Theravance Biopharma
Annual Report 2018

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Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One)☒☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2018OR☐☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from toCommission File No. 001-36033THERAVANCE BIOPHARMA, INC.(Exact name of registrant as specified in its charter) Cayman Islands 98-1226628(State or Other Jurisdiction of (I.R.S. EmployerIncorporation or Organization) Identification No.) P.O. Box 309 Ugland House, South Church Street George Town, Grand Cayman, Cayman Islands KY1-1104(Address of Principal Executive Offices) (Zip Code)Registrant’s telephone number, including area code: 650-808-6000SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:Title of Each Class Name of Each Exchange On Which RegisteredOrdinary Share $0.00001 Par Value NASDAQ Global MarketSECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONEIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐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 ☐ 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 1934during 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 filingrequirements for the past 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit suchfiles). Yes ☒ No ☐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 becontained, 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 anyamendment to this Form 10-K. ☒Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or anemerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” inRule 12b-2 of the Exchange Act. Large accelerated filer ☒Accelerated filer ☐Non-accelerated filer ☐Smaller reporting company ☐ Emerging growth company ☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any newor revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the closing price on theNASDAQ Global Market on June 30, 2018 was $1,209,092,732.On February 15, 2019, there were 55,579,495 of the registrant’s ordinary shares outstanding.DOCUMENTS INCORPORATED BY REFERENCESpecified portions of the registrant’s definitive Proxy Statement to be issued in conjunction with the registrant’s 2019 Annual Meeting of Shareholders,which is expected to be filed not later than 120 days after the registrant’s fiscal year ended December 31, 2018, are incorporated by reference into Part III of thisAnnual 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 Form10-K. Table of ContentsTHERAVANCE BIOPHARMA, INC.2018 Form 10‑K Annual ReportTable of Contents PART I Item 1. Business 4Item 1A. Risk Factors 21Item 1B. Unresolved Staff Comments 53Item 2. Properties 53Item 3. Legal Proceedings 53Item 4. Mine Safety Disclosures 53 PART II Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities 54Item 6. Selected Financial Data 56Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 58Item 7A. Quantitative and Qualitative Disclosures About Market Risk 71Item 8. Financial Statements and Supplementary Data 72Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 114Item 9A. Controls and Procedures 114Item 9B. Other Information 117 PART III Item 10. Directors, Executive Officers and Corporate Governance 117Item 11. Executive Compensation 117Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 117Item 13. Certain Relationships and Related Transactions, and Director Independence 117Item 14. Principal Accountant Fees and Services 117 PART IV Item 15. Exhibits and Financial Statement Schedules 118Exhibit Index 119Signatures 123 2 Table of ContentsSpecial Note regarding Forward‑Looking StatementsThis Annual Report on Form 10‑K contains forward‑looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, asamended (the “Exchange Act”). 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 regardingour strategy, future operations, future financial position, future revenues, projected costs, prospects, plans, intentions,designs, expectations and objectives could be forward‑looking statements. The words “aim,” “anticipate,” “believe,”“contemplate,” “continue,” “could,” “designed,” “developed,” “drive,” “estimate,” “expect,” “goal,” “intend,” “may,”“mission,” “opportunities,” “plan,” “potential,” “predict,” “project,” “pursue,” “represent,” “seek,” “suggest,” “should,”“target,” “will,” “would” and similar expressions (including the negatives thereof) are intended to identify forward lookingstatements, although not all forward looking statements contain these identifying words. These statements reflect our currentviews with respect to future events or our future financial performance, are based on assumptions, and involve known andunknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to bematerially different from any future results, performance or achievements expressed or implied by the forward‑lookingstatements. We may not actually achieve the plans, intentions, expectations or objectives disclosed in our forward‑lookingstatements and the assumptions underlying our forward‑looking statements may prove incorrect. Therefore, you should notplace 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 believecould 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 andResults of Operations” in Item 7 and elsewhere in this Annual Report on Form 10‑K. Our forward‑looking statements in thisAnnual Report on Form 10‑K are based on current expectations and we do not assume any obligation to update anyforward‑looking statements for any reason, even if new information becomes available in the future. When used in this report,all references to “Theravance Biopharma”, the “Company”, or “we” and other similar pronouns refer to TheravanceBiopharma, Inc. collectively with its subsidiaries. 3 Table of ContentsPART I ITEM 1. BUSINESSOverviewTheravance Biopharma, Inc. ("Theravance Biopharma") is a diversified biopharmaceutical company primarilyfocused on the discovery, development and commercialization of organ-selective medicines. Our purpose is to createtransformational medicines to improve the lives of patients suffering from serious illnesses. Our research is focused in the areasof inflammation and immunology. In pursuit of our purpose, we apply insights and innovation at each stage of our business and utilize our internalcapabilities and those of partners around the world. We apply organ-selective expertise to biologically compelling targets todiscover and develop medicines designed to treat underserved localized diseases and to limit systemic exposure, in order tomaximize patient benefit and minimize risk. These efforts leverage years of experience in developing lung-selective medicinesto treat respiratory disease, including US Food and Drug Administration-approved YUPELRI (revefenacin) inhalationsolution indicated for the maintenance treatment of patients with chronic obstructive pulmonary disease (“COPD”). Ourpipeline of internally discovered programs is targeted to address significant patient needs. We have an economic interest in potential future payments from Glaxo Group or one of its affiliates (“GSK”) pursuantto its agreements with Innoviva, Inc. (“Innoviva”) relating to certain programs, including TRELEGY ELLIPTA. 2018 HighlightsIn 2018, we accomplished a number of key corporate goals. As our programs advanced through various stages ofdevelopment, clinical results further informed our focus on strategic priorities and our plans towards creating transformationalmedicines to help improve the lives of patients. FDA Approval of YUPELRIWe announced US Food and Drug Administration (“FDA”) approval of YUPELRI (revefenacin) inhalation solutionfor the maintenance treatment of patients with COPD. YUPELRI, a long-acting muscarinic antagonist, is the first and onlyonce-daily, nebulized bronchodilator approved for the treatment of COPD in the US. Additionally, we completed a Phase 3bstudy of YUPELRI in patients with suboptimal peak inspiratory flow rate, which showed encouraging findings in the pre-specified subgroup of severe and very severe COPD patients. Commercial launch is underway with our partner Mylan. TD-1473 Co-Development and Commercialization AgreementWe announced a global co-development and commercialization agreement with Janssen Biotech, Inc., for our gut-selective JAK inhibitor TD-1473 and related back-up compounds for inflammatory intestinal diseases, including ulcerativecolitis and Crohn's disease. We subsequently completed the remaining two cohorts of the Phase 1b study of TD-1473 inulcerative colitis. Results from this study provided the basis to advance TD-1473 into a larger Phase 2b/3 adaptive designinduction and maintenance study in ulcerative colitis patients and a Phase 2 induction study in Crohn’s disease. Followingcompletion of the Phase 1b study, we completed discussions with US and European Union (“EU”) regulators and gainedagreement on the Phase 2b/3 study design in ulcerative colitis. Positive Phase 2 Data for AmpreloxetineWe reported positive top-line four-week data from the Phase 2 study of ampreloxetine (TD-9855), our norepinephrinereuptake inhibitor (“NRI”) in development for the treatment of patients with symptomatic neurogenic orthostatic hypotension(“nOH”). Data collected in the study provided the basis to advance ampreloxetine into a registrational Phase 3 program insymptomatic nOH, for which we also gained FDA agreement on program design in 2018. 4 TMTM Table of ContentsSale of VIBATIVIn order to sharpen our focus on our most important programs outside of the anti-infectives market, we announced andclosed the sale of VIBATIV to Cumberland Pharmaceuticals Inc., a specialty pharmaceutical company. Economic Interest in GSK-Partnered Respiratory Programs and Issuance of $250.0 million in Aggregate Principal Amount of9.0% Non-Recourse NotesMultiple milestones were achieved in 2018 with TRELEGY ELLIPTA, a respiratory program managed by GSK andInnoviva in which we have an economic interest that effectively entitles us to receive an upward tiering royalty ofapproximately 5.5% to 8.5% of worldwide net sales of TRELEGY ELLIPTA. Over the course of the year, GSK announcedexpanded COPD indications for TRELEGY ELLIPTA in both the US and EU, based on submissions to regulatory authoritiessupported by data from its IMPACT study. Results from the IMPACT study were also published in the New England Journalof Medicine. Outside the US and EU, GSK announced TRELEGY ELLIPTA regulatory applications submitted in additionalmarkets including China and Japan. We announced the closing of a private placement of $250.0 million in aggregate principal amount of 9.0% non-recourse notes, secured by a portion of the future payments we receive related to royalties due on net sales of TRELEGYELLIPTA. In order to comply with Regulation RR – Credit Risk Retention (17 C.F.R. Part 246), 5% of the principal amount ofthese notes were retained by Theravance Biopharma R&D, Inc., a wholly-owned subsidiary of Theravance Biopharma.Excluding the $12.5 million of retained notes and other fees related to the transaction, net proceeds of the offering wereapproximately $229.4 million. Hosted an Investor Event to Highlight Our Research Projects (“R&D Day”)We also described at our R&D Day event our innovative research and development strategy of organ-selectivemedicines designed to expand the therapeutic index compared to conventional systemic therapies. We introduced several newresearch programs, each specifically tailored for the organ of interest. We progressed TD-8236, our novel, lung-selectiveinhaled JAK inhibitor, into a Phase 1 clinical trial in healthy volunteers and asthma patients. Our ProgramsThe table below summarizes the status of our approved product and our other product candidates in development.The table also includes the status of the respiratory programs in which we have an economic interest and for which GSK isresponsible pursuant to agreements between Innoviva and GSK (“GSK‑Partnered Respiratory Programs”). These programsconsist of the TRELEGY ELLIPTA program, the inhaled Bifunctional Muscarinic Antagonist‑Beta2 Agonist (“MABA”)program and any other future products that may be combined with TRELEGY ELLIPTA or MABA. We have an economicinterest in these programs through our interest in Theravance Respiratory Company, LLC, a limited liability companymanaged by Innoviva. The status of all GSK-Partnered Respiratory Programs referenced in this Annual Report on Form 10‑Kare based solely upon publicly available information and may not reflect the most recent developments under the programs. 5 ® Table of ContentsPORTFOLIOSTATUS ProgramPhase 1Phase 2Phase 3FiledApprovedCollaboratorsRESPIRATORYYUPELRI (revefenacin) inhalationsolution: COPD MylanTD-8236:Asthma GASTROINTESTINALTD-1473:Ulcerative colitis Janssen BiotechTD-1473:Crohn’s disease Janssen BiotechNEUROLOGICALAmpreloxetine (TD-9855):Symptomatic nOH ECONOMIC INTEREST IN GSK-PARTNERED RESPIRATORY PROGRAMS *TRELEGY ELLIPTA (FF/UMEC/VI):COPD GSK & InnovivaTRELEGY ELLIPTA:Asthma GSK & InnovivaMABA, MABA/ICS (batefenterol,batefenterol/FF): COPD GSK & InnovivaOTHER ECONOMIC INTERESTSVIBATIV (telavancin): cSSSI,HABP/VABP, concurrent bacteremia CumberlandPharmaceuticalsVelusetrag:Gastroparesis AlfasigmaTD-8954 (TAK-954):POGD IV Takeda *The information regarding TRELEGY ELLIPTA and MABA programs are based solely upon publicly available informationand may not reflect the most recent developments under the programs. Glossary of Defined Terms used in Table Above:COPD: Chronic Obstructive Pulmonary Disease;cSSSI: Complicated Skin and Skin Structure Infections;FF: Fluticasone Furoate;HABP/VABP: Hospital‑Acquired and Ventilator‑Associated Bacterial Pneumonia;ICS: Inhaled Corticosteroid;IV: Intravenous6 TM® Table of ContentsMABA: Bifunctional Muscarinic Antagonist‑Beta2 Agonist;nOH: Neurogenic Orthostatic Hypotension;POGD: Post-operative Gastrointestinal DysfunctionUMEC: Umeclidinium;VI: Vilanterol;Status: The most advanced stage of clinical development that has been completed or is in process;Phase 1: Initial clinical safety testing into patients or healthy human volunteers, or studies directed toward understanding themechanisms of action of the drug;Phase 2: Further clinical safety testing and preliminary efficacy testing in a limited patient population;Phase 3: Evaluation of clinical efficacy and safety within an expanded patient population;Filed: A marketing application has been submitted to a regulatory authority; andApproved: Approved for marketing Program HighlightsGut-selective Pan-Janus Kinase (JAK) Inhibitor Program (TD-1473)JAK inhibitors function by inhibiting the activity of one or more of the Janus kinase family of enzymes (JAK1, JAK2,JAK3, TYK2) that play a key role in cytokine signaling. Inhibiting these JAK enzymes interferes with the JAK/STAT signalingpathway and, in turn, modulates the activity of a wide range of pro-inflammatory cytokines. JAK inhibitors are currentlyapproved for the treatment of rheumatoid arthritis, myelofibrosis, and ulcerative colitis and have demonstrated therapeuticbenefit for patients with Crohn’s disease. However, these products are known to have side effects based on their systemicexposure. Our goal is to develop an orally administered, gut-selective pan-JAK inhibitor specifically designed to distributeadequately and predominantly to the tissues of the intestinal tract, treating inflammation in those tissues while minimizingsystemic exposure. TD-1473 is our lead gut-selective pan-JAK inhibitor in development as a potential treatment for a range ofinflammatory intestinal diseases, including ulcerative colitis and Crohn’s disease. TD-1473 is progressing into multipleclinical studies, as further described below. Phase 1 Single Ascending Dose and Multiple Ascending Dose StudiesIn June 2016, we completed a Phase 1 clinical study of TD-1473, an internally-discovered JAK inhibitor that hasdemonstrated a high affinity for each of the JAK family of enzymes. The primary objective of the study was to evaluate thesafety and tolerability of single ascending and multiple ascending doses of TD-1473 in healthy volunteers. A key secondaryobjective of the trial was to characterize the pharmacokinetics of TD-1473, including the determination of the amount of TD-1473 that entered systemic circulation following oral administration. Data from the study demonstrated TD-1473 to begenerally well tolerated. Study results also demonstrated that systemic exposures of TD-1473 were low relative to that reportedfor tofacitinib, a JAK inhibitor approved for the treatment ulcerative colitis. At steady state, the plasma exposures of TD-1473were significantly lower than the plasma exposure of tofacitinib. Furthermore, subjects exhibited high stool concentrations of TD-1473, which were comparable to concentrationsassociated with efficacy in preclinical colitis models. Preclinical studies also demonstrated penetration of TD-1473 into theintestinal wall and membrane. Data generated from the study met our target pharmacokinetic profile and supported clinicalprogression of the compound. Previously announced findings from a preclinical model of colitis evaluating TD-1473 and tofacitinib demonstratedthat both compounds significantly reduced disease activity scores. However, at doses providing similar preclinical efficacy,the systemic exposure of TD-1473 was much lower than that of tofacitinib and, in contrast to tofacitinib, TD-1473 did notreduce systemic immune cell counts. Also, we completed six and nine month toxicology studies of TD-1473 and demonstratedfavorable safety margins in these studies, in support of the dose ranges planned in the Phase 3 registrational program. Based onthese preclinical findings, we believe that TD-1473 represents a potential breakthrough approach to treating inflammatoryintestinal diseases without the risk generally associated with systemically active therapies. 7 Table of ContentsPhase 1b StudyIn late 2016, we announced dosing of the first patient in a Phase 1b clinical study of TD-1473 in patients withmoderate to severe ulcerative colitis. The Phase 1b exploratory study in 40 patients was designed to evaluate the safety,tolerability, and pharmacokinetics (“PK”) of TD-1473 over a 28-day treatment period. In addition, the study incorporatedbiomarker analysis and clinical, endoscopic, and histologic assessments to evaluate biological effect. In August 2017, we announced encouraging data from the first cohort of patients in the Phase 1b study. Data from thefirst cohort demonstrated evidence of localized biological activity for TD-1473 after four weeks of treatment, based on acompilation of clinical, endoscopic, and biomarker assessments. Pharmacokinetic data demonstrated minimal systemicexposure, and there was no evidence of systemic immunosuppression. In August 2018, we announced top-line results from all cohorts in the Phase 1b study of TD-1473 in ulcerative colitis.Full results were shared as an oral late-breaker presentation at the United European Gastroenterology Week (“UEGW”) inOctober 2018. Data from the Phase 1b study demonstrated that four weeks of TD-1473 treatment led to signals of biologicalactivity and localized target engagement with low systemic exposures and no evidence of systemic immunosuppression oropportunistic infections in patients with moderately to severely active ulcerative colitis. More specifically, rates of clinicalresponse were higher on all active doses (20, 80, 270 mg) compared with placebo using both partial and total Mayo endpoints,with greatest effect seen at the 270 mg dose. Rectal bleeding scores improved above placebo at the 80 and 270 mg doses.Endoscopic improvements and mucosal healing were reported in all active arms, and none was reported in the placebo arm.Additionally, plasma levels were low and consistent with data from healthy volunteers, and TD-1473 was generally welltolerated at all doses. Based on positive results from the Phase 1b study and following dialogues with the FDA and European MedicinesAgency (“EMA”) regarding study design, we began to initiate sites for the registrational Phase 2b/3 (RHEA) induction andmaintenance study in ulcerative colitis. In addition, we announced first patient dosed in a Phase 2 (DIONE) induction study ofTD-1473 in Crohn’s disease in late 2018. Janssen Biotech CollaborationIn February 2018, we announced a global co-development and commercialization agreement with Janssen Biotech,Inc. (“Janssen”) for TD-1473 and related back-up compounds for inflammatory intestinal diseases, including ulcerative colitisand Crohn's disease. Under the terms of the agreement, we received an upfront payment of $100.0 million and will be eligibleto receive up to an additional $900.0 million in potential payments, inclusive of a potential opt-in payment followingcompletion of the Phase 2 Crohn’s study and the Phase 2b induction portion of the ulcerative colitis study. At that time,Janssen can elect to obtain an exclusive license to develop and commercialize TD-1473 and certain related compounds bypaying us a fee of $200.0 million. Upon such election, we and Janssen will jointly develop and commercialize TD-1473 ininflammatory intestinal diseases, and we and Janssen will share profits and losses in the US and expenses related to a potentialPhase 3 program (67% to Janssen; 33% to Theravance Biopharma). In addition, we would receive royalties on ex-US sales atdouble-digit tiered percentage royalty rates. The closing of the opt-in portion of the transaction is subject to clearance under the Hart-Scott-Rodino AntitrustImprovements Act (“HSR Act”). After Phase 2, Janssen would lead subsequent development of TD-1473 in Crohn’s disease ifit makes such an election. We will lead development of TD-1473 in ulcerative colitis through completion of the Phase 2b/3study. If TD-1473 is commercialized, we have the option to co-commercialize in the US, and Janssen would have solecommercialization responsibilities outside the US. Ampreloxetine (TD‑9855)Ampreloxetine is an investigational, once-daily norepinephrine reuptake inhibitor (“NRI”) being developed for thetreatment of patients with symptomatic neurogenic orthostatic hypotension (“nOH”). nOH is caused by primary autonomicfailure conditions, including multiple system atrophy, Parkinson’s disease and pure autonomic failure. The compound hashigh affinity for binding to norepinephrine transporters. By blocking the action of these transporters, ampreloxetine causes anincrease in extracellular concentrations of norepinephrine. 8 Table of ContentsIn May 2016, we initiated a Phase 2 study of ampreloxetine in nOH. The initial study design of the Phase 2 trialconsisted of two parts. Part A, a single ascending dose study, with doses ranging from 1 mg up to 20 mg based on patientresponse, was designed to evaluate impact on blood pressure and standing time for ampreloxetine as compared to placebo. PartB, a double-blind, single dose study was designed to evaluate impact on blood pressure and standing time for ampreloxetineas compared to placebo. Based on encouraging treatment responses in the first part of the study, we amended the study designto allow responders to continue dosing for up to 20 weeks to assess the durability of their response (Part C). Part C, an openlabel extension to Part A, was designed to evaluate improvement in patients’ symptoms and impact on blood pressure.Responders in Part A were eligible to enroll in Part C at up to their highest tolerated Part A dose, which included 5 mg, 10 mgand 20 mg. The primary endpoint of the study was measured after four weeks, although patients can continue to receivemedication for up to five months. We believe the ability to demonstrate a durable effect in nOH with ampreloxetine could leadto significant benefits for patients over existing therapy. In August 2018, we announced positive top-line four-week data from the Phase 2 trial of ampreloxetine for thetreatment of nOH. Top-line results from the study included durable improvements in patients’ disease symptom severity afterfour weeks of treatment with ampreloxetine, as measured by Orthostatic Hypotension Symptom Assessment Question #1(“OHSA #1”). OHSA #1 is a measure of dizziness, lightheadedness, or the sensation of being about to black out. Patientstreated in the extension phase of the study showed a mean symptom improvement of 2.4 points at four weeks. Importantly,mean symptom improvement was greatest (3.8 points) in nOH patients who reported dizziness symptoms (OHSA #1 > 4) atbaseline. Additionally, ampreloxetine consistently increased systolic blood pressure (“SBP”), including clinically meaningfulincreases in standing SBP at the three-minute assessment on all weekly clinic visits. Ampreloxetine was generally welltolerated, with no new safety findings attributable to drug observed in the study. Based on positive top-line four-week resultsfrom the Phase 2 study and discussions with the FDA, we advanced ampreloxetine into a Phase 3 program. The Phase 3program includes two studies. The first study is a four-week, randomized double-blind, placebo-controlled study designed toevaluate the efficacy, safety, and tolerability of ampreloxetine in patients with symptomatic nOH. The second study is arandomized withdrawal study designed to evaluate the durability of patient response of ampreloxetine. We announced that weinitiated patient dosing in each Phase 3 study in January and February 2019, respectively. In late February 2019, we announced emerging five-month data from the Phase 2 study further support previously-announced clinical observations after four weeks of treatment. Detailed study data will be submitted for presentation at a mid-2019 scientific meeting. YUPELRI (revefenacin) Inhalation SolutionYUPELRI (revefenacin) inhalation solution is a once-daily, nebulized long-acting muscarinic antagonist (“LAMA”)approved for the maintenance treatment of COPD in the US. Our market research indicates there is an enduring population ofCOPD patients in the US that either need or prefer nebulized delivery for maintenance therapy. LAMAs are recognized byinternational COPD treatment guidelines as a cornerstone of maintenance therapy for COPD, regardless of severity of disease.YUPELRI is the first and only once-daily, long-acting single-agent product for COPD patients who require, or prefer,nebulized therapy. YUPELRI's stability in both metered dose inhaler and dry powder inhaler (“MDI/DPI”) formulationssuggest that this LAMA could also serve as a foundation for novel handheld combination products. Mylan CollaborationIn January 2015, Mylan Ireland Limited (“Mylan”) and we established a strategic collaboration for the developmentand commercialization of revefenacin. Partnering with a world leader in nebulized respiratory therapies enables us to expandthe breadth of our revefenacin development program and extend our commercial reach beyond the acute care setting. Mylanfunded the Phase 3 development program of YUPELRI, enabling us to advance other high value pipeline assets alongsideYUPELRI. Under the terms of the Mylan Development and Commercialization Agreement (the “Mylan Agreement”), Mylan andwe co-develop revefenacin for COPD and other respiratory diseases. We have led the US Phase 3 development program forYUPELRI in COPD, and Mylan was responsible for reimbursement of our costs related to the registrational program up untilthe approval of the first new drug application (“NDA”), after which costs are shared. With YUPELRI9 TM Table of Contentsapproved in the US, Mylan is leading commercialization, and we co-promote the product in the US under a profit and losssharing arrangement (65% to Mylan; 35% to Theravance Biopharma). Following shipments into commercial channel in late2018, we and Mylan formally launched our sales and marketing efforts in early 2019. Outside the US (excluding China),Mylan will be responsible for development and commercialization and will pay us a tiered royalty on net sales at percentageroyalty rates ranging from low double-digits to mid-teens. Under the Mylan Agreement, Mylan paid us an initial payment of $15.0 million in cash in the second quarter of2015. Also, pursuant to an agreement to purchase ordinary shares entered into on January 30, 2015, Mylan Inc., the indirectparent corporation of Mylan, made a $30.0 million equity investment in us, buying 1,585,790 ordinary shares from us inFebruary 2015 in a private placement transaction at a price of approximately $18.918 per share, which represented a 10%premium over the volume weighted average price per share of our ordinary shares for the five trading days ending onJanuary 30, 2015. In February 2016, we earned a $15.0 million development milestone payment for achieving 50% enrollmentin the Phase 3 twelve-month safety study. As of December 31, 2018, we are eligible to receive from Mylan additional potentialdevelopment, regulatory and sales milestone payments totaling up to $205.0 million in the aggregate, with $160.0 millionassociated with YUPELRI monotherapy, and $45.0 million associated with future potential combination products. Of the$160.0 million associated with monotherapy, $150.0 million relates to sales milestones based on achieving certain levels ofnet sales and $10.0 million relates to regulatory actions in the EU. We do not expect to earn any milestone payments fromMylan in 2019. We retain worldwide rights to revefenacin delivered through other dosage forms, such as a MDI/DPI, while Mylan hascertain rights of first negotiation with respect to our development and commercialization of revefenacin delivered other thanvia a nebulized inhalation product. In China, we retain all rights to revefenacin in any dosage form. Phase 3 Clinical Program in COPD and FDA ApprovalIn September 2015, we announced with our partner Mylan the initiation of the Phase 3 development program forYUPELRI for the treatment of COPD. The Phase 3 development program included two replicate three-month efficacy studiesand a single twelve-month safety study. The two efficacy studies examined two doses (88 mcg and 175 mcg) of YUPELRIinhalation solution administered once-daily via nebulizer in patients with moderate to severe COPD. The Phase 3 efficacystudies were replicate, randomized, double-blind, placebo-controlled, parallel-group trials designed to provide pivotalefficacy and safety data for once-daily YUPELRI over a dosing period of 12 weeks, with a primary endpoint of trough forcedexpiratory volume in one second (FEV1) on day 85. The Phase 3 safety study was an open-label, active comparator study of12 months duration. In October 2016, we announced positive top-line results from the two replicate Phase 3 efficacy studies of YUPELRIin more than 1,200 moderate to very severe COPD patients, and in May and November 2017 we reported additional data fromthese studies. Both Phase 3 efficacy studies met their primary endpoints, demonstrating statistically significant improvementsover placebo in trough FEV1 after 12 weeks of dosing for each of the YUPELRI doses studied (88 mcg once daily and 175mcg once daily). The studies also demonstrated that the 88 mcg and 175 mcg doses of YUPELRI were generally well tolerated,with comparable rates of adverse events and serious adverse events across all treatment groups (active and placebo). InJuly 2017, we announced positive top-line results from the twelve-month safety study in more than 1,000 COPD patients. Datademonstrated that both the 88 mcg and 175 mcg doses of YUPELRI were generally well tolerated, with low rates of adverseevents and serious adverse events, comparable to those seen with the active comparator. Together, the three studies enrolledapproximately 2,280 patients. In November 2017, we submitted to the FDA for filing an NDA for YUPELRI supported by data from the two replicatePhase 3 efficacy studies and twelve-month safety study. In November 2018, YUPELRI was approved by the FDA for themaintenance treatment of patients with COPD. Phase 3b PIFR StudyIn March 2017, we initiated a Phase 3b study of YUPELRI in patients with suboptimal peak inspiratory flow rate(“PIFR”). This study was not required for NDA approval and was designed to support commercialization of YUPELRI. Thepurpose of the study was to assess whether nebulized YUPELRI was superior to handheld tiotropium (dosed via theHandihaler device) in a broad population of COPD patients with suboptimal PIFR. The primary endpoint was10 ® Table of Contentsimprovement in lung function, as measured by trough forced expiratory volume in one second (FEV1) after 4 weeks oftreatment. The PIFR study was completed in the first quarter of 2018. In the overall population of approximately 200 moderateto very severe (GOLD Stage 2/3/4) COPD patients, we saw numerical improvements for YUPELRI over tiotropium, but theseimprovements were not statistically significant, and as a result the study failed to meet the primary endpoint. In thepre‑specified subgroup of severe and very severe (GOLD 3/4) COPD patients, which represented approximately 80% of thepatients in the study, YUPELRI demonstrated nominally statistically significant and clinically relevant improvements intrough FEV1 versus tiotropium. Data generated in the study provide important insights to inform future potential studies ofYUPELRI in COPD patients with suboptimal PIFR. YUPELRI was well tolerated in this study, with no new safety issuesidentified. We plan to publish additional analyses of these results from this study in a future medical meeting or publication. TD-8236TD-8236 is an investigational, lung-selective inhaled JAK inhibitor that has demonstrated a high affinity andselectivity for each of the JAK family enzymes (JAK1, JAK2, JAK3 and TYK2). Through the inhibition of these kinases, TD-8236 interferes with the JAK/STAT signaling pathway and, in turn, modulates the activity of a wide range of pro-inflammatorycytokines. TD-8236 is specifically designed to be an inhaled treatment delivered exclusively to the lungs with a dry-powderinhaler with minimal systemic exposure. With multiple JAK-dependent pathways clinically validated in asthma and COPD, webelieve it offers potentially broad activity across a range of serious respiratory diseases. In severe asthma, patientheterogeneity includes both Th2-high (eosinophilic) and Th2-low (neutrophilic, paucigranulocytic, and mixed granulocytic)phenotypes, but current approved novel biologics address only Th2-high asthma. We recognize a treatment need for theprevention of exacerbations and symptom control for patients regardless of Th2 phenotype. In pre-clinical assessments, TD-8236 has shown to potently inhibit targeted mediators of Th2-high and Th2-low asthma in human cells. In November 2018,we announced first subject dosed in a Phase 1 study of TD-8236, designed to evaluate safety and provide biomarker data inboth healthy volunteers and asthma patients. Velusetrag (TD‑5108)Velusetrag is an oral, investigational medicine developed for gastrointestinal motility disorders. It is a highlyselective agonist with high intrinsic activity at the human 5-HT4 receptor. In 2012, we partnered with Alfasigma S.p.A.(“Alfasigma”) (formerly Alfa Wassermann S.p.A.) in the development of velusetrag and its commercialization in certaincountries. In April 2014, we announced top-line results from the initial Phase 2 proof-of-concept study under this partnership,which evaluated gastric emptying, safety and tolerability of multiple doses of velusetrag. In August 2017, we announced positive top-line results from a 12-week, Phase 2b study of velusetrag characterizingthe impact on symptoms and gastric emptying of three oral doses of velusetrag (5, 15 and 30 mg) compared to placeboadministered once daily over 12 weeks of therapy. Results from the study demonstrated statistically significant improvementsin gastroparesis symptoms and gastric emptying for patients receiving 5 mg of velusetrag as compared to placebo. Patients inthe 15 and 30 mg velusetrag study arms demonstrated statistically significant improvements in gastric emptying, but they didnot experience statistically significant improvements in gastroparesis symptoms. Velusetrag was shown to be generally welltolerated, with 5 mg and placebo having comparable rates of adverse events and serious adverse events. Completion of thePhase 2b study was followed by dialogue with regulatory authorities in the US and EU regarding further development ofvelusetrag. In late April 2018, Alfasigma exercised its option to develop and commercialize velusetrag. As a result, Alfasigmapaid us a total of $11.0 million, comprised of a $10.0 million option exercise fee and a $1.0 million non-refundablereimbursement. Additionally, we elected not to pursue further development of velusetrag, based on our planned pipelineinvestments and in light of an FDA requirement that a chronically administered gastroparesis product in this class complete alarge Phase 3 safety study. Global rights to develop, manufacture and commercialize velusetrag transferred to Alfasigma underthe terms of the existing collaboration agreement. Also under the terms of the collaboration with Alfasigma, we are entitled toreceive future potential development, regulatory and commercial milestone payments of up to $26.8 million, and tieredroyalties on global net sales ranging from high single digits to the mid-teens.11 Table of Contents VIBATIV (telavancin)VIBATIV is a bactericidal, once-daily injectable antibiotic to treat patients with serious, life-threatening infectionsdue to Staphylococcus aureus and other Gram-positive bacteria, including methicillin-resistant (“MRSA”) strains, discoveredand developed by Theravance Biopharma. VIBATIV is approved in the US for the treatment of adult patients with complicatedskin and skin structure infections (“cSSSI”) caused by susceptible Gram-positive bacteria and for the treatment of adultpatients with hospital-acquired and ventilator-associated bacterial pneumonia (“HABP”/“VABP”) caused by susceptibleisolates of Staphylococcus aureus when alternative treatments are not suitable. In addition, in 2016, the FDA authorized newclinical data into the VIBATIV label concerning concurrent bacteremia in cases of HABP/VABP and cSSSI. VIBATIV is alsoindicated in Canada and Russia for cSSSI and HABP and VABP caused by Gram-positive bacteria, including MRSA. In November 2018, we sold VIBATIV to Cumberland Pharmaceuticals Inc. (“Cumberland”) pursuant an AssetPurchase Agreement (the “Agreement”). Cumberland paid us $20.0 million at the closing of the transaction and will pay (i)$5.0 million on or before April 1, 2019 and (ii) tiered royalties of up to 20% of US net sales of VIBATIV until such time asroyalties cumulatively total $100.0 million. In connection with the sale of VIBATIV, Cumberland acquired, among other things, (i) intellectual property rightsrelating to VIBATIV, (ii) active pharmaceutical ingredient for VIBATIV, work-in-process and finished drug product, (iii) theUS marketing authorization for VIBATIV, (iv) certain assigned contracts relating to the manufacture and commercialization ofVIBATIV, and (v) books and records related to VIBATIV. Cumberland also assumed certain clinical study obligations relatedto VIBATIV and post-closing liabilities and obligations relating to VIBATIV as described in the Agreement. The Companyagreed to provide transition services to Cumberland for limited periods of time following the consummation of the transaction. Our acute care sales force, supported by our independent marketing and medical affairs teams, marketed VIBATIV inthe US until shortly after the sale to Cumberland in late 2018. As of early 2019, the commercial organization is focused onsupporting YUPELRI in the US in partnership with Mylan. Selective 5-HT4 Agonist (TD-8954)Takeda Collaborative ArrangementIn June 2016, we entered into a License and Collaboration Agreement with Millennium Pharmaceuticals, Inc., aDelaware corporation (“Millennium”) (the “Takeda Agreement”), in order to establish a collaboration for the development andcommercialization of TD-8954 (TAK-954), a selective 5-HT4 receptor agonist. Millennium is an indirect wholly-ownedsubsidiary of Takeda Pharmaceutical Company Limited (TSE: 4502), a publicly-traded Japanese corporation listed on theTokyo Stock Exchange (collectively with Millennium, “Takeda”). TD-8954 is being developed for potential use in thetreatment of gastrointestinal motility disorders. Under the terms of the Takeda Agreement, Takeda will be responsible forworldwide development and commercialization of TD-8954. We received an upfront cash payment of $15.0 million and willbe eligible to receive success-based development, regulatory and sales milestone payments from Takeda. We will also beeligible to receive a tiered royalty on worldwide net sales by Takeda at percentage royalty rates ranging from low double-digits to mid-teens. Research ProjectsOur research goal is to design organ-selective medicines that target diseased tissues, without systemic exposure, inorder to maximize patient benefit and minimize risk. The intention is to expand the therapeutic index of our potentialmedicines compared to conventional systemic therapies. Our efforts leverage years of experience in developing lung-selectivemedicines, such as YUPELRI, to treat respiratory diseases, and have led to the discovery of the gut-selective pan-JAK inhibitorTD-1473 in inflammatory intestinal diseases and the lung-selective inhaled JAK inhibitor TD-8236 in serious respiratorydisease. We plan to advance towards the clinic other research projects with various mechanisms of action, each specificallytailored for the organ of interest, as we identify and validate potentially appropriate compounds. Our research is focused in theareas of inflammation and immunology, and our pipeline of internally discovered programs is targeted to address significantpatient needs.12 ® Table of Contents Other ProgramsNeprilysin (“NEP”) Inhibitor Program (TD-0714 and TD-1439)Neprilysin (“NEP”) is an enzyme that degrades natriuretic peptides. These peptides play a protective role incontrolling blood pressure and preventing cardiovascular tissue remodeling. Inhibiting NEP may result in clinical benefit forpatients, including diuresis, control of blood pressure, and reversing maladaptive changes in the heart and vascular tissue inpatients with congestive heart failure. We recognize significant potential for a NEP inhibitor that can be used across a broadpopulation of patients with cardiovascular and renal diseases, including acute and chronic heart failure and chronic kidneydisease, including diabetic nephropathy. Our NEP inhibitor program consists of two compounds (TD-0714 and TD-1439),each of which demonstrated characteristics in line with our target product profile in Phase 1 studies in healthy volunteers. TD-0714TD-0714 is our most advanced NEP inhibitor compound. In 2016, a Phase 1 single ascending dose (“SAD”) study inhealthy volunteers demonstrated that the compound achieved maximal and sustained levels of target engagement for 24 hoursafter a single-dose, supporting the drug’s potential for once-daily dosing. Target engagement was measured by dose-relatedincreases in the levels of cyclic GMP (cGMP, a well-precedented biomarker of NEP engagement). TD-0714 also demonstratedvery low levels of renal elimination, as evidenced by intravenous microtracer testing technology, and a favorable tolerabilityprofile. Findings from a Phase 1 multiple ascending dose (“MAD”) study in healthy volunteers were consistent with the SADstudy in healthy volunteers, demonstrating sustained target engagement, low levels of renal elimination, and a favorabletolerability profile. TD-1439TD-1439 is a second NEP inhibitor compound, which is structurally distinct from TD-0714. In 2017, Phase 1 SADand MAD studies of TD-1439 demonstrated characteristics which met our target product profile, including sustained 24-hourtarget engagement, low levels of renal elimination and a favorable tolerability profile. The results from the Phase 1 programs demonstrate potential in a broad range of cardiovascular and renal diseases,including in patients with compromised renal function. We are evaluating next steps for both compounds in our NEP inhibitorprogram clinical program. Economic Interest in GSK‑Partnered Respiratory ProgramsWe are entitled to receive an 85% economic interest in any future payments that may be made by GSK to TheravanceRespiratory Company, LLC (“TRC”) pursuant to its agreements with Innoviva (net of TRC expenses paid and the amount ofcash, if any, expected to be used by TRC pursuant to the TRC LLC Agreement over the next four fiscal quarters) relating to theGSK-Partnered Respiratory Programs, which Innoviva partnered with GSK and assigned to TRC in connection with Innoviva’sseparation of its biopharmaceutical operations into its then wholly-owned subsidiary Theravance Biopharma in June 2014.The GSK-Partnered Respiratory Programs consist primarily of the TRELEGY ELLIPTA program and the inhaled BifunctionalMuscarinic Antagonist-Beta2 Agonist (“MABA”) program, each of which are described in more detail below. We are entitledto this economic interest through our equity ownership in TRC. Our economic interest does not include any paymentsassociated with RELVAR® ELLIPTA®/BREO® ELLIPTA®, ANORO® ELLIPTA® or vilanterol monotherapy. The followinginformation regarding the TRELEGY ELLIPTA and MABA programs is based solely upon publicly available information andmay not reflect the most recent developments under the programs. TRELEGY ELLIPTA (the combination of fluticasone furoate/umeclidinium bromide/vilanterol)TRELEGY ELLIPTA is the first treatment to provide the activity of an inhaled corticosteroid (FF) plus twobronchodilators (UMEC, a LAMA, and VI, a long-acting beta2 agonist, or LABA) in a single delivery device administeredonce-daily. TRELEGY ELLIPTA is approved for use in the US and EU for the long-term, once-daily, maintenance treatment ofpatients with COPD. We are entitled to receive an 85% economic interest in the royalties payable by GSK to TRC onworldwide net sales (net of TRC expenses paid and the amount of cash, if any, expected to be13 Table of Contentsused by TRC pursuant to the TRC LLC Agreement over the next four fiscal quarters). Those royalties are upward-tiering from6.5% to 10%, resulting in cash flows to Theravance Biopharma of approximately 5.5% to 8.5% of worldwide net sales ofTRELEGY ELLIPTA. Theravance Biopharma is not responsible for any of GSK’s costs related to the development orcommercialization of TRELEGY ELLIPTA. Innoviva and GSK conducted two global pivotal Phase 3 studies of TRELEGY ELLIPTA in COPD, the IMPACTstudy and the FULFIL study. The IMPACT study, which enrolled 10,355 COPD patients, was initiated in July 2014. In September 2017, GSK andInnoviva disclosed positive headline results from the IMPACT study, in which data demonstrated statistically significantreductions in the annual rate of on-treatment moderate/severe exacerbations for TRELEGY ELLIPTA (100/62.5/25mcg) whencompared with two, once-daily dual COPD therapies RELVAR ELLIPTA/BREO ELLIPTA (FF/VI), an ICS/LABAcombination, and ANORO ELLIPTA (UMEC/VI), a LAMA/LABA combination. In addition, statistically significantimprovements were observed across all pre-specified key secondary endpoints and associated treatment comparisons. The FULFIL study, which enrolled 1,810 COPD patients, was initiated in February 2015. In June 2016, GSK andInnoviva disclosed positive top‑line results from the FULFIL study, in which data demonstrated superiority of TRELEGYELLIPTA as compared to twice‑daily SYMBICORT TURBOHALER (budesonide/formoterol) in improving lung functionand health‑related quality of life, as well as reducing exacerbations in COPD patients.In September 2017, GSK and Innoviva announced that the FDA approved TRELEGY ELLIPTA for the long-term,once-daily, maintenance treatment of appropriate patients with COPD. In April 2018, GSK and Innoviva announced the FDAapproved a supplemental new drug application (“sNDA”) containing data from the IMPACT study, resulting in an expandedindication for the product. The updated indication is for the long-term, once-daily, maintenance treatment of airflowobstruction in patients with COPD, including chronic bronchitis and/or emphysema. It is also indicated to reduceexacerbations of COPD in patients with a history of exacerbations. In addition, the FDA removed a boxed warning fromTRELEGY ELLIPTA prescribing information. In December 2017, GSK and Innoviva announced that the European Commission granted marketing authorization forTRELEGY ELLIPTA as a maintenance treatment for appropriate patients with COPD. In February 2018, GSK and Innoviva announced the submission of the IMPACT data to the EMA as part of a type IIvariation to support an expanded label for TRELEGY ELLIPTA in Europe for the maintenance treatment of moderate to severeCOPD, and in November 2018, GSK and Innoviva announced the European Commission authorized an expanded label foronce-daily TRELEGY ELLIPTA. The updated indication for TRELEGY ELLIPTA is as a maintenance treatment in adultpatients with moderate to severe COPD who are not adequately treated by a combination of an ICS and a LABA or acombination of a LABA and a LAMA. Additionally, in December 2016, GSK and Innoviva announced the initiation of the Phase 3 (CAPTAIN) study ofTRELEGY ELLIPTA in patients with asthma. GSK and Innoviva have indicated that the CAPTAIN study is expected to becompleted in the first half of 2019, and if positive, an expected sNDA submission in the second half of 2019. Inhaled Bifunctional Muscarinic Antagonist-Beta2 Agonist (MABA)GSK961081 (‘081), also known as batefenterol, is an investigational, single-molecule bifunctional bronchodilatorwith both muscarinic antagonist and beta2 receptor agonist activity that was discovered by us when we were part of Innoviva. If a single-agent MABA medicine containing ‘081 is successfully developed and commercialized, we are entitled toreceive an 85% economic interest in the royalties payable by GSK to TRC on worldwide net sales (net of TRC expenses paidand the amount of cash, if any, expected to be used by TRC pursuant to the TRC LLC Agreement over the next four fiscalquarters), which royalties range between 10% and 20% of annual global net sales up to $3.5 billion, and 7.5% for all annualglobal net sales above $3.5 billion. If a MABA medicine containing ‘081 is commercialized only as a combination product,such as ‘081/FF, the royalty rate is 70% of the rate applicable to sales of the single-agent MABA14 ®®®®®®®® Table of Contentsmedicine. If a MABA medicine containing ‘081 is successfully developed and commercialized in multiple regions of theworld, TRC is eligible to receive contingent milestone payments from GSK. The agreements allow for total milestones of up to$125.0 million for a single-agent medicine and an incremental $125.0 million for a combination medicine. Of these amounts,$112.0 million in potential milestones remain for a single-agent medicine, and $122.0 million remain for a combinationmedicine. In each case, we would be entitled to receive an 85% economic interest in any such payments (net of TRC expensespaid and the amount of cash, if any, expected to be used by TRC pursuant to the TRC LLC Agreement over the next four fiscalquarters). Theravance Respiratory Company, LLCOur equity interest in TRC is the mechanism by which we are entitled to the 85% economic interest in any futurepayments made by GSK under the strategic alliance agreement and under the portion of the collaboration agreement assignedto TRC by Innoviva (net of TRC expenses paid and the amount of cash, if any, expected to be used by TRC pursuant to theTRC LLC Agreement over the next four fiscal quarters). The royalty payments from GSK to TRC arising from the net sales ofTRELEGY ELLIPTA are presented on our consolidated statements of operations under “income from investment in TRC,LLC” and is classified as non-operating income. 