Innoviva (INVA) 10-Q 5 May 17 2017 Q1 Quarterly report Financial data

Document and Entity Information

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2017	Apr. 28, 2017
Document and Entity Information
Entity Registrant Name	Innoviva, Inc.
Entity Central Index Key	1,080,014
Document Type	10-Q
Document Period End Date	Mar. 31, 2017
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		109,354,866
Document Fiscal Year Focus	2,017
Document Fiscal Period Focus	Q1

CONDENSED CONSOLIDATED BALANCE

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016	[1]
Current assets:
Cash and cash equivalents	$ 159,808	$ 118,016
Short-term marketable securities	10,003	32,417
Related party receivables from collaborative arrangements	43,727	46,847
Prepaid expenses and other current assets	880	766
Total current assets	214,418	198,046
Property and equipment, net	328	368
Capitalized fees paid to a related party, net	177,089	180,545
Other assets	37	37
Total assets	391,872	378,996
Current liabilities:
Accounts payable	2,304	128
Accrued personnel-related expenses	998	2,361
Accrued interest payable	6,400	7,828
Other accrued liabilities	3,183	1,095
Non-recourse notes, due 2029, current	6,703	7,752
Deferred revenue, current	885	885
Total current liabilities	20,473	20,049
Convertible subordinated notes, due 2023, net of issuance costs	237,724	237,597
Non-recourse notes, due 2029, net of issuance costs	464,601	470,744
Other long-term liabilities	1,267	1,383
Deferred revenue	1,993	2,214
Commitments and contingencies (Notes 9)
Stockholders' deficit:
Preferred stock: $0.01 par value, 230 shares authorized, no shares issued and outstanding
Common stock: $0.01 par value, 200,000 shares authorized, 109,348 and 108,585 shares issued as of March 31, 2017 and December 31, 2016, respectively	1,093	1,085
Treasury stock: 150 shares at March 31, 2017 and December 31, 2016	(3,263)	(3,263)
Additional paid-in capital	1,284,031	1,282,077
Accumulated other comprehensive income (loss)	(1)	1
Accumulated deficit	(1,616,046)	(1,632,891)
Total stockholders' deficit	(334,186)	(352,991)
Total liabilities and stockholders' deficit	$ 391,872	$ 378,996
[1]	Condensed consolidated balance sheet as of December 31, 2016 has been derived from audited consolidated financial statements.

CONDENSED CONSOLIDATED BALANCE3

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Mar. 31, 2017	Dec. 31, 2016
CONDENSED CONSOLIDATED BALANCE SHEETS
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	230,000	230,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	200,000,000	200,000,000
Common stock, shares issued	109,348,000	108,585,000
Treasury stock, shares	150,000	150,000

CONDENSED CONSOLIDATED STATEMEN

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Revenue:
Royalty revenue from a related party, net of amortization for capitalized fees paid to a related party of $3,456 for the three months ended March 31, 2017 and 2016	$ 40,271	$ 23,955
Revenue from collaborative arrangements from a related party	221	221
Total net revenue	40,492	24,176
Operating expenses:
Research and development	354	392
General and administrative	10,795	6,252
Total operating expenses	11,149	6,644
Income from operations	29,343	17,532
Other income (expense), net	47	(32)
Interest income	236	92
Interest expense	(12,781)	(13,157)
Net income	$ 16,845	$ 4,435
Basic net income per share	$ 0.16	$ 0.04
Diluted net income per share	$ 0.15	$ 0.04
Shares used to compute basic and diluted net income per share:
Shares used to compute basic net income per share	107,487	112,482
Shares used to compute diluted net income per share	120,336	113,178

CONDENSED CONSOLIDATED STATEME5

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Amortization of capitalized fees paid to a related party	$ 3,456	$ 3,456

CONDENSED CONSOLIDATED STATEME6

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$ 16,845	$ 4,435
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities, net	(2)	1
Comprehensive income	$ 16,843	$ 4,436

CONDENSED CONSOLIDATED STATEME7

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017		Mar. 31, 2016
Cash flows from operating activities
Net income	$ 16,845		$ 4,435
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	3,496		3,483
Stock-based compensation	2,507		1,864
Amortization of premium (discount) on short term investment	17		(3)
Interest added to the principal balance of the non-recourse term notes due 2029	0		683
Amortization of debt issuance costs	687		699
Amortization of lease guarantee	(81)		0
Changes in operating assets and liabilities:
Receivables from collaborative arrangements	3,120		(1,311)
Prepaid expenses and other current assets	(114)		(161)
Accounts payable	2,176		(242)
Accrued personnel-related expenses and other accrued liabilities	752		(625)
Accrued interest payable	(1,428)		(1,349)
Other long-term liabilities	5		(2)
Deferred revenue	(221)		(221)
Net cash provided by operating activities	27,761		7,250
Cash flows from investing activities
Maturities of marketable securities	26,387		27,671
Purchases of marketable securities	(3,992)		(15,978)
Net cash provided by investing activities	22,395		11,693
Cash flows from financing activities
Repurchase of common stock	0		(25,357)
Payment of principal on non-recourse notes due 2029	(7,752)		0
Payments of cash dividends to stockholders	(67)		(719)
Repurchase of shares to satisfy tax withholding	(553)		(442)
Proceeds from issuances of common stock, net	8		173
Net cash used in financing activities	(8,364)		(26,345)
Net increase (decrease) in cash and cash equivalents	41,792		(7,402)
Cash and cash equivalents at beginning of period	118,016	[1]	159,180
Cash and cash equivalents at end of period	159,808		151,778
Supplemental disclosure of cash flow information
Cash paid for interest	$ 13,522		$ 13,124
[1]	Condensed consolidated balance sheet as of December 31, 2016 has been derived from audited consolidated financial statements.

