Theravance Biopharma, Inc. (TBPH) FY 2021 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Management’s Discussion and Analysis (“MD&A”) is intended to facilitate an understanding of our results of operations, as well as our liquidity and capital resources. Additionally, it describes accounting policies and estimates that management has deemed as “critical accounting policies and estimates.” This MD&A should be read in conjunction with our consolidated financial statements and notes included in this Annual Report on Form 10-K. The information contained in this MD&A or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, our operating expenses, and future payments under our collaboration agreements, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Such statements are based upon current expectations that involve risks and uncertainties. You should review the section entitled “Risk Factors” in Item 1A of Part I above for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. See the section entitled “Special Note regarding Forward-Looking Statements” on page 3 for more information.

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Management Overview

Theravance Biopharma is a biopharmaceutical company primarily focused on the discovery, development and commercialization of respiratory medicines. Our core purpose is to create medicines that make a difference® in people’s lives.

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In pursuit of our purpose, we leverage decades of respiratory expertise to discover and develop transformational medicines that make a difference. These efforts have led to the development of the US FDA approved YUPELRI® (revefenacin) inhalation solution indicated for the maintenance treatment of patients with COPD. Our respiratory pipeline of internally discovered programs is targeted to address significant patient respiratory needs.

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We have an economic interest in potential future payments from GSK pursuant to our agreements with Innoviva” relating to certain programs, including TRELEGY.

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Strategic Actions to Focus on Respiratory Diseases

Given clinical results from our late-stage development programs, in September 2021, our board of directors approved a plan to focus our resources on our most promising respiratory programs and reduce the size of the Company in order to maximize shareholder value. At completion, the corporate restructuring (the “Restructuring”) will result in us reducing headcount by approximately 75%, an estimated 270 positions, through a reduction in our workforce. Approximately 75% of the total reduction in workforce occurred at the end November 2021, and the remainder will be completed at the end of February 2022.

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As a result of the Restructuring, we expect to realize estimated operating expense savings (excluding share-based compensation and any one-time restructuring, severance, and termination costs) of approximately $170.0 million. We estimate that we will incur total Restructuring and related expenses of approximately $32.0 million comprised of $17.0 million in cash expenses and $15.0 million in non-cash expenses. These expenses are primarily comprised of severance and other related costs. In 2021, we recognized $20.1 million of the Restructuring expenses comprised of $11.5 million in cash-related expenses and $8.6 million in non-cash expenses.

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We expect to recognize the majority of the remaining approximate $12.0 million in Restructuring expenses, comprised of $5.0 million in cash-related expenses and $7.0 million in non-cash expenses, in the first quarter of 2022 and the balance by the third quarter of 2022. The remaining Restructuring expense estimates are subject to a number of assumptions, and actual final amounts may differ. We may also incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with, the Restructuring.

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The go-forward organization leverages our expertise in developing and commercializing respiratory therapeutics. We intend to significantly narrow our R&D focus on our core respiratory assets, including a clinical study

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with Viatris Inc. (“Viatris”) intended to provide data to support a possible label update for YUPELRI, which would capture more of YUPELRI’s addressable market and further strengthen its competitive advantage, and investment in our inhaled Janus kinase inhibitor portfolio, with focus on our most advanced clinical candidate, nezulcitinib, initially targeting acute lung injury. We will also continue to explore strategic partnerships for both core and non-core assets to unlock value. All of these actions drive towards our goal to maximize shareholder value.

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After implementing these strategic actions, we plan to become sustainably cash flow positive beginning in the second half of 2022, and we will work to optimize our capital structure in order to maximize total shareholder returns.

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Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with US Generally Accepted Accounting Principles (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities, and other related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The extent to which the COVID-19 pandemic will continue to directly or indirectly impact our business, results of operations and financial condition, including these estimates, will depend on future developments that are highly uncertain and may be impacted by the emergence of new information concerning the COVID-19 pandemic, ongoing spread of the disease across the US and the globe, and the actions taken to contain or treat the disease, including vaccine availability, distribution, acceptance and effectiveness. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies and estimates discussed below are essential to understanding our operating results and financial condition, as these policies and estimates relate to the more significant areas involving management’s judgments.

