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| THRX > SEC Filings for THRX > Form 10-K on 26-Feb-2013 | All Recent SEC Filings |
26-Feb-2013
Annual Report
Management's Discussion and Analysis (MD&A) is intended to facilitate an understanding of our business and results of operations. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included in Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K. The information contained in this discussion and analysis 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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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" above for more information.
Executive Summary
Theravance is a biopharmaceutical company with a pipeline of internally discovered product candidates and strategic collaborations with pharmaceutical companies. We are focused on the discovery, development and commercialization of small molecule medicines across a number of therapeutic areas including respiratory disease, bacterial infections, and central nervous system (CNS)/pain. Our key programs include: RELVAR™ or BREO™ (fluticasone furoate/vilanterol), ANORO™ (umeclidinium bromide/vilanterol) and MABA (Bifunctional Muscarinic Antagonist-Beta2 Agonist), each partnered with GlaxoSmithKline plc (GSK), and our oral Peripheral Mu Opioid Receptor Antagonist program. By leveraging our proprietary insight of multivalency to drug discovery, we are pursuing a best-in-class strategy designed to discover superior medicines in areas of significant unmet medical need.
In 2012, our net loss was $18.5 million, a decrease of 84% from $115.3 million in 2011. Net income in 2012 reflects the recognition of deferred revenue of $125.8 million from our global collaboration arrangement with Astellas Pharma Inc. (Astellas) for the development and commercialization of VIBATIV®. This recognition resulted from Astellas' January 6, 2012 termination of our agreement with them. In 2012, our research and development expenses were $117.9 million, an increase of 14% from $103.6 million 2011. Cash, cash equivalents, short-term investments, and long-term marketable securities totaled $343.7 million at December 31, 2012, an increase of $102.8 million from December 31, 2011. The increase was primarily due to net proceeds of $229.3 million received from our private placements of common stock to an affiliate of GSK and net proceeds of $7.1 million received from employee stock transactions, partially offset by cash used in operations of $128.0 million.
In 2012, our total operating expenses were $148.8 million. We anticipate total operating expenses for 2013 to increase relative to 2012.
Recent Developments
On January 24, 2013, we completed an underwritten public offering of $287.5 million aggregate principal amount of unsecured 2.125% convertible subordinated notes due 2023. The financing raised proceeds, net of issuance costs, of approximately $244.4 million. The notes are convertible into shares of our common stock at an initial conversion rate of 35.9903 shares per $1,000 principal amount of the
notes, subject to adjustment in certain circumstances, which represents an initial conversion price of approximately $27.79 per share.
In connection with the offering of the notes, we entered into privately-negotiated capped call option transactions. The capped call option transaction is an integrated instrument consisting of a call option purchased by us with a strike price equal to the conversion price of $27.79 per share for the underlying number of shares and a cap price of $38.00 per share. The cap component is economically equivalent to a call option sold by us for the underlying number of shares with a strike price of $38.00 per share. As an integrated instrument, the settlement of the capped call coincides with the due date of the convertible debt. At settlement, we will receive from our hedge counterparty a number of our common shares that will range from zero, if the stock price is below $27.79 per share, to a maximum of 2,779,659 shares, if the stock price is above $38.00 per share. However, if the market price of our common stock, as measured under the terms of the capped call transactions, exceeds $38.00 per share, there is no incremental anti-dilutive benefit from the capped call. The aggregate cost of the capped call options was $36.8 million.
Program Highlights
Respiratory Programs with GlaxoSmithKline plc (GSK)
RELVAR™ or BREO™ (Fluticasone Furoate/Vilanterol, FF/VI)
FF/VI is an investigational once-daily ICS/ LABA combination treatment, comprising fluticasone furoate (FF) and vilanterol (VI), for the maintenance treatment of patients with COPD and patients with asthma. FF/VI is administered by a new dry powder inhaler called ELLIPTA™. RELVAR™ (FF/VI for the European Union (EU) and Japan), BREO™ (FF/VI for the United States (U.S.)), and ELLIPTA™ (for the EU, U.S. and Japan) are proposed brand names and use of these brand names has not yet been approved by any regulatory authority.
