IRONWOOD PHARMACEUTICALS INC
FORM 10-K
(Annual Report)
Filed 02/19/16 for the Period Ending 12/31/15
Address
Telephone
CIK
Symbol
SIC Code
Industry
301 BINNEY STREET
CAMBRIDGE, MA 02142
617-621-7722
0001446847
IRWD
2834 - Pharmaceutical Preparations
Biotechnology & Drugs
Sector Healthcare
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TABLE
OF
CONTENTS
Index
to
Consolidated
Financial
Statements
of
Ironwood
Pharmaceuticals,
Inc.
Table
of
ContentsUNITED
STATES
SECURITIES
AND
EXCHANGE
COMMISSION
Washington,
D.C.
20549FORM
10-KCommission
File
Number
001-34620IRONWOOD
PHARMACEUTICALS,
INC.
(Exact
name
of
registrant
as
specified
in
its
charter)Delaware
(State
or
other
jurisdiction
of
incorporation
or
organization)
04-3404176
(I.R.S.
Employer
Identification
Number)301
Binney
Street
Cambridge,
Massachusetts
(Address
of
Principal
ExecutiveOffices)
02142
(Zip
Code)Registrant's
telephone
number,
including
area
code:
(617)
621-7722
Securities
registered
pursuant
to
Section
12(b)
of
the
Act:Title
of
each
class
Name
of
each
exchange
on
which
registeredClass
A
common
stock,
$0.001
parvalue
The
NASDAQ
Stock
Market
LLC
(NASDAQ
Global
Select
Market)
Securities
registered
pursuant
to
Section
12(g)
of
the
Act:
None
Indicate
by
check
mark
if
the
registrant
is
a
well-known
seasoned
issuer,
as
defined
in
Rule
405
of
the
Securities
Act.
Yes
ý
No
o
Indicate
by
check
mark
if
the
registrant
is
not
required
to
file
reports
pursuant
to
Section
13
or
15(d)
of
the
Exchange
Act.
Yes
o
No
ý
Indicate
by
check
mark
whether
the
registrant:
(1)
has
filed
all
reports
required
to
be
filed
by
Section
13
or
15(d)
of
the
Securities
Exchange
Act
of
1934during
the
preceding
12
months
(or
for
such
shorter
period
that
the
registrant
was
required
to
file
such
reports)
and
(2)
has
been
subject
to
such
filing
requirementsfor
the
past
90
days.
Yes
ý
No
o
Indicate
by
check
mark
whether
the
Registrant
has
submitted
electronically
and
posted
on
its
corporate
Web
site,
if
any,
every
Interactive
Data
File
requiredto
be
submitted
and
posted
pursuant
to
Rule
405
of
Regulation
S-T
during
the
preceding
12
months
(or
for
such
shorter
period
that
the
Registrant
was
required
to(Mark
One)
ý
ANNUAL
REPORT
PURSUANT
TO
SECTION
13
OR
15(d)
OF
THE
SECURITIES
EXCHANGE
ACTOF
1934For
the
fiscal
year
ended
December
31,
2015ORo
TRANSITION
REPORT
PURSUANT
TO
SECTION
13
OR
15(d)
OF
THESECURITIES
EXCHANGE
ACT
OF
1934For
the
transition
period
from
to
submit
and
post
such
files).
Yes
ý
No
o
Indicate
by
check
mark
if
disclosure
of
delinquent
filers
pursuant
to
Item
405
of
Regulation
S-K
is
not
contained
herein
and
will
not
be
contained,
to
the
bestof
registrant's
knowledge,
in
definitive
proxy
or
information
statements
incorporated
by
reference
in
Part
III
of
this
Form
10-K
or
any
amendment
to
this
Form
10-K.
o
Indicate
by
check
mark
whether
the
registrant
is
a
large
accelerated
filer,
an
accelerated
filer,
a
non-accelerated
filer
or
a
smaller
reporting
company.
Seedefinitions
of
"large
accelerated
filer,"
"accelerated
filer"
and
"smaller
reporting
company"
in
Rule
12b-2
of
the
Exchange
Act.
Indicate
by
check
mark
whether
the
registrant
is
a
shell
company
(as
defined
in
Rule
12b-2
of
the
Exchange
Act).
Yes
o
No
ý
Aggregate
market
value
of
voting
stock
held
by
non-affiliates
of
the
Registrant
as
of
June
30,
2015:
$1,647,058,706
As
of
February
12,
2016,
there
were
127,453,930
shares
of
Class
A
common
stock
outstanding
and
15,934,458
shares
of
Class
B
common
stock
outstanding.DOCUMENTS
INCORPORATED
BY
REFERENCE:
Portions
of
the
definitive
proxy
statement
for
our
2016
Annual
Meeting
of
Stockholders
are
incorporated
by
reference
into
Part
III
of
this
report.
Large
accelerated
filer
ý
Accelerated
filer
o
Non-accelerated
filer
o
(Do
not
check
if
a
smaller
reporting
company)
Smaller
reporting
company
o Table
of
ContentsNOTE
REGARDING
FORWARD-LOOKING
STATEMENTS
This
Annual
Report
on
Form
10-K,
including
the
sections
titled
"Business,"
"Risk
Factors"
and
"Management's
Discussion
and
Analysis
of
FinancialCondition
and
Results
of
Operations"
contains
forward-looking
statements.
All
statements
contained
in
this
Annual
Report
on
Form
10-K
other
than
statements
ofhistorical
fact
are
forward-looking
statements.
Forward-looking
statements
include
statements
regarding
our
future
financial
position,
business
strategy,
budgets,projected
costs,
plans
and
objectives
of
management
for
future
operations.
The
words
"may,"
"continue,"
"estimate,"
"intend,"
"plan,"
"will,"
"believe,"
"project,""expect,"
"seek,"
"anticipate,"
"goal"
and
similar
expressions
may
identify
forward-looking
statements,
but
the
absence
of
these
words
does
not
necessarily
meanthat
a
statement
is
not
forward-looking.
These
forward-looking
statements
include,
among
other
things,
statements
about:•the
demand
and
market
potential
for
linaclotide
in
the
United
States,
or
the
U.S.
(LINZESS®),
in
the
European
Union,
or
the
E.U.(CONSTELLA®),
and
in
other
countries
where
it
is
approved
for
marketing,
as
well
as
the
revenues
therefrom;
•the
timing,
investment
and
associated
activities
involved
in
commercializing
LINZESS
by
us
and
Allergan
plc
in
the
U.S.;
•the
timing
and
execution
of
the
launches
and
commercialization
of
CONSTELLA
in
the
E.U.;
•the
timing,
investment
and
associated
activities
involved
in
developing,
launching,
and
commercializing
linaclotide
by
us
and
our
partnersworldwide;
•our
ability
and
the
ability
of
our
partners
to
secure
and
maintain
adequate
reimbursement
for
linaclotide;
•the
ability
of
our
partners
and
third-party
manufacturers
to
manufacture
and
distribute
sufficient
amounts
of
linaclotide
active
pharmaceuticalingredient,
or
API,
drug
product
and
finished
goods
on
a
commercial
scale;
•our
expectations
regarding
U.S.
and
foreign
regulatory
requirements
for
linaclotide
and
our
product
candidates,
including
our
post-approval,nonclinical
and
clinical
post-marketing
plan
with
the
Food
and
Drug
Administration,
or
the
FDA;
•our
partners'
ability
to
obtain
foreign
regulatory
approval
of
linaclotide
and
the
ability
of
all
of
our
product
candidates
to
meet
existing
or
futureregulatory
standards;
•the
safety
profile
and
related
adverse
events
of
linaclotide
and
our
product
candidates;
•the
therapeutic
benefits
and
effectiveness
of
linaclotide
and
our
product
candidates
and
the
potential
indications
and
market
opportunities
therefor;
•our
ability
to
obtain
and
maintain
intellectual
property
protection
for
linaclotide
and
our
product
candidates
and
the
strength
thereof;
•the
ability
of
our
partners
to
perform
their
obligations
under
our
collaboration,
license
and
other
agreements
with
them,
and
our
ability
to
achievemilestone
and
other
payments
under
such
agreements;
•our
plans
with
respect
to
the
development,
manufacture
or
sale
of
our
product
candidates
and
the
associated
timing
thereof,
including
the
design
andresults
of
pre-clinical
and
clinical
studies;
•the
in-licensing
or
acquisition
of
externally
discovered
businesses,
products
or
technologies;
•our
expectations
as
to
future
financial
performance,
revenues,
expense
levels,
payments,
cash
flows,
profitability,
tax
obligations,
capital
raising
andliquidity
sources,
and
real
estate
needs,
as
well
as
the
timing
and
drivers
thereof;2 Table
of
Contents•our
ability
to
repay
our
outstanding
indebtedness
when
due,
or
redeem
or
repurchase
all
or
a
portion
of
such
debt,
as
well
as
the
potential
benefits
ofthe
note
hedge
transactions
described
herein;
•inventory
levels
and
write
downs
and
the
drivers
thereof,
and
inventory
purchase
commitments;
•our
ability
to
compete
with
other
companies
that
are
or
may
be
developing
or
selling
products
that
are
competitive
with
our
products
and
productcandidates;
•the
status
of
government
regulation
in
the
life
sciences
industry,
particularly
with
respect
to
healthcare
reform;
•trends
and
challenges
in
our
potential
markets;
•our
ability
to
attract
and
motivate
key
personnel;
and
•other
factors
discussed
elsewhere
in
this
Annual
Report
on
Form
10-K.
Any
or
all
of
our
forward-looking
statements
in
this
Annual
Report
on
Form
10-K
may
turn
out
to
be
inaccurate.
These
forward-looking
statements
may
beaffected
by
inaccurate
assumptions
or
by
known
or
unknown
risks
and
uncertainties,
including
the
risks,
uncertainties
and
assumptions
identified
under
the
heading"Risk
Factors"
in
this
Annual
Report
on
Form
10-K.
In
light
of
these
risks,
uncertainties
and
assumptions,
the
forward-looking
events
and
circumstances
discussedin
this
Annual
Report
on
Form
10-K
may
not
occur
as
contemplated,
and
actual
results
could
differ
materially
from
those
anticipated
or
implied
by
the
forward-looking
statements.
You
should
not
unduly
rely
on
these
forward-looking
statements,
which
speak
only
as
of
the
date
of
this
Annual
Report
on
Form
10-K.
Unless
required
bylaw,
we
undertake
no
obligation
to
publicly
update
or
revise
any
forward-looking
statements
to
reflect
new
information
or
future
events
or
otherwise.
You
should,however,
review
the
factors
and
risks
we
describe
in
the
reports
we
will
file
from
time
to
time
with
the
U.S.
Securities
and
Exchange
Commission,
or
the
SEC,
afterthe
date
of
this
Annual
Report
on
Form
10-K.NOTE
REGARDING
TRADEMARKS
LINZESS®
and
CONSTELLA®
are
trademarks
of
Ironwood
Pharmaceuticals,
Inc.
Any
other
trademarks
referred
to
in
this
Annual
Report
Form
10-K
are
theproperty
of
their
respective
owners.
All
rights
reserved.3 Table
of
ContentsTABLE
OF
CONTENTS
4
Page
PART
I
Item
1.
Business
5
Item
1A.
Risk
Factors
23
Item
1B.
Unresolved
Staff
Comments
49
Item
2.
Properties
50
Item
3.
Legal
Proceedings
50
Item
4.
Mine
Safety
Disclosures
50
PART
II
Item
5.
Market
For
Registrant's
Common
Equity,
Related
Stockholder
Matters
and
Issuer
Purchases
of
EquitySecurities
51
Item
6.
Selected
Consolidated
Financial
Data
52
Item
7.
Management's
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations
55
Item
7A.
Quantitative
and
Qualitative
Disclosures
about
Market
Risk
83
Item
8.
Consolidated
Financial
Statements
and
Supplementary
Data
84
Item
9.
Changes
in
and
Disagreements
with
Accountants
on
Accounting
and
Financial
Disclosure
84
Item
9A.
Controls
and
Procedures
85
Item
9B.
Other
Information
88
PART
III
Item
10.
Directors,
Executive
Officers
and
Corporate
Governance
89
Item
11.
Executive
Compensation
89
Item
12.
Security
Ownership
of
Certain
Beneficial
Owners
and
Management
and
Related
Stockholder
Matters
89
Item
13.
Certain
Relationships
and
Related
Transactions,
and
Director
Independence
89
Item
14.
Principal
Accountant
Fees
and
Services
89
PART
IV
Item
15.
Exhibits
and
Financial
Statement
Schedules
90
Signatures
98
Index
to
Consolidated
Financial
Statements
F-1
Table
of
ContentsPART
I
Item
1.
Business Our
Company
We
are
a
commercial
biotechnology
company
leveraging
our
proven
development
and
commercial
capabilities
as
we
seek
to
bring
multiple
medicines
topatients.
We
are
advancing
two
therapeutic
platforms,
which
include
product
opportunities
in
areas
of
large
unmet
need,
including
irritable
bowel
syndrome
withconstipation,
or
IBS-C,
and
chronic
idiopathic
constipation,
or
CIC,
vascular
and
fibrotic
diseases,
and
refractory
gastroesophageal
reflux
disease,
or
GERD.
Our
first
and
to-date
only
commercial
product,
linaclotide,
is
available
to
adult
men
and
women
suffering
from
IBS-C
or
CIC
in
the
United
States,
or
the
U.S.,under
the
trademarked
name
LINZESS®,
and
is
available
to
adult
men
and
women
suffering
from
IBS-C
in
certain
European
countries
under
the
trademarkedname
CONSTELLA®.
We
and
our
U.S.
partner
Allergan
plc
(together
with
its
affiliates),
or
Allergan
(formerly
Actavis
plc),
are
also
advancing
linaclotide
colonicrelease,
a
second-generation
product
candidate
with
the
potential
to
improve
abdominal
pain
relief
in
adult
IBS-C
patients,
as
well
as
in
patients
with
additionalgastrointestinal,
or
GI,
disorders
where
lower
abdominal
pain
is
a
predominant
symptom
such
as
IBS-mixed,
or
IBS-M.
Further,
we
and
Allergan
are
exploringways
to
enhance
the
clinical
profile
of
LINZESS
by
seeking
to
expand
its
utility
within
IBS-C
and
CIC,
as
well
as
studying
linaclotide
in
additional
indications
andpopulations
to
assess
its
potential
to
treat
various
GI
conditions.
Linaclotide
is
also
being
developed
and
commercialized
in
other
parts
of
the
world
by
certain
ofour
partners.
In
addition,
we
are
advancing
other
GI
development
programs
for
indications
such
as
refractory
GERD
and
diabetic
gastroparesis.
Within
our
vascular/fibrotic
platform,
we
are
leveraging
our
pharmacological
expertise
in
guanylate
cyclase,
or
GC,
pathways
gained
through
the
discoveryand
development
of
linaclotide
to
advance
development
programs
targeting
soluble
guanylate
cyclase,
or
sGC.
sGC
is
a
validated
mechanism
with
the
potential
forbroad
therapeutic
utility
and
multiple
opportunities
for
product
development
in
vascular
and
fibrotic
diseases,
as
well
as
other
therapeutic
areas.
Our
GI
and
vascular/fibrotic
platforms
include
the
following:5 Table
of
Contents
The
status
of
our
development
programs
in
the
table
above
represents
the
ongoing
phase
of
development,
and
does
not
correspond
to
the
initiation
orcompletion
of
a
particular
phase.
Drug
development
involves
a
high
degree
of
risk
and
investment,
and
the
status,
timing
and
scope
of
our
development
programsare
subject
to
change.
Important
factors
that
could
adversely
affect
our
drug
development
efforts
are
discussed
in
the
"Risk
Factors"
section
of
this
Annual
Reporton
Form
10-K.
As
part
of
the
linaclotide
colonic
release
Phase
IIb
clinical
trial
in
IBS-C
patients,
we
and
Allergan
are
also
evaluating
a
second
colonic
releaseformulation
that
is
expected
to
inform
a
path
forward
in
additional
GI
disorders,
such
as
IBS-M.
In
its
current
target
product
profile,
IW-9179
is
a
wholly
ownedasset.
LINZESS
and
our
current
product
candidates
have
all
been
discovered
internally.
We
believe
our
discovery
team
has
created
a
number
of
promisingcandidates
over
the
past
few
years
and
has
developed
an
extensive
intellectual
property
estate
in
each
of
these
areas.
We
have
committed
significant
resources
intothe
research
and
development
of
our
product
candidates
and
intend
to
continue
to
do
so
for
the
foreseeable
future.
For
the
years
ended
December
31,
2015,
2014and
2013,
research
and
development
expenses
were
approximately
$108.7
million,
$101.9
million
and
$102.4
million,
respectively.
In
addition,
we
intend
to
accessexternally
-discovered
drug
candidates
that
fit
within
our
core
strategy.
In
evaluating
these
potential
assets,
we
apply
the
same
investment
criteria
as
those
used
forinvestments
in
internally
discovered
assets.
We
were
incorporated
in
Delaware
on
January
5,
1998
as
Microbia,
Inc.
On
April
7,
2008,
we
changed
our
name
to
Ironwood
Pharmaceuticals,
Inc.
To
date,we
have
dedicated
substantially
all
of
our
activities
to
the
research,
development
and
commercialization
of
linaclotide,
as
well
as
to
the
research
and
developmentof
our
other
product
candidates.GI
PlatformIBS-C
/
CIC
IBS-C
and
CIC
are
chronic,
functional
GI
disorders
that
afflict
millions
of
sufferers
worldwide.
As
many
as
13
million
adults
suffer
from
IBS-C
and
as
manyas
35
million
adults
suffer
from
CIC
in
the
U.S.
alone,
according
to
our
analysis
of
studies
including
NJ
Talley,
et
al.
(published
in
1995
in
the
American
Journal
ofEpidemiology
),
P
Pare,
et
al.
(published
in
2001
in
the
A
merican
Journal
of
Gastroenterology
)
and
J.F.
Johanson,
et
al.
(published
in
2007
in
AlimentaryPharmacology
and
Therapeutics
).
Symptoms
of
IBS-C
include
abdominal
pain,
discomfort
or
bloating
and
constipation
symptoms
(e.g.,
incomplete
evacuation,infrequent
bowel
movements,
hard/lumpy
stools),
while
CIC
is
primarily
characterized
by
constipation
symptoms.
Linaclotide—U.S.
In
August
2012,
the
FDA
approved
LINZESS
as
a
once-daily
treatment
for
adult
men
and
women
suffering
from
IBS-C
or
CIC.
We
andAllergan
began
commercializing
LINZESS
in
the
U.S.
in
December
2012.
Linaclotide
is
the
first,
and
to
date,
only
product
approved
by
the
U.S.
Food
and
DrugAdministration,
or
FDA,
in
a
new
class
of
GI
medicines
called
guanylate
cyclase
type-C,
or
GC-C,
agonists.
We
and
Allergan
are
also
exploring
developmentopportunities
to
enhance
the
clinical
profile
of
LINZESS
by
seeking
to
expand
its
utility
within
IBS-C
and
CIC,
as
well
as
studying
linaclotide
in
additionalindications
and
populations
to
assess
its
potential
to
treat
various
GI
conditions.
For
example,
in
November
2015,
the
FDA
approved
the
inclusion
of
labelinginstructions
in
the
full
LINZESS
Prescribing
Information
allowing
adult
IBS-C
and
CIC
patients
with
swallowing
difficulties
the
option
to
administer
the
contentsof
LINZESS
capsules
in
applesauce
or
water.
72
mcg
for
CIC
in
Adults.
In
October
2015,
we
reported
positive
top-line
data
from
a
Phase
III
clinical
trial
in
the
U.S.
with
Allergan
evaluating
a
72
mcgdose
of
linaclotide
in
adult
patients
with
CIC.
We
believe
these
data
support
the
submission
of
a
supplemental
new
drug
application,
or
sNDA,
to
the
FDA
forapproval
to
market
the
72
mcg
dose
of
linaclotide
in
the
U.S.
If
approved,
the6 Table
of
Contents72
mcg
dose
would
provide
a
broader
range
of
treatment
options
to
physicians
and
adult
CIC
patients
in
the
U.S.
Pediatrics.
We
and
Allergan
have
established
a
nonclinical
and
clinical
post-marketing
plan
with
the
FDA
to
understand
the
safety
and
efficacy
ofLINZESS
in
pediatric
patients.
The
first
step
in
this
plan
was
to
undertake
certain
additional
nonclinical
studies.
We
and
Allergan
have
completed
these
nonclinicalstudies
and
have
initiated
two
Phase
II
clinical
pediatric
studies
in
IBS-C
patients
age
seven
to
17
and
functional
constipation
patients
age
six
to
17.
Upon
FDA-approval
of
LINZESS
in
the
U.S.,
we
received
five
years
of
exclusivity
under
the
Drug
Price
Competition
and
Patent
Term
Restoration
Act
of1984,
or
the
Hatch-Waxman
Act.
In
addition,
LINZESS
is
covered
by
a
U.S.
composition
of
matter
patent
that
expires
in
2026,
including
patent
term
extension,
aswell
as
three
additional
patents
covering
the
commercial
formulation
of
LINZESS
and
methods
of
using
this
formulation
to
treat
patients
with
IBS-C
or
CIC,
all
ofwhich
expire
in
2031.
Linaclotide—Global.
In
November
2012,
the
European
Commission
granted
marketing
authorization
to
CONSTELLA
for
the
symptomatic
treatment
ofmoderate
to
severe
IBS-C
in
adults.
CONSTELLA
is
the
first,
and
to
date,
only
drug
approved
in
the
European
Union,
or
E.U.,
for
IBS-C.
Our
former
Europeanpartner,
Almirall,
S.A.,
or
Almirall,
began
commercializing
CONSTELLA
in
Europe
in
the
second
quarter
of
2013.
In
October
2015,
Almirall
transferred
itsexclusive
license
to
develop
and
commercialize
linaclotide
in
Europe
to
Allergan.
Currently,
CONSTELLA
is
commercially
available
in
certain
Europeancountries,
including
the
United
Kingdom,
Italy
and
Spain.
In
December
2013
and
February
2014,
linaclotide
was
approved
in
Canada
and
Mexico,
respectively,
as
a
treatment
for
adult
women
and
men
suffering
fromIBS-C
or
CIC.
Allergan
has
exclusive
rights
to
commercialize
linaclotide
in
Canada
as
CONSTELLA
and,
through
a
sublicense
from
Allergan,
Almirall
hadexclusive
rights
to
commercialize
linaclotide
in
Mexico
as
LINZESS.
In
May
2014,
Allergan
began
commercializing
CONSTELLA
in
Canada
and
in
June
2014,Almirall
began
commercializing
LINZESS
in
Mexico.
In
October
2015,
Almirall
and
Allergan
terminated
the
sublicense
arrangement
with
respect
to
Mexico,returning
the
exclusive
rights
to
commercialize
CONSTELLA
in
Mexico
to
Allergan.
CONSTELLA
continues
to
be
available
to
adult
IBS-C
patients
in
Mexico.
Astellas
Pharma
Inc.,
or
Astellas,
our
partner
in
Japan,
is
developing
linaclotide
for
the
treatment
of
patients
with
IBS-C
and
chronic
constipation
in
itsterritory.
In
November
2015,
we
and
Astellas
reported
positive
top-line
data
from
Astellas'
Phase
III
clinical
trial
of
linaclotide
in
adult
patients
with
IBS-C
forJapan.
We
believe
these
data
support
the
submission
of
a
new
drug
application,
or
NDA,
to
the
Ministry
of
Health,
Labor
and
Welfare
for
approval
to
marketlinaclotide
in
Japan.
We
and
AstraZeneca
AB,
or
AstraZeneca,
are
co-developing
linaclotide
in
China,
Hong
Kong
and
Macau,
with
AstraZeneca
having
primaryresponsibility
for
the
local
operational
execution.
In
December
2015,
we
and
AstraZeneca
filed
for
approval
with
the
China
Food
and
Drug
Administration
tomarket
linaclotide
in
China.
We
continue
to
assess
alternatives
to
bring
linaclotide
to
IBS-C
and
CIC
sufferers
in
the
parts
of
the
world
outside
of
our
partneredterritories.
Linaclotide
is
covered
by
European
and
Japanese
composition
of
matter
patents,
all
of
which
expire
in
2024,
subject
to
possible
patent
term
extension,
as
wellas
Chinese
composition
of
matter
patents
and
commercial
formulation
patents
which
expire
in
2024
and
2029,
respectively.
Linaclotide
Colonic
Release.
Abdominal
pain
is
one
of
the
predominant
symptoms
associated
with
IBS,
with
greater
than
75%
of
IBS-C
patients
reportingcontinuous
or
frequent
abdominal
pain,
according
to
information
published
in
2007
by
the
International
Foundation
for
Functional
Gastrointestinal
Disorders.
InPhase
III
clinical
trials
supporting
its
U.S.
approval,
linaclotide
was
demonstrated
to
reduce
the
abdominal
pain
associated
with
IBS-C.7 Table
of
Contents
We
and
Allergan
are
developing
linaclotide
colonic
release,
a
targeted
oral
delivery
formulation
of
linaclotide
designed
to
potentially
improve
abdominal
painrelief
in
adult
IBS-C
patients.
In
November
2015,
we
and
Allergan
initiated
a
Phase
IIb
clinical
trial
evaluating
linaclotide
colonic
release
in
adult
patients
withIBS-C.Refractory
GERD
IW-3718.
According
to
a
study
published
in
2010
by
H.
El-Sarag
in
Alimentary
Pharmacology
&
Therapeutics
and
2015
U.S.
census
data,
there
are
anestimated
10
million
Americans
who
suffer
regularly
from
symptoms
of
gastroesophageal
reflux
disease,
or
GERD,
such
as
heartburn
and
regurgitation,
despitereceiving
the
current
standard
of
care
of
treatment
with
a
proton
pump
inhibitor,
or
PPI,
to
suppress
stomach
acid.
Research
suggests
some
refractory
GERDpatients
may
experience
reflux
of
bile
from
the
intestine
into
the
stomach
and
esophagus.
We
are
investigating
IW-3718,
a
gastric
retentive
formulation
of
a
bile
acid
sequestrant
designed
to
bind
over
an
extended
period
of
time
to
bile
that
refluxesinto
the
stomach
and
upper
small
intestine,
potentially
providing
symptomatic
relief
in
patients
with
refractory
GERD.
In
February
2015,
we
reported
top-line
datafrom
an
exploratory
Phase
IIa
clinical
study
of
IW-3718
in
patients
with
refractory
GERD.
Data
from
this
study
demonstrated
encouraging
improvements
in
reliefof
heartburn
and
certain
other
upper
GI
symptoms
often
associated
with
refractory
GERD.Other
GI
Disorders
IW-9179.
We
are
investigating
IW-9179,
a
GC-C
agonist
designed
to
target
upper
GI
conditions,
for
the
treatment
of
gastroparesis
and
functionaldyspepsia.
Gastroparesis
is
an
upper
GI
disorder
in
which
the
muscles
and/or
nerves
of
the
stomach
do
not
function
properly,
which
disrupts
the
functional
activities
ofthe
stomach.
Diabetic
gastroparesis,
which
is
the
focus
of
our
Phase
IIa
study
discussed
below,
is
a
condition
in
which
symptoms
of
gastroparesis
occur
in
patientswith
type
1
or
type
2
diabetes,
and
has
additional
harmful
effects
on
glycemic
control,
as
well
as
secondary
effects
on
organs,
which
may
lead
to
increasedmortality.
Information
published
in
2009
by
H.P.
Parkman,
et
al.
in
Neuro
&
Mot
provides
that
gastroparesis
symptoms
are
reported
by
approximately
five
to12
percent
of
diabetic
patients.
In
December
2014,
we
initiated
a
randomized,
placebo-controlled,
multi-site
Phase
IIa
clinical
study
evaluating
whether
IW-9179can
provide
symptomatic
relief
to
adult
patients
with
diabetic
gastroparesis.
Functional
dyspepsia,
or
FD,
is
an
upper
GI
disorder
characterized
by
key
symptoms
of
epigastric
pain,
epigastric
bloating,
postprandial
fullness,
epigastricburning,
nausea,
belching
and
early
satiety.
Based
upon
a
study
published
in
2005
by
G.R.
Locke
in
Neuro
&
Mot
,
it
is
estimated
that
approximately
35
millionpeople
suffer
from
FD
in
the
U.S.
In
October
2014,
we
presented
data
from
a
Phase
IIa
clinical
study
evaluating
IW-9179
for
the
treatment
of
functional
dyspepsia.Patients
treated
with
IW-9179
reported
a
numerically
greater
improvement
from
baseline,
compared
with
placebo-treated
patients,
on
six
out
of
seven
FDsymptoms
evaluated.
The
most
common
adverse
event
in
IW-9179-treated
patients
was
diarrhea.
Enrollment
in
this
study
was
limited
by
stringent
enrollmentcriteria
that
sought
to
identify
patients
suffering
only
from
GI
symptoms
of
FD.
These
data
inform
our
continued
work
with
GI
experts
and
regulatory
authorities
todefine
the
path
to
bring
forward
new
therapies
in
FD.
Linaclotide
Colonic
Release.
In
addition
to
IBS-C,
we
are
also
exploring
linaclotide
colonic
release
for
use
in
additional
GI
disorders
where
lowerabdominal
pain
is
a
predominant
symptom,
including
IBS-M,
ulcerative
colitis
and
diverticulitis,
among
others.
As
part
of
the
linaclotide
colonic
release
Phase
IIbclinical
trial
in
IBS-C
patients,
we
and
Allergan
are
also
evaluating
a
second
colonic
release
formulation
that
is
expected
to
inform
a
path
forward
in
theseadditional
GI
disorders.8 Table
of
Contents
Linaclotide.
We
and
Allergan
are
evaluating
linaclotide
in
additional
indications
to
assess
its
potential
to
treat
various
GI
conditions.
We
and
Allergan
are
exploring
the
potential
of
linaclotide
to
provide
relief
of
the
GI
dysfunction
associated
with
opioid
induced
constipation,
or
OIC.
InNovember
2015,
we
reported
positive
top-line
data
from
a
Phase
II
clinical
study
evaluating
linaclotide
in
adult
patients
with
OIC
in
which
linaclotide-treatedpatients
showed
a
statistically
significant
improvement
in
bowel
movement
frequency
compared
to
placebo-treated
patients.
In
addition,
the
National
CancerInstitute,
or
NCI,
is
exploring
linaclotide
in
a
Phase
I
biomarker
study,
in
partnership
with
us
and
Allergan,
designed
to
assess
the
colorectal
bioactivity
oflinaclotide
in
healthy
volunteers,
and
to
inform
the
feasibility
and
design
of
a
study
to
evaluate
the
potential
for
linaclotide
to
prevent
colorectal
cancer.
The
NCI
isfunding
and
managing
the
clinical
study.Vascular/Fibrotic
Platform
We
are
advancing
development
programs
targeting
sGC,
and
exploring
its
utility
in
vascular
and
fibrotic
diseases.
The
stimulation
of
sGC
is
a
clinicallyvalidated
approach
with
broad
therapeutic
potential.
Found
throughout
the
body,
sGC
is
an
enzyme
that
is
activated
by
the
key
regulator
nitric
oxide
to
increaselevels
of
the
second
messenger
cyclic
guanosine
monophosphate,
or
cGMP,
which
ultimately
regulates
processes
such
as
blood
flow,
inflammation
and
fibrosis.
Asmodulators
of
these
core
physiological
processes,
sGC
stimulators
may
be
relevant
in
the
treatment
of
a
broad
range
of
diseases
including
cardiovascular
diseasessuch
as
pulmonary
arterial
hypertension
and
congestive
heart
failure,
as
well
as
muscular
dystrophy,
diabetic
nephropathy
and
other
disorders.
To
date,
we
haveidentified
two
sGC
development
candidates,
IW-1973
and
IW-1701,
which
have
distinct
pharmacologic
profiles
that
we
believe
may
be
differentiating
and
enableopportunities
in
multiple
indications.
IW-1973.
In
November
2015,
we
initiated
a
Phase
Ib
clinical
study
of
IW-1973.
The
study
includes
two
stages:
an
open-label,
single
dose,
crossover
stageand
a
randomized,
double-blind,
placebo-controlled,
multiple-ascending-dose
stage.
The
Phase
Ib
clinical
study
is
designed
to
assess
the
safety,
tolerability,pharmacokinetic
profile
and
pharmacodynamics
effects
of
IW-1973
in
healthy
subjects.
IW-1701.
In
November
2015,
we
initiated
a
randomized,
double-blind,
placebo-controlled,
single-ascending-dose
Phase
Ia
clinical
study
of
IW-1701
toassess
the
safety,
tolerability,
pharmacokinetic
profile
and
pharmacodynamics
effects
of
IW-1701
in
healthy
subjects.Collaborations
and
Partnerships
As
part
of
our
strategy,
we
have
established
development
and
commercial
capabilities
that
we
plan
to
leverage
as
we
seek
to
bring
multiple
medicines
topatients.
We
intend
to
play
an
active
role
in
the
development
and
commercialization
of
our
internally
developed
products
in
the
U.S.,
and
to
establish
a
strongglobal
brand
by
out-licensing
commercialization
rights
in
other
territories
to
high-performing
partners.
We
believe
in
the
long-term
value
of
our
drug
candidates,
sowe
seek
collaborations
that
provide
meaningful
economics
and
incentives
for
us
and
any
potential
partner.
Furthermore,
we
seek
partners
who
share
our
values,culture,
processes
and
vision
for
our
products,
which
we
believe
will
enable
us
to
work
with
those
partners
successfully
for
the
entire
potential
patent
life
of
ourdrugs.
In
addition
to
our
internally
developed
products,
we
also
intend
to
access
innovative
products
through
strategic
transactions
and
leverage
our
existingcapabilities
to
develop
and
commercialize
these
products
in
the
U.S.
The
following
chart
shows
our
revenue
for
the
U.S.
and
territories
outside
of
the
U.S.
as
a
percentage
of
our
total
revenue
for
each
of
the
years
endedDecember
31,
2015,
2014
and
2013.
Revenue
attributable
to
our
linaclotide
partnerships
comprised
substantially
all
of
our
revenue
for
each
of
the
years
indicated;none
of
our
other
product
candidates
generated
revenue
during
these
periods.
Further,
we
currently
derive
substantially
all
of
our
revenue
from
our
LINZESScollaboration
with9 Table
of
ContentsAllergan
for
the
U.S.
and
believe
that
the
revenues
from
this
collaboration
will
continue
to
constitute
a
significant
portion
of
our
total
revenue
for
the
foreseeablefuture.
In
addition,
our
collaborative
arrangements
revenue
outside
of
the
U.S.
has
fluctuated
for
the
years
ended
December
31,
2015,
2014
and
2013,
and
maycontinue
to
fluctuate
as
a
result
of
the
timing
and
amount
of
license
fees
and
clinical
and
commercial
milestones
received
and
recognized
under
our
current
andfuture
strategic
partnerships
outside
of
the
U.S.,
as
well
as
the
timing
and
amount
of
royalties
from
the
sales
of
linaclotide
in
the
European,
Canadian
or
Mexicanmarkets
or
any
other
markets
where
linaclotide
receives
approval.
We
have
pursued
a
partnering
strategy
for
commercializing
linaclotide
that
has
enabled
us
to
retain
significant
oversight
over
linaclotide's
development
andcommercialization
worldwide,
share
the
costs
with
collaborators
whose
capabilities
complement
ours,
and
retain
a
significant
portion
of
linaclotide's
future
long-term
value.
As
of
December
31,
2015,
licensing
fees,
milestones,
royalties
and
related
equity
investments
from
our
linaclotide
partners
totaled
approximately$378.1
million.
In
addition,
we
and
Allergan
jointly
fund
the
development
and
commercialization
of
LINZESS
in
the
U.S.,
sharing
equally
in
any
net
profits
orlosses,
and
we
and
AstraZeneca
jointly
fund
the
development
and
commercialization
of
linaclotide
in
China,
Hong
Kong
and
Macau,
with
AstraZeneca
receiving55%
of
the
net
profits
or
incurring
55%
of
the
net
losses
until
a
certain
specified
commercial
milestone
is
achieved,
at
which
time
profits
or
losses
will
be
sharedequally
thereafter.
Such
reimbursements
for
our
development
and
commercialization
costs
received
from
Allergan
in
the
U.S.
or
AstraZeneca
are
excluded
fromthe
amount
above.
We
continue
to
assess
alternatives
to
bring
linaclotide
to
IBS-C
and
CIC
sufferers
in
the
parts
of
the
world
outside
of
our
partnered
territories.
Allergan
plc.
In
September
2007,
we
entered
into
a
collaboration
agreement
with
Allergan
to
develop
and
commercialize
linaclotide
for
the
treatment
ofIBS-C,
CIC
and
other
GI
conditions
in
North
America.
Under
the
terms
of
the
collaboration
agreement,
we
and
Allergan
are
jointly
and
equally
funding
thedevelopment
and
commercialization
of
LINZESS
in
the
U.S.,
with
equal
share
of
any
profits
or
losses.
Additionally,
we
granted
Allergan
exclusive
rights
todevelop
and
commercialize
linaclotide
in
Canada
and
Mexico
in
which
we
receive
royalties
in
the
mid-teens
percent
on
net
sales
in
those
countries.
Allergan
issolely
responsible
for
the
further
development,
regulatory
approval
and
commercialization
of
linaclotide
in
those
countries
and
funding
any
costs.
Total
licensing,milestone
payments
and
related
equity
investments
to
us
under
the
Allergan
collaboration
agreement
for
North
America
could
total
up
to
$330.0
million,
includingthe
$205.0
million
that
Allergan
has
already
paid
to
us
in
license
fees
and
development-related
milestones
and
the
$25.0
million
of
our
capital
stock
that
Allerganhas
already
purchased.
In
April
2009,
we
entered
into
a
license
agreement
with
Almirall
to
develop
and
commercialize
linaclotide
in
Europe
(including
the
Commonwealth
ofIndependent
States
and
Turkey)
for
the
treatment
of
IBS-C,
CIC
and
other
GI
conditions.
Under
the
terms
of
this
agreement,
we
were
eligible
to
receive
licensing,milestone
payments
and
related
equity
investments
that
could
have
totaled
up
to
$118.0
million,
including
the
$61.0
million
in
milestones,
net
of
foreignwithholding
taxes,
that
Almirall
already
paid
to
us,
and
the
$15.0
million
of
our
capital
stock
that
Almirall
already
purchased.
We
were
also
eligible
to
receiveroyalties
based
on
sales
volume
in
the
Almirall
territory,
beginning
in
the
low-twenties
percent
and
escalating
to
the
mid-forties
percent
through
April
2017,
andthereafter
beginning
in
the
mid-twenties
percent
and
escalating
to
the
mid-forties
percent
at
lower
sales
thresholds.
These
royalty
payments
were
reduced
by
thetransfer
price
paid
for
the
active10
2015
2014
2013
U.S.
92.3%
62.3%
12.9%Rest
of
world
7.7%
37.7%
87.1%
100.0%
100.0%
100.0% Table
of
Contentspharmaceutical
ingredient,
or
API,
included
in
the
product
actually
sold
in
the
Almirall
territory
and
other
contractual
deductions.
In
October
2015,
Almiralltransferred
its
exclusive
license
to
develop
and
commercialize
linaclotide
in
Europe
to
Allergan,
and
we
separately
entered
into
an
amendment
to
the
licenseagreement
with
Allergan
relating
to
the
development
and
commercialization
of
linaclotide
in
Europe.
Pursuant
to
the
terms
of
the
amendment,
(i)
the
remainingsales-based
milestones
payable
to
us
under
the
license
agreement
were
modified
such
that,
when
aggregated
with
the
remaining
commercial
launch
milestones,
theycould
total
up
to
$42.5
million,
(ii)
the
royalties
payable
to
us
during
the
term
of
the
license
agreement
were
modified
such
that
the
royalties
based
on
sales
volumein
Europe
begin
in
the
mid-single
digit
percent
and
escalate
to
the
upper-teens
percent
by
calendar
year
2019,
and
(iii)
Allergan
assumed
responsibility
for
themanufacturing
of
linaclotide
API
for
Europe
from
us,
as
well
as
the
associated
costs.
Furthermore,
as
we
are
no
longer
responsible
for
the
manufacturing
oflinaclotide
API
for
Europe,
the
royalties
under
the
license
agreement
will
no
longer
be
reduced
by
the
transfer
price
paid
for
the
API
included
in
the
productactually
sold
by
Allergan
in
Europe
in
any
given
period.
In
August
2015,
we
and
Allergan
entered
into
an
agreement
for
the
co-promotion
of
VIBERZI™
(eluxadoline)
in
the
U.S.,
Allergan's
treatment
for
adultssuffering
from
IBS
with
diarrhea,
or
IBS-D.
Under
the
terms
of
the
agreement,
our
clinical
sales
specialists
are
detailing
VIBERZI
to
the
approximately
25,000health
care
practitioners
to
whom
they
detail
LINZESS.
Allergan
is
responsible
for
all
costs
and
activities
relating
to
the
commercialization
of
VIBERZI
outside
ofthe
co-promotion.
Our
promotional
efforts
are
compensated
based
on
the
volume
of
calls
delivered
by
our
sales
force,
with
the
terms
of
the
agreement
reducing
oreliminating
certain
of
the
unfavorable
adjustments
to
our
share
of
net
profits
stipulated
by
the
linaclotide
collaboration
agreement
with
Allergan
for
North
America,provided
that
we
deliver
a
minimum
number
of
VIBERZI
calls
on
physicians.
We
have
the
potential
to
achieve
milestone
payments
of
up
to
$10.0
million
based
onthe
net
sales
of
VIBERZI
in
each
of
2017
and
2018,
and
are
also
compensated
via
reimbursements
for
medical
education
initiatives.
Our
promotional
efforts
underthe
agreement
began
when
VIBERZI
became
commercially
available
in
December
2015,
and
will
continue
until
December
31,
2017,
unless
earlier
terminated
byeither
party
pursuant
to
the
provisions
of
the
agreement.
In
November
2015,
Allergan
and
Pfizer
Inc.
entered
into
a
definitive
agreement
providing
for
the
combination
of
the
two
companies.
Our
collaboration
for
thedevelopment
and
commercialization
of
linaclotide,
as
well
as
our
agreement
to
co-promote
VIBERZI,
remains
in
effect.
Astellas
Pharma
Inc.
In
November
2009,
we
entered
into
a
license
agreement
with
Astellas
to
develop
and
commercialize
linaclotide
for
the
treatment
ofIBS-C,
CIC
and
other
GI
conditions
in
Japan,
South
Korea,
Taiwan,
Thailand,
the
Philippines
and
Indonesia.
As
a
result
of
an
amendment
to
the
license
agreementexecuted
in
March
2013,
we
regained
rights
to
linaclotide
in
South
Korea,
Taiwan,
Thailand,
the
Philippines
and
Indonesia.
If
linaclotide
is
successfully
developedand
commercialized
in
the
Astellas
territory,
licensing
and
milestone
payments
to
us
could
total
up
to
$75.0
million,
including
the
$30.0
million
up-front
licensingfee
and
the
$15.0
million
development
milestone
that
have
already
been
paid
to
us.
If
Astellas
receives
approval
to
market
and
sell
linaclotide,
Astellas
will
pay
usgross
royalties
which
escalate
based
on
sales
volume
in
the
Astellas
territory,
beginning
in
the
low-twenties
percent,
less
the
transfer
price
paid
for
the
API
includedin
the
product
actually
sold
in
the
Astellas
territory
and
other
contractual
deductions.
AstraZeneca
AB.
In
October
2012,
we
entered
into
a
collaboration
with
AstraZeneca
to
co-develop
and
co-commercialize
linaclotide
in
China,
Hong
Kongand
Macau.
Under
the
terms
of
the
agreement,
we
and
AstraZeneca
are
jointly
funding
the
development
and
commercialization
of
linaclotide
in
the
AstraZenecaterritory,
with
AstraZeneca
receiving
55%
of
the
net
profits
or
incurring
55%
of
the
net
losses
until
a
certain
specified
commercial
milestone
is
achieved,
at
whichtime
profits
or
losses
will
be
shared
equally
thereafter.
If
linaclotide
is
successfully
developed
and
commercialized
in
China,
total
licensing
and
milestone
paymentsto
us
under
the
collaboration
agreement
could
total
up11 Table
of
Contentsto
$150.0
million,
including
the
$25.0
million
that
AstraZeneca
has
already
paid
to
us.
As
part
of
the
collaboration,
Ironwood's
sales
force
promoted
AstraZeneca'sNEXIUM®
(esomeprazole
magnesium),
one
of
AstraZeneca's
products,
in
the
U.S.
through
May
2014.
Exact
Sciences
Corp.
In
March
2015,
we
and
Exact
Sciences
Corp,
or
Exact
Sciences,
entered
into
an
agreement
to
co-promote
Cologuard®,
the
first
andonly
FDA-approved
noninvasive
stool
DNA
screening
test
for
colorectal
cancer.
Under
the
terms
of
the
agreement,
our
sales
team
is
promoting
and
educatinghealth
care
practitioners
regarding
Cologuard.
We
are
also
collaborating
on
medical
education
initiatives
to
support
more
in-depth
understanding
of
Cologuard
andthe
importance
of
colorectal
cancer
screening.
Exact
Sciences
maintains
responsibility
for
all
other
aspects
of
the
commercialization
of
Cologuard
outside
of
the
co-promotion.
We
are
compensated
via
reimbursements
for
sales
detailing,
promotional
support
services
and
medical
education
initiatives.
During
the
initial
one-yearterm
of
the
agreement,
we
could
receive
up
to
a
maximum
reimbursement
of
approximately
$4.8
million.
We
also
earn
royalties
on
the
net
sales
of
Cologuardgenerated
from
the
healthcare
practitioners
on
whom
we
call
less
the
sales
promotion
reimbursement
to
us,
such
royalties
being
payable
during
the
term
and
for
oneyear
following
the
termination
of
our
co-promotion
efforts.Owner-related
Business
Principles
We
encourage
all
current
and
potential
stockholders
to
read
the
owner-related
business
principles
below
that
guide
our
overall
strategy
and
decision
making.1.
Ironwood's
stockholders
own
the
business;
all
of
our
employees
work
for
them.
Each
of
our
employees
also
has
equity
in
the
business,
aligning
their
interests
with
those
of
their
fellow
stockholders.
As
employees
and
co-owners
ofIronwood,
our
management
and
employee
team
seek
to
effectively
allocate
scarce
stockholder
capital
to
maximize
the
average
annual
growth
of
per
share
value.
Through
our
policies
and
communication,
we
seek
to
attract
like-minded
owner-oriented
stockholders.
We
strive
to
effectively
communicate
our
views
of
thebusiness
opportunities
and
risks
over
time
so
that
entering
and
exiting
stockholders
are
doing
so
at
a
price
that
approximately
reflects
our
intrinsic
value.2.
We
believe
we
can
best
maximize
long-term
stockholder
value
by
building
a
great
pharmaceutical
franchise.
We
believe
that
Ironwood
has
the
potential
to
deliver
outstanding
long-term
returns
to
stockholders
who
are
sober
to
the
risks
inherent
in
the
pharmaceuticalproduct
lifecycle
and
to
the
potential
dramatic
highs
and
lows
along
the
way,
and
who
focus
on
superior
long-term,
per
share
cash
flows.
Since
the
pharmaceutical
product
lifecycle
is
lengthy
and
unpredictable,
we
believe
it
is
critical
to
have
a
long-term
strategic
horizon.
We
work
hard
to
embedour
long-term
focus
into
our
policies
and
practices,
which
may
give
us
a
competitive
advantage
in
attracting
like-minded
stockholders
and
the
highest
caliberemployees.
Our
current
and
future
employees
may
perceive
both
financial
and
qualitative
advantages
in
having
their
inventions
or
hard
work
result
in
marketeddrugs
that
they
and
their
fellow
stockholders
continue
to
own.
Some
of
our
key
policies
and
practices
that
are
aligned
with
this
imperative
include:
a.
Our
dual
class
equity
voting
structure
(which
provides
for
super-voting
rights
of
our
pre-IPO
stockholders
only
in
the
event
of
a
change
of
controlvote)
is
designed
to
concentrate
change
of
control
decisions
in
the
hands
of
long-term
focused
owners
who
have
a
history
of
experience
with
us.12 Table
of
Contents
b.
We
grant
each
of
our
employees
stock-based
awards,
and
long-term
equity
is
a
significant
component
of
their
total
compensation.
We
believe
ouremphasis
on
equity
plays
an
important
role
in
attracting
and
motivating
the
owner-oriented
employees
we
seek
and
aligning
their
interests
with
those
oftheir
fellow
stockholders.
c.
We
have
adopted
a
change
of
control
severance
plan
for
all
of
our
employees
that
is
intended
to
encourage
them
to
bring
forward
their
best
ideasby
providing
them
with
the
comfort
that
if
a
change
of
control
occurs
and
their
employment
is
terminated,
they
will
still
have
an
opportunity
to
share
in
theeconomic
value
that
they
have
helped
create
for
stockholders.
d.
All
of
the
members
of
our
board
of
directors
are
investors
in
the
company.
Furthermore,
each
director
is
required
to
hold
all
shares
of
stockacquired
as
payment
for
his
or
her
service
as
a
director
throughout
his
or
her
term
on
the
board.
e.
Our
partnerships
with
Allergan,
Astellas
and
AstraZeneca
all
include
standstill
agreements,
which
serve
to
protect
us
from
an
unwelcomeacquisition
attempt
by
one
of
our
partners.
In
addition,
we
have
change
of
control
provisions
in
our
partnership
agreements
in
order
to
protect
the
economicvalue
of
linaclotide
should
the
acquirer
of
one
of
our
partners
be
unable
or
unwilling
to
devote
the
time
and
resources
required
to
maximize
linaclotide'sbenefit
to
patients
in
their
respective
territory.3.
We
are
and
will
remain
careful
stewards
of
our
stockholders'
capital.
We
work
intensely
to
allocate
capital
carefully
and
prudently,
continually
reinforcing
a
lean,
cost-conscious
culture.
While
we
are
mindful
of
the
declining
productivity
and
inherent
challenges
of
pharmaceutical
research
and
development,
we
intend
to
invest
in
discovery
anddevelopment
research
for
many
years
to
come.