Description of Operations and S

Description of Operations and Summary of Significant Accounting Policies	3 Months Ended
	Mar. 31, 2017
Description of Operations and Summary of Significant Accounting Policies
Description of Operations and Summary of Significant Accounting Policies	1. Description of Operations and Summary of Significant Accounting Policies Description of Operations Innoviva, Inc. (referred to as “Innoviva”, the “Company”, or “we” and other similar pronouns) is focused on bringing compelling new medicines to patients in areas of unmet need by leveraging its significant expertise in the development, commercialization and financial management of bio-pharmaceuticals. Innoviva’s portfolio is anchored by the respiratory assets partnered with Glaxo Group Limited (“GSK”), including RELVAR ® /BREO ® ELLIPTA ® (fluticasone furoate/ vilanterol, “FF/VI”) and ANORO ® ELLIPTA ® (umeclidinium bromide/ vilanterol, “UMEC/VI”). Under the Long-Acting Beta 2 Agonist (“LABA”) Collaboration Agreement and the Strategic Alliance Agreement with GSK (referred to herein as the “GSK Agreements”), Innoviva is eligible to receive the associated royalty revenues from RELVAR ® /BREO ® ELLIPTA ® and ANORO ® ELLIPTA ® . Innoviva is also entitled to 15% of any future payments made by GSK under its agreements originally entered into with us, and since assigned to Theravance Respiratory Company, LLC (“TRC”), relating to the combination FF/UMEC/VI and the Bifunctional Muscarinic Antagonist — Beta 2 Agonist (“MABA”) program, as monotherapy and in combination with other therapeutically active components, such as an inhaled corticosteroid, and any other product or combination of products that may be discovered and developed in the future under the LABA Collaboration Agreement (“LABA Collaboration”), which has been assigned to TRC other than RELVAR ® /BREO ® ELLIPTA ® and ANORO ® ELLIPTA ® . Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In our opinion, the unaudited condensed consolidated financial statements have been prepared on the same basis as audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of our financial position, results of operations, comprehensive income and cash flows. The interim results are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2017 or any other period. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2017. Variable Interest Entity We evaluate our ownership, contractual and other interest in entities to determine if they are variable interest entities (“VIE”), whether we have a variable interest in those entities and the nature and extent of those interests. Based on our evaluations, if we determine we are the primary beneficiary of such VIEs, we consolidate such entities into our financial statements. We consolidate the financial results of TRC, which we have determined to be a VIE, because we have the power to direct the economically significant activities of TRC and the obligation to absorb losses of, or the right to receive benefits from, TRC. The financial position and results of operations of TRC are not material for the periods presented. Recently Issued Accounting Pronouncements Not Yet Adopted In April 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-10 to clarify the implementation guidance on licensing and the identification of performance obligations consideration included in ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which is also known as ASC 606, was issued in May 2014 and outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In March 2016, the FASB issued ASU 2016-08 to provide amendments to clarify the implementation guidance on principal versus agent considerations. ASU 2014-09 guidance is effective for the fiscal years and interim reporting periods beginning after December 15, 2017 (as amended through ASU 2015-14 issued in August 2015), with early adoption permitted. Companies can elect a full retrospective method to recast prior-period financial statements or a modified retrospective method to recognize the cumulative effect as an adjustment to the retained earnings in the initial year. We plan to implement the standard in the first quarter of 2018 on a modified retrospective basis and do not anticipate that this standard will have a material impact on our accounting for royalty revenues. We are continuing to assess the potential impacts of the standard on the accounting for other revenues associated with the collaboration agreements. In February 2016, the FASB issued ASU 2016-02, Leases , which supersedes the lease recognition requirements in ASC Topic 840, Leases . The standard requires an entity to recognize right-of-use assets and lease liabilities arising from a lease for both financing and operating leases in the consolidated balance sheets but recognize the impact on the consolidated statement of operations and cash flows in a similar manner under current GAAP. The standard also requires additional qualitative and quantitative disclosures. The standard is effective for us at the beginning January 1, 2019 and requires transition under a modified retrospective method. The most significant impact of the update to us is that we will be required to recognize a “right-of-use” asset and lease liability for the operating lease agreement that was not previously included on the balance sheet under the existing lease guidance. We anticipate that the treatment of the lease on our consolidated statement of operations and cash flows will not materially be affected by the adoption of the new standard.

Net Income Per Share

Net Income Per Share	3 Months Ended
	Mar. 31, 2017
Net Income Per Share
Net Income Per Share	2. Net Income Per Share Basic net income per share is computed by dividing net income by the weighted-average number of shares of common shares outstanding. Diluted net income per share is computed by dividing net income adjusted with the interest expense on our unsecured convertible subordinated notes due 2023 (the “2023 Notes”) by the weighted-average number of shares of common shares and dilutive potential common share equivalents then outstanding. Dilutive potential common share equivalents include the assumed exercise, vesting and issuance of employee stock awards using the treasury stock method, as well as common shares issuable upon assumed conversion of our 2023 Notes using the if-converted method. The following table shows the computation of basic and diluted net income per share for the three months ended March 31, 2017 and 2016: Three Months Ended March 31, (In thousands except per share data) 2017 2016 Numerator: Net income, basic $ $ Add: Interest expense on 2023 Notes — Net income, diluted $ $ Denominator: Weighted-average shares used to compute basic net income per share Dilutive effect of 2023 Notes — Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan Weighted-average shares used to compute diluted net income per share Net income per share Basic $ $ Diluted $ $ Anti-Dilutive Securities The following common share equivalents were not included in the computation of diluted net income per share because their effect was anti-dilutive: Three months ended March 31, (In thousands) 2017 2016 Outstanding options and awards granted under equity incentive plan and employee stock purchase plan Shares issuable upon conversion of 2023 Notes —