75% of the “income from investment in TRC, LLC,” as evidenced by theIssuer Class C Units, is available only for payment of the 9.0% fixed-rate non-recourse term notes due 2033 (the “Non-Recourse 2033 Notes”) and is not available to pay our other obligations or the claims of our other creditors. The drugprograms assigned to TRC include all TRELEGY ELLIPTA products and the MABA program, as monotherapy and incombination with other therapeutically active components, such as an inhaled corticosteroid (“ICS”), as well as any otherproduct or combination of products that may be discovered and developed in the future under these GSK agreements. Our special purpose subsidiary Triple Royalty Sub LLC (the “Issuer”) issued the Non-Recourse 2033 Notes inNovember 2018, which are secured by all of the Issuer’s right, title and interest as a holder of certain membership interests (the“Issuer Class C Units”) in TRC. The Issuer Class C Units entitle the Issuer to receive 63.75% of the economic interest that TRCreceives in any future payments made by GSK under the agreements described above, or 75% of the income from ourownership interest in TRC. The primary source of funds to make payments on the Non-Recourse 2033 Notes will be 75% ofthe income from our ownership interest in TRC, as evidenced by the Issuer Class C Units. Since the principal and interestpayments on the Non-Recourse 2033 Notes are ultimately based on royalties from TRELEGY ELLIPTA product sales, whichwill vary from quarter to quarter, the Non-Recourse 2033 Notes may be repaid prior to the final maturity date in 2033. Our StrategyOur core purpose is to create transformational medicines to improve the lives of patients suffering from seriousillnesses. We strive to apply insight and innovation at each stage of our business, including research, development andcommercialization. Our principle strategic objective is to transform the treatment of serious diseases with novel, organ-selective medicines, designed to expand the therapeutic index compared to conventional systemic therapies, in order todeliver value to patients, as well as payers and healthcare providers. We follow these core guiding principles in our mission to drive value creation: •Focus on insight and innovation;•Outsource non‑core activities;•Create and foster an integrated environment; and•Aggressively manage uncertainty.We manage our pipeline with the goal of optimizing program value and allocation of resources. We employ multiplestrategies for commercialization of our products. Our approach may involve retaining product rights and marketing a productindependently in the US or we may partner a product to extend our commercial reach to expand our geographic reach, and/orto manage the financial risk associated with the program. Alternatively, we may monetize or15 Table of Contentsdivest an asset that we designate as outside our core business, where we believe the program is optimized by leveragingpartner capabilities and removing or limiting our research and development costs. ManufacturingWe rely primarily on a network of third‑party manufacturers, including contract manufacturing organizations, toproduce our active pharmaceutical ingredient (“API”) and our drug product. We believe that we have in‑house expertise tomanage this network of third‑party manufacturers, and we believe that we will be able to continue to negotiate third‑partymanufacturing arrangements on commercially reasonable terms and that it will not be necessary for us to obtain internalmanufacturing capacity in order to develop or, potentially, commercialize our products. However, if we are unable to obtaincontract manufacturing or obtain such manufacturing on commercially reasonable terms, or if manufacturing is interrupted atone of our suppliers, whether due to regulatory or other reasons, we may not be able to develop our products as planned. Any inability to acquire sufficient quantities of API or drug product in a timely manner from current or future sourcescould disrupt our research and development programs and the conduct of future clinical trials. For more information, see therisk factors under the heading “We rely on a single source of supply for a number of our product candidates, and our businesswill be harmed if any of these single-source manufacturers are not able to satisfy demand and alternative sources are notavailable” of this Annual Report on Form 10‑K. Government RegulationThe development and commercialization of pharmaceutical products and our product candidates by us, ourcollaboration partners and licensees and Cumberland, GSK and Innoviva and our ongoing research are subject to extensiveregulation by governmental authorities in the US and other countries. Before marketing in the US, any medicine must undergorigorous preclinical studies and clinical studies and an extensive regulatory approval process implemented by the FDA underthe Federal Food, Drug, and Cosmetic Act. Outside the US, the ability to market a product depends upon receiving a marketingauthorization from the appropriate regulatory authorities which are subject to equally rigorous regulatory obligations. Therequirements governing the conduct of clinical studies, marketing authorization, pricing and reimbursement vary widely fromcountry to country. In any country, however, the commercialization of pharmaceutical products is permitted only if theappropriate regulatory authority is satisfied that we have presented adequate evidence of the safety, quality and efficacy of theproduct. Before commencing clinical studies in humans in the US, we must submit to the FDA an investigational new drugapplication (“IND”) that includes, among other things, the general investigational plan and protocols for specific humanstudies, and the results of preclinical studies. An IND will go into effect 30 days following its receipt by the FDA unless theFDA issues a clinical hold. Once clinical studies have begun under the IND, they are usually conducted in three phases andunder FDA oversight. These phases generally include the following: Phase 1. The product candidate is introduced into patients or healthy human volunteers and is tested for safety, dosetolerance and pharmacokinetics. Phase 2. The product candidate is introduced into a limited patient population to assess the efficacy of the drug inspecific, targeted indications, assess dosage tolerance and optimal dosage, and identify possible adverse effects and safetyrisks. Phase 3. If a compound is found to be potentially effective and to have an acceptable safety profile in Phase 2evaluations, the clinical study will be expanded to further demonstrate clinical efficacy, optimal dosage and safety within anexpanded patient population. The results of product development, preclinical studies and clinical studies must be submitted to the FDA as part ofan NDA. The NDA also must contain extensive manufacturing information. The Prescription Drug User Fee Act (“PDUFA”)establishes timeframes for FDA review of NDAs, with a performance goal of reviewing and acting on 90 percent of priority newmolecular entity (“NME”) NDA submissions within 6 months of the 60‑day filing date, and to16 Table of Contentsreview and act on 90 percent of standard NME NDA submissions within 10 months of the 60‑day filing date. The 2007 Foodand Drug Administration Amendments Act gave the FDA authority to require implementation of a formal Risk Evaluation andManagement Strategy to ensure that the benefits of a product outweigh its risks. At the end of the review period, the FDAcommunicates either approval of the NDA or a complete response listing the application’s deficiencies. Once approved, the FDA may withdraw the product approval if compliance with post‑marketing regulatory standardsis not maintained or if safety or quality issues are identified after the product reaches the marketplace. In addition, the FDAmay require post‑marketing studies, sometimes referred to as Phase 4 studies, to monitor the safety and effectiveness ofapproved products, and may limit further marketing of the product based on the results of these post‑marketing studies. TheFDA has broad post‑market regulatory and enforcement powers, including the ability to suspend or delay issuance ofapprovals, seize products, withdraw approvals, enjoin violations, and initiate criminal prosecution. If regulatory approval for a medicine is obtained, the clearance to market the product will be limited to those diseasesand conditions approved by FDA and for which the medicine was shown to be effective, as demonstrated through clinicalstudies and specified in the medicine’s labeling. Even if this regulatory approval is obtained, a marketed medicine, itsmanufacturer and its manufacturing facilities are subject to continual review and periodic inspections by the FDA. The FDAensures the quality of approved medicines by carefully monitoring manufacturers’ compliance with its current GoodManufacturing Practice (“cGMP”) regulations. The cGMP regulations for drugs contain minimum requirements for themethods, facilities, and controls used in manufacturing, processing, and packaging of a medicine. The regulations are intendedto make sure that a medicine is safe for use, and that it has the ingredients and strength it claims to have. Discovery ofpreviously unknown problems with a medicine, manufacturer or facility may result in restrictions on the medicine ormanufacturer, including costly recalls or withdrawal of the medicine from the market. We, our collaboration partners and licensees are also subject to various laws and regulations regarding laboratorypractices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances inconnection with our research. In each of these areas, as above, the FDA and other regulatory authorities have broad regulatoryand enforcement powers, including the ability to suspend or delay issuance of approvals, seize products, withdraw approvals,enjoin violations, and initiate criminal prosecution, any one or more of which could have a material adverse effect upon ourbusiness, financial condition and results of operations. Outside the US our, our collaboration partners’, licensees’, GSK’s and Cumberland’s ability to market products willalso depend on receiving marketing authorizations from the appropriate regulatory authorities. Risks similar to thoseassociated with FDA approval described above exist with the regulatory approval processes in other countries. United States Healthcare ReformThe Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of2010 (together the “Healthcare Reform Act”), substantially changed the way healthcare is financed by both governmental andprivate insurers, and impacts pricing and reimbursement of YUPELRI and the marketed drugs with respect to which we areentitled to royalty or similar payments, and related commercial operations. Moreover, certain legislative changes to andregulatory changes under the Healthcare Reform Act have occurred in the 115th US Congress and under the TrumpAdministration and additional changes remain possible. We expect that the Healthcare Reform Act, as currently enacted or asit may be amended in the future, and other healthcare reform measures that may be adopted in the future, could have a materialadverse effect on our industry generally and on the ability of us, our collaboration partners, or those commercializing productswith respect to which we have an economic interest or right to receive royalties to maintain or increase sales of our existingproducts or to successfully commercialize our product candidates, if approved. For more information, see the risk factor underthe heading “Changes in healthcare law and implementing regulations, including government restrictions on pricing andreimbursement, as well as healthcare policy and other healthcare payor cost‑containment initiatives, may negatively impactus, our collaboration partners, or those commercializing products with respect to which we have an economic interest orright to receive royalties” of this Annual Report on Form 10‑K. 17 Table of ContentsPharmaceutical Pricing and ReimbursementWe participated in and had certain price reporting obligations under the Medicaid Drug Rebate program for VIBATIVfor which we remain responsible, as described in greater detail under the risk factor “If we fail to comply with our reportingand payment obligations under the Medicaid Drug Rebate program or other governmental pricing programs, we could besubject to additional reimbursement requirements, penalties, sanctions and fines, which could have a material adverse effecton our business, financial condition, results of operations and growth prospects” of this Annual Report on Form 10‑K. Our ability, and the ability of our collaboration partners, licensees, GSK and Cumberland to commercialize ourproducts successfully, and our ability to attract commercialization partners for our products, depends in significant part on theavailability of adequate financial coverage and reimbursement from third-party payors, including, in the US, governmentalpayors such as the Medicare and Medicaid programs, managed care organizations, and private health insurers. Thereimbursement environment is described in greater detail under the risk factor “Changes in healthcare law and implementingregulations, including government restrictions on pricing and reimbursement, as well as healthcare policy and otherhealthcare payor cost‑containment initiatives, may negatively impact us, our collaboration partners, or thosecommercializing products with respect to which we have an economic interest or right to receive royalties” of this AnnualReport on Form 10‑K. Fraud and Abuse LawsOur interactions and arrangements with customers and third‑party payors are subject to applicable US federal andstate fraud and abuse laws. These laws and the related risks are described in greater detail under the risk factor “Ourrelationships with customers and third‑party payors are subject to applicable anti‑kickback, fraud and abuse, transparencyand other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, exclusion,contractual damages, reputational harm and diminished profits and future earnings” of this Annual Report on Form 10‑K. Data Privacy and ProtectionWe are subject to laws and regulations that address privacy and data security. In the US, numerous federal and statelaws and regulations, including state data breach notification laws, state health information privacy laws, and federal and stateconsumer protection laws (e.g., Section 5 of the FTC Act), govern the collection, use, disclosure, and protection ofhealth‑related and other personal information. Similar obligations apply in foreign countries. For example, the General DataProtection Regulation (“GDPR”) which entered into force on May 25, 2018 amplified existing data protection obligations inthe EU. These laws and related risks are described in greater detail under the risk factor “If we fail to comply with dataprotection laws and regulations, we could be subject to government enforcement actions (which could include civil orcriminal penalties), private litigation and/or adverse publicity, which could negatively affect our operating results andbusiness” of this Annual Report on Form 10‑K. Patents and Proprietary RightsWe will be able to protect our technology from unauthorized use by third parties only to the extent that ourtechnology is covered by valid and enforceable patents or is effectively maintained as trade secrets. Our success in the futurewill depend in part on obtaining patent protection for our product candidates. Accordingly, patents and other proprietaryrights are essential elements of our business. Our policy is to seek in the US and selected foreign countries patent protectionfor novel technologies and compositions of matter that are commercially important to the development of our business. Forproprietary know‑how that is not patentable, processes for which patents are difficult to enforce and any other elements of ourdrug discovery process that involve proprietary know‑how and technology that is not covered by patent applications, we relyon trade secret protection and confidentiality agreements to protect our interests. We require all of our employees, consultantsand advisors to enter into confidentiality agreements. Where it is necessary to share our proprietary information or data withoutside parties, our policy is to make available only that information and data required to accomplish the desired purpose andonly pursuant to a duty of confidentiality on the part of those parties. 18 Table of ContentsAs of December 31, 2018, we owned 438 issued US patents and 1,672 granted foreign patents, as well as additionalpending US patent applications and foreign patent applications. The claims in these various patents and patent applicationsare typically directed to compositions of matter, including claims covering product candidates, crystalline forms, leadcompounds and key intermediates, pharmaceutical compositions, methods of use and/or processes for making our compounds.In particular, our wholly‑owned subsidiary Theravance Biopharma R&D IP, LLC owns the following US patents which arelisted in the FDA Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book) for YUPELRI(revefenacin) inhalation solution: US Patent No. 7,288,657, expiring on December 23, 2025; US Patent No. 7,491,736,expiring March 10, 2025; US Patent No. 7,521,041, expiring March 10, 2025; US Patent No. 7,550,595, expiring March 10,2025; US Patent No. 7,585,879, expiring March 10, 2025; US Patent No. 7,910,608, expiring March 10, 2025; US Patent No.8,034,946, expiring March 10, 2025; US Patent No. 8,053,448, expiring March 10, 2025; US Patent No. 8,273,894, expiringMarch 10, 2025; and US Patent No. 10,106,503, expiring March 10, 2025 (each of the aforementioned expiration dates notincluding any patent term extensions that may be available under the Drug Price Competition and Patent Term RestorationAct of 1984). Thus, the last to expire patent currently listed in the Orange Book for YUPELRI (revefenacin) inhalationsolution expires on December 23, 2025. On December 19, 2018, we filed patent term extension (“PTE”) applications in the USPatent and Trademark Office (“USPTO”) for US Patent Nos. 7,288,657 and 7,585,879. These PTE applications are currentlypending and if granted, we will be permitted to extend the term of one of these patents for the period determined by theUSPTO. US issued patents and foreign patents generally expire 20 years after filing with the USPTO. The patent rights relatingto YUPELRI (revefenacin) inhalation solution currently consist of US patents that expire in 2025, additional pending USpatent applications and counterpart patents and patent applications in a number of jurisdictions, including Europe.Additionally, our patent rights relating to velusetrag, ampreloxetine and TD-1473 currently include issued US composition ofmatter patents that expire in 2025, 2030 and 2036, respectively (not including any patent term extensions that may beavailable under the Drug Price Competition and Patent Term Restoration Act of 1984), as well as additional issued US patents,pending US patent applications and/or counterpart patents and patent applications in a number of jurisdictions. Nevertheless,issued patents can be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitorsfrom marketing similar products and threaten our ability to commercialize our product candidates. Our patent position, similarto other companies in our industry, is generally uncertain and involves complex legal and factual questions. To maintain ourproprietary position we will need to obtain effective claims and enforce these claims once granted. It is possible that, beforeany of our products can be commercialized, any related patent may expire or remain in force only for a short period followingcommercialization, thereby reducing any advantage of the patent. Also, we do not know whether any of our patentapplications will result in any issued patents or, if issued, whether the scope of the issued claims will be sufficient to protectour proprietary position. CompetitionThe marketed products to which we are entitled to profit share revenue, royalty or similar payments, and ourdevelopment programs target four therapeutic areas—infectious disease, respiratory, gastrointestinal, and neurological. Inresearch, we apply organ-selective expertise to biologically compelling targets to discover and develop medicines designed totreat underserved localized diseases and to limit systemic exposure, in order to maximize patient benefit and minimize risk.Our commercial infrastructure is focused primarily on the acute care setting. We expect that any medicines that wecommercialize with our collaborative partners or on our own will compete with existing and future market‑leading medicines. Many of our competitors have substantially greater financial, technical and personnel resources than we have. Inaddition, many of these competitors have significantly greater commercial infrastructures than we have. Our ability to competesuccessfully will depend largely on our ability to leverage our experience in drug discovery, development andcommercialization to: •discover and develop medicines that are superior to other products in the market;•attract and retain qualified scientific, clinical development and commercial personnel;•obtain patent and/or other proprietary protection for our medicines and technologies;19 Table of Contents•obtain required regulatory approvals;•commercialize approved products; and•successfully collaborate with pharmaceutical companies in the discovery, development and commercialization ofnew medicines.YUPELRI (revefenacin) inhalation solution, a long‑acting muscarinic antagonist (LAMA). YUPELRI competespredominantly with short‑acting nebulized bronchodilators used three to four times per day and the nebulized LAMALonhala Magnair (SUN-101/eFlow®) used two times per day. YUPELRI has the potential to be a primary maintenancetherapy or to be used with nebulized long‑acting beta agonist (LABA) products used two times per day. TRELEGY ELLIPTA or FF/UMEC/VI (fluticasone furoate/umeclidinium bromide/vilanterol). TRELEGY ELLIPTAcompetes in Europe with Trimbow (beclometasone dipropionate/formoterol fumarate/glycopyrronium bromide, dosed twiceper day) from Chiesi Farmaceutici and, in the future, may compete with other closed triple products that are currently underdevelopment. AstraZeneca and Novartis both have closed triple products dosed twice per day in late stage development forCOPD and/or asthma. VIBATIV (telavancin). VIBATIV competes with vancomycin, linezolid and daptomycin, generic drugs that aremanufactured by a variety of companies, as well as other drugs marketed to treat complicated skin and skin structure infectionsand hospital acquired and ventilator associated bacterial pneumonia caused by Gram‑positive bacteria. Currently marketedbranded competitive products include but are not limited to Sivextro (tedizolid) marketed by Merck & Co., Inc.; Teflaro(ceftaroline) and Dalvance™ (dalbavancin) marketed by Allergan; and Orbactiv™ (oritavancin) marketed by MelintaTherapeutics. EmployeesAs of December 31, 2018, we had 363 employees, of which 217 were engaged in research and development activities.Of our 363 employees, 345 were located in the US, and 18 were located in Ireland. We consider our employee relations to begood. In January 2019, we announced a reduction in workforce to align with our focus on continued execution of keystrategic programs, and advancement of selected late-stage research programs toward clinical development. Our overallheadcount was reduced by approximately 50 individuals with the affected employees primarily focused on early research orthe infrastructure in support of VIBATIV which we recently sold to Cumberland in November 2018. The workforce reductionis expected to be substantially completed in the first quarter of 2019. Financial Information About Geographic AreasInformation on our total revenues attributed to geographic areas and customers who represented at least 10% of ourtotal revenues is included in Note 4, “Segment Information,” to our consolidated financial statements in this Annual Report onForm 10‑K. Corporation InformationTheravance Biopharma was incorporated in the Cayman Islands in July 2013 under the name TheravanceBiopharma, Inc. Theravance Biopharma began operating as an independent, publicly‑traded company on June 2, 2014following a spin‑off from Innoviva, Inc. Our corporate address in the Cayman Islands and principal executive office isP.O. Box 309, Ugland House, Grand Cayman, KY1‑1104, Cayman Islands and the address of our wholly‑owned US operatingsubsidiary Theravance Biopharma US, Inc. is 901 Gateway Boulevard, South San Francisco, California 94080. WhileTheravance Biopharma is incorporated under Cayman Island law, the Company became an Irish tax resident effective July 1,2015. The address of our wholly‑owned Irish operating subsidiary, Theravance Biopharma Ireland Limited, is ConnaughtHouse, Burlington Road, Dublin 4, Ireland. 20 TMTM®® Table of ContentsAvailable InformationOur Internet address is www.theravance.com. Our investor relations website is located athttp://investor.theravance.com. We make available free of charge on our investor relations website under “SEC Filings” ourAnnual 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 suchmaterials to the US Securities and Exchange Commission (“SEC”). Our current Code of Business Conduct, CorporateGovernance Guidelines, Articles of Association, Board of Director Committee charters, and other materials, includingamendments thereto, may also be found on our investor relations website under “Corporate Governance.” The informationfound on our website is not part of this or any other report that we file with or furnish to the SEC. Theravance Biopharma andthe Theravance Biopharma logo are registered trademarks of the Theravance Biopharma group of companies. Trademarks,tradenames or service marks of other companies appearing in this report are the property of their respective owners. ITEM 1A. RISK FACTORSRISKS RELATING TO OUR COMPANYThe risks described below and elsewhere in this Annual Report on Form 10‑K and in our other public filings with theSEC are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that wecurrently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. We anticipate that we will incur losses for the foreseeable future. We may never achieve or sustain profitability.First as part of Innoviva, and since June 2, 2014 as Theravance Biopharma, we have been engaged indiscovery and development of compounds and product candidates since mid-1997. We may never generate sufficientrevenue from the sale of medicines, royalties on sales by our partners or from our interest in Theravance RespiratoryCompany, LLC (“TRC”) to achieve profitability. During the years ended December 31, 2018, 2017 and 2016, werecognized net losses of $215.5 million, $285.4 million and $190.7 million, respectively, which are reflected in theshareholders’ (deficit) equity on our consolidated balance sheets. We reflect cumulative net loss incurred after June 2,2014, the effective date of our spin-off from Innoviva, Inc. (the “Spin-Off”), as accumulated deficit on ourconsolidated balance sheets, which was $1.0 billion as of December 31, 2018. We expect to continue to incur netlosses at least over the next several years as we continue our drug discovery and development efforts and incursignificant preclinical and clinical development costs related to our current product candidates andcommercialization and development costs relating to YUPELRI. In particular, to the extent we continue to advanceour product candidates into and through additional clinical studies, we will incur substantial expenses. For example:in August 2018 we announced that we intend to progress ampreloxetine (TD-9855) into a Phase 3 registrationalprogram; in late 2018 we initiated a Phase 2 induction study of TD-1473 in Crohn’s disease; and we have initiatedsites in a Phase 2b/3 induction and maintenance study of TD-1473 in ulcerative colitis. The expenses associated withthese clinical studies are very significant. We will incur costs and expenses associated with our co-promotionagreement with Mylan for commercialization of YUPELRI in the US, including the maintenance of an independentsales and marketing organization with appropriate technical expertise, a medical affairs presence and consultantsupport, and post-marketing studies. We recently sold our VIBATIV product, and therefore will not recognize revenuefrom future product sales, other than through royalties from sales by Cumberland, the purchaser of the product. Ourcommitment of resources to the continued development of our existing product candidates, our discovery programs,and YUPELRI will require significant additional funding. Our operating expenses also will increase if, among otherthings: ·our earlier stage potential products move into later-stage clinical development, which is generally moreexpensive than early stage development;·additional preclinical product candidates are selected for clinical development;·we pursue clinical development of our potential or current products in new indications;21 Table of Contents·we increase the number of patents we are prosecuting or otherwise expend additional resources on patentprosecution or defense; or·we acquire or in-license additional technologies, product candidates, products or businesses.Other than (i) potential revenues from sales of YUPELRI, (ii) our economic interest in royalties from net sales ofTRELEGY ELLIPTA paid to TRC (63.75% of which amounts are used to make payments on the Non-Recourse 2033 Notes),(iii) potential payments under collaboration agreements, and (iv) minor royalties from the net sales of VIBATIV, we do notexpect to generate revenues in the immediate future. Since we or our collaborators or licensees may not successfully developadditional products, obtain required regulatory approvals, manufacture products at an acceptable cost or with appropriatequality, or successfully market and sell such products with desired margins, our expenses will continue to exceed any revenueswe may receive for the foreseeable future. In the absence of substantial licensing payments, contingent payments or other revenues from third-partycollaborators, royalties on sales of products licensed under our intellectual property rights, future revenues from those productcandidates in development that receive regulatory approval or other sources of revenues, we will continue to incur operatinglosses and will require additional capital to execute our business strategy. The likelihood of reaching, and the time required toreach, and then to sustain, profitability are highly uncertain. As a result, we expect to continue to incur substantial losses forthe foreseeable future. We are uncertain when or if we will ever be able to achieve or sustain profitability. Failure to becomeand remain profitable would adversely affect the price of our securities and our ability to raise capital and continue operations. Any delay in commencing or completing clinical studies for product candidates and any adverse results from clinical ornon-clinical studies or regulatory obstacles product candidates may face, would harm our business and the price of oursecurities could fall.Each of our product candidates must undergo extensive non-clinical and clinical studies as a condition to regulatoryapproval. Non-clinical and clinical studies are expensive, take many years to complete and study results may lead to delays infurther studies, new requirements for conducting future studies or decisions to terminate programs. The commencement andcompletion of clinical studies for our product candidates may be delayed and programs may be terminated due to manyfactors, 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 veryexpensive;·inability to enter into partnering arrangements relating to the development and commercialization of ourprograms and product candidates;·delays in patient enrollment and variability in the number and types of patients available for clinical studies;·the need to sequence clinical studies as opposed to conducting them concomitantly in order to conserveresources;·our inability or the inability of our collaborators or licensees to manufacture or obtain from third partiesmaterials sufficient for use in non-clinical and clinical studies;·governmental or regulatory delays or suspensions of the conduct of the clinical trials and changes in regulatoryrequirements, policy and guidelines;22 Table of Contents·failure of our partners to advance our product candidates through clinical development;·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 apandemic, terrorist activities or war, political unrest or a natural disaster.Any adverse developments or results or perceived adverse developments or results with respect to our clinicalprograms including, without limitation, any delays in development in our programs, any halting of development in ourprograms, any difficulties or delays encountered with regard to the FDA or other regulatory authorities with respect to ourprograms, or any indication from clinical or non-clinical studies that the compounds in our programs are not safe orefficacious, could have a material adverse effect on our business and cause the price of our securities to fall. If our product candidates are not approved by regulatory authorities, including the FDA, we will be unable tocommercialize them.The FDA must approve any new medicine before it can be marketed and sold in the US. We will not obtain thisapproval for a product candidate unless and until the FDA approves an NDA. We, or our collaborative partners, must providethe FDA and similar foreign regulatory authorities with data from preclinical and clinical studies that demonstrate that ourproduct candidates comply with the regulatory requirements for the quality of medicinal products and are safe and effectivefor a defined indication before they can be approved for commercial distribution. FDA or foreign regulatory authorities maydisagree with our trial design and our interpretation of data from preclinical studies and clinical trials. The processes by whichregulatory approvals are obtained from the FDA and foreign regulatory authorities to market and sell a new product arecomplex, require a number of years, depend upon the type, complexity and novelty of the product candidate and involve theexpenditure of substantial resources for research, development and testing. The FDA has substantial discretion in the drugapproval process and may require us to conduct additional nonclinical and clinical testing or to perform post-marketingstudies. Further, the implementation of new laws and regulations, and revisions to FDA clinical trial design guidance may leadto increased uncertainty regarding the approvability of new drugs. In addition, the FDA has additional standards for approvalof new drugs, including recommended advisory committee meetings for certain new molecular entities, and formal riskevaluation and mitigation requirements at the FDA’s discretion. Even if we receive regulatory approval of a product, theapproval may limit the indicated uses for which the drug may be marketed or impose significant restrictions or limitations onthe use and/or distribution of such product. In addition, in order to market our medicines in foreign jurisdictions, we or our collaborative partners must obtainseparate regulatory approvals in each country. The approval procedure varies among countries and can involve additionaltesting, and the time required to obtain approval may differ from that required to obtain FDA approval. Approval by the FDAdoes not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority doesnot ensure approval by regulatory authorities in other foreign countries or by the FDA. Conversely, failure to obtain approvalin one or more jurisdictions may make approval in other jurisdictions more difficult. These laws, regulations, additionalrequirements and changes in interpretation could cause non-approval or further delays in the FDA’s or other regulatoryauthorities’ review and approval of our and our collaborative partner’s product candidates, which would materially harm ourbusiness and financial condition and could cause the price of our securities to fall. If additional capital is not available, we may have to curtail or cease operations or we could be forced to share our rights tocommercialize our product candidates with third parties on terms that may not be favorable to us.Based on our current operating plans and financial forecasts, we believe that our cash, cash equivalents andmarketable securities will be sufficient to meet our anticipated operating needs for at least the next twelve months. However,our current operating plans or financial forecasts occasionally change. For example, in August 2017, we announced anincrease in our anticipated operating loss for 2017, primarily driven by our decision to accelerate funding associated with thenext phase of development of our JAK inhibitor program. If our current operating plans or financial23 Table of Contentsforecasts change, we may require or seek additional funding sooner in the form of public or private equity or equity-linkedofferings, debt financings or additional collaborations and licensing arrangements. We may need to raise additional capital in the future to, among other things:·fund our discovery efforts and research and development programs;·fund our commercialization strategies for any approved products and to prepare for potential product approvals;·support our independent sales and marketing organization and medical affairs team;·support our additional investments in YUPELRI, including potential post-marketing clinical studies;·progress any additional product candidates into later-stage development without funding from a collaborationpartner;·progress mid-to-late stage product candidates into later-stage development, if warranted;·respond to competitive pressures; and·acquire complementary businesses or technologies.Our future capital needs depend on many factors, including:·the scope, duration and expenditures associated with our discovery efforts and research and developmentprograms;·continued scientific progress in these programs;·the extent to which we encounter technical obstacles in our research and development programs;·the outcome of potential licensing or partnering transactions, if any;·competing technological developments;·the extent of our proprietary patent position in any approved products and our product candidates;·our facilities expenses, which will vary depending on the time and terms of any facility lease or sublease we mayenter into, and other operating expenses;·the scope and extent of the expansion of our sales and marketing efforts;·potential litigation and other contingencies; and·the regulatory approval process for our product candidates.We may seek to raise additional capital or obtain future funding through public or private equity offerings, debtfinancings or additional collaborations and licensing arrangements. We may not be able to obtain additional financing onterms favorable to us, if at all. General market conditions may make it difficult for us to seek financing from the capitalmarkets. We may be required to relinquish rights to our technologies, product candidates or territories, or grant licenses onterms that are not favorable to us, in order to raise additional funds through collaborations or licensing arrangements.24 Table of ContentsWe may sequence preclinical and clinical studies as opposed to conducting them concomitantly in order to conserveresources, or delay, reduce or eliminate one or more of our research or development programs and reduce overall overheadexpenses. If we are unable to raise additional capital or obtain future funding in sufficient amounts or on terms acceptable tous, we may have to make reductions in our workforce and may be prevented from continuing our discovery, development andcommercialization efforts and exploiting other corporate opportunities. This would likely harm our business, prospects andfinancial condition and cause the price of our securities to fall. We may seek to obtain future financing through the issuance of debt or equity, which may have an adverse effect on ourshareholders or may otherwise adversely affect our business. If we raise funds through the issuance of additional debt, including convertible debt or debt secured by some or all ofour assets, or equity, any debt securities or preferred shares issued will have rights, preferences and privileges senior to those ofholders of our ordinary shares in the event of liquidation. Neither the terms of our $230.0 million of 3.25% convertible seniornotes, due 2023 (the "Convertible Senior 2023 Notes") nor the terms of the Issuer’s Non-Recourse 2033 Notes restrict ourability to issue additional debt. If additional debt is issued, there is a possibility that once all senior claims are settled, theremay be no assets remaining to pay out to the holders of ordinary shares. Moreover, 75% of the income from our investment inTRC, as evidenced by the Issuer Class C Units, is available only for payment of the Non-Recourse 2033 Notes and is notavailable to pay our other obligations or the claims of our other creditors. In addition, if we raise funds through the issuance ofadditional equity, whether through private placements or public offerings, such an issuance would dilute ownership of ourcurrent shareholders that do not participate in the issuance. Since our Spin-Off in June 2014, we have raised an aggregate of$583.9 million in a combination of (i) the sale of approximately 17.5 million ordinary shares, and (ii) $480.0 millionaggregate principal amount of notes. If we are unable to obtain any needed additional funding, we may be required to reducethe scope of, delay, or eliminate some or all of, our planned research, development and commercialization activities or tolicense to third parties the rights to develop and/or commercialize products or technologies that we would otherwise seek todevelop and/or commercialize ourselves or on terms that are less attractive than they might otherwise be, any of which couldmaterially harm our business. Furthermore, the terms of any additional debt securities we may issue in the future may impose restrictions on ouroperations, which may include limiting our ability to incur additional indebtedness, pay dividends on or repurchase our sharecapital, or make certain acquisitions or investments. In addition, we may be subject to covenants requiring us to satisfy certainfinancial tests and ratios, and our ability to satisfy such covenants may be affected by events outside of our control. If our partners do not satisfy their obligations under our agreements with them, or if they terminate our partnerships withthem, we may not be able to develop or commercialize our partnered product candidates as planned.We have an exclusive development and commercialization agreement with Alfasigma for velusetrag, our internallydiscovered 5-HT4 agonist for the treatment of gastromotility disorders, under which we are transferring to Alfasigma globalrights for velusetrag. In January 2015, we entered into a collaboration agreement with Mylan for the development andcommercialization of a nebulized formulation of our LAMA revefenacin, including YUPELRI. Under the terms of theagreement, we and Mylan will co-develop nebulized revefenacin, including YUPELRI, for COPD and other respiratorydiseases. In June 2016, we entered into a License and Collaboration Agreement with Millennium Pharmaceuticals, Inc., anindirect wholly-owned subsidiary of Takeda Pharmaceutical Company Limited (collectively with Millennium, “Takeda”) inorder to establish a collaboration for the development and commercialization of TD-8954, a selective 5-HT4 receptor agonist.Under the terms of the agreement, Takeda is responsible for worldwide development and commercialization of TD-8954. InFebruary 2018, we announced a global co-development and commercialization agreement with Janssen for TD-1473 andrelated back-up compounds for inflammatory intestinal diseases, including ulcerative colitis and Crohn's disease. Inconnection with these agreements, these parties have certain rights regarding the use of patents and technology with respect tothe compounds in our development programs, including development and marketing rights. Our partners have in the past and may in the future not fulfill all of their obligations under these agreements, and, incertain circumstances, they or we may terminate our partnership with them as Astellas did in January 2012 with its VIBATIVagreement and as we and Clinigen did in August 2016 with the commercialization agreement for VIBATIV in the EU andcertain other European countries. In either event, we may be unable to assume the development and25 Table of Contentscommercialization responsibilities covered by the agreements or enter into alternative arrangements with a third-party todevelop and commercialize such product candidates. If a partner elected to promote alternative products and productcandidates such as its own products and product candidates in preference to those licensed from us, does not devote anadequate amount of time and resources to our product candidates or is otherwise unsuccessful in its efforts with respect to ourproducts or product candidates, the development and commercialization of product candidates covered by the agreementscould be delayed or terminated, and future payments to us could be delayed, reduced or eliminated and our business andfinancial condition could be materially and adversely affected. Accordingly, our ability to receive any revenue from theproduct candidates covered by these agreements is dependent on the efforts of our partners. If a partner terminates or breachesits agreements with us, otherwise fails to complete its obligations in a timely manner or alleges that we have breached ourcontractual obligations under these agreements, the chances of successfully developing or commercializing productcandidates under the collaboration could be materially and adversely affected. In addition, effective collaboration with apartner requires coordination to achieve complex and detail-intensive goals between entities that potentially have differentpriorities, capabilities and processes and successful navigation of the challenges such coordination entails. We could alsobecome involved in disputes with a partner, which could lead to delays in or termination of our development andcommercialization programs and time-consuming and expensive litigation or arbitration. Furthermore, termination of anagreement by a partner could have an adverse effect on the price of our ordinary shares or other securities even if not materialto our business. We do not control TRC and, in particular, have no control over the GSK-Partnered Respiratory Programs or access to non-public information regarding the development of the GSK-Partnered Respiratory Programs.Innoviva has assigned to TRC its strategic alliance agreement with GSK and all of its rights and obligations under itsLABA collaboration agreement other than with respect to RELVAR ELLIPTA/BREO ELLIPTA, ANORO ELLIPTA andvilanterol monotherapy. Our equity interest in TRC entitles us to an 85% economic interest in any future payments made byGSK under the strategic alliance agreement and under the portion of the collaboration agreement assigned to TRC (the “GSKAgreements”) (net of TRC expenses paid and the amount of cash, if any, expected to be used by TRC pursuant to the TRCLLC Agreement over the next four fiscal quarters), which agreements govern Innoviva’s and GSK’s respective interests in theGSK-Partnered Respiratory Programs. Our equity interest covers various drug programs including all TRELEGY ELLIPTA (thecombination of fluticasone furoate, umeclidinium, and vilanterol in a single ELLIPTA inhaler, previously referred to as theClosed Triple) products and the MABA program, as monotherapy and in combination with other therapeutically activecomponents, such as an inhaled corticosteroid (“ICS”), and any other product or combination of products that may bediscovered and developed in the future under the GSK Agreements. Our economic interest does not include any payments byGSK associated with RELVAR ELLIPTA/BREO ELLIPTA, ANORO ELLIPTA or vilanterol monotherapy. Innovivacontrols TRC and, except for certain limited consent rights, we have no right to participate in the business and affairs of TRC.Innoviva has the exclusive right to appoint TRC’s manager who, among other things, is responsible for the day-to-daymanagement of the GSK-Partnered Respiratory Programs and exercises the rights relating to the GSK-Partnered RespiratoryPrograms. As a result, we have no rights to participate in, or access to non-public information about, the development andcommercialization work GSK and Innoviva are undertaking with respect to the GSK-Partnered Respiratory Programs and noright to enforce rights under the GSK Agreements assigned to TRC. Moreover, we have many of the same risks with respect toour and TRC’s dependence on GSK as we have with respect to our dependence on our own partners. If there are any adverse developments or perceived adverse developments with respect to the GSK-Partnered RespiratoryPrograms in which we have a substantial economic interest, including TRELEGY ELLIPTA and the MABA program, ourbusiness will be harmed, and the price of our securities could fall.We have no access to confidential information regarding the development progress of, or plans for, the GSK-PartneredRespiratory Programs, including TRELEGY ELLIPTA and the MABA program, and we have little, if any, ability to influencethe progress of those programs because our interest in these programs is only through our ownership interest in TRC, which iscontrolled by Innoviva. However, if any of the GSK-Partnered Respiratory Programs in which we have a substantial economicinterest encounter delays, do not demonstrate required quality, safety and efficacy, are terminated, or if there are any adversedevelopments or perceived adverse developments with respect to such programs,26 ®®®®®®®®®®®®® Table of Contentsour business will be harmed, and the price of our securities could fall. Examples of such adverse developments include, but arenot limited to: ·disappointing or lower than expected sales of TRELEGY ELLIPTA;·disappointing results from GSK’s Phase 3 clinical study of TRELEGY ELLIPTA in asthma patients, which isscheduled to be completed in 2019;·the emergence of new closed triple or other alternative therapies or any developments regarding these potentiallycompetitive therapies, comparative price or efficacy of such potentially competitive therapies; ·GSK deciding to delay or halt any of the GSK-Partnered Respiratory Programs in which we have a substantialeconomic interest;·the FDA and/or other national or foreign regulatory authorities determining that any of the studies under theseprograms do not demonstrate the required quality, safety or efficacy, or that additional non-clinical or clinicalstudies are required with respect to such programs;·any safety, efficacy or other concerns regarding any of the GSK-Partnered Respiratory Programs in which wehave a substantial economic interest;·any particular FDA requirements or changes in FDA policy or guidance regarding these programs or anyparticular regulatory requirements in other jurisdictions or changes in the policies or guidance adopted byforeign regulatory authorities; or·disputes between GSK and Innoviva or between us and Innoviva.Because GSK is a strategic partner of Innoviva, a strategic partner of TRC and a significant shareholder of us, it may takeactions that in certain cases are materially harmful to our business and to our other shareholders.Based on our review of publicly available filings, as of December 31, 2018 GSK beneficially owned approximately17.3% of our outstanding ordinary shares. GSK is also a strategic partner to Innoviva with rights and obligations under theGSK Agreements, which include the strategic alliance agreement and the collaboration agreement assigned to TRC, that maycause GSK’s interests to differ from our interests and those of our other shareholders. For example, GSK’s commercializationefforts are guided by a portfolio approach across products in which we have an indirect interest through TRC and products inwhich we have no interest. Accordingly, GSK’s commercialization efforts may have the effect of reducing the value of ourinterest in TRC. Furthermore, GSK has a substantial respiratory product portfolio in addition to the products covered by theGSK Agreements. GSK may make respiratory product portfolio decisions or statements about its portfolio which may be, ormay be perceived to be, harmful to the respiratory products partnered with Innoviva and TRC. For example, GSK couldpromote its own respiratory products and/or delay or terminate the development or commercialization of the respiratoryprograms covered by the GSK Agreements. Also, given the potential future royalty payments GSK may be obligated to payunder the GSK Agreements, GSK may seek to acquire us or acquire our interests in TRC in order to effectively reduce thosepayment obligations and the price at which GSK might seek to acquire us may not reflect our true value. Before 2018, theactions GSK could have taken to acquire us were limited under our governance agreement with GSK (the “GovernanceAgreement”), but this agreement expired on December 31, 2017. In May 2018, our shareholders approved a resolutionauthorizing our board of directors to adopt a shareholder rights plan in the future which may deter GSK from acquiring morethan 19.9% of our outstanding ordinary shares. However, our board of directors might not adopt such shareholder rights plan,and we otherwise might not be able to respond successfully to a takeover attempt. The timing of when GSK may seek toacquire us could potentially be when it possesses information regarding the status of drug programs covered by the GSKAgreements that has not been publicly disclosed and is not otherwise known to us. As a result of these differing interests, GSKmay take actions that it believes are in its best interest but which might not be in the best interests of either us or our othershareholders. In addition, GSK could also seek to challenge our or Innoviva’s post-Spin-Off operations as violating orallowing it to terminate the GSK Agreements, including by violating the confidentiality provisions of those agreements or themaster agreement between27 Table of ContentsGSK, Innoviva and us entered into in connection with the Spin-Off (the “Master Agreement”), or otherwise violating its legalrights. While we believe our operations fully comply with the GSK Agreements, the Master Agreement and applicable law,there can be no assurance that we or Innoviva will prevail against any such claims by GSK. Moreover, regardless of the meritof any claims by GSK, we may incur significant cost and diversion of resources in defending them. In addition, any otheraction or inaction by either GSK or Innoviva that results in a material dispute, allegation of breach, litigation, arbitration, orsignificant disagreement between those parties or between us and either of those parties may be interpreted negatively by themarket or by our investors, could harm our business and cause the price of our securities to fall. Examples of these kinds ofissues include but are not limited to non-performance of contractual obligations and allegations of non-performance,disagreements over the relative marketing and sales efforts for Innoviva’s partnered products and other GSK respiratoryproducts, disputes over public statements, and similar matters. In general, any uncertainty about the respiratory programspartnered with GSK, the enforceability of the GSK Agreements or the relationship/partnership between Innoviva and GSKcould result in significant reduction in the market price of our securities and other material harm to our business. We do not control the commercialization of TRELEGY ELLIPTA and the amount of royalties we receive will depend onGSK’s ability to further commercialize TRELEGY ELLIPTA, among other factors. We only receive revenues from TRELEGY ELLIPTA based on the amount of sales of this product by GSK in the formof our economic interest in the royalties paid by GSK to TRC, which is managed by Innoviva. There are no required minimumfuture payments associated with the product and any royalties we receive will depend on GSK’s ability to commercialize theproduct. This involves a number of risks and uncertainties, including: ·GSK’s ability to have an adequate supply of their respective product;·Ongoing compliance by GSK or its suppliers with the FDA’s current Good Manufacturing Practice;·Compliance with other applicable FDA and other regulatory requirements in the US or other foreign jurisdictions,including those described elsewhere in this report;·Competition, whether from current competitors or new products developed by others in the future;·Claims relating to intellectual property;·Any future disruptions in GSK’s business which would affect its ability to commercialize the product;·The ability of TRELEGY ELLIPTA to achieve wider acceptance among physicians, patients, third-party payors, orthe medical community in general;·Global economic conditions; and·Any of the other risks relating to commercialization of products described elsewhere in this section.If GSK is unable to address these risks and uncertainties, the amount of future royalties or other revenues we mayreceive from sales of TRELEGY ELLIPTA could be materially affected, which could have a material adverse effect on ourfuture revenues, other financial results and our financial position. Our ongoing drug discovery and development efforts might not generate additional successful product candidates orapprovable drugs.Our compounds in clinical trials and our future leads for potential drug compounds are subject to the risks andfailures inherent in the development of pharmaceutical products. These risks include, but are not limited to, the inherentdifficulty in selecting the right drug and drug target and avoiding unwanted side effects, as well as unanticipated problemsrelating to product development, testing, enrollment, obtaining regulatory approvals, maintaining regulatory compliance,manufacturing, competition and costs and expenses that may exceed current estimates.28 Table of Contents Clinical studies involving our product candidates may reveal that those candidates are ineffective, inferior to existingapproved medicines, unacceptably toxic, or that they have other unacceptable side effects. In addition, the results ofpreclinical studies do not necessarily predict clinical success, and larger and later-stage clinical studies may not produce thesame results as earlier-stage clinical studies. Frequently, product candidates that have shown promising results in early preclinical or clinical studies havesubsequently suffered significant setbacks or failed in later non-clinical or clinical studies. In some instances, there can besignificant variability in safety and/or efficacy results between different trials of the same product candidate due to numerousfactors, including changes in trial protocols, differences in size and type of the patient populations, varying levels ofadherence to the dosing regimen and other trial protocols