Our
singular
passion
is
to
create,
develop
and
commercialize
novel
drug
candidates,
seeking
to
integrate
the
mostsuccessful
drugmaking
and
marketing
practices
of
the
past
and
the
best
of
today's
cutting-edge
technologies
and
basic
research,
development
andcommercialization
advances.
While
we
hope
to
improve
the
productivity
and
efficiency
of
our
drug
creation
efforts
over
time,
our
discovery
process
revolves
around
small,
highlyinteractive,
cross-functional
teams.
We
believe
that
this
is
one
area
where
our
relatively
small
size
is
a
competitive
advantage,
so
for
the
foreseeable
future,
we
donot
expect
our
drug
discovery
team
to
grow
beyond
100-150
scientists.
We
will
continue
to
prioritize
constrained
resources
and
maintain
organizational
discipline.Once
internally
or
externally
derived
candidates
advance
into
development,
compounds
follow
careful
stage-gated
plans,
with
further
advancement
depending
onclear
data
points.
Since
most
pharmaceutical
research
and
development
projects
fail,
it
is
critical
that
our
teams
are
rigorous
in
making
early
go/no
go
decisions,following
the
data,
terminating
unsuccessful
programs,
and
allocating
scarce
dollars
and
talent
to
the
most
promising
efforts,
thus
enhancing
the
likelihood
of
latephase
development
success.
Our
global
operations
and
commercial
teams
take
a
similar
approach
to
capital
allocation
and
decision-making.
By
working
with
our
partners
to
establishredundancy
at
each
critical
node
of
the
linaclotide
global
supply
chain,
we
are
mitigating
against
a
fundamental
risk
inherent
with
pharmaceuticals—unanticipatedshortages
of
commercial
product.
Likewise,
we
have
established
a
commercial
organization
dedicated
to
bringing
innovative,
highly-valued
healthcare
solutions
toall
of
our
customers.
Our
commercial
organization
works
closely
and
methodically
with
our
global
commercialization
partners,
striving
to
maximize
linaclotide'scommercial
potential
through
focused
efforts
aimed
at
educating
patients,
payers
and
healthcare
providers.13 Table
of
Contents4.
Our
financial
goal
is
to
maximize
long-term
per
share
cash
flows.
Our
goal
is
to
maximize
long-term
cash
flows
per
share,
and
we
will
prioritize
this
even
if
it
leads
to
uneven
short-term
financial
results.
If
and
when
webecome
profitable,
we
expect
and
accept
uneven
earnings
growth.
Our
underlying
product
development
model
is
risky
and
unpredictable,
and
we
have
no
intentionto
advance
marginal
development
candidates
or
consummate
suboptimal
in-license
transactions
in
an
attempt
to
fill
anticipated
gaps
in
revenue
growth.
Successfuldrugs
can
be
enormously
beneficial
to
patients
and
highly
profitable
and
rewarding
to
stockholders,
and
we
believe
strongly
in
our
ability
to
occasionally
(but
notin
regular
or
predictable
fashion)
create
and
commercialize
great
medicines
that
make
a
meaningful
difference
in
patients'
lives.
If
and
when
we
reach
profitability,
we
do
not
intend
to
issue
quarterly
or
annual
earnings
guidance;
however
we
plan
to
continue
to
be
transparent
about
thekey
elements
of
our
performance,
including
near-term
operating
plans
and
longer-term
strategic
goals.Our
Strategy
Our
mission
is
to
create
medicines
that
make
a
difference
for
patients,
build
value
for
our
fellow
stockholders,
and
empower
our
passionate
team.
Our
corestrategy
to
achieve
this
mission
is
to
leverage
our
development
and
commercial
capabilities
in
addressing
GI
disorders
as
well
as
our
pharmacologic
expertise
inGC
pathways
to
bring
multiple
medicines
to
patients.
Key
elements
of
our
strategy
include:•attracting
and
incentivizing
a
team
with
a
singular
passion
for
creating,
developing
and
commercializing
medicines
that
can
make
a
significantdifference
in
patients'
lives;
•successfully
and
profitably
commercializing
LINZESS
in
collaboration
with
Allergan
in
the
U.S.;
•exploring
development
opportunities
to
enhance
the
clinical
profile
of
LINZESS
by
seeking
to
expand
its
utility
in
its
indicated
populations,
as
wellas
studying
linaclotide
in
additional
indications,
populations
and
formulations
to
assess
its
potential
to
treat
various
GI
conditions;
•investing
in
our
pipeline
of
novel
GI
product
candidates
and
advancing
our
sGC
stimulators
targeting
vascular/fibrotic
diseases;
•solidifying
and
expanding
our
position
as
the
leader
in
the
field
of
GC-C
agonists
and
cGMP
pharmacology;
•leveraging
our
U.S.-focused
commercial
capabilities
in
marketing,
reimbursement,
patient
engagement
and
sales;
•evaluating
candidates
outside
of
the
company
for
in-licensing
or
acquisition
opportunities;
•maximizing
the
commercial
potential
of
our
drugs
and
playing
an
active
role
in
their
commercialization
or
find
partners
who
share
our
vision,values,
culture
and
processes;
•supporting
global
partners
to
commercialize
linaclotide
outside
of
the
U.S.;
•harvesting
the
maximum
value
of
linaclotide
outside
of
our
currently
partnered
territories;
and,
•executing
our
strategy
with
our
stockholders'
long-term
interests
in
mind
by
seeking
to
maximize
long-term
per
share
cash
flows.Competition
Linaclotide,
our
only
marketed
product
to
date,
competes
globally
with
certain
prescription
therapies
and
over-the-counter,
or
OTC,
products
for
the
treatmentof
IBS-C
and
CIC,
or
their
associated
symptoms.14 Table
of
Contents
Polyethylene
glycol,
or
PEG
(such
as
MiraLAX®),
and
lactulose
account
for
the
majority
of
prescription
laxative
treatments.
Both
agents
demonstrate
animprovement
in
stool
frequency
and
consistency
but
do
not
improve
bloating,
abdominal
discomfort
or
the
recurrence
of
symptoms.
Clinical
trials
and
productlabels
document
several
adverse
effects
with
PEG
and
lactulose,
including
exacerbation
of
bloating,
cramping
and,
according
to
a
study
published
in
2005
by
L.E.Brandt,
et
al.
in
the
American
Journal
of
Gastroenterology
,
up
to
a
40%
incidence
of
diarrhea.
Overall,
up
to
75%
of
patients
taking
prescription
laxatives
reportnot
being
completely
satisfied
with
the
predictability
of
when
they
will
experience
a
bowel
movement
on
treatment,
and
50%
were
not
completely
satisfied
withrelief
of
the
multiple
symptoms
associated
with
constipation,
according
to
the
J.F.
Johanson
study
published
in
2007
in
Alimentary
Pharmacology
&
Therapeutics
.
OTC
laxatives
make
up
the
majority
of
the
IBS-C
and
CIC
treatment
market,
according
to
a
GI
patient
landscape
survey
performed
in
2010
by
Lieberman
et
al.
Given
the
low
barriers
to
access,
many
IBS-C
and
CIC
sufferers
try
OTC
fiber
and
laxatives,
but
according
to
this
same
patient
landscape
survey,
less
than
half
ofthem
are
very
satisfied
with
the
ability
of
these
OTC
products
to
manage
their
symptoms.
Two
of
the
largest
selling
OTC
laxatives
in
the
U.S.,
based
on
2013
U.S.sales
volume
data
from
Euromonitor
International,
are
MiraLAX
and
Dulcolax®.
Until
the
launch
of
LINZESS,
the
only
available
prescription
therapy
for
IBS-C
and
CIC
in
the
U.S.
was
Amitiza®
(lubiprostone),
which
was
approved
for
thetreatment
of
CIC
in
2006,
for
the
treatment
of
IBS-C
in
2008,
and
for
the
treatment
of
opioid-induced
constipation
in
2013.
Amitiza
is
also
approved
for
thetreatment
of
CIC
in
the
United
Kingdom
and
Switzerland,
and
for
the
treatment
of
chronic
constipation
in
Japan.
There
are
additional
compounds
in
late-stagedevelopment
by
other
companies
for
the
treatment
of
patients
with
IBS-C
and
CIC.Manufacturing
and
Supply
We
currently
manage
our
global
supply
and
distribution
of
linaclotide
through
a
combination
of
contract
manufacturers
and
collaboration
partners.
It
is
ourobjective
to
produce
safe
and
effective
medicine
on
a
worldwide
basis,
with
redundancy
built
into
critical
steps
of
the
supply
chain.
We
believe
that
we
havesufficient
in-house
expertise
to
manage
our
manufacturing
and
supply
chain
network
to
meet
worldwide
demand.
Linaclotide
production
consists
of
three
phases—manufacture
of
the
API
(sometimes
referred
to
as
drug
substance),
manufacture
of
drug
product
andmanufacture
of
finished
goods.
We
have
entered
into
agreements
with
multiple
third
party
manufacturers
for
the
production
of
linaclotide
API.
We
believe
ourcommercial
suppliers
have
the
capabilities
to
produce
linaclotide
API
in
accordance
with
current
good
manufacturing
practices,
or
GMP,
on
a
sufficient
scale
tomeet
our
development
and
commercial
needs.
Our
commercial
suppliers
are
subject
to
routine
inspections
by
regulatory
agencies
worldwide
and
also
undergoperiodic
audit
and
certification
by
our
quality
department.
In
connection
with
the
transfer
of
Almirall's
exclusive
license
to
develop
and
commercialize
linaclotidein
Europe
to
Allergan,
Allergan
assumed
responsibility
for
the
manufacturing
of
linaclotide
API
for
Europe.
Each
of
Allergan
and
Astellas
is
responsible
for
drug
product
and
finished
goods
manufacturing
(including
bottling
and
packaging)
for
its
respectiveterritories,
and
distributing
the
finished
goods
to
wholesalers.
We
have
an
agreement
with
an
independent
third
party
to
serve
as
an
additional
source
of
drugproduct
manufacturing
of
linaclotide
for
our
partnered
territories
and
we
have
worked
with
our
partners
to
achieve
sufficient
redundancy
in
this
component
of
thelinaclotide
supply
chain.
Under
our
collaboration
with
AstraZeneca,
we
are
accountable
for
drug
product
and
finished
goods
manufacturing
for
China,
Hong
Kongand
Macau.
Prior
to
linaclotide,
there
was
no
precedent
for
long-term
room
temperature
shelf
storage
formulation
for
an
orally
dosed
peptide
to
be
produced
in
millions
ofcapsules
per
year.
Our
efforts
to
date
have
led
to
a
formulation
that
is
both
cost
effective
and
able
to
meet
the
stability
requirements
for15 Table
of
Contentscommercial
pharmaceutical
products.
Our
work
in
this
area
has
created
an
opportunity
to
seek
additional
intellectual
property
protection
around
the
linaclotideprogram.
In
conjunction
with
Allergan
and
Astellas,
we
have
filed
patent
applications
in
the
U.S.
and
foreign
jurisdictions
and
have
been
issued
three
U.S.
patentsto
protect
the
current
commercial
formulation
of
linaclotide
as
well
as
related
formulations.
The
three
issued
U.S.
patents
expire
in
2031.
If
issued,
the
pendingpatent
applications
would
expire
in
2029
or
later
in
the
U.S.
and
foreign
jurisdictions
and
would
be
eligible
for
potential
patent
term
adjustments
or
patent
termextensions
in
countries
where
such
extensions
may
be
available.Sales
and
Marketing
For
the
foreseeable
future,
we
intend
to
develop
and
commercialize
our
drugs
in
the
U.S.
alone
or
with
partners,
and
expect
to
rely
on
partners
tocommercialize
our
drugs
in
territories
outside
the
U.S.
In
executing
our
strategy,
our
goal
is
to
retain
significant
worldwide
oversight
over
the
development
processand
commercialization
of
our
products,
by
playing
an
active
role
in
their
commercialization
or
finding
partners
who
share
our
vision,
values,
culture
and
processes.
We
have
built
our
commercial
capabilities,
including
marketing,
reimbursement,
patient
engagement
and
sales,
around
linaclotide,
with
the
intent
to
leveragethese
capabilities
for
future
internally
and
externally
developed
products.
To
date,
we
have
established
a
high-quality
commercial
organization
dedicated
tobringing
innovative,
highly-valued
healthcare
solutions
to
our
customers,
including
patients,
payers,
and
healthcare
providers.
As
part
of
our
strategy,
we
andAllergan
have
been
investing
in
a
direct-to-consumer
patient
awareness
campaign
for
LINZESS
designed
to
help
adults
in
the
U.S.
suffering
from
IBS-C
or
CICrecognize
the
symptoms
of
their
disorder,
describe
their
symptoms
to
their
doctor,
and
ask
their
doctor
whether
LINZESS
can
help
proactively
manage
theirdisease.
We
are
coordinating
efforts
with
all
of
our
partners
to
ensure
that
we
launch
and
maintain
an
integrated,
global
linaclotide
brand.
By
leveraging
the
knowledgebase
and
expertise
of
our
experienced
commercial
team
and
the
insights
of
each
of
our
linaclotide
commercialization
partners,
we
continually
improve
ourcollective
marketing
strategies.Patents
and
Proprietary
Rights
We
actively
seek
to
protect
the
proprietary
technology
that
we
consider
important
to
our
business,
including
pursuing
patents
that
cover
our
products
andcompositions,
their
methods
of
use
and
the
processes
for
their
manufacture,
as
well
as
any
other
relevant
inventions
and
improvements
that
are
commerciallyimportant
to
the
development
of
our
business.
We
also
rely
on
trade
secrets
that
may
be
important
to
the
development
of
our
business.
Our
success
will
depend
significantly
on
our
ability
to
obtain
and
maintain
patent
and
other
proprietary
protection
for
the
technology,
inventions
andimprovements
we
consider
important
to
our
business;
defend
our
patents;
preserve
the
confidentiality
of
our
trade
secrets;
and
operate
without
infringing
thepatents
and
proprietary
rights
of
third
parties.Linaclotide
Patent
Portfolio
Our
linaclotide
patent
portfolio
is
currently
composed
of
nine
U.S.
patents
listed
in
the
FDA
publication,
"Approved
Drug
Products
with
TherapeuticEquivalence
Evaluations"
(also
known
as
the
"Orange
Book"),
three
granted
European
patents
(each
of
which
has
been
validated
in
31
European
countries),
fivegranted
Japanese
patents,
four
granted
Chinese
patents,
33
issued
patents
in
other
foreign
jurisdictions,
and
numerous
pending
provisional,
U.S.
non-provisional,foreign
and
PCT
patent
applications.
We
own
or
jointly
own
all
of
the
issued
patents
and
pending
applications.16 Table
of
Contents
The
issued
U.S.
patents,
which
will
expire
between
2024
and
2031,
contain
claims
directed
to
the
linaclotide
molecule,
pharmaceutical
compositions
thereof,methods
of
using
linaclotide
to
treat
GI
disorders,
processes
for
making
the
molecule,
and
room
temperature
stable
formulations
of
linaclotide
and
methods
of
usethereof.
The
granted
European
patents,
which
will
expire
in
2024,
subject
to
potential
patent
term
extension,
contain
claims
directed
to
the
linaclotide
molecule,pharmaceutical
compositions
thereof
and
uses
of
linaclotide
to
prepare
medicaments
for
treating
GI
disorders.
The
granted
Chinese
patents,
which
will
expirebetween
2024
and
2031,
and
the
granted
Japanese
patents,
which
will
expire
between
2024
and
2029
subject
to
potential
patent
term
extension,
contain
claimsdirected
to
the
linaclotide
molecule,
pharmaceutical
compositions
of
linaclotide
for
use
in
treating
GI
disorders,
and
room
temperature
stable
formulations
oflinaclotide.
We
have
pending
patent
applications
worldwide
covering
the
current
commercial
formulation
of
linaclotide
that,
if
issued,
will
expire
in
2029
or
later.
We
have
pending
applications
directed
to
linaclotide
products
under
development
that
will
extend
patent
protection,
if
issued,
until
2035
or
later.
We
also
havepending
provisional,
U.S.
non-provisional,
foreign
and
PCT
applications
directed
to
linaclotide
and
related
molecules,
pharmaceutical
formulations
thereof,methods
of
using
linaclotide
to
treat
various
diseases
and
disorders
and
processes
for
making
the
molecule.
These
additional
patent
applications,
if
issued,
willexpire
between
2024
and
2036.
The
patent
term
of
a
patent
that
covers
an
FDA-approved
drug
is
also
eligible
for
patent
term
extension,
which
permits
patent
term
restoration
as
compensationfor
some
of
the
patent
term
lost
during
the
FDA
regulatory
review
process.
The
Hatch-Waxman
Act
permits
a
patent
term
extension
of
a
single
patent
applicable
toan
approved
drug
for
up
to
five
years
beyond
the
expiration
of
the
patent
but
the
extension
cannot
extend
the
remaining
term
of
a
patent
beyond
a
total
of
14
yearsfrom
the
date
of
product
approval
by
the
FDA.
The
United
States
Patent
and
Trademark
Office
has
issued
a
Certificate
of
Patent
Term
Extension
for
U.S.
Patent7,304,036,
which
covers
linaclotide
and
methods
of
use
thereof.
As
a
result,
the
patent
term
of
this
patent
was
extended
to
August
30,
2026,
14
years
from
the
dateof
linaclotide's
approval
by
the
FDA.
Similar
provisions
are
available
in
Europe
and
certain
other
foreign
jurisdictions
to
extend
the
term
of
a
patent
that
covers
anapproved
drug.Pipeline
Patent
Portfolio
Our
pipeline
patent
portfolio
relating
to
our
development
programs
outside
of
linaclotide
is
currently
composed
of
eight
issued
U.S.
patents;
11
issued
patentsin
foreign
jurisdictions;
and
numerous
pending
provisional,
U.S.
non-provisional,
foreign
and
PCT
patent
applications.
We
own
all
of
the
issued
patents
andpending
applications.
The
issued
U.S.
patents
expire
between
2028
and
2032.
The
foreign
issued
patents
expire
between
2027
and
2036.
The
pending
patentapplications,
if
issued,
will
expire
between
2027
and
2035.Additional
Intellectual
Property
In
addition
to
the
patents
and
patent
applications
related
to
linaclotide
and
our
GI
and
sGC
pipeline,
we
currently
have
five
issued
U.S.
patents;
six
patentsgranted
in
foreign
jurisdictions;
and
a
number
of
pending
provisional,
U.S.
non-provisional,
foreign
and
PCT
applications
directed
to
other
GC-C
agonist
moleculesand
uses
thereof.
We
also
have
other
issued
patents
and
pending
patent
applications
relating
to
our
other
research
and
development
programs,
and
we
are
thelicensee
of
a
number
of
issued
patents
and
pending
patent
applications.
The
term
of
individual
patents
depends
upon
the
legal
term
of
the
patents
in
the
countries
in
which
they
are
obtained.
In
most
countries
in
which
we
file,
thepatent
term
is
20
years
from
the
date
of
filing
the
non-provisional
application.
In
the
U.S.,
a
patent's
term
may
be
lengthened
by
patent
term
adjustment,
whichcompensates
a
patentee
for
administrative
delays
by
the
U.S.
Patent
and
Trademark17 Table
of
ContentsOffice
in
granting
a
patent,
or
may
be
shortened
if
a
patent
is
terminally
disclaimed
over
an
earlier-filed
patent.
We
also
expect
to
apply
for
patent
term
extensionsfor
some
of
our
patents
once
issued,
depending
upon
the
length
of
clinical
trials
and
other
factors
involved
in
the
submission
of
a
NDA.Government
Regulation
In
the
U.S.,
pharmaceutical
products
are
subject
to
extensive
regulation
by
the
FDA.
The
Federal
Food,
Drug,
and
Cosmetic
Act
and
other
federal
and
statestatutes
and
regulations,
govern,
among
other
things,
the
research,
development,
testing,
manufacture,
storage,
recordkeeping,
approval,
labeling,
promotion
andmarketing,
distribution,
FDA
post
marketing
requirements
and
assessments,
post-approval
monitoring
and
reporting,
sampling,
and
import
and
export
ofpharmaceutical
products.
The
FDA
has
very
broad
enforcement
authority
and
failure
to
abide
by
applicable
regulatory
requirements
can
result
in
administrative
orjudicial
sanctions
being
imposed
on
us,
including
warning
letters,
refusals
of
government
contracts,
clinical
holds,
civil
penalties,
injunctions,
restitution,disgorgement
of
profits,
recall
or
seizure
of
products,
total
or
partial
suspension
of
production
or
distribution,
withdrawal
of
approval,
refusal
to
approve
pendingapplications,
and
civil
or
criminal
prosecution.FDA
Approval
Process
We
believe
that
our
product
candidates
will
be
regulated
by
the
FDA
as
drugs.
No
company
may
market
a
new
drug
until
it
has
submitted
an
NDA
to
theFDA,
and
the
FDA
has
approved
it.
The
steps
required
before
the
FDA
may
approve
an
NDA
generally
include:•conducting
nonclinical
laboratory
tests
and
animal
tests
in
compliance
with
FDA's
good
laboratory
practice
requirements;
•development,
manufacture
and
testing
of
active
pharmaceutical
product
and
dosage
forms
suitable
for
human
use
in
compliance
with
current
GMP;
•conducting
adequate
and
well-controlled
human
clinical
trials
that
establish
the
safety
and
efficacy
of
the
product
for
its
specific
intended
use(s);
•In
order
to
evaluate
a
drug
in
humans
in
the
U.S.,
an
investigational
new
drug
application,
or
IND,
must
be
submitted
and
come
into
effectbefore
human
clinical
trials
may
begin.
•the
submission
to
the
FDA
of
an
NDA;
•satisfactory
completion
of
one
or
more
FDA
inspections
of
the
manufacturing
facility
or
facilities
at
which
the
product,
or
components
thereof,
areproduced
to
assess
compliance
with
current
GMP
requirements
and
to
assure
that
the
facilities,
methods
and
controls
are
adequate
to
preserve
theproduct's
identity,
strength,
quality
and
purity;
and
•Inspections
of
other
sources
of
data
in
the
NDA,
such
as
inspection
of
clinical
trial
sites
to
assess
compliance
with
good
clinical
practice,
orGCP,
requirements
are
also
generally
required.
•FDA
review
and
approval
of
the
NDA.
Nonclinical
tests
include
laboratory
evaluation
of
the
product
candidate,
as
well
as
animal
studies
to
assess
the
potential
safety
and
efficacy
of
the
productcandidate.
The
conduct
of
the
nonclinical
tests
must
comply
with
federal
regulations
and
requirements
including
good
laboratory
practices.
We
must
submit
theresults
of
the
nonclinical
tests,
together
with
manufacturing
information,
analytical
data
and
a
proposed
clinical
trial
protocol
to
the
FDA
as
part
of
an
IND,
whichmust
become
effective
before
we
may
commence
human
clinical
trials
in
the
U.S.
The
IND
will
automatically
become
effective
30
days
after
its
receipt
by
theFDA,
unless
the
FDA
raises
concerns
or
questions
before
that
time18 Table
of
Contentsabout
the
conduct
of
the
proposed
trial.
In
such
a
case,
we
must
work
with
the
FDA
to
resolve
any
outstanding
concerns
before
the
clinical
trial
can
proceed.
Wecannot
be
sure
that
submission
of
an
IND
will
result
in
the
FDA
allowing
clinical
trials
to
begin,
or
that,
once
begun,
issues
will
not
arise
that
will
cause
us
or
theFDA
to
modify,
suspend
or
terminate
such
trials.
The
study
protocol
and
informed
consent
information
for
patients
in
clinical
trials
must
also
be
submitted
to
aninstitutional
review
board
for
approval.
An
institutional
review
board
may
also
require
the
clinical
trial
at
the
site
to
be
halted,
either
temporarily
or
permanently,for
failure
to
comply
with
the
institutional
review
board's
requirements
or
if
the
trial
has
been
associated
with
unexpected
serious
harm
to
subjects.
An
institutionalreview
board
may
also
impose
other
conditions
on
the
trial.
Clinical
trials
involve
the
administration
of
the
product
candidate
to
humans
under
the
supervision
of
qualified
investigators,
generally
physicians
notemployed
by
or
under
the
trial
sponsor's
control.
Clinical
trials
are
typically
conducted
in
three
sequential
phases,
though
the
phases
may
overlap
or
be
combined.In
Phase
I,
the
initial
introduction
of
the
drug
into
healthy
human
subjects,
the
drug
is
usually
tested
for
safety
(adverse
effects),
dosage
tolerance
andpharmacologic
action,
as
well
as
to
understand
how
the
drug
is
taken
up
by
and
distributed
within
the
body.
Phase
II
usually
involves
studies
in
a
limited
patientpopulation
(individuals
with
the
disease
under
study)
to:•evaluate
preliminarily
the
efficacy
of
the
drug
for
specific,
targeted
conditions;
•determine
dosage
tolerance
and
appropriate
dosage
as
well
as
other
important
information
about
how
to
design
larger
Phase
III
trials;
and
•identify
possible
adverse
effects
and
safety
risks.
Phase
III
trials
generally
further
evaluate
clinical
efficacy
and
test
for
safety
within
an
expanded
patient
population.
The
conduct
of
clinical
trials
is
subject
toextensive
regulation,
including
compliance
with
GCP
regulations
and
guidance,
and
regulations
designed
to
protect
the
rights
and
safety
of
subjects
involved
ininvestigations.
The
FDA
may
order
the
temporary
or
permanent
discontinuation
of
a
clinical
trial
at
any
time
or
impose
other
sanctions
if
it
believes
that
the
clinical
trial
isnot
being
conducted
in
accordance
with
FDA
requirements
or
presents
an
unacceptable
risk
to
the
clinical
trial
patients.
We
may
also
suspend
clinical
trials
at
anytime
on
various
grounds.
The
results
of
the
nonclinical
and
clinical
studies,
together
with
other
detailed
information,
including
the
manufacture
and
composition
of
the
productcandidate,
are
submitted
to
the
FDA
in
the
form
of
an
NDA
requesting
approval
to
market
the
drug.
FDA
approval
of
the
NDA
is
required
before
marketing
of
theproduct
may
begin
in
the
U.S.
If
the
NDA
contains
all
pertinent
information
and
data,
the
FDA
will
"file"
the
application
and
begin
review.
The
review
process,however,
may
be
extended
by
FDA
requests
for
additional
information,
nonclinical
or
clinical
studies,
clarification
regarding
information
already
provided
in
thesubmission,
or
submission
of
a
risk
evaluation
and
mitigation
strategy.
The
FDA
may
refer
an
application
to
an
advisory
committee
for
review,
evaluation
andrecommendation
as
to
whether
the
application
should
be
approved.
The
FDA
is
not
bound
by
the
recommendations
of
an
advisory
committee,
but
it
considers
suchrecommendations
carefully
when
making
decisions.
Before
approving
an
NDA,
the
FDA
will
typically
inspect
the
facilities
at
which
the
product
candidate
ismanufactured
and
will
not
approve
the
product
candidate
unless
current
GMP
compliance
is
satisfactory.
FDA
also
typically
inspects
facilities
responsible
forperforming
animal
testing,
as
well
as
clinical
investigators
who
participate
in
clinical
trials.
The
FDA
may
refuse
to
approve
an
NDA
if
applicable
regulatorycriteria
are
not
satisfied,
or
may
require
additional
testing
or
information.
The
FDA
may
also
limit
the
indications
for
use
and/or
require
post-marketing
testing
andsurveillance
to
monitor
the
safety
or
efficacy
of
a
product.
Once
granted,
product
approvals
may
be
withdrawn
if
compliance
with
regulatory
standards
is
notmaintained
or
problems
are
identified
following
initial
marketing.19 Table
of
Contents
The
testing
and
approval
process
requires
substantial
time,
effort
and
financial
resources,
and
our
product
candidates
may
not
be
approved
on
a
timely
basis,
ifat
all.
The
time
and
expense
required
to
perform
the
clinical
testing
necessary
to
obtain
FDA
approval
for
regulated
products
can
frequently
exceed
the
time
andexpense
of
the
research
and
development
initially
required
to
create
the
product.
The
results
of
nonclinical
studies
and
initial
clinical
trials
of
our
productcandidates
are
not
necessarily
predictive
of
the
results
from
large-scale
clinical
trials,
and
clinical
trials
may
be
subject
to
additional
costs,
delays
or
modificationsdue
to
a
number
of
factors,
including
difficulty
in
obtaining
enough
patients,
investigators
or
product
candidate
supply.
Failure
by
us
or
our
collaborators,
licensorsor
licensees,
including
Allergan,
Astellas
and
AstraZeneca,
to
obtain,
or
any
delay
in
obtaining,
regulatory
approvals
or
in
complying
with
requirements
couldadversely
affect
commercialization
and
our
ability
to
receive
product
or
royalty
revenues.Hatch-Waxman
Act
The
Hatch-Waxman
Act
established
abbreviated
approval
procedures
for
generic
drugs.
Approval
to
market
and
distribute
these
drugs
is
obtained
bysubmitting
an
abbreviated
new
drug
application,
or
ANDA,
with
the
FDA.
The
application
for
a
generic
drug
is
"abbreviated"
because
it
need
not
includenonclinical
or
clinical
data
to
demonstrate
safety
and
effectiveness
and
may
instead
rely
on
the
FDA's
previous
finding
that
the
brand
drug,
or
reference
drug,
issafe
and
effective.
In
order
to
obtain
approval
of
an
ANDA,
an
applicant
must,
among
other
things,
establish
that
its
product
is
bioequivalent
to
an
existingapproved
drug
and
that
it
has
the
same
active
ingredient(s),
strength,
dosage
form,
and
the
same
route
of
administration.
A
generic
drug
is
considered
bioequivalentto
its
reference
drug
if
testing
demonstrates
that
the
rate
and
extent
of
absorption
of
the
generic
drug
is
not
significantly
different
from
the
rate
and
extent
ofabsorption
of
the
reference
drug
when
administered
under
similar
experimental
conditions.
The
Hatch-Waxman
Act
also
provides
incentives
by
awarding,
in
certain
circumstances,
certain
legal
protections
from
generic
competition.
This
protectioncomes
in
the
form
of
a
non-patent
exclusivity
period,
during
which
the
FDA
may
not
accept,
or
approve,
an
application
for
a
generic
drug,
whether
the
applicationfor
such
drug
is
submitted
through
an
ANDA
or
a
through
another
form
of
application,
known
as
a
505(b)(2)
application.
The
Hatch-Waxman
Act
grants
five
years
of
exclusivity
when
a
company
develops
and
gains
NDA
approval
of
a
new
chemical
entity
that
has
not
beenpreviously
approved
by
the
FDA.
This
exclusivity
provides
that
the
FDA
may
not
accept
an
ANDA
or
505(b)(2)
application
for
five
years
after
the
date
of
approvalof
previously
approved
drug,
or
four
years
in
the
case
of
an
ANDA
or
505(b)(2)
application
that
challenges
a
patent
claiming
the
reference
drug
(see
discussionbelow
regarding
Paragraph
IV
Certifications).
The
Hatch-Waxman
Act
also
provides
three
years
of
exclusivity
for
approved
applications
for
drugs
that
are
not
newchemical
entities,
if
the
application
contains
the
results
of
new
clinical
investigations
(other
than
bioavailability
studies)
that
were
essential
to
approval
of
theapplication.
Examples
of
such
applications
include
applications
for
new
indications,
dosage
forms
(including
new
drug
delivery
systems),
strengths,
or
conditionsof
use
for
an
already
approved
product.
This
three-year
exclusivity
period
only
protects
against
FDA
approval
of
ANDAs
and
505(b)(2)
applications
for
genericdrugs
that
include
the
innovation
that
required
new
clinical
investigations
that
were
essential
to
approval;
it
does
not
prohibit
the
FDA
from
accepting
or
approvingANDAs
or
505(b)(2)
NDAs
for
generic
drugs
that
do
not
include
such
an
innovation.
Paragraph
IV
Certifications.
Under
the
Hatch-Waxman
Act,
NDA
applicants
and
NDA
holders
must
provide
information
about
certain
patents
claimingtheir
drugs
for
listing
in
the
FDA
publication,
"Approved
Drug
Products
with
Therapeutic
Equivalence
Evaluations,"
also
known
as
the
"Orange
Book."
When
anANDA
or
505(b)(2)
application
is
submitted,
it
must
contain
one
of
several
possible
certifications
regarding
each
of
the
patents
listed
in
the
Orange
Book
for
thereference
drug.
A20 Table
of
Contentscertification
that
a
listed
patent
is
invalid
or
will
not
be
infringed
by
the
sale
of
the
proposed
product
is
called
a
"Paragraph
IV"
certification.
Within
20
days
of
the
acceptance
by
the
FDA
of
an
ANDA
or
505(b)(2)
application
containing
a
Paragraph
IV
certification,
the
applicant
must
notify
theNDA
holder
and
patent
owner
that
the
application
has
been
submitted,
and
provide
the
factual
and
legal
basis
for
the
applicant's
opinion
that
the
patent
is
invalid
ornot
infringed.
The
NDA
holder
or
patent
holder
may
then
initiate
a
patent
infringement
suit
in
response
to
the
Paragraph
IV
notice.
If
this
is
done
within
45
days
ofreceiving
notice
of
the
Paragraph
IV
certification,
a
30-month
stay
of
the
FDA's
ability
to
approve
the
ANDA
or
505(b)(2)
application
is
triggered.
The
FDA
mayapprove
the
proposed
product
before
the
expiration
of
the
30-month
stay
only
if
a
court
finds
the
patent
invalid
or
not
infringed,
or
if
the
court
shortens
the
periodbecause
the
parties
have
failed
to
cooperate
in
expediting
the
litigation.
Patent
Term
Restoration.
Under
the
Hatch-Waxman
Act,
a
portion
of
the
patent
term
lost
during
product
development
and
FDA
review
of
an
NDA
or505(b)(2)
application
is
restored
if
approval
of
the
application
is
the
first
permitted
commercial
marketing
of
a
drug
containing
the
active
ingredient.
The
patentterm
restoration
period
is
generally
one-half
the
time
between
the
effective
date
of
the
IND
and
the
date
of
submission
of
the
NDA,
plus
the
time
between
the
dateof
submission
of
the
NDA
and
the
date
of
FDA
approval
of
the
product.
The
maximum
period
of
patent
term
extension
is
five
years,
and
the
patent
cannot
beextended
to
more
than
14
years
from
the
date
of
FDA
approval
of
the
product.
Only
one
patent
claiming
each
approved
product
is
eligible
for
restoration
and
thepatent
holder
must
apply
for
restoration
within
60
days
of
approval.
The
U.S.
Patent
and
Trademark
Office,
in
consultation
with
the
FDA,
reviews
and
approves
theapplication
for
patent
term
restoration.Other
Regulatory
Requirements
After
approval,
drug
products
are
subject
to
extensive
continuing
regulation
by
the
FDA,
which
include
company
obligations
to
manufacture
products
inaccordance
with
current
GMP,
maintain
and
provide
to
the
FDA
updated
safety
and
efficacy
information,
report
adverse
experiences
with
the
product,
keep
certainrecords
and
submit
periodic
reports,
obtain
FDA
approval
of
certain
manufacturing
or
labeling
changes,
and
comply
with
FDA
promotion
and
advertisingrequirements
and
restrictions.
Failure
to
meet
these
obligations
can
result
in
various
adverse
consequences,
both
voluntary
and
FDA-imposed,
including
productrecalls,
withdrawal
of
approval,
restrictions
on
marketing,
and
the
imposition
of
civil
fines
and
criminal
penalties
against
the
NDA
holder.
In
addition,
laterdiscovery
of
previously
unknown
safety
or
efficacy
issues
may
result
in
restrictions
on
the
product,
manufacturer
or
NDA
holder.
We
and
any
manufacturers
of
our
products
are
required
to
comply
with
applicable
FDA
manufacturing
requirements
contained
in
the
FDA's
current
GMPregulations.
Current
GMP
regulations
require,
among
other
things,
quality
control
and
quality
assurance
as
well
as
the
corresponding
maintenance
of
records
anddocumentation.
The
manufacturing
facilities
for
our
products
must
meet
current
GMP
requirements
to
the
satisfaction
of
the
FDA
pursuant
to
a
pre-approvalinspection
before
we
can
use
them
to
manufacture
our
products.
We
and
any
third-party
manufacturers
are
also
subject
to
periodic
inspections
of
facilities
by
theFDA
and
other
authorities,
including
procedures
and
operations
used
in
the
testing
and
manufacture
of
our
products
to
assess
our
compliance
with
applicableregulations.
With
respect
to
post-market
product
advertising
and
promotion,
the
FDA
imposes
a
number
of
complex
regulations
on
entities
that
advertise
and
promotepharmaceuticals,
which
include,
among
others,
standards
for
direct-to-consumer
advertising,
prohibitions
on
promoting
drugs
for
uses
or
in
patient
populations
thatare
not
described
in
the
drug's
approved
labeling
(known
as
"off-label
use"),
and
principles
governing
industry-sponsored
scientific
and
educational
activities.Failure
to
comply
with
FDA
requirements
can
have
negative
consequences,
including
adverse
publicity,
enforcement
letters21 Table
of
Contentsfrom
the
FDA,
mandated
corrective
advertising
or
communications
with
doctors
or
patients,
and
civil
or
criminal
penalties.
Although
physicians
may
prescribelegally
available
drugs
for
off-label
uses,
manufacturers
may
not
market
or
promote
such
off-label
uses.
Changes
to
some
of
the
conditions
established
in
an
approved
application,
including
changes
in
indications,
labeling,
or
manufacturing
processes
or
facilities,require
submission
and
FDA
approval
of
a
new
NDA
or
NDA
supplement
before
the
change
can
be
implemented.
An
NDA
supplement
for
a
new
indicationtypically
requires
clinical
data
similar
in
type
and
quality
to
the
clinical
data
supporting
the
original
application
for
the
original
indication,
and
the
FDA
uses
similarprocedures
and
actions
in
reviewing
such
NDA
supplements
as
it
does
in
reviewing
NDAs.
Adverse
event
reporting
and
submission
of
periodic
reports
is
required
following
FDA
approval
of
an
NDA.
The
FDA
also
may
require
post-marketingtesting,
known
as
Phase
IV
testing,
risk
minimization
action
plans,
and
surveillance
to
monitor
the
effects
of
an
approved
product
or
to
place
conditions
on
anapproval
that
restrict
the
distribution
or
use
of
the
product.
Outside
the
U.S.,
our
and
our
collaborators'
abilities
to
market
a
product
are
contingent
upon
receiving
marketing
authorization
from
the
appropriate
regulatoryauthorities.
The
requirements
governing
marketing
authorization,
pricing
and
reimbursement
vary
widely
from
jurisdiction
to
jurisdiction.
At
present,
foreignmarketing
authorizations
are
applied
for
at
a
national
level,
although
within
the
E.U.
registration
procedures
are
available
to
companies
wishing
to
market
a
productin
more
than
one
E.U.
member
state.Employees
As
of
December
31,
2015,
we
had
474
employees.
Approximately
36
were
scientists
engaged
in
discovery
research,
136
were
in
our
drug
developmentorganization,
204
were
in
our
sales
and
commercial
team,
and
98
were
in
general
and
administrative
functions.
None
of
our
employees
are
represented
by
a
laborunion,
and
we
consider
our
employee
relations
to
be
good.Executive
Officers
of
the
Registrant
The
following
table
sets
forth
the
name,
age
and
position
of
each
of
our
executive
officers
as
of
February
12,
2016:
Peter M. Hecht has
served
as
our
chief
executive
officer
and
a
director
since
our
founding
in
1998.
Under
his
leadership,
Ironwood
has
grown
from
ninePh.D.
scientists
to
a
commercial
biotechnology
company.
Prior
to
founding
Ironwood,
Dr.
Hecht
was
a
research
fellow
at
Whitehead
Institute
for
BiomedicalResearch.
Dr.
Hecht
earned
a
B.S.
in
mathematics
and
an
M.S.
in
biology
from
Stanford
University,
and
holds
a
Ph.D.
in
molecular
biology
from
the
University
ofCalifornia
at
Berkeley.
Tom Graney has
served
as
our
chief
financial
officer
and
senior
vice
president
of
finance
and
corporate
strategy
since
joining
us
in
August
2014.
Prior
tojoining
our
company,
Mr.
Graney
held
a
number
of
positions
in
the
areas
of
mergers
and
acquisitions,
strategic
marketing,
finance
and
accounting
at
Johnson
&Johnson,
or
J&J,
and
its
affiliates
since
1994.
Most
recently
Mr.
Graney22Name
Age
PositionPeter
M.
Hecht,
Ph.D.
52
Chief
Executive
Officer,
DirectorTom
Graney
51
Chief
Financial
Officer
and
Senior
Vice
President,
Finance
and
Corporate
StrategyMark
G.
Currie,
Ph.D.
61
Senior
Vice
President,
Chief
Scientific
Officer
and
President
of
R&DHalley
E.
Gilbert
46
Senior
Vice
President,
Chief
Legal
Officer,
and
SecretaryThomas
A.
McCourt
58
Senior
Vice
President,
Marketing
and
Sales
and
Chief
Commercial
Officer Table
of
Contentsserved
as
worldwide
vice
president
of
finance
and
chief
financial
officer
of
Ethicon,
a
global
leader
in
surgical
medical
devices,
from
January
2010
to
August
2014.Prior
to
that,
Mr.
Graney
was
vice
president
of
finance
for
J&J
Global
Supply
Chain
from
August
2009
to
January
2010,
chief
financial
officer
of
J&J's
JanssenPharmaceuticals
from
February
2008
to
August
2009,
and
chief
financial
officer
for
J&J
Global
Virology
(including
Tibotec
Pharmaceuticals)
from
November2005
to
February
2008.
A
chartered
financial
analyst
charterholder,
Mr.
Graney
holds
a
Bachelor
of
Science
degree
in
accounting
from
the
University
of
Delawareand
an
M.B.A.
in
marketing,
finance
and
international
business
from
the
Leonard
N.
Stern
School
of
Business
at
New
York
University.
Mark G. Currie serves
as
our
senior
vice
president,
chief
scientific
officer
and
president
of
research
and
development,
and
has
led
our
research
anddevelopment
efforts
since
joining
us
in
2002.
Prior
to
joining
Ironwood,
Dr.
Currie
directed
cardiovascular
and
central
nervous
system
disease
research
as
vicepresident
of
discovery
research
at
Sepracor
Inc.
Previously,
Dr.
Currie
initiated,
built
and
led
discovery
pharmacology
and
also
served
as
director
of
arthritis
andinflammation
at
Monsanto
Company.
Dr.
Currie
earned
a
B.S.
in
biology
from
the
University
of
South
Alabama
and
holds
a
Ph.D.
in
cell
biology
from
theBowman-Gray
School
of
Medicine
of
Wake
Forest
University.
Halley E. Gilbert serves
as
our
senior
vice
president,
chief
legal
officer,
and
secretary
and
has
led
our
legal
and
compliance
function
since
joining
us
in
2008.Prior
to
joining
us,
Ms.
Gilbert
was
vice
president
and
deputy
general
counsel
at
Cubist
Pharmaceuticals,
Inc.
and
corporate
counsel
at
Genzyme
Corp.,
and
prior
tothat,
she
was
an
associate
specializing
in
mergers
and
acquisitions
and
securities
law
at
Skadden,
Arps,
Slate,
Meagher
&
Flom
LLP.
Ms.
Gilbert
received
her
J.D.from
Northwestern
University
School
of
Law
and
a
B.A.
from
Tufts
University.
Thomas A. McCourt has
served
as
our
senior
vice
president
of
marketing
and
sales
and
chief
commercial
officer
since
joining
Ironwood
in
2009.
Prior
tojoining
Ironwood,
Mr.
McCourt
led
the
U.S.
brand
team
for
denosumab
at
Amgen
Inc.
from
April
2008
to
August
2009.
Prior
to
that,
Mr.
McCourt
was
withNovartis
AG
from
2001
to
2008,
where
he
directed
the
launch
and
growth
of
Zelnorm
for
the
treatment
of
patients
with
IBS-C
and
CIC
and
held
a
number
of
seniorcommercial
roles,
including
vice
president
of
strategic
marketing
and
operations.
Mr.
McCourt
was
also
part
of
the
founding
team
at
Astra
Merck
Inc.,
leading
thedevelopment
of
the
medical
affairs
and
science
liaison
group
and
then
serving
as
brand
manager
for
Prilosec™
and
NEXIUM®.
Mr.
McCourt
has
a
degree
inpharmacy
from
the
University
of
Wisconsin.Available
Information
You
may
obtain
free
copies
of
our
Annual
Reports
on
Form
10-K,
Quarterly
Reports
on
Form
10-Q
and
Current
Reports
on
Form
8-K,
and
amendments
tothose
reports,
as
soon
as
reasonably
practicable
after
they
are
electronically
filed
or
furnished
to
the
SEC,
on
the
Investors
section
of
our
website
atwww.ironwoodpharma.com
or
by
contacting
our
Investor
Relations
department
at
(617)
374-5082.
The
contents
of
our
website
are
not
incorporated
by
referenceinto
this
report
and
you
should
not
consider
information
provided
on
our
website
to
be
part
of
this
report.Item
1A.
Risk Factors
In
addition
to
the
other
information
in
this
Annual
Report
on
Form
10-K,
any
of
the
factors
described
below
could
significantly
and
negatively
affect
ourbusiness,
financial
condition,
results
of
operations
or
prospects.
The
trading
price
of
our
Class
A
common
stock
may
decline
due
to
these
risks.23 Table
of
ContentsRisks
Related
to
Our
Business
and
IndustryWe are highly dependent on the commercial success of LINZESS in the U.S. for the foreseeable future; we cannot guarantee when, or if, we will attainprofitability or positive cash flows.
We
and
our
partner,
Allergan
plc
(together
with
its
affiliates),
or
Allergan
(formerly
Actavis
plc),
began
selling
LINZESS
in
the
U.S.
during
December
2012.The
commercial
success
of
LINZESS
depends
on
a
number
of
factors,
including:•the
effectiveness
of
LINZESS
as
a
treatment
for
adult
patients
with
IBS-C
or
CIC;
•the
size
of
the
treatable
patient
population;
•the
effectiveness
of
the
sales,
managed
markets
and
marketing
efforts
by
us
and
Allergan;
•the
adoption
of
LINZESS
by
physicians,
which
depends
on
whether
physicians
view
it
as
a
safe
and
effective
treatment
for
adult
patients
with
IBS-C
and
CIC;
•our
success
in
educating
and
activating
adult
IBS-C
and
CIC
patients
to
enable
them
to
more
effectively
communicate
their
symptoms
and
treatmenthistory
to
their
physicians;
•our
ability
to
both
secure
and
maintain
adequate
reimbursement
for,
and
optimize
patient
access
to,
LINZESS
by
providing
third
party
payers
with
astrong
value
proposition
based
on
the
existing
burden
of
illness
associated
with
IBS-C
and
CIC
and
the
benefits
of
LINZESS;
•the
effectiveness
of
our
partners'
distribution
networks;
•the
occurrence
of
any
side
effects,
adverse
reactions
or
misuse,
or
any
unfavorable
publicity
in
these
areas,
associated
with
LINZESS;
and
•the
development
or
commercialization
of
competing
products
or
therapies
for
the
treatment
of
IBS-C
or
CIC,
or
their
associated
symptoms.
Our
revenues
from
the
commercialization
of
LINZESS
are
subject
to
these
factors,
and
therefore
may
be
unpredictable
from
quarter-to-quarter.
Ultimately,
wemay
never
generate
sufficient
revenues
from
LINZESS
to
reach
or
maintain
profitability
for
our
company
or
to
sustain
our
anticipated
levels
of
operations.Linaclotide may cause undesirable side effects or have other properties that could limit its commercial potential.
The
most
commonly
reported
adverse
reaction
in
the
Phase
III
placebo-controlled
trials
for
linaclotide
in
IBS-C
and
CIC
was
diarrhea.
Severe
diarrhea
wasreported
in
2%
or
less
of
the
linaclotide-treated
patients,
and
its
incidence
was
similar
between
the
IBS-C
and
CIC
populations
in
these
trials.
If
we
or
othersidentify
previously
unknown
side
effects,
if
known
side
effects
are
more
frequent
or
severe
than
in
the
past,
if
we
or
others
detect
unexpected
safety
signals
forlinaclotide
or
any
products
perceived
to
be
similar
to
linaclotide,
or
if
any
of
the
foregoing
are
perceived
to
have
occurred,
then
in
any
of
these
circumstances:•sales
of
linaclotide
may
be
impaired;
•regulatory
approvals
for
linaclotide
may
be
denied,
restricted
or
withdrawn;
•we
may
decide
to,
or
be
required
to,
send
product
warning
letters
or
field
alerts
to
physicians,
pharmacists
and
hospitals;
•reformulation
of
the
product,
additional
nonclinical
or
clinical
studies,
changes
in
labeling
or
changes
to
or
reapprovals
of
manufacturing
facilitiesmay
be
required;24 Table
of
Contents•we
may
be
precluded
from
pursuing
additional
development
opportunities
to
enhance
the
clinical
profile
of
LINZESS
within
its
indicatedpopulations,
as
well
as
be
precluded
from
studying
linaclotide
in
additional
indications,
populations
and
formulations;
•our
reputation
in
the
marketplace
may
suffer;
and
•government
investigations
or
lawsuits,
including
class
action
suits,
may
be
brought
against
us.
Any
of
the
above
occurrences
would
harm
or
prevent
sales
of
linaclotide,
increase
our
expenses
and
impair
our
ability
to
successfully
commercializelinaclotide.
Furthermore,
with
LINZESS
and
CONSTELLA
commercially
available
in
certain
countries
and
used
in
wider
populations
and
in
less
rigorously
controlledenvironments
than
in
clinical
studies,
and
as
we
and
Allergan
explore
development
opportunities
to
enhance
the
clinical
profile
of
LINZESS
through
additionalclinical
trials,
the
number
of
patients
treated
with
linaclotide
within
and
outside
of
its
current
indications
or
patient
populations
may
expand,
which
could
result
inthe
identification
of
previously
unknown
side
effects,
increased
frequency
or
severity
of
known
side
effects,
or
detection
of
unexpected
safety
signals.
As
a
result,regulatory
authorities,
healthcare
practitioners,
third
party
payers
or
patients
may
perceive
or
conclude
that
the
use
of
linaclotide
is
associated
with
serious
adverseeffects,
undermining
our
commercialization
efforts.
In
addition,
the
FDA-approved
label
for
LINZESS
contains
a
boxed
warning
about
its
use
in
pediatric
patients.
