Innoviva, Inc. - Quarter Report: 2014 June (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2014

 

OR

 

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

 

For the transition period from                    to                   

 

Commission File Number: 0-30319

 

THERAVANCE, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

951 Gateway Boulevard

South San Francisco, CA 94080

(Address of Principal Executive Offices)

 

(650) 238-9600

(Registrant’s Telephone Number, Including Area Code)

 

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

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

 

 

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

 

The number of shares of registrant’s common stock outstanding on July 31, 2014 was 115,014,166.

 

 

 

Table of Contents

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013		3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013		4
Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2014 and 2013		5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3. Quantitative and Qualitative Disclosures About Market Risk		36
Item 4. Controls and Procedures		37
PART II. OTHER INFORMATION
Item 1A. Risk Factors		38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		50
Item 3. Defaults Upon Senior Securities		50
Item 4. Mine Safety Disclosures		50
Item 5. Other Information		50
Item 6. Exhibits		51
Signatures		52

 

2

 

Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

THERAVANCE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

		June 30, 2014			December 31, 2013
		(Unaudited)			*
Assets
Current assets:
Cash and cash equivalents		$	208,052		$	143,510
Restricted cash		14,232			—
Short-term investments		126,424			321,615
Accounts receivable, net of allowances of $89 at December 31, 2013		—			199
Receivables from collaborative arrangements (including amounts from a related party of $3,473 and $2,247 at June 30, 2014 and December 31, 2013)		3,473			3,181
Prepaid expenses and other current assets		982			4,287
Inventories		—			10,406
Total current assets		353,163			483,198
Marketable securities		34,349			55,374
Restricted cash		833			833
Property and equipment, net		—			10,238
Intangible assets, net		194,880			124,257
Other assets		22,385			7,355
Total assets		$	605,610		$	681,255
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable		$	1,799		$	7,583
Payable to a related party		15,000			40,000
Payable to Theravance Biopharma, Inc.		15,243			—
Accrued personnel-related expenses		1,023			10,881
Accrued clinical and development expenses		—			9,714
Accrued interest payable		11,013			2,800
Other accrued liabilities		4,834			4,137
Deferred revenue		1,082			9,289
Total current liabilities		49,994			84,404
Convertible subordinated notes		287,500			287,500
Non-recourse notes payable, due 2029		450,000			—
Deferred rent		13			4,774
Other long-term liabilities		1,300			—
Deferred revenue		4,329			5,455
Commitments and contingencies (Notes 3, 7 and 9)
Stockholders’ equity (deficit):
Common stock, $0.01 par value; authorized: 200,000 shares; outstanding: 113,285 and 111,516 at June 30, 2014 and December 31, 2013		1,133			1,115
Additional paid-in capital		1,444,105			1,803,048
Accumulated other comprehensive income		3,706			162
Accumulated deficit		(1,636,470		)	(1,505,203		)
Total stockholders’ equity (deficit)		(187,526		)	299,122
Total liabilities and stockholders’ equity (deficit)		$	605,610		$	681,255

*                    Condensed consolidated balance sheet at December 31, 2013 has been derived from audited consolidated financial statements.

 

See accompanying notes to condensed consolidated financial statements.

 

3

Table of Contents

 

THERAVANCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

 

		Three Months Ended June 30,							Six Months Ended June 30,
		2014				2013			2014				2013
Royalty revenue from a related party, net of intangible assets amortization: three months—2014-$2,598; 2013-$0; six months—2014-$4,378; 2013-$0 (Note 3) (1)		$	663			$	—		$	(387		)	$	—
Net revenue from collaborative arrangements from a related party		271				1,322			541				2,644
Total net revenue		934				1,322			154				2,644
Operating expenses:
Research and development		2,125				2,412			4,812				4,451
General and administrative		8,603				5,808			19,859				11,864
Total operating expenses		10,728				8,220			24,671				16,315
Loss from operations		(9,794			)	(6,898		)	(24,517			)	(13,671		)
Other income (expense), net		83				8,192			80				6,770
Interest income		165				190			353				375
Interest expense		(10,327			)	(3,025		)	(11,971			)	(5,761		)
Loss from continuing operations before income taxes		(19,873			)	(1,541		)	(36,055			)	(12,287		)
Income tax expense				(278	)	—					(278	)	—
Loss from continuing operations, net of tax		(20,151			)	(1,541		)	(36,333			)	(12,287		)
Loss from discontinued operations (Notes 11 and 12):		(43,413			)	(34,888		)	(94,934			)	(61,502		)
Net loss		$	(63,564		)	$	(36,429	)	$	(131,267		)	$	(73,789	)
Basic and diluted net loss per share:
Continuing operations, net of tax		$	(0.18		)	$	(0.02	)	$	(0.33		)	$	(0.13	)
Discontinued operations		(0.39			)	(0.35		)	(0.86			)	(0.63		)
Basic and diluted net loss per share		$	(0.57		)	$	(0.37	)	$	(1.19		)	$	(0.76	)
Shares used to compute basic and diluted net loss per share		110,974				97,603			110,419				96,964

 

(1) Gross royalty revenue from a related party for the three and six months ended June 30, 2014 is $3,261 and $3,991, respectively.

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

Table of Contents

 

THERAVANCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except per share data)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2014			2013			2014			2013
Net loss		$	(63,564	)	$	(36,429	)	$	(131,267	)	$	(73,789	)
Other comprehensive income (loss):
Net unrealized gain (loss) on available-for-sale securities		3,535			(107		)	3,544			(114		)
Comprehensive loss		$	(60,029	)	$	(36,536	)	$	(127,723	)	$	(73,903	)

 

See accompanying notes to condensed consolidated financial statements.

