance of certain obligations under the facility operating leases for our headquarters, we were required to have a financial institution issue letters of credit in the aggregate of approximately $0.8 million, which we have collateralized with the financial institution by an equal amount of restricted cash. ITEM 3. LEGAL PROCEEDINGS We are not a party to any material legal proceedings. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 34 Table of Contents PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock has been traded on the Nasdaq Global Market under the symbol "THRX" since October 5, 2004. The following table sets forth the high and low closing prices of our common stock on a per share basis for the periods indicated and as reported on the Nasdaq Global Market: Calendar Quarter 2011 Fourth Quarter Third Quarter Second Quarter First Quarter 2010 Fourth Quarter Third Quarter Second Quarter First Quarter High Low $ 23.91 $ 19.02 $ 24.87 $ 16.89 $ 28.70 $ 21.18 $ 25.78 $ 20.98 $ 28.64 $ 20.00 $ 20.10 $ 11.83 $ 17.15 $ 12.52 9.70 $ 13.85 $ As of February 17, 2012, there were 187 stockholders of record of our common stock. In July 2011, GSK converted all of the shares of our Class A common stock held by its affiliates into 9,401,499 shares of our common stock on a one share-for-one share basis in accordance with the terms of our restated certificate of incorporation. In addition, during 2011, Glaxo Group Limited, an affiliate of GSK, purchased a total of 574,454 shares of our common stock via private placement for an aggregate purchase price of $13.6 million pursuant to its periodic "top-up" rights under our governance agreement with GSK dated June 4, 2004, as amended. We issued and sold these shares in reliance upon an exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Dividend Policy We currently intend to retain any future earnings to finance our research and development efforts. We have never declared or paid cash dividends on our common stock or Class A common stock and do not intend to declare or pay cash dividends on our common stock in the foreseeable future. 35 Table of Contents Equity Compensation Plans The following table provides certain information with respect to all of our equity compensation plans in effect as of December 31, 2011: Plan Category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) 7,906,129(1) 526,718(2) (1) (2) 8,432,847 $ $ $ Weighted-average exercise price of outstanding options, warrants and rights (b) 19.18(3) 11.82(3) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) 2,646,644(4) — 18.62(3) 2,646,644(4) (1) (2) (3) (4) Includes 6,372,349 shares issuable upon exercise of outstanding options and 1,533,780 shares issuable upon vesting of outstanding restricted stock units. Includes 518,749 shares issuable upon exercise of outstanding options and 7,969 shares issuable upon vesting of outstanding restricted stock units. Does not take into account outstanding restricted stock units as these awards have no exercise price. Includes 556,546 shares of common stock available under our Employee Stock Purchase Plan. The Theravance, Inc. 2008 New Employee Equity Incentive Plan (2008 Plan) is a non-stockholder approved plan adopted by the Board of Directors (Board) on January 29, 2009 and is intended to satisfy the requirements of Nasdaq Marketplace Rule 5635(c)(4). Non-statutory options, restricted stock units, and restricted stock awards were granted under the 2008 Plan to our newly hired employees until April 27, 2010, the date on which stockholders approved our amended and restated 2004 Equity Incentive Plan. No further awards will be granted under the 2008 Plan. The Board authorized 500,000 shares of common stock for issuance under the 2008 Plan upon its adoption in 2008 and the Compensation Committee of the Board authorized an additional 200,000 shares for issuance under the 2008 Plan in July 2009. All option grants have an exercise price per share of no less than 100% of the fair market value per share of common stock on the grant date. Additional features of the 2008 Plan are outlined in Note 1, "Description of Operations and Summary of Significant Accounting Policies-Fair Value of Stock-Based Compensation Awards," and Note 10, "Stock-Based Compensation," in the Notes to Consolidated Financial Statements below in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. 36 Table of Contents Stock Performance Graph The graph set forth below compares the cumulative total stockholder return on our common stock for the period commencing on December 31, 2006 and ending on December 31, 2011, with the cumulative total return of (i) the Nasdaq Composite Index and (ii) the NYSE Arca Biotechnology Index, over the same period. This graph assumes the investment of $100.00 on December 31, 2006 in each of (1) our common stock, (2) the Nasdaq Composite Index and (3) the NYSE Arca Biotechnology Index, and assumes the reinvestment of dividends, if any, although dividends have never been declared on our common stock. The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. Information used in the graph was obtained from Research Data Group, Inc., a source believed to be reliable, but we are not responsible for any errors or omissions in such information. Notwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate this Annual Report on Form 10-K or future filings made by us under those statutes, this Stock Performance Graph section shall not be deemed filed with the United States Securities and Exchange Commission and shall not be deemed incorporated by reference into any of those prior filings or into any future filings made by us under those statutes. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Theravance, Inc., the NASDAQ Composite Index, and the NYSE Arca Biotechnology Index * $100 invested on 12/31/06 in stock or index, including reinvestment of dividents. Fiscal year ending December 31. 37 Table of Contents ITEM 6. SELECTED FINANCIAL DATA The following tables reflect selected consolidated summary financial data for each of the last five fiscal years and are derived from our audited financial statements. This data should be read in conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 8, "Financial Statements and Supplementary Data", in this Annual Report on Form 10-K. CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue Operating expenses: Research and development General and administrative Restructuring charges Total operating expenses(1) Loss from operations Interest and other income Interest expense Net loss 2011 Year Ended December 31, 2010 2008 2009 (in thousands, except per share data) 2007 $ 24,512 $ 24,223 $ 24,374 $ 23,096 $ 22,002 77,524 27,066 1,145 105,735 75,070 27,476 — 102,546 103,568 30,681 — 134,249 (109,737) 155,254 35,313 — 190,567 (168,565) 8,661 (93) $ (115,344) $ (83,862) $ (85,302) $ (93,643) $ (159,997) 82,020 28,861 5,419 116,300 (81,361) 2,111 (6,052) (78,323) 505 (6,044) (93,204) 5,242 (5,681) 415 (6,022) Basic and diluted net loss per share $ (1.41) $ (1.16) $ (1.35) $ (1.53) $ (2.64) Shares used in computing basic and net loss per share(2) (3)(4) 82,051 72,070 63,027 61,390 60,498 2011 2010 As of December 31, 2009 2008 2007 CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and marketable securities $ Working capital Total assets Long-term liabilities(5)(6) Accumulated deficit Total stockholders' equity (net capital deficiency) 240,915 $ 199,267 258,782 300,338 (1,315,960) (87,052) 309,634 $ 276,300 331,202 313,568 (1,200,616) (22,420) 155,390 $ 123,096 181,393 331,441 (1,116,754) (188,994) 200,605 $ 166,006 236,156 327,150 (1,031,452) (134,949) 129,272 78,554 161,983 172,714 (937,809) (66,264) (1) The following table discloses the allocation of stock-based compensation expense included in total operating expenses: (in thousands) Research and development General and administrative Total stock-based compensation 2011 2010 Year Ended December 31, 2009 $ 13,421 $ 10,322 $ 11,542 $ 10,264 $ 13,133 9,361 $ 24,916 $ 19,009 $ 20,000 $ 18,019 $ 22,494 11,495 8,687 7,755 8,458 2008 2007 38 Table of Contents (2) (3) (4) (5) (6) In March 2010, we completed a public offering of 8,625,000 shares of common stock. The financing raised proceeds, net of issuance costs, of $93.5 million. In November 2010, we completed a private placement of 5,750,000 shares of common stock to Glaxo Group Limited, an affiliate of GSK. The financing raised proceeds, net of issuance costs, of $129.2 million. During 2011, Glaxo Group Limited, an affiliate of GSK, purchased a total of 574,454 shares of common stock pursuant to its rights under our governance agreement with GSK dated June 4, 2004, as amended. The purchases resulted in proceeds of $13.6 million. Long-term liabilities include the long-term portion of deferred revenue as follows: (in thousands) Deferred revenue 2011 2009 $ 122,017 $ 137,425 $ 157,426 $ 152,771 $ 166,136 2008 2007 2010 In January 2008, we completed a public offering of $172.5 million aggregate principal amount of unsecured convertible subordinated notes which will mature on January 15, 2015. The financing raised proceeds, net of issuance costs, of $166.7 million. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis (MD&A) is intended to facilitate an understanding of our business and results of operations. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included in Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K. The information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. You should review the section entitled "Risk Factors" in Item 1A of Part I above for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Executive Summary Theravance is a biopharmaceutical company with a pipeline of internally discovered product candidates and strategic collaborations with pharmaceutical companies. We are focused on the discovery, development and commercialization of small molecule medicines across a number of therapeutic areas including respiratory disease, bacterial infections, and central nervous system (CNS)/pain. Our key programs include: RELOVAIR™, LAMA/LABA ('719/vilanterol (VI)) and MABA (Bifunctional Muscarinic Antagonist-Beta2 Agonist), each partnered with GlaxoSmithKline plc (GSK), and our oral Peripheral Mu Opioid Receptor Antagonist (PµMA) program. By leveraging our proprietary insight of multivalency to drug discovery, we are pursuing a best-in-class strategy designed to discover superior medicines in areas of significant unmet medical need. Our net loss for the year ended December 31, 2011 was $115.3 million compared to $83.9 million in 2010. This increase was due primarily to higher research and development expenses. Research and development expenses for the year ended December 31, 2011 increased to $103.5 million compared to $75.1 million in 2010. This increase was driven primarily by higher external costs. Cash, cash equivalents, and short-term investments totaled $240.9 million at December 31, 2011, a decrease of $68.7 million since December 31, 2010. The decrease was due primarily to cash used in operations, 39 Table of Contents partially offset by net proceeds of $13.6 million received from sales of our common stock to an affiliate of GSK, net proceeds of $10.1 million received from exercises of employee stock options, a $3.0 million milestone payment received from GSK for the initiation of a Phase 1 combination study in the MABA program, a $1.0 million upfront license payment related to GSK's license of additional preclinical MABA compounds from us, and $2.4 million royalty revenue from VIBATIV® sales. Program Highlights Respiratory Programs with GSK RELOVAIR™ RELOVAIR™ is an investigational once-daily inhaled corticosteroid (ICS)/long-acting beta2 agonist (LABA) combination treatment, comprising fluticasone furoate and vilanterol (FF/VI), currently in development for the treatment of patients with chronic obstructive pulmonary disease (COPD) or asthma. In January 2012, we and GSK announced that GSK intends to commence global regulatory filings in COPD and asthma beginning in mid-2012 based upon the initial outcomes from pivotal Phase 3 studies for once-daily RELOVAIR™ in COPD and asthma. For asthma, GSK will continue discussions with the U.S. Food and Drug Administration (FDA) on the regulatory requirements for a U.S. asthma indication. LAMA/LABA Combination (GSK573719/Vilanterol or '719/VI) Enrollment is complete for the seven ongoing studies in the Phase 3 program for the once-daily long-acting muscarinic antagonist (LAMA)/LABA dual bronchodilator '719/VI. '719/VI combines two bronchodilators currently under development—'719, a LAMA and VI, a LABA. These two molecules provide two mechanisms of bronchodilation for patients with COPD: antagonism of acetylcholine muscarinic receptors and agonism of beta2 adrenoreceptors. The LAMA/LABA Phase 3 program, which will evaluate over 5,000 patients with COPD globally, consists of a 52-week study to evaluate the long term safety and tolerability of '719 (125mcg) alone, as well as the combination '719/VI (125/25mcg), two large 6-month pivotal studies that will compare improvements in lung function between '719/VI, its components and placebo, two 6-month studies to compare the combination with its components and tiotropium and two studies to assess the effect of '719/VI on exercise endurance. The Phase 3 program will investigate two doses of '719 (125mcg and 62.5mcg) and two doses of the combination '719/VI (125/25mcg and 62.5/25mcg). Inhaled Bifunctional Muscarinic Antagonist-Beta2 Agonist (MABA) GSK961081 ('081), the lead compound in the MABA program with GSK, is a single molecule bifunctional bronchodilator with both muscarinic antagonist and beta2 receptor agonist activity. In February 2012, we announced topline results from a Phase 2b COPD study with '081. In October 2011, we and GSK amended the 2004 Strategic Alliance Agreement to expand the MABA program. We granted to GSK an exclusive license to develop and commercialize additional preclinical MABA compounds discovered by Theravance. We received an upfront license payment of $1.0 million and have the potential to receive clinical, regulatory and commercial milestone payments as well as royalties on worldwide net sales if one of these MABA compounds is successfully commercialized. 40 Table of Contents Bacterial Infections Program VIBATIV® (telavancin) for injection In November 2005, we entered into a global collaboration arrangement with Astellas for the development and commercialization of VIBATIV®. On January 6, 2012, Astellas exercised its right to terminate this agreement. The rights granted to Astellas ceased upon termination of the agreement and Astellas has stopped promotional sales efforts. Pursuant to the terms of the agreement, there are no termination payments required by either party and Astellas is entitled to a ten-year, 2% royalty on future net sales of VIBATIV®. To support the transition, Astellas will sell inventory to us, manage certain clinical and regulatory activities and respond to medical inquiries with respect to VIBATIV® until no later than March 31, 2012. We currently are focusing our efforts on evaluating commercialization alternatives for VIBATIV®, including re-partnering, and re-establishing consistent VIBATIV® product supply. Due to manufacturing issues at the single-source supplier of VIBATIV® drug product, VIBATIV® is currently subject to critical product shortages and regional supply outages in the U.S., and the Committee for Medicinal Products for Human Use (CHMP) recommended to the European Commission that it suspend marketing authorization for VIBATIV®. If the issues at the manufacturer are not promptly resolved, obtaining supply would require identifying and qualifying an alternative manufacturer, which could take 12 to 24 months. Central Nervous System (CNS)/Pain Program Oral Peripheral Mu Opioid Receptor Antagonist (PµMA)—TD-1211 Enrollment is progressing in the Phase 2b program, which will assess the safety, tolerability and clinical activity of TD-1211 in patients with opioid-induced constipation. This program is evaluating several doses and dose regimens to provide information for the design of the Phase 3 program. TD-1211 is an investigational once-daily, orally-administered, peripherally selective, multivalent inhibitor of the mu opioid receptor designed to alleviate gastrointestinal side effects of opioid therapy without affecting analgesia. MonoAmine Reuptake INhibitor (MARIN)—TD-9855 In December 2011, we announced the initiation of an Attention-Deficit/Hyperactivity Disorder (ADHD) Phase 2 proof-of-concept study with TD-9855, the lead compound in our MARIN program. This Phase 2 study will evaluate the safety and efficacy of two different doses of TD-9855 in adult male patients with ADHD. TD-9855 is an investigational norepinephrine and serotonin reuptake inhibitor (NSRI) discovered by Theravance for the treatment of CNS conditions such as ADHD and chronic pain. Theravance Respiratory Program Long-Acting Muscarinic Antagonist (LAMA)—TD-4208 In November 2011, we announced positive topline results from a Phase 2a single-dose COPD study of TD-4208, an investigational inhaled LAMA, discovered by Theravance. In this study, TD-4208 met the primary endpoint by demonstrating a statistically significant mean change from baseline in peak forced expiratory volume in one second (FEV1) compared to placebo and was generally well tolerated. Other Programs In addition to the programs listed above, we have other clinical-stage programs for bacterial infections, cognitive disorders and gastrointestinal motility. 41 Table of Contents TD-1792 is our investigational heterodimer antibiotic that combines the antibacterial activities of a glycopeptide and a beta-lactam in one molecule. The goal of our program with TD-1792 is to develop a next-generation antibiotic for the treatment of serious infections caused by Gram-positive bacteria. In cognitive disorders, we are evaluating compound TD-5108 as a potential treatment for Alzheimer's disease. TD-5108 has successfully completed a Phase 1 study assessing CNS penetration. Our Gastrointestinal (GI) Motility Dysfunction program is dedicated to finding new medicines for GI motility disorders such as chronic idiopathic constipation (CIC) and other disorders related to reduced gastrointestinal motility. Our lead compound in this area is TD-5108, a highly selective 5-HT4 receptor agonist that has successfully completed a 400 patient Phase 2 proof-of-concept study in CIC. The back-up compound in this program, TD-8954, has completed single-ascending and multiple-ascending dose Phase 1 studies. Critical Accounting Policies This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. 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 and expenses during the reporting periods. We periodically evaluate our material estimates and judgments based on the terms of underlying agreements, the expected course of development, historical experience and other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are more fully described in Note 1, "Description of Operations and Summary of Significant Accounting Policies," in the Notes to our consolidated financial statements contained in Part II, Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K, we believe that the following accounting policies relating to revenue recognition, preclinical study and clinical study expenses, stock-based compensation charges and inventory require us to make significant estimates, assumptions and judgments. Revenue Recognition We recognize revenue in accordance with the Financial Accounting Standards Board (FASB) Subtopic ASC 605-25, "Revenue Recognition—Multiple- Element Arrangements." As of January 1, 2011, we adopted on a prospective basis the accounting updates to guidance ASC 605 "Revenue Recognition", subtopic ASC 605-25 "Revenue with Multiple Element Arrangements" and subtopic ASC 605-28 "Revenue Recognition-Milestone Method", which provides accounting guidance for revenue recognition for arrangements with multiple deliverables and guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research and development transactions is appropriate, respectively. The adoption of ASC 605-25 "Revenue with Multiple Element Arrangements" and the election of the milestone method under subtopic ASC 605-28 "Revenue Recognition-Milestone Method" did not have a material impact on our consolidated financial statements. However, these updates will result in different accounting treatment for future new collaboration arrangements and substantive milestones earned after the dates of adoption. Our revenues are related primarily to our collaboration arrangements with GSK and our collaboration agreement with Astellas, which was in effect through January 6, 2012 (see Collaboration Arrangements section below). Our arrangements provide for various types of payments to us, including non-refundable upfront license and other fees, milestone payments and royalty payments. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. 42 Table of Contents For multiple-element arrangements entered into prior to January 1, 2011, we determined that the deliverables under our collaboration agreements with GSK and Astellas did not meet the criteria required for separate accounting units for the purposes of revenue recognition. As a result, we recognized revenue from non- refundable, upfront fees and development milestone payments ratably over the term of its performance under the agreements. These upfront or milestone payments received, pending recognition as revenue, are recorded as deferred revenue and are classified as a short-term or long-term liability on the balance sheet to be amortized over the period of deferral. We periodically review the estimated performance periods of our contracts based on the progress of its programs. In accordance with ASC Subtopic 808-10, "Collaborative Arrangement," and pursuant to our agreement with Astellas, we recognized as revenue the net impact of transactions with Astellas related to VIBATIV® inventory including revenue specifically attributable to any sales, and cost of inventory either transferred or expensed as unrealizable. We have recognized royalty revenue on net sales in the period in which the royalties are earned based on net sales reporting provided by Astellas, our former collaborative partner for VIBATIV®. We have been reimbursed by GSK and Astellas for certain external development costs under their respective collaboration agreements. Such reimbursements have been reflected as a reduction of research and development expense and not as revenue. For multiple-element arrangements entered into, or materially modified, subsequent to January 1, 2011, each deliverable within a multiple deliverable revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. In addition, multiple deliverable revenue arrangement consideration is allocated at the inception of an arrangement to all deliverables using the relative selling price method. We also apply a selling price hierarchy for determining the selling price of a deliverable, which includes (1) vendor-specific objective evidence, if available, (2) third-party evidence, if vendor-specific objective evidence is not available, and (3) estimated selling price if neither vendor-specific nor third-party evidence is available. Where a portion of non-refundable upfront license or other payments, or milestone payments received are allocated to continuing performance obligations under the terms of a collaboration agreement, it will be recorded as deferred revenue and recognized as revenue ratably over the term of its estimated performance period under the agreement. We determine the estimated performance periods and they are periodically reviewed based on the progress of the related program. The effect of a change made to an estimated performance period and therefore revenue recognized ratably would occur on a prospective basis in the period that the change was made. Deferred revenue associated with a non-refundable payment received under a collaborative agreement that the performance obligations are terminated will result in an immediate recognition of any remaining deferred revenue in the period that termination occurred provided that all performance obligations have been satisfied. For milestones earned after January 1, 2011, we recognize revenue from milestone payments when: (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, and (ii) we do not have ongoing performance obligations related to the achievement of the milestone earned. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment (a) is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from our performance to achieve the milestone, (b) relates solely to past performance, and (c) is reasonable relative to all of the deliverables and payment terms (including 43 Table of Contents other potential milestone consideration) within the arrangement. See Note 3, "Collaboration Arrangements," in the Notes to the Consolidated Financial Statements below in part II, Item 8, "Financial Statements and Supplementary Data" on this Annual Report on Form 10-K, for analysis of each milestone event deemed to be substantive or non-substantive. Preclinical Study and Clinical Study Expenses A substantial portion of our preclinical studies and all of our clinical studies have been performed by third-party contract research organizations (CROs). Some CROs bill monthly for services performed, while others bill based upon milestones achieved. We review the activities performed under the significant contracts each quarter. For preclinical studies, the significant factors used in estimating accruals include the percentage of work completed to date and contract milestones achieved. For clinical study expenses, the significant factors used in estimating accruals include the number of patients enrolled and percentage of work completed to date. Vendor confirmations are obtained for contracts with longer duration when necessary to validate our estimate of expenses. Our estimates are highly dependent upon the timeliness and accuracy of the data provided by our CROs regarding the status of each program and total program spending and adjustments are made when deemed necessary. To date, we have not recorded any material adjustments as a result of changes to our estimates. Stock-Based Compensation Stock-based compensation arrangements currently include stock options granted, restricted stock unit awards (RSUs) granted and restricted shares issued RSAs) under the 2004 Equity Incentive Plan (2004 Plan) and the 2008 New Employee Equity Incentive Plan (2008 Plan) and purchases of common stock by our employees at a discount to the market price during offering periods under our Employee Stock Purchase Plan (ESPP). Non-statutory options, RSUs, and RSAs were granted under the 2008 Plan to our newly hired employees until April 27, 2010, the date on which stockholders approved our amended and restated 2004 Plan. No further awards will be granted under the 2008 Plan. We use the Black-Scholes option pricing model to estimate the fair value of options granted under our equity incentive plans and rights to acquire stock granted under our employee stock purchase plan. The Black-Scholes option valuation model requires the use of assumptions, including the expected term of the award and the expected stock price volatility. We use the "simplified" method as described in Staff Accounting Bulletin No. 107 for the expected option term because the usage of our historical exercise data is limited due to post-IPO exercise restrictions. Since April 1, 2011, we have used our historical volatility to estimate expected stock price volatility. Prior to April 1, 2011, we used peer company price volatility to estimate expected stock price volatility due to our limited historical common stock price volatility since its initial public offering in 2004. Restricted stock units (RSUs) and stock awards are measured based on the fair market values of the underlying stock on the dates of grant. The estimated fair value of stock options, RSUs and RSAs are expensed on a straight-line basis over the expected term of the grant and the fair value of performance-contingent RSUs and performance-contingent RSAs are expensed during the term of the award when we determine that it is probable that certain performance milestones will be achieved. Compensation expense for purchases under the ESPP is recognized based on the estimated fair value of the common stock during each offering period and the percentage of the purchase discount. Stock-based compensation expense for stock options, RSUs and RSAs has been reduced for estimated forfeitures so that compensation expense is based on options, RSUs and RSAs ultimately expected to vest. We estimate annual forfeiture rates for stock options, RSUs and RSAs based on our historical forfeiture experience. 44 Table of Contents See Note 10, "Stock-Based Compensation," in the Notes to Consolidated Financial Statements in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K, for more information. Inventory Inventory is stated at the lower of cost or market value and is included in prepaid and other current assets. Inventory was comprised of VIBATIV® active pharmaceutical ingredient. VIBATIV® has a limited shelf life. During the quarter ended December 31, 2011, we expensed all remaining inventory at an average cost basis of $0.5 million as it was no longer realizable. Collaboration Arrangements GSK LABA collaboration with GSK In November 2002, we entered into our LABA collaboration with GSK to develop and commercialize once-daily LABA products for the treatment of COPD and asthma. For the treatment of COPD, the collaboration is developing combination products, RELOVAIR™ and the LAMA/LABA '719/VI. For the treatment of asthma, the collaboration is developing RELOVAIR™. RELOVAIR™ is an investigational once-daily combination medicine consisting of a LABA, VI, previously referred to as GW642444 or '444, and an ICS, fluticasone furoate (FF). The LAMA/LABA, '719/VI, is an investigational once-daily combination medicine consisting of the LAMA, '719, and the LABA, VI. The RELOVAIR™ program is aimed at developing a once-daily combination LABA/ICS to succeed GSK's Advair®/Seretide™ (salmeterol and fluticasone as a combination) franchise, which reported 2011 sales of approximately $8.1 billion, and to compete with Symbicort® (formoterol and budesonide as a combination), which reported 2011 sales of approximately $3.1 billion. '719/VI, which is also a combination product, is targeted as an alternative treatment option to Spiriva® (tiotropium), a once-daily, single-mechanism bronchodilator, which reported 2010 sales of approximately $3.8 billion. The current lead product candidates in the LABA collaboration, VI and FF, were discovered by GSK. In the event that VI is successfully developed and commercialized, we will be obligated to make milestone payments to GSK which could total as much as $220.0 million if both a single-agent and a combination product or two different combination products are launched in multiple regions of the world. If global regulatory authorities accept the applications for RELOVAIR™, which we anticipate will be filed by GSK beginning in mid-2012, a portion of these potential milestone payments could be payable to GSK within the next two years. We are entitled to annual royalties from GSK of 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion. Sales of single-agent LABA medicines and combination medicines would be combined for the purposes of this royalty calculation. For other products combined with a LABA from the LABA collaboration, such as '719/VI, royalties are upward tiering and range from the mid-single digits to 10%. However, if GSK is not selling a LABA/ICS combination product at the time that the first other LABA combination is launched, then the royalties described above for the LABA/ICS combination medicine would be applicable. In connection with the LABA collaboration, in 2002, Glaxo Group Limited, an affiliate of GSK, purchased shares of our Series E preferred stock for an aggregate purchase price of $40.0 million. 45 Table of Contents 2004 Strategic Alliance with GSK In March 2004, we entered into our strategic alliance with GSK. Under this alliance, GSK received an option to license exclusive development and commercialization rights to product candidates from certain of our discovery programs on pre-determined terms and on an exclusive, worldwide basis. Upon GSK's decision to license a program, GSK is responsible for funding all future development, manufacturing and commercialization activities for product candidates in that program. In addition, GSK is obligated to use diligent efforts to develop and commercialize product candidates from any program that it licenses. If the program is successfully advanced through development by GSK, we are entitled to receive clinical, regulatory and commercial milestone payments and royalties on any sales of medicines developed from the program. If GSK chooses not to license a program, we retain all rights to the program and may continue the program alone or with a third party. In 2005, GSK licensed our MABA program for the treatment of COPD, and in October 2011, we and GSK expanded the MABA program by adding six additional Theravance-discovered preclinical MABA compounds (the "Additional MABAs"). GSK's development, commercialization, milestone and royalty obligations under the strategic alliance remain the same with respect to '081, the lead compound in the MABA program. GSK is obligated to use diligent efforts to develop and commercialize at least one MABA within the MABA program, but may terminate progression of any or all Additional MABAs at any time and return them to us, at which point we may develop and commercialize such Additional MABAs alone or with a third party. Both GSK and we have agreed not to conduct any MABA clinical studies outside of the strategic alliance so long as GSK is in possession of the Additional MABAs. If a single-agent MABA medicine containing '081 is successfully developed and commercialized, we are entitled to receive royalties from GSK of 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 a MABA/ICS, the royalty rate is 70% of the rate applicable to sales of the single-agent MABA medicine. For single-agent MABA medicines containing an Additional MABA, we are entitled to receive royalties from GSK of between 10% and 15% of annual global net sales up to $3.5 billion, and 10% for all annual global net sales above $3.5 billion. For combination products containing an Additional MABA, such as a MABA/ICS, the royalty rate is 50% 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, we could earn total milestone payments up to $125.0 million for a single-agent medicine and up to $250.0 million for both a single-agent and a combination medicine. If a MABA medicine containing an Additional MABA is successfully developed and commercialized in multiple regions of the world, we could earn total milestone payments up to $129.0 million. In connection with the expansion of the MABA program, GSK relinquished its option right on our MonoAmine Reuptake Inhibitor (MARIN) program and Angiotensin Receptor-NEP Inhibitor (ARNI) program. GSK has no further option rights on any of our research or development programs under the strategic alliance. In May 2004, GlaxoSmithKline LLC, an affiliate of GSK, purchased 6,387,096 shares of our Class A common stock for an aggregate purchase price of $108.9 million and, upon the closing of our initial public offering on October 8, 2004, GlaxoSmithKline LLC purchased an additional 433,757 shares of Class A common stock for an aggregate purchase price of $6.9 million. In November 2010 Glaxo Group Limited, an affiliate of GSK, purchased 5,750,000 shares of our Common Stock for an aggregate purchase price of $129.4 million. 46 Table of Contents GSK Conversion of our Class A Common Stock and Purchases of Common Stock under our Governance Agreement with GSK In July 2011, GSK converted all of the shares of our Class A common stock held by its affiliates into 9,401,499 shares of our common stock on a one share- for-one share basis in accordance with the terms of our restated certificate of incorporation. In addition, Glaxo Group Limited purchased shares of our common stock pursuant to its periodic "top-up" rights under our governance agreement with GSK dated June 4, 2004, as amended, as follows: Purchase dates February 24, 2011 May 3, 2011 August 2, 2011 November 1, 2011 Through December 31, 2011 Common Stock Shares Purchased Aggregate Amounts (in thousands) 152,278 $ 261,299 $ 102,466 $ 58,411 $ 3,609 6,689 2,020 1,298 GSK Upfront License Fees, Milestone Payments and Revenue In August 2011, we received a $3.0 million milestone payment from GSK for the initiation of the Phase 1 combination study in our MABA program. In October 2011, we received an upfront license payment of $1.0 million from GSK related to the Additional MABAs, which is being accounted for as a new arrangement under the updated multiple element arrangement accounting guidance. We allocated revenue from this upfront license payment and will allocate any potential contingent payments related to the Additional MABAs under the MABA program, as discussed above in the section entitled Critical Accounting Policies—Revenue Recognition, to each non-contingent element based upon the relative selling price of each element. We determined the license has standalone value because the license can be used for its intended purpose and may be developed, commercialized and manufactured for its intended purpose without any remaining participation from us. As a result, we recognized $936,000 of the upfront license payment and the remaining amount was deferred and will be amortized over the estimated development period over which we will be performing services. Any eligible potential contingent payments related to the MABA program are not deemed substantive due to the fact that the achievement of the event underlying the payment predominantly relates to GSK's performance of future development, manufacturing and commercialization activities for product candidates after licensing the program. 47 Table of Contents Revenue recognized from GSK under the LABA collaboration and strategic alliance agreement was as follows: (in millions) LABA/RELOVAIR™ collaboration(1) Strategic alliance agreement Strategic alliance—LAMA license Strategic alliance—MABA program license(2) Total revenue Year Ended December 31, 2010 2009 2011 $ 4.7 $ 5.1 $ 5.1 2.7 4.3 3.0 $ 9.7 $ 9.8 $ 15.1 1.9 — 3.1 2.7 — 2.0 (1) (2) In the fourth quarter of 2011, we revised the estimated performance period for the LABA program based on its progress. We do not expect that the revisions will have a material impact on future revenue recognized under this program. In the fourth quarter of 2011 and the first quarter of 2010, we revised the estimated performance period for the MABA program based on its progress. We do not expect that the revisions will have a material impact on future revenue recognized under this program Astellas In November 2005, we entered into a global collaboration arrangement with Astellas for the development and commercialization of VIBATIV®. On January 6, 2012, Astellas exercised its right to terminate this agreement. The rights granted to Astellas ceased upon termination of the agreement and Astellas has stopped promotional sales efforts. Pursuant to the terms of the agreement, there are no termination payments required by either party and Astellas is entitled to a ten-year, 2% royalty on future net sales of VIBATIV®. To support the transition, Astellas will sell inventory to us, manage certain clinical and regulatory activities and respond to medical inquiries with respect to VIBATIV® until no later than March 31, 2012. We are evaluating global commercialization alternatives for VIBATIV® either alone or with partners. VIBATIV® (telavancin), a bactericidal, once-daily injectable antibiotic developed by us for the treatment of Gram-positive infections. The FDA has approved VIBATIV® for the treatment of complicated skin and skin structure infections (cSSSI) caused by susceptible Gram-positive bacteria including both methicillin-resistant (MRSA) and methicillin-susceptible strains of Staphylococcus aureus in adult patients. VIBATIV® is also approved in Canada for the treatment of cSSSI in adult patients. In September 2011, the European Commission granted marketing authorization for VIBATIV® 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. However, in February 2012 the Committee for Medicinal Products for Human Use (CHMP) recommended to the European Commission that it suspend this marketing authorization because the single-source drug product supplier does not meet the Good Manufacturing Practice (GMP) requirements to allow the manufacture of VIBATIV®. Due to manufacturing issues at the single-source supplier of VIBATIV® drug product, VIBATIV® is currently subject to critical product shortages and regional supply outages in the U.S. If the issues at the manufacturer are not promptly resolved, obtaining supply would require identifying and qualifying an alternative manufacturer, which could take 12 to 24 months. Through December 31, 2011, we have received $191.0 million in upfront license, milestone and other fees from Astellas. We recorded these payments as deferred revenue and are amortizing them ratably over our estimated performance period (development and commercialization period). As a 48 Table of Contents result of the termination of the VIBATIV® collaboration agreement in January 2012, we are no longer eligible to receive any further milestone payments. Net revenue recognized under this collaboration agreement was as follows: (in millions) Amortization of deferred revenue Royalties from net sales of VIBATIV® Proceeds from VIBATIV® delivered to Astellas Cost of VIBATIV® delivered to Astellas Cost of unrealizable VIBATIV® inventory Total net revenue 2011 2009 Year Ended December 31, 2010 $ 13.0 $ 13.0 $ 11.3 0.8 — (1.6) (1.2) 9.3 1.1 2.0 (0.9) (0.8) $ 14.9 $ 14.4 $ 2.4 1.2 (1.2) (0.5) Results of Operations Revenue Revenue, as compared to the prior years, was as follows: (in millions, except percentages) Revenue Year Ended December 31, 2010 2011 2009 Change 2011/2010 $ Change 2010/2009 $ % % 1% $ (0.2) (1)% $ 24.5 $ 24.2 $ 24.4 $ 0.3 We recognize revenue from the amortization of upfront license fees and milestone payments related to our GSK LABA collaboration and strategic alliance agreements and our Astellas telavancin collaboration, which was terminated on January 6, 2012. In addition, we recognized revenue related to our Astellas telavancin collaboration from royalties from net sales of VIBATIV® and from the impact of VIBATIV® inventory transfers or dispositions. Revenue increased to $24.5 million in 2011 compared to 2010. This increase was due primarily to an (i) increase in royalty revenue of $1.3 million from higher net sales of VIBATIV®, (ii) an increase in revenue related to our GSK MABA program of $1.1 million reflecting primarily the Additional MABA upfront license fee, and (iii) a decrease in expense of $0.3 million related to VIBATIV® inventory that was no longer realizable. These increases in 2011 were partially offset by (i) a decrease in revenue related to our GSK strategic alliance agreement of $0.8 million resulting from the deferred revenue being fully amortized in the third quarter of 2011, (ii) a decrease in net proceeds of $1.1 million in 2011, compared to 2010, related to the delivery of VIBATIV® to Astellas, and (iii) a decrease in revenue of $0.4 million in 2011, compared to 2010, resulting from a change in the estimated performance period related to our GSK LABA collaboration. 49 Table of Contents Upfront license fees and milestone payments received from GSK under the LABA collaboration and strategic alliance agreements and from Astellas under the telavancin collaboration were as follows: (in millions) GSK Collaborations LABA/RELOVAIR™ collaboration(1) Strategic alliance agreement Strategic alliance—LAMA license(2) Strategic alliance—MABA program license Astellas License agreement(3) Total Through December 31, 2011 Upfront license and Other Fees Milestone Payments Total $ $ 10.0 $ 20.0 5.0 6.0 70.0 111.0 $ 60.0 50.0 $ 20.0 — 8.0 3.0 22.0 16.0 121.0 191.0 190.0 $ 301.0 (1) (2) (3) We do not currently expect to be eligible for any additional milestones under this collaboration. In August 2004, GSK exercised its right to license our LAMA program pursuant to the terms of the strategic alliance. In 2009, GSK returned the program to us. This agreement was terminated on January 6, 2012. As a result of the termination of the VIBATIV® collaboration agreement with Astellas, future revenue from Astellas will be comprised of recognition in the first quarter of 2012 of the remaining non-cash, deferred upfront license fees and milestone payments, net of any estimated termination obligations, of approximately $125.0 million. Future revenue from GSK will include ongoing amortization of upfront license fees and milestone payments over their estimated performance periods. We periodically review and, if necessary, revise the estimated performance periods pursuant to these contracts. Research & Development Research and development (R&D) expenses, as compared to the prior years, were as follows: (in millions, except percentages) Employee-related External research and development Stock-based compensation Facilities, depreciation and other allocated Total research and development expenses Year Ended December 31, 2010 2011 2009 Change 2011/2010 $ Change 2010/2009 $ $ 35.5 $ 30.4 $ 29.3 $ 30.8 13.4 23.8 5.2 18.6 3.1 1.6 $ 103.5 $ 75.1 $ 77.5 $ 28.5 12.2 10.3 22.2 13.8 11.5 22.9 % 17% $ 152% 30% 7% % 1.1 4% (1.6) (12)% (1.2) (10)% (3)% (0.7) (3)% 38% $ (2.4) R&D expenses increased in 2011 compared to 2010, due primarily to clinical costs related to our PµMA and MARIN programs, laboratory supplies, and higher employee related expenses in 2011. R&D expenses decreased in 2010 compared to 2009, due primarily to lower external costs in 2010, partially offset by lower reimbursements received from third parties in 2010. Employee-related expenses increased in 2010 compared to 2009 due primarily to higher salary and benefits costs. Stock-based compensation decreased in 2010 compared to 2009, due primarily to a larger number of options that completed vesting in 2009. 50 Table of Contents During the first quarter of 2011, we granted special long-term retention and incentive equity awards to executive officers and certain employees and special long-term retention and incentive cash bonus awards to certain employees. The vesting of these awards is tied to the achievement of certain performance conditions over a six-year timeframe from 2011 through December 31, 2016 and continued employment, both of which must be satisfied in order for vesting to occur. The maximum potential expense for R&D associated with this program is $6.3 million related to stock-based compensation expense and $35.4 million related to cash bonus expense, which would be recognized in increments based on achievement of the performance conditions. During the third quarter of 2011, we granted an incentive equity award to a non-executive officer that has dual triggers of vesting based upon the achievement of a performance condition over a timeframe from 2011-2013 and continued employment through 2014, both of which must be satisfied in order for the award to vest in full. The maximum potential expense for R&D associated with this award is approximately $475,000, which would be recognized in increments based on achievement of the performance conditions. As of December 31, 2011, we determined that the achievement of the performance conditions under these awards was not probable and, as a result, no compensation expense has been recognized. Management believes that the likelihood of achieving all of the performance conditions under these awards is remote. We anticipate R&D expenses for 2012 to increase relative to 2011. R&D expenses in 2012 will be driven largely by employee related expenses, costs associated with our continued development efforts in our PµMA program for opioid-induced constipation with TD-1211, our MARIN program with TD-9855, and costs associated with our earlier stage clinical programs and our Hepatitis C virus (HCV) and cardiovascular programs in late-stage discovery, as well as new drug discovery programs. We have not provided program costs in detail because we do not track, and have not tracked, all of the individual components (specifically the internal cost components) of our research and development expenses on a program basis. We do not have the systems and processes in place to accurately capture these costs on a program basis. General & Administrative General and administrative (G&A) expenses, as compared to the prior years, were as follows: (in millions, except percentages) General and administrative Year Ended December 31, 2010 2011 2009 Change 2011/2010 $ % Change 2010/2009 $ $ 30.7 $ 27.5 $ 27.1 $ 3.2 12% $ 0.4 % 1% G&A expenses increased in 2011 compared to 2010, due primarily to higher employee related and external expenses offset by lower facilities related costs. G&A expenses increased in 2010 compared to 2009, due primarily to higher salary and benefits costs partially offset by lower external costs. During the first quarter of 2011, we granted special long-term retention and incentive equity awards to executive officers and certain employees and special long-term retention and incentive cash bonus awards to certain employees. The vesting of these awards is tied to the achievement of certain performance conditions over a six-year timeframe from 2011 through December 31, 2016 and continued employment, both of which must be satisfied in order for the vesting to occur. The maximum potential expense for G&A associated with this program is $25.6 million related to stock-based compensation expense and $4.4 million related to cash bonus expense, which would be recognized in increments based on achievement of the performance conditions. As of December 31, 2011, we determined that the achievement of the requisite performance conditions was not probable and, as a result, no compensation expense has been recognized. Management believes that the likelihood of achieving all of the performance conditions is remote. 51 Table of Contents We anticipate G&A expenses for 2012 to be at a similar level to 2011. Restructuring charges Restructuring charges, as compared to the prior years, were as follows: (in millions, except percentages) Restructuring charges Year Ended December 31, 2010 Change 2011/2010 $ $ — $ — $ 1.1 $ — N/A $ (1.1) (100)% Change 2010/2009 $ % % 2009 2011 In 2009, we recognized restructuring charges for the sublease of excess space in a portion of one of our South San Francisco, CA buildings. Interest and other income Interest and other income, as compared to the prior years, were as follows: (in millions, except percentages) Interest and other income Year Ended December 31, 2010 Change 2011/2010 $ $ 0.4 $ 0.5 $ 2.1 $ (0.1) (20)% $ (1.6) (76)% Change 2010/2009 $ % % 2009 2011 Interest and other income decreased in 2011 compared to 2010, and in 2010 compared to 2009, due primarily to a trend of lower prevailing rates of interest income earned on our investments. Interest expense Interest expense, as compared to the prior years, was as follows: (in millions, except percentages) Interest expense Year Ended December 31, 2010 Change 2011/2010 % $ $ 6.0 $ 6.0 $ 6.1 $ (0) (0)% $ (0.1) (2)% Change 2010/2009 $ % 2009 2011 Interest expense is comprised primarily of interest expense and amortization of debt issuance costs on our convertible subordinated notes issued in January 2008. Income Taxes At December 31, 2011, we had net operating loss carryforwards for federal income taxes of $1,068.2 million and federal research and development tax credit carryforwards of $43.2 million. We recorded a valuation allowance to offset in full the benefit related to our deferred tax assets because realization of these benefits is uncertain. We had unrecognized tax benefits of $42.6 million as of December 31, 2010 and $46.9 million as of December 31, 2011. If we eventually are able to recognize these uncertain positions, most of the $46.9 million of the unrecognized benefit would reduce the effective tax rate, except for excess tax benefits related to stock-based payments. Utilization of net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. We conducted an analysis through 2011 to determine whether an ownership change had occurred since inception. The analysis indicated that two ownership changes occurred in prior years. However, notwithstanding the applicable annual limitations, we estimate that no portion of the net operating loss or credit carryforwards will expire before becoming available to reduce federal and 52 Table of Contents state income tax liabilities. Annual limitations may result in expiration of net operating loss and tax credit carryforwards before some or all of such amounts have been utilized. Liquidity and Capital Resources Liquidity Since our inception, we have financed our operations primarily through private placements and public offerings of equity and debt securities and payments received under corporate collaboration arrangements. As of December 31, 2011, we had $240.9 million in cash, cash equivalents and marketable securities, excluding $0.9 million in restricted cash that was pledged as collateral for certain of our leases. We expect to incur substantial expenses as we continue our discovery and development efforts; particularly to the extent we advance our product candidates into clinical studies, which are very expensive. A Phase 2b program is underway in our PµMA program and we initiated a Phase 2 study for MARIN in late 2011. We also intend to invest in other assets in our pipeline, including our Hepatitis C virus (HCV) and cardiovascular programs in late-stage discovery, and to conduct a number of other non-clinical and clinical studies in 2012. On January 6, 2012, Astellas exercised its right to terminate our collaboration agreement for VIBATIV®. Pursuant to the terms of the termination agreement, we may purchase certain VIBATIV® inventory from Astellas in 2012. The purchase is subject to release of the inventory by a third-party manufacturer and may cost up to $11.0 million. We believe that our cash, cash equivalents and marketable securities will be sufficient to meet our anticipated operating needs for at least the next twelve months based upon current operating plans, milestone and royalty forecasts and spending assumptions. If our current operating plans, milestone and royalty forecasts or spending assumptions change, we may require additional funding sooner in the form of public or private equity offerings or debt financings. Furthermore, if in our view favorable financing opportunities arise, we may seek additional funding at any time. However, future financing may not be available in amounts or on terms acceptable to us, if at all. This could leave us without adequate financial resources to fund our operations as presently conducted. In addition, we regularly explore debt restructuring and/or reduction alternatives, including through tender offers, redemptions, repurchases or otherwise, all consistent with the terms of our debt agreements. Cash Flows (in millions) Net cash used in operating activities Net cash provided by (used in) investing activities Net cash provided by financing activities 2011 Year Ended December 31, 2010 $ (88.3) $ (75.1) $ (58.1) $ 1.7 $ $ (55.8) $ (40.3) $ 11.6 $ 25.6 $ 231.2 $ $ 2009 Change 2011/2010 $ (13.2) $ (15.5) $ (205.6) $ Change 2010/2009 $ (17.0) (42.0) 219.6 Cash used in operations increased in 2011, compared to 2010, due primarily to higher uses of cash for operating liabilities. Cash used in investing activities increased in 2011, compared to 2010, resulting primarily from higher cash balances being invested in short-term investments during 2011, compared to 2010. Cash provided by financing activities decreased in 2011, compared to 2010, due primarily to net proceeds of $129.2 million received from our private equity placement with GSK in November 2010, net proceeds of $93.5 million received from our public offering of common stock that closed in March 2010 and $2.7 million in Qualifying Therapeutic Discovery Project Grants received from the National Institute of Health in December 2010. This decrease was partially offset by proceeds of $13.6 million received from sales of our common stock to an affiliate of GSK throughout 2011, an increase in 53 Table of Contents proceeds of $3.7 million resulting from the exercises of employee stock options in 2011, a $3.0 million milestone payment received from GSK for the initiation of a Phase 1 combination study in the MABA program in August 2011 and $1.0 million upfront license fee received from GSK for the Additional MABAs in October 2011. Off-Balance Sheet Arrangements We lease various real properties under an operating lease that generally requires us to pay taxes, insurance, maintenance, and minimum lease payments. This lease has options to renew. We have not entered into any off-balance sheet financial arrangements and have not established any structured finance or special purpose entities. We have not guaranteed any debts or commitments of other entities or entered into any options on non-financial assets. Contractual Obligations and Commercial Commitments In the table below, we set forth our enforceable and legally binding 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 December 31, 2011. Some of the figures that we include in this table are based on management's estimate and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. 