This Report 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. All statements in this Report, other than statements of historical facts, including statements regarding the Spin-Off, our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans, intentions, expectations and objectives could be forward-looking statements. The words "anticipates," "believes," "could," "designed," "estimates," "expects," "goal," "intends," "may," "plans," "projects," "pursuing," "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 differ materially 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 in "Risk Factors", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Report. Our forward-looking statements in this Report are based on current expectations and we do not assume any obligation to update any forward-looking statements. Management Overview We are a biopharmaceutical company with a pipeline of internally discovered product candidates, strategic collaborations with pharmaceutical companies and one approved product that was discovered and developed internally. We are focused on the discovery, development and commercialization of small molecule medicines across a number of therapeutic areas including respiratory disease, bacterial infections, central nervous system ("CNS")/pain, and gastrointestinal ("GI") motility dysfunction. 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. We also have an economic interest in future payments that may be made by
Glaxo Group Limited(which we refer to, together with its affiliates, as "GSK") under agreements with Theravance, Inc. ("Theravance"), relating to certain drug programs, including FF/UMEC/VI and the MABA program, as monotherapy with GSK961081 ('081) and as a combination ('081/FF). Our strategy focuses on the discovery, development and commercialization of medicines with superior efficacy, convenience, tolerability and/or safety using our proprietary insight in chemistry, biology and multivalency, where applicable. Multivalency refers to the simultaneous attachment of a single molecule to multiple binding sites on one or more biological targets. When compared to monovalency, whereby a molecule attaches to only one binding site, multivalency can significantly increase a compound's potency, duration of action and/or selectivity. Multivalent compounds generally consist of several individual small molecules, at least one of which is biologically active when bound to its target, joined by linking components. In addition, we believe we can enhance the probability of successfully developing and commercializing medicines by identifying at least two structurally different product candidates, whenever practicable, in each therapeutic program. We believe that in some instances strategic collaborations and licensing activities will help us succeed at implementing our research, development and commercialization strategy for our product and product candidates. Through such strategic collaborations or licensing activities, we believe that we can enhance our ability to develop and expand our pipeline as well as commercialize products once approved. Prior to June 2, 2104, we had never operated as a separate, stand-alone entity. In addition, there have been a number of events over the past several years that have had a significant impact on our operations. As a result of these factors, our historical financial results are not likely to be indicative of our future financial performance. For the first six months of 2014, our net loss was $118.2 million, an increase of $47.1 millionfrom $71.1 millionfor the first six months of 2013. In 2014, our research and development expenses were $88.0 million, an increase of $32.2 millionfrom $55.8 millionin 2013 primarily due to external costs for progression of clinical studies in our key clinical programs. In 2014, our selling, general and administrative expenses were $32.2 million, an increase of $16.8 millionfrom $15.3 millionin 2013. The increase was primarily due to achievement of performance conditions under special long-term retention and incentive awards granted to certain employees in 2011, VIBATIV® commercialization activities, and external legal and accounting fees in connection with the Spin-Off. Cash, cash equivalents, and marketable securities totaled $387.4 millionon June 30, 2014, reflecting the contribution of $393.0 millionfrom Theravance in connection with the Spin-Off. 22 --------------------------------------------------------------------------------
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The Separation of
June 1, 2014, Theravance separated its late-stage respiratory assets partnered with GSK from its biopharmaceutical operations (the "Spin-Off") by transferring its discovery, development and commercialization operations (the "Biopharmaceutical Business") into its then wholly-owned subsidiary Theravance Biopharma. Theravance contributed $393.0 millionof cash, cash equivalents and marketable securities to us. In connection with the Spin-Off, on June 2, 2014Theravance made a pro rata dividend distribution to its stockholders of record on May 15, 2014of one ordinary share of Theravance Biopharmafor every three and one half shares of Theravance common stock outstanding on the record date. The Spin-Off resulted in Theravance Biopharmaoperating as an independent, publicly traded company. Basis of Presentation For the periods prior to June 2, 2014, the consolidated financial statements have been prepared using Theravance's historical cost basis of the assets, liabilities, revenues, and expenses of the various activities that comprise the Biopharmaceutical Business as a component of Theravance and reflect the results of operations, financial condition and cash flows of the Biopharmaceutical Business as a component of Theravance. The statements of operations include expense allocations for general corporate overhead functions historically shared with Theravance, including finance, legal, human resources, information technology and other administrative functions, which include the costs of salaries, benefits and other related costs, as well as consulting and other professional services. Where appropriate, these allocations were made on a specific identification basis. Otherwise, the expenses related to services provided to the Biopharmaceutical Business by Theravance were allocated to Theravance Biopharmabased on the relative percentages, as compared to Theravance's other businesses, of headcount or square footage usage.
