Theravance Biopharma, Inc. (TBPH) FY 2022 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, Inc. (“we,” “our,” “Theravance Biopharma” or the “Company”) is a biopharmaceutical company primarily focused on the discovery, development, and commercialization of 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 expertise, which has led to the development of FDA approved YUPELRI® (revefenacin) inhalation solution indicated for the maintenance treatment of patients with chronic obstructive pulmonary disease (“COPD”). Our pipeline of internally discovered programs is targeted to address significant unmet patient needs.

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Sale of Theravance Respiratory Company, LLC

On July 20, 2022, we completed the sale of all of our equity interests in Theravance Respiratory Company, LLC (“TRC”) representing our 85% economic interest in the sales-based royalty rights on worldwide net sales of GSK's TRELEGY ELLIPTA (“TRELEGY”) to Royalty Pharma Investments 2019 ICAV (“Royalty Pharma”) for over $1.5 billion in potential total value (the “TRELEGY Royalty Transaction”). The TRELEGY Royalty Transaction is intended to provide us near-, mid- and long-term value with (i) an upfront cash payment of approximately $1.1 billion received on July 20, 2022, (ii) up to $250.0 million in additional milestone payments contingent on the achievement of certain TRELEGY net sales thresholds between 2023 and 2026 and (iii) outer year royalties.

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Debt Paydown and Capital Return Program

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Immediately after announcing the TRELEGY Royalty Transaction, we initiated a multi-step process to eliminate our outstanding debt and return capital to shareholders. The first step in this process was the repayment of our 9.5% non-recourse TRELEGY notes due 2035 for approximately $420.0 million, which was completed on July 20, 2022. The second step of the process was a tender offer to retire $230.0 million in principal amount of our 3.25% convertible senior notes due 2023, at par, which was completed on August 25, 2022. Following the completion of our debt paydown, our board of directors authorized $250.0 million capital return program consisting of three elements as summarized below:

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GSK Share Repurchase

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On September 20, 2022, we completed a share repurchase transaction of 9,644,807 of our ordinary shares from GSK Finance (No.3) plc (“GSK Finance”), representing all of the shares owned by GSK Finance or its affiliates. The purchase price under the Share Repurchase Agreement was $9.75 per share, resulting in a total consideration of $94.0 million.

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Modified Dutch Auction Tender Offer

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On November 22, 2022, we completed our “modified Dutch auction” tender offer (the “Offer”) to purchase up to $95.0 million of our ordinary shares, at a purchase price not greater than $10.50 nor less than $9.75 per share, in cash, less any applicable withholding taxes and without interest. A "modified Dutch auction" tender offer allows shareholders to indicate how many shares and at what price or within the range described above they wish to tender their shares. Based on the number of shares tendered and the prices specified by the tendering shareholders, we determined the lowest per-share price that enabled us to purchase all of the shares that were validly tendered. All shares accepted in the Offer were purchased at the same price even if tendered at a lower price.

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We accepted a total of 115,967 ordinary shares at a price of $10.50 per share, for an aggregate cost of $1.2 million, excluding fees and expenses relating to the Offer. The total of 115,967 ordinary shares that we accepted for purchase represented approximately 0.2% of the total number of ordinary shares outstanding as of November 21, 2022. We intend to use the unused portion of the Offer to enlarge our previously announced, planned open market share repurchase plan which is described below.

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Open Market Share Repurchase Plan

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On December 13, 2022, we initiated our open market repurchase plan. As of February 27, 2023, we repurchased 5,439,341 shares on the open market at an average cost of $11.03 per share for an aggregate cost of $60.0 million, excluding fees and expenses.

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2021- 2022 Corporate Restructuring Completion

As previously announced in September 2021, our board of directors approved a plan to focus our resources on our most promising programs and reduce the size of the Company in order to maximize shareholder value. The corporate restructuring (the “Restructuring”) resulted in us reducing headcount by approximately 75%. A majority of the total reduction in workforce occurred at the end of November 2021, and the remainder was completed at the end of February 2022. Since the Restructuring was announced and through its completion in the third quarter of 2022, we incurred $33.0 million in Restructuring and related expenses, which was consistent with our expectations.

