8. Share-Based Compensation

Theravance Biopharma Equity Plans

Upon the completion of the Spin-Off, we had two equity compensation plans—our 2013 Equity Incentive Plan (the "2013 EIP") and our 2013 Employee Share Purchase Plan (the "2013 ESPP"). At inception, we were authorized to issue 5,428,571 ordinary shares under the 2013 EIP and 857,142 ordinary shares under the 2013 ESPP. In October 2014, we adopted the 2014 New Employee Equity Incentive Plan (the "2014 NEEIP"). We are authorized to issue 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 and consultants. 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 number equal to the 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 less than the fair market value of the ordinary shares on the grant date. Under the terms of our 2013 EIP, options granted 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. We may grant options with different vesting terms from time to time. Unless an employee's termination of service is due to disability or death, upon termination of service, any unexercised vested options will generally be forfeited at the end of three months or the expiration of the option, whichever is earlier.

Under the 2013 ESPP, our officers and employees may purchase ordinary shares through payroll deductions at a price equal 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 of each 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 increase by a number equal to the least of 1% of the total number of ordinary shares outstanding on December 31 of the prior year, 571,428 ordinary shares or a number of ordinary shares determined by our board of directors. The ESPP generally provides for consecutive and overlapping offering periods of 24 months in duration, with each offering period generally composed of four consecutive six-month purchase periods. The purchase periods end on either May 15 or November 15. ESPP contributions are limited 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 participants in that offering period to automatically be enrolled in a new offering period when the fair market value of an ordinary share at the beginning of a subsequent offering period falls below the fair market value of an ordinary share on the first day of such offering 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 market value of the ordinary shares on the grant date. Under the terms of our 2014 NEEIP, options granted 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. We may grant options with different vesting terms from time to time. Unless an employee's termination of service is due to disability or death, upon termination of service, any unexercised vested options will generally be forfeited at the end of three months or the expiration of the option, whichever is earlier.

Innoviva's Equity Plans

Many of our employees have in the past received Innoviva stock-based compensation awards, and, therefore, the following disclosures include information regarding stock-based compensation expense allocated to Theravance Biopharma that related to Innoviva stock-based equity awards. Accordingly, the amounts presented are not necessarily indicative of future performance and do not necessarily reflect the results that we would have experienced as an independent, publicly-traded company for the periods presented.

At the time of the Spin-Off, Innoviva had one active stock-based incentive plan under which it granted stock-based awards to employees, officers and consultants, the 2012 Equity Incentive Plan. All outstanding stock options and restricted stock units ("RSUs") held by (1) Innoviva employees who became our employees, and (2) members of the board of directors of Innoviva who became members of our board of directors, in connection with the Spin-Off were adjusted for the Spin-Off. Such awards, along with outstanding restricted stock awards ("RSAs") held by Innoviva employees who became our employees in connection with the Spin-Off, will continue to vest and remain outstanding based on continuing employment or service with us.

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 options were granted with an exercise price not less than the fair market value of the common stock on the grant date. Stock options granted 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 options with different vesting terms from time to time. Unless an employee's termination of service is due to disability or death, upon termination of service, any unexercised vested options will be forfeited at the end of three months or the expiration of the option, whichever is earlier.

On June 2, 2014, Innoviva made a pro rata dividend distribution to its stockholders of record on May 15, 2014 of one ordinary share of Theravance Biopharma for every three and one half shares of Innoviva common stock outstanding on the record date. Innoviva's outstanding stock options and RSUs, which were not entitled to the dividend distribution were adjusted for the Spin-Off. Specifically, the number of shares and exercise price for Innoviva's outstanding stock options were adjusted and the number of shares underlying Innoviva's outstanding RSUs was adjusted. All other terms of these options and RSUs remained the same; provided, however, that the vesting and expiration of these grants are based on the holder's continuing employment or service with Innoviva or us, as applicable.

Although the anti-dilution adjustments were required pursuant to the terms of each equity plan, the anti-dilution adjustments were calculated using a volume-weighted average stock price, rather than the stock price as of the date of the dividend distribution, which resulted in incremental compensation expense. The accounting impact of the adjustment to the outstanding Innoviva stock options and RSUs that occurred in connection with the Spin-Off of Theravance Biopharma was measured by comparing the fair values of the modified stock options and RSUs to our employees and directors immediately before and after the adjustment.

Innoviva Performance-Contingent Restricted Stock Awards

Over the past three years, the Compensation Committee of Innoviva's board of directors ("Innoviva's Compensation Committee") has approved grants of performance-contingent RSAs to its 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 deemed achieved 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 had dual triggers of vesting based upon the achievement of certain performance conditions over a six-year time frame from 2011 through December 31, 2016 and require continued employment.

In May 2014, Innoviva's Compensation Committee determined that the requisite performance conditions for the first tranche of the awards were achieved and, as a result, $7.0 million in share-based compensation expense was recognized by us during the year ended December 31, 2014.