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. (in millions) Convertible subordinated notes(1) Note payable Capital lease(2) Facility operating leases(3) Purchase obligations(4) Total Total $ 190.6 $ —* —* 44.3 1.0 $ 235.9 $ Less than 1 year 1 - 3 years 4 - 5 years After 5 years 5.2 $ 10.4 $ 175.0 $ — — —* — —* 18.8 5.4 0.8 — 11.4 $ 20.5 $ 185.2 $ 18.8 — — 9.9 0.2 — — 10.2 — (1) (2) (3) (4) In January 2008, we closed an underwritten public offering of $172.5 million aggregate principal amount of unsecured convertible subordinated notes that will mature on January 15, 2015. The financing raised proceeds, net of issuance costs, of $166.7 million which is being used for general corporate purposes. The notes bear interest at the rate of 3.0% per year, that is payable semi-annually in arrears in cash on January 15 and July 15 of each year, beginning on July 15, 2008. The notes are convertible, at the option of the holder, into shares of our common stock at an initial conversion rate of 38.6548 shares per $1,000 principal amount of the notes, subject to adjustment in certain circumstances, which represents an initial conversion price of approximately $25.87 per share. As security for performance of certain obligations under the capital lease for office equipment, we have issued letters of credit in the aggregate of approximately $0.1 million, collateralized by an equal amount of restricted cash. As security for performance of certain obligations under the operating leases for our headquarters, we have issued letters of credit in the aggregate of approximately $0.8 million, collateralized by an equal amount of restricted cash. On January 6, 2012, Astellas exercised its right to terminate our collaboration agreement for VIBATIV®. Pursuant to the terms of the termination agreement, we may purchase 54 Table of Contents certain VIBATIV® inventory from Astellas in 2012.The purchase is subject to release of the inventory by a third-party manufacturer and may cost up to $11.0 million. * Amount due is less than $50,000. We indemnify our officers and directors for certain events or occurrences, subject to certain limits. We may be subject to contingencies that may arise from matters such as product liability claims, legal proceedings, shareholder suits and tax matters, as such, we are unable to estimate the potential exposure related to these indemnification agreements. We have not recognized any liabilities relating to these agreements as of December 31, 2011. Pursuant to our LABA collaboration with GSK, we will be obligated to make milestone payments to GSK which could total as much as $220.0 million if both a single-agent and a combination product or two different combination products are launched in multiple regions of the world with the current lead LABA, VI. If global regulatory authorities accept the applications for RELOVAIR™, which we anticipate will be filed by GSK beginning in mid-2012, a portion of these potential milestone payments could be payable to GSK within the next two years. We have not recognized any liabilities relating to this agreement as of December 31, 2011. Recent Accounting Update In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05, "Presentation of Comprehensive Income" an update to Accounting Standards Codification (ASC) Topic 220, "Comprehensive Income". The amendments of this update require that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This update is to be applied retrospectively and is effective for financial statements issued for fiscal years, and interim periods within those years, beginning after December 15, 2011, and interim and annual periods thereafter. This update will be effective for us January 1, 2012. We do not expect the adoption of this guidance to have a material impact on our condensed consolidated financial statements ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk, including changes to interest rates which are confined to our cash, cash equivalents, restricted cash and marketable securities. We have invested primarily in money market funds, federal agency notes, corporate debt securities and U.S. treasury notes. To reduce the volatility relating to these exposures, we have put investment and risk management policies and procedures in place. The securities in our investment portfolio are not leveraged, are classified as available-for-sale and, due to their very short-term nature, are subject to minimal interest rate risk. We currently do not engage in hedging activities. Because of the short-term maturities of our investments, we do not believe that an increase in market rates would have any significant negative impact on the realized value of our investment portfolio. Our outstanding note payable has a fixed interest rate and therefore, we have no exposure to interest rate fluctuations. Most of our transactions are conducted in U.S. dollars, although we do conduct some preclinical activities and manufacture some active pharmaceutical ingredients with vendors located outside the United States. Some of these expenses are paid in U.S. dollars, and some are paid in the local foreign currency. If the exchange rate undergoes a change of 10%, we do not believe that it would have a material impact on our results of operations or cash flows. 55 Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Balance Sheets as of December 31, 2011 and December 31, 2010 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2011 Consolidated Statements of Stockholders' Net Capital Deficiency for each of the three years in the period ended December 31, 2011 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2011 Notes to Consolidated Financial Statements Supplementary Financial Data (unaudited) Report of Independent Registered Public Accounting Firm 56 57 58 59 60 61 87 88 Table of Contents THERAVANCE, INC. Consolidated Balance Sheets (in thousands, except per share data) Assets Current assets: Cash and cash equivalents Marketable securities Receivable from related party Notes receivable, current Prepaid and other current assets Total current assets Restricted cash Property and equipment, net Notes receivable, non-current Other assets, non-current Total assets Liabilities and stockholders' net capital deficiency Current liabilities: Accounts payable Accrued personnel related expenses Accrued clinical and development expenses Accrued interest on convertible subordinated notes Other accrued liabilities Note payable and capital lease, current Deferred revenue, current Total current liabilities Convertible subordinated notes Deferred rent Note payable and capital lease, non-current Deferred revenue, non-current Commitments and contingencies (Notes 3 and 9) Stockholders' net capital deficiency: Preferred stock, $0.01 par value, 230 shares authorized, no shares issued and outstanding Common stock, $0.01 par value; authorized: 200,000 shares; outstanding: 85,543 at December 31, 2011 and 70,950 at December 31, 2010 Class A common stock, $0.01 par value; authorized: 30,000 shares; outstanding: none at December 31, 2011 and 9,402 at December 31, 2010 Additional paid-in capital Accumulated other comprehensive income Accumulated deficit Total stockholders' net capital deficiency Total liabilities and stockholders' net capital deficiency See accompanying notes to consolidated financial statements. 57 $ $ $ December 31, 2011 2010 44,778 $ 196,137 223 100 3,525 244,763 893 10,372 240 2,514 258,782 $ 5,813 $ 9,643 6,956 2,372 1,946 69 18,697 45,496 172,500 5,821 — 122,017 — 855 163,333 146,301 194 531 5,995 316,354 893 10,215 400 3,340 331,202 2,128 8,617 2,801 2,372 2,008 206 21,922 40,054 172,500 3,574 69 137,425 — 710 — 1,228,037 16 (1,315,960) (87,052) 258,782 $ $ 94 1,177,359 33 (1,200,616) (22,420) 331,202 Table of Contents THERAVANCE, INC. Consolidated Statements of Operations (in thousands, except per share data) Revenue (including amounts from a related party of $9,658 in 2011, $9,826 in 2010, and $15,073 in 2009) Operating expenses: Research and development General and administrative Restructuring charges Total operating expenses Loss from operations Interest and other income Interest expense Net loss Year Ended December 31, 2010 2011 2009 $ 24,512 $ 24,223 $ 24,374 75,070 27,476 — 102,546 103,568 30,681 — 134,249 (109,737) 77,524 27,066 1,145 105,735 (81,361) 2,111 (6,052) $ (115,344) $ (83,862) $ (85,302) (78,323) 505 (6,044) 415 (6,022) Basic and diluted net loss per share $ (1.41) $ (1.16) $ (1.35) Shares used in computing basic and diluted net loss per share 82,051 72,070 63,027 See accompanying notes to consolidated financial statements. 58 Table of Contents Balance at December 31, 2008 Exercise of stock options, and Issuance of common stock in settlement of restricted stock units, stock awards and purchase plan Stock-based compensation Comprehensive loss: Net loss Net unrealized gain on marketable securities Total comprehensive loss Balance at December 31, 2009 Exercise of stock options, and Issuance of common stock in settlement of restricted stock units, stock awards and purchase plan Issuance of common stock for cash in secondary stock offering, net of expenses of $5.7 million Issuance of common stock in private placement to a related party, net of expenses of $0.2 million Stock-based compensation Comprehensive loss: Net loss Net unrealized loss on marketable securities Total comprehensive loss Balance at December 31, 2010 Exercise of stock options, and Issuance of common stock in settlement of restricted stock units, stock awards and purchase plan Issuance of common stock in private placements to a related party Conversion of Class A common stock (Note 3) Stock-based compensation Comprehensive loss: Net loss Net unrealized loss on marketable securities Total comprehensive loss Balance at December 31, 2011 THERAVANCE, INC. Consolidated Statements of Stockholders' Net Capital Deficiency (in thousands) Common Stock Class A Common Stock Shares Amount Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income 52,576 $ 525 9,402 $ 94 $ 895,383 $ 501 Accumulated Deficit (1,031,452) $ $ Total Stockholders' Net Capital Deficiency (134,949) 2,254 — — — 24 — — — — — — — 54,830 549 9,402 — — — — 94 11,699 20,000 — — — — — — — 11,723 20,000 (85,302) (85,302) (466) — 927,082 35 (1,116,754) (466) (85,768) (188,994) 8,761 93,478 129,190 19,009 (83,862) (2) (83,864) (22,420) 12,195 13,618 — 24,916 (17) (115,361) (87,052) 1,745 17 — — 8,744 8,625 86 — — 93,392 5,750 — — — 58 — — — — — — — 70,950 710 9,402 — — — — 94 129,132 19,009 — — 1,177,359 2,134 574 9,402 2,483 — — 21 5 94 25 — — — — (9,402) — — — — 12,174 — (94) — — — 13,613 — 24,891 — — — — — — — (2) 33 — — — — — (17) — — — — (83,862) — (1,200,616) — — — — — 85,543 $ 855 — $ — $ 1,228,037 $ 16 $ (1,315,960) $ See accompanying notes to consolidated financial statements. 59 (115,344) (115,344) Table of Contents THERAVANCE, INC. Consolidated Statements of Cash Flows (in thousands) Cash flows from operating activities Net loss Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization Stock-based compensation Loss on sale of equipment Forgiveness of notes receivable Changes in operating assets and liabilities: Receivables Prepaid and other assets Accounts payable Accrued personnel related expenses, accrued interest on convertible subordinated notes and accrued liabilities Deferred rent Deferred revenue Other long-term liabilities Net cash used in operating activities Cash flows from investing activities Purchases of property and equipment Purchases of marketable securities Maturities of marketable securities Sales of marketable securities Sale of equipment Release of restricted cash Additions to notes receivable Decrease in notes receivable Net cash (used in) provided by investing activities Cash flows from financing activities Payments on notes payable and capital leases Net proceeds from issuances of common stock Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental Disclosure of Cash Flow Information Cash paid for interest Supplemental Disclosure of Non-Cash Investing Activity Acquisition cost of property and equipment under capital lease Year Ended December 31, 2010 2011 2009 $ (115,344) $ (83,862) $ (85,302) 7,583 24,916 — 16 (29) 2,288 3,312 5,124 2,429 (18,633) — (88,338) 6,336 19,009 33 8 81 649 (236) 3,321 1,446 (21,801) (128) (75,144) 5,541 20,000 — (13) 14 2,741 (1,625) (3,689) (709) 4,589 389 (58,064) (3,628) (301,563) 231,476 17,321 — — (140) 715 (55,819) (861) (183,899) 131,855 12,024 12 417 — 140 (40,312) (744) (123,460) 118,065 5,000 — 2,500 — 375 1,736 (206) (184) 25,808 25,602 (118,555) 163,333 44,778 $ 231,429 231,245 115,789 47,544 163,333 $ (131) 11,723 11,592 (44,736) 92,280 47,544 $ $ 5,195 $ 5,217 $ 5,229 $ — $ — $ 154 See accompanying notes to consolidated financial statements. 60 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of Operations and Summary of Significant Accounting Policies Description of Operations Theravance, Inc. (the Company or Theravance) is a biopharmaceutical company with a pipeline of internally discovered product candidates and strategic collaborations with pharmaceutical companies. Theravance is focused on the discovery, development and commercialization of small molecule medicines across a number of therapeutic areas including respiratory disease, bacterial infections, and central nervous system (CNS)/pain. By leveraging the Company's proprietary insight of multivalency to drug discovery, Theravance is pursuing a best-in-class strategy designed to discover superior medicines in areas of significant unmet medical need. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Use of Management's Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. Segment Reporting The Company has determined that it operates in a single segment which is the research and development of human therapeutics. Revenues are generated primarily from the Company's collaborations with GlaxoSmithKline plc (GSK), located in the United Kingdom and, through 2011, Astellas Pharma Inc. (Astellas), located in Japan. All long-lived assets are maintained in the United States. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less on the date of purchase to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value. Under certain lease agreements and letters of credit, the Company has pledged cash and cash equivalents as collateral. Restricted cash related to such agreements was $0.9 million as of December 31, 2011 and December 31, 2010. Marketable Securities The Company determines the appropriate classification of its marketable securities, which consist of debt securities, at the time of purchase and reevaluates such designation at each balance sheet date. All of the marketable securities are classified as available-for-sale and carried at estimated fair values and reported in either cash equivalents or marketable securities. Unrealized gains and losses on available-for-sale securities are reported in accumulated other comprehensive income as a separate component of stockholders' net capital deficiency. Interest, amortization of purchase premiums and 61 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Description of Operations and Summary of Significant Accounting Policies (Continued) discounts, and realized gains and losses on sales of securities are included in interest and other income. The cost of securities sold is based on the specific identification method. The Company regularly reviews all of its investments for other-than-temporary declines in fair value. The Company's review includes the consideration of the cause of the impairment, including the creditworthiness of the security issuers, the number of securities in an unrealized loss position, the severity and duration of the unrealized losses, whether the Company has the intent to sell the securities and whether it is more likely than not that the Company will be required to sell the securities before the recovery of their amortized cost basis. When the Company determines that the decline in fair value of an investment is below the amortized cost basis and the decline is other-than-temporary, the Company reduces the carrying value of the security and records a loss for the amount of such decline. Fair Value of Financial Instruments Financial instruments include cash equivalents, marketable securities, related party receivables, accounts payable, accrued liabilities and convertible subordinated notes. Marketable securities are carried at estimated fair value. The carrying value of cash equivalents, receivables from related party, accounts payable and accrued liabilities approximate their fair value due to the relatively short nature of these instruments. Convertible subordinated notes are described in Note 7. Concentration of Credit Risks The Company invests in a variety of financial instruments and, by its policy, limits the amount of credit exposure with any one issuer, industry or geographic area for investments other than instruments backed by the U.S. federal government. Notes Receivable The Company provided loans to certain employees to assist them primarily with the purchase of a primary residence, which collateralizes the resulting loans. There was no interest receivable related to the loans as of December 31, 2011 and December 31, 2010. The outstanding loans have maturity dates ranging from July 2012 through May 2014. Inventory Inventory is stated at the lower of cost or market value and is included in prepaid and other current assets in the accompanying consolidated balance sheets. Inventory is comprised of VIBATIV® active pharmaceutical ingredient. VIBATIV® has a limited shelf life. Astellas purchased VIBATIV® inventory from the Company at a cost of $1.2 million in 2011 and $2.0 million in 2010. The Company expensed inventory, on an average cost basis, that was no longer realizable of $0.5 million in 2011, $0.8 million in 2010 and $1.2 million in 2009. Inventory was valued at zero at December 31, 2011 and $1.7 million at December 31, 2010. 62 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Description of Operations and Summary of Significant Accounting Policies (Continued) Property and Equipment Property, equipment and leasehold improvements are stated at cost and depreciated using the straight-line method as follows: Leasehold improvements Equipment, furniture and fixtures Software and computer equipment Shorter of remaining lease terms or useful life 5 - 7 years 3 years Capitalized Software The Company capitalizes certain costs related to direct material and service costs for software obtained for internal use. Capitalized software costs are depreciated over 3 years. Impairment of Long-Lived Assets Long-lived assets include property and equipment. The carrying value of long-lived assets is reviewed for impairment whenever events or changes in circumstances indicate that the asset may not be recoverable. An impairment loss is recognized when the total of estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Bonus Accruals The Company has short-term bonus programs for eligible employees. Bonuses are determined based on various criteria, including the achievement of corporate, departmental and individual goals. Bonus accruals are estimated based on various factors, including target bonus percentages per level of employee and probability of achieving the goals upon which bonuses are based. The Company's management periodically reviews the progress made towards the goals under the bonus programs. As bonus accruals are dependent upon management's judgments of the likelihood of achieving the various goals, it is possible for bonus expense to vary significantly in future periods if changes occur in those management estimates. Deferred Rent Deferred rent consists of the difference between cash payments and the recognition of rent expense on a straight-line basis for the buildings the Company occupies. Rent expense is being recognized ratably over the life of the leases. Because the Company's facility operating leases provide for rent increases over the terms of the leases, average annual rent expense during the first 1.5 years of the leases exceeded the Company's actual cash rent payments. Also included in deferred rent are lease incentives of $2.6 million as of December 31, 2011, which is being recognized ratably over the life of the leases. Revenue Recognition The Company recognizes revenue in accordance with Financial Accounting Standards Board (FASB) Subtopic ASC 605-25, "Revenue Recognition— Multiple-Element Arrangements." As of January 1, 2011, the Company adopted on a prospective basis the accounting updates to guidance ASC 605 "Revenue Recognition", subtopic ASC 605-25 "Revenue with Multiple Element Arrangements" 63 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Description of Operations and Summary of Significant Accounting Policies (Continued) and subtopic ASC 605-28 "Revenue Recognition-Milestone Method", which provides accounting guidance for revenue recognition for arrangements with multiple deliverables and guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research and development transactions is appropriate, respectively. The adoption of ASC 605-25 "Revenue with Multiple Element Arrangements" and the election of the milestone method under subtopic ASC 605-28 "Revenue Recognition-Milestone Method" did not have a material impact on the Company's consolidated financial statements. However, these updates will result in different accounting treatment for future new collaboration arrangements and substantive milestones earned after the dates of adoption. The Company's revenues are related primarily to its collaboration arrangements with GSK and, through 2011, with Astellas (see Note 3, "Collaboration Arrangements" for more information). The Company's arrangements provide for various types of payments to the Company, including non-refundable upfront fees and milestone payments and royalty payments. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. For multiple-element arrangements entered into prior to January 1, 2011, the Company determined the deliverables under its collaboration agreements with GSK and Astellas did not meet the criteria required for separate accounting units for the purposes of revenue recognition. As a result, the Company recognized revenue from non-refundable, upfront fees and development milestone payments ratably over the term of its performance under the agreements. These upfront or milestone payments received, pending recognition as revenue, are recorded as deferred revenue and are classified as a short-term or long-term liability on the balance sheet to be amortized over the period of deferral. The Company periodically reviewed the estimated performance periods of its contracts based on the progress of its programs. In accordance with ASC Subtopic 808-10, "Collaborative Arrangement," and pursuant to the Company's agreement with Astellas, the Company recognized as revenue the net impact of transactions with Astellas related to VIBATIV® inventory including revenue specifically attributable to any sales, and cost of inventory either transferred or expensed as unrealizable. The Company recognizes royalty revenue on net sales in the period in which the royalties are earned based on net sales reporting provided by the Company's former collaboration partner, Astellas. The Company has been reimbursed by GSK and Astellas for certain external development costs under their respective collaboration agreements. Such reimbursements have been reflected as a reduction of research and development expense and not as revenue. For multiple-element arrangements entered into, or materially modified, subsequent to January 1, 2011, each deliverable within a multiple deliverable revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the Company's control. In addition, multiple deliverable revenue arrangement consideration is allocated at the inception of an arrangement to all deliverables using the relative selling price method. The Company also applies a selling price hierarchy for determining the selling price of a deliverable, which includes 64 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Description of Operations and Summary of Significant Accounting Policies (Continued) (1) vendor-specific objective evidence, if available, (2) third-party evidence, if vendor-specific objective evidence is not available, and (3) estimated selling price if neither vendor-specific nor third-party evidence is available. Where a portion of non-refundable upfront license or other payments, or milestone payments received are allocated to continuing performance obligations under the terms of a collaborative agreement, it will be recorded as deferred revenue and recognized as revenue ratably over the term of its estimated performance period under the agreement. The Company determines the estimated performance periods and they are periodically reviewed based on the progress of the related program. The effect of a change made to an estimated performance period and therefore revenue recognized ratably would occur on a prospective basis in the period that the change was made. Deferred revenue associated with a non-refundable payment received under a collaborative agreement that the performance obligations are terminated will result in an immediate recognition of any remaining deferred revenue in the period that termination occurred provided that all performance obligations have been satisfied. For milestones earned after January 1, 2011, the Company recognizes revenue from milestone payments when (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement and (ii) the Company does not have ongoing performance obligations related to the achievement of the milestone earned. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment (a) is commensurate with either the Company's performance to achieve the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the Company's performance to achieve the milestone, (b) relates solely to past performance, and (c) is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement. See Note 3, "Collaboration Arrangements," for analysis of each milestone event deemed to be substantive or non-substantive. Research and Development Costs Research and development costs are expensed in the period that services are rendered or goods are received. Research and development costs consist of salaries and benefits, laboratory supplies and facility costs, as well as fees paid to third parties that conduct certain research and development activities on behalf of the Company, net of certain external research costs reimbursed by GSK and, through 2011, Astellas. Preclinical Study and Clinical Study Expenses Most of the Company's preclinical studies and all of its clinical studies have been performed by third-party contract research organizations (CROs). Some CROs bill monthly for services performed, while others bill based upon milestones achieved. The Company reviews the activities performed under the significant contracts each quarter. For preclinical studies, the significant factors used in estimating accruals include the percentage of work completed to date and contract milestones achieved. For clinical study expenses, the significant factors used in estimating accruals include the number of patients enrolled and percentage of work completed to date. Vendor confirmations are obtained for contracts with longer duration when necessary to validate the Company's estimate of expenses. The Company's estimates are highly dependent upon the timeliness and accuracy of the data provided by its CROs 65 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Description of Operations and Summary of Significant Accounting Policies (Continued) regarding the status of each program and total program spending and adjustments are made when deemed necessary. Fair Value of Stock-Based Compensation Awards Stock-based compensation arrangements currently include the following awards granted under the 2004 Equity Incentive Plan (2004 Plan) and the 2008 New Employee Equity Incentive Plan (2008 Plan): stock options, restricted stock unit awards (RSUs), performance-contingent RSUs, restricted stock awards (RSAs), and performance-contingent RSAs. In addition, purchases of common stock by the Company's employees at a discount to the market price during offering periods under the Company's Employee Stock Purchase Plan (ESPP). Under the 2004 Plan and 2008 Plan, stock options may be granted with an exercise price not less than 100% of the fair market value of the common stock on the date of grant. Stock options are generally granted with terms of up to ten years and vest over a period of four years. The Company uses the Black-Scholes option pricing model to estimate the fair value of options granted under its equity incentive plans and rights to acquire stock granted under its employee stock purchase plan. The Black-Scholes option valuation model requires the use of assumptions, including the expected term of the award and the expected stock price volatility. The Company used the "simplified" method as described in Staff Accounting Bulletin No. 107 for the expected option term because the usage of its historical exercise data is limited due to post-IPO exercise restrictions. Beginning April 1, 2011, the Company used its historical volatility to estimate expected stock price volatility. Prior to April 1, 2011, the Company used peer company price volatility to estimate expected stock price volatility due to the Company's limited historical common stock price volatility since its initial public offering in 2004. RSUs and RSAs are measured based on the fair market values of the underlying stock on the dates of grant. Stock-based compensation expense was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company's estimated annual forfeiture rates for stock options, RSUs and RSAs are based on its historical forfeiture experience. The estimated fair value of stock options, RSUs and RSAs is expensed on a straight-line basis over the expected term of the grant and the fair value of performance-contingent RSUs and RSAs is expensed during the term of the award when the Company determines that it is probable that certain performance milestones will be achieved. Compensation expense for purchases under the ESPP is recognized based on the estimated fair value of the common stock during each offering period and purchase discount percentage. The Company has not recognized, and does not expect to recognize in the near future, any tax benefit related to employee stock-based compensation costs as a result of the full valuation allowance on the Company's net deferred tax assets including deferred tax assets related to its net operating loss carryforwards. 66 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Description of Operations and Summary of Significant Accounting Policies (Continued) Income Taxes The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Comprehensive Loss Comprehensive loss is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) consists of changes in unrealized gains and losses on the Company's available-for-sale securities. Comprehensive income or loss for the years ended December 31, 2011, 2010 and 2009 has been presented in the Company's Consolidated Statements of Stockholders' Net Capital Deficiency. Related Parties Transactions with GSK are described in Note 3, "Collaboration Arrangements". Robert V. Gunderson, Jr. is a director of the Company. The Company has engaged Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, of which Mr. Gunderson is a partner, as its primary legal counsel. Fees are incurred in the ordinary course of business were $0.3 million in 2011, $0.7 million in 2010, and $0.4 million in 2009. Recent Accounting Update In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05, "Presentation of Comprehensive Income" an update to Accounting Standards Codification (ASC) Topic 220, "Comprehensive Income". This update requires that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This update is to be applied retrospectively and is effective for financial statements issued for fiscal years, and interim periods within those years, beginning after December 15, 2011, and interim and annual periods thereafter. This update will be effective for the Company January 1, 2012. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements. 2. Net Loss per Share Basic net loss per share (basic EPS) is computed by dividing net loss by the weighted-average number of common shares outstanding during the period, less RSAs subject to forfeiture. Diluted net loss per share (diluted EPS) is computed by dividing net loss by the weighted-average number of common shares outstanding during the period, less RSAs subject to forfeiture, plus dilutive potential common shares. Diluted EPS is identical to basic EPS for all periods presented since potential common shares are excluded from the calculation, as their effect is anti-dilutive. 67 Table of Contents 2. Net Loss per Share (Continued) Weighted-Average Shares Outstanding THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table sets forth the computation of basic and diluted net loss and the weighted-average number of shares used in computing basic and diluted net loss per share: Basic and diluted: Net loss Weighted-average shares of common stock outstanding Less: unvested RSAs Weighted-average shares used in computing basic and diluted net loss 2011 Year Ended December 31, 2010 (in thousands, except for per share data) 2009 $ (115,344) $ (83,862) $ (85,302) 84,493 (2,442) 72,103 (33) 63,084 (57) per common share 82,051 72,070 63,027 Basic and diluted net loss per common share $ (1.41) $ (1.16) $ (1.35) Anti-dilutive securities Securities that were not included in the computation of diluted EPS because their effect would have been anti-dilutive were as follows: (in thousands) Shares issuable upon the exercise of stock options Shares issuable under RSUs and RSAs Shares issuable upon the conversion of convertible debt Total anti-dilutive securities 3. Collaboration Arrangements GSK LABA collaboration with GSK Year Ended December 31, 2010 5,823 813 6,668 13,304 2011 4,610 854 6,668 12,132 2009 6,646 444 6,668 13,758 In November 2002, the Company entered into its long-acting beta2 agonist (LABA) collaboration with GSK to develop and commercialize once-daily LABA products for the treatment of chronic obstructive pulmonary disease (COPD) and asthma. For the treatment of COPD, the collaboration is developing combination products, RELOVAIR™ and the LAMA/LABA (GSK573719/vilanterol or '719/VI). For the treatment of asthma, the collaboration is developing RELOVAIR™. RELOVAIR™ is an investigational once-daily combination medicine consisting of a LABA, VI, previously referred to as GW642444 or '444, and an inhaled corticosteroid (ICS), fluticasone furoate (FF). The LAMA/LABA, '719/VI, is an investigational once-daily combination medicine consisting of the long-acting muscarinic antagonist (LAMA) '719, and the LABA, VI. 68 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. Collaboration Arrangements (Continued) The current lead product candidates in the LABA collaboration, VI and FF, were discovered by GSK. In the event that VI is successfully developed and commercialized, the Company will be obligated to make milestone payments to GSK which could total as much as $220.0 million if both a single-agent and a combination product or two different combination products are launched in multiple regions of the world. If global regulatory authorities accept the applications for RELOVAIR™, which the Company anticipates will be filed by GSK beginning in mid-2012, a portion of these potential milestone payments could be payable to GSK within the next two years. The Company is entitled to annual royalties from GSK of 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion. Sales of single-agent LABA medicines and combination medicines would be combined for the purposes of this royalty calculation. For other products combined with a LABA from the LABA collaboration, such as '719/VI, royalties are upward tiering and range from the mid-single digits to 10%. However, if GSK is not selling a LABA/ICS combination product at the time that the first other LABA combination is launched, then the royalties described above for the LABA/ICS combination medicine would be applicable. In connection with the LABA collaboration, in 2002, Glaxo Group Limited, an affiliate of GSK, purchased shares of the Company's Series E preferred stock for an aggregate purchase price of $40.0 million. 2004 Strategic Alliance with GSK In March 2004, the Company entered into its strategic alliance with GSK. Under this alliance, GSK received an option to license exclusive development and commercialization rights to product candidates from certain of the Company's discovery programs on pre-determined terms and on an exclusive, worldwide basis. Upon GSK's decision to license a program, GSK is responsible for funding all future development, manufacturing and commercialization activities for product candidates in that program. In addition, GSK is obligated to use diligent efforts to develop and commercialize product candidates from any program that it licenses. If the program is successfully advanced through development by GSK, the Company is entitled to receive clinical, regulatory and commercial milestone payments and royalties on any sales of medicines developed from the program. If GSK chooses not to license a program, the Company retains all rights to the program and may continue the program alone or with a third party. In 2005, GSK licensed the Company's bifunctional muscarinic antagonist-beta2 agonist (MABA) program for the treatment of COPD, and in October 2011, the Company and GSK expanded the MABA program by adding six additional Theravance-discovered preclinical MABA compounds (the "Additional MABAs"). GSK's development, commercialization, milestone and royalty obligations under the strategic alliance remain the same with respect to '081, the lead compound in the MABA program. GSK is obligated to use diligent efforts to develop and commercialize at least one MABA within the MABA program, but may terminate progression of any or all Additional MABAs at any time and return them to the Company, at which point the Company may develop and commercialize such Additional MABAs alone or with a third party. Both GSK and the Company have agreed not to conduct any MABA clinical studies outside of the strategic alliance so long as GSK is in possession of the Additional MABAs. If a single-agent MABA medicine containing '081 is successfully developed and commercialized, the Company is entitled to receive royalties from GSK of 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 69 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. Collaboration Arrangements (Continued) a MABA medicine containing '081 is commercialized only as a combination product, such as a MABA/ICS, the royalty rate is 70% of the rate applicable to sales of the single-agent MABA medicine. For single-agent MABA medicines containing an Additional MABA, the Company is entitled to receive royalties from GSK of between 10% and 15% of annual global net sales up to $3.5 billion, and 10% for all annual global net sales above $3.5 billion. For combination products containing an Additional MABA, such as a MABA/ICS, the royalty rate is 50% 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, the Company could earn total milestone payments up to $125.0 million for a single-agent medicine and up to $250.0 million for both a single-agent and a combination medicine. If a MABA medicine containing an Additional MABA is successfully developed and commercialized in multiple regions of the world, the Company could earn total milestone payments up to $129.0 million. In May 2004, GlaxoSmithKline LLC, an affiliate of GSK, purchased 6,387,096 shares of the Company's Class A common stock for an aggregate purchase price of $108.9 million and, upon the closing of the Company's initial public offering on October 8, 2004, GlaxoSmithKline LLC purchased an additional 433,757 shares of Class A common stock for an aggregate purchase price of $6.9 million. In November 2010 Glaxo Group Limited, an affiliate of GSK, purchased 5,750,000 shares of the Company's Common Stock for an aggregate purchase price of $129.4 million. GSK Conversion of the Company's Class A Common Stock and Purchases of Common Stock under the Company's Governance Agreement with GSK In July 2011, GSK converted all of the shares of the Company's Class A common stock held by its affiliates into 9,401,499 shares of the Company's common stock on a one share-for-one share basis in accordance with the terms of the Company's restated certificate of incorporation. In addition, Glaxo Group Limited purchased shares of the Company's common stock pursuant to its periodic "top-up" rights under the Company's governance agreement with GSK dated June 4, 2004, as amended, as follows: Purchase dates February 24, 2011 May 3, 2011 August 2, 2011 November 1, 2011 Through December 31, 2011 Common Stock Shares Purchased Aggregate Amounts (in thousands) 152,278 $ 261,299 $ 102,466 $ 58,411 $ 3,609 6,689 2,020 1,298 70 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. Collaboration Arrangements (Continued) GSK Upfront License Fees, Milestone Payments and Revenue Upfront license fees and milestone payments received from GSK under the LABA collaboration and strategic alliance agreements were as follows: (in thousands) GSK Collaborations LABA/RELOVAIR™ collaboration(1) Strategic alliance agreement Strategic alliance—LAMA license(2) Strategic alliance—MABA program license Total (1) (2) Through December 31, 2011 Milestone Payments Upfront License Fees Total $ $ 60,000 10,000 $ 50,000 $ 20,000 — 20,000 8,000 3,000 5,000 6,000 22,000 16,000 41,000 $ 69,000 $ 110,000 The Company does not currently expect to be eligible for any additional milestones under this collaboration. In August 2004, GSK exercised its right to license the Company's LAMA program pursuant to the terms of the strategic alliance. In 2009, GSK returned the program to the Company. In August 2011, the Company received a $3.0 million milestone payment from GSK for the initiation of the Phase 1 combination study in the Company's MABA program. In October 2011, the Company received an upfront license payment of $1.0 million from GSK related to the Additional MABAs, which is being accounted for as a new arrangement under the updated multiple element arrangement accounting guidance. The Company allocated revenue from this upfront license payment and will allocate any potential contingent payments related to the Additional MABAs under the MABA program, as discussed above in the section entitled Note 1, "Description of Operations and Summary of Significant Accounting Policies—Revenue Recognition," to each non-contingent element based upon the relative selling price of each element. The Company determined the license has standalone value because the license can be used for its intended purpose and may be developed, commercialized and manufactured for its intended purpose without any remaining participation from the Company's. As a result, the Company recognized $936,000 of the upfront license payment and the remaining amount was deferred and will be amortized over the estimated development period over which we will be performing services. The eligible potential contingent payments related to the MABA program, which includes the Additional MABAs, are not deemed substantive due to the fact that the achievement of the event underlying the payment predominantly relates to GSK's performance of future development, manufacturing and commercialization activities for product candidates after licensing the program. 71 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. Collaboration Arrangements (Continued) Revenue recognized from GSK under the LABA collaboration and strategic alliance agreements was as follows: (in thousands) LABA/RELOVAIR™ collaboration(1) Strategic alliance agreement Strategic alliance—LAMA license Strategic alliance—MABA program license(2) Total revenue Year Ended December 31, 2010 2009 2011 $ 4,718 $ 5,081 $ 5,081 2,738 4,240 3,014 $ 9,658 $ 9,826 $ 15,073 2,738 — 2,007 1,858 — 3,082 (1) (2) In the fourth quarter of 2011, the Company revised the estimated performance period for the LABA program based on its progress. The Company does not expect that the revisions will have a material impact on future revenue recognized under this program. In the fourth quarter of 2011 and the first quarter of 2010, the Company revised the estimated performance period for the MABA program based on its progress. The Company does not expect that the revisions will have a material impact on future revenue recognized under this program. Astellas In November 2005, the Company entered into a global collaboration arrangement with Astellas for the development and commercialization of VIBATIV®. On January 6, 2012, Astellas exercised its right to terminate this agreement. The rights granted to Astellas ceased upon termination of the agreement and Astellas has stopped promotional sales efforts. Pursuant to the terms of the agreement, there are no termination payments required by either party and Astellas is entitled to a ten-year, 2% royalty on future net sales of VIBATIV®. To support the transition, Astellas will sell inventory to the Company, manage certain clinical and regulatory activities and respond to medical inquiries with respect to VIBATIV® until no later than March 31, 2012. The Company is evaluating global commercialization alternatives for VIBATIV® either alone or with partners. Through December 31, 2011, the Company received $191.0 million in upfront license, milestone and other fees from Astellas. The Company recorded these payments as deferred revenue and is amortizing them ratably over its estimated performance period (development and commercialization period). As a result of the termination of the VIBATIV® collaboration agreement, the Company is no longer eligible to receive any further milestone payments. 72 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. Collaboration Arrangements (Continued) Net revenue recognized under this collaboration agreement was as follows: (in thousands) Amortization of deferred revenue Royalties from net sales of VIBATIV® Proceeds from VIBATIV® delivered to Astellas Cost of VIBATIV® delivered to Astellas Cost of unrealizable VIBATIV® inventory Total net revenue 2011 2009 December 31, 2010 $ 12,975 $ 12,975 $ 11,338 766 — (1,629) (1,175) 9,300 1,123 2,058 (938) (821) $ 14,854 $ 14,397 $ 2,422 1,171 (1,177) (537) 4. Marketable Securities The following table is a summary of available-for-sale debt securities and money market funds recorded in cash equivalents or marketable securities in the Company's Consolidated Balance Sheets. Estimated fair values of available-for-sale securities are generally based on prices obtained from commercial pricing services: (in thousands) U.S. government securities U.S. government agencies U.S. corporate notes U.S. commercial paper Money market funds Total Less amounts classified as cash equivalents Less amounts classified as restricted cash Amounts classified as marketable securities Amortized Cost December 31, 2011 Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Amortized Cost December 31, 2010 Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value $ 66,150 $ 24 $ — $ 66,174 $ 25,966 $ 10 $ — $ 25,976 93,183 2,707 34,973 38,721 235,734 9 — 3 — 36 (17) 93,175 54,625 (2) 2,705 34,695 — 34,976 97,221 38,721 — (19) 235,751 91,805 304,312 30 9 — — 49 (7) 54,648 (9) 34,695 — 97,221 — (16) 91,805 304,345 (38,721) — — (38,721) (157,151) — — (157,151) (893) — — (893) (893) — — (893) $ 196,120 $ 36 $ (19) $ 196,137 $ 146,268 $ 49 $ (16) $ 146,301 73 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. Marketable Securities (Continued) The following table provides the net realized gains (losses) on marketable securities for the periods presented: (in thousands) Realized gains Realized losses Net realized gains (losses) 2011 $ — $ Year Ended December 31, 2010 2009 (2) — (2) $ 3 $ — — 3 $ — $ The Company realized no gains or losses in 2011 and 2010 that were previously classified as unrealized gains and losses in accumulated other comprehensive income at December 31, 2010 and 2009, respectively. The following table provides the breakdown of the marketable securities with unrealized losses at December 31, 2011: (in thousands) U.S. government agencies U.S. corporate notes Total In loss position for less than 12 months In loss position for more than 12 months Estimated Gross Unrealized Losses Fair Value Estimated Gross Unrealized Losses Fair Value Total Estimated Gross Unrealized Losses (17) $ (2) (19) $ — $ — — $ — $ — — $ 47,807 $ 2,754 50,561 $ (17) (2) (19) Fair Value $ 47,807 $ 2,754 50,561 $ $ At December 31, 2011, all of the available-for-sale debt securities had contractual maturities within twelve months and the average duration of marketable securities was approximately five months. The Company does not intend to sell the investments which are in an unrealized loss position and it is unlikely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. The Company has determined that the gross unrealized losses on its marketable securities at December 31, 2011 were temporary in nature. 5. Fair Value Measurements The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company's valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company's market assumptions. The Company classifies these inputs into the following hierarchy: Level 1 Inputs— Quoted prices for identical instruments in active markets. 74 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. Fair Value Measurements (Continued) Level 2 Inputs— Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Level 3 Inputs— Unobservable inputs and little, if any, market activity for the assets. The estimated fair values of the Company's financial assets were as follows: December 31, 2011 (in thousands) U.S. government securities U.S. government agency securities U.S. corporate notes U.S. commercial paper Money market funds Total December 31, 2010 (in thousands) U.S. government securities U.S. government agency securities U.S. corporate notes U.S. commercial paper Money market funds Total Fair Value Measurements at Reporting Date Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Level 1 Level 2 Level 3 $ $ 66,174 $ 55,901 2,705 — 38,721 163,501 $ — $ 37,274 — 34,976 — 72,250 $ Total 66,174 — $ 93,175 — 2,705 — 34,976 — — 38,721 — $ 235,751 Fair Value Measurements at Reporting Date Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Level 1 Level 2 Level 3 $ 25,976 $ 24,375 34,695 — 91,805 — $ 30,273 — 97,221 — $ 176,851 $ 127,494 $ Total 25,976 — $ 54,648 — 34,695 — 97,221 — — 91,805 — $ 304,345 75 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. Property and Equipment Property and equipment consists of the following: (in thousands) Computer equipment Software Furniture and fixtures Laboratory equipment Leasehold improvements Less accumulated depreciation and amortization Property and equipment, net December 31, 2011 3,158 $ 4,628 3,821 28,894 17,263 57,764 (47,392) 10,372 $ 2010 2,473 4,592 3,689 27,006 16,101 53,861 (43,646) 10,215 $ $ Depreciation expense was $3.8 million in 2011, $3.9 million in 2010 and $4.3 million in 2009. The change in accumulated depreciation is net of asset retirements. 