The costs historically allocated to us by Theravance for the services it has shared with us may not be indicative of the costs we will incur for these services following the Spin-Off.
Program Highlights Respiratory Program
Long-Acting Muscarinic Antagonist (LAMA)-TD-4208
TD-4208 is currently in a dose-ranging Phase 2b study as a nebulized aqueous solution in patients with moderate-to-severe chronic obstructive pulmonary disease (COPD), and we expect to report top-line data in the fourth quarter of 2014. TD-4208 is a once-daily inhaled nebulized muscarinic antagonist discovered internally for the treatment of a subset of COPD patients that we believe are underserved by current hand-held products. We believe that TD-4208 has the potential to serve as a foundation for several combination nebulized products as well as potential metered dose inhaler or dry powder inhaler products. Positive top-line data from a Phase 2b study to evaluate the bronchodilatory effect, pharmacokinetics, safety and tolerability of multiple doses of TD-4208 were announced in
September 2013. In this study, TD-4208 met the primary efficacy endpoint for all six doses studied and demonstrated a statistically significant change versus placebo from baseline in forced expiratory volume in one second ("FEV1"). All doses of TD-4208 were generally well tolerated with rates of adverse events comparable to placebo. Bacterial Infections Programs VIBATIV® (telavancin)
We are currently commercializing VIBATIV® in the U.S. through a targeted program consisting of a small number of sales representatives and medical science liaisons supporting physician education on the proper usage of VIBATIV®.
VIBATIV® (telavancin) is a bactericidal, once-daily injectable antibiotic discovered internally in a research program dedicated to finding new antibiotics for serious infections due to Staphylococcus aureus and other Gram-positive bacteria, including methicillin-resistant (MRSA) strains. VIBATIV® is approved in the U.S. and
Canadafor the treatment of adult patients with complicated skin and skin structure infections (cSSSI) caused by susceptible Gram-positive bacteria. VIBATIV® is also approved in the U.S. for the treatment of adult patients with hospital-acquired and ventilator-associated bacterial pneumonia (HABP/VABP) caused by susceptible isolates of Staphylococcus aureus when alternative treatments are not suitable. VIBATIV® is approved in the European Union for the treatment of adults with nosocomial pneumonia, including ventilator-associated pneumonia, known or suspected to be caused by MRSA when other alternatives are not suitable. We plan to progress VIBATIV® into a registrational study for the treatment of patients with bacteremia and a patient registry study, with an objective of generating additional safety and efficacy data that can further elucidate the potential therapeutic benefit and utilization of VIBATIV®. 23 --------------------------------------------------------------------------------
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GI Motility Dysfunction Program
Velusetrag is an oral, investigational medicine discovered internally and developed for gastrointestinal motility disorders. It is a highly selective agonist with high intrinsic activity at the human 5-HT4 receptor.
Velusetrag is being developed in collaboration with
Alfa WassermannsocietÀ per azioni (S.p.A.) ("Alfa Wassermann") in a two-part Phase 2 program to test the efficacy, safety and tolerability of velusetrag in the treatment of patients with gastroparesis. Positive top-line results from the initial Phase 2 proof-of-concept study under this partnership, which evaluated gastric emptying, safety and tolerability of multiple doses of velusetrag, were announced in April 2014. Based on these results, we have agreed with Alfa Wassermannto advance velusetrag into a Phase 2b study later this year. Pursuant to our agreement with Alfa Wassermann, the first Phase 2 study was, and the bulk of the Phase 2b study will be, funded by Alfa Wassermann. TD-8954 TD-8954, like velusetrag, is an internally discovered highly selective agonist with high intrinsic activity at the human 5-HT4 receptor. We are investigating the development potential of TD-8954 for acute use in the hospital setting for patients who require rapid restoration of upper and lower GI motility. We believe that TD-8954 may help hospitalized patients with enteral feeding intolerance, or EFI, and potentially other GI disorders. A Phase 2a study evaluating the safety, tolerability and pharmacodynamics of a single dose of TD-8954 administered intravenously compared to metoclopramide in critically ill patients with EFI is ongoing.