LINZESS
is
contraindicated
in
pediatricpatients
up
to
6
years
of
age
based
on
nonclinical
data
from
studies
in
neonatal
mice
approximately
equivalent
to
human
pediatric
patients
less
than
2
years
of
age.There
is
also
a
warning
advising
physicians
to
avoid
the
use
of
LINZESS
in
pediatric
patients
6
through
17
years
of
age.
This
warning
is
based
on
data
in
youngjuvenile
mice
and
the
lack
of
clinical
safety
and
efficacy
data
in
pediatric
patients
of
any
age
group.
We
and
Allergan
have
established
a
nonclinical
and
clinicalpost-marketing
plan
with
the
FDA
to
understand
the
safety
and
efficacy
of
LINZESS
in
pediatric
patients,
which
is
discussed
below.We rely entirely on contract manufacturers and our collaboration partners to manufacture and distribute linaclotide. If they are unable to comply withapplicable regulatory requirements, unable to source sufficient raw materials, experience manufacturing or distribution difficulties, or are otherwise unable tomanufacture and distribute sufficient quantities to meet demand, our commercialization efforts may be materially harmed.
We
have
no
internal
manufacturing
or
distribution
capabilities.
Instead,
we
rely
on
a
combination
of
contract
manufacturers
and
our
partners
to
manufacturelinaclotide
API
and
final
linaclotide
drug
product,
and
to
distribute
that
drug
product
to
third
party
purchasers.
We
and
certain
of
our
partners
have
commercialsupply
agreements
with
independent
third
parties
to
manufacture
the
linaclotide
API
used
to
support
all
of
our
partnered
and
unpartnered
territories.
Each
ofAllergan
and
Astellas
is
responsible
for
drug
product
and
finished
goods
manufacturing
(including
bottling
and
packaging)
for
its
respective
territories,
anddistributing
the
finished
goods
to
wholesalers.
Among
our
drug
product
manufacturers,
only
Allergan
has
manufactured
linaclotide
on
a
commercial
scale.
We
havean
agreement
with
an
independent
third
party
to
serve
as
an
additional
source
of
drug
product
manufacturing
of
linaclotide
for
our
partnered
territories
and
we
haveworked
with
our
partners
to
achieve
sufficient
redundancy
in
this
component
of
the
linaclotide
supply
chain.
Under
our
collaboration
with
AstraZeneca,
we
areaccountable
for
drug
product
and
finished
goods
manufacturing
for
China,
Hong
Kong
and
Macau.
Each
of
our
linaclotide
API
and
drug
product
manufacturers
must
comply
with
current
good
manufacturing
practices,
or
GMP,
and
other
stringent
regulatoryrequirements
enforced
by
the
FDA
and
foreign
regulatory
authorities
in
other
jurisdictions.
These
requirements
include,
among
other
things,
quality
control,
qualityassurance
and
the
maintenance
of
records
and
documentation,
which
occur
in
addition
to
our
quality
assurance
release
of
linaclotide
API.
Manufacturers
oflinaclotide
may25 Table
of
Contentsbe
unable
to
comply
with
these
GMP
requirements
and
with
other
regulatory
requirements.
We
have
little
control
over
our
manufacturers'
or
collaboration
partners'compliance
with
these
regulations
and
standards.
Our
manufacturers
may
experience
problems
with
their
respective
manufacturing
and
distribution
operations
and
processes,
including
for
example,
qualityissues,
including
product
specification
and
stability
failures,
procedural
deviations,
improper
equipment
installation
or
operation,
utility
failures,
contamination
andnatural
disasters.
In
addition,
our
API
manufacturers
acquire
the
raw
materials
necessary
to
make
linaclotide
API
from
a
limited
number
of
sources.
Any
delay
ordisruption
in
the
availability
of
these
raw
materials
or
a
change
in
raw
material
suppliers
could
result
in
production
disruptions,
delays
or
higher
costs
withconsequent
adverse
effects
on
us.
The
manufacture
of
pharmaceutical
products
requires
significant
expertise
and
capital
investment,
including
the
development
of
advanced
manufacturingtechniques
and
process
controls.
Manufacturers
of
pharmaceutical
products
often
encounter
difficulties
in
commercial
production.
These
problems
includedifficulties
with
production
costs
and
yields,
quality
control,
including
stability
of
the
product
and
quality
assurance
testing,
and
shortages
of
qualified
personnel,
aswell
as
compliance
with
federal,
state
and
foreign
regulations
and
the
challenges
associated
with
complex
supply
chain
management.
Even
if
our
manufacturers
donot
experience
problems
and
commercial
manufacturing
is
achieved,
their
maximum
or
available
manufacturing
capacities
may
be
insufficient
to
meet
commercialdemand.
Finding
alternative
manufacturers
or
adding
additional
manufacturers
requires
a
significant
amount
of
time
and
involves
significant
expense.
Newmanufacturers
would
need
to
develop
and
implement
the
necessary
production
techniques
and
processes,
which
along
with
their
facilities,
would
need
to
beinspected
and
approved
by
the
regulatory
authorities
in
each
applicable
territory.
If
our
API
or
drug
product
manufacturers
fail
to
adhere
to
applicable
GMP
or
other
regulatory
requirements,
experience
delays
or
disruptions
in
theavailability
of
raw
materials
or
experience
manufacturing
or
distribution
problems,
we
will
suffer
significant
consequences,
including
product
seizures
or
recalls,loss
of
product
approval,
fines
and
sanctions,
reputational
damage,
shipment
delays,
inventory
shortages,
inventory
write-offs
and
other
product-related
charges
andincreased
manufacturing
costs.
If
we
experience
any
of
these
results,
or
if
our
manufacturers'
maximum
or
available
capacities
are
insufficient
to
meet
demand,
wemay
not
be
able
to
successfully
commercialize
linaclotide.If any of our partners undergoes a change in control or in management, this may adversely affect our collaborative relationship or the success of thecommercialization of LINZESS in the U.S. or the continued launches and commercialization of CONSTELLA in the E.U., or the ability to achieve regulatoryapproval, launch and commercialize linaclotide in our other partnered territories.
We
work
jointly
and
collaboratively
with
each
of
our
partners
on
many
aspects
of
the
development,
manufacturing
and
commercialization
of
linaclotide.
Indoing
so,
we
have
established
relationships
with
several
key
members
of
the
management
teams
of
our
linaclotide
partners
in
functional
areas
such
as
development,quality,
regulatory,
drug
safety
and
pharmacovigilance,
operations,
marketing,
sales,
field
operations
and
medical
science.
Further,
the
success
of
our
collaborationsis
highly
dependent
on
the
resources,
efforts
and
skills
of
our
partners
and
their
key
employees.
As
we
and
our
partners
commercialize
LINZESS
in
the
U.S.,continue
to
launch
and
commercialize
CONSTELLA
in
the
E.U.
and
develop,
launch
and
commercialize
linaclotide
in
other
parts
of
the
world,
the
drug's
successbecomes
more
dependent
on
us
maintaining
highly
collaborative
and
well
aligned
partnerships.
In
November
2015,
Allergan
and
Pfizer
Inc.
entered
into
adefinitive
agreement
providing
for
the
combination
of
the
two
companies.
If
the
transaction
is
completed,
or
if
our
partners
otherwise
undergo
a
change
of
controlor
in
management,
we
will
need
to
reestablish
many
relationships
and
confirm
continued
alignment
on
our
development
and
commercialization
strategy
forlinaclotide.
Further,
in
connection
with
any
change
of
control
or
in
management,
there
is
inherent
uncertainty
and
disruption
in
operations,
which
could
result
indistraction,
inefficiencies,
and
misalignment
of
priorities.26 Table
of
ContentsAs
a
result,
in
the
event
of
a
change
of
control
or
in
management
at
one
of
our
partners,
we
cannot
be
sure
that
we
will
be
able
to
successfully
execute
on
ourdevelopment
and
commercialization
strategy
for
linaclotide
in
an
effective
and
efficient
manner
and
without
disruption
or
reduced
performance.
Finally,
anychange
of
control
or
in
management
may
result
in
a
reprioritization
of
linaclotide
within
a
partner's
portfolio,
or
such
partner
may
fail
to
maintain
the
financial
orother
resources
necessary
to
continue
supporting
its
portion
of
the
development,
manufacturing
or
commercialization
of
linaclotide.
If
any
of
our
partners
undergoes
a
change
of
control
and
the
acquirer
either
is
unable
to
perform
such
partner's
obligations
under
its
collaboration
or
licenseagreement
with
us
or
has
a
product
that
competes
with
linaclotide
that
such
acquirer
does
not
divest,
we
have
the
right
to
terminate
the
collaboration
or
licenseagreement
and
reacquire
that
partner's
rights
with
respect
to
linaclotide.
If
we
elect
to
exercise
these
rights
in
such
circumstances,
we
will
need
to
either
establishthe
capability
to
develop,
manufacture
and
commercialize
linaclotide
in
that
partnered
territory
on
our
own
or
we
will
need
to
establish
a
relationship
with
a
newpartner.
We
have
assembled
a
team
of
specialists
in
manufacturing,
quality,
sales,
marketing,
payer,
pricing
and
field
operations,
and
specialized
medical
scientists,who
represent
the
functional
areas
necessary
for
a
successful
commercial
launch
of
a
high
potential,
GI
therapy
and
who
support
the
commercialization
ofLINZESS
in
the
U.S.
If
Allergan
was
subject
to
a
change
of
control
that
allowed
us
to
further
commercialize
LINZESS
in
the
U.S.
on
our
own,
and
we
chose
to
doso,
we
would
need
to
enhance
each
of
these
functional
aspects
to
replace
the
capabilities
that
Allergan
was
previously
providing
to
the
collaboration.
Any
suchtransition
might
result
in
a
period
of
reduced
efficiency
or
performance
by
our
operations
and
commercialization
teams,
which
could
adversely
affect
our
ability
tocommercialize
LINZESS.
Although
many
members
of
our
global
operations,
commercial
and
medical
affairs
teams
have
strategic
oversight
of,
and
a
certain
level
of
involvement
in,their
functional
areas
globally,
we
do
not
have
corresponding
operational
capabilities
in
these
areas
outside
of
the
U.S.
If
Allergan,
Astellas
or
AstraZeneca
wassubject
to
a
change
of
control
that
allowed
us
to
continue
linaclotide's
development
or
commercialization
anywhere
outside
of
the
U.S.
on
our
own,
and
we
chose
todo
so
rather
than
establishing
a
relationship
with
a
new
partner,
we
would
need
to
build
operational
capabilities
in
the
relevant
territory.
In
any
of
these
situations,the
timeline
and
likelihood
of
achieving
regulatory
approval
and,
ultimately,
the
commercialization
of
linaclotide
could
be
negatively
impacted.We must work effectively and collaboratively with Allergan to market and sell LINZESS in the U.S. in order for it to achieve its maximum commercialpotential.
We
are
working
closely
with
Allergan
to
implement
our
joint
commercialization
plan
for
LINZESS.
The
commercialization
plan
includes
an
agreed
uponmarketing
campaign
that
targets
the
physicians
who
see
patients
who
could
benefit
from
LINZESS
treatment.
Our
marketing
campaign
also
targets
the
adult
menand
women
who
suffer
from
IBS-C
or
CIC.
Our
commercialization
plan
also
includes
an
integrated
call
plan
for
our
sales
forces
to
optimize
the
education
ofspecific
gastroenterologists
and
primary
care
physicians
on
whom
our
and
Allergan's
sales
representatives
call,
and
the
frequency
with
which
the
representativesmeet
with
them.
In
order
to
optimize
the
commercial
potential
of
LINZESS,
we
and
Allergan
must
execute
upon
this
commercialization
plan
effectively
and
efficiently.
Inaddition,
we
and
Allergan
must
continually
assess
and
modify
our
commercialization
plan
in
a
coordinated
and
integrated
fashion
in
order
to
adapt
to
thepromotional
response.
Further,
we
and
Allergan
must
continue
to
focus
and
refine
our
marketing
campaign
to
ensure
a
clear
and
understandable
physician-patientdialogue
around
IBS-C,
CIC
and
the
potential
for
LINZESS
as
an
appropriate
therapy.
In
addition,
we
and
Allergan
must
provide
our
sales
forces
with
the
highestquality
support,
guidance
and
oversight
in
order
for
them
to
continue
to
effectively
promote
LINZESS
to
gastroenterologists
and
primary
care
physicians.
If
we
andAllergan
fail
to
perform
these
commercial
functions
in
the
highest
quality
manner
and
in
accordance
with
our
joint
commercialization
plan
and
related
agreements,LINZESS
will
not
achieve
its
maximum27 Table
of
Contentscommercial
potential
and
we
may
suffer
financial
harm.
Our
efforts
to
further
target
and
engage
adult
patients
with
IBS-C
or
CIC
may
not
effectively
increaseappropriate
patient
awareness
or
patient/physician
dialogue,
and
may
not
increase
the
revenues
that
we
generate
from
LINZESS.We are subject to uncertainty relating to pricing and reimbursement policies which, if not favorable for linaclotide, could hinder or prevent linaclotide'scommercial success.
Our
and
Allergan's
ability
to
commercialize
LINZESS
in
the
U.S.
successfully
depends
in
part
on
the
coverage
and
reimbursement
levels
set
by
governmentalauthorities,
private
health
insurers
and
other
third-party
payers.
In
determining
whether
to
approve
reimbursement
for
LINZESS
and
at
what
level,
we
expect
thatthird-party
payers
will
consider
factors
that
include
the
efficacy,
cost
effectiveness
and
safety
of
LINZESS,
as
well
as
the
availability
of
other
treatments
includinggeneric
prescription
drugs
and
over-the-counter
alternatives.
Further,
in
order
to
maintain
acceptable
reimbursement
levels
and
access
for
patients
at
copay
levelsthat
are
reasonable
and
customary,
we
may
face
increasing
pressure
to
offer
discounts
or
rebates
from
list
prices
or
discounts
to
a
greater
number
of
third-partypayers
or
other
unfavorable
pricing
modifications.
Obtaining
and
maintaining
favorable
reimbursement
can
be
a
time
consuming
and
expensive
process,
and
thereis
no
guarantee
that
we
or
Allergan
will
be
able
to
continue
to
negotiate
pricing
terms
with
third-party
payers
at
levels
that
are
profitable
to
us,
or
at
all.
Certainthird-party
payers
also
require
prior
authorization
for,
or
even
refuse
to
provide,
reimbursement
for
LINZESS,
and
others
may
do
so
in
the
future.
Our
businesswould
be
materially
adversely
affected
if
we
and
Allergan
are
not
able
to
receive
approval
for
reimbursement
of
LINZESS
from
third-party
payers
on
a
broad,timely
or
satisfactory
basis;
if
reimbursement
is
subject
to
overly
broad
or
restrictive
prior
authorization
requirements;
or
if
reimbursement
is
not
maintained
at
asatisfactory
level
or
becomes
subject
to
prior
authorization.
In
addition,
our
business
could
be
adversely
affected
if
private
health
insurers,
including
managed
careorganizations,
the
Medicare
or
Medicaid
programs
or
other
reimbursing
bodies
or
payers
limit
or
reduce
the
indications
for
or
conditions
under
which
LINZESSmay
be
reimbursed.
We
expect
to
experience
pricing
pressures
in
connection
with
the
sale
of
linaclotide
and
our
future
products
due
to
the
healthcare
reforms
discussed
below,
aswell
as
the
trend
toward
programs
aimed
at
reducing
healthcare
costs,
the
increasing
influence
of
managed
care,
the
ongoing
debates
on
reducing
governmentspending
and
additional
legislative
proposals.
These
healthcare
reform
efforts
or
any
future
legislation
or
regulatory
actions
aimed
at
controlling
and
reducinghealthcare
costs,
including
through
measures
designed
to
limit
reimbursement,
restrict
access
or
impose
unfavorable
pricing
modifications
on
pharmaceuticalproducts,
could
impact
our
and
our
partners'
ability
to
obtain
or
maintain
reimbursement
for
LINZESS
at
a
satisfactory
level,
or
at
all,
which
could
materially
harmour
business
and
financial
results.
In
some
foreign
countries,
particularly
Canada
and
the
countries
of
Europe,
the
pricing
and
payment
of
prescription
pharmaceuticals
is
subject
togovernmental
control.
In
these
countries,
pricing
negotiations
with
governmental
authorities
can
take
six
to
12
months
or
longer
after
the
receipt
of
regulatoryapproval
and
product
launch.
To
obtain
favorable
reimbursement
for
the
indications
sought
or
pricing
approval
in
some
countries,
we
and
our
partners
may
berequired
to
conduct
a
clinical
trial
that
compares
the
cost-effectiveness
of
our
products,
including
linaclotide,
to
other
available
therapies.
In
addition,
in
countriesin
which
linaclotide
is
the
only
approved
therapy
for
a
particular
indication,
such
as
CONSTELLA
as
the
only
product
approved
for
the
symptomatic
treatment
ofmoderate
to
severe
IBS-C
in
adults
in
Europe,
there
may
be
disagreement
as
to
what
the
most
comparable
product
is,
or
if
there
even
is
one.
Further,
severalEuropean
countries
have
implemented
government
measures
to
either
freeze
or
reduce
pricing
of
pharmaceutical
products.
Many
third-party
payers
andgovernmental
authorities
also
consider
the
price
for
which
the
same
product
is
being
sold
in
other
countries
to
determine
their
own
pricing
and
reimbursementstrategy,
so
if
linaclotide
is
priced
low
or
gets
limited
reimbursement
in
a
particular
country,
this
could
result
in
similarly
low
pricing
and28 Table
of
Contentsreimbursement
in
other
countries.
If
reimbursement
for
our
products
is
unavailable
in
any
country
in
which
reimbursement
is
sought,
limited
in
scope
or
amount,
orif
pricing
is
set
at
or
reduced
to
unsatisfactory
levels,
our
ability
to
successfully
commercialize
linaclotide
in
such
country
would
be
impacted
negatively.Furthermore,
if
these
measures
prevent
us
or
any
of
our
partners
from
selling
linaclotide
on
a
profitable
basis
in
a
particular
country,
they
could
prevent
thecommercial
launch
or
continued
sale
of
linaclotide
in
that
country.If the pricing and reimbursement of CONSTELLA in the E.U. is low, our royalty revenues based on sales of linaclotide will be adversely affected.
In
the
second
quarter
of
2013,
our
former
European
partner
Almirall
began
commercializing
CONSTELLA
in
Europe
for
the
symptomatic
treatment
ofmoderate
to
severe
IBS-C
in
adults.
In
October
2015,
Almirall
transferred
its
exclusive
license
to
develop
and
commercialize
linaclotide
in
Europe
to
Allergan.Currently,
CONSTELLA
is
commercially
available
in
certain
European
countries,
including
the
United
Kingdom,
Italy
and
Spain.
The
pricing
and
reimbursement
strategy
is
a
key
component
of
Allergan's
commercialization
plan
for
CONSTELLA
in
Europe.
Reimbursement
sources
aredifferent
in
each
country,
and
each
country
may
include
a
combination
of
distinct
potential
payers,
including
private
insurance
and
governmental
payers.
Countriesin
Europe
may
restrict
the
range
of
medicinal
products
for
which
their
national
health
insurance
systems
provide
reimbursement
and
control
the
prices
of
medicinalproducts
for
human
use.
Our
revenues
may
suffer
if
Allergan
is
unable
to
successfully
and
timely
conclude
reimbursement,
price
approval
or
funding
processes
andmarket
CONSTELLA
in
key
member
states
of
the
E.U.,
or
if
coverage
and
reimbursement
for
CONSTELLA
is
limited
or
reduced.
If
Allergan
is
not
able
to
obtaincoverage,
pricing
or
reimbursement
on
acceptable
terms
or
at
all,
or
if
such
terms
change
in
any
countries
in
its
territory,
Allergan
may
not
be
able
to,
or
maydecide
not
to,
sell
CONSTELLA
in
such
countries.
Further,
Allergan
could
sell
CONSTELLA
at
a
low
price.
Since
we
receive
royalties
on
net
sales
ofCONSTELLA
in
the
E.U.,
which
is
correlated
directly
to
the
price
at
which
Allergan
sells
CONSTELLA
in
the
E.U.,
our
royalty
revenues
globally
could
be
limitedshould
Allergan
sell
CONSTELLA
at
a
low
price
or
elect
not
to
launch
in
a
certain
country
within
the
E.U.Because we work with partners to develop, manufacture and commercialize linaclotide, we are dependent upon third parties, and our relationships with thosethird parties, in our efforts to commercialize LINZESS and to obtain regulatory approval for, and to commercialize, linaclotide in our other partneredterritories.
Allergan
played
a
significant
role
in
the
conduct
of
the
clinical
trials
for
linaclotide
and
in
the
subsequent
collection
and
analysis
of
data,
and
Allergan
holdsthe
NDA
for
LINZESS.
In
addition,
we
are
commercializing
LINZESS
in
the
U.S.
with
Allergan.
Allergan
is
also
responsible
for
the
development,
regulatoryapproval
and
commercialization
of
linaclotide
in
Canada
and
Mexico,
which,
for
Mexico,
it
had
sublicensed
its
commercialization
rights
to
Almirall.
In
October2015,
in
connection
with
the
transfer
of
the
exclusive
license
to
develop
and
commercialize
linaclotide
in
Europe
to
Allergan,
Almirall
and
Allergan
terminated
thesublicense
arrangement
with
respect
to
Mexico,
returning
the
exclusive
rights
to
commercialize
linaclotide
in
Mexico
to
Allergan.
As
a
result,
Allergan
is
alsocommercializing
LINZESS
in
Mexico
and
CONSTELLA
in
Canada,
as
well
as
commercializing
CONSTELLA
in
certain
countries
in
Europe,
with
responsibilityfor
obtaining
regulatory
approval
of
linaclotide
in
the
other
countries
in
its
territory.
Astellas,
our
partner
in
Japan,
is
responsible
for
completing
the
clinicalprograms
and
obtaining
regulatory
approval
of
linaclotide
in
its
territory.
Further,
we
are
jointly
overseeing
the
development,
and
will
jointly
oversee
thecommercialization,
of
linaclotide
in
China,
Hong
Kong
and
Macau
through
our
collaboration
with
AstraZeneca,
with
AstraZeneca
having
primary
responsibility
forthe
local
operational
execution.
Upon
any
approval,
each
of
Astellas
and
AstraZeneca,
as
well
as
Allergan
for
the
European
region,
is
responsible
forcommercializing
linaclotide
in
its
respective
territory,
and
each
has
agreed
to
use
commercially29 Table
of
Contentsreasonable
efforts
to
do
so.
Each
of
our
partners
is
responsible
for
reporting
adverse
event
information
from
its
territory
to
us.
Finally,
each
of
our
partners,
otherthan
AstraZeneca,
is
responsible
for
drug
product
manufacturing
of
linaclotide
and
making
it
into
finished
goods
(including
bottling
and
packaging)
for
itsrespective
territory.
The
integration
of
our
efforts
with
our
partners'
efforts
is
subject
to
the
uncertainty
of
the
markets
for
pharmaceutical
products
in
each
partner'srespective
territories,
and
accordingly,
these
relationships
must
evolve
to
meet
any
new
challenges
that
arise
in
those
regions.
These
integrated
functions
may
not
be
carried
out
effectively
and
efficiently
if
we
fail
to
communicate
and
coordinate
with
our
partners,
and
vice
versa.
Ourpartnering
strategy
imposes
obligations,
risks
and
operational
requirements
on
us
as
the
central
node
in
our
global
network
of
partners.
If
we
do
not
effectivelycommunicate
with
each
partner
and
ensure
that
the
entire
network
is
making
integrated
and
cohesive
decisions
focused
on
the
global
brand
for
linaclotide,linaclotide
will
not
achieve
its
maximum
commercial
potential.
As
the
holder
of
the
global
safety
database
for
linaclotide,
we
are
responsible
for
coordinating
thesafety
surveillance
and
adverse
event
reporting
efforts
worldwide.
If
we
are
unsuccessful
in
doing
so
due
to
poor
process,
execution,
oversight,
communication,adjudication
or
otherwise,
then
our
and
our
partner's
ability
to
obtain
and
maintain
regulatory
approval
of
linaclotide
will
be
at
risk.
We
have
limited
ability
to
control
the
amount
or
timing
of
resources
that
our
partners
devote
to
linaclotide.
If
any
of
our
partners
fails
to
devote
sufficient
timeand
resources
to
linaclotide,
or
if
its
performance
is
substandard,
it
will
delay
the
potential
submission
or
approval
of
regulatory
applications
for
linaclotide,
as
wellas
the
manufacturing
and
commercialization
of
linaclotide
in
the
particular
territory.
A
material
breach
by
any
of
our
partners
of
our
collaboration
or
licenseagreement
with
such
partner,
or
a
significant
disagreement
between
us
and
a
partner,
could
also
delay
the
regulatory
approval
and
commercialization
of
linaclotide,potentially
lead
to
costly
litigation,
and
could
have
a
material
adverse
impact
on
our
financial
condition.
Moreover,
although
we
have
non-compete
restrictions
inplace
with
each
of
our
partners,
they
may
have
relationships
with
other
commercial
entities,
some
of
which
may
compete
with
us.
If
any
of
our
partners
assists
ourcompetitors,
it
could
harm
our
competitive
position.Even though LINZESS is approved by the FDA for the treatment of adults with IBS-C or CIC, it faces post-approval development and regulatory requirements,which will present additional challenges.
In
August
2012,
the
FDA
approved
LINZESS
as
a
once-daily
treatment
for
adult
men
and
women
suffering
from
IBS-C
or
CIC.
LINZESS
is
subject
toongoing
FDA
requirements
governing
the
labeling,
packaging,
storage,
advertising,
promotion,
recordkeeping
and
submission
of
safety
and
other
post-marketinformation.
LINZESS
is
contraindicated
in
pediatric
patients
up
to
6
years
of
age
based
on
nonclinical
data
from
studies
in
neonatal
mice
approximately
equivalent
tohuman
pediatric
patients
less
than
2
years
of
age.
There
is
also
a
warning
advising
physicians
to
avoid
the
use
of
LINZESS
in
pediatric
patients
6
through
17
yearsof
age.
This
warning
is
based
on
data
in
young
juvenile
mice
and
the
lack
of
clinical
safety
and
efficacy
data
in
pediatric
patients
of
any
age
group.
We
andAllergan
have
established
a
nonclinical
and
clinical
post-marketing
plan
with
the
FDA
to
understand
the
safety
and
efficacy
of
LINZESS
in
pediatric
patients.
Thefirst
step
in
this
plan
was
to
undertake
additional
nonclinical
studies
to
further
understand
the
results
of
the
earlier
neonatal
mouse
study
and
to
understand
thetolerability
of
LINZESS
in
older
juvenile
mice.
We
and
Allergan
have
completed
these
nonclinical
studies
and
have
initiated
two
Phase
II
clinical
pediatric
studiesin
IBS-C
patients
age
seven
to
17
and
functional
constipation
patients
age
six
to
17.
Our
ability
to
conduct
clinical
studies
in
younger
pediatric
patients
will
depend,in
part,
on
the
safety
and
efficacy
data
from
our
clinical
studies
in
older
pediatric
patients.
Our
ability
to
ever
expand
the
indication
for
LINZESS
to
pediatrics
willdepend
on,
among
other
things,
our
successful
completion
of
pediatric
clinical
studies.30 Table
of
Contents
We
and
Allergan
have
also
committed
to
certain
nonclinical
and
clinical
studies
aimed
at
understanding:
(a)
whether
orally
administered
linaclotide
can
bedetected
in
breast
milk,
(b)
the
potential
for
antibodies
to
be
developed
to
linaclotide,
and
if
so,
(c)
whether
antibodies
specific
for
linaclotide
could
have
anytherapeutic
or
safety
implications.
We
expect
to
complete
these
studies
over
the
next
two
to
four
years.
These
post-approval
requirements
impose
burdens
and
costs
on
us.
Failure
to
complete
the
required
studies
and
meet
our
other
post-approval
commitmentswould
lead
to
negative
regulatory
action
at
the
FDA,
which
could
include
withdrawal
of
regulatory
approval
of
LINZESS
for
the
treatment
of
adults
with
IBS-C
orCIC.
Manufacturers
of
drug
products
and
their
facilities
are
subject
to
continual
review
and
periodic
inspections
by
the
FDA
and
other
regulatory
authorities
forcompliance
with
GMP
regulations.
If
we
or
a
regulatory
agency
discovers
previously
unknown
problems
with
a
product,
such
as
adverse
events
of
unanticipatedseverity
or
frequency,
or
problems
with
a
facility
where
the
product
is
manufactured,
a
regulatory
agency
may
impose
restrictions
on
that
product
or
themanufacturer,
including
requiring
implementation
of
a
risk
evaluation
and
mitigation
strategy
program,
withdrawal
of
the
product
from
the
market
or
suspension
ofmanufacturing.
If
we,
our
partners
or
the
manufacturing
facilities
for
linaclotide
fail
to
comply
with
applicable
regulatory
requirements,
a
regulatory
agency
may:•issue
warning
letters
or
untitled
letters;
•impose
civil
or
criminal
penalties;
•suspend
or
withdraw
regulatory
approval;
•suspend
any
ongoing
clinical
trials;
•refuse
to
approve
pending
applications
or
supplements
to
applications
submitted
by
us;
•impose
restrictions
on
operations,
including
costly
new
manufacturing
requirements;
or
•seize
or
detain
products
or
require
us
to
initiate
a
product
recall.Even though linaclotide is approved for marketing in the U.S. as LINZESS and in the E.U. as CONSTELLA, and is approved for marketing in a number ofother countries, we or our collaborators may never receive approval to commercialize linaclotide in additional parts of the world.
In
order
to
market
any
products
outside
of
the
countries
where
linaclotide
is
approved,
we
or
our
partners
must
comply
with
numerous
and
varying
regulatoryrequirements
of
other
jurisdictions
regarding
safety
and
efficacy.
Approval
procedures
vary
among
jurisdictions
and
can
involve
product
testing
and
administrativereview
periods
different
from,
and
greater
than,
those
in
the
U.S.,
the
E.U.
and
the
other
countries
where
linaclotide
is
approved.
Potential
risks
include
that
theregulatory
authorities:•may
not
deem
linaclotide
safe
and
effective;
•may
not
find
the
data
from
nonclinical
studies
and
clinical
trials
sufficient
to
support
approval;
•may
not
approve
of
manufacturing
processes
and
facilities;
•may
not
approve
linaclotide
for
any
or
all
indications
or
patient
populations
for
which
approval
is
sought;
•may
require
significant
warnings
or
restrictions
on
use
to
the
product
label
for
linaclotide;
or
•may
change
their
approval
policies
or
adopt
new
regulations.31 Table
of
Contents
If
any
of
the
foregoing
were
to
occur,
our
receipt
of
regulatory
approval
in
the
applicable
jurisdiction
could
be
delayed
or
we
may
never
receive
approval
atall.
Further,
regulatory
approval
in
one
jurisdiction
does
not
ensure
regulatory
approval
in
another,
but
a
failure
or
delay
in
obtaining
regulatory
approval
in
onejurisdiction
may
have
a
negative
effect
on
the
regulatory
processes
in
others.
If
linaclotide
is
not
approved
for
all
indications
or
patient
populations
or
with
the
labelrequested,
this
would
limit
the
uses
of
linaclotide
and
have
an
adverse
effect
on
its
commercial
potential
or
require
costly
post-marketing
studies.We face potential product liability exposure, and, if claims brought against us are successful, we could incur substantial liabilities.
The
use
of
our
product
candidates
in
clinical
trials
and
the
sale
of
marketed
products
expose
us
to
product
liability
claims.
If
we
do
not
successfully
defendourselves
against
product
liability
claims,
we
could
incur
substantial
liabilities.
In
addition,
regardless
of
merit
or
eventual
outcome,
product
liability
claims
mayresult
in:•decreased
demand
for
approved
products;
•impairment
of
our
business
reputation;
•withdrawal
of
clinical
trial
participants;
•initiation
of
investigations
by
regulators;
•litigation
costs;
•distraction
of
management's
attention
from
our
primary
business;
•substantial
monetary
awards
to
patients
or
other
claimants;
•loss
of
revenues;
and
•the
inability
to
commercialize
our
product
candidates.
We
currently
have
product
liability
insurance
coverage
for
the
commercial
sale
of
linaclotide
and
for
the
clinical
trials
of
our
product
candidates
which
issubject
to
industry-standard
terms,
conditions
and
exclusions.
Our
insurance
coverage
may
not
be
sufficient
to
reimburse
us
for
expenses
or
losses
associated
withclaims.
Moreover,
insurance
coverage
is
becoming
increasingly
expensive,
and,
in
the
future,
we
may
not
be
able
to
maintain
insurance
coverage
at
a
reasonablecost
or
in
sufficient
amounts
to
protect
us
against
losses.
On
occasion,
large
judgments
have
been
awarded
in
lawsuits
based
on
drugs
that
had
unanticipated
sideeffects.
A
successful
product
liability
claim
or
series
of
claims
could
cause
our
stock
price
to
decline
and,
if
judgments
exceed
our
insurance
coverage,
coulddecrease
our
cash
and
adversely
affect
our
business.We may face competition in the IBS-C and CIC marketplace, and new products may emerge that provide different or better alternatives for treatment of GIconditions.
Linaclotide
competes
globally
with
certain
prescription
therapies
and
over-the-counter
products
for
the
treatment
of
IBS-C
and
CIC,
or
their
associatedsymptoms.
The
availability
of
prescription
competitors
and
over-the-counter
products
for
GI
conditions
could
limit
the
demand,
and
the
price
we
are
able
to
charge,for
linaclotide
unless
we
are
able
to
differentiate
linaclotide
on
the
basis
of
its
actual
or
perceived
benefits.
New
developments,
including
the
development
of
otherdrug
technologies
and
methods
of
preventing
the
incidence
of
disease,
occur
in
the
pharmaceutical
and
medical
technology
industries
at
a
rapid
pace.
Thesedevelopments
may
render
linaclotide
obsolete
or
noncompetitive.32 Table
of
Contents
We
believe
other
companies
are
developing
products
which
could
compete
with
linaclotide,
should
they
be
approved
by
the
FDA
or
foreign
regulatoryauthorities.
Currently,
there
are
compounds
in
late
stage
development
and
other
potential
competitors
are
in
earlier
stages
of
development
for
the
treatment
ofpatients
with
either
IBS-C
or
CIC.
If
our
potential
competitors
are
successful
in
completing
drug
development
for
their
drug
candidates
and
obtain
approval
fromthe
FDA
or
foreign
regulatory
authorities,
they
could
limit
the
demand
for
linaclotide.
In
addition,
certain
of
our
competitors
have
substantially
greater
financial,
technical
and
human
resources
than
us.
Mergers
and
acquisitions
in
thepharmaceutical
industry
may
result
in
even
more
resources
being
concentrated
in
our
competitors.
Competition
may
increase
further
as
a
result
of
advances
made
inthe
commercial
applicability
of
technologies
and
greater
availability
of
capital
for
investment
in
these
fields.We will incur significant liability if it is determined that we are promoting any "off-label" use of LINZESS or any other product.
Physicians
are
permitted
to
prescribe
drug
products
and
medical
devices
for
uses
that
are
not
described
in
the
product's
labeling
and
that
differ
from
thoseapproved
by
the
FDA
or
other
applicable
regulatory
agencies.
Such
"off-label"
uses
are
common
across
medical
specialties.
Although
the
FDA
and
other
regulatoryagencies
do
not
regulate
a
physician's
choice
of
treatments,
the
FDA
and
other
regulatory
agencies
do
restrict
communications
on
the
subject
of
off-label
use.Companies
are
not
permitted
to
promote
drugs
or
medical
devices
for
off-label
uses.
Accordingly,
we
do
not
permit
promotion
of
LINZESS
in
the
U.S.
for
use
inany
indications
other
than
IBS-C
or
CIC
or
in
any
patient
populations
other
than
adult
men
and
women.
Similarly,
we
do
not
permit
promotion
of
any
otherapproved
product
we
develop,
license,
co-promote
or
otherwise
partner
for
any
indication,
population
or
use
not
described
in
such
product's
label.
The
FDA
andother
regulatory
and
enforcement
authorities
actively
enforce
laws
and
regulations
prohibiting
promotion
of
off-label
uses
and
the
promotion
of
products
for
whichmarketing
approval
has
not
been
obtained.
A
company
that
is
found
to
have
promoted
off-label
uses
will
be
subject
to
significant
liability,
including
civil
andadministrative
remedies
as
well
as
criminal
sanctions.
Notwithstanding
the
regulatory
restrictions
on
off-label
promotion,
the
FDA
and
other
regulatory
authorities
allow
companies
to
engage
in
truthful,
non-misleading,
and
non-promotional
scientific
exchange
concerning
their
products.
We
intend
to
engage
in
medical
education
activities
and
communicate
withhealthcare
providers
in
compliance
with
all
applicable
laws,
regulatory
guidance
and
industry
best
practices.
Although
we
believe
we
have
put
in
place
a
robustcompliance
program,
which
is
designed
to
ensure
that
all
such
activities
are
performed
in
a
legal
and
compliant
manner,
we
cannot
be
certain
that
our
program
willaddress
all
areas
of
potential
exposure
and
the
risks
in
this
area
cannot
be
entirely
eliminated.If we fail to comply with healthcare and other regulations, we could face substantial penalties and our business, operations and financial condition could beadversely affected.
LINZESS
and
the
other
products
that
we
promote
are
marketed
in
the
U.S.
and/or
covered
by
federal
healthcare
programs,
and,
as
a
result,
certain
federal
andstate
healthcare
laws
and
regulations
pertaining
to
product
promotion
and
fraud
and
abuse
are
applicable
to,
and
may
affect,
our
business.
These
laws
andregulations
include:•federal
healthcare
program
anti-kickback
laws,
which
prohibit,
among
other
things,
persons
from
soliciting,
receiving
or
providing
remuneration,directly
or
indirectly,
to
induce
either
the
referral
of
an
individual,
for
an
item
or
service
or
the
purchasing
or
ordering
of
a
good
or
service,
forwhich
payment
may
be
made
under
federal
healthcare
programs
such
as
Medicare
and
Medicaid;33 Table
of
Contents•federal
false
claims
laws
which
prohibit,
among
other
things,
individuals
or
entities
from
knowingly
presenting,
or
causing
to
be
presented,information
or
claims
for
payment
from
Medicare,
Medicaid,
or
other
third-party
payers
that
are
false
or
fraudulent,
and
which
may
apply
to
us
forreasons
including
providing
coding
and
billing
advice
to
customers;
•the
federal
Health
Insurance
Portability
and
Accountability
Act
of
1996,
which
prohibits
executing
a
scheme
to
defraud
any
healthcare
benefitprogram
or
making
false
statements
relating
to
healthcare
matters
and
which
also
imposes
certain
requirements
relating
to
the
privacy,
security
andtransmission
of
individually
identifiable
health
information;
•the
Federal
Food,
Drug,
and
Cosmetic
Act,
which
among
other
things,
strictly
regulates
drug
product
and
medical
device
marketing,
prohibitsmanufacturers
from
marketing
such
products
for
off-label
use
and
regulates
the
distribution
of
samples;
•federal
laws
that
require
pharmaceutical
manufacturers
to
report
certain
calculated
product
prices
to
the
government
or
provide
certain
discounts
orrebates
to
government
authorities
or
private
entities,
often
as
a
condition
of
reimbursement
under
government
healthcare
programs;
•the
so-called
"federal
sunshine"
law,
which
requires
pharmaceutical
and
medical
device
companies
to
monitor
and
report
certain
financialinteractions
with
physicians
and
other
healthcare
professionals
and
healthcare
organizations
to
the
federal
government
for
re-disclosure
to
thepublic;
and
•state
law
equivalents
of
the
above
federal
laws,
such
as
anti-kickback
and
false
claims
laws
which
may
apply
to
items
or
services
reimbursed
by
anythird-party
payer,
including
commercial
insurers,
state
transparency
laws
and
state
laws
governing
the
privacy
and
security
of
health
information
incertain
circumstances,
many
of
which
differ
from
each
other
in
significant
ways
and
often
are
not
preempted
by
federal
laws,
thus
complicatingcompliance
efforts.
Our
global
activities
are
subject
to
the
U.S.
Foreign
Corrupt
Practices
Act
which
prohibits
corporations
and
individuals
from
paying,
offering
to
pay,
orauthorizing
the
payment
of
anything
of
value
to
any
foreign
government
official,
government
staff
member,
political
party,
or
political
candidate
in
an
attempt
toobtain
or
retain
business
or
to
otherwise
influence
a
person
working
in
an
official
capacity.
We
are
also
subject
to
similar
anti-bribery
laws
in
the
other
countries
inwhich
we
do
business.
If
our
operations
are
found
to
be
in
violation
of
any
of
the
laws
described
above
or
any
other
laws,
rules
or
regulations
that
apply
to
us,
we
will
be
subject
topenalties,
including
civil
and
criminal
penalties,
damages,
fines
and
the
curtailment
or
restructuring
of
our
operations.
Any
penalties,
damages,
fines,
curtailment
orrestructuring
of
our
operations
could
adversely
affect
our
ability
to
operate
our
business
and
our
financial
results.
Although
compliance
programs
can
mitigate
therisk
of
investigation
and
prosecution
for
violations
of
these
laws,
rules
or
regulations,
we
cannot
be
certain
that
our
program
will
address
all
areas
of
potentialexposure
and
the
risks
in
this
area
cannot
be
entirely
eliminated,
particularly
because
the
requirements
and
government
interpretations
of
the
requirements
in
thisspace
are
constantly
evolving.
Any
action
against
us
for
violation
of
these
laws,
rules
or
regulations,
even
if
we
successfully
defend
against
it,
could
cause
us
toincur
significant
legal
expenses
and
divert
our
management's
attention
from
the
operation
of
our
business,
as
well
as
damage
our
business
or
reputation.
Moreover,achieving
and
sustaining
compliance
with
applicable
federal
and
state
privacy,
security,
fraud
and
reporting
laws
may
prove
costly.Healthcare reform and other governmental and private payer initiatives may have an adverse effect upon, and could prevent, our product's or productcandidates' commercial success.
The
U.S.
government
and
individual
states
are
aggressively
pursuing
healthcare
reform,
as
evidenced
by
the
passing
of
the
Patient
Protection
and
AffordableCare
Act,
as
modified
by
the
Health34 Table
of
ContentsCare
and
Education
Reconciliation
Act
of
2010.
These
healthcare
reform
laws
contain
several
cost
containment
measures
that
could
adversely
affect
our
futurerevenue,
including,
for
example,
increased
drug
rebates
under
Medicaid
for
brand
name
prescription
drugs,
extension
of
Medicaid
rebates
to
Medicaid
managedcare
plans,
and
extension
of
so-called
340B
discounted
pricing
on
pharmaceuticals
sold
to
certain
healthcare
providers.
Additional
provisions
of
the
healthcarereform
laws
that
may
negatively
affect
our
future
revenue
and
prospects
for
profitability
include
the
assessment
of
an
annual
fee
based
on
our
proportionate
shareof
sales
of
brand
name
prescription
drugs
to
certain
government
programs,
including
Medicare
and
Medicaid,
as
well
as
mandatory
discounts
on
pharmaceuticalssold
to
certain
Medicare
Part
D
beneficiaries.
Other
aspects
of
healthcare
reform,
such
as
expanded
government
enforcement
authority
and
heightened
standardsthat
could
increase
compliance-related
costs,
could
also
affect
our
business.
In
addition
to
governmental
efforts
in
the
U.S.,
foreign
jurisdictions
as
well
as
private
health
insurers
and
managed
care
plans
are
likely
to
continuechallenging
manufacturers'
ability
to
obtain
reimbursement,
as
well
as
the
level
of
reimbursement,
for
pharmaceuticals
and
other
healthcare-related
products
andservices.
These
cost-control
initiatives
could
significantly
decrease
the
available
coverage
and
the
price
we
might
establish
for
linaclotide
and
our
other
potentialproducts,
which
would
have
an
adverse
effect
on
our
financial
results.
The
Food
and
Drug
Administration
Amendments
Act
of
2007
also
provides
the
FDA
enhanced
post-marketing
authority,
including
the
authority
to
requirepost-marketing
studies
and
clinical
trials,
labeling
changes
based
on
new
safety
information,
and
compliance
with
risk
evaluations
and
mitigation
strategiesapproved
by
the
FDA.
We
and
Allergan
have
established
a
nonclinical
and
clinical
post-marketing
plan
with
the
FDA
to
understand
the
safety
and
efficacy
ofLINZESS
in
pediatrics,
which
is
discussed
above.
The
FDA's
exercise
of
this
authority
has
resulted
(and
is
expected
to
continue
to
result)
in
increaseddevelopment-related
costs
following
the
commercial
launch
of
LINZESS
for
the
treatment
of
adult
men
and
women
suffering
from
IBS-C
or
CIC,
and
could
resultin
potential
restrictions
on
the
sale
and/or
distribution
of
LINZESS,
even
in
its
approved
indications
and
patient
populations.In pursuing our growth strategy, we will incur a variety of costs and may devote resources to potential opportunities that are never completed or for which wenever receive the benefit. Our failure to successfully discover, acquire, develop and market additional product candidates or approved products would impairour ability to grow and adversely affect our business.
As
part
of
our
growth
strategy,
we
intend
to
explore
further
linaclotide
development
opportunities.
We
and
Allergan
are
exploring
development
opportunitiesto
enhance
the
clinical
profile
of
LINZESS
by
seeking
to
expand
its
utility
in
its
indicated
populations,
as
well
as
studying
linaclotide
in
additional
indications,populations
and
formulations
to
assess
its
potential
to
treat
various
GI
conditions.
These
development
efforts
may
fail
or
may
not
increase
the
revenues
that
wegenerate
from
LINZESS.
Furthermore,
they
may
result
in
adverse
events,
or
perceived
adverse
events,
in
certain
patient
populations
that
are
then
attributed
to
thecurrently
approved
patient
population,
which
may
result
in
adverse
regulatory
action
at
the
FDA
or
in
other
countries
or
harm
linaclotide's
reputation
in
themarketplace,
each
of
which
could
materially
harm
our
revenues
from
linaclotide.
We
are
also
pursuing
various
other
programs
in
our
pipeline.
We
may
spend
several
years
and
make
significant
investments
in
developing
any
current
orfuture
internal
product
candidate,
and
failure
may
occur
at
any
point.
Our
product
candidates
are
in
various
stages
of
development
and
must
satisfy
rigorousstandards
of
safety
and
efficacy
before
they
can
be
approved
for
sale
by
the
FDA.
To
satisfy
these
standards,
we
must
allocate
resources
among
our
variousdevelopment
programs
and
we
must
engage
in
costly
and
lengthy
discovery
and
development
efforts,
which
are
subject
to
unanticipated
delays
and
othersignificant
uncertainties.
Despite
our
efforts,
our
product
candidates
may
not
offer
therapeutic
or
other
improvement
over
existing
competitive
drugs,
be
provensafe
and
effective
in35 Table
of
Contentsclinical
trials,
or
meet
applicable
regulatory
standards.
It
is
possible
that
none
of
the
product
candidates
we
are
developing
will
be
approved
for
commercial
sale,which
would
impair
our
ability
to
grow.
We
have
ongoing
or
planned
nonclinical
and
clinical
trials
for
linaclotide
and
a
number
of
our
internal
product
candidates,
and
the
strength
of
our
company'spipeline
will
depend
in
large
part
on
the
outcomes
of
these
studies.
Many
companies
in
the
pharmaceutical
industry
have
suffered
significant
setbacks
in
clinicaltrials
even
after
achieving
promising
results
in
earlier
nonclinical
or
clinical
trials.
The
findings
from
our
completed
nonclinical
studies
may
not
be
replicated
inlater
clinical
trials,
and
our
clinical
trials
may
not
be
predictive
of
the
results
we
may
obtain
in
later-stage
clinical
trials
or
of
the
likelihood
of
regulatory
approval.Results
from
our
clinical
trials
and
findings
from
our
nonclinical
studies
could
lead
to
abrupt
changes
in
our
development
activities,
including
the
possiblelimitation
or
cessation
of
development
activities
associated
with
a
particular
product
candidate
or
program.
Furthermore,
our
analysis
of
data
obtained
fromnonclinical
and
clinical
activities
is
subject
to
confirmation
and
interpretation
by
the
FDA
and
other
applicable
regulatory
authorities,
which
could
delay,
limit
orprevent
regulatory
approval.
Satisfaction
of
FDA
or
other
applicable
regulatory
requirements
is
costly,
time-consuming,
uncertain
and
subject
to
unanticipateddelays.
In
addition,
because
our
internal
research
capabilities
are
limited,
we
may
be
dependent
upon
pharmaceutical
and
biotechnology
companies,
academicscientists
and
other
researchers
to
sell
or
license
products
or
technology
to
us.
The
success
of
this
strategy
depends
partly
upon
our
ability
to
identify,
select,discover
and
acquire
promising
pharmaceutical
product
candidates
and
products.
The
process
of
proposing,
negotiating
and
implementing
a
license
or
acquisitionof
a
product
candidate
or
approved
product
is
lengthy
and
complex.
Other
companies,
including
some
with
substantially
greater
financial,
marketing
and
salesresources,
may
compete
with
us
for
the
license
or
acquisition
of
product
candidates
and
approved
products.
We
have
limited
resources
to
identify
and
execute
theacquisition
or
in-licensing
of
third-party
products,
businesses
and
technologies
and
integrate
them
into
our
current
infrastructure.
Moreover,
we
may
devoteresources
to
potential
acquisitions
or
in-licensing
opportunities
that
are
never
completed,
or
we
may
fail
to
realize
the
anticipated
benefits
of
such
efforts.
We
maynot
be
able
to
acquire
the
rights
to
additional
products
or
product
candidates
on
terms
that
we
find
acceptable,
or
at
all.
In
addition,
future
acquisitions
may
entail
numerous
operational
and
financial
risks,
including:•exposure
to
unknown
liabilities;
•disruption
of
our
business
and
diversion
of
our
management's
time
and
attention
to
develop
acquired
products,
product
candidates
or
technologies;
•incurrence
of
substantial
debt,
dilutive
issuances
of
securities
or
depletion
of
cash
to
pay
for
acquisitions;
•higher
than
expected
acquisition
and
integration
costs;
•difficulty
in
combining
the
operations
and
personnel
of
any
acquired
businesses
with
our
operations
and
personnel;
•increased
amortization
expenses;
•impairment
of
relationships
with
key
suppliers
or
customers
of
any
acquired
businesses
due
to
changes
in
management
and
ownership;
and
•inability
to
motivate
key
employees
of
any
acquired
businesses.