and the rate of dropout among clinical trial participants. Clinicaland non-clinical studies of product candidates often reveal that it is not possible or practical to continue development effortsfor these product candidates. In addition, the design of a clinical trial can determine whether its results will support regulatoryapproval and flaws in the design of a clinical trial may not become apparent until the clinical trial is well underway orcompleted. If our clinical studies for our current product candidates, such as the clinical studies for our JAK inhibitor programor ampreloxetine in patients with nOH, are substantially delayed or suggest that any of our product candidates may not beefficacious or well tolerated, we could choose to cease development of these product candidates. In addition, our productcandidates may have undesirable side effects or other unexpected characteristics that could cause us or regulatory authoritiesto interrupt, delay or halt clinical trials and could result in a more restricted label or the delay or denial of regulatory approvalby regulatory authorities. We face substantial competition from companies with more resources and experience than we have, which may result inothers 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 withrespect to our approach to the discovery, development and commercialization of medicines. Our objective is to discover,develop and commercialize new small molecule medicines with superior efficacy, convenience, tolerability and/or safetyusing our proprietary insight in chemistry, biology and multivalency, where applicable. We expect that any medicines that wecommercialize with or without our collaborative partners will compete with existing or future market-leading medicines. Many of our current and potential competitors have substantially greater financial, technical and personnel resourcesthan we have. In addition, many of these competitors have significantly greater commercial infrastructures than we have. Ourability to compete successfully will depend largely on our ability to leverage our experience in drug discovery anddevelopment, and, more recently, commercialization, to: ·discover and develop medicines that are superior to other products in the market;·attract and retain qualified personnel;·obtain and enforce patent and/or other proprietary protection for our medicines and technologies;·conduct effective clinical trials and obtain required regulatory approvals;·develop and effectively implement commercialization strategies, with or without collaborative partners; and·successfully collaborate with pharmaceutical companies in the discovery, development and commercializationof new medicines.Pharmaceutical companies, including companies with which we collaborate, may invest heavily to quickly discoverand develop or in-license novel compounds that could make our product candidates obsolete. Accordingly, our competitorsmay succeed in obtaining patent protection, receiving FDA or equivalent regulatory approval outside the US29 Table of Contentsor discovering, developing and commercializing medicines before we do. Other companies are engaged in the discovery ofmedicines 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 compellingadvantages in efficacy, convenience, tolerability and/or safety in order to overcome severe price competition and becommercially successful. For example, YUPELRI competes predominantly with short‑acting nebulized bronchodilators usedthree to four times per day and the nebulized LAMA Lonhala Magnair (SUN-101/eFlow®) used twice per day. If we are notable to compete effectively against our current and future competitors, our business will not grow, our financial condition andoperations will suffer and the price of our securities could fall. If we are unable to enter into future collaboration arrangements or if any such collaborations with third parties areunsuccessful, we will be unable to fully develop and commercialize all of our product candidates and our business will beadversely affected.We have collaborations with a number of third parties including Janssen for TD-1473 and related back-upcompounds for inflammatory intestinal diseases, including ulcerative colitis and Crohn's disease and Mylan for thedevelopment and commercialization of a nebulized formulation of revefenacin, our LAMA compound (including YUPELRI).Also, through our interest in TRC we may participate economically in Innoviva’s collaborations with GSK with respect to theGSK-Partnered Respiratory Programs. Additional collaborations will likely be needed to fund later-stage development ofcertain programs that have not been licensed to a collaborator, such as our NEP inhibitor program, and to commercialize theproduct candidates in our programs if approved by the necessary regulatory authorities. We evaluate commercial strategy on aproduct by product basis either to engage pharmaceutical or other healthcare companies with an existing sales and marketingorganization and distribution system to market, sell and distribute our products or to commercialize a product ourselves.However, we may not be able to establish these sales and distribution relationships on acceptable terms, or at all, or mayencounter difficulties in commercializing a product ourselves. For any of our product candidates that receive regulatoryapproval in the future and are not covered by our current collaboration agreements, we will need a partner in order tocommercialize such products unless we establish independent sales, marketing and distribution capabilities with appropriatetechnical expertise and supporting infrastructure. Collaborations with third parties regarding our programs may require us to relinquish material rights, includingrevenue from commercialization of our medicines, or to assume material ongoing development obligations that we wouldhave to fund. These collaboration arrangements are complex and time-consuming to negotiate, and if we are unable to reachagreements with third-party collaborators, we may fail to meet our business objectives and our financial condition may beadversely affected. We face significant competition in seeking third-party collaborators. We may be unable to find thirdparties to pursue product collaborations on a timely basis or on acceptable terms. Furthermore, for any collaboration, we maynot be able to control the amount of time and resources that our partners devote to our product candidates and our partnersmay choose to prioritize alternative programs or otherwise be unsuccessful in their efforts with respect to our products orproduct candidates. In addition, effective collaboration with a partner requires coordination to achieve complex and detail-intensive goals between entities that potentially have different priorities, capabilities and processes and successful navigationof the challenges such coordination entails. For example, Mylan has a substantial existing product portfolio and otherconsiderations that influence its resource allocation, and other priorities and internal organizational processes that differ fromour own. As a result of these differing interests and processes, Mylan may take actions that it believes are in its best interest butwhich might not be in the best interests of either us or our other shareholders. Our inability to successfully collaborate withthird parties would increase our development costs and may cause us to choose not to continue development of certainproduct candidates, would limit the likelihood of successful commercialization of some of our product candidates, may causeus not to continue commercialization of our authorized products and could cause the price of our securities to fall. We depend on third parties in the conduct of our clinical studies for our product candidates.We depend on independent clinical investigators, contract research and manufacturing organizations and other third-party service providers in the conduct of our non-clinical and clinical studies for our product candidates. We rely heavily onthese 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,laboratory and manufacturing practices (“GXPs”) and other regulations as required by the FDA and foreign30 TMTM Table of Contentsregulatory authorities, and the applicable protocol. Failure by these parties to comply with applicable regulations andpractices in conducting studies of our product candidates can result in a delay in our development programs or non-approvalof our product candidates by regulatory authorities. The FDA, and equivalent authorities in other countries, enforces GXPs and other regulations through periodicinspections of trial sponsors, clinical research organizations (“CROs”), principal investigators and trial sites. If we or any of thethird parties on which we have relied to conduct our clinical studies are determined to have failed to comply with GXPs (orother equivalent regulations outside the US), the study protocol or applicable regulations, the clinical data generated in ourstudies may be deemed unreliable. This could result in non-approval of our product candidates by the FDA, or equivalentauthorities in other countries, or we, the FDA, or equivalent authorities in other countries may decide to conduct additionalaudits or require additional clinical studies, which would delay our development programs, could result in significantadditional costs and cause the price of our securities to fall. We rely on a single source of supply for a number of our product candidates, and our business will be harmed if any of thesesingle-source manufacturers are not able to satisfy demand and alternative sources are not available.We have limited in-house production capabilities for preclinical and clinical study purposes, and depend primarilyon a number of third-party Active Pharmaceutical Ingredient (“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 anytime. If, for any reason, these third parties are unable or unwilling to perform, or if their performance does not meet regulatoryrequirements, we may not be able to locate alternative manufacturers or enter into acceptable agreements with them. Anyinability to acquire sufficient quantities of API and drug product in a timely manner from these third parties could delaypreclinical and clinical studies and prevent us from developing our product candidates in a cost-effective manner or on atimely basis. In addition, manufacturers of our API and drug product are subject to the FDA’s current Good ManufacturingPractice (“cGMP”) regulations and similar foreign standards and we do not have control over compliance with theseregulations by our manufacturers. Our manufacturing strategy presents the following additional risks:·because of the complex nature of many of our compounds, our manufacturers may not be able to successfullymanufacture our APIs and/or drug products in a cost-effective and/or timely manner and changing manufacturersfor our APIs or drug products could involve lengthy technology transfer, validation and regulatory qualificationactivities for the new manufacturer;·the processes required to manufacture certain of our APIs and drug products are specialized and available onlyfrom a limited number of third-party manufacturers;·some of the manufacturing processes for our APIs and drug products have not been scaled to quantities neededfor continued clinical studies or commercial sales, and delays in scale-up to higher quantities could delayclinical studies, regulatory submissions and commercialization of our product candidates; and·because some of the third-party manufacturers are located outside of the US, there may be difficulties inimporting our APIs and drug products or their components into the US as a result of, among other things, FDAimport inspections, incomplete or inaccurate import documentation or defective packaging.We have a significant amount of debt, including our Non-Recourse 2033 Notes and Convertible Senior 2023 Notes, that aresenior in capital structure and cash flow, respectively, to holders of our ordinary shares. Satisfying the obligations relatingto our debt could adversely affect the amount or timing of distributions to our shareholders. As of December 31, 2018, we had approximately $513.3 million in total long-term liabilities outstanding, comprisedprimarily of $237.5 million in net principal that remains outstanding under the Issuer’s Non-Recourse 2033 Notes and $230.0million in principal that remains outstanding under our Convertible Senior 2023 Notes (together with the Non-Recourse 2033Notes, the “Notes”). 31 Table of ContentsThe Convertible Senior 2023 Notes are unsecured debt and are not redeemable by us prior to the maturity date exceptfor certain changes in tax law. Holders of the Convertible Senior 2023 Notes may require us to purchase all or any portion oftheir notes at 100% of their principal amount, plus any unpaid interest, upon a fundamental change such as a change ofcontrol of us or the termination of trading of our ordinary shares in accordance with the indenture governing the ConvertibleSenior 2023 Notes. Until the Non-Recourse 2033 Notes are paid in full, holders of the Non-Recourse 2033 Notes have a perfectedsecurity interest in the Issuer Class C Units that represent a 63.75% economic interest in any future payments that may bemade by GSK to TRC under the strategic alliance agreement and under the portion of the collaboration agreement assigned toTRC by Innoviva (net of TRC expenses paid and the amount of cash, if any, expected to be used by TRC pursuant to the TRCLLC Agreement over the next four fiscal quarters) relating to the GSK-Partnered Respiratory Programs, including theTRELEGY ELLIPTA program. Satisfying the obligations of these Notes could adversely affect the amount or timing of any distributions to ourshareholders. We may choose to satisfy, repurchase, or refinance these Notes through public or private equity or debtfinancings if we deem such financings are available on favorable terms. If any or all of the Convertible Senior 2023 Notes arenot converted into our ordinary shares before the maturity date, we will have to pay the holders the full aggregate principalamount of the Convertible Senior 2023 Notes then outstanding. If the Non-Recourse 2033 Notes are not refinanced or paid infull, the holders of the Non-Recourse 2033 Notes will have the right to foreclose on the Issuer Class C Units that represent a63.75% economic interest in future royalties due on net sales of TRELEGY ELLIPTA and related assets. If the Issuer Class CUnits are foreclosed upon, we will lose any right to receive 75% of the future royalty payments made by GSK in connectionwith the net sales of TRELEGY ELLIPTA and related assets. Any of the above payments could have a material adverse effecton our cash position. Our failure to satisfy these obligations may result in a default under the applicable indenture governingthese Notes, which could result in a default under certain of our other debt instruments, if any. Any such default would harmour business and the price of our securities could fall. Servicing our Convertible Senior 2023 Notes requires a significant amount of cash, and we may not have sufficient cash flowfrom our business to pay our debt. Additionally, holders may require us to repurchase our Convertible Senior 2023 Notesunder certain circumstances, and we may not have sufficient cash to do so.Our ability to make interest or principal payments when due or to refinance the Convertible Senior 2023 Notesdepends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control.Our business may not generate cash flow from operations sufficient to satisfy our obligations under the Convertible Senior2023 Notes and any future indebtedness we may incur and to make necessary capital expenditures. In addition, the issuance ofthe Non-Recourse 2033 Notes reduced the cash available for us to make interest or principal payments on, or to refinance, theConvertible Senior 2023 Notes. We may be required to adopt one or more alternatives, such as reducing or delayinginvestments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that may beonerous or highly dilutive. Our ability to refinance the Convertible Senior 2023 Notes or future indebtedness will depend onthe capital markets and our financial condition at such time. We may not be able to engage in any of these activities ondesirable terms or at all, which could result in a default on the Convertible Senior 2023 Notes or future indebtedness. The holders of the Convertible Senior 2023 Notes may have the right to require us to repurchase the ConvertibleSenior 2023 Notes upon the occurrence of a “fundamental change” such as a change of control of our Company or thetermination of trading of our ordinary shares, as defined in the indenture governing the Convertible Senior 2023 Notes. Wemay not have sufficient funds to repurchase the Convertible Senior 2023 Notes in cash or have the ability to arrange necessaryfinancing on acceptable terms. Our failure to repurchase the Convertible Senior 2023 Notes when required would result in anevent of default with respect to the Convertible Senior 2023 Notes. In addition, any acceleration of the repayment of theConvertible Senior 2023 Notes or future indebtedness after any applicable notice or grace periods could have a materialadverse effect on our business, results of operations and financial condition. 32 Table of ContentsOur business and operations would suffer in the event of significant disruptions of information technology systems orsecurity breaches.We rely extensively on computer systems to maintain information and manage our finances and business. In theordinary course of business, we collect, store and transmit large amounts of confidential information (including but not limitedto trade secrets or other intellectual property, proprietary business information and personal information) and it is critical thatwe maintain the confidentiality and integrity of such confidential information. Although we have security measures in place,our internal information technology systems and those of our CROs and other service providers, including cloud-based andhosted applications, data and services, are vulnerable to service interruptions and security breaches from inadvertent orintentional actions by our employees, service providers and/or business partners, from cyber-attacks by malicious third parties,and/or from, natural disasters, terrorism, war and telecommunication and electrical failures. Cyber-attacks are increasing intheir frequency, sophistication, and intensity, and have become increasingly difficult to detect. Significant disruptions ofinformation technology systems or security breaches could adversely affect our business operations and result in financial,legal, business and reputational harm to us, including significant liability and/or significant disruption to our business. If adisruption of information technology systems or security breach results in a loss of or damage to our data or regulatoryapplications, unauthorized access, use, or disclosure of, or the prevention of access to, confidential information, or other harmto our business, we could incur liability and reputational harm, we could be required to comply with federal and/or statebreach notification laws and foreign law equivalents, we may incur legal expenses to protect our confidential information, thefurther development of our product candidates could be delayed and the price of our securities could fall. For example, theloss of clinical trial data from completed or ongoing clinical trials of our product candidates could result in delays in ourregulatory approval efforts and significantly increase our costs to recover or reproduce the data. As another example, we mayincur penalties imposed by the competent authorities in the EU Member States in case of breach of the EU rules governing thecollection and processing of personal data, including unauthorized access to or disclosure of personal data. Although we havesecurity and fraud prevention measures in place, we have been subject to immaterial payment fraud activity. In 2017, we fileda lawsuit (which has since been resolved) against a former employee for misappropriation of our confidential, proprietary andtrade secret information. Moreover, there can be no assurance that such security measures will prevent service interruptions orsecurity breaches that could adversely affect our business. If we lose key management or scientific personnel, or if we fail to attract and retain key employees, our ability to discoverand develop our product candidates and commercialize our products, if any, will be impaired.We are highly dependent on principal members of our management team and scientific staff, and in particular, ourChief Executive Officer, Rick E Winningham, to operate our business. Mr. Winningham has significant pharmaceuticalindustry experience. The loss of Mr. Winningham’s services could impair our ability to discover, develop and commercializenew medicines. If we fail to retain our qualified personnel or replace them when they leave, we may be unable to continue ourdiscovery, development and commercialization activities, which may cause the price of our securities to fall. For instance, wehave undertaken a search for a new Chief Financial Officer, a position that has been vacant since the beginning of 2019. In addition, our US operating subsidiary’s facility and most of its employees are located in northern California,headquarters to many other biotechnology and biopharmaceutical companies and many academic and research institutions. Asa result, competition for certain skilled personnel in our market is intense. None of our employees have employmentcommitments for any fixed period of time and they all may leave our employment at will. If we fail to retain our qualifiedpersonnel or replace them when they leave, we may be unable to continue our development and commercialization activitiesand the price of our securities could fall. Global health and economic, political and social conditions may harm our ability to do business, increase our costs andnegatively affect our stock price.Worldwide economic conditions remain uncertain due to the decision by the United Kingdom to initiate the formalprocedure of withdrawal from the EU (often referred to as “Brexit”), current economic challenges in Asia and other disruptionsto global and regional economies and markets. 33 Table of ContentsBrexit has created significant uncertainty about the future relationship between the United Kingdom and the EU,including with respect to the laws and regulations that will apply as the United Kingdom determines which EU laws to replaceor replicate in the event of a withdrawal. From a regulatory perspective, the United Kingdom's withdrawal could bearsignificant complexity and risks. In addition, the exact terms of the United Kingdom's withdrawal and the laws and regulationsthat will apply after the United Kingdom withdraws from the EU would affect manufacturing sites that hold an EUmanufacturing authorization issued by the United Kingdom competent authorities. The referendum has also given rise to callsfor the governments of other EU Member States to consider withdrawal from the EU. Further, development of our product candidates and/or regulatory approval may be delayed for other political eventsbeyond our control. For example, a US federal government shutdown or budget sequestration, such as ones that occurredduring 2013, 2018, and 2019, may result in significant reductions to the FDA’s budget, employees and operations, which maylead to slower response times and longer review periods, potentially affecting our ability to progress development of ourproduct candidates or obtain regulatory approval for our product candidates. Further, future government shutdowns couldimpact our ability to access the public markets and obtain necessary capital in order to properly capitalize and continue ouroperations. Our operations also depend upon favorable trade relations between the US and those foreign countries in which ourmaterials suppliers have operations. A protectionist trade environment in either the US or those foreign countries in which wedo business, such as a change in the current tariff structures, export compliance or other trade policies, may materially andadversely affect our operations. External factors, such as potential terrorist attacks, acts of war, geopolitical and social turmoilor epidemics and other similar outbreaks in many parts of the world, could also prevent or hinder our ability to do business,increase our costs and negatively affect our stock price. These geopolitical, social and economic conditions could harm ourbusiness. Our US operating subsidiary’s 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 usto cease or curtail operations.Our US operating subsidiary’s facility is located in the San Francisco Bay Area near known earthquake fault zonesand therefore will be vulnerable to damage from earthquakes. In October 1989, a major earthquake struck this area and causedsignificant 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 anydisaster were to occur, our ability to operate our business could be seriously impaired. In addition, the unique nature of ourresearch activities and of much of our equipment could make it difficult and costly 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 businessinterruptions and we do not plan to purchase additional insurance to cover such losses due to the cost of obtaining suchcoverage. Any significant losses that are not recoverable under our insurance policies could seriously impair our business andfinancial condition, which could cause the price of our securities to fall. If YUPELRI is not broadly accepted by physicians, patients, third-party payors, or the medical community in general, wemay never receive significant revenues from sales of this product.The commercial success of YUPELRI depends upon its acceptance by physicians, patients, third-party payors and themedical community in general. YUPELRI may not be sufficiently accepted by these parties. YUPELRI competes withpredominantly with short‑acting nebulized bronchodilators used three to four times per day and the nebulized LAMALonhala Magnair (SUN-101/eFlow®) used twice per day. If YUPELRI is not widely accepted, our business and financialresults could be materially harmed. 34 TMTM Table of ContentsIn collaboration with Mylan, we are responsible for marketing and sales of YUPELRI in the US, which subjects us to certainrisks.We currently maintain a sales force in the US and plan to continue to augment our sales and marketing personnel tosupport our co-promotion obligations for YUPELRI under our agreement with Mylan. The risks of fulfilling our US co-promotion obligations to Mylan include: ·costs and expenses associated with creating and maintaining an independent sales and marketing organizationwith appropriate technical expertise and supporting infrastructure, including third-party vendor logistics andconsultant support, which costs and expenses could, depending on the scope and method of the marketing effort,exceed any product revenue for several years;·our ability to retain effective sales and marketing personnel and medical science liaisons in the US;·the ability of our sales and marketing personnel to obtain access to and educate adequate numbers of physiciansabout prescribing YUPELRI, in appropriate clinical situations; and·the lack of complementary products to be offered by sales personnel, which may put us at a competitivedisadvantage relative to companies with more extensive product lines.If we are not successful in maintaining an internal sales and marketing organization with appropriateexperience, technical expertise, supporting infrastructure and the ability to obtain access to and educateadequate numbers of physicians about prescribing YUPELRI in appropriate clinical situations, we will havedifficulty commercializing YUPELRI, which would adversely affect our business and financial condition and theprice of our securities could fall.We are subject to extensive and ongoing regulation, oversight and other requirements by the FDA and failure to complywith these regulations and requirements may subject us to penalties that may adversely affect our financial condition or ourability to commercialize any approved products. Prescription drug advertising and promotion are closely scrutinized by the FDA, including substantiation ofpromotional claims, disclosure of risks and safety information, and the use of themes and imagery in advertising andpromotional materials. As with all companies selling and marketing products regulated by the FDA in the US, we areprohibited from promoting any uses of an approved product, such as YUPELRI, that are outside the scope of those uses thathave been expressly approved by the FDA as safe and effective on the product’s label. The manufacturing, labeling, packaging, adverse event reporting, advertising, promotion and recordkeeping for anapproved product remain subject to extensive and ongoing regulatory requirements. If we become aware of previouslyunknown problems with an approved product in the US or overseas or at a contract manufacturer’s facilities, a regulatoryauthority may impose restrictions on the product, the contract manufacturers or on us, including requiring us to reformulatethe product, conduct additional clinical studies, change the labeling of the product, withdraw the product from the market orrequire the contract manufacturer to implement changes to its facilities. 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 US Department of Health and Human Services (“OIG”)and other regulatory bodies with respect to any approved product, such as YUPELRI, as well as governmental authorities inthose foreign countries in which any product is 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 unableto comply, we may be subject to regulatory or civil actions or penalties that could significantly and adversely affect ourbusiness. 35 Table of ContentsRegulatory approval for our product candidates, if any, may include similar or other limitations on the indicated usesfor which we can market our medicines or the patient population that may utilize our medicines, which may limit the marketfor our medicines or put us at a competitive disadvantage relative to alternative therapies. Failure to satisfy required post-approval requirements and/or commitments may have implications for a product’sapproval and may carry civil monetary penalties. Any failure to maintain regulatory approval will materially limit the abilityto commercialize a product or any future product candidates and if we fail to comply with FDA regulations and requirements,the FDA could potentially take a number of enforcement actions against us, including the issuance of untitled letters, warningletters, preventing the introduction or delivery of the product into interstate commerce in the US, misbranding charges,product seizures, injunctions, and civil monetary penalties, which would materially and adversely affect our business andfinancial condition and may cause the price of our securities to fall. The risks identified in this risk factor relating to regulatory actions and oversight by agencies in the US andthroughout the world also apply to the commercialization of any partnered products by our collaboration partners and thosecommercializing products with respect to which we have an economic interest or right to receive royalties, including GSK andCumberland, and such regulatory actions and oversight may limit those parties’ ability to commercialize such products, whichcould materially and adversely affect our business and financial condition, and which may cause the price of our securities tofall. We and/or our collaboration partners and those commercializing products with respect to which we have an economicinterest or right to receive royalties may face competition from companies seeking to market generic versions of anyapproved products in which we have an interest, such as TRELEGY ELLIPTA or YUPELRI.Under the Drug Price Competition and Patent Term Restoration Act of 1984, a company may submit an abbreviatednew drug application (“ANDA”) under section 505(j) of the Federal Food, Drug, and Cosmetic Act to market a generic versionof an approved drug. Because a generic applicant does not conduct its own clinical studies, but instead relies on the FDA’sfinding of safety and effectiveness for the approved drug, it is able to introduce a competing product into the market at a costsignificantly below that of the original drug. Although we have multiple patents protecting YUPELRI until at least 2025 thatare listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the OrangeBook, and those commercializing products with respect to which we have an economic interest or right to receiveroyalties similarly have patents protecting their products, such as TRELEGY ELLIPTA and VIBATIV, generic applicantscould potentially submit “paragraph IV certifications” to FDA stating that such patents are invalid or will not be infringed bythe applicant’s product. We have not received any such paragraph IV notifications nor are we aware of any with respect toproducts in which we have an economic interest or right to receive royalties, but if any competitors successfully challenge thepatents related to these products, we and/or our collaboration partners and those commercializing products with respect towhich we have an economic interest or right to receive royalties would face substantial competition. If we are not able tocompete effectively against such future competition, our business will not grow, our financial condition and operations willsuffer and the price of our securities could fall. For additional discussion of the risk of generic competition to YUPELRI, please see the following risk factor below“If our efforts to protect the proprietary nature of the intellectual property related to our technologies are not adequate, wemay not be able to compete effectively in our current or future markets.”We may be treated as a US corporation for US federal income tax purposes.For US federal income tax purposes, a corporation generally is considered tax resident in the place of itsincorporation. Theravance Biopharma is incorporated under Cayman Islands law and established tax residency in Irelandeffective July 1, 2015. Therefore, it should be a non-US corporation under this general rule. However, Section 7874 of theInternal Revenue Code of 1986, as amended (the “Code”), contains rules that may result in a foreign corporation being treatedas a US corporation for US federal income tax purposes. The application of these rules is complex and there is little guidanceregarding certain aspects of their application. Under Section 7874 of the Code, a corporation created or organized outside the US will be treated as a US corporationfor US federal tax purposes if (i) the foreign corporation directly or indirectly acquires substantially all of the properties helddirectly or indirectly by a US corporation, (ii) the former shareholders of the acquired US corporation hold36 Table of Contentsat least 80% of the vote or value of the shares of the foreign acquiring corporation by reason of holding stock in the USacquired corporation, and (iii) the foreign corporation’s “expanded affiliated group” does not have “substantial businessactivities” in the foreign corporation’s country of incorporation relative to its expanded affiliated group’s worldwideactivities. For this purpose, “expanded affiliated group” generally means the foreign corporation and all subsidiaries in whichthe foreign corporation, directly or indirectly, owns more than 50% of the stock by vote and value, and “substantial businessactivities” generally means at least 25% of employees (by number and compensation), assets and gross income of ourexpanded affiliated group are based, located and derived, respectively, in the country of incorporation. We do not expect to be treated as a US corporation under Section 7874 of the Code, because we do not believe thatthe assets contributed to us by Innoviva constituted “substantially all” of the properties of Innoviva (as determined on both agross and net fair market value basis). However, the Internal Revenue Service may disagree with our conclusion on this pointand assert that, in its view, the assets contributed to us by Innoviva did constitute “substantially all” of the properties ofInnoviva. In addition, there could be legislative proposals to expand the scope of US corporate tax residence and there couldbe changes to Section 7874 of the Code or the Treasury Regulations promulgated thereunder that could apply retroactivelyand could result in Theravance Biopharma being treated as a US corporation. If it were determined that we should be treated as a US corporation for US federal income tax purposes, we could beliable for substantial additional US federal income tax on our post-Spin-Off taxable income. In addition, though we have nocurrent plans to pay any dividends, payments of any dividends to non-US holders may be subject to US withholding tax. Taxing authorities may challenge our structure and transfer pricing arrangements.We are incorporated in the Cayman Islands, maintain subsidiaries in the Cayman Islands, the US, the United Kingdomand Ireland, and effective July 1, 2015, we migrated our tax residency from the Cayman Islands to Ireland. Due to economicand political conditions, various countries are actively considering changes to existing tax laws. We cannot predict the formor timing of potential legislative changes that could have a material adverse impact on our results of operations. We are awarethat Ireland is expected to implement certain tax law changes to comply with the European Union Anti-Tax AvoidanceDirectives. These changes will include the first ever Irish controlled foreign company (“CFC”) rules which were effective as ofJanuary 1, 2019. It is also expected that Ireland will implement certain transfer pricing rule changes, most likely with effectfrom 2020. We are continuing to evaluate and monitor the applicability of the CFC rules published in Finance Bill 2018, butour current assessment, based on the rules and guidance published to date, is that the rules are unlikely to have a materialimpact on our operations. Proposed statutory language has not yet been provided for transfer pricing rule changes and, as aresult, we have not yet been able to determine the impact, if any, of such future legislation on our operations. In addition, significant judgment is required in determining our worldwide provision for income taxes. Variousfactors may have favorable or unfavorable effects on our income tax rate including, but not limited to the performance ofcertain functions and ownership of certain assets in tax-efficient jurisdictions such as the Cayman Islands and Ireland, togetherwith intra-group transfer pricing agreements. Taxing authorities may challenge our structure and transfer pricing arrangementsthrough an audit or lawsuit. Responding to or defending such a challenge could be expensive and consume time and otherresources, and divert management’s time and focus from operating our business. We cannot predict whether taxing authoritieswill conduct an audit or file a lawsuit challenging this structure, the cost involved in responding to any such audit or lawsuit,or the outcome. We may be required to pay taxes for prior periods, interest, fines or penalties, and may be obligated to payincreased taxes in the future which could result in reduced cash flows and have a material adverse effect on our business,financial condition and growth prospects. We were a passive foreign investment company, or “PFIC,” for 2014, but we were not a PFIC from 2015 through 2018, andwe do not expect to be a PFIC for the foreseeable future.For US federal income tax purposes, we generally would be classified as a PFIC for any taxable year if either (i) 75%or more of our gross income (including gross income of certain 25% or more owned corporate subsidiaries) is “passiveincome” (as defined for such purposes) or (ii) the average percentage of our assets (including the assets of certain 25% or moreowned corporate subsidiaries) that produce passive income or that are held for the production of passive income is at least50%. In addition, whether our Company will be a PFIC for any taxable year depends on our assets and37 Table of Contentsincome over the course of each such taxable year and, as a result, cannot be predicted with certainty until after the end of theyear. Based upon our assets and income during the course of 2014, we believe that our Company and one of ourCompany’s wholly-owned subsidiaries, Theravance Biopharma R&D, Inc. was a PFIC for 2014. Based upon our assets andincome from 2015 through 2018, we do not believe that our company is a PFIC during these four years. We do not expect tobe a PFIC for the foreseeable future based on our current business plans and current business model. For any taxable year (orportion thereof) in which our Company is a PFIC that is included in the holding period of a US holder, the US holder isgenerally subject to additional US federal income taxes plus an interest charge with respect to certain distributions fromTheravance Biopharma or gain recognized on a sale of Theravance Biopharma shares. Similar rules would apply with respectto distributions from or gain recognized on an indirect sale of Theravance Biopharma Ireland Limited. US holders of ourordinary shares may have filed an election with respect to Company shares held at any time during 2014 to be treated asowning an interest in a “qualified electing fund” (“QEF”) or to “mark to market” their ordinary shares to avoid the otherwiseapplicable interest charge consequences of PFIC treatment with respect to our ordinary shares. A foreign corporation will notbe treated as a QEF for any taxable year in which such foreign corporation is not treated as a PFIC. QEF and mark to marketelections generally apply to the taxable year for which the election is made and all subsequent taxable years unless theelection is revoked with consent of the Secretary of Treasury. US holders of our ordinary shares should consult their taxadvisers regarding the tax reporting implications with respect to any QEF and mark to market elections made with respect toour company and with respect to their indirect interests in Theravance Biopharma R&D, Inc. If we are unable to maintain effective internal controls, our business, financial position and results of operations could beadversely affected.If we are unable to maintain effective internal controls, our business, financial position and results of operationscould be adversely affected. We are subject to the reporting and other obligations under the Exchange Act, including therequirements of Section 404 of the Sarbanes-Oxley Act of 2002, which require annual management assessments of theeffectiveness of our internal control over financial reporting. Our management is responsible for establishing and maintainingadequate internal control over financial reporting as defined in Rules 13a-15(f) under the Exchange Act. Our internal controlover financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with accounting principles generally acceptedin the US. Any failure to achieve and maintain effective internal controls could have an adverse effect on our business,financial position and results of operations. In addition, our independent registered public accounting firm is required to attestto the effectiveness of our internal control over financial reporting annually. If our independent registered public accountingfirm is unable to attest to the effectiveness of our internal control over financial reporting, investor confidence in our reportedresults will be harmed and the price of our securities may fall. These reporting and other obligations place significant demandson our management and administrative and operational resources, including accounting resources. Agreements entered into with or for the benefit of GSK in connection with the Spin-Off may significantly restrict our businessand affairs.On March 3, 2014, in connection with the Spin-Off, we, Innoviva and GSK entered into a number of agreements thatmay significantly restrict our business and affairs. In particular, we, Innoviva and GSK entered into the Master Agreementwhich, among other things, requires GSK’s consent to make any changes to (A) a Separation and Distribution Agreement andancillary agreements that would, individually or in the aggregate, reasonably be expected to adversely affect GSK in anymaterial respect or (B) the TRC Limited Liability Company Agreement, which consent is not to be unreasonably withheld,conditioned or delayed, provided that GSK may withhold, condition or delay such consent in its sole discretion with respectto certain sections of the TRC Limited Liability Company Agreement and any changes to the governance structure of TRC,the confidentiality restrictions, the consent rights, and the transfer restrictions in the TRC Limited Liability CompanyAgreement. We and GSK also entered into (i) the Governance Agreement that expired on December 31, 2017, (ii) a registrationrights agreement that gives GSK certain registration rights with respect to our ordinary shares held by GSK and (iii) anextension agreement that extends to us certain restrictive covenants similar to those applicable to Innoviva under the GSKAgreements. There can be no assurance that these restrictions will not38 Table of Contentsmaterially harm our business, particularly given that GSK’s interests may not be aligned with the interests of our business orour other shareholders. Certain of our directors and officers may have actual or potential conflicts of interest because of their equity ownership inInnoviva, which actual or potential conflicts may harm our business, prospects and financial condition and result in thediversion of corporate opportunities to Innoviva.Certain of our directors and executive officers hold shares of Innoviva’s common stock or rights to acquire suchshares, and these holdings may be significant for some of these individuals compared to their total assets. This ownership ofInnoviva common stock by most of our officers and directors may create, or may create the appearance of, conflicts of interestwhen these directors and officers are faced with decisions that could have different implications for Innoviva and for us. Forexample, potential or actual conflicts could arise relating to: our relationship with Innoviva, including Innoviva’s and ourrespective rights and obligations under agreements entered into in connection with the Spin-Off; Innoviva’s management ofTRC, particularly given that we and Innoviva have different economic interests in TRC; and corporate opportunities that maybe available to both companies in the future. Although we and Innoviva have implemented policies and procedures to identifyand properly address such potential and actual conflicts of interest, there can be no assurance that, when such conflicts areresolved in accordance with applicable laws, such conflicts of interest will not harm our business, prospects and financialcondition and result in the diversion of corporate opportunities to Innoviva. If we are required to indemnify Innoviva or Cumberland, or if we are not able to enforce our indemnification rights againstInnoviva or Cumberland, our business prospects and financial condition may be harmed.We agreed to indemnify Innoviva from and after the Spin-Off with respect to (i) all debts, liabilities and obligationstransferred to us in connection with the Spin-Off (including our failure to pay, perform or otherwise promptly discharge anysuch debts, liabilities or obligations after the Spin-Off), (ii) any misstatement or omission of a material fact resulting in amisleading statement in our Information Statement distributed to Innoviva stockholders in connection with the Spin-Off and(iii) any breach by us of certain agreements entered into with Innoviva in connection with the Spin-Off (namely, theSeparation and Distribution Agreement, a Transition Services Agreement, an Employee Matters Agreement, a Tax MattersAgreement, and a Facility Sublease Agreement). We are not aware of any existing indemnification obligations at this time, butany such indemnification obligations that may arise could be significant. Under the terms of the Separation and DistributionAgreement, Innoviva agreed to indemnify us from and after the Spin-Off with respect to (i) all debts, liabilities and obligationsretained by Innoviva after the Spin-Off (including its failure to pay, perform or otherwise promptly discharge any such debts,liabilities or obligations after the Spin-Off) and (ii) any breach by Innoviva of the Separation and Distribution Agreement, theTransition Services Agreement, the Employee Matters Agreement, the Tax Matters Agreement, and the Facility SubleaseAgreement. Our and Innoviva’s ability to satisfy these indemnities, if called upon to do so, will depend upon our andInnoviva’s future financial strength. If we are required to indemnify Innoviva, or if we are not able to enforce ourindemnification rights against Innoviva, our business prospects and financial condition may be harmed. In addition, the agreement relating to the sale of VIBATIV to Cumberland contains indemnification obligations ofboth us and Cumberland. If we are required to indemnify Cumberland or if we are unable to enforce our indemnification rightsagainst Cumberland for any reason, our business and financial condition may be harmed. We commenced a workforce restructuring during the first quarter of 2019 to focus our efforts on our key programs. Evenafter giving effect to this restructuring, we will not have sufficient cash to fully execute on our key programs, and therestructuring may impact our ability to execute our business plan. During the first quarter of 2019, we commenced a workforce restructuring involving the reduction of our overallheadcount by approximately 50 individuals, with affected employees primarily focused on early research or the infrastructurein support of VIBATIV. Our objective with the restructuring was to align with our focus on continued execution of keystrategic programs, and advancement of selected late-stage research programs toward clinical development. There can be noassurance that we will be able to reduce spending as planned or that unanticipated costs will not occur. Our restructuringefforts to focus on key programs may not prove successful due to a variety of factors, including, without limitation, risks that asmaller workforce may have difficulty achieving our goals. In addition, we may39 Table of Contentsin the future decide to restructure operations and reduce expenses further by taking such measures as additional reductions inour workforce and program spending. Any restructuring places a substantial strain on remaining management and employeesand on operational resources and there is a risk that our business will be adversely affected by the diversion of managementtime to the restructuring efforts. There can be no assurance that following this restructuring, we will have sufficient cashresources to allow us to fund our operations as planned. RISKS RELATED TO LEGAL AND REGULATORY UNCERTAINTYIf our efforts to protect the proprietary nature of the intellectual property related to our technologies are not adequate, wemay not be able to compete effectively in our current or future markets.We rely upon a combination of patents, patent applications, trade secret protection and confidentiality agreements toprotect the intellectual property related to our technologies. Any involuntary disclosure to or misappropriation by third partiesof this proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thuseroding our competitive position in our market. The status of patents in the biotechnology and pharmaceutical field involvescomplex legal and scientific questions and is very uncertain. As of December 31, 2018, we owned 438 issued US patents and1,672 granted foreign patents, as well as additional pending US and foreign patent applications. Our patent applications maybe challenged or fail to result in issued patents and our existing or future patents may be invalidated or be too narrow toprevent third parties from developing or designing around these patents. If the sufficiency of the breadth or strength ofprotection provided by our patents with respect to a product candidate is threatened, it could dissuade companies fromcollaborating with us to develop product candidates and threaten our ability to commercialize products. Further, if weencounter delays in our clinical trials or in obtaining regulatory approval of our product candidates, the patent lives of therelated product candidates would be reduced. In addition, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that isnot patentable, for processes for which patents are difficult to enforce and for any other elements of our drug discovery anddevelopment processes that involve proprietary know-how, information and technology that is not covered by patentapplications. Although we require our employees, consultants, advisors and any third parties who have access to ourproprietary know-how, information and technology to enter into confidentiality agreements, we cannot be certain that thisknow-how, information and technology will not be misappropriated, disclosed or used for unauthorized purposes or thatcompetitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent informationand techniques. Further, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws ofthe US. As a result, we may encounter significant problems in protecting and defending our intellectual property both in theUS and abroad. If we are unable to prevent material disclosure of the intellectual property related to our technologies to thirdparties, we will not be able to establish or, if established, maintain a competitive advantage in our market, which couldmaterially adversely affect our business, financial condition and results of operations, which could cause the price of oursecurities to fall. Litigation to protect or defend our intellectual property or third-party claims of intellectual property infringement wouldrequire 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 ofthird parties. Third parties may assert that we or our partners are using their proprietary rights without authorization. There arethird-party patents that may cover materials or methods for treatment related to our product candidates. At present, we are notaware of any patent infringement claims with merit that would adversely and materially affect our ability to develop ourproduct candidates, but nevertheless the possibility of third-party allegations cannot be ruled out. In addition, third partiesmay obtain patents in the future and claim that use of our technologies infringes upon these patents. Furthermore, partiesmaking claims against us or our partners may obtain injunctive or other equitable relief, which could effectively block ourability to further develop and commercialize one or more of our product candidates. Defense against these claims, regardless oftheir merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from ourbusiness. In the event of a successful claim of infringement against us, we may have to pay substantial damages, obtain one ormore licenses from third parties or pay royalties. In addition, even in the absence of litigation, we may need to obtain licensesfrom third parties to advance our research or allow commercialization of our product