Collaborative Arrangements

Collaborative Arrangements	3 Months Ended
	Mar. 31, 2017
Collaborative Arrangements
Collaborative Arrangements	3. Collaborative Arrangements Net Revenue from Collaborative Arrangements Net revenue recognized under our GSK Agreements was as follows: Three months ended March 31, (In thousands) 2017 2016 Royalties from a related party - RELVAR/BREO $ $ Royalties from a related party - ANORO Total royalties from a related party Less: amortization of capitalized fees paid to a related party ) ) Royalty revenue Strategic alliance - MABA program license Total net revenue from GSK $ $ LABA Collaboration As a result of the launch and approval of RELVAR ® /BREO ® ELLIPTA ® and ANORO ® ELLIPTA ® in the U.S., Japan and Europe, we paid milestone fees to GSK totaling $220.0 million during the year ended December 31, 2014. Although we have no further milestone payment obligations to GSK pursuant to the LABA Collaboration Agreement, we continue to have ongoing participation as part of the collaboration, including joint steering and joint project committees that are expected to continue over the life of the agreements. The milestone fees paid to GSK were recognized as capitalized fees paid to a related party, which are being amortized over their estimated useful lives commencing upon the commercial launch of the product. The amortization expense is recorded as a reduction to the royalties from GSK. We are entitled to receive annual royalties from GSK on sales of RELVAR ® /BREO ® ELLIPTA ® as follows: 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion. Sales of single-agent LABA medicines and combination medicines would be combined for the purposes of this royalty calculation. For other products combined with a LABA from the LABA Collaboration, such as ANORO ® ELLIPTA ® , royalties are upward tiering and range from 6.5% to 10%. GSK Contingent Payments and Revenue The potential future contingent payments receivable related to the MABA program of up to $363.0 million are not deemed substantive milestones due to the fact that the achievement of the event underlying the payment predominantly relates to GSK’s performance of future development, manufacturing and commercialization activities for product candidates after licensing the program. We are entitled to 15% of any contingent payments and royalties payable by GSK through our ownership interest in TRC.

Available-for-Sale Securities a

Available-for-Sale Securities and Fair Value Measurements	3 Months Ended
	Mar. 31, 2017
Available-for-Sale Securities and Fair Value Measurements
Available-for-Sale Securities and Fair Value Measurements	4. Available-for-Sale Securities and Fair Value Measurements Available-for-Sale Securities The estimated fair value of available-for-sale securities is based on quoted market prices for these or similar investments that were based on prices obtained from a commercial pricing service. Available-for-sale securities are summarized below: March 31, 2017 (In thousands) Amortized Cost Gross Gross Estimated U.S. government agencies $ $ — $ ) $ U.S. commercial paper — — Money market funds — — Total $ $ — $ ) $ December 31, 2016 (In thousands) Amortized Cost Gross Gross Estimated U.S. government agencies $ $ $ — $ U.S. commercial paper — — Money market funds — — Total $ $ $ — $ As of March 31, 2017, all of the available-for-sale securities had contractual maturities within one year and the weighted average maturity of marketable securities was approximately one month. Fair Value Measurements Our available-for-sale securities are measured at fair value on a recurring basis and our debt is carried at the amortized cost basis. The estimated fair values were as follows: Estimated Fair Value Measurements as of March 31, 2017 Using: Types of Instruments Quoted Price in Significant Other Significant (In thousands) Level 1 Level 2 Level 3 Total Assets U.S. government agencies $ — $ $ — $ U.S. commercial paper — — Money market funds — — Total assets measured at estimated fair value $ $ $ — $ Liabilities 2023 Notes $ — $ $ — $ Non-recourse notes due 2029 (the “2029 Notes”) — — Total fair value of liabilities $ — $ $ — $ Estimated Fair Value Measurements as of December 31, 2016 Using: Types of Instruments Quoted Price in Significant Other Significant (In thousands) Level 1 Level 2 Level 3 Total Assets U.S. government agencies $ — $ $ — $ U.S. commercial paper — — Money market funds — — Total assets measured at estimated fair value $ $ $ — $ Liabilities 2023 Notes $ — $ $ — $ 2029 Notes — — Total fair value of liabilities $ — $ $ — $ The fair value of our marketable securities classified within Level 2 is based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The fair value of our 2023 Notes and of our 2029 Notes is based on recent trading prices of the instruments.

Capitalized Fees Paid to a Rela

Capitalized Fees Paid to a Related Party	3 Months Ended
	Mar. 31, 2017
Capitalized Fees Paid to a Related Party
Capitalized Fees Paid to a Related Party	5. Capitalized Fees Paid to a Related Party We capitalize fees paid to licensors related to agreements for approved products or commercialized products and amortize these fees on a straight-line basis over their estimated useful lives upon the commercial launch of the product. The estimated useful lives of these capitalized fees are based on a country-by-country and product-by-product basis, as the later of the expiration or termination of the last patent right covering the compound in such product in such country and 15 years from first commercial sale of such product in such country, unless the agreement is terminated earlier. Capitalized fees paid to a related party of $220.0 million consist registrational and launch-related milestone fees paid to GSK. Accumulated amortization of these capitalized fees is $42.9 million as of March 31, 2017.