Central Nervous System/Pain Programs
Oral Peripheral Mu Opioid Receptor Antagonist- Axelopran (TD-1211)
Axelopran is an internally discovered 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, positive top-line results were announced from the Phase 2b study 0084, the key study in the Phase 2b program evaluating axelopran as a potential treatment for chronic, non-cancer pain patients with opioid-induced constipation. In June 2014, the FDA's Anesthetic and Analgesic Drug Products Advisory Committeemet to review the class of peripherally acting opioid receptor antagonists and to assess the necessity, timing, design and size of cardiovascular outcomes trials to support approval of products in the class for the proposed indication of opioid induced constipation in patients taking opioids for chronic pain. Following a clarification of the vote, a majority of committee members voted that the FDAshould not require cardiovascular outcomes trials for peripherally acting mu opioid receptor antagonists being developed for the treatment of opioid-induced constipation in patients with chronic, non-cancer pain. The FDA Advisory Committeeprovides non-binding recommendations for consideration by the FDA, with the final decision on approval made by the FDA. We are currently evaluating our Phase 3 strategy relative to potentially evolving FDArequirements for this class of drug. 24 --------------------------------------------------------------------------------
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Monoamine Reuptake Inhibitor - TD-9855
Positive results from a Phase 2 study of TD-9855, an internally discovered investigational norepinephrine and serotonin reuptake inhibitor (NSRI), in patients with fibromyalgia were announced in
April 2014. The Phase 2 randomized, double-blind, parallel-group, placebo-controlled study evaluated the safety and efficacy of two doses of TD-9855 (5 mg and 20 mg) in 392 patients. Study medication was administered once-daily for up to 6 weeks. The primary endpoint of the study was improvement in pain. Secondary endpoints assessed improvement in core symptoms of fibromyalgia using established fibromyalgia measures. The study demonstrated statistically significant and clinically meaningful improvements in the primary and secondary endpoints at the 20 mg dose of TD-9855 compared to placebo. The 5 mg dose did not meet statistical significance for the primary endpoint. Both doses were generally well tolerated.
Economic Interests in GSK Respiratory Programs Partnered with Theravance
Prior to the Spin-Off, Theravance assigned to
Theravance Respiratory Company, LLC("TRC"), a Delawarelimited liability company formed and controlled by Theravance, its strategic alliance agreement with GSK and all of its rights and obligations under its LABA collaboration agreement with GSK other than with respect to RELVAR® ELLIPTA®/BREO® ELLIPTA®, ANORO® ELLIPTA® and vilanterol monotherapy. Our equity interest in TRC entitles us to 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. The drug programs assigned to TRC include FF/UMEC/VI and the MABA program, as monotherapy and in combination with other therapeutically active components, such as an inhaled corticosteroid (ICS), and any other product or combination of products that may be discovered and developed in the future under these GSK agreements. Our economic interest will not include any payments associated with RELVAR® ELLIPTA®/BREO® ELLIPTA®, ANORO® ELLIPTA® or vilanterol monotherapy. The information in the following three paragraphs is based solely upon publicly available information and may not reflect the most recent developments under the FF/UMEC/VI and MABA programs.
"Closed Triple" or FF/UMEC/VI (fluticasone furoate/umeclidinium bromide/vilanterol)
The "closed triple" program seeks to provide the activity of an inhaled corticosteroid (FF) plus two bronchodilators (UMEC, a LAMA, and VI, a long-acting beta2 agonist or LABA) in a single delivery device. If the "closed triple" is successfully developed and commercialized, TRC is entitled to receive upward-tiering royalties from 6.5% to 10% from GSK on worldwide net sales. In
July 2014, Theravance and GSK announced the initiation of a large, global Phase 3 program for the "closed triple" in patients with COPD.