In May 2014, Innoviva's Compensation Committee approved the modification of the remaining tranches related to these awards contingent upon the Spin-Off. The modification acknowledged the Spin-Off and permitted recognition of achievement of the original performance conditions that were met prior to the Spin-Off, triggering twelve-month service-based vesting for a portion of the equity awards. Share-based compensation expense of $6.9 million associated with this portion of the awards after the modification was fully recognized as of June 30, 2015.

During the fourth quarter of 2014, we determined that it was probable that the performance conditions associated with the vesting of the remaining RSAs outstanding under these awards would be achieved. In addition, the remaining RSAs outstanding under these awards are entitled to the pro rata dividend distribution made by Innoviva on June 2, 2014 of one ordinary share of Theravance Biopharma for every three and one half shares of Innoviva common stock. As a result, for the years ended December 31, 2016 and 2015, we recognized $1.0 million and $7.1 million, respectively, of the total share-based compensation expense of $9.5 million related to these remaining RSAs and pro rata dividends.

Employee Share Option Exchange Program

On August 28, 2015, we gave eligible option holders of the Company and its subsidiaries the opportunity to exchange some or all of their outstanding options granted under our 2013 EIP or our NEEIP before August 4, 2015, whether vested or unvested, for restricted share units (the "Exchange Program"). The Exchange Program was designed to restore the intended employee retention and incentive value of our equity awards.

In accordance with the terms of the Exchange Program, employees who held options that had an exercise price above the market price of our ordinary shares at the offer expiration date were eligible to exchange two shares subject to eligible options for one RSU granted under the terms of our 2013 EIP. The RSUs granted under the Exchange Program will vest over a three or four year service period depending on the grant date of the original option exchanged. Our executive officers and members of our board of directors were not eligible to participate in the Exchange Program.

The Exchange Program closed on September 25, 2015 and we exchanged 1,975,009 outstanding options for 987,496 RSUs with a fair value of $12.43 per share. The exchange of options for RSUs is considered a modification to the terms of the original equity award. As such, the Exchange Program resulted in an incremental share-based compensation costs of $1.4 million to be recognized, concurrently with the unamortized original compensation costs of the exchanged option awards, ratably over the new vesting period of three years. For the years ended December 31, 2016 and 2015, we recognized $0.5 million and $0.1 million, respectively, of the $1.4 million in incremental share-based compensation costs.

Performance-Contingent Awards

In the first quarter of 2016, the Compensation Committee of our Board of Directors ("Compensation Committee") approved the grant of 1,575,000 performance-contingent RSAs and 135,000 performance contingent RSUs to senior management. These grants have dual triggers of vesting based upon the achievement of certain performance conditions over a five-year timeframe from 2016 to 2020 and continued employment, both of which must be satisfied in order for the awards to vest. As of December 31, 2016, there were 1,440,000 performance-contingent RSAs and 135,000 performance-contingent RSUs outstanding.

Expense associated with these awards may be recognized during the years 2016 to 2020 depending on the probability of meeting the performance conditions. Compensation expense relating to awards subject to performance conditions is recognized if it is considered probable that the performance goals will be achieved. The probability of achievement will be reassessed at each reporting period.

In August 2016, the Compensation Committee determined not to award credit for a performance condition that occurred in the second quarter of 2016, which for accounting purposes is treated as a modification of the vesting conditions of all outstanding awards. As a result of the modification, the vesting of the first tranche of the awards changed from probable of achievement to improbable. The vesting of the second and third tranches of the awards is still considered improbable of achievement. As a result of the modification, there is a new measurement date for the second and third tranches of the awards as of the modification date. While the total number of shares under the award did not change, the remeasurement of the awards results in a higher potential compensation charge for the awards because our share price had increased since the original measurement date. The revised maximum potential expense associated with the awards could be up to $38.9 million (allocated as $16.7 million for research and development expense and $22.2 million for selling, general and administrative expense) if all of the performance conditions are achieved. For the year ended December 31, 2016, we recognized $1.8 million in share-based compensation expense related to our assessment of the probability that the performance conditions associated with the first tranche of these awards was considered to be probable of vesting. As of December 31, 2016, we determined that the remaining second and third tranches were not probable of vesting and, as a result, no compensation expense related to these tranches has been recognized for the year.