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Revenue Recognition

We recognize revenue under Accounting Standards Codification (“ASC”), Topic 606, Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, an entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

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At contract inception, once the contract is determined to be within the scope of ASC 606, we identify the performance obligations in the contract by assessing whether the goods or services promised within each contract are distinct. We then recognize revenue for the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

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Collaborative Arrangements under ASC 606

We enter into collaborative arrangements with partners that fall under the scope of Accounting Standards Codification, Topic 808, Collaborative Arrangements (“ASC 808”). While these arrangements are in the scope of ASC 808, we may analogize to ASC 606 for some aspects of these arrangements. We analogize to ASC 606 for certain activities within collaborative arrangements for the delivery of a good or service (i.e., a unit of account) that is part of our ongoing major or central operations. Revenue recognized by analogizing to ASC 606 is recorded as “collaboration revenue” or “licensing revenue” whereas, revenue recognized in accordance with ASC 808 is recorded on a separate collaboration revenue line on the consolidated statements of operations.

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The terms of our collaborative arrangements typically include one or more of the following: (i) up-front fees; (ii) milestone payments related to the achievement of development, regulatory, or commercial goals; (iii) royalties on net sales of licensed products; (iv) reimbursements or cost-sharing of research and development expenses; and (v) profit/loss sharing arising from co-promotion arrangements. Each of these payments results in collaboration revenues or an offset

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against research and development expense. Where a portion of non-refundable up-front fees or other payments received is allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as collaboration revenue when (or as) the underlying performance obligation is satisfied.

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As part of the accounting for these arrangements, we must develop estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligations. The estimation of the stand-alone selling price may include such estimates as, forecasted revenues or costs, development timelines, discount rates and probabilities of technical and regulatory success. We evaluate each performance obligation to determine if they can be satisfied at a point in time or over time, and we measure the services delivered to our collaborative partner which are periodically reviewed based on the progress of the related program. The effect of any change made to an estimated input component and, therefore revenue or expense recognized, would be recorded as a change in estimate. In addition, variable consideration (e.g., milestone payments) must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

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Up-front Fees: If a license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize collaboration revenues from the transaction price allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing collaboration revenue from the allocated transaction price. For example, when we receive up-front fees for the performance of research and development services, or when research and development services are not considered to be distinct from a license, we recognize collaboration revenue for those units of account over time using a measure of progress. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue or expense recognition as a change in estimate.

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Milestone Payments: At the inception of each arrangement that includes milestone payments (variable consideration), we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our or the collaborative partner’s control, such as non-operational developmental and regulatory approvals, are generally not considered probable of being achieved until those approvals are received. At the end of each reporting period, we re-evaluate the probability of achievement of milestones that are within our or the collaborative partner’s control, such as operational developmental milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenues and earnings in the period of adjustment. Revisions to our estimate of the transaction price may also result in negative collaboration revenues and earnings in the period of adjustment.

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Royalties: For arrangements that include sales-based royalties, including commercial milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). Our income earned related to TRELEGY sales is included within “income from our investment in TRC, LLC” on the consolidated statements of operations.

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Reimbursement, cost-sharing and profit-sharing payments: Under certain collaborative arrangements, we have been reimbursed for a portion of our research and development expenses or participate in the cost-sharing of such research and development expenses. Such reimbursements and cost-sharing arrangements have been reflected as a reduction of research and development expense in our consolidated statements of operations, as we do not consider performing research and development services for reimbursement to be a part of our ongoing major or central operations.

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Research and Development Expenses

We incur substantial expenses associated with our clinical trials. Accounting for clinical trials relating to activities performed by clinical research organizations (“CROs”), contract manufacturing organizations (“CMOs”) and other external vendors requires management to exercise significant estimates in regard to the timing and accounting for these expenses. We estimate costs of research and development activities conducted by service providers, which include, the conduct of sponsored research, preclinical studies, and contract manufacturing activities. The diverse nature of services being provided under CRO and other arrangements, the different compensation arrangements that exist for each type of service and the lack of timely information related to certain clinical activities complicates the estimation of accruals for services rendered by CROs, CMOs and other vendors in connection with clinical trials.

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Research and development (“R&D”) expenses are recorded in the period that services are rendered or goods are received. R&D expenses consist of salaries and benefits, laboratory supplies and facility costs, as well as fees paid to third parties that conduct certain R&D activities on our behalf, net of certain external R&D expenses reimbursed under our collaborative arrangements.