Stock-Based Compensation

Stock-Based Compensation	3 Months Ended
	Mar. 31, 2017
Stock-Based Compensation
Stock-Based Compensation	6. Stock-Based Compensation Performance-Contingent RSAs and RSUs Since 2011, the Compensation Committee of our Board of Directors (the “Compensation Committee”) have approved grants of performance-contingent RSAs and RSUs to senior management and a non-executive officer. Generally, these awards have dual triggers of vesting based upon the achievement of certain performance goals by a pre-specified date, as well as a requirement for continued employment. Recognition of stock-based compensation expense begins when the performance goals are deemed probable of achievement. Included in these performance-contingent RSAs is the remaining grant of 63,000 special long-term retention and incentive performance-contingent RSAs to senior management in 2011. The awards have dual triggers of vesting based upon the achievement of certain performance conditions over a six-year timeframe from 2011 through December 31, 2016 and require continued service to the company. During the year ended December 31, 2016, we determined that the achievement of the requisite performance conditions was met. These awards remain subject to continued employment and will vest in November 2017. The stock-based compensation cost for these awards was not material for the three months ended March 31, 2017. On January 14, 2016, the Compensation Committee approved and granted 282,394 RSAs and 46,294 RSUs to senior management. These awards include a market condition based on Total Shareholder Return (“TSR”) and a service condition that requires continued employment, collectively the “Performance Measures I”. The vesting percentages of these awards are calculated based on the two-year TSR with a catch-up provision opportunity measured on January 13, 2019 for RSAs and on September 30, 2018 for RSUs. Two-thirds of amounts earned at the end of year two will vest and be distributed on February 20, 2018, while the final one-third earned after two years as well as the catch-up amount earned will vest and be distributed on February 20, 2019 for RSAs and November 20, 2018 for RSUs. The actual payout of shares may range from a minimum of zero shares to a maximum of 328,688 shares granted upon the actual performance against the Performance Measures I. The grant date fair value of these awards is determined using a Monte Carlo valuation model. The aggregate value of $2.0 million is recognized as compensation expense over the implied service period and will not be reversed if the market condition is not met. On January 17, 2017, the Compensation Committee approved and granted 353,508 RSAs and 53,360 RSUs to senior management. These awards include a market condition based on the TSR of Innoviva’s common stock as compared to the TSR of NASDAQ Biotechnology Index (“Index”) and a service condition that requires continued employment, collectively the “Performance Measures II”. The vesting percentages of these awards are calculated based on the two-year performance period with a catch-up provision opportunity measured on December 31, 2019 for RSAs and on September 30, 2019 for RSUs. Two-thirds of amounts earned at the end of year two will vest and be distributed on February 20, 2019, while the final one-third earned after two years as well as the catch-up amount earned will vest and be distributed on February 20, 2020 for RSAs and November 20, 2019 for RSUs. The actual payout of shares may range from a minimum of zero shares to a maximum of 406,868 shares granted upon the actual performance against the Performance Measures II. The grant date fair value of these awards is determined using a Monte Carlo valuation model. The aggregate value of $3.2 million is recognized as compensation expense over the implied service period and will not be reversed if the market condition is not met. Stock-Based Compensation Expense Stock-based compensation expense is included in the condensed consolidated statements of operations as follows: Three months ended March 31, (In thousands) 2017 2016 Research and development $ $ General and administrative Total stock-based compensation expense $ $ As of March 31, 2017, unrecognized stock-based compensation cost, net of expected forfeitures for awards expected to vest, including performance-contingent RSAs for which the performance milestones were determined to be probable of achievement was as follows: (In thousands) Unrecognized Stock options $ RSUs RSAs Performance-based RSAs Market-based RSUs Market-based RSAs Total stock-based compensation expense $

Debt

Debt	3 Months Ended
	Mar. 31, 2017
Debt
Debt	7. Debt Our debt consists of: March 31 December 31, (In thousands) 2017 2016 Convertible subordinated notes due 2023 $ $ Non-recourse notes due 2029 Total debt Unamortized debt issuance cost ) ) Current portion of non-recourse notes due 2029 ) ) Net long-term debt $ $ Convertible Subordinated Notes Due 2023 In January 2013, we completed an underwritten public offering of $287.5 million aggregate principal amount of our unsecured 2023 Notes, which will mature on January 15, 2023. The financing raised proceeds, net of issuance costs, of approximately $281.2 million, less $36.8 million to purchase two privately-negotiated capped call option transactions in connection with the issuance of the notes. The 2023 Notes bear interest at the rate of 2.125% per year that is payable semi-annually in arrears in cash on January 15 and July 15 of each year, beginning on July 15, 2013. Prior to March 31, 2017, the principal balance of the 2023 Notes was reduced to $241.0 million by the partial coversion of $32.4 million in 2014 and repurchase of $14.1 million in open market in 2016. As of March 31, 2017, the capped call strike price and cap price are at $19.77 and $27.04, respectively. Non-Recourse Notes Due 2029 In April 2014, we entered into certain note purchase agreements relating to the private placement of $450.0 million aggregate principal amount of the 2029 Notes issued by our wholly-owned subsidiary. The 2029 Notes bear an annual fixed interest rate of 9%, with interest and principal paid quarterly beginning November 15, 2014. The 2029 Notes may be redeemed at any time prior to maturity, in whole or in part, at specified redemption premiums. The redemption premium is 2.5% until April 17, 2017, and there is no redemption premium after such date. Since the principal and interest payments on the 2029 Notes are based on royalties from product sales recorded by GSK, which will vary from quarter to quarter and are unknown to us, the 2029 Notes may be repaid prior to the final maturity date in 2029. Prior to March 31, 2017, the principal balance of the 2029 Notes was paid down by $14.6 million, of which $7.8 million was made during the three months ended March 31, 2017 with the payments received from the royalty revenues generated in the previous quarter ended December 31, 2016. As of March 31, 2017, the principal balance of the 2029 Notes was $479.4 million, which will be partially paid down by $6.7 million in the next quarterly payment expected to be made in May 2017. This payment is based on our royalty revenues of $43.7 million for the three months ended March 31, 2017. On April 10, 2017, we announced our plan to prepay $50.0 million in outstanding principal on our 2029 Notes on May 15, 2017 as part of the 2017 Capital Return Plan.

