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CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2011	Dec. 31, 2010
Current assets:
Cash and cash equivalents	$ 62,736	$ 163,333
Marketable securities	202,433	146,301
Accounts receivable from related party	63	194
Notes receivable	85	531
Prepaid expenses and other current assets	3,848	5,995
Total current assets	269,165	316,354
Restricted cash	893	893
Property and equipment, net	10,206	10,215
Notes receivable	340	400
Other assets	2,721	3,340
Total assets	283,325	331,202
Current liabilities:
Accounts payable	3,699	2,128
Accrued personnel-related expenses	7,123	8,617
Accrued clinical and development expenses	5,075	2,801
Accrued interest on convertible subordinated notes	1,078	2,372
Other current liabilities	1,843	2,008
Note payable and capital lease, current	109	206
Deferred revenue, current	20,887	21,922
Total current liabilities	39,814	40,054
Convertible subordinated notes	172,500	172,500
Deferred rent, non-current	5,728	3,574
Note payable and capital lease, non-current		69
Deferred revenue, non-current	124,435	137,425
Commitments and contingencies (Notes 4, 8 and 9)
Stockholders' net capital deficiency:
Additional paid-in capital	1,218,934	1,177,359
Accumulated other comprehensive income	16	33
Accumulated deficit	(1,278,953)	(1,200,616)
Total stockholders' net capital deficiency	(59,152)	(22,420)
Total liabilities and stockholders' net capital deficiency	283,325	331,202
Common stock
Stockholders' net capital deficiency:
Common stock	$ 851	710
Class A common stock
Stockholders' net capital deficiency:
Common stock		$ 94

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Revenue (including amounts from a related party of $2,380 and $2,456 for the three months ended September 30, 2011 and 2010, respectively, and $7,294 and $7,370 for the nine months ended September 30, 2011 and 2010, respectively)	$ 6,431	$ 5,302	$ 19,150	$ 17,281
Operating expenses:
Research and development	27,837	18,537	71,099	57,594
General and administrative	7,796	6,610	22,213	20,077
Total operating expenses	35,633	25,147	93,312	77,671
Loss from operations	(29,202)	(19,845)	(74,162)	(60,390)
Interest income	81	136	344	364
Interest expense	(1,505)	(1,513)	(4,519)	(4,537)
Net loss	$ (30,626)	$ (21,222)	$ (78,337)	$ (64,563)
Basic and diluted net loss per share (in dollars per share)	$ (0.37)	$ (0.29)	$ (0.96)	$ (0.91)
Shares used in computing net loss per share, basic (in shares)	82,490	73,726	81,777	70,675
Shares used in computing net loss per share, diluted (in shares)	82,490	73,726	81,777	70,675

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Cash flows from operating activities
Net loss	$ (78,337)	$ (64,563)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	5,459	4,697
Stock-based compensation	18,706	14,316
Forgiveness of notes receivable	16	18
Changes in operating assets and liabilities:
Receivables	113	75
Prepaid expenses and other current assets	1,983	1,727
Accounts payable	1,446	94
Accrued personnel-related expenses, accrued clinical and development expenses, accrued interest on convertible subordinated notes and other current liabilities	(679)	(1,585)
Deferred rent	2,336	1,637
Deferred revenue	(14,025)	(16,100)
Other liabilities, non-current		(389)
Net cash used in operating activities	(62,982)	(60,073)
Cash flows from investing activities
Purchases of property and equipment	(2,723)	(286)
Purchases of marketable securities	(231,284)	(134,058)
Sales of marketable securities	8,750	10,009
Maturities of marketable securities	164,401	101,500
Release of restricted cash		417
Additions to notes receivable	(140)
Payments received on notes receivable	630	140
Net cash used in investing activities	(60,366)	(22,278)
Cash flows from financing activities
Payments on note payable and capital lease	(166)	(148)
Proceeds from issuances of common stock, net	22,917	98,056
Net cash provided by financing activities	22,751	97,908
Net increase (decrease) in cash and cash equivalents	(100,597)	15,557
Cash and cash equivalents at beginning of period	163,333	47,544
Cash and cash equivalents at end of period	$ 62,736	$ 63,101