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As part of the process of preparing our consolidated financial statements, we are required to estimate and accrue certain R&D expenses. This process involves the following:

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Examples of estimated R&D expenses that we accrue include:

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We base our expense accruals related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical studies on our behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors, such as the successful enrollment of patients and the completion of clinical study milestones. Our service providers typically invoice us monthly in arrears for services performed. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.

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To date, we have not experienced significant changes in our estimates of accrued R&D expenses after a reporting period. However, due to the nature of estimates, there is no assurance that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical studies and other R&D activities. Such changes in estimates will be recognized as R&D expenses in the period that the change in estimate occurs.

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Theravance Respiratory Company, LLC (“TRC”)

Through our 85% equity interest in TRC, we are 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.

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We analyzed our ownership, contractual and other interests in TRC to determine if TRC is a variable-interest entity (“VIE”), whether we have a variable interest in TRC and the nature and extent of that interest. We 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, we also assessed whether we are the primary beneficiary of TRC based on the power to direct its activities that most significantly impact its economic performance and our obligation to absorb its losses or the right to receive benefits from it that could potentially be significant to TRC. Based on our assessment, we determined that we are not the primary beneficiary of TRC, and, as a result, we do not consolidate TRC in our consolidated financial statements. TRC is recognized in our consolidated financial statements under the equity method of accounting.

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Income related to our equity ownership of TRC is reflected within our consolidated statements of operations and is classified as non-operating income. Amounts due from TRC that we believe to be collectable within one year and our equity in the net assets of TRC are reflected on our consolidated balance sheets as a current asset and a non-current asset, respectively. The portion of the Non-Recourse 2035 Notes classified as a current liability, if any, is based on the amount of royalties received, or receivable, as of December 31, 2021, that are expected to be collected from TRC and used to make a principal repayment on the Non-Recourse 2035 Notes within the next twelve months. The determination of the amounts likely to be received from TRC within the next twelve months requires significant judgement due to the significant variability of the amounts paid to the Company, as compared to the royalties due. Consequently, the actual amount paid to the holders of the 2035 Notes within twelve months of the reporting date may differ significantly from that recorded in the consolidated balance sheets.

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Income Taxes

We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are anticipated to be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

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Our total unrecognized tax benefits of $75.0 million and $63.4 million, as of December 31, 2021 and December 31, 2020, respectively, may reduce the effective tax rate in the period of recognition. We currently have a full valuation allowance against our deferred tax assets, which would impact the timing of the effective tax rate benefit should any of our uncertain positions be favorably settled in the future.

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We assess all material positions, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether the factors underlying the sustainability assertion have changed and whether the amount of the recognized tax benefit is still appropriate.

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The recognition and measurement of tax benefits requires significant judgment. We have taken certain positions where we believe that our position is greater than 50% likely to be realized upon ultimate settlement and for which no reserve for uncertain tax positions has been recorded. If we do not ultimately realize the expected benefit of these positions, we will record additional income tax expenses in future periods. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

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Any tax levied or credited by a governmental taxing authority that is not based on our income is outside the scope of accounting for income taxes. Therefore, we record such items as a component in our loss before income taxes.

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Results of Operations

The following tables set forth our results of operations for the periods presented. Management’s commentary for the 2021 results compared to 2020 results are presented in the paragraphs below, and management’s commentary for the 2020 results compared to the 2019 results are included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 26, 2021.

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Revenue

Revenue, as compared to the prior years, was as follows:

NM: Not Meaningful

Collaboration revenue was $11.5 million in 2021, which represented a $15.0 million decrease from 2020. Collaboration revenue was primarily comprised of revenue recognized related to the $100.0 million upfront payment received in 2018 pursuant to the Janssen collaboration agreement that was entered into in February 2018. Janssen collaboration revenue is recognized for the R&D services we performed during the period based on a measure of our efforts toward satisfying the performance obligation relative to the total expected efforts or inputs to satisfy the performance obligation (e.g., costs incurred compared to total budgeted costs). The $15.0 million decrease in collaboration revenue compared to 2020 reflects the reduction of costs incurred to satisfy the remaining performance obligation related to the recently completed izencitinib Phase 2 study in ulcerative colitis and the closeout of the izencitinib Phase 2 study in Crohn’s disease. As of December 31, 2021, we have recognized all of the revenue associated with the Janssen $100.0 million upfront payment.