candidates, and we40 Table of Contentshave 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 couldharm our business significantly. In addition, in the future we could be required to initiate litigation to enforce our proprietary rights againstinfringement by third parties, prevent the unauthorized use or disclosure of our trade secrets and confidential information, ordefend the validity of our patents. For example, in 2017, we filed a lawsuit against a former employee for misappropriation ofcertain of our confidential, proprietary and trade secret information. While this litigation has since been resolved, prosecutionof claims to enforce or defend our rights against others involve substantial litigation expenses and divert substantial employeeresources from our business but may not result in adequate remedy to us or sufficiently mitigate the harm to our businesscaused by any intellectual property infringement, unauthorized access, use or disclosure of trade secrets. If we fail toeffectively enforce our proprietary rights against others, our business will be harmed and the price of our securities could fall. If the efforts of our partners or future partners to protect the proprietary nature of the intellectual property related tocollaboration assets are not adequate, the future commercialization of any medicines resulting from collaborations could bedelayed 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 may also apply to the intellectual property protection efforts ofour partners or future partners and to GSK with respect to the GSK-Partnered Respiratory Programs in which we hold aneconomic interest. To the extent the intellectual property protection of any partnered assets are successfully challenged orencounter problems with the US Patent and Trademark Office or other comparable agencies throughout the world, the futurecommercialization of these potential medicines could be delayed or prevented. Any challenge to the intellectual propertyprotection of a late-stage development asset, particularly those of the GSK-Partnered Respiratory Programs in which we holdan economic interest, could harm our business and cause the price of our securities to fall. Product liability and other lawsuits could divert our resources, result in substantial liabilities and reduce the commercialpotential of our medicines.The risk that we may be sued on product liability claims is inherent in the development and commercialization ofpharmaceutical products. Side effects of, or manufacturing defects in, products that we or our partners develop orcommercialize could result in the deterioration of a patient’s condition, injury or even death. Once a product is approved forsale and commercialized, the likelihood of product liability lawsuits tends to increase. Claims may be brought by individualsseeking relief for themselves or by individuals or groups seeking to represent a class, asserting injuries based both on potentialadverse effects described in the label as well as adverse events not yet observed. We also face an inherent risk of productliability exposure related to the testing of our product candidates in human clinical trials. In addition, changes in laws outsidethe US are expanding our potential liability for injuries that occur during clinical trials. Product liability claims could harmour reputation, regardless of the merit or ultimate success of the claim, which may adversely affect our and our partners’ abilityto commercialize our products and cause the price of our securities to fall. These lawsuits may divert our management frompursuing our business strategy and may be costly to defend. In addition, if we are held liable in any of these lawsuits, we mayincur 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 potentialliabilities and we cannot be sure that our insurer will not disclaim coverage as to a future claim. In addition, inability to obtainor maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liabilityclaims could prevent or inhibit the commercial production and sale of our products, which could adversely affect our business. We may also be required to prosecute or defend general commercial, intellectual property, securities and otherlawsuits. Litigation typically involves substantial expenses and diverts substantial employee resources from our business. Thecost of defending any product liability litigation or engaging in any other legal proceeding, even if resolved in our favor,could be substantial and uncertainties resulting from the initiation and continuation of the litigation or other41 Table of Contentsproceedings could have a material adverse effect on our ability to compete in the marketplace and achieve our business goals. If we fail to comply with data protection laws and regulations, we could be subject to government enforcement actions(which could include civil or criminal penalties), private litigation and/or adverse publicity, which could negatively affectour operating results and business.We are subject to data protection laws and regulations (i.e., laws and regulations that address privacy and datasecurity). In the US, numerous federal and state laws and regulations, including state data breach notification laws, state healthinformation privacy laws, and federal and state consumer protection laws (e.g., Section 5 of the FTC Act), govern thecollection, use, disclosure, and protection of health-related and other personal information. Failure to comply with dataprotection laws and regulations could result in government enforcement actions and create liability for us (which couldinclude civil and/or criminal penalties), private litigation and/or adverse publicity that could negatively affect our operatingresults and business. In addition, we may obtain health information from third parties (e.g., healthcare providers who prescribeour products) that are subject to privacy and security requirements under the Health Insurance Portability and AccountabilityAct of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act (“HIPAA”). Althoughwe are not directly subject to HIPAA—other than with respect to providing certain employee benefits—we could be subject tocriminal penalties if we knowingly obtain or disclose individually identifiable health information maintained by a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA. HIPAA generally requires that healthcare providersand other covered entities obtain written authorizations from patients prior to disclosing protected health information of thepatient (unless an exception to the authorization requirement applies). If authorization is required and the patient fails toexecute an authorization or the authorization fails to contain all required provisions, then we may not be allowed access toand use of the patient’s information and our research efforts could be impaired or delayed. Furthermore, use of protected healthinformation that is provided to us pursuant to a valid patient authorization is subject to the limits set forth in the authorization(e.g., for use in research and in submissions to regulatory authorities for product approvals). In addition, HIPAA does notreplace federal, state, international or other laws that may grant individuals even greater privacy protections. EU Member States and other jurisdictions where we operate have adopted data protection laws and regulations, whichimpose significant compliance obligations. For example, the General Data Protection Regulation (“GDPR”) which becomeapplicable on May 25, 2018, replacing the EU Data Protection Directive, imposes strict obligations and restrictions on theability to collect, analyze and transfer personal data, including health data from clinical trials and adverse event reporting. Switzerland has adopted similar restrictions. These obligations and restrictions concern, in particular, the consent ofthe individuals to whom the personal data relate, the information provided to the individuals, the transfer of personal data outof the European Economic Area (“EEA”) or Switzerland, security breach notifications, security and confidentiality of thepersonal data, as well as substantial potential fines for breaches of the data protection obligations. Data protection authoritiesfrom the different EU Member States may interpret the GDPR and applicable related national laws differently and imposerequirements additional to those provided in the GDPR. In addition, guidance on implementation and compliance practicesmay be updated or otherwise revised, which adds to the complexity of processing personal data in the EU. When processingpersonal data of subjects in the EU, we have to comply with the applicable data protection laws. In particular, as we rely onservices providers processing personal data of subjects in the EU, we have to enter into suitable contract terms with suchproviders and receive sufficient guarantees that such providers meet the requirements of the applicable data protection laws,particularly the GDPR which imposes specific and relevant obligations. Although there are legal mechanisms to allow for the transfer of personal data from the EEA to the US, a decision ofthe European Court of Justice in the Schrems case (Case C-362/14 Maximillian Schrems v. Data Protection Commissioner)that invalidated the safe harbor framework has increased uncertainty around compliance with EU privacy law requirements. Asa result of the decision, it was no longer possible to rely on the safe harbor certification as a legal basis for the transfer ofpersonal data from the EU to entities in the US. On February 29, 2016, however, the European Commission announced anagreement with the US Department of Commerce (“DOC”) to replace the invalidated Safe Harbor framework with a new EU-US“Privacy Shield.” On July 12, 2016, the European Commission adopted a decision on the adequacy of the protection providedby the Privacy Shield. The Privacy Shield is intended to address the42 Table of Contentsrequirements set out by the European Court of Justice in its ruling by imposing more stringent obligations on companies,providing stronger monitoring and enforcement by the DOC and Federal Trade Commission, and making commitments on thepart of public authorities regarding access to information. US companies have been able to certify to the US Department ofCommerce their compliance with the privacy principles of the Privacy Shield since August 1, 2016. On September 16, 2016, an Irish privacy advocacy group brought an action for annulment of the EC decision on theadequacy of the Privacy Shield before the European Court of Justice (Case T-670/16). In October 2016, a further action forannulment was brought by three French digital rights advocacy groups (Case T-738/16). Case T-670/16 was declaredinadmissible and Case T-738/16 is still pending before the European Court of Justice. The US was admitted as an intervener inthe action on September 4, 2018. If the European Court of Justice invalidates the Privacy Shield, it will no longer be possibleto rely on the Privacy Shield certification to support transfer of personal data from the EU to entities in the US. Adherence tothe Privacy Shield is not, however, mandatory. US-based companies are permitted to rely either on their adherence to thePrivacy Shield or on the other authorized means and procedures to transfer personal data provided by the GDPR. If we or ourvendors fail to comply with applicable data privacy laws, or if the legal mechanisms we or our vendors rely upon to allow forthe transfer of personal data from the EEA or Switzerland to the US (or other countries not considered by the EuropeanCommission to provide an adequate level of data protection) are not considered adequate, we could be subject to governmentenforcement actions and significant penalties against us, and our business could be adversely impacted if our ability totransfer personal data outside of the EEA or Switzerland is restricted, which could adversely impact our operating results. Changes in healthcare law and implementing regulations, including government restrictions on pricing and reimbursement,as well as healthcare policy and other healthcare payor cost-containment initiatives, may negatively impact us, ourcollaboration partners, or those commercializing products with respect to which we have an economic interest or right toreceive royalties. The continuing efforts of the government, insurance companies, managed care organizations and other payors ofhealth care costs to contain or reduce costs of health care may adversely affect us, our collaboration partners, or thosecommercializing products with respect to which we have an economic interest or right to receive royalties in regard to one ormore of the following: ·the ability to set and collect a price believed to be reasonable for products;·the ability to generate revenues and achieve profitability; and·the availability of capital.The pricing and reimbursement environment for products may change in the future and become more challenging dueto, among other reasons, policies advanced by the current or new presidential administrations, federal agencies, new healthcarelegislation passed by Congress or fiscal challenges faced by all levels of government health administration authorities. Amongpolicy makers and payors in the US and elsewhere, there is significant interest in promoting changes in healthcare systemswith the stated goals of containing healthcare costs, improving quality and expanding access to healthcare. In the US, thepharmaceutical industry has been a particular focus of these efforts and has been and may in the future be significantlyaffected by major legislative initiatives. For instance, in the fourth quarter of 2018, the Centers for Medicare & MedicaidServices (“CMS”), the federal agency that administers the Medicare and Medicaid programs, released an advance notice ofproposed rule-making to solicit feedback on a potential change in the way Medicare Part B pays for certain physician-administered drugs. Under Part B’s current reimbursement policy, Medicare pays providers the average sales price of the drugplus 6 percent (reduced to 4.3 percent as a result of sequestration). CMS is considering a proposal that would more closelyalign payment for these drugs with prices in certain countries (such as Canada, the United Kingdom, Japan, and Germany),allow private-sector vendors to negotiate prices, and pay providers a flat add-on payment not tied to the price of the drug. Weexpect we, our collaboration partners or those commercializing products with respect to which we have an economic interestor right to receive royalties may experience pricing pressures in connection with the sale of drug products, due to the trendtoward managed healthcare, the increasing influence of health maintenance organizations and additional legislativeenactments. 43 Table of ContentsThe Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of2010 (together the “Healthcare Reform Act”), is a sweeping measure intended to expand healthcare coverage within the US,primarily through the imposition of health insurance mandates on employers and individuals and expansion of the Medicaidprogram. This law has substantially changed the way healthcare is financed by both governmental and private insurers, andsignificantly impacts the pharmaceutical industry. The Healthcare Reform Act contains a number of provisions that impact ourbusiness and operations, including those governing enrollment in federal healthcare programs, reimbursement changes,benefits for patients within a coverage gap in the Medicare Part D prescription drug program (commonly known as the “donuthole”), rules regarding prescription drug benefits under the health insurance exchanges, changes to the Medicare Drug Rebateprogram, expansion of the Public Health Service’s 340B drug pricing program, fraud and abuse and enforcement. Thesechanges have impacted previously existing government healthcare programs and have resulted in the development of newprograms, including Medicare payment for performance initiatives and improvements to the physician quality reportingsystem and feedback program. In particular, CMS issued final regulations to implement the changes to the Medicaid Drug Rebate program under theHealthcare Reform Act. These regulations became effective on April 1, 2016. Congress could enact additional legislation thatfurther increases Medicaid drug rebates or other costs and charges associated with participating in the Medicaid Drug Rebateprogram. The issuance of regulations and coverage expansion by various governmental agencies relating to the MedicaidDrug Rebate program has and will continue to increase the costs and the complexity of compliance, has been and will be time-consuming, and could have a material adverse effect on results of operations for us, our collaboration partners, or thosecommercializing products with respect to which we have an economic interest or right to receive royalties. Some states have elected not to expand their Medicaid programs by raising the income limit to 133% of the federalpoverty level, as is permitted under the Healthcare Reform Act. For each state that does not choose to expand its Medicaidprogram, there may be fewer insured patients overall, which could impact the sales, business and financial condition of us, ourcollaboration partners, or those commercializing products with respect to which we have an economic interest or right toreceive royalties. Where Medicaid patients receive insurance coverage under any of the new options made available throughthe Healthcare Reform Act, manufacturers may be required to pay Medicaid rebates on drugs used under these circumstances,which could impact manufacturer revenues. In addition, there have been delays in the implementation of key provisions of theHealthcare Reform Act. Moreover, certain legislative changes to and regulatory changes under the Healthcare Reform Act have occurred inthe 115th US Congress and under the Trump Administration. For example, the Tax Cuts and Jobs Act enacted on December22, 2017, eliminated the shared responsibility payment for individuals who fail to maintain minimum essential coverageunder section 5000A of the Internal Revenue Code of 1986, commonly referred to as the individual mandate, effective January1, 2019. Additional legislative changes to and regulatory changes under the Healthcare Reform Act remain possible, but thenature and extent of such potential additional changes are uncertain at this time. We expect that the Healthcare Reform Act, ascurrently enacted or as it may be amended in the future, and other healthcare reform measures that may be adopted in thefuture, could have a material adverse effect on our industry generally and on the ability of us, our collaboration partners, orthose commercializing products with respect to which we have an economic interest or right to receive royalties to maintain orincrease sales of existing products or to successfully commercialize product candidates, if approved. In addition, there have been proposals to impose federal rebates on Medicare Part D drugs, requiring federally-mandated rebates on all drugs dispensed to Medicare Part D enrollees or on only those drugs dispensed to certain groups oflower income beneficiaries. If any of these proposals are adopted and result in additional rebates, this could have a negativeimpact on revenues for our collaboration partners, or those commercializing products with respect to which we have aneconomic interest or right to receive royalties, which could impact our revenues. Beginning on April 1, 2013, Medicare payments for all items and services under Part A and B, including drugs andbiologicals, were reduced by 2% under the sequestration (i.e., automatic spending reductions) as required by federal law,which requires sequestration for most federal programs, excluding Medicaid, Social Security, and certain other programs. Thelaw caps the cuts to Medicare payments for items and services at 2% and this will continue to 2027. As long as these cutsremain in effect, they could adversely impact payment for any products that are reimbursed under44 Table of ContentsMedicare. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of whichcould limit the amounts that federal and state governments will pay for healthcare products and services, which could result inreduced demand for product or additional pricing pressures for our collaboration partners, or those commercializing productswith respect to which we have an economic interest or right to receive royalties, which could impact our revenues. If we failed to comply with our reporting and payment obligations under the Medicaid Drug Rebate program or othergovernmental pricing programs, we could be subject to additional reimbursement requirements, penalties, sanctions andfines, which could have a material adverse effect on our business, financial condition, results of operations and growthprospects.Prior to the sale of VIBATIV to Cumberland, we had certain price reporting obligations to the Medicaid Drug Rebateprogram and other governmental pricing programs, and we had obligations to report average sales price under the Medicareprogram. Following the consummation of the transaction with Cumberland, our price reporting obligations related toVIBATIV have been transitioned to Cumberland, and price reporting obligations for YUPELRI reside with Mylan. However,we retain liability related to price reporting for VIBATIV for historic periods. Under the Medicaid Drug Rebate program, a manufacturer is required to pay a rebate to each state Medicaid programfor its covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program as acondition of having federal funds being made available to the states for our drugs under Medicaid and Medicare Part B. Thoserebates are based on pricing data reported by the manufacturer on a monthly and quarterly basis to CMS, the federal agencythat administers the Medicaid Drug Rebate program. These data include the average manufacturer price and, in the case ofinnovator products, the best price for each drug which, in general, represents the lowest price available from the manufacturerto any entity in the US in any pricing structure, calculated to include all sales and associated rebates, discounts and other priceconcessions. Federal law requires that any company that participates in the Medicaid Drug Rebate program also participate in thePublic Health Service’s 340B drug pricing program in order for federal funds to be available for the manufacturer’s drugsunder Medicaid and Medicare Part B. The 340B program requires participating manufacturers to agree to charge no more thanthe 340B “ceiling price” for the manufacturer’s covered outpatient drugs to a variety of community health clinics and otherentities that receive health services grants from the Public Health Service, as well as hospitals that serve a disproportionateshare of low-income patients. A final regulation regarding the calculation of the 340B ceiling price and the imposition of civilmonetary penalties on manufacturers that knowingly and intentionally overcharge covered entities became effective onJanuary 1, 2019. Federal law also requires that a company that participates in the Medicaid Drug Rebate program report average salesprice information each quarter to CMS for certain categories of drugs that are paid under the Medicare Part B program.Manufacturers calculate the average sales price based on a statutorily defined formula as well as regulations andinterpretations of the statute by CMS. CMS uses these submissions to determine payment rates for drugs under MedicarePart B. Pricing and rebate calculations vary across products and programs, are complex, and are often subject tointerpretation by the manufacturer, governmental or regulatory agencies and the courts. A manufacturer that becomes awarethat its Medicaid reporting for a prior quarter was incorrect, or has changed as a result of recalculation of the pricing data, is areobligated to resubmit the corrected data for up to three years after those data originally were due. Such restatements andrecalculations increase the costs for complying with the laws and regulations governing the Medicaid Drug Rebate programand could result in an overage or underage in our rebate liability for past quarters. Price recalculations also may affect the340B ceiling price. We are liable for errors associated with our submission of pricing data. In addition to retroactive rebates and thepotential for 340B program refunds, if we are found to have knowingly submitted any false price information to thegovernment, we may be liable for significant civil monetary penalties per item of false information. If we are found to havemade a misrepresentation in the reporting of our average sales price, the Medicare statute provides for significant civilmonetary penalties for each misrepresentation for each day in which the misrepresentation was applied. Our failure to submitthe required price data on a timely basis could result in a significant civil monetary penalty per day for each day45 Table of Contentsthe information is late beyond the due date. Such failure also could be grounds for CMS to terminate our Medicaid drug rebateagreement, pursuant to which we participate in the Medicaid program. In the event that CMS terminates our rebate agreement,federal payments may not be available under Medicaid or Medicare Part B for our covered outpatient drugs. In order to be eligible to have its products paid for with federal funds under the Medicaid and Medicare Part Bprograms and purchased by the Department of Veterans Affairs (“VA”), Department of Defense (“DoD”), Public Health Service,and Coast Guard (the “Big Four agencies”) and certain federal grantees, a manufacturer is required to participate in the VAFederal Supply Schedule (“FSS”) pricing program, established under Section 603 of the Veterans Health Care Act of 1992.Under this program, the manufacturer is obligated to make its covered drugs available for procurement on an FSS contract andcharge a price to the Big Four agencies that is no higher than the Federal Ceiling Price (“FCP”), which is a price calculatedpursuant to a statutory formula. The FCP is derived from a calculated price point called the “non-federal average manufacturerprice” (“Non-FAMP”), which the manufacturer calculates and reports to the VA on a quarterly and annual basis. Pursuant toapplicable law, knowing provision of false information in connection with a Non-FAMP filing can subject a manufacturer tosignificant penalties for each item of false information. The FSS contract also contains extensive disclosure and certificationrequirements. Under Section 703 of the National Defense Authorization Act for FY 2008, the manufacturer is required to payquarterly rebates to DoD on utilization of its innovator products that are dispensed through DoD’s Tricare network pharmaciesto Tricare beneficiaries. The rebates are calculated as the difference between the annual Non-FAMP and FCP for the calendaryear that the product was dispensed. A manufacturer that overcharges the government in connection with the FSS contract orTricare Retail Pharmacy Rebate Program, whether due to a misstated FCP or otherwise, is required to refund the difference tothe government. Failure to make necessary disclosures and/or to identify contract overcharges can result in allegations againstus under the False Claims Act and other laws and regulations. Our relationships with customers and third-party payors are subject to applicable anti-kickback, fraud and abuse,transparency and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties,exclusion, contractual damages, reputational harm and diminished profits and future earnings. Healthcare providers, physicians, distributors and third-party payors play a primary role in the distribution,recommendation and prescription of any pharmaceutical product for which we obtain marketing approval. Our arrangementswith third-party payors and customers expose us to broadly applicable fraud and abuse and other healthcare laws andregulations that may constrain the business or financial arrangements through which we market, sell and distribute anyproducts for which we have obtained or may obtain marketing approval. Restrictions under applicable federal and statehealthcare laws and regulations include the following: ·The US federal healthcare Anti-Kickback Statute prohibits any person from, among other things, knowingly andwillfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, in cash or in kind, toinduce or reward either the referral of an individual for, or the purchasing, leasing, ordering or arranging for orrecommending of any good or service for which payment may be made, in whole or in part, under federal andstate healthcare programs such as Medicare and Medicaid. The term “remuneration” has been broadly interpretedto include anything of value. The Anti-Kickback Statute is subject to evolving interpretation and has beenapplied by government enforcement officials to a number of common business arrangements in thepharmaceutical industry. The government can establish a violation of the Anti-Kickback Statute without provingthat a person or entity had actual knowledge of the statute or specific intent to violate it. There are a number ofstatutory exemptions and regulatory safe harbors protecting some common activities from prosecution; however,those exceptions and safe harbors are drawn narrowly. Failure to meet all of the requirements of a particularstatutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-KickbackStatute, but the legality of the arrangement will be evaluated on a case-by-case basis based on the totality of thefacts and circumstances. We seek to comply with the available statutory exemptions and safe harbors wheneverpossible, but our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability. Moreover, there are no safe harbors for many common practices, such as educational andresearch grants or patient or product assistance programs.46 Table of Contents·The federal civil False Claims Act prohibits, among other things, knowingly presenting, or causing to bepresented, claims for payment of government funds that are false or fraudulent, or knowingly making, or using orcausing to be made or used, a false record or statement material to a false or fraudulent claim to avoid, decrease,or conceal an obligation to pay money to the federal government. Private individuals, commonly known as“whistleblowers,” can bring civil False Claims Act qui tam actions, on behalf of the government and suchindividuals and may share in amounts paid by the entity to the government in recovery or settlement. In recentyears, several pharmaceutical and other healthcare companies have faced enforcement actions under the federalFalse Claims Act for, among other things, allegedly submitting false or misleading pricing information togovernment health care programs and providing free product to customers with the expectation that thecustomers would bill federal programs for the product. Federal enforcement agencies also have showed increasedinterest in pharmaceutical companies’ product and patient assistance programs, including reimbursement and co-pay support services, and a number of investigations into these programs have resulted in significant civil andcriminal settlements. Other companies have faced enforcement actions for causing false claims to be submittedbecause of the company’s marketing the product for unapproved, and thus non-reimbursable, uses. In addition, aclaim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes afalse or fraudulent claim for purposes of the federal civil False Claims Act. False Claims Act liability ispotentially significant in the healthcare industry because the statute provides for treble damages and significantmandatory penalties per false claim or statement for violations. Because of the potential for large monetaryexposure, healthcare and pharmaceutical companies often resolve allegations without admissions of liability forsignificant and material amounts to avoid the uncertainty of treble damages and per claim penalties that may beawarded in litigation proceedings. Companies may be required, however, to enter into corporate integrityagreements with the government, which may impose substantial costs on companies to ensure compliance.Criminal penalties, including imprisonment and criminal fines, are also possible for making or presenting a false,fictitious or fraudulent claim to the federal government.·HIPAA, among other things, imposes criminal and civil liability for knowingly and willfully executing a schemeto defraud any healthcare benefit program, including private third-party payors, and also imposes obligations,including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission ofindividually identifiable health information. HIPAA also prohibits knowingly and willfully falsifying,concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement orrepresentation, or making or using any false writing or document knowing the same to contain any materiallyfalse fictitious or fraudulent statement or entry in connection with the delivery of or payment for healthcarebenefits, items or services. Similar to the federal healthcare Anti-Kickback Statute, a person or entity does notneed to have actual knowledge of the statute or specific intent to violate it to have committed a violation.·The federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, requirescertain manufacturers of drugs, devices, biologics, and medical supplies for which payment is available underMedicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually tothe US Department of Health and Human Services, Centers for Medicare and Medicaid Services, informationrelated to payments and other transfers of value, directly or indirectly, to physicians (defined to include doctors,dentists, optometrists, podiatrists, and chiropractors) and teaching hospitals, as well as ownership and investmentinterests held by physicians and their immediate family members. Beginning in 2022, applicable manufacturersalso will be required to report information regarding payments and transfers of value provided to physicianassistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists, and certified nurse-midwives.A manufacturer’s failure to submit timely, accurately and completely the required information for all payments,transfers of value or ownership or investment interests may result in civil monetary penalties of up to anaggregate of $150,000 per year, and up to an aggregate of $1 million per year for “knowing failures.”Manufacturers must submit reports by the 90th day of each calendar year.·Analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales ormarketing arrangements and claims involving healthcare items or services reimbursed by any third-party47 Table of Contentspayors, including private insurers or patients. Several states also require pharmaceutical companies to reportexpenses relating to the marketing and promotion of pharmaceutical products in those states and to report giftsand payments to individual health care providers in those states. Some of these states also prohibit certainmarketing-related activities, including the provision of gifts, meals, or other items to certain health care providers, and restrict the ability of manufacturers to offer co-pay support to patients for certain prescription drugs. Somestates require the posting of information relating to clinical studies and their outcomes. Some states and citiesrequire identification or licensing of sales representatives. In addition, several states require pharmaceuticalcompanies to implement compliance programs or marketing codes.·Similar restrictions are imposed on the promotion and marketing of medicinal products in the EU Member Statesand other countries, including restrictions prohibiting the promotion of a compound prior to its approval. Laws(including those governing promotion, marketing and anti-kickback provisions), industry regulations andprofessional codes of conduct often are strictly enforced. Even in those countries where we may decide not todirectly promote or market our products, inappropriate activity by our international distribution partners couldhave implications for us.The shifting commercial compliance environment and the need to build and maintain robust and expandable systemsto comply with different compliance or reporting requirements in multiple jurisdictions increase the possibility that we or ourpartners may fail to comply fully with one or more of these requirements. Efforts to ensure that our business arrangements withthird parties will comply with applicable healthcare laws and regulations may involve substantial costs. It is possible thatgovernmental authorities will conclude that our business practices may not comply with applicable fraud and abuse or otherhealthcare laws and regulations or guidance. If our operations are found to be in violation of any of these laws or any othergovernmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties,damages, fines, disgorgement, exclusion from government funded healthcare programs, such as Medicare and Medicaid in theUS and similar programs outside the US, contractual damages, diminished profits and future earnings, and the curtailment orrestructuring of our operations, any of which could adversely affect our ability to operate our business and our financialresults. If any of the physicians or other providers or entities with whom we do or expect to do business are found to not be incompliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions fromgovernment funded healthcare programs. Even if we are not determined to have violated these laws, governmentinvestigations into these issues typically require the expenditure of significant resources and generate negative publicity,which could harm our financial condition and divert resources and the attention of our management from operating ourbusiness.Our business and operations, including the use of hazardous and biological materials may result in liabilities with respect toenvironmental, health and safety matters. Our research and development activities involve the controlled use of potentially hazardous substances, includingchemical, biological and radioactive materials. In addition, our operations produce hazardous waste products, includinghazardous waste. Federal, state and local laws and regulations govern the use, manufacture, management, storage, handlingand disposal of hazardous materials and wastes. We may incur significant additional costs or liabilities to comply with, or forviolations of, these and other applicable laws in the future. Also, even if we are in compliance with applicable laws, we cannotcompletely eliminate the risk of contamination or injury resulting from hazardous materials and we may incur liability as aresult of any such contamination or injury. Further, in the event of a release of or exposure to hazardous materials, including atthe sites we currently or formerly operate or at sites such as landfills where we send wastes for disposal, we could be held liablefor cleanup costs or damages or subject to other costs or penalties and such liability could exceed our resources. We do nothave any insurance for liabilities arising from hazardous materials or under environmental laws. Compliance with or liabilityunder applicable environmental laws and regulations or with respect to hazardous materials may be expensive, and current orfuture environmental regulations may impair our research, development and production efforts, which could harm ourbusiness, which could cause the price of our securities to fall. 48 Table of ContentsRISKS RELATING TO OUR ORDINARY SHARESThe market price for our shares has and may continue to fluctuate widely, and may result in substantial losses for purchasersof our ordinary shares.Our ordinary shares began trading on June 3, 2014, and the market price for our shares has and may continue tofluctuate widely, and may result in substantial losses for purchasers of our ordinary shares. To the extent that historically lowtrading volumes for our ordinary shares continues, our stock price may fluctuate significantly more than the stock market as awhole or the stock prices of similar companies. Without a larger public float of actively traded shares, our ordinary shares arelikely to be more sensitive to changes in sales volumes, market fluctuations and events or perceived events with respect to ourbusiness, than the shares of common stock of companies with broader public ownership, and as a result, the trading prices forour ordinary shares may be more volatile. Among other things, trading of a relatively small volume of ordinary shares mayhave a greater effect on the trading price than would be the case if our public float of actively traded shares were larger. Inaddition, as further described below under the risk factor entitled “—Concentration of ownership will limit your ability toinfluence corporate matters,” a number of shareholders hold large concentrations of our shares which, if sold within arelatively short timeframe, could cause the price of our shares to drop significantly. Market prices for securities of biotechnology and biopharmaceutical companies have been highly volatile, and weexpect such volatility to continue for the foreseeable future, so that investment in our ordinary shares involves substantial risk.Additionally, the stock market from time to time has experienced significant price and volume fluctuations unrelated to theoperating performance of particular companies. The following are some of the factors that may have a significant effect on the market price of our ordinary shares: ·lower than expected sales of YUPELRI;·any adverse developments or results or perceived adverse developments or results with respect to our key clinicalprograms, for example our JAK inhibitor program or ampreloxetine, including, without limitation, any delays indevelopment in these programs, any halting of development in these programs, any difficulties or delaysencountered with regard to the FDA or other regulatory authorities in these programs, or any indication fromclinical or non-clinical studies that the compounds in such programs are not safe or efficacious;·any adverse developments or results or perceived adverse developments or results with respect to the GSK-Partnered Respiratory Programs, including, without limitation, lower than expected sales of TRELEGYELLIPTA, any delays in development in these programs, any halting of development in these programs, anydifficulties or delays encountered with regard to the FDA or other regulatory authorities in these programs, anyindication from clinical or non-clinical studies that the compounds in such programs are not safe or efficacious;·any announcements of developments with, or comments by, the FDA or other regulatory authorities with respectto products we or our partners have under development, are manufacturing or have commercialized;·any adverse developments or agreements or perceived adverse developments or agreements with respect to ourrelationship with Innoviva, or the relationship of Innoviva or TRC on the one hand and GSK on the other hand,including any such developments or agreements resulting from or relating to the Spin-Off;·any adverse developments or perceived adverse developments with respect to our relationship with any of ourresearch, development or commercialization partners, including, without limitation, disagreements that may arisebetween us and any of those partners;·any adverse developments or perceived adverse developments in our programs with respect to partnering effortsor otherwise;49 Table of Contents·announcements of patent issuances or denials, technological innovations or new commercial products by us orour competitors;·publicity regarding actual or potential study results or the outcome of regulatory review relating to productsunder development by us, our partners or our competitors;·regulatory developments in the US and foreign countries;·announcements with respect to governmental or private insurer reimbursement policies;·announcements of equity or debt financings;·possible impairment charges on non-marketable equity securities; ·economic and other external factors beyond our control, such as fluctuations in interest rates;·loss of key personnel;·likelihood of our ordinary shares to be more sensitive to changes in sales volume, market fluctuations and eventsor perceived events with respect to our business due to our small public float;·low public market trading volumes for our ordinary shares related in part to the concentration of ownership ofour shares;·the sale of large concentrations of our shares;·developments or disputes as to patent or other proprietary rights;·approval or introduction of competing products and technologies;·results of clinical trials;·failures or unexpected delays in timelines for our potential products in development, including the obtaining ofregulatory approvals;·delays in manufacturing adversely affecting clinical or commercial operations;·fluctuations in our operating results;·market reaction to announcements by other biotechnology or pharmaceutical companies;·initiation, termination or modification of agreements with our collaborators or disputes or disagreements withcollaborators;·litigation or the threat of litigation;·public concern as to the safety of product candidates or medicines developed by us; and·comments and expectations of results made by securities analysts or investors.If any of these factors causes us to fail to meet the expectations of securities analysts or investors, or if adverseconditions prevail or are perceived to prevail with respect to our business, the price of the ordinary shares would likely50 Table of Contentsdrop significantly. A significant drop in the price of a company’s securities often leads to the filing of securities class actionlitigation against the company. This type of litigation against us could result in substantial costs and a diversion ofmanagement’s attention and resources. Concentration of ownership will limit your ability to influence corporate matters.Based on our review of publicly available filings, as of December 31, 2018 our three largest shareholders collectivelyowned approximately 56.2% of our outstanding ordinary shares. These shareholders could control the outcome of actionstaken by us that require shareholder approval, including a transaction in which shareholders might receive a premium over theprevailing market price for their shares. Based on our review of publicly available filings, as of December 31, 2018 ourdirectors, executive officers and investors affiliated with these individuals beneficially owned approximately 7.2% of ouroutstanding ordinary shares. Certain provisions in our constitutional and other documents may discourage our acquisition by a third-party, which couldlimit your opportunity to sell shares at a premium.Our constitutional documents include provisions that could limit the ability of others to acquire control of us, modifyour structure or cause us to engage in change-of-control transactions, including, among other things, provisions that: ·require supermajority shareholder voting to effect certain amendments to our amended and restatedmemorandum and articles of association;·establish a classified board of directors;·restrict our shareholders from calling meetings or acting by written consent in lieu of a meeting;·limit the ability of our shareholders to propose actions at duly convened meetings; and·authorize our board of directors, without action by our shareholders, to issue preferred shares and additionalordinary shares.In addition, in May 2018, our shareholders approved a resolution authorizing our board of directors to adopt ashareholder rights plan in the future intended to deter any person from acquiring more than 19.9% of our outstanding ordinaryshares without the approval of our board of directors. These provisions could have the effect of depriving you of an opportunity to sell your ordinary shares at a premiumover prevailing market prices by discouraging third parties from seeking to acquire control of us in a tender offer or similartransaction. Our shareholders may face difficulties in protecting their interests because we are incorporated under Cayman Islands law.Our corporate affairs are governed by our amended and restated memorandum and articles of association, by theCompanies Law (2016 Revision) of the Cayman Islands and by the common law of the Cayman Islands. The rights of ourshareholders and the fiduciary responsibilities of our directors under the laws of the Cayman Islands are different from thoseunder statutes or judicial precedent in existence in jurisdictions in the US. Therefore, you may have more difficulty inprotecting your interests than would shareholders of a corporation incorporated in a jurisdiction in the US, due to the differentnature of Cayman Islands law in this area. Shareholders of Cayman Islands exempted companies such as our Company have no general rights under CaymanIslands law to inspect corporate records and accounts or to obtain copies of lists of shareholders. Our directors have discretionunder our amended and restated memorandum and articles of association to determine whether or not, and under whatconditions, our corporate records may be inspected by our shareholders, but are not obliged to make them51 Table of Contentsavailable to our shareholders. This may make it more difficult for you to obtain the information needed to establish any factsnecessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest. Our Cayman Islands counsel, Maples and Calder, is not aware of any reported class action having been brought in aCayman Islands court. Derivative actions have been brought in the Cayman Islands courts, and the Cayman Islands courtshave confirmed the availability for such actions. In most cases, the company will be the proper plaintiff in any claim based ona breach of duty owed to it, and a claim against (for example) our officers or directors usually may not be brought by ashareholder. However, based on English authorities, which would in all likelihood be of persuasive authority and be appliedby a court in the Cayman Islands, exceptions to the foregoing principle apply in circumstances in which: ·a company is acting, or proposing to act, illegally or beyond the scope of its authority;·the act complained of, although not beyond the scope of the authority, could be effected if duly authorized bymore than the number of votes which have actually been obtained; or·those who control the company are perpetrating a “fraud on the minority.”A shareholder may have a direct right of action against the company where the individual rights of that shareholderhave been infringed or are about to be infringed. There is uncertainty as to shareholders’ ability to enforce certain foreign civil liabilities in the Cayman Islands.We are incorporated as an exempted company limited by shares with limited liability under the laws of the CaymanIslands. A material portion of our assets are located outside of the US. As a result, it may be difficult for our shareholders toenforce judgments against us or judgments obtained in US courts predicated upon the civil liability provisions of the federalsecurities laws of the US or any state of the US. We have been advised by our Cayman Islands legal counsel, Maples and Calder, that the courts of the CaymanIslands are unlikely (i) to recognize or enforce against Theravance Biopharma judgments of courts of the US predicated uponthe civil liability provisions of the securities laws of the US or any State; and (ii) in original actions brought in the CaymanIslands, to impose liabilities against Theravance Biopharma predicated upon the civil liability provisions of the securitieslaws of the US or any State, on the grounds that such provisions are penal in nature. However, in the case of laws that are notpenal in nature, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the US, the courtsof the Cayman Islands will recognize and enforce a foreign money judgment of a foreign court of competent jurisdictionwithout retrial on the merits based on the principle that a judgment of a competent foreign court imposes upon the judgmentdebtor an obligation to pay the sum for which judgment has been given provided certain conditions are met. For a foreignjudgment to be enforced in the Cayman Islands, such judgment must be final and conclusive and for a liquidated sum, andmust not be in respect of taxes or a fine or penalty, inconsistent with a Cayman Islands’ judgment in respect of the same matter,impeachable on the grounds of fraud or obtained in a manner, and or be of a kind the enforcement of which is, contrary tonatural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well be held to becontrary to public policy). A Cayman Islands court, including the Grand Court of the Cayman Islands, may stay proceedings ifconcurrent proceedings are being brought elsewhere, which would delay proceedings and make it more difficult for ourshareholders to bring action against us. If securities or industry analysts cease coverage of us or do not publish research, or publish inaccurate or unfavorableresearch, about our business, the price of our ordinary shares and trading volume could decline. The trading market for our ordinary shares depends in part on the research and reports that securities or industryanalysts publish about us or our business. If few securities analysts commence coverage of us, or if industry analysts ceasecoverage of us, the trading price for our ordinary shares could be negatively affected. If one or more of the analysts who coverus downgrade our ordinary shares or publish inaccurate or unfavorable research about our business, the price of our ordinaryshares would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly,demand for our ordinary shares could decrease, which might cause our share price and trading volume to decline.52 Table of Contents We do not anticipate paying any cash dividends on our capital shares in the foreseeable future; as a result, capitalappreciation, if any, of our ordinary shares will be your sole source of gain for the foreseeable future.We have never declared or paid cash dividends on our capital shares. We do not anticipate paying any cash dividendson our capital shares in the foreseeable future. We currently intend to retain all available funds and any future earnings to fundthe development and growth of our business. In addition, the terms of any future debt financing arrangement may containterms prohibiting or limiting the amount of dividends that may be declared or paid on our ordinary shares. As a result, capitalappreciation, if any, of our ordinary shares will be your sole source of gain for the foreseeable future. ITEM 1B. UNRESOLVED STAFF COMMENTSNot applicable. ITEM 2. PROPERTIESOur principal physical properties in the US consist of approximately 170,000 square feet of office and laboratoryspace leased in two buildings in South San Francisco, California. The South San Francisco lease expires in May 2030. OurIrish subsidiary operates from approximately 6,100 square feet of leased office space in Dublin, Ireland, and the lease expiresin April 2027. We believe our current space is sufficient for our needs. ITEM 3. LEGAL PROCEEDINGSWe are not currently a party to any material litigation or other material legal proceedings. ITEM 4. MINE SAFETY DISCLOSURESNot applicable.53 Table of Contents PART II ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIESOur ordinary shares have traded on The NASDAQ Global Market under the symbol “TBPH” since June 3, 2014. As ofFebruary 15, 2019, there were 72 shareholders of record of our ordinary shares. As many of our ordinary shares are held bybrokers and other institutions on behalf of shareholders, we are unable to estimate the total number of shareholders representedby these record holders. Dividend PolicyWe currently intend to retain any future earnings to finance our research and development efforts. We have neverdeclared or paid cash dividends on our ordinary shares and do not intend to declare or pay cash dividends on our ordinaryshares in the foreseeable future.Equity Compensation PlansThe following table provides certain information with respect to all of our equity compensation plans in effect as ofDecember 31, 2018: Number of Securities Remaining Available Number of Securities for Future Issuance to be Issued Upon Weighted-Average Under Equity Exercise of Exercise Price of Compensation Plans Outstanding Options, Outstanding Options, (excluding securitiesPlan Category Warrants and Rights (a) Warrants and Rights reflected in column (a))Options 2,634,443 $28.12 3,642,602Restricted shares 3,069,403 n/a n/aEmployee share purchase plan n/a n/a 1,153,357Equity compensation plans approved by securityholders 5,703,846 $28.12 4,795,959Options 428,726 $17.95 132,415Equity compensation plans not approved by securityholders 428,726 $17.95 132,415Total 6,132,572 $26.70 4,928,374 We have three equity compensation plans — our 2013 Equity Incentive Plan (the “2013 EIP”), our 2013 EmployeeShare Purchase Plan (the “2013 ESPP”), and our 2014 New Employee Equity Incentive Plan (the “2014 NEEIP”). At inceptionof the plans, we were authorized to issue 5,428,571 ordinary shares under the 2013 EIP and 857,142 ordinary shares under the2013 ESPP, and 750,000 ordinary shares under the 2014 NEEIP. The 2013 EIP provides for the issuance of share‑based awards, including restricted shares, restricted share units,options, share appreciation rights (“SARs”) and other equity‑based awards, to our employees, officers, directors andconsultants. As of January 1 of each year, commencing on January 1, 2015 and ending on (and including) January 1, 2023, theaggregate number of ordinary shares that may be issued under the 2013 EIP shall automatically increase by a number equal tothe least of 5% of the total number of ordinary shares outstanding on December 31 of the prior year, 3,428,571 ordinary shares,or a number of ordinary shares determined by our board of directors. Options may be granted with an exercise price not lessthan the fair market value of the ordinary shares on the grant date. Under the terms of our 2013 EIP, options granted toemployees generally have a maximum term of 10 years and vest over a four‑year period from the date of grant; 25% vest at theend of one year, and 75% vest monthly over the remaining three years. We may grant options with different vesting terms fromtime to time. Unless an employee’s termination of service is due to disability or death, upon termination of service, anyunexercised vested options will generally be forfeited at the end of three months or the expiration of the option, whichever isearlier. 