Shareholders' Deficit

Shareholders' Deficit	3 Months Ended
	Mar. 31, 2017
Shareholders' Deficit
Shareholders' Deficit	8. Shareholders’ Deficit In February 2017, we announced a new capital return plan, the 2017 Capital Return Plan. The 2017 Capital Return Plan authorizes a combination of repurchases of stock and/or repurchases, redemptions or prepayments of debt up to $150 million, through tender offers, open market purchases, private transactions, exchange offers or other means through December 31, 2017. There were no activities related to the 2017 Capital Return Plan during the three months ended March 31, 2017.

Commitments and Contingencies

Commitments and Contingencies	3 Months Ended
	Mar. 31, 2017
Commitments and Contingencies
Commitments and Contingencies	9. Commitments and Contingencies We have an existing lease agreement for our corporate headquarters with term expiring in June 2023. We also have a lease guarantee obligation for our former facility, which was assigned to Theravance Biopharma Inc. through the end of the lease in May 2020.

Income Taxes

Income Taxes	3 Months Ended
	Mar. 31, 2017
Income Taxes
Income Taxes	10. Income Taxes The effective tax rate for the three months ended March 31, 2017 was 0.1%, compared to 0.2% for the same period in 2016. Should we generate taxable income in 2017, we expect that the taxable income will be substantially offset by the utilization of net operating losses or other deferred tax assets. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate is primarily attributable to a change in valuation allowance against net deferred tax assets.

Description of Operations and18

Description of Operations and Summary of Significant Accounting Policies (Policies)	3 Months Ended
	Mar. 31, 2017
Description of Operations and Summary of Significant Accounting Policies
Basis of Presentation	Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In our opinion, the unaudited condensed consolidated financial statements have been prepared on the same basis as audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of our financial position, results of operations, comprehensive income and cash flows. The interim results are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2017 or any other period. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2017.
Variable Interest Entity	Variable Interest Entity We evaluate our ownership, contractual and other interest in entities to determine if they are variable interest entities (“VIE”), whether we have a variable interest in those entities and the nature and extent of those interests. Based on our evaluations, if we determine we are the primary beneficiary of such VIEs, we consolidate such entities into our financial statements. We consolidate the financial results of TRC, which we have determined to be a VIE, because we have the power to direct the economically significant activities of TRC and the obligation to absorb losses of, or the right to receive benefits from, TRC. The financial position and results of operations of TRC are not material for the periods presented.
Recently Issued Accounting Pronouncements Not Yet Adopted	Recently Issued Accounting Pronouncements Not Yet Adopted In April 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-10 to clarify the implementation guidance on licensing and the identification of performance obligations consideration included in ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which is also known as ASC 606, was issued in May 2014 and outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In March 2016, the FASB issued ASU 2016-08 to provide amendments to clarify the implementation guidance on principal versus agent considerations. ASU 2014-09 guidance is effective for the fiscal years and interim reporting periods beginning after December 15, 2017 (as amended through ASU 2015-14 issued in August 2015), with early adoption permitted. Companies can elect a full retrospective method to recast prior-period financial statements or a modified retrospective method to recognize the cumulative effect as an adjustment to the retained earnings in the initial year. We plan to implement the standard in the first quarter of 2018 on a modified retrospective basis and do not anticipate that this standard will have a material impact on our accounting for royalty revenues. We are continuing to assess the potential impacts of the standard on the accounting for other revenues associated with the collaboration agreements. In February 2016, the FASB issued ASU 2016-02, Leases , which supersedes the lease recognition requirements in ASC Topic 840, Leases . The standard requires an entity to recognize right-of-use assets and lease liabilities arising from a lease for both financing and operating leases in the consolidated balance sheets but recognize the impact on the consolidated statement of operations and cash flows in a similar manner under current GAAP. The standard also requires additional qualitative and quantitative disclosures. The standard is effective for us at the beginning January 1, 2019 and requires transition under a modified retrospective method. The most significant impact of the update to us is that we will be required to recognize a “right-of-use” asset and lease liability for the operating lease agreement that was not previously included on the balance sheet under the existing lease guidance. We anticipate that the treatment of the lease on our consolidated statement of operations and cash flows will not materially be affected by the adoption of the new standard.

Net Income Per Share (Tables)

Net Income Per Share (Tables)	3 Months Ended
	Mar. 31, 2017
Net Income Per Share
Schedule of computation of basic and diluted net income per share	Three Months Ended March 31, (In thousands except per share data) 2017 2016 Numerator: Net income, basic $ $ Add: Interest expense on 2023 Notes — Net income, diluted $ $ Denominator: Weighted-average shares used to compute basic net income per share Dilutive effect of 2023 Notes — Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan Weighted-average shares used to compute diluted net income per share Net income per share Basic $ $ Diluted $ $
Schedule of anti-dilutive securities	Three months ended March 31, (In thousands) 2017 2016 Outstanding options and awards granted under equity incentive plan and employee stock purchase plan Shares issuable upon conversion of 2023 Notes —

Collaborative Arrangements (Tab

Collaborative Arrangements (Tables)	3 Months Ended
	Mar. 31, 2017
Collaborative Arrangements
Schedule of net revenue recognized under GSK Agreements	Three months ended March 31, (In thousands) 2017 2016 Royalties from a related party - RELVAR/BREO $ $ Royalties from a related party - ANORO Total royalties from a related party Less: amortization of capitalized fees paid to a related party ) ) Royalty revenue Strategic alliance - MABA program license Total net revenue from GSK $ $