 

5

Table of Contents

 

THERAVANCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Six Months Ended June 30,
		2014			2013
Cash flows from operating activities
Net loss		$	(131,267	)	$	(73,789	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		6,190			2,036
Stock-based compensation		21,281			13,257
Amortization on premium of short-term investments		1,412			1,854
Change in fair value of capped-call derivative assets		—			1,422
Other non-cash items		(2		)	(3		)
Changes in operating assets and liabilities:
Account receivables		74			—
Receivables from collaborative arrangements		(294		)	(1,169		)
Prepaid expenses and other current assets		(177		)	357
Inventories		(1,908		)	(2,533		)
Other assets		(411		)	—
Accounts payable		(5,832		)	1,026
Payable to Theravance Biopharma, Inc., net		(1,738		)	—
Accrued personnel-related expenses, accrued clinical and development expenses, and other accrued liabilities		1,874			2,941
Accrued interest payable		8,213			2,540
Deferred rent		183			(376		)
Deferred revenue		(2,640		)	4,120
Net cash used in operating activities		(105,042		)	(48,317		)
Cash flows from investing activities
Purchases of property and equipment		(556		)	(1,431		)
Purchases of available-for-sale securities		(142,861		)	(211,797		)
Maturities of available-for-sale securities		241,173			106,983
Sales of available-for-sale securities		5,000			17,600
Increase in intangible assets		(100,000		)	(30,000		)
Payments received on notes receivable		140			100
Net cash provided by (used in) investing activities		2,896			(118,545		)
Cash flows from financing activities
Cash and cash equivalents contributed to Theravance Biopharma, Inc.		(277,541		)	—
Proceeds from issuances of common stock, net		23,786			26,433
Purchase of capped-call options		—			(36,800		)
Change in restricted cash		(14,234		)	—
Proceeds from issuances of notes payable, net of debt issuance costs		434,677			281,623
Net cash provided by financing activities		166,688			271,256
Net increase in cash and cash equivalents		64,542			104,394
Cash and cash equivalents at beginning of period		143,510			94,849
Cash and cash equivalents at end of period		$	208,052		$	199,243
Supplemental disclosures of noncash information
Contribution of net assets, excluding cash and cash equivalents to Theravance Biopharma, Inc.		$	125,337		$	—
Guarantee issued in connection with the Spin-Off (Note 9)		$	1,300		$	—

 

See accompanying notes to condensed consolidated financial statements.

 

6

 

Table of Contents

 

THERAVANCE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Description of Operations and Summary of Significant Accounting Policies

 

Description of Operations

 

Theravance, Inc. (Theravance, the Company, or we and other similar pronouns) is a royalty management company focused on maximizing the potential value of the respiratory assets partnered with Glaxo Group Limited (GSK), including RELVAR®/BREO® ELLIPTA® (fluticasone furoate/ vilanterol, “FF/VI”) and ANORO® ELLIPTA® (umeclidinium bromide/ vilanterol, “UMEC/VI”), with the intention of providing capital returns to stockholders. Under the Long-Acting Beta2 Agonist (LABA) Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the GSK Agreements), Theravance is eligible to receive the associated royalty revenues from RELVAR®/BREO® ELLIPTA® , ANORO® ELLIPTA® and if approved and commercialized, VI monotherapy. Theravance is also entitled to a 15% economic interest in any future payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC (“TRC”), relating to the combination of UMEC/VI/FF and the Bifunctional Muscarinic Antagonist-Beta2 Agonist (MABA) program, as monotherapy and in combination with other therapeutically active components, such as an inhaled corticosteroid, and any other product or combination of products that may be discovered and developed in the future under the LABA Collaboration Agreement (“LABA Collaboration”) with us, which has been assigned to TRC other than with respect to RELVAR®/BREO®ELLIPTA®, ANORO® ELLIPTA® and VI monotherapy.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In our opinion, the unaudited condensed consolidated financial statements have been prepared on the same basis as audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of our financial position, results of operations, comprehensive loss and cash flows. The interim results are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2014 or any other period.

 

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission (“SEC”) on March 3, 2014.

 

Business Separation

 

On June 1, 2014, we separated our late-stage partnered respiratory assets from our biopharmaceutical research and drug development operations (“Spin-Off”) by transferring our research and drug development operations into a wholly-owned subsidiary.  We contributed $393.0 million of cash, cash equivalents and marketable securities to Theravance Biopharma, Inc. (“Theravance Biopharma”) and all outstanding shares of Theravance Biopharma were then distributed to our stockholders as a pro-rata dividend distribution on June 2, 2014 by issuing one ordinary share of Theravance Biopharma for every 3.5 shares held of Theravance common stock to stockholders of record on May 15, 2014.  The separation resulted in Theravance Biopharma operating as an independent, publicly traded company.

 

The results of operations for our former research and drug development operations conducted by us and by Theravance Biopharma until June 1, 2014 are included as part of this report as discontinued operations. Refer to Notes 11 and 12, “Spin-Off of Theravance Biopharma, Inc.,”and “Discontinued Operations” for further information.

 

Pursuant to a three-way master agreement entered into by and among us, Theravance Biopharma and GSK in connection with the Spin-Off, we agreed to sell that number of Theravance Biopharma shares withheld from a taxable dividend of Theravance Biopharma shares to GSK.  After such Theravance Biopharma shares were sent to the transfer agent, we agreed to purchase the Theravance Biopharma shares from the transfer agent, rather than have them sold on the open market, in order to satisfy tax withholdings.  GSK had an option to purchase these shares of Theravance Biopharma from us, but this option expired unexercised.  Accordingly, at June 30, 2014, we owned 436,802 ordinary shares of Theravance Biopharma, which are accounted for as available-for-sale securities in the condensed consolidated balance sheets. These equity securities are discussed further in Note 4, “Available-for-Sale Securities”.