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Licensing revenue was $1.5 million in 2020 and was attributable to the achievement of a milestone related to the acceptance of a clinical trial application associated with our agreement with Viatris to develop and commercialize nebulized revefenacin in China and adjacent territories. We did not recognize any licensing revenue in 2021.

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We are entitled to a share of US profits and losses (65% to Viatris; 35% to Theravance Biopharma) received in connection with commercialization of YUPELRI. In accordance with the applicable accounting guidance, amounts receivable from Viatris in connection with the commercialization of YUPELRI are recorded within the consolidated statements of operations as revenue from “Viatris collaboration agreement” irrespective of whether the overall collaboration is profitable. Amounts payable to Viatris in connection with the commercialization of YUPELRI, if any, are recorded within the consolidated statements of operations as a collaboration loss within selling, general and administrative expenses. Any reimbursement from Viatris attributed to the 65% cost-sharing of our R&D expenses is characterized as a reduction of R&D expense, as we do not consider performing R&D services for reimbursement to be a part of our ordinary operations.

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In 2021 and 2020, we recognized $43.8 million and $43.9 million, respectively, in revenue from the Viatris collaboration agreement, which represented the receivables due from Viatris related to YUPELRI. While Viatris records the total net sales of YUPELRI within its own financial statements, Viatris collaboration agreement revenue in our financial statements includes our implied 35% share of net sales of YUPELRI for 2021 and 2020 of $56.7 million and $50.0 million, respectively. While institutions in some parts of the country are allowing more in-person access, in-person engagements remain below pre-pandemic levels. Total 2021 prescription volumes continue to grow across most specialties with volumes heading toward parity with 2020. However, prescription volumes in pulmonology remain

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below pre-pandemic levels. Despite the challenges of the respiratory pandemic, dose demand for YUPELRI increased 25% in 2021 compared to 2020.

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Research and Development

Our R&D expenses consist primarily of employee-related costs, external costs, and various allocable expenses. We budget total R&D expenses on an internal department level basis, and we manage and report our R&D activities across the following four cost categories:

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The following table summarizes our R&D expenses incurred, net of any reimbursements from collaboration partners, as compared to the prior years:

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R&D expenses decreased by $67.3 million in 2021 compared to 2020, and the decrease was across all R&D categories. External-related expenses decreased by $44.9 million and was the largest contributor to the total R&D expense decrease. The decrease in external-related expenses was primarily due to the completion, or-near completion, of our late-stage clinical programs, primarily izencitinib and ampreloxetine. The decreases across the remaining R&D categories were primarily due to the Restructuring announced in September 2021 which resulted in significant reductions in employee-related expenses, share-based compensation expenses, and other allocated expenses of $11.9 million, $5.7 million, and $4.8 million, respectively. The reduction in employee-related expenses was primarily due to the reversal of the annual corporate bonus, and the reduction in share-based compensation was primarily due to a reduction in employee headcount. The reduction in other allocated expenses was primarily due to the decrease in allocated overhead costs from selling, general, and administrative expenses due to the Restructuring. Expenses that were directly attributed to the Restructuring are included in the Restructuring and Related Expenses section below.

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Under certain of our collaborative arrangements, we receive partial reimbursement of employee-related costs and external costs, which have been reflected as a reduction of R&D expenses of $7.9 million, $10.1 million and $5.6 million for 2021, 2020, and 2019, respectively.

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As a result of the Restructuring and our focus on our respiratory programs, we expect R&D expenses to continue to decrease over the next 12 months.

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Selling, General and Administrative

Selling, general and administrative expenses, as compared to the prior years, were as follows:

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Selling, general and administrative expenses decreased by $9.4 million in 2021 compared to 2020. The $9.4 million decrease was primarily attributed to the Restructuring and resulted in reductions in employee-related expenses, share-based compensation expenses, and external-related services. The decrease in employee-related expenses was primarily due to the reversal of the annual corporate bonus, and the reduction in share-based compensation was primarily due to a reduction in employee headcount. The decrease in external-related expenses was primarily due to a reduction in expenses related to the Restructuring. Expenses that were directly attributed to the Restructuring are included in the Restructuring and Related Expenses section below.

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Share-based compensation expense related to selling, general and administrative expenses was $28.1 million, $31.7 million, and $31.5 million, in 2021, 2020, and 2019, respectively.

