Long-Term Debt

12 Months Ended

Dec. 31, 2019

Long-Term Debt

Long-Term Debt

7. Long-Term Debt

Long-term debt consisted of the following liability components:

	December 31,
(In thousands)	2019		2018
3.25% Convertible notes due 2023
Principal amount	$	230,000	$	230,000
Unamortized debt issuance costs		(4,110)		(5,182)
9.0% Non-recourse notes due 2033
Principal amount, net of 5% retained by the Company		235,347		237,500
Unamortized debt issuance costs		(6,196)		(7,965)
Total long-term debt	$	455,041	$	454,353

Long-term debt interest expense consists of the following components:

	Year Ended December 31,
(In thousands)	2019		2018		2017
Stated coupon interest	$	28,811	$	9,316	$	7,475
Amortization of debt issuance costs		3,051		1,166		1,072
Total long-term debt interest expense	$	31,862	$	10,482	$	8,547

9.0% Non-Recourse Notes Due 2033

In November 2018, the Company entered into note purchase agreements relating to the private placement of $250.0 million aggregate principal amount of 9.0% non-recourse notes, due on or before 2033 (the "Non-Recourse 2033 Notes") issued by the Company’s wholly-owned subsidiary, Triple Royalty Sub LLC (the “Issuer”).

The Non-Recourse 2033 Notes are secured by all of the Issuer’s rights, title and interest as a holder of certain membership interests (the “Issuer Class C Units”) in Theravance Respiratory Company, LLC (“TRC”). The primary source of funds to make payments on the Non-Recourse 2033 Notes will be the 63.75% economic interest of the Issuer (evidenced by the Issuer Class C Units) in any future payments made by the GSK under the collaboration agreement, dated as of November 14, 2002, by and between Innoviva, Inc. (“Innoviva”) and GSK, as amended from time to time (net of the amount of cash, if any, expected to be used by TRC pursuant to the TRC LLC Agreement (“TRC LLC Agreement”) over the next four fiscal quarters) relating to the TRELEGY ELLIPTA program. The sole source of principal and interest payments for the Non-Recourse 2033 Notes are the future royalty payments generated from the

TRELEGY ELLIPTA program, and as a result, the holders of the Non-Recourse 2033 Notes have no recourse against the Company even if the TRELEGY ELLIPTA payments are insufficient to cover the principal and interest payments for the Non-Recourse 2033 Notes.

The Non-Recourse 2033 Notes are not convertible into Company equity and have no security interest in nor rights under any agreement with GSK. The Non-Recourse 2033 Notes may be redeemed at any time prior to maturity, in whole or in part, at specified redemption premiums. The Non-Recourse 2033 Notes bear an annual interest rate of 9.0%, with interest and principal paid quarterly beginning April 15, 2019. Prior to October 15, 2020, in the event that the distributions received by the Issuer from TRC in a quarter are less than the interest accrued for the quarter, the principal amount of the Non-Recourse 2033 Notes will increase by the interest shortfall amount for that period without a default or event of default occurring. The terms of the Notes also provide that the Company, at its option, may satisfy the quarterly interest payment obligations by making a capital contribution to the Issuer, but not for more than four (4) consecutive quarterly interest payment dates or for more than six (6) quarterly interest payment dates during the term of the Notes. Since the principal and interest payments on the Non-Recourse 2033 Notes are ultimately based on royalties from TRELEGY ELLIPTA product sales, which will vary from quarter to quarter, the Non-Recourse 2033 Notes may be repaid prior to the final maturity date in 2033. The portion of the Non-Recourse 2033 Notes classified as a current liability is based on the amount of royalties received, or receivable, as of December 31, 2019, that are expected to be used to make a principal repayment on the Non-Recourse 2033 Notes within the next 12 months. Please refer to “Note 9. Theravance Respiratory Company, LLC” for information regarding the results of the arbitration against Innoviva and TRC that the Company initiated in May 2019.

In order to comply with Regulation RR – Credit Risk Retention (17 C.F.R. Part 246), 5.0% of the principal amount of the Non-Recourse 2033 Notes were retained by Theravance Biopharma R&D, Inc. and eliminated in the Company’s consolidated financial statements.

As of December 31, 2019, the remaining net principal of the Non-Recourse 2033 Notes was $235.3 million. The estimated fair value of the Non-Recourse 2033 Notes was $228.3 million and $237.5 million as of December 31, 2019 and 2018, respectively. The inputs to determine fair value of the Non-Recourse 2033 Notes are categorized as Level 2 inputs. Level 2 inputs include 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.

3.25% Convertible Senior Notes Due 2023

In November 2016, the Company completed an underwritten public offering of $230.0 million of 3.25% convertible senior notes, due 2023 (the "Convertible Senior 2023 Notes") for net proceeds of approximately $222.5 million. The Company incurred approximately $7.5 million in debt issuance costs, which are being amortized to interest expense over the estimated life of the Convertible Senior 2023 Notes. The Convertible Senior 2023 Notes bear an annual interest rate of 3.25%, payable semi-annually in arrears, on November 1 and May 1 of each year, which commenced on May 1, 2017.

The Convertible Senior 2023 Notes are senior unsecured obligations and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Convertible Senior 2023 Notes; equal in right of payment to any of the Company’s indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.

The Convertible Senior 2023 Notes will mature on November 1, 2023, unless earlier redeemed or repurchased by the Company or converted. Holders may convert their Convertible Senior 2023 Notes into ordinary shares at an initial conversion rate of 29.0276 shares for each $1,000 principal amount of Convertible Senior 2023 Notes, which is equivalent to an initial conversion price of approximately $34.45 per share, subject to adjustment, in certain circumstances (including upon the occurrence of a fundamental change), at any time prior to the close of business on the second business day immediately preceding the maturity date. Upon the occurrence of a fundamental change involving the Company, holders of the Convertible Senior 2023 Notes may require the Company to repurchase all or a portion of

their Convertible Senior 2023 Notes for cash at a redemption price equal to 100% of the principal amount of the Convertible Senior 2023 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, in some circumstances, the conversion rate of the Convertible Senior 2023 Notes will increase with a make whole premium for conversions in connection with certain fundamental changes.

The debt issuance costs related to the Convertible Senior 2023 Notes offering were capitalized as deferred financing costs and presented as a reduction of the carrying value of the financial liability on the Company’s consolidated balance sheets at December 31, 2019 and 2018.

The estimated fair value of the Convertible Senior 2023 Notes was $236.0 million and $235.0 million at December 31, 2019 and 2018, respectively. The estimated fair value was primarily based upon the underlying price of Theravance Biopharma’s publicly traded shares and other observable inputs as of December 31, 2019 and 2018. The inputs to determine fair value of the Convertible Senior 2023 Notes are categorized as Level 2 inputs. Level 2 inputs include 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.