Discontinued Operations

3 Months Ended

Mar. 31, 2023

Sale of Equity Interests in Theravance Respiratory Company, LLC and Discontinued Operations

Sale of Equity Interests in Theravance Respiratory Company, LLC and Discontinued Operations

7. Discontinued Operations

Background

In July 2022, the Company completed the sale of all of its equity interests in Theravance Respiratory Company, LLC (“TRC”) representing its 85% economic interest in the sales-based royalty rights on worldwide net sales of Assigned Collaboration Products, primarily comprised of GSK's TRELEGY ELLIPTA (“TRELEGY”) to Royalty Pharma Investments 2019 ICAV, an Irish collective asset-management vehicle (“Royalty Pharma”), pursuant to the Equity Purchase and Funding Agreement, dated as of July 13, 2022 (including the schedules and exhibits thereto, the “Purchase Agreement”), by and between the Company and Royalty Pharma (collectively with the other transactions contemplated by the Purchase Agreement, the “TRC Transaction”).

At the closing of the TRC Transaction, the Company received approximately $1.1 billion in cash. From and after January 1, 2023, for any calendar year starting with the year ending December 31, 2023 and ending with the year December 31, 2026, upon certain milestone minimum royalty amounts for Assigned Collaboration Products being met, Royalty Pharma is obligated to make certain cash payments to the Company (the “Milestone Payments”), which are not to exceed $250.0 million in aggregate. Additionally, the Company will receive from Royalty Pharma 85% of the royalty payments on the Assigned Collaboration Products payable (a) for sales or other activities occurring on and after January 1, 2031 related to the Assigned Collaboration Products in the US, and (b) for sales or other activities occurring on and after July 1, 2029 related to the Assigned Collaboration Products outside of the US (collectively with the Milestone Payments, the “Contingent Consideration”).

The Contingent Consideration was initially measured at fair value utilizing a Monte Carlo simulation model to calculate the present value of the risk-adjusted cash flows estimated to be received from the Contingent Consideration. The discount rate utilized in the valuation model was 7.83%. The fair value model involved significant unobservable inputs derived using management’s estimates. Management’s estimates were based in part on external data and reflected management’s judgements and forecasts. The primary significant unobservable input was the estimate of forecasted TRELEGY net revenues which is considered a Level 3 fair value input. The Company reassesses the carrying value of the Contingent Consideration when indicators of impairment are identified and will recognize any increases in the carrying value of the asset when such contingent gains are realized. As of March 31, 2023, there were no changes in the carrying value of the Contingent Consideration since its initial measurement date in July 2022.

The Contingent Consideration is subject to counterparty credit risk, and the carrying value of the Contingent Consideration represents the maximum amount of potential loss due to credit risk. To date, the Company has not recorded any credit losses related to the Contingent Consideration. The Contingent Consideration is presented on the condensed consolidated balance sheets as future contingent milestone and royalty assets.

Discontinued Operations

The TRC Transaction represented a monetization of a significant equity method investment that had a major effect on the Company’s financial results. In accordance with ASC 860, Transfers and Servicing of Financial Assets, the TRC Transaction was accounted for as a sale of a financial asset. For all periods presented, the balances and the results related to TRC have been classified as discontinued operations on the Company’s condensed consolidated financial statements.

The results of discontinued operations consisted of the following:

	Three Months Ended March 31,
(In thousands)	2023		2022
Income from investments in TRC, LLC	$	—	$	25,110
Transaction-related legal expenses (prior to July 20, 2022)		—		(1,279)
Interest expense on 9.5% Non-recourse notes due 2035		—		(9,518)
Provision for income tax expense		—		—
Net income from discontinued operations	$	—	$	14,313

TRC Summary Financial Information

Prior to the TRC Transaction, the Company analyzed its ownership, contractual and other interests in TRC to determine if it was a variable-interest entity (“VIE”), whether the Company had a variable interest in TRC and the nature and extent of that interest. The Company determined that TRC was 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 was 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 was not the primary beneficiary of TRC, and, as a result, the Company did not consolidate TRC in its condensed consolidated financial statements. The Company’s maximum exposure to loss, as a result of its involvement with TRC, were the amounts recorded in the condensed consolidated balance sheets within “Equity in net assets of TRC, LLC”. TRC was recognized in the Company’s condensed consolidated financial statements under the equity method of accounting.

Rule 4-08(g) of Regulation S-X requires that a company include summary financial information for equity method investees when such investees are individually significant for a company. For the prior year comparable period, the income from the Company’s investment in TRC was determined to be significant. As a result, TRC’s summary financial information, including the portion of equity interest that the Company did not own, was as follows:

	Three Months Ended
	March 31,
(In thousands)	2022
Royalty revenue and gross profit	$	29,309
Income from continuing operations		29,112
Net income		29,541