Further,
any
product
candidate
that
we
acquire
may
require
additional
development
efforts
prior
to
commercial
sale,
including
extensive
clinical
testing
andapproval
by
the
FDA
and
applicable
foreign
regulatory
authorities.
All
product
candidates
are
prone
to
risks
of
failure
typical
of
pharmaceutical36 Table
of
Contentsproduct
development,
including
the
possibility
that
a
product
candidate
will
not
be
shown
to
be
sufficiently
safe
and
effective
for
approval
by
regulatory
authorities.Delays in the completion of clinical testing of any of our product candidates could result in increased costs and delay or limit our ability to generate revenues.
Delays
in
the
completion
of
clinical
testing
could
significantly
affect
our
product
development
costs.
We
do
not
know
whether
planned
clinical
trials
will
becompleted
on
schedule,
if
at
all.
The
commencement
and
completion
of
clinical
trials
can
be
delayed
for
a
number
of
reasons,
including
delays
related
to:•obtaining
regulatory
approval
to
commence
a
clinical
trial;
•reaching
agreement
on
acceptable
terms
with
prospective
clinical
research
organizations,
or
CROs,
and
trial
sites,
the
terms
of
which
can
be
subjectto
extensive
negotiation
and
may
vary
significantly
among
different
CROs
and
trial
sites;
•manufacturing
sufficient
quantities
of
a
product
candidate
for
use
in
clinical
trials;
•obtaining
institutional
review
board
approval
to
conduct
a
clinical
trial
at
a
prospective
site;
•recruiting
and
enrolling
patients
to
participate
in
clinical
trials
for
a
variety
of
reasons,
including
competition
from
other
clinical
trial
programs
forthe
treatment
of
similar
conditions;
and
•maintaining
patients
who
have
initiated
a
clinical
trial
but
may
be
prone
to
withdraw
due
to
side
effects
from
the
therapy,
lack
of
efficacy
orpersonal
issues,
or
who
are
lost
to
further
follow-up.
Clinical
trials
may
also
be
delayed
as
a
result
of
ambiguous
or
negative
interim
results.
In
addition,
a
clinical
trial
may
be
suspended
or
terminated
by
us,
aninstitutional
review
board
overseeing
the
clinical
trial
at
a
clinical
trial
site
(with
respect
to
that
site),
the
FDA,
or
other
regulatory
authorities
due
to
a
number
offactors,
including:•failure
to
conduct
the
clinical
trial
in
accordance
with
regulatory
requirements
or
the
study
protocols;
•inspection
of
the
clinical
trial
operations
or
trial
sites
by
the
FDA
or
other
regulatory
authorities
resulting
in
the
imposition
of
a
clinical
hold;
•unforeseen
safety
issues;
or
•lack
of
adequate
enrollment
or
funding
to
continue
the
clinical
trial.Additionally,
changes
in
regulatory
requirements
and
guidance
may
occur,
and
we
may
need
to
amend
clinical
trial
protocols
to
reflect
these
changes.
Eachprotocol
amendment
would
require
institutional
review
board
review
and
approval,
which
may
adversely
impact
the
costs,
timing
or
successful
completion
of
theassociated
clinical
trials.
If
we
experience
delays
in
completion,
or
if
we
terminate
any
of
our
clinical
trials,
the
commercial
prospects
for
our
product
candidatemay
be
harmed,
and
our
ability
to
generate
product
revenues
will
be
delayed.
In
addition,
many
of
the
factors
that
cause,
or
lead
to,
a
delay
in
the
commencementor
completion
of
clinical
trials
may
also
ultimately
lead
to
the
denial
of
regulatory
approval.We may not be able to manage our business effectively if we lose any of our current management team or if we are unable to attract and motivate keypersonnel.
We
may
not
be
able
to
attract
or
motivate
qualified
management
and
scientific,
clinical,
operations
and
commercial
personnel
in
the
future
due
to
the
intensecompetition
for
qualified
personnel
among
biotechnology,
pharmaceutical
and
other
businesses,
particularly
in
the
greater-Boston
area.
If
we
are37 Table
of
Contentsnot
able
to
attract
and
motivate
necessary
personnel
to
accomplish
our
business
objectives,
we
will
experience
constraints
that
will
significantly
impede
theachievement
of
our
objectives.
We
are
highly
dependent
on
the
drug
discovery,
development,
regulatory,
commercial,
financial
and
other
expertise
of
our
management,
particularly
Peter
M.Hecht,
Ph.D.,
our
chief
executive
officer;
Mark
G.
Currie,
Ph.D.,
our
senior
vice
president,
chief
scientific
officer
and
president
of
research
and
development;
TomGraney,
our
chief
financial
officer
and
senior
vice
president,
finance
and
corporate
strategy;
Thomas
A.
McCourt,
our
senior
vice
president,
marketing
and
salesand
chief
commercial
officer;
and
Halley
E.
Gilbert,
our
senior
vice
president,
chief
legal
officer,
and
secretary.
Transitions
in
our
senior
management
team
mayresult
in
operational
disruptions,
and
our
business
may
be
harmed
as
a
result.
In
addition
to
the
competition
for
personnel,
the
Boston
area
in
particular
ischaracterized
by
a
high
cost
of
living.
As
such,
we
could
have
difficulty
attracting
experienced
personnel
to
our
company
and
may
be
required
to
expend
significantfinancial
resources
in
our
employee
recruitment
efforts.
We
also
have
scientific
and
clinical
advisors
who
assist
us
in
formulating
our
product
development,
clinical
strategies
and
our
global
supply
chain
plans,
aswell
as
sales
and
marketing
advisors
who
have
assisted
us
in
our
commercialization
strategy
and
brand
plan
for
linaclotide.
These
advisors
are
not
our
employeesand
may
have
commitments
to,
or
consulting
or
advisory
contracts
with,
other
entities
that
may
limit
their
availability
to
us,
or
may
have
arrangements
with
othercompanies
to
assist
in
the
development
and
commercialization
of
products
that
may
compete
with
ours.Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In
the
ordinary
course
of
our
business,
we
collect
and
store
sensitive
data,
including
intellectual
property,
our
proprietary
business
information
and
that
of
oursuppliers
and
business
partners,
as
well
as
personally
identifiable
information
of
linaclotide
patients,
clinical
trial
participants
and
employees.
We
also
haveoutsourced
elements
of
our
information
technology
structure,
and
as
a
result,
we
are
managing
independent
vendor
relationships
with
third
parties
who
may
orcould
have
access
to
our
confidential
information.
Similarly,
our
business
partners
and
other
third
party
providers
possess
certain
of
our
sensitive
data.
The
securemaintenance
of
this
information
is
critical
to
our
operations
and
business
strategy.
Despite
our
security
measures,
our
information
technology
and
infrastructuremay
be
vulnerable
to
attacks
by
hackers
or
breached
due
to
employee
error,
malfeasance
or
other
disruptions.
We,
our
partners,
vendors
and
other
third
partyproviders
could
be
susceptible
to
third
party
attacks
on
our,
and
their,
information
security
systems,
which
attacks
are
of
ever
increasing
levels
of
sophistication
andare
made
by
groups
and
individuals
with
a
wide
range
of
motives
and
expertise,
including
criminal
groups.
Any
such
breach
could
compromise
our,
and
their,networks
and
the
information
stored
there
could
be
accessed,
publicly
disclosed,
lost
or
stolen.
Any
such
access,
disclosure
or
other
loss
of
information
could
resultin
legal
claims
or
proceedings,
liability
under
laws
that
protect
the
privacy
of
personal
information,
disrupt
our
operations,
and
damage
our
reputation,
any
of
whichcould
adversely
affect
our
business.Our business involves the use of hazardous materials, and we must comply with environmental laws and regulations, which can be expensive and restrict howwe do business.
Our
activities
involve
the
controlled
storage,
use
and
disposal
of
hazardous
materials.
We
are
subject
to
federal,
state,
city
and
local
laws
and
regulationsgoverning
the
use,
manufacture,
storage,
handling
and
disposal
of
these
hazardous
materials.
Although
we
believe
that
the
safety
procedures
we
use
for
handlingand
disposing
of
these
materials
comply
with
the
standards
prescribed
by
these
laws
and
regulations,
we
cannot
eliminate
the
risk
of
accidental
contamination
orinjury
from
these
materials.
In
the
event
of
an
accident,
local,
city,
state
or
federal
authorities
may
curtail
the
use
of
these
materials
and
interrupt
our
businessoperations.
We
do
not
currently
maintain
hazardous
materials
insurance
coverage.38 Table
of
ContentsRisks
Related
to
Intellectual
PropertyLimitations on our patent rights relating to our product candidates may limit our ability to prevent third parties from competing against us.
Our
success
depends
on
our
ability
to
obtain
and
maintain
patent
protection
for
our
product
candidates,
preserve
our
trade
secrets,
prevent
third
parties
frominfringing
upon
our
proprietary
rights
and
operate
without
infringing
upon
the
proprietary
rights
of
others.
The
strength
of
patents
in
the
pharmaceutical
industry
involves
complex
legal
and
scientific
questions
and
can
be
uncertain.
Patent
applications
in
the
U.S.
andmost
other
countries
are
confidential
for
a
period
of
time
until
they
are
published,
and
publication
of
discoveries
in
scientific
or
patent
literature
typically
lagsactual
discoveries
by
several
months
or
more.
As
a
result,
we
cannot
be
certain
that
we
were
the
first
to
conceive
inventions
covered
by
our
patents
and
pendingpatent
applications
or
that
we
were
the
first
to
file
patent
applications
for
such
inventions.
In
addition,
we
cannot
be
certain
that
our
patent
applications
will
begranted,
that
any
issued
patents
will
adequately
protect
our
intellectual
property,
or
that
such
patents
will
not
be
challenged,
narrowed,
invalidated
or
circumvented.
We
have
several
issued
patents
and
pending
applications
in
the
U.S.
related
to
LINZESS,
including
a
LINZESS
composition
of
matter
and
methods
of
usepatent
(U.S.
Patent
7,304,036)
and
two
patents
relating
to
our
commercial,
room
temperature
stable
formulation
of
linaclotide
and
methods
of
using
thisformulation.
We
also
have
additional
U.S.
patents
and
applications
covering
processes
for
making
LINZESS,
formulations
and
dosing
regimens
thereof,
andmolecules
related
to
LINZESS.
Although
none
of
these
issued
patents
currently
is
subject
to
a
patent
reexamination
or
review,
we
cannot
guarantee
that
they
willnot
be
subject
to
reexamination
or
review
by
the
U.S.
Patent
and
Trademark
Office,
or
the
USPTO,
in
the
future.
If
any
or
all
of
our
LINZESS-related
patents
wereinvalidated,
we
would
still
have
at
least
five
years
of
marketing
exclusivity
under
the
Hatch-Waxman
Act
from
FDA
approval
of
LINZESS.
We
believe
that
eachof
the
patents
in
our
linaclotide
patent
portfolio
was
rightfully
issued
and
the
portfolio
gives
us
sufficient
freedom
to
operate;
however,
if
any
of
our
present
orfuture
patents
is
invalidated,
this
could
have
an
adverse
effect
on
our
business
and
financial
results,
particularly
for
the
period
beyond
five
years
followingmarketing
approval.
In
March
2013,
an
opposition
to
one
of
our
granted
patents
covering
linaclotide
was
filed
in
Europe.
In
April
2015,
the
patent
was
upheld
in
its
entirety
by
theEuropean
Patent
Office,
affirming
the
strength
of
our
intellectual
property
and
our
belief
that
the
opposition
was
without
merit.
We
believe
that
this
patent
wasappropriately
granted
but
we
cannot
be
certain
of
this
until
the
opposition
proceedings,
including
the
associated
appeals
process,
are
complete.
While
the
oppositionis
ongoing,
we
will
incur
additional
expense
and
be
required
to
focus
additional
efforts
on
the
proceedings.
However,
even
if
this
patent
were
ultimately
found
to
beinvalid,
we
have
other
composition
of
matter-
and
use-related
linaclotide
patents
that
are
granted
and
in
force,
and
we
believe
these
patents
provide
strong
andsufficient
patent
protection
in
Europe.
Furthermore,
the
America
Invents
Act,
which
was
signed
into
law
in
2011,
has
made
several
major
changes
in
the
U.S.
patent
statutes.
These
changes
willpermit
third
parties
to
challenge
our
patents
more
easily
and
will
create
uncertainty
with
respect
to
the
interpretation
and
practice
of
U.S.
patent
law
for
theforeseeable
future.
We
also
rely
upon
unpatented
trade
secrets,
unpatented
know-how
and
continuing
technological
innovation
to
develop
and
maintain
our
competitive
position,which
we
seek
to
protect,
in
part,
by
confidentiality
agreements
with
our
employees
and
our
collaborators
and
consultants.
We
also
have
agreements
with
ouremployees
and
selected
consultants
that
obligate
them
to
assign
their
inventions
to
us.
It
is
possible,
however,
that
technology
relevant
to
our
business
will
beindependently
developed
by
a
person
that
is
not
a
party
to
such
an
agreement.
Furthermore,
if
the
employees
and
consultants
that39 Table
of
Contentsare
parties
to
these
agreements
breach
or
violate
the
terms
of
these
agreements,
we
may
not
have
adequate
remedies,
and
we
could
lose
our
trade
secrets
throughsuch
breaches
or
violations.
Further,
our
trade
secrets
could
otherwise
become
known
or
be
independently
discovered
by
our
competitors.
In
addition,
the
laws
of
certain
foreign
countries
do
not
protect
proprietary
rights
to
the
same
extent
or
in
the
same
manner
as
the
U.S.,
and,
therefore,
we
mayencounter
problems
in
protecting
and
defending
our
intellectual
property
in
certain
foreign
jurisdictions.If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in such litigationcould have a material adverse effect on our business.
Our
commercial
success
depends
on
our
ability,
and
the
ability
of
our
collaborators,
to
develop,
manufacture,
market
and
sell
our
products
and
use
ourproprietary
technologies
without
infringing
the
proprietary
rights
of
third
parties.
Numerous
U.S.
and
foreign
issued
patents
and
pending
patent
applications,
whichare
owned
by
third
parties,
exist
in
the
fields
in
which
we
and
our
collaborators
are
developing
products.
As
the
biotechnology
and
pharmaceutical
industry
expandsand
more
patents
are
issued,
the
risk
increases
that
our
potential
products
may
give
rise
to
claims
of
infringement
of
the
patent
rights
of
others.
There
may
be
issuedpatents
of
third
parties
of
which
we
are
currently
unaware
that
may
be
infringed
by
linaclotide
or
our
product
candidates.
Because
patent
applications
can
takemany
years
to
issue,
there
may
be
currently
pending
applications
which
may
later
result
in
issued
patents
that
linaclotide
or
our
product
candidates
may
infringe.
We
may
be
exposed
to,
or
threatened
with,
litigation
by
third
parties
alleging
that
linaclotide
or
our
product
candidates
infringe
their
intellectual
propertyrights.
If
linaclotide
or
one
of
our
product
candidates
is
found
to
infringe
the
intellectual
property
rights
of
a
third
party,
we
or
our
collaborators
could
be
enjoinedby
a
court
and
required
to
pay
damages
and
could
be
unable
to
commercialize
linaclotide
or
the
applicable
product
candidate
unless
we
obtain
a
license
to
theintellectual
property
rights.
A
license
may
not
be
available
to
us
on
acceptable
terms,
if
at
all.
In
addition,
during
litigation,
the
counter-party
could
obtain
apreliminary
injunction
or
other
equitable
relief
which
could
prohibit
us
from
making,
using
or
selling
our
products,
pending
a
trial
on
the
merits,
which
may
notoccur
for
several
years.
There
is
a
substantial
amount
of
litigation
involving
patent
and
other
intellectual
property
rights
in
the
biotechnology
and
pharmaceutical
industries
generally.If
a
third
party
claims
that
we
or
our
collaborators
infringe
its
intellectual
property
rights,
we
may
face
a
number
of
issues,
including,
but
not
limited
to:•infringement
and
other
intellectual
property
claims
which,
regardless
of
merit,
may
be
expensive
and
time-consuming
to
litigate
and
may
divert
ourmanagement's
attention
from
our
core
business;
•substantial
damages
for
infringement,
which
we
may
have
to
pay
if
a
court
decides
that
the
product
at
issue
infringes
on
or
violates
the
third
party'srights,
and,
if
the
court
finds
that
the
infringement
was
willful,
we
could
be
ordered
to
pay
treble
damages
and
the
patent
owner's
attorneys'
fees;
•a
court
prohibiting
us
from
selling
our
product
unless
the
third
party
licenses
its
rights
to
us,
which
it
is
not
required
to
do;
•if
a
license
is
available
from
a
third
party,
we
may
have
to
pay
substantial
royalties,
fees
or
grant
cross-licenses
to
our
intellectual
property
rights;and
•redesigning
our
products
so
they
do
not
infringe,
which
may
not
be
possible
or
may
require
substantial
monetary
expenditures
and
time.40 Table
of
ContentsWe may become involved in legal proceedings to protect or enforce our patents, which could be expensive and time consuming, and unfavorable outcomes insuch proceedings could have a material adverse effect on our business.
Competitors
may
infringe
our
patents
or
may
assert
our
patents
are
invalid.
To
counter
ongoing
or
potential
infringement
or
unauthorized
use,
we
may
berequired
to
file
infringement
claims,
which
can
be
expensive
and
time-consuming.
Litigation
with
generic
manufacturers
has
become
increasingly
common
in
thebiotechnology
and
pharmaceutical
industries.
In
addition,
in
an
infringement
or
invalidity
proceeding,
a
court
or
patent
administrative
body
may
determine
that
apatent
of
ours
is
not
valid
or
is
unenforceable,
or
may
refuse
to
stop
the
other
party
from
using
the
technology
at
issue
on
the
grounds
that
our
patents
do
not
coverthe
technology
in
question.
One
or
more
generic
drug
manufacturers
may
file
abbreviated
new
drug
applications,
or
ANDAs,
with
the
FDA
for
generic
versions
ofLINZESS.
Generic
drug
manufacturers
will
first
be
able
to
file
ANDAs
in
August
2016,
but
we
may
not
become
aware
of
these
filings
for
several
months
after
anysuch
submission
due
to
procedures
specified
under
applicable
FDA
regulations.
When
filing
an
ANDA
for
LINZESS,
a
generic
drug
manufacturer
may
choose
tochallenge
one
or
more
of
the
patents
that
cover
LINZESS.
As
such,
we
may
need
to
protect
our
intellectual
property
rights
by
bringing
legal
proceedings
against
thegeneric
drug
manufacturer.
Additionally,
the
validity
of
our
patents
may
be
challenged
by
third
parties
pursuant
to
administrative
procedures
introduced
by
the
American
Invents
Act,specifically
inter
partes
review,
or
IPR,
and/or
post
grant
review,
or
PGR,
before
the
USPTO.
Generic
drug
manufacturers
may
challenge
our
patents
through
IPRsor
PGRs
instead
of
or
in
addition
to
ANDA
legal
proceedings.
Patent
litigation,
IPRs
and
PGRs
involve
complex
legal
and
factual
questions
and
we
may
need
todevote
significant
resources
to
such
legal
proceedings.
We
can
provide
no
assurance
concerning
the
duration
or
the
outcome
of
any
such
patent-related
lawsuits
oradministrative
proceedings.
An
adverse
result
in
any
litigation
or
defense
proceedings
could
put
one
or
more
of
our
patents
at
risk
of
being
invalidated
orinterpreted
narrowly
and
could
put
our
patent
applications
at
risk
of
not
issuing,
which
would
materially
harm
our
business.
Interference
or
derivation
proceedings
brought
by
the
USPTO
may
be
necessary
to
determine
the
priority
of
inventions
with
respect
to
our
patents
and
patentapplications
or
those
of
our
collaborators.
An
unfavorable
outcome
could
require
us
to
cease
using
the
technology
or
to
attempt
to
license
rights
to
it
from
theprevailing
party.
Our
business
could
be
harmed
if
a
prevailing
party
does
not
offer
us
a
license
on
terms
that
are
acceptable
to
us.
Litigation
or
interferenceproceedings
may
fail
and,
even
if
successful,
may
result
in
substantial
costs
and
distraction
of
our
management
and
other
employees.
In
addition,
we
may
not
beable
to
prevent,
alone
or
with
our
collaborators,
misappropriation
of
our
proprietary
rights,
particularly
in
countries
where
the
laws
may
not
protect
those
rights
asfully
as
in
the
U.S.
Furthermore,
because
of
the
substantial
amount
of
discovery
required
in
connection
with
intellectual
property
litigation,
as
well
as
the
potential
for
publicannouncements
of
the
results
of
hearings,
motions
or
other
interim
proceeding
or
developments,
there
is
a
risk
that
some
of
our
confidential
information
could
becompromised
by
disclosure
during
this
type
of
litigation.Risks
Related
to
Our
Finances
and
Capital
RequirementsWe have incurred significant losses since our inception and cannot guarantee when, if ever, we will become profitable.
In
recent
years,
we
have
focused
primarily
on
developing,
manufacturing
and
commercializing
linaclotide,
as
well
as
developing
our
other
product
candidates.We
have
financed
our
business
to
date
primarily
through
the
issuance
of
equity,
our
collaboration
and
license
arrangements,
our
January
2013
issuance
of
our
11%PhaRMA
Notes
due
2024,
or
the
PhaRMA
Notes,
related
to
the
sales
of41 Table
of
ContentsLINZESS
in
the
U.S.
and
our
June
2015
issuance
of
our
2.25%
Convertible
Senior
Notes
due
June
15,
2022,
or
the
2022
Notes,
and
we
have
incurred
losses
in
eachyear
since
our
inception
in
1998.
We
currently
derive
substantially
all
of
our
revenue
from
our
LINZESS
collaboration
with
Allergan
for
the
U.S.
and
believe
thatthe
revenues
from
this
collaboration
will
continue
to
constitute
a
significant
portion
of
our
total
revenue
for
the
foreseeable
future.
We
incurred
net
losses
ofapproximately
$142.7
million,
$189.6
million
and
$272.8
million
in
the
years
ended
December
31,
2015,
2014
and
2013,
respectively.
As
of
December
31,
2015,we
had
an
accumulated
deficit
of
approximately
$1.1
billion.
We
cannot
be
certain
that
sales
of
LINZESS
and
the
revenue
from
our
other
commercial
activities
willnot
fall
short
of
our
projections
or
be
delayed.
Further,
we
expect
to
continue
to
incur
substantial
expenses
in
connection
with
our
efforts
to
commercializelinaclotide
and
our
research
and
development
of
our
product
candidates.
Because
of
the
numerous
risks
and
uncertainties
associated
with
developing
andcommercializing
pharmaceutical
products,
as
well
as
those
related
to
our
expectations
for
LINZESS
and
our
other
commercial
activities,
we
are
unable
to
predictthe
extent
of
any
future
losses
or
guarantee
when,
or
if,
our
company
will
become
profitable
or
cash
flow
positive.
If
we
never
achieve
profitability
or
positive
cashflows,
or
achieve
either
later
than
we
anticipate,
this
will
have
an
adverse
effect
on
our
stockholders'
equity
and
working
capital.We may need additional funding and may be unable to raise capital when needed, which could cause us to delay, reduce or eliminate our product developmentprograms or commercialization efforts.
In
June
2015,
we
issued
approximately
$335.7
million
aggregate
principal
amount
of
our
2022
Notes
and
we
have
previously
raised
additional
funds
throughother
capital
raising
activities,
including
the
sale
of
shares
of
our
Class
A
common
stock
in
public
offerings
and
the
issuance
of
our
PhaRMA
Notes
in
January2013.
However,
marketing
and
selling
a
primary
care
drug,
purchasing
commercial
quantities
of
pharmaceutical
products,
and
developing
product
candidates
andconducting
clinical
trials
are
expensive
and
uncertain.
Circumstances,
our
strategic
imperatives,
or
opportunities
to
create
or
acquire
new
programs,
as
well
asmaturities,
redemptions
or
repurchases
of
our
outstanding
debt
securities,
could
require
us
to,
or
we
may
choose
to,
seek
to
raise
additional
funds.
The
amount
andtiming
of
our
future
funding
requirements
will
depend
on
many
factors,
including,
but
not
limited
to:•the
level
of
underlying
demand
for
linaclotide
by
prescribers
and
patients
in
the
U.S.,
the
E.U.
and
the
other
countries
where
it
is
approved;
•the
costs
associated
with
commercializing
LINZESS
in
the
U.S.;
•the
costs
of
maintaining
and
expanding
sales,
marketing
and
distribution
capabilities
for
linaclotide;
•the
regulatory
approval
of
linaclotide
outside
of
the
U.S.,
the
E.U.
and
the
other
countries
where
it
is
approved,
and
the
timing
of
commerciallaunches
in
those
countries,
as
well
as
the
associated
development
and
commercial
milestones
and
royalties;
•the
rate
of
progress,
the
cost
of
our
clinical
trials
and
the
other
costs
associated
with
our
product
development
programs,
including
our
post-approvalnonclinical
and
clinical
studies
of
linaclotide
in
pediatrics
and
our
investment
to
enhance
the
clinical
profile
of
LINZESS
within
its
indicatedpopulations,
as
well
as
to
study
linaclotide
in
additional
indications,
populations
and
formulations
to
assess
its
potential
to
treat
various
GIconditions;
•the
costs
and
timing
of
in-licensing
additional
products
or
product
candidates
or
acquiring
other
complementary
companies;
•the
status,
terms
and
timing
of
any
collaboration,
licensing,
co-commercialization
or
other
arrangements;42 Table
of
Contents•the
timing
of
any
regulatory
approvals
of
our
product
candidates;
•whether
the
holders
of
our
2022
Notes
hold
the
notes
to
maturity
without
conversion
into
our
Class
A
common
stock
and
whether
we
are
required
torepurchase
our
2022
Notes
prior
to
maturity
upon
a
fundamental
change,
as
defined
in
the
indenture
governing
the
2022
Notes;
and
•whether
we
seek
to
redeem
or
repurchase
all
or
part
of
our
outstanding
debt
through
cash
purchases
and/or
exchanges,
in
open
market
purchases,privately
negotiated
transactions,
by
tender
offer
or
otherwise.
Additional
funding
may
not
be
available
on
acceptable
terms
or
at
all.
If
adequate
funds
are
not
available,
we
may
be
required
to
delay
or
reduce
the
scope
ofour
commercialization
efforts,
delay,
reduce
or
eliminate
one
or
more
of
our
development
programs
or
delay
or
abandon
potential
strategic
opportunities.Our ability to pay principal of and interest on our outstanding debt securities will depend in part on the receipt of payments from Allergan under ourcollaboration agreement for North America.
In
January
2013,
we
issued
$175.0
million
aggregate
principal
amount
of
our
PhaRMA
Notes
bearing
an
annual
interest
rate
of
11%
and
in
June
2015,
weissued
approximately
$335.7
million
aggregate
principal
amount
of
our
2022
Notes
bearing
an
annual
interest
rate
of
2.25%.
Quarterly
interest
payments
on
ourPhaRMA
Notes
commenced
on
June
15,
2013
and
semi-annual
payments
on
our
2022
Notes
commenced
on
December
15,
2015.
In
March
2014,
we
began
makingquarterly
payments
on
the
PhaRMA
Notes
equal
to
the
greater
of
(i)
7.5%
of
net
sales
of
LINZESS
in
the
U.S.
for
the
preceding
quarter
and
(ii)
the
quarterlyinterest
amount.
Principal
on
the
PhaRMA
Notes
is
repaid
in
an
amount
equal
to
the
difference
between
(i)
and
(ii)
above,
when
this
is
a
positive
number,
until
theprincipal
has
been
paid
in
full.
We
expect
that
for
the
next
few
years,
at
a
minimum,
the
net
quarterly
payments
from
Allergan
will
be
our
primary
source
of
cashflow
from
operations.
If
the
cash
flows
derived
from
the
net
quarterly
payments
that
we
receive
from
Allergan
under
the
collaboration
agreement
for
NorthAmerica
are
insufficient
on
any
particular
payment
date
to
fund
the
interest
payment
on
our
outstanding
indebtedness,
at
a
minimum,
we
will
be
obligated
to
paythe
amounts
of
such
shortfall
out
of
our
general
funds.
The
determination
of
whether
Allergan
will
be
obligated
to
make
a
net
quarterly
payment
to
us
in
respect
ofa
particular
quarterly
period
is
a
function
of
the
revenue
generated
by
LINZESS
in
the
U.S.
as
well
as
the
development,
manufacturing
and
commercializationexpenses
incurred
by
each
of
us
and
Allergan
under
the
collaboration
agreement
for
North
America.
Accordingly,
since
we
cannot
guarantee
when,
or
if,
ourcompany
will
become
profitable
or
cash
flow
positive,
we
cannot
provide
assurances
that
(i)
we
will
have
the
available
funds
to
fund
the
interest
payment
on
ouroutstanding
indebtedness,
at
a
minimum,
in
the
event
that
there
is
a
deficiency
in
the
net
quarterly
payment
received
from
Allergan,
(ii)
there
will
be
a
net
quarterlypayment
from
Allergan
at
all
or
(iii)
we
will
not
also
be
required
to
make
a
true-up
payment
to
Allergan
under
the
collaboration
agreement
for
North
America,
ineach
case,
in
respect
of
a
particular
quarterly
period.Our indebtedness could adversely affect our financial condition or restrict our future operations.
As
of
December
31,
2015,
we
had
total
indebtedness
of
approximately
$496.8
million
and
available
cash,
cash
equivalents
and
available
for
sale
securities
of$439.4
million.
We
chose
to
issue
our
PhaRMA
Notes
and
2022
Notes
based
on
the
additional
strategic
optionality
that
they
create
for
us,
and
the
limitedrestrictions
that
these
debt
securities
place
on
our
ability
to
run
our
business
compared
to
other
potential
available
financing
transactions.
However,
ourindebtedness,
combined
with
our
other43 Table
of
Contentsfinancial
obligations
and
contractual
commitments,
could
have
other
important
consequences
on
our
business,
including:•limiting
our
ability
to
obtain
additional
financing
to
fund
future
working
capital,
capital
expenditures
or
other
general
corporate
purposes,
includingproduct
development,
commercialization
efforts,
research
and
development
activities,
strategic
arrangements,
acquisitions
and
refinancing
of
ouroutstanding
debt;
•requiring
a
substantial
portion
of
our
cash
flow
to
be
dedicated
to
debt
service
payments
instead
of
other
purposes,
thereby
reducing
the
amount
ofcash
flow
available
for
working
capital,
capital
expenditures,
corporate
transactions
and
other
general
corporate
purposes;
•increasing
our
vulnerability
to
adverse
changes
in
general
economic,
industry
and
competitive
conditions;
•limiting
our
flexibility
in
planning
for
and
reacting
to
changes
in
the
industry
in
which
we
compete;
•placing
us
at
a
disadvantage
compared
to
other,
less
leveraged
competitors
or
competitors
with
comparable
debt
at
more
favorable
interest
rates;
and•increasing
our
cost
of
borrowing.If
we
do
not
generate
sufficient
cash
flow
from
operations
or
if
future
borrowings
are
not
available
to
us
in
an
amount
sufficient
to
pay
our
indebtedness,
includingpayments
of
principal
when
due
on
our
outstanding
indebtedness
or,
in
the
case
of
our
2022
Notes,
in
connection
with
a
transaction
involving
us
that
constitutes
afundamental
change
under
the
indenture
governing
the
2022
Notes,
or
to
fund
our
liquidity
needs,
we
may
be
forced
to
refinance
all
or
a
portion
of
ourindebtedness
on
or
before
the
maturity
dates
thereof,
sell
assets,
reduce
or
delay
currently
planned
activities
or
curtail
operations,
seek
to
raise
additional
capital
ortake
other
actions.
We
may
not
be
able
to
execute
any
of
these
actions
on
commercially
reasonable
terms
or
at
all.
This,
together
with
any
of
the
factors
describedabove,
could
materially
and
adversely
affect
our
business,
financial
condition
and
results
of
operations.
In
addition,
while
our
2022
Notes
do
not
include
covenants
restricting
the
operation
of
our
business
except
in
certain
limited
circumstances,
in
the
event
of
adefault
under
the
2022
Notes,
the
noteholders
or
the
trustee
under
the
indenture
governing
the
2022
Notes
may
accelerate
our
payment
obligations
under
the
2022Notes,
which
could
have
a
material
adverse
effect
on
our
business,
financial
condition
and
results
of
operations.
We
are
also
required
to
offer
to
repurchase
the2022
Notes
upon
the
occurrence
of
a
fundamental
change,
which
could
include,
among
other
things,
any
acquisition
of
our
company
(other
than
an
acquisition
inwhich
at
least
90%
of
the
consideration
is
common
stock
listed
on
The
NASDAQ
Global
or
Global
Select
Market
or
The
New
York
Stock
Exchange),
subject
tothe
terms
of
the
2022
Notes
indenture.
The
repurchase
price
must
be
paid
in
cash,
and
this
obligation
may
have
the
effect
of
discouraging,
delaying
or
preventingan
acquisition
of
our
company
that
would
otherwise
be
beneficial
to
our
security
holders.
Further,
although
we
are
not
as
restricted
under
our
PhaRMA
Notes
as
we
might
have
been
under
a
more
traditional
secured
credit
facility
provided
by
a
bank,the
indenture
governing
our
PhaRMA
Notes
contains
a
number
of
restrictive
covenants
that
impose
restrictions
on
us
and
may
limit
our
ability
to
engage
in
certainacts,
including
restrictions
on
our
ability
to:•amend
our
collaboration
agreement
with
Allergan
for
North
America
in
a
way
that
would
have
a
material
adverse
effect
on
the
noteholders'
rights,or
terminate
this
collaboration
agreement
with
respect
to
the
U.S.;
•transfer
our
rights
to
commercialize
the
product
under
our
collaboration
agreement
with
Allergan
for
North
America;
and44 Table
of
Contents•incur
certain
liens.Upon
a
breach
of
the
covenants
under
our
PhaRMA
Notes
indenture,
or
if
certain
other
defaults
thereunder
occur,
the
holders
of
our
PhaRMA
Notes
could
elect
todeclare
all
amounts
outstanding
under
our
PhaRMA
Notes
to
be
immediately
due
and
payable
and
we
cannot
be
certain
that
we
will
have
sufficient
assets
to
repaythem.
If
we
are
unable
to
repay
those
amounts,
the
holders
of
our
PhaRMA
Notes
could
proceed
against
the
collateral
granted
to
them
to
secure
the
debt
securitiesand
we
could
be
forced
into
bankruptcy
or
liquidation.
If
we
breach
our
covenants
under
our
PhaRMA
Notes
indenture
and
seek
a
waiver,
we
may
not
be
able
toobtain
a
waiver
from
the
required
noteholders.
If
this
occurs,
we
would
be
in
default
under
our
PhaRMA
Notes
indenture
and
the
holders
of
our
PhaRMA
Notescould
exercise
their
rights,
as
described
above.
Each
of
our
2022
Notes
and
the
PhaRMA
Notes
also
include
cross-default
features
providing
that
a
default
under
the
indenture
governing
either
the
2022Notes
or
the
PhaRMA
Notes
would
likely
result
in
a
default
under
the
indenture
governing
the
other
indebtedness.
In
the
event
of
such
default,
the
trustee
ornoteholders
could
elect
to
declare
all
amounts
outstanding
to
be
immediately
due
and
payable
under
the
applicable
indenture,
which
could
have
a
material
adverseeffect
on
our
business,
financial
condition
and
results
of
operations.Convertible note hedge and warrant transactions entered into in connection with our 2022 Notes may affect the value of our Class A common stock.
In
connection
with
our
2022
Notes,
we
entered
into
Convertible
Note
Hedges
and
separate
Note
Hedge
Warrant
transactions
with
certain
financial
institutions.These
transactions
are
expected
generally
to
reduce
the
potential
dilution
upon
any
conversion
of
our
2022
Notes
or
offset
any
cash
payments
we
are
required
tomake
in
excess
of
the
principal
amount
of
converted
2022
Notes,
as
the
case
may
be.
In
connection
with
these
transactions,
the
financial
institutions
purchased
our
Class
A
common
stock
in
secondary
market
transactions
and
entered
into
variousover-the-counter
derivative
transactions
with
respect
to
our
Class
A
common
stock.
These
entities
or
their
affiliates
are
likely
to
modify
their
hedge
positions
fromtime
to
time
prior
to
conversion
or
maturity
of
the
2022
Notes
by
purchasing
and
selling
shares
of
our
Class
A
common
stock
or
other
instruments
they
may
wish
touse
in
connection
with
such
hedging.
Any
of
these
activities
could
adversely
affect
the
value
of
our
Class
A
common
stock
and,
as
a
result,
the
number
of
sharesand
the
value
of
the
Class
A
common
stock
noteholders
will
receive
upon
conversion
of
the
2022
Notes.
In
addition,
under
certain
circumstances
the
counterpartieshave
the
right
to
terminate
the
Convertible
Note
Hedges
and
settle
the
Note
Hedge
Warrants
at
fair
value
(as
defined
in
the
applicable
confirmations),
which
mayresult
in
us
not
receiving
all
or
any
portion
of
the
anticipated
benefit
of
the
Convertible
Note
Hedges.
If
the
price
of
our
Class
A
common
stock
increases
such
thatthe
hedge
transactions
settle
in
our
favor,
we
could
also
be
exposed
to
credit
risk
related
to
the
counterparties
to
the
Convertible
Note
Hedges,
which
would
limit
oreliminate
the
benefit
of
such
transactions
to
us.Our quarterly and annual operating results may fluctuate significantly.
We
expect
our
operating
results
to
be
subject
to
frequent
fluctuations.
Our
net
loss
and
other
operating
results
will
be
affected
by
numerous
factors,
including:•the
level
of
underlying
demand
for
linaclotide
in
the
U.S.,
the
E.U.
and
the
other
countries
where
it
is
approved,
and
wholesalers'
buying
patterns;
•the
costs
associated
with
commercializing
LINZESS
in
the
U.S.;
•the
achievement
and
timing
of
milestone
payments
under
our
existing
collaboration
and
license
agreements;45 Table
of
Contents•our
execution
of
any
collaboration,
partnership,
licensing
or
other
strategic
arrangements,
and
the
timing
of
payments
we
may
make
or
receive
underthese
arrangements;
•any
excess
or
obsolete
inventory
or
asset
impairments
and
associated
write-downs;
•variations
in
the
level
of
expenses
related
to
our
development
programs;
•addition
or
termination
of
clinical
trials;
•regulatory
developments
affecting
linaclotide
or
our
product
candidates;
and
•any
material
lawsuit
in
which
we
may
become
involved.
If
our
operating
results
fall
below
the
expectations
of
investors
or
securities
analysts,
the
price
of
our
Class
A
common
stock
could
decline
substantially.Furthermore,
any
quarterly
or
annual
fluctuations
in
our
operating
results
may,
in
turn,
cause
the
price
of
our
stock
to
fluctuate
substantially.Our ability to use net operating loss and tax credit carryforwards and certain built-in losses to reduce future tax payments is limited by provisions of theInternal Revenue Code, and it is possible that our net operating loss and tax credit carryforwards may expire before we generate sufficient taxable income touse such carryforwards, or that certain transactions or a combination of certain transactions may result in material additional limitations on our ability to useour net operating loss and tax credit carryforwards.
We
have
incurred
significant
net
losses
since
our
inception
and
cannot
guarantee
when,
if
ever,
we
will
become
profitable.
To
the
extent
that
we
continue
togenerate
federal
and
state
taxable
losses,
unused
net
operating
loss
and
tax
credit
carryforwards
will
carry
forward
to
offset
future
taxable
income,
if
any,
until
suchunused
carryforwards
expire.
Sections
382
and
383
of
the
Internal
Revenue
Code
of
1986,
as
amended,
contain
rules
that
limit
the
ability
of
a
company
thatundergoes
an
ownership
change,
which
is
generally
any
change
in
ownership
of
more
than
50%
of
its
stock
over
a
three-year
period,
to
utilize
its
net
operating
lossand
tax
credit
carryforwards
and
certain
built-in
losses
recognized
in
years
after
the
ownership
change.
These
rules
generally
operate
by
focusing
on
ownershipchanges
involving
stockholders
owning
directly
or
indirectly
5%
or
more
of
the
stock
of
a
company
and
any
change
in
ownership
arising
from
a
new
issuance
ofstock
by
the
company.
Generally,
if
an
ownership
change
occurs,
the
yearly
taxable
income
limitation
on
the
use
of
net
operating
loss
and
tax
credit
carryforwardsand
certain
built-in
losses
is
equal
to
the
product
of
the
applicable
long
term
tax
exempt
rate
and
the
value
of
the
company's
stock
immediately
before
theownership
change.
If
we
do
not
generate
sufficient
taxable
income
prior
to
the
expiration
of
the
applicable
carryforwards
or
if
the
carryforwards
are
subject
to
the
limitationsdescribed
above,
we
may
be
unable
to
offset
our
taxable
income
with
losses,
or
our
tax
liability
with
credits,
before
such
losses
and
credits
expire
and
thereforewould
incur
larger
federal
or
state
income
tax
liability.
We
have
completed
several
financings
since
our
inception
which
may
have
resulted
in
a
change
in
control
asdefined
by
Section
382,
or
could
result
in
a
change
in
control
in
the
future.Risks
Relating
to
Securities
Markets
and
Investment
in
Our
StockAnti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control which could negatively impact the marketprice of our Class A common stock.
Provisions
in
our
certificate
of
incorporation
and
bylaws
may
have
the
effect
of
delaying
or
preventing
a
change
of
control.
These
provisions
include
thefollowing:•Our
certificate
of
incorporation
provides
for
a
dual
class
common
stock
structure.
As
a
result
of
this
structure,
holders
of
our
Class
B
common
stockhave
significant
influence
over
certain
matters
requiring
stockholder
approval,
including
a
merger
involving
Ironwood,
a
sale
of
substantially
allIronwood
assets
and
a
dissolution
or
liquidation
of
Ironwood.
This
concentrated46 Table
of
Contentscontrol
could
discourage
others
from
initiating
a
change
of
control
transaction
that
other
stockholders
may
view
as
beneficial.•Our
board
of
directors
is
divided
into
three
classes
serving
staggered
three-year
terms,
such
that
not
all
members
of
the
board
are
elected
at
onetime.
This
staggered
board
structure
prevents
stockholders
from
replacing
the
entire
board
at
a
single
stockholders'
meeting.
•Our
board
of
directors
has
the
right
to
elect
directors
to
fill
a
vacancy
created
by
the
expansion
of
the
board
of
directors
or
the
resignation,
death
orremoval
of
a
director,
which
prevents
stockholders
from
being
able
to
fill
vacancies
on
our
board
of
directors.
•Our
board
of
directors
may
issue,
without
stockholder
approval,
shares
of
preferred
stock.
The
ability
to
authorize
preferred
stock
makes
it
possiblefor
our
board
of
directors
to
issue
preferred
stock
with
voting
or
other
rights
or
preferences
that
could
impede
the
success
of
any
attempt
to
acquireus.
•Stockholders
must
provide
advance
notice
to
nominate
individuals
for
election
to
the
board
of
directors
or
to
propose
matters
that
can
be
acted
uponat
a
stockholders'
meeting.
Furthermore,
stockholders
may
only
remove
a
member
of
our
board
of
directors
for
cause.
These
provisions
maydiscourage
or
deter
a
potential
acquirer
from
conducting
a
solicitation
of
proxies
to
elect
such
acquirer's
own
slate
of
directors
or
otherwiseattempting
to
obtain
control
of
our
company.
•Our
stockholders
may
not
act
by
written
consent.
As
a
result,
a
holder,
or
holders,
controlling
a
majority
of
our
capital
stock
are
not
able
to
takecertain
actions
outside
of
a
stockholders'
meeting.
•Special
meetings
of
stockholders
may
be
called
only
by
the
chairman
of
our
board
of
directors,
our
chief
executive
officer
or
a
majority
of
our
boardof
directors.
As
a
result,
a
holder,
or
holders,
controlling
a
majority
of
our
capital
stock
are
not
able
to
call
a
special
meeting.
•A
majority
of
the
outstanding
shares
of
Class
B
common
stock
are
required
to
amend
our
certificate
of
incorporation
and
a
super-majority
(80%)
ofthe
outstanding
shares
of
common
stock
are
required
to
amend
our
bylaws,
which
make
it
more
difficult
to
change
the
provisions
described
above.
In
addition,
we
are
governed
by
the
provisions
of
Section
203
of
the
Delaware
General
Corporation
Law,
which
may
prohibit
certain
business
combinationswith
stockholders
owning
15%
or
more
of
our
outstanding
voting
stock.
These
and
other
provisions
in
our
certificate
of
incorporation
and
our
bylaws
and
in
theDelaware
General
Corporation
Law
could
make
it
more
difficult
for
stockholders
or
potential
acquirers
to
obtain
control
of
our
board
of
directors
or
initiate
actionsthat
are
opposed
by
the
then-current
board
of
directors.The concentration of voting control on certain corporate matters with our pre-IPO stockholders will limit the ability of the holders of our Class A commonstock to influence such matters.
Because
of
our
dual
class
common
stock
structure,
the
holders
of
our
Class
B
common
stock,
who
consist
of
our
pre-IPO
investors
(and
their
affiliates),founders,
directors,
executives
and
certain
of
our
employees,
are
able
to
control
certain
corporate
matters
listed
below
if
any
such
matter
is
submitted
to
ourstockholders
for
approval
even
though
such
stockholders
own
less
than
50%
of
the
outstanding
shares
of
our
common
stock.
As
of
December
31,
2015,
there
were127,371,478
and
15,870,356
shares
of
our
Class
A
common
stock
and
Class
B
common
stock
issued
and
outstanding,
respectively,
and
an
aggregate
of
16,012,732and
4,554,128
outstanding
stock
options
(vested
and
unvested)
and
900,051
and
zero
unvested
restricted
stock
units
for
shares
of
our
Class
A
common
stock
andClass
B
common
stock,
respectively.
As
of
December
31,
2015,
the
holders
of
our
Class
A
common
stock
own
approximately
89%
and
the
holders
of
our
Class
Bcommon
stock
own
approximately
11%
of
the47 Table
of
Contentsoutstanding
shares
of
Class
A
common
stock
and
Class
B
common
stock,
combined.
However,
because
of
our
dual
class
common
stock
structure
these
holders
ofour
Class
A
common
stock
have
approximately
45%
and
holders
of
our
Class
B
common
stock
have
approximately
55%
of
the
total
votes
on
each
of
the
mattersidentified
in
the
list
below.
This
concentrated
control
of
our
Class
B
common
stockholders
limits
the
ability
of
the
Class
A
common
stockholders
to
influence
thosecorporate
matters
and,
as
a
result,
we
may
take
actions
that
many
of
our
stockholders
do
not
view
as
beneficial,
which
could
adversely
affect
the
market
price
of
ourClass
A
common
stock.
Each
share
of
Class
A
common
stock
and
each
share
of
Class
B
common
stock
has
one
vote
per
share
on
all
matters
except
for
the
following
matters,
forwhich
each
share
of
our
Class
B
common
stock
has
ten
votes
per
share
and
each
share
of
our
Class
A
common
stock
has
one
vote
per
share:•adoption
of
a
merger
or
consolidation
agreement
involving
Ironwood;
•a
sale
of
all
or
substantially
all
of
Ironwood's
assets;
•a
dissolution
or
liquidation
of
Ironwood;
and
•every
matter,
if
and
when
any
individual,
entity
or
"group"
(as
that
term
is
used
in
Regulation
13D
of
the
Exchange
Act)
has,
or
has
publiclydisclosed
(through
a
press
release
or
a
filing
with
the
SEC)
an
intent
to
have,
beneficial
ownership
of
30%
or
more
of
the
number
of
outstandingshares
of
Class
A
common
stock
and
Class
B
common
stock,
combined.If we identify a material weakness in our internal control over financial reporting, it could have an adverse effect on our business and financial results and ourability to meet our reporting obligations could be negatively affected, each of which could negatively affect the trading price of our Class A common stock.
A
material
weakness
is
a
deficiency,
or
a
combination
of
deficiencies,
in
internal
control
over
financial
reporting,
such
that
there
is
a
reasonable
possibilitythat
a
material
misstatement
of
our
annual
or
interim
financial
statements
will
not
be
prevented
or
detected
on
a
timely
basis.
Accordingly,
a
material
weaknessincreases
the
risk
that
the
financial
information
we
report
contains
material
errors.
We
regularly
review
and
update
our
internal
controls,
disclosure
controls
and
procedures,
and
corporate
governance
policies.
In
addition,
we
are
requiredunder
the
Sarbanes-Oxley
Act
of
2002
to
report
annually
on
our
internal
control
over
financial
reporting.
Our
system
of
internal
controls,
however
well
designedand
operated,
is
based
in
part
on
certain
assumptions
and
includes
elements
that
rely
on
information
from
third
parties,
including
our
collaboration
partners.
Oursystem
can
provide
only
reasonable,
not
absolute,
assurances
that
the
objectives
of
the
system
are
met.
If
we,
or
our
independent
registered
public
accounting
firm,determine
that
our
internal
controls
over
financial
reporting
are
not
effective,
or
we
discover
areas
that
need
improvement
in
the
future,
these
shortcomings
couldhave
an
adverse
effect
on
our
business
and
financial
results,
and
the
price
of
our
Class
A
common
stock
could
be
negatively
affected.
Further,
we
are
dependent
on
our
collaboration
partners
for
information
related
to
our
results
of
operations.
Our
net
profit
or
net
loss
generated
from
the
salesof
LINZESS
in
the
U.S.
is
partially
determined
based
on
amounts
provided
by
Allergan
and
involves
the
use
of
estimates
and
judgments,
which
could
be
modifiedin
the
future.
We
are
also
highly
dependent
on
our
partners
for
timely
and
accurate
information
regarding
any
revenues
realized
from
sales
of
linaclotide
in
theirrespective
territories,
and
in
the
case
of
Allergan
for
the
U.S.
and
AstraZeneca
for
China,
Hong
Kong
and
Macau,
the
costs
incurred
in
developing
andcommercializing
it
in
order
to
accurately
report
our
results
of
operations.