54 Table of ContentsUnder the 2013 ESPP, our officers and employees may purchase ordinary shares through payroll deductions at a priceequal to 85% of the lower of the fair market value of the ordinary share at the beginning of the offering period or at the end ofeach applicable purchase period. As of January 1 of each year, commencing on January 1, 2015 and ending on (and including)January 1, 2033, the aggregate number of ordinary shares that may be issued under the 2013 ESPP shall automatically increaseby a number equal to the least of 1% of the total number of ordinary shares outstanding on December 31 of the prior year,857,142 ordinary shares, or a number of ordinary shares determined by our board of directors. The ESPP generally provides forconsecutive and overlapping offering periods of 24 months in duration, with each offering period generally composed of fourconsecutive six‑month purchase periods. The purchase periods end on either May 15 or November 15. ESPP contributions arelimited to a maximum of 15% of an employee’s eligible compensation. Our 2013 ESPP also includes a feature that provides for the existing offering period to terminate and for participantsin that offering period to automatically be enrolled in a new offering period when the fair market value of an ordinary share atthe beginning of a subsequent offering period falls below the fair market value of an ordinary share on the first day of suchoffering period. The 2014 NEEIP provides for the issuance of share‑based awards, including restricted shares, restricted share units,non‑qualified options and SARs, to our employees. Options may be granted with an exercise price not less than the fair marketvalue of the ordinary shares on the grant date. Under the terms of our 2014 NEEIP, options granted to employees generallyhave a maximum term of 10 years and vest over a four‑year period from the date of grant; 25% vest at the end of one year, and75% vest monthly over the remaining three years. We may grant options with different vesting terms from time to time. Unlessan employee’s termination of service is due to disability or death, upon termination of service, any unexercised vested optionswill generally be forfeited at the end of three months or the expiration of the option, whichever is earlier. Additional information regarding share‑based compensation is included in Note 1, “Organization and Summary ofSignificant Accounting Policies,” and Note 11, “Share‑Based Compensation,” to the consolidated financial statementsappearing in this Annual Report on Form 10‑K.Share Performance GraphThe graph set forth below compares the cumulative total shareholder return on our ordinary shares for the periodcommencing on June 3, 2014, the date on which our ordinary shares began trading on The NASDAQ Global Market, throughDecember 31, 2018, with the cumulative total return of (i) the NASDAQ Composite Index, (ii) the NYSE Arca PharmaceuticalIndex (previously labeled as the NASDAQ Pharmaceutical Index) and (iii) the NASDAQ Biotechnology Index over the sameperiod. This graph assumes the investment of $100 on June 3, 2014 in each of (1) our ordinary shares, (2) the NASDAQComposite Index, (3) the NYSE Arca Pharmaceutical Index and (4) the NASDAQ Biotechnology Index, and assumes thereinvestment of dividends, if any, although dividends have never been declared on our ordinary shares. The comparisons shown in the graph below are based upon historical data. We caution that the price performanceshown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of ourordinary shares. Notwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act orthe Exchange Act that might incorporate this Annual Report on Form 10‑K or future filings made by us under those statutes,this Performance Graph section shall not be deemed filed with the SEC and shall not be deemed incorporated by reference intoany of those prior filings or into any future filings made by us under those statutes. 55 Table of Contents $100 Investment in TBPH Shares or Index TBPH NASDAQComposite Index NYSE ArcaPharmaceuticalIndex NASDAQBiotechnologyIndexJune 3, 2014 $100.00 $100.00 $100.00 $100.00December 31, 2014 63.46 112.66 105.29 126.47December 31, 2015 69.72 120.66 109.68 141.35December 31, 2016 135.60 131.49 100.53 111.17December 31, 2017 118.63 170.57 117.20 135.22December 31, 2018 108.85 165.78 125.98 123.24 ITEM 6. SELECTED FINANCIAL DATAThe selected consolidated summary financial data below 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, “FinancialStatements and Supplementary Data”, in this Annual Report on Form 10‑K. The following table sets forth certain summary historical financial information as of and for each of the years in thefive‑year period ended December 31, 2018, which have been derived from our (i) audited consolidated financial statements asof December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017, and 2016, which are included in thisAnnual Report, (ii) audited combined financial statements as of December 31, 2016, 2015 and 2014 and for the years endedDecember 31, 2015, and 2014, which are not included in this Annual Report. The summary historical financial informationmay not be indicative of the results of operations or financial position that we would have obtained56 Table of Contentsif we had been an independent company during the periods presented or of our future performance as an independentcompany. Year Ended December 31, 2018 2017 2016 2015 2014 (In thousands, except per share data)CONSOLIDATED STATEMENT OF OPERATIONSDATA Product sales $15,304 $14,788 $17,603 $9,408 $4,418Collaboration revenue 41,791 598 31,045 32,718 7,270Profit sharing revenue 3,275 — — — —Total revenue 60,370 15,386 48,648 42,126 11,688Costs and expenses: Cost of goods sold 715 6,030 2,894 4,657 4,058Research and development 201,348 173,887 141,712 129,165 168,522Selling, general and administrative 97,058 95,592 84,509 90,203 71,647Total costs and expenses 299,121 275,509 229,115 224,025 244,227Loss from operations (238,751) (260,123) (180,467) (181,899) (232,539)Income from investment in TRC, LLC 11,182 170 — — —Interest expense (10,482) (8,547) (1,404) — —Other-than-temporary impairment loss — (8,000) — — —Interest and other income, net 11,966 4,789 1,312 631 1,865Loss before income taxes (226,085) (271,711) (180,559) (181,268) (230,674)Provision for income tax benefit (expense) 10,561 (13,694) (10,110) (951) (6,364)Net loss $(215,524) $(285,405) $(190,669) $(182,219) $(237,038)Basic and diluted net loss per share $(3.99) $(5.45) $(4.26) $(5.34) $(7.46)Shares used to compute basic and diluted net loss per share 53,969 52,352 44,711 34,150 31,755 As of December 31, 2018 2017 2016 2015 2014 (In thousands)CONSOLIDATED BALANCE SHEETS DATA Cash, cash equivalents and marketable securities $517,145 $390,153 $592,661 $215,294 $306,010Working capital 434,269 316,197 479,235 188,002 234,114Total assets 560,235 441,400 639,254 300,116 337,771Convertible senior notes due 2023, net 224,818 223,746 222,676 — —Non-recourse notes due 2033, net 229,535 — — — —Accumulated deficit (1,012,145) (797,740) (512,225) (321,556) (139,337)Total shareholders’ (deficit) equity (51,589) 115,178 350,231 243,065 289,787For the year ended December 31, 2018, cost of goods sold includes a reversal of a $2.25 million charge related to excessinventory purchase commitments originally recognized in 2017. For the years ended December 31, 2017, 2016, 2015, and2014 cost of goods sold includes charges of $3.0 million, $0.3 million, $1.9 million, and $2.9 million, respectively,arising from excess inventory.57 (1)(2) (3)(4)(1) Table of ContentsThe following table discloses the allocation of share‑based compensation expense included in total operating expenses: Year Ended December 31, 2018 2017 2016 2015 2014 (In thousands)Research and development $25,563 $22,691 $20,202 $25,770 $21,191Selling, general and administrative 25,750 26,454 20,967 28,280 22,043Total share-based compensation $51,313 $49,145 $41,169 $54,050 $43,234 75% of the income from our investment in TRC is available only for payment of the Non-Recourse 2033 Notes and is notavailable to pay our other obligations or the claims of our other creditors. Prior to the Spin‑Off in June 2014, we operated as part of Innoviva and not as a separate entity. As a result, the calculationof basic and diluted net loss per share assumes that the 32,260,105 ordinary shares issued to Innoviva stockholders inconnection with the Spin‑Off, less the number of ordinary shares subject to forfeiture, were outstanding from thebeginning of 2014. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONSManagement’s Discussion and Analysis (“MD&A”) is intended to facilitate an understanding of our business andresults of operations. This discussion and analysis should be read in conjunction with our consolidated financial statementsand notes included in this Annual Report on Form 10‑K. The information contained in this discussion and analysis or set forthelsewhere in this Annual Report on Form 10‑K, including information with respect to our plans and strategy for our business,our operating expenses, and future payments under our collaboration agreements, includes forward‑looking statements withinthe meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”), and Section 21E of the Securities ExchangeAct of 1934 (the “Exchange Act”). 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 thatcould cause actual results to differ materially from the results described in or implied by the forward‑looking statementscontained in the following discussion and analysis. See the section entitled “Special Note regarding Forward‑LookingStatements” above for more information. Management OverviewTheravance Biopharma, Inc. ("Theravance Biopharma") is a diversified biopharmaceutical company primarilyfocused on the discovery, development and commercialization of organ-selective medicines. Our purpose is to createtransformational medicines to improve the lives of patients suffering from serious illnesses. Our research is focused in the areasof inflammation and immunology. In pursuit of our purpose, we apply insights and innovation at each stage of our business and utilize our internalcapabilities and those of partners around the world. We apply organ-selective expertise to biologically compelling targets todiscover and develop medicines designed to treat underserved localized diseases and to limit systemic exposure, in order tomaximize patient benefit and minimize risk. These efforts leverage years of experience in developing lung-selective medicinesto treat respiratory disease, including FDA-approved YUPELRI (revefenacin) inhalation solution indicated for themaintenance treatment of patients with chronic obstructive pulmonary disease (“COPD”). Our pipeline of internallydiscovered programs is targeted to address significant patient needs. We have an economic interest in potential future payments from Glaxo Group or one of its affiliates (“GSK”) pursuantto its agreements with Innoviva, Inc. (“Innoviva”) relating to certain programs, including TRELEGY ELLIPTA. Critical Accounting Policies and EstimatesOur management’s discussion and analysis of our financial condition and results of operations is based on ourfinancial statements, which have been prepared in accordance with US Generally Accepted Accounting Principles58 (2)(3)(4)TM Table of Contents(“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, aswell as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on ourhistorical experience and on various other factors that we believe are reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates under different assumptions or conditions. We believe that theaccounting policies discussed below are critical to understanding our historical and future performance, as these policies relateto the more significant areas involving management’s judgments and estimates.Revenue RecognitionEffective January 1, 2018, we adopted Accounting Standards Codification, Topic 606, Revenue from Contracts withCustomers (“ASC 606”) using the modified retrospective method. Under ASC 606, an entity recognizes revenue when itscustomer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expectsto receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entitydetermines are within the scope of ASC 606, an entity performs the following five steps: (i) identify the contract(s) with acustomer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate thetransaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies aperformance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, we identify the performanceobligations in the contract by assessing whether the goods or services promised within each contract are distinct. We thenrecognize revenue for the amount of the transaction price that is allocated to the respective performance obligation when (oras) the performance obligation is satisfied. Product SalesIn our accompanying consolidated income statements, the comparative prior period product sales revenue remainsreported under Accounting Standards Codification, Topic 605, Revenue Recognition (“ASC 605”), and our product salesrevenue recognized in 2018 would not have been materially different under ASC 605 as compared to ASC 606. On November 12, 2018, we completed the sale of our assets related to the manufacture, marketing and sale of theVIBATIV product to Cumberland Pharmaceuticals Inc. (“Cumberland”) pursuant to the Asset Purchase Agreement datedNovember 1, 2018. Up until that date, we sold VIBATIV in the US market by making the drug product available through alimited number of distributors, who sell VIBATIV to healthcare providers. Title and risk of loss transferred upon receipt bythese distributors. We recognized VIBATIV product sales and related cost of product sales when the distributors obtainedcontrol of the drug product, which was at the time title transferred to the distributors. We recorded sales on a net sales basis which includes estimates of variable consideration. The variable considerationresults from sales discounts, government‑mandated rebates and chargebacks, distribution fees, estimated product returns andother deductions for sales made by us prior to the November 12, 2018 sale to Cumberland. We reflected such reductions inrevenue as either an allowance to the related account receivable from the distributor, or as an accrued liability, depending onthe nature of the sales deduction. Sales deductions are based on management’s estimates that considered payor mix in targetmarkets, industry benchmarks and experience to date. In general, these estimates take into consideration a range of possibleoutcomes which are probability-weighted in accordance with the expected value method in ASC 606. We monitoredinventory levels in the distribution channel, as well as sales by distributors to healthcare providers, using product‑specific dataprovided by the distributors. Product return allowances are based on amounts owed or to be claimed on related sales. Theseestimates take into consideration the terms of our agreements with customers, historical product returns of, rebates or discountstaken, estimated levels of inventory in the distribution channel, the shelf life of the product, and specific known marketevents, such as competitive pricing and new product introductions. We update our estimates and assumptions each quarter andif actual future results vary from our estimates, we may adjust these estimates, which could have an effect on product sales andearnings in the period of adjustment. 59 Table of ContentsThe following table summarizes activity in each of the product revenue allowance and reserve categories: Chargebacks, Government Discounts and and Other (In thousands) Fees Rebates Returns Total Balance at December 31, 2016 $779 $377 $747 $1,903 Provision related to current period sales 5,193 580 573 6,346 Adjustment related to prior period sales (127) 75 561 509 Credit or payments made during the period (4,853) (680) (935) (6,468) Balance at December 31, 2017 $992 $352 $946 $2,290 Provision related to current period sales 6,402 704 521 7,627 Adjustment related to prior period sales (81) 168 (449) (362) Credit or payments made during the period (6,938) (932) (157) (8,027) Balance at December 31, 2018 $375 $292 $861 $1,528 Collaborative Arrangements under ASC 606We enter into collaborative arrangements with partners that fall under the scope of Accounting StandardsCodification, Topic 808, Collaborative Arrangements (“ASC 808”). While these arrangements are in the scope of ASC 808,we may analogize to ASC 606 for some aspects of the arrangements. We analogize to ASC 606 for certain activities within thecollaborative arrangement for the delivery of a good or service (i.e., a unit of account) that is part of our ongoing major orcentral operations. Revenue recognized by analogizing to ASC 606 is recorded as “collaboration revenue” whereas, revenuerecognized in accordance with ASC 808, is recorded as “profit sharing revenue” in the consolidated statements of operations. The terms of our collaborative arrangements typically include one or more of the following: (i) up-front fees; (ii)milestone payments related to the achievement of development, regulatory, or commercial goals; (iii) royalties on net sales oflicensed products; (iv) reimbursements or cost-sharing of R&D expenses; and (v) profit/loss sharing arising from co-promotionarrangements. Each of these payments results in collaboration revenues or an offset against R&D expense. Where a portion ofnon‑refundable up-front fees or other payments received is allocated to continuing performance obligations under the terms ofa collaborative arrangement, they are recorded as deferred revenue and recognized as collaboration revenue when (or as) theunderlying performance obligation is satisfied. As part of the accounting for these arrangements, we must develop estimates and assumptions that require judgmentto determine the underlying stand-alone selling price for each performance obligation which determines how the transactionprice is allocated among the performance obligations. The estimation of the stand-alone selling price may include suchestimates as, forecasted revenues or costs, development timelines, discount rates, and probabilities of technical and regulatorysuccess. We evaluate each performance obligation to determine if they can be satisfied at a point in time or over time, and wemeasure the services delivered to our collaborative partner which are periodically reviewed based on the progress of therelated program. The effect of any change made to an estimated input component and, therefore revenue or expenserecognized, would be recorded as a change in estimate. In addition, variable consideration (e.g., milestone payments) must beevaluated to determine if it is constrained and, therefore, excluded from the transaction price. Up-front Fees: If a license to our intellectual property is determined to be distinct from the other performanceobligations identified in the arrangement, we recognize collaboration revenues from transaction price allocated to the licensewhen the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that arebundled with other promises, we utilize judgment to assess the nature of the combined performance obligation to determinewhether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriatemethod of measuring progress for purposes of recognizing collaboration revenue from the allocated transaction price. Forexample, when we receive up-front fees for the performance of research and development services, or when research anddevelopment services are not considered to be distinct from a license, we recognize collaboration revenue for those units ofaccount over time using a measure of progress. We evaluate the measure of progress each reporting period and, if necessary,adjust the measure of performance and related revenue or expense recognition as a change in estimate.60 Table of Contents Milestone Payments: At the inception of each arrangement that includes milestone payments (variable consideration),we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in thetransaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, theassociated milestone value is included in the transaction price. Milestone payments that are not within our or the collaborativepartner’s control, such as non-operational developmental and regulatory approvals, are generally not considered probable ofbeing achieved until those approvals are received. At the end of each reporting period, we re-evaluate the probability ofachievement of milestones that are within our or the collaborative partner’s control, such as operational developmentalmilestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any suchadjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenues and earnings in theperiod of adjustment. Revisions to our estimate of the transaction price may also result in negative collaboration revenues andearnings in the period of adjustment. Royalties: For arrangements that include sales-based royalties, including commercial milestone payments based onthe level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue atthe later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has beenallocated has been satisfied (or partially satisfied). To date, we have not recognized any material royalty revenue resultingfrom any of our collaborative arrangements. Following the sale of VIBATIV to Cumberland in November 2018, VIBATIV royalties earned from Cumberland willbe included within “interest and other income, net” on the consolidated statements of operations. In addition, our incomeearned related to TRELEGY ELLIPTA sales is included within “income from our investment in TRC, LLC” on theconsolidated statements of operations. Reimbursement, cost-sharing and profit-sharing payments: Under certain collaborative arrangements, we have beenreimbursed for a portion of our R&D expenses or participate in the cost-sharing of such R&D expenses. Such reimbursementsand cost-sharing arrangements have been reflected as a reduction of R&D expense in our consolidated statements ofoperations, as we do not consider performing research and development services for reimbursement to be a part of our ongoingmajor or central operations. Research and Development ExpensesResearch and development expenses are recorded in the period that services are rendered or goods are received.Research and development expenses consist of salaries and benefits, laboratory supplies and facility costs, as well as fees paidto third parties that conduct certain research and development activities on behalf of us, net of certain external research anddevelopment expenses reimbursed under our collaborative arrangements. As part of the process of preparing financial statements, we are required to estimate and accrue certain research anddevelopment expenses. This process involves the following: •identifying services that have been performed on our behalf and estimating the level of service performed and theassociated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost; •estimating and accruing expenses in our financial statements as of each balance sheet date based on facts andcircumstances known to us at the time; and •periodically confirming the accuracy of our estimates with selected service providers and making adjustments, ifnecessary. Examples of estimated research and development expenses that we accrue include: •fees paid to clinical research organizations (“CROs”) in connection with preclinical and toxicology studies andclinical studies; 61 Table of Contents•fees paid to investigative sites in connection with clinical studies; •fees paid to contract manufacturing organizations (“CMOs”) in connection with the production of product andclinical study materials; and •professional service fees for consulting and related services. We base our expense accruals related to clinical studies on our estimates of the services received and efforts expendedpursuant to contracts with multiple research institutions and CROs that conduct and manage clinical studies on our behalf.The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Paymentsunder some of these contracts depend on factors, such as the successful enrollment of patients and the completion of clinicalstudy milestones. Our service providers typically invoice us monthly in arrears for services performed. In accruing service fees,we estimate the time period over which services will be performed and the level of effort to be expended in each period. If wedo not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or thecosts of these services, our actual expenses could differ from our estimates. To date, we have not experienced significant changes in our estimates of accrued research and development expensesafter a reporting period. Such changes in estimates recorded after a reporting period have been less than 1% of our annualresearch and development expenses and have not been material. However, due to the nature of estimates, there is no assurancethat we will not make changes to our estimates in the future as we become aware of additional information about the status orconduct of our clinical studies and other research activities. Such changes in estimates will be recognized as research anddevelopment expenses in the period that the change in estimate occurs. Theravance Respiratory Company, LLC (“TRC”)Through our equity ownership of TRC, we are entitled to receive an 85% economic interest in any future paymentsthat may be made by GSK relating to the GSK-Partnered Respiratory Programs (net of TRC expenses paid and the amount ofcash, if any, expected to be used by TRC pursuant to the TRC LLC Agreement over the next four fiscal quarters). The GSK-Partnered Respiratory Programs consist primarily of the TRELEGY ELLIPTA program and the inhaled BifunctionalMuscarinic Antagonist-Beta2 Agonist (“MABA”) program. We analyzed our ownership, contractual and other interests in TRC to determine if TRC is a variable‑interest entity(“VIE”), whether we have a variable interest in TRC and the nature and extent of that interest. We determined that TRC is aVIE. The party with the controlling financial interest, the primary beneficiary, is required to consolidate the entity determinedto be a VIE. Therefore, we also assessed whether we are the primary beneficiary of TRC based on the power to direct itsactivities that most significantly impact its economic performance and our obligation to absorb its losses or the right toreceive benefits from it that could potentially be significant to TRC. Based on our assessment, we determined that we are notthe primary beneficiary of TRC, and, as a result, we do not consolidate TRC in our consolidated financial statements. TRC isrecognized in our consolidated financial statements under the equity method of accounting. Income related to our equityownership of TRC is reflected in our consolidated statement of operations as non-operating income. Income TaxesWe utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets andliabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and aremeasured using enacted tax rates and laws that are anticipated to be in effect when the differences are expected to reverse. Avaluation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not berealized. Our total unrecognized tax benefits of $52.4 million and $41.8 million, as of December 31, 2018 and December 31,2017, respectively, may reduce the effective tax rate in the period of recognition. As of December 31, 2018, we do not believethat it is reasonably possible that our unrecognized tax benefit will significantly decrease in the next62 Table of Contentstwelve months. We currently have a full valuation allowance against our deferred tax assets, which would impact the timing ofthe effective tax rate benefit should any of these uncertain positions be favorably settled in the future. We assess all material positions, including all significant uncertain positions, in all tax years that are still subject toassessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initialdetermination of the position’s sustainability and is measured at the largest amount of benefit that is greater than 50% likelyto be realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed,and we will determine whether the factors underlying the sustainability assertion have changed and whether the amount of therecognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. We have taken certain positionswhere we believe that our position is greater than 50% likely to be realized upon ultimate settlement and for which no reservefor uncertain tax positions has been recorded. If we do not ultimately realize the expected benefit of these positions, we willrecord additional income tax expenses in future periods. Judgments concerning the recognition and measurement of a taxbenefit might change as new information becomes available. Results of OperationsProduct Sales, Collaboration Revenue, and Profit Sharing RevenueProduct sales, collaboration revenue, and profit sharing revenue as compared to the prior years, were as follows: Change Year Ended December 31, 2018 2017 (In thousands) 2018 2017 2016 $ % $ % Product sales $15,304 $14,788 $17,603 $516 3% $(2,815) (16)%Collaboration revenue 41,791 598 31,045 41,193 NM (30,447) (98) Profit sharing revenue 3,275 — — 3,275 NM — — Total revenue $60,370 $15,386 $48,648 $44,984 292% $(33,262) (68)%NM: Not MeaningfulRevenue from product sales was $15.3 million in 2018 and represented our sales of VIBATIV through November 11,2018, the date of the sale of VIBATIV to Cumberland. The increase in revenue of $0.5 million in 2018 compared to 2017 wasprimarily due to an increase in sales volume and pricing. Collaboration revenue increased by $41.2 million in 2018 compared to 2017. The $41.2 million increase wasprimarily due to $31.1 million earned under the Janssen collaboration arrangement for TD-1473 and related back-upcompounds that was entered into in February 2018 and $10.0 million attributed to the April 2018 exercise by Alfasigma of itsoption to develop and commercialize velusetrag. The $31.1 million from Janssen represented the portion of revenuerecognized in 2018 that was related to the total $100.0 million upfront payment received in the same year. We are entitled to a share of US profits and losses (65% to Mylan; 35% to Theravance Biopharma) received inconnection with commercialization of YUPELRI, which was approved by the US Food and Drug Administration (“FDA”) inNovember 2018. Any reimbursement attributed to the 65% cost sharing of our R&D expense from Mylan is characterized as areduction of R&D expense. If in any reporting period, the arrangement results in a receivable from Mylan after the Company’sR&D expenses have been reimbursed, then such a receivable is recognized as profit sharing revenue. Profit sharing revenue of$3.3 million represents our share of the profit receivable from Mylan for the period from approval to December 31, 2018. If in any reporting period, the arrangement results in a payable to Mylan after our R&D expenses have beenreimbursed, then such payments will be recognized as collaboration expenses within operating expenses and no profit sharingrevenue will be recognized. 63 Table of ContentsRevenue from product sales decreased by $2.8 million in 2017 compared to 2016 primarily due to reduced salesvolume attributed to increased competition from generic daptomycin in the US outpatient market, and revenue fromcollaboration arrangements decreased by $30.4 million in 2017 compared to 2016 due to the absence of milestones achievedin 2017. Cost of Goods SoldCost of goods sold, as compared to the prior years, were as follows: Change Year Ended December 31, 2018 2017 (In thousands) 2018 2017 2016 $ % $ % Cost of goods sold $715 $6,030 $2,894 $(5,315) (88)% $3,136 108% Cost of goods sold decreased by $5.3 million in 2018 compared to 2017 primarily due to the reversal of an excessinventory charge that was originally recognized in 2017. In the fourth quarter of 2017, we accrued a $2.25 million liabilityrelated to excess inventory purchase commitments based on our expected purchase obligations at the time. In the secondquarter of 2018, we reversed the expense related to the $2.25 million purchase commitment liability due to the waiver of ourminimum purchase commitment by our third-party manufacturer. The 2018 decrease in cost of goods sold was also attributedto a separate $0.7 million write-off of inventory taken early in 2017 and the sale of the VIBATIV product to Cumberland onNovember 12, 2018. Cost of goods sold increased by $3.1 million in 2017 compared to 2016 primarily due to a $3.0 million chargearising from excess inventory. Research & DevelopmentOur research and development (“R&D”) expenses consist primarily of employee-related costs, external costs, andvarious allocable expenses. We budget total R&D expenses on an internal department level basis, and we manage and reportour R&D activities across the following four cost categories: 1)Employee-related costs, which include salaries, wages and benefits; 2)Share-based compensation, which includes expenses associated with our equity plans; 3)External-related costs, which include clinical trial related expenses, other contract research fees, consulting fees,and contract manufacturing fees; and 4)Facilities and other, which include laboratory and office supplies, depreciation and other allocated expenses,which include general and administrative support functions, insurance and general supplies. The following table summarizes our R&D expenses, net of reimbursements from collaboration partners, during theperiods presented: Change Year Ended December 31, 2018 2017 (In thousands) 2018 2017 2016 $ % $ % Employee-related $62,896 $57,723 $37,328 $5,173 9% $20,395 55%Share-based compensation 25,563 22,691 20,202 2,872 13 2,489 12 External-related 77,305 62,656 57,576 14,649 23 5,080 9 Facilities, depreciation and other allocatedexpenses 35,584 30,817 26,606 4,767 15 4,211 16 Total research & development $201,348 $173,887 $141,712 $27,461 16% $32,175 23% R&D expenses increased by $27.5 million in 2018 compared to 2017. The increase was due to a $14.6 millionincrease in external-related expenses, a $5.2 million increase in employee-related expenses, a $4.8 million increase infacilities, depreciation and other allocated expenses, and a $2.9 million increase in share-based compensation.64 Table of Contents The $14.6 million increase in external-related expenses was primarily due to the advancement of TD-1473 (our gut-selective pan-JAK inhibitor) into a Phase 2 study in Crohn’s disease and a Phase 2b/3 study in ulcerative colitis, continueddevelopment of ampreloxetine (TD-9855, a norepinephrine reuptake inhibitor (“NRI”)) in neurogenic orthostatic hypotension(“nOH”), and continued investment in our research and preclinical programs. The $5.2 million increase in employee-related expenses was primarily due to a $7.3 million net increase in salaries,bonuses and other costs associated with incremental headcount and the achievement of goals related to our key programs anda $5.5 million decrease in employee-related expense reimbursements under certain collaborative arrangements. Theseincreases were partially offset by a $7.6 million decrease in long-term retention and incentive cash bonus awards offered tocertain employees in 2016 due to the probable achievement of certain performance conditions. The payout of such awards isdependent on the Company meeting its critical operating goals and objectives during a five-year period from 2016 toDecember 31, 2020. R&D expenses increased by $32.2 million in 2017 compared to 2016. The increase was primarily related to a $25.5million increase in employee-related and external-related costs due to progression of our key pipeline programs and continuedinvestment in our research efforts. Under certain of our collaborative arrangements, we receive partial reimbursement of employee‑related costs andexternal costs, which have been reflected as a reduction of R&D expenses of $9.1 million, $23.5 million and $90.7 million for2018, 2017 and 2016, respectively. The decreases in expense reimbursements in 2018 compared to 2017 and 2016 wereprimarily attributed to the completion of the Phase 3 pivotal program and submission and approval of the NDA for YUPELRI. Due to later stage clinical development activities and continued investment in our research programs, we anticipateour R&D expenses will increase over current levels. Selling, General & AdministrativeSelling, general and administrative expenses, as compared to the prior years, were as follows: Change Year Ended December 31, 2018 2017 (In thousands) 2018 2017 2016 $ % $ % Selling, general and administrative $97,058 $95,592 $84,509 $1,466 2% $11,083 13% Selling, general and administrative expenses increased by $1.5 million in 2018 compared to 2017. The increase wasprimarily due a $4.1 million increase in employee-related expenses primarily due to increases in salaries and bonuses, and a$1.6 million increase in external-related expenses primarily due to information technology infrastructure projects. Theincrease was partially offset by a $3.5 million decrease in facilities and other allocated expenses, and a $0.7 million decreasein share-based compensation. Selling, general and administrative expenses increased by $11.1 million in 2017 compared to 2016 primarily due tohigher incentive bonus costs. The higher incentive bonus costs were associated with the accrual of our long-term retention andincentive bonus awards granted to certain employees in 2016 due to the probable achievement of certain performanceconditions, as further described below. The payout of such awards is dependent on meeting certain operating goals andobjectives during a five-year period from 2016 to December 31, 2020. Share-based compensation expenses related to selling, general and administrative expenses were $25.8 million, $26.5million and $21.0 million in 2018, 2017 and 2016, respectively. 65 Table of ContentsIncome from Investment in TRC, LLCIncome from investment in TRC, as compared to the prior years, was as follows: Change Year Ended December 31, 2018 2017 (In thousands) 2018 2017 2016 $ % $ % Income from investment in TRC, LLC $11,182 $170 $ — $11,012 NM $170 NM NM: Not MeaningfulIncome from investment in TRC was $11.2 million in 2018 compared to $0.2 million in 2017. The investmentincome in TRC was generated by royalty payments from GSK to TRC arising from the net sales of TRELEGY ELLIPTA whichwas launched in the fourth quarter of 2017. There was no income from TRC in 2016. In connection with the issuance of our $237.5 million net principal amount of 9% non-recourse notes due 2033(“Non-Recourse 2033 Notes”) that were issued in November 2018, 75% of the income from our investment in TRC is availableonly for payment of the Non-Recourse 2033 Notes and is not available to pay our other obligations or the claims of our othercreditors. Interest ExpenseInterest expense, as compared to the prior years, was as follows: Change Year Ended December 31, 2018 2017 (In thousands) 2018 2017 2016 $ % $ % Interest expense $10,482 $8,547 $1,404 $1,935 23%$7,143 509% Interest expense increased to $10.5 million in 2018 compared to $8.5 million in 2017 and $1.4 million in 2016. The$1.9 million increase in 2018 compared to 2017 was primarily due to additional interest expense related to the issuance of theNon-Recourse 2033 Notes in November 2018. The $7.1 million increase in 2017 compared to 2016 was due to a full year ofinterest expense associated with the November 2016 issuance of $230.0 million in aggregate principal amount of 3.25%convertible senior notes due 2023 (the “Convertible Senior 2023 Notes”).Other-Than-Temporary Impairment LossOther-than-temporary impairment loss, as compared to the prior years, was as follows: Change Year Ended December 31, 2018 2017 (In thousands) 2018 2017 2016 $ % $ % Other-than-temporary impairment loss $ — $8,000 $ — $(8,000) NM $8,000 NM NM: Not MeaningfulIn 2017, we recognized an impairment loss of $8.0 million on our investment in Trek Therapeutics, PBC, a non-marketable equity security, which we determined to be other-than-temporary. We had no such loss recorded in the comparableperiods in 2018 and 2016. 66 Table of ContentsInterest and Other IncomeInterest and other income, as compared to the prior years, were as follows: Change Year Ended December 31, 2018 2017 (In thousands) 2018 2017 2016 $ % $ % Interest and other income, net $11,966 $4,789 $1,312 $7,177 150%$3,477 265% Interest and other income increased to $12.0 million in 2018 compared to $4.8 million in 2017 and $1.3 million in2016. The $7.2 million increase in 2018 compared to 2017 was primarily due to a $6.1 million net gain recorded for the sale ofthe VIBATIV product to Cumberland on November 12, 2018. We expect to record the royalties receivable from future US netsales by Cumberland within other income. The $3.5 million increase in 2017 compared to 2016 was primarily due to theadditional income earned from higher investment balances following our public equity and convertible debt offerings inNovember 2016. Provision for Income Tax Benefit (Expense) Change Year Ended December 31, 2018 2017 (In thousands) 2018 2017 2016 $ % $ % Provision for income tax benefit (expense) $10,561 $(13,694) $(10,110) $24,255 (177)%$(3,584) 35% The 2018 benefit for income taxes of $10.6 million was primarily due to additional tax loss generated in 2017 by theUS entity as a result of the finalization of transfer pricing policy, current year US research and development credit, and therelease of previously recorded contingent tax liabilities due to the lapse of the statute of limitations. The provision for incometax recorded in 2017 and 2016 primarily resulted from contingent tax liabilities related to uncertain tax positions taken withrespect to transfer pricing and tax credits. Although we incurred operating losses on a consolidated basis, we operate in multiple jurisdictions and certainjurisdictions generated taxable income. In contrast to 2017 and 2016, we recorded a tax benefit in 2018 because of theaforementioned tax benefits. Liquidity and Capital ResourcesWe have financed our operations primarily through public offering of equity and debt securities, private placementsof equity and debt, revenue from collaboration arrangements and, to a lesser extent, revenue from product sales. As ofDecember 31, 2018, we had approximately $517.1 million in cash, cash equivalents, and investments in marketable securities.Also, as of December 31, 2018, we had outstanding $230.0 million in aggregate principal Convertible Senior 2023 Notes and$237.5 million in net principal Non-Recourse 2033 Notes. The Non-Recourse 2033 Notes are secured by all of the issuer’s right, title and interest as a holder of certainmembership interests (the “Issuer Class C Units”) in TRC. The primary source of funds to make payments on the Non-Recourse2033 Notes will be the 63.75% economic interest of the issuer (evidenced by the Issuer Class C Units) in any future paymentsthat may be made by GSK to TRC under the strategic alliance agreement and under the portion of the collaboration agreementassigned to TRC by Innoviva (net of TRC expenses paid and the amount of cash, if any, expected to be used by TRC pursuantto the TRC LLC Agreement over the next four fiscal quarters) relating to the GSK-Partnered Respiratory Programs, includingthe TRELEGY ELLIPTA program. The sole source of principal and interest payments for the Non-Recourse 2033 Notes are thefuture royalty payments generated from the TRELEGY ELLIPTA program, and as a result, the holders of the Non-Recourse2033 Notes have no recourse against Theravance Biopharma even if the TRELEGY ELLIPTA payments are insufficient tocover the principal and interest payments for the Non-Recourse 2033 Notes. We expect to continue to incur net losses over at least the next several years due to significant expenditures relatingto our continuing drug discovery efforts, preclinical and clinical development of our current product candidates andcommercialization costs relating to YUPELRI. In particular, to the extent we advance our product candidates into and67 Table of Contentsthrough later‑stage clinical studies without a partner, we will incur substantial expenses. We expect the clinical developmentof our key development programs will require significant investment in order to continue to advance in clinical development.In addition, we expect to invest strategically in our research efforts to continue to grow our development pipeline. In the past,we have received a number of significant payments from collaboration agreements and other significant transactions. In thefuture, we may continue to receive potential substantial payments from future collaboration transactions if the drug candidatesin our pipeline achieve positive clinical or regulatory outcomes. In addition, we recently began recognizing investmentincome arising from our economic interest in royalties payable by GSK to TRC. Our current business plan is subject tosignificant uncertainties and risks as a result of, among other factors, clinical program outcomes, whether, when and on whatterms we are able to enter into new collaboration arrangements, expenses being higher than anticipated, the sales levels of anyapproved products, unplanned expenses, cash receipts being lower than anticipated, and the need to satisfy contingentliabilities, including litigation matters and indemnification obligations. Adequacy of cash resources to meet future needsWe expect our cash and cash equivalents and marketable securities will be sufficient to fund our operations for atleast the next 12 months from the issuance date of these consolidated financial statements based on current operating plansand financial forecasts. We may seek to obtain additional financing in the form of public or private equity offerings, debt financing oradditional collaborations and licensing arrangements. However, future financing may not be available in amounts or on termsacceptable to us, if at all. Without adequate financial resources to fund our operations as presently conducted, we may be required to relinquishrights to our technologies, product candidates or territories, or grant licenses on terms that are not favorable to us, in order toraise additional funds through collaborations or licensing arrangements. We may also have to sequence preclinical andclinical studies as opposed to conducting them concomitantly in order to conserve resources, or delay, reduce or eliminate oneor more of our research or development programs and reduce overall overhead expenses. In addition, we may have to makereductions in our workforce and may be prevented from continuing our discovery, development and commercialization effortsand exploiting other corporate opportunities. Cash FlowsCash flows, as compared to the prior years, were as follows: Year Ended December 31, Change(In thousands) 2018 2017 2016 2018 2017Net cash used in operating activities $(112,867) $(201,052) $(98,989) $88,185 $(102,063)Net cash provided by (used in) investing activities 176,708 (56,333) (148,235) 233,041 91,902Net cash provided by financing activities 225,200 1,656 479,226 223,544 (477,570) Net cash flows used in operating activitiesNet cash used in operating activities was $112.9 million in 2018, consisting primarily of net loss of $215.5 million,adjusted for non-cash items such as $51.3 million for share-based compensation expense, and $59.4 million of net cash inflowrelated to changes in operating assets and liabilities primarily driven by the $100.0 million upfront payment in February 2018from the Janssen collaborative arrangement.Net cash used in operating activities was $201.1 million in 2017, consisting primarily of net loss of $285.4 million,adjusted for non‑cash items such as $49.1 million for share‑based compensation expense, $8.0 million for other-than-temporary impairment loss on our non-marketable equity securities and $22.4 million of net cash inflow related to changes inoperating assets and liabilities. The $22.4 million net cash inflow related to changes in operating assets and liabilities wasprimarily attributable to a $36.6 million increase in our accounts payable, accrued personnel-related and clinical/developmentexpenses, and other long-term liabilities. This was partially offset by a $15.2 million increase in our inventory and long-termtax receivable related to the prepayment of corporate taxes and tax withholdings.68 Table of Contents Net cash used in operating activities was $99.0 million in 2016, consisting primarily of net loss of $190.7 million,adjusted for non‑cash items such as $41.2 million for share‑based compensation expense and $46.9 million of net cash inflowrelated to changes in operating assets and liabilities. The $46.9 million net cash inflow related to changes in operating assetsand liabilities was primarily attributable to a $26.2 million net decrease in receivables from collaboration partners, principallyMylan, and $9.5 million in net tax refunds in 2016. Net cash flows provided by (used in) investing activitiesNet cash provided by investing activities was $176.7 million in 2018, consisting of maturities of marketablesecurities of $347.2 million and $20.0 million in proceeds from the VIBATIV sale. These inflows were partially offset byoutflows related to purchases of marketable securities of $183.3 million and the acquisition of property and equipment of $7.2million. Net cash used in investing activities was $56.3 million in 2017, consisting primarily of purchases of marketablesecurities of $288.8 million partially offset by maturities of marketable securities of $234.9 million. Net cash used in investing activities was $148.2 million in 2016, consisting primarily of purchases of marketablesecurities of $237.6 million partially offset by maturities of marketable securities of $91.5 million. Net cash flows provided by financing activitiesNet cash provided by financing activities was $225.2 million in 2018, consisting of net proceeds from the issuance ofour Non-Recourse 2033 Notes of $229.4 million, $5.6 million in share option exercises and employee share plan purchases,and partially offset by $9.8 million related to the repurchase of shares to satisfy tax withholdings associated with vestedoptions. Net cash provided by financing activities was $1.7 million in 2017, consisting of net proceeds arising from shareoption exercises, employee share plan purchases, and partially offset by the repurchase of shares to satisfy tax withholdingsassociated with vested options. Net cash provided by financing activities was $479.2 million in 2016, consisting primarily of the sales of ordinaryshares for total net proceeds of $253.0 million and the issuance of our Convertible Senior 2023 Notes for a total net proceedsof $222.5 million. Contractual Obligations and Commercial CommitmentsIn the table below, we set forth our significant obligations and future commitments, as well as obligations related toall contracts that we are likely to continue, regardless of the fact that they were cancelable as of December 31, 2018. Some ofthe figures that we include in this table are based on management’s estimate and assumptions about these obligations,including their duration. Because these estimates and assumptions are necessarily subjective, the amount of the obligations wewill actually pay in future periods may vary from those reflected in the table. Years(In thousands) Total Within 1 Over 1 to 3 Over 3 to 5 After 53.25% Convertible senior notes due 2023 - principal $230,000 $ — $ — $230,000 $ —3.25% Convertible senior notes due 2023 - interest 36,150 7,475 14,950 13,725 —9.0% Non-recourse notes due 2033 - principal * 237,500 * * * *Facility operating leases 113,912 7,817 16,048 19,810 70,237Purchase obligations 282,827 139,132 104,946 26,027 12,722Total $900,389 $154,424 $135,944 $289,562 $82,959 *The Non-Recourse 2033 Notes are secured by Triple Royalty Sub LLC’s (the “Issuer”) right, title, and interest in TRC. Theprimary source of funds to make payments on the Non-Recourse 2033 Notes is the 63.75% economic69 (1)(2) Table of Contentsinterest of the Issuer in any future payments made by GSK under the collaboration agreement, dated as of November 14,2002, by and between Innoviva and GSK relating to the TRELEGY ELLIPTA program. In addition, prior to October 15,2020, in the event that the distributions received by the Issuer from TRC in a quarter is less than the interest accrued forthe quarter, the principal amount of the Non-Recourse 2033 Notes will increase by the interest shortfall amount for thatperiod. Since the timing of the principal and interest payments on the Non-Recourse 2033 Notes are ultimately based onroyalties from TRELEGY ELLIPTA product sales, which will vary from quarter to quarter and are unknown to us, only thetotal net principal payment amount at issuance is included in the above table. See Note 8, "Long-Term Debt" of theaccompanying consolidated financial statements for further information.As security for performance of certain obligations under the operating leases for our principal physical properties, weissued a letter of credit in the amount of $0.8 million, collateralized by an equal amount of restricted cash. Substantially all of this amount was subject to open purchase orders, as of December 31, 2018, that were issued underexisting contracts. This amount does not represent any minimum contract termination liabilities for our existing contracts. Commitments and ContingenciesWe indemnify our officers and directors for certain events or occurrences, subject to certain limits. We believe the fairvalue of these indemnification agreements is minimal. Accordingly, we have not recognized any liabilities relating to theseagreements as of December 31, 2018. Performance-Contingent AwardsIn 2016, we granted long-term retention and incentive restricted share awards (“RSAs”) and restricted share units(“RSUs”) to members of senior management and long-term retention and incentive cash bonus awards to certain employees.The vesting and payout of such awards is dependent on meeting certain operating goals and objectives during a five-yearperiod from 2016 to December 31, 2020. These goals are strategically important for us, and we believe the goals, if achieved,will increase shareholder value. The awards have dual triggers of vesting based upon the achievement of these goals andcontinued employment, and they are broken into three separate tranches. We determined that achievement of the requisite performance conditions for the first tranche were completed as ofJune 30, 2018. The maximum potential remaining expense associated with the second and third tranches of this program is$17.8 million related to share-based compensation expense and $21.0 million related to cash bonus expense, which would berecognized in increments based on achievement of the performance conditions. With the completed achievement of the firsttranche’s requisite performance conditions and the second tranche being probable due to achievement of certain performanceconditions and multiple advancements of programs within our development pipeline, we have recognized $4.3 million inshare-based compensation expense and $5.4 million in cash bonus expense for the year ended December 31, 2018,respectively. We determined that the remaining third tranche was not probable of vesting and, as a result, no compensationexpense related to this tranche has been recognized to date. In 2017, we approved the grant of 50,000 performance-contingent RSUs to a newly appointed member of seniormanagement. The RSUs have dual triggers of vesting based upon the achievement of certain corporate operating milestones inspecified timelines, as well as a requirement for continued employment. Share-based compensation expense related to thisgrant is broken into two separate tranches and recognized when the associated performance goals are deemed to be probable ofachievement. The maximum expense associated with the first tranche was $0.8 million. In 2017, we recognized $0.4 million inshare-based compensation expense as we determined that the performance conditions associated with the first tranche wasprobable of vesting, and in 2018, we recognized the remaining $0.4 million of share-based compensation expense as theperformance conditions associated with the first tranche of this award were met. We have determined that the second tranchewas not probable of vesting as of December 31, 2018 and, as a result, no compensation expense related to the second tranchehas been recognized to date. 70 (1)(2) Table of ContentsOff‑Balance Sheet ArrangementsOur equity interest in TRC constitutes an off‑balance sheet arrangement. Under the agreement governing TRC, themanager of TRC may request quarterly capital contributions from us to fund the operating costs of TRC; however, we are notobligated to make such contributions. Our equity interest in TRC entitles us to an 85% economic interest in any futurepayments, which includes royalties and milestone payments, made by GSK under the strategic alliance agreement and underthe portion of the collaboration agreement assigned to TRC by Innoviva (the “GSK Agreements”). We have determined TRCto be a variable interest entity that is not consolidated in our financial statements. The potential importance of TRC to ourfuture financial condition and results of operations is dependent upon the progression of drug candidates covered by the GSKAgreements through development to commercialization and the rate of commercialization for approved drugs covered by theGSK Agreements. We rely on publicly available information about those drug candidates as we do not have access toconfidential information regarding their progression or status. Recent Accounting PronouncementsThe information required by this item is included in Item 8, Note 1, “Organization and Summary of SignificantAccounting Policies,” in our consolidated financial statements included in this Annual Report on Form 10‑K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKWe are exposed to market risks in the ordinary course of our business. These risks primarily include risk related tointerest rate sensitivities.Interest Rate SensitivityWe have invested primarily in money market funds, federal agency notes, corporate debt securities, commercialpapers and US treasury notes. To reduce the volatility relating to these exposures, we have put investment and riskmanagement policies and procedures in place. The securities in our investment portfolio are not leveraged and are classified asavailable‑for‑sale due to their short‑term nature. We currently do not engage in hedging activities. We performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of ourinvestment portfolio. As of December 31, 2018 and 2017, we have estimated that a hypothetical 100 basis point increase ininterest rates would have resulted in a decrease in the fair market value of our investment portfolio of $0.5 million and$1.8 million, respectively. Such losses would only be realized if we sold the investments prior to maturity. We are also subject to interest rate sensitivity on our outstanding Convertible Senior 2023 Notes that were issued inNovember 2016 and our Non-Recourse 2033 Notes that were issued in November 2018. Increases in interest rates would resultin a decrease in the fair value of our outstanding debt and decreases in interest rates would result in an increase in the fairvalue of our outstanding debt. These increases or decreases in the fair value of our outstanding debt would be partially offsetby corresponding increases or decreases in our investment portfolio. The Convertible Senior 2023 Notes pay interestsemi‑annually, and the $230.0 million of principal is scheduled to be repaid in 2023. The Non-Recourse 2033 Notes payinterest and principal quarterly, and the final payment of the $237.5 million of net principal is due by 2033. 