Available-for-Sale Securities21

Available-for-Sale Securities and Fair Value Measurements (Tables)	3 Months Ended
	Mar. 31, 2017
Available-for-Sale Securities and Fair Value Measurements
Schedule of amortized cost and estimated fair values for available-for-sale securities	March 31, 2017 (In thousands) Amortized Cost Gross Gross Estimated U.S. government agencies $ $ — $ ) $ U.S. commercial paper — — Money market funds — — Total $ $ — $ ) $ December 31, 2016 (In thousands) Amortized Cost Gross Gross Estimated U.S. government agencies $ $ $ — $ U.S. commercial paper — — Money market funds — — Total $ $ $ — $
Schedule of estimated fair values	Estimated Fair Value Measurements as of March 31, 2017 Using: Types of Instruments Quoted Price in Significant Other Significant (In thousands) Level 1 Level 2 Level 3 Total Assets U.S. government agencies $ — $ $ — $ U.S. commercial paper — — Money market funds — — Total assets measured at estimated fair value $ $ $ — $ Liabilities 2023 Notes $ — $ $ — $ Non-recourse notes due 2029 (the “2029 Notes”) — — Total fair value of liabilities $ — $ $ — $ Estimated Fair Value Measurements as of December 31, 2016 Using: Types of Instruments Quoted Price in Significant Other Significant (In thousands) Level 1 Level 2 Level 3 Total Assets U.S. government agencies $ — $ $ — $ U.S. commercial paper — — Money market funds — — Total assets measured at estimated fair value $ $ $ — $ Liabilities 2023 Notes $ — $ $ — $ 2029 Notes — — Total fair value of liabilities $ — $ $ — $

Stock-Based Compensation (Table

Stock-Based Compensation (Tables)	3 Months Ended
	Mar. 31, 2017
Stock-Based Compensation
Schedule of stock-based compensation expense included in the condensed consolidated statements of operations	Three months ended March 31, (In thousands) 2017 2016 Research and development $ $ General and administrative Total stock-based compensation expense $ $
Schedule of unrecognized stock-based compensation cost, net of expected forfeitures for awards expected to vest, including performance-contingent RSAs for which the performance milestones were determined to be probable of achievement	As of March 31, 2017, unrecognized stock-based compensation cost, net of expected forfeitures for awards expected to vest, including performance-contingent RSAs for which the performance milestones were determined to be probable of achievement was as follows: (In thousands) Unrecognized Stock options $ RSUs RSAs Performance-based RSAs Market-based RSUs Market-based RSAs Total stock-based compensation expense $

Debt (Tables)

Debt (Tables)	3 Months Ended
	Mar. 31, 2017
Debt
Schedule of debt	March 31 December 31, (In thousands) 2017 2016 Convertible subordinated notes due 2023 $ $ Non-recourse notes due 2029 Total debt Unamortized debt issuance cost ) ) Current portion of non-recourse notes due 2029 ) ) Net long-term debt $ $

Description of Operations and24

Description of Operations and Summary of Significant Accounting Policies (Details)	3 Months Ended
	Mar. 31, 2017
GSK | LABA collaboration and Strategic Alliance agreements
Description of Operations and Summary of Significant Accounting Policies
Percentage of economic interest in any future payments made under the agreements	15.00%

Net Income Per Share - Basic an

Net Income Per Share - Basic and Diluted EPS (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Numerator:
Net income, basic	$ 16,845	$ 4,435
Add: Interest expense on 2023 Notes	1,407	0
Net income, diluted	$ 18,252	$ 4,435
Denominator:
Weighted-average shares used to compute basic net income per share	107,487	112,482
Dilutive effect of 2023 Notes	12,189	0
Dilutive effect of options and awards granted under equity incentive plan and employee stock purchase plan	660	696
Weighted-average shares used to compute diluted net income per share	120,336	113,178
Net income per share
Basic (in dollars per share)	$ 0.16	$ 0.04
Diluted (in dollars per share)	$ 0.15	$ 0.04

Net Income Per Share - Anti-Dil

Net Income Per Share - Anti-Dilutive Securities (Details) - shares shares in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Anti-Dilutive Securities
Anti-dilutive securities (in shares)	3,062	17,331
Equity incentive plans and ESPP
Anti-Dilutive Securities
Anti-dilutive securities (in shares)	3,062	4,427
Shares issuable upon conversion of 2023 Notes
Anti-Dilutive Securities
Anti-dilutive securities (in shares)	0	12,904

Collaborative Arrangements (Det

Collaborative Arrangements (Details) - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2014
Information related to collaborative arrangements
Less: amortization of capitalized fees paid to a related party	$ (3,456)	$ (3,456)
Royalty revenue	40,271	23,955
Strategic alliance - MABA program license	221	221
Total net revenue	40,492	24,176
GSK
Information related to collaborative arrangements
Total net revenue	40,492	24,176
Long-acting beta agonist (LABA) collaboration | GSK
Information related to collaborative arrangements
Royalties from a related party	43,727	27,411
Less: amortization of capitalized fees paid to a related party	(3,456)	(3,456)
Royalty revenue	40,271	23,955
Milestone fees paid			$ 220,000
Obligation for milestone payments	0
Long-acting beta agonist (LABA) collaboration | GSK | RELVAR/BREO
Information related to collaborative arrangements
Royalties from a related party	$ 38,689	24,287
Royalty rate for first level of annual global net sales (as a percent)	15.00%
Annual global sales level used to determine royalty rate	$ 3,000,000
Royalty rate for sales above first level of annual global net sales (as a percent)	5.00%
Long-acting beta agonist (LABA) collaboration | GSK | ANORO
Information related to collaborative arrangements
Royalties from a related party	$ 5,038	3,124
Long-acting beta agonist (LABA) collaboration | GSK | ANORO | Minimum
Information related to collaborative arrangements
Royalty rate for combination products (as a percent)	6.50%
Long-acting beta agonist (LABA) collaboration | GSK | ANORO | Maximum
Information related to collaborative arrangements
Royalty rate for combination products (as a percent)	10.00%
Strategic alliance - MABA program license | GSK
Information related to collaborative arrangements
Strategic alliance - MABA program license	$ 221	$ 221
Percentage of milestone payment	15.00%
Strategic alliance - MABA program license | GSK | Maximum
Information related to collaborative arrangements
Potential future contingent payments receivable	$ 363,000