Basis of Presentation and Significant Accounting Policies

9 Months Ended

Sep. 30, 2011

Basis of Presentation and Significant Accounting Policies

Basis of Presentation and Significant Accounting Policies

1. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Theravance, Inc. (the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements have been prepared on the same basis as audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position, results of operations and cash flows. The interim results are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2011 or any other period.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission (SEC) on February 28, 2011. Certain reclassifications of prior period amounts have been made to our consolidated financial statements to conform to the current period presentation.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Management’s Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Other-than-Temporary Impairment Assessment

The Company reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, credit quality and the Company’s conclusion that it does not intend to sell an impaired investment and is not more likely than not to be required to sell the security before it recovers its amortized cost basis. If the Company determines that the impairment of an investment is other-than-temporary, the investment is written down with a charge recorded in interest income.

Inventory

Inventory is stated at the lower of cost or market value and is included in prepaid and other current assets in the accompanying condensed consolidated balance sheets. Inventory is comprised of VIBATIV® active pharmaceutical ingredient. Inventory was $0.5 million at September 30, 2011 and $1.7 million at December 31, 2010. During the nine months ended September 30, 2011, Astellas Pharma Inc. (Astellas) purchased $1.2 million of VIBATIV® inventory from the Company at cost. If Astellas decides not to purchase some or any of the remaining VIBATIV® inventory, the Company will be required to expense a portion of, or the entire remaining, capitalized inventory.

Research and Development Costs

Research and development costs are expensed in the period that services are rendered or goods are received. Research and development costs consist of salaries and benefits, laboratory supplies and facility costs, as well as fees paid to third parties that conduct certain research and development activities on behalf of the Company, net of certain external research costs reimbursed by GlaxoSmithKline plc (GSK) and Astellas.

Fair Value of Stock-based Compensation Awards

The Company uses the fair value method of accounting for stock-based compensation arrangements. Stock-based compensation arrangements currently include stock options granted, restricted stock unit awards (RSUs) granted, performance-contingent RSUs granted, restricted stock awards (RSAs) granted, and performance-contingent RSAs granted under the 2004 Equity Incentive Plan (2004 Plan) and the 2008 New Employee Equity Incentive Plan (2008 Plan) and purchases of common stock by the Company’s employees at a discount to the market price during offering periods under the Company’s Employee Stock Purchase Plan (ESPP). Non-statutory options, RSUs, and RSAs were granted under the 2008 Plan to the Company’s newly hired employees until April 27, 2010, the date on which stockholders approved the Company’s amended and restated 2004 Plan. No further awards will be granted under the 2008 Plan. Stock options were granted with an exercise price not less than 100% of the fair market value of the common stock on the date of grant. Stock options were generally granted with terms of up to ten years and vest over a period of four years.

The Company uses the Black-Scholes valuation model for stock-based payment awards granted. The Company’s determination of the fair value of stock-based payment awards on the grant date using the Black-Scholes option valuation model requires the use of assumptions, including the expected term of the award and the expected stock price volatility. The Company used the “simplified” method as described in Staff Accounting Bulletin No. 107 for the expected option term. Beginning April 1, 2011, the Company used its historical volatility to estimate expected stock price volatility. Prior to April 1, 2011, the Company used peer company price volatility to estimate expected stock price volatility due to the Company’s limited historical common stock price volatility since its initial public offering in 2004.

Stock-based compensation expense was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company’s estimated annual forfeiture rates for stock options, RSUs and RSAs are based on its 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 fair value of performance-contingent RSUs and RSAs with service conditions is expensed on an accelerated attribution method over the expected term of the award when the Company determines that it is probable that certain performance milestones will be achieved. Compensation expense for purchases under the ESPP is recognized based on the estimated fair value of the common stock during each offering period and purchase discount percentage.

The Company has not recognized, and does not expect to recognize in the near future, any tax benefit related to employee stock-based compensation costs as a result of the full valuation allowance on the Company’s net deferred tax assets including deferred tax assets related to its net operating loss carryforwards.