Inhaled Bifunctional Muscarinic Antagonist-Beta2 Agonist (MABA)
GSK961081 ('081) is an investigational, single-molecule bifunctional bronchodilator with both muscarinic antagonist and beta2 receptor agonist (MABA) activity that was discovered by us when we were part of Theravance. In
August 2014, Theravance reported that preclinical Phase 3-enabling studies and a Phase 1 study with healthy volunteers of '081/FF are ongoing to explore its potential as a once-daily medicine delivered in GSK's ELLIPTA® inhaler. If a single-agent MABA medicine containing '081 is successfully developed and commercialized, TRC is entitled to receive royalties from GSK of between 10% and 20% of annual global net sales up to $3.5 billion, and 7.5% for all annual global net sales above $3.5 billion. If a MABA medicine containing '081 is commercialized only as a combination product, such as '081/FF, the royalty rate is 70% of the rate applicable to sales of the single-agent MABA medicine. If a MABA medicine containing '081 is successfully developed and commercialized in multiple regions of the world, TRC could earn total contingent payments of up to $125.0 millionfor a single-agent medicine and up to $250.0 millionfor both a single-agent and a combination medicine.
Critical Accounting Policies and Estimates
Our management's 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 ("GAAP"). 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 generated and expenses incurred during the reporting periods. Our estimates are based on Theravance's historical experiences 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. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. 25 --------------------------------------------------------------------------------
Table of Contents Revenue Recognition Revenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the nature of the fee charged for products or services delivered and the collectability of those fees. Where the revenue recognition criteria are not met, we defer the recognition of revenue by recording deferred revenue until such time that all criteria are met. Product Revenues We sell VIBATIV® in the U.S. through a limited number of distributors, and title and risk of loss transfer upon receipt by these distributors. Healthcare providers order VIBATIV® through these distributors. Commencing in the first quarter of 2014, we have recorded revenue on the sale of VIBATIV® on a sell-through basis, once the distributors sell the product to healthcare providers. Product sales are recorded net of estimated government-mandated rebates and chargebacks, distribution fees, estimated product returns and other deductions. We reflect such reductions in revenue as either an allowance to the related account receivable from the distributor, or as an accrued liability, depending on the nature of the sales deduction. Sales deductions are based on management's estimates that consider payer mix in target markets, industry benchmarks and experience to date. We monitor inventory levels in the distribution channel, as well as sales of VIBATIV® by distributors to healthcare providers, using product-specific data provided by the distributors. Product return allowances are based on amounts owed or to be claimed on related sales. These estimates take into consideration the terms of our agreements with customers, historical product returns of VIBATIV® experienced by Theravance's former collaborative partner, Astellas Pharma Inc. ("Astellas"), rebates or discounts taken, estimated levels of inventory in the distribution channel, the shelf life of the product, and specific known market events, such as competitive pricing and new product introductions. We update our estimates and assumptions each quarter and if actual future results vary from our estimates, we may adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment. Sales Discounts: We offer cash discounts to our customers, generally 2% of the sales price, as an incentive for prompt payment. We expect our customers to comply with the prompt payment terms to earn the cash discount. We account for cash discounts by reducing accounts receivable by the full amount and recognizing the discount as a reduction of revenue in the same period the related revenue is recognized. Chargebacks and Government Rebates: For VIBATIV® sales in the U.S., we estimate reductions to product sales for qualifying federal and state government programs including discounted pricing offered to
Public Health Service("PHS") as well as government-managed Medicaidprograms. Our reduction for PHS is based on actual chargebacks that distributors have claimed for reduced pricing offered to such health care providers. Our accrual for Medicaidis based upon statutorily-defined discounts, estimated payer mix, expected sales to qualified healthcare providers, and our expectation about future utilization. The Medicaidaccrual and government rebates that are invoiced directly to us are recorded in other accrued liabilities on the consolidated balance sheet. For qualified programs that can purchase our products through distributors at a lower contractual government price, the distributors charge back to us the difference between their acquisition cost and the lower contractual government price, which we record as an allowance against accounts receivable. Distribution Fees and Product Returns: We have written contracts with our distributors that include terms for distribution-related fees. We record distribution-related fees based on a percentage of the product sales price. We offer our distributors a right to return product purchased directly from us, which is principally based upon the product's expiration date. Additionally, we have granted more expansive return rights to our distributors following our product launch of VIBATIV®. We will generally accept product returns during the six months prior to and twelve months after the product expiration date on product that had been sold to our distributors. We have developed estimates for VIBATIV® product returns based upon historical VIBATIV® sales. We record distribution fees and product returns as an allowance against accounts receivable. Allowance for Doubtful Accounts: We maintain a policy to record allowances for potentially doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. As of June 30, 2014and December 31, 2013, there was no allowance for doubtful accounts as we have not had any write-offs historically.