71 Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAReport of Independent Registered Public Accounting Firm 73Consolidated Balance Sheets as of December 31, 2018 and 2017 74Consolidated Statements of Operations for each of the three years in the period ended December 31, 2018 75Consolidated Statements of Comprehensive Loss for each of the three years in the period ended December 31, 2018 76Consolidated Statements of Shareholders’ Equity (Deficit) for each of the three years in the period ended December 31,2018 77Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2018 78Notes to Consolidated Financial Statements 79Supplementary Financial Data (unaudited) 11372 Table of ContentsReport of Independent Registered Public Accounting FirmTo the Shareholders and the Board of Directors of Theravance Biopharma, Inc. Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Theravance Biopharma, Inc. (the Company) as ofDecember 31, 2018 and 2017, the related consolidated statements of operations, comprehensive loss, shareholders’ equity, andcash flows, for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to asthe “consolidated financial statements”). In our opinion, the financial statements present fairly, in all material respects, thefinancial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows foreach of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accountingprinciples. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established inInternal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission(2013 Framework) and our report dated February 28, 2019 expressed an unqualified opinion thereon. Basis for OpinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion onthe Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and arerequired to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicablerules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether dueto error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financialstatements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includeexamining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits alsoincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating theoverall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2013. San Jose, CaliforniaFebruary 28, 2019 73 Table of ContentsTHERAVANCE BIOPHARMA, INC.CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) December 31, 2018 2017 Assets Current assets: Cash and cash equivalents $378,021 $88,980 Short-term marketable securities 127,255 259,586 Accounts receivable, net of allowances of $0 and $992 at December 31, 2018 and 2017,respectively 620 2,253 Receivables from collaborative arrangements 10,053 7,109 Prepaid taxes 310 291 Other prepaid and current assets 16,564 3,700 Inventories — 16,830 Total current assets 532,823 378,749 Property and equipment, net 13,176 10,157 Long-term marketable securities 11,869 41,587 Tax receivable — 8,191 Restricted cash 833 833 Other assets 1,534 1,883 Total assets $560,235 $441,400 Liabilities and Shareholders' (Deficit) Equity Current liabilities: Accounts payable $9,028 $5,924 Accrued personnel-related expenses 23,803 24,136 Accrued clinical and development expenses 11,876 20,657 Other accrued liabilities 10,445 11,710 Deferred revenue 43,402 125 Total current liabilities 98,554 62,552 Convertible senior notes due 2023, net 224,818 223,746 Non-recourse notes due 2033, net 229,535 — Deferred rent 7,976 3,668 Long-term deferred revenue 26,179 1,436 Other long-term liabilities 24,762 34,820 Commitments and contingencies (Notes 2, 11, and 13) Shareholders’ (Deficit) Equity Preferred shares, $0.00001 par value: 230 shares authorized, no shares issued oroutstanding at December 31, 2018 and 2017, respectively — — Ordinary shares, $0.00001 par value: 200,000 shares authorized; 55,681 and 54,381 sharesissued and outstanding at December 31, 2018 and 2017, respectively 1 1 Additional paid-in capital 960,721 913,650 Accumulated other comprehensive loss (166) (733) Accumulated deficit (1,012,145) (797,740) Total shareholders’ (deficit) equity (51,589) 115,178 Total liabilities and shareholders’ (deficit) equity $560,235 $441,400 See accompanying notes to consolidated financial statements74 Table of ContentsTHERAVANCE BIOPHARMA, INC.CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Year Ended December 31, 2018 2017 2016Revenue: Product sales $15,304 $14,788 $17,603Collaboration revenue 41,791 598 31,045Profit sharing revenue 3,275 — —Total revenue 60,370 15,386 48,648 Costs and expenses: Cost of goods sold 715 6,030 2,894Research and development (1) 201,348 173,887 141,712Selling, general and administrative (1) 97,058 95,592 84,509Total costs and expenses 299,121 275,509 229,115Loss from operations (238,751) (260,123) (180,467)Income from investment in TRC, LLC (Note 7) 11,182 170 —Interest expense (10,482) (8,547) (1,404)Other-than-temporary impairment loss — (8,000) —Interest and other income, net 11,966 4,789 1,312Loss before income taxes (226,085) (271,711) (180,559)Provision for income tax benefit (expense) (Note 12) 10,561 (13,694) (10,110)Net loss $(215,524) $(285,405) $(190,669) Net loss per share: Basic and diluted net loss per share $(3.99) $(5.45) $(4.26)Shares used to compute basic and diluted net loss per share 53,969 52,352 44,711 (1)Amounts include share-based compensation expense as follows: Year Ended December 31, (In thousands) 2018 2017 2016Research and development $25,563 $22,691 $20,202Selling, general and administrative 25,750 26,454 20,967Total share-based compensation expense $51,313 $49,145 $41,169 See accompanying notes to consolidated financial statements.75 Table of ContentsTHERAVANCE BIOPHARMA, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) Year Ended December 31, 2018 2017 2016Net loss $(215,524) $(285,405) $(190,669)Other comprehensive income (loss):Net unrealized gain (loss) on available-for-sale investments, net of tax 567 (480) (183)Comprehensive loss $(214,957) $(285,885) $(190,852) See accompanying notes to consolidated financial statements.76 Table of ContentsTHERAVANCE BIOPHARMA, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)(In thousands) Additional Other Total Ordinary Shares Paid-In Comprehensive Accumulated Shareholders' Shares Amount Capital Income (Loss) Deficit Equity (Deficit)Balances at December 31, 2015 37,981 $ — $564,691 $(70) $(321,556) $243,065Net proceeds from sale of ordinary shares 11,978 1 253,027 — — 253,028Proceeds from ESPP purchases 245 — 3,172 — — 3,172Employee share-based compensation expense — — 41,290 — — 41,290Issuance of restricted shares 2,466 — — — — —Option exercises 197 — 4,378 — — 4,378Repurchase of shares to satisfy tax withholding (34) — (3,871) — — (3,871)Excess tax benefit of share-based compensation — — 21 — — 21Net unrealized loss on marketable securities — — — (183) — (183)Net loss — — — — (190,669) (190,669)Balances at December 31, 2016 52,833 1 862,708 (253) (512,225) 350,231Net proceeds from sale of ordinary shares — — 1 — — 1Proceeds from ESPP purchases 250 — 3,980 — — 3,980Employee share-based compensation expense — — 49,175 — — 49,175Issuance of restricted shares 1,025 — — — — —Option exercises 276 — 6,236 — — 6,236Cumulative effect upon the adoption of ASU2016-09 — — 110 — (110) —Repurchase of shares to satisfy tax withholding (3) — (8,560) — — (8,560)Net unrealized loss on marketable securities — — — (480) — (480)Net loss — — — — (285,405) (285,405)Balances at December 31, 2017 54,381 1 913,650 (733) (797,740) 115,178Proceeds from ESPP purchases 204 — 4,173 — — 4,173Employee share-based compensation expense — — 51,313 — — 51,313Issuance of restricted shares 1,168 — — — — —Option exercises 75 — 1,393 — — 1,393Cumulative effect upon the adoption of ASC 606 — — — — 1,119 1,119Repurchase of shares to satisfy tax withholding (147) — (9,808) — — (9,808)Net unrealized gain on marketable securities — — — 567 — 567Net loss — — — — (215,524) (215,524)Balances at December 31, 2018 55,681 $ 1 $960,721 $(166) $(1,012,145) $(51,589) See accompanying notes to consolidated financial statements.77 Table of ContentsTHERAVANCE BIOPHARMA, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2018 2017 2016Operating activities Net loss $(215,524) $(285,405) $(190,669)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,166 4,027 3,119Share-based compensation 51,313 49,145 41,169Net gain from the sale of VIBATIV business (6,056) — —Other-than-temporary impairment loss — 8,000 —Inventory write-down — 740 303Excess tax benefits from share-based compensation — — (21)Undistributed earnings from investment in TRC, LLC (5,152) — —Other (43) 10 182Changes in operating assets and liabilities: Accounts receivable 1,633 (1,607) 1,276Receivables from collaborative arrangements (2,944) 1,967 26,156Prepaid taxes — 2,788 9,522Other prepaid and current assets (2,400) (1,489) 2,710Inventories (1,629) (7,301) (3,182)Tax receivable 8,191 (7,890) —Other assets 45 (354) 184Accounts payable 3,575 3,796 (16,436)Accrued personnel-related expenses, accrued clinical and development expenses, andother accrued liabilities (10,516) 8,353 17,192Deferred rent 4,308 (298) (632)Deferred revenue 69,224 17 448Other long-term liabilities (10,058) 24,449 9,690Net cash used in operating activities (112,867) (201,052) (98,989) Investing activities Purchases of property and equipment (7,240) (2,406) (2,135)Purchases of marketable securities (183,261) (288,791) (237,567)Maturities of marketable securities 347,192 234,864 91,467Proceeds from the sale of VIBATIV business, net 20,000 — —Proceeds from the sales of fixed assets 17 — —Net cash provided by (used in) investing activities 176,708 (56,333) (148,235) Financing activities Proceeds from sale of ordinary shares, net — — 253,028Proceeds from issuance of notes, net 229,441 — 222,498Proceeds from ESPP purchases 4,173 3,980 3,172Proceeds from option exercises 1,393 6,236 4,378Excess tax benefits from share-based compensation — — 21Repurchase of shares to satisfy tax withholding (9,807) (8,560) (3,871)Net cash provided by financing activities 225,200 1,656 479,226 Net increase (decrease) in cash, cash equivalents, and restricted cash 289,041 (255,729) 232,002Cash, cash equivalents, and restricted cash at beginning of period 89,813 345,542 113,540Cash, cash equivalents, and restricted cash at end of period $378,854 $89,813 $345,542 Supplemental disclosure of cash flow information Cash paid for interest $7,475 $7,454 $ —Cash (received) paid for income taxes, net $(7,316) $4,929 (9,488) See accompanying notes to consolidated financial statements. 78 Table of ContentsTHERAVANCE BIOPHARMA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Summary of Significant Accounting PoliciesTheravance Biopharma, Inc. (“Theravance Biopharma” or the “Company”) is a diversified biopharmaceuticalcompany primarily focused on the discovery, development and commercialization of organ-selective medicines to improvethe lives of patients suffering from serious illnesses. Basis of PresentationThe Company’s consolidated financial statements have been prepared in conformity with US Generally AcceptedAccounting Principles ("GAAP"), and the US Securities and Exchange (“SEC”) regulations for annual reporting.Principles of ConsolidationThe consolidated financial statements include the accounts of Theravance Biopharma and its wholly-ownedsubsidiaries, all of which are denominated in US dollars. All intercompany balances and transactions have been eliminated inconsolidation.Use of Management’s EstimatesThe preparation of consolidated financial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.Actual results could differ materially from those estimates. On an ongoing basis, management evaluates its significantaccounting policies or estimates. Management based its estimates on historical experience and other relevant assumptionsthat it believes to be reasonable under the circumstances. These estimates also form the basis for making judgments about thecarrying values of assets and liabilities when these values are not readily apparent from other sources. Segment ReportingThe Company operates in a single segment, which is the discovery (research), development and commercializationof human therapeutics. The Company’s business offerings have similar economics and other characteristics, including thenature of products and manufacturing processes, types of customers, distribution methods and regulatory environment. TheCompany is comprehensively managed as one business segment by the Company’s Chief Executive Officer and themanagement team. Product sales are attributed to regions based on ship‑to location and revenue from collaborativearrangements, including royalty revenue, are attributed to regions based on the location of the collaboration partner.Revenue from profit sharing arrangements are attributed to the geographic market in which the products are sold. Capitalizedproperty and equipment is predominantly located in the US. Cash and Cash EquivalentsThe Company considers all highly liquid investments purchased with a maturity of three months or less on the dateof purchase to be cash equivalents. Cash equivalents are carried at fair value. Restricted CashUnder certain lease agreements and letters of credit, the Company has pledged cash and cash equivalents ascollateral. As of December 31, 2018 and 2017, restricted cash related to such agreements was $0.8 million. Investments in Marketable SecuritiesThe Company invests in marketable securities, primarily corporate notes, government, government agency, andmunicipal bonds. The Company classifies its marketable securities as available‑for‑sale securities and reports them at79 Table of Contentsfair value in cash equivalents or marketable securities on the consolidated balance sheets with related unrealized gains andlosses included as a component of shareholders’ equity. The amortized cost of debt securities is adjusted for amortization ofpremiums and accretion of discounts to maturity, which is included in interest income on the consolidated statements ofoperations. Realized gains and losses and declines in value judged to be other‑than‑temporary, if any, on available‑for‑salesecurities are included in interest and other income (loss). The cost of securities sold is based on the specific identificationmethod. Interest and dividends on securities classified as available‑for‑sale are included in interest income. The Company regularly reviews all of its investments for other‑than‑temporary declines in estimated fair value. TheCompany’s review includes the consideration of the cause of the impairment, including the creditworthiness of the securityissuers, the number of securities in an unrealized loss position, the severity and duration of the unrealized losses, whether theCompany has the intent to sell the securities and whether it is more likely than not that the Company will be required to sellthe securities before the recovery of their amortized cost basis. When the Company determines that the decline in estimatedfair value of an investment is below the amortized cost basis and the decline is other‑than‑temporary, the Company reducesthe carrying value of the security and records a loss for the amount of such decline. Fair Value of Financial InstrumentsThe Company defines fair value as the exchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transactionbetween market participants on the measurement date. The Company’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflectreadily obtainable data from independent sources, while unobservable inputs reflect the Company’s market assumptions. TheCompany classifies these inputs into the following hierarchy: Level 1 — Quoted prices for identical instruments in active markets. Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instrumentsin markets that are not active; and model‑derived valuations whose inputs are observable or whose significant valuedrivers are observable. Level 3 — Unobservable inputs and little, if any, market activity for the assets. Financial instruments include cash equivalents, marketable securities, non-marketable securities, accountsreceivable, accounts payable, accrued liabilities, and debt. The Company’s cash equivalents and marketable securities arecarried at estimated fair value and remeasured on a recurring basis. The carrying value of accounts receivable, receivablesfrom collaborative arrangements, accounts payable, and accrued liabilities approximate their estimated fair value due to therelatively short‑term nature of these instruments. Accounts ReceivableTrade accounts receivable are recorded net of allowances for wholesaler chargebacks related to government rebateprograms, cash discounts for prompt payment, distribution fees, and sales discounts. Estimates for wholesaler chargebacks forgovernment rebates and cash discounts are based on contractual terms, historical trends and the Company’s expectationsregarding the utilization rates for these programs. When appropriate, the Company provides for an allowance for doubtfulaccounts by reserving for specifically identified doubtful accounts. For the periods presented, the Company did not have anymaterial write‑offs of trade accounts receivable. The Company performs periodic credit evaluations of its customers andgenerally does not require collateral. On November 12, 2018, the Company completed the sale of its assets related to the manufacture, marketing and saleof the VIBATIV product to Cumberland Pharmaceuticals Inc. (“Cumberland”) pursuant to the Asset Purchase Agreementdated November 1, 2018. As a result, the remaining accounts receivable balance at December 31, 2018 related to productsales recognized prior to November 12, 2018.80 Table of Contents Concentration of Credit RisksThe Company invests in a variety of financial instruments and, by its policy, limits the amount of credit exposurewith any one issuer, industry or geographic area for investments other than instruments backed by the US federalgovernment. InventoriesInventories consist of raw materials, work‑in‑process and finished goods related to the production of VIBATIV. Rawmaterials include VIBATIV active pharmaceutical ingredient (“API”) and other raw materials. Work‑in‑process and finishedgoods include third‑party manufacturing costs and labor and indirect costs the Company incurred in the production process.Included in inventories are raw materials and work‑in‑process that may be used as clinical products, which are charged toresearch and development (“R&D”) expense when consumed. In addition, under certain prior commercialization agreements,the Company sold VIBATIV packaged in unlabeled vials that were recorded in work‑in‑process. Inventories are stated at thelower of cost or net realizable value. The Company determines the cost of inventory using the average‑cost method for eachmanufacturing batch. The Company assesses its inventory levels each reporting period and writes‑down inventory that is expected to be atrisk for expiration, that has a cost basis in excess of its expected net realizable value and inventory quantities in excess ofexpected requirements. In evaluating the sufficiency of its inventory reserves or liabilities for firm purchase commitments,the Company also takes into consideration its firm purchase commitments for future inventory production. If the Companywere to decide to cancel its manufacturing commitment, such cancellation would trigger the payment of a cancellation fee. Ifthe Company projects to have excess inventories and that it would be more cost-efficient to pay the cancellation fee, it mayaccrue the cancellation fee as a liability. The Company’s assessment of excess inventories, including future firm purchasecommitments, requires management to utilize judgement in formulating estimates and assumptions that it believes to bereasonable under the circumstances. Actual results may differ from those estimates and assumptions. When the Company recognizes a loss on such inventory or firm purchase commitments, it establishes a new, lowercost basis for that inventory, and subsequent changes in facts and circumstances will not result in the restoration or increasein that newly established cost basis. If inventory with a lower cost basis is subsequently sold, it will result in higher grossmargin for those sales. In 2017, the Company recognized a charge of $3.0 million arising from excess inventory of which$2.25 million was attributed to an expected purchase obligation at the time. In 2018, the Company reversed the expenserelated to the $2.25 million purchase obligation due to the waiver of its minimum purchase commitment by the third-partymanufacturer. As a result of the VIBATIV sale to Cumberland in November 2018, the Company did not have any inventory as ofDecember 31, 2018. Property and EquipmentProperty, equipment and leasehold improvements are stated at cost, net of accumulated depreciation anddepreciated using the straight‑line method as follows: Leasehold improvementsShorter of remaining lease terms or useful lifeEquipment, furniture and fixtures5 ‑ 7 yearsSoftware and computer equipment3 ‑ 5 years Capitalized SoftwareThe Company capitalizes certain costs related to direct material and service costs for software obtained for internaluse. For the year ended December 31, 2017, the Company capitalized costs for the implementation of its new procurementsoftware system of $0.5 million. Upon being placed in service, these costs and other future capitalizable costs related to theinternal use software system integration will be depreciated over five years. There was no additional capitalized softwarecosts recorded for the year ended December 31, 2018.81 Table of Contents Impairment of Long‑Lived AssetsLong‑lived assets include property and equipment. The carrying value of long‑lived assets is reviewed forimpairment whenever events or changes in circumstances indicate that the asset may not be recoverable. An impairment lossis recognized when the total of estimated future cash flows expected to result from the use of the asset and its eventualdisposition is less than its carrying amount. Deferred RentDeferred rent consists of the difference between cash payments and the recognition of rent expense on a straight‑linebasis for the buildings the Company occupies. Rent expense is recognized ratably over the life of the leases. Because theCompany’s facility operating leases provide for rent increases over the terms of the leases, average annual rent expenseduring the initial years of the leases exceeded the Company’s actual cash rent payments. Also included in deferred rent arelease incentives which are being recognized ratably over the life of the leases. Revenue RecognitionPrior to January 1, 2018, the Company recognized revenue under Accounting Standards Codification (“ASC”),Topic 605, Revenue Recognition (“ASC 605”). Under ASC 605, revenue is recognized when the four basic criteria of revenuerecognition are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have beenrendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Where the revenue recognitioncriteria was not met, the Company delayed the recognition of revenue by recording deferred revenue until such time that allcriteria are met. Effective January 1, 2018, the Company adopted ASC, Topic 606, Revenue from Contracts with Customers (“ASC606”) using the modified retrospective method. Under ASC 606, an entity recognizes revenue when its customer obtainscontrol of promised goods or services, in an amount that reflects the consideration which the entity expects to receive inexchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are withinthe scope of ASC 606, an entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify theperformance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to theperformance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company identifiesthe performance obligations in the contract by assessing whether the goods or services promised within each contract aredistinct. The Company then recognizes revenue for the amount of the transaction price that is allocated to the respectiveperformance obligation when (or as) the performance obligation is satisfied. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior periodamounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. TheCompany recorded a reduction to the opening balance of accumulated deficit of approximately $1.1 million and acorresponding reduction in deferred revenue as of January 1, 2018 due to ASC 606’s cumulative adoption impact on theCompany’s collaborative arrangements. The Company’s revenue recognized in 2018 would not have been materiallydifferent under ASC 605 as compared to ASC 606. Product SalesOn November 12, 2018, the Company completed the sale of its assets related to the manufacture, marketing and saleof the VIBATIV product to Cumberland pursuant to the Asset Purchase Agreement dated November 1, 2018. Up until thatdate, the Company sold VIBATIV in the US market by making the drug product available through a limited number ofdistributors, who sold VIBATIV to healthcare providers. Title and risk of loss transferred upon receipt by these distributors.The Company recognized VIBATIV product sales and related cost of product sales when the distributors obtained control ofthe drug product, which was at the time title transferred to the distributors. 82 Table of ContentsThe Company recorded sales on a net sales basis which includes estimates of variable consideration. The variableconsideration results from sales discounts, government‑mandated rebates and chargebacks, distribution fees, estimatedproduct returns and other deductions. The Company reflected such reductions in revenue as either an allowance to the relatedaccount receivable from the distributor, or as an accrued liability, depending on the nature of the sales deduction. Salesdeductions are based on management’s estimates that considered payor mix in target markets, industry benchmarks andexperience to date. In general, these estimates take into consideration a range of possible outcomes which are probability-weighted in accordance with the expected value method in ASC 606. The Company monitored inventory levels in thedistribution channel, as well as sales by distributors to healthcare providers, using product‑specific data provided by thedistributors. Product return allowances are based on amounts owed or to be claimed on related sales. These estimates takeinto consideration the terms of the Company’s agreements with customers, historical product returns of, rebates or discountstaken, estimated levels of inventory in the distribution channel, the shelf life of the product, and specific known marketevents, such as competitive pricing and new product introductions. The Company updates its estimates and assumptionseach quarter and if actual future results vary from its estimates, the Company may adjust these estimates, which could have aneffect on product sales and earnings in the period of adjustment. Sales Discounts: The Company offers cash discounts to certain customers as an incentive for prompt payment. TheCompany expects its customers to comply with the prompt payment terms to earn the cash discount. In addition, theCompany offers contract discounts to certain direct customers. The Company estimates sales discounts based on contractualterms, historical utilization rates, as available, and its expectations regarding future utilization rates. The Company accountsfor sales discounts by reducing accounts receivable by the expected discount and recognizing the discount as a reduction ofrevenue in the same period the related revenue is recognized. Chargebacks and Government Rebates: The Company estimates reductions to product sales for qualifying federaland state government programs including discounted pricing offered to Public Health Service (“PHS”), as well asgovernment‑managed Medicaid programs. The Company’s reduction for PHS is based on actual chargebacks that distributorshave claimed for reduced pricing offered to such healthcare providers and our expectation about future utilization rates. TheCompany’s accrual for Medicaid is based upon statutorily‑defined discounts, estimated payor mix, expected sales toqualified healthcare providers, and the Company’s expectation about future utilization. The Medicaid accrual andgovernment rebates that are invoiced directly to the Company are recorded in other accrued liabilities on the consolidatedbalance sheets. For qualified programs that can purchase the Company’s products through distributors at a lower contractualgovernment price, the distributors charge back to the Company the difference between their acquisition cost and the lowercontractual government price, which the Company records as an allowance against accounts receivable. Distribution Fees: The Company has contracts with its distributors in the US that include terms fordistribution‑related fees. The Company determines distribution‑related fees based on a percentage of the product sales price,and it records the distribution fees as an allowance against accounts receivable. Product Returns: The Company offers its distributors a right to return product purchased directly from theCompany, which is principally based upon the product’s expiration date. The Company’s policy is to accept product returnsduring the six months prior to and twelve months after the product expiration date on product that has been sold to itsdistributors. Product return allowances are based on amounts owed or to be claimed on related sales. These estimates takeinto consideration the terms of our agreements with customers, historical product returns, rebates or discounts taken,estimated levels of inventory in the distribution channel, the shelf life of the product, and specific known market events, suchas competitive pricing and new product introductions. The Company records its product return reserves as other accruedliabilities. Allowance for Doubtful Accounts: The Company records allowances for potentially doubtful accounts for estimatedlosses resulting from the inability of its customers to make required payments. As of December 31, 2018, there was noallowance for doubtful accounts related to trade accounts receivable. 83 Table of ContentsThe following table summarizes activity in each of the product revenue allowance and reserve categories: Chargebacks, Government Discounts and and Other (In thousands) Fees Rebates Returns Total Balance at December 31, 2016 $779 $377 $747 $1,903 Provision related to current period sales 5,193 580 573 6,346 Adjustment related to prior period sales (127) 75 561 509 Credit or payments made during the period (4,853) (680) (935) (6,468) Balance at December 31, 2017 $992 $352 $946 $2,290 Provision related to current period sales 6,402 704 521 7,627 Adjustment related to prior period sales (81) 168 (449) (362) Credit or payments made during the period (6,938) (932) (157) (8,027) Balance at December 31, 2018 $375 $292 $861 $1,528 Collaborative Arrangements Under ASC 606 (Effective January 1, 2018)The Company enters into collaborative arrangements with partners that fall under the scope of ASC, Topic 808,Collaborative Arrangements (“ASC 808”). While these arrangements are in the scope of ASC 808, the Company mayanalogize to ASC 606 for some aspects of the arrangements. The Company analogizes to ASC 606 for certain activitieswithin the collaborative arrangement for the delivery of a good or service (i.e., a unit of account) that is part of its ongoingmajor or central operations. Revenue recognized by analogizing to ASC 606 is recorded as “collaboration revenue” whereas,revenue recognized in accordance with ASC 808, is recorded as “profit sharing revenue” in the consolidated statements ofoperations. The terms of the Company’s collaborative arrangements typically include one or more of the following: (i) up-frontfees; (ii) milestone payments related to the achievement of development, regulatory, or commercial goals; (iii) royalties onnet sales of licensed products; (iv) reimbursements or cost-sharing of R&D expenses; and (v) profit/loss sharing arising fromco-promotion arrangements. Each of these payments results in collaboration revenues or an offset against R&D expense.Where a portion of non‑refundable up-front fees or other payments received is allocated to continuing performanceobligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized ascollaboration revenue when (or as) the underlying performance obligation is satisfied. As part of the accounting for these arrangements, the Company must develop estimates and assumptions that requirejudgment to determine the underlying stand-alone selling price for each performance obligation which determines how thetransaction price is allocated among the performance obligations. The estimation of the stand-alone selling price mayinclude such estimates as, forecasted revenues or costs, development timelines, discount rates, and probabilities of technicaland regulatory success. The Company evaluates each performance obligation to determine if they can be satisfied at a pointin time or over time, and it measures the services delivered to the collaborative partner which are periodically reviewed basedon the progress of the related program. The effect of any change made to an estimated input component and, thereforerevenue or expense recognized, would be recorded as a change in estimate. In addition, variable consideration (e.g.,milestone payments) must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price. Up-front Fees: If a license to the Company’s intellectual property is determined to be distinct from the otherperformance obligations identified in the arrangement, the Company recognizes collaboration revenues from the transactionprice allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from thelicense. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of thecombined performance obligation to determine whether the combined performance obligation is satisfied over time or at apoint in time and, if over time, the appropriate method of measuring progress for purposes of recognizing collaborationrevenue from the allocated transaction price. For example, when the Company receives up-front fees for the performance ofresearch and development services, or when research and development services are not considered to be distinct from alicense, the Company recognizes collaboration revenue for those units of account over time using a measure of progress. TheCompany evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance andrelated revenue or expense recognition as a change in estimate.84 Table of Contents Milestone Payments: At the inception of each arrangement that includes milestone payments (variableconsideration), the Company evaluates whether the milestones are considered probable of being reached and estimates theamount to be included in the transaction price using the most likely amount method. If it is probable that a significantrevenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone paymentsthat are not within the Company’s or the collaborative partner’s control, such as non-operational developmental andregulatory approvals, are generally not considered probable of being achieved until those approvals are received. At the endof each reporting period, the Company re-evaluates the probability of achievement of milestones that are within its or thecollaborative partner’s control, such as operational developmental milestones and any related constraint, and if necessary,adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, whichwould affect collaboration revenues and earnings in the period of adjustment. Revisions to the Company’s estimate of thetransaction price may also result in negative collaboration revenues and earnings in the period of adjustment. Royalties: For arrangements that include sales-based royalties, including commercial milestone payments based onthe level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizesrevenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of theroyalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any material royaltyrevenue resulting from any of our collaborative arrangements. Following the sale of VIBATIV to Cumberland in November 2018, VIBATIV royalties earned from Cumberland areincluded within “interest and other income, net” on the consolidated statements of operations. In addition, the Company’sincome earned related to TRELEGY ELLIPTA sales is included within “income from our investment in TRC, LLC” on theconsolidated statements of operations. Reimbursement, cost-sharing and profit-sharing payments: Under certain collaborative arrangements, the Companyhas been reimbursed for a portion of its R&D expenses or participates in the cost-sharing of such R&D expenses. Suchreimbursements and cost-sharing arrangements have been reflected as a reduction of R&D expense in the Company’sconsolidated statements of operations, as the Company does not consider performing research and development services forreimbursement to be a part of its ongoing major or central operations. Collaborative Arrangements under ASC 605 (Effective Prior to January 1, 2018)Revenue from non‑refundable, up‑front license or technology access payments under license and collaborativearrangements that were not dependent on any future performance by the Company was recognized when such amounts wereearned. If the Company had continuing obligations to perform under the arrangement, such fees were recognized over theestimated period of continuing performance obligation. The Company accounted for multiple element arrangements, such as license and development agreements in whichit may have provided several deliverables, in accordance with ASC, Subtopic 605‑25, Multiple Element Arrangements. Fornew or materially amended multiple element arrangements, the Company identified the deliverables at the inception of thearrangement and each deliverable within a multiple deliverable revenue arrangement was accounted for as a separate unit ofaccounting if both of the following criteria were met: (1) the delivered item or items had value to the customer on astandalone basis and (2) for an arrangement that included a general right of return relative to the delivered item(s), delivery orperformance of the undelivered item(s) was considered probable and substantially in the Company’s control. The Companyallocated revenue to each non‑contingent element based on the relative selling price of each element. When applying therelative selling price method, the Company determined the selling price for each deliverable using vendor‑specific objectiveevidence (“VSOE”) of selling price, if it existed, or third‑party evidence (“TPE”) of selling price, if it existed. If neither VSOEnor TPE of selling price existed for a deliverable, the Company used the best estimated selling price for that deliverable.Revenue allocated to each element was then recognized based on when the basic four revenue recognition criteria were metfor each element. Where a portion of non‑refundable upfront fees or other payments received were allocated to continuingperformance obligations under the terms of a collaborative arrangement, they were recorded as deferred revenue andrecognized as revenue ratably over the term of the Company’s estimated performance period under the agreement. The85 Table of ContentsCompany determined the estimated performance periods, and they were periodically reviewed based on the progress of therelated program. The effect of any change made to an estimated performance period and, therefore revenue recognized, wouldoccur on a prospective basis in the period that the change was made. Under certain collaborative arrangements, the Company was reimbursed for a portion of its R&D expenses. Thesereimbursements were reflected as a reduction of R&D expense in the Company’s consolidated statements of operations, as itdid not consider performing research and development services to be a customer relationship in the context of thosecollaborative arrangements. Therefore, the reimbursement of research and development services were recorded as a reductionof R&D expense. The Company recognized revenue from milestone payments when (i) the milestone event was substantive and itsachievability was not reasonably assured at the inception of the agreement and (ii) the Company did not have ongoingperformance obligations related to the achievement of the milestone. Milestone payments were considered substantive if allof the following conditions were met: the milestone payment (a) was commensurate with either the Company’s performanceto achieve the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcomeresulting from the Company’s performance to achieve the milestone, (b) related solely to past performance, and (c) wasreasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) withinthe arrangement. Research and Development ExpensesResearch and development expenses are recorded in the period that services are rendered or goods are received.Research and development expenses consist of salaries and benefits, laboratory supplies and facility costs, as well as feespaid to third parties that conduct certain research and development activities on behalf of the Company, net of certainexternal research and development expenses reimbursed under the Company’s collaborative arrangements. As part of the process of preparing financial statements, the Company is required to estimate and accrue certainresearch and development expenses. This process involves the following: •identifying services that have been performed on the Company’s behalf and estimating the level of serviceperformed and the associated cost incurred for the service when the Company has not yet been invoiced orotherwise notified of actual cost; •estimating and accruing expenses in the Company’s financial statements as of each balance sheet date based onfacts and circumstances known to it at the time; and •periodically confirming the accuracy of the Company’s estimates with selected service providers and makingadjustments, if necessary. Examples of estimated research and development expenses that the Company accrues include: •fees paid to clinical research organizations (“CROs”) in connection with preclinical and toxicology studies andclinical studies; •fees paid to investigative sites in connection with clinical studies; •fees paid to contract manufacturing organizations (“CMOs”) in connection with the production of product andclinical study materials; and •professional service fees for consulting and related services. The Company bases its expense accruals related to clinical studies on its estimates of the services received andefforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical studieson the Company’s behalf. The financial terms of these agreements vary from contract to contract and may result in unevenpayment flows. Payments under some of these contracts depend on factors, such as the successful enrollment86 Table of Contentsof patients and the completion of clinical study milestones. The Company’s service providers invoice it monthly in arrearsfor services performed. In accruing service fees, the Company estimates the time period over which services will be performedand the level of effort to be expended in each period. If the Company does not identify costs that it has begun to incur or if itunderestimates or overestimates the level of services performed or the costs of these services, the Company’s actual expensescould differ from its estimates. To date, the Company has not experienced significant changes in its estimates of accrued research and developmentexpenses after a reporting period. Such changes in estimates recorded after a reporting period have been less than 1% of theCompany’s annual research and development expenses and have not been material. However, due to the nature of estimates,there is no assurance that the Company will not make changes to its estimates in the future as it becomes aware of additionalinformation about the status or conduct of its clinical studies and other research activities. Such changes in estimates will berecognized as research and development expenses in the period that the change in estimate occurs. Advertising ExpensesThe Company expenses the costs of advertising, including promotional expenses, as incurred. Advertising expenseswere $1.9 million, $3.2 million and $2.5 million for the years ended December 31, 2018, 2017 and 2016, respectively. Fair Value of Share‑Based Compensation AwardsThe Company uses the Black‑Scholes‑Merton option pricing model to estimate the fair value of options grantedunder its equity incentive plans and rights to acquire shares granted under its employee share purchase plan (“ESPP”). TheBlack‑Scholes‑Merton option valuation model requires the use of assumptions, including the expected term of the award andthe expected share price volatility. The Company uses the “simplified” method as described in Staff Accounting BulletinNo. 