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As a result of the Restructuring and reduction in workforce, in May 2022, we assigned our Dublin, Ireland, office lease to an unaffiliated company and moved into a smaller office in Dublin, which we estimate will result in approximately $1.4 million cumulative cash savings through March 2027, or approximately $0.3 million annually. In addition, in June 2022, we subleased approximately 78,000 square feet of our South San Francisco office and laboratory space to an unaffiliated company. As a result of the sublease, we expect to realize cumulative cash savings of approximately $52.7 million through May 2030, or approximately $6.7 million annually.

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2023 Strategic Actions

On February 27, 2023, we announced additional strategic actions to sharpen the Company’s focus and deliver on its commitment to create shareholder value:

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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 uncertain and may be impacted by the emergence of new information concerning the COVID-19 pandemic, new variants or sub-variants of the COVID-19 virus, and the actions taken to manage 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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Future Contingent Milestone and Royalty Assets

The fair value of consideration received in connection with TRELEGY Royalty Transaction in July 2022 included an estimated $194.2 million in future contingent milestone and royalties that was recorded as a contingent consideration asset (“Contingent Consideration”) on our consolidated balance sheets on the transaction date. The Contingent Consideration was initially measured at fair value utilizing a Monte Carlo simulation model to calculate the present value of the risk-adjusted cash flows estimated to be received from the Contingent Consideration. The fair value model involved significant unobservable inputs derived using our estimates. Our estimates were based in part on external data and reflected our judgements and forecasts. The primary significant unobservable input was the estimate of forecasted TRELEGY net revenues which is considered a Level 3 fair value input. We periodically reassess the carrying value of the Contingent Consideration when indicators of impairment are identified, and we will recognize an impairment loss if the carry value materially exceeds the reassessed fair value. We recognize any increases in the carrying value of the Contingent Consideration only when such contingent gains are realized.

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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 2022 results compared to 2021 results are presented in the paragraphs below, and management’s commentary for the 2021 results compared to the 2020 results are included in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022.

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Revenue

Our implied 35% YUPELRI revenue, as compared to the prior years, was as follows:

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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 aggregate net sales of YUPELRI of $70.7 million and $56.7 million for 2022 and 2021, respectively, which represented increases of 25% and 13% over the respective prior year periods. However, under applicable accounting guidance, our Viatris collaboration agreement revenue increased by only 11% in 2022 (see table below). This increase was due to overall lower costs incurred by

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Theravance Biopharma as a result of the Restructuring, which improved YUPELRI profitability, but lowered our Viatris collaboration agreement revenue. Additionally, there were higher costs incurred by Viatris in 2022, which also reduced our Viatris collaboration agreement revenue.

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Our recognized revenue, as compared to the prior years, was as follows:

NM: Not Meaningful

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 2022 and 2021, we recognized $48.6 million and $43.8 million, respectively, in revenue from the Viatris collaboration agreement, which represented the receivables due from Viatris related to YUPELRI. In addition to a 11% increase in revenue over the period, YUPELRI continued to increase its share of the long-acting nebulized COPD market and continued to be profitable for us on a brand basis. In the fourth quarter of 2022, we recognized our first revenue associated with non-US YUPELRI royalties in the amount of $30,000.

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Our other collaboration revenue was $0.2 million in 2022, which represented a $11.3 million decrease from 2021. The decrease was primarily due to the full recognition of the remaining non-cash Janssen collaboration revenue in the fourth quarter of 2021 which resulted from the planned close-out of the izencitinib program in that period.

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Licensing revenue was $2.5 million in 2022 and was related to a development milestone payment from Pfizer for the first patient dosed in a Phase 1 clinical trial of the skin-selective pan-JAK inhibitor program.

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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 significantly by $130.3 million in 2022 compared to 2021, and the decrease was across all R&D categories. External-related expenses decreased by $72.0 million in 2022 and was the largest contributor to the total R&D expense decrease. The decrease in external-related expenses was primarily due to the near completion of expenses related to the izencitinib program and the SEQUOIA and REDWOOD ampreloxetine studies. The decrease in external-related expenses was partially offset by expenses incurred in the fourth quarter of 2022 associated with the new ampreloxetine Phase 3 clinical study (CYPRESS) for MSA patients with symptomatic nOH. The decreases across the remaining R&D categories were primarily due to the Restructuring originally announced in September 2021 and completed in the third quarter of 2022. As anticipated, the Restructuring resulted in significant savings in 2022 R&D expenses, including (i) $30.7 million in employee-related expenses; (ii) $12.7 million in share-based compensation expenses; and (iii) $14.8 million in facilities, depreciation, and other allocated expenses. Severance and other costs 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 $6.7 million, $7.9 million, and $10.1 million for 2022, 2021, and 2020, respectively.