Collaborative Arrangements and Multiple Element Arrangements
Revenue from nonrefundable, up-front license or technology access payments under license and collaborative arrangements that are not dependent on any future performance by us is recognized when such amounts are earned. If we have continuing obligations to perform under the arrangement, such fees are recognized over the estimated period of continuing performance obligation.
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We account for 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") Accounting Standards Codification ("ASC") Subtopic 605-25, "Multiple Element Arrangements." For new or materially amended multiple element arrangements, we identify the deliverables at the inception of the arrangement and 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 the 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 delivered items under our collaborative arrangements did not meet the criteria 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 contingent payments in the same manner as the final deliverable, which is ratably over the expected term of our performance of research and development ("R&D") services under the agreements. These upfront or contingent payments received, pending recognition as revenue, are recorded as deferred revenue and are classified as a short-term or long-term liability on the consolidated balance sheets and recognized 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 collaborative arrangement, they are recorded as deferred revenue and recognized as revenue or as an accrued liability and recognized as a reduction of R&D 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 collaborative arrangements, we have been reimbursed for a portion of our R&D expenses. These reimbursements have been reflected as a reduction of R&D expense in our consolidated statements of operations, 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 R&D expense.
Amounts deferred under a collaborative arrangement 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 there are no remaining performance obligations.
We account for contingent payments 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. Inventories Inventories consist of raw materials, work-in-process and finished goods related to the production of VIBATIV® (telavancin). Raw materials include VIBATIV® active pharmaceutical ingredient (API) and other raw materials. Work-in-process and finished goods include third party manufacturing costs and labor and indirect costs we incur in the production process. Included in inventories are raw materials and work-in-process that may be used as clinical products, which are charged to R&D expense when consumed. In addition, under certain commercialization agreements, we may sell VIBATIV® packaged in unlabeled vials that are recorded in work-in-process. Inventories are stated at the lower of cost or market value. We determine the cost of inventory using the average-cost method for validation batches. We analyze our inventory levels quarterly and write down any inventory that is expected to become obsolete, that has a cost basis in excess of its expected net realizable value or for inventory quantities in excess of expected requirements. As of
June 30, 2014, the carrying value of our inventory is approximately $14.8 million. In order to realize the value of our recorded inventory, we will be dependent upon continued increases in the sales volumes of VIBATIV®. 27 --------------------------------------------------------------------------------
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Total revenues, as compared to the prior year period, was as follows:
Three months Ended Six months Ended June 30, Change June 30, Change (In thousands, except percentages) 2014 2013 $
% 2014 2013 $ % Product sales
$ 861 $ - $
861 * %
2,113 5 2,108 * 2,113 27 2,086 * Total revenue
$ 2,974 $ 5 $ 2,969* % $ 3,91927 3,892 * %
Total revenue increased in the three and six months ended
June 30, 2014from the comparable period in 2013 primarily due to recognition of revenue from sales of VIBATIV® that were previously deferred. Commencing in the first quarter of 2014, we have recorded revenue on the sale of VIBATIV® on a sell-through basis, once the distributors sell the product to healthcare providers. In addition, in the three months ended June 30, 2014, we recognized previously deferred revenue of $2.1 millionfrom the R-Pharm collaborative arrangements due to the completion of technical transfer of the license in the second quarter of 2014, and from the sale of active pharmaceutical ingrediants. Cost of goods sold
Cost of goods sold, as compared to the prior year period, was as follows:
Three months Ended Six months Ended June 30, Change June 30, Change (In thousands, except percentages) 2014 2013 $ % 2014 2013 $ % Cost of goods sold
$ 279$ - $ 279* % $ 467- 467 * %
Cost of goods sold in the three and six months ended
Research and Development Expenses
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, we do not have program level reporting capabilities. We manage and report our R&D activities across the following four cost categories: 1) Employee-related costs, which include salaries, wages and benefits; 2) External costs, which include clinical trial related
expenses, other contract research fees, consulting fees, and contract manufacturing fees;
3) Share-based compensation, which includes expenses
associated with our equity plans; and
4) Facilities and other, which include laboratory and
supplies, depreciation and other allocated expenses, which include general and administrative support functions, insurance and general supplies.