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Through June 2021, we leased approximately 170,000 square feet of office and laboratory space in two buildings in South San Francisco, California, under a non-cancelable operating lease that ends in May 2030. In July 2021, we terminated approximately 8,000 square feet of office space in one of the buildings and returned the space to the building’s landlord for their use. We determined that the termination would be accounted for as a lease modification under the applicable accounting guidance. As a result of the modification, we adjusted the value of our operating lease assets and liabilities in our consolidated balance sheets that resulted in a gain of $1.9 million in 2021. The $1.9 million gain was offset against facility expenses within selling, general and administrative expenses and then partially allocated to R&D expenses above.

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Effective October 2021, we also subleased approximately 21,000 square feet of our South San Francisco office and laboratory space. Under the terms of the sublease agreement, the Company will receive an initial monthly base rent of $0.1 million, with annual base rent increases of 3%, and the subtenant’s proportionate share of the building’s operating expenses. In October 2021, we began recognizing the sublease income on a straight-line basis over the term of the sublease which ends in September 2028. The sublease income was be reflected as a reduction facility expenses within selling, general and administrative expenses and then partially allocated to R&D expenses above.

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As a result of the Restructuring, we expect our selling, general and administrative expenses to significantly decrease over the next 12 months.

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Restructuring and Related Expenses

Restructuring and related expenses, as compared to the prior years, were as follows:

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NM: Not Meaningful

Of the total $20.1 million in Restructuring and related expenses recognized in 2021, $10.5 million was related to R&D expenses and $9.6 million was related to selling, general and administrative expenses. The Restructuring and related expenses were primarily comprised of one-time severance payments, employee-related separation costs, retention costs, and other Restructuring-related expenses. The $20.1 million also included non-cash charges of $8.6 million

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primarily related to the modification of equity awards for employees affected by the Restructuring and certain related awards for other employees.

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We estimate that we will incur total Restructuring and related expenses of approximately $32.0 million comprised of $17.0 million in cash expenses associated with employee termination benefits and related costs and $15.0 million in non-cash expenses relating to the acceleration of equity-awards for employees affected by the Restructuring. We expect to recognize the majority of the remaining approximate $12.0 million in Restructuring and related expenses, comprised of $5.0 million in cash-related expenses and $7.0 million in non-cash expenses, in the first quarter of 2022 and the balance by the third quarter of 2022. The remaining Restructuring expense estimates are subject to a number of assumptions, and actual final amounts may differ. We may also incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with, the Restructuring.

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We are also evaluated the impact of the Restructuring on the carrying value of our long-lived assets, such as property and equipment and operating lease assets. This process included evaluating the estimated remaining lives, significant changes in the use, and potential impairment charges related to our long-lived assets. Based on our evaluation, we determined that our long-lived assets were not impaired as of December 31, 2021, and we did not recognize any impairment charges related to the long-lived assets in 2021. However, we may incur additional costs not currently contemplated due to events that may occur because of, or that are associated with, the Restructuring.

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Income from Investment in TRC, LLC

Income from investment in TRC, as compared to the prior years, was as follows:

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The income from investment in TRC, LLC represented our share of the royalty payments from GSK to TRC on the net sales of TRELEGY (net of our share 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).

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Income from investment in TRC, LLC increased by $35.5 million in 2021 compared to 2020 which included $8.5 million representing our share of the one-time fee that GSK paid to TRC upon termination of the MABA program in June 2020. The $104.0 million and $68.4 million in TRC income for 2021 and 2020, respectively, were recorded net of our share of TRC expenses of $3.4 million and $2.2 million, respectively. Our share of TRC expenses for both years were primarily comprised of TRC’s legal and related expenses associated with the arbitration between Innoviva and TRC and us.

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In connection with the issuance of our $380.0 million net principal amount Non-Recourse 2035 Notes in February 2020, 75% of the income from our investment in TRC is available only for payment of the Non-Recourse 2035 Notes and is not available to pay other creditor obligations or claims.

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See “Risk Factors—We do not control the commercialization of TRELEGY and we do not control TRC; accordingly the amount of royalties we receive will depend on, among other factors, GSK’s ability to further commercialize TRELEGY and TRC’s decisions concerning use of cash in accordance with the TRC LLC Agreement” for additional information regarding our economic interest in TRC, LLC.

