3. Collaborative Arrangements

Revenue from Collaborative Arrangements

We recognized revenues from our collaborative arrangements as follows:


	Three Months Ended
	March 31,
(In thousands)	2018		2017
Janssen	$	4,613	$	—
Other		27		37
Total revenue from collaborative arrangements	$	4,640	$	37

Under legacy ASC 605 revenue guidance, we would have recognized $4.7 million in revenue from collaboration arrangements for the three months ended March 31, 2018.

Changes in Deferred Revenue Balances

We recognized the following revenue as a result of changes in our deferred revenue balance during the period below:


	Three Months Ended
	March 31,
(In thousands)	2018
Revenue recognized in the period from:
Amounts included in deferred revenue at the beginning of the period	$	16

Mylan

Development and Commercialization Agreement

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

Under the Mylan Agreement, Mylan paid us an up-front fee of $15.0 million for the delivery of the revefenacin license in 2015 and, in 2016, Mylan paid us a milestone payment $15.0 million for the achievement of 50% enrollment in the Phase 3 twelve-month safety study. Separately, pursuant to an ordinary share purchase agreement entered into on January 30, 2015, Mylan Inc., a subsidiary of Mylan N.V., made a $30.0 million equity investment in us, buying 1,585,790 ordinary shares from us in early February 2015 in a private placement transaction at a price of approximately $18.918 per share, which represented a 10% premium, equal to $4.2 million, over the volume weighted average price per share of our ordinary shares for the five trading days ending on January 30, 2015.

As of March 31, 2018, we are eligible to receive from Mylan additional potential development, regulatory and sales milestone payments totaling up to $205.0 million in the aggregate, with $160.0 million associated with revefenacin monotherapy and $45.0 million for future potential combination products. Of the $160.0 million associated with monotherapy, $150.0 million relates to sales milestones based on achieving certain levels of net sales and $10.0 million relates to regulatory actions in the European Union (“EU”).

We evaluated the terms of the Mylan Agreement under ASC 606 and identified two performance obligations: (1) delivery of the license to develop and commercialize revefenacin; and (2) joint steering committee participation. We determined the license to be distinct from the joint steering committee participation. We further determined that the transaction price under the arrangement was comprised of the following: (1) $15.0 million up-front license fee received in 2015; (2) $4.2 million premium related to the ordinary share purchase agreement received in 2015; and (3) $15.0 million milestone for 50% enrollment in the Phase 3 twelve-month safety study received in 2016. The total transaction price of $34.2 million was allocated to the two performance obligations based on our best estimate of the relative stand-alone selling price. For the delivery of the license, we based the stand-alone selling price on a discounted cash flow approach 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, we based the stand-alone selling price on the average compensation of our committee members estimated to be incurred over the performance period. We expect to recognize revenue from the committee participation ratably over the performance period of approximately seventeen years.

The future potential milestone amounts were not included in the transaction price, as they were all determined to be fully constrained under ASC 606. As part of our evaluation of the development and regulatory milestones constraint, we determined that the achievement of such milestones are contingent upon success in future clinical trials and regulatory approvals which are not within our control and uncertain at this stage. We expect that the sales-based milestone payments and royalty arrangements will be recognized when the sales occur or the milestone is achieved. We will re-evaluate the transaction price each quarter and as uncertain events are resolved or other changes in circumstances occur.

Under the terms of the Mylan Agreement, Mylan is responsible for reimbursement of our costs related to the registrational program up until the approval of the first new drug application. Performing R&D services for reimbursement is considered to be a collaborative activity under the scope of ASC 808. Reimbursable program costs are recognized proportionately with the performance of the underlying services and accounted for as reductions to R&D expense. For this unit of account, we do not recognize revenue or analogize to ASC 606 and, as such, the reimbursable program costs are excluded from the transaction price.

We are also entitled to a share of US profits and losses (65% Mylan/35% Theravance Biopharma) received in connection with commercialization of revefenacin, and we are entitled to low double-digit royalties on ex-US net sales (excluding China). We expect that Mylan will be the principle in the sales transaction and will record the product sales. Under a co-promote arrangement with Mylan, we currently record losses in the period incurred based on our estimate of those amounts. Until revefenacin is approved and we have recognized a profit under the agreement, losses are recognized within R&D expense and selling, general and administrative expense on our condensed consolidated statements of operations. For this unit of account, we have determined that Mylan is not a customer and do not analogize to ASC 606 for the profits and losses sharing activities. These activities are considered to be collaborative activities under the scope of ASC 808, and we will recognize the shared profits and losses in the periods that such profits and losses occur.