In September 2012, GSK and Theravance announced that the NDA for FF/VI for patients with COPD was accepted by the FDA, indicating that the application is sufficiently complete to permit a substantive review. The Prescription Drug User Fee Act goal date was confirmed as May 12, 2013 and the FDA's Pulmonary-Allergy Drugs Advisory Committee is scheduled to discuss the NDA for BREO™ for COPD at a meeting on March 7, 2013. GSK and Theravance also reported that the Marketing Authorization Application for FF/VI for COPD and asthma was validated by the EMA and GSK also submitted a Japanese New Drug Application for FF/VI for patients with COPD and asthma in September 2012.
ANORO™ (Umeclidinium Bromide/Vilanterol, UMEC/VI)
UMEC/VI is a once-daily investigational medicine, combining a LAMA, UMEC, and a LABA, VI, for the maintenance treatment of patients with COPD. UMEC/VI is administered by the ELLIPTA™ dry powder inhaler.
In December 2012, GSK and Theravance announced the submission to the FDA of a NDA for UMEC/VI for patients with COPD and in February 2013, GSK and Theravance announced that the NDA was accepted by the FDA, indicating that the application is sufficiently complete to permit a substantive review. The Prescription Drug User Fee Act goal date was confirmed as December 18, 2013. In January 2013, GSK and Theravance announced the submission of a regulatory application to the EMA for UMEC/VI for patients with COPD, which has now been validated for assessment by the EMA. Regulatory submissions for UMEC/VI are planned in other countries during the course of 2013.
Inhaled Bifunctional Muscarinic Antagonist-Beta2 Agonist (MABA)
GSK961081 ('081) is an investigational, single molecule bifunctional bronchodilator with both muscarinic antagonist and beta2 receptor agonist activities. Based on the results from the Phase 2b study, GSK and Theravance plan to advance '081 monotherapy into Phase 3 in 2013 and the '081/FF combination into Phase 3-enabling studies shortly.
Bacterial Infections Program
VIBATIV® (telavancin)
In November, 2012, Theravance announced a favorable outcome of the FDA's Anti-Infective Drugs Advisory Committee meeting on VIBATIV® (telavancin) for the treatment of NP due to susceptible isolates of Gram-positive microorganisms. Theravance remains in dialogue with the FDA on the NP indication and is working toward re-establishing consistent product supply.
Central Nervous System (CNS)/Pain Program
Oral Peripheral Mu Opioid Receptor Antagonist-TD-1211
TD-1211 is an investigational once-daily, orally administered, peripherally selective, multivalent inhibitor of the mu opioid receptor designed with a goal of alleviating gastrointestinal side effects of opioid therapy without affecting analgesia. In July 2012, Theravance announced positive topline results from the Phase 2b Study 0084, the key study in the Phase 2b program evaluating TD-1211 as potential treatment for chronic, non-cancer pain patients with opioid-induced constipation. The Phase 2b program consisted of three studies (0074, 0076 and 0084) designed to evaluate doses and dosing regimens for Phase 3. We are currently evaluating our Phase 3 strategy due to potentially evolving FDA requirements for this class of drug.
Monoamine Reuptake Inhibitor-TD-9855
TD-9855 is an investigational norepinephrine and serotonin reuptake inhibitor for the treatment of central nervous system conditions such as ADHD and chronic pain. TD-9855 is being evaluated in an ongoing Phase 2 safety and efficacy study in adults with ADHD. In addition, we initiated a Phase 2 study with TD-9855 in patients with fibromyalgia in December 2012.