7. Long-Term Obligations Long-term obligations are as follows: (in thousands) Convertible subordinated notes Note payable to lessor Convertible Subordinated Notes December 31, 2011 December 31, 2010 Carrying value Estimated fair value Carrying value Estimated fair value $ 172,500 $ 189,588 $ 172,500 $ 202,391 42 — 42 — In January 2008, the Company closed an underwritten public offering of $172.5 million aggregate principal amount of unsecured convertible subordinated notes which will mature on January 15, 2015. The financing raised proceeds, net of issuance costs, of $166.7 million. The notes bear interest at the rate of 3.0% per year, that is payable semi-annually in arrears in cash on January 15 and July 15 of each year, beginning on July 15, 2008. The fair value of debt was estimated based on the quoted price of the instrument on December 30, 2011. The notes are convertible, at the option of the holder, into shares of the Company's common stock at an initial conversion rate of 38.6548 shares per $1,000 principal amount of the notes, subject to adjustment in certain circumstances, which represents an initial conversion price of approximately $25.87 per share. The debt issuance costs, which are included in other long-term assets, are being amortized on a straight-line basis over the life of the notes. Unamortized debt issuance costs totaled $2.5 million as of December 31, 2011. Amortization expense was $0.8 million in 2011, 2010 and 2009. Holders of the notes will be able to require the Company to repurchase some or all of their notes upon the occurrence of a fundamental change (as defined) at 100% of the principal amount of the notes being repurchased plus accrued and unpaid interest. The Company may not redeem the notes prior to January 15, 2012. On or after January 15, 2012 and prior to the maturity date, the Company, 76 Table of Contents 7. Long-Term Obligations (Continued) THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) upon notice of redemption, may redeem for cash all or part of the notes if the last reported sale price of its common stock has been greater than or equal to 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period prior to the date on which it provides notice of redemption. The redemption price will equal 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest up to but excluding the redemption date. Note Payable In connection with the Company's original lease agreement for its facility in South San Francisco, California (see Note 8, "Operating Leases and Subleases," for more information), the Company received approximately $0.9 million in July 2002 under a tenant improvement loan from the lessor, which is payable in monthly installments through 2012, bears interest at 14.5% per annum and is secured by the underlying leasehold improvements. The aggregate maturity of the note payable for the remaining year was $42,000 in 2012 and is included in note payable and capital lease, current in the accompanying consolidated balance sheets. Capital Lease The Company's capital lease agreement for communications equipment entered into in June 2009 is accounted for as follows: (in thousands) Obligation of lease arrangement Minimum lease payments less interest Present value of future payments Less current portion Long-term portion Year Ended December 31, 2010 2011 $ 79 $ 130 (51) (52) 79 27 (52) (27) 27 $ — $ The equipment under the capital lease arrangement is included in property and equipment and the related amortization is included in depreciation and amortization expense in the consolidated statements of cash flows. The cost of equipment financed under capital leases was $0.2 million and the related accumulated amortization was $72,000 as of December 31, 2011 and $41,000 as of December 31, 2010. 8. Operating Leases and Subleases The Company entered into amendments to its South San Francisco, CA facility leases in June 2010. These amendments extend the lease terms through May 2020 and the Company may extend the terms for two additional five-year periods. The leases are for two buildings of approximately 110,000 and 40,000 square feet. 77 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. Operating Leases and Subleases (Continued) The Company leases its South San Francisco, California, facilities under a non-cancelable operating lease. Future minimum lease payments under this lease, exclusive of executory costs, at December 31, 2011, were as follows: (in thousands) Years ending December 31: 2012 2013 2014 2015 2016 Thereafter Total Expenses and income associated with operating leases were as follows: (in thousands) Rent expense Sublease income, net $ 5,429 5,029 4,859 5,005 5,156 18,806 $ 44,284 2011 Year Ended December 31, 2010 $ 6,702 $ 6,779 $ 6,559 (580) (637) (622) 2009 As of December 31, 2011, the Company expects to receive up to $0.2 million of minimum rentals through the end of a non-cancelable sublease in March 2012. 9. Commitments and Contingencies Guarantees and Indemnifications The Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits. The Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recognized any liabilities relating to these agreements as of December 31, 2011. Purchase Obligations As of December 31, 2011, the Company had outstanding purchase obligations on commercially reasonable terms, primarily for services under contract research, development and clinical supply agreements totaling $1.0 million. 10. Stock-Based Compensation Equity Incentive Plans The Company authorized 500,000 shares of common stock for issuance under the 2008 Plan upon its adoption in 2008 and authorized an additional 200,000 shares for issuance under the 2008 Plan in July 2009. The 2008 Plan provided for the granting of non-qualified stock options, restricted stock awards and RSUs to newly hired employees. Following the approval by stockholders of the amendment 78 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. Stock-Based Compensation (Continued) and restatement of the 2004 Plan on April 27, 2010, no additional awards have been made or will be made in the future under the 2008 Plan. The 2004 Plan provides for the granting of stock options, restricted stock awards, stock appreciation rights and RSUs to employees, officers, directors and consultants of the Company. On April 27, 2010, an amendment and restatement of the 2004 Plan was approved by the Company's stockholders to, among other things, reserve additional shares of common stock for issuance thereunder. As of December 31, 2011, total shares remaining available for issuance under the 2004 Plan were 2,090,098. Employee Stock Purchase Plan Under the 2004 Employee Stock Purchase Plan (ESPP), the Company's non-officer employees may purchase common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of the stock at the beginning of the offering period or at the end of each applicable purchase period. The ESPP provides for consecutive and overlapping offering periods of 24 months in duration, with each offering period composed of four consecutive six-month purchase periods. The purchase periods end on either May 15th or November 15th. ESPP contributions are limited to a maximum of 15 percent of an employee's eligible compensation. The Company's ESPP plan also includes a feature that provides for a new offering period to begin when the fair market value of the Company's common stock on any purchase date during an offering period falls below the fair market value of the Company's common stock on the first day of such offering period. This feature is called a reset. The Company had resets for new twenty-four month offering periods starting on November 16, 2007, May 16, 2008, November 16, 2008, May 16, 2010, and November 16, 2011. The Company applied modification accounting to determine the incremental fair value associated with the ESPP resets and recognized the related incremental stock-based compensation expense. As of December 31, 2011, a total of 2,025,000 shares of common stock were approved and authorized for issuance under the ESPP. Through December 31, 2011, the Company issued 1,468,454 shares under the ESPP at an average price of $10.15 per share. As of December 31, 2011, total shares remaining available for issuance under the ESPP were 556,546. Restricted Stock Awards The Compensation Committee of the Company's Board of Directors approved the grant of 1,168,000 in 2011 and 71,000 shares in 2007, of restricted stock to certain members of the Company's management. These restricted shares of common stock vest based on continued service, with pre-determined vesting percentages and anniversary dates. The Company valued the awards based on the closing market price of the Company's common stock on the date of the respective awards. Performance-Contingent Restricted Stock Awards In 2011, the Compensation Committee of the Company's Board of Directors approved the grant of 1,290,000 performance-contingent RSAs to senior management. These grants have dual triggers of vesting based upon the achievement of certain performance conditions over a six-year timeframe from 2011-2016 and continued employment, both of which must be satisfied in order for the RSAs to vest. 79 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. Stock-Based Compensation (Continued) Expense associated with these RSAs would be recognized, if at all, during these years depending on the probability of meeting the performance conditions. The maximum potential expense associated with the RSAs could be up to approximately $31.9 million (allocated as $6.3 million for research and development expense and $25.6 million for general and administrative expense) if all of the performance conditions are achieved on time. As of December 31, 2011, the Company had determined that the achievement of the requisite performance conditions was not probable and, as a result, no compensation expense has been recognized. As the RSAs are dependent upon the achievement of certain performance conditions, the expense associated with the RSAs may vary significantly from period to period. In 2011, the Compensation Committee of the Company's Board of Directors approved the grant of 25,000 performance-contingent RSAs to a non-executive officer that has dual triggers of vesting based upon the achievement of a performance condition over a timeframe from 2012-2013 and continued employment through 2014, both of which must be satisfied in order for the award to vest in full. The maximum potential expense associated with this award is approximately $475,000, which would be recognized in increments based on the achievement of the performance condition. As of December 31, 2011, the Company had determined that the achievement of the requisite performance condition was not probable and, as a result, no compensation expense has been recognized. As the vesting of the RSAs is contingent upon the achievement of the performance condition, the expense associated with the RSAs may vary significantly from period to period. Performance-Contingent Restricted Stock Units In 2010, the Compensation Committee of the Company's Board of Directors approved the grant of 210,000 performance-contingent RSUs to senior management. These awards have dual triggers of vesting based upon the successful achievement of certain corporate operating milestones during 2010 and 2011, as well as a requirement for continued employment through early 2014. As of February 11, 2011, both performance milestones had been deemed achieved, and time-based vesting commenced with respect to all of the performance-contingent RSU shares. Director Compensation Program Non-employee directors of the Company receive compensation for services provided as a director. Each member of the Company's Board who is not an employee receives an annual retainer as well as a fee for each board and committee meeting attended. Commencing on April 27, 2011, chairpersons of the various committees of the Board, the Audit Committee, the Compensation Committee, Nominating/Corporate Governance Committee and the Science and Technology Advisory Committee receives a fixed retainer. The lead independent director also receives a fixed retainer. Each of the Company's independent directors receives periodic automatic grants of equity awards under a program implemented under the 2004 Plan. These grants are non-discretionary. Only independent directors of the Company or affiliates of such directors are eligible to receive automatic grants under the 2004 Plan. Under the program, as amended in July 2010, each individual who first becomes an independent director will, on the date such individual joins the Board, automatically be granted (i) a one-time grant of RSUs covering 6,000 shares of the Company's common stock and (ii) a one-time nonstatutory stock option grant covering 6,000 shares of the Company's common stock. 80 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. Stock-Based Compensation (Continued) These initial equity grants vest monthly over the director's first two years of service. In addition, on the date of joining the Board, the new director will also receive the standard annual equity awards (if joining on the date of the Company's Annual Meeting of Stockholders) or pro-rated annual equity awards (if joining on any other date). The pro-ration is based upon the number of months of service the new board member will provide during the 12-month period ending on the one-year anniversary of the most recent annual meeting of stockholders. Annually, upon his or her re-election to the Board at the Annual Meeting of Stockholders, each independent director is automatically granted both an RSU covering 6,000 shares of the Company's common stock and a nonstatutory stock option covering 6,000 shares of the Company's common stock. These standard annual equity awards vest monthly over the twelve month period of service following the date of grant. In addition, all automatic equity awards vest in full if the Company is subject to a change in control or the Board member dies while in service. Stock-Based Compensation Expense The allocation of stock-based compensation expense included in the consolidated statements of operations was as follows: (in thousands) Research and development General and administrative Total stock-based compensation expense 2011 Year Ended December 31, 2010 $ 13,422 $ 10,322 $ 11,542 8,458 $ 24,916 $ 19,009 $ 20,000 11,494 8,687 2009 Stock-based compensation expense included in the consolidated statements of operations by award type was as follows: (in thousands) Employee stock options Employee RSUs Employee RSAs Non-employee options and RSUs ESPP Total stock-based compensation expense Year Ended December 31, 2010 2009 2011 4,528 $ $ 7,003 $ 10,271 7,473 9,783 470 398 501 1,186 1,285 639 $ 24,916 $ 19,009 $ 20,000 13,290 5,498 307 1,293 In connection with the retirement of the Company's former chairman of the Board of Directors in April 2010, the Company entered into a consulting agreement that provided for, among other things, the acceleration of an RSU that was scheduled to vest through April 2012 and an extension of the period of time in which vested stock options may be exercised until to the stated expiration date of the stock options. As a result of the stock option modification, the Company recorded an expense of $0.9 million in June 2010. 81 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. Stock-Based Compensation (Continued) As of December 31, 2011, the unrecognized compensation cost, net of expected forfeitures, and the estimated weighted-average amortization period, using the straight-line attribution method, was as follows: (in thousands, except amortization period) Stock options RSUs RSAs Compensation Awards Unrecognized Compensation Cost Weighted-average amortization period (years) $ $ $ 7,293 12,449 5,389 2.8 2.0 4.5 The following table summarizes equity award activity under the 2008 Plan and the 2004 Plan, and related information: Number of Shares Subject to Outstanding Options Weighted- average Exercise Price of Outstanding Options Number of Shares Subject to Outstanding RSUs Weighted- average Fair Value per Share at Grant Number of Shares Outstanding Subject to Vesting or Performance Conditions with vesting Weighted- average Fair Value per Share at Grant 9,953 $ 356 (1,333) — (562) 8,414 321 (784) — (297) 7,654 629 (1,265) — (127) 16.01 14.90 7.77 — 25.43 16.63 14.90 9.60 — 26.17 16.91 21.98 8.87 — 29.15 2,260 $ 950 — (603) (565) 2,042 1,170 — (657) (658) 1,897 471 — (797) (29) 21.51 14.66 — 14.62 29.78 14.15 10.55 — 13.20 26.26 12.45 24.96 — 13.89 15.35 77 $ — — (20) — 57 — — (24) — 33 2,483 — (74) — 24.42 — — 20.18 — 25.87 — — 25.55 — 26.10 24.42 — 24.96 — 6,891 18.62 1,542 15.47 2,442 24.42 (in thousands, except per share data) Balance at December 31, 2008 Granted Exercised Released RSUs/RSAs Forfeited Balance at December 31, 2009 Granted Exercised Released RSUs/RSAs Forfeited Balance at December 31, 2010 Granted Exercised Released RSUs/RSAs Forfeited Balance at December 31, 2011 As of December 31, 2011, the aggregate intrinsic value of the options outstanding was $42.6 million and the aggregate intrinsic value of the options exercisable was $39.0 million. The total intrinsic value of the options exercised was $17.1 million in 2011, $7.2 million in 2010, and $10.0 million in 2009. The total estimated fair value of options vested was $6.4 million in 2011, $8.2 million in 2010, and $15.7 million in 2009. 82 Table of Contents THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. Stock-Based Compensation (Continued) Valuation Assumptions The Company based the range of weighted average estimated values of employee stock option grants and rights granted under the employee stock purchase plan, as well as the weighted-average assumptions used in calculating these values, on estimates at the date of grant, as follows: Employee stock options Risk-free interest rate Expected life (in years) Volatility Dividend yield Weighted-average estimated fair value of stock options granted Employee stock purchase plan issuances Risk-free interest rate Expected life (in years) Volatility Dividend yield Weighted-average estimated fair value of ESPP issuances 2011 Year Ended December 31, 2010 2009 1.10% - 2.57% 5 - 6 0.49 - 0.55 —% $11.11 0.05% - 0.54% 0.5 - 2 0.48 - 0.59 —% $9.46 1.11% - 2.82% 5 - 6 0.48 - 0.52 —% $7.41 0.19% - 0.79% 0.5 - 2 0.50 - 0.69 —% $7.63 1.55% - 2.98% 5 - 6 0.48 - 0.57 —% $7.48 0.17% - 0.88% 0.5 - 2 0.50 - 0.84 —% $6.42 Range of Stock Option Exercise Prices As of December 31, 2011, all outstanding options to purchase common stock of the Company are summarized in the following table (in thousands, except years and per share data): Range of Exercise Prices $3.10 $6.15 - $6.70 $8.53 $9.69 $9.70 - $16.00 $16.01 - $21.96 $21.97 - $29.70 $29.71 - $35.46 Total Options Outstanding Weighted- average Remaining Contractual Life in Years Weighted- average Exercise Prices Number Outstanding Options Exercisable Weighted- average Remaining Contractual Life in Years Weighted- average Exercise Price Options Exercisable 557 145 218 1,172 924 1,493 1,385 997 6,891 1.3 $ 6.9 0.4 2.3 5.1 5.6 5.5 5.2 4.4 3.10 6.19 8.53 9.69 14.69 18.52 27.34 33.52 18.62 557 99 218 1,172 749 1,061 1,136 997 5,989 1.3 $ 6.9 0.4 2.3 4.5 4.1 4.7 5.2 3.7 3.10 6.18 8.53 9.69 15.00 18.34 28.00 33.52 18.61 83 Table of Contents 11. Income Taxes THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Due to ongoing operating losses and the inability to recognize any income tax benefit, there is no provision for income taxes for any periods presented. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows: (in thousands) Deferred tax assets: Net operating loss carryforwards Deferred revenues Capitalized research and development expenditures Research and development tax credit carryforwards Other Valuation allowance Net deferred tax assets December 31, 2011 2010 $ $ 359,000 $ 56,000 35,000 37,000 31,000 (518,000) — $ 311,000 63,000 34,000 34,000 26,000 (468,000) — Realization of deferred tax assets is dependent on future taxable income, if any, the timing and the amount of which are uncertain. Accordingly, the deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $50.0 million in 2011, $35.0 million in 2010, and $32.0 million in 2009. As of December 31, 2011, the Company had federal net operating loss carryforwards of approximately $1,068.2 million, which will expire from 2012 through 2030, and federal research and development tax credit carryforwards of approximately $43.2 million, which will expire from 2018 through 2030. The Company also had state net operating loss carryforwards of approximately $425.0 million expiring in the years 2012 through 2030 and state research tax credits of approximately $46.9 million, which do not expire. The net operating loss deferred tax asset balances as of December 31, 2011 and 2010 do not include excess tax benefits from stock option exercises. Stockholders' net capital deficiency will be credited if and when such excess tax benefits are ultimately realized. Utilization of net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. The Company conducted an analysis through 2011 to determine whether an ownership change had occurred since inception. The analysis indicated that two ownership changes occurred in prior years. However, notwithstanding the applicable annual limitations, no portion of the net operating loss or credit carryforwards are expected to expire before becoming available to reduce federal and state income tax liabilities. Annual limitations may result in expiration of net operating loss and tax credit carryforwards before some or all of such amounts have been utilized. 84 Table of Contents 11. Income Taxes (Continued) Uncertain Tax Positions THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits are as follows (in thousands): Gross unrecognized tax benefits as of January 1, 2009 Gross decrease for tax positions for prior years Gross increase in tax positions for current year Unrecognized tax benefits as of December 31, 2009 Gross decrease for tax positions for prior years Gross increase in tax positions for current year Unrecognized tax benefits as of December 31, 2010 Gross decrease for tax positions for prior years Gross increase in tax positions for current year Unrecognized tax benefits as of December 31, 2011 $ 36,200 (100) 3,500 39,600 — 3,000 42,600 — 4,300 $ 46,900 If the Company eventually is able to recognize these uncertain positions, most of the $46.9 million of the unrecognized benefit would reduce the effective tax rate, except for excess tax benefits related to stock-based payments. The Company currently has a full valuation allowance against its deferred tax asset which would impact the timing of the effective tax rate benefit should any of these uncertain positions be favorably settled in the future. The Company does not believe it is reasonably possible that its unrecognized tax benefits will significantly change within the next twelve months. The Company is subject to taxation in the U.S. and various state jurisdictions. The tax years 1996 and forward remain open to examination by the federal and most state tax authorities due to net operating loss and overall credit carryforward positions. 12. Subsequent Events Termination of Collaboration Arrangement On January 6, 2012, Astellas exercised its right to terminate the global License, Development and Commercialization agreement for VIBATIV®. The Company is evaluating global commercialization alternatives for VIBATIV® either alone or with partners. The rights granted to Astellas ceased upon termination of the agreement and Astellas has stopped promotional sales efforts. Pursuant to the terms of the agreement, there are no termination payments required by either party and Astellas is entitled to a ten-year, 2% royalty on future net sales of VIBATIV®. This is being accounted for as a nonrecognized subsequent event as the termination agreement was entered into after December 31, 2011. The Company is evaluating the financial impact of the termination. However, the Company expects to recognize in the first quarter of 2012 the remaining non-cash, deferred upfront license fees and milestone payments, net of any estimated termination obligations, of approximately $125.0 million and the Company may purchase certain VIBATIV® inventory from Astellas in 2012. The purchase is subject to release of the inventory by a third-party manufacturer and may cost up to $11.0 million. 85 Table of Contents 12. Subsequent Events (Continued) Sale of Stock THERAVANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) On February 14, 2012, the Company and GSK entered into an agreement pursuant to which GSK agreed to purchase through an affiliate, in a private placement, 88,468 shares of the Company's common stock at $18.12 per share, for an aggregate purchase price of $1.6 million, on February 13, 2012 pursuant to its rights under the Company's governance agreement with GSK dated June 4, 2004, as amended. 86 Table of Contents SUPPLEMENTARY FINANCIAL DATA (UNAUDITED) (In thousands, except per share amounts) The following table presents certain unaudited consolidated quarterly financial information for the eight quarters in the period ended December 31, 2011. This information has been prepared on the same basis as the audited Consolidated Financial Statements and includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the unaudited quarterly results of operations set forth herein. 2011: Revenue Operating expenses Loss from operations Net loss Basic and diluted net loss per share 2010: Revenue Operating expenses Loss from operations Net loss Basic and diluted net loss per share March 31 For the Quarters Ended(1) September 30 June 30 December 31 (in thousands except per share data) $ $ $ $ 6,331 $ (27,633) (21,302) (22,667) (0.28) $ 6,389 $ (30,046) (23,657) (25,045) (0.31) $ 5,714 $ (26,827) (21,113) (22,536) (0.35) $ 6,264 $ (25,696) (19,432) (20,806) (0.28) $ 6,431 $ (35,633) (29,202) (30,626) (0.37) $ 5,302 $ (25,147) (19,845) (21,222) (0.29) $ 5,361 (40,937) (35,576) (37,007) (0.45) 6,942 (24,876) (17,934) (19,299) (0.25) (1) The 2011 and 2010 amounts were computed independently for each quarter, and the sum of the quarters may not total the annual amounts. 87 Table of Contents The Board of Directors and Stockholders of Theravance, Inc. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have audited the accompanying consolidated balance sheets of Theravance, Inc. (the "Company") as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders' net capital deficiency, and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Theravance, Inc. at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Theravance, Inc.'s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2012 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP Redwood City, California February 27, 2012 88 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures. We conducted an evaluation as of December 31, 2011, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, which are defined under SEC rules as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and reported within required time periods. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective. Management's Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2011. Our independent registered public accounting firm, Ernst & Young LLP, has audited our internal control over financial reporting as of December 31, 2011. Their attestation report on the audit of our internal control over financial reporting is included below. Limitations on the Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Theravance have been detected. Also, projections of any evaluation of 89 Table of Contents effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Changes in Internal Control over Financial Reporting There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act, which occurred during the fourth fiscal quarter of the year ended December 31, 2011 which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 90 Table of Contents The Board of Directors and Stockholders of Theravance, Inc. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have audited Theravance, Inc.'s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Theravance, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Theravance, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Theravance, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders' net capital deficiency, and cash flows for each of the three years in the period ended December 31, 2011 of Theravance, Inc. and our report dated February 27, 2012 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP Redwood City, California February 27, 2012 91 Table of Contents ITEM 9B. OTHER INFORMATION None. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE PART III For the information required by this Item, see "Questions and Answers About this Proxy Material and Voting", "Election of Directors", "Nominees", "Meetings of the Board of Directors", "Executive Officers", "Section 16(a) Beneficial Ownership Reporting Compliance", "Audit Committee" and "Code of Business Conduct" in the Proxy Statement to be filed with the SEC, which sections are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION For the information required by this Item, see "2011 Director Compensation", "Compensation of Named Executive Officers", "Compensation Committee Report" and "Compensation Committee Interlocks and Insider Participation" in the Proxy Statement to be filed with the SEC, which sections are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS For the information required by this Item, see "Security Ownership of Certain Beneficial Owners and Management" and "Securities Authorized for Issuance Under Equity Compensation Plans" in the Proxy Statement to be filed with the SEC, which sections are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE For the information required by this Item, see "Independence of the Board of Directors" and "Review, Approval or Ratification of Transactions with Related Persons" in the Proxy Statement to be filed with the SEC, which sections are incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES For the information required by this Item, see "Ratification of Section of Independent Registered Public Accounting Firm" and "Pre-Approval Policies and Procedures" in the Proxy Statement to be filed with the SEC, which sections are incorporated herein by reference. 92 Table of Contents ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this Annual Report on Form 10-K: PART IV 1. Financial Statements: The following financial statements and schedules of the Registrant are contained in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K: Consolidated Balance Sheets as of December 31, 2011 and 2010 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2011 Consolidated Statements of Stockholders' Net Capital Deficiency for each of the three years in the period ended December 31, 2011 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2011 Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm 57 58 59 60 61 88 2. Financial Statement Schedules: All schedules are omitted because they are either not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto. (b) Exhibits required by Item 601 of Regulation S-K The information required by this Item is set forth on the exhibit index that follows the signature page of this report. 93 Table of Contents Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES Date: February 27, 2012 By: /s/ RICK E WINNINGHAM THERAVANCE, INC. Rick E Winningham Chief Executive Officer POWER OF ATTORNEY KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Rick E Winningham and Michael W. Aguiar, each of whom may act without joinder of the other, as their true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for such person and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to the annual report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ RICK E WINNINGHAM Chairman of the Board and Chief Executive February 27, 2012 Rick E Winningham Officer (Principal Executive Officer) /s/ MICHAEL W. AGUIAR Michael W. Aguiar Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) February 27, 2012 /s/ JEFFREY M. DRAZAN Director February 27, 2012 Jeffrey M. Drazan /s/ HENRIETTA HOLSMAN FORE Director February 27, 2012 Henrietta Holsman Fore 94 Table of Contents Signature Title Date /s/ ROBERT V. GUNDERSON, JR. Robert V. Gunderson, Jr. Director February 27, 2012 /s/ ARNOLD J. LEVINE, PH.D. Arnold J. Levine, Ph.D Director February 27, 2012 /s/ BURTON G. MALKIEL, PH.D. Burton G. Malkiel, Ph.D Director February 27, 2012 /s/ PETER S. RINGROSE, PH.D. Peter S. Ringrose, Ph.D. Director February 27, 2012 /s/ WILLIAM H. WALTRIP William H. Waltrip Director February 27, 2012 /s/ GEORGE M. WHITESIDES, PH.D. George M. Whitesides, Ph.D Director February 27, 2012 /s/ WILLIAM D. YOUNG William D. Young Director February 27, 2012 95 Table of Contents Exhibits Exhibit Number 3.3 Description Amended and Restated Certificate of Incorporation Incorporated by Reference Filing Date/Period End Date 7/26/04 Form S-1 3.4 Certificate of Amendment of Restated Certificate of Incorporation 10-Q 3/31/07 3.5 Amended and Restated Bylaws (as amended by the board of directors April 25, 2007) 10-Q 9/30/08 4.1 Specimen certificate representing the common stock of the registrant 10-K 12/31/06 4.2 4.3 Amended and Restated Rights Agreement between the registrant and The Bank of New York, as Rights Agent, dated as of June 22, 2007 10-Q 6/30/07 Indenture dated as of January 23, 2008 by and between Theravance, Inc. and The Bank of New York Trust Company, N.A., as trustee 8-K 1/23/08 4.4 Form of 3.0% Convertible Subordinated Note Due 2015 (included in Exhibit 4.3) 4.5 Amendment to Amended and Restated Rights Agreement between the registrant and The Bank of New York Mellon Corporation, as Rights Agent, dated November 21, 2008 8-K 11/25/08 10.1+ 1997 Stock Plan 10.2+ Long-Term Stock Option Plan S-1 6/10/04 S-1 6/10/04 10.3+ 2004 Equity Incentive Plan, as amended by the board of directors February 10, 2010 and approved by stockholders April 27, 2010 and forms of equity award 10.4 Employee Stock Purchase Plan, as amended April 27, 2010 10-Q 6/30/10 10.5+ Change in Control Severance Plan, as amended and restated on July 27, 2007 10-Q 6/30/08 10.6 10.7 Amended and Restated Lease Agreement, 951 Gateway Boulevard, between the registrant and HMS Gateway Office L.P., dated January 1, 2001 S-1 6/10/04 Lease Agreement, 901 Gateway Boulevard, between the registrant and HMS Gateway Office L.P., dated January 1, 2001 S-1 6/10/04 10.8* Collaboration Agreement between the registrant and Glaxo Group Limited, dated as of November 14, 2002 S-1 9/29/04 10.9+ Form of Indemnification Agreement for directors and officers of the registrant S-1 6/10/04 10.10 10.11 10.12 Class A Common Stock Purchase Agreement between the registrant and SmithKline Beecham Corporation, dated as of March 30, 2004 S-1 6/10/04 Amended and Restated Investors' Rights Agreement by and among the registrant and the parties listed therein, dated as of May 11, 2004 S-1 6/10/04 Amended and Restated Governance Agreement by and among the registrant, SmithKline Beecham Corporation and GlaxoSmithKline dated as of June 4, 2004 S-1 7/26/04 Table of Contents Exhibit Number 10.13* Description Strategic Alliance Agreement between the registrant and Glaxo Group Limited, dated as of March 30, 2004 Form S-1 Filing Date/Period End Date 9/30/04 Incorporated by Reference 10.14* License Agreement between the registrant and Janssen Pharmaceutica, dated as of May 14, 2002 S-1 9/29/04 10.15+ Offer Letter with Rick E Winningham dated August 23, 2001 S-1 6/10/04 10.16 Form of Class A Common Stock Purchase Agreement between the registrant and GSK S-1 9/29/04 10.17+ Offer Letter with Michael W. Aguiar dated as of January 31, 2005 10-K 12/31/04 10.18+ Form of Notice of Grant and Stock Option Agreement under 2004 Equity Incentive Plan 10-K 12/31/04 10.19+ Form of Notice of Restricted Stock Award and Restricted Stock Agreement under 2004 Equity Incentive Plan (form in effect through 2010) 10-Q 6/30/07 10.20+ Description of Cash Bonus Program, as amended 10.21* License, Development and Commercialization Agreement between the registrant and Astellas Pharma Inc. dated November 7, 2005 10-K 12/31/09 S-3 1/30/06 10.22* Amendment to License, Development and Commercialization Agreement between the registrant and Astellas Pharma Inc. dated as of July 18, 2006 10-Q 9/30/06 10.23+ Offer letter with Leonard Blum dated July 27, 2007 10-Q 9/30/07 10.24+ Amended and Restated 2008 New Employee Equity Incentive Plan and forms of equity award 10.25+ Amendment to Offer Letter between the registrant and Leonard Blum dated July 23, 2008 10-K 12/31/08 10.26+ Amendment to Offer Letter between the registrant and Rick E Winningham dated December 23, 2008 10-K 12/31/08 10.27+ Amendment to Change in Control Severance Plan effective December 16, 2009 10-K 12/31/09 10.28+ 2010 Change in Control Severance Plan adopted December 16, 2009 10-K 12/31/09 10.29 10.30 10.31 10.32 First Amendment to Lease for 901 Gateway Boulevard effective as of June 1, 2010 between ARE-901/951 Gateway Boulevard, LLC and the registrant 10-Q 6/30/10 First Amendment to Lease for 951 Gateway Boulevard effective as of June 1, 2010 between ARE-901/951 Gateway Boulevard, LLC and the registrant 10-Q 6/30/10 Common Stock Purchase Agreement among the registrant, Glaxo Group Limited and GlaxoSmithKline LLC, dated as of November 29, 2010 Second Amendment to Amended and Restated Governance Agreement among the registrant, Glaxo Group Limited, GlaxoSmithKline plc and GlaxoSmithKline LLC, dated as of November 29, 2010 8-K 11/29/10 8-K 11/29/10 Table of Contents Exhibit Number 10.33+ Form of Amendment to Restricted Stock Unit Agreements between the registrant and each current member of the Board of Directors outstanding as of December 31, 2010 Description 10.34(1) Amendment to Strategic Alliance Agreement dated October 3, 2011 Incorporated by Reference Filing Date/Period End Date Form 10-K 12/31/2010 21.1 List of Subsidiaries 10-K 12/31/05 23.1 Consent of Independent Registered Public Accounting Firm 24.1 Power of Attorney (see signature page to this Annual Report on Form 10-K) 31.1 31.2 Certification of Chief Executive Officer Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 Certification of Chief Financial Officer Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 32 Certifications Pursuant to 18 U.S.C. Section 1350 101^ The following materials from Registrant's Annual Report on Form 10-K for the year ended December 31, 2011, formatted in Extensible Business Reporting Language (XBRL) includes: (i) Consolidated Balance Sheets at December 31, 2011 and 2010, (ii) Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009, (iii) Consolidated Statements of Stockholders' Equity for the years ended December 31, 2011, 2010 and 2009, (iv) Consolidated Statements of Cash Flows for years ended December 31, 2011, 2010 and 2009 and (v) Notes to Consolidated Financial Statements. + * (1) ^ Management contract or compensatory plan or arrangement required to be filed pursuant to Item 15(b) of Form 10-K. Confidential treatment has been requested for certain portions which are omitted in the copy of the exhibit electronically filed with the Securities and Exchange Commission. The omitted information has been filed separately with the Securities and Exchange Commission pursuant to Theravance Inc.'s application for confidential treatment. Application has been made to the Securities and Exchange Commission to seek confidential treatment of certain provisions. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission. XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Exchange Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN (AS AMENDED AND RESTATED FEBRUARY 10, 2010) TABLE OF CONTENTS ARTICLE I. INTRODUCTION ARTICLE II. 2.1 2.2 2.3 ARTICLE III. 3.1 3.2 3.3 ARTICLE IV. 4.1 4.2 ARTICLE V. 5.1 5.2 5.3 5.4 5.5 5.6 ARTICLE VI. 6.1 6.2 6.3 6.4 6.5 6.6 ARTICLE VII. 7.1 7.2 7.3 7.4 7.5 7.6 ADMINISTRATION Committee Composition Committee Responsibilities Committee for Non-Officer Grants SHARES AVAILABLE FOR GRANTS Basic Limitation Additional Shares Shares Subject to Substituted Awards ELIGIBILITY Incentive Stock Options Other Grants OPTIONS Stock Option Agreement Number of Shares Exercise Price Exercisability and Term Modification or Assumption of Options Buyout Provisions PAYMENT FOR OPTION SHARES General Rule Surrender of Stock Exercise/Sale Exercise/Pledge Promissory Note Other Forms of Payment STOCK APPRECIATION RIGHTS SAR Agreement Number of Shares Exercise Price Exercisability and Term Exercise of SARs Modification or Assumption of SARs ARTICLE VIII. 8.1 8.2 8.3 RESTRICTED SHARES Restricted Stock Agreement Payment for Awards Vesting Conditions i 8.4 Voting and Dividend Rights ARTICLE IX. 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 STOCK UNITS AND PERFORMANCE CASH AWARDS Stock Unit Agreement Payment for Awards Vesting Conditions Voting and Dividend Rights Form and Time of Settlement of Stock Units Death of Recipient Creditors’ Rights Performance Cash Awards Exhibit 10.3 Page 1 1 1 1 2 2 2 2 3 3 3 3 3 3 3 4 4 4 4 4 4 5 5 5 5 5 5 5 5 6 6 6 6 7 7 7 7 7 8 8 8 8 8 8 9 9 9 ARTICLE X. 10.1 10.2 ARTICLE XI. 11.1 11.2 11.3 CHANGE IN CONTROL Effect of Change in Control Acceleration PROTECTION AGAINST DILUTION Adjustments Dissolution or Liquidation Reorganizations ARTICLE XII. DEFERRAL OF AWARDS ARTICLE XIII. AWARDS UNDER OTHER PLANS ARTICLE XIV. 14.1 14.2 14.3 ARTICLE XV. 15.1 15.2 15.3 15.4 ARTICLE XVI. 16.1 16.2 ARTICLE XVII. 17.1 17.2 17.3 PAYMENT OF FEES IN SECURITIES Effective Date Elections to Receive NSOs, Restricted Shares or Stock Units Number and Terms of NSOs, Restricted Shares or Stock Units LIMITATION ON RIGHTS Retention Rights Stockholders’ Rights Regulatory Requirements Transferability of Awards WITHHOLDING TAXES General Share Withholding FUTURE OF THE PLAN Term of the Plan Amendment or Termination Stockholder Approval ARTICLE XVIII. DEFINITIONS ii THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN 9 9 10 10 10 10 10 11 12 12 12 12 12 13 13 13 13 13 13 13 14 14 14 14 14 15 ARTICLE I. INTRODUCTION. The Plan was adopted by the Board on May 27, 2004 to be effective at the IPO, and the amendment and restatement of the Plan was approved by the Board and the Compensation Committee of the Board on February 10, 2010 to be effective on the date of the Corporation’s 2010 Annual Meeting of Stockholders assuming the Plan is approved by the Corporation’s stockholders at such meeting. The purpose of the Plan is to promote the long-term success of the Corporation and the creation of stockholder value by (a) encouraging Employees, Outside Directors and Consultants to focus on critical long-range objectives, (b) encouraging the attraction and retention of Employees, Outside Directors and Consultants with exceptional qualifications, and (c) linking Employees, Outside Directors and Consultants directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for the following Awards: (i) Options (which may constitute incentive stock options or nonstatutory stock options), (ii) stock appreciation rights, (iii) Restricted Shares, (iv) Stock Units and (v) Performance Cash Awards. The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware (except their choice-of-law provisions). ARTICLE II. ADMINISTRATION. 2.1 Committee Composition. The Committee shall administer the Plan. The Committee shall consist exclusively of two or more directors of the Corporation, who shall be appointed by the Board. In addition, each member of the Committee shall meet the following requirements: (a) Any listing standards prescribed by the principal securities market on which the Corporation’s equity securities are traded; (b) Such requirements as the Internal Revenue Service may establish for outside directors acting under plans intended to qualify for exemption under section 162(m)(4)(C) of the Code; (c) Such requirements as the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act; and (d) Any other requirements imposed by applicable law, regulations or rules. 2.2 Committee Responsibilities. The Committee shall (a) select the Employees, Outside Directors and Consultants who are to receive Awards under the Plan, (b) determine the type, number, vesting requirements and other features and conditions of such Awards, (c) interpret the Plan, (d) make all other decisions relating to the operation of the Plan and (e) carry out any other duties delegated to it by the Board. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee’s determinations under the Plan shall be final and binding on all persons. 2.3 Committee for Non-Officer Grants. The Board may also appoint a secondary committee of the Board, which shall be composed of one or more directors of the Corporation who need not satisfy the requirements of Section 2.1. Such secondary committee may administer the Plan with respect to Employees and Consultants who are not Outside Directors and are not considered executive officers of the Corporation under section 16 of the Exchange Act, may grant Awards under the Plan to such Employees and Consultants and may determine all features and conditions of such Awards. Within the limitations of this Section 2.3, any reference in the Plan to the Committee shall include such secondary committee. ARTICLE III. SHARES AVAILABLE FOR GRANTS. 3.1 Basic Limitation. Shares of Common Stock issued pursuant to the Plan may be authorized but unissued shares or treasury shares. The aggregate number of shares of Common Stock that may be awarded pursuant to Stock Awards granted under the Plan on or after January 1, 2010 shall not exceed (a) 7,600,000 shares (which includes 1,541,428 shares remaining available for issuance under the Plan as of January 1, 2010) and (b) the additional shares of Common Stock described in Sections 3.2 and 3.3(1). The number of shares of Common Stock that may be awarded pursuant to ISOs granted under the Plan on or after January 1, 2010 shall not exceed 7,600,000 shares. The number of shares of Common Stock that may be awarded under the Plan on or after January 1, 2010 shall be reduced by (a) one share for every option and stock appreciation right granted under the Plan or the Corporation’s 2008 New Employee Equity Incentive Plan on or after January 1, 2010 and (b) 1.45 shares for every stock award other than an option or stock appreciation right granted under the Plan or the Corporation’s 2008 New Employee Equity Incentive Plan on or after January 1, 2010. The limitations of this Section 3.1 shall be subject to adjustment pursuant to Article 11. The number of shares of Common Stock that are subject to Options or other rights outstanding at any time under the Plan shall not exceed the number of shares of Common Stock that then remain available for issuance under the Plan. No further awards shall be granted under the Predecessor Plans after the dates specified in Section 17.1. 3.2 Additional Shares. If restricted shares or shares of Common Stock issued upon the exercise of options under this Plan or the Predecessor Plans are forfeited or repurchased, then such shares of Common Stock shall again become available for Stock Awards under this Plan. If stock units, options or stock appreciation rights under this Plan or the Predecessor Plans are forfeited, settled in cash (in whole or in part) or terminate for any other reason before being exercised, then the corresponding shares of Common Stock shall again become available for (1) The history of the Plan’s share reserve prior to January 1, 2010 includes the following: (i) an initial share reserve of 13,034,369 shares (consisting of 3,700,000 shares plus 9,334,369 shares remaining available for issuance under the Pre-IPO Plans on the date of effectiveness of the IPO) and (ii) an increase of 3,500,000 shares approved by the Compensation Committee of the Board of Directors on November 29, 2006 and the Board of Directors on December 6, 2006 (all share numbers in clause (i) reflect the reverse stock split approved in connection with the Corporation’s IPO). 2 Stock Awards under this Plan. Notwithstanding anything to the contrary contained herein, on or after January 1, 2010, the following shares of Common Stock shall not be added back to the number of shares available for Stock Awards under Section 3.1: (i) shares tendered by a Participant or withheld by the Corporation in payment of the exercise price of an option granted under this Plan or the Predecessor Plans, or to satisfy any tax withholding obligation with respect to a stock award granted under this Plan or the Predecessor Plans, (ii) shares subject to a stock appreciation right issued under this Plan or the Predecessor Plans that are not issued in connection with the stock settlement of the stock appreciation right on exercise thereof and (iii) shares reacquired by the Corporation on the open market or otherwise using cash proceeds from the exercise of an option granted under this Plan or the Predecessor Plans. On or after January 1, 2010, any shares that again become available for Stock Awards under this Section 3.2 shall be added back as (i) one share if such shares were subject to options or stock appreciation rights granted under this Plan or the Predecessor Plans and (ii) 1.45 shares if such shares were subject to stock awards other than options or stock appreciation rights that were granted under this Plan or the Predecessor Plans. 3.3 Shares Subject to Substituted Awards. The number of shares of Common Stock subject to Substitute Awards granted by the Corporation shall not reduce the number of shares of Common Stock that may be issued under Section 3.1, nor shall shares subject to Substitute Awards again be available for Awards under the Plan to the extent of any forfeiture, expiration or cash settlement as provided under Section 3.2. ARTICLE IV. ELIGIBILITY. 4.1 Incentive Stock Options. Only Employees who are common-law employees of the Corporation, a Parent or a Subsidiary shall be eligible for the grant of ISOs. In addition, an Employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Corporation or any of its Parents or Subsidiaries shall not be eligible for the grant of an ISO unless the requirements set forth in section 422(c)(6) of the Code are satisfied. 4.2 Other Grants. Awards other than ISOs may only be granted to Employees, Outside Directors and Consultants. ARTICLE V. OPTIONS. 5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Corporation. Such Option shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. Options may be granted in consideration of a reduction in the Optionee’s other compensation. 5.2 Number of Shares. Each Stock Option Agreement shall specify the number of shares of Common Stock subject to the Option and shall provide for the adjustment of such number in accordance with Article 11. Options granted to any Optionee in a single fiscal year of 3 the Corporation shall not cover more than 1,500,000 shares of Common Stock, except that Options granted to a new Employee in the fiscal year of the Corporation in which his or her service as an Employee first commences shall not cover more than 2,000,000 shares of Common Stock. The limitations set forth in the preceding sentence shall be subject to adjustment in accordance with Article 11. 5.3 Exercise Price. Each Stock Option Agreement shall specify the Exercise Price; provided that the Exercise Price shall in no event be less than 100% of the Fair Market Value of a share of Common Stock on the date of grant. This Section 5.3 shall not apply to an Option granted pursuant to an assumption of, or substitution for, another option in a manner that complies with Section 424(a) of the Code (whether or not the Option is an ISO). 5.4 Exercisability and Term. Each Stock Option Agreement shall specify the date or event when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option; provided that the term of an Option shall in no event exceed 10 years from the date of grant. A Stock Option Agreement may provide for accelerated exercisability in the event of a Change in Control, the Optionee’s death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s service. Options may be awarded in combination with SARs, and such an Award may provide that the Options will not be exercisable unless the related SARs are forfeited. 5.5 Modification or Assumption of Options. Within the limitations of the Plan, the Committee may modify, extend, or assume outstanding options. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such Option. Notwithstanding anything in this Plan to the contrary, and except for the adjustments provided in Articles 10 and 11, neither the Committee nor any other person may (a) decrease the exercise price for any outstanding Option after the date of grant, (b) cancel or allow an optionee to surrender an outstanding Option to the Corporation in exchange for cash or as consideration for the grant of a new Option with a lower exercise price or the grant of another type of Award the effect of which is to reduce the exercise price of any outstanding Option or (c) take any other action with respect to an Option that would be treated as a repricing under the rules and regulations of the NASDAQ Stock Market (or such other principal U.S. national securities exchange on which the Corporation’s Common Stock is traded). 5.6 Buyout Provisions. Except to the extent prohibited by Section 5.5, the Committee may at any time (a) offer to buy out for a payment in cash or cash equivalents an Option previously granted or (b) authorize an Optionee to elect to cash out an Option previously granted, in either case at such time and based upon such terms and conditions as the Committee shall establish. ARTICLE VI. PAYMENT FOR OPTION SHARES. 6.1 General Rule. The entire Exercise Price of shares of Common Stock issued upon exercise of Options shall be payable in cash or cash equivalents at the time such shares of Common Stock are purchased, except that the Committee at its sole discretion may accept 4 payment of the Exercise Price in any other form(s) described in this Article 6. However, if the Optionee is an Outside Director or executive officer of the Corporation, he or she may pay the Exercise Price in a form other than cash or cash equivalents only to the extent permitted by section 13(k) of the Exchange Act. 6.2 Surrender of Stock. With the Committee’s consent, all or any part of the Exercise Price may be paid by surrendering, or attesting to the ownership of, shares of Common Stock that are already owned by the Optionee. Such shares of Common Stock shall be valued at their Fair Market Value on the date the new shares of Common Stock are purchased under the Plan. The Optionee shall not surrender, or attest to the ownership of, shares of Common Stock in payment of the Exercise Price if such action would cause the Corporation to recognize compensation expense (or additional compensation expense) with respect to the Option for financial reporting purposes. 6.3 Exercise/Sale. With the Committee’s consent, all or any part of the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed by the Corporation) an irrevocable direction to a securities broker approved by the Corporation to sell all or part of the shares of Common Stock being purchased under the Plan and to deliver all or part of the sales proceeds to the Corporation. 6.4 Exercise/Pledge. With the Committee’s consent, all or any part of the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed by the Corporation) an irrevocable direction to pledge all or part of the shares of Common Stock being purchased under the Plan to a securities broker or lender approved by the Corporation, as security for a loan, and to deliver all or part of the loan proceeds to the Corporation. 