3. Collaboration Arrangements

GSK

LABA collaboration

In November 2002, the Company entered into its 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.

In the event that a product containing VI is successfully developed and commercialized, the Company 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, the Company estimates up to $140.0 million could be payable during 2013 and all the milestone payments could be payable by the end of 2014. The Company is 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, the Company entered into its strategic alliance with GSK. Under this alliance, GSK received an option to license exclusive development and commercialization rights to product candidates from certain of the Company's 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 candidates from any program that it licenses. If the program is successfully advanced through development by GSK, the Company is entitled to receive clinical, regulatory and commercial milestone payments and royalties on any sales of medicines developed from the program. If GSK chooses not to license a program, the Company retains all rights to the program and may continue the program alone or with a third party.

In 2005, GSK licensed the Company's bifunctional muscarinic antagonist-beta₂ agonist (MABA) program for the treatment of COPD, and in October 2011, the Company and GSK expanded the MABA program by adding six additional Theravance-discovered preclinical MABA compounds (the "Additional MABAs"). GSK's development, commercialization, milestone and royalty obligations under the strategic alliance remain the same with respect to '081, the lead compound in the MABA program. GSK is obligated to use diligent efforts to develop and commercialize at least one MABA within the MABA program, but may terminate progression of any or all Additional MABAs at any time and return them to the Company, at which point the Company may develop and commercialize such Additional MABAs alone or with a third party. Both GSK and the Company have agreed not to conduct any MABA clinical studies outside of the strategic alliance so long as GSK is in possession of the Additional MABAs. If a single-agent MABA medicine containing '081 is successfully developed and commercialized, the Company 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 a MABA/ICS, the royalty rate is 70% of the rate applicable to sales of the single-agent MABA medicine. For single-agent MABA medicines containing an Additional MABA, the Company is entitled to receive royalties from GSK of between 10% and 15% of annual global net sales up to $3.5 billion, and 10% for all annual global net sales above $3.5 billion. For combination products containing an Additional MABA, such as a MABA/ICS, the royalty rate is 50% 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, the Company could earn total milestone payments of up to $125.0 million for a single-agent medicine and up to $250.0 million for both a single-agent and a combination medicine. If a MABA medicine containing an Additional MABA is successfully developed and commercialized in multiple regions of the world, the Company could earn total milestone payments of up to $129.0 million. GSK has no further option rights on any of the Company's research or development programs under the strategic alliance.

Purchases of Common Stock under the Company's Governance Agreement and Common Stock Purchase Agreements with GSK; GSK Conversion of the Company's Class A Common Stock

On May 16, 2012, the Company issued and Glaxo Group Limited, an affiliate of GSK, purchased 10,000,000 shares of the Company's common stock at a price of $21.2887 per share, for a total investment of $212.9 million.

In addition, Glaxo Group Limited purchased shares of the Company's common stock pursuant to its periodic "top-up" rights under the Company's governance agreement with GSK dated June 4, 2004, as amended, as follows:

	Through December 31, 2012

	Common Stock Shares Purchased		Aggregate Amounts (in thousands)
Purchase dates
February 18, 2011		152,278	$	3,609
May 3, 2011		261,299	$	6,689
August 2, 2011		102,466	$	2,020
November 1, 2011		58,411	$	1,298
February 14, 2012		88,468	$	1,603
August 3, 2012		316,334	$	8,924
November 2, 2012		280,348	$	6,266

In July 2011, GSK converted all of the shares of the Company's Class A common stock held by its affiliates into 9,401,499 shares of the Company's common stock on a one share-for-one share basis in accordance with the terms of the Company's restated certificate of incorporation.

GSK Contingent Payments and Revenue

The potential future contingent payments related to the MABA program of $102.0 million are not deemed substantive milestones due to the fact that the achievement of the event underlying the payment predominantly relates to GSK's performance of future development, manufacturing and commercialization activities for product candidates after licensing the program.

Revenue recognized from GSK under the LABA collaboration and strategic alliance agreements was as follows:

	Year Ended December 31,

(in thousands)	2012		2011		2010
LABA collaboration(1)	$	3,629	$	4,718	$	5,081
Strategic alliance agreement		—		1,858		2,738
Strategic alliance—MABA program license(2)		1,984		3,082		2,007

Total revenue	$	5,613	$	9,658	$	9,826

(1): The Company revised the estimated performance period for the LABA program based on its progress in the fourth quarter of 2011, resulting in an increase to net loss of $0.4 million for the year ended December 31, 2011. The Company does not expect that the revision will have a material impact on future revenue recognized under this program.
(2): The Company revised the estimated performance period for the MABA program based on its progress as follows: (i) in the first quarter of 2010, resulting in an increase to net loss of $1.0 million for the year ended December 31, 2010; (ii) in the fourth quarter of 2011, resulting in an increase to net loss of $0.2 million for the year ended December 31, 2011; and (iii) in the fourth quarter of 2012, resulting in an increase to net loss of $0.1 million for the year ended December 31, 2012. The Company does not expect that the revision will have a material impact on future revenue recognized under this program.