Theravance Respiratory Program
Long-Acting Muscarinic Antagonist-TD-4208
In November 2011, we announced positive topline results from a Phase 2a single-dose COPD study of TD-4208, an investigational inhaled LAMA discovered by Theravance. In this study, TD-4208 met the primary endpoint by demonstrating a statistically significant mean change from baseline in peak forced expiratory volume in one second (FEV1) compared to placebo, and was generally well tolerated. In December 2012, we initiated a Phase 2b study to evaluate the safety and pharmacokinetics of multiple doses of TD-4208.
GI Motility Dysfunction Program
Velusetrag
Velusetrag, an oral, investigational medicine dosed once-daily, is a highly selective agonist with high intrinsic activity at the human 5-HT4 receptor. In October 2012, we entered into an exclusive development and commercialization agreement with Alfa Wassermann for velusetrag, our lead compound in the 5-HT4 program, covering the EU, Russia, China, Mexico and certain other countries. In January 2013, Theravance and Alfa Wassermann announced the initiation of a Phase 2 proof-of-concept study to evaluate the efficacy and safety of velusetrag for the treatment of patients with diabetic or idiopathic gastroparesis.
Critical Accounting Policies and Estimates
This 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 U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenue and expenses during the reporting periods. We periodically evaluate our material estimates and judgments based on the terms of underlying agreements, the expected course of development, historical experience and other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 1, "Description of Operations and Summary of Significant Accounting Policies," in the Notes to our consolidated financial statements contained in
Revenue Recognition
Our revenues are related primarily to our collaboration arrangements (see Collaboration Arrangements section below). Our arrangements provide for various types of payments to us, including non-refundable upfront fees, milestone and other contingent payments and royalty payments.
Beginning in January 1, 2011, we account for new multiple element arrangements, such as license and development agreements in which a customer may purchase several deliverables, in accordance with Financial Accounting Standards Board (FASB) Subtopic ASC 605-25, "Multiple Element Arrangements". For new or materially amended multiple element arrangements, at the inception of the arrangement each deliverable within a multiple deliverable revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We allocate revenue to each non-contingent element based on the relative selling price of each element. When applying the relative selling price method, we determine the selling price for each deliverable using vendor-specific objective evidence (VSOE) of selling price, if it exists, or third-party evidence (TPE) of selling price, if it exists. If neither VSOE nor TPE of selling price exist for a deliverable, we use best estimated selling price for that deliverable. Revenue allocated to each element is then recognized based on when the basic four revenue recognition criteria are met for each element.
For multiple-element arrangements entered into prior to January 1, 2011, we determined the deliverables under our collaboration agreements which did not meet the criteria required to be considered separate accounting units for the purposes of revenue recognition. As a result, we recognized revenue from non-refundable, upfront fees and development milestone payments ratably over the term of our performance under the agreements. These upfront or milestone payments received, pending recognition as revenue, are recorded as deferred revenue and are classified as a short-term or long-term liability on our consolidated balance sheet and amortized over the estimated period of performance. We periodically review the estimated performance periods of our contracts based on the progress of our programs.
Where a portion of non-refundable upfront fees or other payments received are allocated to continuing performance obligations under the terms of a collaboration agreement, they are recorded as deferred revenue and recognized as revenue or as an accrued liability and recognized as a reduction of
research and development expenses ratably over the term of our estimated performance period under the agreement. We determine the estimated performance periods and they are periodically reviewed based on the progress of the related program. The effect of any change made to an estimated performance period, and therefore revenue recognized, would occur on a prospective basis in the period that the change was made.
Under certain collaboration arrangements, we have been reimbursed for a portion of our research and development expenses. These reimbursements have been reflected as a reduction of research and development expense in our consolidated statements of operation, as we do not consider performing research and development services to be a part of our ongoing and central operations. Therefore, the reimbursement of research and developmental services and any amounts allocated to our research and development services are recorded as a reduction of research and development expense.
Amounts deferred under a collaboration agreement in which the performance obligations are terminated will result in an immediate recognition of any remaining deferred revenue and accrued liability in the period that termination occurred, provided that all performance obligations have been satisfied.