Available-for-Sale Securities28

Available-for-Sale Securities and Fair Value Measurements - Available-for Sale Securities (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Dec. 31, 2016
Available-for Sale Securities
Amortized Cost	$ 168,826	$ 148,812
Gross Unrealized Gains	0	1
Gross Unrealized Losses	(1)	0
Estimated Fair Value	$ 168,825	148,813
Maturity period for marketable securities
Maximum contractual maturity period	1 year
Weighted average maturity	1 month
U.S. government agencies
Available-for Sale Securities
Amortized Cost	$ 6,006	12,428
Gross Unrealized Gains	0	1
Gross Unrealized Losses	(1)	0
Estimated Fair Value	6,005	12,429
U.S. commercial paper
Available-for Sale Securities
Amortized Cost	62,878	72,065
Gross Unrealized Gains	0	0
Gross Unrealized Losses	0	0
Estimated Fair Value	62,878	72,065
Money market funds
Available-for Sale Securities
Amortized Cost	99,942	64,319
Gross Unrealized Gains	0	0
Gross Unrealized Losses	0	0
Estimated Fair Value	$ 99,942	$ 64,319

Available-for-Sale Securities29

Available-for-Sale Securities and Fair Value Measurements - Fair Value Measurements (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Recurring basis
Assets
Total assets measured at estimated fair value	$ 168,825	$ 148,813
Recurring basis | U.S. government agencies
Assets
Total assets measured at estimated fair value	6,005	12,429
Recurring basis | U.S. commercial paper
Assets
Total assets measured at estimated fair value	62,878	72,065
Recurring basis | Money market funds
Assets
Total assets measured at estimated fair value	99,942	64,319
Recurring basis | Quoted Prices in Active Markets for Identical Assets, Level 1
Assets
Total assets measured at estimated fair value	99,942	64,319
Recurring basis | Quoted Prices in Active Markets for Identical Assets, Level 1 | U.S. government agencies
Assets
Total assets measured at estimated fair value	0	0
Recurring basis | Quoted Prices in Active Markets for Identical Assets, Level 1 | U.S. commercial paper
Assets
Total assets measured at estimated fair value	0	0
Recurring basis | Quoted Prices in Active Markets for Identical Assets, Level 1 | Money market funds
Assets
Total assets measured at estimated fair value	99,942	64,319
Recurring basis | Significant Other Observable Inputs, Level 2
Assets
Total assets measured at estimated fair value	68,883	84,494
Recurring basis | Significant Other Observable Inputs, Level 2 | U.S. government agencies
Assets
Total assets measured at estimated fair value	6,005	12,429
Recurring basis | Significant Other Observable Inputs, Level 2 | U.S. commercial paper
Assets
Total assets measured at estimated fair value	62,878	72,065
Recurring basis | Significant Other Observable Inputs, Level 2 | Money market funds
Assets
Total assets measured at estimated fair value	0	0
Recurring basis | Significant Unobservable Inputs, Level 3
Assets
Total assets measured at estimated fair value	0	0
Recurring basis | Significant Unobservable Inputs, Level 3 | U.S. government agencies
Assets
Total assets measured at estimated fair value	0	0
Recurring basis | Significant Unobservable Inputs, Level 3 | U.S. commercial paper
Assets
Total assets measured at estimated fair value	0	0
Recurring basis | Significant Unobservable Inputs, Level 3 | Money market funds
Assets
Total assets measured at estimated fair value	0	0
Nonrecurring basis
Liabilities
Total fair value of liabilities	715,075	689,314
Nonrecurring basis | Convertible subordinated notes due 2023
Liabilities
2023 Notes	227,248	202,125
Nonrecurring basis | Non-recourse notes due 2029
Liabilities
2029 Notes	487,827	487,189
Nonrecurring basis | Quoted Prices in Active Markets for Identical Assets, Level 1
Liabilities
Total fair value of liabilities	0	0
Nonrecurring basis | Quoted Prices in Active Markets for Identical Assets, Level 1 | Convertible subordinated notes due 2023
Liabilities
2023 Notes	0	0
Nonrecurring basis | Quoted Prices in Active Markets for Identical Assets, Level 1 | Non-recourse notes due 2029
Liabilities
2029 Notes	0	0
Nonrecurring basis | Significant Other Observable Inputs, Level 2
Liabilities
Total fair value of liabilities	715,075	689,314
Nonrecurring basis | Significant Other Observable Inputs, Level 2 | Convertible subordinated notes due 2023
Liabilities
2023 Notes	227,248	202,125
Nonrecurring basis | Significant Other Observable Inputs, Level 2 | Non-recourse notes due 2029
Liabilities
2029 Notes	487,827	487,189
Nonrecurring basis | Significant Unobservable Inputs, Level 3
Liabilities
Total fair value of liabilities	0	0
Nonrecurring basis | Significant Unobservable Inputs, Level 3 | Convertible subordinated notes due 2023
Liabilities
2023 Notes	0	0
Nonrecurring basis | Significant Unobservable Inputs, Level 3 | Non-recourse notes due 2029
Liabilities
2029 Notes	$ 0	$ 0