Under the GSK collaboration arrangements, the Company is reimbursed for research and development expenses. These reimbursements have been reflected as a reduction of research and development expense of $0.2 million for the year ended December 31, 2012, and $0.4 million for each of the years ended December 31, 2011 and 2010.

Merck

Research Collaboration and License Agreement with Merck

In October 2012, the Company signed a collaboration agreement with Merck, known as MSD outside the United States and Canada, to discover, develop and commercialize novel small molecule therapeutics directed towards a target being investigated for the treatment of hypertension and heart failure. In exchange for granting Merck a worldwide, exclusive license to the Company's therapeutic candidates, the Company received a $5.0 million upfront payment in November 2012. Also, the Company will receive funding for research and be eligible for potential future contingent payments totaling up to $148.0 million for the first indication and royalties on worldwide annual net sales of any products derived from the collaboration. The contingent payments are not deemed substantive milestones due to the fact that the achievement of the event underlying the payment predominantly relates to Merck's performance of future development and commercialization activities. The initial research term is twelve months, with optional extensions by mutual agreement, and Merck can terminate the agreement at any time.

The Company identified all of the deliverables at the inception of the agreement. The significant deliverables were determined to be the license, research services and committee participation. The Company's management determined that the license represents a separate unit of accounting as the license, which includes rights to the underlying technologies for the Company's therapeutic candidates, has standalone value because the rights conveyed permit Merck to perform all efforts necessary to use the Company's technologies to bring a therapeutic candidate through development, commercialization and begin selling the drug upon regulatory approval. Also, the Company's management determined that the research services and committee participation each represent individual units of accounting. The Company's management determined the best estimate of selling price for the license based on potential future cash flows under the arrangement over the estimated development period. The Company's management determined the best estimate of selling price of the research services and committee participation based on the nature and timing of the services to be performed.

The $5.0 million upfront payment received in November 2012 was allocated to the three units of accounting based on the relative selling price method as follows: $4.4 million to the license, $0.4 million to the research services and $0.2 million to the committee participation. The Company recognized revenue from the license in 2012 as the technical transfer activities were complete and the associated unit of accounting was deemed delivered. The amount allocated to the committee participation was deferred and will be recognized as revenue over the estimated performance period. The amount allocated to the research services was deferred and will be recognized as an offset to research and development expense as the underlying services are performed, as the nature of the research services is more appropriately characterized as research and development expense, consistent with the research reimbursements being received. Revenue recognized from Merck under the collaboration agreement was $4.4 million in 2012. Deferred research services of $0.4 million were included in other accrued liabilities at December 31, 2012. Amounts associated with deferred committee participation of $19,000 were included in deferred revenue, current and $0.2 million were included in deferred revenue, non-current at December 31, 2012.

The Company recognized $0.8 million in research reimbursement due from Merck as a reduction of research and development expense in 2012, which receivable was included in receivables from collaboration partners at December 31, 2012.

Alfa Wassermann

Development and Commercialization Agreement with Alfa Wassermann

In October 2012, the Company entered into a development and commercialization agreement with Alfa Wassermann società per azioni (S.p.A.) for velusetrag (or TD-5108), the Company's investigational 5-HT4 agonist in development for gastrointestinal motility disorders. Under the agreement, the companies will collaborate in the execution of a two-part Phase 2 program to test the efficacy, safety and tolerability of velusetrag in the treatment of patients with gastroparesis. Alfa Wassermann has an exclusive option to develop and commercialize velusetrag in the European Union, Russia, China, Mexico and certain other countries, while the Company retains full rights to velusetrag in the US, Canada, Japan and certain other countries. In October 2012, the Company entered into a development and commercialization agreement with Alfa Wassermann società per azioni (S.p.A.) for velusetrag (or TD-5108), the Company's investigational 5-HT4 agonist in development for gastrointestinal motility disorders. Under the agreement, the Company will collaborate in the execution of a two-part Phase 2 program to test the efficacy, safety and tolerability of velusetrag in the treatment of patients with gastroparesis. Alfa Wassermann has an exclusive option to develop and commercialize velusetrag in the European Union, Russia, China, Mexico and certain other countries, while the Company retains full rights to velusetrag in the US, Canada, Japan and certain other countries. The Company is entitled to receive funding for the Phase 2a study and a subsequent Phase 2b study if the parties agree to proceed. If Alfa Wassermann exercises its license option at the completion of the Phase 2 program, then the Company is entitled to receive a $10.0 million option fee. If velusetrag is successfully developed and commercialized, the Company is entitled to receive potential future contingent payments totaling up to $53.5 million, and royalties on net sales by Alfa Wassermann ranging from the low teens to 20%. The contingent payments are not deemed substantive milestones due to the fact that the achievement of the event underlying the payment predominantly relates to Alfa Wassermann's performance of future development and commercialization activities. At December 31, 2012, Alfa Wassermann's option right had not been exercised. The option right could be exercised within the next two years. The Company recognized $0.2 million in research reimbursement due from Alfa Wassermann as a reduction of research and development expense in 2012, which receivable was included in receivables from collaboration partners at December 31, 2012.