Recent Accounting Updates

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05, “Presentation of Comprehensive Income” an update to Accounting Standards Codification (ASC) Topic 220, “Comprehensive Income”. This update requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This update is to be applied retroactively and is effective for financial statements issued for fiscal years, and interim periods within those years, beginning after December 15, 2011, and interim and annual periods thereafter. This update will be effective for the Company January 1, 2012. The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

Recently Adopted Accounting Updates

In April 2010, the FASB issued ASU No. 2010-17, “Revenue Recognition—Milestone Method” an update to ASC Topic 605, “Revenue Recognition”. This update provides guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research and development transactions is appropriate. It provides criteria for evaluating if the milestone is substantive and clarifies that a vendor can recognize consideration that is contingent upon achievement of a milestone as revenue in the period in which the milestone is achieved, if the milestone meets all the criteria to be considered substantive. The guidance became effective on a prospective basis in fiscal years beginning on or after June 15, 2010 and early adoption was permitted. The Company elected to adopt the milestone method of revenue recognition on a prospective basis effective January 1, 2011. The election of the milestone method did not have a material impact on the Company’s condensed consolidated financial statements. However, the election will result in different accounting treatment for future substantive milestones earned after the date of this adoption. Non-substantive milestones will continue to be recognized over the remaining performance period.

In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition - Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force”, an update to ASC Topic 605, “Revenue Recognition”. This update requires companies to allocate the overall consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor specific objective evidence or other third party evidence of the selling price. The guidance became effective on a prospective basis in fiscal years beginning on or after June 15, 2010 and early adoption was permitted. Companies may elect to adopt this guidance prospectively for all revenue arrangements entered into or materially modified after the date of adoption or retrospectively for all periods presented. The Company elected to adopt this update on a prospective basis effective January 1, 2011. The adoption of this update did not have a material impact on the Company’s condensed consolidated financial statements. However, the election may result in different accounting treatment for future collaboration arrangements than the accounting treatment applied to previous and existing collaboration arrangements.

- Definition

The entire disclosure for the organization, consolidation and basis of presentation of financial statements disclosure, and significant accounting policies of the reporting entity. May be provided in more than one note to the financial statements, as long as users are provided with an understanding of (1) the significant judgments and assumptions made by an enterprise in determining whether it must consolidate a VIE and/or disclose information about its involvement with a VIE, (2) the nature of restrictions on a consolidated VIE's assets reported by an enterprise in its statement of financial position, including the carrying amounts of such assets, (3) the nature of, and changes in, the risks associated with an enterprise's involvement with the VIE, and (4) how an enterprise's involvement with the VIE affects the enterprise's financial position, financial performance, and cash flows. Describes procedure if disclosures are provided in more than one note to the financial statements.

+ References + Details

Net Loss per Share

9 Months Ended

Sep. 30, 2011

Net Loss per Share

Net Loss per Share

2. Net Loss per Share

Basic net loss per share (basic EPS) is computed by dividing net loss by the weighted average number of common shares outstanding during the period, less RSAs subject to forfeiture. Diluted net loss per share (diluted EPS) is computed by dividing net loss by the weighted average number of common shares outstanding during the period, less RSAs subject to forfeiture, plus dilutive potential common shares. Diluted EPS is identical to basic EPS for all periods presented since potential common shares are excluded from the calculation, as their effect is anti-dilutive.

Weighted Average Shares Outstanding

The following table sets forth the computation of basic and diluted net loss and the weighted average number of shares used in computing basic and diluted net loss per share:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except for per share amounts)	2011			2010			2011			2010

Net loss	$	(30,626	)	$	(21,222	)	$	(78,337	)	$	(64,563	)

Weighted average shares of common stock outstanding	84,951			73,766			84,238			70,715
Less: unvested RSAs	(2,461		)	(40		)	(2,461		)	(40		)
Weighted average shares used in computing basic and diluted net loss per share	82,490			73,726			81,777			70,675
Basic and diluted net loss per share	$	(0.37	)	$	(0.29	)	$	(0.96	)	$	(0.91	)

Anti-dilutive securities

Securities that could potentially dilute basic EPS in the future that were not included in the computation of diluted EPS because their effect would have been anti-dilutive were as follows:

	Three Months Ended September 30,		Nine Months Ended September 30,
(in thousands)	2011	2010	2011	2010
Shares issuable upon the exercise of stock options	4,563	6,142	4,598	6,068
Shares issuable under RSUs and RSAs	2,181	626	1,607	616
Shares issuable upon the conversion of convertible debt	6,668	6,668	6,668	6,668
Total anti-dilutive securities	13,412	13,436	12,873	13,352

Collaboration Arrangements

9 Months Ended

Sep. 30, 2011

Collaboration Arrangements

Collaboration Arrangements

4. Collaboration Arrangements

LABA collaboration with GSK

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 combination products, RELOVAIR™ and the LAMA/LABA (GSK573719/vilanterol or ‘719/VI). For the treatment of asthma, the collaboration is developing RELOVAIR™. RELOVAIR™ is an investigational once-daily combination medicine consisting of a LABA, VI, previously referred to as GW642444 or ‘444, and an inhaled corticosteroid (ICS), fluticasone furoate (FF). The LAMA/LABA, ‘719/VI, is an investigational once-daily combination medicine consisting of the long-acting muscarinic antagonist (LAMA) ‘719, and the LABA, VI.

The current lead product candidates in the LABA collaboration, VI and FF, were discovered by GSK. In the event that 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. If the results of the Phase 3 studies with RELOVAIR™ are positive, a portion of these potential milestone payments could be payable to GSK within the next two years. The Company is entitled to 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 ‘719/VI, 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.

In connection with the LABA collaboration, in 2002, Glaxo Group Limited, an affiliate of GSK, purchased shares of the Company’s Series E preferred stock for an aggregate purchase price of $40.0 million. On July 22, 2011, Glaxo Group Limited converted 2,580,645 shares of the Company’s Class A common stock into 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.

Strategic Alliance with GSK

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 preclinical MABA compounds discovered by the Company (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 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 up to $129.0 million.

In connection with the expansion of the MABA program, GSK relinquished its option right on the Company’s MonoAmine Reuptake Inhibitor (MARIN) program and Angiotensin Receptor-NEP Inhibitor (ARNI) program. GSK has no further option rights on any of the Company’s research or development programs under the strategic alliance.

In May 2004, GlaxoSmithKline LLC, an affiliate of GSK, purchased 6,387,096 shares of the Company’s Class A common stock for an aggregate purchase price of $108.9 million and, upon the closing of the Company’s initial public offering on October 8, 2004, GlaxoSmithKline LLC purchased an additional 433,757 shares of Class A common stock for an aggregate purchase price of $6.9 million. On July 21, 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. In addition, Glaxo Group Limited, an affiliate of GSK, purchased shares of the Company’s common stock pursuant to its rights under the Company’s governance agreement with GSK dated June 4, 2004, as amended, as follows:

	Through September 30, 2011
	Common stock shares	Aggregate Amounts (in thousands)
Purchase dates
November 29, 2010	5,750,000	$	129,375
February 24, 2011	152,278	3,609
May 3, 2011	261,299	6,689
August 2, 2011	102,466	2,020

GSK Upfront Fees, Milestone Payments and Revenue

Upfront fees and certain milestone payments have been deferred and are being amortized ratably into revenue over the estimated performance period (the product development period). Upfront fees and milestone payments received from GSK under the LABA collaboration and strategic alliance agreements were as follows:

	Through September 30, 2011
(in thousands)	Upfront Fees		Milestone Payments		Total
GSK Collaborations
LABA/RELOVAIR™ collaboration(1)	$	10,000	$	50,000	$	60,000
Strategic alliance agreement	20,000		—		20,000
Strategic alliance—LAMA license(2)	5,000		3,000		8,000
Strategic alliance—MABA license	5,000		16,000		21,000
Total	$	40,000	$	69,000	$	109,000

(1) The Company does not currently expect to be eligible for any additional milestones under this collaboration.

(2) In August 2004, GSK exercised its right to license the Company’s LAMA program pursuant to the terms of the strategic alliance. In 2009, GSK returned the program to the Company.