 

7

Table of Contents

 

Inventories

 

All inventories were related to our former research and drug development operations and, thus, were contributed to Theravance Biopharma in connection with the Spin-Off.  Accordingly, we have no inventories as of June 30, 2014.

 

Prior to the Spin-Off of Theravance Biopharma, our inventories consisted of raw materials, work-in-process and finished goods related to the production of VIBATIV® (telavancin). Raw materials include VIBATIV® active pharmaceutical ingredient (API) and other raw materials. Work-in-process and finished goods included third party manufacturing costs and labor and indirect costs incurred in the production process. Included in inventories were raw materials and work-in-process that may be used as clinical products, which were charged to research and development expense when consumed. In addition, under certain commercialization agreements, we could sell VIBATIV® packaged in unlabeled vials that are recorded in work-in-process. Inventories were stated at the lower of cost or market value. We determined the cost of inventory using the average-cost method for validation batches. We analyzed our inventory levels quarterly and wrote down any inventory that was expected to become obsolete, that had a cost basis in excess of its expected net realizable value or for inventory quantities in excess of expected requirements.

 

Inventories were as follows:

 

		June 30,			December 31,
(In thousands)		2014			2013
Raw materials		$	—		$	5,138
Work-in-process		—			360
Finished goods		—			4,908
Total inventories		$	—		$	10,406

 

Revenue Recognition

 

Revenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the nature of the fee charged for products or services delivered and the collectability of those fees. Where the revenue recognition criteria are not met, we defer the recognition of revenue by recording deferred revenue until such time that all criteria are met.

 

Collaborative Arrangements and Multiple-Element Arrangements

 

Revenue from nonrefundable, up-front license or technology access payments under license and collaborative arrangements that are not dependent on any future performance by us is recognized when such amounts are earned. If we have continuing obligations to perform under the arrangement, such fees are recognized over the estimated period of continuing performance obligation.

 

We account for multiple element arrangements, such as license and development agreements in which a customer may purchase several deliverables, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-25, “Multiple Element Arrangements.” For new or materially amended multiple element arrangements, we identify the deliverables at the inception of the arrangement and each deliverable within a multiple deliverable revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We allocate revenue to each non-contingent element based on the relative selling price of each element. When applying the relative selling price method, we determine the selling price for each deliverable using vendor-specific objective evidence (“VSOE”) of selling price, if it exists, or third-party evidence (“TPE”) of selling price, if it exists. If neither VSOE nor TPE of selling price exist for a deliverable, we use the best estimated selling price for that deliverable. Revenue allocated to each element is then recognized based on when the basic four revenue recognition criteria are met for each element.

 

For multiple-element arrangements entered into prior to January 1, 2011, we determined the delivered items under our collaborative arrangements did not meet the criteria to be considered separate accounting units for the purposes of revenue recognition. As a result, we recognized revenue from non-refundable, upfront fees and development contingent payments in the same manner as the final deliverable, which is ratably over the expected term of our performance of research and development services under the agreements. These upfront or contingent payments received, pending recognition as revenue, are recorded as deferred revenue and are classified as a short-term or long-term liability on the consolidated balance sheets and recognized over the estimated period of performance. We periodically review the estimated performance periods of our contracts based on the progress of our programs.

 

8

Table of Contents

 

Where a portion of non-refundable upfront fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as revenue or as an accrued liability and recognized as a reduction of research and development expenses ratably over the term of our estimated performance period under the agreement. We determine the estimated performance periods, and they are periodically reviewed based on the progress of the related program. The effect of any change made to an estimated performance period and, therefore revenue recognized, would occur on a prospective basis in the period that the change was made.

 

Under certain collaborative arrangements, we have been reimbursed for a portion of our research and development expenses. These reimbursements have been reflected as a reduction of research and development expense in our consolidated statements of operations, as we do not consider performing research and development services to be a part of our ongoing and central operations. Therefore, the reimbursement of research and developmental services and any amounts allocated to our research and development services are recorded as a reduction of research and development expense.

 

Amounts deferred under a collaborative arrangement in which the performance obligations are terminated will result in an immediate recognition of any remaining deferred revenue and accrued liability in the period that termination occurred, provided that there are no remaining performance obligations.

 

We account for contingent payments in accordance with FASB Subtopic ASC 605-28 “Revenue Recognition—Milestone Method.” We recognize revenue from milestone payments when (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement and (ii) we do not have ongoing performance obligations related to the achievement of the milestone. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment (a) is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from our performance to achieve the milestone, (b) relates solely to past performance, and (c) is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.

 

Under our collaborative arrangements with GSK, and in accordance with FASB Subtopic ASC 808-10, “Collaborative Arrangements,” royalty revenue earned is reduced by amortization expense resulting from the fees paid to GSK, which were capitalized as finite-lived intangible assets. When amortization expense exceeds amounts recognized for royalty revenues from GSK, negative revenue would be reported in our consolidated statements of operations.

 

Royalties

 

We recognize royalty revenue on licensee net sales of products with respect to which we have contractual royalty rights in the period in which the royalties are earned and reported to us and collectability is reasonably assured.  Royalties are recognized net of amortization of intangible assets associated with any approval and launch milestone payments made to GSK.

 

Product Revenues

 

We currently have no product revenues following the spin-off of Theravance Biopharma.

