Forward-Looking Statements

The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve substantial risks, uncertainties and assumptions. All statements contained herein that are not of historical fact, including, without limitation, statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans, intentions, expectations, goals and objectives, may be forward-looking statements. The words "anticipates," "believes," "designed," "estimates," "expects," "intends," "may," "objective," "plans," "projects," "pursue," "will," "would" and similar expressions (including the negatives thereof) are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions, expectations or objectives disclosed in our forward-looking statements and the assumptions underlying our forward-looking statements may prove incorrect. Therefore, you should not place undue reliance on our forward-looking statements. Actual results or events could materially differ from the plans, intentions, expectations and objectives disclosed in the forward-looking statements that we make. Factors that we believe could cause actual results or events to differ materially from our forward-looking statements include, but are not limited to those discussed below in "Risk Factors" in Item 1A of Part II and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Item 2 of Part I. All forward-looking statements in this document are based on information available to us as of the date hereof and we assume no obligation to update any such forward-looking statements.

Executive Summary

Theravance is a biopharmaceutical company with a pipeline of internally discovered product candidates. Theravance is focused on the discovery, development and commercialization of small molecule medicines across a number of therapeutic areas including respiratory disease, bacterial infections and gastrointestinal motility dysfunction. Our key programs include:
VIBATIVTM (telavancin) with Astellas Pharma Inc. (Astellas) and the Horizon program and the bifunctional muscarinic antagonist-beta2 agonist (MABA) program with GlaxoSmithKline plc (GSK). By leveraging our proprietary insight of multivalency to drug discovery focused primarily on validated targets, we are pursuing a next generation strategy designed to discover superior medicines in areas of significant unmet medical need.

Our net loss for the three months and nine months ended September 30, 2009 was $22.2 million and $63.1 million, respectively, compared to $20.9 million and $77.7 million, respectively, during the same periods of 2008. For the three months and nine months ended September 30, 2009, total operating expenses were $26.6 million and $81.3 million, respectively, compared to $26.6 million and $94.9 million, respectively, during the same periods of 2008. Cash, cash equivalents and marketable securities totaled $154.2 million at September 30, 2009, a decrease of $46.4 million since December 31, 2008. The decrease was primarily due to cash used in operations.

Following are updates on the progress of our key programs:

Horizon

The first patient has commenced treatment in the Phase 3 program to develop a next-generation combination treatment for patients with chronic obstructive pulmonary disease (COPD). The Phase 3 program comprises a broad range of large scale Phase 3 studies to evaluate the investigational once-a-day long-acting beta agonist (LABA), 642444 ('444), in combination with the once-a-day inhaled corticosteroid (ICS), fluticasone furoate (FF), for the treatment of COPD. The overall program, which will study more than 6,000 patients, includes two 12-month exacerbation studies, two 6-month efficacy and safety studies, a detailed lung function profile study, and studies to assess the potential for superiority of the fixed combination of '444 and FF versus other treatments for COPD.

Telavancin

In September 2009, the U.S. Food and Drug Administration (FDA) approved VIBATIV for the treatment of adult patients with complicated skin and skin structure infections (cSSSI) caused by susceptible Gram-positive bacteria, including Staphylococcus aureus, both methicillin-resistant and methicillin-susceptible strains. VIBATIV was also recently approved by Health Canada for the treatment of adult patients with cSSSI. In October 2009, we earned a milestone payment of $20.0 million for the FDA approval of VIBATIV and supplying Astellas with launch inventory for the first commercial sale in the United States. Astellas recently began notifying wholesalers that it is now accepting orders for VIBATIV in preparation for a commercial launch during the fourth quarter of 2009.

The New Drug Application (NDA) for telavancin for the treatment of nosocomial pneumonia is currently under review by the FDA, with a Prescription Drug User Fee Act date in November 2009. We believe that it is likely the review of the NDA will extend into 2010.

Critical Accounting Policies and the Use of Estimates

As of the date of the filing of this quarterly report, we believe there have been no material changes or additions to our critical accounting policies and estimates during the three and nine months ended September 30, 2009 compared to those discussed in our Annual Report on Form 10-K filed on February 26, 2009 (2008 10-K).