Beginning in 2011, we account for milestones in accordance with FASB
Subtopic ASC 605-28 "Revenue Recognition-Milestone Method". We recognize revenue
from milestone payments when (i) the milestone event is substantive and its
achievability was not reasonably assured at the inception of the agreement and
(ii) we do not have ongoing performance obligations related to the achievement
of the milestone. Milestone payments are considered substantive if all of the
following conditions are met: the milestone payment (a) is commensurate with
either our performance to achieve the milestone or the enhancement of the value
of the delivered item or items as a result of a specific outcome resulting from
our performance to achieve the milestone, (b) relates solely to past
performance, and (c) is reasonable relative to all of the deliverables and
payment terms (including other potential milestone consideration) within the
arrangement. See Note 3, "Collaboration Arrangements," in the Notes to the
Consolidated Financial Statements below in part II, Item 8, "Financial
Statements and Supplementary Data" on this Annual Report on Form 10-K, for
analysis of each milestone event deemed to be substantive or non-substantive.
In accordance with ASC Subtopic 808-10, "Collaborative Arrangement," and pursuant to our agreement with Astellas, we recognized as revenue the net impact of transactions with Astellas related to VIBATIV® inventories including revenue specifically attributable to any sales, and cost of inventories either transferred or expensed as unrealizable.
We recognize royalty revenue on licensee net sales in the period in which the royalties are earned.
Preclinical Study and Clinical Study Expenses
A substantial portion of our preclinical studies and all of our clinical studies have been performed by third-party contract research organizations (CROs). Some CROs bill monthly for services performed, while others bill based upon milestones achieved. We review the activities performed under the significant contracts each quarter. For preclinical studies, the significant factors used in estimating accruals include the percentage of work completed to date and contract milestones achieved. For clinical study expenses, the significant factors used in estimating accruals include the number of patients enrolled and percentage of work completed to date. Vendor confirmations are obtained for contracts with longer duration when necessary to validate our estimate of expenses. Our estimates are highly dependent upon the timeliness and accuracy of the data provided by our CROs regarding the status of each program and total program spending and adjustments are made when deemed necessary.
Fair Value of Stock-Based Compensation Awards
We use the Black-Scholes-Merton option pricing model to estimate the fair value of options granted under our equity incentive plans and rights to acquire stock granted under our employee stock purchase plan (ESPP). The Black-Scholes-Merton option valuation model requires the use of assumptions, including the expected term of the award and the expected stock price volatility. We used the "simplified" method as described in Staff Accounting Bulletin No. 107, "Share-Based Payment", for the expected option term because the usage of our historical option exercise data is limited due to post-IPO exercise restrictions. Beginning April 1, 2011, we use our historical volatility to estimate expected stock price volatility. Prior to April 1, 2011, we used peer company price volatility to estimate expected stock price volatility due to our limited historical common stock price volatility since our initial public offering in 2004.
Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs) are measured based on the fair market values of the underlying stock on the dates of grant.
Stock-based compensation expense was calculated based on awards ultimately expected to vest and was reduced for estimated forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates. We estimated annual forfeiture rates for stock options, RSUs and RSAs based on our historical forfeiture experience.
The estimated fair value of stock options, RSUs and RSAs is expensed on a straight-line basis over the expected term of the grant and the estimated fair value of performance-contingent RSUs and RSAs is expensed using an accelerated method over the term of the award once we determine that it is probable that those performance milestones will be achieved. Compensation expense for RSUs and RSAs that contain performance conditions is based on the grant date fair value of the award. Compensation expense is recorded over the requisite service period based on management's best estimate as to whether it is probable that the shares awarded are expected to vest. We assess the probability of the performance indicators being met on a continuous basis.