Capitalized Fees Paid to a Re30

Capitalized Fees Paid to a Related Party (Details) $ in Millions	3 Months Ended
	Mar. 31, 2017USD ($)
Capitalized Fees paid to a Related Party
Capitalized fees paid to a related party, useful life	15 years
GSK
Capitalized Fees paid to a Related Party
Capitalized fees paid to a related party	$ 220
Accumulated amortization of capitalized fees	$ 42.9

Stock-Based Compensation - Perf

Stock-Based Compensation - Performance-Contingent RSAs and RSUs (Details) - USD ($) $ in Millions	Jan. 17, 2017	Jan. 14, 2016	Dec. 31, 2011
TSR and Performance Measures
Stock-based compensation
Timeframe for calculation of TSR	2 years	2 years
Minimum payout of shares (in shares)	0	0
Maximum payout of shares (in shares)	406,868	328,688
Aggregate value of RSA and RSU grants	$ 3.2	$ 2
RSAs | Vesting on February 20, 2018
Stock-based compensation
Vesting percentage		66.70%
RSAs | Vesting on February 20, 2019
Stock-based compensation
Vesting percentage	66.70%	33.30%
RSAs | Vesting On February 20, 2020
Stock-based compensation
Vesting percentage	33.30%
RSUs | Vesting on February 20, 2018
Stock-based compensation
Vesting percentage		66.70%
RSUs | Vesting on November 20, 2018
Stock-based compensation
Vesting percentage		33.30%
RSUs | Vesting on February 20, 2019
Stock-based compensation
Vesting percentage	66.70%
RSUs | Vesting On November 20, 2019
Stock-based compensation
Vesting percentage	33.30%
Special Long-Term Retention and Incentive Cash Awards Program | RSAs | Performance Contingent
Stock-based compensation
Shares of common stock approved and authorized for issuance			63,000
Timeframe for achievement of performance conditions			6 years
Senior Management | RSAs | TSR and Performance Measures
Stock-based compensation
Granted (in shares)	353,508	282,394
Senior Management | RSUs | TSR and Performance Measures
Stock-based compensation
Granted (in shares)	53,360	46,294

Stock-Based Compensation - Stoc

Stock-Based Compensation - Stock-Based Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Stock-based compensation
Total stock-based compensation	$ 2,507	$ 1,864
Unrecognized Compensation Cost	17,864
Stock options
Stock-based compensation
Unrecognized Compensation Cost	750
RSUs
Stock-based compensation
Unrecognized Compensation Cost	1,488
RSAs
Stock-based compensation
Unrecognized Compensation Cost	11,558
Research and development
Stock-based compensation
Total stock-based compensation	178	175
General and administrative
Stock-based compensation
Total stock-based compensation	2,329	$ 1,689
Performance Contingent | RSAs
Stock-based compensation
Unrecognized Compensation Cost	175
Market Contingent | RSUs
Stock-based compensation
Unrecognized Compensation Cost	510
Market Contingent | RSAs
Stock-based compensation
Unrecognized Compensation Cost	$ 3,383

Debt - Summary (Details)

Debt - Summary (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Debt
Total debt	$ 720,421	$ 728,173
Unamortized debt issuance cost	(11,393)	(12,080)
Net long-term debt	702,325	708,341
Convertible subordinated notes due 2023
Debt
Total debt	240,984	240,984
Non-recourse notes due 2029
Debt
Total debt	479,437	487,189
Current portion of non-recourse notes due 2029	$ (6,703)	$ (7,752)

Debt - Convertible Subordinated

Debt - Convertible Subordinated Notes (Details) $ / shares in Units, $ in Thousands	Jan. 31, 2013USD ($)item	Mar. 31, 2017USD ($)$ / shares$ / item	Dec. 31, 2014USD ($)	Dec. 31, 2016USD ($)
Debt
Principal balance		$ 720,421		$ 728,173
Convertible subordinated notes due 2023
Debt
Loan amount	$ 287,500
Principal balance		$ 240,984		240,984
Partial conversion			$ 32,400
Repurchase amount				$ 14,100
Convertible subordinated notes due 2023 | Privately-negotiated capped call option
Debt
Proceeds from issuance of notes payable, net of debt issuance costs	281,200
Payments for capped call options	$ 36,800
Number of derivative instruments purchased | item	2
Interest rate (as a percent)	2.125%
Strike price for the underlying number of shares (in dollars per share) | $ / shares		$ 19.77
Cap price for the underlying number of shares (in dollars per share) | $ / item		27.04

Debt - Non-Recourse Notes (Deta

Debt - Non-Recourse Notes (Details) - USD ($) $ in Thousands	1 Months Ended		3 Months Ended	36 Months Ended
	May 31, 2017	Apr. 30, 2014	Mar. 31, 2017	Mar. 31, 2017	Apr. 10, 2017	Dec. 31, 2016
Debt
Principal balance			$ 720,421	$ 720,421		$ 728,173
Non-recourse notes due 2029
Debt
Principal balance			479,437	479,437		$ 487,189
Non-recourse notes due 2029 | GSK
Debt
Payment of principal			7,800	$ 14,600
Principal balance					$ 50,000
Royalty Revenue			$ 43,700
Non-recourse notes due 2029 | GSK | Future
Debt
Payment of principal	$ 6,700
Non-recourse notes due 2029 | Private Placement
Debt
Loan amount		$ 450,000
Interest rate (as a percent)		9.00%
Debt prepayment premium (as a percent)		2.50%

Shareholders' Deficit (Details)

Shareholders' Deficit (Details) $ in Millions	Mar. 31, 2017USD ($)
2017 Capital Return Plan
Share Repurchase Program
Amount approved under share repurchase program	$ 150

Income Taxes (Details)

Income Taxes (Details)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Income Taxes
Effective tax rate (as a percent)	0.10%	0.20%