107, Share‑Based Payment, to estimate the expected option term. Share‑based compensation expense is calculated based on awards ultimately expected to vest and is reduced foractual forfeitures as they occur, as allowed under Accounting Standards Update (“ASU”) 2016-09, Compensation—StockCompensation (Topic 718) (“ASU 2016‑09”). Prior to the adoption of ASU 2016-09 on January 1, 2017, forfeitures wereestimated at the time of grant and revised, if necessary, in subsequent periods if the actual forfeitures differed from thoseestimates. Compensation expense for purchases under the ESPP is recognized based on the fair value of the award on the dateof offering. Amortization of Debt Issuance CostsDebt issuance costs are amortized to interest expense over the estimated life of the related debt based on theeffective interest method. Theravance Respiratory Company, LLC (“TRC”)Through its equity ownership of TRC, the Company is entitled to receive an 85% economic interest in any futurepayments that may be made by Glaxo Group or one of its affiliates (“GSK”) relating to the GSK-Partnered RespiratoryPrograms (net of TRC expenses paid and the amount of cash, if any, expected to be used by TRC pursuant to the TRC LLCAgreement over the next four fiscal quarters). The GSK-Partnered Respiratory Programs consist primarily of the TRELEGYELLIPTA program and the inhaled Bifunctional Muscarinic Antagonist-Beta2 Agonist (“MABA”) program. The Company analyzed its ownership, contractual and other interests in TRC to determine if TRC is avariable‑interest entity (“VIE”), whether the Company has a variable interest in TRC and the nature and extent of thatinterest. The Company determined that TRC is a VIE. The party with the controlling financial interest, the primarybeneficiary, is required to consolidate the entity determined to be a VIE. Therefore, the Company also assessed whether theCompany is the primary beneficiary of TRC based on the power to direct its activities that most significantly impact87 Table of Contentsits economic performance and the Company’s obligation to absorb its losses or the right to receive benefits from it that couldpotentially be significant to TRC. Based on the Company’s assessment, it determined that it is not the primary beneficiary ofTRC, and, as a result, the Company does not consolidate TRC in its consolidated financial statements. TRC is recognized inthe Company’s consolidated financial statements under the equity method of accounting. Income related to the Company’sequity ownership of TRC is reflected in its consolidated statement of operations as non-operating income. Income TaxesThe Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferredtax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilitiesand are measured using enacted tax rates and laws that are anticipated to be in effect when the differences are expected toreverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset willnot be realized. The Company’s total unrecognized tax benefits of $52.4 million and $41.8 million, as of December 31, 2018 andDecember 31, 2017, respectively, may reduce the effective tax rate in the period of recognition. As of December 31, 2018, theCompany does not believe that it is reasonably possible that its unrecognized tax benefit will significantly decrease in thenext twelve months. The Company currently has a full valuation allowance against its deferred tax assets, which wouldimpact the timing of the effective tax rate benefit should any of these uncertain positions be favorably settled in the future. The Company assesses all material positions, including all significant uncertain positions, in all tax years that arestill subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with theinitial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than 50%likely to be realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must bereassessed, and the Company will determine whether the factors underlying the sustainability assertion have changed andwhether the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. The Company has taken certainpositions where it believes that its position is greater than 50% likely to be realized upon ultimate settlement and for whichno reserve for uncertain tax positions has been recorded. If the Company does not ultimately realize the expected benefit ofthese positions, it will record additional income tax expenses in future periods. Judgments concerning the recognition andmeasurement of a tax benefit might change as new information becomes available. Net Loss per ShareBasic net loss per share is computed by dividing net loss by the weighted-average number of shares of outstanding,less ordinary shares subject to forfeiture. Diluted net loss per share is computed by dividing net loss by the weighted-averagenumber of shares outstanding, less ordinary shares subject to forfeiture, plus all additional ordinary shares that would havebeen outstanding, assuming dilutive potential ordinary shares had been issued for other dilutive securities. For the years ended December 31, 2018, 2017 and 2016, diluted and basic net loss per share was identical sincepotential ordinary shares were excluded from the calculation, as their effect was anti‑dilutive.88 Table of Contents Anti‑dilutive SecuritiesThe following ordinary equivalent shares were not included in the computation of diluted net loss per share becausetheir effect was anti‑dilutive: Year Ended December 31, (In thousands) 2018 2017 2016Share issuances under equity incentive plans and ESPP 3,492 3,369 3,709Restricted shares 2 6 33Share issuances upon the conversion of convertible senior notes 6,676 6,676 6,676Total 10,170 10,051 10,418 In addition, there were 978,750 and 1,305,000 shares that are subject to performance‑based vesting criteria whichhave been excluded from the ordinary equivalent shares table above for the years ended December 31, 2018 and 2017,respectively. Comprehensive LossComprehensive loss is comprised of net loss and changes in unrealized gains and losses on the Company’savailable-for-sale investments. Related PartiesGSK owned 17.3% of the Company’s ordinary shares outstanding as of December 31, 2018. On March 17, 2016,GSK purchased from the Company 1,301,015 of its ordinary shares for an aggregate purchase price of approximately$23.0 million pursuant to a Share Purchase Agreement between GSK and the Company dated March 14, 2016. The SharePurchase Agreement was entered into pursuant to Section 2.1(d)(ii) of the Governance Agreement between GSK and theCompany dated March 3, 2014 (the “Governance Agreement”), which until December 31, 2017 afforded GSK, on a quarterlybasis, the opportunity to purchase from the Company ordinary shares sufficient to maintain GSK’s Percentage Interest (asdefined in the Governance Agreement) at the same level as prior to any exercise of share options and vesting of restrictedshares that occurred during the prior quarter, and pursuant to the Company’s approval to GSK to make additional purchases,which approval was required by Section 2.1(a) of the Governance Agreement. The Governance Agreement expired onDecember 31, 2017. Robert V. Gunderson, Jr. is a member of the Company’s board of directors. The Company has engaged GundersonDettmer Stough Villeneuve Franklin & Hachigian, LLP, of which Mr. Gunderson is a partner, as its primary legal counsel.Fees incurred were $0.5 million, $0.3 million, and $1.1 million for the years ended December 31, 2018, 2017, and 2016,respectively. Dr. Smaldone Alsup is a member of the Company’s board of directors and is also the Chief Operating Officer andChief Scientific Officer of NDA Group. The Company engaged NDA Group in 2017 to perform consulting services related tothe regulatory plans for one of the Company’s drug candidates. There were no fees incurred for the year ended December 31,2018 and $0.1 million in fees incurred for the year ended December 31, 2017. Recently Adopted Accounting PronouncementsEffective January 1, 2018, the Company adopted ASC, Topic 606, Revenue from Contracts with Customers (“ASC606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018and recognized the cumulative effect of ASC 606 at the date of initial application. This standard applies to all contracts withcustomers, except for contracts that are within the scope of other standards, such as leases, insurance, collaborationarrangements and financial instruments. Results for reporting periods beginning after January 1, 2018 are presented underASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effectfor the prior period. The Company recorded a reduction to the opening balance of accumulated deficit of approximately $1.1million and a corresponding reduction in deferred revenue as of January 1, 2018 due to ASC 606’s cumulative adoptionimpact on its collaborative arrangements. The Company’s product sales89 Table of Contentsrevenue under ASC 606 would not have been materially different under the legacy Accounting Standards Codification,Topic 605, Revenue Recognition (“ASC 605”). Effective January 1, 2018, the Company adopted ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers ofAssets Other Than Inventory (“ASU 2016-16”) using the modified retrospective approach. ASU 2016-16 requires immediaterecognition of income tax consequences of intra-company asset transfers, other than inventory transfers. Legacy GAAPprohibited recognition of income tax consequences of intra-company asset transfers whereby the seller defers any net taxeffect and the buyer is prohibited from recognizing a deferred tax asset on the difference between the newly created tax basisof the asset in its tax jurisdiction and its financial statement carrying amount as reported in the consolidated financialstatements. An example of an inter-company asset transfers included in ASU 2016-16’s scope is intellectual property. Theadoption of ASU 2016-16 did not have a material impact on the Company’s balance sheet or statement of operations as itsdeferred tax assets are fully offset by a valuation allowance. Effective January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230): RestrictedCash (“ASU 2016-18”) that changed the presentation of restricted cash and cash equivalents on the consolidated statementsof cash flows. Restricted cash balances are now included with cash and cash equivalents when reconciling the beginning ofperiod and end of period total amounts shown on the consolidated statements of cash flows. To conform to the presentationunder ASU 2016-18, the Company revised the amounts previously reported on the consolidated statements of cash flows forthe comparable prior year periods. Recently Issued Accounting Pronouncements Not Yet AdoptedIn February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016‑02, Leases (Topic 842)(“ASU 2016‑02”). ASU 2016‑02 is aimed at making leasing activities more transparent and comparable, and requires leaseswith terms greater than one year to be recognized by lessees on their balance sheet as a right‑of‑use asset and correspondinglease liability. ASU 2016‑02 is effective for all interim and annual reporting periods beginning after December 15, 2018, withearly adoption permitted, and is required to be adopted using a modified retrospective approach. In July 2018, the FASBissued supplemental adoption guidance that allows for an optional transition method to initially account for the impact ofthe adoption with a cumulative adjustment to accumulated deficit on the effective date of ASU 2016-02, January 1, 2019,rather than applying the transition provisions in the earliest period presented. Based on the Company’s assessment of ASU 2016-02, it elected the optional transition method described above anda package of practical expedients that allows entities to not (i) reassess whether any expired or existing contracts areconsidered or contain leases; (ii) reassess the lease classification for any expired or existing leases; and (iii) reassess initialdirect costs for any existing leases. In addition, the Company elected other practical expedients that allow entities to (iv) usehindsight in determining the term of a lease when the lease includes an option to extend the lease term; (v) exclude all leases,on a go forward basis, that have a lease term of 12-month or less; and (vi) combine lease and non-lease components (e.g.,office common area maintenance expenses) when recognizing a lease on an entity’s balance sheet on a go forward basis. The Company will adopt ASU 2016-02 in January 2019, and the Company has substantially completed theevaluation of its existing lease arrangements in order to determine the full impact that the adoption of ASU 2016‑02 willhave on its balance sheet, financial statement disclosures, and related internal controls. The most significant impact to theCompany’s balance sheet upon adoption will be from recognizing a right-of-use asset and corresponding lease liabilityrelated to its office leases in South San Francisco and Dublin, Ireland. The Company currently anticipates that it will record aright-to-use asset and corresponding lease liability ranging between appropriately $47 million to $50 million. Based on thereview of the Company’s existing lease arrangements, ASU 2016-02 will not have a material impact on the Company’sresults of operations or cash flows. In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope ofModification Accounting (“ASU 2017-09”). ASU 2017-09 was issued to provide clarity and reduce both (1) diversity inpractice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to achange to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 provide guidance aboutwhich changes to the terms or conditions of a share-based payment award require an entity to apply modification90 Table of Contentsaccounting in Topic 718. Essentially, an entity will not have to account for the effects of a modification if: (1) the fair valueof the modified award is the same immediately before and after the modification; (2) the vesting conditions of the modifiedaward are the same immediately before and after the modification; and (3) the classification of the modified award as eitheran equity instrument or liability instrument is the same immediately before and after the modification. The amendments inASU 2017-09 will become effective for the Company as of January 1, 2019. Early adoption is permitted, including adoptionin any interim period. The adoption of this guidance is not expected to have a material impact upon the Company’sconsolidated financial statements and related disclosures. In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update andSimplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated orsuperseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity forinterim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presentedin the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of thebeginning balance to the ending balance of each period for which a statement of comprehensive income is required to befiled. The Company anticipates its first presentation of changes in stockholders’ equity as required under the new SECguidance will be included in its Form 10-Q for the three month period ending March 31, 2019. The Company has evaluated other recently issued accounting pronouncements and does not believe that any ofthese pronouncements will have a material impact on its consolidated financial statements and related disclosures. 2. Collaborative ArrangementsRevenues from Collaboration and Profit Sharing ArrangementsThe Company recognized collaboration revenue as follows: Year Ended December 31, (In thousands) 2018 2017 2016Janssen $31,053 $ — $ —Alfasigma 10,678 — —Mylan 24 102 15,102R-Pharm 32 491 109Takeda Pharmaceuticals — — 15,075Various VIBATIV collaborative partners 4 5 259Other — — 500Total collaboration revenue $41,791 $598 $31,045 In addition, the Company recognized $3.3 million in profit sharing revenue from its YUPELRI (revefenacin)collaborative arrangement with Mylan for the year ended December 31, 2018. Under the legacy revenue guidance ASC 605, the Company’s collaboration revenue for the year ended December31, 2018 would not have differed materially. 91 TM Table of ContentsChanges in Deferred Revenue BalancesThe Company recognized the following revenue from collaborative arrangements as a result of changes in itsdeferred revenue balance during the periods below: Year EndedDecember 31, (In thousands) 2018Collaboration revenue recognized in the period from: Amounts included in deferred revenue at the beginning of the period $130Performance obligations satisfied in the previous period — Janssen BiotechIn February 2018, the Company entered into a global co-development and commercialization agreement withJanssen Biotech, Inc. (“Janssen”) for TD-1473 and related back-up compounds for inflammatory intestinal diseases,including ulcerative colitis and Crohn's disease (the “Janssen Agreement”). Under the terms of the Janssen Agreement, theCompany received an upfront payment of $100.0 million. The Company has dosed first patients a Phase 2 (DIONE) study inCrohn’s disease and initiated sites in the registrational Phase 2b/3 (RHEA) induction and maintenance study in ulcerativecolitis. Following completion of the Phase 2 Crohn’s study and the Phase 2b induction portion of an ulcerative colitis study,Janssen can elect to obtain an exclusive license to develop and commercialize TD-1473 and certain related compounds bypaying us a fee of $200.0 million. Upon any such election, the Company and Janssen will jointly develop and commercializeTD-1473 in inflammatory intestinal diseases and share profits in the US and expenses related to a potential Phase 3 program(67% to Janssen; 33% to Theravance Biopharma). The Company would receive royalties on ex-US sales at double-digittiered percentage royalty rates, and the Company would be eligible to receive up to an additional $700.0 million indevelopment and commercialization milestone payments from Janssen. The Janssen Agreement is considered to be within the scope of ASC 808, as the parties are active participants andexposed to the risks and rewards of the collaborative activity. The Company evaluated the terms of the Janssen Agreementand have analogized to ASC 606 for the research and development activities to be performed through the initial Phase 2development period of the collaborative arrangement that are considered to be part of the Company’s ongoing major orcentral operations. Using the concepts of ASC 606, the Company has identified research and development activities as itsonly performance obligation. The Company further determined that the transaction price under the arrangement was the$100.0 million upfront payment which was allocated to the single performance obligation. The $900.0 million in future potential payments is considered variable consideration if Janssen elects to remain inthe collaboration arrangement following completion of certain Phase 2 activities, as described above and, as such, was notincluded in the transaction price, as the potential payments were all determined to be fully constrained under ASC 606. Aspart of the Company’s evaluation of this variable consideration constraint, it determined that the potential payments arecontingent upon developmental and regulatory milestones that are uncertain and are highly susceptible to factors outside ofits control. The Company expects that any consideration related to royalties and sales-based milestones will be recognizedwhen the subsequent sales occur. For the year ended December 31, 2018, the Company recognized $31.1 million as revenue from collaborationarrangements related to the Janssen Agreement. The remaining transaction price of $68.9 million was recorded in deferredrevenue on the consolidated balance sheets and is expected to be recognized as collaboration revenue as the research anddevelopment services are delivered over the Phase 2 development period. Collaboration revenue is recognized for theresearch and development services based on a measure of the Company’s efforts toward satisfying the performance obligationrelative to the total expected efforts or inputs to satisfy the performance obligation (e.g., costs incurred compared to totalbudget). For the year ended December 31, 2018, the Company incurred $38.6 million in research and development costsrelated to the Janssen Agreement. In future reporting periods, the Company will reevaluate the Company’s estimates relatedto its efforts towards satisfying the performance obligation and may record a change in estimate if deemed necessary. 92 Table of ContentsAlfasigmaDevelopment and Collaboration AgreementUnder an October 2012 development and collaboration agreement for velusetrag, the Company and Alfasigma S.p.A(“Alfasigma”) agreed to collaborate in the execution of a two-part Phase 2 program to test the efficacy, safety and tolerabilityof velusetrag in the treatment of patients with gastroparesis (a medical condition consisting of a paresis (partial paralysis) ofthe stomach, resulting in food remaining in the stomach for a longer time than normal) (the “Alfasigma Agreement”). As partof the Alfasigma Agreement, Alfasigma funded the majority of the costs associated with the Phase 2 gastroparesis program,which consisted of a Phase 2 study focused on gastric emptying and a Phase 2 study focused on symptoms. Alfasigma had anexclusive option to develop and commercialize velusetrag in the European Union (“EU”), Russia, China, Mexico and certainother countries, while the Company retained full rights to velusetrag in the US, Canada, Japan and certain other countries. In April 2018, Alfasigma exercised its exclusive option to develop and commercialize velusetrag, and the Companyelected not to pursue further development of velusetrag. As a result, the Company is transferring global rights for velusetragto Alfasigma under the terms of the existing collaboration agreement. The Company received a $10.0 million option exercisefee and a $1.0 million non-refundable reimbursement from Alfasigma, and the Company is eligible to receive future potentialdevelopment, regulatory and sales milestone payments of up to $26.8 million, and tiered royalties on global net salesranging from high single digits to the mid-teens. The Alfasigma Agreement is considered to be within the scope of ASC 808, as the parties are active participants andexposed to the risks and rewards of the collaborative activity. The Company has historically received reimbursements relatedto R&D services performed under the Alfasigma Agreement. Performing R&D services for reimbursement is considered to bea collaborative activity under the scope of ASC 808. Reimbursable program costs are accounted for as reductions to R&Dexpense. For this unit of account, the Company does not recognize revenue or analogize to ASC 606 and, as such, thereimbursable program costs are excluded from the transaction price. As a result of Alfasigma’s election to exercise its exclusive option to develop and commercialize velusetrag in April2018, Alfasigma paid the Company a total of $11.0 million, comprised of the $10.0 million option exercise fee and the $1.0million non-refundable reimbursement. The Company analogized to ASC 606 for the delivery of the following identifiedperformance obligations: (i) delivery of the velusetrag license; (ii) transfer of technical know-how; (iii) delivery of clinicalstudy reports (“CSRs”); (iv) delivery of registration batches, including drug substances; and (v) joint steering committeeparticipation. The Company determined that all of the five performance obligations were distinct, and it allocated thetransaction price based on the estimated stand-alone selling prices of each of the performance obligations. The stand-aloneselling price of the license was based on a discounted cash flow approach and considered several factors including, but notlimited to: discount rate, development timeline, regulatory risks, estimated market demand and future revenue potential. The Company determined that any potential development or regulatory milestones were to be fully constrained asprescribed under ASC 606. As part of its evaluation of this variable consideration constraint, the Company determined thatthe potential payments are contingent upon developmental and regulatory milestones that are uncertain and are highlysusceptible to factors outside of the Company’s control. In addition, the Company expects that any consideration related tosales-based milestones would be recognized when the subsequent sales occur. For the year ended December 31, 2018, the Company recognized $10.7 million as revenue from collaborationarrangements related to the Alfasigma Agreement. As of December 31, 2018, $0.3 million was recorded in deferred revenueon the consolidated balance sheets and is expected to be recognized as collaboration revenue over approximately the nextfour years. MylanDevelopment and Commercialization AgreementIn January 2015, the Company and Mylan Ireland Limited (“Mylan”) established a strategic collaboration (the“Mylan Agreement”) for the development and commercialization of revefenacin, including YUPELRI inhalation93 Table of Contentssolution. The Company entered into the collaboration to expand the breadth of its revefenacin development program andextend its commercial reach beyond the acute care setting. Under the Mylan Agreement, Mylan paid the Company an up-front fee of $15.0 million for the delivery of therevefenacin license in 2015 and, in 2016, Mylan paid the Company a milestone payment $15.0 million for the achievementof 50% enrollment in the Phase 3 twelve-month safety study. Separately, pursuant to an agreement to purchase ordinaryshares entered into on January 30, 2015, Mylan Inc., a subsidiary of Mylan N.V., made a $30.0 million equity investment inthe Company, buying 1,585,790 ordinary shares from the Company in February 2015 in a private placement transaction at aprice of approximately $18.918 per share, which represented a 10% premium, equal to $4.2 million, over the volumeweighted average price per share of the Company’s ordinary shares for the five trading days ending on January 30, 2015. As of December 31, 2018, the Company is eligible to receive from Mylan additional potential development,regulatory and sales milestone payments totaling up to $205.0 million in the aggregate, with $160.0 million associated withYUPELRI monotherapy, and $45.0 million associated with future potential combination products. Of the $160.0 millionassociated with monotherapy, $150.0 million relates to sales milestones based on achieving certain levels of net sales and$10.0 million relates to regulatory actions in the EU. The Mylan Agreement is considered to be within the scope of ASC 808, as the parties are active participants andexposed to the risks and rewards of the collaborative activity. Under the terms of the Mylan Agreement, Mylan wasresponsible for reimbursement of the Company’s costs related to the registrational program up until the approval of the firstnew drug application in November 2018. Performing R&D services for reimbursement is considered to be a collaborativeactivity under the scope of ASC 808. Reimbursable program costs are recognized proportionately with the performance of theunderlying services and accounted for as reductions to R&D expense. For this unit of account, the Company did notrecognize revenue or analogize to ASC 606 and, as such, the reimbursable program costs are excluded from the transactionprice. The Company analogized to ASC 606 for the accounting for two performance obligations: (1) delivery of thelicense to develop and commercialize revefenacin; and (2) joint steering committee participation. The Company determinedthe license to be distinct from the joint steering committee participation. The Company further determined that thetransaction price under the arrangement was comprised of the following: (1) $15.0 million up-front license fee received in2015; (2) $4.2 million premium related to the ordinary share purchase agreement received in 2015; and (3) $15.0 millionmilestone for 50% enrollment in the Phase 3 twelve-month safety study received in 2016. The total transaction price of $34.2million was allocated to the two performance obligations based on the Company’s best estimate of the relative stand-aloneselling price. For the delivery of the license, the Company based the stand-alone selling price on a discounted cash flowapproach and considered several factors including, but not limited to: discount rate, development timeline, regulatory risks,estimated market demand and future revenue potential. For the committee participation, the Company based the stand-aloneselling price on the average compensation of its committee members estimated to be incurred over the performance period.The Company expects to recognize collaboration revenue from the committee participation ratably over the performanceperiod of approximately seventeen years. The future potential milestone amounts were not included in the transaction price, as they were all determined to befully constrained following the concepts of ASC 606. As part of the Company’s evaluation of the development andregulatory milestones constraint, the Company determined that the achievement of such milestones are contingent uponsuccess in future clinical trials and regulatory approvals which are not within its control and uncertain at this stage. TheCompany expects that the sales-based milestone payments and royalty arrangements will be recognized when the sales occuror the milestone is achieved. The Company will re-evaluate the transaction price each quarter and as uncertain events areresolved or other changes in circumstances occur. As of December 31, 2018, $0.3 million was recorded in deferred revenue on the consolidated balance sheets underthe Mylan Agreement. This amount reflects revenue allocated to joint steering committee participation and will berecognized as collaboration revenue over the course of the remaining performance period of approximately fourteen years.For the year ended December 31, 2018, the Company recognized $24,000 in collaboration revenue from the recognition ofpreviously deferred revenue under the Mylan collaborative arrangement.94 Table of Contents The Company is also entitled to a share of US profits and losses (65% to Mylan; 35% to Theravance Biopharma)received in connection with commercialization of YUPELRI, and the Company is entitled to low double-digit royalties onex-US net sales (excluding China). Mylan is the principal in the sales transactions, and as a result, the Company will notreflect the product sales in its financial statements. Net amounts payable to or receivable from Mylan each quarter under theprofit sharing structure are disaggregated according to their individual components. The reimbursement received from Mylanfor the Company’s R&D expense is characterized as a reduction of R&D expense, as the Company does not considerperforming research and development services for reimbursement to be a part of its ongoing major or central operations. Forthe year ended December 31, 2018, the Company recorded $7.5 million as a reduction to R&D expense comprised of $4.5million related to registrational activities conducted in support of the NDA and $3.0 million related to the YUPELRI profitsharing payments receivable from Mylan which were attributed to R&D services. There were no reductions to R&D expenserelated to such profit sharing payments for the year ended December 31, 2017. If in any reporting period, the arrangement results in a receivable from Mylan after the Company’s R&D expenseshave been reimbursed, then such a receivable is recognized as profit sharing revenue. For the year ended December 31, 2018,the Company recorded $3.3 million as collaboration profit sharing revenue related to profit sharing payments receivablefrom Mylan. There was no collaboration profit sharing revenue for the year ended December 31, 2017. If in any reportingperiod, the arrangement results in a payable to Mylan after the Company’s R&D expenses have been reimbursed, then suchpayments are recognized as collaboration expenses within operating expenses. Takeda PharmaceuticalsLicense and Collaboration AgreementIn June 2016, the Company entered into a License and Collaboration Agreement with Millennium Pharmaceuticals,Inc., a Delaware corporation (“Millennium”) (the “Takeda Agreement”), in order to establish a collaboration for thedevelopment and commercialization of TD-8954 (TAK-954), a selective 5-HT4 receptor agonist. Millennium is an indirectwholly-owned subsidiary of Takeda Pharmaceutical Company Limited (TSE: 4502), a publicly-traded Japanese corporationlisted on the Tokyo Stock Exchange (collectively with Millennium, "Takeda").Under the terms of the Takeda Agreement, Takeda is responsible for worldwide development and commercializationof TD-8954. The Company received an upfront cash payment of $15.0 million and will be eligible to receive success baseddevelopment, regulatory and sales milestone payments by Takeda. The Company will also be eligible to receive a tieredroyalty on worldwide net sales by Takeda at percentage royalty rates ranging from low double-digits to mid-teens.The Takeda Agreement was finalized in the third quarter of 2016, and the Company recognized $15.1 million inrevenue for the year ended December 31, 2016. Reimbursement of R&D CostsThe following table summarizes the reductions to R&D expenses related to reimbursement payments: Year Ended December 31, (In thousands) 2018 2017 2016Mylan $7,515 $23,427 $83,490Janssen 1,597 — —Alfasigma — — 7,113Other — 113 134Total reduction to R&D expense $9,112 $23,540 $90,737 95 Table of Contents3. Sale of VIBATIVOn November 12, 2018, the Company completed the sale of its assets related to the manufacture, marketing and saleof VIBATIV to Cumberland Pharmaceutical Inc. (“Cumberland”) pursuant to the Asset Purchase Agreement datedNovember 1, 2018 (the “APA”). At the closing of the transaction, the Company received $20.0 million in cash. Pursuant tothe terms of the APA, an additional $5.0 million in cash will be paid by the Cumberland to the Company on or before April 1,2019. In addition, the Company is entitled to receive tiered royalties of up to 20% of US net sales of VIBATIV until suchtime as royalties cumulatively total $100.0 million. In connection with the closing of the transaction, Cumberland acquired, among other things, (i) intellectual propertyrights relating to VIBATIV, (ii) active pharmaceutical ingredient for VIBATIV, work-in-process and finished drug product,(iii) the US marketing authorization for VIBATIV, (iv) certain assigned contracts relating to the manufacture andcommercialization of VIBATIV, and (v) books and records related to VIBATIV. Cumberland also assumed certain clinicalstudy obligations related to VIBATIV and certain post-closing liabilities and obligations as described in the APA. The Company retained financial responsibility for any liabilities relating to products sold prior to the closing of thetransaction, and Cumberland assumed financial responsibility for any liabilities relating to products sold on or after theclosing of the transaction. The Company has agreed to provide transition services to Cumberland for limited periods of timefollowing the closing of the transaction. The Company has also agreed for a limited period not to engage in specifiedactivities that would compete with the manufacture, marketing and sale of VIBATIV. The Company recognized a net gain of approximately $6.1 million upon the sale of VIBATIV within “interest andother income, net” on the consolidated statements of operations. The Company will record the royalties receivable fromfuture US net sales by Cumberland within other income. Transition-related costs of approximately $1.1 million wererecognized concurrently and included as a reduction to the net gain on the sale. 4. Segment InformationThe Company operates in a single segment, which is the discovery (research), development and commercializationof human therapeutics. The following table summarizes total revenue by geographic region: Year Ended December 31, (In thousands) 2018 2017 2016US $49,239 $14,272 $33,179Europe 11,117 1,109 15,211Asia 14 5 254Other — — 4Total revenue $60,370 $15,386 $48,648 The following table summarizes total revenue from each of the Company’s customers or collaboration partners whoindividually accounted for 10% or more of the Company’s total revenue (as a percentage of total revenues) during the mostrecent three years: Year Ended December 31, (% of total revenue) 2018 2017 2016 Janssen 51% — — Alfasigma 18% — — Cardinal Health — 28% — AmerisourceBergen Drug Corp. — 25% — McKesson Corp. — 23% — Besse Medical — 13% — Mylan — — 31%Takeda — — 31%96 Table of Contents 5. Cash, Cash Equivalents, and Restricted CashThe following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within theconsolidated balance sheets that sum to the total of the same such amount shown on the consolidated statements of cashflows. December 31,(In thousands) 2018 2017Cash and cash equivalents $378,021 $88,980Restricted cash 833 833Total cash, cash equivalents, and restricted cash shown on theconsolidated statements of cash flows $378,854 $89,813 6. Investments and Fair Value MeasurementsAvailable-for-Sale SecuritiesThe estimated fair value of marketable securities is based on quoted market prices for these or similar investmentsthat were based on prices obtained from a commercial pricing service. The fair value of marketable securities classified withinLevel 2 is based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuerspreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.Available-for-sale securities are summarized below: December 31, 2018 Gross Gross Amortized Unrealized Unrealized Estimated(In thousands) Cost Gains Losses Fair ValueUS government securities Level 1 $48,807 $ — $(86) $48,721US government agency securities Level 2 9,852 2 — 9,854Corporate notes Level 2 57,508 6 (88) 57,426Commercial paper Level 2 90,919 — — 90,919Marketable securities 207,086 8 (174) 206,920Money market funds Level 1 294,751 — — 294,751Total $501,837 $ 8 $(174) $501,671 December 31, 2017 Gross Gross Amortized Unrealized Unrealized Estimated(In thousands) Cost Gains Losses Fair ValueUS government securities Level 1 $89,896 $ — $(342) $89,554US government agency securities Level 2 50,891 — (113) 50,778Corporate notes Level 2 141,226 2 (280) 140,948Commercial paper Level 2 19,893 — — 19,893Marketable securities 301,906 2 (735) 301,173Money market funds Level 1 69,055 — — 69,055Total $370,961 $ 2 $(735) $370,228 As of December 31, 2018, all of the available-for-sale securities had contractual maturities within two years and theweighted average maturity of marketable securities was approximately four months. There were no transfers between Level 1and Level 2 during the periods presented, and there have been no changes to the Company’s valuation techniques during theyears ended December 31, 2018 and 2017. 97 Table of ContentsIn general, the Company invests in debt securities with the intent to hold such securities until maturity at par value.The Company does not intend to sell the investments that are currently in an unrealized loss position, and it is unlikely thatit will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. The Companyhas determined that the gross unrealized losses on its marketable securities, as of December 31, 2018, were temporary innature and primarily due to increases in short-term interest rates in the capital markets. There were no material unrealizedlosses on investments which have been in a loss position for more than twelve months as of December 31, 2018. As of December 31, 2018, the Company’s accumulated other comprehensive loss on its consolidated balance sheetsconsisted of net unrealized losses on available-for-sale investments. During the years ended December 31, 2018 and 2017,the Company did not sell any of its marketable securities. Non-Marketable Equity Securities and Other-Than-Temporary ImpairmentIn September 2015, the Company and Trek Therapeutics, PBC ("TREKtx") entered into a licensing agreement (the"TREKtx Agreement") granting TREKtx an exclusive worldwide license for the development, manufacturing, use, marketingand sale of the Company’s NS5A inhibitor known as TD-6450 as a component in combination hepatitis C virus ("HCV")products (the "HCV Products"). Pursuant to the TREKtx Agreement, the Company received an upfront payment of $8.0million in the form of TREKtx's Series A preferred stock and would be eligible to receive future royalties based on net salesof the HCV Products. TREKtx is solely responsible for all future costs associated with the supply, manufacture, development,sale and marketing of the licensed compound.At the date of the acquisition of the investment, the Company estimated the fair value of the consideration receivedto be $8.0 million based upon the price of similar Series A preferred stock that TREKtx sold to an independent third-party forcash consideration. The Company accounted for this investment using the cost method of accounting and recorded it in otherinvestments on the Company’s consolidated balance sheets. The Company is not considered to be the primary beneficiary ofTREKtx and therefore, does not consolidate the financial results of the company into its financial statements. TheCompany’s equity investments is reviewed at least annually for impairment or whenever events or changes in circumstancesindicate that the carrying value of the investment might not be recoverable.During 2017, the Company identified indicators of impairment were present for its investment in TREKtx. TheCompany concluded that the impairment of this investment was other-than-temporary due to TREKtx's challenges insecuring additional funding and, as a result, the Company recorded an impairment charge. Due to the uncertainty in therecovery of the investment, the Company recorded an impairment charge for the full carrying value of the investment. The$8.0 million other-than-temporary impairment charge was reported as "Other-than-temporary impairment loss" on theconsolidated statements of operations for the year ended December 31, 2017. As the inputs utilized for the assessment werenot based on observable market data, the determination of fair value of this cost-method investment was classified withinLevel 3 of the fair value hierarchy. To determine the fair value of this investment, the Company used all available financialinformation related to the investee, including liquidity, rate of cash use, and ability to secure additional funding.7. Theravance Respiratory Company, LLC (“TRC”)Prior to the June 2014 spin-off from Innoviva, Inc. (the “Spin-Off”), the Company’s former parent company,Innoviva, Inc. (“Innoviva”), assigned to TRC, a Delaware limited liability company formed by Innoviva, its strategic allianceagreement with GSK and all of its rights and obligations under its collaboration agreement with GSK other than with respectto RELVAR ELLIPTA/BREO ELLIPTA, ANORO ELLIPTA and vilanterol monotherapy. Through the Company’s 85%equity interests in TRC, the Company is entitled to receive an 85% economic interest in any future payments made by GSKunder the strategic alliance agreement and under the portion of the collaboration agreement assigned to TRC (net of TRCexpenses paid and the amount of cash, if any, expected to be used by TRC pursuant to the TRC LLC Agreement over thenext four fiscal quarters). The drug programs assigned to TRC include TRELEGY ELLIPTA and the MABA program, asmonotherapy and in combination with other therapeutically active components, such as an inhaled corticosteroid (“ICS”),and any other product or combination of products that may be discovered and developed in the future under the GSKagreements. 98 ®®®®®® Table of ContentsIn May 2014, the Company entered into the TRC LLC Agreement with Innoviva that governs the operation of TRC.Under the TRC LLC Agreement, Innoviva is the manager of TRC, and the business and affairs of TRC are managedexclusively by the manager, including (i) day to day management of the drug programs in accordance with the existing GSKagreements; (ii) preparing an annual operating plan for TRC; and (iii) taking all actions necessary to ensure that theformation, structure and operation of TRC complies with applicable law and partner agreements. The Company is responsiblefor its proportionate share of TRC’s administrative expenses incurred by Innoviva. The Company analyzed its ownership, contractual and other interests in TRC to determine if it is a variable‑interestentity (“VIE”), whether the Company has a variable interest in TRC and the nature and extent of that interest. The Companydetermined that TRC is a VIE. The party with the controlling financial interest, the primary beneficiary, is required toconsolidate the entity determined to be a VIE. Therefore, the Company also assessed whether it is the primary beneficiary ofTRC based on the power to direct TRC’s activities that most significantly impact TRC’s economic performance and itsobligation to absorb TRC’s losses or the right to receive benefits from TRC that could potentially be significant to TRC.Based on the Company’s assessment, the Company determined that it is not the primary beneficiary of TRC, and, as a result,the Company does not consolidate TRC in its consolidated financial statements. TRC is recognized in the Company’sconsolidated financial statements under the equity method of accounting, and the value of the Company’s equity investmentin TRC was $5.4 million and $0.2 million as of December 31, 2018 and 2017, respectively. These amounts are comprised ofundistributed earnings from the Company’s investment in TRC which are recorded within “other prepaid and current assets”on the consolidated balance sheets. Pursuant to the TRC operating agreement, the cash from the TRELEGY ELLIPTAroyalties, net of any expenses, is distributed to the equity holders quarterly. For the years ended December 31, 2018 and 2017, the Company recognized $11.2 million and $0.2 million,respectively, in income from its investment in TRC which was generated by royalty payments from GSK to TRC arising fromthe net sales of TRELEGY ELLIPTA. 8. Long-Term DebtLong-term debt consists of the following liability components: December 31, (In thousands) 2018 20173.25% Convertible notes due 2023 Principal amount $230,000 $230,000 Unamortized debt issuance costs (5,182) (6,254)9.0% Non-recourse notes due 2033 Principal amount, net of 5% retained by the Company 237,500 — Unamortized debt issuance costs (7,965) —Total long-term debt $454,353 $223,746 Long-term debt interest expense consists of the following components: Year Ended December 31,(In thousands) 2018 2017 2016Stated coupon interest $9,316 $7,475 $1,225Amortization of debt issuance costs 1,166 1,072 179Total long-term debt interest expense $10,482 $8,547 $1,404 3.25% Convertible Senior Notes Due 2023In November 2016, the Company completed an underwritten public offering of $230.0 million of 3.25% convertiblesenior notes, due 2023 (the "Convertible Senior 2023 Notes") for net proceeds of approximately $222.5 million. TheCompany incurred approximately $7.5 million in debt issuance costs, which are being amortized to interest expense over theestimated life of the Convertible Senior 2023 Notes. The Convertible Senior 2023 Notes bear an annual99 Table of Contentsinterest rate of 3.25%, payable semi-annually in arrears, on November 1 and May 1 of each year, which commenced on May1, 2017.The Convertible Senior 2023 Notes are senior unsecured obligations and rank senior in right of payment to any ofthe Company’s indebtedness that is expressly subordinated in right of payment to the Convertible Senior 2023 Notes; equalin right of payment to any of the Company’s indebtedness that is not so subordinated; effectively junior in right of paymentto any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; andstructurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.The Convertible Senior 2023 Notes will mature on November 1, 2023, unless earlier redeemed or repurchased by theCompany or converted. Holders may convert their Convertible Senior 2023 Notes into ordinary shares at an initialconversion rate of 29.0276 shares for each $1,000 principal amount of Convertible Senior 2023 Notes, which is equivalent toan initial conversion price of approximately $34.45 per share, subject to adjustment, in certain circumstances (includingupon the occurrence of a fundamental change), at any time prior to the close of business on the second business dayimmediately preceding the maturity date. Upon the occurrence of a fundamental change involving the Company, holders ofthe Convertible Senior 2023 Notes may require the Company to repurchase all or a portion of their Convertible Senior 2023Notes for cash at a redemption price equal to 100% of the principal amount of the Convertible Senior 2023 Notes to beredeemed, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, in somecircumstances, the conversion rate of the Convertible Senior 2023 Notes will increase with a make whole premium forconversions in connection with certain fundamental changes.The debt issuance costs related to the Convertible Senior 2023 Notes offering were capitalized as deferred financingcosts and presented as a reduction of the carrying value of the financial liability on the Company’s consolidated balancesheets at December 31, 2018 and 2017.The estimated fair value of the Convertible Senior 2023 Notes was $235.0 million and $251.0 million at December31, 2018 and 2017, respectively. The estimated fair value was primarily based upon the underlying price of TheravanceBiopharma’s publicly traded shares and other observable inputs as of December 31, 2018 and 2017. The inputs to determinefair value of the Convertible Senior 2023 Notes are categorized as Level 2 inputs. Level 2 inputs include quoted prices forsimilar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; andmodel-derived valuations whose inputs are observable or whose significant value drivers are observable.9.0% Non-Recourse Notes Due 2033In November 2018, the Company entered into note purchase agreements relating to the private placement of $250.0million aggregate principal amount of 9.0% non-recourse notes, due on or before 2033 (the "Non-Recourse 2033 Notes")issued by the Company’s wholly-owned subsidiary, Triple Royalty Sub LLC (the “Issuer”). The Issuer was formed in October2018 and is governed as a special purpose bankruptcy remote entity under Delaware law by the Amended and RestatedLimited Liability Agreement, dated as of November 30, 2018, entered into by Theravance Biopharma R&D, Inc., a wholly-owned subsidiary of the Company, as the initial sole equity member of the Issuer. The Non-Recourse 2033 Notes are secured by all of the Issuer’s right, title and interest as a holder of certainmembership interests (the “Issuer Class C Units”) in TRC. The primary source of funds to make payments on the Non-Recourse 2033 Notes will be the 63.75% economic interest of the Issuer (evidenced by the Issuer Class C Units) in any futurepayments made by GSK under the collaboration agreement, dated as of November 14, 2002, by and between Innoviva, Inc.and GSK, as amended from time to time (net of the amount of cash, if any, expected to be used in TRC LLC pursuant to theTRC LLC Agreement over the next four fiscal quarters) relating to the TRELEGY ELLIPTA program. The sole source ofprincipal and interest payments for the Non-Recourse 2033 Notes are the future royalty payments generated from theTRELEGY ELLIPTA program, and as a result, the holders of the Non-Recourse 2033 Notes have no recourse against theCompany even if the TRELEGY ELLIPTA payments are insufficient to cover the principal and interest payments for theNon-Recourse 2033 Notes. 100 Table of ContentsThe Non-Recourse 2033 Notes are not convertible into Company equity and have no security interest in nor rightsunder any agreement with GSK. The Non-Recourse 2033 Notes may be redeemed at any time prior to maturity, in whole or inpart, at specified redemption premiums. The Non-Recourse 2033 Notes bear an annual interest rate of 9.0%, with interest andprincipal paid quarterly beginning April 15, 2019. Prior to October 15, 2020, in the event that the distributions received bythe Issuer from TRC in a quarter is less than the interest accrued for the quarter, the principal amount of the Non-Recourse2033 Notes will increase by the interest shortfall amount for that period. Since the principal and interest payments on theNon-Recourse 2033 Notes are ultimately based on royalties from TRELEGY ELLIPTA product sales, which will vary fromquarter to quarter, the Non-Recourse 2033 Notes may be repaid prior to the final maturity date in 2033.In order to comply with Regulation RR – Credit Risk Retention (17 C.F.R. Part 246), 5% of the principal amount ofthe Non-Recourse 2033 Notes were retained by Theravance Biopharma R&D, Inc. and eliminated in the Company’sconsolidated financial statements. Excluding the $12.5 million of retained Non-Recourse 2033 Notes and other fees relatedto the transaction, net proceeds of the offering were approximately $229.4 million. The Company incurred approximately$8.1 million in debt issuance costs, which were capitalized as deferred financing costs and are being amortized to interestexpense over the estimated life of the Non-Recourse 2033 Notes.The estimated fair value of the Non-Recourse 2033 Notes, net, was $237.5 million at December 31, 2018. The inputsto determine fair value of the Non-Recourse 2033 Notes are categorized as Level 2 inputs. Level 2 inputs include quotedprices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are notactive; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.9. InventoriesAs a result of the VIBATIV sale to Cumberland in November 2018, the Company did not have any inventory as ofDecember 31, 2018. Inventory as of December 31, 2017 consisted of the following: December 31, (In thousands) 2017 Raw materials $11,729 Work-in-process 66 Finished goods 5,035 Total inventories $16,830 10. Property and EquipmentProperty and equipment are held predominantly in the US and consist of the following: December 31, (In thousands) 2018 2017Computer equipment $2,522 $1,866Software 3,577 3,432Furniture and fixtures 3,759 3,759Laboratory equipment 31,164 28,371Leasehold improvements 21,849 19,444Subtotal 62,871 56,872Less: accumulated depreciation (49,695) (46,715)Property and equipment, net $13,176 $10,157For the years ended December 31, 2018, 2017 and 2016, depreciation expense for property and equipment was $3.0million, $2.5 million and $2.2 million, respectively. 