6.5 Promissory Note. To the extent permitted by Section 13(k) of the Exchange Act, with the Committee’s consent, all or any part of the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed by the Corporation) a full-recourse promissory note. However, the par value of the shares of Common Stock being purchased under the Plan, if newly issued, shall be paid in cash or cash equivalents. 6.6 Other Forms of Payment. With the Committee’s consent, all or any part of the Exercise Price and any withholding taxes may be paid in any other form that is consistent with applicable laws, regulations and rules. ARTICLE VII. STOCK APPRECIATION RIGHTS. 7.1 SAR Agreement. Each grant of an SAR under the Plan shall be evidenced by an SAR Agreement between the Optionee and the Corporation. Such SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various SAR Agreements entered into under the Plan need not be identical. SARs may be granted in consideration of a reduction in the Optionee’s other compensation. 7.2 Number of Shares. Each SAR Agreement shall specify the number of shares of Common Stock to which the SAR pertains and shall provide for the adjustment of such number in accordance with Article 11. SARs granted to any Optionee in a single fiscal year shall in no 5 event pertain to more than 1,500,000 shares of Common Stock, except that SARs granted to a new Employee in the fiscal year of the Corporation in which his or her service as an Employee first commences shall not pertain to more than 2,000,000 shares of Common Stock. The limitations set forth in the preceding sentence shall be subject to adjustment in accordance with Article 11. 7.3 Exercise Price. Each SAR Agreement shall specify the Exercise Price which, except with respect to Substitute Awards, shall not be less than Fair Market Value. An SAR Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the SAR is outstanding. 7.4 Exercisability and Term. Each SAR Agreement shall specify the date all or any installment of the SAR is to become exercisable. The SAR Agreement shall also specify the term of the SAR; provided that the term of a SAR shall in no event exceed 10 years from the date of grant. An SAR Agreement may provide for accelerated exercisability in the event of a Change in Control, the Optionee’s death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s service. SARs may be awarded in combination with Options, and such an Award may provide that the SARs will not be exercisable unless the related Options are forfeited. An SAR may be included in an ISO only at the time of grant but may be included in an NSO at the time of grant or thereafter. An SAR granted under the Plan may provide that it will be exercisable only in the event of a Change in Control. 7.5 Exercise of SARs. Upon exercise of an SAR, the Optionee (or any person having the right to exercise the SAR after his or her death) shall receive from the Corporation (a) shares of Common Stock, (b) cash or (c) a combination of shares of Common Stock and cash, as the Committee shall determine. The amount of cash and/or the Fair Market Value of shares of Common Stock received upon exercise of SARs shall, in the aggregate, be equal to the amount by which the Fair Market Value (on the date of surrender) of the shares of Common Stock subject to the SARs exceeds the Exercise Price. If, on the date an SAR expires, the Exercise Price under such SAR is less than the Fair Market Value on such date but any portion of such SAR has not been exercised or surrendered, then such SAR shall automatically be deemed to be exercised as of such date with respect to such portion. 7.6 Modification or Assumption of SARs. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding SARs. The foregoing notwithstanding, no modification of an SAR shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such SAR. Notwithstanding anything in this Plan to the contrary, and except for the adjustments provided in Articles 10 and 11, neither the Committee nor any other person may (a) decrease the exercise price for any outstanding SAR after the date of grant, (b) cancel or allow an Optionee to surrender an outstanding SAR to the Corporation in exchange for cash or as consideration for the grant of a new SAR with a lower exercise price or the grant of another type of Award the effect of which is to reduce the exercise price of any outstanding SAR or (c) take any other action with respect to a SAR that would be treated as a repricing under the rules and regulations of the NASDAQ Stock Market (or such other principal U.S. national securities exchange on which the Corporation’s Common Stock is traded). 6 ARTICLE VIII. RESTRICTED SHARES. 8.1 Restricted Stock Agreement. Each grant of Restricted Shares under the Plan shall be evidenced by a Restricted Stock Agreement between the recipient and the Corporation. Such Restricted Shares shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Restricted Stock Agreements entered into under the Plan need not be identical. 8.2 Payment for Awards. Subject to the following two sentences, Restricted Shares may be sold or awarded under the Plan for such consideration as the Committee may determine, including (without limitation) cash, cash equivalents, property, full-recourse promissory notes, past services and future services. To the extent that an Award consists of newly issued Restricted Shares, the consideration shall consist exclusively of cash, cash equivalents, property or past services rendered to the Corporation (or a Parent or Subsidiary) or, for the amount in excess of the par value of such newly issued Restricted Shares, full-recourse promissory notes. If the Participant is an Outside Director or executive officer of the Corporation, he or she may pay for Restricted Shares with a promissory note only to the extent permitted by section 13(k) of the Exchange Act. Within the limitations of the Plan, the Committee may accept the cancellation of outstanding options in return for the grant of Restricted Shares. 8.3 Vesting Conditions. Each Award of Restricted Shares may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Restricted Stock Agreement. The Committee may include among such conditions the requirement that the performance of the Corporation or a business unit of the Corporation for a specified period of one or more fiscal years equal or exceed a target determined in advance by the Committee. The Committee shall determine such performance. Such target shall be based on one or more of the criteria set forth in Appendix A. The Committee shall identify such target not later than the 90 day of such period. Subject to adjustment in accordance with Article 11, in no event shall more than 1,500,000 Restricted Shares that are subject to performance-based vesting conditions be granted to any Participant in a single fiscal year of the Corporation, except that 2,000,000 Restricted Shares may be granted to a new Employee in the fiscal year of the Corporation in which his or her service as an Employee first commences. A Restricted Stock Agreement may provide for accelerated vesting in the event of a Change in Control, the Participant’s death, disability or retirement or other events. th 8.4 Voting and Dividend Rights. The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Corporation’s other stockholders. A Restricted Stock Agreement, however, may require that the holders of Restricted Shares invest any cash dividends received in additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid. Cash dividends with respect to any Restricted Shares and any other property (other than cash) distributed as a dividend or otherwise with respect to Restricted Shares that vest based on the achievement of performance goals shall be accumulated, shall be subject to restrictions and risk of forfeiture to the same extent as the Restricted Shares with respect to which such cash, shares or other property has been distributed and shall be paid at the time such restrictions and risk of forfeiture lapse. 7 ARTICLE IX. STOCK UNITS AND PERFORMANCE CASH AWARDS. 9.1 Stock Unit Agreement. Each grant of Stock Units under the Plan shall be evidenced by a Stock Unit Agreement between the recipient and the Corporation. Such Stock Units shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Stock Unit Agreements entered into under the Plan need not be identical. Stock Units may be granted in consideration of a reduction in the recipient’s other compensation. 9.2 Payment for Awards. To the extent that an Award is granted in the form of Stock Units, no cash consideration shall be required of the Award recipients. 9.3 Vesting Conditions. Each Award of Stock Units may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Stock Unit Agreement. The Committee may include among such conditions the requirement that the performance of the Corporation or a business unit of the Corporation for a specified period of one or more fiscal years equal or exceed a target determined in advance by the Committee. The Committee shall determine such performance. Such target shall be based on one or more of the criteria set forth in Appendix A. The Committee shall identify such target not later than the 90 day of such period. Subject to adjustment in accordance with Article 11, in no event shall more than 1,500,000 Stock Units that are subject to performance-based vesting conditions be granted to any Participant in a single fiscal year of the Corporation, except that up to 2,000,000 Stock Units subject to performance-based vesting conditions may be granted to a new Employee in the fiscal year of the Corporation in which his or her Service first commences. A Stock Unit Agreement may provide for accelerated vesting in the event of a Change in Control, the Participant’s death, disability or retirement or other events. th 9.4 Voting and Dividend Rights. The holders of Stock Units shall have no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committee’s discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one share of Common Stock while the Stock Unit is outstanding. Dividend equivalents may be converted into additional Stock Units. Settlement of dividend equivalents may be made in the form of cash, in the form of shares of Common Stock, or in a combination of both. Prior to distribution, any dividend equivalents which are not paid shall be subject to the same conditions and restrictions as the Stock Units to which they attach. Notwithstanding the foregoing, dividend equivalents with respect to any Stock Units that vest based on the achievement of performance goals shall be subject to the same conditions and restrictions as the Stock Units to which they attach. 9.5 Form and Time of Settlement of Stock Units. Settlement of vested Stock Units may be made in the form of (a) cash, (b) shares of Common Stock or (c) any combination of both, as determined by the Committee. The actual number of Stock Units eligible for settlement may be larger or smaller than the number included in the original Award, based on predetermined performance factors. Methods of converting Stock Units into cash may include (without limitation) a method based on the average Fair Market Value of shares of Common Stock over a series of trading days. Vested Stock Units may be settled in a lump sum or in installments. The distribution may occur or commence when all vesting conditions applicable to 8 the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Article 11. 9.6 Death of Recipient. Any Stock Units Award that becomes payable after the recipient’s death shall be distributed to the recipient’s beneficiary or beneficiaries. Each recipient of a Stock Units Award under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed form with the Corporation. A beneficiary designation may be changed by filing the prescribed form with the Corporation at any time before the Award recipient’s death. If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Stock Units Award that becomes payable after the recipient’s death shall be distributed to the recipient’s estate. 9.7 Creditors’ Rights. A holder of Stock Units shall have no rights other than those of a general creditor of the Corporation. Stock Units represent an unfunded and unsecured obligation of the Corporation, subject to the terms and conditions of the applicable Stock Unit Agreement. 9.8 Performance Cash Awards. A Performance Cash Award is a cash award that may be granted upon the attainment of certain performance th goals for a specified performance period of one or more fiscal years. The Committee shall determine such performance. The goals applicable to a Performance Cash Award shall be based on one or more of the criteria set forth in Appendix A. The Committee shall determine such goals no later than the 90 day of such period. Each Performance Cash Award shall be set forth in a written agreement or in a resolution duly adopted by the Committee which shall contain provisions determined by the Committee and not inconsistent with the Plan. The terms of various Performance Cash Awards need not be identical. The maximum amount that may be paid to any Participant for each fiscal year of the Corporation in a performance period attributable to Performance Cash Awards shall not exceed $2,000,000. The Committee may determine, at the time of granting a Performance Cash Award or thereafter, that all or part of such Performance Cash Award shall become earned and payable in the event that the Corporation is subject to a Change in Control before the Participant’s service terminates or as otherwise determined by the Committee in special circumstances. ARTICLE X. CHANGE IN CONTROL. 10.1 Effect of Change in Control. Unless the Committee provides otherwise in a Stock Option Agreement, SAR Agreement, Restricted Stock Agreement or Stock Unit Agreement, in the event of any Change in Control, each outstanding Stock Award shall automatically accelerate so that each such Stock Award shall, immediately prior to the effective date of the Change in Control, become fully exercisable for all of the shares of Common Stock at the time subject to such Stock Award and may be exercised for any or all of those shares as fully-vested shares of Common Stock. However, an outstanding Stock Award shall not so accelerate if and to the extent such Stock Award is, in connection with the Change in Control, either to be assumed by the successor corporation (or parent thereof) or to be replaced with a comparable Stock Award for shares of the capital stock of the successor corporation (or parent 9 thereof). The determination of award comparability shall be made by the Committee, and its determination shall be final, binding and conclusive. 10.2 Acceleration. The Committee shall have the discretion, exercisable either at the time the Stock Award is granted or at any time while the Stock Award remains outstanding, to provide for the automatic acceleration of vesting upon the occurrence of a Change in Control, whether or not the Stock Award is to be assumed or replaced in the Change in Control. ARTICLE XI. PROTECTION AGAINST DILUTION. 11.1 Adjustments. In the event of a subdivision of the outstanding shares of Common Stock, a declaration of a dividend payable in shares of Common Stock, a declaration of a dividend payable in a form other than shares of Common Stock in an amount that has a material affect on the price of shares of Common Stock, a combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a lesser number of shares of Common Stock, a recapitalization, a spin-off or a similar occurrence, corresponding adjustments shall automatically be made in each of the following: (a) The number of Options, SARs, Restricted Shares and Stock Units available for future Stock Awards under Article 3, including the limitation on the number of ISOs in Section 3.1; (b) The limitations set forth in Sections 5.2, 7.2, 8.3 and 9.3; (c) The number of shares of Common Stock covered by each outstanding Option and SAR; (d) The Exercise Price under each outstanding Option and SAR; or (e) The number of Stock Units included in any prior Award which has not yet been settled. Except as provided in this Article 11, a Participant shall have no rights by reason of any issue by the Corporation of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. 11.2 Dissolution or Liquidation. To the extent not previously exercised or settled, Options, SARs and Stock Units shall terminate immediately prior to the dissolution or liquidation of the Corporation. 11.3 Reorganizations. In the event that the Corporation is a party to a merger or consolidation, all outstanding Stock Awards shall be subject to the agreement of merger or consolidation. Such agreement shall provide for one or more of the following: (a) The continuation of such outstanding Stock Awards by the Corporation (if the Corporation is the surviving corporation). 10 (b) The assumption of such outstanding Stock Awards by the surviving corporation or its parent (in a manner that complies with section 424(a) of the Code with respect to Options). (c) The substitution by the surviving corporation or its parent of new awards for such outstanding Stock Awards (in a manner that complies with section 424(a) of the Code with respect to Options). (d) Full exercisability of such outstanding Stock Awards and full vesting of the shares of Common Stock subject to such Stock Awards, followed by the cancellation of such Stock Awards. The full exercisability of such Stock Awards and full vesting of the shares of Common Stock subject to such Stock Awards may be contingent on the closing of such merger or consolidation. The Participants shall be able to exercise such Stock Awards during a period of not less than five full business days preceding the closing date of such merger or consolidation, unless (i) a shorter period is required to permit a timely closing of such merger or consolidation and (ii) such shorter period still offers the Participants a reasonable opportunity to exercise such Stock Awards. Any exercise of such Stock Awards during such period may be contingent on the closing of such merger or consolidation. (e) The cancellation of such outstanding Stock Awards and a payment to the Participants equal to the excess of (i) the Fair Market Value of the shares of Common Stock subject to such Stock Awards (whether or not such Stock Awards are then exercisable or such shares of Common Stock are then vested) as of the closing date of such merger or consolidation over (ii) their Exercise Price. Such payment shall be made in the form of cash, cash equivalents, or securities of the surviving corporation or its parent with a Fair Market Value equal to the required amount. Such payment may be made in installments and may be deferred until the date or dates when such Stock Awards would have become exercisable or such shares of Common Stock would have vested. Such payment may be subject to vesting based on the Optionee’s continuing service, provided that the vesting schedule shall not be less favorable to the Participants than the schedule under which such Stock Awards would have become exercisable or such shares of Common Stock would have vested. If the Exercise Price of the shares of Common Stock subject to such Stock Awards exceeds the Fair Market Value of such shares of Common Stock, then such Stock Awards may be cancelled without making a payment to the Participants. For purposes of this Subsection (e), the Fair Market Value of any security shall be determined without regard to any vesting conditions that may apply to such security. ARTICLE XII. DEFERRAL OF AWARDS. The Committee (in its sole discretion) may permit or require a Participant to: (a) Have cash that otherwise would be paid to such Participant as a result of the exercise of an SAR or the settlement of Stock Units credited to a deferred compensation account established for such Participant by the Committee as an entry on the Corporation’s books; 11 (b) Have shares of Common Stock that otherwise would be delivered to such Participant as a result of the exercise of an Option or SAR converted into an equal number of Stock Units; or (c) Have shares of Common Stock that otherwise would be delivered to such Participant as a result of the exercise of an Option or SAR or the settlement of Stock Units converted into amounts credited to a deferred compensation account established for such Participant by the Committee as an entry on the Corporation’s books. Such amounts shall be determined by reference to the Fair Market Value of such shares of Common Stock as of the date they otherwise would have been delivered to such Participant. A deferred compensation account established under this Article 12 may be credited with interest or other forms of investment return, as determined by the Committee. A Participant for whom such an account is established shall have no rights other than those of a general creditor of the Corporation. Such an account shall represent an unfunded and unsecured obligation of the Corporation and shall be subject to the terms and conditions of the applicable agreement between such Participant and the Corporation. If the deferral or conversion of Awards is permitted or required, the Committee (in its sole discretion) may establish rules, procedures and forms pertaining to such Awards, including (without limitation) the settlement of deferred compensation accounts established under this Article 12. ARTICLE XIII. AWARDS UNDER OTHER PLANS. The Corporation may grant awards under other plans or programs. Such awards may be settled in the form of shares of Common Stock issued under this Plan. Such shares of Common Stock shall be treated for all purposes under the Plan like shares of Common Stock issued in settlement of Stock Units and shall, when issued, reduce the number of shares of Common Stock available under Article 3. ARTICLE XIV. PAYMENT OF FEES IN SECURITIES. 14.1 Effective Date. No provision of this Article 14 shall be effective unless and until the Board has determined to implement such provision. 14.2 Elections to Receive NSOs, Restricted Shares or Stock Units. An Outside Director may elect to receive his or her annual retainer payments or meeting fees from the Corporation in the form of cash, NSOs, Restricted Shares or Stock Units, or a combination thereof, as determined by the Board. Such NSOs, Restricted Shares and Stock Units shall be issued under the Plan. An election under this Article 14 shall be filed with the Corporation on the prescribed form. 14.3 Number and Terms of NSOs, Restricted Shares or Stock Units. The number of NSOs, Restricted Shares or Stock Units to be granted to Outside Directors in lieu of annual retainers or meeting fees that would otherwise be paid in cash shall be calculated in a manner determined by the Board. The Board shall also determine the terms of such NSOs, Restricted Shares or Stock Units. 12 ARTICLE XV. LIMITATION ON RIGHTS. 15.1 Retention Rights. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain an Employee, Outside Director or Consultant. The Corporation and its Parents, Subsidiaries and Affiliates reserve the right to terminate the service of any Employee, Outside Director or Consultant at any time, with or without cause, subject to applicable laws, the Corporation’s certificate of incorporation and by- laws and a written employment agreement (if any). 15.2 Stockholders’ Rights. A Participant shall have no dividend rights, voting rights or other rights as a stockholder with respect to any shares of Common Stock covered by his or her Award prior to the time a stock certificate for such shares of Common Stock is issued or, if applicable, the time he or she becomes entitled to receive such shares of Common Stock by filing any required notice of exercise and paying any required Exercise Price. No adjustment shall be made for cash dividends or other rights for which the record date is prior to such time, except as expressly provided in the Plan. 15.3 Regulatory Requirements. Any other provision of the Plan notwithstanding, the obligation of the Corporation to issue shares of Common Stock under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. The Corporation reserves the right to restrict, in whole or in part, the delivery of shares of Common Stock pursuant to any Award prior to the satisfaction of all legal requirements relating to the issuance of such shares of Common Stock, to their registration, qualification or listing or to an exemption from registration, qualification or listing. 15.4 Transferability of Awards. Except as provided below, no Award and no shares subject to Awards that have not been issued or as to which any applicable restriction, performance or deferral period has not lapsed, may be sold, assigned, transferred, pledged or otherwise encumbered, other than by a beneficiary designation, will or the laws of descent and distribution, and such Award may be exercised during the life of a Participant only by the Participant or the Participant’s guardian or legal representative. To the extent and under such terms and conditions as determined by the Committee, a Participant may assign or transfer an Award (each transferee there, a “Permitted Assignee”) other than an ISO to a “family member” as such term is defined in the General Instructions to Form S-8 (whether by gift or a domestic relations order); provided that such Permitted Assignee shall be bound by and subject to all of the terms and conditions of the Plan and the Award Agreement relating to the transferred Award and shall execute an agreement satisfactory to the Corporation evidencing such obligations; and provided further that such Participant shall remain bound by the terms and conditions of the Plan. ARTICLE XVI. WITHHOLDING TAXES. 16.1 General. To the extent required by applicable federal, state, local or foreign law, a Participant or his or her successor shall make arrangements satisfactory to the Corporation for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Corporation shall not be required to issue any shares of Common Stock or make any cash payment under the Plan until such obligations are satisfied. 13 16.2 Share Withholding. To the extent that applicable law subjects a Participant to tax withholding obligations, the Committee may permit a Participant to satisfy all or part of his or her withholding or income tax obligations by having the Corporation withhold all or a portion of any shares of Common Stock that otherwise would be issued to him or her or by surrendering all or a portion of any shares of Common Stock that he or she previously acquired. Such shares of Common Stock shall be valued at their Fair Market Value on the date they are withheld or surrendered. ARTICLE XVII. FUTURE OF THE PLAN. th 17.1 Term of the Plan. The Plan shall remain in effect until it is terminated under Section 17.2, except that no ISOs shall be granted on or after the 10 anniversary of the later of (a) the date the Board adopted the Plan or (b) the date the Board adopted the most recent increase in the number of shares of Common Stock available under Article 3 which was approved by the Corporation’s stockholders. No further option grants shall be made under the Pre- IPO Plans after the Plan effective date. No further awards shall be made under the Corporation’s 2008 New Employee Equity Incentive Plan after the date of the Corporation’s 2010 Annual Meeting of Stockholders, assuming this Plan is re-approved by the stockholders at such meeting. All awards outstanding under the Predecessor Plans as of such dates shall, immediately upon effectiveness of the Plan, remain outstanding in accordance with their terms. Each outstanding award under the Predecessor Plans shall continue to be governed solely by the terms of the documents evidencing such award, and no provision of the Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of such awards with respect to their acquisition of shares of Common Stock, except that the following vesting acceleration provisions relating to Change in Control shall be extended to the options outstanding under the Pre-IPO Plans at the IPO: if the optionee experiences an involuntary termination within three months before or twenty-four months following a Change in Control, each of such optionee’s outstanding options shall automatically accelerate so that each such option shall, immediately prior to the effective date of the termination, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. 17.2 Amendment or Termination. The Board may, at any time and for any reason, amend or terminate the Plan. No Awards shall be granted under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Award previously granted under the Plan. 17.3 Stockholder Approval. An amendment of the Plan shall be subject to the approval of the Corporation’s stockholders only to the extent required by applicable laws, regulations or rules. However, an amendment of the last sentence of Section 5.5 or 7.6 is subject to the approval of the Corporation’s stockholders and section 162(m) of the Code may require that the Corporation’s stockholders approve: (a) The Plan not later than the first regular meeting of stockholders that occurs in the fourth calendar year following the calendar year in which the Corporation’s initial public offering occurred; and 14 (b) The performance criteria set forth on Appendix A not later than the first meeting of stockholders that occurs in the fifth year following the year in which the Corporation’s stockholders previously approved such criteria. ARTICLE XVIII. DEFINITIONS. 18.1 “Affiliate” means any entity other than a Subsidiary, if the Corporation and/or one or more Subsidiaries own not less than 50% of such entity. 18.2 “Award” means any award of a Stock Award or a Performance Cash Award under the Plan. 18.3 “Board” means the Corporation’s Board of Directors, as constituted from time to time. 18.4 “Change in Control” shall mean: (a) The consummation of a merger or consolidation of the Corporation with or into another entity or any other corporate reorganization, if persons who were not stockholders of the Corporation immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding securities of each of (i) the continuing or surviving entity and (ii) any direct or indirect parent corporation of such continuing or surviving entity; (b) The sale, transfer or other disposition of all or substantially all of the Corporation’s assets; (c) A change in the composition of the Board, as a result of which fewer than 50% of the incumbent directors are directors who either: Board (the “Original Directors”) or (i) Had been directors of the Corporation on the date 24 months prior to the date of such change in the composition of the (ii) Were appointed to the Board, or nominated for election to the Board, with the affirmative votes of at least a majority of the aggregate of (A) the Original Directors who were in office at the time of their appointment or nomination and (B) the directors whose appointment or nomination was previously approved in a manner consistent with this Paragraph (ii); or (d) Any transaction as a result of which any person is the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing at least 50% of the total voting power represented by the Corporation’s then outstanding voting securities. For purposes of this Paragraph (d), the term “person” shall have the same meaning as when used in sections 13(d) and 14(d) of the Exchange Act but shall exclude (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or of a Parent or Subsidiary and (ii) a corporation owned directly or indirectly by the stockholders of the Corporation in substantially the same proportions as their ownership of the common stock of the Corporation. 15 Except with respect to a GSK Change In Control (defined below), (i) any stock purchase by SmithKline Beecham Corporation, a Pennsylvania corporation (“GSK”), pursuant to the Class A Common Stock Purchase Agreement dated as of March 30, 2004 or (ii) the exercise by GSK of any of its rights under the Amended and Restated Governance Agreement dated as of June 4, 2004 among the Corporation, GSK, GlaxoSmithKline plc and Glaxo Group Limited, as amended (the “Governance Agreement”) to representation on the Board (and its committees) or (iii) any acquisition by GSK of securities of the Corporation (whether by merger, tender offer, private or market purchases or otherwise) not prohibited by the Governance Agreement shall not constitute a Change in Control. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Corporation’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Corporation’s securities immediately before such transaction. A “GSK Change In Control” shall mean the acquisition by GSK of the Corporation’s Voting Stock (as defined in the Governance Agreement) that would bring GSK’s Percentage Interest (as defined in the Governance Agreement) to 100% in compliance with the provisions of the Governance Agreement. 18.5 “Code” means the Internal Revenue Code of 1986, as amended. 18.6 “Committee” means a committee of the Board, as described in Article 2. 18.7 “Common Stock” means the common stock of the Corporation. 18.8 “Corporation” means Theravance, Inc., a Delaware corporation. 18.9 “Consultant” means a consultant or adviser who provides bona fide services to the Corporation, a Parent, a Subsidiary or an Affiliate as an independent contractor. Service as a Consultant shall be considered employment for all purposes of the Plan, except as provided in Section 4.1. 18.10 “Employee” means a common-law employee of the Corporation, a Parent, a Subsidiary or an Affiliate. 18.11 “Exchange Act” means the Securities Exchange Act of 1934, as amended. 18.12 “Exercise Price,” in the case of an Option, means the amount for which one share of Common Stock may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. “Exercise Price,” in the case of an SAR, means an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value of one share of Common Stock in determining the amount payable upon exercise of such SAR. 18.13 “Fair Market Value” means the closing selling price of one share of Common Stock as reported on Nasdaq, and if not available, then it shall be determined by the Committee in good faith on such basis as it deems appropriate. Whenever possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in The Wall Street Journal. Such determination shall be conclusive and binding on all persons. 18.14 “IPO” means the initial public offering of the Corporation’s Common Stock. 16 18.15 “ISO” means an incentive stock option described in section 422(b) of the Code. 18.16 “NSO” means a stock option not described in sections 422 or 423 of the Code. 18.17 “Option” means an ISO or NSO granted under the Plan and entitling the holder to purchase shares of Common Stock. 18.18 “Optionee” means an individual who or estate that holds an Option or SAR. 18.19 “Outside Director” shall mean a member of the Board who is not an Employee. Service as an Outside Director shall be considered employment for all purposes of the Plan, except as provided in Section 4.1. 18.20 “Parent” means any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, if each of the corporations other than the Corporation owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date. 18.21 “Participant” means an individual who or estate that holds an Award. 18.22 “Performance Cash Award” means an award of cash granted under Section 9.8 of the Plan. 18.23 “Plan” means this Theravance, Inc. 2004 Equity Incentive Plan, as amended from time to time. 18.24 “Predecessor Plans” means the Corporation’s 1997 Stock Plan, Long-Term Stock Option Plan and 2008 New Employee Equity Incentive Plan. 18.25 “Pre-IPO Plans” means the Corporation’s 1997 Stock Plan and Long-Term Stock Option Plan. 18.26 “Restricted Share” means a share of Common Stock awarded under Article 8 of the Plan. 18.27 “Restricted Stock Agreement” means the agreement between the Corporation and the recipient of a Restricted Share that contains the terms, conditions and restrictions pertaining to such Restricted Share. 18.28 “SAR” means a stock appreciation right granted under the Plan. 18.29 “SAR Agreement” means the agreement between the Corporation and an Optionee which contains the terms, conditions and restrictions pertaining to his or her SAR. 18.30 “Stock Award” means any award of an Option, an SAR, a Restricted Share or a Stock Unit under the Plan. 17 18.31 “Stock Option Agreement” means the agreement between the Corporation and an Optionee that contains the terms, conditions and restrictions pertaining to his or her Option. 18.32 “Stock Unit” means a bookkeeping entry representing the equivalent of one share of Common Stock, as awarded under the Plan. 18.33 “Stock Unit Agreement” means the agreement between the Corporation and the recipient of a Stock Unit which contains the terms, conditions and restrictions pertaining to such Stock Unit. 18.34 “Subsidiary” means any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. 18.35 “Substitute Awards” means Awards or shares of Common Stock issued by the Corporation in assumption of, or substitution or exchange for, Awards previously granted, or the right or obligation to make future awards, in each case by a corporation acquired by the Corporation or any Affiliate or with which the Corporation or any Affiliates combines to the extent permitted by NASDAQ Marketplace Rule 5635 or any successor thereto. 18 Appendix A PERFORMANCE CRITERIA FOR RESTRICTED SHARES, STOCK UNITS AND PERFORMANCE CASH AWARDS The performance goals that may be used by the Committee for such awards shall consist of: stock price; net sales; revenue; revenue growth or product revenue growth; operating income (before or after taxes); pre- or after-tax income or loss (before or after allocation of corporate overhead and bonus); earnings or loss per share; net income or loss (before or after taxes); return on equity; total stockholder return; return on assets or net assets; appreciation in and/or maintenance of the price of the Shares or any other publicly-traded securities of the Corporation; market share; gross profits; net profits; earnings or losses (including earnings or losses before taxes, before interest and taxes, or before interest, taxes, depreciation and amortization); economic value-added models or equivalent metrics; comparisons with various stock market indices; reductions in costs; cash flow or cash flow per share (before or after dividends); return on capital (including return on total capital or return on invested capital); cash flow return on investment; improvement in or attainment of expense levels or working capital levels, including cash, inventory and accounts receivable; operating margin; gross margin; year-end cash; cash margin; debt reduction; stockholders equity; operating efficiencies; market share; customer satisfaction; customer growth; employee satisfaction; drug development milestones; regulatory achievements (including submitting or filing applications or other documents with regulatory authorities, successfully executing an advisory committee meeting, or receiving approval of any such applications or other documents and passing pre-approval inspections (whether of the Corporation or the Corporation’s third-party manufacturer) and validation of manufacturing processes (whether the Corporation’s or the Corporation’s third- party manufacturer’s); initiation or completion of pre-clinical studies; clinical achievements (including initiating clinical studies; initiating enrollment, completing enrollment or enrolling particular numbers of subjects in clinical studies; completing phases of a clinical study (including the treatment phase); or announcing or presenting preliminary or final data from clinical studies; in each case, whether on particular timelines or generally); strategic partnerships or transactions (including in-licensing and out-licensing of intellectual property; establishing relationships with commercial entities with respect to the marketing, distribution and sale of the Corporation’s products or development candidates (including with group purchasing organizations, distributors and other vendors); supply chain achievements (including establishing relationships with manufacturers or suppliers of component materials and manufacturers of the Corporation’s products or development candidates); co-development, co-marketing, profit sharing, joint venture or other similar arrangements); financial ratios, including those measuring liquidity, activity, profitability or leverage; cost of capital or assets under management; financing and other capital raising transactions (including sales of the Corporation’s equity or debt securities; factoring transactions; sales or licenses of the Corporation’s assets, including its intellectual property, whether in a particular jurisdiction or territory or globally; or through partnering transactions); implementation, completion or attainment of measurable objectives with respect to research (including nominating a development candidate or initiating a new full discovery program), development, manufacturing (including initiating formulation or device development work or finalizing API or drug product processes), commercialization, development candidates, products 19 or projects, safety, production volume levels, acquisitions and divestitures; factoring transactions; and recruiting and maintaining personnel. In the areas of development, regulatory progress and commercialization, the achievements described above performed by a third party with which the Corporation has a licensing or collaborative agreement (a “Partner”) shall apply to the Corporation. For example, if a Partner accomplishes development milestones, regulatory achievements, commercialization or sales targets with an asset within a program that is a subject of the licensing or collaboration agreement between the Corporation and the Partner, then such Partner’s accomplishments shall constitute achievements of the Corporation. Such performance goals also may be based solely by reference to the Corporation’s performance or the performance of a Subsidiary, division, business segment or business unit of the Corporation, or based upon the relative performance of other companies or upon comparisons of any of the indicators of performance relative to other companies. To the extent consistent with section 162(m) of the Code, the Committee may adjust the results under any performance criterion to exclude any of the following events that occurs during a performance measurement period: (a) asset write-downs, (b) litigation, claims, judgments or settlements, (c) the effect of changes in tax law, accounting principles or other such laws or provisions affecting reported results, (d) accruals for reorganization and restructuring programs and (e) any extraordinary, unusual or non-recurring items. 20 Form of Notice of Grant and Stock Option Agreement under 2004 Equity Incentive Plan THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN NOTICE OF STOCK OPTION GRANT You have been granted the following option to purchase shares of the Common Stock of Theravance, Inc. (the “Company”): Name of Optionee: «First» «Last» ID Number: «ID» Total Number of Shares: «Shares» Type of Option: Grant Number: Nonstatutory Stock Option «Number» Exercise Price Per Share: «Price» Date of Grant: February 10, 2005 Vesting Schedule: This option becomes exercisable for the first time on the earlier of the Put Date or January 1, 2008 (as applicable, the “First Exercise Date”) provided you have remained in continuous Service from the Date of Grant through the First Exercise Date. On the First Exercise Date, this option may be exercised and shall be vested as to that number of Shares subject to the option equal to 1/48 times the number of months that have elapsed from the Date of Grant through the First Exercise Date. Thereafter, this option may be exercised and shall be vested as to an additional 1/48 of the Shares subject to this option when you complete each month of continuous Service following the First Exercise Date. The option shall be fully vested and exercisable on the 4-year anniversary of the Date of Grant provided you have remained in continuous Service through such date. th th Expiration Date: February 9, 2015. This option expires earlier if your Service terminates earlier, as described in the Stock Option Agreement. You and the Company agree that this option is granted under and governed by the terms and conditions of the Stock Option Agreement, which is attached to and made a part of this document, and the 2004 Equity Incentive Plan (the “Plan”). You further agree that the Company may deliver by email all documents relating to the Plan or this option (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a web site maintained by the Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by email. THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN STOCK OPTION AGREEMENT Tax Treatment This option is a nonstatutory stock option. Vesting This option becomes exercisable in installments, as shown in the Notice of Stock Option Grant. This option shall become exercisable in full if not assumed or a new option substituted pursuant to Section 11.3 of the Plan. In addition, this option becomes exercisable in full if the Company is subject to a “Change in Control” (as defined in the Plan) before your Service terminates, and you are subject to an Involuntary Termination (as defined below) within three months prior or 24 months after the Change in Control. Should the exercisability of this option accelerate as a result of the occurrence of a Change in Control prior to the First Exercise Date, the right to exercise this option shall be deferred as to the additional shares until the First Exercise Date, provided and only if this option is assumed by the surviving corporation or its parent or the surviving corporation or its parent substitutes its own option for this option. For purposes of this Agreement, “Cause” shall mean (i) the unauthorized use or disclosure of the confidential information or trade secrets of the Company, which use causes material harm to the Company, (ii) conviction of a felony under the laws of the United States or any state thereof, (iii) gross negligence or (iv) repeated failure to perform lawful assigned duties for thirty days after receiving written notification from the Board of Directors. For purposes of this Agreement, “Involuntary Termination” means the termination of your Service by reason of: (a) an involuntary dismissal or discharge by the Company for reasons other than for Cause; or (b) your voluntary resignation following (i) a change in your position with the Company (or Parent or Subsidiary employing you) which materially reduces your level of responsibility, (ii) a reduction in your level of compensation (including base salary, fringe benefits and participation in corporate-performance based bonus or incentive programs) or (iii) a relocation of your workplace more than fifty miles away from the workplace designated by the Company on your initial date of service, provided and only if such change, reduction or relocation is effected by the Company without your consent. For purposes of this Agreement, “Put Date” shall mean the day after the final day of the Put Period, as such term is defined in the Restated Certificate of Incorporation of Theravance, Inc. or, if earlier, the consummation of a Qualified Change in Control as defined in the Restated Certificate of Incorporation of Theravance, Inc. For purposes of this Agreement, “Service” means your service as an Employee, Outside Director or Consultant. No additional shares will vest after your Service has terminated for any reason, except to the extent set forth above if you are subject to an Involuntary Termination within three months prior to a Change in Control. th This option expires in any event at the close of business at Company headquarters on the day before the 10 anniversary of the Date of Grant, as shown in the Notice of Stock Option Grant. (It will expire earlier if your Service terminates, as described below.) You may exercise this option at any time before its expiration under the preceding sentence, but only to the extent that this option had become exercisable before your Service terminated (giving effect where necessary to any deferred acceleration on Change in Control as set forth under the heading “Vesting” above). Term Regular Termination If your Service terminates for any reason except death or total and permanent disability, then this option will expire at the close of business at Company headquarters on the date three months after the later of your termination date or the First Exercise Date. The Company determines when your Service terminates for this purpose. Death Disability If you die before your Service terminates, then this option will expire at the close of business at Company headquarters on the later of the date that is three months after the First Exercise Date or 12 months after the date of death. If your Service terminates because of your total and permanent disability, then this option will expire at the close of business at Company headquarters on the date 12 months after your termination date. For all purposes under this Agreement, “total and permanent disability” means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be 4 expected to last, for a continuous period of not less than one year. Leaves of Absence and Part- Time Work For purposes of this option, your Service does not terminate when you go on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing. But your Service terminates when the approved leave ends, unless you immediately return to active work. If you go on a leave of absence, then the vesting schedule specified in the Notice of Stock Option Grant may be adjusted in accordance with the Company’s leave of absence policy or the terms of your leave. If you commence working on a part-time basis, then the vesting schedule specified in the Notice of Stock Option Grant may be adjusted in accordance with the Company’s part-time work policy or the terms of an agreement between you and the Company pertaining to your part-time schedule. Restrictions on Exercise The Company will not permit you to exercise this option if the issuance of shares at that time would violate any law or regulation. Notice of Exercise When you wish to exercise this option, you must notify the Company by filing the proper “Notice of Exercise” form at the address given on the form. Your notice must specify how many shares you wish to purchase. Your notice must also specify how your shares should be registered. The notice will be effective when the Company receives it. If someone else wants to exercise this option after your death, that person must prove to the Company’s satisfaction that he or she is entitled to do so. Form of Payment When you submit your notice of exercise, you must include payment of the option exercise price for the shares that you are purchasing. To the extent permitted by applicable law, payment may be made in one (or a combination of two or more) of the following forms: · Your personal check, a cashier’s check or a money order. · Certificates for shares of Company stock that you own, along with any forms needed to effect a transfer of those shares to the Company. The value of the shares, determined as of the effective date of the option exercise, will be applied to the option exercise price. Instead of surrendering shares of Company stock, you may attest to the ownership of those shares on a form provided by the Company and have the same number of shares subtracted from the option shares issued to you. However, you may not surrender, or attest to the ownership of, shares of Company stock in payment of 5 the exercise price if your action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to this option for financial reporting purposes. · Irrevocable directions to a securities broker approved by the Company to sell all or part of your option shares and to deliver to the Company from the sale proceeds an amount sufficient to pay the option exercise price and any withholding taxes. (The balance of the sale proceeds, if any, will be delivered to you.) The directions must be given by signing a special “Notice of Exercise” form provided by the Company. · Irrevocable directions to a securities broker or lender approved by the Company to pledge option shares as security for a loan and to deliver to the Company from the loan proceeds an amount sufficient to pay the option exercise price and any withholding taxes. The directions must be given by signing a special “Notice of Exercise” form provided by the Company. Withholding Taxes and Stock Withholding You will not be allowed to exercise this option unless you make arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the option exercise. With the Company’s consent, these arrangements may include withholding shares of Company stock that otherwise would be issued to you when you exercise this option. The value of these shares, determined as of the effective date of the option exercise, will be applied to the withholding taxes. Restrictions on Resale Transfer of Option You agree not to sell any option shares at a time when applicable laws, Company policies or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as your Service continues and for such period of time after the termination of your Service as the Company may specify. Prior to your death, only you may exercise this option. You cannot transfer or assign this option. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid. You may, however, dispose of this option in your will or a beneficiary designation. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your former spouse, nor is the Company obligated to recognize your former spouse’s interest in your option in any other way. Retention Rights Your option or this Agreement does not give you the right to be retained by the Company or a subsidiary of the Company in any capacity. The Company and its subsidiaries reserve the right to terminate your Service at 6 any time, with or without cause. Stockholder Rights Adjustments Applicable Law You, or your estate or heirs, have no rights as a stockholder of the Company until you have exercised this option by giving the required notice to the Company and paying the exercise price. No adjustments are made for dividends or other rights if the applicable record date occurs before you exercise this option, except as described in the Plan. In the event of a stock split, a stock dividend or a similar change in Company stock, the number of shares covered by this option and the exercise price per share may be adjusted pursuant to the Plan. This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice-of-law provisions). The Plan and Other Agreements The text of the Plan is incorporated in this Agreement by reference. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded. This Agreement may be amended only by another written agreement between the parties. BY ACCEPTING THIS STOCK OPTION GRANT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 7 Form of Notice of Restricted Stock Award and Restricted Stock Agreement under 2004 Equity Incentive Plan (form in effect through 2010) THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN NOTICE OF RESTRICTED STOCK AWARD You have been granted restricted shares of Common Stock of Theravance, Inc. (the “Company”) on the following terms: Name of Recipient: «Name» Total Number of Shares Granted: «TotalShares» Fair Market Value per Share: $«ValuePerShare» Total Fair Market Value of Award: $«TotalValue» Date of Grant: Vesting Commencement Date: Vesting Schedule: «DateGrant» «VestDay» «VestSchedule» You and the Company agree that these shares are granted under and governed by the terms and conditions of the Theravance, Inc. 2004 Equity Incentive Plan (the “Plan”) and the Restricted Stock Agreement, which is attached to and made a part of this document. You further agree that the Company may deliver by email all documents relating to the Plan or this award (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a web site maintained by the Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by email. RECIPIENT: THERAVANCE, INC. By: Title: THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN: RESTRICTED STOCK AGREEMENT Payment for Shares No payment is required for the shares that you are receiving, except for satisfying any withholding taxes that may be due as a result of the grant of this award or the vesting or transfer of the shares. Transfer Vesting Change in Control On the terms and conditions set forth in the Notice of Restricted Stock Award and this Agreement, the Company agrees to transfer to you the number of Shares set forth in the Notice of Restricted Stock Award. The shares will vest in installments, as shown in the Notice of Restricted Stock Award, as you continue in service as an employee, consultant or outside director of the Company or a parent or subsidiary of the Company (“Service”). The shares will fully vest if the Company is subject to a “Change in Control” (as defined in the Plan) before your Service terminates and you are subject to an Involuntary Termination (as defined below) within 3 months prior or 24 months after the Change in Control. Should the vesting of the shares accelerate as the result of a Change in Control prior to the First Vesting Date, the acceleration of vesting shall be deferred as to the additional shares until the First Vesting Date. Involuntary Termination For purposes of this Agreement, “Involuntary Termination” means the termination of your Service by reason of: (a) an involuntary dismissal or discharge by the Company for reasons other than for Cause; or (b) your voluntary resignation following (i) a change in your position with the Company (or Parent or Subsidiary employing you) which materially reduces your level of responsibility, (ii) a reduction in your level of compensation (including base salary, fringe benefits and participation in corporate-performance based bonus or incentive programs) or (iii) a relocation of your workplace more than fifty miles away from the workplace designated by the Company on your initial date of service, provided and only if such change, reduction or relocation is effected by the Company without your consent. For purposes of this Agreement, “Cause” shall mean (i) the unauthorized use or disclosure of the confidential information or trade secrets of the Company, which use causes material harm to the Shares Restricted Company, (ii) conviction of a felony under the laws of the United States or any state thereof, (iii) gross negligence or (iv) repeated failure to perform lawful assigned duties for thirty days after receiving written notification from the Board of Directors. No additional shares will vest after your Service has terminated for any reason, except to the extent set forth above if you are subject to an Involuntary Termination within 3 months prior to a Change in Control. Unvested shares will be considered “Restricted Shares.” You may not sell, transfer, pledge or otherwise dispose of any Restricted Shares without the written consent of the Company, except as provided in the next sentence. You may transfer Restricted Shares to your spouse, children or grandchildren or to a trust established by you for the benefit of yourself or your spouse, children or grandchildren. However, a transferee of Restricted Shares must agree in writing on a form prescribed by the Company to be bound by all provisions of this Agreement. Forfeiture If your Service terminates for any reason, then your shares will be forfeited to the extent that they have not vested before the termination date and do not vest as a result of the termination. This means that the Restricted Shares will immediately revert to the Company. You receive no payment for Restricted Shares that are forfeited. The Company determines when your Service terminates for this purpose. Leaves of Absence and Part- Time Work For purposes of this award, your Service does not terminate when you go on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing. But your Service terminates when the approved leave ends, unless you immediately return to active work. If you go on a leave of absence, then the vesting schedule specified in the Notice of Restricted Stock Award may be adjusted in accordance with the Company’s leave of absence policy or the terms of your leave. If you commence working on a part-time basis, then the vesting schedule specified in the Notice of Restricted Stock Award may be adjusted in accordance with the Company’s part-time work policy or the terms of an agreement between you and the Company pertaining to your part-time schedule. Stock Certificates The certificates for Restricted Shares have stamped on them a special legend referring to the Company’s forfeiture right. In addition to or in lieu of imposing the legend, the Company may hold the certificates in escrow. As your vested percentage increases, you may request (at reasonable intervals) that the Company release to you a non- legended 2 Voting Rights You may vote your shares even before they vest. certificate for your vested shares. Withholding Taxes Restrictions on Resale No Retention Rights Adjustments Applicable Law No stock certificates will be released to you unless you have made arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of this award or the vesting of the shares. With the Company’s consent, these arrangements may include (a) withholding shares of Company stock that otherwise would be issued to you when they vest or (b) surrendering shares that you previously acquired. The fair market value of the shares you surrender, determined as of the date taxes otherwise would have been withheld in cash, will be applied as a credit against the withholding taxes. You agree not to sell any shares at a time when applicable laws, Company policies or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as your Service continues and for such period of time after the termination of your Service as the Company may specify. Your award or this Agreement does not give you the right to be employed or retained by the Company or a subsidiary of the Company in any capacity. The Company and its subsidiaries reserve the right to terminate your Service at any time, with or without cause. In the event of a stock split, a stock dividend or a similar change in Company stock, the number of Restricted Shares that remain subject to forfeiture will be adjusted accordingly. This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice-of-law provisions). The Plan and Other Agreements The text of the Plan is incorporated in this Agreement by reference. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this award. Any prior agreements, commitments or negotiations concerning this award are superseded. This Agreement may be amended only by another written agreement between the parties. BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 3 Form of Notice of Stock Option Grant and Stock Option Agreement under 2004 Equity Incentive Plan (form in effect from 2007) THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN NOTICE OF STOCK OPTION GRANT You have been granted the following option to purchase shares of the Common Stock of Theravance, Inc. (the “Company”): Name of Optionee: «First» «Last» ID Number: Total Number of Shares: «ID» «Shares» Type of Option: Nonstatutory Stock Option Grant Number: Exercise Price Per Share: Date of Grant: Vesting Schedule: Expiration Date: «Number» «Price» «Grant_Date» «VestSchedule» «Expiration_Date». This option expires earlier if your Service terminates earlier, as described in the Stock Option Agreement. You and the Company agree that this option is granted under and governed by the terms and conditions of the Stock Option Agreement, which is attached to and made a part of this document, and the 2004 Equity Incentive Plan (the “Plan”). You further agree that the Company may deliver by email all documents relating to the Plan or this option (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a web site maintained by the Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by email. THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN STOCK OPTION AGREEMENT Tax Treatment This option is a nonstatutory stock option. Vesting This option becomes exercisable in installments, as shown in the Notice of Stock Option Grant. This option shall become exercisable in full if not assumed or a new option substituted pursuant to Section 11.3 of the Plan. In addition, this option becomes exercisable in full if the Company is subject to a “Change in Control” (as defined in the Plan) before your Service terminates, and you are subject to an Involuntary Termination (as defined below) within three months prior or 24 months after the Change in Control. For purposes of this Agreement, “Cause” shall mean (i) the unauthorized use or disclosure of the confidential information or trade secrets of the Company, which use causes material harm to the Company, (ii) conviction of a felony under the laws of the United States or any state thereof, (iii) gross negligence or (iv) repeated failure to perform lawful assigned duties for thirty days after receiving written notification from the Board of Directors. For purposes of this Agreement, “Involuntary Termination” means the termination of your Service by reason of: (a) an involuntary dismissal or discharge by the Company for reasons other than for Cause; or (b) your voluntary resignation following (i) a change in your position with the Company (or Parent or Subsidiary employing you) which materially reduces your level of responsibility, (ii) a reduction in your level of compensation (including base salary, fringe benefits and participation in corporate-performance based bonus or incentive programs) or (iii) a relocation of your workplace more than fifty miles away from the workplace designated by the Company on your initial date of service, provided and only if such change, reduction or relocation is effected by the Company without your consent. For purposes of this Agreement, “Service” means your service as an Employee, Outside Director or Consultant. Term No additional shares will vest after your Service has terminated for any reason, except to the extent set forth above if you are subject to an Involuntary Termination within three months prior to a Change in Control. th This option expires in any event at the close of business at Company headquarters on the day before the 10 anniversary of the Date of Grant, as shown in the Notice of Stock Option Grant. (It will expire earlier if your Service terminates, as described below.) You may exercise this option at any time before its expiration under the preceding sentence, but only to the extent that this option had become exercisable before your Service terminated. Regular Termination If your Service terminates for any reason except death or total and permanent disability, then this option will expire at the close of business at Company headquarters on the date three months after your termination date. The Company determines when your Service terminates for this purpose. Death Disability If you die before your Service terminates, then this option will expire at the close of business at Company headquarters on the date that is 12 months after the date of death. If your Service terminates because of your total and permanent disability, then this option will expire at the close of business at Company headquarters on the date 12 months after your termination date. For all purposes under this Agreement, “total and permanent disability” means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of not less than one year. Leaves of Absence and Part- Time Work For purposes of this option, your Service does not terminate when you go on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing. But your Service terminates when the approved leave ends, unless you immediately return to active work. If you go on a leave of absence, then the vesting schedule specified in the Notice of Stock Option Grant may be adjusted in accordance with the Company’s leave of absence policy or the terms of your leave. If you commence working on a part-time basis, then the vesting schedule specified in the Notice of Stock Option Grant may be adjusted in accordance with the Company’s part-time work policy or the terms of an agreement between you and the Company pertaining to your part-time 3 schedule. Restrictions on Exercise The Company will not permit you to exercise this option if the issuance of shares at that time would violate any law or regulation. Notice of Exercise When you wish to exercise this option, you must notify the Company by filing the proper “Notice of Exercise” form at the address given on the form. Your notice must specify how many shares you wish to purchase. Your notice must also specify how your shares should be registered. The notice will be effective when the Company receives it. If someone else wants to exercise this option after your death, that person must prove to the Company’s satisfaction that he or she is entitled to do so. Form of Payment When you submit your notice of exercise, you must include payment of the option exercise price for the shares that you are purchasing. To the extent permitted by applicable law, payment may be made in one (or a combination of two or more) of the following forms: · Your personal check, a cashier’s check or a money order. · Certificates for shares of Company stock that you own, along with any forms needed to effect a transfer of those shares to the Company. The value of the shares, determined as of the effective date of the option exercise, will be applied to the option exercise price. Instead of surrendering shares of Company stock, you may attest to the ownership of those shares on a form provided by the Company and have the same number of shares subtracted from the option shares issued to you. However, you may not surrender, or attest to the ownership of, shares of Company stock in payment of the exercise price if your action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to this option for financial reporting purposes. · Irrevocable directions to a securities broker approved by the Company to sell all or part of your option shares and to deliver to the Company from the sale proceeds an amount sufficient to pay the option exercise price and any withholding taxes. (The balance of the sale proceeds, if any, will be delivered to you.) The directions must be given by signing a special “Notice of Exercise” form provided by the Company. · Irrevocable directions to a securities broker or lender approved by the Company to pledge option shares as security for a loan and to deliver to the Company from the loan proceeds an amount sufficient to pay the option exercise price and any withholding taxes. The directions 4 must be given by signing a special “Notice of Exercise” form provided by the Company. Withholding Taxes and Stock Withholding You will not be allowed to exercise this option unless you make arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the option exercise. With the Company’s consent, these arrangements may include withholding shares of Company stock that otherwise would be issued to you when you exercise this option. The value of these shares, determined as of the effective date of the option exercise, will be applied to the withholding taxes. Restrictions on Resale Transfer of Option You agree not to sell any option shares at a time when applicable laws, Company policies or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as your Service continues and for such period of time after the termination of your Service as the Company may specify. Prior to your death, only you may exercise this option. You cannot transfer or assign this option. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid. You may, however, dispose of this option in your will or a beneficiary designation. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your former spouse, nor is the Company obligated to recognize your former spouse’s interest in your option in any other way. Retention Rights Stockholder Rights Adjustments Applicable Law Your option or this Agreement does not give you the right to be retained by the Company or a subsidiary of the Company in any capacity. The Company and its subsidiaries reserve the right to terminate your Service at any time, with or without cause. You, or your estate or heirs, have no rights as a stockholder of the Company until you have exercised this option by giving the required notice to the Company and paying the exercise price. No adjustments are made for dividends or other rights if the applicable record date occurs before you exercise this option, except as described in the Plan. In the event of a stock split, a stock dividend or a similar change in Company stock, the number of shares covered by this option and the exercise price per share may be adjusted pursuant to the Plan. This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice-of-law provisions). 5 The Plan and Other Agreements The text of the Plan is incorporated in this Agreement by reference. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded. This Agreement may be amended only by another written agreement between the parties. BY ACCEPTING THIS STOCK OPTION GRANT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 6 Form of Non-Employee Director Notice of Stock Option Grant and Stock Option Agreement under 2004 Equity Incentive Plan (form in effect through 2006) THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN NOTICE OF STOCK OPTION GRANT You have been granted the following option to purchase shares of the Common Stock of Theravance, Inc. (the “Company”): Name of Optionee: Total Number of Shares: «Name» «Shares» Type of Option: Nonstatutory Stock Option Exercise Price Per Share: $«PricePerShare» Date of Grant: Vesting Schedule: Expiration Date: «DateGrant» «VestSched» «ExpDate». This option expires earlier if your Service terminates earlier, as described in the Stock Option Agreement. You and the Company agree that this option is granted under and governed by the terms and conditions of the 2004 Equity Incentive Plan (the “Plan”) and the Stock Option Agreement, both of which are attached to and made a part of this document. You further agree that the Company may deliver by email all documents relating to the Plan or this option (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a web site maintained by the Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by email. OPTIONEE: THERAVANCE, INC. By: Title: THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN STOCK OPTION AGREEMENT New Director Grant Tax Treatment This option is intended to be an incentive stock option under section 422 of the Internal Revenue Code or a nonstatutory stock option, as provided in the Notice of Stock Option Grant. Vesting This option becomes exercisable as shown in the Notice of Stock Option Grant. This option shall become exercisable in full if not assumed or a new option substituted pursuant to Section 8(b)(ii) or (iii) of the Plan. In addition, this option becomes exercisable in full if the Company is subject to a “Change in Control” (as defined in the Plan) before your Service terminates. Should the exercisability of this option accelerate as a result of the occurrence of a Change in Control prior to the First Exercise Date, the right to exercise this option shall be deferred as to the additional shares until the First Exercise Date, provided and only if this option is assumed by the surviving corporation or its parent or the surviving corporation or its parent substitutes its own option for this option. For purposes of this Agreement, “Cause” shall mean (i) the unauthorized use or disclosure of the confidential information or trade secrets of the Company, which use causes material harm to the Company, (ii) conviction of a felony under the laws of the United States or any state thereof, (iii) gross negligence or (iv) repeated failure to perform lawful assigned duties for thirty days after receiving written notification from the Board of Directors. For purposes of this Agreement, “Put Date” shall mean the day after the final day of the Put Period, as such term is defined in the Restated Certificate of Incorporation of Theravance, Inc. or, if earlier, the consummation of a Qualified Change in Control as defined in the Restated Certificate of Incorporation of Theravance, Inc. For purposes of this Agreement, “Service” means your service as an Outside Director. This option will in no event become exercisable for additional shares after your Service has terminated for any reason except as set forth above Term This option expires in any event at the close of business at Company headquarters on the day before the 10 anniversary of the Date of Grant, as shown in the Notice of Stock Option Grant. (It will expire earlier if your Service terminates, as described below.) th Termination Prior to the Put Date If your Service terminates for any reason prior to the Put Date, then this option will expire at the close of business at Company headquarters on the date 36 months after your termination date. The Company determines when your Service terminates for this purpose. Regular Termination on or after the Put Date If your Service terminates for any reason on or after the Put Date except a Qualified Retirement, then this option will expire at the close of business at Company headquarters on the date 12 months after your termination date. The Company determines when your Service terminates for this purpose. Qualified Retirement If you retire from Service at or after the age of 65 or at or after the age of 55 and have provided 10 years of consecutive Service for the Company prior to retirement (a “Qualified Retirement”), then this option will expire at the close of business at the Company headquarters on the date 36 months after the date of your Qualified Retirement. Restrictions on Exercise The Company will not permit you to exercise this option if the issuance of shares at that time would violate any law or regulation. Notice of Exercise When you wish to exercise this option, you must notify the Company by filing the proper “Notice of Exercise” form at the address given on the form. Your notice must specify how many shares you wish to purchase. Your notice must also specify how your shares should be registered. The notice will be effective when the Company receives it. If someone else wants to exercise this option after your death, that person must prove to the Company’s satisfaction that he or she is entitled to do so. Form of Payment When you submit your notice of exercise, you must include payment of the option exercise price for the shares that you are purchasing. To the extent permitted by applicable law, payment may be made in one (or a combination of two or more) of the following forms: · Your personal check, a cashier’s check or a money order. · Certificates for shares of Company stock that you own, along with any forms needed to effect a transfer of those shares to the Company. The value of the shares, determined as of the effective date of the option exercise, will be applied to the option exercise price. Instead of surrendering shares of Company stock, you may attest to the ownership of those shares on a form provided by the 2 Company and have the same number of shares subtracted from the option shares issued to you. However, you may not surrender, or attest to the ownership of, shares of Company stock in payment of the exercise price if your action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to this option for financial reporting purposes. · Irrevocable directions to a securities broker approved by the Company to sell all or part of your option shares and to deliver to the Company from the sale proceeds an amount sufficient to pay the option exercise price and any withholding taxes. (The balance of the sale proceeds, if any, will be delivered to you.) The directions must be given by signing a special “Notice of Exercise” form provided by the Company. Withholding Taxes and Stock Withholding You will not be allowed to exercise this option unless you make arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the option exercise. With the Company’s consent, these arrangements may include withholding shares of Company stock that otherwise would be issued to you when you exercise this option. The value of these shares, determined as of the effective date of the option exercise, will be applied to the withholding taxes. Restrictions on Resale Transfer of Option Retention Rights Stockholder Rights Adjustments Applicable Law The Plan and Other Agreements You agree not to sell any option shares at a time when applicable laws, Company policies or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as your Service continues and for such period of time after the termination of your Service as the Company may specify. Prior to your death, only you may exercise this option. You cannot transfer or assign this option. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid. You may, however, dispose of this option in your will or a beneficiary designation. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your former spouse, nor is the Company obligated to recognize your former spouse’s interest in your option in any other way. Your option or this Agreement does not give you the right to be retained by the Company or a subsidiary of the Company in any capacity. The Company and its subsidiaries reserve the right to terminate your Service at any time, with or without cause. Nor shall this Agreement in any way be construed or interpreted so as to affect adversely or otherwise impair the right of the Company or the stockholders to remove Optionee from the Board of Directors at any time in accordance with the provisions of 3 applicable law. You, or your estate or heirs, have no rights as a stockholder of the Company until you have exercised this option by giving the required notice to the Company and paying the exercise price. No adjustments are made for dividends or other rights if the applicable record date occurs before you exercise this option, except as described in the Plan. In the event of a stock split, a stock dividend or a similar change in Company stock, the number of shares covered by this option and the exercise price per share may be adjusted pursuant to the Plan. This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice-of-law provisions). The text of the Plan is incorporated in this Agreement by reference. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded. This Agreement may be amended only by another written agreement between the parties. BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 4 Form of Non-Employee Director Notice of Stock Option Grant and Stock Option Agreement under 2004 Equity Incentive Plan (form in effect from 2007) THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN NOTICE OF STOCK OPTION GRANT You have been granted the following option to purchase shares of the Common Stock of Theravance, Inc. (the “Company”): Name of Optionee: Total Number of Shares: «Name» «Shares» Type of Option: Nonstatutory Stock Option Exercise Price Per Share: $«PricePerShare» Date of Grant: Vesting Schedule: Expiration Date: «DateGrant» «VestSched» «ExpDate». This option expires earlier if your Service terminates earlier, as described in the Stock Option Agreement. You and the Company agree that this option is granted under and governed by the terms and conditions of the 2004 Equity Incentive Plan (the “Plan”) and the Stock Option Agreement, both of which are attached to and made a part of this document. You further agree that the Company may deliver by email all documents relating to the Plan or this option (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a web site maintained by the Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by email. OPTIONEE: THERAVANCE, INC. By: Title: THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN STOCK OPTION AGREEMENT New Director Grant Tax Treatment This option is intended to be a nonstatutory stock option, as provided in the Notice of Stock Option Grant. Vesting This option becomes exercisable as shown in the Notice of Stock Option Grant. This option shall become exercisable in full if not assumed or a new option substituted pursuant to Section 8(b)(ii) or (iii) of the Plan. In addition, this option becomes exercisable in full if the Company is subject to a “Change in Control” (as defined in the Plan) before your Service terminates. Should the exercisability of this option accelerate as a result of the occurrence of a Change in Control prior to the First Exercise Date, the right to exercise this option shall be deferred as to the additional shares until the First Exercise Date, provided and only if this option is assumed by the surviving corporation or its parent or the surviving corporation or its parent substitutes its own option for this option. For purposes of this Agreement, “Cause” shall mean (i) the unauthorized use or disclosure of the confidential information or trade secrets of the Company, which use causes material harm to the Company, (ii) conviction of a felony under the laws of the United States or any state thereof, (iii) gross negligence or (iv) repeated failure to perform lawful assigned duties for thirty days after receiving written notification from the Board of Directors. For purposes of this Agreement, “Put Date” shall mean the day after the final day of the Put Period, as such term is defined in the Restated Certificate of Incorporation of Theravance, Inc. or, if earlier, the consummation of a Qualified Change in Control as defined in the Restated Certificate of Incorporation of Theravance, Inc. For purposes of this Agreement, “Service” means your service as an Outside Director. This option will in no event become exercisable for additional shares after your Service has terminated for any reason except as set forth above. Term This option expires in any event at the close of business at Company headquarters on the day before the 10 anniversary of the Date of Grant, th as shown in the Notice of Stock Option Grant. (It will expire earlier if your Service terminates, as described below.) Regular Termination If your Service terminates for any reason except a termination for Cause, then this option will expire at the close of business at Company headquarters on the date 36 months after your termination date. If your Service terminates for Cause, then this option will expire on your termination date. The Company determines when your Service terminates for this purpose. Restrictions on Exercise The Company will not permit you to exercise this option if the issuance of shares at that time would violate any law or regulation. Notice of Exercise When you wish to exercise this option, you must notify the Company by filing the proper “Notice of Exercise” form at the address given on the form. Your notice must specify how many shares you wish to purchase. Your notice must also specify how your shares should be registered. The notice will be effective when the Company receives it. If someone else wants to exercise this option after your death, that person must prove to the Company’s satisfaction that he or she is entitled to do so. Form of Payment When you submit your notice of exercise, you must include payment of the option exercise price for the shares that you are purchasing. To the extent permitted by applicable law, payment may be made in one (or a combination of two or more) of the following forms: · Your personal check, a cashier’s check or a money order. · Certificates for shares of Company stock that you own, along with any forms needed to effect a transfer of those shares to the Company. The value of the shares, determined as of the effective date of the option exercise, will be applied to the option exercise price. Instead of surrendering shares of Company stock, you may attest to the ownership of those shares on a form provided by the Company and have the same number of shares subtracted from the option shares issued to you. However, you may not surrender, or attest to the ownership of, shares of Company stock in payment of the exercise price if your action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to this option for financial reporting purposes. · Irrevocable directions to a securities broker approved by the Company to sell all or part of your option shares and to deliver to the Company from the sale proceeds an amount sufficient to pay the option exercise 2 price and any withholding taxes. (The balance of the sale proceeds, if any, will be delivered to you.) The directions must be given by signing a special “Notice of Exercise” form provided by the Company. Withholding Taxes and Stock Withholding You will not be allowed to exercise this option unless you make arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the option exercise. With the Company’s consent, these arrangements may include withholding shares of Company stock that otherwise would be issued to you when you exercise this option. The value of these shares, determined as of the effective date of the option exercise, will be applied to the withholding taxes. Restrictions on Resale Transfer of Option Retention Rights You agree not to sell any option shares at a time when applicable laws, Company policies or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as your Service continues and for such period of time after the termination of your Service as the Company may specify. Prior to your death, only you may exercise this option. You cannot transfer or assign this option. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid. You may, however, dispose of this option in your will or a beneficiary designation. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your former spouse, nor is the Company obligated to recognize your former spouse’s interest in your option in any other way. Your option or this Agreement does not give you the right to be retained by the Company or a subsidiary of the Company in any capacity. The Company and its subsidiaries reserve the right to terminate your Service at any time, with or without cause. Nor shall this Agreement in any way be construed or interpreted so as to affect adversely or otherwise impair the right of the Company or the stockholders to remove Optionee from the Board of Directors at any time in accordance with the provisions of applicable law. Stockholder Rights You, or your estate or heirs, have no rights as a stockholder of the Company until you have exercised this option by giving the required notice to the Company and paying the exercise price. No adjustments are made for dividends or other rights if the applicable record date occurs before you exercise this option, except as described in the Plan. Adjustments In the event of a stock split, a stock dividend or a similar change in Company stock, the number of shares covered by this option and the 3 exercise price per share may be adjusted pursuant to the Plan. Applicable Law The Plan and Other Agreements This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice- of-law provisions). The text of the Plan is incorporated in this Agreement by reference. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded. This Agreement may be amended only by another written agreement between the parties. BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 4 Form of Time-Based Vesting Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement under 2004 Equity Incentive Plan (form in effect through 2007) THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN NOTICE OF RESTRICTED STOCK UNIT AWARD You have been granted the number of restricted stock units indicated below by Theravance, Inc. (the “Company”) on the following terms: Name: «Name» Restricted Stock Unit Award Details: Date of Grant: Restricted Stock Units: Vesting Commencement Date: «DateGrant» «TotalShares» «VestComDate» Each restricted stock unit (the “Restricted Stock Unit”) represents the right to receive one share of the Company’s Common Stock subject to the terms and conditions contained in the Restricted Stock Unit Agreement. Vesting Schedule: Vesting is dependent upon continuous service as an employee of the Company, a Parent, a Subsidiary or an Affiliate (“Service”) throughout the vesting period. The units will vest as follows: 25% on <>; 6.25% on <>; and an additional 6.25% on the final day of each 3-month period thereafter through <>, provided that you remain in continuous service through such date. You and the Company agree that your right to receive the units is granted under and governed by the terms and conditions of the Plan and of the Restricted Stock Unit Agreement that is attached to and made a part of this document. Capitalized terms not defined herein have the meaning ascribed to such terms in the Plan. You further agree that the Company may deliver by email all documents relating to the Plan or this award (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a web site maintained by the Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by email. You agree to cover the applicable withholding taxes as set forth more fully herein. THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN: RESTRICTED STOCK UNIT AGREEMENT Payment for Shares No payment is required for the restricted stock units you are receiving. Nature of Units Settlement of Units Your units are bookkeeping entries. They represent only the Company’s unfunded and unsecured promise to issue shares of Common Stock on a future date. As a holder of units, you have no rights other than the rights of a general creditor of the Company. Each of your units will be settled when it vests (unless you and the Company have agreed to a later settlement date pursuant to procedures that the Company may prescribe at its discretion). At the time of settlement, you will receive one share of the Company’s Common Stock for each vested unit. Vesting The restricted stock units that you are receiving will vest as shown in the Notice of Restricted Stock Unit Award. No additional units vest after your Service has terminated for any reason, except as set forth on the Notice of Restricted Stock Unit Award. It is intended that vesting in the restricted stock units is commensurate with a full-time work schedule. For possible adjustments that may be made by the Company, see the Section below entitled “Leaves of Absence and Part-Time Work.” The restricted stock units will vest in full if not assumed or substituted with a new award as set forth in Section 11.3 of the Plan. If your Service terminates for any reason then your restricted stock units that have not vested before the termination date and do not vest as a result of the termination pursuant to this Agreement or as set forth on the Notice of Restricted Stock Unit Award, will be forfeited immediately. This means that the restricted Forfeiture Leaves of Absence and Part-Time Work Stock Certificates Stockholder Rights Units Restricted Withholding Taxes Restrictions on Issuance Restrictions on Resale No Retention Rights Adjustments stock units will immediately revert to the Company. You receive no payment for restricted stock units that are forfeited. The Company determines when your Service terminates for this purpose. For purposes of this award, your Service does not terminate when you go on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing. If your leave of absence lasts for more than 6 months, then vesting will be suspended on the day that is 6 months and 1 day after the leave of absence began. Vesting will resume effective as of the second vesting date after you return from leave of absence provided you have worked at least one day during that vesting period. In the case of all leaves, your Service terminates when the approved leave ends, unless you immediately return to active work. If you and the Company agree to a reduction in your scheduled work hours, then the Company reserves the right to modify the rate at which the restricted stock units vest, so that the rate of vesting is commensurate with your reduced work schedule. Any such adjustment shall be consistent with the Company’s policies for part-time or reduced work schedules or shall be pursuant to the terms of an agreement between you and the Company pertaining to your reduced work schedule. The Company shall not be required to adjust any vesting schedule pursuant to this subsection. No shares of Common Stock shall be issued to you prior to the date on which the restricted stock units vest. After any restricted stock units vest pursuant to this Agreement, the Company shall promptly cause to be issued in book-entry form, registered in your name or in the name of your legal representatives, beneficiaries or heirs, as the case may be, the number of shares of Common Stock representing your vested restricted stock units. No fractional shares shall be issued. The restricted stock units do not entitle you to any of the rights of a stockholder of Common Stock. Upon settlement of the restricted stock units into shares of Common Stock, you will obtain full voting and other rights as a stockholder of the Company. You may not sell, transfer, pledge or otherwise dispose of any restricted stock units or rights under this Agreement other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, you may designate a beneficiary or beneficiaries to receive any property distributable with respect to the restricted stock units upon your death. No shares will be distributed to you unless you have made arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the settlement of this award. Prior to the relevant taxable event, you shall pay or make adequate arrangements satisfactory to the Company to satisfy all withholding obligations for applicable taxes. You authorize the Company to instruct the broker whom it has selected for this purpose to sell a number of shares of Common Stock to be issued upon the vesting of your restricted stock units to meet the withholding obligations. Such sales shall be effected at the prevailing market price following the date that the restricted stock units vest. 2 You acknowledge that the proceeds of any such sale may not be sufficient to satisfy your withholding obligations. To the extent the proceeds from such sale are insufficient to cover the taxes due, the Company may in its discretion (a) withhold the balance of all applicable taxes legally payable by you from your wages or other cash compensation paid to you by the Company and/or (b) withhold in shares of Common Stock, provided that the Company only withholds an amount of shares not in excess of the amount necessary to satisfy the minimum withholding amount. The fair market value of withheld shares, determined as of the date taxes otherwise would have been withheld in cash, will be applied against the withholding taxes. If the Company satisfies the obligation for taxes by withholding a number of shares of Common Stock as described above, you are deemed to have been issued the full number of shares subject to the award of restricted stock units. The Company will not issue shares to you if the issuance of shares at that time would violate any law or regulation. You agree not to sell any shares of Common Stock you receive under this Agreement at a time when applicable laws, regulations, Company trading policies (including the Company’s Insider Trading Policy, a copy of which can be found on the Company’s intranet) or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as your Service continues and for such period of time after the termination of your Service as the Company may specify. Your award or this Agreement does not give you the right to be employed or retained by the Company (or a Parent or Subsidiary) in any capacity. The Company and its Parent and its Subsidiaries reserve the right to terminate your Service at any time, with or without cause. In the event of a stock split, a stock dividend or a similar change in Common Stock, the number of restricted stock units that will vest in any future installments will be adjusted accordingly. Applicable Law This Agreement will be interpreted and enforced with respect to issues of contract law under the laws of the State of Delaware. 3 The Plan and Other Agreements The text of the Plan is incorporated in this Agreement by reference. A copy of the Plan is available on the Company’s intranet or by request to the Finance Department. This Agreement, the Notice of Restricted Stock Unit Award, and the Plan constitute the entire understanding between you and the Company regarding this award. Any prior agreements, commitments or negotiations concerning this award are superseded. This Agreement may be amended only by another written agreement between the parties. BY ACCEPTING THIS RESTRICTED STOCK UNIT AWARD, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 4 Form of Non-Employee Director Time-Based Vesting Notice of Initial Restricted Stock Unit Award and Restricted Stock Unit Agreement under 2004 Equity Incentive Plan (form in effect through 2010) Initial Director Auto Grant THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN NOTICE OF RESTRICTED STOCK UNIT AWARD You have been granted the number of restricted stock units indicated below by Theravance, Inc. (the “Company”) on the following terms: Name: «Name» Restricted Stock Unit Award Details: Date of Grant: Restricted Stock Units: «DateGrant» «Shares» Each restricted stock unit (the “Restricted Stock Unit”) represents the right to receive one share of the Company’s Common Stock subject to the terms and conditions contained in the Restricted Stock Unit Agreement. Vesting Schedule: Vesting is dependent upon continuous service as a member of the Board (“Service”) throughout the vesting period. The units will vest in twenty-four (24) equal monthly installments, provided that you remain in continuous Service through each such date. In addition, all of the restricted stock units subject to this award will vest immediately if the Company is subject to a Change in Control (as defined in the Plan) before your continuous Service terminates and upon your death. You and the Company agree that your right to receive the units is granted under and governed by the terms and conditions of the Plan and of the Restricted Stock Unit Agreement that is attached to and made a part of this document. Capitalized terms not defined herein have the meaning ascribed to such terms in the Plan. You agree that the Company may deliver by email all documents relating to the Plan or this award (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a web site maintained by the Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by email. RECIPIENT: THERAVANCE, INC. Print Name By: Title: Payment for Shares No payment is required for the restricted stock units you are receiving. THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN: RESTRICTED STOCK UNIT AGREEMENT Nature of Units Your units are bookkeeping entries. They represent only the Company’s unfunded and unsecured promise to issue shares of Common Stock on a future date. As a holder of units, you have no rights other than the rights of a general creditor of the Company. Vesting The restricted stock units that you are receiving will vest as shown in the Notice of Restricted Stock Unit Award. No additional units vest after your Service has terminated for any reason, except as set forth on the Notice of Restricted Stock Unit Award. The restricted stock units will vest in full if not assumed or substituted with a new award as set forth in Section 11.3 of the Plan. Time of Settlement A vested unit will be settled on the fourth anniversary of the Date of Grant or, if earlier, 60 days following the cessation of your Service for any reason. If a unit vests on an accelerated basis as the result of a Change in Control, then it will be settled immediately prior to the closing of the transaction that constitutes a Change in Control. If a unit vests on an accelerated basis as the result of your death, then it will be settled 60 days following the cessation of your Service due to your death. Form of Settlement At the time of settlement, you will receive one share of the Company’s Common Stock for each vested unit. Forfeiture If your Service terminates for any reason, then your restricted stock units that have not vested before the termination date and do not vest as a result of the termination pursuant to this Agreement or as set forth on the Notice of Restricted Stock Unit Award, will be forfeited immediately. This means that the restricted stock units will immediately revert to the Company. You receive no payment for restricted stock units that are forfeited. The Company determines when your Service terminates for this purpose. Stock Certificates No shares of Common Stock shall be issued to you prior to the date on Stockholder Rights Units Restricted which the restricted stock units are settled. At the time of settlement, a stock certificate for the shares representing your vested restricted stock units shall be released to you or the Company shall cause to be issued in book-entry form, registered in your name or in the name of your legal representatives, beneficiaries or heirs, as the case may be, the number of shares of Common Stock representing your vested restricted stock units. No fractional shares shall be issued. The restricted stock units do not entitle you to any of the rights of a stockholder of Common Stock. Upon settlement of the restricted stock units into shares of Common Stock, you will obtain full voting and other rights as a stockholder of the Company. You may not sell, transfer, pledge or otherwise dispose of any restricted stock units or rights under this Agreement other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, you may designate a beneficiary or beneficiaries to receive any property distributable with respect to the restricted stock units upon your death. Withholding Taxes No shares will be distributed to you unless you have made arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the settlement of this award. Restrictions on Issuance The Company will not issue shares to you if the issuance of shares at that time would violate any law or regulation. Restrictions on Resale No Retention Rights You agree not to sell any shares of Common Stock you receive under this Agreement at a time when applicable laws, regulations, Company trading policies (including the Company’s Insider Trading Policy, a copy of which can be found on the Company’s intranet) or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as your Service continues and for such period of time after the termination of your Service as the Company may specify. Your award or this Agreement does not give you the right to be retained by the Company or a subsidiary of the Company in any capacity. The Company and its subsidiaries reserve the right to terminate your Service at any time, with or without cause. Nor shall this Agreement in any way be construed or interpreted so as to affect adversely or otherwise impair the right of the Company or the stockholders to remove you from the Board at any time in accordance with the provisions of applicable law. Adjustments In the event of a stock split, a stock dividend or a similar change in Common Stock, the number of restricted stock units that will vest in any future installments will be adjusted accordingly. 