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Interest Expense

Interest expense primarily consisted of interest payments due on the Convertible Senior 2023 Notes, the redeemed Non-Recourse 2033 Notes, and the Non-Recourse 2035 Notes, as well as, the amortization of the associated debt issuance costs. Interest expense, as compared to the prior year, was as follows:

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NM: Not Meaningful

Interest expense increased by $2.3 million in 2021 compared to 2020 The $2.3 million increase was primarily attributed to additional interest expense incurred in 2021 related to an increase in principal balance of the Non-Recourse 2035 Notes. The increase in principal balance resulted from the February 2020 re-financing of the Non-Recourse 2033 Notes and interest payment shortfalls added to the principal balance as of the applicable interest payment dates.

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Loss on Extinguishment of Debt

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Loss on extinguishment of debt as compared to the comparable periods in the prior year, was as follows:

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NM: Not Meaningful

In 2020, we recognized a $15.5 million loss on the extinguishment of debt related to the issuance of the Non-Recourse 2035 Notes in February 2020. A portion of the proceeds from the Non-Recourse 2035 Notes were used to repay the outstanding balance of the Non-Recourse 2033 Notes that were issued in November 2018. The $15.5 million loss was comprised of a redemption premium related to the early repayment of the Non-Recourse 2033 Notes and the write-off of the previously deferred debt issuance costs related to the portion of the Non-Recourse 2033 Notes that was considered extinguished.

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Interest and Other Income (Expense), net

Interest and other income (expense), net, as compared to the prior years, was as follows:

NM: Not Meaningful

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Interest and other income (expense), net, decreased by $1.7 million in 2021 compared to 2020. The decrease was primarily due to higher investment balances in 2020 following the issuance of the Non-Recourse 2035 Notes in February 2020, lower investment yields in 2021, and an increase in foreign currency losses in 2021.

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In June 2020, GSK completed its previously announced offering of $300.0 million of exchangeable senior notes due 2023, $280.3 million of which are exchangeable into our ordinary shares that are held by GSK and its affiliates for investment purposes. The $1.6 million in costs were primarily comprised of financial advisory and legal-related costs incurred by us in connection with the GSK offering.

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Provision for Income Tax Benefit

The provision for income tax benefit, as compared to the prior years, was as follows:

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The benefits for income tax were primarily due to the reversals of previously accrued contingent liabilities for uncertain tax positions due to a lapse of the statute of limitations. The $8.4 million decrease in income tax benefit in 2021 compared to 2020 was primarily due to a lower estimate of the uncertain tax positions taken with respect to transfer pricing and tax credits in comparison to 2020. Our provision for income tax expense differs from the expected statutory rate due to the valuation allowance on deferred tax assets.

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We are currently under Internal Revenue Service (“IRS”) examination for the tax year ended December 31, 2018. We believe that an adequate provision has been made for any adjustments that may result from the tax examination.

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Liquidity and Capital Resources

As of December 31, 2021, we had approximately $173.5 million in cash, cash equivalents, and investments in marketable securities (excluding restricted cash). To date, we have financed our operations primarily through public offerings of equity securities, private placements of equity and debt, revenue from collaboration and licensing arrangements and, to a lesser extent, revenue from product sales. As of December 31, 2021, we had outstanding (i) $230.0 million in principal Convertible Senior 2023 Notes and (ii) $392.6 million in principal Non-Recourse 2035 Notes which are stated net of a 5.0% retention by us in compliance with Regulation RR — Credit Risk Retention (17 C.F.R. Part 246).

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The Non-Recourse 2035 Notes were issued on February 28, 2020 and are secured by all of the Triple Royalty Sub II LLC’s (the “Issuer II”) rights, title and interest as a holder of the Issuer II Class C Units in TRC. The primary source of funds to make payments on the Non-Recourse 2035 Notes is the 63.75% economic interest of the Issuer (evidenced by the Issuer II Class C Units) in any future payments that may be made by GSK to TRC under the strategic alliance agreement and under the portion of the collaboration agreement assigned to TRC by Innoviva (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) relating to the GSK-Partnered Respiratory Programs, including the Trelegy program. As a result, the holders of the Non-Recourse 2035 Notes have no recourse against Theravance Biopharma even if the TRELEGY payments are insufficient to cover the principal and interest payments for the Non-Recourse 2035 Notes. Prior to and including the December 5, 2024 payment date, in the event that the distributions received by the Issuer II from TRC in a quarter is less than the interest accrued for that quarter, the principal amount of the Non-Recourse 2035 Notes will increase by the interest shortfall amount for that quarter. While the holders of the Non-Recourse 2035 Notes have no recourse against Theravance Biopharma, the terms of the Non-Recourse 2035 Notes also provide that Theravance Biopharma, at its option, may satisfy the quarterly interest payment obligations by making a capital contribution to the Issuer II.

