11. Share-Based Compensation

Theravance Biopharma Equity Plans

The Company has three equity compensation plans — its 2013 Equity Incentive Plan (the “2013 EIP”), its 2013 Employee Share Purchase Plan (the “2013 ESPP”) and its 2014 New Employee Equity Incentive Plan (the “2014 NEEIP”). At inception, the Company was authorized to issue 5,428,571 ordinary shares under the 2013 EIP, 857,142 ordinary shares under the 2013 ESPP, and 750,000 ordinary shares under the 2014 NEEIP.

The 2013 EIP provides for the issuance of share-based awards, including restricted shares, restricted share units, options, share appreciation rights (“SARs”) and other equity-based awards, to Company employees, officers, directors 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 the Company’s 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 the Company’s 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. The Company 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, the Company’s 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 the Company’s 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.

The 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 the Company’s 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 the 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. The Company 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

Prior to the Spin-Off, the Company’s employees may have received Innoviva stock-based compensation awards, and, therefore, the following disclosures include information regarding stock-based compensation expense allocated to Theravance Biopharma that relates to Innoviva stock-based equity awards.

At the time of the Spin-Off, Innoviva had one active stock-based incentive plan under which it granted stock-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 the Company’s employees, and (2) members of the board of directors of Innoviva who became members of the Company’s 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 the Company’s employees in connection with the Spin-Off, will continue to vest and remain outstanding based on continuing employment or service with the Company.

The 2012 Equity Incentive Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, stock unit awards and SARs to employees, non-employee directors and consultants. Stock 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.

Innoviva Performance-Contingent Restricted Stock Awards

In connection with performance-contingent RSAs granted to members of the Company’s senior management by Innoviva’s board of directors prior to the Spin-Off in 2014, the Company recognized $1.0 million in share-based compensation expense for the year ended December 31, 2016. The expense recognition pertaining to these RSAs was completed in 2016.

Employee Share Option Exchange Program

On August 28, 2015, the Company gave eligible share option holders of the Company and its subsidiaries the opportunity to exchange some or all of their outstanding options granted under the 2013 EIP or the 2014 NEEIP before August 4, 2015, whether vested or unvested, for RSUs (the “Exchange Program”). The Exchange Program was designed to restore the intended employee retention and incentive value of the equity awards.

In accordance with the terms of the Exchange Program, employees who held options that had an exercise price above the market price of the Company’s 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 the 2013 EIP. The RSUs granted under the Exchange Program vests over a three or four year service period depending on the grant date of the original option exchanged. The Company’s executive officers and members of the board of directors were not eligible to participate in the Exchange Program.

The Exchange Program closed on September 25, 2015, and the Company 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 was considered a modification to the terms of the original equity award. As such, the Exchange Program resulted in 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, 2018, 2017, and 2016, the Company recognized $0.3 million, $0.5 million, and $0.5 million, respectively, of the $1.4 million in incremental share-based compensation costs.

Performance-Contingent Awards

In the first quarter of 2016, the Compensation Committee of the Company’s board of directors (“Compensation Committee”) approved the grant of 1,575,000 performance-contingent RSAs and 135,000 performance-contingent restricted share units RSUs to senior management. The vesting of such awards is dependent on the Company meeting its critical operating goals and objectives during a five-year period from 2016 to December 31, 2020. The goals that must be met in order for the performance-contingent RSAs and RSUs to vest are strategically important for the Company, and the Compensation Committee believes the goals, if achieved, will increase shareholder value. The awards have dual triggers of vesting based upon the achievement of these goals and continued employment. As of December 31, 2018, there were 978,750 of these performance-contingent RSAs and 101,250 of these performance-contingent RSUs outstanding, and as of December 31, 2017, there were 1,305,000 performance-contingent RSAs and 135,000 performance-contingent RSUs outstanding.

Expense associated with these awards is broken into three separate tranches and may be recognized during the 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 is reassessed at each quarter-end reporting period.

The performance conditions associated with the first tranche of these awards were completed in the second quarter of 2018, and the Company recognized $1.7 million and $2.6 million of share-based compensation expense for the years ended December 31, 2018 and 2017, respectively, associated with these awards.

For years ended December 31, 2018 and 2017, the Company recognized $2.6 million and $6.3 million, respectively, of share-based compensation expense related to its assessment of the probability that the performance conditions associated with the second tranche of these awards was considered to be probable of vesting. As of December 31, 2018, the Company determined that the remaining third tranche was not probable of vesting and, as a result, no compensation expense related to the third tranche has been recognized to date.

The maximum potential expense associated with the remaining second and third tranches could be up to $17.8 million (allocated as $7.4 million for research and development expense and $10.4 million for selling, general and administrative expense) if the performance conditions for the second and third tranches are achieved.