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The following table summarizes our research and development expenses incurred during the periods presented:
Three months Ended Six months Ended June 30, Change June 30, Change (In thousands, except percentages) 2014 2013 $ % 2014 2013 $ % Employee-related
$ 12,066 $ 8,315 $ 3,75145 % $ 31,365 $ 17,417 $ 13,94880 % External-related 23,208 12,313 10,895 88 35,022 19,314 15,708 81 Share-based compensation 4,194 4,310 (116 ) (3 ) 8,915 7,998 917 11 Facilities, depreciation and other allocated 6,815 5,462 1,353 25 12,704 11,079 1,625 15 Total R&D expenses $ 46,283 $ 30,400 $ 15,88352 % $ 88,006 $ 55,808 $ 32,19858 % R&D expenses increased 52% to $46.3 millionin the second quarter of 2014 from the comparable period in 2013 primarily due to higher external-related costs of $10.9 million, employee-related costs of $3.8 millionand facilities expense of $1.3 million. The key clinical trials we were conducting in the second quarter of 2014 were our Phase 2 studies in our LAMA program with TD-4208, our Phase 2 clinical study in our MARIN program with TD-9855 for fibromyalgia and our Phase 1 studies in earlier stage programs. In the comparable period in 2013 our key clinical trials primarily consisted of our Phase 2 clinical studies in our MARIN program with TD-9855 for ADHD and fibromyalgia, the first Phase 2b study in our LAMA program with TD-4208 and Phase 1 studies in earlier stage programs. Employee-related costs increased primarily due to R&D reimbursements received from our collaboration partners in 2013, achievement of performance conditions under special long-term retention and incentive awards granted to certain employees in 2011, and increased support for clinical activities. R&D expenses increased 58% to $88.0 millionin the first six months of 2014 from the comparable period in 2013 primarily due to due to higher external-related costs of $15.7 million, employee-related costs of $13.9 millionand facilities expense of $1.6 million. The key clinical trials we were conducting in the first six months of 2014 were our Phase 2 studies in our LAMA program with TD-4208, our Phase 2 clinical study in our MARIN program with TD-9855 for fibromyalgia and our Phase 1 studies in earlier stage programs. In the comparable period in 2013 our key clinical trials primarily consisted of our Phase 2 clinical studies in our MARIN program with TD-9855 for ADHD and fibromyalgia, the first Phase 2b study in our LAMA program with TD-4208 and Phase 1 studies in earlier stage programs. The increase in employee-related costs primarily resulted from the achievement of performance conditions under a special long-term retention and incentive cash bonus awarded to certain employees in 2011, the majority of which was recognized in the first quarter of 2014, R&D reimbursements received from our collaboration partners in 2013, and increased support for clinical activities. Under certain of our collaborative arrangements we received partial reimbursement of external costs and employee-related costs, which have been reflected as a reduction of R&D expenses of $2.1 millionand $3.9 millionfor the three and six months ended June 30, 2013. The reimbursement received in the three and six months ended June 30, 2014was not material.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, as compared to the prior year period, were as follows: Three months Ended Six months Ended June 30, Change June 30, Change
(In thousands, except percentages) 2014 2013 $ %
2014 2013 $ % Selling, general and administrative expenses
$ 13,118 $ 8,557 $ 4,56153 % $ 32,170 $ 15,345 $ 16,825110 % Selling, general and administrative expenses increased 53% to $13.1 millionin the second quarter of 2014, from the comparable period in 2013 primarily due to VIBATIV® commercialization activities. Selling, general and administrative expenses include share-based compensation expense of $2.6 millionand $1.9 millionfor the three months ended June 30, 2014and 2013, respectively. Selling, general and administrative expenses increased 110% to $32.2 millionin the first six months of 2014, from the comparable period in 2013. The increase was primarily due to achievement of performance conditions under special long-term retention and incentive awards granted to certain employees in 2011, VIBATIV® commercialization and external legal and accounting fees in connection with the Spin-Off. Total expenses related to the Spin-Off were $3.0 millionand $1.1 millionfor the first six months of 2014 and 2013. Selling, general and administrative expenses include share-based compensation expense of $10.6 millionand $3.7 millionfor the six months ended June 30, 2014and 2013. 29