Collaboration and Licensing Agreements

2005 License, Development and Commercialization Agreement with Astellas

In November 2005, we entered into a collaboration arrangement with Astellas for the development and commercialization of telavancin. In July 2006, Japan was added to the collaboration, thereby giving Astellas worldwide rights to this medicine. Through September 30, 2009, we have received $170.0 million in upfront, milestone and other fees from Astellas, and in October 2009 we earned a $20.0 million milestone for FDA approval of VIBATIV for the treatment of cSSSI caused by susceptible Gram-positive bacteria and delivery of the first six month commercial supply of VIBATIV to Astellas. We are eligible to receive up to an additional $30.0 million in remaining milestone payments related to regulatory filings and approvals in various regions of the world. We record these payments as deferred revenue and are amortizing them ratably over our estimated period of performance (development and commercialization period). We recognized $2.8 million and $2.7 million in revenue under this agreement in the three months ended September 30, 2009 and 2008, respectively, and $8.2 million in each of the nine months ended September 30, 2009 and 2008.

We are entitled to receive royalties on global net sales of VIBATIV by Astellas that, on a percentage basis, range from the high teens to the upper twenties depending on sales volume. Under this arrangement, we are responsible for substantially all costs to develop and obtain U.S. regulatory approval for telavancin for cSSSI and nosocomial pneumonia, and Astellas is responsible for substantially all other costs associated with commercialization and further development of telavancin.

Horizon Program with GSK

In November 2002, we entered into our Horizon collaboration with GSK to develop and commercialize a LABA product candidate both as a single agent new medicine for the treatment of COPD and as part of a new combination medicine with an ICS for the treatment of asthma and/or a long-acting muscarinic antagonist (LAMA) for COPD.

In connection with the Horizon program, in 2002 we received from GSK an upfront payment of $10.0 million and sold to an affiliate of GSK shares of our Series E Preferred Stock for an aggregate purchase price of $40.0 million. In addition, we were eligible to receive up to $495.0 million in development, approval, launch and sales milestones and royalties on the sales of any product resulting from this program. Through September 30, 2009, we have received a total of $60.0 million in upfront and development milestone payments. GSK has determined to focus the collaboration's resources on the development of the lead LABA, GW642444, a GSK-discovered compound, together with GSK's ICS, fluticasone furoate. Accordingly, we do not expect to receive any further milestone payments from the Horizon program. In the event that a LABA product candidate discovered by GSK is successfully developed and commercialized, we would be obligated to make milestone payments to GSK which could total as much as $220.0 million if both a single agent and a combination product were launched in multiple regions of the world. Based on available information, we do not estimate that a significant portion of these potential milestone payments to GSK are likely to be made in the next two years. In addition, we are entitled to receive the same royalties on sales of medicines from the Horizon program, regardless of whether the product candidate originated with Theravance or with GSK. We are entitled to receive royalties of 15% on the first $3.0 billion of annual net sales, and 5% on annual net sales above $3.0 billion, for approved single-agent LABA and combination LABA-ICS medicines. 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 Horizon collaboration, such as a combination LABA/LAMA medicine, which are launched after a LABA/ICS combination medicine, royalties are upward tiering and range from the mid-single digits to 10%. However, if GSK is not selling a LABA/ICS combination product at the time that the first other LABA combination is launched, then the royalties described above for the LABA/ICS combination medicine are applicable.

We recorded the initial cash payment and subsequent milestone payments as deferred revenue and are amortizing them ratably over our estimated period of performance (the product development period). Collaboration revenue from GSK was $1.3 million and $1.7 million for the three months ended September 30, 2009 and 2008, respectively, and $3.8 million and $5.1 million for the nine months ended September 30, 2009 and 2008, respectively.