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A portion of the proceeds from the Non-Recourse 2035 Notes issuance were used to repay, in full, the remaining outstanding balance of the Non-Recourse 2033 Notes, as well as, a 5% premium on the early redemption of

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the Non-Recourse 2033 Notes. The Non-Recourse 2033 Notes were issued in November 2018 and were structured similarly to the Non-Recourse 2035 Notes.

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On June 29, 2021, we sold 6,700,000 ordinary shares at a price to the public of $15.00 per share (the “Shares”). Under the terms of the underwriting agreement, on June 29, 2021, the underwriters also exercised a 30-day option to purchase an additional 1,005,000 ordinary shares for a total of 7,705,000 ordinary shares sold. The total gross proceeds from the offering were $115.6 million, before deducting underwriting discounts and commissions and offering expenses. The Shares were issued pursuant to our currently effective shelf registration statement on Form S-3, which became effective automatically on December 3, 2019, and a prospectus supplement filed with the SEC in connection with the offering.

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Corporate Restructuring

On September 15, 2021, we announced the Restructuring to focus our capital resources on our respiratory programs, resulting in an approximate 75% reduction in workforce to significantly reduce operational costs and preserve capital. Approximately 75% of the total reduction in workforce occurred at the end of November 2021, and the remainder will be completed at the end of February 2022. In 2021, we recognized $20.1 million of the Restructuring and related expenses comprised of $11.5 million in cash-related expenses and $8.6 million in non-cash expenses. We estimate that we will incur total Restructuring and related expenses of approximately $32.0 million comprised of $17.0 million in cash expenses associated with employee termination benefits and related costs and $15.0 million in non-cash expenses relating to the acceleration of equity-awards for employees affected by the Restructuring and certain related awards for other employees. We expect to recognize the majority of the remaining approximate $12.0 million in Restructuring and related expenses, comprised of $5.0 million in cash-related expenses and $7.0 million in non-cash expenses, in the first quarter of 2022 and the balance by the third quarter of 2022.

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As a result of the Restructuring, we expect to realize estimated operating expense savings (excluding share-based compensation and any one-time restructuring, severance, and termination costs) of approximately $170.0 million. We expect to be sustainably cash flow positive beginning in the second half of 2022 primarily achieved through our reduced cash expenditures in light of the Restructuring and the focus on our respiratory assets. These estimates are subject to a number of assumptions, and actual results may differ. We may also incur additional costs not currently contemplated due to events that may occur because of, or that are associated with, the Restructuring.

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Despite expected expense savings from the Restructuring, we may continue to incur net losses over the next several years due to expenditures relating to our continuing respiratory drug discovery efforts and preclinical and clinical development of our current respiratory product candidates. In particular, to the extent we advance our respiratory product candidates into and through later-stage clinical studies without a partner, we may incur substantial expenses. In addition, we may invest strategically in our research efforts to continue to grow our respiratory development pipeline. In the past, we have received a number of significant payments from collaboration agreements and other significant transactions. In the future, we may continue to receive potential substantial payments from future collaboration transactions if the drug candidates in our pipeline achieve positive clinical or regulatory outcomes or if our product candidates are approved and meet certain milestones.

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Our new strategic business plan is subject to significant uncertainties and risks as a result of, among other factors, the COVID-19 pandemic, clinical program outcomes, whether, when and on what terms we are able to enter into new collaboration arrangements, expenses being higher than anticipated, the sales levels of our approved products, unplanned expenses, cash receipts being lower than anticipated, and the need to satisfy contingent liabilities, including litigation matters and indemnification obligations.

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Adequacy of cash resources to meet future needs

We expect our cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least the next twelve months from the date of issuance of this Annual Report on Form 10-K based on current operating plans and financial forecasts. We plan to be sustainably cash flow positive beginning in the second half of 2022 primarily driven by our Restructuring and forecasted revenues and royalties generated by YUPELRI and TRELEGY net sales.

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As needed, we may seek to obtain additional financing in the form of public or private equity offerings, debt financing or additional collaborations and licensing arrangements. However, future financing may not be available in amounts or on terms acceptable to us.