 

Prior to the Spin-Off of Theravance Biopharma, we sold VIBATIV® in the U.S. through a limited number of distributors, and title and risk of loss transferred upon receipt of the product by these distributors. Healthcare providers ordered VIBATIV® through these distributors. Commencing in the first quarter of 2014, revenue on the sale of VIBATIV® was recorded on a sell-through basis, once the distributors sold the product to healthcare providers.  As VIBATIV® is a product that is sold by Theravance Biopharma, the revenue from product sales are included within discontinued operations in the consolidated statements of operations for the three and six months ended June 30, 2014.  There was no revenue from product sales for any period in 2013.

 

Product sales were recorded net of estimated government-mandated rebates and chargebacks, distribution fees, estimated product returns and other deductions. We reflected such reductions in revenue either as an allowance to the related account receivable from the distributor, or as an accrued liability, depending on the nature of the sales deduction. Sales deductions were based on management’s estimates that considered payer mix in target markets, industry benchmarks and experience to date. We monitored inventory levels in the distribution channel, as well as sales of VIBATIV® by distributors to healthcare providers, using product-specific data provided by the distributors. Product return allowances were based on amounts owed or to be claimed on related sales. These estimates took into consideration the terms of our agreements with customers, historical product returns of VIBATIV® experienced by our former collaborative partner, Astellas Pharma, Inc. (“Astellas”), rebates or discounts taken, estimated levels of inventory in the distribution channel, the shelf life of the product, and specific known market events, such as competitive pricing and new product introductions.

 

9

Table of Contents

 

Sales Discounts:  We offered cash discounts to our customers, generally 2% of the sales price, as an incentive for prompt payment. We expected our customers to comply with the prompt payment terms to earn the cash discount. We accounted for cash discounts by reducing accounts receivable by the full amount and recognizing the discount as a reduction of revenue in the same period the related revenue is recognized.

 

Chargebacks and Government Rebates:  For VIBATIV® sales in the U.S., we estimated reductions to product sales for qualifying federal and state government programs including discounted pricing offered to Public Health Service (PHS) as well as government-managed Medicaid programs. Our reduction for PHS was based on actual chargebacks that distributors have claimed for reduced pricing offered to such health care providers. Our accrual for Medicaid was based upon statutorily-defined discounts, estimated payer mix, expected sales to qualified healthcare providers, and our expectation about future utilization. The Medicaid accrual and government rebates that were invoiced directly to us were recorded in other accrued liabilities on the consolidated balance sheet. For qualified programs that purchased our products through distributors at a lower contractual government price, the distributors charged back to us the difference between their acquisition cost and the lower contractual government price, which we recorded as an allowance against accounts receivable.

 

Distribution Fees and Product Returns:  We had written contracts with our distributors that include terms for distribution-related fees. We recorded distribution-related fees based on a percentage of the product sales price. We offered our distributors a right to return product purchased directly from us, which was principally based upon the product’s expiration date. Additionally, we had granted more expansive return rights to our distributors following our product launch of VIBATIV®. Our policy was to accept returns for expired product during the six months prior to and twelve months after the product expiration date on product that had been sold to our distributors. We developed estimates for VIBATIV® product returns based upon historical VIBATIV® sales from our former collaborative partner, Astellas. We recorded distribution fees and product returns as an allowance against accounts receivable.

 

Allowance for Doubtful Accounts:  We maintained a policy to record allowances for potentially doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. As of June 30, 2014 and December 31, 2013, there were no allowances for doubtful accounts as we have not had any write-offs historically.

 

Variable Interest Entities

 

We analyze any potential variable interest or special-purpose entities in accordance with the guidance of FASB Subtopic ASC 810-10, Consolidation of Variable Interest and Special-Purpose Entities. The party with the controlling financial interest, the primary beneficiary, is required to consolidate the entity that is determined to be a variable interest entity (VIE). We have determined TRC to be a VIE.  We have the power to direct the economically significant activities of TRC and the obligation to absorb losses of, or the right to receive benefits from TRC. Therefore, we consolidate the financial results of TRC. The financial position and results of operations of TRC are not material as of and for the three and six months ended June 30, 2014.

 

Intangible Assets

 

We capitalize fees paid to licensors related to agreements for approved products or commercialized products. We capitalize these fees as finite-lived intangible assets and amortize these intangible assets on a straight-line basis over their estimated useful lives upon the commercial launch of the product, which is expected to be shortly after regulatory approval of such product. The estimated useful lives of these intangible assets are based on a country-by-country and product-by-product basis, as the later of the expiration or termination of the last patent right covering the compound in such product in such country and 15 years from first commercial sale of such product in such country, unless the agreement is terminated earlier. Consistent with our policy for classification of costs under the research and development collaborative arrangements, the amortization of these intangible assets will be recognized as a reduction of royalty revenue. We review our intangible assets for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The recoverability of finite-lived intangible assets is measured by comparing the asset’s carrying amount to the expected undiscounted future cash flows that the asset is expected to generate. The determination of recoverability typically requires various estimates and assumptions, including estimating the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. We derive the required cash flow estimates from near-term forecasted product sales and long-term projected sales in the corresponding market.

 

10

Table of Contents

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In April 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-08, “Presentation of Financial Statements and Property, Plant and Equipment; Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 modifies the requirements for reporting discontinued operations. Under the amendments in ASU 2014-08, the definition of discontinued operation has been modified to only include those disposals of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. ASU 2014-08 also expands the disclosure requirements for disposals that meet the definition of a discontinued operation and requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations. ASU 2014-08 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2014. We do not expect the adoption of this guidance to have a material effect on our consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which converges the FASB and the International Accounting Standards Board standards on revenue recognition. Areas of revenue recognition that will be affected include, but are not limited to, transfer of control, variable consideration, allocation of transfer pricing, licenses, time value of money, contract costs and disclosures. This guidance is effective for the fiscal years and interim reporting periods beginning after December 15, 2016, at which time we may adopt the new standard under the full retrospective method or the modified retrospective method. Early adoption is not permitted. We are currently evaluating the impact of adopting ASU 2014-09 on our consolidated financial statements and related disclosures.