2004 Strategic Alliance with GSK

In March 2004, we entered into our strategic alliance with GSK. Under this alliance, GSK received an option to license exclusive development and commercialization rights to product candidates from our entire full drug discovery programs initiated prior to September 1, 2007, on pre-determined terms and on an exclusive, worldwide basis. Under the terms of the strategic alliance, GSK has only one opportunity to license each of our programs. Upon GSK's decision to license a program, GSK is responsible for funding all future development, manufacturing and commercialization activities for product candidates in that program. In addition, GSK is obligated to use diligent efforts to develop and commercialize product candidates from any program that it licenses. Consistent with our strategy, we are obligated at our sole cost to discover two structurally different product candidates for any programs that are licensed by GSK under the alliance. If these programs are successfully advanced through development by GSK, we are entitled to receive clinical, regulatory and commercial milestone payments and royalties on any sales of medicines developed from these programs. For product candidates licensed to date under this agreement, the royalty structure for a product containing one of our compounds as a single active ingredient would result in an average percentage royalty rate in the low double digits. If a product is successfully commercialized, in addition to any royalty revenue that we receive, the total upfront and milestone payments that we could receive in any given program that GSK licenses range from $130.0 million to $162.0 million for programs with single agent medicines and up to $252.0 million for programs with both a single agent and a combination medicine. If GSK chooses not to license a program, we retain all rights to the program and may continue the program alone or with a third party. To date, GSK has licensed our two COPD programs: long-acting muscarinic antagonist (LAMA) and muscarinic antagonist-beta2 agonist (MABA). We received $5.0 million payments from GSK in connection with our license of each of our LAMA and MABA programs in August 2004 and March 2005, respectively. GSK has chosen not to license our bacterial infections program, anesthesia program or 5-HT4 program.

In connection with the strategic alliance with GSK, we received from GSK a payment of $20.0 million. This payment is being amortized over the initial performance period during which GSK may exercise its right to license certain of our programs under the agreement, which we currently estimate to be through September 2011. In connection with the strategic alliance, we recognized $0.7 million in revenue for each of the three months ended September 30, 2009 and 2008 and $2.1 million in revenue for each of the nine months ended September 30, 2009 and 2008. In addition, in May 2004, GSK purchased through an affiliate 6,387,096 shares of our Class A common stock for an aggregate purchase price of $108.9 million.

Through September 30, 2009, we have received $46.0 million in upfront and milestone payments from GSK relating to the strategic alliance agreement. In addition, pursuant to a partial exercise of its rights under the governance agreement, upon the closing of our initial public offering on October 8, 2004, GSK purchased through an affiliate an additional 433,757 shares of Class A common stock for $6.9 million.

In August 2004, GSK exercised its right to license our LAMA program pursuant to the terms of the strategic alliance. We received a $5.0 million payment from GSK in connection with its licensing of our LAMA program. Through September 30, 2009, we received a milestone payment from GSK of $3.0 million related to clinical progress of our product candidate. These payments were amortized ratably over the estimated period of performance (the product development period) until the three months ended March 31, 2009, when we recognized the remaining $4.2 million of deferred revenue related to the LAMA program as a result of the program being returned to us from GSK. For the three and nine months ended September 30, 2008, we recognized $0.2 million and $0.6 million, respectively, in revenue related to the LAMA program.

In March 2005, GSK exercised its right to license our MABA program pursuant to the terms of the strategic alliance. We received a $5.0 million payment from GSK in connection with the license of our MABA program. Through September 30, 2009, we received milestone payments from GSK of $13.0 million related to clinical progress of our candidate. These payments are being amortized ratably over the estimated period of performance (the product development period). In connection with the MABA program, we recognized $0.8 million in revenue for each of the three months ended September 30, 2009 and 2008, and $2.3 million and $1.3 million for the nine months ended September 30, 2009 and 2008, respectively.

RESULTS OF OPERATIONS

Revenue

Revenue, as compared to the prior year periods, was as follows:

Three months Ended Nine months Ended September 30, Change September 30, Change (in millions, except percentages) 2009 2008 $ % 2009 2008 $ % Revenue $ 5.5 $ 6.0 $ (0.5 ) (8 )% $ 20.6 $ 17.1 $ 3.5 20 %