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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 also decreased significantly by $32.2 million in 2022 compared to 2021. The decrease was attributed to a (i) $17.7 million reduction in employee-related expenses; (ii) $9.4 million reduction in external-related expenses; (iii) $8.2 million reduction in share-based compensation expense; and (iv) $6.2 million reduction in facilities, depreciation, and other expenses. These decreases were partially offset by a $9.3 million decrease in expenses allocated to research and development primarily related to the Restructuring. Severance and other costs 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 $19.8 million, $28.1 million, and $31.7 million in 2022, 2021, and 2020, respectively.

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As a result of our Restructuring and the related reduction in workforce, in May 2022, we assigned our Dublin, Ireland, office lease to an unaffiliated company and moved into a smaller office in Dublin, which we estimate will result in approximately $1.4 million cumulative cash savings through March 2027, or approximately $0.3 million annually. In addition, in June 2022, we subleased approximately 78,000 square feet of our South San Francisco office and laboratory

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space to an unaffiliated company. As a result of the sublease, we expect to realize cumulative cash savings of approximately $52.7 million through May 2030, or approximately $6.7 million annually.

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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

The Restructuring and related expenses were primarily comprised of one-time severance payments, employee-related separation costs, retention costs, and other Restructuring-related expenses. Of the total $12.8 million in Restructuring and related expenses recognized in 2022, $5.9 million were related to R&D expenses and $6.9 million were related to selling, general and administrative expenses. The total Restructuring-related expenses of $12.8 million also included non-cash share-based compensation expense of $7.0 million which was 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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Since the Restructuring was announced and through its completion in the third quarter of 2022, we incurred $33.0 million in Restructuring and related expenses, which was consistent with our expectations. The $33.0 million was comprised of $17.4 million in cash expenses associated with employee termination benefits and related costs and $15.6 million in non-cash expenses primarily relating to share-based compensation expense.

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Interest Expense

Interest expense, as compared to the prior years, was as follows:

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NM: Not Meaningful

Interest expense, related to continuing operations, was $6.4 million in 2022 compared to $8.5 million in 2021. The $2.2 million decrease in interest expense was due to the retirement of our 3.25% convertible senior notes in August 2022 which was partially offset by the implied (non-cash) interest expense associated with the $25.0 million funding for ampreloxetine received from Royalty Pharma in July 2022. We do not anticipate having any cash interest expense in the foreseeable future.

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Loss on Extinguishment of Debt

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Loss on extinguishment of debt, as compared to the prior years, was as follows:

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NM: Not Meaningful

In 2022, we incurred a $3.0 million loss on the extinguishment of our 3.25% convertible senior notes due 2023, at par, that was completed in August 2022. The $3.0 million loss was comprised of transaction costs related to the extinguishment and the write-off of the remaining debt issuance cost.

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Interest and Other Income, net

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

NM: Not Meaningful

Interest income and other income, net, increased by $7.4 million in 2022 compared to 2021. The increase was primarily due to (i) higher interest income related to an increase in investment yields, as well as investment balances resulting from the TRELEGY Royalty Transaction; and (ii) the sale of velusetrag to Alfasigma in June 2022 which resulted in a net gain of approximately $2.7 million.

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Provision for Income Tax Benefit (Expense) – Continuing Operations

The provision for income tax benefit (expense) related to continuing operations, as compared to the prior years, was as follows:

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We were recently under Internal Revenue Service (“IRS”) examination for the tax year ended December 31, 2018. The examination was completed in the third quarter of 2022 with minimal adjustments to the 2018 federal tax return.

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Net Income from Discontinued Operations (After tax)

Net income from discontinued operations, after tax, as compared to the prior years, was as follows:

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In 2022, the TRELEGY Royalty Transaction resulted in (i) income from our investment in TRC; (ii) interest expense related to our Non-Recourse 2035 Notes; and (iii) the net gain from the sale of our equity interests in TRC to be reclassified as net income from discontinued operations for all of the periods presented above.