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Liquidity and Capital Resources
At the closing of the Spin-Off, Theravance provided cash, cash equivalents and marketable securities of
$393.0 million. In addition, Theravance is obligated to fund all current liabilities, with the exception of deferred rent, deferred revenue, accrued vacation and accrued discretionary cash bonus that were incurred by us through the Spin-Off date in accordance with the Separation and Distribution Agreement between us. For ease of administration and in connection with the assignment of certain rights and obligations under the Separation and Distribution Agreement, certain current liabilities, which were transferred to us on the Spin-Off date, are to be paid by us and reimbursed by Theravance. As such, Theravance provided us with an additional $17.0 millionin July 2014to reimburse us for these liabilities that were incurred before the Spin-Off and transferred to us on the Spin-Off date. We expect our cash, cash equivalents and marketable securities will fund our operations for at least the next twelve months based on current operating plans and financial forecasts. We expect to incur substantial expenses as we continue our drug discovery and development efforts, particularly to the extent we advance our product and product candidates into and through clinical studies, which are very expensive. For example, in April 2014Theravance initiated a second Phase 2b study with TD-4208, our LAMA compound, and Theravance completed and announced positive results from a Phase 2 study of TD-9855 in our MARIN program for fibromyalgia. Though we are seeking to partner these and other mid-to-late stage programs, we may choose to progress one or more of these programs into later-stage clinical studies by ourselves, which could increase our anticipated operating expenses substantially. For example, we intend to progress telavancin, our approved antibiotic, into a registrational study for bacteremia as well as a patient registry study. We currently employ or have contracted with a small number of sales representatives and medical science liaisons in the U.S. supporting physician education on the proper usage of VIBATIV®, and we presently intend to modestly increase the size of this group. Furthermore, without a commercialization partner for VIBATIV® in the U.S., we are not able to leverage a commercialization partner's capabilities and infrastructure and we are incurring all of the costs and expenses associated with the commercialization of VIBATIV® in the U.S., including the creation of an independent sales and marketing organization with appropriate technical expertise, supporting infrastructure and distribution capabilities, expansion of medical affairs presence, manufacturing and third party vendor logistics and consultant support. In 2011, Theravance granted special long-term retention and incentive cash bonus awards to certain employees. 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, 2016and continued employment. In May 2014, Theravance's Compensation Committee determined that the requisite performance conditions for the first tranche of the awards were achieved and, as a result, $9.5 millionwas paid by Theravance. In May 2014, Theravance's Compensation Committee approved the modification of the remaining tranches related to these awards contingent upon the Spin-Off. The modification acknowledged the Spin-Off and permitted recognition of achievement of the original performance conditions that were met prior to the Spin-Off, triggering twelve-month service-based vesting for a portion of the cash awards. The maximum amount payable by us under these modified cash bonus awards is $10.7 million. The remaining tranches of the cash awards were forfeited. If our current operating plans or financial forecasts change, we may require additional funding sooner in the form of public or private equity offerings, debt financings or additional collaborations and licensing arrangements. Furthermore, if in our view favorable financing opportunities arise, we may seek additional funding at any time. However, future financing may not be available in amounts or on terms acceptable to us, if at all. This could leave us without adequate financial resources to fund our operations as presently conducted. Cash Flows Six Months Ended June 30, (In thousands) 2014 2013 Change Net cash used in operating activities $ (96,239 ) $ (52,836 ) $ 43,403Net cash used in investing activities (6,079 ) (1,331 ) 4,748 Net cash provided by financing activities 370,517 54,167 316,350 Net cash used in our operating activities in the six months ended June 30, 2014and 2013 was $96.2 millionand $52.8 million. The $43.4 millionincrease in net cash used in operating activities was primarily attributable to the increase in costs related for progression of clinical studies in our key clinical programs, bonus payments related to achievement of performance conditions under special long-term retention and incentive awards granted to certain employees in 2011, and costs related to VIBATIV® commercialization. 30 --------------------------------------------------------------------------------