Revenue decreased for the three months ended September 30, 2009 compared to the same period in 2008 primarily due to changes made in our recognition of deferred revenue due to revised performance period estimates. Revenue increased for the nine months ended September 30, 2009 compared to the same period in 2008 primarily due to recognition of the remaining $4.2 million deferred revenue for the LAMA program as a result of the program being returned to us from GSK in the three months ended March 31, 2009. Upfront and milestone payments received from GSK and Astellas are deferred upon receipt and are amortized ratably into revenue over our estimated performance periods with end dates ranging between 2011 and 2021. We periodically review the estimated performance periods of our agreements based on the progress of our programs. The remaining revenue for the three months and nine months ended September 30, 2009 and 2008 consisted of the amortization of upfront and milestone payments from GSK related to our Horizon collaboration and our strategic alliance and from Astellas related to our telavancin collaboration. The table below reflects the upfront and milestone payments received through September 30, 2009:

                                     Upfront and
                                      Milestone
Agreements/Programs (in millions)     Payments
GSK Collaborations
Horizon collaboration               $        60.0
Strategic alliance agreement                 20.0
Strategic alliance-LAMA license               8.0
Strategic alliance-MABA license              18.0
Astellas license agreement                  170.0
Total                               $       276.0

In October 2009, we delivered the estimated first six month commercial supply of VIBATIV to Astellas. We earned a $20.0 million milestone from Astellas for FDA approval of VIBATIV for treatment of cSSSI and the delivery of the first six months of commercial inventory. Future revenue will include the ongoing amortization of all upfront and milestone payments earned and royalties from Astellas on net sales of VIBATIV. In addition, Astellas has the option to purchase a portion or all of the remaining inventory not already delivered to them.

Research & Development



Research and development expenses, as compared to the prior year periods, were
as follows:



                                       Three months Ended                            Nine months Ended
                                         September 30,              Change             September 30,             Change
(in millions, except percentages)      2009          2008         $        %          2009         2008        $        %
External research and development   $      3.8    $      5.0   $  (1.2 )  (24)%    $     10.5    $   17.3   $  (6.8 )  (39)%
Employee-related                           7.3           6.4       0.9      14%          22.5        24.6      (2.1 )   (9)%
Stock-based compensation                   2.9           2.9         -       -%           9.0         7.5       1.5      20%
Facilities, depreciation and
other allocated                            5.5           5.8      (0.3 )   (5)%          17.1        17.5      (0.4 )   (2)%
Total research and development
expenses                            $     19.5    $     20.1   $  (0.6 )   (3)%    $     59.1    $   66.9   $  (7.8 )  (12)%

Research and development expenses decreased for the three and nine months ended September 30, 2009 compared to the same period in 2008 primarily due to lower external costs related to the regulatory process for telavancin. Research and development expenses also decreased for the nine months ended September 30, 2009 compared to the same period in 2008 due to lower employee related expenses as a result of the reduction in force announced in April 2008.

Research and development expenses for the remainder of 2009 are expected to be driven largely by employee related expenses, costs associated with our continued development efforts in our oral peripheral opioid-induced bowel dysfunction, or PUMA, program with TD-1211 and our 5-HT4 program with TD-5108 and TD-8954, ongoing efforts to obtain FDA approval of telavancin for nosocomial pneumonia and costs associated with new drug discovery programs.

Under our agreement with Astellas, we are responsible for completion of the telavancin Phase 3 programs, publication of the results of these studies and preparation and submission of an NDA to the FDA for the cSSSI and nosocomial pneumonia indications. The FDA approved VIBATIV for cSSSI in September 2009 and the FDA accepted for review our telavancin NDA for nosocomial pneumonia in April 2009. We do not anticipate incurring substantial additional costs associated with VIBATIV for cSSSI, but we cannot predict the time and costs that will be required to complete regulatory review of the telavancin NDA for nosocomial pneumonia. We anticipate that our aggregate net external costs associated with our obligations with regard to telavancin described above will be towards the upper end of the range of $160.0 million to $170.0 million. In addition, if any of the remaining VIBATIV inventory is not realizable, we may be required to expense a portion or all of the remaining capitalized inventory costs.

We have not provided program costs in detail because we do not track, and have not tracked, all of the individual components (specifically the internal cost components) of our research and development expenses on a program basis. We do not have the systems and processes in place to accurately capture these costs on a program basis.