Share-Based Compensation Expense

The allocation of share-based compensation expense included in the consolidated statements of operations was as follows:

	Year Ended December 31,
(In thousands)	2016		2015		2014
Research and development	$	20,202	$	25,770	$	21,191
Selling, general and administrative		20,967		28,280		22,043

Total share-based compensation expense	$	41,169	$	54,050	$	43,234

Share-based compensation expense included in the consolidated statements of operations by award type was as follows:

	Year Ended December 31,
(In thousands)	2016		2015		2014
Transferred from parent	$	—	$	—	$	17,043
Innoviva equity:
Options		3,973		5,199		4,378
RSUs		1,547		3,292		3,169
RSAs		2,597		7,590		3,796
Performance RSAs		1,005		11,166		4,490
Theravance Biopharma equity:
Options		7,591		14,063		9,404
RSUs		20,946		10,471		—
Performance RSAs and RSUs		1,808		—		—
ESPP		1,702		2,269		954

Total share-based compensation expense	$	41,169	$	54,050	$	43,234

Total share-based compensation expense capitalized to inventory was not material for any of the periods presented.

As of December 31, 2016, the unrecognized share-based compensation cost, net of expected forfeitures, and the estimated weighted-average amortization period, using the straight-line attribution method, was as follows:

(In thousands, except amortization period)	Unrecognized Compensation Cost		Weighted-Average Amortization Period (Years)
Innoviva equity:
Options	$	3,310		1.1
RSUs		215		0.2
RSAs		1,287		1.5
Performance RSAs		1		0.1
Theravance Biopharma equity:
Options		14,596		2.5
RSUs		48,731		2.9
Performance RSAs and RSUs(1)		4,865		3.5
ESPP		1,102		1.0

	$	74,107


(1)	Represents unrecognized share-based compensation cost associated with tranche 1 of the Theravance Biopharma performance-contingent awards described above.

Compensation Awards

The following table summarizes option activity under the 2013 EIP and 2014 NEEIP for the years ended December 31, 2016 and 2015:

	Number of Shares Subject to Outstanding Options			Weighted-Average Exercise Price of Outstanding Options
Balance at June 2, 2014		—		$	—
Granted		4,235,059			24.75
Forfeited		(272,633	)		25.01

Outstanding at December 31, 2014		3,962,426		$	24.73
Granted		750,775			14.26
Forfeited		(2,402,037	)		23.05

Outstanding at December 31, 2015		2,311,164		$	23.07


Granted		474,675			24.06
Exercised		(197,328	)		22.18
Forfeited		(357,716	)		19.83

Outstanding at December 31, 2016		2,230,795		$	23.88

As of December 31, 2016, the aggregate intrinsic value of the options outstanding was $18.1 million and the aggregate intrinsic value of the options exercisable was $7.6 million. As of December 31, 2015, the aggregate intrinsic value of the options outstanding was $1.4 million and the aggregate intrinsic value of the options exercisable were not material. The total estimated fair value of options vested (excluding vested options that have expired) was $7.7 million in 2016 and $10.7 million in 2015.

The following table summarizes total RSU and RSA activity (including performance RSUs and RSAs) for the years ended December 31, 2016 and 2015:

	Number of Shares Subject to Outstanding RSUs			Number of Shares Outstanding Subject to Performance Conditions (RSAs)
Outstanding at December 31, 2014		—			—
Granted		3,399,924			—
Forfeited		(411,883	)		—

Outstanding at December 31, 2015		2,988,041			—


Granted		2,344,034			1,575,000
Released		(1,185,905	)		—
Forfeited		(537,052	)		(135,000	)

Outstanding at December 31, 2016		3,609,118			1,440,000

As of December 31, 2016, the aggregate intrinsic value of the RSUs and RSAs outstanding was $115.1 million and $45.9 million, respectively. The total estimated fair value of RSUs vested was $21.4 million in 2016. As of December 31, 2015, the aggregate intrinsic value of the RSUs outstanding was $49.0 million and the total estimated fair value of RSUs vested was $1.6 million in 2015.

Valuation Assumptions

The range of assumptions we used to estimate the fair value of options granted and rights granted under the 2013 ESPP was as follows:

	Year Ended December 31,
	2016	2015	2014
Options
Risk-free interest rate	1.1% - 1.9%	1.4% - 1.9%	1.7% - 2.0%
Expected term (in years)	6	6	5 - 6
Volatility	53% - 73%	71% - 78%	64% - 70%
Dividend yield	—	—	—
Weighted-average estimated fair value	$13.28	$9.16	$15.55
2013 ESPP
Risk-free interest rate	0.4% - 1.0%	0.1% - 0.9%	0.1% - 0.7%
Expected term (in years)	0.5 - 2.0	0.5 - 2.0	0.6 - 2.2
Volatility	54% - 65%	46% - 62%	58% - 66%
Dividend yield	—	—	—
Weighted-average estimated fair value	$9.63	$5.91	$10.95

The range of assumptions Innoviva used to estimate the fair value of stock options granted prior to the Spin-Off was as follows:

		Year Ended December 31, 2014
Options
Risk-free interest rate		1.6% - 2.1%
Expected term (in years)		5 - 6
Volatility		52% - 61%
Dividend yield		—
Weighted-average estimated fair value		$16.14