During the three months ended September 30, 2011, the Company received a $3.0 million milestone payment from GSK for the initiation of the Phase 1 combination study in the Company’s MABA program. The Company deemed that this milestone and any additional potential milestones related to ‘081 in the MABA program are not substantive due to the fact that achievement of the milestones predominantly relates to GSK’s development, manufacturing and commercialization activities. In October 2011, the Company received an upfront payment of $1.0 million from GSK related to the Additional MABAs. The Company will allocate revenue from this upfront payment and any potential milestones related to the Additional MABAs under the MABA program, as discussed above, to each non-contingent element based upon the relative selling price of each element. When applying the relative selling price method, the Company will determine the selling price for each deliverable using vendor-specific objective evidence (VSOE) of selling price or third-party evidence (TPE) of selling price, if either exists. If neither VSOE nor TPE of selling price exists for a deliverable, the Company will use best estimated selling price for that deliverable. Revenue allocated to each element will then be recognized when earned. The Company deemed that any potential milestones related to the Additional MABAs in the MABA program are not substantive due to the fact that achievement of the milestones predominantly relates to GSK’s development, manufacturing and commercialization activities.

Revenue recognized through amortization of the deferred upfront fees and milestone payments from GSK under the LABA collaboration and strategic alliance agreement was as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2011		2010		2011		2010
GSK Collaborations
LABA/ RELOVAIR™ collaboration	$	1,270	$	1,270	$	3,811	$	3,811
Strategic alliance agreement	489		684		1,858		2,053
Strategic alliance—MABA license	621		502		1,625		1,506
Total	$	2,380	$	2,456	$	7,294	$	7,370

License, Development and Commercialization Agreement with Astellas

In November 2005, the Company entered into a collaboration arrangement with Astellas for the development and commercialization of telavancin. In July 2006, Japan was added to the collaboration, thereby giving Astellas worldwide rights to this medicine. Under this arrangement, the Company is responsible for substantially all costs to develop and obtain U.S. regulatory approval for telavancin and Astellas is responsible for substantially all other costs associated with commercialization of VIBATIV®. The Company is entitled to receive royalties from Astellas on global net sales of VIBATIV® that, on a percentage basis, range from the high teens to the upper twenties depending on sales volume. Astellas has the right to terminate this agreement since VIBATIV® was not approved by the U.S. Food and Drug Administration (FDA) before December 31, 2008.

Through September 30, 2011, the Company had received $191.0 million in upfront, milestone and other fees from Astellas. The Company recorded these payments as deferred revenue and is amortizing them ratably over its estimated performance period (development and commercialization period). The Company is eligible to receive up to an additional $15.0 million in milestone payments. The Company has deemed $10.0 million of the remaining potential milestone payments to be substantive as the Company is responsible for substantially all activities to develop and obtain U.S. regulatory approval for telavancin for the treatment of nosocomial pneumonia. However, the Company’s management believes that the likelihood of achieving this milestone is low. The remaining potential milestone payment of $5.0 million is not deemed substantive due to the fact that pursuing regulatory approval of telavancin in the regions of the world outside of the U.S. is predominantly the responsibility of Astellas.

Revenue recognized under this collaboration agreement was as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2011		2010			2011			2010
Amortization of deferred revenue	$	3,244	$	3,244		$	9,731		$	9,731
Royalties from net sales of VIBATIV®	807		422			2,131			546
Proceeds from VIBATIV® delivered to Astellas	—		—			1,171			1,393
Cost of VIBATIV® delivered to Astellas	—		—			(1,177		)	(943		)
Cost of unrealizable VIBATIV® inventory	—		(820		)	—			(820		)
Total net revenue	$	4,051	$	2,846		$	11,856		$	9,907

Marketable Securities

9 Months Ended

Sep. 30, 2011

Marketable Securities

Marketable Securities

5. Marketable Securities

The Company manages, monitors and measures its investments in highly liquid investment grade securities by major security type. Investments in debt securities are accounted for as available-for-sale securities, carried at estimated fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss), held for use in current operations and classified in current assets as marketable securities. The cost of securities sold is based on the specific-identification method.

