Theravance Respiratory Company, LLC	6 Months Ended
Jun. 30, 2020
Theravance Respiratory Company, LLC
Theravance Respiratory Company, LLC	7. Theravance Respiratory Company, LLC Through the Company’s 85% equity interest in TRC, the Company is entitled to receive an 85% economic interest in any future payments made by GSK under the strategic alliance agreement and under the portion of the collaboration agreement assigned to TRC (net of TRC expenses paid and the amount of cash, if any, expected to be used by TRC pursuant to the TRC LLC Agreement over the next four fiscal quarters). The drug programs assigned to TRC include Trelegy and the inhaled Bifunctional Muscarinic Antagonist-Beta2 Agonist (“MABA”) program, as monotherapy and in combination with other therapeutically active components, such as an inhaled corticosteroid (“ICS”), and any other product or combination of products that may be discovered and developed in the future under the GSK agreements. In May 2014, the Company entered into the TRC LLC Agreement with Innoviva, Inc. (“Innoviva”) that governs the operation of TRC. Under the TRC LLC Agreement, Innoviva is the manager of TRC, and the business and affairs of TRC are managed exclusively by the manager, including (i) day to day management of the drug programs in accordance with the existing GSK agreements; (ii) preparing an annual operating plan for TRC; and (iii) taking all actions necessary to ensure that the formation, structure and operation of TRC complies with applicable law and partner agreements. The Company is responsible for its proportionate share of TRC’s administrative expenses incurred, and communicated to the Company, by Innoviva. The Company analyzed its ownership, contractual and other interests in TRC to determine if it is a variable-interest entity (“VIE”), whether the Company has a variable interest in TRC and the nature and extent of that interest. The Company determined that TRC is a VIE. The party with the controlling financial interest, the primary beneficiary, is required to consolidate the entity determined to be a VIE. Therefore, the Company also assessed whether it is the primary beneficiary of TRC based on the power to direct TRC’s activities that most significantly impact TRC’s economic performance and its obligation to absorb TRC’s losses or the right to receive benefits from TRC that could potentially be significant to TRC. Based on the Company’s assessment, the Company determined that it is not the primary beneficiary of TRC, and, as a result, the Company does not consolidate TRC in its condensed consolidated financial statements. TRC is recognized in the Company’s condensed consolidated financial statements under the equity method of accounting, and the value of the Company’s equity investment in TRC was $35.5 million and $28.6 million as of June 30, 2020 and December 31, 2019, respectively. This amount includes undistributed earnings from the Company’s investment in TRC which are recorded on the condensed consolidated balance sheets as “Amounts due from TRC, LLC” and are net of the Company’s proportionate share of TRC’s administrative expenses incurred, and communicated to the Company, by Innoviva. Pursuant to the TRC operating agreement, the cash from the TRELEGY royalties, net of any expenses, is distributed to the equity holders quarterly. For the three and six months ended June 30, 2020, the Company recognized net royalty income of $21.4 million and $34.9 million, respectively, within the condensed consolidated statements of operations within “Income from investment in TRC, LLC”. These amounts were recorded net of the Company’s share of TRC’s expenses of $0.4 million and $0.6 million for the three and six months ended June 30, 2020, respectively. For the three and six months ended June 30, 2019, the Company recognized net royalty income of $8.4 million and $14.6 million, respectively, after the deducting the Company’s share of minimal TRC expenses. On June 10, 2020, the Company disclosed in a Form 8-K its objections to TRC and Innoviva, as the manager of TRC, regarding TRC’s proposed use of funds to invest in certain privately-held companies. The Company has objected to the withholding of funds by TRC for these and similar investments. On July 16, 2020, Innoviva and TRC filed a complaint in Delaware Chancery Court seeking an order establishing that the arbitration award from the parties’ 2019 dispute conclusively established that (a) Innoviva possesses the authority as manager of TRC to cause TRC to make such investments and (b) Innoviva possesses the authority as manager of TRC to cause TRC to reserve cash to make such investments. The Court directed the parties to refer certain relevant questions raised by the complaint to the arbitrator in the 2019 dispute between the parties, who in turn determined that the 2019 proceedings did not resolve the issues currently in dispute. On August 5, 2020, Innoviva and TRC voluntarily dismissed the complaint, without prejudice. The Company is pursuing and intends to continue to pursue the protection of the interests of the Company in this matter consistent with the dispute resolution procedures of the TRC LLC Agreement, including, if necessary, the initiation of a new arbitration proceeding.