R-Pharm CJSC

Development and Commercialization Agreement with R-Pharm CJSC

In October 2012, the Company entered into two separate development and commercialization agreements with R-Pharm CJSC (R-Pharm). The first was for TD-1792, the Company's investigational glycopeptide-cephalosporin heterodimer antibiotic for the treatment of resistant Gram-positive infections, and the second was for telavancin. In exchange for granting R-Pharm exclusive development and commercialization rights in Russia, Ukraine, other member countries of the Commonwealth of Independent States, and Georgia under both agreements, the Company received $1.1 million in license and maintenance fees in November 2012. Also, the Company is eligible to receive an additional $1.0 million in near-term licensing fees, potential future contingent payments totaling up to $10.0 million and royalties on net sales by R-pharm of 15% from TD-1792 and 25% from telavancin. The contingent payments are not deemed substantive milestones due to the fact that the achievement of the event underlying the payment predominantly relates to R-Pharm's performance of future development and commercialization activities.

The Company identified all of the deliverables at the inception of the agreements. The significant deliverables were determined to be the licenses and committee participation for each agreement. The Company's management determined that the licenses represent a separate unit of accounting as the licenses, which include rights to the Company's underlying technologies for TD-1792 and telavancin, have standalone value because the rights conveyed permit R-Pharm to use the Company's technologies to bring the compounds through development, commercialization and begin selling the drugs upon regulatory approval. Also, the Company's management determined that the committee participation represents a separate unit of accounting under each agreement. The amounts received in license and maintenance fees of $1.1 million are included in deferred revenue, current at December 31, 2012, as the completion of the technical transfer to R-Pharm was not completed. The technical transfer is expected to be completed during the first quarter of 2013.

Astellas

License, Development and Commercialization Agreement with Astellas

In November 2005, the Company entered into a global collaboration arrangement with Astellas for the development and commercialization of VIBATIV®. On January 6, 2012, Astellas exercised its right to terminate this agreement. The rights previously granted to Astellas ceased upon termination of the agreement and Astellas stopped all promotional sales efforts. Pursuant to the terms of the agreement, Astellas is entitled to a ten-year, 2% royalty on future net sales of VIBATIV®. The Company continues to evaluate global commercialization alternatives for VIBATIV® either with partners or alone, and the Company intends to reintroduce VIBATIV® in the U.S. later in 2013 provided the Company can assure a reasonable source of VIBATIV® drug product.

In 2012, the Company issued purchase orders to Astellas for the purchase of VIBATIV® active pharmaceutical ingredient and other raw materials of up to $7.7 million, and as of December 31, 2012 the Company had purchased $5.8 million pursuant to these orders. The remaining active pharmaceutical ingredient and other raw materials will not be purchased. Also in 2012, the Company issued purchase orders to Astellas for the purchase of VIBATIV® finished goods inventories of up to $4.2 million, and as of December 31, 2012 these finished goods inventories remained subject to release.

In addition, beginning July 1, 2012, the Company was responsible to fund governmental rebate and governmental chargeback claims for Astellas-labeled product sales. As a result of the termination of the VIBATIV® collaboration agreement, the Company recognized $31,000 in governmental rebate and governmental chargeback claims in 2012.

Through January 6, 2012, the Company had received $191.0 million in upfront license, contingent payments and other fees from Astellas. The Company previously recorded these payments as deferred revenue and amortized them ratably over its estimated performance period (development and commercialization period). As a result of the termination of the VIBATIV® collaboration agreement, the development and commercialization period ended on January 6, 2012. As such, the Company recognized into revenue $125.8 million of deferred revenue related to Astellas in the first quarter of 2012, and the Company is no longer eligible to receive any further contingent payments from Astellas.

Net revenue recognized under this collaboration agreement was as follows:

	Year Ended December 31,

(in thousands)	2012			2011			2010
Recognition of deferred revenue	$	125,819		$	—		$	—
Amortization of deferred revenue		—			12,975			12,975
Royalties from net sales of VIBATIV®		—			2,422			1,123
Proceeds from VIBATIV® delivered to Astellas		—			1,171			2,058
Cost of VIBATIV® delivered to Astellas		—			(1,177	)		(938	)
Cost of unrealizable VIBATIV® inventories		—			(537	)		(821	)
Astellas-labeled product sales allowance		(31	)		—			—

Total net revenue	$	125,788		$	14,854		$	14,397

Under the Astellas collaboration arrangement, the Company was reimbursed for a portion of the Company's research and development expenses. These reimbursements have been reflected as a reduction of research and development expense of $0.4 million for the year ended December 31, 2011 and $0.3 million for the year ended December 31, 2010.