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Without adequate financial resources to fund our expected future operations, we may be required to relinquish rights to our technologies, product candidates or territories, or grant licenses on terms that are not favorable to us, in order to raise additional funds through collaborations or licensing arrangements. We may also have to sequence preclinical and clinical studies as opposed to conducting them concomitantly in order to conserve resources, or, as we have recently announced in September 2021, we may need to delay, reduce or eliminate one or more of our research or development programs and reduce overall overhead expenses. In addition, we may have to make further reductions in our workforce and may be prevented from continuing our discovery, development and commercialization efforts and exploiting other corporate opportunities.

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Cash Flows

Cash flows, as compared to the prior years, were as follows:

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Net cash flows used in operating activities

Net cash used in operating activities was $207.9 million in 2021, consisting of a net loss of $199.4 million, a net increase in cash resulting from adjustments for non-cash and other reconciling items of $31.2 million and a net decrease in cash resulting from changes in operating assets and liabilities of $39.6 million.

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Net cash used in operating activities was $250.4 million in 2020, consisting primarily of a net loss of $278.0 million, a net increase in cash resulting from adjustments for total non-cash and other reconciling items of $67.1 million and a net decrease in cash resulting from changes in operating assets and liabilities of $39.5 million.

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Net cash flows provided by (used in) investing activities

Net cash provided by investing activities was $124.5 million in 2021, consisting primarily of cash inflows from the net purchase and maturities of marketable securities of $127.9 million and partially offset by $3.4 million used for the purchase of property and equipment.

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Net cash provided by investing activities was $10.7 million in 2020 and was primarily attributed the proceeds from the sales of marketable securities of $19.9 million which was partially offset by $6.6 million related to the purchase of property and equipment and $2.7 million in cash outflows resulting from net purchases and maturities of marketable securities.

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Net cash flows provided by financing activities

Net cash provided by financing activities was $91.9 million in 2021, consisting of the sale of 7,705,000 ordinary shares for total net proceeds of $108.2 million and $3.5 million in proceeds from ESPP and share option purchases. These proceeds were partially offset by $10.7 million in principal payments on the Non-Recourse 2035 Notes and $9.1 million related to the repurchase of shares to satisfy tax withholding obligations.

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Net cash provided by financing activities was $263.1 million in 2020, consisting primarily of the sale of 5,500,000 ordinary shares for total net proceeds of $139.9 million and the issuance of our Non-Recourse 2035 Notes for

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total net proceeds of $374.7 million. A portion of the of the Non-Recourse 2035 Notes proceeds were used to repay, in full, the remaining $235.3 million outstanding balance of our Non-Recourse 2033 Notes and an $11.5 million redemption premium related to the payoff of the Non-Recourse 2033 Notes. In addition to the above, net cash provided by financing activities was partially offset by the repurchase of shares to satisfy tax withholding obligations in the amount of $9.7 million.

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Contractual Obligations

In the table below, we set forth our significant contractual obligations, as well as obligations related to contracts that we are likely to continue, regardless of the fact that some were cancelable as of December 31, 2021. Some of the amounts that we include in this table are based on management’s estimate and assumptions about these obligations, including their duration. Because these estimates and assumptions are necessarily subjective, the amount of the obligations that we will pay in future periods may vary from those reflected in the table.

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Commitments and Contingencies

We indemnify our officers and directors for certain events or occurrences, subject to certain limits. We maintain insurance policies that may limit our exposure, and therefore, we believe the fair value of these indemnification agreements is minimal. Accordingly, we have not recognized any liabilities relating to these agreements as of December 31, 2021. However, no assurances can be given regarding the amounts that may ultimately be covered by the insurers, and we may incur substantial liabilities because of these indemnification obligations.

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Performance-Contingent Awards

We periodically grant performance-contingent awards to our employees. For the year ended December 31, 2021, we recognized $0.8 million of aggregate share-based compensation expense and $0.4 million in cash bonus expense related to these types of awards. As of December 31, 2021, the maximum remaining expense related to

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outstanding performance-contingent awards was $2.9 million which had performance expiration dates through December 2025.

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Recent Accounting Pronouncements

The information required by this item is included in “Item 8, Note 1. Organization and Summary of Significant Accounting Policies,” in our consolidated financial statements included in this Annual Report on Form 10-K.