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 primary drug program assigned to TRC is Trelegy.

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 consolidated financial statements. TRC is recognized in the Company’s consolidated financial statements under the equity method of accounting.

For the year ended December 31, 2021, 2020, and 2019, the Company recognized net royalty income of $104.0 million, $68.4 million, and $33.7 million, respectively, in the 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 $3.4 million, $2.2 million, $2.7 million for the year ended December 31, 2021, 2020, and 2019, respectively. The Company’s share of TRC expenses for 2021, 2020, and 2019 was primarily comprised of TRC legal and related fees associated with the arbitration between Innoviva, as the manager of TRC, and TRC and the Company (see below for more information regarding the arbitration).

For the year ended December 31, 2021, the Company received $59.5 million from TRC related to TRELEGY royalties, and as of December 31, 2021, the amounts due from TRC of $43.5 million were recorded as a current asset in the consolidated balance sheets within “Amounts due from TRC, LLC”. The Company has also recorded $67.5 million as a long-term asset within “Equity in net assets of TRC, LLC” in the consolidated balance sheets which represented its share of TRC’s net assets which included funds withheld by TRC for future investments. For the year ended December 31, 2021, the Company recognized a net unrealized loss of $0.3 million associated with the estimated fair market value of certain equity investments previously made by TRC.

TRC’s summary financial information, including the portion of equity interest that the Company does not own, was as follows as of or for the year ended December 31:



	Year Ended December 31,
(In thousands)	2021		2020		2019
Current assets	$	93,275	$	63,027	$	36,737
Non-current assets		37,695		16,959		—
Current liabilities		252		508		3,069
Royalty revenue and gross profit		126,688		73,089		42,790
Revenue from collaborative arrangements for the period ended		—		10,000		—
Income from continuing operations		122,732		80,477		39,410
Net income	$	121,191	$	81,662	$	39,653

SEC Rule 3-09 of Regulation S-X requires that a company include audited financial statements for equity method investees when such investees are individually significant for a company’s fiscal year. For the year ended December 31, 2021, the income from the Company’s investment in TRC was determined to be significant. As a result, TRC’s audited financial statements for the year ended December 31, 2021 were included as Exhibit 10.72 in this Annual Report on Form 10-K.

The Company initiated an arbitration proceeding in October 2020 against Innoviva and TRC, challenging the authority of Innoviva and TRC to pursue a business plan to use TRELEGY royalties to invest in certain privately-held companies, rather than distribute such funds that would otherwise be available for distribution to the Company under the

terms of the TRC LLC Agreement to the Company in a manner that it believes is consistent with the TRC LLC Agreement and its 85% economic interest in TRC.

On March 30, 2021, the arbitrator ruled that, the Company had not shown that at the then current levels of investment, Innoviva and TRC had not breached the TRC LLC Agreement as of the date of the arbitration. The arbitrator further ruled that Innoviva and TRC had not breached the implied covenant of good faith and fair dealing; or their fiduciary duties. The arbitrator also ruled that (i) Innoviva is entitled to indemnification from TRC for all legal fees and expenses reasonably incurred in the arbitration and (ii) the Company is entitled to indemnification from TRC for legal fees and costs incurred in defending an action Innoviva brought against it in the Delaware Court of Chancery. The arbitrator noted in the ruling that although the Company failed to show that Innoviva’s investment activities, at the then current levels of investment, have or will have a material and adverse effect on its economic interest in TRC, this does not mean that any future investments or actions will not require the Company’s consent. The arbitrator noted in the ruling that the Company may, in the future, have a consent right over the decision to continue this investment strategy or whether to make a particular investment if, for example, Innoviva develops a track record of poor investments, over allocates royalties to these investment activities, or fails to distribute sufficient investment returns, and such facts cause the strategy or investment to have a material adverse effect on the Company’s economic interest in TRC.

Pursuant to the terms of the TRC LLC Agreement, Innoviva is required to deliver to the Company a draft quarterly financial plan 30 days prior to the end of each fiscal quarter covering the next fiscal quarter. While the TRC LLC Agreement provides that Innoviva must consider in good faith any comments the Company provides, an applicable financial plan becomes effective 30 days after the draft plan is provided to the Company. The Company has objected to the proposed investments in private companies presented in draft TRC quarterly financial plans to date. If TRC identifies and consummates investments and incurs associated fees identified in a TRC quarterly plan, even over the Company’s objections, distributions by TRC to its members in subsequent quarters will be reduced.

The Company’s objections with regard to a TRC quarterly plan or other actions by TRC could result in additional legal proceedings between the Company, TRC and Innoviva, as was the case when the Company initiated arbitration proceedings against Innoviva and TRC in May 2019 and again in October 2020. Any such legal proceedings could divert the attention of management and cause the Company to incur significant costs, regardless of the outcome, which the Company cannot predict. If such proceedings were pursued, there can be no assurance that they would result in the Company receiving additional distributions from TRC. An adverse result could materially and adversely affect the funds that the Company would otherwise expect to receive from TRC in the future.