General and administrative

General and administrative expenses, as compared to the prior year periods, were as follows:

Three months Ended Nine months Ended September 30, Change September 30, Change (in millions, except percentages) 2009 2008 $ % 2009 2008 $ % General and administrative $ 7.1 $ 6.5 $ 0.6 9 % $ 20.9 $ 22.9 (2.0 ) (9 )%

General and administrative expenses increased for the three months ended September 30, 2009 compared to the same period in 2008 primarily due to increased employee related and stock-based compensation expenses that were partially offset by reduced facilities and external expenses. General and administrative expenses decreased for the nine months ended September 30, 2009 compared to the same period of 2008 primarily due to lower employee and facilities related costs as a result of the reduction in force announced in April 2008.

We anticipate general and administrative expenses for the remainder of 2009 to be at similar quarterly levels to the first three quarters of the year.

Restructuring charges

Restructuring charges, as compared to the prior year periods, were as follows:

Three months Ended Nine months Ended September 30, Change September 30, Change (in millions, except percentages) 2009 2008 $ % 2009 2008 $ % Restructuring charges $ - $ 0.1 $ (0.1 ) (100 )% $ 1.3 $ 5.1 $ (3.8 ) (75 )%

Restructuring charges decreased for the three and nine months ended September 30, 2009 compared to the same periods in 2008. The expenses in 2009 were due to restructuring charges recognized for the sublease of excess space in a portion of one of our South San Francisco, CA buildings whereas the expenses in 2008 were due to restructuring charges recognized for severance and other termination benefit charges resulting from our workforce reduction announced in April 2008.

We do not anticipate incurring additional significant restructuring charges from the plan announced in April 2008 in future periods.

Interest and other income

Interest and other income, as compared to the prior year periods, were as follows:

Three months Ended Nine months Ended September 30, Change September 30, Change (in millions, except percentages) 2009 2008 $ % 2009 2008 $ % Interest and other income $ 0.4 $ 1.2 $ (0.8 ) (67 )% $ 2.2 $ 4.2 $ (2.0 ) (48 )%

Interest and other income decreased for the three and nine months ended September 30, 2009 compared to the same periods in 2008 primarily due to lower average investment balances as well as lower average market rates of return during the periods in 2009.

We expect interest and other income to fluctuate in the future due to changes in average cash, cash equivalents and marketable securities balances and market interest rates.

Interest expense

Interest expense, as compared to the prior year periods, was as follows:

Three months Ended Nine months Ended September 30, Change September 30, Change (in millions, except percentages) 2009 2008 $ % 2009 2008 $ % Interest expense $ 1.5 $ 1.5 $ - - % $ 4.5 $ 4.2 0.3 7 %

Interest expense increased for the nine months ended September 30, 2009 compared to the same period in 2008 due to a full period of interest expense and debt amortization costs on our convertible subordinated notes in 2009.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception, we have financed our operations primarily through private placements and public offerings of equity and debt securities and payments received under corporate collaboration agreements. As of September 30, 2009 and December 31, 2008, we had $154.2 million and $200.6 million, respectively, in cash, cash equivalents and marketable securities, excluding $1.3 million and $3.8 million, respectively, in restricted cash that was pledged as collateral for certain of our leases.

Although we expect our net cash used in operations to be lower in 2009 compared to 2008, we expect to incur substantial expenses as we continue our discovery and development efforts, particularly to the extent we advance our product candidates into clinical studies, which are very expensive. We believe that our cash, cash equivalents and marketable securities will be sufficient to meet our anticipated operating needs for at least the next twelve months based upon current operating plans, milestone and royalty forecasts and spending assumptions. We are likely to require additional capital to fund operating needs thereafter. If our current operating plans, milestone and royalty forecasts or spending assumptions change, we may require additional funding sooner in the form of public or private equity offerings or debt financings. Furthermore, if favorable financing opportunities arise, we may seek additional funding sooner than currently planned. However, future financing may not be available in amounts or on terms acceptable to us, if at all, particularly if global financial and economic conditions do not improve or worsen. This could leave us without adequate financial resources to fund our operations as presently conducted.

Cash Flows



Cash flows, as compared to the prior year period, were as follows:



                                                        Nine Months Ended
                                                          September 30,
. . .