Our
results
of
operations
are
also
dependent
on
the
timeliness
and
accuracy
of
informationfrom
any
other
licensing,
collaboration
or
other
partners
we
may
have,
as
well
as
our
and
our
partners'
use
of
estimates
and
judgments.
If
we
do
not
receive
timelyand
accurate
information
or
if
estimated
activity
levels
associated
with
the
relevant
collaboration
at
a
given
point
in
time
are
incorrect,
whether
the
result
of
amaterial
weakness
or
not,
we
could
be
required
to
record
adjustments48 Table
of
Contentsin
future
periods.
Such
adjustments,
if
significant,
could
have
an
adverse
effect
on
our
financial
results,
which
could
lead
to
a
decline
in
our
Class
A
common
stockprice.
If
we
cannot
conclude
that
we
have
effective
internal
control
over
our
financial
reporting,
or
if
our
independent
registered
public
accounting
firm
is
unable
toprovide
an
unqualified
opinion
regarding
the
effectiveness
of
our
internal
control
over
financial
reporting,
investors
could
lose
confidence
in
the
reliability
of
ourfinancial
statements,
which
could
lead
to
a
decline
in
our
stock
price.
Failure
to
comply
with
reporting
requirements
could
also
subject
us
to
sanctions
and/orinvestigations
by
the
SEC,
The
NASDAQ
Stock
Market
or
other
regulatory
authorities.We expect that the price of our Class A common stock will fluctuate substantially.
The
market
price
of
our
Class
A
common
stock
may
be
highly
volatile
due
to
many
factors,
including:•the
commercial
performance
of
linaclotide
in
the
U.S.,
the
E.U.
and
the
other
countries
where
it
is
approved;
•any
third-party
coverage
and
reimbursement
policies
for
linaclotide;
•market
conditions
in
the
pharmaceutical
and
biotechnology
sectors;
•developments,
litigation
or
public
concern
about
the
safety
of
linaclotide
or
our
potential
products;
•announcements
of
the
introduction
of
new
products
by
us
or
our
competitors;
•announcements
concerning
product
development
results,
including
clinical
trial
results,
or
intellectual
property
rights
of
us
or
others;
•actual
and
anticipated
fluctuations
in
our
quarterly
and
annual
operating
results;
•deviations
in
our
operating
results
from
any
guidance
we
may
provide
or
the
estimates
of
securities
analysts;
•sales
of
additional
shares
of
our
common
stock
or
sales
of
securities
convertible
into
common
stock
or
the
perception
that
these
sales
might
occur;
•additions
or
departures
of
key
personnel;
•developments
concerning
current
or
future
collaboration,
partnership,
licensing
or
other
strategic
arrangements;
and
•discussion
of
us
or
our
stock
price
in
the
financial
or
scientific
press
or
in
online
investor
communities.
The
realization
of
any
of
the
risks
described
in
these
"Risk
Factors"
could
have
a
dramatic
and
material
adverse
impact
on
the
market
price
of
our
Class
Acommon
stock.
In
addition,
class
action
litigation
has
often
been
instituted
against
companies
whose
securities
have
experienced
periods
of
volatility.
Any
suchlitigation
brought
against
us
could
result
in
substantial
costs
and
a
diversion
of
management
attention,
which
could
hurt
our
business,
operating
results
and
financialcondition.Item
1B.
Unresolved Staff Comments
None.49 Table
of
ContentsItem
2.
Properties
Our
corporate
headquarters
and
operations
are
located
in
Cambridge,
Massachusetts,
where,
as
of
December
31,
2015,
we
occupy
approximately
205,000square
feet
of
office
and
laboratory
space.
We
lease
approximately
312,000
square
feet
of
office
and
laboratory
space
at
our
Cambridge,
Massachusetts
facilityunder
our
lease
expiring
in
January
2018.
In
2014,
we
began
subleasing
approximately
107,000
square
feet
of
our
total
leased
space
to
third
parties
under
subleasesexpiring
in
2016
and
2018.
We
believe
that
our
facilities
are
suitable
and
adequate
for
our
needs
for
the
foreseeable
future.Item
3.
Legal Proceedings
None.Item
4.
Mine Safety Disclosures
Not
applicable.50 Table
of
ContentsPART
II
Item
5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Shares
of
our
Class
A
common
stock
are
traded
on
the
NASDAQ
Global
Select
Market
under
the
symbol
"IRWD."
Our
shares
have
been
publicly
traded
sinceFebruary
3,
2010.
The
following
table
furnishes
the
high
and
low
sales
prices
for
our
Class
A
common
stock
as
reported
by
The
NASDAQ
Global
Select
Marketfor
each
quarter
in
the
years
ended
December
31,
2015
and
2014:
As
of
February
12,
2016,
there
were
51
stockholders
of
record
of
our
Class
A
common
stock
and
78
stockholders
of
record
of
our
Class
B
common
stock.
Thenumber
of
record
holders
is
based
upon
the
actual
number
of
holders
registered
on
the
books
of
the
company
at
such
date
and
does
not
include
holders
of
shares
in"street
names"
or
persons,
partnerships,
associations,
corporations
or
other
entities
identified
in
security
position
listings
maintained
by
depositories.
Subject
to
preferences
that
may
apply
to
any
shares
of
preferred
stock
outstanding
at
the
time,
the
holders
of
Class
A
common
stock
and
Class
B
commonstock
are
entitled
to
share
equally
in
any
dividends
that
our
board
of
directors
may
determine
to
issue
from
time
to
time.
In
the
event
a
dividend
is
paid
in
the
formof
shares
of
common
stock
or
rights
to
acquire
shares
of
common
stock,
the
holders
of
Class
A
common
stock
will
receive
Class
A
common
stock,
or
rights
toacquire
Class
A
common
stock,
as
the
case
may
be,
and
the
holders
of
Class
B
common
stock
will
receive
Class
B
common
stock,
or
rights
to
acquire
Class
Bcommon
stock,
as
the
case
may
be.
We
have
never
declared
or
paid
any
cash
dividends
on
our
capital
stock,
and
we
do
not
currently
anticipate
declaring
or
paying
cash
dividends
on
our
capitalstock
in
the
foreseeable
future.
We
currently
intend
to
retain
all
of
our
future
earnings,
if
any,
to
finance
operations.
Any
future
determination
relating
to
ourdividend
policy
will
be
made
at
the
discretion
of
our
board
of
directors
and
will
depend
on
a
number
of
factors,
including
future
earnings,
capital
requirements,financial
conditions,
future
prospects,
contractual
restrictions
and
covenants
and
other
factors
that
our
board
of
directors
may
deem
relevant.
The
information
required
to
be
disclosed
by
Item
201(d)
of
Regulation
S-K,
"Securities
Authorized
for
Issuance
Under
Equity
Compensation
Plans,"
isreferenced
under
Item
12
of
Part
III
of
this
Annual
Report
on
Form
10-K
and
incorporated
herein.Corporate Performance Graph
The
following
performance
graph
and
related
information
shall
not
be
deemed
to
be
"soliciting
material"
or
to
be
"filed"
with
the
SEC,
nor
shall
suchinformation
be
incorporated
by
reference
into
any
future
filing
under
the
Securities
Act
of
1933,
as
amended,
or
the
Securities
Act,
except
to
the
extent
that
wespecifically
incorporate
it
by
reference
into
such
filing.
The
following
graph
compares
the
performance
of
our
Class
A
common
stock
to
the
NASDAQ
Benchmark
TR
Index
(U.S.)
and
to
the
NASDAQPharmaceutical
Benchmark
TR
Index
(U.S.)
from
February
3,
2010
(the
first
date
that
shares
of
our
Class
A
common
stock
were
publicly
traded)
throughDecember
31,
2015.
The
comparison
assumes
$100
was
invested
after
the
market
closed
on
February
3,51
Class
A
Common
Stock
2015
2014
High
Low
High
Low
First
Quarter
$17.11
$14.18
$15.47
$11.22
Second
Quarter
$16.17
$11.57
$15.83
$9.01
Third
Quarter
$12.36
$9.77
$15.95
$11.97
Fourth
Quarter
$12.62
$10.05
$15.62
$11.65
Table
of
Contents2010
in
our
Class
A
common
stock
and
in
each
of
the
presented
indices,
and
it
assumes
reinvestment
of
dividends,
if
any.COMPARISON
OF
QUARTERLY
CUMULATIVE
TOTAL
RETURN
Among
The
NASDAQ
Benchmark
TR
Index
(U.S.),
the
NASDAQ
Pharmaceutical
Benchmark
TR
Index
(U.S.)
and
Ironwood
Pharmaceuticals,
Inc.
Item
6.
Selected Consolidated Financial Data
You
should
read
the
following
selected
financial
data
together
with
our
consolidated
financial
statements
and
the
related
notes
appearing
elsewhere
in
thisAnnual
Report
on
Form
10-K.
We
have
derived
the
consolidated
statements
of
operations
data
for
the
years
ended
December
31,
2015,
2014
and
2013
and
theconsolidated
balance
sheet
data
as
of
December
31,
2015
and
2014
from
our
audited
financial
statements
included
elsewhere
in
this
Annual
Report
on
Form
10-K.We
have
derived
the
consolidated
statements
of
operations
data
for
the
years
ended
December
31,
2012
and
2011
and
the
consolidated
balance
sheet
data
as
ofDecember
31,
2013,
2012
and
2011
from
our
audited
financial52 Table
of
Contentsstatements
not
included
in
this
Annual
Report
on
Form
10-K.
Our
historical
results
for
any
prior
period
are
not
necessarily
indicative
of
results
to
be
expected
inany
future
period.53
Years
Ended
December
31,
2015
2014
2013
2012
2011
(in
thousands,
except
per
share
data)
Consolidated
Statement
of
Operations
Data:
Collaborative
arrangements
revenue
(1)
$149,555
$76,436
$22,881
$150,245
$65,871
Cost
and
expenses:
Cost
of
revenue
12
5,291
7,203
965
—
Write-down
of
inventory
to
net
realizable
value
and
losson
non-cancellable
purchase
commitments
(2)
17,638
20,292
—
—
—
Research
and
development
(3)
108,746
101,890
102,378
113,474
86,093
Selling,
general
and
administrative
(3)
125,247
118,333
123,228
92,538
45,920
Collaboration
expense
(4)
—
—
42,074
16,030
—
Total
cost
and
expenses
251,643
245,806
274,883
223,007
132,013
Loss
from
operations
(102,088)
(169,370)
(252,002)
(72,762)
(66,142)Other
(expense)
income:
Interest
expense
(31,096)
(21,166)
(21,002)
(59)
(63)Interest
and
investment
income
443
257
192
197
456
Loss
on
derivatives
(5)
(9,928)
—
—
—
—
Other
income
—
661
—
—
900
Other
(expense)
income,
net
(40,581)
(20,248)
(20,810)
138
1,293
Net
loss
before
income
tax
expense
(142,669)
(189,618)
(272,812)
(72,624)
(64,849)Income
tax
expense
—
—
—
—
3
Net
loss
$(142,669)$(189,618)$(272,812)$(72,624)$(64,852)Net
loss
per
share—basic
and
diluted
$(1.00)$(1.39)$(2.35)$(0.68)$(0.65)Weighted
average
number
of
common
shares
used
in
netloss
per
share—basic
and
diluted:
142,155
136,811
115,852
106,403
99,875
(1)Collaborative
arrangements
revenue
for
the
year
ended
December
31,
2014
includes
approximately
$10.2
million
related
to
the
receipt
of
amilestone
payment
under
our
license
agreement
with
Astellas
for
the
enrollment
of
the
first
study
subject
in
a
Phase
III
study
for
linaclotidein
Japan,
which
was
achieved
in
November
2014,
and
also
includes
approximately
$1.9
million
in
payments
from
Almirall
related
to
theachievement
of
two
commercial
milestones
under
the
license
agreement
with
Almirall.
Collaborative
arrangements
revenue
for
the
year
ended
December
31,
2013
includes
approximately
$1.9
million
in
payments
from
Almirallrelated
to
the
achievement
of
two
milestones
under
the
license
agreement
with
Almirall.
Collaborative
arrangements
revenue
for
the
year
ended
December
31,
2012
includes
an
$85.0
million
milestone
payment
received
fromAllergan
under
the
collaboration
agreement
for
North
America
for
the
achievement
of
two
development
milestones
upon
the
FDA'sapproval
of
the
linaclotide
NDA
for
both
IBS-C
and
CIC.
Collaborative
arrangements
revenue
for
the
year
ended
December
31,
2011
includes
a
$20.0
million
milestone
payment
received
fromAllergan
under
the
collaboration
agreement
for Table
of
Contents
54North
America
for
the
achievement
of
two
development
milestones
upon
the
FDA's
acceptance
of
the
linaclotide
NDA
for
both
IBS-C
andCIC.(2)During
the
year
ended
December
31,
2015,
we
recorded
expenses
of
approximately
$17.6
million
for
the
write-down
of
inventory
and
anaccrual
for
excess
non-cancelable
inventory
purchase
commitments
related
to
linaclotide
API.
These
charges
primarily
related
to
areduction
in
the
near
term
demand
forecast
for
CONSTELLA
in
the
European
territory
by
Almirall,
our
former
European
partner;
recentregulatory
changes
made
by
the
China
Food
and
Drug
Administration
to
the
marketing
approval
process
in
China;
and
the
amendment
tothe
license
agreement
with
Allergan
pertaining
to
the
development
and
commercialization
of
linaclotide
for
Europe
executed
in
October2015.
Pursuant
to
the
terms
of
the
amendment,
Allergan
assumed
responsibility
for
the
manufacturing
of
linaclotide
API
for
Europe,
as
wellas
the
associated
costs,
which
resulted
in
accruing
for
a
loss
on
non-cancelable
inventory
purchase
commitments
under
one
of
our
APIsupply
agreements
covering
the
commercial
supply
of
linaclotide
API
for
the
European
market.
During
the
year
ended
December
31,
2014,
we
recorded
approximately
$20.3
million
as
a
write-down
of
inventory
to
an
estimated
netrealizable
value
of
approximately
$5.0
million.
This
write-down
was
primarily
attributable
to
Almirall's
reduced
inventory
demandforecasts
for
the
European
territory,
mainly
due
to
the
suspension
of
commercialization
of
CONSTELLA
in
Germany
and
a
challengingcommercial
environment
throughout
Europe.
These
charges
are
more
fully
described
in
Note
7,
Inventory
,
to
our
consolidated
financial
statements
appearing
elsewhere
in
this
AnnualReport
on
Form
10-K.(3)During
the
year
ended
December
31,
2014,
we
recorded
approximately
$4.2
million
of
costs
related
to
a
reduction
in
workforce
in
the
threemonths
ended
March
31,
2014,
including
employee
severance,
benefits
and
related
costs
and
adjustments.
These
costs
are
reflected
in
ourConsolidated
Statement
of
Operations
for
the
year
ended
December
31,
2014
as
approximately
$3.0
million
in
research
and
developmentexpenses
and
approximately
$1.2
million
in
selling,
general
and
administrative
expenses.
(4)Collaboration
expense
for
the
year
ended
December
31,
2011
is
included
in
selling,
general
and
administrative
expense
and
was
notmaterial.
(5)Loss
on
derivatives
consists
of
the
change
in
fair
value
of
our
Convertible
Note
Hedges
and
Note
Hedge
Warrants,
which
are
recorded
asderivative
assets
and
liabilities.
The
Convertible
Note
Hedges
and
the
Note
Hedge
Warrants
are
recorded
at
fair
value
at
each
reportingperiod
and
changes
in
fair
value
are
recorded
in
our
consolidated
statements
of
operations.
The
Convertible
Note
Hedges
and
Note
HedgeWarrants
are
more
fully
described
in
Note
5,
Fair
Value
of
Financial
Instruments
,
and
Note
10,
Notes
Payable
,
to
our
consolidatedfinancial
statements
appearing
elsewhere
in
this
Annual
Report
on
Form
10-K. Table
of
ContentsItem
7.
Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking
Information
The
following
discussion
of
our
financial
condition
and
results
of
operations
should
be
read
in
conjunction
with
our
consolidated
financial
statements
and
thenotes
to
those
financial
statements
appearing
elsewhere
in
this
Annual
Report
on
Form
10-K.
This
discussion
contains
forward-looking
statements
that
involvesignificant
risks
and
uncertainties.
As
a
result
of
many
factors,
such
as
those
set
forth
under
"Risk
Factors"
in
Item
1A
of
this
Annual
Report
on
Form
10-K,
ouractual
results
may
differ
materially
from
those
anticipated
in
these
forward-looking
statements.Overview
We
are
a
commercial
biotechnology
company
leveraging
our
proven
development
and
commercial
capabilities
as
we
seek
to
bring
multiple
medicines
topatients.
We
are
advancing
two
therapeutic
platforms,
which
include
product
opportunities
in
areas
of
large
unmet
need,
including
irritable
bowel
syndrome
withconstipation,
or
IBS-C,
and
chronic
idiopathic
constipation,
or
CIC,
vascular
and
fibrotic
diseases,
and
refractory
gastroesophageal
reflux
disease,
or
GERD.
Our
first
and
to-date
only
commercial
product,
linaclotide,
is
available
to
adult
men
and
women
suffering
from
IBS-C
or
CIC
in
the
United
States,
or
the
U.S.,under
the
trademarked
name
LINZESS®,
and
is
available
to
adult
men
and
women
suffering
from
IBS-C
in
certain
European55
Years
Ended
December
31,
2015
2014
2013
2012
2011
(in
thousands)
Consolidated
Balance
Sheet
Data:
Cash,
cash
equivalents
and
available-for-sale
securities
$439,394
$248,334
$197,602
$168,228
$164,016
Working
capital
(excluding
deferred
revenue)
(1)
430,931
234,957
191,636
132,883
138,724
Total
assets
(1)
619,121
329,322
273,292
229,907
208,977
Deferred
revenue,
including
current
portion
8,989
16,180
16,490
21,405
57,421
Debt
financing
and
convertible
notes,
including
currentportion
(1)
378,548
169,405
169,002
—
—
Capital
lease
obligations,
including
current
portion
2,937
3,723
4,273
569
655
Total
liabilities
(1)
523,996
240,770
235,067
85,855
99,121
Total
stockholders'
equity
95,125
88,552
38,225
144,052
109,856
(1)In
April
2015,
the
Financial
Accounting
Standards
Board
issued
Accounting
Standards
Update
No.
2015-03,
Simplifying
the
Presentationof
Debt
Issuance
Costs
,
or
ASU
2015-03.
ASU
2015-03
requires
debt
issuance
costs
to
be
presented
in
an
entity's
balance
sheet
as
a
directdeduction
from
the
associated
debt
liability.
We
elected
early
adoption
of
ASU
2015-03
in
the
three
months
ended
June
30,
2015,
which
resulted
in
a
balance
sheet
reclassification
ofissuance
costs
in
connection
with
our
11%
PhaRMA
Notes
due
2024
of
approximately
$1.4
million
recorded
in
prepaid
expenses
and
othercurrent
assets
and
approximately
$2.8
million
in
other
assets
to
a
reduction
in
PhaRMA
Notes
payable
as
of
December
31,
2014,
andapproximately
$1.5
million
recorded
in
prepaid
expenses
and
other
current
assets
and
approximately
$4.1
million
in
other
assets
to
areduction
in
PhaRMA
Notes
payable
as
of
December
31,
2013.
The
financing
costs
incurred
in
connection
with
the
issuance
of
our
2.25%Convertible
Senior
Notes
due
June
15,
2022,
or
the
2022
Notes,
were
recorded
as
a
reduction
in
the
carrying
value
of
such
debt
inaccordance
with
ASU
2015-03.
ASU
2015-03
is
more
fully
described
in
Note
2,
Summary
of
Significant
Accounting
Policies
,
to
ourconsolidated
financial
statements
appearing
elsewhere
in
this
Annual
Report
on
Form
10-K. Table
of
Contentscountries
under
the
trademarked
name
CONSTELLA®.
We
and
our
U.S.
partner
Allergan
plc
(together
with
its
affiliates),
or
Allergan
(formerly
Actavis
plc),began
commercializing
LINZESS
in
the
U.S.
in
December
2012.
Under
our
collaboration
with
Allergan
for
North
America,
total
net
sales
of
LINZESS
in
the
U.S.,as
recorded
by
Allergan,
are
reduced
by
commercial
costs
incurred
by
each
party,
and
the
resulting
amount
is
shared
equally
between
us
and
Allergan.
Our
former
European
partner,
Almirall,
S.A.,
or
Almirall,
began
commercializing
CONSTELLA
in
Europe
for
the
symptomatic
treatment
of
moderate
tosevere
IBS-C
in
adults
in
the
second
quarter
of
2013.
In
October
2015,
Almirall
transferred
its
exclusive
license
to
develop
and
commercialize
linaclotide
in
Europeto
Allergan,
and
we
and
Allergan
entered
into
an
amendment
to
the
European
license
agreement
to
modify
the
remaining
sales-based
milestones
and
royaltiespayable
to
us
and
to
provide
for
Allergan's
assumption
of
responsibility
for,
and
cost
of,
the
manufacturing
of
linaclotide
active
pharmaceutical
ingredient,
or
API,for
Europe
from
us.
This
amendment,
together
with
the
transfer
of
the
European
license
for
linaclotide
from
Almirall
to
Allergan,
is
more
fully
described
in
Note
4,Collaboration,
License
and
Co-promotion
Agreements,
to
our
consolidated
financial
statements
appearing
elsewhere
in
this
Annual
Report
on
Form
10-K.Currently,
CONSTELLA
is
commercially
available
in
certain
European
countries,
including
the
United
Kingdom,
Italy
and
Spain.
Within
our
gastrointestinal,
or
GI,
platform,
we
and
Allergan
are
exploring
development
opportunities
to
enhance
the
clinical
profile
of
LINZESS
by
seekingto
expand
its
utility
within
IBS-C
and
CIC,
as
well
as
studying
linaclotide
in
additional
indications
and
populations
to
assess
its
potential
to
treat
various
GIconditions.
In
October
2015,
as
part
of
this
strategy,
we
reported
positive
top-line
data
from
a
Phase
III
clinical
trial
in
the
U.S.
with
Allergan
evaluating
a
72
mcgdose
of
linaclotide
in
adult
patients
with
CIC.
We
believe
these
data
support
the
submission
of
a
supplemental
new
drug
application,
or
sNDA,
to
the
FDA
forapproval
to
market
the
72
mcg
dose
of
linaclotide
in
the
U.S.
If
approved,
the
72
mcg
dose
would
provide
a
broader
range
of
treatment
options
to
physicians
andadult
CIC
patients
in
the
U.S.
Linaclotide
is
also
being
developed
and
commercialized
in
other
parts
of
the
world
by
certain
of
our
partners.
We
and
Allergan
are
also
developing
linaclotide
colonic
release,
a
targeted
oral
delivery
formulation
of
linaclotide
designed
to
potentially
improve
abdominalpain
relief
in
adult
IBS-C
patients.
In
addition
to
IBS-C,
we
are
exploring
linaclotide
colonic
release
for
use
in
additional
GI
disorders
where
lower
abdominal
painis
a
predominant
symptom,
including
IBS-mixed,
or
IBS-M,
ulcerative
colitis
and
diverticulitis,
among
others.
We
are
also
advancing
other
GI
development
programs
for
multiple
indications.
For
example,
we
are
investigating
IW-3718,
a
gastric
retentive
formulation
ofa
bile
acid
sequestrant
that
is
being
evaluated
for
the
potential
treatment
of
refractory
GERD.
We
are
also
investigating
IW-9179,
a
guanylate
cyclase
type-C,
orGC-C,
agonist
designed
to
target
upper
GI
conditions,
for
the
treatment
of
gastroparesis
and
functional
dyspepsia.
Within
our
vascular/fibrotic
platform,
we
are
leveraging
our
pharmacological
expertise
in
guanylate
cyclase,
or
GC,
pathways
gained
through
the
discoveryand
development
of
linaclotide
to
advance
development
programs
targeting
soluble
guanylate
cyclase,
or
sGC.
sGC
is
a
validated
mechanism
with
the
potential
forbroad
therapeutic
utility
and
multiple
opportunities
for
product
development
in
vascular
and
fibrotic
diseases,
as
well
as
other
therapeutic
areas.
To
date,
we
haveidentified
two
sGC
development
candidates,
IW-1973
and
IW-1701,
which
have
distinct
pharmacologic
profiles
that
we
believe
may
be
differentiating
and
enableopportunities
in
multiple
indications.56 Table
of
Contents
As
part
of
our
strategy,
we
have
also
established
development
and
commercial
capabilities
that
we
plan
to
leverage
as
we
seek
to
bring
multiple
medicines
topatients.
We
intend
to
play
an
active
role
in
the
development
and
commercialization
of
our
internally
developed
products
in
the
U.S.,
and
to
establish
a
strongglobal
brand
by
out-licensing
commercialization
rights
in
other
territories
to
high-performing
partners.
In
addition
to
the
U.S.
and
Europe,
we
have
entered
intopartnerships
to
develop
and
commercialize
linaclotide
in
other
parts
of
the
world.
In
December
2013
and
February
2014,
linaclotide
was
approved
in
Canada
and
Mexico,
respectively,
as
a
treatment
for
adult
women
and
men
suffering
fromIBS-C
or
CIC.
Allergan
has
exclusive
rights
to
commercialize
linaclotide
in
Canada
as
CONSTELLA
and,
through
a
sublicense
from
Allergan,
Almirall
hadexclusive
rights
to
commercialize
linaclotide
in
Mexico
as
LINZESS.
In
May
2014,
Allergan
began
commercializing
CONSTELLA
in
Canada
and
in
June
2014,Almirall
began
commercializing
LINZESS
in
Mexico.
In
October
2015,
Almirall
and
Allergan
terminated
the
sublicense
arrangement
with
respect
to
Mexico,returning
the
exclusive
rights
to
commercialize
CONSTELLA
in
Mexico
to
Allergan.
CONSTELLA
continues
to
be
available
to
adult
IBS-C
patients
in
Mexico.
Astellas
Pharma
Inc.,
or
Astellas,
our
partner
in
Japan,
is
developing
linaclotide
for
the
treatment
of
patients
with
IBS-C
and
chronic
constipation
in
itsterritory.
In
November
2015,
we
and
Astellas
reported
positive
top-line
data
from
Astellas'
Phase
III
clinical
trial
of
linaclotide
in
adult
patients
with
IBS-C
forJapan.
We
believe
these
data
support
the
submission
of
a
new
drug
application,
or
NDA,
to
the
Ministry
of
Health,
Labor
and
Welfare
for
approval
to
marketlinaclotide
in
Japan.
In
October
2012,
we
entered
into
a
collaboration
agreement
with
AstraZeneca
AB,
or
AstraZeneca,
to
co-develop
and
co-commercializelinaclotide
in
China,
Hong
Kong
and
Macau,
with
AstraZeneca
having
primary
responsibility
for
the
local
operational
execution.
In
December
2015,
we
andAstraZeneca
filed
for
approval
with
the
China
Food
and
Drug
Administration,
or
CFDA,
to
market
linaclotide
in
China.
We
continue
to
assess
alternatives
to
bringlinaclotide
to
IBS-C
and
CIC
sufferers
in
the
parts
of
the
world
outside
of
our
partnered
territories.
In
March
2015,
we
and
Exact
Sciences
Corp,
or
Exact
Sciences,
entered
into
an
agreement
to
co-promote
Cologuard®,
the
first
and
only
FDA-approvednoninvasive
stool
DNA
screening
test
for
colorectal
cancer.
Under
the
terms
of
the
agreement,
our
sales
team
is
promoting
and
educating
health
care
practitionersregarding
Cologuard.
We
are
also
collaborating
on
medical
education
initiatives
to
support
more
in-depth
understanding
of
Cologuard
and
the
importance
ofcolorectal
cancer
screening.
Exact
Sciences
maintains
responsibility
for
all
other
aspects
of
the
commercialization
of
Cologuard
outside
of
the
co-promotion.
Weare
compensated
via
reimbursements
for
sales
detailing,
promotional
support
services
and
medical
education
initiatives.
We
also
earn
royalties
on
the
net
sales
ofCologuard
generated
from
the
healthcare
practitioners
on
whom
we
call
less
the
sales
promotion
reimbursement
to
us.
In
August
2015,
we
and
Allergan
entered
into
an
agreement
for
the
co-promotion
of
VIBERZI™
(eluxadoline)
in
the
U.S.,
Allergan's
treatment
for
adultssuffering
from
IBS
with
diarrhea,
or
IBS-D.
Under
the
terms
of
the
agreement,
our
clinical
sales
specialists
are
detailing
VIBERZI
to
the
approximately
25,000health
care
practitioners
to
whom
they
detail
LINZESS.
Allergan
is
responsible
for
all
costs
and
activities
relating
to
the
commercialization
of
VIBERZI
outside
theco-promotion.
Our
promotional
efforts
are
compensated
based
on
the
volume
of
calls
delivered
by
our
sales
force,
with
the
terms
of
the
agreement
reducing
oreliminating
certain
of
the
unfavorable
adjustments
to
the
share
of
net
profits
stipulated
by
the
linaclotide
collaboration
agreement
with
Allergan
for
North
America,provided
that
we
deliver
a
minimum
number
of
VIBERZI
calls
on
physicians.
We
are
also
compensated
via
reimbursement
for
medical
education
initiatives.57 Table
of
Contents
In
November
2015,
Allergan
and
Pfizer
Inc.
entered
into
a
definitive
agreement
providing
for
the
combination
of
the
two
companies.
Our
collaboration
for
thedevelopment
and
commercialization
of
linaclotide,
as
well
as
our
agreement
to
co-promote
VIBERZI,
remains
in
effect.
In
January
2013,
we
closed
a
private
placement
of
$175.0
million
in
aggregate
principal
amount
of
11%
PhaRMA
Notes
due
2024,
or
the
PhaRMA
Notes.
Asa
result
of
the
debt
offering,
we
received
aggregate
net
proceeds,
after
offering
expenses,
of
approximately
$167.3
million.
During
the
second
quarter
of
2013,
wesold
11,204,948
shares
of
our
Class
A
common
stock
through
a
firm
commitment,
underwritten
public
offering
at
a
price
to
the
public
of
$13.00
per
share.
As
aresult
of
the
offering,
we
received
aggregate
net
proceeds,
after
underwriting
discounts
and
commissions
and
other
offering
expenses,
of
approximately$137.8
million.
In
February
2014,
we
sold
15,784,325
shares
of
our
Class
A
common
stock
through
a
firm
commitment,
underwritten
public
offering
at
a
price
tothe
public
of
$12.75
per
share.
As
a
result
of
this
offering,
we
received
aggregate
net
proceeds,
after
underwriting
discounts
and
commissions
and
other
offeringexpenses,
of
approximately
$190.4
million.
In
June
2015,
we
issued
approximately
$335.7
million
in
aggregate
principal
amount
of
2.25%
Convertible
SeniorNotes
due
2022,
or
the
2022
Notes.
We
received
net
proceeds
of
approximately
$324.0
million
from
the
sale
of
the
2022
Notes,
after
deducting
fees
and
expensesof
approximately
$11.7
million.
The
net
proceeds
from
these
financings
are
being
used
to
support
the
commercialization
of
LINZESS
in
the
U.S.
and
to
fundlinaclotide
and
other
development
opportunities
to
advance
our
strategy
to
grow
a
leading
commercial
biotechnology
company,
in
addition
to
other
generalcorporate
purposes.
We
were
incorporated
in
Delaware
on
January
5,
1998
as
Microbia,
Inc.
On
April
7,
2008,
we
changed
our
name
to
Ironwood
Pharmaceuticals,
Inc.
Wecurrently
operate
in
one
reportable
business
segment—human
therapeutics.
To
date,
we
have
dedicated
substantially
all
of
our
activities
to
the
research,
development
and
commercialization
of
linaclotide,
as
well
as
to
the
research
anddevelopment
of
our
other
product
candidates.
We
have
incurred
significant
operating
losses
since
our
inception
in
1998.
As
of
December
31,
2015,
we
had
anaccumulated
deficit
of
approximately
$1.1
billion.
We
are
unable
to
predict
the
extent
of
any
future
losses
or
guarantee
when,
or
if,
our
company
will
become
cashflow
positive.Financial
Overview
Revenue.
Revenue
to
date
has
been
generated
primarily
through
our
collaboration
agreements
for
the
development
and
commercialization
of
linaclotidewith
Allergan
for
North
America
and
AstraZeneca
for
China,
Hong
Kong
and
Macau,
our
license
agreements
for
the
development
and
commercialization
oflinaclotide
in
Japan
with
Astellas
and
the
development
and
commercialization
of
linaclotide
in
Europe
with
Allergan
(formerly
with
Almirall),
and
our
co-promotion
agreements
with
Allergan
for
VIBERZI
and
Exact
Sciences
for
Cologuard
in
the
U.S.
The
terms
of
these
agreements
contain
multiple
deliverableswhich
may
include
(i)
licenses,
(ii)
research
and
development
activities,
(iii)
the
manufacture
of
finished
drug
product,
API
or
development
materials
for
a
partnerwhich
are
reimbursed
at
a
contractually
determined
rate,
and
(iv)
co-promotion
activities
by
our
clinical
sales
specialists.
Payments
to
us
may
include
(i)
up-frontlicense
fees,
(ii)
payments
for
research
and
development
activities,
(iii)
payments
for
the
manufacture
of
finished
drug
product,
API
or
development
materials,(iv)
payments
based
upon
the
achievement
of
certain
milestones,
(v)
payments
for
sales
detailing,
promotional
support
services
and
medical
education
initiativesand
(vi)
royalties
on
product
sales.
Additionally,
we
receive
our
share
of
the
net
profits
or
bear
our
share
of
the
net
losses
from
the
sale
of
linaclotide
in
the
U.S.
andChina.
LINZESS
launched
in
the
U.S.
in
December
2012
and
CONSTELLA
became
commercially
available
in
certain
European
countries
beginning
in
the
secondquarter
of
2013.
Linaclotide
is
also
approved
in
a
number
of
other
countries.58 Table
of
Contents
We
record
our
share
of
the
net
profits
and
losses
from
the
sales
of
LINZESS
in
the
U.S.
on
a
net
basis
and
present
the
settlement
payments
to
and
fromAllergan
as
collaboration
expense
or
collaborative
arrangements
revenue,
as
applicable.
Net
profits
or
losses
consist
of
net
sales
to
third-party
customers
andsublicense
income
in
the
U.S.
less
the
cost
of
goods
sold
as
well
as
selling,
general
and
administrative
expenses.
Although
we
expect
net
sales
to
increase
overtime,
the
settlement
payments
between
Allergan
and
us,
resulting
in
collaborative
arrangements
revenue
or
collaboration
expense,
are
subject
to
fluctuation
basedon
the
ratio
of
selling,
general
and
administrative
expenses
incurred
by
each
party.
In
addition,
our
collaborative
arrangements
revenue
may
fluctuate
as
a
result
ofthe
timing
and
amount
of
license
fees
and
clinical
and
commercial
milestones
received
and
recognized
under
our
current
and
future
strategic
partnerships
as
well
astiming
and
amount
of
royalties
from
the
sales
of
linaclotide
in
the
European,
Canadian
or
Mexican
markets
or
any
other
markets
where
linaclotide
receivesapproval.
In
October
2015,
Almirall
transferred
its
exclusive
license
to
develop
and
commercialize
linaclotide
in
Europe
to
Allergan.
Concurrently
with
theEuropean
license
transfer,
Almirall
and
Allergan
terminated
the
sublicense
arrangement
with
respect
to
Mexico,
returning
the
exclusive
rights
to
commercializeCONSTELLA
in
Mexico
to
Allergan.
CONSTELLA
continues
to
be
available
to
adult
IBS-C
patients
in
Mexico.
Additionally,
as
described
above,
in
October2015
we
and
Allergan
separately
entered
into
an
amendment
to
the
license
agreement
relating
to
the
development
and
commercialization
of
linaclotide
in
Europe.This
amendment
is
more
fully
described
in
Note
4,
Collaboration,
License
and
Co-promotion
Agreements,
to
our
consolidated
financial
statements
appearingelsewhere
in
this
Annual
Report
on
Form
10-K.
Cost
of
Revenue.
Cost
of
revenue
is
recognized
upon
shipment
of
linaclotide
API
to
certain
of
our
licensing
partners
outside
of
the
U.S.
Our
cost
of
revenueconsists
of
the
internal
and
external
costs
of
producing
such
API.
Write-down
of
inventory
to
net
realizable
value
and
loss
on
non-cancelable
purchase
commitments.
During
the
year
ended
December
31,
2015,
we
recordedexpenses
of
approximately
$17.6
million
for
the
write-down
of
inventory
and
an
accrual
for
excess
non-cancelable
inventory
purchase
commitments
related
tolinaclotide
API.
These
charges
primarily
related
to
a
reduction
in
the
near
term
demand
forecast
for
CONSTELLA
in
the
European
territory
by
Almirall;
recentregulatory
changes
made
by
the
CFDA
to
the
marketing
approval
process
in
China;
and
the
amendment
to
the
license
agreement
with
Allergan
pertaining
to
thedevelopment
and
commercialization
of
linaclotide
for
Europe
executed
in
October
2015.
Pursuant
to
the
terms
of
the
amendment,
Allergan
assumed
responsibilityfor
the
manufacturing
of
linaclotide
API
for
Europe,
as
well
as
the
associated
costs,
which
resulted
in
accruing
for
a
loss
on
non-cancelable
inventory
purchasecommitments
during
the
three
months
ended
September
30,
2015,
under
one
of
our
API
supply
agreements
covering
the
commercial
supply
of
linaclotide
API
forthe
European
market.
We
have
evaluated
all
remaining
minimum
purchase
commitments
under
our
linaclotide
API
supply
agreements
through
2023
and
concludedthat
the
approximately
$22.3
million
of
purchase
commitments
from
the
second
API
supply
agreement
covering
the
Japan,
China,
Hong
Kong
and
Macau
marketsare
realizable
based
on
the
current
forecasts
received
from
our
partners
in
these
territories
and
our
internal
forecasts.
During
the
year
ended
December
31,
2014,
we
wrote
down
approximately
$20.3
million
in
inventory
to
an
estimated
net
realizable
value
of
approximately$5.0
million.
This
write
down
was
primarily
attributable
to
Almirall's
reduced
inventory
demand
forecasts,
mainly
due
to
the
suspension
of
commercialization
ofCONSTELLA
in
Germany
and
a
challenging
commercial
environment
throughout
Europe.
These
charges
are
more
fully
described
in
Note
7,
Inventory,
to
our
consolidated
financial
statements
appearing
elsewhere
in
this
Annual
Report
on
Form
10-K.
Research
and
Development
Expense.
Research
and
development
expense
consists
of
expenses
incurred
in
connection
with
the
discovery
and
developmentof
our
product
candidates.
These
expenses59 Table
of
Contentsconsist
primarily
of
compensation,
benefits
and
other
employee-related
expenses,
research
and
development
related
facility
costs,
third-party
contract
costs
relatingto
nonclinical
study
and
clinical
trial
activities,
development
of
manufacturing
processes,
regulatory
registration
of
third-party
manufacturing
facilities,
as
well
aslicensing
fees
for
our
product
candidates.
We
charge
all
research
and
development
expenses
to
operations
as
incurred.
Under
our
collaboration
agreements
withAllergan
for
the
U.S.
and
AstraZeneca
for
China,
Hong
Kong
and
Macau,
we
are
reimbursed
for
certain
research
and
development
expenses,
and
we
net
thesereimbursements
against
our
research
and
development
expenses
as
incurred.
Payments
to
Allergan
or
AstraZeneca
for
such
territories
are
recorded
as
incrementalresearch
and
development
expense.
The
core
of
our
research
and
development
strategy
is
to
leverage
our
development
capabilities
in
addressing
GI
disorders
as
well
as
our
pharmacologicexpertise
in
GC
pathways
to
bring
multiple
medicines
to
patients.
We
are
advancing
multiple
product
opportunities
within
two
core
therapeutic
platforms:
GI
andvascular/fibrotic
diseases.
Linaclotide
.
Our
lead
product
is
linaclotide,
and
it
represents
the
largest
portion
of
our
research
and
development
expense
for
our
product
candidates.Linaclotide
is
the
first
and,
to
date,
only
FDA-approved
guanylate
cyclase
type-C,
or
GC-C,
agonist.
Linaclotide
is
approved
in
the
U.S.
and
in
a
number
of
E.U.and
other
countries.
We
and
Allergan
are
exploring
development
opportunities
in
the
U.S.
to
enhance
the
clinical
profile
of
LINZESS
by
seeking
to
expand
its
utility
in
itsindicated
populations,
as
well
as
studying
linaclotide
in
additional
indications,
populations
and
formulations
to
assess
its
potential
to
treat
various
GI
conditions.
InOctober
2015,
as
part
of
this
strategy,
we
reported
positive
top-line
data
from
a
Phase
III
clinical
trial
in
the
U.S.
with
Allergan
evaluating
a
72
mcg
dose
oflinaclotide
in
adult
patients
with
CIC.
Additionally,
in
November
2015,
the
FDA
approved
the
inclusion
of
labeling
instructions
in
the
full
LINZESS
PrescribingInformation
allowing
adult
IBS-C
and
CIC
patients
with
swallowing
difficulties
the
option
to
administer
the
contents
of
LINZESS
capsules
in
applesauce
or
water.
Our
linaclotide
development
opportunities
also
include
linaclotide
colonic
release,
a
targeted
oral
delivery
formulation
of
linaclotide
designed
to
potentiallyimprove
abdominal
pain
relief
in
adult
IBS-C
patients,
as
well
as
in
patients
with
additional
GI
disorders
where
lower
abdominal
pain
is
a
predominant
symptom,such
as
IBS-M.
Additionally,
we
and
Allergan
are
evaluating
linaclotide
as
a
potential
treatment
of
the
GI
dysfunction
associated
with
opioid-induced
constipation,or
OIC,
in
adult
patients
and
have
established
a
plan
with
the
FDA
for
clinical
pediatric
studies
with
linaclotide,
as
described
below.
Development
Candidates.
We
are
advancing
other
development
programs
within
our
GI
platform
for
indications
such
as
refractory
GERD
and
diabeticgastroparesis.
This
includes
IW-9179,
a
GC-C
agonist
designed
to
target
upper
GI
conditions,
which
is
being
explored
for
the
treatment
of
diabetic
gastroparesisand
functional
dyspepsia.
Additionally,
IW-3718
is
a
gastric
retentive
formulation
of
a
bile
acid
sequestrant
that
is
being
evaluated
for
the
potential
treatment
ofrefractory
GERD.
Within
our
vascular/fibrotic
platform,
we
are
leveraging
our
pharmacological
expertise
in
GC
pathways
gained
through
the
discovery
and
development
oflinaclotide
to
advance
development
programs
targeting
sGC.
To
date,
we
have
identified
two
sGC
development
candidates,
IW-1973
and
IW-1701,
which
havedistinct
pharmacologic
profiles
that
we
believe
may
be
differentiating
and
enable
opportunities
in
multiple
indications.
We
have
additional
assets
in
earlydevelopment
that
we
continue
to
advance,
and
we
are
exploring
strategic
options
for
further
development
of
these
assets.
Discovery
Research
.
Our
discovery
efforts
are
primarily
focused
on
identifying
novel
clinical
candidates
that
draw
on
our
proprietary
and
expandingexpertise
in
GI
disorders
and
GC.60 Table
of
Contents
The
following
table
sets
forth
our
research
and
development
expenses
related
to
our
product
pipeline
for
the
years
ended
December
31,
2015,
2014
and
2013.These
expenses
relate
primarily
to
external
costs
associated
with
nonclinical
studies
and
clinical
trial
costs,
costs
incurred
to
develop
manufacturing
processes
andregister
manufacturing
facilities
with
the
FDA,
and
licensing
fees
for
our
product
candidates.
We
allocate
costs
related
to
facilities,
depreciation,
share-basedcompensation,
research
and
development
support
services,
laboratory
supplies
and
certain
other
costs
directly
to
programs.
Since
2004,
the
date
we
began
tracking
costs
by
program,
we
have
incurred
approximately
$355.7
million
of
research
and
development
expenses
related
tolinaclotide.
The
expenses
for
linaclotide
include
both
our
portion
of
the
research
and
development
costs
incurred
by
Allergan
for
the
U.S.
and
AstraZeneca
forChina,
Hong
Kong
and
Macau
and
invoiced
to
us
under
the
cost-sharing
provisions
of
our
collaboration
agreements,
as
well
as
the
unreimbursed
portion
ofresearch
and
development
costs
incurred
by
us
under
such
cost-sharing
provisions.
The
lengthy
process
of
securing
regulatory
approvals
for
new
drugs
requires
the
expenditure
of
substantial
resources.
Any
failure
by
us
to
obtain,
or
any
delayin
obtaining,
regulatory
approvals
would
materially
adversely
affect
our
product
development
efforts
and
our
business
overall.
In
August
2012,
the
FDA
approvedour
New
Drug
Applications
for
LINZESS
as
a
once-daily
treatment
for
adult
men
and
women
suffering
from
IBS-C
or
CIC.
In
connection
with
the
FDA
approval,we
are
required
to
conduct
certain
nonclinical
and
clinical
studies,
including
those
aimed
at
understanding:
(a)
whether
orally
administered
linaclotide
can
bedetected
in
breast
milk,
(b)
the
potential
for
antibodies
to
be
developed
to
linaclotide,
and
if
so,
(c)
whether
antibodies
specific
for
linaclotide
could
have
anytherapeutic
or
safety
implications.
In
addition,
we
and
Allergan
established
a
nonclinical
and
clinical
post-marketing
plan
with
the
FDA
to
understand
the
efficacyand
safety
of
LINZESS
in
pediatric
patients.
The
first
step
in
this
plan
was
to
undertake
certain
additional
nonclinical
studies.
We
and
Allergan
have
completedthese
nonclinical
studies
and
have
initiated
two
Phase
II
clinical
pediatric
studies
in
IBS-C
patients
age
seven
to
17
and
functional
constipation
patients
age
six
to17.
We
and
Allergan
are
also
exploring
development
opportunities
to
enhance
the
clinical
profile
of
LINZESS
by
seeking
to
expand
its
utility
within
IBS-C
andCIC,
as
well
as
studying
linaclotide
in
additional
indications,
populations
and
formulations
to
assess
its
potential
to
treat
various
GI
conditions.
In
October
2012,we
entered
into
a
collaboration
agreement
with
AstraZeneca
to
co-develop
and
co-commercialize
linaclotide
in
China,
Hong
Kong
and
Macau,
with
AstraZenecahaving
primary
responsibility
for
the
local
operational
execution.
We
cannot
currently
estimate
with
any
degree
of61
Years
Ended
December
31,
2015
2014
2013
(in
thousands)
Linaclotide
(1)
$48,981
$48,340
$46,048
Development
candidates:
GI
disorders
(three
compounds)
(2)
19,152
15,992
11,068
Vascular
and
fibrotic
disorders
(two
compounds)
(2)
20,465
11,775
—
Central
nervous
system
disorders
(one
compound)
(2)
1,653
2,190
14,793
Allergic
disorders
—
—
916
Total
development
candidates
41,270
29,957
26,777
Discovery
research
18,495
23,593
29,553
$108,746
$101,890
$102,378
(1)Includes
linaclotide
in
all
indications,
populations
and
formulations.
(2)Number
of
compounds
is
for
the
year
ended
December
31,
2015. Table
of
Contentscertainty
the
amount
of
time
or
money
that
we
will
be
required
to
expend
in
the
future
on
linaclotide
for
other
geographic
markets,
within
its
indicated
populationor
in
additional
indications,
populations
or
formulations.
We
are
also
advancing
multiple
other
GI
development
programs
targeting
diseases
such
as
refractoryGERD
and
diabetic
gastroparesis,
as
well
as
development
programs
within
our
vascular/fibrotic
platform
targeting
sGC.
Given
the
inherent
uncertainties
that
comewith
the
development
of
pharmaceutical
products,
we
cannot
estimate
with
any
degree
of
certainty
how
our
programs
will
evolve,
and
therefore
the
amount
of
timeor
money
that
would
be
required
to
obtain
regulatory
approval
to
market
them.
As
a
result
of
these
uncertainties
surrounding
the
timing
and
outcome
of
anyapprovals,
we
are
currently
unable
to
estimate
precisely
when,
if
ever,
linaclotide's
utility
will
be
expanded
in
its
indicated
population;
if
or
when
linaclotide
will
bedeveloped
outside
of
its
current
markets,
indications,
populations
or
formulations;
or
when,
if
ever,
any
of
our
other
product
candidates
will
generate
revenues
andcash
flows.
We
invest
carefully
in
our
pipeline,
and
the
commitment
of
funding
for
each
subsequent
stage
of
our
development
programs
is
dependent
upon
the
receipt
ofclear,
supportive
data.
In
addition,
we
intend
to
access
externally
discovered
drug
candidates
that
fit
within
our
core
strategy.
In
evaluating
these
potential
assets,we
apply
the
same
investment
criteria
as
those
used
for
investments
in
internally
discovered
assets.
The
successful
development
of
our
product
candidates
is
highly
uncertain
and
subject
to
a
number
of
risks
including,
but
not
limited
to:•The
duration
of
clinical
trials
may
vary
substantially
according
to
the
type,
complexity
and
novelty
of
the
product
candidate.
•The
FDA
and
comparable
agencies
in
foreign
countries
impose
substantial
and
varying
requirements
on
the
introduction
of
therapeuticpharmaceutical
products,
typically
requiring
lengthy
and
detailed
laboratory
and
clinical
testing
procedures,
sampling
activities
and
other
costly
andtime-consuming
procedures.
•Data
obtained
from
nonclinical
and
clinical
activities
at
any
step
in
the
testing
process
may
be
adverse
and
lead
to
discontinuation
or
redirection
ofdevelopment
activity.
Data
obtained
from
these
activities
also
are
susceptible
to
varying
interpretations,
which
could
delay,
limit
or
preventregulatory
approval.
•The
duration
and
cost
of
discovery,
nonclinical
studies
and
clinical
trials
may
vary
significantly
over
the
life
of
a
product
candidate
and
are
difficultto
predict.
•The
costs,
timing
and
outcome
of
regulatory
review
of
a
product
candidate
may
not
be
favorable.