 

2. Net Loss per Share

 

Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding, less restricted stock awards (“RSAs”) subject to forfeiture. Diluted net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding, less RSAs subject to forfeiture, plus all additional common shares that would have been outstanding, assuming dilutive potential common shares had been issued for other dilutive securities.

 

For the three months and six months ended June 30, 2014 and 2013, diluted and basic net loss per share were identical since potential common shares were excluded from the calculation, as their effect was anti-dilutive.

 

The computations for basic and diluted net loss per share were as follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
(In thousands, except for per share amounts)		2014			2013			2014			2013
Numerator:
Loss from continuing operations, net of tax		$	(20,151	)	$	(1,541	)	$	(36,333	)	$	(12,287	)
Loss from discontinued operations		(43,413		)	(34,888		)	(94,934		)	(61,502		)
Net loss		$	(63,564	)	$	(36,429	)	$	(131,267	)	$	(73,789	)
Denominator:
Weighted-average number of shares outstanding		113,163			100,316			112,608			99,677
Less: unvested RSAs		(2,189		)	(2,713		)	(2,189		)	(2,713		)
Weighted-average number of shares used to compute basic and diluted net loss per share		110,974			97,603			110,419			96,964
Basic and diluted net loss per share:
Continuing operations, net of tax		$	(0.18	)	$	(0.02	)	$	(0.33	)	$	(0.13	)
Discontinued operations		(0.39		)	(0.35		)	(0.86		)	(0.63		)
Basic and diluted net loss per share		$	(0.57	)	$	(0.37	)	$	(1.19	)	$	(0.76	)

 

11

Table of Contents

 

Anti-Dilutive Securities

 

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

 

		Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)		2014		2013		2014		2013
Shares issuable under equity incentive plans and ESPP		6,136		3,848		5,942		4,519
Shares issuable upon the conversion of convertible subordinated notes		17,869		17,015		17,869		15,643
Total anti-dilutive securities		24,005		20,863		23,811		20,162

 

3. Collaborative Arrangements

 

Net Revenue from Collaborative Arrangements

 

Net revenue from collaborative arrangements from continuing operations relates to our arrangement with GSK.  Net revenue from other collaborative arrangements was reflected as discontinued operations in the consolidated statements of operations. Refer to Notes 1, 11 and 12, “Description of Operations and Summary of Significant Accounting Policies,” “Spin-Off of Theravance Biopharma, Inc.” and “Discontinued Operations” for further information.

 

Net Royalty Revenue from GSK

 

Net revenue recognized under our GSK Agreements was as follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)		2014			2013			2014			2013
Royalty revenue		$	3,261		$	—		$	3,991		$	—
Amortization of intangible assets		(2,598		)	—			(4,378		)	—
Net royalty revenue		663			—			(387		)	—
LABA collaboration		—			907			—			1,814
Strategic alliance—MABA program license		271			415			541			830
Total revenue		$	934		$	1,322		$	154		$	2,644

 

Amortization expense for intangible assets, which is a reduction to royalty revenue, exceeded amounts recognized for royalty revenue under the LABA Collaboration with GSK, resulting in negative net royalty revenue in the first six months of 2014.

 

LABA Collaboration

 

In November 2002, we entered into our Long-Acting Beta2 Agonist (LABA) collaboration with GSK to develop and commercialize once-daily LABA products for the treatment of chronic obstructive pulmonary disease (COPD) and asthma. For the treatment of COPD, the collaboration has developed two combination products: (1) RELVAR®/BREO® ELLIPTA® (FF/VI), a once-daily combination medicine consisting of a LABA, vilanterol (VI), and an inhaled corticosteroid (ICS), fluticasone furoate (FF) and (2) ANORO® ELLIPTA® (UMEC/VI), a once-daily medicine combining a long-acting muscarinic antagonist (LAMA), umeclidinium bromide (UMEC), with a LABA, VI. For the treatment of asthma, RELVAR® ELLIPTA® is approved in multiple regions outside of North America and the collaboration is further developing FF/VI for the U.S.

 

In the event that a product containing VI is successfully developed and commercialized, we are obligated to make milestone payments to GSK, which could total as much as $220.0 million if both a single-agent and a combination product or two different combination products are launched in multiple regions of the world. As of June 30, 2014, we have paid a total of $185.0 million of these milestones and have an accrued a liability of $15.0 million. In July 2014, we recorded an additional $10.0 million accrued liability. These milestone fees paid or owed to GSK were capitalized as finite-lived intangible assets, which are being amortized over their estimated useful lives commencing upon the commercial launch of the product. We estimate the remaining potential milestone payments of $10.0 million could become payable by the end of 2014.

 

Total milestone fees paid of $185.0 million and accrued as a liability of $15.0 million at June 30, 2014 resulted from the following:

 

·                  In May 2013, the U.S. Food and Drug Administration (FDA) approved BREO® ELLIPTA® as an inhaled long-term, once-daily maintenance treatment of airflow obstruction in patients with COPD, including chronic bronchitis and/or emphysema. It is also indicated to reduce exacerbations of COPD in patients with a history of exacerbations.

·                  In September 2013, the Japanese Ministry of Health, Labour and Welfare (MHLW) approved RELVAR® ELLIPTA® for the treatment of bronchial asthma in cases where concurrent use of inhaled corticosteroid and long-acting inhaled beta2 agonist is required.

·                  In October 2013, BREO® ELLIPTA® was launched in the U.S. for the treatment of COPD.