2 Applicable Law This Agreement will be interpreted and enforced with respect to issues of contract law under the laws of the State of Delaware. The Plan and Other Agreements The text of the Plan is incorporated in this Agreement by reference. A copy of the Plan is available on the Company’s intranet or by request to the Finance Department. This Agreement, the Notice of Restricted Stock Unit Award, and the Plan constitute the entire understanding between you and the Company regarding this award. Any prior agreements, commitments or negotiations concerning this award are superseded. This Agreement may be amended only by another written agreement between the parties. BY ACCEPTING THIS RESTRICTED STOCK UNIT AWARD, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 3 Form of Non-Employee Director Time-Based Vesting Notice of Annual Restricted Stock Unit Award and Restricted Stock Unit Agreement under 2004 Equity Incentive Plan (form in effect through 2010) Annual Director Auto Grant THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN NOTICE OF RESTRICTED STOCK UNIT AWARD You have been granted the number of restricted stock units indicated below by Theravance, Inc. (the “Company”) on the following terms: Name: «Name» Restricted Stock Unit Award Details: Date of Grant: Restricted Stock Units: «DateGrant» «Shares» Each restricted stock unit (the “Restricted Stock Unit”) represents the right to receive one share of the Company’s Common Stock subject to the terms and conditions contained in the Restricted Stock Unit Agreement. Vesting Schedule: Vesting is dependent upon continuous service as a member of the Board (“Service”) throughout the vesting period. The units will vest in twelve (12) equal monthly installments, provided that you remain in continuous Service through each such date. In addition, all of the restricted stock units subject to this award will vest immediately if the Company is subject to a Change in Control (as defined in the Plan) before your continuous Service terminates and upon your death. You and the Company agree that your right to receive the units is granted under and governed by the terms and conditions of the Plan and of the Restricted Stock Unit Agreement that is attached to and made a part of this document. Capitalized terms not defined herein have the meaning ascribed to such terms in the Plan. You agree that the Company may deliver by email all documents relating to the Plan or this award (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a web site maintained by the Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by email. RECIPIENT: THERAVANCE, INC. Print Name By: Title: Payment for Shares No payment is required for the restricted stock units you are receiving. THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN: RESTRICTED STOCK UNIT AGREEMENT Nature of Units Your units are bookkeeping entries. They represent only the Company’s unfunded and unsecured promise to issue shares of Common Stock on a future date. As a holder of units, you have no rights other than the rights of a general creditor of the Company. Vesting The restricted stock units that you are receiving will vest as shown in the Notice of Restricted Stock Unit Award. No additional units vest after your Service has terminated for any reason, except as set forth on the Notice of Restricted Stock Unit Award. The restricted stock units will vest in full if not assumed or substituted with a new award as set forth in Section 11.3 of the Plan. Time of Settlement A vested unit will be settled on the fourth anniversary of the Date of Grant or, if earlier, 60 days following the cessation of your Service for any reason. If a unit vests on an accelerated basis as the result of a Change in Control, then it will be settled immediately prior to the closing of the transaction that constitutes a Change in Control. If a unit vests on an accelerated basis as the result of your death, then it will be settled 60 days following the cessation of your Service due to your death. Form of Settlement At the time of settlement, you will receive one share of the Company’s Common Stock for each vested unit. Forfeiture If your Service terminates for any reason, then your restricted stock units that have not vested before the termination date and do not vest as a result of the termination pursuant to this Agreement or as set forth on the Notice of Restricted Stock Unit Award, will be forfeited immediately. This means that the restricted stock units will immediately revert to the Company. You receive no payment for restricted stock units that are forfeited. The Company determines when your Service terminates for this purpose. Stock Certificates No shares of Common Stock shall be issued to you prior to the date on Stockholder Rights Units Restricted which the restricted stock units are settled. At the time of settlement, a stock certificate for the shares representing your vested restricted stock units shall be released to you or the Company shall cause to be issued in book-entry form, registered in your name or in the name of your legal representatives, beneficiaries or heirs, as the case may be, the number of shares of Common Stock representing your vested restricted stock units No fractional shares shall be issued. The restricted stock units do not entitle you to any of the rights of a stockholder of Common Stock. Upon settlement of the restricted stock units into shares of Common Stock, you will obtain full voting and other rights as a stockholder of the Company. You may not sell, transfer, pledge or otherwise dispose of any restricted stock units or rights under this Agreement other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, you may designate a beneficiary or beneficiaries to receive any property distributable with respect to the restricted stock units upon your death. Withholding Taxes No shares will be distributed to you unless you have made arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the settlement of this award. Restrictions on Issuance The Company will not issue shares to you if the issuance of shares at that time would violate any law or regulation. Restrictions on Resale No Retention Rights You agree not to sell any shares of Common Stock you receive under this Agreement at a time when applicable laws, regulations, Company trading policies (including the Company’s Insider Trading Policy, a copy of which can be found on the Company’s intranet) or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as your Service continues and for such period of time after the termination of your Service as the Company may specify. Your award or this Agreement does not give you the right to be retained by the Company or a subsidiary of the Company in any capacity. The Company and its subsidiaries reserve the right to terminate your Service at any time, with or without cause. Nor shall this Agreement in any way be construed or interpreted so as to affect adversely or otherwise impair the right of the Company or the stockholders to remove you from the Board at any time in accordance with the provisions of applicable law. Adjustments In the event of a stock split, a stock dividend or a similar change in Common Stock, the number of restricted stock units that will vest in any future installments will be adjusted accordingly. 2 Applicable Law This Agreement will be interpreted and enforced with respect to issues of contract law under the laws of the State of Delaware. The Plan and Other Agreements The text of the Plan is incorporated in this Agreement by reference. A copy of the Plan is available on the Company’s intranet or by request to the Finance Department. This Agreement, the Notice of Restricted Stock Unit Award, and the Plan constitute the entire understanding between you and the Company regarding this award. Any prior agreements, commitments or negotiations concerning this award are superseded. This Agreement may be amended only by another written agreement between the parties. BY ACCEPTING THIS RESTRICTED STOCK UNIT AWARD, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 3 Form of Time-Based Vesting Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement under 2004 Equity Incentive Plan (sales plan applicable to more than one award, form used in 2008) THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN NOTICE OF RESTRICTED STOCK UNIT AWARD You have been granted the number of restricted stock units indicated below by Theravance, Inc. (the “Company”) on the following terms: Name: «Name» Restricted Stock Unit Award Details: Date of Grant: Restricted Stock Units: Vesting Commencement Date: «DateGrant» «TotalShares» «VestComDate» Each restricted stock unit (the “restricted stock unit”) represents the right to receive one share of the Company’s Common Stock subject to the terms and conditions contained in the Restricted Stock Unit Agreement (the “Agreement”). Vesting Schedule: Vesting is dependent upon continuous service as an employee or consultant of the Company, a Parent, a Subsidiary or an Affiliate (“Service”) throughout the vesting period. The units will vest as follows: 25% on <>; 6.25% on <>; and an additional 6.25% on the final day of each 3-month period thereafter until the final vest date, which is three years after <>, provided that you remain in continuous Service through such date. You and the Company agree that your right to receive the units is granted under and governed by the terms and conditions of the Plan and of the Agreement that is attached to and made a part of this document. Capitalized terms not defined herein have the meaning ascribed to such terms in the Plan. You agree that the Company may deliver by email all documents relating to the Plan or this award (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a web site maintained by the Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by email. You agree to cover the applicable withholding taxes as set forth more fully herein. In connection with your receipt of the restricted stock units, you are simultaneously entering into a trading arrangement that complies with the requirements of Rule 10b5-1(c)(1) under the Securities Exchange Act of 1934 (a “10b5-1 Plan”). As of the date of the Agreement, you are not aware of any material nonpublic information concerning the Company or its securities, or, as of the date any sales are effected pursuant to the 10b5-1 Plan, you will not effect such sales on the basis of material nonpublic information about the securities or the Company of which you were aware at the time you entered into the Agreement. Payment for Shares No payment is required for the restricted stock units you are receiving. THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN: RESTRICTED STOCK UNIT AGREEMENT Nature of Units Your units are bookkeeping entries. They represent only the Company’s unfunded and unsecured promise to issue shares of Common Stock on a future date. As a holder of units, you have no rights other than the rights of a general creditor of the Company. Settlement of Units Each of your units will be settled when it vests (unless you and the Company have agreed to a later settlement date pursuant to procedures that the Company may prescribe at its discretion). At the time of settlement, you will receive one share of the Company’s Common Stock for each vested unit. Vesting The restricted stock units that you are receiving will vest as shown in the Notice of Restricted Stock Unit Award. No additional units vest after your Service has terminated for any reason, except as set forth on the Notice of Restricted Stock Unit Award. It is intended that vesting in the restricted stock units is commensurate with a full-time work schedule. For possible adjustments that may be made by the Company, see the Section below entitled “Leaves of Absence and Part- Time Work.” The restricted stock units will vest in full if not assumed or substituted with a new award as set forth in Section 11.3 of the Plan. If your Service terminates for any reason then your restricted stock units that have not vested before the termination date and do not vest as a result of the termination pursuant to this Agreement or as set forth on the Notice of Restricted Stock Unit Award, will be forfeited immediately. This means that the restricted stock units will immediately revert to the Company. You receive no payment for restricted stock units that are forfeited. The Company determines when your Service terminates for this purpose. Forfeiture Leaves of Absence and Part- Time Work For purposes of this award, your Service does not terminate when you go on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing. If your leave of absence lasts for more than 6 months, then vesting will be suspended on the day that is 6 months and 1 day after the leave of absence began. Vesting will resume effective as of the second vesting date after you return from leave of absence provided you have worked at least one day during that vesting period. In the case of all leaves, your Service terminates when the approved leave ends, unless you immediately return to active work. If you and the Company agree to a reduction in your scheduled work hours, then the Company reserves the right to modify the rate at which the restricted stock units vest, so that the rate of vesting is commensurate with your reduced work schedule. Any such adjustment shall be consistent with the Company’s policies for part-time or reduced work schedules or shall be pursuant to the terms of an agreement between you and the Company pertaining to your reduced work schedule. The Company shall not be required to adjust any vesting schedule pursuant to this subsection. No shares of Common Stock shall be issued to you prior to the date on which the restricted stock units vest. After any restricted stock units vest pursuant to this Agreement, the Company shall promptly cause to be issued in book-entry form, registered in your name or in the name of your legal representatives, beneficiaries or heirs, as the case may be, the number of shares of Common Stock representing your vested restricted stock units. No fractional shares shall be issued. The restricted stock units do not entitle you to any of the rights of a stockholder of Common Stock. Upon settlement of the restricted stock units into shares of Common Stock, you will obtain full voting and other rights as a stockholder of the Company. You may not sell, transfer, pledge or otherwise dispose of any restricted stock units or rights under this Agreement other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, you may designate a beneficiary or beneficiaries to receive any property distributable with respect to the restricted stock units upon your death. No shares will be distributed to you unless you have made arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the settlement of this award. Prior to the relevant taxable event, you shall pay or make adequate arrangements satisfactory to the Company to satisfy all withholding obligations for applicable taxes. You authorize the Company to instruct the broker whom it has selected for this purpose to sell a number of shares of Common Stock to be issued upon the vesting of your restricted stock units or a lesser number necessary to meet tax withholding obligations. You further 2 authorize the Company to instruct the broker whom it has selected for this purpose to sell a number of shares of Common Stock to be issued upon the vesting of all other restricted stock units granted to you prior to the Date of Grant or a lesser number of shares that vest under such other awards as necessary to meet tax withholding obligations. Such sales shall be effected at a market price following the date that the restricted stock units vest (unless you and the Company have agreed to a later settlement date pursuant to procedures that the Company may prescribe at its discretion). You acknowledge that the proceeds of any such sale may not be sufficient to satisfy your withholding obligations. To the extent the proceeds from such sale are insufficient to cover the taxes due, the Company may in its discretion (a) withhold the balance of all applicable taxes legally payable by you from your wages or other cash compensation paid to you by the Company and/or (b) withhold in shares of Common Stock, provided that the Company only withholds an amount of shares not in excess of the amount necessary to satisfy the minimum withholding amount. The fair market value of withheld shares, determined as of the date taxes otherwise would have been withheld in cash, will be applied against the withholding taxes. If the Company satisfies the obligation for taxes by withholding a number of shares of Common Stock as described above, you are deemed to have been issued the full number of shares subject to the award of restricted stock units. You acknowledge that the instruction to the broker to sell in the foregoing section is intended to comply with the requirements of Rule 10b5-1(c)(1)(i)(B) under the Securities Exchange Act of 1934 (the “Exchange Act”), and to be interpreted to comply with the requirements of Rule 10b5-1(c)(1) under the Exchange Act (a “10b5-1 Plan”). This 10b5-1 Plan is adopted to be effective as of the first date on which the applicable restricted stock units vest. This 10b5-1 Plan is being adopted to permit you to sell a number of shares awarded upon the vesting of restricted stock units sufficient to pay withholding taxes that become due as a result of the award or the vesting of the restricted stock units or, if you elect within thirty days following notification via the broker whom the Company has selected for this purpose of your restricted stock unit award, to permit you to sell all of the applicable vested restricted stock units. You hereby appoint the Company as your agent and attorney-in-fact to instruct the broker with respect to the number of shares to be sold under this 10b5-1 Plan. You hereby authorize the broker to sell the number of shares of Common Stock determined as set forth above and acknowledge that the broker is under no obligation to arrange for such sale at any particular price. You acknowledge that the broker may aggregate your sales with sales occurring on the same day that are effected on behalf of other 3 Stock Certificates Stockholder Rights Units Restricted Withholding Taxes Rule 10b5-1 Plan Company employees pursuant to sales of shares vesting under Company options or restricted stock unit awards and your proceeds will be based on a blended price for all such sales. You acknowledge that you will be responsible for all brokerage fees and other costs of sale, and you agree to indemnify and hold the Company harmless from any losses, costs, damages, or expenses relating to any such sale. You acknowledge that it may not be possible to sell Common Stock during the term of this 10b5-1 Plan due to (a) a legal or contractual restriction applicable to you or to the broker, (b) a market disruption, (c) rules governing order execution priority on the Nasdaq Global Market, (d) a sale effected pursuant to this 10b5-1 Plan that fails to comply (or in the reasonable opinion of the broker’s counsel is likely not to comply) with Rule 144 under the Securities Act of 1933, if applicable, or (e) if the Company determines that sales may not be effected under this 10b5-1 Plan. You acknowledge that this 10b5-1 Plan is subject to the terms of any policy adopted now or hereafter by the Company governing the adoption of 10b5-1 plans. Restrictions on Issuance The Company will not issue shares to you if the issuance of shares at that time would violate any law or regulation. Restrictions on Resale You agree not to sell any shares of Common Stock you receive under this Agreement at a time when applicable laws, regulations, Company trading policies (including the Company’s Insider Trading Policy, a copy of which can be found on the Company’s intranet) or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as your Service continues and for such period of time after the termination of your Service as the Company may specify. No Retention Rights Your award or this Agreement does not give you the right to be employed or retained by the Company (or a Parent or Subsidiary) in any capacity. The Company and its Parent and its Subsidiaries reserve the right to terminate your Service at any time, with or without cause. Adjustments Applicable Law In the event of a stock split, a stock dividend or a similar change in Common Stock, the number of restricted stock units that will vest in any future installments will be adjusted accordingly. This Agreement will be interpreted and enforced with respect to issues of contract law under the laws of the State of Delaware. The Plan and Other Agreements The text of the Plan is incorporated in this Agreement by reference. A copy of the Plan is available on the Company’s intranet or by request to the Finance Department. This Agreement, the Notice of Restricted Stock Unit Award, and the Plan constitute the entire understanding between you and the Company 4 regarding this award. Any prior agreements, commitments or negotiations concerning this award are superseded. This Agreement may be amended only by another written agreement between the parties. BY ACCEPTING THIS RESTRICTED STOCK UNIT AWARD, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 5 Form of Time-Based Vesting Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement under 2004 Equity Incentive Plan (sales plan applicable to one award, form used in 2008) THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN NOTICE OF RESTRICTED STOCK UNIT AWARD You have been granted the number of restricted stock units indicated below by Theravance, Inc. (the “Company”) on the following terms: Name: «Name» Restricted Stock Unit Award Details: Date of Grant: Restricted Stock Units: Vesting Commencement Date: «DateGrant» «TotalShares» «VestComDate» Each restricted stock unit (the “restricted stock unit”) represents the right to receive one share of the Company’s Common Stock subject to the terms and conditions contained in the Restricted Stock Unit Agreement (the “Agreement”). Vesting Schedule: Vesting is dependent upon continuous service as an employee or consultant of the Company, a Parent, a Subsidiary or an Affiliate (“Service”) throughout the vesting period. The units will vest as follows: 25% on <>; 6.25% on <>; and an additional 6.25% on the final day of each 3-month period thereafter until the final vest date, which is three years after <> , provided that you remain in continuous Service through such date. You and the Company agree that your right to receive the units is granted under and governed by the terms and conditions of the Plan and of the Agreement that is attached to and made a part of this document. Capitalized terms not defined herein have the meaning ascribed to such terms in the Plan. You agree that the Company may deliver by email all documents relating to the Plan or this award (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a web site maintained by the Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by email. You agree to cover the applicable withholding taxes as set forth more fully herein. In connection with your receipt of the restricted stock units, you are simultaneously entering into a trading arrangement that complies with the requirements of Rule 10b5-1(c)(1) under the Securities Exchange Act of 1934 (a “10b5-1 Plan”). As of the date of the Agreement, you are not aware of any material nonpublic information concerning the Company or its securities, or, as of the date any sales are effected pursuant to the 10b5-1 Plan, you will not effect such sales on the basis of material nonpublic information about the securities or the Company of which you were aware at the time you entered into the Agreement. Payment for Shares No payment is required for the restricted stock units you are receiving. THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN: RESTRICTED STOCK UNIT AGREEMENT Nature of Units Your units are bookkeeping entries. They represent only the Company’s unfunded and unsecured promise to issue shares of Common Stock on a future date. As a holder of units, you have no rights other than the rights of a general creditor of the Company. Settlement of Units Each of your units will be settled when it vests (unless you and the Company have agreed to a later settlement date pursuant to procedures that the Company may prescribe at its discretion). At the time of settlement, you will receive one share of the Company’s Common Stock for each vested unit. Vesting The restricted stock units that you are receiving will vest as shown in the Notice of Restricted Stock Unit Award. No additional units vest after your Service has terminated for any reason, except as set forth on the Notice of Restricted Stock Unit Award. It is intended that vesting in the restricted stock units is commensurate with a full-time work schedule. For possible adjustments that may be made by the Company, see the Section below entitled “Leaves of Absence and Part- Time Work.” The restricted stock units will vest in full if not assumed or substituted with a new award as set forth in Section 11.3 of the Plan. If your Service terminates for any reason then your restricted stock units that have not vested before the termination date and do not vest as a result of the termination pursuant to this Agreement or as set forth on the Notice of Restricted Stock Unit Award, will be forfeited immediately. This means that the restricted stock units will immediately revert to the Company. You receive no payment for restricted stock units that are forfeited. The Company determines when your Service terminates for this purpose. Forfeiture Leaves of Absence and Part- Time Work For purposes of this award, your Service does not terminate when you go on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing. If your leave of absence lasts for more than 6 months, then vesting will be suspended on the day that is 6 months and 1 day after the leave of absence began. Vesting will resume effective as of the second vesting date after you return from leave of absence provided you have worked at least one day during that vesting period. In the case of all leaves, your Service terminates when the approved leave ends, unless you immediately return to active work. If you and the Company agree to a reduction in your scheduled work hours, then the Company reserves the right to modify the rate at which the restricted stock units vest, so that the rate of vesting is commensurate with your reduced work schedule. Any such adjustment shall be consistent with the Company’s policies for part-time or reduced work schedules or shall be pursuant to the terms of an agreement between you and the Company pertaining to your reduced work schedule. The Company shall not be required to adjust any vesting schedule pursuant to this subsection. Stock Certificates No shares of Common Stock shall be issued to you prior to the date on which the restricted stock units vest. After any restricted stock units vest pursuant to this Agreement, the Company shall promptly cause to be issued in book-entry form, registered in your name or in the name of your legal representatives, beneficiaries or heirs, as the case may be, the number of shares of Common Stock representing your vested restricted stock units. No fractional shares shall be issued. Stockholder Rights The restricted stock units do not entitle you to any of the rights of a stockholder of Common Stock. Upon settlement of the restricted stock units into shares of Common Stock, you will obtain full voting and other rights as a stockholder of the Company. Units Restricted Withholding Taxes You may not sell, transfer, pledge or otherwise dispose of any restricted stock units or rights under this Agreement other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, you may designate a beneficiary or beneficiaries to receive any property distributable with respect to the restricted stock units upon your death. No shares will be distributed to you unless you have made arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the settlement of this award. Prior to the relevant taxable event, you shall pay or make adequate arrangements satisfactory to the Company to satisfy all withholding obligations for applicable taxes. You authorize the Company to instruct the broker whom it has selected for this purpose to sell a number of shares of Common Stock to be issued upon the vesting of your restricted stock units or a lesser number necessary to meet tax withholding obligations. Such sales 2 Rule 10b5-1 Plan shall be effected at a market price following the date that the restricted stock units vest (unless you and the Company have agreed to a later settlement date pursuant to procedures that the Company may prescribe at its discretion). You acknowledge that the proceeds of any such sale may not be sufficient to satisfy your withholding obligations. To the extent the proceeds from such sale are insufficient to cover the taxes due, the Company may in its discretion (a) withhold the balance of all applicable taxes legally payable by you from your wages or other cash compensation paid to you by the Company and/or (b) withhold in shares of Common Stock, provided that the Company only withholds an amount of shares not in excess of the amount necessary to satisfy the minimum withholding amount. The fair market value of withheld shares, determined as of the date taxes otherwise would have been withheld in cash, will be applied against the withholding taxes. If the Company satisfies the obligation for taxes by withholding a number of shares of Common Stock as described above, you are deemed to have been issued the full number of shares subject to the award of restricted stock units. You acknowledge that the instruction to the broker to sell in the foregoing section is intended to comply with the requirements of Rule 10b5-1(c)(1)(i)(B) under the Securities Exchange Act of 1934 (the “Exchange Act”), and to be interpreted to comply with the requirements of Rule 10b5-1(c)(1) under the Exchange Act (a “10b5-1 Plan”). This 10b5-1 Plan is adopted to be effective as of the first date on which the restricted stock units vest. This 10b5-1 Plan is being adopted to permit you to sell a number of shares awarded upon the vesting of restricted stock units sufficient to pay withholding taxes that become due as a result of this award or the vesting of the restricted stock units or, if you elect within thirty days following notification via the broker whom the Company has selected for this purpose of your restricted stock unit award, to permit you to sell all of the vested restricted stock units. You hereby appoint the Company as your agent and attorney-in-fact to instruct the broker with respect to the number of shares to be sold under this 10b5-1 Plan. You hereby authorize the broker to sell the number of shares of Common Stock determined as set forth above and acknowledge that the broker is under no obligation to arrange for such sale at any particular price. You acknowledge that the broker may aggregate your sales with sales occurring on the same day that are effected on behalf of other Company employees pursuant to sales of shares vesting under Company options or restricted stock unit awards and your proceeds will be based on a blended price for all such sales. You acknowledge that you will be responsible for all brokerage fees and other costs of sale, and you agree to indemnify and hold the Company harmless from any 3 losses, costs, damages, or expenses relating to any such sale. You acknowledge that it may not be possible to sell Common Stock during the term of this 10b5-1 Plan due to (a) a legal or contractual restriction applicable to you or to the broker, (b) a market disruption, (c) rules governing order execution priority on the Nasdaq Global Market, (d) a sale effected pursuant to this 10b5-1 Plan that fails to comply (or in the reasonable opinion of the broker’s counsel is likely not to comply) with Rule 144 under the Securities Act of 1933, if applicable, or (e) if the Company determines that sales may not be effected under this 10b5-1 Plan. You acknowledge that this 10b5-1 Plan is subject to the terms of any policy adopted now or hereafter by the Company governing the adoption of 10b5-1 plans. Restrictions on Issuance The Company will not issue shares to you if the issuance of shares at that time would violate any law or regulation. Restrictions on Resale You agree not to sell any shares of Common Stock you receive under this Agreement at a time when applicable laws, regulations, Company trading policies (including the Company’s Insider Trading Policy, a copy of which can be found on the Company’s intranet) or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as your Service continues and for such period of time after the termination of your Service as the Company may specify. No Retention Rights Your award or this Agreement does not give you the right to be employed or retained by the Company (or a Parent or Subsidiary) in any capacity. The Company and its Parent and its Subsidiaries reserve the right to terminate your Service at any time, with or without cause. Adjustments Applicable Law In the event of a stock split, a stock dividend or a similar change in Common Stock, the number of restricted stock units that will vest in any future installments will be adjusted accordingly. This Agreement will be interpreted and enforced with respect to issues of contract law under the laws of the State of Delaware. The Plan and Other AgreementsThe text of the Plan is incorporated in this Agreement by reference. A copy of the Plan is available on the Company’s intranet or by request to the Finance Department. This Agreement, the Notice of Restricted Stock Unit Award, and the Plan constitute the entire understanding between you and the Company regarding this award. Any prior agreements, commitments or negotiations concerning this award are superseded. This Agreement may be amended only by another written agreement between the parties. BY ACCEPTING THIS RESTRICTED STOCK UNIT AWARD, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 4 Form of Time-Based Vesting Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement under 2004 Equity Incentive Plan (executive officer replenishment 2009) THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN NOTICE OF RESTRICTED STOCK UNIT AWARD You have been granted the number of restricted stock units indicated below by Theravance, Inc. (the “Company”) on the following terms: Name: «Name» Restricted Stock Unit Award Details: Date of Grant: Restricted Stock Units: Vesting Commencement Date: «DateGrant» «TotalShares» «VestComDate» Each restricted stock unit (the “restricted stock unit”) represents the right to receive one share of the Company’s Common Stock subject to the terms and conditions contained in the Restricted Stock Unit Agreement (the “Agreement”). Vesting Schedule: Vesting is dependent upon continuous service as an employee or consultant of the Company, a Parent, a Subsidiary or an Affiliate (“Service”) throughout the vesting period. The units will vest in equal quarterly installments over approximately four years as follows: 6.25% on <>; 6.25% on <>; and an additional 6.25% on the final day of each 3-month period thereafter, provided that you remain in continuous Service through such date. You and the Company agree that your right to receive the units is granted under and governed by the terms and conditions of the Plan and of the Agreement that is attached to and made a part of this document. Capitalized terms not defined herein have the meaning ascribed to such terms in the Plan. You agree that the Company may deliver by email all documents relating to the Plan or this award (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a web site maintained by the Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by email. You agree to cover the applicable withholding taxes as set forth more fully herein. Payment for Shares No payment is required for the restricted stock units you are receiving. THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN: RESTRICTED STOCK UNIT AGREEMENT Nature of Units Your units are bookkeeping entries. They represent only the Company’s unfunded and unsecured promise to issue shares of Common Stock on a future date. As a holder of units, you have no rights other than the rights of a general creditor of the Company. Settlement of Units Each of your units will be settled when it vests (unless you and the Company have agreed to a later settlement date pursuant to procedures that the Company may prescribe at its discretion). At the time of settlement, you will receive one share of the Company’s Common Stock for each vested unit. Vesting The restricted stock units that you are receiving will vest as shown in the Notice of Restricted Stock Unit Award. No additional units vest after your Service has terminated for any reason, except as set forth on the Notice of Restricted Stock Unit Award. It is intended that vesting in the restricted stock units is commensurate with a full-time work schedule. For possible adjustments that may be made by the Company, see the Section below entitled “Leaves of Absence and Part- Time Work.” The restricted stock units will vest in full if not assumed or substituted with a new award as set forth in Section 11.3 of the Plan. Forfeiture If your Service terminates for any reason then your restricted stock units that have not vested before the termination date and do not vest as a result of the termination pursuant to this Agreement or as set forth on the Notice of Restricted Stock Unit Award, will be forfeited immediately. This means that the restricted stock units will immediately revert to the Company. You receive no payment for restricted stock units that are forfeited. The Company determines when your Service terminates for this purpose. Leaves of Absence and Part- Time Work For purposes of this award, your Service does not terminate when you go on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing. If your leave of absence lasts for more than 6 months, then vesting will be suspended on the day that is 6 months and 1 day after the leave of absence began. Vesting will resume effective as of the second vesting date after you Stock Certificates Stockholder Rights Units Restricted Withholding Taxes return from leave of absence provided you have worked at least one day during that vesting period. In the case of all leaves, your Service terminates when the approved leave ends, unless you immediately return to active work. If you and the Company agree to a reduction in your scheduled work hours, then the Company reserves the right to modify the rate at which the restricted stock units vest, so that the rate of vesting is commensurate with your reduced work schedule. Any such adjustment shall be consistent with the Company’s policies for part-time or reduced work schedules or shall be pursuant to the terms of an agreement between you and the Company pertaining to your reduced work schedule. The Company shall not be required to adjust any vesting schedule pursuant to this subsection. No shares of Common Stock shall be issued to you prior to the date on which the restricted stock units vest. After any restricted stock units vest pursuant to this Agreement, the Company shall promptly cause to be issued in book-entry form, registered in your name or in the name of your legal representatives, beneficiaries or heirs, as the case may be, the number of shares of Common Stock representing your vested restricted stock units. No fractional shares shall be issued. The restricted stock units do not entitle you to any of the rights of a stockholder of Common Stock. Upon settlement of the restricted stock units into shares of Common Stock, you will obtain full voting and other rights as a stockholder of the Company. You may not sell, transfer, pledge or otherwise dispose of any restricted stock units or rights under this Agreement other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, you may designate a beneficiary or beneficiaries to receive any property distributable with respect to the restricted stock units upon your death. No shares will be distributed to you unless you have made arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the settlement of this award. Prior to the relevant taxable event, you shall pay or make adequate arrangements satisfactory to the Company to satisfy all withholding obligations for applicable taxes. At your discretion, these arrangements may include (a) payment in cash, (b) payment from the proceeds of the sale of shares through a Company-approved broker or (c) withholding shares of Company stock that otherwise would be issued to you when the units are settled, provided 2 that the Company, acting through the Board of Directors or Compensation Committee, may provide prospectively that it no longer authorizes (c) withholding of shares. If the Company satisfies the obligation for taxes by withholding a number of shares of Common Stock as described above, you are deemed to have been issued the full number of shares subject to the award of restricted stock units and the fair market value of these shares, determined as of the date when taxes otherwise would have been withheld in cash, will be applied to the withholding taxes. You acknowledge that the proceeds of a sale pursuant to (b) above or withholding pursuant to (c) above may not be sufficient to satisfy your withholding obligations. To the extent the proceeds from such sale are insufficient to cover the taxes due, the Company may in its discretion withhold the balance of all applicable taxes legally payable by you from your wages or other cash compensation paid to you by the Company. Restrictions on Issuance The Company will not issue shares to you if the issuance of shares at that time would violate any law or regulation. Restrictions on Resale You agree not to sell any shares of Common Stock you receive under this Agreement at a time when applicable laws, regulations, Company trading policies (including the Company’s Insider Trading Policy, a copy of which can be found on the Company’s intranet) or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as your Service continues and for such period of time after the termination of your Service as the Company may specify. No Retention Rights Your award or this Agreement does not give you the right to be employed or retained by the Company (or a Parent or Subsidiary) in any capacity. The Company and its Parent and its Subsidiaries reserve the right to terminate your Service at any time, with or without cause. Adjustments Applicable Law In the event of a stock split, a stock dividend or a similar change in Common Stock, the number of restricted stock units that will vest in any future installments will be adjusted accordingly. This Agreement will be interpreted and enforced with respect to issues of contract law under the laws of the State of Delaware. The Plan and Other Agreements The text of the Plan is incorporated in this Agreement by reference. A copy of the Plan is available on the Company’s intranet or by request to the Finance Department. This Agreement, the Notice of Restricted Stock Unit Award, and the Plan constitute the entire understanding between you and the Company 3 regarding this award. Any prior agreements, commitments or negotiations concerning this award are superseded. This Agreement may be amended only by another written agreement between the parties. BY ACCEPTING THIS RESTRICTED STOCK UNIT AWARD, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 4 Form of Time-Based Vesting Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement under 2004 Equity Incentive Plan (employee replenishment 2009) THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN NOTICE OF RESTRICTED STOCK UNIT AWARD You have been granted the number of restricted stock units indicated below by Theravance, Inc. (the “Company”) on the following terms: Name: «Name» Restricted Stock Unit Award Details: Date of Grant: Restricted Stock Units: Vesting Commencement Date: «DateGrant» «TotalShares» «VestComDate» Each restricted stock unit (the “restricted stock unit”) represents the right to receive one share of the Company’s Common Stock subject to the terms and conditions contained in the Restricted Stock Unit Agreement (the “Agreement”). Vesting Schedule: Vesting is dependent upon continuous service as an employee or consultant of the Company, a Parent, a Subsidiary or an Affiliate (“Service”) throughout the vesting period. The units will vest in equal quarterly installments over approximately four years as follows: 6.25% on <>; 6.25% on <>; and an additional 6.25% on the final day of each 3-month period thereafter, provided that you remain in continuous Service through such date. You and the Company agree that your right to receive the units is granted under and governed by the terms and conditions of the Plan and of the Agreement that is attached to and made a part of this document. Capitalized terms not defined herein have the meaning ascribed to such terms in the Plan. You agree that the Company may deliver by email all documents relating to the Plan or this award (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a web site maintained by the Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by email. You agree to cover the applicable withholding taxes as set forth more fully herein. In connection with your receipt of the restricted stock units, you are simultaneously entering into a trading arrangement that complies with the requirements of Rule 10b5-1(c)(1) under the Securities Exchange Act of 1934 (a “10b5-1 Plan”). As of the date of the Agreement, you are not aware of any material nonpublic information concerning the Company or its securities, or, as of the date any sales are effected pursuant to the 10b5-1 Plan, you will not effect such sales on the basis of material nonpublic information about the securities or the Company of which you were aware at the time you entered into the Agreement. Payment for Shares No payment is required for the restricted stock units you are receiving. THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN: RESTRICTED STOCK UNIT AGREEMENT Nature of Units Your units are bookkeeping entries. They represent only the Company’s unfunded and unsecured promise to issue shares of Common Stock on a future date. As a holder of units, you have no rights other than the rights of a general creditor of the Company. Settlement of Units Each of your units will be settled when it vests (unless you and the Company have agreed to a later settlement date pursuant to procedures that the Company may prescribe at its discretion). At the time of settlement, you will receive one share of the Company’s Common Stock for each vested unit. Vesting The restricted stock units that you are receiving will vest as shown in the Notice of Restricted Stock Unit Award. No additional units vest after your Service has terminated for any reason, except as set forth on the Notice of Restricted Stock Unit Award. It is intended that vesting in the restricted stock units is commensurate with a full-time work schedule. For possible adjustments that may be made by the Company, see the Section below entitled “Leaves of Absence and Part-Time Work.” The restricted stock units will vest in full if not assumed or substituted with a new award as set forth in Section 11.3 of the Plan. Forfeiture If your Service terminates for any reason then your restricted stock units that have not vested before the termination date and do not vest as a result of the termination pursuant to this Agreement or as set forth on the Notice of Restricted Stock Unit Award, will be forfeited immediately. This means that the restricted stock units will immediately revert to the Company. You receive no payment for restricted stock units that are forfeited. The Company determines when your Service terminates for this purpose. Leaves of Absence and Part-Time Work For purposes of this award, your Service does not terminate when you go on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing. If your leave of absence lasts for more than 6 months, then vesting will be suspended on the day that is 6 months and 1 day after the leave of absence began. Vesting will resume effective as of the second vesting date after you return from leave of absence provided you have worked at least one day during that vesting period. In the case of all leaves, your Service terminates when the approved leave ends, unless you immediately return to active work. If you and the Company agree to a reduction in your scheduled work hours, then the Company reserves the right to modify the rate at which the restricted stock units vest, so that the rate of vesting is commensurate with your reduced work schedule. Any such adjustment shall be consistent with the Company’s policies for part-time or reduced work schedules or shall be pursuant to the terms of an agreement between you and the Company pertaining to your reduced work schedule. The Company shall not be required to adjust any vesting schedule pursuant to this subsection. Stock Certificates No shares of Common Stock shall be issued to you prior to the date on which the restricted stock units vest. After any restricted stock units vest pursuant to this Agreement, the Company shall promptly cause to be issued in book-entry form, registered in your name or in the name of your legal representatives, beneficiaries or heirs, as the case may be, the number of shares of Common Stock representing your vested restricted stock units. No fractional shares shall be issued. Stockholder Rights The restricted stock units do not entitle you to any of the rights of a stockholder of Common Stock. Upon settlement of the restricted stock units into shares of Common Stock, you will obtain full voting and other rights as a stockholder of the Company. Units Restricted Withholding Taxes You may not sell, transfer, pledge or otherwise dispose of any restricted stock units or rights under this Agreement other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, you may designate a beneficiary or beneficiaries to receive any property distributable with respect to the restricted stock units upon your death. No shares will be distributed to you unless you have made arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the settlement of this award. Prior to the relevant taxable event, you shall pay or make adequate arrangements satisfactory to the Company to satisfy all withholding obligations for applicable taxes. You authorize the Company to instruct the broker whom it has selected for this purpose to sell a number of shares of Common Stock to be issued upon the vesting of your restricted stock units or a lesser number necessary to meet tax withholding obligations. Such sales 2 shall be effected at a market price following the date that the restricted stock units vest (unless you and the Company have agreed to a later settlement date pursuant to procedures that the Company may prescribe at its discretion). You acknowledge that the proceeds of any such sale may not be sufficient to satisfy your withholding obligations. To the extent the proceeds from such sale are insufficient to cover the taxes due, the Company may in its discretion (a) withhold the balance of all applicable taxes legally payable by you from your wages or other cash compensation paid to you by the Company and/or (b) withhold in shares of Common Stock, provided that the Company only withholds an amount of shares not in excess of the amount necessary to satisfy the minimum withholding amount. The fair market value of withheld shares, determined as of the date taxes otherwise would have been withheld in cash, will be applied against the withholding taxes. If the Company satisfies Rule 10b5-1 Plan the obligation for taxes by withholding a number of shares of Common Stock as described above, you are deemed to have been issued the full number of shares subject to the award of restricted stock units. You acknowledge that the instruction to the broker to sell in the foregoing section is intended to comply with the requirements of Rule 10b5-1(c)(1)(i)(B) under the Securities Exchange Act of 1934 (the “Exchange Act”), and to be interpreted to comply with the requirements of Rule 10b5-1(c)(1) under the Exchange Act (a “10b5-1 Plan”). This 10b5-1 Plan is adopted to be effective as of the first date on which the restricted stock units vest. This 10b5-1 Plan is being adopted to permit you to sell a number of shares awarded upon the vesting of restricted stock units sufficient to pay withholding taxes that become due as a result of this award or the vesting of the restricted stock units or, if you elect within thirty days following notification via the broker whom the Company has selected for this purpose of your restricted stock unit award, to permit you to sell all of the vested restricted stock units. You hereby appoint the Company as your agent and attorney-in-fact to instruct the broker with respect to the number of shares to be sold under this 10b5-1 Plan. You hereby authorize the broker to sell the number of shares of Common Stock determined as set forth above and acknowledge that the broker is under no obligation to arrange for such sale at any particular price. You acknowledge that the broker may aggregate your sales with sales occurring on the same day that are effected on behalf of other Company employees pursuant to sales of shares vesting under Company options or restricted stock unit awards and your proceeds will be based on a blended price for all such sales. You acknowledge that you will be responsible for all brokerage fees and other costs of sale, and you agree to indemnify and hold the Company harmless from any 3 losses, costs, damages, or expenses relating to any such sale. You acknowledge that it may not be possible to sell Common Stock during the term of this 10b5-1 Plan due to (a) a legal or contractual restriction applicable to you or to the broker, (b) a market disruption, (c) rules governing order execution priority on the Nasdaq Global Market, (d) a sale effected pursuant to this 10b5-1 Plan that fails to comply (or in the reasonable opinion of the broker’s counsel is likely not to comply) with Rule 144 under the Securities Act of 1933, if applicable, or (e) if the Company determines that sales may not be effected under this 10b5- 1 Plan. You acknowledge that this 10b5-1 Plan is subject to the terms of any policy adopted now or hereafter by the Company governing the adoption of 10b5-1 plans. Restrictions on Issuance The Company will not issue shares to you if the issuance of shares at that time would violate any law or regulation. Restrictions on Resale You agree not to sell any shares of Common Stock you receive under this Agreement at a time when applicable laws, regulations, Company trading policies (including the Company’s Insider Trading Policy, a copy of which can be found on the Company’s intranet) or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as your Service continues and for such period of time after the termination of your Service as the Company may specify. No Retention Rights Your award or this Agreement does not give you the right to be employed or retained by the Company (or a Parent or Subsidiary) in any capacity. The Company and its Parent and its Subsidiaries reserve the right to terminate your Service at any time, with or without cause. Adjustments In the event of a stock split, a stock dividend or a similar change in Common Stock, the number of restricted stock units that will vest in any future installments will be adjusted accordingly. Applicable Law This Agreement will be interpreted and enforced with respect to issues of contract law under the laws of the State of Delaware. The Plan and Other Agreements The text of the Plan is incorporated in this Agreement by reference. A copy of the Plan is available on the Company’s intranet or by request to the Finance Department. This Agreement, the Notice of Restricted Stock Unit Award, and the Plan constitute the entire understanding between you and the Company regarding this award. Any prior agreements, commitments or negotiations concerning this award are superseded. This Agreement may be amended only by another written agreement between the parties. 