•The
emergence
of
competing
technologies
and
products
and
other
adverse
market
developments
may
negatively
impact
us.As
a
result
of
the
factors
discussed
above,
including
the
factors
discussed
under
"Risk
Factors"
in
Item
1A
of
this
Annual
Report
on
Form
10-K,
we
are
unable
todetermine
the
duration
and
costs
to
complete
current
or
future
nonclinical
and
clinical
stages
of
our
product
candidates
or
when,
or
to
what
extent,
we
will
generaterevenues
from
the
commercialization
and
sale
of
our
product
candidates.
Development
timelines,
probability
of
success
and
development
costs
vary
widely.
Weanticipate
that
we
will
make
determinations
as
to
which
additional
programs
to
pursue
and
how
much
funding
to
direct
to
each
program
on
an
ongoing
basis
inresponse
to
the
data
of
each
product
candidate,
the
competitive
landscape
and
ongoing
assessments
of
such
product
candidate's
commercial
potential.
As
a
result
ofthe
regulatory
approvals
beginning
in
2012,
linaclotide
has
been
generating
sales
in
connection
with
commercial
launches
in
the
U.S.
and
a
number
of
E.U.
andother
countries.62 Table
of
Contents
We
expect
our
research
and
development
costs
will
be
substantial
for
the
foreseeable
future.
We
will
continue
to
invest
in
linaclotide
including
theinvestigation
of
ways
to
enhance
the
clinical
profile
within
its
indicated
population
and
the
exploration
of
its
utility
in
other
indications,
populations
andformulations.
We
will
also
invest
in
our
other
product
candidates
as
we
advance
them
through
nonclinical
studies
and
clinical
trials,
in
addition
to
funding
full-timeequivalents
for
research
and
development
activities
under
our
external
collaboration
and
license
agreements.
Selling,
General
and
Administrative
Expense.
Selling,
general
and
administrative
expense
consists
primarily
of
compensation,
benefits
and
other
employee-related
expenses
for
personnel
in
our
administrative,
finance,
legal,
information
technology,
business
development,
commercial,
sales,
marketing,
communicationsand
human
resource
functions.
Other
costs
include
the
legal
costs
of
pursuing
patent
protection
of
our
intellectual
property,
general
and
administrative
relatedfacility
costs,
insurance
costs
and
professional
fees
for
accounting
and
legal
services.
As
we
continue
to
invest
in
the
commercialization
of
LINZESS,
we
expectour
selling,
general
and
administrative
expenses
will
be
substantial
for
the
foreseeable
future.
We
charge
all
selling,
general
and
administrative
expenses
tooperations
as
incurred.
Under
our
AstraZeneca
collaboration
agreement,
we
are
reimbursed
for
certain
selling,
general
and
administrative
expenses
and
we
net
these
reimbursementsagainst
our
selling,
general
and
administrative
expenses
as
incurred.
We
include
Allergan's
selling,
general
and
administrative
cost-sharing
payments
in
thecalculation
of
the
net
profits
and
net
losses
from
the
sale
of
LINZESS
in
the
U.S.
and
present
the
net
payment
to
or
from
Allergan
as
collaboration
expense
orcollaborative
arrangements
revenue,
respectively.
Collaboration
Expense.
Collaboration
expense
represents
settlement
payments
due
to
Allergan
on
50%
of
LINZESS
net
sales
in
the
U.S.
as
well
as
cost
ofgoods
sold
and
selling,
general
and
administrative
cost-sharing
settlement
between
us
and
Allergan.
Other
(Expense)
Income.
Interest
expense
consists
primarily
of
cash
and
non-cash
interest
costs
related
to
our
outstanding
PhaRMA
Notes
and
the
2022Notes.
Non-cash
interest
expense
consists
of
amortization
of
the
debt
discount
and
associated
debt
issuance
costs
associated
with
the
PhaRMA
Notes
and
2022Notes.
We
amortize
these
costs
using
the
effective
interest
rate
method
over
the
life
of
the
respective
note
agreements
as
interest
expense
in
our
statements
ofoperations.
Interest
income
consists
of
interest
earned
on
our
cash,
cash
equivalents
and
marketable
securities.
In
June
2015,
in
connection
with
the
issuance
of
the
2022
Notes,
we
entered
into
convertible
note
hedge
transactions,
or
the
Convertible
Note
Hedges.Concurrently
with
entering
into
the
Convertible
Note
Hedges,
we
also
entered
into
certain
warrant
transactions
in
which
we
sold
note
hedge
warrants,
or
the
NoteHedge
Warrants,
to
the
Convertible
Note
Hedge
counterparties
to
acquire
20,249,665
shares
of
our
Class
A
common
stock,
subject
to
customary
anti-dilutionadjustments.
Loss
on
derivatives
consists
of
the
change
in
fair
value
of
the
Convertible
Note
Hedges
and
Note
Hedge
Warrants,
which
are
recorded
as
derivativeassets
and
liabilities.
The
Convertible
Note
Hedges
and
the
Note
Hedge
Warrants
are
recorded
at
fair
value
at
each
reporting
period
and
changes
in
fair
value
arerecorded
in
our
consolidated
statements
of
operations.Critical
Accounting
Policies
and
Estimates
Our
discussion
and
analysis
of
our
financial
condition
and
results
of
operations
is
based
upon
our
consolidated
financial
statements
prepared
in
accordancewith
U.S.
generally
accepted
accounting
principles.
The
preparation
of
these
financial
statements
requires
us
to
make
certain
estimates
and
assumptions
that
mayaffect
the
reported
amounts
of
assets
and
liabilities
and
disclosure
of
contingent
assets
and
liabilities
at
the
date
of
the
consolidated
financial
statements,
and
theamounts
of
revenues
and
expenses
during
the
reported
periods.
Significant
estimates
and
assumptions
in
our
consolidated63 Table
of
Contentsfinancial
statements
include
those
related
to
revenue
recognition,
available-for-sale
securities,
inventory
valuation,
and
related
reserves;
impairment
of
long-livedassets;
initial
valuation
procedures
for
the
issuance
of
convertible
notes;
fair
value
of
derivatives;
balance
sheet
classification
of
notes
payable
and
convertiblenotes;
income
taxes,
including
the
valuation
allowance
for
deferred
tax
assets;
research
and
development
expenses;
contingencies
and
share-based
compensation.We
base
our
estimates
on
our
historical
experience
and
on
various
other
assumptions
that
are
believed
to
be
reasonable,
the
results
of
which
form
the
basis
formaking
judgments
about
the
carrying
values
of
assets
and
liabilities.
Actual
results
may
differ
materially
from
our
estimates
under
different
assumptions
orconditions.
Changes
in
estimates
are
reflected
in
reported
results
in
the
period
in
which
they
become
known.
We
believe
that
our
application
of
the
following
accounting
policies,
each
of
which
require
significant
judgments
and
estimates
on
the
part
of
management,
arethe
most
critical
to
aid
in
fully
understanding
and
evaluating
our
reported
financial
results.
Our
significant
accounting
policies
are
more
fully
described
in
Note
2,Summary
of
Significant
Accounting
Policies
,
to
our
consolidated
financial
statements
appearing
elsewhere
in
this
Annual
Report
on
Form
10-K.Revenue Recognition
Our
revenue
is
generated
primarily
through
collaborative
research
and
development,
licensing
and
co-promotion
agreements.
The
terms
of
these
agreementscontain
multiple
deliverables
which
may
include
(i)
licenses,
(ii)
research
and
development
activities,
including
participation
on
joint
steering
committees,
(iii)
themanufacture
of
finished
drug
product,
API
or
development
materials
for
a
partner,
which
are
reimbursed
at
a
contractually
determined
rate,
and
(iv)
co-promotionactivities
by
our
clinical
sales
specialists.
Non-refundable
payments
to
us
under
these
agreements
may
include
(i)
up-front
license
fees,
(ii)
payments
for
researchand
development
activities,
(iii)
payments
for
the
manufacture
of
finished
drug
product,
API
or
development
materials,
(iv)
payments
based
upon
the
achievementof
certain
milestones,
(v)
payments
for
sales
detailing,
promotional
support
services
and
medical
education
initiatives,
and
(vi)
royalties
on
product
sales.Additionally,
we
may
receive
our
share
of
the
net
profits
or
bear
our
share
of
the
net
losses
from
the
sale
of
linaclotide
in
the
U.S.
and
China
through
ourcollaborations
with
Allergan
and
AstraZeneca,
respectively.
We
evaluate
revenue
from
new
agreements
that
have
multiple
elements
under
the
guidance
of
Accounting
Standards
Update,
or
ASU,
No.
2009-13,
Multiple-Deliverable
Revenue
Arrangements
,
or
ASU
2009-13.
We
also
evaluate
whether
amendments
to
our
multiple
element
arrangements
are
considered
materialmodifications
that
are
subject
to
the
application
of
ASU
2009-13.
This
evaluation
requires
us
to
assess
all
relevant
facts
and
circumstances
and
to
make
subjectivedeterminations
and
judgments.
As
part
of
this
assessment,
we
consider
whether
the
modification
results
in
a
material
change
to
the
arrangement,
including
whetherthere
is
a
change
in
total
arrangement
consideration
that
is
more
than
insignificant,
whether
there
are
changes
in
the
deliverables
included
in
the
arrangement,whether
there
is
a
change
in
the
term
of
the
arrangement
and
whether
there
is
a
significant
modification
to
the
delivery
schedule
for
contracted
deliverables.
We
identify
the
deliverables
included
within
multiple
element
agreements
and
evaluate
which
deliverables
represent
separate
units
of
accounting.
We
accountfor
those
components
as
separate
elements
when
the
following
criteria
are
met:•the
delivered
items
have
value
to
the
customer
on
a
stand-alone
basis;
and
•if
there
is
a
general
right
of
return
relative
to
the
delivered
items,
delivery
or
performance
of
the
undelivered
items
is
considered
probable
and
withinour
control.This
evaluation
requires
subjective
determinations
and
requires
us
to
make
judgments
about
the
individual
deliverables
and
whether
such
deliverables
are
separablefrom
the
other
aspects
of
the
contractual
relationship.
In
determining
the
units
of
accounting,
we
evaluate
certain
criteria,
including64 Table
of
Contentswhether
the
deliverables
have
standalone
value,
based
on
consideration
of
the
relevant
facts
and
circumstances
for
each
arrangement.
Factors
considered
in
thisdetermination
include
the
research,
manufacturing
and
commercialization
capabilities
of
the
partner
and
the
availability
of
peptide
research
and
manufacturingexpertise
in
the
general
marketplace.
In
addition,
we
consider
whether
the
collaborator
can
use
the
license
or
other
deliverables
for
their
intended
purpose
withoutthe
receipt
of
the
remaining
elements,
and
whether
the
value
of
the
deliverable
is
dependent
on
the
undelivered
items
and
whether
there
are
other
vendors
that
canprovide
the
undelivered
items.
The
consideration
received
is
allocated
among
the
separate
units
of
accounting
using
the
relative
selling
price
method,
and
the
applicable
revenue
recognitioncriteria
are
applied
to
each
of
the
separate
units.
We
determine
the
estimated
selling
price
for
deliverables
using
vendor-specific
objective
evidence,
or
VSOE,
of
selling
price,
if
available,
third-partyevidence,
or
TPE,
of
selling
price
if
VSOE
is
not
available,
or
best
estimate
of
selling
price,
or
BESP,
if
neither
VSOE
nor
TPE
is
available.
Determining
the
BESPfor
a
deliverable
requires
significant
judgment.
We
use
BESP
to
estimate
the
selling
price
for
licenses
to
our
proprietary
technology,
since
we
often
do
not
haveVSOE
or
TPE
of
selling
price
for
these
deliverables.
In
those
circumstances
where
we
utilize
BESP
to
determine
the
estimated
selling
price
of
a
license
to
ourproprietary
technology,
we
consider
market
conditions
as
well
as
entity-specific
factors,
including
those
factors
contemplated
in
negotiating
the
agreements
as
wellas
internally
developed
models
that
include
assumptions
related
to
the
market
opportunity,
estimated
development
costs,
probability
of
success
and
the
time
neededto
commercialize
a
product
candidate
pursuant
to
the
license.
In
validating
our
BESP,
we
evaluate
whether
changes
in
the
key
assumptions
used
to
determine
theBESP
will
have
a
significant
effect
on
the
allocation
of
arrangement
consideration
between
multiple
deliverables.
We
recognize
revenue
when
there
is
persuasive
evidence
that
an
arrangement
exists,
services
have
been
rendered
or
delivery
has
occurred,
the
price
is
fixed
ordeterminable,
and
collection
is
reasonably
assured.
For
certain
of
our
arrangements,
particularly
our
license
agreement
with
Allergan
for
the
European
territory,
it
is
required
that
taxes
be
withheld
on
paymentsto
us.
We
have
adopted
a
policy
to
recognize
revenue
net
of
these
tax
withholdings.Net
Profit
or
Net
Loss
Sharing
The
determination
of
whether
we
should
recognize
revenue
on
a
gross
or
net
basis
involves
judgment
based
on
the
relevant
facts
and
circumstances.
Inaccordance
with
Accounting
Standards
Codification,
or
ASC,
Topic
808,
Collaborative
Arrangements
,
and
ASC
605-45,
Principal
Agent
Considerations
,
weconsider
the
nature
and
contractual
terms
of
the
arrangement
and
the
nature
of
our
business
operations
to
determine
the
classification
of
the
transactions
under
ourcollaboration
agreements.
We
record
revenue
transactions
gross
in
the
consolidated
statements
of
operations
if
we
are
deemed
the
principal
in
the
transaction,which
includes
being
the
primary
obligor
and
having
the
risks
and
rewards
of
ownership.
We
recognize
our
share
of
the
pre-tax
commercial
net
profit
or
net
loss
generated
from
the
sales
of
LINZESS
in
the
U.S.
in
the
period
the
product
sales
arereported
by
Allergan
and
related
cost
of
goods
sold
and
selling,
general
and
administrative
expenses
are
incurred
by
us
and
our
collaboration
partner.
Theseamounts
are
partially
determined
based
on
amounts
provided
by
Allergan
and
involve
the
use
of
estimates
and
judgments,
such
as
product
sales
allowances
andaccruals
related
to
prompt
payment
discounts,
chargebacks,
governmental
and
contractual
rebates,
wholesaler
fees,
product
returns,
and
co-payment
assistancecosts,
which
could
be
adjusted
based
on
actual
results
in
the
future.
We
are
highly
dependent
on
Allergan
for
timely
and
accurate
information
regarding
any
netrevenues
realized
from
sales
of
LINZESS
in
the
U.S.
and
the
costs
incurred
in
selling
it,
in
order
to
accurately65 Table
of
Contentsreport
our
results
of
operations.
For
the
periods
covered
in
the
consolidated
financial
statements
presented,
there
have
been
no
material
changes
to
prior
periodestimates
of
revenues,
cost
of
goods
sold
or
selling,
general
and
administrative
expenses
associated
with
the
sales
of
LINZESS
in
the
U.S.
However,
if
we
do
notreceive
timely
and
accurate
information
or
incorrectly
estimate
activity
levels
associated
with
the
collaboration
at
a
given
point
in
time,
we
could
be
required
torecord
adjustments
in
future
periods.
We
record
our
share
of
the
net
profits
or
net
losses
from
the
sales
of
LINZESS
in
the
U.S.
on
a
net
basis
and
present
the
settlement
payments
to
and
fromAllergan
as
collaboration
expense
or
collaborative
arrangements
revenue,
as
applicable,
as
we
are
not
the
primary
obligor
and
do
not
have
the
risks
and
rewards
ofownership
in
the
collaboration
agreement
with
Allergan
for
North
America.
We
and
Allergan
settle
the
cost
sharing
quarterly,
such
that
our
statement
of
operationsreflects
50%
of
the
pre-tax
net
profit
or
loss
generated
from
sales
of
LINZESS
in
the
U.S.Up-Front
License
Fees
We
recognize
revenues
from
nonrefundable,
up-front
license
fees
related
to
arrangements
entered
into
prior
to
the
adoption
of
ASU
2009-13,
including
the$30.0
million
up-front
license
fee
under
the
Astellas
license
agreement
entered
into
in
November
2009,
on
a
straight-line
basis
over
the
contracted
or
estimatedperiod
of
performance
since
the
license
deliverables
were
not
deemed
to
have
value
on
a
standalone
basis
under
pre-ASU
2009-13
guidance
and
we
could
notdetermine
the
fair
value
of
the
undelivered
elements.
The
period
of
performance
over
which
the
revenues
are
recognized
is
typically
the
period
over
which
theresearch
and/or
development
is
expected
to
occur.
As
a
result,
we
are
required
to
make
estimates
regarding
the
drug
development
and
commercialization
timelinesfor
compounds
being
developed
pursuant
to
any
applicable
agreement.
The
determination
of
the
length
of
the
period
over
which
to
recognize
the
revenue
is
subjectto
judgment
and
estimation
and
can
have
an
impact
on
the
amount
of
revenue
recognized
in
a
given
period.
Quarterly,
we
reassess
our
period
of
substantialinvolvement
over
which
we
amortize
our
up-front
license
fees
and
make
adjustments
as
appropriate.
Our
estimates
regarding
the
period
of
performance
under
ourcollaborative
research
and
development
and
licensing
agreements
have
changed
in
the
past
and
may
change
in
the
future.
Any
change
in
our
estimates
could
resultin
substantial
changes
to
our
results
for
the
period
over
which
the
revenues
from
an
up-front
license
fee
are
recognized.
In
the
event
that
an
arrangement
were
to
beterminated,
we
would
recognize
as
revenue
any
portion
of
the
up-front
fee
that
had
not
previously
been
recorded
as
revenue,
but
was
classified
as
deferred
revenueat
the
date
of
such
termination.
At
December
31,
2015,
of
our
linaclotide
collaboration
and
license
arrangements,
only
a
portion
of
Astellas'
up-front
license
feeremained
deferred.
The
up-front
license
fees
under
the
Allergan
collaboration
for
North
America
and
the
Allergan
collaboration
for
Europe
(previously
withAlmirall)
were
fully
amortized
at
December
31,
2015,
as
the
period
of
performance
under
those
arrangements
ended
in
the
three
months
ended
September
30,
2012.
We
recognize
revenue
allocated
to
the
license
related
to
collaboration
and
license
agreements
entered
into
or
materially
modified,
including
the
amountsallocated
to
the
license
under
the
AstraZeneca
collaboration
agreement
entered
into
in
October
2012,
upon
delivery,
when
we
believe
the
license
to
our
intellectualproperty
has
stand-alone
value.
When
we
recognize
revenue
allocated
to
the
license
upon
delivery
under
any
of
our
collaborations,
we
may
experience
significantfluctuations
in
our
collaborative
arrangements
revenues
from
quarter
to
quarter
and
year
to
year
depending
on
the
timing
of
transactions.
When
we
believe
thelicense
to
our
intellectual
property
does
not
have
stand-alone
value
from
the
other
deliverables
to
be
provided
in
the
arrangement,
it
is
combined
with
otherdeliverables
and
the
revenue
of
the
combined
unit
of
accounting
is
recorded
based
on
the
method
appropriate
for
the
last
delivered
item.66 Table
of
ContentsMilestones
At
the
inception
of
each
arrangement
that
includes
pre-commercial
milestone
payments,
we
evaluate
whether
each
pre-commercial
milestone
is
substantive,
inaccordance
with
ASU
No.
2010-17,
Revenue
Recognition—Milestone
Method,
or
ASU
2010-17.
This
evaluation
includes
an
assessment
of
whether
(a)
theconsideration
is
commensurate
with
either
(1)
the
entity's
performance
to
achieve
the
milestone,
or
(2)
the
enhancement
of
the
value
of
the
delivered
item(s)
as
aresult
of
a
specific
outcome
resulting
from
the
entity's
performance
to
achieve
the
milestone,
(b)
the
consideration
relates
solely
to
past
performance
and
(c)
theconsideration
is
reasonable
relative
to
all
of
the
deliverables
and
payment
terms
within
the
arrangement.
We
evaluate
factors
such
as
the
scientific,
clinical,regulatory,
commercial
and
other
risks
that
must
be
overcome
to
achieve
the
respective
milestone,
the
level
of
effort
and
investment
required
and
whether
themilestone
consideration
is
reasonable
relative
to
all
deliverables
and
payment
terms
in
the
arrangement
in
making
this
assessment.
At
December
31,
2015,
we
hadno
pre-commercial
milestones
that
were
deemed
substantive.
If
a
substantive
pre-commercial
milestone
were
achieved
and
collection
of
the
related
receivable
wasreasonably
assured,
we
would
recognize
revenue
related
to
the
milestone
in
its
entirety
in
the
period
in
which
the
milestone
was
achieved.
If
we
were
to
achievemilestones
that
we
consider
substantive
under
any
of
our
collaborations,
we
may
experience
significant
fluctuations
in
our
collaborative
arrangements
revenue
fromquarter
to
quarter
and
year
to
year
depending
on
the
timing
of
achieving
such
substantive
milestones.
In
those
circumstances
where
a
pre-commercial
milestone
isnot
substantive,
we
recognize
as
revenue
on
the
date
the
milestone
is
achieved
an
amount
equal
to
the
applicable
percentage
of
the
performance
period
that
hadelapsed
as
of
the
date
the
milestone
was
achieved,
with
the
balance
being
deferred
and
recognized
over
the
remaining
period
of
performance.
Pre-commercialmilestone
payments
received
prior
to
the
adoption
of
ASU
2010-17
continue
to
be
recognized
over
the
remaining
period
of
performance.
Commercial
milestones
are
accounted
for
as
royalties
and
are
recorded
as
revenue
upon
achievement
of
the
milestone,
assuming
all
other
revenue
recognitioncriteria
are
met.Royalties
on
Product
Sales
We
receive,
or
expect
to
receive
in
the
future,
royalty
revenues
under
certain
of
our
license
or
collaboration
agreements.
If
we
do
not
have
any
futureperformance
obligations
under
these
license
or
collaborations
agreements,
we
record
these
revenues
as
earned.
To
the
extent
we
do
not
have
access
to
the
royaltyreports
from
our
partners
or
the
ability
to
accurately
estimate
the
royalty
revenue
in
the
period
earned,
we
record
such
royalty
revenues
one
quarter
in
arrears.Other
We
produce
finished
drug
product,
API
and
development
materials
for
certain
of
our
partners.
We
recognize
revenue
on
finished
drug
product,
API
and
development
materials
when
the
material
has
passed
all
quality
testing
required
for
collaboratoracceptance,
delivery
has
occurred,
title
and
risk
of
loss
have
transferred
to
the
collaborator,
the
price
is
fixed
or
determinable,
and
collection
is
reasonably
assured.As
it
relates
to
development
materials
and
API
produced
for
Astellas,
we
are
reimbursed
at
a
contracted
rate.
Such
reimbursements
are
considered
as
part
ofrevenue
generated
pursuant
to
the
Astellas
license
agreement
and
are
presented
as
collaborative
arrangements
revenue.
Any
finished
drug
product,
API
anddevelopment
materials
currently
produced
for
Allergan
for
the
U.S.
or
AstraZeneca
for
China,
Hong
Kong
and
Macau
are
recognized
in
accordance
with
the
cost-sharing
provisions
of
the
Allergan
and
AstraZeneca
collaboration
agreements,
respectively.
In
October
2015,
Almirall
transferred
its
exclusive
license
to
developand
commercialize
linaclotide
in
Europe
to
Allergan,
and
we
separately
entered
into
an
amendment
to
the
license
agreement
with
Allergan
relating
to
thedevelopment
and
commercialization
of
linaclotide
in
Europe.
Pursuant
to
the67 Table
of
Contentsterms
of
the
amendment,
Allergan
assumed
responsibility
for
the
manufacturing
of
linaclotide
API
for
Europe
from
us,
as
well
as
the
associated
costs.
We
mayexperience
fluctuations
in
our
collaborative
arrangements
revenue
from
quarter
to
quarter
and
year
to
year
depending
on
the
timing
of
such
transactions.
The
agreements
above
are
more
fully
described
in
Note
4,
Collaboration,
License
and
Co-promotion
Agreements
,
in
the
accompanying
notes
to
ourconsolidated
financial
statements
appearing
elsewhere
in
this
Annual
Report
on
Form
10-K.Fair Value Measurements
We
have
certain
assets
and
liabilities
that
are
measured
at
fair
value
on
a
recurring
basis,
and
which
have
been
classified
as
Level
1,
2
or
3
within
the
fair
valuehierarchy
as
described
in
the
accounting
standards
for
fair
value
measurements.
In
general,
fair
values
determined
by
Level
1
inputs
utilize
observable
inputs
suchas
quoted
prices
in
active
markets
for
identical
assets
or
liabilities.
Fair
values
determined
by
Level
2
inputs
utilize
data
points
that
are
either
directly
or
indirectlyobservable,
such
as
quoted
prices,
interest
rates
and
yield
curves.
Fair
values
determined
by
Level
3
inputs
utilize
unobservable
data
points
in
which
there
is
little
orno
market
data,
which
require
us
to
develop
our
own
assumptions
for
the
asset
or
liability.
Our
investment
portfolio
includes
mainly
fixed
income
securities
that
do
not
always
trade
on
a
daily
basis.
As
a
result,
the
pricing
services
we
use
apply
otheravailable
information
as
applicable
through
processes
such
as
benchmark
yields,
benchmarking
of
like
securities,
sector
groupings
and
matrix
pricing
to
preparevaluations.
In
addition,
model
processes
are
used
to
assess
interest
rate
impact
and
develop
prepayment
scenarios.
These
models
take
into
consideration
relevantcredit
information,
perceived
market
movements,
sector
news
and
economic
events.
The
inputs
into
these
models
may
include
benchmark
yields,
reported
trades,broker-dealer
quotes,
issuer
spreads
and
other
relevant
data.
We
validate
the
prices
provided
by
our
third
party
pricing
services
by
obtaining
market
values
fromother
pricing
sources
and
analyzing
pricing
data
in
certain
instances.
We
classify
our
derivative
financial
instruments
as
Level
3
under
the
fair
value
hierarchy.
These
derivatives
are
not
actively
traded
and
are
valued
using
theBlack-Scholes
option-pricing
model
which
requires
the
use
of
subjective
assumptions,
primarily
the
expected
stock
price
volatility
assumption.Inventory Valuation
Inventory
is
stated
at
the
lower
of
cost
or
market
with
cost
determined
under
the
first-in,
first-out
basis.
We
evaluate
inventory
levels
quarterly
and
any
inventory
that
has
a
cost
basis
in
excess
of
its
expected
net
realizable
value,
inventory
that
becomes
obsolete,inventory
in
excess
of
expected
sales
requirements,
inventory
that
fails
to
meet
commercial
sale
specifications
or
is
otherwise
impaired
is
written
down
with
acorresponding
charge
to
the
statement
of
operations
in
the
period
that
the
impairment
is
first
identified.
We
also
assess,
on
a
quarterly
basis,
whether
we
have
anyexcess
non-cancelable
purchase
commitments
resulting
from
our
two
minimum
supply
agreements
with
our
suppliers
of
linaclotide
API
outside
of
North
America.We
rely
on
data
from
several
sources
to
estimate
the
net
realizable
value
of
inventory
and
non-cancelable
purchase
commitments,
including
partner
forecasts
ofprojected
inventory
purchases
that
are
received
quarterly,
our
internal
forecasts
and
related
process,
historical
sales
by
geographic
region,
and
the
status
of
andprogress
toward
commercialization
of
linaclotide
in
partnered
territories.
We
capitalize
inventories
manufactured
in
preparation
for
initiating
sales
of
a
product
candidate
when
the
related
product
candidate
is
considered
to
have
ahigh
likelihood
of
regulatory
approval
and
the
related
costs
are
expected
to
be
recoverable
through
sales
of
the
inventories.
In
determining68 Table
of
Contentswhether
or
not
to
capitalize
such
inventories,
we
evaluate,
among
other
factors,
information
regarding
the
product
candidate's
safety
and
efficacy,
the
status
ofregulatory
submissions
and
communications
with
regulatory
authorities
and
the
outlook
for
commercial
sales,
including
the
existence
of
current
or
anticipatedcompetitive
drugs
and
the
availability
of
reimbursement.
In
addition,
we
evaluate
risks
associated
with
manufacturing
the
product
candidate,
including
the
ability
ofour
third-party
suppliers
to
complete
the
validation
batches,
and
the
remaining
shelf
life
of
the
inventories.
Costs
associated
with
developmental
products
prior
to
satisfying
the
inventory
capitalization
criteria
are
charged
to
research
and
development
expense
asincurred.
There
is
a
risk
inherent
in
these
judgments
and
any
changes
in
these
judgments
may
have
a
material
impact
on
our
financial
results
in
future
periods.Research and Development Expense
All
research
and
development
expenses
are
expensed
as
incurred.
We
defer
and
capitalize
nonrefundable
advance
payments
we
make
for
research
anddevelopment
activities
until
the
related
goods
are
received
or
the
related
services
are
performed.
Research
and
development
expenses
are
comprised
of
costs
incurred
in
performing
research
and
development
activities,
including
salary,
benefits
and
otheremployee-related
expenses;
share-based
compensation
expense;
laboratory
supplies
and
other
direct
expenses;
facilities
expenses;
overhead
expenses;
third-partycontractual
costs
relating
to
nonclinical
studies
and
clinical
trial
activities
and
related
contract
manufacturing
expenses,
development
of
manufacturing
processesand
regulatory
registration
of
third-party
manufacturing
facilities;
licensing
fees
for
our
product
candidates;
and
other
outside
expenses.
Clinical
trial
expenses
include
expenses
associated
with
contract
research
organizations,
or
CROs.
The
invoicing
from
CROs
for
services
rendered
can
lagseveral
months.
We
accrue
the
cost
of
services
rendered
in
connection
with
CRO
activities
based
on
our
estimate
of
site
management,
monitoring
costs,
projectmanagement
costs,
and
investigator
fees.
We
maintain
regular
communication
with
our
CRO
vendors
to
gauge
the
reasonableness
of
our
estimates.
Differencesbetween
actual
clinical
trial
expenses
and
estimated
clinical
trial
expenses
recorded
have
not
been
material
and
are
adjusted
for
in
the
period
in
which
they
becomeknown.
However,
if
we
incorrectly
estimate
activity
levels
associated
with
the
CRO
services
at
a
given
point
in
time,
we
could
be
required
to
record
materialadjustments
in
future
periods.
Under
our
Allergan
and
AstraZeneca
collaboration
agreements
for
the
U.S.
and
China,
Hong
Kong
and
Macau,
respectively,
we
arereimbursed
for
certain
research
and
development
expenses
and
we
net
these
reimbursements
against
our
research
and
development
expenses
as
incurred.
Paymentsto
Allergan
or
AstraZeneca
for
such
territories
are
recorded
as
incremental
research
and
development
expense.
Nonrefundable
advance
payments
for
research
anddevelopment
activities
are
capitalized
and
expensed
over
the
related
service
period
or
as
goods
are
received.Share-based Compensation Expense
We
make
certain
assumptions
in
order
to
value
and
record
expense
associated
with
awards
made
under
our
share-based
compensation
arrangements.
Weestimate
the
fair
value
of
the
stock
option
awards
for
employees
and
non-employees
using
the
Black-Scholes
option-pricing
model.
The
fair
value
of
our
restrictedstock
unit,
or
RSU,
awards
is
based
on
the
market
value
of
our
Class
A
common
stock
on
the
date
of
grant.
Determining
the
fair
value
of
share-based
awardsrequires
the
use
of
highly
subjective
assumptions,
including
expected
term
of
the
award
and
expected
stock
price
volatility.
For
certain
of
these
awards,
wedetermine
the
appropriate
amount
to
expense
based
on
the
anticipated
achievement
of
performance
targets,
which
requires
judgment,
including
forecasting
theachievement
of
future
specified
targets.
Changes
in
these
assumptions
may
lead
to
variability
with
respect
to
the
amount
of
expense
we
recognize
in
connectionwith
share-based
payments.69 Table
of
Contents
We
recognize
compensation
expense
on
a
straight-line
basis
over
the
requisite
service
period
based
upon
stock
options
that
are
ultimately
expected
to
vest,
andaccordingly,
such
compensation
expense
is
adjusted
by
the
amount
of
estimated
forfeitures.
We
estimate
forfeitures
over
the
requisite
service
period
whenrecognizing
share-based
compensation
expense
based
on
historical
rates
and
forward-looking
factors;
these
estimates
are
adjusted
to
the
extent
that
actualforfeitures
differ,
or
are
expected
to
materially
differ,
from
our
estimates.
We
have
also
granted
time-accelerated
stock
options
with
terms
that
allow
the
acceleration
in
vesting
of
the
stock
options
upon
the
achievement
ofperformance-based
milestones
specified
in
the
grants.
Share-based
compensation
expense
associated
with
these
time-accelerated
stock
options
is
recognized
overthe
requisite
service
period
of
the
awards
or
the
implied
service
period,
if
shorter.
While
the
assumptions
used
to
calculate
and
account
for
share-based
compensation
awards
represent
management's
best
estimates,
these
estimates
involveinherent
uncertainties
and
the
application
of
management's
judgment.
As
a
result,
if
revisions
are
made
to
our
underlying
assumptions
and
estimates,
our
share-based
compensation
expense
could
vary
significantly
from
period
to
period.Derivative Assets and Liabilities
In
June
2015,
in
connection
with
the
issuance
of
the
2022
Notes,
we
entered
into
the
Convertible
Note
Hedges.
Concurrently
with
entering
into
theConvertible
Note
Hedges,
we
also
entered
into
certain
warrant
transactions
in
which
we
sold
Note
Hedge
Warrants
to
the
Convertible
Note
Hedge
counterparties
toacquire
20,249,665
shares
of
our
Class
A
common
stock,
subject
to
customary
anti-dilution
adjustments.
These
instruments
are
derivative
financial
instrumentsunder
ASC
Topic
815,
Derivatives
and
Hedging
.
These
derivatives
are
recorded
as
assets
or
liabilities
at
fair
value
each
reporting
period
and
the
fair
value
is
determined
using
the
Black-Scholes
option-pricingmodel.
The
changes
in
fair
value
are
recorded
as
a
component
of
other
(expense)
income
in
the
consolidated
statements
of
operations.
Significant
inputs
used
todetermine
the
fair
value
include
the
price
per
share
of
our
Class
A
common
stock
on
the
date
of
valuation,
time
to
maturity
of
the
derivative
instruments,
the
strikeprices
of
the
derivative
instruments,
the
risk-free
interest
rate,
and
the
volatility
of
our
Class
A
common
stock.
Changes
to
these
inputs
could
materially
affect
thevaluation
of
the
Convertible
Note
Hedges
and
Note
Hedge
Warrants
in
future
periods.70 Table
of
ContentsResults
of
Operations
The
following
discussion
summarizes
the
key
factors
our
management
believes
are
necessary
for
an
understanding
of
our
consolidated
financial
statements.Year Ended December 31, 2015 Compared to Year Ended December 31, 2014Revenue
Collaborative
Arrangements
Revenue.
The
increase
in
revenue
from
collaborative
arrangements
of
approximately
$73.1
million
for
the
year
endedDecember
31,
2015
compared
to
the
year
ended
December
31,
2014
was
primarily
related
to
an
approximately
$85.8
million
increase
in
our
share
of
the
net
profitsfrom
the
sale
of
LINZESS
in
the
U.S.;
an
approximately
$4.4
million
increase
due
to
revenues
from
our
co-promotion
agreement
with
Exact
Sciences
forCologuard
in
the
U.S.
entered
into
in
March
2015;
an
approximately
$0.8
million
increase
in
royalty
revenue
based
on
sales
of
linaclotide
in
our
partneredterritories;
and
an
approximately
$0.2
million
increase
due
to
revenues
from
our
co-promotion
agreement
with
Allergan
for
VIBERZI
in
the
U.S.
entered
into
inAugust
2015.
The
increases
were
partially
offset
by
an
approximately
$8.1
million
decrease
in
revenue
recognized
in
connection
with
the
achievement
of
adevelopment
milestone
under
our
Astellas
license
agreement
in
2014;
an
approximately
$7.0
million
decrease
in
revenue
from
the
shipments
of
linaclotide
API
toour
licensing
partners;
an
approximately
$1.9
million
decrease
in
revenue
recognized
related
to
the
achievement
of
commercial
launch
milestones
under
our
licenseagreement
with
Almirall
in
2014;
and71
Year
Ended
December
31,
2015
2014
2013
(in
thousands)
Collaborative
arrangements
revenue:
$149,555
$76,436
$22,881
Cost
and
expenses:
Cost
of
revenue
12
5,291
7,203
Write-down
of
inventory
to
net
realizable
value
and
loss
on
non-cancellable
purchase
commitments
17,638
20,292
—
Research
and
development
108,746
101,890
102,378
Selling,
general
and
administrative
125,247
118,333
123,228
Collaboration
expense
—
—
42,074
Total
cost
and
expenses
251,643
245,806
274,883
Loss
from
operations
(102,088)
(169,370)
(252,002)Other
(expense)
income:
Interest
expense
(31,096)
(21,166)
(21,002)Interest
and
investment
income
443
257
192
Loss
on
derivatives
(9,928)
—
—
Other
income
—
661
—
Other
expense,
net
(40,581)
(20,248)
(20,810)Net
loss
$(142,669)$(189,618)$(272,812)
Year
Ended
December
31,
Change
2015
2014
$
%
(dollars
in
thousands)
Collaborative
arrangements
revenue
$149,555
$76,436
$73,119
96% Table
of
Contentsan
approximately
$1.1
million
decrease
in
revenue
related
to
our
collaboration
agreement
with
AstraZeneca.Cost
and
Expenses
Cost
of
Revenue.
The
decrease
in
cost
of
revenue
of
approximately
$5.3
million
for
the
year
ended
December
31,
2015
compared
to
the
year
endedDecember
31,
2014
was
primarily
attributable
to
lower
sales
of
linaclotide
API
to
our
licensing
partners.
Write-down
of
inventory
to
net
realizable
value
and
loss
on
non-cancelable
purchase
commitments.
The
decrease
in
write-down
of
inventory
and
loss
onnon-cancelable
purchase
commitments
of
approximately
$2.7
million
for
the
year
ended
December
31,
2015
compared
to
the
year
ended
December
31,
2014
wasprimarily
related
to
an
accrual
for
a
loss
on
non-cancelable
inventory
purchase
commitments
recorded
in
the
year
ended
December
31,
2015,
partially
offset
by
adecrease
in
the
amount
of
inventory
written
down
to
estimated
net
realizable
value.
Inventory
represents
linaclotide
API
that
is
available
for
commercial
sale.
We
evaluate
inventory
levels
quarterly
and
any
inventory
that
has
a
cost
basis
inexcess
of
its
expected
net
realizable
value,
inventory
that
becomes
obsolete,
inventory
in
excess
of
expected
sales
requirements,
inventory
that
fails
to
meetcommercial
sale
specifications
or
is
otherwise
impaired
is
written
down
with
a
corresponding
charge
to
the
statement
of
operations
in
the
period
that
theimpairment
is
first
identified.
As
part
of
our
net
realizable
value
assessment
of
our
inventory,
we
assess
whether
we
have
any
excess
non-cancelable
purchasecommitments
resulting
from
our
two
minimum
supply
agreements
with
our
suppliers
of
linaclotide
API
outside
of
North
America.
We
have
entered
into
multiple
commercial
supply
agreements
for
the
purchase
of
linaclotide
API.
Two
of
our
API
supply
agreements
for
supplying
API
to
ourcollaboration
partners
outside
of
North
America
contain
minimum
purchase
commitments.
Prior
to
October
2015,
we
were
also
responsible
for
the
manufacturingof
linaclotide
API
for
Europe.
As
part
of
our
net
realizable
value
assessment
of
our
inventory,
we
assess
whether
we
have
any
excess
non-cancelable
purchasecommitments
resulting
from
our
minimum
supply
agreements
with
our
suppliers
of
linaclotide
API.
The
determination
of
the
net
realizable
value
of
inventory
and
non-cancelable
purchase
commitments
is
based
on
demand
forecasts
from
our
partners
that
arereceived
quarterly,
to
project
the
next
24
months
of
demand
and
our
internal
forecast
for
projected
demand
in
subsequent
years.
During
the
three
months
endedJune
30,
2015,
Almirall,
our
former
European
partner,
reduced
its
forecasted
purchases
of
linaclotide
API
for
its
territory
for
the
subsequent
18
months.
In
addition,recent
regulatory
changes
made
by
the
CFDA
to
the
marketing
approval
process
in
China
resulted
in
a
potentially
lengthened
approval
timeline
for
thecommercialization
of
linaclotide.
The
reduced
demand
from
Almirall,
and
the
potential
extended
timeline
for
commercialization
of
linaclotide
in
China,
resulted
inlower
projected
sales
of
linaclotide
API
to
our
partners
in
Europe
and
China.
As
a
result,72
Year
Ended
December
31,
Change
2015
2014
$
%
(dollars
in
thousands)
Cost
and
expenses:
Cost
of
revenue
$12
$5,291
$(5,279)
(100)%Write-down
of
inventory
to
net
realizable
value
and
loss
on
non-cancellablepurchase
commitments
17,638
20,292
(2,654)
(13)%Research
and
development
108,746
101,890
6,856
7%Selling,
general
and
administrative
125,247
118,333
6,914
6%Total
cost
and
expenses
$251,643
$245,806
$5,837
2% Table
of
Contentsduring
the
three
months
ended
June
30,
2015,
we
wrote-down
the
balance
of
our
inventory
of
approximately
$5.0
million
to
zero
and
accrued
approximately$3.2
million
for
excess
non-cancelable
inventory
purchase
commitments.
In
October
2015,
Almirall
transferred
its
exclusive
license
to
develop
and
commercialize
linaclotide
in
Europe
to
Allergan,
and
we
separately
entered
into
anamendment
to
the
license
agreement
with
Allergan
relating
to
the
development
and
commercialization
of
linaclotide
in
Europe.
Pursuant
to
the
terms
of
theamendment,
Allergan
assumed
responsibility
for
the
manufacturing
of
linaclotide
API
for
Europe,
as
well
as
the
associated
costs.
Upon
the
execution
of
theamendment
to
the
license
agreement,
we
recorded
an
incremental
loss
on
non-cancelable
API
purchase
commitments
of
approximately
$6.9
million
related
to
oneof
our
API
supply
agreements
covering
the
commercial
supply
of
linaclotide
API
for
the
European
market.
During
the
three
months
ended
September
30,
2015,
wealso
recorded
an
incremental
loss
on
non-cancelable
API
purchase
commitments
related
to
in-process
API
batches.
We
have
evaluated
all
remaining
minimumpurchase
commitments
under
our
linaclotide
API
supply
agreements
through
2023
and
concluded
that
the
approximately
$22.3
million
of
purchase
commitmentsfrom
the
second
API
supply
agreement
covering
the
Japan,
China,
Hong
Kong
and
Macau
markets
are
realizable
based
on
the
current
forecasts
received
from
ourpartners
in
these
territories
and
our
internal
forecasts.
These
charges
are
more
fully
described
in
Note
7,
Inventory
,
to
our
consolidated
financial
statementsappearing
elsewhere
in
this
Annual
Report
on
Form
10-K.
During
the
year
ended
December
31,
2014,
we
wrote
down
approximately
$20.3
million
in
inventory
to
an
estimated
net
realizable
value
of
approximately$5.0
million.
This
write
down
was
primarily
attributable
to
Almirall's
reduced
inventory
demand
forecasts,
mainly
due
to
the
suspension
of
commercialization
ofCONSTELLA
in
Germany
and
a
challenging
commercial
environment
throughout
Europe.
Research
and
Development
Expense.
The
increase
in
research
and
development
expense
of
approximately
$6.9
million
for
the
year
ended
December
31,2015
compared
to
the
year
ended
December
31,
2014
was
primarily
related
to
an
increase
of
approximately
$19.7
million
in
external
costs
related
to
thedevelopment
of
linaclotide;
an
increase
of
approximately
$4.2
million
in
compensation,
benefits
and
other
employee-related
expenses
primarily
associated
withincreased
headcount;
and
an
increase
of
approximately
$3.2
million
in
research
costs
related
to
our
early
stage
pipeline
candidates.
The
increases
were
partiallyoffset
by
a
decrease
of
approximately
$12.6
million
in
costs
related
to
the
collaboration
with
Allergan
for
North
America;
a
decrease
of
approximately
$3.0
millionrelated
to
our
January
2014
workforce
reduction;
a
decrease
of
approximately
$1.8
million
in
operating
costs,
including
information
technology
infrastructure
costsand
facility
costs
such
as
rent
and
amortization
of
leasehold
improvements
allocated
to
research
and
development;
an
approximately
$1.6
million
decrease
in
costsassociated
with
the
collaboration
with
AstraZeneca;
and
a
decrease
of
approximately
$1.2
million
related
to
the
development
of
manufacturing
processes
and
costsassociated
with
linaclotide
API
prior
to
meeting
our
inventory
capitalization
policy.
Selling,
General
and
Administrative
Expense.
Selling,
general
and
administrative
expenses
increased
approximately
$6.9
million
for
the
year
endedDecember
31,
2015
compared
to
the
year
ended
December
31,
2014
primarily
as
a
result
of
an
approximately
$2.9
million
increase
in
costs
associated
with
sellingexpenses
and
marketing
programs;
an
approximately
$2.7
million
increase
in
external
consulting
costs,
patent-related
legal
costs
and
other
service
costs
primarilyassociated
with
commercial
activities
to
support
linaclotide;
an
approximately
$2.1
million
increase
in
compensation,
benefits
and
other
employee-relatedexpenses;
and
an
approximately
$0.4
million
increase
in
selling,
general
and
administrative
expenses
related
to
facilities
and
information
technology
infrastructurecosts,
including
rent
and
amortization
of
leasehold
improvements.
These
increases
were
partially
offset
by
a
decrease
in
costs
of
approximately
$1.2
million
relatedto
our
January
2014
workforce
reduction.73 Table
of
ContentsOther
(Expense)
Income,
Net
Interest
Expense.
Interest
expense
increased
approximately
$9.9
million
for
the
year
ended
December
31,
2015
compared
to
the
year
ended
December
31,2014,
mainly
due
to
an
increase
in
interest
expense
of
approximately
$10.9
million
associated
with
our
2022
Notes.
This
increase
was
partially
offset
by
a
decreaseof
approximately
$0.9
million
in
interest
expense
associated
with
the
PhaRMA
Notes
for
the
year
ended
December
31,
2015,
and
an
insignificant
amount
due
tointerest
associated
with
capital
leases
for
the
automobiles
for
our
field-based
sales
force
and
medical
science
liaisons.
Loss
on
derivatives.
The
approximately
$9.9
million
increase
in
the
net
loss
on
derivatives
for
the
year
ended
December
31,
2015,
compared
to
the
yearended
December
31,
2014
is
due
to
an
approximately
$5.4
million
decrease
in
the
fair
value
of
the
Convertible
Note
Hedges
and
an
approximately
$4.5
millionincrease
in
the
fair
value
of
the
Note
Hedge
Warrants
since
their
issuance
in
June
2015.
Other
Income.
The
decrease
in
other
income
of
approximately
$0.7
million
for
the
year
ended
December
31,
2015
compared
to
the
year
endedDecember
31,
2014
is
primarily
related
to
timing
of
the
recognition
of
tax
incentive
awards
that
were
recognized
in
the
year
ended
December
31,
2014.
In
the
yearended
December
31,
2012,
we
were
awarded
an
approximately
$1.7
million
tax
incentive,
associated
with
the
Life
Sciences
Tax
Incentive
Program
from
theMassachusetts
Life
Sciences
Center.
During
the
year
ended
December
31,
2014,
we
recognized
approximately
$0.7
million
as
other
income
in
the
consolidatedstatement
of
operations,
as
we
believed
we
had
satisfied
our
job
creation
commitments
related
to
this
award
for
2012
and
2013.Year Ended December 31, 2014 Compared to Year Ended December 31, 2013Revenue
Collaborative
Arrangements
Revenue.
The
increase
in
revenue
from
collaborative
arrangements
of
approximately
$53.6
million
for
the
year
endedDecember
31,
2014
compared
to
the
year
ended
December
31,
2013
was
primarily
related
to
an
approximately
$44.7
million
increase
in
our
share
of
the
net
profitsfrom
the
sale
of
LINZESS
in
the
U.S.;
an
approximately
$10.2
million
increase
in
revenue
recognized
in
connection
with
the
achievement
of
a
developmentmilestone
under
our
Astellas
license
agreement
in
the
fourth
quarter
of
2014;
an
approximately
$2.6
million
increase
in
license
revenue
related
to
our
collaborationagreement
with
AstraZeneca
recognized
in
connection
with
a
modification74
Year
Ended
December
31,
Change
2015
2014
$
%
(dollars
in
thousands)
Other
(expense)
income:
Interest
expense
$(31,096)$(21,166)$(9,930)
47%Interest
and
investment
income
443
257
186
72%Loss
on
derivatives
(9,928)
—
(9,928)
100%Other
income
—
661
(661)
(100)%Total
other
(expense)
income,
net
$(40,581)$(20,248)$(20,333)
100%
Year
Ended
December
31,
Change
2014
2013
$
%
(dollars
in
thousands)
Collaborative
arrangements
revenue
$76,436
$22,881
$53,555
234% Table
of
Contentsto
the
initial
development
plan
and
development
budget
in
August
2014,
which
was
deemed
to
be
a
material
modification;
an
approximately
$0.5
million
increasein
royalty
revenue
based
on
sales
of
CONSTELLA
in
the
European
territory;
and
an
approximately
$0.4
million
increase
in
the
amortization
of
deferred
revenueassociated
with
the
Astellas
license
agreement
due
to
a
change
in
estimate
in
the
development
period
in
March
2013.
The
increases
were
partially
offset
by
anapproximately
$4.7
million
decrease
in
revenue
from
the
shipments
of
linaclotide
API
to
our
licensing
partners.Cost
and
Expenses
Cost
of
Revenue.
The
decrease
in
cost
of
revenue
of
approximately
$1.9
million
for
the
year
ended
December
31,
2014
compared
to
the
year
endedDecember
31,
2013
was
primarily
attributable
to
lower
sales
of
linaclotide
API
to
our
licensing
partners.
Write-down
of
inventory
to
net
realizable
value
and
loss
on
non-cancelable
purchase
commitments.