Theravance Respiratory Company, LLC

6 Months Ended

Jun. 30, 2020

7. Theravance Respiratory Company, LLC

Through the Company’s 85% equity interest in TRC, the Company is entitled to receive an 85% economic interest in any future payments made by GSK under the strategic alliance agreement and under the portion of the collaboration agreement assigned to TRC (net of TRC expenses paid and the amount of cash, if any, expected to be used by TRC pursuant to the TRC LLC Agreement over the next four fiscal quarters). The drug programs assigned to TRC include Trelegy and the inhaled Bifunctional Muscarinic Antagonist-Beta2 Agonist (“MABA”) program, as monotherapy and in combination with other therapeutically active components, such as an inhaled corticosteroid (“ICS”), and any other product or combination of products that may be discovered and developed in the future under the GSK agreements.

In May 2014, the Company entered into the TRC LLC Agreement with Innoviva, Inc. (“Innoviva”) that governs the operation of TRC. Under the TRC LLC Agreement, Innoviva is the manager of TRC, and the business and affairs of TRC are managed exclusively by the manager, including (i) day to day management of the drug programs in accordance with the existing GSK agreements; (ii) preparing an annual operating plan for TRC; and (iii) taking all actions necessary to ensure that

the formation, structure and operation of TRC complies with applicable law and partner agreements. The Company is responsible for its proportionate share of TRC’s administrative expenses incurred, and communicated to the Company, by Innoviva.

The Company analyzed its ownership, contractual and other interests in TRC to determine if it is a variable-interest entity (“VIE”), whether the Company has a variable interest in TRC and the nature and extent of that interest. The Company determined that TRC is a VIE. The party with the controlling financial interest, the primary beneficiary, is required to consolidate the entity determined to be a VIE. Therefore, the Company also assessed whether it is the primary beneficiary of TRC based on the power to direct TRC’s activities that most significantly impact TRC’s economic performance and its obligation to absorb TRC’s losses or the right to receive benefits from TRC that could potentially be significant to TRC. Based on the Company’s assessment, the Company determined that it is not the primary beneficiary of TRC, and, as a result, the Company does not consolidate TRC in its condensed consolidated financial statements. TRC is recognized in the Company’s condensed consolidated financial statements under the equity method of accounting, and the value of the Company’s equity investment in TRC was $35.5 million and $28.6 million as of June 30, 2020 and December 31, 2019, respectively. This amount includes undistributed earnings from the Company’s investment in TRC which are recorded on the condensed consolidated balance sheets as “Amounts due from TRC, LLC” and are net of the Company’s proportionate share of TRC’s administrative expenses incurred, and communicated to the Company, by Innoviva. Pursuant to the TRC operating agreement, the cash from the TRELEGY royalties, net of any expenses, is distributed to the equity holders quarterly.

For the three and six months ended June 30, 2020, the Company recognized net royalty income of $21.4 million and $34.9 million, respectively, within the condensed consolidated statements of operations within “Income from investment in TRC, LLC”. These amounts were recorded net of the Company’s share of TRC’s expenses of $0.4 million and $0.6 million for the three and six months ended June 30, 2020, respectively. For the three and six months ended June 30, 2019, the Company recognized net royalty income of $8.4 million and $14.6 million, respectively, after the deducting the Company’s share of minimal TRC expenses.

On June 10, 2020, the Company disclosed in a Form 8-K its objections to TRC and Innoviva, as the manager of TRC, regarding TRC’s proposed use of funds to invest in certain privately-held companies. The Company has objected to the withholding of funds by TRC for these and similar investments. On July 16, 2020, Innoviva and TRC filed a complaint in Delaware Chancery Court seeking an order establishing that the arbitration award from the parties’ 2019 dispute conclusively established that (a) Innoviva possesses the authority as manager of TRC to cause TRC to make such investments and (b) Innoviva possesses the authority as manager of TRC to cause TRC to reserve cash to make such investments. The Court directed the parties to refer certain relevant questions raised by the complaint to the arbitrator in the 2019 dispute between the parties, who in turn determined that the 2019 proceedings did not resolve the issues currently in dispute. On August 5, 2020, Innoviva and TRC voluntarily dismissed the complaint, without prejudice. The Company is pursuing and intends to continue to pursue the protection of the interests of the Company in this matter consistent with the dispute resolution procedures of the TRC LLC Agreement, including, if necessary, the initiation of a new arbitration proceeding.