In 2017, the Compensation Committee approved the grant of 50,000 performance-contingent RSUs to a newly appointed member of senior management. The RSUs have dual triggers of vesting based upon the achievement of certain corporate operating milestones in specified timelines, as well as a requirement for continued employment. Share-based compensation expense related to this grant is broken into two separate tranches and recognized when the associated performance goals are deemed to be probable of achievement. The maximum expense associated with the first tranche was $0.8 million. In 2017, the Company recognized $0.4 million in share-based compensation expense as it determined that the performance conditions associated with the first tranche were probable of vesting, and in 2018, the Company recognized the remaining $0.4 million of share-based compensation expense as the performance conditions associated with the first tranche of this award were met. The Company has determined that the second tranche was not probable of vesting as of December 31, 2018 and, as a result, no compensation expense related to the second tranche has been recognized to date.

Share-Based Compensation Expense

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


	Year Ended December 31,
(In thousands)	2018		2017		2016
Research and development	$	25,563	$	22,691	$	20,202
Selling, general and administrative		25,750		26,454		20,967
Total share-based compensation expense	$	51,313	$	49,145	$	41,169

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


	Year Ended December 31,
(In thousands)	2018		2017		2016
Innoviva equity:
Options	$	280	$	2,973	$	3,973
RSUs		—		224		1,547
RSAs		457		660		2,597
Performance RSAs		—		1		1,005
Theravance Biopharma equity:
Options		8,441		7,969		7,591
RSUs		34,077		25,959		20,946
Performance RSAs and RSUs		4,707		9,224		1,808
ESPP		3,351		2,135		1,702
Total share-based compensation expense	$	51,313	$	49,145	$	41,169

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

As of December 31, 2018, the unrecognized share-based compensation cost, net of actual forfeitures, and the estimated weighted‑average amortization period, using the straight-line attribution method, was as follows:


	Unrecognized		Weighted‑Average
	Compensation		Amortization Period
(In thousands, except amortization period)	Cost		(Years)
Innoviva equity:
Options	$	—	—
RSAs		64	0.23
Theravance Biopharma equity:
Options		18,147	2.84
RSUs		62,718	2.49
Performance RSAs and RSUs (1)		3,604	1.14
ESPP		2,322	1.03
Total	$	86,855

(1)

Represents unrecognized share-based compensation cost associated with the Theravance Biopharma performance-contingent awards described above that are probable of vesting.

Compensation Awards

The following table summarizes option activity under the 2013 EIP and 2014 NEEIP for the years ended December 31, 2018, 2017 and 2016:


	Number of Shares	Weighted-Average
	Subject	Exercise Price
	to Outstanding Options	of Outstanding Options
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
Granted	720,350		32.60
Exercised	(275,776)		22.61
Forfeited	(166,800)		25.70
Outstanding at December 31, 2017	2,508,569	$	26.40
Granted	755,800		27.10
Exercised	(74,692)		18.65
Forfeited	(126,508)		27.95
Outstanding at December 31, 2018	3,063,169	$	26.70

As of December 31, 2018, 2017, and 2016, the aggregate intrinsic value of the options outstanding was $5.1 million, $8.0 million and $18.1 million, respectively. As of December 31, 2018, the aggregate intrinsic value of the options exercisable was $3.9 million. The total estimated fair value of options vested (excluding vested options that have expired) was $8.4 million, $8.2 million, and $7.7 million in 2018, 2017, and 2016, respectively.

The following table summarizes total RSU and RSA activity (including performance RSUs and RSAs) for the years ended December 31, 2018, 2017 and 2016:


	Number of Shares	Number of Shares
	Subject to	Outstanding Subject to
	Outstanding RSUs	Performance Conditions (RSAs)
Outstanding at December 31, 2015	2,988,041	—
Granted	2,344,034	1,575,000
Released	(1,185,905)	—
Forfeited	(537,052)	(135,000)
Outstanding at December 31, 2016	3,609,118	1,440,000
Granted	1,165,578	—
Released	(1,420,485)	—
Forfeited	(456,453)	(135,000)
Outstanding at December 31, 2017	2,897,758	1,305,000
Granted	1,772,263	—
Released	(1,405,294)	(326,250)
Forfeited	(195,324)	—
Outstanding at December 31, 2018	3,069,403	978,750

As of December 31, 2018, the aggregate intrinsic value of the RSUs and RSAs outstanding was $78.5 million and $25.0 million, respectively. The total estimated fair value of RSUs vested was $31.6 million, $25.1 million, and $21.4 million in 2018, 2017, and 2016, respectively.

Valuation Assumptions

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


	Year Ended December 31,
	2018		2017		2016
Options
Risk-free interest rate		2.3% - 3.0%		2.0% - 2.1%		1.1% - 1.9%
Expected term (in years)		6.0		6.0		6.0
Volatility		53% - 54%		54% - 56%		53% - 73%
Dividend yield		—		—		—
Weighted-average estimated fair value	$	14.32	$	17.29	$	13.28
2013 ESPP
Risk-free interest rate		2.1% - 2.8%		0.9% - 1.7%		0.4% - 1.0%
Expected term (in years)		0.5 - 2.0		0.5 - 2.0		0.5 - 2.0
Volatility		42% - 53%		41% - 56%		54% - 65%
Dividend yield		—		—		—
Weighted-average estimated fair value	$	9.13	$	7.09	$	9.63