The estimated fair value amounts were determined using available market information. Available-for-sale debt securities recorded in cash equivalents, marketable securities or restricted cash in the Company’s condensed consolidated balance sheets were as follows:

	September 30, 2011											December 31, 2010
(in thousands)	Amortized Cost			Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value			Amortized Cost			Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government securities	$	66,329		$	34	$	—		$	66,363		$	25,966		$	10	$	—		$	25,976
U.S. government agencies	68,141			7		(11		)	68,137			54,625			30		(7		)	54,648
U.S. corporate notes	12,469			—		(18		)	12,451			34,695			9		(9		)	34,695
U.S. commercial paper	64,145			4		—			64,149			97,221			—		—			97,221
Money market funds	51,336			—		—			51,336			91,805			—		—			91,805
Total	262,420			45		(29		)	262,436			304,312			49		(16		)	304,345

Less amounts classified as cash equivalents	(59,110		)	—		—			(59,110		)	(157,151		)	—		—			(157,151		)
Less amounts classified as restricted cash	(893		)	—		—			(893		)	(893		)	—		—			(893		)
Amounts classified as marketable securities	$	202,417		$	45	$	(29	)	$	202,433		$	146,268		$	49	$	(16	)	$	146,301

At September 30, 2011, all of the marketable securities had contractual maturities within twelve months and the average duration of marketable securities was approximately five months. The Company does not intend to sell the investments which are in an unrealized loss position and it is unlikely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. The Company has determined that the gross unrealized losses on its marketable securities at September 30, 2011 were temporary in nature. All marketable securities with unrealized losses have been in a loss position for less than twelve months.

Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements

Fair Value Measurements

6. Fair Value Measurements

The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The Company’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company’s market assumptions. The Company classifies these inputs into the following hierarchy:

Level 1 Inputs—Quoted prices for identical instruments in active markets.

Level 2 Inputs—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs—Unobservable inputs and little, if any, market activity for the assets.

The estimated fair values of the Company’s financial assets were as follows:

	September 30, 2011
	Fair Value Measurements at Reporting Date Using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Level 1		Level 2		Level 3		Total
U.S. government securities	$	66,363	$	—	$	—	$	66,363
U.S. government agency securities	51,057		17,080		—		68,137
U.S. corporate notes	12,451		—		—		12,451
U.S. commercial paper	—		64,149		—		64,149
Money market funds	51,336		—		—		51,336
Total	$	181,207	$	81,229	$	—	$	262,436

	December 31, 2010
	Fair Value Measurements at Reporting Date Using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Level 1		Level 2		Level 3		Total
U.S. government securities	$	25,976	$	—	$	—	$	25,976
U.S. government agency securities	24,375		30,273		—		54,648
U.S. corporate notes	34,695		—		—		34,695
U.S. commercial paper	—		97,221		—		97,221
Money market funds	91,805		—		—		91,805
Total	$	176,851	$	127,494	$	—	$	304,345

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 133
-Paragraph 44A, 44B
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
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Reference 3: http://www.xbrl.org/2003/role/presentationRef
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-Name Statement of Financial Accounting Standard (FAS)
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-Paragraph 15A
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Reference 5: http://www.xbrl.org/2003/role/presentationRef
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+ Details

Stock-Based Compensation and Stockholders' Net Capital Deficiency

9 Months Ended

Sep. 30, 2011

Stock-Based Compensation and Stockholders' Net Capital Deficiency

Stock-Based Compensation and Stockholders' Net Capital Deficiency

10. Stock-Based Compensation and Stockholders’ Net Capital Deficiency

Equity Incentive Plan

The 2004 Plan provides for the granting of stock options, stock appreciation rights, RSUs and RSAs to employees, officers, directors and consultants of the Company. Stock options may be granted with an exercise price not less than 100% of the fair market value of the common stock on the date of grant. As of September 30, 2011, total shares remaining available for issuance under the 2004 Plan were 2,123,027.

Employee Stock Purchase Plan

As of September 30, 2011, a total of 2,025,000 shares of common stock were approved and authorized for issuance under the Employee Stock Purchase Plan (ESPP).