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The $965.0 million in net income from discontinued operations for 2022 was primarily attributed to the $1,141.1 million net realized gain from the sale of our equity interests in TRC. This net gain was partially offset by a $24.0 million loss on the extinguishment of our Non-Recourse 2035 Notes and a $179.0 million provision for income tax expense in 2022. The income tax expense was primarily attributed to the net gain from the sale of our equity interests in TRC and was partially offset by the release of the Company’s valuation allowance on its US federal deferred tax assets.

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Liquidity and Capital Resources

As a result of the approximate $1.1 billion in cash proceeds received from the TRELEGY Royalty Transaction completed in July 2022, our cash position increased significantly during the second half of 2022. In connection with TRELEGY Royalty Transaction, we also repaid our Non-Recourse 2035 Notes for approximately $420.0 million and subsequently repaid our convertible senior notes due 2023, at par, for approximately $230.0 million.

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Following the completion of the paydown of all of our long-term debt, our board of directors authorized a $250.0 million capital return program consisting of the three elements listed below:

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As of December 31, 2022, we had approximately $327.5 million in cash, cash equivalents, and investments in marketable securities (excluding restricted cash) and a streamlined balance sheet with no long-term debt.

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2021 – 2022 Corporate Restructuring Completion

As previously announced in September 2021, our board of directors approved a plan to focus our resources on our most promising programs and reduce the size of the Company in order to maximize shareholder value. The Restructuring resulted in us reducing headcount by approximately 75%. A majority of the total reduction in workforce occurred at the end of November 2021, and the remainder was completed at the end of February 2022. Since the Restructuring was announced and through its completion in the third quarter of 2022, we incurred $33.0 million in Restructuring and related expenses, which was consistent with our expectations.

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2023 Strategic Actions

As discussed above, on February 27, 2023, we announced additional strategic actions to sharpen the Company’s focus and deliver on its commitment to create shareholder value. These new strategic actions include a $75.0 million increase to the existing $250.0 million capital return program initiated in September 2022, bringing the total capital return program to $325.0 million. As of February 27, 2023, we have repurchased $155.3 million of shares, including $27.1 million in 2023, and we have approximately $170.0 million remaining in the capital return program which is expected to be completed by the end of 2023.

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Our 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 product, 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 capital return program and our operations for at least the next twelve months from the issuance date of these consolidated financial statements based on current operating plans and financial forecasts.

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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 $187.0 million in 2022, of which $2.4 million was used in continuing operations and $184.6 million was used in discontinued operations, consisting of net income of $872.1 million, adjustments for non-cash expenses and other reconciling items of ($1,098.8) million, primarily related to the net gain from the sale of our equity interests in TRC, and a net increase in cash resulting from changes in operating assets and liabilities of $39.7 million.

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Net cash used in operating activities was $207.9 million in 2021, of which $235.8 million was used in continuing operations and $27.9 million was provided by discontinued operations, 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 flows provided by investing activities

Net cash provided by investing activities was $1,154.0 million in 2022, of which $58.9 million was from continuing operations and $1,095.1 million was from discontinued operations, consisting primarily of $54.9 million in net cash inflow from the purchase and maturities of marketable securities and $1,095.1 million in net proceeds related to the sale of our equity interests in TRC.

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Net cash provided by investing activities was $124.5 million in 2021, all of which was provided by continuing operations, and consisting 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 flows (used in) provided by financing activities

Net cash used in financing activities was $758.8 million in 2022, of which $738.6 million was used in continuing operations and $20.2 million was used in discontinued operations, consisting primarily of a $128.8 million cash outflow related to the repurchase of ordinary shares, a $631.6 million cash outflow related to the extinguishment of our debt, and a $20.2 million cash outflow related to the debt redemption premium associated with the Non-Recourse 2035 Notes. These cash outflows were partially offset by a $24.5 million cash inflow related to the funding of an additional Phase 3 study for the ampreloxetine program.

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Net cash provided by financing activities was $91.9 million in 2021, all of which was provided by continuing operations, and 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 our formerly outstanding Non-Recourse 2035 Notes and $9.1 million related to the repurchase of shares to satisfy tax withholding obligations.

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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, 2022. 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, 2022. 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, 2022, we recognized $0.2 million of share-based compensation expense related to these types of awards. As of December 31, 2022, the maximum remaining expense related to outstanding performance-contingent awards was $0.4 million which had performance expiration dates through February 2024.

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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.