 

12

Table of Contents

 

·                  In November 2013, the European Commission granted marketing authorization for RELVAR® ELLIPTA® for the regular treatment of asthma and the systematic treatment of COPD.

·                  In December 2013, RELVAR® ELLIPTA® was launched in Japan for the treatment of bronchial asthma.

·                  In December 2013, the FDA approved ANORO® ELLIPTA® as a combination anticholinergic/long-acting beta2-adrenergic agonist (LABA) indicated for the long-term, once-daily, maintenance treatment of airflow obstruction in patients with COPD, including chronic bronchitis and/or emphysema.

·                  In January 2014, RELVAR® ELLIPTA® was launched in the European Union.

·                  In April 2014, ANORO® ELLIPTA® was made available in the U.S. for the treatment of COPD.

·                  In May 2014, the European Commission granted marketing authorization for ANORO(R) (umeclidinium/vilanterol) as a once-daily, maintenance bronchodilator treatment to relieve symptoms in adult patients with COPD.

·                  In June 2014, ANORO® ELLIPTA® was made available in the European Union.

 

Total milestone fees recorded of $10.0 million in July 2014 resulted from the following:

 

·                  In July 2014, the Japanese MHLW approved ANORO® ELLIPTA® for the relief of various symptoms due to airway obstruction with COPD in cases where concurrent use of long-acting inhaled muscarinic antagonist and long-acting inhaled beta2 agonist is required.

 

We are entitled to receive annual royalties from GSK on sales of RELVAR®/BREO® ELLIPTA® as follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion. Sales of single-agent LABA medicines and combination medicines would be combined for the purposes of this royalty calculation. For other products combined with a LABA from the LABA Collaboration, such as ANORO® ELLIPTA®, royalties are upward tiering and range from 6.5% to 10%.

 

Amortization expense resulting from the milestone fees paid to GSK, which are capitalized as finite-lived intangible assets, is a reduction to royalty revenue. When amortization expense exceeds amounts recognized for royalty revenue, negative revenue would be reported in our consolidated statements of operations.

 

2004 Strategic Alliance

 

In March 2004, we entered into our strategic alliance with GSK (the Strategic Alliance Agreement and the LABA Collaboration Agreement are together referred to herein as the GSK Agreements). Under this alliance, GSK received an option to license exclusive development and commercialization rights to product candidates from certain of our discovery programs on pre-determined terms and on an exclusive, worldwide basis. Upon GSK’s decision to license a program, GSK is responsible for funding all future development, manufacturing and commercialization activities for product candidates in that program. In addition, GSK is obligated to use diligent efforts to develop and commercialize product candidates from any program that it licenses. If the program is successfully advanced through development by GSK, we are entitled to receive clinical, regulatory and commercial milestone payments and royalties on any sales of medicines developed from the program. If GSK chooses not to license a program, we retain all rights to the program and may continue the program alone or with a third party. GSK has no further option rights on any of our research or development programs under the strategic alliance.

 

In 2005, GSK licensed our bifunctional muscarinic antagonist-beta2 agonist (MABA) program for the treatment of COPD, and in October 2011, we and GSK expanded the MABA program by adding six additional Theravance-discovered preclinical MABA compounds (the “Additional MABAs”). GSK’s development, commercialization, milestone and royalty obligations under the strategic alliance remain the same with respect to GSK961081 (‘081), the lead compound in the MABA program. GSK is obligated to use diligent efforts to develop and commercialize at least one MABA within the MABA program, but may terminate progression of any or all Additional MABAs at any time and return them to us, at which point we may develop and commercialize such Additional MABAs alone or with a third party. Both GSK and we have agreed not to conduct any MABA clinical studies outside of the strategic alliance so long as GSK is in possession of the Additional MABAs. If a single-agent MABA medicine containing ‘081 is successfully developed and commercialized, we are entitled to receive royalties from GSK of between 10% and 20% of annual global net sales up to $3.5 billion, and 7.5% for all annual global net sales above $3.5 billion. If a MABA medicine containing ‘081 is commercialized as a combination product, such as ‘081/FF, the royalty rate is 70% of the rate applicable to sales of the single-agent MABA medicine. For single-agent MABA medicines containing an Additional MABA, we are entitled to receive royalties from GSK of between 10% and 15% of annual global net sales up to $3.5 billion, and 10% for all annual global net sales above $3.5 billion. For combination products containing an Additional MABA, such as a MABA/ICS combination, the royalty rate is 50% of the rate applicable to sales of the single-agent MABA medicine. If a MABA medicine containing ‘081 is successfully developed and commercialized in multiple regions of the world, we could earn total contingent payments of up to $125.0 million for a single-agent medicine and up to $250.0 million for both a single-agent and a combination medicine. If a MABA medicine containing an Additional MABA is successfully developed and commercialized in multiple regions of the world, we could earn total contingent payments of up to $129.0 million.

 

13

Table of Contents

 

Agreements Entered into with GSK in Connection with the Spin-Off

 

On March 3, 2014, in contemplation of the Spin-Off, we, Theravance Biopharma and GSK entered into a series of agreements clarifying how the companies would implement the Spin-Off and operate following the Spin-Off. We, Theravance Biopharma and GSK entered into a three-way master agreement providing for GSK’s consent to the Spin-Off provided certain conditions were met. In addition, we and GSK also entered into amendments of our GSK Agreements, and Theravance Biopharma and GSK entered into a governance agreement, a registration rights agreement and an extension agreement. The three-way master agreement was effective on June 1, 2014 when we transferred our research and drug development operations to Theravance Biopharma. Pursuant to a three-way master agreement entered into by and among us, Theravance Biopharma and GSK in connection with the Spin-Off, we agreed to sell that number of Theravance Biopharma shares withheld from a taxable dividend of Theravance Biopharma shares to GSK.  After such Theravance Biopharma shares were sent to the transfer agent, we agreed to purchase the Theravance Biopharma shares from the transfer agent, rather than have them sold on the open market, in order to satisfy tax withholdings.  GSK had an option to purchase these shares of Theravance Biopharma from us, but this option expired unexercised.  Accordingly, at June 30, 2014, we owned 436,802 ordinary shares of Theravance Biopharma, which are accounted for as available-for-sale securities in the condensed consolidated balance sheets.