As of March 31, 2018, $0.3 million was recorded in deferred revenue on the condensed consolidated balance sheet under the Mylan Agreement. This amount reflects revenue allocated to joint steering committee participation and will be recognized as revenue over the course of the remaining performance period of approximately fourteen years. For the three months ended March 31, 2018, we recognized $6,000 in revenue primarily from the recognition of previously deferred revenue.

Janssen Biotech

In February 2018, we entered into 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 colitis and Crohn's disease (the “Janssen Agreement”). Under the terms of the Janssen Agreement, we received an upfront payment of $100.0 million. In 2018, we plan to initiate a large, Phase 2b/3 adaptive design induction and maintenance study in ulcerative colitis with TD-1473, as well as a Phase 2 study in Crohn’s disease. Following completion of the Phase 2 Crohn’s study and the Phase 2b induction portion of the ulcerative colitis study, Janssen can elect to obtain an exclusive license to develop and commercialize TD-1473 and certain related compounds by paying us a fee of $200.0 million. Upon such election, we and Janssen will jointly develop and commercialize TD-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). We would receive royalties on ex-US sales at double-digit tiered percentage royalty rates, and we would be eligible to receive up to an additional $700.0 million in development and commercialization milestone payments from Janssen.

We evaluated the terms of the Janssen Agreement under ASC 606 and identified research and development activities as our only performance obligation. We further determined that the transaction price under the arrangement was the $100.0 million upfront payment which was allotted to the single performance obligation.

The $900.0 million in future potential payments is considered variable consideration if Janssen elects to remain in the collaboration arrangement following completion of certain Phase 2 activities, as described above and, as such, was not included in the transaction price, as the potential payments were all determined to be fully constrained under ASC 606. As part of our evaluation of this variable consideration constraint, we determined that the potential payments are contingent upon developmental and regulatory milestones that are uncertain and are highly susceptible to factors outside of our control. We expect that any consideration related to royalties and sales-based milestones will be recognized when the subsequent sales occur.

For the three months ended March 31, 2018, we recognized $4.6 million as revenue from collaboration agreements related to the Janssen Agreement. The remaining transaction price of $95.4 million was recorded in deferred revenue on the condensed consolidated balance sheet and is expected to be recognized as revenue as the research and development services are delivered over the Phase 2 period. Revenue is recognized for the research and development services based on a measure of our efforts toward satisfying a performance obligation relative to the total expected efforts or inputs to satisfy the performance obligation (e.g., costs incurred compared to total budget). In future reporting periods, we will revisit our estimates related to our efforts towards satisfying the performance obligation and may record a change in estimate.

Alfasigma

Development and Collaboration Agreement

Under an October 2012 development and collaboration agreement for velusetrag, we 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 tolerability of velusetrag in the treatment of patients with gastroparesis (a medical condition consisting of a paresis (partial paralysis) of the stomach, resulting in food remaining in the stomach for a longer time than normal) (the “Alfasigma Agreement”). As part of 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 an exclusive option to develop and commercialize velusetrag in the EU, Russia, China, Mexico and certain other countries, while we retained full rights to velusetrag in the US, Canada, Japan and certain other countries.

In late April 2018, Alfasigma exercised its exclusive option to develop and commercialize velusetrag, and we elected not to pursue further development of velusetrag. As a result, we will transfer global rights for velusetrag to Alfasigma under the terms of the existing collaboration agreement. We have received a $10.0 million option fee from Alfasigma, and we are eligible to receive future potential development, regulatory and sales milestone payments and royalties.

As of March 31, 2018, we evaluated the terms of the Alfasigma Agreement under ASC 606 and identified committee participation as our only performance obligation. We further determined that the transaction price under the arrangement was nil, as of March 31, 2018, as any potential development or regulatory milestones were determined to be fully constrained as prescribed under ASC 606. As part of our evaluation of this variable consideration constraint, we determined that the potential payments are contingent upon development and regulatory milestones that are uncertain and are highly susceptible to factors outside of our control. In addition, we expect that any consideration related to sales-based milestones would be recognized when the subsequent sales occur.

Reimbursement of R&D Expense

Under certain collaborative arrangements, we are entitled to reimbursement of certain R&D expense. Activities under collaborative arrangements for which we are entitled to reimbursement are considered to be collaborative activities under the scope of ASC 808. For these units of account, we do not analogize to ASC 606 or recognize revenue. We record reimbursement payments received from our collaboration partners as reductions to R&D expense.

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


	Three Months Ended
	March 31,
(In thousands)	2018		2017
Mylan	$	1,850	$	7,089
Other		—		37
Total reduction to R&D expense	$	1,850	$	7,126