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Net cash used in investing activities in the six months ended
June 30, 2014and 2013 was $6.1 millionand $1.3 million. The $4.7 millionincrease in net cash used in investing activities was due to $4.2 millionfrom purchases of available-for-sale securities in the first six months of 2014, net of the maturities, and increase in purchases of property and equipment of $0.4 millionin 2014. Net cash provided by financing activities in six months ended June 30, 2014and 2013 was $370.5 millionand $54.2 million. The $316.4 millionincrease in net cash provided by financing activities was due to $277.5 millionof cash and cash equivalents contributed from Theravance as a result of the Spin-Off and an increase of $38.8 milliontransfers from Theravance in the first six months of 2014 compared to 2013.
Off-Balance Sheet Arrangements
Our equity interest in TRC constitutes an off-balance sheet arrangement. Under the agreement governing the TRC, the manager of TRC may request quarterly capital contributions from us to fund the operating costs of TRC, however, we are not obligated to make such contributions. Our equity interest in TRC entitles us to an 85% economic interest in any future payments, which includes royalties and milestone payments, made by GSK under the strategic alliance agreement and under the portion of the collaboration agreement assigned to TRC (the "TRC-Assigned Agreements"). We have determined TRC to be a variable interest entity that is not consolidated in our financial statements. See Note 11 in the notes to our consolidated financial statements for further information regarding our interests in TRC. The potential importance of TRC to our future financial condition and results of operations is dependent upon the progression of drug candidates covered by the TRC-Assigned Agreements through development to commercialization. We rely on publicly available information about those drug candidates as we do not have access to confidential information regarding their progression or status. Commitments and Contingencies In 2011, Theravance granted special long-term retention and incentive restricted stock awards to members of senior management and special long-term retention and incentive cash bonus awards to certain employees. The awards have dual triggers of vesting based upon the achievement of certain performance conditions over a six-year time frame from 2011 through
December 31, 2016and continued employment. In May 2014, Theravance's Compensation Committee determined that the requisite performance conditions for the first tranche of the awards were achieved and, as a result, $0.2 millionand $7.0 millionin stock-based compensation expense was recognized by us in the three and six months ended June 30, 2014and $9.5 millionof cash bonus was paid by Theravance. In May 2014, Theravance's Compensation Committee approved the modification of the remaining tranches related to these awards contingent upon the Spin-Off. The modification acknowledged the Spin-Off and permitted recognition of achievement of the original performance conditions that were met prior to the Spin-Off, triggering twelve-month service-based vesting for a portion of the equity and cash awards. The stock-based compensation expense of $10.7 millionassociated with a portion of these awards after the modification is expected to be recognized by either Theravance or us, based on which company employs the individuals who hold these awards during the twelve-month service period commencing in June 2014. The maximum amount payable by us under these modified cash bonus awards is $10.7 million. The remaining tranches of the restricted stock awards remain subject to performance and service conditions and the remaining tranches of the cash awards were forfeited.
Contractual Obligations and Commercial Commitments
There have been no material changes in our contractual obligations and commercial commitments from those set forth in our Registration Statement on Form 10 filed on