4 BY ACCEPTING THIS RESTRICTED STOCK UNIT AWARD, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 5 Form of Non-Employee Director Time-Based Vesting Notice of Initial Restricted Stock Unit Award and Restricted Stock Unit Agreement under 2004 Equity Incentive Plan (form in effect from December 2010) Initial Director Auto Grant THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN NOTICE OF RESTRICTED STOCK UNIT AWARD You have been granted the number of restricted stock units indicated below by Theravance, Inc. (the “Company”) on the following terms: Name: «Name» Restricted Stock Unit Award Details: Date of Grant: Restricted Stock Units: «DateGrant» 6,000 Each restricted stock unit (the “Restricted Stock Unit”) represents the right to receive one share of the Company’s Common Stock subject to the terms and conditions contained in the Restricted Stock Unit Agreement. Vesting Schedule: Vesting is dependent upon continuous service as a member of the Board (“Service”) throughout the vesting period. The units will vest in twenty-four (24) equal monthly installments, provided that you remain in continuous Service through each such date. In addition, all of the restricted stock units subject to this award will vest immediately if the Company is subject to a Change in Control (as defined in the Plan) before your continuous Service terminates and upon your death. You and the Company agree that your right to receive the units is granted under and governed by the terms and conditions of the Plan and of the Restricted Stock Unit Agreement that is attached to and made a part of this document. Capitalized terms not defined herein have the meaning ascribed to such terms in the Plan. You agree that the Company may deliver by email all documents relating to the Plan or this award (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a web site maintained by the Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by email. RECIPIENT: THERAVANCE, INC. Print Name By: Title: Payment for Shares No payment is required for the restricted stock units you are receiving. THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN: RESTRICTED STOCK UNIT AGREEMENT Nature of Units Your units are bookkeeping entries. They represent only the Company’s unfunded and unsecured promise to issue shares of Common Stock on a future date. As a holder of units, you have no rights other than the rights of a general creditor of the Company. Vesting The restricted stock units that you are receiving will vest as shown in the Notice of Restricted Stock Unit Award. No additional units vest after your Service has terminated for any reason, except as set forth on the Notice of Restricted Stock Unit Award. The restricted stock units will vest in full if not assumed or substituted with a new award as set forth in Section 11.3 of the Plan. Regardless of when the restricted stock units vest, settlement of the units will only occur at the time specified below under “Time of Settlement”. Time of Settlement A vested unit will be settled on the fourth anniversary of the Date of Grant or, if earlier, 60 days following your “separation from service” (within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”)) or your death. In the event of a Change in Control that also constitutes a “change in control event” under Treasury Regulation 1.409A- 3(a)(5) (a “409A CiC”), all vested units will be settled immediately prior to the closing of the transaction that constitutes a Change in Control. In the event of a Change in Control that is not a 409A CiC, the vested units will be settled as described in the rest of this section or, if sooner, immediately prior to a 409A CiC after such Change in Control. Notwithstanding anything to the contrary in the Plan, the Notice of Restricted Stock Unit Award or any other section of this Agreement, the Company may accelerate settlement of these units from the time specified in this section only in accordance with Treasury Regulation 1.409A-3(j)(4). Form of Settlement At the time of settlement, you will receive one share of the Company’s Common Stock for each vested unit. Forfeiture Stock Certificates Stockholder Rights Units Restricted If your Service terminates for any reason, then your restricted stock units that have not vested before the termination date and do not vest as a result of the termination pursuant to this Agreement or as set forth on the Notice of Restricted Stock Unit Award, will be forfeited immediately. This means that the restricted stock units will immediately revert to the Company. You receive no payment for restricted stock units that are forfeited. The Company determines when your Service terminates for this purpose. No shares of Common Stock shall be issued to you prior to the date on which the restricted stock units are settled. At the time of settlement, a stock certificate for the shares representing your vested restricted stock units shall be released to you or the Company shall cause to be issued in book-entry form, registered in your name or in the name of your legal representatives, beneficiaries or heirs, as the case may be, the number of shares of Common Stock representing your vested restricted stock units. No fractional shares shall be issued. The restricted stock units do not entitle you to any of the rights of a stockholder of Common Stock. Upon settlement of the restricted stock units into shares of Common Stock, you will obtain full voting and other rights as a stockholder of the Company. You may not sell, transfer, pledge or otherwise dispose of any restricted stock units or rights under this Agreement other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, you may designate a beneficiary or beneficiaries to receive any property distributable with respect to the restricted stock units upon your death. Taxes No shares will be distributed to you unless you have made arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the settlement of this award. These restricted stock units are subject to Code Section 409A. The Company has attempted in good faith to structure this award in a manner that conforms to the requirements of Code Sections 409A(a)(2), (3) and (4), and any ambiguities herein will be interpreted to so comply to the maximum extent permissible. However, you acknowledge and agree that the Company has made no representations or warranties to you with respect to whether this award in fact complies with Code Sections 409A(a)(2), (3) and (4) or the income tax consequences related to this award Restrictions on Issuance The Company will not issue shares to you if the issuance of shares at that time would violate any law or regulation. Restrictions on Resale You agree not to sell any shares of Common Stock you receive under 2 No Retention Rights Adjustments Applicable Law this Agreement at a time when applicable laws, regulations, Company trading policies (including the Company’s Insider Trading Policy, a copy of which can be found on the Company’s intranet) or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as your Service continues and for such period of time after the termination of your Service as the Company may specify. Your award or this Agreement does not give you the right to be retained by the Company or a subsidiary of the Company in any capacity. The Company and its subsidiaries reserve the right to terminate your Service at any time, with or without cause. Nor shall this Agreement in any way be construed or interpreted so as to affect adversely or otherwise impair the right of the Company or the stockholders to remove you from the Board at any time in accordance with the provisions of applicable law. In the event of a stock split, a stock dividend or a similar change in Common Stock, the number of restricted stock units that will vest in any future installments will be adjusted accordingly. This Agreement will be interpreted and enforced with respect to issues of contract law under the laws of the State of Delaware. The Plan and Other Agreements The text of the Plan is incorporated in this Agreement by reference. A copy of the Plan is available on the Company’s intranet or by request to the Finance Department. This Agreement, the Notice of Restricted Stock Unit Award, and the Plan constitute the entire understanding between you and the Company regarding this award. Any prior agreements, commitments or negotiations concerning this award are superseded. This Agreement may be amended only by another written agreement between the parties. BY ACCEPTING THIS RESTRICTED STOCK UNIT AWARD, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 3 Form of Non-Employee Director Time-Based Vesting Notice of Annual Restricted Stock Unit Award and Restricted Stock Unit Agreement under 2004 Equity Incentive Plan (form in effect from December 2010) THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN Annual Director Auto Grant You have been granted the number of restricted stock units indicated below by Theravance, Inc. (the “Company”) on the following terms: NOTICE OF RESTRICTED STOCK UNIT AWARD Name: «Name» Restricted Stock Unit Award Details: Date of Grant: Restricted Stock Units: «DateGrant» 6,000 Each restricted stock unit (the “Restricted Stock Unit”) represents the right to receive one share of the Company’s Common Stock subject to the terms and conditions contained in the Restricted Stock Unit Agreement. Vesting Schedule: Vesting is dependent upon continuous service as a member of the Board (“Service”) throughout the vesting period. The units will vest in twelve (12) equal monthly installments, provided that you remain in continuous Service through each such date. In addition, all of the restricted stock units subject to this award will vest immediately if the Company is subject to a Change in Control (as defined in the Plan) before your continuous Service terminates and upon your death. You and the Company agree that your right to receive the units is granted under and governed by the terms and conditions of the Plan and of the Restricted Stock Unit Agreement that is attached to and made a part of this document. Capitalized terms not defined herein have the meaning ascribed to such terms in the Plan. You agree that the Company may deliver by email all documents relating to the Plan or this award (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a web site maintained by the Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by email. RECIPIENT: THERAVANCE, INC. Print Name By: Title: Payment for Shares No payment is required for the restricted stock units you are receiving. THERAVANCE, INC. 2004 EQUITY INCENTIVE PLAN: RESTRICTED STOCK UNIT AGREEMENT Nature of Units Your units are bookkeeping entries. They represent only the Company’s unfunded and unsecured promise to issue shares of Common Stock on a future date. As a holder of units, you have no rights other than the rights of a general creditor of the Company. Vesting The restricted stock units that you are receiving will vest as shown in the Notice of Restricted Stock Unit Award. No additional units vest after your Service has terminated for any reason, except as set forth on the Notice of Restricted Stock Unit Award. The restricted stock units will vest in full if not assumed or substituted with a new award as set forth in Section 11.3 of the Plan. Regardless of when the restricted stock units vest, settlement of the units will only occur at the time specified below under “Time of Settlement”. Time of Settlement A vested unit will be settled on the fourth anniversary of the Date of Grant or, if earlier, 60 days following your “separation from service” (within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”)) or your death. In the event of a Change in Control that also constitutes a “change in control event” under Treasury Regulation 1.409A- 3(a)(5) (a “409A CiC”), all vested units will be settled immediately prior to the closing of the transaction that constitutes a Change in Control. In the event of a Change in Control that is not a 409A CiC, the vested units will be settled as described in the rest of this section or, if sooner, immediately prior to a 409A CiC after such Change in Control. Notwithstanding anything to the contrary in the Plan, the Notice of Restricted Stock Unit Award or any other section of this Agreement, the Company may accelerate settlement of these units from the time specified in this section only in accordance with Treasury Regulation 1.409A-3(j)(4). Form of Settlement At the time of settlement, you will receive one share of the Company’s Common Stock for each vested unit. Forfeiture Stock Certificates Stockholder Rights Units Restricted If your Service terminates for any reason, then your restricted stock units that have not vested before the termination date and do not vest as a result of the termination pursuant to this Agreement or as set forth on the Notice of Restricted Stock Unit Award, will be forfeited immediately. This means that the restricted stock units will immediately revert to the Company. You receive no payment for restricted stock units that are forfeited. The Company determines when your Service terminates for this purpose. No shares of Common Stock shall be issued to you prior to the date on which the restricted stock units are settled. At the time of settlement, a stock certificate for the shares representing your vested restricted stock units shall be released to you or the Company shall cause to be issued in book-entry form, registered in your name or in the name of your legal representatives, beneficiaries or heirs, as the case may be, the number of shares of Common Stock representing your vested restricted stock units. No fractional shares shall be issued. The restricted stock units do not entitle you to any of the rights of a stockholder of Common Stock. Upon settlement of the restricted stock units into shares of Common Stock, you will obtain full voting and other rights as a stockholder of the Company. You may not sell, transfer, pledge or otherwise dispose of any restricted stock units or rights under this Agreement other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, you may designate a beneficiary or beneficiaries to receive any property distributable with respect to the restricted stock units upon your death. Taxes No shares will be distributed to you unless you have made arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the settlement of this award. These restricted stock units are subject to Code Section 409A. The Company has attempted in good faith to structure this award in a manner that conforms to the requirements of Code Sections 409A(a)(2), (3) and (4), and any ambiguities herein will be interpreted to so comply to the maximum extent permissible. However, you acknowledge and agree that the Company has made no representations or warranties to you with respect to whether this award in fact complies with Code Sections 409A(a)(2), (3) and (4) or the income tax consequences related to this award. Restrictions on Issuance The Company will not issue shares to you if the issuance of shares at that time would violate any law or regulation. Restrictions on Resale You agree not to sell any shares of Common Stock you receive under 2 No Retention Rights Adjustments Applicable Law this Agreement at a time when applicable laws, regulations, Company trading policies (including the Company’s Insider Trading Policy, a copy of which can be found on the Company’s intranet) or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as your Service continues and for such period of time after the termination of your Service as the Company may specify. Your award or this Agreement does not give you the right to be retained by the Company or a subsidiary of the Company in any capacity. The Company and its subsidiaries reserve the right to terminate your Service at any time, with or without cause. Nor shall this Agreement in any way be construed or interpreted so as to affect adversely or otherwise impair the right of the Company or the stockholders to remove you from the Board at any time in accordance with the provisions of applicable law. In the event of a stock split, a stock dividend or a similar change in Common Stock, the number of restricted stock units that will vest in any future installments will be adjusted accordingly. This Agreement will be interpreted and enforced with respect to issues of contract law under the laws of the State of Delaware. The Plan and Other Agreements The text of the Plan is incorporated in this Agreement by reference. A copy of the Plan is available on the Company’s intranet or by request to the Finance Department. This Agreement, the Notice of Restricted Stock Unit Award, and the Plan constitute the entire understanding between you and the Company regarding this award. Any prior agreements, commitments or negotiations concerning this award are superseded. This Agreement may be amended only by another written agreement between the parties. BY ACCEPTING THIS RESTRICTED STOCK UNIT AWARD, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 3 THERAVANCE, INC. 2008 NEW EMPLOYEE EQUITY INCENTIVE PLAN (AS ADOPTED EFFECTIVE JANUARY 29, 2008) (AS AMENDED JULY 21, 2009) (AS AMENDED DECEMBER 16, 2009) Exhibit 10.24 TABLE OF CONTENTS Page ARTICLE 1. INTRODUCTION ARTICLE 2. 2.1 2.2 2.3 ARTICLE 3. 3.1 3.2 3.3 ADMINISTRATION Committee Composition Committee Responsibilities Committee for Non-Officer Grants SHARES AVAILABLE FOR GRANTS Basic Limitation Shares Returned to Reserve Dividend Equivalents ARTICLE 4. ELIGIBILITY ARTICLE 5. 5.1 5.2 5.3 5.4 5.5 5.6 ARTICLE 6. 6.1 6.2 6.3 6.4 6.5 ARTICLE 7. 7.1 7.2 7.3 7.4 ARTICLE 8. 8.1 8.2 8.3 8.4 8.5 8.6 8.7 OPTIONS Stock Option Agreement Number of Shares Exercise Price Exercisability and Term Modification or Assumption of Options Buyout Provisions PAYMENT FOR OPTION SHARES General Rule Surrender of Stock Net Exercise Exercise/Sale Other Forms of Payment RESTRICTED SHARES Restricted Stock Agreement Payment for Awards Vesting Conditions Voting and Dividend Rights STOCK UNITS Stock Unit Agreement Payment for Awards Vesting Conditions Voting and Dividend Rights Form and Time of Settlement of Stock Units Death of Recipient Creditors’ Rights ARTICLE 9. 9.1 9.2 CHANGE IN CONTROL Effect of Change in Control Acceleration ARTICLE 10. 10.1 10.2 10.3 PROTECTION AGAINST DILUTION Adjustments Dissolution or Liquidation Reorganizations ARTICLE 11. AWARDS UNDER OTHER PLANS i 1 1 1 1 1 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 5 6 6 6 6 6 7 7 8 ARTICLE 12. 12.1 12.2 12.3 LIMITATION ON RIGHTS Retention Rights Stockholders’ Rights Regulatory Requirements ARTICLE 13. 13.1 13.2 WITHHOLDING TAXES General Share Withholding ARTICLE 14. 14.1 14.2 14.3 FUTURE OF THE PLAN Term of the Plan Amendment or Termination Stockholder Approval ARTICLE 15. DEFINITIONS 8 8 8 8 8 8 8 9 9 9 9 9 ii THERAVANCE, INC. 2008 NEW EMPLOYEE EQUITY INCENTIVE PLAN ARTICLE 1. INTRODUCTION. The Plan was adopted by the Board effective January 29, 2008. The purpose of the Plan is to promote the long-term success of the Corporation and the creation of stockholder value by (a) encouraging Employees to focus on critical long-range objectives, (b) encouraging the attraction and retention of Employees with exceptional qualifications and (c) linking Employees directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Stock Units, or Options (which shall be NSOs). The Plan is designed to attract new employees and is intended to satisfy the requirements of Nasdaq Marketplace Rule 5635. The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware (except their choice-of-law provisions). ARTICLE 2. ADMINISTRATION. 2.1 Committee Composition. The Committee shall administer the Plan. The Committee shall consist exclusively of two or more directors of the Corporation, who shall be appointed by the Board. In addition, each member of the Committee shall meet the following requirements: traded; (a) Any listing standards prescribed by the principal securities market on which the Corporation’s equity securities are intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act; and (b) Such requirements as the Securities and Exchange Commission may establish for administrators acting under plans (c) Any other requirements imposed by applicable law, regulations or rules. 2.2 Committee Responsibilities. The Committee shall (a) select the Employees who are to receive Awards under the Plan, (b) determine the type, number, vesting requirements and other features and conditions of such Awards, (c) interpret the Plan, (d) make all other decisions relating to the operation of the Plan and (e) carry out any other duties delegated to it by the Board. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee’s determinations under the Plan shall be final and binding on all persons. 2.3 Committee for Non-Officer Grants. The Board may also appoint a secondary committee of the Board, which shall be composed of one or more directors of the Corporation who need not satisfy the requirements of Section 2.1. Such secondary committee may administer the Plan with respect to Employees who are not considered executive officers of the Corporation under section 16 of the Exchange Act, may grant Awards under the Plan to such Employees and may determine all features and conditions of such Awards. Within the limitations of this Section 2.3, any reference in the Plan to the Committee shall include such secondary committee. ARTICLE 3. SHARES AVAILABLE FOR GRANTS. 3.1 Basic Limitation. Common Shares issued pursuant to the Plan may be authorized but unissued shares or treasury shares. The aggregate number of Common Shares issued under the Plan shall not exceed (a) 700,000(1) plus (b) the additional Common Shares described in Section 3.2. The number of Common Shares that are subject to Awards outstanding at any time under the Plan shall not exceed the number of Common Shares that then remain available for issuance under the Plan. The limitations of this Section 3.1 shall be subject to adjustment pursuant to Article 10. 3.2 Shares Returned to Reserve. If Options or Stock Units are forfeited or terminate for any other reason before being exercised or settled, then the Common Shares subject to such Options or Stock Units shall again become available for issuance under the Plan. If Stock Units are settled, then only the number of Common Shares (if any) actually issued in settlement of such Stock Units shall reduce the number available under Section 3.1 and the balance shall again become available for issuance under the Plan. If Restricted Shares or Common Shares issued upon the exercise of Options are reacquired by the Corporation pursuant to a forfeiture provision or for any other reason, then such Common Shares shall again become available for issuance under the Plan. Shares not issued or delivered as a result of the net exercise of an Option shall again become available for issuance under the Plan. 3.3 Dividend Equivalents. Any dividend equivalents paid or credited under the Plan shall not be applied against the number of Common Shares that may be issued under the Plan, whether or not such dividend equivalents are converted into Stock Units. ARTICLE 4. ELIGIBILITY. Only Employees shall be eligible for the grant of Restricted Shares, Stock Units, or NSOs. ARTICLE 5. OPTIONS. 5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Corporation. Such Option shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. Options may be granted in consideration of a reduction in the Optionee’s other compensation. A Stock Option Agreement may provide that a (1) Exhibit A includes a schedule of the initial share reserve and any subsequent increases in the reserve. 2 new Option will be granted automatically to the Optionee when he or she exercises a prior Option and pays the Exercise Price in the form described in Section 6.2. 5.2 Number of Shares. Each Stock Option Agreement shall specify the number of Common Shares subject to the Option and shall provide for the adjustment of such number in accordance with Article 10. 5.3 Exercise Price. Each Stock Option Agreement shall specify the Exercise Price; provided that the Exercise Price shall in no event be less than 100% of the Fair Market Value of a Common Share on the date of grant. 5.4 Exercisability and Term. Each Stock Option Agreement shall specify the date or event when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option. A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee’s death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s Service. 5.5 Modification or Assumption of Options. Within the limitations of the Plan, the Committee may modify, extend, or assume outstanding options. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such Option. Notwithstanding anything in this Plan to the contrary, and except for the adjustments provided in Articles 9 and 10, neither the Committee nor any other person may decrease the exercise price for any outstanding Option after the date of grant nor cancel or allow an optionee to surrender an outstanding Option to the Corporation as consideration for the grant of a new Option with a lower exercise price or the grant of another type of Award the effect of which is to reduce the exercise price of any outstanding Option. 5.6 Buyout Provisions. The Committee may at any time (a) offer to buy out for a payment in cash or cash equivalents an Option previously granted or (b) authorize an Optionee to elect to cash out an Option previously granted, in either case at such time and based upon such terms and conditions as the Committee shall establish. ARTICLE 6. PAYMENT FOR OPTION SHARES. 6.1 General Rule. The entire Exercise Price of Common Shares issued upon exercise of Options shall be payable in cash or cash equivalents at the time when such Common Shares are purchased, except that the Committee at its sole discretion may accept payment of the Exercise Price in any other form(s) described in this Article 6. However, if the Optionee is an executive officer of the Corporation, he or she may pay the Exercise Price in a form other than cash or cash equivalents only to the extent permitted by section 13(k) of the Exchange Act. 6.2 Surrender of Stock. With the Committee’s consent, all or any part of the Exercise Price may be paid by surrendering, or attesting to the ownership of, Common Shares that are already owned by the Optionee. Such Common Shares shall be valued at their Fair Market Value on the date when the new Common Shares are purchased under the Plan. 3 6.3 Net Exercise. With the Committee’s consent, all or any part of the Exercise Price may be paid by requesting that the Corporation withhold Common Shares that otherwise would be issued in connection with the Option exercise. Such Common Shares shall be valued at their Fair Market Value on the date when the Option is exercised. 6.4 Exercise/Sale. With the Committee’s consent, all or any part of the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed by the Corporation) an irrevocable direction to a securities broker approved by the Corporation to sell all or part of the Common Shares being purchased under the Plan and to deliver all or part of the sales proceeds to the Corporation. 6.5 Other Forms of Payment. With the Committee’s consent, all or any part of the Exercise Price and any withholding taxes may be paid in any other form that is consistent with applicable laws, regulations and rules. ARTICLE 7. RESTRICTED SHARES. 7.1 Restricted Stock Agreement. Each grant of Restricted Shares under the Plan shall be evidenced by a Restricted Stock Agreement between the recipient and the Corporation. Such Restricted Shares shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Restricted Stock Agreements entered into under the Plan need not be identical. 7.2 Payment for Awards. Restricted Shares may be sold or awarded under the Plan for such consideration as the Committee may determine, including (without limitation) cash, cash equivalents, property, full-recourse promissory notes, past services and future services. If the Participant is an executive officer of the Corporation, he or she may pay for Restricted Shares with a promissory note only to the extent permitted by section 13(k) of the Exchange Act. Within the limitations of the Plan, the Committee may accept the cancellation of outstanding options in return for the grant of Restricted Shares. 7.3 Vesting Conditions. Each Award of Restricted Shares may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Restricted Stock Agreement. A Restricted Stock Agreement may provide for accelerated vesting in the event of the Participant’s death, disability or retirement or other events. 7.4 Voting and Dividend Rights. The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Corporation’s other stockholders. A Restricted Stock Agreement, however, may require that the holders of Restricted Shares invest any cash dividends received in additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid. ARTICLE 8. STOCK UNITS. 8.1 Stock Unit Agreement. Each grant of Stock Units under the Plan shall be evidenced by a Stock Unit Agreement between the recipient and the Corporation. Such Stock 4 Units shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Stock Unit Agreements entered into under the Plan need not be identical. Stock Units may be granted in consideration of a reduction in the recipient’s other compensation. 8.2 Payment for Awards. To the extent that an Award is granted in the form of Stock Units, no cash consideration shall be required of the Award recipients. 8.3 Vesting Conditions. Each Award of Stock Units may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Stock Unit Agreement. A Stock Unit Agreement may provide for accelerated vesting in the event of the Participant’s death, disability or retirement or other events. 8.4 Voting and Dividend Rights. The holders of Stock Units shall have no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committee’s discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one Common Share while the Stock Unit is outstanding. Dividend equivalents may be converted into additional Stock Units. Settlement of dividend equivalents may be made in the form of cash, in the form of Common Shares, or in a combination of both. Prior to distribution, any dividend equivalents that are not paid shall be subject to the same conditions and restrictions as the Stock Units to which they attach. 8.5 Form and Time of Settlement of Stock Units. Settlement of vested Stock Units may be made in the form of (a) cash, (b) Common Shares or (c) any combination of both, as determined by the Committee. The actual number of Stock Units eligible for settlement may be larger or smaller than the number included in the original Award, based on predetermined performance factors. Methods of converting Stock Units into cash may include (without limitation) a method based on the average Fair Market Value of Common Shares over a series of trading days. Vested Stock Units may be settled in a lump sum or in installments. The distribution may occur or commence when all vesting conditions applicable to the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Article 10. 8.6 Death of Recipient. Any Stock Units Award that becomes payable after the recipient’s death shall be distributed to the recipient’s beneficiary or beneficiaries. Each recipient of a Stock Units Award under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed form with the Corporation. A beneficiary designation may be changed by filing the prescribed form with the Corporation at any time before the Award recipient’s death. If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Stock Units Award that becomes payable after the recipient’s death shall be distributed to the recipient’s estate. 8.7 Creditors’ Rights. A holder of Stock Units shall have no rights other than those of a general creditor of the Corporation. Stock Units represent an unfunded and 5 unsecured obligation of the Corporation, subject to the terms and conditions of the applicable Stock Unit Agreement. ARTICLE 9. CHANGE IN CONTROL 9.1 Effect of Change in Control. In the event of any Change in Control, each outstanding Award shall automatically accelerate so that each such Award shall, immediately prior to the effective date of the Change in Control, become fully exercisable for all of the Common Shares at the time subject to such Award and may be exercised for any or all of those shares as fully-vested Common Shares. However, an outstanding Award shall not so accelerate if and to the extent such Award is, in connection with the Change in Control, either to be assumed by the successor corporation (or parent thereof) or to be replaced with a comparable Award for shares of the capital stock of the successor corporation (or parent thereof). The determination of Award comparability shall be made by the Committee, and its determination shall be final, binding and conclusive. 9.2 Acceleration. The Committee shall have the discretion, exercisable either at the time the Award is granted or at any time while the Award remains outstanding, to provide for the automatic acceleration of vesting upon the occurrence of a Change in Control, whether or not the Award is to be assumed or replaced in the Change in Control. ARTICLE 10. PROTECTION AGAINST DILUTION. 10.1 Adjustments. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common Shares or a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, corresponding adjustments shall automatically be made in each of the following: (a) The number of Options, Restricted Shares and Stock Units available for future Awards under Article 3; (b) The number of Common Shares covered by each outstanding Option; (c) The Exercise Price under each outstanding Option; or (d) The number of Stock Units included in any prior Award that has not yet been settled. In the event of a declaration of an extraordinary dividend payable in a form other than Common Shares in an amount that has a material effect on the price of Common Shares, a recapitalization, a spin-off or a similar occurrence, the Committee shall make such adjustments as it, in its sole discretion, deems appropriate in one or more of the foregoing. Except as provided in this Article 10, a Participant shall have no rights by reason of any issuance by the Corporation of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. 6 10.2 Dissolution or Liquidation. To the extent not previously exercised or settled, Options, and Stock Units shall terminate immediately prior to the dissolution or liquidation of the Corporation. 10.3 Reorganizations. In the event that the Corporation is a party to a merger or consolidation, all outstanding Awards shall be subject to the agreement of merger or consolidation. Such agreement shall provide for one or more of the following: (a) The continuation of such outstanding Awards by the Corporation (if the Corporation is the surviving corporation). section 424(a) of the Code with respect to Options). (b) The assumption of such outstanding Awards by the surviving corporation or its parent (in a manner that complies with complies with section 424(a) of the Code with respect to Options). (c) The substitution by the surviving corporation or its parent of new awards for such outstanding Awards (in a manner that (d) Full exercisability of such outstanding Awards and full vesting of the Common Shares subject to such Awards, followed by the cancellation of such Awards. The full exercisability of such Awards and full vesting of the Common Shares subject to such Awards may be contingent on the closing of such merger or consolidation. The Participants shall be able to exercise such Awards during a period of not less than five full business days preceding the closing date of such merger or consolidation, unless (i) a shorter period is required to permit a timely closing of such merger or consolidation and (ii) such shorter period still offers the Participants a reasonable opportunity to exercise such Awards. Any exercise of such Awards during such period may be contingent on the closing of such merger or consolidation. (e) The cancellation of such outstanding Awards and a payment to the Participants equal to the excess of (i) the Fair Market Value of the Common Shares subject to such Awards (whether or not such Awards are then exercisable or such Common Shares are then vested) as of the closing date of such merger or consolidation over (ii) their Exercise Price. Such payment shall be made in the form of cash, cash equivalents, or securities of the surviving corporation or its parent with a Fair Market Value equal to the required amount. Such payment may be made in installments and may be deferred until the date or dates when such Awards would have become exercisable or such Common Shares would have vested. Such payment may be subject to vesting based on the Participant’s continuing service, provided that the vesting schedule shall not be less favorable to the Participant than the schedule under which such Award would have become exercisable or such Common Shares would have vested. If the Exercise Price of the Common Shares subject to such Awards exceeds the Fair Market Value of such Common Shares, then such Awards may be cancelled without making a payment to the Participants. For purposes of this Subsection (e), the Fair Market Value of any security shall be determined without regard to any vesting conditions that may apply to such security. 7 ARTICLE 11. AWARDS UNDER OTHER PLANS. The Corporation may grant awards under other plans or programs. Such awards may be settled in the form of Common Shares issued under this Plan. Such Common Shares shall be treated for all purposes under the Plan like Common Shares issued in settlement of Stock Units and shall, when issued, reduce the number of Common Shares available under Article 3. ARTICLE 12. LIMITATION ON RIGHTS. 12.1 Retention Rights. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain an Employee. The Corporation and its Parents, Subsidiaries and Affiliates reserve the right to terminate the Service of any Employee at any time, with or without cause, subject to applicable laws and a written employment agreement (if any). 12.2 Stockholders’ Rights. A Participant shall have no dividend rights, voting rights or other rights as a stockholder with respect to any Common Shares covered by his or her Award prior to the time when a stock certificate for such Common Shares is issued or, if applicable, the time when he or she becomes entitled to receive such Common Shares by filing any required notice of exercise and paying any required Exercise Price. No adjustment shall be made for cash dividends or other rights for which the record date is prior to such time, except as expressly provided in the Plan. 12.3 Regulatory Requirements. Any other provision of the Plan notwithstanding, the obligation of the Corporation to issue Common Shares under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. The Corporation reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Award prior to the satisfaction of all legal requirements relating to the issuance of such Common Shares, to their registration, qualification or listing or to an exemption from registration, qualification or listing. ARTICLE 13. WITHHOLDING TAXES. 13.1 General. To the extent required by applicable federal, state, local or foreign law, a Participant or his or her successor shall make arrangements satisfactory to the Corporation for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Corporation shall not be required to issue any Common Shares or make any cash payment under the Plan until such obligations are satisfied. 13.2 Share Withholding. To the extent that applicable law subjects a Participant to tax withholding obligations, the Committee may permit such Participant to satisfy all or part of such obligations by having the Corporation withhold all or a portion of any Common Shares that otherwise would be issued to him or her or by surrendering all or a portion of any Common Shares that he or she previously acquired. Such Common Shares shall be valued at their Fair Market Value on the date when they are withheld or surrendered. 8 ARTICLE 14. FUTURE OF THE PLAN. until the earlier of (a) the date the Plan is terminated under Section 14.2 or (b) the 10 anniversary of the date the Board adopted the Plan. th 14.1 Term of the Plan. The Plan, as set forth herein, shall become effective on the date of adoption. The Plan shall remain in effect 14.2 Amendment or Termination. The Board may, at any time and for any reason, amend or terminate the Plan. No Awards shall be granted under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Award previously granted under the Plan. 14.3 Stockholder Approval. Approval of the Corporation’s stockholders shall be required only to the extent required by applicable laws, regulations or rules. ARTICLE 15. DEFINITIONS. 15.1 “Affiliate” means any entity other than a Subsidiary, if the Corporation and/or one or more Subsidiaries own not less than 50% of such entity. 15.2 “Award” means any award of an Option, a Restricted Share or a Stock Unit under the Plan. 15.3 “Board” means the Corporation’s Board of Directors, as constituted from time to time. 15.4 “Change in Control” shall mean: (a) The consummation of a merger or consolidation of the Corporation with or into another entity or any other corporate reorganization, if persons who were not stockholders of the Corporation immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding securities of each of (i) the continuing or surviving entity and (ii) any direct or indirect parent corporation of such continuing or surviving entity; (b) The sale, transfer or other disposition of all or substantially all of the Corporation’s assets; who either: (c) A change in the composition of the Board, as a result of which fewer than 50% of the incumbent directors are directors of the Board (the “Original Directors”) or (i) Had been directors of the Corporation on the date 24 months prior to the date of such change in the composition majority of the aggregate of (A) the Original Directors who were in office at the time of their appointment or nomination and (B) the directors (ii) Were appointed to the Board, or nominated for election to the Board, with the affirmative votes of at least a 9 whose appointment or nomination was previously approved in a manner consistent with this Paragraph (ii); or (d) Any transaction as a result of which any person is the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing at least 50% of the total voting power represented by the Corporation’s then outstanding voting securities. For purposes of this Paragraph (d), the term “person” shall have the same meaning as when used in sections 13(d) and 14(d) of the Exchange Act but shall exclude (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or of a Parent or Subsidiary and (ii) a corporation owned directly or indirectly by the stockholders of the Corporation in substantially the same proportions as their ownership of the common stock of the Corporation. Except with respect to a GSK Change In Control (defined below), (i) any stock purchase by SmithKline Beecham Corporation, a Pennsylvania corporation (“GSK”), pursuant to the Class A Common Stock Purchase Agreement dated as of March 30, 2004 or (ii) the exercise by GSK of any of its rights under the Amended and Restated Governance Agreement dated as of June 4, 2004 among the Corporation, GSK, GlaxoSmithKline plc and Glaxo Group Limited (the “Governance Agreement”) to representation on the Board (and its committees) or (iii) any acquisition by GSK of securities of the Corporation (whether by merger, tender offer, private or market purchases or otherwise) not prohibited by the Governance Agreement shall not constitute a Change in Control. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Corporation’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Corporation’s securities immediately before such transaction. A “GSK Change In Control” shall mean the acquisition by GSK of the Corporation’s Voting Stock (as defined in the Governance Agreement) that would bring GSK’s Percentage Interest (as defined in the Governance Agreement) to 100% in compliance with the provisions of the Governance Agreement. 15.5 “Code” means the Internal Revenue Code of 1986, as amended. 15.6 “Committee” means a committee of the Board, as described in Article 2. 15.7 “Common Share” means one share of the common stock of the Corporation. 15.8 “Corporation” means Theravance, Inc., a Delaware corporation. 15.9 “Consultant” means a consultant or adviser who provides bona fide services to the Corporation, a Parent, a Subsidiary or an Affiliate as an independent contractor. 15.10 “Employee” means a common-law employee of the Corporation, a Parent, a Subsidiary or an Affiliate who is newly hired as a employee by the Corporation, or who is rehired following a bona fide period of interruption of employment, including persons who become new employees of the Corporation, a Parent, a Subsidiary or an Affiliate in connection with a merger or acquisition. 15.11 “Exchange Act” means the Securities Exchange Act of 1934, as amended. 10 15.12 “Exercise Price,” in the case of an Option, means the amount for which one Common Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. 15.13 “Fair Market Value” means the closing selling price of one Common Share as reported on Nasdaq, and if not available, then it shall be determined by the Committee in good faith on such basis as it deems appropriate. Whenever possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in The Wall Street Journal. Such determination shall be conclusive and binding on all persons. 15.14 “NSO” means a stock option not described in sections 422 or 423 of the Code. 15.15 “Option” means an NSO granted under the Plan and entitling the holder to purchase Common Shares. 15.16 “Optionee” means an individual or estate who holds an Option. 15.17 “Parent” means any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, if each of the corporations other than the Corporation owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date. 15.18 “Participant” means an individual or estate who holds an Award. 15.19 “Plan” means this Theravance, Inc. 2008 New Employee Equity Incentive Plan, as amended from time to time. 15.20 “Restricted Share” means a Common Share awarded under the Plan. 15.21 “Restricted Stock Agreement” means the agreement between the Corporation and the recipient of a Restricted Share that contains the terms, conditions and restrictions pertaining to such Restricted Share. 15.22 “Service” means service as an Employee or Consultant. 15.23 “Stock Option Agreement” means the agreement between the Corporation and an Optionee that contains the terms, conditions and restrictions pertaining to his or her Option. 15.24 “Stock Unit” means a bookkeeping entry representing the equivalent of one Common Share, as awarded under the Plan. 15.25 “Stock Unit Agreement” means the agreement between the Corporation and the recipient of a Stock Unit that contains the terms, conditions and restrictions pertaining to such Stock Unit. 11 15.26 “Subsidiary” means any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. 12 EXHIBIT A SCHEDULE OF SHARES RESERVED FOR ISSUANCE UNDER THE PLAN Date of Board/Committee Approval January 29, 2008 July 21, 2009 Number of Shares Added Not Applicable 200,000 Cumulative Number of Shares 500,000 700,000 Form of Notice of Grant and Stock Option Agreement under 2008 New Employee Equity Incentive Plan THERAVANCE, INC. 2008 NEW EMPLOYEE EQUITY INCENTIVE PLAN NOTICE OF STOCK OPTION GRANT You have been granted the following option to purchase shares of the Common Stock of Theravance, Inc. (the “Company”): Name of Optionee: ID Number: Total Number of Shares Granted: Type of Option: Grant Number: Exercise Price Per Share: Date of Grant: Vesting Commencement Date: Vesting Schedule: «Name» «ID» «Shares» Nonstatutory Stock Option «Number» $«Price» «DateGrant» «VestDay» This option becomes exercisable with respect to the first 25% of the Shares subject to this option when you complete 12 months of continuous Service from the Vesting Commencement Date and with respect to an additional 2.0833% of the Shares subject to this option when you complete each month of continuous Service thereafter. Expiration Date: «ExpDate». This option expires earlier if your Service terminates earlier, as described in the Stock Option Agreement. You and the Company agree that this option is granted under and governed by the terms and conditions of the Stock Option Agreement, which is attached to and made a part of this document, and the Company’s 2008 New Employee Equity Incentive Plan (the “Plan”). You further agree that the Company may deliver by email all documents relating to the Plan or this option (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a web site maintained by the Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by email. THERAVANCE, INC. 2008 NEW EMPLOYEE EQUITY INCENTIVE PLAN STOCK OPTION AGREEMENT Grant of Option You have been granted an option as of the Grant Date to purchase up to the number of Shares of Company Common Stock specified in the Notice of Stock Option Grant. Tax Treatment Vesting This option is a nonstatutory stock option. This option becomes exercisable in installments, as shown in the Notice of Stock Option Grant. This option shall become exercisable in full if not assumed or a new option substituted pursuant to Section 11.3 of the Plan. In addition, this option becomes exercisable in full if the Company is subject to a “Change in Control” (as defined in the Plan) before your Service (as defined in the Plan) terminates, and you are subject to an Involuntary Termination (as defined below) within three months prior or 24 months after the Change in Control. For purposes of this Agreement, “Cause” shall mean (i) the unauthorized use or disclosure of the confidential information or trade secrets of the Company, which use causes material harm to the Company, (ii) conviction of a felony under the laws of the United States or any state thereof, (iii) gross negligence or (iv) repeated failure to perform lawful assigned duties for thirty days after receiving written notification from the Board of Directors. For purposes of this Agreement, “Involuntary Termination” means the termination of your Service by reason of: (a) an involuntary dismissal or discharge by the Company for reasons other than for Cause; or (b) your voluntary resignation following (i) a change in your position with the Company (or Parent or Subsidiary employing you) which materially reduces your level of responsibility, (ii) a reduction in your level of compensation (including base salary, fringe benefits and participation in corporate-performance based bonus or incentive programs) or (iii) a relocation of your workplace more than fifty miles away from the workplace designated by the Company on your initial date of service, provided and only if such change, reduction or relocation is effected by the Company without your consent. No additional shares will vest after your Service has terminated for any reason, except to the extent set forth above if you are subject to an Involuntary Termination within three months prior to a Change in Control. Term th This option expires in any event at the close of business at Company headquarters on the day before the 10 anniversary of the Date of Grant, as shown in the Notice of Stock Option Grant. (It will expire earlier if your Service terminates, as described below.) You may exercise this option at any time before its expiration under the preceding sentence, but only to the extent that this option had become exercisable before your Service terminated. Regular Termination If your Service terminates for any reason except death or total and permanent disability, then this option will expire at the close of business at Company headquarters on the date three months after your termination date. The Company determines when your Service terminates for this purpose. Death Disability If you die before your Service terminates, then this option will expire at the close of business at Company headquarters on the date that is 12 months after the date of death. If your Service terminates because of your total and permanent disability, then this option will expire at the close of business at Company headquarters on the date 12 months after your termination date. For all purposes under this Agreement, “total and permanent disability” means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of not less than one year. Leaves of Absence and Part-Time Work For purposes of this option, your Service does not terminate when you go on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing. But your Service terminates when the approved leave ends, unless you immediately return to active work. If you go on a leave of absence, then the vesting schedule specified in the Notice of Stock Option Grant may be adjusted in accordance with the Company’s leave of absence policy or the terms of your leave. If you commence working on a part-time basis, then the vesting schedule specified in the Notice of Stock Option Grant may be adjusted in accordance with the Company’s part-time work policy or the terms of an agreement between you and the Company pertaining to your part-time schedule. Restrictions on Exercise The Company will not permit you to exercise this option if the issuance of shares at that time would violate any law or regulation. 2 Notice of Exercise When you wish to exercise this option, you must notify the Company by filing the proper “Notice of Exercise” form at the address given on the form. Your notice must specify how many shares you wish to purchase. Your notice must also specify how your shares should be registered. The notice will be effective when the Company receives it. If someone else wants to exercise this option after your death, that person must prove to the Company’s satisfaction that he or she is entitled to do so. Form of Payment When you submit your notice of exercise, you must include payment of the option exercise price for the shares that you are purchasing. To the extent permitted by applicable law, payment may be made in one (or a combination of two or more) of the following forms: · · · · Your personal check, a cashier’s check or a money order. Certificates for shares of Company stock that you own, along with any forms needed to effect a transfer of those shares to the Company. The value of the shares, determined as of the effective date of the option exercise, will be applied to the option exercise price. Instead of surrendering shares of Company stock, you may attest to the ownership of those shares on a form provided by the Company and have the same number of shares subtracted from the option shares issued to you. However, you may not surrender, or attest to the ownership of, shares of Company stock in payment of the exercise price if your action would cause the Company to recognize additional compensation expense with respect to this option for financial reporting purposes. Irrevocable directions to a securities broker approved by the Company to sell all or part of your option shares and to deliver to the Company from the sale proceeds an amount sufficient to pay the option exercise price and any withholding taxes. (The balance of the sale proceeds, if any, will be delivered to you.) The directions must be given by signing a special “Notice of Exercise” form provided by the Company. Irrevocable directions to a securities broker or lender approved by the Company to pledge option shares as security for a loan and to deliver to the Company from the loan proceeds an amount sufficient to pay the option exercise price and any withholding taxes. The directions must be given by signing a special “Notice of Exercise” form provided by the Company. 