 

The amendments to the GSK Agreements do not change the economics or royalty rates under the GSK Agreements, though the assignment of the Strategic Alliance Agreement and portions of the LABA Collaboration to TRC do change how the economics are allocated between Theravance Biopharma and us. The amendments to the GSK Agreements do provide that GSK’s diligent efforts obligations regarding commercialization matters under both agreements will change upon regulatory approval in either the United States or the European Union of UMEC/VI/FF or a MABA in combination with FF. Upon such regulatory approval, GSK’s diligent efforts obligations as to commercialization matters under the GSK Agreements will have the objective of focusing on the best interests of patients and maximizing the net value of the overall portfolio of products under the GSK Agreements. Since GSK’s commercialization efforts following such regulatory approval will be guided by a portfolio approach across products in which we will retain our full interests upon the Spin-Off and also products in which we will have retained only a portion of our interests upon the planned Spin-Off transaction, GSK’s commercialization efforts may have the effect of reducing the overall value of our remaining interests in the GSK Agreements after the Spin-Off.

 

Purchases of Common Stock under the Company’s Governance Agreement and Common Stock Purchase Agreements with GSK

 

During the first six months of 2014, GSK purchased 659,999 shares of our common stock pursuant to its periodic “top-up” rights under our Amended and Restated Governance Agreement, dated as of June 4, 2004, as amended, among us, GSK and certain GSK affiliates, for an aggregate purchase price of approximately $21.4 million.

 

GSK Contingent Payments and Revenue

 

The potential future contingent payments receivable related to the MABA program of $363.0 million are not deemed substantive milestones due to the fact that the achievement of the event underlying the payment predominantly relates to GSK’s performance of future development, manufacturing and commercialization activities for product candidates after licensing the program.

 

Reimbursement of Research and Development Costs

 

Reimbursement of research and development costs from continuing operations is solely related to GSK.  Under the GSK Agreements, we are entitled to reimbursement of certain research and development costs. For the three months and six months ended June 30, 2014 and the three and six months ended June 30, 2013, research and development costs reimbursed from GSK was $19,000, $62,000, $0.2 million, and $0.3 million.  Reimbursement of research and development costs from other collaborative arrangements has been reflected as discontinued operations in the condensed consolidated statements of operations. Refer to Notes 1, 11 and 12, “Description of Operations and Summary of Significant Accounting Policies,” “Spin-Off of Theravance Biopharma, Inc.” and “Discontinued Operations” for further information.

 

14

 

Table of Contents

 

4. Available-for-Sale Securities

 

The classification of available-for-sale securities in the consolidated balance sheets is as follows:

 

(In thousands)		June 30, 2014			December 31, 2013
Cash and cash equivalents		$	184,994		$	125,009
Short-term investments		126,424			321,615
Marketable securities		34,349			55,374
Restricted cash		833			833
Total		$	346,600		$	502,831

 

The estimated fair value of available-for-sales securities is based on quoted market prices for these or similar investments that were based on prices obtained from a commercial pricing service. Available-for-sale securities are summarized below:

 

		June 30, 2014
(In thousands)		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
U.S. government securities		$	23,509		$	44		$	—		$	23,553
U.S. government agencies		54,712			15			(5		)	54,722
U.S. corporate notes		33,632			7			(11		)	33,628
U.S. commercial paper		34,942			—			—			34,942
Equity securities		10,269			3,656			—			13,925
Money market funds		185,830			—			—			185,830
Total		$	342,894		$	3,722		$	(16	)	$	346,600

 

Equity securities consist of ordinary shares of Theravance Biopharma owned by us as of June 30, 2014.  These equity securities are restricted securities and can only be resold pursuant to a registration statement or an exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”).  We expect to be able to sell these shares pursuant to Rule 144 promulgated under the Securities Act after the satisfaction of a six-month holding period and, therefore, have classified them as available-for-sale marketable securities.

 

		December 31, 2013
(In thousands)		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
U.S. government securities		$	42,104		$	55		$	(1	)	$	42,158
U.S. government agencies		141,278			61			(8		)	141,331
U.S. corporate notes		94,923			54			—			94,977
U.S. commercial paper		102,021			2			(1		)	102,022
Money market funds		122,343			—			—			122,343
Total		$	502,669		$	172		$	(10	)	$	502,831

 

At June 30, 2014, all of the available-for-sale debt securities had contractual maturities within two years and the average duration of marketable securities was approximately seven months. We do not intend to sell the investments that are in an unrealized loss position, and it is unlikely that we will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. We have determined that the gross unrealized losses on our marketable securities at June 30, 2104 were temporary in nature. All marketable securities with unrealized losses at June 30, 2014 have been in a loss position for less than twelve months.

 

During the six months ended June 30, 2014 and 2013, we sold available-for-sale securities totaling $5.0 million and $17.6 million, and the related realized gains and losses were not significant in any of these periods.

 

5. Fair Value Measurements

 

We define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

 

Our valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. We classify 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 instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

Level 3—Unobservable inputs and little, if any, market activity for the assets.