In 2011, we granted special long-term retention and incentive restricted stock awards (RSAs) to members of senior management. The awards have dual triggers of vesting based upon the achievement of certain performance conditions over a six-year timeframe from 2011 through December 31, 2016 and continued employment. The maximum potential expense associated with the RSAs is $31.9 million, which would be recognized in increments based on achievement of the performance conditions. As of December 31, 2012, we determined that the achievement of the requisite performance conditions was not probable and, as a result, no compensation expense has been recognized. If sufficient performance conditions are achieved in 2013, then we would recognize up to $15.6 million in stock-based compensation expense associated with these RSAs in 2013.
Compensation expense for purchases under the ESPP is recognized based on the fair value of the common stock on the date of offering, less the purchase discount percentage provided for in the plan.
We have not recognized, and we do not expect to recognize in the near future, any tax benefit related to employee stock-based compensation expense as a result of the full valuation allowance on our deferred tax assets including deferred tax assets related to our net operating loss carryforwards.
See Note 8, "Stock-Based Compensation," in the Notes to Consolidated Financial Statements in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K, for more information.
Inventories
Inventories are stated at the lower of cost or market value. Inventories include VIBATIV® active pharmaceutical ingredient and other raw materials of $5.7 million and work-in-process of $1.8 million
at December 31, 2012. Work-in-process consists of third party manufacturing costs and associated labor costs relating to our personnel directly involved in the production process. Due to manufacturing issues at the previous single-source supplier of VIBATIV® drug product, VIBATIV® is currently subject to critical product shortages and we currently do not have sufficient finished drug product inventories to commercialize VIBATIV®. We are in the process of re-establishing drug product supply with a new third-party manufacturer, Hospira. We must obtain regulatory approval for VIBATIV® drug product manufactured at Hospira's facility before any such product may be sold. These inventories are capitalized based upon management's judgment of the likely achievement of this regulatory licensure. If information becomes available that suggests the inventories may not be realizable, we may be required to expense a portion or all of the previously capitalized inventories.
Collaboration Arrangements
GSK
LABA collaboration
In November 2002, we entered into our long-acting beta2 agonist (LABA)
collaboration with GSK to develop and commercialize once-daily LABA products for
the treatment of chronic obstructive pulmonary disease (COPD) and asthma. For
the treatment of COPD, the collaboration is developing two combination products:
(1) RELVAR™ or BREO™ (FF/VI), an investigational once-daily combination medicine
consisting of a LABA, vilanterol (VI), and an inhaled corticosteroid (ICS),
fluticasone furoate (FF) and (2) ANORO™ (UMEC/VI), a once-daily investigational
medicine combining a long-acting muscarinic antagonist (LAMA), umeclidinium
bromide (UMEC), with a LABA, VI. For the treatment of asthma, the collaboration
is developing FF/VI. The FF/VI program is aimed at developing a once-daily
combination LABA/ICS to succeed GSK's Advair®/Seretide™ (salmeterol and
fluticasone as a combination) franchise, which had reported 2012 sales of
approximately $8.0 billion, and to compete with Symbicort® (formoterol and
budesonide as a combination), which had reported 2012 sales of approximately
$3.2 billion. ANORO™, which is also a combination product, is targeted as an
alternative treatment option to Spiriva® (tiotropium), a once-daily,
single-mechanism bronchodilator, which had reported 2011 sales of approximately
$4.2 billion.
In the event that a product containing VI is successfully developed and commercialized, we will 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 or two different combination products are launched in multiple regions of the world. Of these potential milestone payments, we estimate up to $140.0 million could be payable during 2013 and all the milestone payments could be payable by the end of 2014. We are entitled to receive annual royalties from GSK of 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion. Sales of single-agent LABA medicines and combination medicines would be combined for the purposes of this royalty calculation. For other products combined with a LABA from the LABA collaboration, such as ANORO™, 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 would be applicable.
2004 Strategic Alliance
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 certain of our discovery programs on pre-determined terms and on an exclusive, worldwide basis. 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 . . .
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