3 You will not be allowed to exercise this option unless you make arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the option exercise. With the Company’s consent, these arrangements may include withholding shares of Company stock that otherwise would be issued to you when you exercise this option. The value of these shares, determined as of the effective date of the option exercise, will be applied to the withholding taxes. You agree not to sell any option shares at a time when applicable laws, Company policies or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as your Service continues and for such period of time after the termination of your Service as the Company may specify. Prior to your death, only you may exercise this option. You cannot transfer or assign this option. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid. You may, however, dispose of this option in your will or a beneficiary designation. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your former spouse, nor is the Company obligated to recognize your former spouse’s interest in your option in any other way. Your option or this Agreement does not give you the right to be retained by the Company or a subsidiary of the Company in any capacity. The Company and its subsidiaries reserve the right to terminate your Service at any time, with or without cause. You, or your estate or heirs, have no rights as a stockholder of the Company until you have exercised this option by giving the required notice to the Company and paying the exercise price. No adjustments are made for dividends or other rights if the applicable record date occurs before you exercise this option, except as described in the Plan. In the event of a stock split, a stock dividend or a similar change in Common Stock, the number of shares covered by this option and the exercise price per share shall be adjusted as provided in the Plan. This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice-of-law provisions). 4 Withholding Taxes and Stock Withholding Restrictions on Resale Transfer of Option Retention Rights Stockholder Rights Adjustments Applicable Law The Plan and Other Agreements The text of the Plan is incorporated in this Agreement by reference. A copy of the Plan is available on the Company’s intranet or by request to the Company’s Finance Department. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded. This Agreement may be amended only by another written agreement between the parties. BY ACCEPTING THIS STOCK OPTION GRANT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 5 Form of Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement under 2008 New Employee Equity Incentive Plan THERAVANCE, INC. 2008 NEW EMPLOYEE EQUITY INCENTIVE PLAN NOTICE OF RESTRICTED STOCK UNIT AWARD You have been granted the number of restricted stock units indicated below by Theravance, Inc. (the “Company”) on the following terms: Name: «Name» Restricted Stock Unit Award Details: Date of Grant: Restricted Stock Units: Vesting Commencement Date: «DateGrant» «TotalShares» «VestComDate» Each restricted stock unit (the “Restricted Stock Unit”) represents the right to receive one share of the Company’s Common Stock subject to the terms and conditions contained in the Restricted Stock Unit Agreement. Vesting Schedule: Vesting is dependent upon continuous service as an employee or consultant of the Company, a Parent, a Subsidiary or an Affiliate (“Service”) throughout the vesting period. The units will vest as follows: 25% on «InitialVestDate»; 6.25% on «SecondVestDate»; and an additional 6.25% on the final day of each 3- month period thereafter until the final vest date, which is three years after «InitialVestDate», provided that you remain in continuous service through such date. You and the Company agree that your right to receive the units is granted under and governed by the terms and conditions of the Plan and of the Restricted Stock Unit Agreement that is attached to and made a part of this document. Capitalized terms not defined herein have the meaning ascribed to such terms in the Plan. You agree that the Company may deliver by email all documents relating to the Plan or this award (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a web site maintained by the Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by email. You further agree to cover the applicable withholding taxes as set forth more fully herein. THERAVANCE, INC. 2008 NEW EMPLOYEE EQUITY INCENTIVE PLAN: RESTRICTED STOCK UNIT AGREEMENT Payment for Shares No payment is required for the restricted stock units you are receiving. Nature of Units Your units are bookkeeping entries. They represent only the Company’s unfunded and unsecured promise to issue shares of Common Stock on a future date. As a holder of units, you have no rights other than the rights of a general creditor of the Company. Settlement of Units Each of your units will be settled when it vests (unless you and the Company have agreed to a later settlement date pursuant to procedures that the Company may prescribe at its discretion). Vesting The restricted stock units that you are receiving will vest as shown in the Notice of Restricted Stock Unit Award. At the time of settlement, you will receive one share of the Company’s Common Stock for each vested unit. No additional units vest after your Service has terminated for any reason, except as set forth on the Notice of Restricted Stock Unit Award. It is intended that vesting in the restricted stock units is commensurate with a full-time work schedule. For possible adjustments that may be made by the Company, see the Section below entitled “Leaves of Absence and Part- Time Work.” The restricted stock units will vest in full if not assumed or substituted with a new award as set forth in Section 11.3 of the Plan. Forfeiture If your Service terminates for any reason then your restricted stock units that have not vested before the termination date and do not vest as a result of the termination pursuant to this Agreement or as set forth on the Notice of Restricted Stock Unit Award, will be forfeited immediately. This means that the restricted stock units will immediately revert to the Company. You receive no payment for restricted stock units that are forfeited. The Company determines when your Service terminates for this purpose. Leaves of Absence and Part- Time Work For purposes of this award, your Service does not terminate when you go on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing. If your leave of absence lasts for more than 6 months, then vesting will be suspended on the day that is 6 months and 1 day after the leave of absence began. Vesting will resume effective as of the second vesting date after you Stock Certificates Stockholder Rights Units Restricted Withholding Taxes return from leave of absence provided you have worked at least one day during that vesting period. In the case of all leaves, your Service terminates when the approved leave ends, unless you immediately return to active work. If you and the Company agree to a reduction in your scheduled work hours, then the Company reserves the right to modify the rate at which the restricted stock units vest, so that the rate of vesting is commensurate with your reduced work schedule. Any such adjustment shall be consistent with the Company’s policies for part-time or reduced work schedules or shall be pursuant to the terms of an agreement between you and the Company pertaining to your reduced work schedule. The Company shall not be required to adjust any vesting schedule pursuant to this subsection. No shares of Common Stock shall be issued to you prior to the date on which the restricted stock units vest. After any restricted stock units vest pursuant to this Agreement, the Company shall promptly cause to be issued in book-entry form, registered in your name or in the name of your legal representatives, beneficiaries or heirs, as the case may be, the number of shares of Common Stock representing your vested restricted stock units. No fractional shares shall be issued. The restricted stock units do not entitle you to any of the rights of a stockholder of Common Stock. Upon settlement of the restricted stock units into shares of Common Stock, you will obtain full voting and other rights as a stockholder of the Company. You may not sell, transfer, pledge or otherwise dispose of any restricted stock units or rights under this Agreement other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, you may designate a beneficiary or beneficiaries to receive any property distributable with respect to the restricted stock units upon your death. No shares will be distributed to you unless you have made arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the settlement of this award. Prior to the relevant taxable event, you shall pay or make adequate arrangements satisfactory to the Company to satisfy all withholding obligations for applicable taxes. You authorize the Company to instruct the broker whom it has selected for this purpose to sell a number of shares of Common Stock to be issued upon the vesting of your restricted stock units to meet the withholding obligations. Such sales shall be effected at the prevailing market price following the date that the restricted stock units vest. 2 You acknowledge that the proceeds of any such sale may not be sufficient to satisfy your withholding obligations. To the extent the proceeds from such sale are insufficient to cover the taxes due, the Company may in its discretion (a) withhold the balance of all applicable taxes legally payable by you from your wages or other cash compensation paid to you by the Company and/or (b) withhold in shares of Common Stock, provided that the Company only withholds an amount of shares not in excess of the amount necessary to satisfy the minimum withholding amount. The fair market value of withheld shares, determined as of the date taxes otherwise would have been withheld in cash, will be applied against the withholding taxes. If the Company satisfies the obligation for taxes by withholding a number of shares of Common Stock as described above, you are deemed to have been issued the full number of shares subject to the award of restricted stock units. Restrictions on Issuance The Company will not issue shares to you if the issuance of shares at that time would violate any law or regulation. Restrictions on Resale No Retention Rights Beneficiary Designation You agree not to sell any shares of Common Stock you receive under this Agreement at a time when applicable laws, regulations, Company trading policies (including the Company’s Insider Trading Policy, a copy of which can be found on the Company’s intranet) or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as your Service continues and for such period of time after the termination of your Service as the Company may specify. Your award or this Agreement does not give you the right to be employed or retained by the Company (or a Parent or Subsidiary) in any capacity. The Company and its Parent and its Subsidiaries reserve the right to terminate your Service at any time, with or without cause. You may dispose of your units in a written beneficiary designation. A beneficiary designation must be filed with the Company on the proper form. It will be recognized only if it has been received at the Company’s headquarters before your death. If you file no beneficiary designation or if none of your designated beneficiaries survives you, then your estate will receive any vested units that you hold at the time of your death. Adjustments In the event of a stock split, a stock dividend or a similar change in Common Stock, the number of restricted stock units that will vest in any future installments will be adjusted accordingly. Applicable Law This Agreement will be interpreted and enforced with respect to issues of contract law under the laws of the State of Delaware. 3 The Plan and Other Agreements The text of the Plan is incorporated in this Agreement by reference. A copy of the Plan is available on the Company’s intranet or by request to the Finance Department. This Agreement, the Notice of Restricted Stock Unit Award, and the Plan constitute the entire understanding between you and the Company regarding this award. Any prior agreements, commitments or negotiations concerning this award are superseded. This Agreement may be amended only by another written agreement between the parties. BY ACCEPTING THIS RESTRICTED STOCK UNIT AWARD, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 4 SUPPLEMENTAL MABA AMENDMENT TO STRATEGIC ALLIANCE AGREEMENT Exhibit 10.34 This Amendment to the Strategic Alliance Agreement (this “Amendment”) is entered into effective as of October 3, 2011 (the “Effective Date of this Amendment”), between Theravance, Inc., a Delaware corporation (“Theravance”) and Glaxo Group Limited, a private company limited by shares registered under the laws of England and Wales (“GSK”) and amends and supplements the Strategic Alliance Agreement entered into as of March 30, 2004, as amended and supplemented on September 13, 2004, February 11, 2005, February 8, 2006, February 27, 2006, February 27, 2009, June 22, 2009 and July 16, 2010 (the “Agreement”). All capitalized terms not defined in this Amendment shall have the meaning ascribed to them in the Agreement. WHEREAS, GSK desires to receive from Theravance and Theravance desires to grant to GSK the right to Develop and Commercialize additional Muscarinic Antagonist-Beta Agonist (“MABA”) compounds discovered by Theravance on an exclusive, worldwide basis in order to combine Theravance’s and GSK’s activities with respect to MABA compounds in accordance with the terms and conditions of the Agreement as amended and supplemented by this Amendment. 2 NOW, THEREFORE, in consideration of the foregoing premises and the representations, covenants and agreements contained herein, Theravance and GSK, intending to be legally bound, hereby agree as follows: 1. Definitions: 1.1 “Combination Supplemental MABA Alliance Product” means a Supplemental MABA Alliance Product that contains one or more therapeutically active agents in addition to the Theravance Compound. 1.2 “MABA Alliance Product” shall mean the Alliance Product GSK961081 discovered in the course of the MABA Alliance Program. 1.3 “MABA Alliance Program” shall mean the Alliance Program in respect of which GSK exercised its Opt-In Right on 21 March 2005. 1.4 “Supplemental MABA Alliance Products” shall mean the following Theravance Compounds: [***], and each such Supplemental MABA Alliance Product can be used as a single agent and/or in combination with other therapeutically active components for human pharmaceutical applications. The term “Supplemental MABA Alliance Product” shall also include any formulation of excipients, stabilizers, propellants, or other components necessary to prepare and deliver a pharmaceutically effective dose of such Theravance Compound and any other therapeutically active component together with any delivery device. ***CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 1.5 “Supplemental MABA Alliance Program” shall mean all activities with respect to the Development and Commercialization of the Supplemental MABA Alliance Products. 1.6 “Supplemental MABA Development Milestone” shall have the meaning set forth in Section 6.2(i) of this Amendment. 1.7 “Supplemental MABA Technology Transfer Package” means all Theravance Confidential Information and Theravance Know-How relating to the Supplemental MABA Alliance Products. Any material supplied by Theravance to GSK as contemplated hereunder shall comply with any specification agreed by GSK and Theravance. 1.8 Notwithstanding the definition of the term “Alliance Product” in the Agreement, “Alliance Product” shall include the Supplemental MABA Alliance Products in the following sections of Article 1: Sections 1.8, 1.19, 1.21, 1.22, 1.24, 1.33, 1.34, 1.41, 1.46, 1.47, 1.58, 1.59, 1.69, 1.71, 1.75, 1.85 through 1.90, 1.93, 1.94, 1.103, 1.110 through 1.112, 1.116, 1.117, 1.121 and 1.122. 1.9 Notwithstanding the definition of the term “Alliance Program” in the Agreement, “Alliance Program” shall include the Supplemental MABA Alliance Program in the following sections of Article 1: Sections 1.9 and 1.33. 2. License. Notwithstanding the definition of the term “Alliance Product” in the Agreement, “Alliance Product” shall include the Supplemental MABA Alliance Products in Article 2 of the Agreement. 3. Governance. 3.1 Notwithstanding the definition of the term “Alliance Product” in the Agreement, “Alliance Product” shall include the Supplemental MABA Alliance Products in Sections 3.2 through 3.6 of the Agreement; provided, however, that: under Section 10.2 of this Amendment. (i) In Section 3.2.3(g), reference to GSK’s termination rights under Article 14 shall also include GSK’s termination rights 3.2 Notwithstanding the definition of the term “Alliance Program” in the Agreement, “Alliance Program” shall include the Supplemental MABA Alliance Program in Sections 3.2.3 and 3.3, and the Parties hereby agree that it is appropriate for one Joint Program Committee to manage both the MABA Alliance Program and the Supplemental MABA Alliance Program. 3.3 The Parties hereby agree to amend and restate Section 3.2.5(b) of the Agreement with respect to all Alliance Products and Supplemental MABA Alliance Products as follows: “With respect to any issue, if the Joint Steering Committee cannot reach consensus within ten (10) Business Days after the matter has been brought to the Joint Steering Committee’s attention, then such issue shall be referred to the Chief ***CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Executive Officer of Theravance and either the Chairman of GSK R&D (if the issue relates to a discovery and/or development matter) or the Chief Executive Officer of GSK (or one of his direct reports designated by him) (if the issue relates to a commercial matter) (collectively, the “Officers”) for resolution. The Parties accept that the use of the Officers for resolution of any unresolved issues will be on an exceptional basis. In the event that the use of the Officers occurs on more than two occasions in any consecutive twelve (12) month period and such disputes are not related to Commercial Conflict issues, then GSK will from then on retain the final vote within the Joint Steering Committee for all issues other than Commercial Conflict. If the Officers are unable to reach consensus within thirty (30) days after the matter has been referred to them, the final decision on such disputed issue will reside with GSK; provided, however, that if the disputed issue involves [***], then the final decision will be made by binding arbitration (“Arbitration”). Either Party can initiate Arbitration on [***] to the other Party. The Arbitration shall be conducted pursuant to the American Arbitration Association (“AAA”) Commercial Arbitration Rules then in effect, except that notwithstanding those rules, the following provisions shall apply to the Arbitration hereunder. (i) Panel. The Arbitration shall be conducted by a panel of three (3) arbitrators (the “Arbitration Panel”) in [***]. The Arbitration Panel shall consist of one arbitrator selected by each of the Parties from a pool of arbitrators to be presented to the Parties by AAA from the AAA’s National Roster. Each of these two arbitrators shall have expertise in pharmaceutical product Development and Commercialization, and these two arbitrators shall jointly select the chairman from a pool of arbitrators to be presented to the Parties by AAA from the AAA’s National Roster. (ii) Process. The time periods set forth in the AAA rules shall be followed, unless a Party can demonstrate to the Arbitration Panel that the urgency of the dispute or other reasons warrant contraction of one or more of the timetables. For good cause shown, the Arbitration Panel may contract such timetables. Within such time frames, each Party shall have the right to conduct such discovery as would be permitted by the Federal Rules of Civil Procedure. Interpretation of and enforcement of this Section 3.2.5(b) shall be governed by the Federal Arbitration Act. The Arbitration Panel shall apply the Federal Rules of Evidence to the hearing. The fees of the Arbitration Panel and AAA shall be paid by the losing Party, which shall be designated by the Arbitration Panel or in such proportions as may be designed by the Arbitration Panel where a Party does not prevail with respect to all issues. (iii) Confidentiality. The Arbitration proceeding shall be confidential and the Arbitration Panel shall issue appropriate protective orders to safeguard each Party’s Confidential Information. Except as required by Law, no Party shall make (or instruct the Arbitration Panel to make) any public announcement with respect to the proceedings or decision of the Arbitration Panel without prior written consent of each other Party. The existence of a dispute submitted to ***CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Arbitration, and the outcome, shall be kept in confidence by the Parties and the Arbitration Panel except as, in the opinion of either Party’s counsel, may be required by Law. (iv) Findings of Arbitration Panel. The decision of the Arbitration Panel will be final and binding on the Parties; provided that either Party shall retain all rights to bring an action against the other for damages and other monetary relief related to or arising out of the issue decided by the Arbitration Panel.” 4. Material and Tech Transfer; Development. Article 4 of the Agreement shall not apply to the Supplemental MABA Alliance Products and instead the Parties agree as follows: 4.1 Delivery of Supplemental MABA Alliance Products. As soon as reasonably practicable but in any event within [***] after the Effective Date of this Amendment, Theravance shall deliver to GSK existing stock of each Supplemental MABA Alliance Product as well as the Supplemental MABA Technology Transfer Package. For the avoidance of doubt, Theravance’s delivery of material and information pursuant to this Section 4.1 constitutes the entirety of Theravance’s information and material delivery obligations with regard to the Supplemental MABA Alliance Program, and Theravance shall be responsible for no further research or development of the Supplemental MABA Alliance Products thereafter provided that in the event that Theravance does obtain any further information in respect of the Supplemental MABA Alliance Products, it shall promptly disclose such information to GSK. 4.2 Obligations for Development. (i) GSK hereby agrees to exercise Diligent Efforts to move one Supplemental MABA Alliance Product forward in Development provided always that it is understood and hereby acknowledged by the Parties that any GSK decision to pursue Development of a Combination Supplemental MABA Alliance Product as against a single agent Alliance Product (or vice versa) and/or a certain Supplemental MABA Alliance Product as opposed to any other Supplemental MABA Alliance Product shall not, for the avoidance of doubt, constitute a breach of GSK’s Diligent Efforts obligations under the Agreement or this Amendment. GSK shall have the overall responsibility for, and use Diligent Efforts in, the performance of all such Development activities which shall include, where applicable, relevant regulatory filings (as contemplated under Article 8 of the Agreement) for any such Supplemental MABA Alliance Product(s) moved forward in Development. Further, GSK shall use Diligent Efforts to advance such Supplemental MABA Alliance Product(s) through Development in accordance with the Go/No-Go checkpoints identified in the then-current Development Plan for such Supplemental MABA Alliance Product. GSK shall also use Diligent Efforts to develop an optimal formulation of such Supplemental MABA Alliance Product. As of the Effective Date of this Amendment, GSK shall bear all subsequent costs and expenses associated with the Development of any Supplemental MABA Alliance Product. the Supplemental MABA Alliance Program; [***] Theravance Compounds in the MABA Alliance Program and the Supplemental (ii) For the avoidance of doubt, it is each Party’s intention that [***] such time as [***] from the MABA Alliance Program or ***CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. MABA Alliance Program and [***] pursuant to Section 14.5.2(b) of the Agreement, as amended by Section 10.3 of this Amendment. [***] Develop at least one Supplemental MABA Alliance Product and [***] Develop the MABA Alliance Product pursuant to the Agreement, [***] the Supplemental MABA Alliance Program pursuant to the terms of Section 14.5.2(b) of the Agreement, as amended by Section 10.3 of this Amendment, and Theravance shall be entitled to develop and commercialize all compounds from such program outside of the Alliance alone or with a Third Party pursuant to Section 14.5 of the Agreement as amended by this Amendment. (iii) The Specific Alliance Product Development & Commercialization Appendix applicable to the MABA Alliance Program shall apply to the Supplemental MABA Alliance Program except where otherwise decided by the Joint Program Committee or the Joint Steering Committee, as applicable, save that the Technology Transfer Appendix shall be as set out in Schedule 4.2(iii) to this Amendment. 4.3 Decisions with Respect to Supplemental MABA Alliance Products. subject to and in accordance with Sections 3.2.5 and 3.3.5 of the Agreement, as amended by this Amendment, and Section 4.2 of this Amendment. (i) GSK shall have the sole discretion with respect to Development decisions for Supplemental MABA Alliance Products (ii) GSK will provide the Joint Program Committee with (i) a notification within thirty (30) days of the initiation (i.e. the first person dosed) of any Study involving a Supplemental MABA Alliance Product, and (ii) a “top line results” report within [***] following the last person dosed/last visit in any Study involving a Supplemental MABA Alliance Product. 4.4 Development Timelines. It is hereby acknowledged that the Parties’ mutual strategic objective is to move one Supplemental MABA Alliance Product into Development at the earliest opportunity ([***]), to initiate and undertake clinical Development of at least one Supplemental MABA Alliance Product having regard to progress made with respect to the MABA Alliance Product currently in clinical Development and to move at least one MABA Alliance Product or one Supplemental MABA Alliance Product into subsequent Commercialization at the earliest opportunity. GSK will consult with the Joint Program Committee and will share, modify and further develop all applicable Development Plans and timelines in that forum. GSK will use Diligent Efforts to secure the necessary resources and will keep the Joint Program Committee informed on the progress of individual studies and activities relating to Supplemental MABA Alliance Products in accordance with Section 3.2.3 of the Agreement as amended by this Amendment. 4.5 Activity Outside of the Alliance. (i) The Parties hereby agree that for so long as the Supplemental MABA Alliance Products have not been returned to Theravance pursuant to Section 14.5.2(b) of the Agreement, neither GSK nor Theravance shall, whether alone or with a Third Party, conduct a clinical study with respect to a MABA compound (or product containing a MABA compound) outside of the Agreement or this Amendment. ***CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (ii) The Parties however acknowledge that the research, Development and Commercialization objectives of the Alliance are intended to be complementary to GSK’s other research, development and commercialization efforts outside the Alliance. Accordingly and subject to the provisions of Section 4.5(i) of this Amendment, the Parties agree that GSK shall be free to discover and develop other compounds for the treatment of diseases targeted by Supplemental MABA Alliance Products outside of this Amendment and the Agreement, subject to GSK’s obligations under this Amendment and under the Agreement with respect to any Supplemental MABA Alliance Product and the MABA Alliance Product. 5. Commercialization. Notwithstanding the definition of the term “Alliance Product” in the Agreement, “Alliance Product” shall include the Supplemental MABA Alliance Products in Sections 5.1 through 5.3 of the Agreement. 6. Financial Provisions. 6.1 Up-Front Payment. Section 6.1 of the Agreement shall not apply to the Supplemental MABA Alliance Products and instead GSK shall, within [***] of the Effective Date of this Amendment, pay to Theravance a non-refundable amount of One Million United States Dollars ($1,000,000). Alliance Products and instead the following Development milestone payment terms shall apply: 6.2 Milestones. Except as otherwise set forth below, Section 6.2 of the Agreement shall not apply to the Supplemental MABA (i) In further consideration for the acquisition of license rights relating to the Supplemental MABA Alliance Products under the Theravance Patents and Theravance Know-How, GSK shall also pay to Theravance the payments set forth below for each such Development milestone achieved (each, a “Supplemental MABA Development Milestone”); provided always that each such payment shall be made only one time upon the first achievement of such Supplemental MABA Development Milestone by the first Supplemental MABA Alliance Product, regardless of how many times such Supplemental MABA Development Milestones are achieved by one or more Supplemental MABA Alliance Products and regardless of whether the Supplemental MABA Alliance Product is a single-agent or a Combination Supplemental MABA Alliance Product, and no payment shall be owed for a Supplemental MABA Development Milestone which is not achieved (except that, upon achievement of a Development Milestone for a particular Supplemental MABA Alliance Product, any previous Development Milestone for that Supplemental MABA Alliance Product for which payment was not made shall be deemed achieved and payment therefore shall be made). The Development milestones specified in Section 6.2.2 of the Agreement for “Filing for Regulatory Approval” and “Launch” shall apply to the Supplemental MABA Alliance Products and, when applied to the Supplemental MABA Alliance Products, shall constitute Supplemental MABA Development Milestones. Milestones Initiation of [***] Successful Completion of [***] Amount [***] [***] ***CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Initiation of [***] [***] Filing for Regulatory Approval and Launch milestones as per Section 6.2.2 of the Agreement Notwithstanding the definition of the term “Alliance Product” in the Agreement, “Alliance Product” shall include the Supplemental MABA Alliance Products in the definitions specified in Section 6.2.2, and all of the definitions set forth in Section 6.2.2 shall apply to the Supplemental MABA Alliance Products. (ii) Notification and Payment. In the event a Supplemental MABA Alliance Product achieves a Supplemental MABA Development Milestone, GSK shall promptly, but in no event more than [***] after the achievement of each such Supplemental MABA Development Milestone, notify Theravance in writing of the achievement of same. For all Supplemental MABA Development Milestones achieved GSK shall promptly, but in no event more than [***] after notification of the achievement of each such Supplemental MABA Development Milestone, remit payment to Theravance for such Supplemental MABA Development Milestone. royalties shall apply to net sales of any Supplemental MABA Alliance Product: 6.3 Royalties. Section 6.3 of the Agreement shall not apply to the Supplemental MABA Alliance Products and instead the following (i) Patent Royalty. As further consideration for the acquisition of license rights under the Theravance Patents under this Amendment, and in those Countries of the Territory in which there is a Valid Claim of a Theravance Patent covering the Supplemental MABA Alliance Product in the Country of sale at the time such Net Sales occur (for the avoidance of doubt, “covering” as used in this Section and subsequent Sections shall include the making, using, selling, offering for sale, or importing the Supplemental MABA Alliance Product), GSK shall pay Theravance, within [***] after the end of each Calendar Quarter, royalty payments for each such Supplemental MABA Alliance Product based on Net Sales in such Calendar Quarter on a Country by Country basis, as follows: [***] [***] [***] [***] [***] [***] (ii) Decreased Royalty. As further consideration for the acquisition of license rights under the Theravance Patents under this Amendment, and in those Countries of the Territory where an obligation to pay royalties under Section 6.3(i) of this Amendment has applied during the Term but is no longer applicable (as a result of subsequent expiration or termination of the last Valid Claim of a Theravance Patent covering the Supplemental MABA Alliance Product in the Country of sale at the time such Net Sales occur), GSK shall pay Theravance, within [***] after the end of each Calendar Quarter, royalty payments for each such Supplemental MABA Alliance Product based on Net Sales in such Calendar Quarter on a Country by Country basis, as follows: ***CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [***] [***] [***] [***] [***] [***] (iii) Know-How Royalty. As further consideration for the acquisition of Theravance Know-How by GSK under this Amendment, and in those countries which are not subject to the royalty obligation referred to in Section 6.3(i) or (ii) of this Amendment, GSK shall pay Theravance, within [***] after the end of each Calendar Quarter, royalty payments for each such Supplemental MABA Alliance Product based on Net Sales in such Calendar Quarter on a Country by Country basis, as follows: [***] [***] [***] [***] [***] [***] (iv) Royalty on Combination Supplemental MABA Alliance Products. For the purpose of determining royalty payments on Supplemental MABA Alliance Products, if the Combination Supplemental MABA Alliance Product is commercialized, then (irrespective of (a) whether the relevant Theravance single agent in such Combination Supplemental MABA Alliance Product is also separately commercialized for which Theravance is receiving separate royalty payments and (b) how many therapeutically active agents are contained in such Combination Supplemental MABA Alliance Product) [***] of the royalty rates referred to in Section 6.3(i), (ii) and (iii) of this Amendment inclusive (whichever is applicable) shall apply. (v) Estimates. The quarterly royalty payments made hereunder may be based on estimated Net Sales. Within thirty (30) days after the end of each Calendar Quarter, GSK shall calculate the actual amount of Net Sales for the previous Calendar Quarter and either credit or debit the difference between such actual and projected amount on the succeeding Calendar Quarter’s royalty payment to Theravance. GSK will also provide Theravance with those estimates of future Net Sales as it provides in accordance with its own internal procedures. (vi) Duration of Royalty Payments. first commercial sale of each Supplemental MABA Alliance Product in a particular Country. (a) Commencement. All royalties payable hereunder shall be paid on a Country-by-Country basis from the date of of the Territory shall remain until the expiration or termination of the last Valid Claim of a Theravance Patent covering the Supplemental MABA Alliance Product in such Country. (b) Duration of Full Patent Royalties. Royalty obligations under Section 6.3(i) of this Amendment in each Country Country of the Territory shall apply for a maximum period of [***] from First Commercial Sale of the relevant Supplemental MABA (c) Duration of Decreased Patent Royalties. Royalty obligations under Section 6.3(ii) of this Amendment in each ***CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Alliance Product in each such Country (where, for the avoidance of doubt, such period would include, and not be additional to, the time for which a full patent royalty was previously payable under Section 6.3(i)). (d) Duration of Know-How Royalties. Royalty obligations under Section 6.3(iii) of this Amendment in each Country of the Territory shall apply for a maximum period of ten (10) years from First Commercial Sale of the relevant Supplemental MABA Alliance Product in each such Country. 6.4 In each of the following Sections of the Agreement, notwithstanding the definition of the term “Alliance Product” in the Agreement, “Alliance Product” shall include the Supplemental MABA Alliance Products: Sections 6.4 through 6.10 (except that references to Sections 6.1, 6.2 and 6.3 in Section 6.9 shall instead refer to Sections 6.1, 6.2 and 6.3 of this Amendment). 7. Communications, Promotional Materials and Samples; Regulatory Matters; Orders and Supply and Returns; Confidential Information. 7.1 Notwithstanding the definition of the term “Alliance Product” in the Agreement, “Alliance Product” shall include the Supplemental MABA Alliance Products in Articles 7 through 10 of the Agreement provided that the transfer of the stock of Supplemental MABA Alliance Products to GSK shall take place pursuant to Section 4.1 of this Amendment and not Section 9.2.1 of the Agreement. 8. Representations and Warranties. 8.1 Mutual. Theravance and GSK each represents and warrants to the other as of the Effective Date of this Amendment the representations and warranties set forth in Section 11.1 of the Agreement, except that references therein to “this Agreement” shall refer instead to the Agreement as amended by this Amendment. 8.2 Additional GSK. GSK further represents, warrants and covenants to Theravance as of the Effective Date of this Amendment that: (i) neither GSK nor any of its Affiliates is a Party to or otherwise bound by any oral or written contract or agreement that will result in any Person obtaining any interest in, or that would give to any Person any right to assert any claim in or with respect to, any of GSK’s rights granted under this Amendment; and reporting under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. (ii) GSK’s valuation of the Supplemental MABA Alliance Products does not meet the size-of-transaction threshold for 8.3 Additional Theravance. Theravance further represents and warrants and covenants to GSK as of the Effective Date of this Amendment that: ***CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. infringed by the manufacture, distribution, marketing or sale of the Supplemental MABA Alliance Products; (i) Theravance has not received notice from any Third Party of a claim that an issued patent of such Third Party would be Products are subject to any pending or any threatened re-examination, opposition, interference or litigation proceedings; (ii) To Theravance’s knowledge, none of Theravance’s current patent rights relating to the Supplemental MABA Alliance (iii) Theravance has not received notice from any Third Party of a claim asserting the invalidity, misuse, unregisterability or unenforceability of any of Theravance’s current patent rights relating to the Supplemental MABA Alliance Products, or challenging its right to use or ownership of any of Theravance’s current patent rights relating to the Supplemental MABA Alliance Products or Theravance’s know-how relating to the Supplemental MABA Alliance Products, or making any adverse claim of ownership thereof; (iv) Theravance has not received notice from any Third Party that any trade secrets or other intellectual property rights of such Third Party would be misappropriated by the development and reduction to practice of Theravance’s current patent rights relating to the Supplemental MABA Alliance Products and Theravance’s know-how relating to the Supplemental MABA Alliance Products; and (v) Theravance will not at any time during the Term disclose to any Third Party(ies) and/or publish in the public domain any proprietary and secret Theravance Know-How relating to the Supplemental MABA Alliance Products that is proprietary and secret as of the Effective Date of this Amendment. Supplemental MABA Alliance Products as follows: 8.4 The Parties hereby agree to amend and restate Section 11.4 of the Agreement with respect to all Alliance Products and “Each Party hereby covenants and agrees during the Term that it shall carry out its obligations or activities hereunder in accordance with (i) the terms of this Agreement; (ii) all applicable Laws (which shall include without limitation applicable anti-corruption laws); and (iii) GSK’s ‘Prevention of Corruption — Third Party Guidelines’.” 8.5 Notwithstanding the definition of the term “Alliance Product” in the Agreement, “Alliance Product” shall include the Supplemental MABA Alliance Products in Section 11.5. 9. Indemnification; Patents and Inventions. Notwithstanding the definition of the term “Alliance Product” in the Agreement, “Alliance Product” shall include the Supplemental MABA Alliance Products in Articles 12 and 13 of the Agreement, and notwithstanding the definition of the term “Alliance Program” in the Agreement, “Alliance Program” shall include the Supplemental MABA Alliance Program in Article 13; provided, however, that: refer to the Effective Date of this 9.1 in the context of Supplemental MABA Alliance Products, (i) references to the “Alliance Program Acceptance Date” shall instead ***CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Amendment and (ii) reference to Article 14 (in Section 13.6) shall refer to Article 14 of the Agreement as amended by this Amendment. 9.2 For the avoidance of doubt, pursuant to the fourth sentence of the second paragraph of Section 13.1, GSK shall reimburse Theravance for all reasonable expenses incurred from the Effective Date to the Effective Date of this Amendment in connection with OUS patent applications corresponding to the Supplemental MABA Alliance Products. 9.3 the proviso to Section 13.1.5 of the Agreement shall be taken to refer also to GSK’s proprietary Gemini technology. 10. Termination. 10.1 Notwithstanding the definition of the term “Alliance Product” in the Agreement, “Alliance Product” shall include the Supplemental MABA Alliance Products in Sections 14.1 and 14.2 of the Agreement; provided, however, that GSK may terminate the Development and Commercialization of the Supplemental MABA Alliance Products pursuant to Section 10.2 of this Agreement. 10.2 GSK Right to Terminate Development and Commercialization of the Supplemental MABA Alliance Products. GSK shall have the right to terminate Development or Commercialization of any or all Supplemental MABA Alliance Products on a country-by-country basis upon the provision of ninety (90) days written notice to Theravance. In the event of termination of the Supplemental MABA Alliance Program under this Section 10.2, each Supplemental MABA Alliance Product shall be a “Terminated Respiratory Development Alliance Product” or “Terminated Respiratory Commercialized Alliance Product” (as the case may be) which GSK shall return to Theravance pursuant to Section 14.5.2(b) or 14.5.3(b), respectively, of the Agreement and Theravance shall be entitled to develop and commercialize all compounds from such programs outside of the Alliance alone or with a Third Party. For the avoidance of doubt, the provisions of this Section 10.2 do not affect the rights of GSK to terminate Development of the MABA Alliance Program pursuant to Section 14.3 of the Agreement or, after First Commercial Sale of the MABA Alliance Product, to terminate Commercialization of the MABA Alliance Program pursuant to Section 14.4 of the Agreement. 10.3 Notwithstanding the definition of the term “Alliance Product” in the Agreement, “Alliance Product” shall include the Supplemental MABA Alliance Products in Sections 14.5.1, 14.5.2(b), 14.5.3(b), and 14.6 through 14.8 of the Agreement; provided, however, that: Respiratory Development Alliance Product” for any other Supplemental MABA Alliance Product or for any Theravance Compound in the MABA Alliance Program; (i) In Section 14.5.2(b) of the Agreement, any Supplemental MABA Alliance Product shall constitute an “alternative Alliance Product” with “Terminated Respiratory Development Alliance Product” and the Parties agree that “GSK Property” shall also include GSK’s proprietary Gemini technology; (ii) The final sentence of Section 14.5.2(b)(iv) is hereby amended to replace “Terminated Respiratory Commercialized ***CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Theravance Compound in the MABA Alliance Program; (iii) Section 14.5.2(b)(vii) shall not apply to the Supplemental MABA Alliance Products, but it shall continue to apply to the Respiratory Alliance Product” for any other Supplemental MABA Alliance Product or for any Theravance Compound in the MABA Alliance Program; and (iv) In Section 14.5.3(b) of the Agreement, any Supplemental MABA Alliance Product shall constitute an “alternative of the Agreement shall instead refer to Section 6.2 of this Amendment. (v) In Section 14.7 of the Agreement, in the context of Supplemental MABA Alliance Products, the reference to Section 6.2 10.4 Notwithstanding the definition of the term “Alliance Program” in the Agreement, “Alliance Program” shall include the Supplemental MABA Alliance Program in Article 14. 11. Reversion Programs. Notwithstanding Section 4.2.2 of the Agreement regarding the timing and process pursuant to which GSK may exercise its Opt-In Right with respect to the two remaining non-respiratory Additional Discovery Programs (the AT1 Receptor-Neprilysin Inhibitor (ARNI) program and the Monoamine Reuptake Inhibitor (MARIN) program) (collectively, the “Remaining Additional Discovery Programs”), GSK hereby releases Theravance from the Diligent Efforts and funding obligations set forth in Section 4.1 and Section 4.2 of the Agreement with respect to the Remaining Additional Discovery Programs, irrevocably waives its Opt-In Right with respect to the Remaining Additional Discovery Programs and designates each such program a Reversion Program effective upon the Effective Date of this Amendment. Accordingly, on the Effective Date of this Amendment each of the Remaining Additional Discovery Programs shall revert in full to Theravance and Theravance shall be entitled to pursue development and commercialization of all compounds from such programs outside the Alliance alone or with a Third Party. 12. Investor Relations Planning. As of the Effective Date of this Amendment, the Parties shall have agreed upon a public communications plan regarding this Amendment and the transactions contemplated hereby. 13. Supplemental MABA Alliance Program Closing Condition. The obligation of each Party to consummate the transactions contemplated by this Amendment is subject to the satisfaction of the following condition (the “Supplemental MABA Closing Condition”): All filings under the Hart-Scott- Rodino Antitrust Improvements Act of 1976 and any other similar laws that are necessary in any jurisdiction with respect to the transaction contemplated hereby shall have been made and any required waiting period under such laws shall have expired or been terminated and any Governmental Authority in a jurisdiction with an applicable mandatory pre-closing waiting period that has power under or authority to enforce such laws shall have, if applicable, approved, cleared or decided neither to initiate proceedings or otherwise intervene in respect of the transaction contemplated hereby nor to refer the transaction to any other competent Governmental Authority. Each Party shall use good faith efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other Party in doing, ***CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. all things necessary, proper or advisable to consummate and make effective the transaction contemplated by this Amendment, including, but not limited to satisfaction of the Supplemental MABA Closing Condition and each Party shall keep the other Party reasonably apprised of the status of matters relating to the completion of same. In connection with the foregoing, the Parties shall use all reasonable efforts to make any such filing(s), if applicable, within five (5) business days of the Effective Date of this Amendment. In connection with the foregoing, the Parties hereby agree to negotiate in good faith to make as soon as practicable any modification or amendment to this Amendment that is required by the United States Federal Trade Commission, Department of Justice or equivalent Governmental Authority, provided that no Party shall be required to agree to any modification or amendment that, in the reasonable opinion of such Party’s external legal or financial counsel, would be adverse to such Party. This Agreement may be terminated by either Party upon written notice any time after December 31, 2011 if the transactions contemplated by this Agreement shall not have been consummated by December 31, 2011 due to failure to satisfy the Supplemental MABA Closing Condition; provided, however, that the terminating Party shall not have breached in any material respect its obligations under this Amendment in any manner that shall have been the proximate cause of, or resulted in, the failure to satisfy the Supplemental MABA Closing Condition or otherwise to consummate the transactions contemplated by this Amendment by such date. 14. Entire Agreement. This Amendment and the Agreement constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 15. Governing Law. This Agreement shall be construed, and the respective rights of the Parties determined, according to the substantive law of the State of Delaware notwithstanding the provisions governing conflict of laws under such Delaware law to the contrary, except matters of intellectual property law which shall be determined in accordance with the intellectual property laws relevant to the intellectual property in question. Each Party hereby irrevocably submits to the exclusive jurisdiction of said Court in respect of any claim relating to the validity, interpretation and enforcement of this Amendment, and hereby waives, and agrees not to assert, as a defense in any action, suit or proceeding in which any such claim is made that it is not subject thereto or that such action suit or proceeding may not be brought or is not maintainable in such courts, or that the venue thereof may not be appropriate or that this agreement may not be enforced in or by such courts. 16. Severability. In the event of the invalidity of any provisions of this Amendment or if this Amendment contains any gaps, the Parties agree that such invalidity or gap shall not affect the validity of the remaining provisions of this Amendment. The Parties will replace an invalid provision or fill any gap with valid provisions which most closely approximate the purpose and economic effect of the invalid provision or, in case of a gap, the parties’ presumed intentions. In the event that the terms and conditions of this Amendment are materially altered as a result of the preceding sentences, the Parties shall renegotiate the terms and conditions of this Amendment in order to resolve any inequities. Nothing in this Amendment shall be interpreted so as to require any Party to violate any applicable laws, rules or regulations. 17. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. ***CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. IN WITNESS WHEREOF, the parties hereby have executed this Amendment on the dates written below. Date: October 3, 2011 Date: October 3, 2011 THERAVANCE, INC. By: /s/ Rick E Winningham Name: Rick E Winningham Title: Chief Executive Officer GLAXO GROUP LIMITED By: /s/ Paul Williamson Name: Paul Williamson Title: Corporate Director SIGNATURE PAGE TO AMENDMENT TO STRATEGIC ALLIANCE AGREEMENT QuickLinks -- Click here to rapidly navigate through this document CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-119559, No. 333-123716, No. 333-129669, No. 333- 142707, No. 333-150753, No. 333-159042, No. 333-161065, No. 333-166546), and No. 333-173923 pertaining to the 2004 Equity Incentive Plan, 2004 Employee Stock Purchase Plan, Shares Acquired Under Written Compensation Agreements and 2008 New Employee Equity Incentive Plan of Theravance, Inc. and the Registration Statement on Form S-3 (No. 333-160761) and related Prospectus of Theravance, Inc. of our reports dated February 27, 2012, with respect to the consolidated financial statements of Theravance, Inc. and the effectiveness of internal control over financial reporting of Theravance, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2011. Exhibit 23.1 /s/ ERNST & YOUNG LLP Redwood City, California February 27, 2012 QuickLinks Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM QuickLinks -- Click here to rapidly navigate through this document Exhibit 31.1 I, Rick E Winningham, certify that: Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 1. 2. 3. 4. I have reviewed this Annual Report on Form 10-K of Theravance, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: a) b) c) d) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) b) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. February 27, 2012 (Date) /s/ RICK E WINNINGHAM Rick E Winningham Chairman of the Board and Chief Executive Officer (Principal Executive Officer) QuickLinks Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 QuickLinks -- Click here to rapidly navigate through this document Exhibit 31.2 I, Michael W. Aguiar, certify that: Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 1. 2. 3. 4. I have reviewed this Annual Report on Form 10-K of Theravance Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: a) b) c) d) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) b) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. February 27, 2012 (Date) /s/ MICHAEL W. AGUIAR Michael W. Aguiar Senior Vice President, Finance and Chief Financial Officer (Principal Financial Officer) QuickLinks Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 QuickLinks -- Click here to rapidly navigate through this document CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32 I, Rick E Winningham, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Theravance Inc. on Form 10-K for the fiscal year ended December 31, 2011 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Theravance, Inc. for the periods covered by such Annual Report on Form 10-K. February 27, 2012 (Date) By: /s/ RICK E WINNINGHAM Name: Title: Rick E Winningham Chairman of the Board and Chief Executive Officer CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Michael W. Aguiar, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Theravance Inc. on Form 10-K for the fiscal year ended December 31, 2011 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Theravance, Inc. for the periods covered by such Annual Report on Form 10-K. February 27, 2012 (Date) By: /s/ MICHAEL W. AGUIAR Name: Title: Michael W. Aguiar Senior Vice President, Finance and Chief Financial Officer QuickLinks Exhibit 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 

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