The
increase
in
write-down
of
inventory
and
loss
onnon-cancelable
purchase
commitments
of
approximately
$20.3
million
for
the
year
ended
December
31,
2014
compared
to
the
year
ended
December
31,
2013
wasrelated
to
a
write-down
of
approximately
$20.3
million
in
inventory
to
an
estimated
net
realizable
value
of
approximately
$5.0
million.
This
write-down
wasprimarily
attributable
to
Almirall's
reduced
inventory
demand
forecasts
for
the
European
territory,
mainly
due
to
the
suspension
of
commercialization
ofCONSTELLA
in
Germany
and
a
challenging
commercial
environment
throughout
Europe.
Research
and
Development
Expense.
The
decrease
in
research
and
development
expense
of
approximately
$0.5
million
for
the
year
ended
December
31,2014
compared
to
the
year
ended
December
31,
2013
was
primarily
related
to
a
decrease
of
approximately
$5.5
million
in
compensation,
benefits
and
otheremployee-related
expenses
primarily
associated
with
decreased
average
headcount;
a
decrease
of
approximately
$5.0
million
related
to
the
development
ofmanufacturing
processes
and
costs
associated
with
linaclotide
API
prior
to
meeting
our
inventory
capitalization
policy;
a
decrease
of
approximately
$3.6
million
incosts
related
to
the
collaboration
with
Allergan
for
North
America;
and
a
decrease
of
approximately
$1.0
million
in
research
costs
related
to
our
early
stage
pipelinecandidates.
The
decreases
were
partially
offset
by
an
increase
of
approximately
$8.0
million
in
external
costs
related
to
the
development
of
linaclotide;
an
increaseof
approximately
$3.2
million
in
operating
costs,
including
information
technology
infrastructure
costs
and
facility
costs
such
as
rent
and
amortization
of
leaseholdimprovements
allocated
to
research
and
development;
an
increase
in
costs
of
approximately
$3.0
million
related
to
our
January
2014
workforce
reduction;
and
anincrease
of
approximately
$0.4
million
in
costs
related
to
the
collaboration
with
AstraZeneca.75
Year
Ended
December
31,
Change
2014
2013
$
%
(dollars
in
thousands)
Cost
and
expenses:
Cost
of
revenue
$5,291
$7,203
$(1,912)
(27)%Write-down
of
inventory
to
net
realizable
value
and
loss
on
non-cancellablepurchase
commitments
20,292
—
20,292
100%Research
and
development
101,890
102,378
(488)
(0)%Selling,
general
and
administrative
118,333
123,228
(4,895)
(4)%Collaboration
expense
—
42,074
(42,074)
(100)%Total
cost
and
expenses
$245,806
$274,883
$(29,077)
(11)% Table
of
Contents
Selling,
General
and
Administrative
Expense.
Selling,
general
and
administrative
expenses
decreased
approximately
$4.9
million
for
the
year
endedDecember
31,
2014
compared
to
the
year
ended
December
31,
2013
primarily
as
a
result
of
an
approximately
$6.5
million
decrease
in
external
consulting
and
otherservice
costs
primarily
associated
with
developing
and
maintaining
the
infrastructure
to
support
linaclotide;
an
approximately
$3.6
million
decrease
in
costsassociated
with
selling
expenses
and
marketing
programs;
an
approximately
$1.5
million
decrease
in
compensation,
benefits
and
other
employee-related
expensesassociated
with
decreased
average
headcount;
and
an
approximately
$0.4
million
decrease
in
selling,
general
and
administrative
expenses
related
to
facilities
andinformation
technology
infrastructure
costs
associated
with
operating
our
Cambridge,
Massachusetts
facility,
including
rent
and
amortization
of
leaseholdimprovements.
The
decreases
were
partially
offset
by
an
approximately
$5.9
million
increase
in
share-based
compensation
costs,
of
which
approximately$2.3
million
is
related
to
the
departure
of
an
executive
officer,
and
an
increase
in
costs
of
approximately
$1.2
million
related
to
our
January
2014
workforcereduction.
Collaboration
Expense.
Collaboration
expense
decreased
approximately
$42.1
million
for
the
year
ended
December
31,
2014
compared
to
the
year
endedDecember
31,
2013,
primarily
as
a
result
of
our
share
of
higher
LINZESS
net
sales
in
the
U.S.,
which
generated
a
payment
from
Allergan
to
us
rather
than
apayment
to
Allergan.Other
(Expense)
Income,
Net
Interest
Expense.
Interest
expense
increased
approximately
$0.2
million
for
the
year
ended
December
31,
2014
compared
to
the
year
ended
December
31,2013,
mainly
due
to
interest
associated
with
capital
leases
for
the
automobiles
for
our
field-based
sales
force
and
medical
science
liaisons.
Other
Income.
The
increase
in
other
income
of
approximately
$0.7
million
for
the
year
ended
December
31,
2014
compared
to
the
year
ended
December
31,2013
was
primarily
related
to
timing
of
the
recognition
of
tax
incentive
awards
that
were
previously
received.
In
the
year
ended
December
31,
2012,
we
wereawarded
an
approximately
$1.7
million
tax
incentive,
associated
with
the
Life
Sciences
Tax
Incentive
Program
from
the
Massachusetts
Life
Sciences
Center.During
the
year
ended
December
31,
2014,
we
recognized
approximately
$0.7
million
as
other
income
in
the
consolidated
statement
of
operations,
as
we
believedwe
had
satisfied
our
job
creation
commitments
related
to
this
award
for
2012
and
2013.Liquidity
and
Capital
Resources
We
have
incurred
losses
since
our
inception
in
1998
and,
as
of
December
31,
2015,
we
had
an
accumulated
deficit
of
approximately
$1.1
billion.
We
havefinanced
our
operations
to
date
primarily
through
both
the
private
sale
of
our
preferred
stock
and
the
public
sale
of
our
common
stock,
including
approximately$203.2
million
of
net
proceeds
from
our
initial
public
offering,
or
IPO,
in
February
2010,
and
approximately
$413.4
million
of
net
proceeds
from
our
follow-onpublic
offerings;
payments
received
under
our
strategic
collaborative
arrangements,
including
upfront
and
milestone
payments,76
Year
Ended
December
31,
Change
2014
2013
$
%
(dollars
in
thousands)
Other
(expense)
income:
Interest
expense
$(21,166)$(21,002)$(164)
1%Interest
and
investment
income
257
192
65
34%Other
income
661
—
661
100%Total
other
(expense)
income,
net
$(20,248)$(20,810)$562
(3)% Table
of
Contentsroyalties
and
our
share
of
net
profits,
as
well
as
reimbursement
of
certain
expenses;
and
debt
financings,
including
approximately
$167.3
million
of
net
proceedsfrom
the
private
placement
of
our
PhaRMA
Notes
in
January
2013
and
approximately
$324.0
million
of
net
proceeds
from
the
private
placement
of
our
2022
Notesin
June
2015.
At
December
31,
2015,
we
had
approximately
$439.4
million
of
unrestricted
cash,
cash
equivalents
and
available-for-sale
securities.
Our
cashequivalents
include
amounts
held
in
money
market
funds
and
U.S.
government-sponsored
securities.
Our
available-for-sale
securities
include
amounts
held
in
U.S.Treasury
securities
and
U.S.
government-sponsored
securities.
We
invest
cash
in
excess
of
immediate
requirements
in
accordance
with
our
investment
policy,which
limits
the
amounts
we
may
invest
in
any
one
type
of
investment
and
requires
all
investments
held
by
us
to
be
at
least
A+
rated,
with
a
remaining
maturitywhen
purchased
of
less
than
twelve
months,
so
as
to
primarily
achieve
liquidity
and
capital
preservation.
During
the
year
ended
December
31,
2015,
our
balances
of
cash,
cash
equivalents
and
available-for-sale
securities
increased
approximately
$191.1
million.This
increase
is
primarily
due
to
approximately
$335.7
million
in
gross
proceeds
from
the
issuance
of
our
2022
Notes
in
June
2015,
approximately
$70.8
million
ingross
proceeds
from
the
issuance
of
Note
Hedge
Warrants
issued
in
connection
with
the
2022
Notes,
and
approximately
$14.2
million
in
proceeds
from
the
exerciseof
stock
options
and
the
issuance
of
shares
pursuant
to
our
employee
stock
purchase
plan.
These
cash
inflows
were
partially
offset
by
the
purchase
of
ConvertibleNote
Hedges
for
approximately
$91.9
million
in
connection
with
our
2022
Notes
and
the
payment
of
approximately
$11.7
million
of
issuance
costs
in
connectionwith
our
2022
Notes,
as
well
as
the
cash
used
to
operate
our
business,
including
payments
related
to,
among
other
things,
research
and
development
and
selling,general
and
administrative
expenses
as
we
continued
to
invest
in
our
research
pipeline
and
support
the
continued
commercialization
of
LINZESS
in
the
U.S.
Wealso
made
principal
payments
of
approximately
$12.7
million
on
our
outstanding
PhaRMA
Notes,
invested
approximately
$4.0
million
in
capital
expenditures,
andmade
payments
of
approximately
$1.3
million
on
capital
lease
obligations.Cash
Flows
From
Operating
Activities
Net
cash
used
in
operating
activities
totaled
approximately
$106.9
million
for
the
year
ended
December
31,
2015.
The
primary
uses
of
cash
were
our
net
lossof
approximately
$142.7
million
and
changes
in
assets
and
liabilities
of
approximately
$38.2
million
resulting
primarily
from
an
increase
in
related
party
accountsreceivable
principally
attributable
to
higher
amounts
due
from
Allergan
as
a
result
of
increased
profits
on
the
sale
of
LINZESS
in
the
U.S.,
an
increase
in
restrictedcash
associated
with
our
salesforce
vehicle
fleet,
a
decrease
in
accounts
payable,
related
party
accounts
payable
and
accrued
expenses,
a
decrease
in
prepaidexpenses
and
other
assets,
a
decrease
in
deferred
revenue,
a
decrease
in
deferred
rent
and
an
increase
in
accrued
research
and
development
costs.
These
uses
of
cashwere
primarily
offset
by
non-cash
items
of
approximately
$74.0
million,
including
approximately
$25.5
million
in
share-based
compensation
expense,approximately
$17.6
million
due
to
the
write-down
of
inventory
to
net
realizable
value
and
loss
on
non-cancelable
purchase
commitments,
approximately$11.6
million
in
depreciation
and
amortization
expense
of
property
and
equipment,
approximately
$8.1
million
in
non-cash
interest
expense,
approximately$9.9
million
due
to
the
change
in
fair
value
of
the
Convertible
Note
Hedges
and
Note
Hedge
Warrants,
and
approximately
$1.1
million
in
accretion
of
discountsand
premiums
on
available-for-sale
securities.
Net
cash
used
in
operating
activities
totaled
approximately
$155.6
million
for
the
year
ended
December
31,
2014.
The
primary
uses
of
cash
were
our
net
lossof
approximately
$189.6
million
and
changes
in
assets
and
liabilities
of
approximately
$30.1
million
resulting
primarily
from
an
increase
in
related
party
accountsreceivable
principally
due
to
higher
amounts
due
from
Allergan
due
to
increased
profits
on
the
sale
of
LINZESS
in
the
U.S.,
an
increase
in
purchases
of
linaclotideAPI,
an
increase
in
prepaid
expenses
and
other
assets,
and
an
increase
in
deferred
rent.
These
uses
of
cash
were
partially
offset
by
non-cash
items
of
approximately$64.2
million,
including
approximately
$26.2
million
in
share-77 Table
of
Contentsbased
compensation
expense,
approximately
$20.3
million
due
to
the
write-down
of
inventory
to
net
realizable
value,
approximately
$12.3
million
in
depreciationand
amortization
expense
of
property
and
equipment,
approximately
$2.6
million
in
losses
on
facility
subleases,
approximately
$1.6
million
in
non-cash
interestexpense
and
approximately
$1.1
million
in
accretion
of
discounts
and
premiums
on
available-for-sale
securities.
Net
cash
used
in
operating
activities
totaled
approximately
$273.4
million
for
the
year
ended
December
31,
2013.
The
primary
uses
of
cash
were
our
net
lossof
approximately
$272.8
million
and
changes
in
assets
and
liabilities
of
approximately
$35.7
million
resulting
primarily
from
a
decrease
in
accounts
payable
andaccrued
expenses,
including
accrued
research
and
development
costs
due
to
timing
of
payments,
an
increase
in
inventory
for
linaclotide
API,
a
decrease
in
deferredrevenue
associated
with
the
Astellas
license
agreement,
a
decrease
in
deferred
rent
and
an
increase
accounts
receivable.
These
uses
of
cash
were
partially
offset
bynon-cash
items
of
approximately
$35.1
million,
including
approximately
$19.8
million
in
share-based
compensation
expense,
approximately
$11.7
million
indepreciation
and
amortization
expense
of
property
and
equipment,
approximately
$1.7
million
in
non-cash
interest
expense,
approximately
$1.3
million
in
accretionof
discounts
and
premiums
on
available-for-sale
securities
and
approximately
$0.6
million
in
losses
on
the
disposal
of
property
and
equipment.Cash
Flows
From
Investing
Activities
Cash
used
in
investing
activities
for
the
year
ended
December
31,
2015
totaled
approximately
$9.2
million
and
resulted
primarily
from
the
purchase
ofapproximately
$282.0
million
of
available-for-sale
securities
and
the
purchase
of
approximately
$4.0
million
of
property
and
equipment,
primarily
leaseholdimprovements
and
laboratory
equipment.
This
was
partially
offset
by
the
sales
and
maturities
of
approximately
$276.7
million
of
available-for-sale
securities
andan
insignificant
amount
of
proceeds
from
the
sale
of
property
and
equipment.
Cash
used
in
investing
activities
for
the
year
ended
December
31,
2014
totaled
approximately
$56.6
million
and
resulted
primarily
from
the
purchase
ofapproximately
$254.0
million
of
available-for-sale
securities
and
the
purchase
of
approximately
$3.5
million
of
property
and
equipment,
primarily
manufacturingand
laboratory
equipment
as
well
as
software
to
improve
our
information
technology
infrastructure.
This
was
partially
offset
by
the
maturity
of
approximately$200.9
million
in
available-for-sale
securities.
Cash
used
in
investing
activities
for
the
year
ended
December
31,
2013
totaled
approximately
$101.4
million
and
resulted
primarily
from
the
purchase
ofapproximately
$287.9
million
of
available-for-sale
securities
and
the
purchase
of
$9.6
million
of
property
and
equipment,
primarily
manufacturing
and
laboratoryequipment
as
well
as
software
to
improve
our
information
technology
infrastructure.
This
was
partially
offset
by
the
maturity
of
approximately
$196.1
million
inavailable-for-sale
securities.Cash
Flows
From
Financing
Activities
Cash
provided
by
financing
activities
for
the
year
ended
December
31,
2015
totaled
approximately
$303.1
million
and
resulted
primarily
from
approximately$324.0
million
in
net
proceeds
from
the
issuance
of
our
2022
Notes
in
June
2015,
approximately
$70.8
million
in
gross
proceeds
from
the
issuance
of
the
NoteHedge
Warrants
in
connection
with
the
2022
Notes,
approximately
$14.2
million
in
cash
provided
by
stock
option
exercises
and
the
issuance
of
shares
under
ouremployee
stock
purchase
plan,
partially
offset
by
approximately
$91.9
million
related
to
the
purchase
of
the
Convertible
Note
Hedges
in
connection
with
our
2022Notes,
approximately
$12.7
million
in
cash
used
for
principal
payments
on
our
outstanding
PhaRMA
Notes,
and
approximately
$1.3
million
in
cash
used
forpayments
on
our
capital
leases.78 Table
of
Contents
Cash
provided
by
financing
activities
for
the
year
ended
December
31,
2014
totaled
approximately
$210.9
million
and
resulted
primarily
from
approximately$190.4
million
in
net
proceeds
from
our
follow-on
public
stock
offering
in
the
first
quarter
of
2014
and
approximately
$22.7
million
in
cash
provided
by
stockoption
exercises
and
the
issuance
of
shares
under
our
employee
stock
purchase
plan,
partially
offset
by
approximately
$1.2
million
in
cash
used
for
principalpayments
on
debt
and
approximately
$1.0
million
in
cash
used
for
payments
on
our
capital
leases.
Cash
provided
by
financing
activities
for
the
year
ended
December
31,
2013
totaled
approximately
$313.6
million
and
resulted
primarily
from
approximately$167.3
million
in
net
proceeds
from
our
debt
financing
in
January
2013,
approximately
$137.8
million
in
net
proceeds
from
our
follow-on
public
stock
offering
inthe
second
quarter
of
2013
and
approximately
$9.3
million
in
cash
provided
by
stock
option
exercises
and
the
issuance
of
shares
under
our
employee
stockpurchase
plan,
partially
offset
by
approximately
$0.8
million
in
cash
used
for
payments
on
our
capital
leases.Funding Requirements
We
began
commercializing
LINZESS
in
the
U.S.
with
our
collaboration
partner,
Allergan,
in
the
fourth
quarter
of
2012,
and
we
currently
derive
substantiallyall
of
our
revenue
from
this
collaboration.
We
are
also
deploying
significant
resources
to
advance
product
opportunities
in
GI
and
vascular/fibrotic
diseases.
Ourgoal
is
to
become
cash
flow
positive
driven
by
increased
revenue
generated
through
sales
of
LINZESS
and
financial
discipline.
However,
we
have
not
achievedpositive
cash
flows
from
operations
to
date.
Under
our
collaboration
with
Allergan
for
North
America,
total
net
sales
of
LINZESS
in
the
U.S.,
as
recorded
by
Allergan,
are
reduced
by
commercial
costsincurred
by
each
party,
and
the
resulting
amount
is
shared
equally
between
us
and
Allergan.
Additionally,
we
receive
royalties
based
on
sales
of
linaclotide
in
theEuropean
territory,
Canada,
and
Mexico
from
Allergan.
We
believe
revenues
from
our
LINZESS
partnership
for
the
U.S.
with
Allergan
will
continue
to
constitute
asignificant
portion
of
our
total
revenue
for
the
foreseeable
future
and
we
cannot
be
certain
that
such
revenues,
as
well
as
the
revenues
from
our
other
commercialactivities,
will
enable
us
to
become
cash
flow
positive,
or
to
do
so
on
the
timeframes
we
expect.
We
also
anticipate
that
we
will
continue
to
incur
substantialexpenses
for
the
next
several
years
as
we
further
develop
and
commercialize
linaclotide
in
the
U.S.,
China
and
other
markets,
and
continue
to
invest
in
our
pipelineand
potentially
other
external
opportunities.
We
believe
that
our
cash
on
hand
as
of
December
31,
2015
will
be
sufficient
to
meet
our
projected
operating
needs
atleast
through
the
next
twelve
months.
Our
forecast
of
the
period
of
time
through
which
our
financial
resources
will
be
adequate
to
support
our
operations,
including
the
underlying
estimatesregarding
the
costs
to
develop
our
product
candidates
and
obtain
regulatory
approvals
and
the
costs
to
commercialize
linaclotide
in
the
U.S.,
China
and
othermarkets,
as
well
as
our
goal
to
become
cash
flow
positive,
are
forward-looking
statements
that
involve
risks
and
uncertainties.
Our
actual
results
could
varymaterially
and
negatively
from
these
and
other
forward-looking
statements
as
a
result
of
a
number
of
factors,
including
the
factors
discussed
in
the
"Risk
Factors"section
of
this
Annual
Report
on
Form
10-K.
We
have
based
our
estimates
on
assumptions
that
may
prove
to
be
wrong,
and
we
could
utilize
our
available
capitalresources
sooner
than
we
currently
expect.
Due
to
the
numerous
risks
and
uncertainties
associated
with
the
development
and
commercialization
of
our
product
candidates,
we
are
unable
to
estimateprecisely
the
amounts
of
capital
outlays
and
operating
expenditures
necessary
to
complete
the
development
of,
and
to
obtain
regulatory
approval
for,
linaclotide(other
than
in
the
countries
where
it
is
already
approved)
and
our
other
product
candidates,
or
to
commercialize
linaclotide
and
our
other
product
candidates,
ineach
case,
for
all
of
the
markets,
indications,
populations
and
formulations
for
which
we
believe
each79 Table
of
Contentsproduct
candidate
is
suited.
Our
funding
requirements
will
depend
on
many
factors,
including,
but
not
limited
to,
the
following:•the
revenue
generated
by
sales
of
LINZESS,
CONSTELLA
and
any
other
products;
•the
rate
of
progress
and
cost
of
our
commercialization
activities,
including
the
expense
we
incur
in
marketing
and
selling
LINZESS
and
any
otherproducts;
•the
success
of
our
third-party
manufacturing
activities;
•the
time
and
costs
involved
in
developing,
and
obtaining
regulatory
approvals
for,
our
product
candidates;
•the
success
of
our
research
and
development
efforts;
•the
emergence
of
competing
or
complementary
developments;
•the
costs
of
filing,
prosecuting,
defending
and
enforcing
any
patent
claims
and
other
intellectual
property
rights;
•the
terms
and
timing
of
any
additional
collaborative,
licensing
or
other
arrangements
that
we
may
establish;
and
•the
acquisition
of
businesses,
products
and
technologies
and
the
impact
of
other
strategic
transactions.Financing Strategy
We
may,
from
time
to
time,
consider
additional
funding
through
a
combination
of
new
collaborative
arrangements,
strategic
alliances,
and
additional
equityand
debt
financings
or
from
other
sources.
We
will
continue
to
manage
our
capital
structure
and
to
consider
all
financing
opportunities,
whenever
they
may
occur,that
could
strengthen
our
long-term
liquidity
profile.
Any
such
capital
transactions
may
or
may
not
be
similar
to
transactions
in
which
we
have
engaged
in
the
past.There
can
be
no
assurance
that
any
such
financing
opportunities
will
also
be
available
on
acceptable
terms,
if
at
all.Contractual
Commitments
and
ObligationsLease and Commercial Supply Obligations
The
following
table
summarizes
our
lease
and
commercial
supply
obligations
at
December
31,
2015
(excluding
interest):80
Payments
Due
by
Period
Total
Less
Than
1
Year
1
-
3
Years
3
-
5
Years
More
Than
5
Years
(in
thousands)
Commercial
supply
obligations
(1)
$32,440
$2,259
$9,641
$11,252
$9,288
Capital
lease
obligations
(2)
3,094
2,756
338
—
—
Operating
lease
obligations
(3)
32,422
15,617
16,805
—
—
Convertible
senior
notes
due
2022
(including
interest)
(4)
384,795
7,553
15,106
15,106
347,030
Total
contractual
obligations
$452,751
$28,185
$41,890
$26,358
$356,318
(1)We
have
multiple
commercial
supply
agreements
with
contract
manufacturing
organizations
for
the
purchase
of
linaclotide
finished
drugproduct
and
API.
Two
of
our
API
supply
agreements
for
supplying
API
to
our
collaboration
partners
outside
of
North
America
containminimum
purchase Table
of
ContentsNotes Payable
In
January
2013,
we
closed
a
private
placement
of
$175.0
million
in
aggregate
principal
amount
of
11%
PhaRMA
Notes
due
2024.
The
notes
bear
an
annualinterest
rate
of
11%,
with
interest
payable
March
15,
June
15,
September
15
and
December
15
of
each
year,
each
a
Payment
Date,
which
began
on
June
15,
2013.On
March
15,
2014,
we
began
making
quarterly
payments
on
the
notes
equal
to
the
greater
of
(i)
7.5%
of
net
sales
of
LINZESS
in
the
U.S.
for
the
precedingquarter,
or
the
Synthetic
Royalty
Amount,
and
(ii)
accrued
and
unpaid
interest
on
the
notes,
or
the
Required
Interest
Amount.
Principal
on
the
notes
will
be
repaidin
an
amount
equal
to
the
Synthetic
Royalty
Amount
minus
the
Required
Interest
Amount,
when
this
is
a
positive
number,
until
the
principal
has
been
paid
in
full.Given
the
principal
payments
on
the
notes
are
based
on
the
net
sales
of
LINZESS
in
the
U.S.,
which
will
vary
from
quarter
to
quarter,
the
notes
may
be
repaid
priorto
June
15,
2024,
the
final
legal
maturity
date.
We
made
principal
payments
of
$13.9
million
through
December
31,
2015.
Since
we
are
unable
to
reliably
estimatethe
exact
timing
and
amounts
of
the
principal
payments,
as
discussed
under
"Risk
Factors"
in
Item
1A
of
this
Annual
Report
on
Form
10-K,
the
notes-relatedcommitments
are
not
included
in
the
table
above.
In
June
2015,
we
issued
approximately
$335.7
million
of
2.25%
Convertible
Senior
Notes
due
June
15,
2022.
The
2022
Notes
are
governed
by
an
indenturebetween
us
and
U.S.
Bank
National
Association,
as
the
trustee,
or
the
Indenture.
The
2022
Notes
are
senior
unsecured
obligations
and
bear
interest
at
a
rate
of2.25%
per
year,
payable
on
June
15
and
December
15
of
each
year,
which
began
on
December
15,
2015.
The
2022
Notes
will
mature
on
June
15,
2022,
unlessearlier
converted
or
repurchased.
The
initial
conversion
rate
for
the
2022
Notes
is
60.3209
shares
of
Class
A
common
stock
(subject
to
adjustment
as
provided
forin
the
Indenture)
per
$1,000
principal
amount
of
the
2022
Notes,
which
is
equal
to
an
initial
conversion
price
of
approximately
$16.58
per
share.
In
addition,
tominimize
the
impact
of
potential
dilution
to
our
common
stock
upon
conversion
of
the
2022
Notes,
we
entered
into
the
Convertible
Note
Hedges
covering20,249,665
shares
of
our
Class
A
common
stock
in
connection
with
the
2022
Notes.
Concurrently
with
entering
into
the
Convertible
Note
Hedges,
we
sold
NoteHedge
Warrants
to
acquire
20,249,665
shares
of
our
Class
A
common
stock
at
an
initial
strike
price
of
approximately
$21.50
per
share,
subject
to
customary
anti-dilution
adjustments.
The
2022
Notes,
Convertible
Note
Hedges
and
Note
Hedge
Warrants
are
more
fully
described
in
Note
10,
Notes81commitments,
which
are
reflected
in
the
table
above.
During
the
year
ended
December
31,
2015,
we
recognized
approximately$10.1
million
of
the
commitments
included
in
the
table
above,
as
an
accrual
for
excess
purchase
commitments
that
is
recorded
in
otherliabilities
in
our
consolidated
balance
sheet.
In
addition,
we
and
Allergan
are
jointly
obligated
to
make
minimum
purchases
of
linaclotideAPI
for
the
territories
covered
by
our
collaboration
with
Allergan
for
North
America.
Currently,
Allergan
fulfills
all
such
minimumpurchase
commitments
and,
as
a
result,
they
are
excluded
from
the
table
above.(2)Our
commitment
for
capital
lease
obligations
principally
relates
to
leased
automobiles
for
our
field-based
sales
force
and
medical
scienceliaisons,
and
computer
and
office
equipment.
(3)Our
commitments
for
operating
leases
relate
to
our
lease
of
office
and
laboratory
space
in
Cambridge,
Massachusetts
and
our
data
storagespace
in
Boston,
Massachusetts.
In
the
third
quarter
of
2014,
we
entered
into
two
arrangements,
with
the
landlord's
consent,
to
sublease
aportion
of
our
Cambridge,
Massachusetts
corporate
headquarters.
The
future
minimum
lease
payments
included
in
this
table
do
not
reflectthe
$0.8
million
of
sublease
rental
income
that
we
are
entitled
to
receive
through
2016
under
the
first
sublease
or
the
$11.1
million
ofsublease
rental
income
that
we
are
entitled
to
receive
through
2018
under
the
second
sublease.
(4)Convertible
senior
notes
includes
approximately
$335.7
million
of
our
2022
Notes
which
can
potentially
be
settled
in
our
common
stockunder
the
terms
of
the
associated
indenture. Table
of
ContentsPayable
,
in
the
accompanying
notes
to
our
consolidated
financial
statements
appearing
elsewhere
in
this
Annual
Report
on
Form
10-K
for
additional
information.Commitments Related to Our Collaboration and License Agreements
Under
our
collaborative
agreements
with
Allergan
for
North
America
and
AstraZeneca
for
China,
Hong
Kong
and
Macau,
we
share
with
Allergan
andAstraZeneca
all
development
and
commercialization
costs
related
to
linaclotide
in
the
U.S.
and
for
China,
Hong
Kong
and
Macau,
respectively.
The
actual
amountsthat
we
pay
our
partners
or
that
partners
pay
to
us
will
depend
on
numerous
factors
outside
of
our
control,
including
the
success
of
our
clinical
development
effortswith
respect
to
linaclotide,
the
content
and
timing
of
decisions
made
by
the
regulators,
the
reimbursement
and
competitive
landscape
around
linaclotide
and
ourother
product
candidates,
and
other
factors
described
under
"Risk
Factors"
in
Item
1A
of
this
Annual
Report
on
Form
10-K.
In
addition,
we
have
commitments
to
make
potential
future
milestone
payments
under
one
of
our
license
and
collaboration
arrangements
totaling$23.0
million,
which
includes
$5.0
million
for
development
milestones
and
$18.0
million
for
regulatory
milestones.
We
are
also
committed
to
make
potential
futuremilestone
payments
of
up
to
$114.5
million
per
product
to
one
of
our
collaboration
partners,
including
$21.5
million
for
development
milestones,
$58.0
million
forregulatory
milestones
and
$35.0
million
for
sales-based
milestones.
These
milestones
primarily
include
the
commencement
and
results
of
clinical
trials,
obtainingregulatory
approval
in
various
jurisdictions
and
the
future
commercial
success
of
development
programs,
the
outcome
and
timing
of
which
are
difficult
to
predictand
subject
to
significant
uncertainty.
In
addition
to
the
milestones
discussed
above,
we
are
obligated
to
pay
royalties
on
future
sales,
which
are
contingent
ongenerating
levels
of
sales
of
future
products
that
have
not
been
achieved
and
may
never
be
achieved.
Since
we
are
unable
to
reliably
estimate
the
timing
andamounts
of
such
milestone
and
royalty
payments,
or
whether
they
will
occur
at
all,
these
contingent
payments
have
been
excluded
from
the
table
above.
Our
licenseand
collaboration
agreements
are
more
fully
described
in
Note
4,
Collaboration,
License
and
Co-promotion
Agreements
,
in
the
accompanying
notes
to
ourconsolidated
financial
statements
appearing
elsewhere
in
this
Annual
Report
on
Form
10-K.Tax-related Obligations
We
exclude
liabilities
or
obligations
pertaining
to
uncertain
tax
positions
from
our
summary
of
contractual
commitments
and
obligations
as
we
cannot
make
areliable
estimate
of
the
period
of
cash
settlement
with
the
respective
taxing
authorities.
As
of
December
31,
2015,
we
have
approximately
$17.6
million
ofuncertain
tax
positions,
and
we
cannot
reasonably
estimate
the
potential
adjustment
to
our
net
operating
loss
carryforward.
These
uncertain
tax
positions
are
morefully
described
in
Note
14,
Income
Taxes
,
in
the
accompanying
notes
to
our
consolidated
financial
statements
appearing
elsewhere
in
this
Annual
Report
onForm
10-K
for
additional
information.Other Funding Commitments
As
of
December
31,
2015,
we
have
several
on-going
studies
in
various
clinical
trial
stages.
Our
most
significant
clinical
trial
expenditures
are
to
CROs.
Thecontracts
with
CROs
generally
are
cancellable,
with
notice,
at
our
option
and
do
not
have
any
significant
cancellation
penalties.
These
items
are
not
included
in
thetable
above.Off-Balance
Sheet
Arrangements
We
do
not
have
any
relationships
with
unconsolidated
entities
or
financial
partnerships,
such
as
entities
often
referred
to
as
structured
finance
or
specialpurpose
entities,
that
would
have
been
established
for
the
purpose
of
facilitating
off-balance
sheet
arrangements
(as
that
term
is
defined
in82 Table
of
ContentsItem
303(a)(4)(ii)
of
Regulation
S-K)
or
other
contractually
narrow
or
limited
purposes.
As
such,
we
are
not
exposed
to
any
financing,
liquidity,
market
or
creditrisk
that
could
arise
if
we
had
engaged
in
those
types
of
relationships.
We
enter
into
guarantees
in
the
ordinary
course
of
business
related
to
the
guarantee
of
ourown
performance
and
the
performance
of
our
subsidiaries.New
Accounting
Pronouncements
For
a
discussion
of
new
accounting
pronouncements
refer
to
Note
2,
Summary
of
Significant
Accounting
Policies
,
to
our
consolidated
financial
statementsappearing
elsewhere
in
this
Annual
Report
on
Form
10-K.Item
7A.
Quantitative and Qualitative Disclosures about Market Risk Interest
Rate
Risk
We
are
exposed
to
market
risk
related
to
changes
in
interest
rates.
We
invest
our
cash
in
a
variety
of
financial
instruments,
principally
securities
issued
by
theU.S.
government
and
its
agencies
and
money
market
instruments.
The
goals
of
our
investment
policy
are
preservation
of
capital,
fulfillment
of
liquidity
needs
andfiduciary
control
of
cash
and
investments.
We
also
seek
to
maximize
income
from
our
investments
without
assuming
significant
risk.
Our
primary
exposure
to
market
risk
is
interest
income
sensitivity,
which
is
affected
by
changes
in
the
general
level
of
interest
rates,
particularly
because
ourinvestments
are
in
short-term
marketable
securities.
Due
to
the
short-term
duration
of
our
investment
portfolio
and
the
low
risk
profile
of
our
investments,
animmediate
1%
change
in
interest
rates
would
not
have
a
material
effect
on
the
fair
market
value
of
our
portfolio.
Accordingly,
we
would
not
expect
our
operatingresults
or
cash
flows
to
be
affected
to
any
significant
degree
by
the
effect
of
a
sudden
change
in
market
interest
rates
on
our
investment
portfolio.
We
do
not
believe
our
cash,
cash
equivalents
and
available-for-sale
securities
have
significant
risk
of
default
or
illiquidity.
While
we
believe
our
cash,
cashequivalents
and
available-for-sale
securities
do
not
contain
excessive
risk,
we
cannot
provide
absolute
assurance
that
in
the
future
our
investments
will
not
besubject
to
adverse
changes
in
market
value.
In
addition,
we
maintain
significant
amounts
of
cash,
cash
equivalents
and
available-for-sale
securities
at
one
or
morefinancial
institutions
that
are
in
excess
of
federally
insured
limits.
Given
the
potential
instability
of
financial
institutions,
we
cannot
provide
assurance
that
we
willnot
experience
losses
on
these
deposits.
Our
capital
lease
obligations,
PhaRMA
Notes
and
2022
Notes
bear
interest
at
a
fixed
rate
and
therefore
have
minimal
exposure
to
changes
in
interest
rates;however,
because
these
interest
rates
are
fixed,
we
may
be
paying
a
higher
interest
rate,
relative
to
market,
in
the
future
if
our
credit
rating
improves
or
othercircumstances
change.Equity
Price
Risk2022
Notes
Our
2022
Notes
include
conversion
and
settlement
provisions
that
are
based
on
the
price
of
our
Class
A
common
stock
at
conversion
or
at
maturity
of
the
2022Notes.
The
amount
of
cash
we
may
be
required
to
pay
is
determined
by
the
price
of
our
Class
A
common
stock.
The
fair
value
of
our
2022
Notes
is
dependent
onthe
price
and
volatility
of
our
Class
A
common
stock
and
will
generally
increase
or
decrease
as
the
market
price
of
our
Class
A
common
stock
changes.
The
2022
Notes
are
convertible
into
Class
A
common
stock
at
an
initial
conversion
rate
of
60.3209
shares
of
Class
A
common
stock
(subject
to
adjustment
asprovided
for
in
the
Indenture)
per
$1,000
principal
amount
of
the
2022
Notes,
which
is
equal
to
an
initial
conversion
price
of
approximately83 Table
of
Contents$16.58
per
share.
The
2022
Notes
will
mature
on
June
15,
2022
unless
earlier
converted
or
repurchased.
The
2022
Notes
bear
cash
interest
at
an
annual
rate
of2.25%,
payable
on
June
15
and
December
15
of
each
year,
which
began
on
December
15,
2015.
As
of
December
31,
2015,
the
fair
value
of
the
2022
Notes
wasestimated
by
us
to
be
$311.6
million.
The
2022
Notes
are
more
fully
described
in
Note
5,
Fair
Value
of
Financial
Instruments
,
and
Note
10,
Notes
Payable
,
in
theaccompanying
notes
to
our
consolidated
financial
statements
appearing
elsewhere
in
this
Annual
Report
on
Form
10-K
for
additional
information.Convertible
Note
Hedge
and
Warrant
Transactions
with
Respect
to
2022
Notes
To
minimize
the
impact
of
potential
dilution
to
our
common
stock
upon
conversion
of
the
2022
Notes,
we
entered
into
Convertible
Note
Hedges.
Concurrentlywith
entering
into
the
Convertible
Note
Hedges,
we
entered
into
warrant
transactions
whereby
we
sold
Note
Hedge
Warrants
to
acquire,
subject
to
customaryadjustments,
20,249,665
shares
of
our
Class
A
common
stock
at
an
initial
strike
price
of
approximately
$21.50
per
share,
subject
to
adjustment.
The
ConvertibleNote
Hedges
and
Note
Hedge
Warrants
are
more
fully
described
in
Note
10,
Notes
Payable
,
in
the
accompanying
notes
to
our
consolidated
financial
statementsappearing
elsewhere
in
this
Annual
Report
on
Form
10-K
for
additional
information.Foreign
Currency
Risk
We
have
no
significant
operations
outside
the
U.S.
and
we
do
not
expect
to
be
impacted
significantly
by
foreign
currency
fluctuations.Effects
of
Inflation
We
do
not
believe
that
inflation
and
changing
prices
over
the
years
ended
December
31,
2015,
2014
and
2013
had
a
significant
impact
on
our
results
ofoperations.Item
8.
Consolidated Financial Statements and Supplementary Data
Our
consolidated
financial
statements,
together
with
the
independent
registered
public
accounting
firm
report
thereon,
appear
at
pages
F-1
through
F-66,
ofthis
Annual
Report
on
Form
10-K.Item
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.84 Table
of
ContentsItem
9A.
Controls and Procedures Evaluation
of
Disclosure
Controls
and
Procedures
As
required
by
Rule
13a-15(b)
of
the
Exchange
Act,
our
management,
including
our
principal
executive
officer
and
our
principal
financial
officer,
conductedan
evaluation
as
of
the
end
of
the
period
covered
by
this
Annual
Report
on
Form
10-K
of
the
effectiveness
of
the
design
and
operation
of
our
disclosure
controlsand
procedures.
Based
on
that
evaluation,
our
principal
executive
officer
and
principal
financial
officer
concluded
that
our
disclosure
controls
and
procedures
areeffective
at
the
reasonable
assurance
level
in
ensuring
that
information
required
to
be
disclosed
by
us
in
the
reports
that
we
file
or
submit
under
the
Exchange
Act
isrecorded,
processed,
summarized
and
reported
within
the
time
periods
specified
in
the
SEC's
rules
and
forms.
Disclosure
controls
and
procedures
include,
withoutlimitation,
controls
and
procedures
designed
to
ensure
that
information
required
to
be
disclosed
by
us
in
the
reports
we
file
under
the
Exchange
Act
is
accumulatedand
communicated
to
our
management,
including
our
principal
executive
officer
and
principal
financial
officer,
as
appropriate
to
allow
timely
decisions
regardingrequired
disclosure.Management's
Report
on
Internal
Control
Over
Financial
Reporting
Our
management
is
responsible
for
establishing
and
maintaining
adequate
internal
control
over
our
financial
reporting.
Internal
control
over
financial
reportingis
defined
in
Rules
13a-15(f)
and
15d-15(f)
under
the
Exchange
Act
as
the
process
designed
by,
or
under
the
supervision
of,
our
Chief
Executive
Officer
and
ChiefFinancial
Officer,
and
effected
by
our
board
of
directors,
management
and
other
personnel,
to
provide
reasonable
assurance
regarding
the
reliability
of
our
financialreporting
and
the
preparation
of
our
financial
statements
for
external
purposes
in
accordance
with
generally
accepted
accounting
principles,
and
includes
thosepolicies
and
procedures
that:(1)pertain
to
the
maintenance
of
records
that,
in
reasonable
detail,
accurately
and
fairly
reflect
the
transactions
and
dispositions
of
assets;
(2)provide
reasonable
assurance
that
transactions
are
recorded
as
necessary
to
permit
preparation
of
financial
statements
in
accordance
with
generallyaccepted
accounting
principles,
and
that
receipts
and
expenditures
are
being
made
only
in
accordance
with
the
authorizations
of
management
anddirectors;
and
(3)provide
reasonable
assurance
regarding
the
prevention
or
timely
detection
of
unauthorized
acquisition,
use
or
disposition
of
assets
that
could
have
amaterial
effect
on
our
financial
statements.
Under
the
supervision
and
with
the
participation
of
our
management,
including
our
Chief
Executive
Officer
and
Chief
Financial
Officer,
we
conducted
anevaluation
of
the
effectiveness
of
our
internal
control
over
financial
reporting
based
on
the
framework
provided
in
Internal
Control—Integrated
Framework
issuedby
the
Committee
of
Sponsoring
Organizations
of
the
Treadway
Commission
(2013
framework).
Based
on
this
evaluation,
our
management
concluded
that
ourinternal
control
over
financial
reporting
was
effective
as
of
December
31,
2015.
The
effectiveness
of
our
internal
control
over
financial
reporting
as
of
December
31,
2015
has
been
audited
by
Ernst
and
Young
LLP,
an
independentregistered
public
accounting
firm,
as
stated
in
their
report,
which
is
included
herein.Changes
in
Internal
Control
As
required
by
Rule
13a-15(d)
of
the
Exchange
Act,
our
management,
including
our
principal
executive
officer
and
our
principal
financial
officer,
conductedan
evaluation
of
the
internal
control
over
financial
reporting
to
determine
whether
any
changes
occurred
during
the
quarter
ended85 Table
of
ContentsDecember
31,
2015
that
have
materially
affected,
or
are
reasonably
likely
to
materially
affect,
our
internal
control
over
financial
reporting.
Based
on
thatevaluation,
our
principal
executive
officer
and
principal
financial
officer
concluded
no
such
changes
during
the
quarter
ended
December
31,
2015
materiallyaffected,
or
were
reasonably
likely
to
materially
affect,
our
internal
control
over
financial
reporting.86 Table
of
ContentsReport
of
Independent
Registered
Public
Accounting
Firm
The
Board
of
Directors
and
Shareholders
of
Ironwood
Pharmaceuticals,
Inc.
We
have
audited
Ironwood
Pharmaceuticals,
Inc.'s
internal
control
over
financial
reporting
as
of
December
31,
2015,
based
on
criteria
established
in
InternalControl—Integrated
Framework
issued
by
the
Committee
of
Sponsoring
Organizations
of
the
Treadway
Commission
(2013
framework)
(the
COSO
criteria).Ironwood
Pharmaceuticals,
Inc.'s
management
is
responsible
for
maintaining
effective
internal
control
over
financial
reporting,
and
for
its
assessment
of
theeffectiveness
of
internal
control
over
financial
reporting
included
in
the
accompanying
Management's
Report
on
Internal
Control
Over
Financial
Reporting.
Ourresponsibility
is
to
express
an
opinion
on
the
company's
internal
control
over
financial
reporting
based
on
our
audit.
We
conducted
our
audit
in
accordance
with
the
standards
of
the
Public
Company
Accounting
Oversight
Board
(United
States).
Those
standards
require
that
weplan
and
perform
the
audit
to
obtain
reasonable
assurance
about
whether
effective
internal
control
over
financial
reporting
was
maintained
in
all
material
respects.Our
audit
included
obtaining
an
understanding
of
internal
control
over
financial
reporting,
assessing
the
risk
that
a
material
weakness
exists,
testing
and
evaluatingthe
design
and
operating
effectiveness
of
internal
control
based
on
the
assessed
risk,
and
performing
such
other
procedures
as
we
considered
necessary
in
thecircumstances.
We
believe
that
our
audit
provides
a
reasonable
basis
for
our
opinion.
A
company's
internal
control
over
financial
reporting
is
a
process
designed
to
provide
reasonable
assurance
regarding
the
reliability
of
financial
reporting
andthe
preparation
of
financial
statements
for
external
purposes
in
accordance
with
generally
accepted
accounting
principles.
A
company's
internal
control
overfinancial
reporting
includes
those
policies
and
procedures
that
(1)
pertain
to
the
maintenance
of
records
that,
in
reasonable
detail,
accurately
and
fairly
reflect
thetransactions
and
dispositions
of
the
assets
of
the
company;
(2)
provide
reasonable
assurance
that
transactions
are
recorded
as
necessary
to
permit
preparation
offinancial
statements
in
accordance
with
generally
accepted
accounting
principles,
and
that
receipts
and
expenditures
of
the
company
are
being
made
only
inaccordance
with
authorizations
of
management
and
directors
of
the
company;
and
(3)
provide
reasonable
assurance
regarding
prevention
or
timely
detection
ofunauthorized
acquisition,
use,
or
disposition
of
the
company's
assets
that
could
have
a
material
effect
on
the
financial
statements.
Because
of
its
inherent
limitations,
internal
control
over
financial
reporting
may
not
prevent
or
detect
misstatements.
Also,
projections
of
any
evaluation
ofeffectiveness
to
future
periods
are
subject
to
the
risk
that
controls
may
become
inadequate
because
of
changes
in
conditions,
or
that
the
degree
of
compliance
withthe
policies
or
procedures
may
deteriorate.
In
our
opinion,
Ironwood
Pharmaceuticals,
Inc.
maintained,
in
all
material
respects,
effective
internal
control
over
financial
reporting
as
of
December
31,2015,
based
on
the
COSO
criteria.
We
also
have
audited,
in
accordance
with
the
standards
of
the
Public
Company
Accounting
Oversight
Board
(United
States),
the
consolidated
balance
sheetsof
Ironwood
Pharmaceuticals,
Inc.
as
of
December
31,
2015
and
2014,
and
the
related
consolidated
statements
of
operations,
comprehensive
loss,
stockholders'equity,
and
cash
flows
for
each
of
the
three
years
in
the
period
ended
December
31,
2015
of
Ironwood
Pharmaceuticals,
Inc.
and
our
report
dated
February
19,
2016expressed
an
unqualified
opinion
thereon.Boston,
Massachusetts
February
19,
201687
/s/
Ernst
&
Young
LLP
Table
of
ContentsItem
9B.
Other Information
None.88 Table
of
ContentsPART
III
Item
10.
Directors, Executive Officers and Corporate Governance
We
have
adopted
a
code
of
business
conduct
and
ethics
applicable
to
our
directors,
executive
officers
and
all
other
employees.
A
copy
of
that
code
is
availableon
our
corporate
website
at
http://www.ironwoodpharma.com.
Any
amendments
to
the
code
of
business
conduct
and
ethics,
and
any
waivers
thereto
involving
ourexecutive
officers,
also
will
be
available
on
our
corporate
website.
A
printed
copy
of
these
documents
will
be
made
available
upon
request.
The
content
on
ourwebsite
is
not
incorporated
by
reference
into
this
Annual
Report
on
Form
10-K.
Certain
information
regarding
our
executive
officers
is
set
forth
at
the
end
of
Part
I,
Item
1
of
this
Form
10-K
under
the
heading,
"Executive
Officers
of
theRegistrant."
The
other
information
required
by
this
item
is
incorporated
by
reference
from
our
proxy
statement
for
our
2016
Annual
Meeting
of
Stockholders.Item
11.
Executive Compensation
The
information
required
by
this
item
is
incorporated
by
reference
from
our
proxy
statement
for
our
2016
Annual
Meeting
of
Stockholders.Item
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The
information
required
by
this
item
is
incorporated
by
reference
from
our
proxy
statement
for
our
2016
Annual
Meeting
of
Stockholders.Item
13.
Certain Relationships and Related Transactions, and Director Independence
The
information
required
by
this
item
is
incorporated
by
reference
from
our
proxy
statement
for
our
2016
Annual
Meeting
of
Stockholders.Item
14.
Principal Accountant Fees and Services
The
information
required
by
this
item
is
incorporated
by
reference
from
our
proxy
statement
for
our
2016
Annual
Meeting
of
Stockholders.89 Table
of
ContentsPART
IV
Item
15.
Exhibits and Financial Statement Schedules
(a)
List
of
documents
filed
as
part
of
this
report(1)Consolidated
Financial
Statements
listed
under
Part
II,
Item
8
and
included
herein
by
reference.
(2)Consolidated
Financial
Statement
SchedulesNo
schedules
are
submitted
because
they
are
not
applicable,
not
required
or
because
the
information
is
included
in
the
ConsolidatedFinancial
Statements
or
Notes
to
Consolidated
Financial
Statements.(3)Exhibits90
Incorporated
by
reference
hereinNumber
Description
Form
Date
3.1
Eleventh
Amended
and
RestatedCertificate
of
Incorporation
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
March
30,
2010
3.2
Fifth
Amended
and
Restated
Bylaws
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
March
30,
2010
4.1
Specimen
Class
A
common
stockcertificate
Registration
Statement
on
Form
S-1,
asamended
(File
No.
333-163275)
January
20,
2010
4.2
Eighth
Amended
and
Restated
Investors'Rights
Agreement,
dated
as
ofSeptember
1,
2009,
by
and
amongIronwood
Pharmaceuticals,
Inc.,
theFounders
and
the
Investors
namedtherein
Registration
Statement
on
Form
S-1,
asamended
(File
No.
333-163275)
November
20,
2009
4.3
Indenture,
dated
as
of
January
4,
2013,by
and
between
IronwoodPharmaceuticals,
Inc.,
as
issuer
of
theNotes,
and
U.S.
Bank
NationalAssociation,
as
initial
trustee
of
theNotes
and
as
Operating
Bank
(includingthe
form
of
the
Linaclotide
PhaRMA
SM11%
Notes
due
2024)
Form
8-K
(File
No.
001-34620)
January
8,
2013
4.4
Indenture,
dated
as
of
June
15,
2015,
byand
between
IronwoodPharmaceuticals,
Inc.
and
U.
S.
BankNational
Association
(including
theform
of
the
2.25%
Convertible
SeniorNote
due
2022)
Form
8-K
(File
No.