101 Table of Contents11. Share-Based CompensationTheravance Biopharma Equity PlansThe Company has three equity compensation plans — its 2013 Equity Incentive Plan (the “2013 EIP”), its 2013Employee Share Purchase Plan (the “2013 ESPP”) and its 2014 New Employee Equity Incentive Plan (the “2014 NEEIP”). Atinception, the Company was authorized to issue 5,428,571 ordinary shares under the 2013 EIP, 857,142 ordinary sharesunder the 2013 ESPP, and 750,000 ordinary shares under the 2014 NEEIP.The 2013 EIP provides for the issuance of share-based awards, including restricted shares, restricted share units,options, share appreciation rights (“SARs”) and other equity-based awards, to Company employees, officers, directors andconsultants. As of January 1 of each year, commencing on January 1, 2015 and ending on (and including) January 1, 2023,the aggregate number of ordinary shares that may be issued under the 2013 EIP shall automatically increase by a numberequal to the least of 5% of the total number of ordinary shares outstanding on December 31 of the prior year, 3,428,571ordinary shares, or a number of ordinary shares determined by the Company’s board of directors. Options may be grantedwith an exercise price not less than the fair market value of the ordinary shares on the grant date. Under the terms of theCompany’s 2013 EIP, options granted to employees generally have a maximum term of 10 years and vest over a four-yearperiod from the date of grant; 25% vest at the end of one year, and 75% vest monthly over the remaining three years. TheCompany may grant options with different vesting terms from time to time. Unless an employee’s termination of service isdue to disability or death, upon termination of service, any unexercised vested options will generally be forfeited at the endof three months or the expiration of the option, whichever is earlier.Under the 2013 ESPP, the Company’s officers and employees may purchase ordinary shares through payrolldeductions at a price equal to 85% of the lower of the fair market value of the ordinary share at the beginning of the offeringperiod or at the end of each applicable purchase period. As of January 1 of each year, commencing on January 1, 2015 andending on (and including) January 1, 2033, the aggregate number of ordinary shares that may be issued under the 2013 ESPPshall automatically increase by a number equal to the least of 1% of the total number of ordinary shares outstanding onDecember 31 of the prior year, 571,428 ordinary shares or a number of ordinary shares determined by the Company’s board ofdirectors. The ESPP generally provides for consecutive and overlapping offering periods of 24 months in duration, with eachoffering period generally composed of four consecutive six-month purchase periods. The purchase periods end on eitherMay 15 or November 15. ESPP contributions are limited to a maximum of 15% of an employee’s eligible compensation.The 2013 ESPP also includes a feature that provides for the existing offering period to terminate and for participantsin that offering period to automatically be enrolled in a new offering period when the fair market value of an ordinary share atthe beginning of a subsequent offering period falls below the fair market value of an ordinary share on the first day of suchoffering period.The 2014 NEEIP provides for the issuance of share-based awards, including restricted shares, restricted share units,non-qualified options and SARs, to the Company’s employees. Options may be granted with an exercise price not less thanthe fair market value of the ordinary shares on the grant date. Under the terms of the 2014 NEEIP, options granted toemployees generally have a maximum term of 10 years and vest over a four-year period from the date of grant; 25% vest atthe end of one year, and 75% vest monthly over the remaining three years. The Company may grant options with differentvesting terms from time to time. Unless an employee’s termination of service is due to disability or death, upon terminationof service, any unexercised vested options will generally be forfeited at the end of three months or the expiration of theoption, whichever is earlier.Innoviva’s Equity PlansPrior to the Spin-Off, the Company’s employees may have received Innoviva stock-based compensation awards,and, therefore, the following disclosures include information regarding stock-based compensation expense allocated toTheravance Biopharma that relates to Innoviva stock-based equity awards.At the time of the Spin-Off, Innoviva had one active stock-based incentive plan under which it granted stock-basedawards to employees, officers and consultants, the 2012 Equity Incentive Plan. All outstanding stock options and102 Table of Contentsrestricted stock units (“RSUs”) held by (1) Innoviva employees who became the Company’s employees, and (2) members ofthe board of directors of Innoviva who became members of the Company’s board of directors, in connection with the Spin-Offwere adjusted for the Spin-Off. Such awards, along with outstanding restricted stock awards (“RSAs”) held by Innovivaemployees who became the Company’s employees in connection with the Spin-Off, will continue to vest and remainoutstanding based on continuing employment or service with the Company.The 2012 Equity Incentive Plan provides for the grant of incentive stock options, non-statutory stock options,restricted stock awards, stock unit awards and SARs to employees, non-employee directors and consultants. Stock optionswere granted with an exercise price not less than the fair market value of the common stock on the grant date. Stock optionsgranted to employees generally have a maximum term of 10 years and vest over a four year period from the date of grant;25% vest at the end of one year, and 75% vest monthly over the remaining three years. However, Innoviva granted optionswith different vesting terms from time to time. Unless an employee’s termination of service is due to disability or death, upontermination of service, any unexercised vested options will be forfeited at the end of three months or the expiration of theoption, whichever is earlier.Innoviva Performance-Contingent Restricted Stock AwardsIn connection with performance-contingent RSAs granted to members of the Company’s senior management byInnoviva’s board of directors prior to the Spin-Off in 2014, the Company recognized $1.0 million in share-basedcompensation expense for the year ended December 31, 2016. The expense recognition pertaining to these RSAs wascompleted in 2016.Employee Share Option Exchange ProgramOn August 28, 2015, the Company gave eligible share option holders of the Company and its subsidiaries theopportunity to exchange some or all of their outstanding options granted under the 2013 EIP or the 2014 NEEIP beforeAugust 4, 2015, whether vested or unvested, for RSUs (the “Exchange Program”). The Exchange Program was designed torestore the intended employee retention and incentive value of the equity awards.In accordance with the terms of the Exchange Program, employees who held options that had an exercise priceabove the market price of the Company’s ordinary shares at the offer expiration date were eligible to exchange two sharessubject to eligible options for one RSU granted under the terms of the 2013 EIP. The RSUs granted under the ExchangeProgram vests over a three or four year service period depending on the grant date of the original option exchanged. TheCompany’s executive officers and members of the board of directors were not eligible to participate in the ExchangeProgram.The Exchange Program closed on September 25, 2015, and the Company exchanged 1,975,009 outstanding optionsfor 987,496 RSUs with a fair value of $12.43 per share. The exchange of options for RSUs was considered a modification tothe terms of the original equity award. As such, the Exchange Program resulted in incremental share-based compensationcosts of $1.4 million to be recognized, concurrently with the unamortized original compensation costs of the exchangedoption awards, ratably over the new vesting period of three years. For the years ended December 31, 2018, 2017, and 2016,the Company recognized $0.3 million, $0.5 million, and $0.5 million, respectively, of the $1.4 million in incremental share-based compensation costs.Performance-Contingent AwardsIn the first quarter of 2016, the Compensation Committee of the Company’s board of directors (“CompensationCommittee”) approved the grant of 1,575,000 performance-contingent RSAs and 135,000 performance-contingent restrictedshare units RSUs to senior management. The vesting of such awards is dependent on the Company meeting its criticaloperating goals and objectives during a five-year period from 2016 to December 31, 2020. The goals that must be met inorder for the performance-contingent RSAs and RSUs to vest are strategically important for the Company, and theCompensation Committee believes the goals, if achieved, will increase shareholder value. The awards have dual triggers ofvesting based upon the achievement of these goals and continued employment. As of December 31, 2018, there were978,750 of these performance-contingent RSAs and 101,250 of these performance-contingent RSUs103 Table of Contentsoutstanding, and as of December 31, 2017, there were 1,305,000 performance-contingent RSAs and 135,000 performance-contingent RSUs outstanding. Expense associated with these awards is broken into three separate tranches and may be recognized during the years2016 to 2020 depending on the probability of meeting the performance conditions. Compensation expense relating toawards subject to performance conditions is recognized if it is considered probable that the performance goals will beachieved. The probability of achievement is reassessed at each quarter-end reporting period.The performance conditions associated with the first tranche of these awards were completed in the second quarter of2018, and the Company recognized $1.7 million and $2.6 million of share-based compensation expense for the years endedDecember 31, 2018 and 2017, respectively, associated with these awards. For years ended December 31, 2018 and 2017, the Company recognized $2.6 million and $6.3 million, respectively,of share-based compensation expense related to its assessment of the probability that the performance conditions associatedwith the second tranche of these awards was considered to be probable of vesting. As of December 31, 2018, the Companydetermined that the remaining third tranche was not probable of vesting and, as a result, no compensation expense related tothe third tranche has been recognized to date. The maximum potential expense associated with the remaining second and third tranches could be up to$17.8 million (allocated as $7.4 million for research and development expense and $10.4 million for selling, general andadministrative expense) if the performance conditions for the second and third tranches are achieved. In 2017, the Compensation Committee approved the grant of 50,000 performance-contingent RSUs to a newlyappointed member of senior management. The RSUs have dual triggers of vesting based upon the achievement of certaincorporate operating milestones in specified timelines, as well as a requirement for continued employment. Share-basedcompensation expense related to this grant is broken into two separate tranches and recognized when the associatedperformance goals are deemed to be probable of achievement. The maximum expense associated with the first tranche was$0.8 million. In 2017, the Company recognized $0.4 million in share-based compensation expense as it determined that theperformance conditions associated with the first tranche were probable of vesting, and in 2018, the Company recognized theremaining $0.4 million of share-based compensation expense as the performance conditions associated with the first trancheof this award were met. The Company has determined that the second tranche was not probable of vesting as of December 31,2018 and, as a result, no compensation expense related to the second tranche has been recognized to date. Share-Based Compensation ExpenseThe allocation of share-based compensation expense included in the consolidated statements of operations was asfollows: Year Ended December 31, (In thousands) 2018 2017 2016Research and development $25,563 $22,691 $20,202Selling, general and administrative 25,750 26,454 20,967Total share-based compensation expense $51,313 $49,145 $41,169 104 Table of ContentsShare-based compensation expense included in the consolidated statements of operations by award type was asfollows: Year Ended December 31, (In thousands) 2018 2017 2016Innoviva equity: Options $280 $2,973 $3,973RSUs — 224 1,547RSAs 457 660 2,597Performance RSAs — 1 1,005Theravance Biopharma equity: Options 8,441 7,969 7,591RSUs 34,077 25,959 20,946Performance RSAs and RSUs 4,707 9,224 1,808ESPP 3,351 2,135 1,702Total share-based compensation expense $ 51,313 $49,145 $41,169 Total share-based compensation expense capitalized to inventory was not material for any of the periods presented.As of December 31, 2018, the unrecognized share-based compensation cost, net of actual forfeitures, and theestimated weighted‑average amortization period, using the straight-line attribution method, was as follows: Unrecognized Weighted‑‑Average Compensation AmortizationPeriod(In thousands, except amortization period) Cost (Years)Innoviva equity: Options $ — —RSAs 64 0.23Theravance Biopharma equity: Options 18,147 2.84RSUs 62,718 2.49Performance RSAs and RSUs 3,604 1.14ESPP 2,322 1.03Total $86,855 (1)Represents unrecognized share-based compensation cost associated with the Theravance Biopharma performance-contingent awards described above that are probable of vesting.105 (1) Table of ContentsCompensation AwardsThe following table summarizes option activity under the 2013 EIP and 2014 NEEIP for the years ended December31, 2018, 2017 and 2016: Number of Shares Weighted-Average Subject Exercise Price to Outstanding Options of Outstanding OptionsOutstanding at December 31, 2015 2,311,164 $23.07Granted 474,675 24.06Exercised (197,328) 22.18Forfeited (357,716) 19.83Outstanding at December 31, 2016 2,230,795 $23.88Granted 720,350 32.60Exercised (275,776) 22.61Forfeited (166,800) 25.70Outstanding at December 31, 2017 2,508,569 $26.40Granted 755,800 27.10Exercised (74,692) 18.65Forfeited (126,508) 27.95Outstanding at December 31, 2018 3,063,169 $26.70 As of December 31, 2018, 2017, and 2016, the aggregate intrinsic value of the options outstanding was $5.1million, $8.0 million and $18.1 million, respectively. As of December 31, 2018, the aggregate intrinsic value of the optionsexercisable was $3.9 million. The total estimated fair value of options vested (excluding vested options that have expired)was $8.4 million, $8.2 million, and $7.7 million in 2018, 2017, and 2016, respectively.The following table summarizes total RSU and RSA activity (including performance RSUs and RSAs) for the yearsended December 31, 2018, 2017 and 2016: Number of Shares Number of Shares Subject to Outstanding Subject to Outstanding RSUs Performance Conditions(RSAs)Outstanding at December 31, 2015 2,988,041 —Granted 2,344,034 1,575,000Released (1,185,905) —Forfeited (537,052) (135,000)Outstanding at December 31, 2016 3,609,118 1,440,000Granted 1,165,578 —Released (1,420,485) —Forfeited (456,453) (135,000)Outstanding at December 31, 2017 2,897,758 1,305,000Granted 1,772,263 —Released (1,405,294) (326,250)Forfeited (195,324) —Outstanding at December 31, 2018 3,069,403 978,750 As of December 31, 2018, the aggregate intrinsic value of the RSUs and RSAs outstanding was $78.5 million and$25.0 million, respectively. The total estimated fair value of RSUs vested was $31.6 million, $25.1 million, and $21.4million in 2018, 2017, and 2016, respectively.106 Table of ContentsValuation AssumptionsThe range of assumptions used to estimate the fair value of options granted and rights granted under the 2013 ESPPwas as follows: Year Ended December 31, 2018 2017 2016Options Risk-free interest rate 2.3% - 3.0% 2.0% - 2.1% 1.1% - 1.9%Expected term (in years) 6.0 6.0 6.0Volatility 53% - 54% 54% - 56% 53% - 73%Dividend yield — — —Weighted-average estimated fair value $14.32 $17.29 $13.282013 ESPP Risk-free interest rate 2.1% - 2.8% 0.9% - 1.7% 0.4% - 1.0%Expected term (in years) 0.5 - 2.0 0.5 - 2.0 0.5 - 2.0Volatility 42% - 53% 41% - 56% 54% - 65%Dividend yield — — —Weighted-average estimated fair value $9.13 $7.09 $9.63 12. Income TaxesTheravance Biopharma was incorporated in the Cayman Islands in July 2013 under the name TheravanceBiopharma, Inc. as a wholly-owned subsidiary of Innoviva and began operations subsequent to the Spin-Off with wholly-owned subsidiaries in the Cayman Islands, US, United Kingdom, and Ireland. Effective July 1, 2015, Theravance Biopharmabecame an Irish tax resident, therefore, the loss before income taxes of Theravance Biopharma, the parent company, areincluded in Ireland in the tables below.The components of the loss before income taxes were as follows: Year Ended December 31, (In thousands) 2018 2017 2016Income (loss) before provision for income taxes: Cayman Islands $14,838 $(163,770) $(185,099)United States (69,695) (33,374) (18,441)Ireland (171,134) (74,472) 23,323United Kingdom (94) (95) (342)Total $(226,085) $(271,711) $(180,559) The components of provision for income tax benefit (expense) were as follows: Year Ended December 31, (In thousands) 2018 2017 2016 Provision for income tax benefit (expense): Current: Cayman Islands $ — $ — $ — United States 10,563 (13,091) (9,859) Ireland — (566) (219) United Kingdom (2) (37) (32) Subtotal 10,561 (13,694) (10,110) Deferred — — — Total $10,561 $(13,694) $(10,110) Effective tax rate 4.67% (5.04)% (5.60)% 107 Table of ContentsThe provision for income tax benefit (expense) was $10.6 million, ($13.7) million, and ($10.1) million for the yearsended December 31, 2018, 2017, and 2016 respectively.The 2018 benefit for income taxes was primarily due to additional tax loss generated in 2017 by the US entity as aresult of the finalization of transfer pricing policy, current year US research and development credit, and the release ofpreviously recorded contingent tax liabilities due to the lapse of the statute of limitations. The provision for income taxrecorded in 2017 and 2016 primarily resulted from contingent tax liabilities related to uncertain tax positions taken withrespect to transfer pricing and tax credits.No provision for income taxes has been recognized on undistributed earnings of the Company’s foreign subsidiariesbecause it considers such earnings to be indefinitely reinvested. In the event of a distribution of these earnings in the form ofdividends or otherwise, the Company may be liable for income taxes, subject to an adjustment, if any, for foreign tax creditsand foreign withholdings taxes payable to certain foreign tax authorities. As of December 31, 2018, there were noundistributed earnings.For 2018 and 2017, as a result of the Company becoming an Irish tax resident effective July 1, 2015, the tax ratesreflect the Irish statutory rate of 25%. The differences between the Irish statutory income tax rate and the Company’s effectivetax rates were as follows: Year Ended December 31, 2018 2017 2016 Provision at statutory income tax rate 25.00% 25.00% 25.00%Foreign rate differential (7.51) (18.17) (23.11) Share-based compensation 0.28 1.52 (0.27) Non-deductible executive compensation (0.72) (1.03) (1.07) Uncertain tax positions (4.00) (6.55) (8.55) Research and development tax credit carryforwards 1.79 1.21 1.93 Federal tax reform - Tax rate change — (4.66) — Foreign exchange loss 8.52 — — Change in valuation allowance (18.82) (5.15) (0.89) Other 0.13 2.79 1.36 Effective tax rate 4.67% (5.04)% (5.60)% Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of theCompany’s deferred tax assets and liabilities were as follows: December 31, (In thousands) 2018 2017Deferred tax assets: Net operating loss carryforwards $33,396 $15,834Capital loss carryforwards 19,409 —Research and development tax credit carryforwards 8,508 6,504Fixed assets and intangibles 285,821 3,746Share-based compensation 12,479 11,140Accruals 8,343 5,293Other — 248Subtotal 367,956 42,765Valuation allowance (367,748) (42,613)Total deferred tax assets 208 152 Deferred tax liabilities: Prepaid assets (208) (152)Total deferred tax liabilities (208) (152) Net deferred tax assets/liabilities $ — $ —108 Table of Contents Realization of deferred tax assets is dependent upon future taxable income in the respective jurisdictions, if any, thetiming and the amount of which are uncertain. Accordingly, the deferred tax assets have been fully offset by a valuationallowance.On January 1, 2018, the Company adopted ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of AssetsOther Than Inventory (“ASU 2016-16”) using the modified retrospective approach. ASU 2016-16 requires immediaterecognition of income tax consequences of intra-company asset transfers, other than inventory transfers. Legacy GAAPprohibited recognition of income tax consequences of intra-company asset transfers whereby the seller defers any net taxeffect and the buyer is prohibited from recognizing a deferred tax asset on the difference between the newly created tax basisof the asset in its tax jurisdiction and its financial statement carrying amount as reported in the consolidated financialstatements. An example of an inter-company asset transfers included in ASU 2016-16’s scope is intellectual property. OnOctober 2, 2017, Theravance Biopharma R&D, Inc. (Cayman Islands) transferred its economic interests in certain intellectualproperty to Theravance Biopharma Ireland Limited. The transfer was classified as an intra-company sale of assets for bothfinancial reporting and income tax purposes. The Company recorded a deferred tax asset of $282.7 million fully offset by avaluation allowance as a result of the sale of intellectual property. The adoption of this pronouncement did not have amaterial impact on the Company’s balance sheet or statement of operations. The valuation allowance as of December 31, 2018 increased from $42.6 million (the valuation allowance as ofDecember 31, 2017) to $367.7 million, primarily as a result of additional tax loss generated in various jurisdictions duringthe current year, the transfer of intellectual property to Ireland, and a capital loss carryforward generated in Ireland. Valuationallowances require an assessment of both positive and negative evidence when determining whether it is more likely than notthat the deferred tax assets are recoverable. As required, the Company prepares its assessment of the realizability of deferredtax assets on a jurisdiction-by-jurisdiction basis. As of December 31, 2018, the Company had $101.8 million of US federal net operating loss carryforwards and $10.6million of federal research and development tax credit carryforwards which expire beginning in 2035. After the enactment ofthe Tax Cut and Jobs Act (the “Tax Act”) in December 2017, the operating losses of $56.9 million generated in 2018 have anindefinite carryforward life, but are limited to 80% of taxable income when utilized. The Company had state net operatingloss carryforwards of $76.6 million which generally begin to expire in 2034 and state research and development creditcarryforwards of $13.3 million to be carried forward indefinitely. The Company also had Irish net operating loss carryforwards of $210.7 million with no expiration date and capitalloss carryforwards of $58.8 million to be carried forward indefinitely. Utilization of net operating loss and tax credit carryforwards may be subject to an annual limitation due toownership change limitations provided by the Internal Revenue Code and similar state provisions. Annual limitations mayresult in expiration of net operating loss and tax credit carryforwards before some or all of such amounts have been utilized.The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense.The amount of tax expense related to interest or penalties was immaterial for the years ended December 31, 2018 and 2017.109 Table of ContentsUncertain Tax PositionsA reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits were asfollows:(In thousands) Unrecognized tax benefits as of December 31, 2016 $23,254Gross decrease in tax positions for prior years (51)Gross increase in tax positions for current year 18,591Unrecognized tax benefits as of December 31, 2017 41,794Gross decrease in tax positions for prior years (685)Gross increase in tax positions for current year 11,295Unrecognized tax benefits as of December 31, 2018 $52,404 The total unrecognized tax benefits of $52.4 million and $41.8 million, as of December 31, 2018 and December 31,2017, respectively, may reduce the effective tax rate in the period of recognition. As of December 31, 2018, the Companydoes not believe that it is reasonably possible that its unrecognized tax benefit will significantly decrease in the next twelvemonths. The Company currently has a full valuation allowance against its deferred tax assets, which would impact the timingof the effective tax rate benefit should any of these uncertain positions be favorably settled in the future. The Company is subject to taxation in Ireland, the US, and various other jurisdictions. The tax years 2015 andforward remain open to examination in Ireland, tax years 2015 and forward remain open to examination in the US, and thetax years 2012 and forward remain open to examination in other jurisdictions. US Tax ReformIn December 2017, the US government enacted the Tax Act. The Tax Act significantly revises the US corporateincome tax laws by, amongst other things, reducing the corporate income tax rate from 35% to 21% and implementing amodified territorial tax system that includes a one-time repatriation tax on accumulated undistributed foreign earnings. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications ofthe Tax Cuts and Jobs Act (“SAB 118”), which allowed the Company to record provisional amounts for the Tax Act during ameasurement period not to extend beyond one year of the enactment date, with further clarifications made recently with theissuance of amendments to SAB 118. The Company has completed its assessment of the Tax Act and did not have anysignificant adjustments to its provisional amount of $12.4 million related to the reduction in the corporate income tax ratefrom 35% to 21%. The Company’s future income tax expense may be affected by such factors as changes in tax laws, its business,regulations, tax rates, interpretation of existing laws or regulations, the impact of accounting for share-based compensation,the impact of accounting for business combinations, its international organization, shifts in the amount of income before taxearned in the US as compared with other regions in the world, and changes in overall levels of income before tax. 13. Commitments and ContingenciesOperating Leases and SubleasesThe Company leases approximately 170,000 square feet of office and laboratory space in two buildings in SouthSan Francisco, California, under a non-cancelable operating lease that ends in May 2030. In addition, the110 Table of ContentsCompany’s Irish subsidiary leases approximately 6,100 square feet of office space in Dublin, Ireland. Future minimum leasepayments under the leases, exclusive of executory costs, as of December 31, 2018, are as follows:(In thousands) Years ending December 31: 2019 $7,8172020 6,5472021 9,5012022 9,766Thereafter 80,281Total $113,912 Rent expense (net of sublease income) and sublease income associated with operating leases were as follows: Year Ended December 31, (In thousands) 2018 2017 2016Rent expense, net $9,965 $7,740 $6,865Sublease income $73 $209 $244 Performance-Contingent AwardsIn 2016, the Company granted long-term retention RSAs and RSUs to members of senior management and incentivecash bonus awards to certain employees. The vesting and payout of such awards is dependent on the Company meeting itscritical operating goals and objectives during a five-year period from 2016 to December 31, 2020. These goals arestrategically important for the Company, and it believes the goals, if achieved, will increase shareholder value. The awardshave dual triggers of vesting based upon the achievement of these goals and continued employment, and they are brokeninto three separate tranches. The Company determined that achievement of the requisite performance conditions for the first tranche werecompleted as of June 30, 2018. The maximum potential remaining expense associated with the second and third tranches ofthis program is $17.8 million related to share-based compensation expense and $21.0 million related to cash bonus expense,which would be recognized in increments based on achievement of the performance conditions. With the completedachievement of the first tranche’s requisite performance conditions and the second tranche being probable due toachievement of certain performance conditions and multiple advancements of programs within the Company’s developmentpipeline, the Company recognized $4.3 million in share-based compensation expense and $5.4 million in cash bonusexpense for the year ended December 31, 2018. For the year ended December 31, 2017, the Company recognized $8.9million in share-based compensation expense and $18.2 million in cash bonus expense. The Company determined that theremaining third tranche was not probable of vesting and, as a result, no compensation expense related to this tranche hasbeen recognized to date. Guarantees and IndemnificationsThe Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits. TheCompany believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has notrecognized any liabilities relating to these agreements as of December 31, 2018.14. Subsequent EventsIn January 2019, the Company announced a reduction in workforce to align with its focus on continued executionof key strategic programs, and advancement of selected late-stage research programs toward clinical development. TheCompany reduced its overall headcount by approximately 50 individuals, with the affected employees primarily focused onearly research or the infrastructure in support of VIBATIV which was sold by the Company to Cumberland PharmaceuticalsInc. in November 2018. The workforce reduction is expected to be substantially completed in the first quarter of 2019. 111 Table of ContentsAs a result of the workforce reduction, the Company expects to record severance related charges totalingapproximately $3.5 million to $4.0 million including compensation expense that will continue to be made to affectedemployees during any minimum statutory notice periods. A significant majority of the cash payments relating to personnel-related restructuring charges will be paid during the first quarter of 2019. The charges that the Company expects to incur in connection with the workforce reduction are estimates and subjectto a number of assumptions, and actual results may differ materially. The Company may incur additional costs not currentlycontemplated due to events associated with or resulting from the workforce reduction.112 Table of ContentsSUPPLEMENTARY FINANCIAL DATA (UNAUDITED)(In thousands, except per share data)The following table presents certain unaudited consolidated quarterly financial information for the eight quarters inthe periods ended December 31, 2018 and 2017. This information has been prepared on the same basis as the auditedconsolidated financial statements and includes all adjustments (consisting only of normal recurring adjustments) necessaryto present fairly the unaudited quarterly results of operations set forth herein. For the Quarters Ended March 31, June 30, September 30, December 31, 2018 Total revenue $8,319 $23,476 $12,838 $15,737Costs and expenses 73,295 72,180 75,288 78,358Loss from operations (64,976) (48,704) (62,450) (62,621)Net loss (65,087) (40,818) (59,433) (50,186)Basic and diluted net loss per share $(1.22) $(0.76) $(1.10) $(0.92)2017 Total revenue $3,087 $3,509 $4,275 $4,515Costs and expenses 61,916 68,630 61,272 83,691Loss from operations (58,829) (65,121) (56,997) (79,176)Net loss (65,319) (66,287) (66,877) (86,922)Basic and diluted net loss per share $(1.27) $(1.27) $(1.27) $(1.64) 113 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURENot applicable. ITEM 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and Procedures.We conducted an evaluation required by paragraph (d) of Rule 13a‑15 of the Exchange Act as of December 31,2018, under the supervision and with the participation of our management, including our Chief Executive Officer andPrincipal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (asdefined under Rule 13a-15(e) of the Exchange Act), which are controls and other procedures of a company that are designedto ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act isrecorded, processed, summarized and reported within required time periods. Based upon that evaluation, our Chief ExecutiveOfficer and Principal Financial Officer concluded that, as of such date, our disclosure controls and procedures were effectiveat the reasonable assurance level.Management’s Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting,as such term is defined in Rule 13a‑15(f) of the Exchange Act. In connection with the preparation of this Annual Report, ourmanagement, including our Chief Executive Officer and Principal Financial Officer, assessed the effectiveness of our internalcontrol over financial reporting as of December 31, 2018 based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the“COSO criteria”). Based on its assessment, our management concluded that our internal control over financial reporting waseffective as of December 31, 2018.The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited byErnst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.114 Table of ContentsLimitations on the Effectiveness of ControlsOur management, including our Chief Executive Officer and Principal Financial Officer, does not expect that ourdisclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. Acontrol system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a control system must reflect the fact that there are resourceconstraints, and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any,within Theravance Biopharma have been detected. Also, projections of any evaluation of effectiveness to future periods aresubject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.Changes in Internal Control over Financial ReportingThere was no change in our internal control over financial reporting (as defined in Rule 13a‑15(f) of the ExchangeAct) identified in connection with the evaluation required by paragraph (d) of Rule 13a‑15 of the Exchange Act, whichoccurred during the fourth quarter of the year ended December 31, 2018 which has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.115 Table of ContentsReport of Independent Registered Public Accounting FirmTo the Shareholders and the Board of Directors of Theravance Biopharma, Inc.Opinion on Internal Control over Financial ReportingWe have audited Theravance Biopharma, Inc.’s internal control over financial reporting as of December 31, 2018,based on criteria established in Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, TheravanceBiopharma, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2018, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board(United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the relatedconsolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows, for each of the three years inthe period ended December 31, 2018 and related notes and our report dated February 28, 2019 expressed an unqualifiedopinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting andfor its assessment of the effectiveness of internal control over financial reporting included in the accompanyingManagement’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on theCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with thePCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities lawsand the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effective internal control over financial reporting wasmaintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that amaterial weakness exists, testing and evaluating the design and operating effectiveness of internal control based on theassessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes those policiesand procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and thatreceipts and expenditures of the company are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, 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 detectmisstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures maydeteriorate./s/ Ernst & Young LLPSan Jose, CaliforniaFebruary 28, 2019116 Table of Contents ITEM 9B. OTHER INFORMATIONNone. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEFor the information required by this Item, see “Questions and Answers About Procedural Matters”, “Election ofDirectors”, “Nominees”, “Audit Committee”, “Meetings of the Board of Directors”, “Code of Conduct”, “Executive Officers”and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement to be filed with the SEC, whichsections are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATIONFor the information required by this Item, see “Director Compensation”, “Executive Compensation” and“Compensation Committee Interlocks and Insider Participation” in the Proxy Statement to be filed with the SEC, whichsections are incorporated herein by reference. ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERSFor the information required by this Item, see “Security Ownership of Certain Beneficial Owners and Management”and “Equity Compensation Plan Information” in the Proxy Statement to be filed with the SEC, which sections areincorporated herein by reference. ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEFor the information required by this Item, see “Director Independence” and “Policies and Procedures for RelatedParty Transactions” in the Proxy Statement to be filed with the SEC, which sections are incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESFor the information required by this Item, see “Ratification of the Appointment of Independent Registered PublicAccounting Firm” and “Pre‑Approval of Audit and Non‑Audit Services” in the Proxy Statement to be filed with the SEC,which sections are incorporated herein by reference.117 Table of Contents PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a)The following documents are filed as part of this Annual Report on Form 10‑K:1.Financial Statements:The following financial statements and schedules of the Registrant are contained in Part II, Item 8, “Financial Statementsand Supplementary Data” of this Annual Report on Form 10‑K:Report of Independent Registered Public Accounting Firm 73Consolidated Balance Sheets as of December 31, 2018 and 2017 74Consolidated Statements of Operations for each of the three years in the period ended December 31, 2018 75Consolidated Statements of Comprehensive Loss for each of the three years in the period ended December 31, 2018 76Consolidated Statements of Shareholders’ Equity (Deficit) for each of the three years in the period endedDecember 31, 2018 77Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2018 78Notes to Consolidated Financial Statements 79Supplementary Financial Data (unaudited) 113 2.Financial Statement Schedules:All schedules have been omitted because of the absence of conditions under which they are required or because therequired information, where material, is shown in the financial statements, financial notes or supplementary financialinformation.(b)Exhibits required by Item 601 of Regulation S‑KThe information required by this Item is set forth on the exhibit index that precedes the signature page of this report.118 Table of ContentsExhibit Index Incorporated by ReferenceExhibitNumberDescriptionFormFilingDate/PeriodEnd Date2.1Separation and Distribution Agreement by and between Theravance Biopharma, Inc.and Innoviva, Inc., dated June 1, 20148‑KJune 3, 20142.2*Asset Purchase Agreement, dated as of November 1, 2018, by and amongCumberland Pharmaceuticals Inc. on the one hand, and Theravance BiopharmaIreland Limited and Theravance Biopharma US, Inc. on the other hand.8-KNovember 16,20183.1Amended and Restated Memorandum and Articles of Association10‑12BApril 30, 20144.1Specimen Share Certificate10‑12BApril 30, 20144.2Registration Rights Agreement, dated March 3, 201410‑12BApril 8, 20144.3Form of Rights Agreement by and between Theravance Biopharma, Inc. andComputershare Inc.10‑12BApril 8, 20144.4First Amendment to Rights Agreement by and between Theravance Biopharma, Inc.and Computershare Inc., dated November 10, 20158‑KNovember 10,20154.5Controlled Equity Offering Sales Agreement, dated June 26, 2015, by and betweenTheravance Biopharma, Inc. and Cantor Fitzgerald & Co.S‑3June 26, 20154.6Indenture, dated as of November 2, 2016, between Theravance Biopharma, Inc. andWells Fargo Bank, National Association, as trustee8‑KNovember 2, 20164.7First Supplemental Indenture, dated as of November 2, 2016, between TheravanceBiopharma, Inc. and Wells Fargo Bank, National Association, as trustee8‑KNovember 2, 20164.8Form of 3.25% Convertible Senior Note due 2023 (included in Exhibit 4.7)8‑KNovember 2, 20164.9Indenture, dated as of November 30, 2018, between Triple Royalty Sub LLC, asissuer, and U.S. Bank National Association, as trustee8‑KDecember 3, 20184.10Form of 9.0% PhaRMA 9% Fixed-Rate Term Notes due 2033 (included in Exhibit4.9)8‑KDecember 3, 201810.1Transition Services Agreement by and between Theravance Biopharma, Inc. andInnoviva, Inc., dated June 2, 20148‑KJune 3, 201410.2Tax Matters Agreement by and between Theravance Biopharma, Inc. andInnoviva, Inc., dated June 2, 20148‑KJune 3, 201410.3Employee Matters Agreement by and between Theravance Biopharma, Inc. andInnoviva, Inc., dated June 1, 20148‑KJune 3, 201410.4+2013 Equity Incentive PlanS‑8August 18, 201410.5+UK Addendum to the 2013 Equity Incentive Plan10‑QAugust 14, 201410.6+2014 New Employee Equity Incentive PlanS‑8November 14,201410.7+2013 Employee Share Purchase Plan, as amendedS‑8Aug. 18, 201410.8+Forms of award agreements under the 2013 Equity Incentive Plan and 2014 NewEmployee Equity Incentive Plan10‑QMay 10, 201610.9+Forms of Equity Award Amendment10‑12BMay 7, 201410.10+Form of TFIO Cash Award Amendment10‑12BMay 7, 201410.11+Form of Acknowledgment for Irish Non‑Employee Directors10‑KMarch 11, 201610.12+Irish Addendum to the 2013 Equity Incentive Plan10‑KMarch 11, 201610.13+Irish Addendum to the 2014 New Employee Equity Incentive Plan10‑KMarch 11, 201610.14+UK and Irish Addendums to the 2013 Employee Share Purchase Plan10‑KMarch 11, 201610.15+Theravance Biopharma, Inc. Performance Incentive Plan8‑KMay 6, 201610.16+Form of Notice of Option Grant and Option Agreement under the Company’sPerformance Incentive Plan10‑QNovember 8, 201710.17+Form of Notice of Performance Restricted Share Unit Award and Restricted ShareUnit Agreement under the Company’s Performance Incentive Plan10‑QNovember 8, 2017119 SMSM Table of Contents Incorporated by ReferenceExhibitNumberDescriptionFormFilingDate/PeriodEnd Date10.18+Change in Control Severance Plan10‑12BApril 8, 201410.19+Cash Bonus Program10‑12BNovember 22,201310.20+Form of Indemnity Agreement10‑12BApril 30, 201410.21Amended and Restated Lease Agreement, 951 Gateway Boulevard, betweenInnoviva, Inc. and HMS Gateway Office L.P., dated January 1, 200110‑12BAugust 1, 201310.22First Amendment to Lease for 951 Gateway Boulevard effective as of June 1, 2010between Innoviva, Inc. and ARE‑901/951 Gateway Boulevard, LLC10‑12BAugust 1, 201310.23Lease Agreement, 901 Gateway Boulevard, between Innoviva, Inc. and HMSGateway Office L.P., dated January 1, 200110‑12BAugust 1, 201310.24First Amendment to Lease for 901 Gateway Boulevard effective as of June 1, 2010between Innoviva, Inc. and ARE‑901/951 Gateway Boulevard, LLC10‑12BAugust 1, 201310.25Consent to Assignment by and among ARE‑901/951 Gateway Boulevard, LLC,Innoviva, Inc. and Theravance Biopharma, Inc. and Assignment and Assumption ofLease for 901 Gateway Blvd.10‑QAugust 14, 201410.26Consent to Assignment by and among ARE‑901/951 Gateway Boulevard, LLC,Innoviva, Inc. and Theravance Biopharma, Inc. and Assignment and Assumption ofLease for 951 Gateway Blvd.10‑QAugust 14, 201410.27Theravance Respiratory Company, LLC Limited Liability Company Agreement,dated May 31, 20148‑KJune 3, 201410.28*Technology Transfer and Supply Agreement, dated as of May 22, 2012 betweenInnoviva, Inc. and Hospira Worldwide, Inc.10‑12BMay 7, 201410.29*First Amendment to the Technology Transfer and Supply Agreement by and betweenInnoviva, Inc. and Hospira Worldwide, Inc., dated May 16, 201310‑QNovember 9, 201610.30*Second Amendment to the Technology Transfer and Supply Agreement by andbetween Theravance Biopharma Antibiotics, Inc. and Hospira Worldwide, Inc., datedOctober 17, 201410‑QNovember 9, 201610.31*Third Amendment to the Technology Transfer and Supply Agreement by andbetween Theravance Biopharma Ireland Limited and Hospira Worldwide, Inc., datedApril 14, 201610‑QNovember 9, 201610.32*Fourth Amendment to the Technology Transfer and Supply Agreement by andbetween Theravance Biopharma Ireland Limited and Pfizer CentreOne group ofPfizer, Inc., dated September 29, 201610‑QNovember 9, 201610.33Amendment No. 1 to the License, Development, and Commercialization Agreementby and between Theravance Biopharma Ireland Limited and Clinigen Group PLCdated August 4, 201610‑QAugust 9, 201610.34License Agreement with Janssen Pharmaceutica, dated as of May 14, 200210‑QAugust 14, 201410.35Collaboration Agreement between Innoviva, Inc. and Glaxo Group Limited, datedNovember 14, 2002 10.36Strategic Alliance Agreement by and between Innoviva, Inc. and Glaxo GroupLimited, dated March 30, 2004 10.37Amendment to Strategic Alliance Agreement by and between Innoviva, Inc. andGlaxo Group Limited, dated October 3, 2011 10.38Collaboration Agreement Amendment by and between Innoviva, Inc. and GlaxoGroup Limited dated, March 3, 2014 10.39Strategic Alliance Agreement Amendment by and between Innoviva, Inc. and GlaxoGroup Limited dated, March 3, 2014 10.40Master Agreement by and between Innoviva, Inc., Theravance Biopharma, Inc. andGlaxo Group Limited, dated March 3, 2014 120 (1)(2)(3)(4)(4)(4) Table of Contents Incorporated by ReferenceExhibitNumberDescriptionFormFilingDate/PeriodEnd Date10.41Extension Agreement by and between the Company and Glaxo Group Limited,dated March 3, 201410‑12BApril 8, 201410.42Governance Agreement by and between Theravance Biopharma, Inc. and GlaxoGroup Limited, dated March 3, 201410‑12BApril 8, 201410.43+Amended Offer Letter with Rick E Winningham dated August 5, 201410‑QNovember 12,201410.44+Offer Letter with Frank Pasqualone May 12, 201410‑QAugust 14, 201410.45+Offer Letter with Brett K. Haumann dated May 12, 201410‑QAugust 14, 201410.46+Offer Letter with Renee D. Gala dated May 12, 201410‑QNovember 12,201410.47+Offer Letter with Brad Shafer dated August 20, 201410‑QNovember 12,201410.48+Offer Letter with Sharath Hegde May 12, 201410‑QMay 10, 201610.49+Offer Letter with Ken Pitzer September 15, 201410‑QMay 10, 201610.50+Offer Letter with Phil Worboys September 9, 201410‑QMay 10, 201610.51+Offer Letter with Shehnaaz Suliman dated May 31, 201710‑QNovember 8, 201710.52*Development and Commercialization Agreement by and between TheravanceBiopharma R&D, Inc. and Mylan Ireland Limited, dated January 30, 20158‑K/AApril 24, 201510.53*License and Collaboration Agreement by and between Theravance BiopharmaIreland Limited and Millennium Pharmaceuticals, Inc. dated June 8, 201610‑QAugust 9, 201610.54Form of Note Purchase Agreement, dated November 30, 2018, among TheravanceBiopharma R&D, Inc., Triple Royalty Sub LLC, and the note purchasers8‑KDecember 3, 201810.55Sale and Contribution Agreement, dated November 30, 2018, among TheravanceBiopharma R&D, Inc., as the transferor, Triple Royalty Sub LLC, as the transferee,and Theravance Biopharma, Inc.8‑KDecember 3, 201810.56Pledge and Security Agreement, dated November 30, 2018, between TheravanceBiopharma R&D, Inc., as the pledgor, and U.S. Bank National Association, as thepledgee8‑KDecember 3, 201810.57Servicing Agreement, dated November 30, 2018, between Triple Royalty Sub LLC,as the issuer and Theravance Biopharma R&D, Inc., as the servicer8‑KDecember 3, 201810.58Account Control Agreement, dated November 30, 2018, among Triple Royalty SubLLC, as the issuer, Theravance Biopharma R&D, Inc., as the servicer, U.S. BankNational Association, as the secured party, and U.S. Bank National Association, asthe financial institution8‑KDecember 3, 201810.59Amended and Restated Limited Liability Company Agreement of Triple RoyaltySub LLC, dated November 30, 2018, by Theravance Biopharma R&D, Inc., as theinitial sole equity member, including Annex A — Rules of Construction andDefined Terms, dated November 30, 20188‑KDecember 3, 201810.60*License and Collaboration Agreement by and between Theravance BiopharmaIreland Limited and Janssen Biotech, Inc. dated as of February 5, 201810-QMay 9, 201810.61+Memorandum to Brett K. Haumann regarding Transfer to Theravance Biopharma US,Inc., executed April 5, 201810-QAugust 2, 201810.62Amendments to Lease for 901 Gateway Boulevard between Theravance BiopharmaUS, Inc. and ARE-901/951 Gateway Boulevard, LLC10-QAugust 2, 201810.63Amendments to Lease for 951 Gateway Boulevard between Theravance BiopharmaUS, Inc. and ARE-901/951 Gateway Boulevard, LLC10-QAugust 2, 201821.1Subsidiaries of Theravance Biopharma, Inc. 23.1Consent of Independent Registered Public Accounting Firm 24.1Power of Attorney (see signature page to this Annual Report on Form 10‑K) 121 Table of Contents Incorporated by ReferenceExhibitNumberDescriptionFormFilingDate/PeriodEnd Date31.1Certification of Chief Executive Officer Pursuant to Rule 13a‑14(a) and 15d‑14(a)under the Securities Exchange Act of 1934 31.2Certification of Chief Financial Officer Pursuant to Rule 13a‑14(a) and 15d‑14(a)under the Securities Exchange Act of 1934 32Certifications Pursuant to 18 U.S.C. Section 1350 101The following materials from Registrant’s Annual Report on Form 10‑K for the yearended December 31, 2018, formatted in Extensible Business Reporting Language(XBRL) includes: (i) Consolidated Balance Sheets, (ii) Consolidated Statements ofOperations, (iii) Consolidated Statements of Comprehensive Loss, (iv) ConsolidatedStatements of Shareholders’ Equity (Deficit), (v) Consolidated Statements of CashFlows, and (vi) Notes to Consolidated Financial Statements. +Management contract or compensatory plan or arrangement required to be filed pursuant to Item 15(b) of Form 10‑K.*Portions of this exhibit have been omitted and the omitted information has been filed separately with the Securitiesand Exchange Commission pursuant to an order granting confidential treatment.(1)Incorporated by reference to an exhibit filed with the quarterly report on Form 10‑Q of Innoviva, Inc., filed with theSecurities and Exchange Commission on August 7, 2014.(2)Incorporated by reference to an exhibit filed with the annual report on Form 10‑K of Innoviva, Inc., filed with theCommission on March 3, 2014.(3)Incorporated by reference to an exhibit filed with the annual report on Form 10‑K of Innoviva, Inc., filed with theCommission on February 27, 2012.(4)Incorporated by reference to an exhibit filed with the current report on Form 8‑K/A of Innoviva, Inc., filed with theCommission on March 6, 2014.122 Table of Contents SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THERAVANCE BIOPHARMA, INC. Date: February 28, 2019By:/s/ RICK E WINNINGHAM Rick E Winningham Chief Executive Officer POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes andappoints Rick E Winningham as their true and lawful attorney‑in‑fact and agent, each with full power of substitution andresubstitution, for such person and in his or her name, place and stead, in any and all capacities, to sign any and allamendments to the annual report on Form 10‑K, and to file the same, with all exhibits thereto and other documents inconnection therewith, with the Securities and Exchange Commission, granting unto said attorney‑in‑fact and agent fullpower and authority to do and perform each and every act and thing requisite and necessary to be done in and about thepremises, as fully to all intents and purposes as he or she could do in person, hereby ratifying and confirming all that saidattorney‑in‑fact and agent, or his substitute, 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 thefollowing persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Rick E WinninghamRick E WinninghamChairman of the Board and Chief ExecutiveOfficer (Principal Executive Officer andPrincipal Financial Officer)February 28, 2019 /s/ Laurie Smaldone Alsup, MDLaurie Smaldone Alsup, MDDirectorFebruary 28, 2019 /s/ Eran BroshyEran BroshyDirectorFebruary 28, 2019 /s/ Robert V. Gunderson, Jr.Robert V. Gunderson, Jr.DirectorFebruary 28, 2019 /s/ Donal O’ConnorDonal O’ConnorDirectorFebruary 28, 2019 /s/ Burton G. Malkiel, Ph.D.Burton G. Malkiel, Ph.D.DirectorFebruary 28, 2019 /s/ Dean J. MitchellDean J. MitchellDirectorFebruary 28, 2019 123 Table of Contents Signature Title Date /s/ Susan M. Molineaux, Ph.D.Susan M. Molineaux, Ph.D.DirectorFebruary 28, 2019 /s/ Peter S. Ringrose, Ph.D.Peter S. Ringrose, Ph.D.DirectorFebruary 28, 2019 /s/ George M. Whitesides, Ph.D.George M. Whitesides, Ph.D.DirectorFebruary 28, 2019 /s/ William D. YoungWilliam D. YoungDirectorFebruary 28, 2019 124 Exhibit 21.1 SubsidiariesTheravance Biopharma US, Inc. (Delaware)Theravance Biopharma R&D, Inc. (Cayman Islands)Theravance Biopharma UK Limited (England and Wales)Theravance Biopharma Ireland Limited (Ireland) Theravance Biopharma R&D IP, LLC (Delaware)Theravance Biopharma Antibiotics IP, LLC (Delaware)Triple Royalty Sub LLC (Delaware) Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in the following Registration Statements:(1) Registration Statements (Form S‑8 Nos. 333‑198206, 333‑202856, 333‑210225, 333-216446, and 333-223470)pertaining to the Theravance Biopharma, Inc. 2013 Equity Incentive Plan and the Theravance Biopharma, Inc.2013 Employee Share Purchase Plan,(2) Registration Statement (Form S‑8 No. 333‑200225) pertaining to the Theravance Biopharma, Inc. 2014 NewEmployee Equity Incentive Plan, and(3) Registration Statement (Form S‑3 No. 333‑214257) of Theravance Biopharma, Inc.;of our reports dated February 28, 2019, with respect to the consolidated financial statements of Theravance Biopharma, Inc., andthe effectiveness of internal control over financial reporting of Theravance Biopharma, Inc. included in this Annual Report(Form 10‑K) for the year ended December 31, 2018./s/ Ernst & Young LLPSan Jose, CaliforniaFebruary 28, 2019 Exhibit 31.1 Certification of Chief Executive OfficerPursuant to Section 302 of the Sarbanes‑Oxley Act of 2002I, Rick E Winningham, certify that:1. I have reviewed this Annual Report on Form 10‑K of Theravance Biopharma, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the periods covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present inall material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a‑15(f) and 15d‑15(f)) for the registrant and have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the periods inwhich this report is being prepared;b) Designed such internal control over financial reporting, or caused such internal control over financial reportingto be designed under our supervision, to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles;c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periodscovered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurredduring the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annualreport) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controlover financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions):a) All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarizeand report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role inthe registrant’s internal control over financial reporting.Chairman of the Board and Chief Executive Officer (PrincipalExecutive Officer)February 28, 2019(Date)/s/ Rick E WinninghamRick E WinninghamChairman of the Board and Chief Executive Officer (PrincipalExecutive Officer) Exhibit 31.2 Certification of Chief Financial OfficerPursuant to Section 302 of the Sarbanes‑Oxley Act of 2002I, Rick E Winningham, certify that:1. I have reviewed this Annual Report on Form 10‑K of Theravance Biopharma, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the periods covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present inall material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a‑15(f) and 15d‑15(f)) for the registrant and have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the periods inwhich this report is being prepared;b) Designed such internal control over financial reporting, or caused such internal control over financial reportingto be designed under our supervision, to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles;c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periodscovered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurredduring the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annualreport) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controlover financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions):a) All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarizeand report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role inthe registrant’s internal control over financial reporting.Senior Vice President and Chief Financial Officer (PrincipalFinancial Officer)February 28, 2019(Date)/s/ Rick E WinninghamRick E WinninghamChairman of the Board and Chief Executive Officer(Principal Financial Officer) Exhibit 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES‑OXLEY ACT OF 2002I, Rick E Winningham, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes‑Oxley Act of 2002, that the Annual Report of Theravance Biopharma, Inc. on Form 10‑K for the fiscal year endedDecember 31, 2018 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, asamended and that information contained in such Annual Report on Form 10‑K fairly presents in all material respects the financialcondition of Theravance Biopharma, Inc. for the periods covered by such Annual Report on Form 10‑K and results of operationsof Theravance Biopharma, Inc. for the periods covered by such Annual Report on Form 10‑K.February 28, 2019By:/s/ Rick E Winningham(Date) Name:Rick E Winningham Title:Chairman of the Board and Chief Executive Officer(Principal Executive Officer) CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES‑OXLEY ACT OF 2002I, Rick E Winningham, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes‑Oxley Act of 2002, that the Annual Report of Theravance Biopharma, Inc. on Form 10‑K for the fiscal year endedDecember 31, 2018 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, asamended and that information contained in such Annual Report on Form 10‑K fairly presents in all material respects the financialcondition of Theravance Biopharma, Inc. for the periods covered by such Annual Report on Form 10‑K and results of operationsof Theravance Biopharma, Inc. for the periods covered by such Annual Report on Form 10‑K.February 28, 2019By:/s/ Rick E Winningham(Date) Name:Rick E Winningham Title:Chairman of the Board and Chief Executive Officer(Principal Financial Officer) A signed original of this written statement required by Section 906 has been provided to Theravance Biopharma, Inc. and will beretained by it and furnished to the Securities and Exchange Commission or its staff upon request.

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