 

15

Table of Contents

 

Our available-for-sale securities are measured at fair value on a recurring basis and our debt is carried at the amortized cost basis. The estimated fair values were as follows:

 

		Estimated Fair Value Measurements at Reporting Date Using:
Types of Instruments		Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
(In thousands)		Level 1			Level 2			Level 3			Total
Assets at June 30, 2014:
U.S. government securities		$	23,553		$	—		$	—		$	23,553
U.S. government agency securities		—			54,722			—			54,722
U.S. corporate notes		—			33,628			—			33,628
U.S. commercial paper		—			34,942			—			34,942
Equity securities		13,925			—			—			13,925
Money market funds		185,830			—			—			185,830
Total assets measured at estimated fair value		$	223,308		$	123,292		$	—		$	346,600
Liabilities at June 30, 2014:
Convertible subordinated notes due 2023		$	—		$	417,148		$	—		$	417,148
Non-recourse notes due 2029		—			454,500			—			454,500
Total fair value of liabilities		$	—		$	871,648		$	—		$	871,648

 

		Estimated Fair Value Measurements at Reporting Date Using
Types of Instruments		Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
(In thousands)		Level 1			Level 2			Level 3			Total
Assets at December 31, 2013:
U.S. government securities		$	42,158		$	—		$	—		$	42,158
U.S. government agency securities		98,236			43,095			—			141,331
U.S. corporate notes		61,591			33,386			—			94,977
U.S. commercial paper		3,499			98,523			—			102,022
Money market funds		122,343			—			—			122,343
Total assets measured at estimated fair value		$	327,827		$	175,004		$	—		$	502,831
Liabilities at December 31, 2013:
Convertible subordinated notes due 2023		$	—		$	408,250		$	—		$	408,250

 

At June 30, 2014, securities with a total fair value of $5.4 million were measured using Level 2 inputs in comparison to December 31, 2013, at which time the securities had a fair value of $5.4 million and were measured using Level 1 inputs.

 

Due to their short-term maturities, we believe that the fair value of our bank deposits, receivables from collaborative arrangements, accounts payable and accrued expenses approximate their carrying value.

 

16

Table of Contents

 

6. Intangible Assets

 

Intangible assets, which consist of registrational and launch-related milestone fees paid or owed to GSK, were as follows:

 

		June 30, 2014
(In thousands)		Weighted Average Remaining Amortization Period (Years)		Gross Carrying Value			Accumulated Amortization			Net Carrying Value
FDA approval and launch of BREO® ELLIPTA® in the U.S.		15.2		$	60,000		$	(2,526	)	$	57,474
MHLW approval and launch of RELVAR® ELLIPTA® in Japan		14.4		20,000			(778		)	19,222
European Commission approval and launch of RELVAR® ELLIPTA®		14.5		30,000			(1,000		)	29,000
FDA approval and launch of ANORO® ELLIPTA® in the U.S.		15.2		60,000			(652		)	59,348
European Commission approval and launch of ANORO® ELLIPTA®		15.2		30,000			(164		)	29,836
Total intangible assets				$	200,000		$	(5,120	)	$	194,880

 

		December 31, 2013
(In thousands)		Weighted Average Remaining Amortization Period (Years)		Gross Carrying Value			Accumulated Amortization			Net Carrying Value
FDA approval and launch of BREO® ELLIPTA® in the U.S.		15.7		$	60,000		$	(632	)	$	59,368
MHLW approval and launch of RELVAR® ELLIPTA® in Japan		14.9		20,000			(111		)	19,889
European Commission approval of RELVAR® ELLIPTA®		15		15,000			—			15,000
FDA approval of ANORO® ELLIPTA® in the U.S.		15.3		30,000			—			30,000
Total intangible assets				$	125,000		$	(743	)	$	124,257

 

Additional information regarding these milestone fees is included in Note 3 “Collaborative Arrangements.” Amortization expense for the BREO® ELLIPTA® intangible asset for the U.S. region and the RELVAR® ELLIPTA® intangible asset for the Japan region began in the fourth quarter of 2013, the RELVAR® ELLIPTA® intangible asset for the European Union region began in the first quarter of 2014 and the ANORO® ELLIPTA® intangible assets for the U.S. and European Union regions began in the second quarter of 2014. Amortization expense is recorded as a reduction in revenue from collaborative arrangements. Amortization expense for the three months and six months ended June 30, 2014 was $2.6 million and $4.4 million. The amortization expense for the same periods in 2013 is zero.  Estimated annual amortization expense of intangible assets is $10.9 million for 2014, $13.0 million for each of the years from 2015 to 2018 and $136.4 million thereafter.

 

7. Stock-Based Compensation

 

Equity Incentive Plan

 

The 2012 Equity Incentive Plan (“2012 Plan”) provides for the grant of stock options, time-based and performance-contingent restricted stock units (RSUs), time-based and performance-contingent RSAs, and stock appreciation rights to employees, non-employee directors and consultants. As of June 30, 2014, total shares remaining available for issuance under the 2012 Plan were 2,533,778.

 

Performance-Contingent RSAs

 

Over the past three years, the Compensation Committee of our Board of Directors (the “Compensation Committee”) has approved grants of performance-contingent RSAs to senior management and a non-executive officer. Generally, these awards have dual triggers of vesting based upon the achievement of certain performance goals by a pre-specified date, as well as a requirement for continued employment. When the performance goals are probable of achievement for these types of awards, time-based vesting and, as a result, recognition of stock-based compensation expense commence. Included in these performance-contingent RSAs is the grant of 1,290,000 special long-term retention and incentive performance-contingent RSAs to senior management in 2011. The awards have dual triggers of vesting based upon the achievement of certain performance conditions over a six-year timeframe from 2011 through December 31, 2016 and require continued employment.

 

17