Stock-Based Compensation Expense

The allocation of stock-based compensation expense included in the condensed consolidated statements of operations was as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2011		2010		2011		2010
Research and development	$	3,510	$	2,564	$	10,021	$	7,709
General and administrative	3,380		1,933		8,685		6,607
Total	$	6,890	$	4,497	$	18,706	$	14,316

As of September 30, 2011, unrecognized compensation expense was as follows: $7.9 million related to unvested stock options; $21.2 million related to unvested RSUs; and $25.2 million related to unvested RSAs.

Compensation Awards

The Company granted the following compensation awards:

	Nine Months Ended September 30, 2011			Nine Months Ended September 30, 2010
	Number of Compensation Awards Granted	Weighted Average Exercise Price/Fair Value		Number of Compensation Awards Granted	Weighted Average Exercise Price/ Fair Value
2004 Plan
Stock options	582,250	$	22.06	167,000	$	15.95
RSUs time-based	465,000	25.03		945,542	10.48
RSAs time-based	1,168,000	24.59		—	—
RSUs performance-contingent(1)	—	—		210,000	10.12
RSAs performance-contingent(2)	1,315,000	24.26		—	—

2008 Plan
Stock options	—	$	—	110,000	$	10.95

(1) These performance-contingent RSUs awarded to senior management in 2010 have dual triggers of vesting based upon the successful achievement of certain corporate operating milestones during 2010 and 2011, as well as a requirement for continued employment through early 2014. As of February 11, 2011, both performance milestones had been deemed achieved, and time-based vesting had commenced with respect to all of the performance-contingent RSU shares.

(2) During the first quarter of 2011, the Company granted special long-term retention and incentive equity awards to executive officers and certain employees. The vesting of these awards is tied to the achievement of certain performance targets over a six-year timeframe from 2011 through December 31, 2016 and continued employment, both of which must be satisfied in order for vesting to occur. The maximum potential expense associated with this program is $31.9 million, which if achieved would be allocated as $6.3 million for research and development expense and $25.6 million for general and administrative expense and recognized in increments based on achievement of the performance conditions. During the third quarter of 2011, the Company granted an incentive equity award to a non-executive officer that has dual triggers of vesting based upon the achievement of a performance target over a timeframe from 2011-2013 and continued employment through 2014, both of which must be satisfied in order for the award to vest in full. The maximum potential expense associated with this award is approximately $475,000, which if achieved would be allocated to research and development expense and recognized in increments based on achievement of the performance conditions. As of September 30, 2011, the Company determined that the achievement of the performance conditions under these awards was not probable, and as a result, no compensation expense has been recognized. Management believes that the likelihood of achieving all of the performance targets under these awards is remote.

Valuation Assumptions

The range of weighted average assumptions used to estimate the fair value of stock options granted was as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
*Employee stock options*
Risk-free interest rate	1.20%-2.17		%	2.00%-2.12		%	1.20%-2.57		%	2.00%-2.82		%
Expected term (in years)	6			6			5-6			5-6
Volatility	0.53			0.49			0.49-0.55			0.48-0.52
Dividend yield	—		%	—		%	—		%	—		%
Weighted average estimated fair value of stock options granted	$	9.74		$	6.45		$	11.15		$	7.02

Stockholders’ net capital deficiency

For the nine months ended September 30, 2011, 1,141,544 shares were exercised at a weighted average exercise price of $8.89 per share for a total of $10.1 million.

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 123R
-Paragraph 64, 65, A240
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

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+ Details

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares shares in Thousands	Sep. 30, 2011	Dec. 31, 2010
Common stock
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, authorized	200,000	200,000
Common stock, outstanding	85,127	70,950
Class A common stock
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, authorized	30,000	30,000
Common stock, outstanding		9,402

Document and Entity Information - shares	9 Months Ended
Document and Entity Information - shares	Sep. 30, 2011	Oct. 26, 2011
Document and Entity Information
Entity Registrant Name	THERAVANCE INC
Entity Central Index Key	0001080014
Document Type	10-Q
Document Period End Date	Sep. 30, 2011
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		85,128,202
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q3