001-34620)
June
15,
2015
Table
of
Contents91
Incorporated
by
reference
hereinNumber
Description
Form
Date
10.1#Amended
and
Restated
2002
StockIncentive
Plan
and
form
agreementsthereunder
Registration
Statement
on
Form
S-1,
asamended
(File
No.
333-163275)
December
23,
2009
10.2#Amended
and
Restated
2005
StockIncentive
Plan
and
form
agreementsthereunder
Registration
Statement
on
Form
S-1,
asamended
(File
No.
333-163275)
January
29,
2010
10.3#Amended
and
Restated
2010
Employee,Director
and
Consultant
EquityIncentive
Plan
Registration
Statement
on
Form
S-8,
asamended
(File
No.
333-184396)
October
12,
2012
10.3.1#Form
of
Stock
Option
Agreement
underthe
Amended
and
Restated
2010Employee,
Director
and
ConsultantEquity
Incentive
Plan
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
February
18,
2015
10.3.2#Form
of
Non-employee
DirectorRestricted
Stock
Agreement
under
theAmended
and
Restated
2010
Employee,Director
and
Consultant
EquityIncentive
Plan
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
February
18,
2015
10.3.3#Form
of
Restricted
Stock
UnitAgreement
under
the
Amended
andRestated
2010
Employee,
Director
andConsultant
Equity
Incentive
Plan
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
February
18,
2015
10.4#Amended
and
Restated
2010
EmployeeStock
Purchase
Plan
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
February
21,
2013
10.5#Change
of
Control
Severance
BenefitPlan,
as
amended
and
restated
Quarterly
Report
on
Form
10-Q
(FileNo.
001-34620)
April
29,
2014
10.6#Form
of
Executive
SeveranceAgreement
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
February
18,
2015
10.7#Director
Compensation
Plan
effectiveJanuary
1,
2014
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
February
7,
2014
10.8#Form
of
Indemnification
Agreementwith
Directors
and
Officers
Registration
Statement
on
Form
S-1,
asamended
(File
No.
333-163275)
December
23,
2009
10.9#Consulting
Agreement,
dated
as
ofDecember
16,
2014,
by
and
betweenChristopher
Walsh
and
IronwoodPharmaceuticals,
Inc.
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
February
18,
2015
Table
of
Contents92
Incorporated
by
reference
hereinNumber
Description
Form
Date
10.10#Consulting
Agreement,
datedDecember
3,
2014,
by
and
betweenLawrence
S.
Olanoff
and
IronwoodPharmaceuticals,
Inc.
Quarterly
Report
on
Form
10-Q
(FileNo.
001-34620)
May
6,
2015
10.11+Collaboration
Agreement,
dated
as
ofSeptember
12,
2007,
as
amended
onNovember
3,
2009,
by
and
betweenForest
Laboratories,
Inc.
and
IronwoodPharmaceuticals,
Inc.
Registration
Statement
on
Form
S-1,
asamended
(File
No.
333-163275)
February
2,
2010
10.11.1
Amendment
No.
2
to
the
CollaborationAgreement,
dated
as
of
January
8,
2013,by
and
between
ForestLaboratories,
Inc.
and
IronwoodPharmaceuticals,
Inc.
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
February
21,
2013
10.12+License
Agreement,
dated
as
ofApril
30,
2009,
by
and
betweenAllergan
PharmaceuticalsInternational
Ltd.
(formerly
withAlmirall,
S.A.)
and
IronwoodPharmaceuticals,
Inc.
Registration
Statement
on
Form
S-1,
asamended
(File
No.
333-163275)
February
2,
2010
10.12.1+Amendment
No.
1
to
LicenseAgreement,
dated
as
of
June
11,
2013,by
and
between
AllerganPharmaceuticals
International
Ltd.(formerly
with
Almirall,
S.A.)
andIronwood
Pharmaceuticals,
Inc.
Quarterly
Report
on
Form
10-Q
(FileNo.
001-34620)
August
8,
2013
10.12.2++*Amendment
to
the
License
Agreement,dated
as
of
October
26,
2015,
by
andbetween
Allergan
PharmaceuticalsInternational
Ltd.
and
IronwoodPharmaceuticals,
Inc.
10.13++*Novation
Agreement,
dated
as
ofOctober
26,
2015,
by
and
amongAlmirall,
S.A.,
AllerganPharmaceuticals
International
Ltd.
andIronwood
Pharmaceuticals,
Inc.
10.14+License
Agreement,
dated
as
ofNovember
10,
2009,
by
and
amongAstellas
Pharma
Inc.
and
IronwoodPharmaceuticals,
Inc.
Registration
Statement
on
Form
S-1,
asamended
(File
No.
333-163275)
February
2,
2010
Table
of
Contents93
Incorporated
by
reference
hereinNumber
Description
Form
Date
10.15+Collaboration
Agreement,
dated
as
ofOctober
23,
2012,
by
and
betweenAstraZeneca
AB
and
IronwoodPharmaceuticals,
Inc.
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
February
21,
2013
10.16+Commercial
Supply
Agreement,
datedas
of
June
23,
2010,
by
and
amongPolyPeptide
Laboratories,
Inc.
andPolypeptide
Laboratories
(SWEDEN)AB,
Forest
Laboratories,
Inc.
andIronwood
Pharmaceuticals,
Inc.
Quarterly
Report
on
Form
10-Q
(FileNo.
001-34620)
August
10,
2010
10.17+Commercial
Supply
Agreement,
datedas
of
March
28,
2011,
by
and
amongCorden
Pharma
Colorado,
Inc.
(f/k/aRoche
Colorado
Corporation),Ironwood
Pharmaceuticals,
Inc.
andForest
Laboratories,
Inc.
Quarterly
Report
on
Form
10-Q
(FileNo.
001-34620)
May
13,
2011
10.17.1+Amendment
No.
3
to
CommercialSupply
Agreement,
dated
as
ofNovember
26,
2013,
by
and
betweenCorden
Pharma
Colorado,
Inc.
(f/k/aRoche
Colorado
Corporation),Ironwood
Pharmaceuticals,
Inc.
andForest
Laboratories,
Inc.
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
February
7,
2014
10.18
Lease
for
facilities
at
301
Binney
St.,Cambridge,
MA,
dated
as
of
January
12,2007,
as
amended
on
April
9,
2009,
byand
between
IronwoodPharmaceuticals,
Inc.
and
BMR-RogersStreet
LLC
Registration
Statement
on
Form
S-1,
asamended
(File
No.
333-163275)
December
23,
2009
10.18.1
Second
Amendment
to
Lease
forfacilities
at
301
Binney
St.,
Cambridge,MA,
dated
as
of
February
9,
2010,
byand
between
IronwoodPharmaceuticals,
Inc.
and
BMR-RogersStreet
LLC
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
March
30,
2010
10.18.2
Third
Amendment
to
Lease
for
facilitiesat
301
Binney
St.,
Cambridge,
MA,dated
as
of
July
1,
2010,
by
and
betweenIronwood
Pharmaceuticals,
Inc.
andBMR-Rogers
Street
LLC
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
March
30,
2011
Table
of
Contents94
Incorporated
by
reference
hereinNumber
Description
Form
Date
10.18.3
Fourth
Amendment
to
Lease
forfacilities
at
301
Binney
St.,
Cambridge,MA,
dated
as
of
February
3,
2011,
byand
between
IronwoodPharmaceuticals,
Inc.
and
BMR-RogersStreet
LLC
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
March
30,
2011
10.18.4
Fifth
Amendment
to
Lease
for
facilitiesat
301
Binney
St.,
Cambridge,
MA,dated
as
of
October
18,
2011,
by
andbetween
IronwoodPharmaceuticals,
Inc.
and
BMR-RogersStreet
LLC
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
February
29,
2012
10.18.5
Sixth
Amendment
to
Lease
for
facilitiesat
301
Binney
St.,
Cambridge,
MA,dated
as
of
July
19,
2012,
by
andbetween
IronwoodPharmaceuticals,
Inc.
and
BMR-RogersStreet
LLC
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
February
21,
2013
10.18.6
Seventh
Amendment
to
Lease
forfacilities
at
301
Binney
St.,
Cambridge,MA,
dated
as
of
October
30,
2012,
byand
between
IronwoodPharmaceuticals,
Inc.
and
BMR-RogersStreet
LLC
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
February
21,
2013
10.18.7
Eighth
Amendment
to
Lease
forfacilities
at
301
Binney
St.,
Cambridge,MA,
dated
as
of
July
8,
2014,
by
andbetween
IronwoodPharmaceuticals,
Inc.
and
BMR-RogersStreet
LLC
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
February
18,
2015
10.18.8
Ninth
Amendment
to
Lease
for
facilitiesat
301
Binney
St.,
Cambridge,
MA,dated
as
of
October
27,
2014,
by
andbetween
IronwoodPharmaceuticals,
Inc.
and
BMR-RogersStreet
LLC
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
February
18,
2015
10.18.9
Tenth
Amendment
to
Lease
for
facilitiesat
301
Binney
St.,
Cambridge,
MA,dated
as
of
January
21,
2015,
by
andbetween
IronwoodPharmaceuticals,
Inc.
and
BMR-RogersStreet
LLC
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
February
18,
2015
Table
of
Contents95
Incorporated
by
reference
hereinNumber
Description
Form
Date
10.18.10
Sublease,
dated
as
of
July
1,
2014,
byand
between
Biogen
Idec
MA
Inc.
andIronwood
Pharmaceuticals,
Inc.
toLease
for
facilities
at
301
Binney
St.,Cambridge,
MA,
as
amended,
by
andbetween
IronwoodPharmaceuticals,
Inc.
and
BMR-RogersStreet
LLC
Annual
Report
on
Form
10-K
(FileNo.
001-34620)
February
18,
2015
10.19
Base
Call
Option
TransactionConfirmation,
dated
as
of
June
10,2015,
between
IronwoodPharmaceuticals,
Inc.
and
JPMorganChase
Bank,
National
Association,London
Branch
Quarterly
Report
on
Form
10-Q
(FileNo.
001-34620)
August
7,
2015
10.20
Base
Call
Option
TransactionConfirmation,
dated
as
of
June
10,2015,
between
IronwoodPharmaceuticals,
Inc.
and
Credit
SuisseCapital
LLC,
through
its
agent
CreditSuisse
Securities
(USA)
LLC
Quarterly
Report
on
Form
10-Q
(FileNo.
001-34620)
August
7,
2015
10.21
Base
Warrants
Confirmation,
dated
asof
June
10,
2015,
between
IronwoodPharmaceuticals,
Inc.
and
JPMorganChase
Bank,
National
Association,London
Branch
Quarterly
Report
on
Form
10-Q
(FileNo.
001-34620)
August
7,
2015
10.22
Base
Warrants
Confirmation,
dated
asof
June
10,
2015,
between
IronwoodPharmaceuticals,
Inc.
and
Credit
SuisseCapital
LLC,
through
its
agent
CreditSuisse
Securities
(USA)
LLC
Quarterly
Report
on
Form
10-Q
(FileNo.
001-34620)
August
7,
2015
10.23
Additional
Call
Option
TransactionConfirmation,
dated
as
of
June
22,2015,
between
IronwoodPharmaceuticals,
Inc.
and
JPMorganChase
Bank,
National
Association,London
Branch
Quarterly
Report
on
Form
10-Q
(FileNo.
001-34620)
August
7,
2015
Table
of
Contents96
Incorporated
by
reference
hereinNumber
Description
Form
Date
10.24
Additional
Call
Option
TransactionConfirmation,
dated
as
of
June
22,2015,
between
IronwoodPharmaceuticals,
Inc.
and
Credit
SuisseCapital
LLC,
through
its
agent
CreditSuisse
Securities
(USA)
LLC
Quarterly
Report
on
Form
10-Q
(FileNo.
001-34620)
August
7,
2015
10.25
Additional
Warrants
Confirmation,dated
as
of
June
22,
2015,
betweenIronwood
Pharmaceuticals,
Inc.
andJPMorgan
Chase
Bank,
NationalAssociation,
London
Branch
Quarterly
Report
on
Form
10-Q
(FileNo.
001-34620)
August
7,
2015
10.26
Additional
Warrants
Confirmation,dated
as
of
June
22,
2015,
betweenIronwood
Pharmaceuticals,
Inc.
andCredit
Suisse
Capital
LLC,
through
itsagent
Credit
Suisse
Securities(USA)
LLC
Quarterly
Report
on
Form
10-Q
(FileNo.
001-34620)
August
7,
2015
21.1*Subsidiaries
of
IronwoodPharmaceuticals,
Inc.
23.1*Consent
of
Independent
RegisteredPublic
Accounting
Firm
31.1*Certification
of
Chief
Executive
Officerpursuant
to
Rules
13a-14
or
15d-14
ofthe
Exchange
Act
31.2*Certification
of
Chief
Financial
Officerpursuant
to
Rules
13a-14
or
15d-14
ofthe
Exchange
Act
32.1‡Certification
of
Chief
Executive
Officerpursuant
to
Rules
13a-14(b)
or
15d-14(b)
of
the
Exchange
Act
and
18U.S.C.
Section
1350
32.2‡Certification
of
Chief
Financial
Officerpursuant
to
Rules
13a-14(b)
or
15d-14(b)
of
the
Exchange
Act
and
18U.S.C.
Section
1350
101.INS*XBRL
Instance
Document
101.SCH*XBRL
Taxonomy
Extension
SchemaDocument
101.CAL*XBRL
Taxonomy
ExtensionCalculation
Linkbase
Document
Table
of
Contents
(b)
Exhibits.
The
exhibits
required
by
this
Item
are
listed
under
Item
15(a)(3).
(c)
Financial
Statement
Schedules.
The
financial
statement
schedules
required
by
this
Item
are
listed
under
Item
15(a)(2).97
Incorporated
by
reference
hereinNumber
Description
Form
Date
101.LAB*XBRL
Taxonomy
Extension
LabelLinkbase
Database
101.PRE*XBRL
Taxonomy
ExtensionPresentation
Linkbase
Document
101.DEF*XBRL
Taxonomy
Extension
DefinitionLinkbase
Document
*Filed
herewith.
‡Furnished
herewith.
+Confidential
treatment
granted
under
17
C.F.R.
§§200.80(b)(4)
and
230.406.
The
confidential
portions
of
this
exhibit
have
been
omittedand
are
marked
accordingly.
The
confidential
portions
have
been
provided
separately
to
the
SEC
pursuant
to
the
confidential
treatmentrequest.
++Confidential
treatment
requested
under
17
C.F.R.
§§200.80(b)(4)
and
Rule
24b-2.
The
confidential
portions
of
this
exhibit
have
beenomitted
and
are
marked
accordingly.
The
confidential
portions
have
been
provided
separately
to
the
SEC
pursuant
to
the
confidentialtreatment
request.
#Management
contract
or
compensatory
plan,
contract,
or
arrangement. Table
of
ContentsSIGNATURES
Pursuant
to
the
requirements
of
Section
13
or
15(d)
of
the
Securities
Exchange
Act
of
1934,
the
registrant
has
duly
caused
this
report
to
be
signed
on
its
behalfby
the
undersigned,
thereunto
duly
authorized,
in
the
City
of
Cambridge,
Commonwealth
of
Massachusetts,
on
the
19
th
day
of
February
2016.
Pursuant
to
the
requirements
of
Section
13
or
15(d)
of
the
Securities
Exchange
Act
of
1934,
this
report
has
been
signed
below
by
the
following
persons
onbehalf
of
the
registrant
and
in
the
capacities
and
on
the
date
indicated.98
Ironwood
Pharmaceuticals,
Inc.
By:
/s/
PETER
M.
HECHT
Peter
M.
Hecht
Chief
Executive
OfficerSignature
Title
Date
/s/
PETER
M.
HECHT
Peter
M.
Hecht
Chief
Executive
Officer
and
Director
(PrincipalExecutive
Officer)
February
19,
2016/s/
THOMAS
GRANEY
Thomas
Graney
Chief
Financial
Officer
(Principal
FinancialOfficer)
February
19,
2016/s/
GINA
CONSYLMAN
Gina
Consylman
Vice
President,
Finance
and
Chief
AccountingOfficer
(Principal
Accounting
Officer)
February
19,
2016/s/
TERRANCE
G.
MCGUIRE
Terrance
G.
McGuire
Chairman
of
the
Board
February
19,
2016/s/
GEORGE
H.
CONRADES
George
H.
Conrades
Director
February
19,
2016/s/
MARSHA
H.
FANUCCI
Marsha
H.
Fanucci
Director
February
19,
2016/s/
JULIE
H.
MCHUGH
Julie
H.
McHugh
Director
February
19,
2016 Table
of
Contents99Signature
Title
Date
/s/
LAWRENCE
S.
OLANOFF
Lawrence
S.
Olanoff
Director
February
19,
2016/s/
EDWARD
P.
OWENS
Edward
P.
Owens
Director
February
19,
2016/s/
BRYAN
E.
ROBERTS
Bryan
E.
Roberts
Director
February
19,
2016/s/
CHRISTOPHER
T.
WALSH
Christopher
T.
Walsh
Director
February
19,
2016/s/
DOUGLAS
E.
WILLIAMS
Douglas
E.
Williams
Director
February
19,
2016 Table
of
ContentsIndex
to
Consolidated
Financial
Statements
of
Ironwood
Pharmaceuticals,
Inc.
F-1
Page
Report
of
Independent
Registered
Public
Accounting
Firm
F-2
Consolidated
Balance
Sheets
as
of
December
31,
2015
and
2014
F-3
Consolidated
Statements
of
Operations
for
the
Years
Ended
December
31,
2015,
2014
and
2013
F-4
Consolidated
Statements
of
Comprehensive
Loss
for
the
Years
Ended
December
31,
2015,
2014
and
2013
F-5
Consolidated
Statements
of
Stockholders'
Equity
for
the
Years
Ended
December
31,
2015,
2014
and
2013
F-6
Consolidated
Statements
of
Cash
Flows
for
the
Years
Ended
December
31,
2015,
2014
and
2013
F-8
Notes
to
Consolidated
Financial
Statements
F-9
Table
of
ContentsREPORT
OF
INDEPENDENT
REGISTERED
PUBLIC
ACCOUNTING
FIRMTo
the
Board
of
Directors
and
Shareholders
of
Ironwood
Pharmaceuticals,
Inc.
We
have
audited
the
accompanying
consolidated
balance
sheets
of
Ironwood
Pharmaceuticals,
Inc.
as
of
December
31,
2015
and
2014,
and
the
relatedconsolidated
statements
of
operations,
comprehensive
loss,
stockholders'
equity,
and
cash
flows
for
each
of
the
three
years
in
the
period
ended
December
31,
2015.These
financial
statements
are
the
responsibility
of
the
Company's
management.
Our
responsibility
is
to
express
an
opinion
on
these
financial
statements
based
onour
audits.
We
conducted
our
audits
in
accordance
with
the
standards
of
the
Public
Company
Accounting
Oversight
Board
(United
States).
Those
standards
require
thatwe
plan
and
perform
the
audit
to
obtain
reasonable
assurance
about
whether
the
financial
statements
are
free
of
material
misstatement.
An
audit
includesexamining,
on
a
test
basis,
evidence
supporting
the
amounts
and
disclosures
in
the
financial
statements.
An
audit
also
includes
assessing
the
accounting
principlesused
and
significant
estimates
made
by
management,
as
well
as
evaluating
the
overall
financial
statement
presentation.
We
believe
that
our
audits
provide
areasonable
basis
for
our
opinion.
In
our
opinion,
the
financial
statements
referred
to
above
present
fairly,
in
all
material
respects,
the
consolidated
financial
position
of
IronwoodPharmaceuticals,
Inc.
at
December
31,
2015
and
2014,
and
the
consolidated
results
of
its
operations
and
its
cash
flows
for
each
of
the
three
years
in
the
periodended
December
31,
2015,
in
conformity
with
U.S.
generally
accepted
accounting
principles.
We
also
have
audited,
in
accordance
with
the
standards
of
the
Public
Company
Accounting
Oversight
Board
(United
States),
Ironwood
Pharmaceuticals,
Inc.'sinternal
control
over
financial
reporting
as
of
December
31,
2015,
based
on
criteria
established
in
Internal
Control—Integrated
Framework
issued
by
the
Committeeof
Sponsoring
Organizations
of
the
Treadway
Commission
(2013
framework)
and
our
report
dated
February
19,
2016
expressed
an
unqualified
opinion
thereon.Boston,
Massachusetts
February
19,
2016F-2
/s/
Ernst
&
Young
LLP Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Consolidated
Balance
Sheets(In
thousands,
except
share
and
per
share
amounts)
The
accompanying
notes
are
an
integral
part
of
these
consolidated
financial
statements.F-3
December
31,
2015
December
31,
2014
ASSETS
Current
assets:
Cash
and
cash
equivalents
$261,287
$74,297
Available-for-sale
securities
178,107
174,037
Accounts
receivable
2,884
10
Related
party
accounts
receivable,
net
51,634
25,829
Inventory
—
4,954
Prepaid
expenses
and
other
current
assets
6,293
9,180
Total
current
assets
500,205
288,307
Restricted
cash
8,747
8,147
Property
and
equipment,
net
21,075
29,826
Convertible
note
hedges
86,466
—
Other
assets
2,628
3,042
Total
assets
$619,121
$329,322
LIABILITIES
AND
STOCKHOLDERS'
EQUITY
Current
liabilities:
Accounts
payable
$8,586
$9,754
Related
party
accounts
payable,
net
3
8
Accrued
research
and
development
costs
4,245
3,574
Accrued
expenses
and
other
current
liabilities
23,301
22,612
Current
portion
of
capital
lease
obligations
2,631
1,152
Current
portion
of
deferred
rent
5,544
4,992
Current
portion
of
deferred
revenue
7,191
7,191
Current
portion
of
PhaRMA
notes
payable
24,964
11,258
Total
current
liabilities
76,465
60,541
Capital
lease
obligations,
net
of
current
portion
306
2,571
Deferred
rent,
net
of
current
portion
6,395
10,522
Deferred
revenue,
net
of
current
portion
1,798
8,989
Note
hedge
warrants
75,328
—
Convertible
senior
notes
220,620
—
PhaRMA
Notes
payable,
net
of
current
portion
132,964
158,147
Other
liabilities
10,120
—
Commitments
and
contingencies
Stockholders'
equity:
Preferred
stock,
$0.001
par
value,
75,000,000
shares
authorized,
no
shares
issued
andoutstanding
—
—
Class
A
common
stock,
$0.001
par
value,
500,000,000
shares
authorized
and
127,371,478
and124,915,658
shares
issued
and
outstanding
at
December
31,
2015
and
2014,
respectively
127
125
Class
B
common
stock,
$0.001
par
value,
100,000,000
shares
authorized
and
15,870,356
and15,907,272
shares
issued
and
outstanding
at
December
31,
2015
and
2014,
respectively
16
16
Additional
paid-in
capital
1,205,183
1,055,876
Accumulated
deficit
(1,110,115)
(967,446)Accumulated
other
comprehensive
loss
(86)
(19)Total
stockholders'
equity
95,125
88,552
Total
liabilities
and
stockholders'
equity
$619,121
$329,322
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Consolidated
Statements
of
Operations(In
thousands,
except
per
share
amounts)
The
accompanying
notes
are
an
integral
part
of
these
consolidated
financial
statements.F-4
Years
Ended
December
31,
2015
2014
2013
Collaborative
arrangements
revenue
$149,555
$76,436
$22,881
Cost
and
expenses:
Cost
of
revenue
12
5,291
7,203
Write-down
of
inventory
to
net
realizable
value
and
loss
on
non-cancellablepurchase
commitments
17,638
20,292
—
Research
and
development
108,746
101,890
102,378
Selling,
general
and
administrative
125,247
118,333
123,228
Collaboration
expense
—
—
42,074
Total
cost
and
expenses
251,643
245,806
274,883
Loss
from
operations
(102,088)
(169,370)
(252,002)Other
(expense)
income:
Interest
expense
(31,096)
(21,166)
(21,002)Interest
and
investment
income
443
257
192
Loss
on
derivatives
(9,928)
—
—
Other
income
—
661
—
Other
expense,
net
(40,581)
(20,248)
(20,810)Net
loss
$(142,669)$(189,618)$(272,812)Net
loss
per
share—basic
and
diluted
$(1.00)$(1.39)$(2.35)Weighted
average
number
of
common
shares
used
in
net
loss
per
share—basic
anddiluted:
142,155
136,811
115,852
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Consolidated
Statements
of
Comprehensive
Loss(In
thousands)
The
accompanying
notes
are
an
integral
part
of
these
consolidated
financial
statements.F-5
Years
Ended
December
31,
2015
2014
2013
Net
loss
$(142,669)$(189,618)$(272,812)Other
comprehensive
loss:
Unrealized
losses
on
available-for-sale
securities
(67)
(21)
(3)Total
other
comprehensive
loss
(67)
(21)
(3)Comprehensive
loss
$(142,736)$(189,639)$(272,815) Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Consolidated
Statements
of
Stockholders'
Equity(In
thousands,
except
share
amounts)The
accompanying
notes
are
an
integral
part
of
these
consolidated
financial
statements.F-6
Class
A
common
stock
Class
B
common
stock
Accumulated
other
comprehensive
income
(loss)
Additional
paid-in
capital
Accumulated
deficit
Total
Stockholders'
equity
Shares
Amount
Shares
Amount
Balance
at
December
31,
2012
78,253,074
$78
29,512,253
$30
$648,955
$(505,016)$5
$144,052
Issuance
of
common
stock
uponexercise
of
stock
options
andemployee
stock
purchaseplan
645,196
1
1,538,887
1
9,295
—
—
9,297
Issuance
of
common
stockawards
10,772
—
—
—
28
—
—
28
Issuance
of
common
stock
uponpublic
offering,
net
of
offeringcosts
of
$7.9
million
11,204,948
11
—
—
137,755
—
—
137,766
Conversion
of
Class
B
commonstock
to
Class
A
commonstock
12,689,103
13
(12,689,103)
(13)
—
—
—
—
Share-based
compensationexpense
related
to
issuance
ofstock
options
to
non-employees
—
—
—
—
272
—
—
272
Share-based
compensationexpense
related
to
share-basedawards
to
employees
andemployee
stock
purchase
plan
—
—
—
—
19,624
—
—
19,624
Restricted
common
stock
nolonger
subject
to
repurchase
—
—
—
—
1
—
—
1
Unrealized
losses
on
short-terminvestments
—
—
—
—
—
—
(3)
(3)Net
loss
—
—
—
—
—
(272,812)
—
(272,812)Balance
at
December
31,
2013
102,803,093
103
18,362,037
18
815,930
(777,828)
2
38,225
Issuance
of
common
stock
uponexercise
of
stock
options
andemployee
stock
purchaseplan
1,705,752
2
1,876,880
2
23,328
—
—
23,332
Issuance
of
common
stockawards
290,843
—
—
—
22
—
—
22
Issuance
of
common
stock
uponpublic
offering,
net
of
offeringcosts
of
$10.8
million
15,784,325
16
—
—
190,412
—
—
190,428
Conversion
of
Class
B
commonstock
to
Class
A
commonstock
4,331,645
4
(4,331,645)
(4)
—
—
—
—
Share-based
compensationexpense
related
to
issuance
ofstock
options
to
non-employees
—
—
—
—
2,618
—
—
2,618
Share-based
compensationexpense
related
to
share-basedawards
to
employees
andemployee
stock
purchase
plan
—
—
—
—
23,566
—
—
23,566
Unrealized
losses
on
short-terminvestments
—
—
—
—
—
—
(21)
(21)Net
loss
—
—
—
—
—
(189,618)
—
(189,618) Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Consolidated
Statements
of
Stockholders'
Equity
(Continued)(In
thousands,
except
share
amounts)The
accompanying
notes
are
an
integral
part
of
these
consolidated
financial
statements.F-7
Class
A
common
stock
Class
B
common
stock
Accumulated
other
comprehensive
income
(loss)
Additional
paid-in
capital
Accumulated
deficit
Total
Stockholders'
equity
Shares
Amount
Shares
Amount
Balance
atDecember
31,2014
124,915,658
125
15,907,272
16
1,055,876
(967,446)
(19)
88,552
Issuance
ofcommonstock
uponexercise
ofstock
optionsand
employeestockpurchase
plan
972,325
1
1,293,032
1
13,619
—
—
13,621
Issuance
ofcommonstock
awards
153,547
—
—
—
24
—
—
24
Conversion
ofClass
Bcommonstock
toClass
Acommonstock
1,329,948
1
(1,329,948)
(1)
—
—
—
—
Share-basedcompensationexpenserelated
toshare-basedawards
toemployeesand
employeestockpurchase
plan
—
—
—
—
25,448
—
—
25,448
Equitycomponent
ofconvertibledebt
—
—
—
—
114,199
—
—
114,199
Equitycomponent
ofdeferredfinancingcosts
forconvertibledebt
—
—
—
—
(3,983)
—
—
(3,983)Unrealizedlosses
onshort-terminvestments
—
—
—
—
—
—
(67)
(67)Net
loss
—
—
—
—
—
(142,669)
—
(142,669)Balance
atDecember
31,2015
127,371,478
$127
15,870,356
$16
$1,205,183
$(1,110,115)$(86)$95,125
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Consolidated
Statements
of
Cash
Flows(In
thousands)
The
accompanying
notes
are
an
integral
part
of
these
consolidated
financial
statements.F-8
Year
Ended
December
31,
2015
2014
2013
Cash
flows
from
operating
activities:
Net
loss
$(142,669)$(189,618)$(272,812)Adjustments
to
reconcile
net
loss
to
net
cash
used
in
operating
activities:
Depreciation
and
amortization
11,630
12,331
11,729
(Gain)
loss
on
disposal
of
property
and
equipment
(196)
119
610
Share-based
compensation
expense
25,469
26,184
19,829
Change
in
fair
value
of
note
hedge
warrants
4,479
—
—
Change
in
fair
value
of
convertible
note
hedges
5,449
—
—
Write-down
of
inventory
to
net
realizable
value
and
loss
on
non-cancellable
purchase
commitments
17,638
20,292
—
Loss
on
facility
subleases
296
2,573
—
Accretion
of
discount/premium
on
investment
securities
1,114
1,085
1,254
Non-cash
interest
expense
8,102
1,566
1,719
Changes
in
assets
and
liabilities:
Accounts
receivable
and
related
party
accounts
receivable
(28,679)
(23,680)
(1,726)Restricted
cash
(600)
—
(500)Prepaid
expenses
and
other
current
assets
2,568
(3,947)
(52)Inventory
—
(3,078)
(11,915)Other
assets
414
(2,876)
116
Accounts
payable,
related
party
accounts
payable
and
accrued
expenses
(1,551)
1,425
(11,724)Accrued
research
and
development
costs
671
162
(2,252)Deferred
revenue
(7,191)
744
(4,915)Deferred
rent
(3,871)
1,811
(2,716)Other
liabilities
—
(661)
—
Net
cash
used
in
operating
activities
(106,927)
(155,568)
(273,355)Cash
flows
from
investing
activities:
Purchases
of
available-for-sale
securities
(281,958)
(253,995)
(287,943)Sales
and
maturities
of
available-for-sale
securities
276,707
200,964
196,102
Purchases
of
property
and
equipment
(4,049)
(3,538)
(9,592)Proceeds
from
sale
of
property
and
equipment
147
—
—
Net
cash
used
in
investing
activities
(9,153)
(56,569)
(101,433)Cash
flows
from
financing
activities:
Proceeds
from
issuance
of
convertible
senior
notes
335,699
—
—
Costs
associated
with
issuance
of
convertible
senior
notes
(11,730)
—
—
Proceeds
from
issuance
of
common
stock
—
190,428
137,766
Proceeds
from
issuance
of
PhaRMA
notes
payable
—
—
175,000
Costs
associated
with
issuance
of
PhaRMA
notes
payable
—
—
(7,717)Proceeds
from
issuance
of
note
hedge
warrants
70,849
—
—
Purchase
of
convertible
note
hedges
(91,915)
—
—
Proceeds
from
exercise
of
stock
options,
and
shares
issued
under
employee
stock
purchase
plan
14,196
22,741
9,297
Payments
on
capital
lease
obligations
(1,317)
(1,062)
(768)Principal
payments
on
PhaRMA
notes
payable
(12,712)
(1,163)
—
Net
cash
provided
by
financing
activities
303,070
210,944
313,578
Net
increase
(decrease)
in
cash
and
cash
equivalents
186,990
(1,193)
(61,210)Cash
and
cash
equivalents,
beginning
of
period
74,297
75,490
136,700
Cash
and
cash
equivalents,
end
of
period
$261,287
$74,297
$75,490
Supplemental
cash
flow
disclosure:
Cash
paid
for
interest
$22,742
$19,606
$18,428
Non-cash
investing
activities
Purchases
under
capital
leases
$2,957
$766
$4,472
Disposals
under
capital
leases
$(2,529)$—
$—
Fixed
asset
purchases
in
accounts
payable
and
accrued
expenses
$98
$1,592
$261
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements1.
Nature
of
Business
Ironwood
Pharmaceuticals,
Inc.
(the
"Company")
is
a
commercial
biotechnology
company
leveraging
its
proven
development
and
commercial
capabilities
asit
seeks
to
bring
multiple
medicines
to
patients.
The
Company
is
advancing
two
therapeutic
platforms,
which
include
product
opportunities
in
areas
of
large
unmetneed,
including
irritable
bowel
syndrome
with
constipation
("IBS-C)
and
chronic
idiopathic
constipation
("CIC"),
vascular
and
fibrotic
diseases,
and
refractorygastroesophageal
reflux
disease
("GERD").
The
Company's
first
and
to-date
only
commercial
product,
linaclotide,
is
available
to
adult
men
and
women
suffering
from
IBS-C
or
CIC
in
the
United
States("U.S.")
under
the
trademarked
name
LINZESS®,
and
is
available
to
adult
men
and
women
suffering
from
IBS-C
in
certain
European
countries
under
thetrademarked
name
CONSTELLA®.
The
Company
and
its
U.S.
partner
Allergan
plc
(together
with
its
affiliates,
"Allergan"),
formerly
Actavis
plc,
begancommercializing
LINZESS
in
the
U.S.
in
December
2012.
Under
the
Company's
collaboration
with
Allergan
for
North
America,
total
net
sales
of
LINZESS
in
theU.S.,
as
recorded
by
Allergan,
are
reduced
by
commercial
costs
incurred
by
each
party,
and
the
resulting
amount
is
shared
equally
between
the
Company
andAllergan.
The
Company's
former
European
partner,
Almirall,
S.A.
("Almirall"),
began
commercializing
CONSTELLA
in
Europe
for
the
symptomatic
treatment
ofmoderate
to
severe
IBS-C
in
adults
in
the
second
quarter
of
2013.
In
October
2015,
Almirall
transferred
its
exclusive
license
to
develop
and
commercializelinaclotide
in
Europe
to
Allergan,
and
the
Company
and
Allergan
entered
into
an
amendment
to
the
European
license
agreement
(Note
4).
Currently,
CONSTELLAis
commercially
available
in
certain
European
countries,
including
the
United
Kingdom,
Italy
and
Spain.
Within
the
Company's
gastrointestinal
("GI")
platform,
the
Company
and
Allergan
are
exploring
development
opportunities
to
enhance
the
clinical
profile
ofLINZESS
by
seeking
to
expand
its
utility
within
IBS-C
and
CIC,
as
well
as
studying
linaclotide
in
additional
indications
and
populations
to
assess
its
potential
totreat
various
GI
conditions.
The
Company
and
Allergan
are
also
developing
linaclotide
colonic
release,
a
targeted
oral
delivery
formulation
of
linaclotide
designedto
potentially
improve
abdominal
pain
relief
in
adult
IBS-C
patients.
The
Company
is
also
exploring
linaclotide
colonic
release
for
use
in
additional
GI
disorderswhere
lower
abdominal
pain
is
a
predominant
symptom
such
as
IBS-mixed
("IBS-M"),
ulcerative
colitis
and
diverticulitis,
among
others.
Linaclotide
is
also
beingdeveloped
and
commercialized
in
other
parts
of
the
world
by
certain
of
the
Company's
partners.
In
addition,
the
Company
is
advancing
other
GI
developmentprograms
for
indications
such
as
refractory
GERD
and
diabetic
gastroparesis.
Within
the
Company's
vascular/fibrotic
platform,
it
is
leveraging
its
pharmacological
expertise
in
guanylate
cyclase
("GC")
pathways
gained
through
thediscovery
and
development
of
linaclotide
to
advance
development
programs
targeting
soluble
guanylate
cyclase
("sGC").
sGC
is
a
validated
mechanism
with
thepotential
for
broad
therapeutic
utility
and
multiple
opportunities
for
product
development
in
vascular
and
fibrotic
diseases,
as
well
as
other
therapeutic
areas.
In
addition
to
the
U.S.
and
Europe,
the
Company
has
entered
into
partnerships
to
develop
and
commercialize
linaclotide
in
other
parts
of
the
world.
InDecember
2013
and
February
2014,
linaclotide
was
approved
in
Canada
and
Mexico,
respectively,
as
a
treatment
for
adult
women
and
men
suffering
from
IBS-Cor
CIC.
Allergan
has
exclusive
rights
to
commercialize
linaclotide
in
Canada
as
CONSTELLA
and,
through
a
sublicense
from
Allergan,
Almirall
had
exclusiverights
to
commercialize
linaclotide
in
Mexico
as
LINZESS.
In
May
2014,
Allergan
began
commercializing
CONSTELLA
inF-9 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)1.
Nature
of
Business
(Continued)Canada
and
in
June
2014,
Almirall
began
commercializing
LINZESS
in
Mexico.
In
October
2015,
Almirall
and
Allergan
terminated
the
sublicense
arrangementwith
respect
to
Mexico,
returning
the
exclusive
rights
to
commercialize
CONSTELLA
in
Mexico
to
Allergan.
CONSTELLA
continues
to
be
available
to
adult
IBS-C
patients
in
Mexico.
Astellas
Pharma
Inc.
("Astellas"),
the
Company's
partner
in
Japan,
is
developing
linaclotide
for
the
treatment
of
patients
with
IBS-C
and
chronic
constipationin
its
territory.
In
November
2015,
the
Company
and
Astellas
reported
positive
top-line
data
from
Astellas'
Phase
III
clinical
trial
of
linaclotide
in
adult
patientswith
IBS-C
for
Japan.
In
October
2012,
the
Company
entered
into
a
collaboration
agreement
with
AstraZeneca
AB
("AstraZeneca")
to
co-develop
and
co-commercialize
linaclotide
in
China,
Hong
Kong
and
Macau,
with
AstraZeneca
having
primary
responsibility
for
the
local
operational
execution.
In
December
2015,the
Company
and
AstraZeneca
filed
for
approval
with
the
China
Food
and
Drug
Administration
("CFDA")
to
market
linaclotide
in
China.
The
Company
continuesto
assess
alternatives
to
bring
linaclotide
to
IBS-C
and
CIC
sufferers
in
the
parts
of
the
world
outside
of
its
partnered
territories.
In
March
2015,
the
Company
and
Exact
Sciences
Corp,
("Exact
Sciences"),
entered
into
an
agreement
to
co-promote
Cologuard®,
the
first
and
only
FDA-approved
noninvasive
stool
DNA
screening
test
for
colorectal
cancer,
and
in
August
2015,
the
Company
and
Allergan
entered
into
an
agreement
for
the
co-promotion
of
VIBERZI™
(eluxadoline)
in
the
U.S.,
Allergan's
treatment
for
adults
suffering
from
IBS
with
diarrhea
("IBS-D").
In
November
2015,
Allergan
and
Pfizer
Inc.
entered
into
a
definitive
agreement
providing
for
the
combination
of
the
two
companies.
The
Company'scollaboration
for
the
development
and
commercialization
of
linaclotide,
as
well
as
the
Company's
agreement
to
co-promote
VIBERZI,
remains
in
effect.
These
agreements
are
more
fully
described
in
Note
4,
Collaboration,
License
and
Co-promotion
Agreements
,
to
these
consolidated
financial
statements.
In
June
2015,
the
Company
issued
approximately
$335.7
million
in
aggregate
principal
amount
of
2.25%
Convertible
Senior
Notes
due
2022
(the
"2022Notes").
The
Company
received
net
proceeds
of
approximately
$324.0
million
from
the
sale
of
the
2022
Notes,
after
deducting
fees
and
expenses
of
approximately$11.7
million
(Note
10).
The
Company
was
incorporated
in
Delaware
on
January
5,
1998
as
Microbia,
Inc.
On
April
7,
2008,
the
Company
changed
its
name
to
IronwoodPharmaceuticals,
Inc.
To
date,
the
Company
has
dedicated
substantially
all
of
its
activities
to
the
research,
development
and
commercialization
of
linaclotide,
aswell
as
to
the
research
and
development
of
its
other
product
candidates.
The
Company
has
incurred
significant
operating
losses
since
its
inception
in
1998.
As
ofDecember
31,
2015,
the
Company
had
an
accumulated
deficit
of
approximately
$1.1
billion.2.
Summary
of
Significant
Accounting
PoliciesPrinciples
of
Consolidation
The
accompanying
consolidated
financial
statements
include
the
accounts
of
Ironwood
Pharmaceuticals,
Inc.
and
its
wholly
owned
subsidiaries,
IronwoodPharmaceuticals
SecuritiesF-10 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)Corporation
and
Ironwood
Pharmaceuticals
GmbH.
All
intercompany
transactions
and
balances
are
eliminated
in
consolidation.Use
of
Estimates
The
preparation
of
consolidated
financial
statements
in
accordance
with
U.S.
generally
accepted
accounting
principles
requires
the
Company's
management
tomake
estimates
and
judgments
that
may
affect
the
reported
amounts
of
assets
and
liabilities
and
disclosure
of
contingent
assets
and
liabilities
at
the
date
of
theconsolidated
financial
statements,
and
the
amounts
of
revenues
and
expenses
during
the
reported
periods.
On
an
on-going
basis,
the
Company's
managementevaluates
its
estimates,
judgments
and
methodologies.
Significant
estimates
and
assumptions
in
the
consolidated
financial
statements
include
those
related
torevenue
recognition,
available-for-sale
securities,
inventory
valuation,
and
related
reserves;
impairment
of
long-lived
assets;
initial
valuation
procedures
for
theissuance
of
convertible
notes;
fair
value
of
derivatives;
balance
sheet
classification
of
notes
payable
and
convertible
notes;
income
taxes,
including
the
valuationallowance
for
deferred
tax
assets;
research
and
development
expenses;
contingencies
and
share-based
compensation.
The
Company
bases
its
estimates
on
historicalexperience
and
on
various
other
assumptions
that
are
believed
to
be
reasonable,
the
results
of
which
form
the
basis
for
making
judgments
about
the
carrying
valuesof
assets
and
liabilities.
Actual
results
may
differ
materially
from
these
estimates
under
different
assumptions
or
conditions.
Changes
in
estimates
are
reflected
inreported
results
in
the
period
in
which
they
become
known.Cash
and
Cash
Equivalents
The
Company
considers
all
highly
liquid
investment
instruments
with
a
remaining
maturity
when
purchased
of
three
months
or
less
to
be
cash
equivalents.Investments
qualifying
as
cash
equivalents
primarily
consist
of
money
market
funds
and
U.S.
government-sponsored
securities.
The
carrying
amount
of
cashequivalents
approximates
fair
value.
The
amount
of
cash
equivalents
included
in
cash
and
cash
equivalents
was
approximately
$258.2
million
and
approximately$61.0
million
at
December
31,
2015
and
2014,
respectively.Restricted
Cash
The
Company
is
contingently
liable
under
unused
letters
of
credit
with
a
bank,
related
to
the
Company's
facility
lease
and
automobile
lease
agreements,
in
theamount
of
approximately
$8.7
million
and
approximately
$8.1
million
as
of
December
31,
2015
and
2014,
respectively.
As
a
result,
the
Company
has
restrictedcash
of
approximately
$8.7
million
and
approximately
$8.1
million
as
of
December
31,
2015
and
2014,
respectively,
securing
these
letters
of
credit.
The
cash
willbe
restricted
until
the
termination
of
the
lease
arrangements.Available-for-Sale
Securities
The
Company
classifies
all
short-term
investments
with
a
remaining
maturity
when
purchased
of
greater
than
three
months
as
available-for-sale.
Available-for-sale
securities
are
recorded
at
fair
value,
with
the
unrealized
gains
and
losses
reported
in
other
comprehensive
income
(loss).
The
amortized
cost
of
debtsecurities
in
this
category
is
adjusted
for
the
amortization
of
premiums
and
accretion
of
discounts
to
maturity.
Such
amortization
is
included
in
interest
andinvestment
income.
Realized
gainsF-11 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)and
losses,
interest,
dividends,
and
declines
in
value
judged
to
be
other
than
temporary
on
available-for-sale
securities
are
included
in
interest
and
investmentincome.
The
cost
of
securities
sold
is
based
on
the
specific
identification
method
for
purposes
of
recording
realized
gains
and
losses.
To
determine
whether
an
other-than-temporary
impairment
exists,
the
Company
considers
whether
it
has
the
ability
and
intent
to
hold
the
investment
until
a
market
price
recovery,
and
whetherevidence
indicating
the
recoverability
of
the
cost
of
the
investment
outweighs
evidence
to
the
contrary.
There
were
no
other-than-temporary
impairments
for
theyears
ended
December
31,
2015,
2014
or
2013.Inventory
Inventory
is
stated
at
the
lower
of
cost
or
market
with
cost
determined
under
the
first-in,
first-out
basis.
The
Company
evaluates
inventory
levels
quarterly
and
any
inventory
that
has
a
cost
basis
in
excess
of
its
expected
net
realizable
value,
inventory
that
becomesobsolete,
inventory
in
excess
of
expected
sales
requirements,
inventory
that
fails
to
meet
commercial
sale
specifications
or
is
otherwise
impaired
is
written
downwith
a
corresponding
charge
to
the
statement
of
operations
in
the
period
that
the
impairment
is
first
identified.
The
Company
also
assesses,
on
a
quarterly
basis,whether
it
has
any
excess
non-cancelable
purchase
commitments
resulting
from
its
minimum
supply
agreements
with
its
suppliers
of
linaclotide
activepharmaceutical
ingredient
("API").
The
Company
relies
on
data
from
several
sources
to
estimate
the
net
realizable
value
of
inventory
and
non-cancelable
purchasecommitments,
including
partner
forecasts
of
projected
inventory
purchases
that
are
received
quarterly,
the
Company's
internal
forecasts
and
related
process,historical
sales
by
geographic
region,
and
the
status
of
and
progress
toward
commercialization
of
linaclotide
in
partnered
territories.
The
Company
capitalizes
inventories
manufactured
in
preparation
for
initiating
sales
of
a
product
candidate
when
the
related
product
candidate
is
consideredto
have
a
high
likelihood
of
regulatory
approval
and
the
related
costs
are
expected
to
be
recoverable
through
sales
of
the
inventories.
In
determining
whether
or
notto
capitalize
such
inventories,
the
Company
evaluates,
among
other
factors,
information
regarding
the
product
candidate's
safety
and
efficacy,
the
status
ofregulatory
submissions
and
communications
with
regulatory
authorities
and
the
outlook
for
commercial
sales,
including
the
existence
of
current
or
anticipatedcompetitive
drugs
and
the
availability
of
reimbursement.
In
addition,
the
Company
evaluates
risks
associated
with
manufacturing
the
product
candidate,
includingthe
ability
of
the
Company's
third-party
suppliers
to
complete
the
validation
batches,
and
the
remaining
shelf
life
of
the
inventories.
Costs
associated
with
developmental
products
prior
to
satisfying
the
inventory
capitalization
criteria
are
charged
to
research
and
development
expense
asincurred.Concentrations
of
Suppliers
The
Company
relies
on
third-party
manufacturers
and
its
collaboration
partners
to
manufacture
the
linaclotide
API
and
final
linaclotide
drug
product.Currently,
there
are
two
third-party
manufacturers
approved
for
the
production
of
the
linaclotide
API
in
three
facilities.
Each
of
Allergan
and
Astellas
is
responsiblefor
drug
product
manufacturing
of
linaclotide
into
finished
product
for
its
respective
territory.
Under
the
Company's
collaboration
with
AstraZeneca,
the
Companyis
responsibleF-12 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)for
drug
product
and
finished
goods
manufacturing
for
China,
Hong
Kong
and
Macau.
The
Company
also
has
an
agreement
with
another
independent
third
party
toserve
as
a
second
source
of
drug
product
manufacturing
of
linaclotide
for
its
partnered
territories.
If
any
of
the
Company's
suppliers
were
to
limit
or
terminateproduction
or
otherwise
fail
to
meet
the
quality
or
delivery
requirements
needed
to
satisfy
the
supply
commitments,
the
process
of
locating
and
qualifying
alternatesources
could
require
up
to
several
months,
during
which
time
the
Company's
production
could
be
delayed.
Such
delays
could
have
a
material
adverse
effect
on
theCompany's
business,
financial
position
and
results
of
operations.Accounts
Receivable
and
Related
Valuation
Account
The
Company
makes
judgments
as
to
its
ability
to
collect
outstanding
receivables
and
provides
an
allowance
for
receivables
when
collection
becomesdoubtful.
Provisions
are
made
based
upon
a
specific
review
of
all
significant
outstanding
invoices
and
the
overall
quality
and
age
of
those
invoices
not
specificallyreviewed.
The
Company's
receivables
primarily
relate
to
amounts
reimbursed
under
its
collaboration,
license
and
co-promotion
agreements.
The
Company
believesthat
credit
risks
associated
with
these
partners
are
not
significant.
To
date,
the
Company
has
not
had
any
write-offs
of
bad
debt,
and
the
Company
did
not
have
anallowance
for
doubtful
accounts
as
of
December
31,
2015
and
2014.Concentrations
of
Credit
Risk
Financial
instruments
that
subject
the
Company
to
credit
risk
primarily
consist
of
cash
and
cash
equivalents,
restricted
cash,
available-for-sale
securities,
andaccounts
receivable.
The
Company
maintains
its
cash
and
cash
equivalent
balances
with
high-quality
financial
institutions
and,
consequently,
the
Companybelieves
that
such
funds
are
subject
to
minimal
credit
risk.
The
Company's
available-for-sale
investments
primarily
consist
of
U.S.
Treasury
securities
and
certainU.S.
government-sponsored
securities
and
potentially
subject
the
Company
to
concentrations
of
credit
risk.
The
Company
has
adopted
an
investment
policy
whichlimits
the
amounts
the
Company
may
invest
in
any
one
type
of
investment,
and
requires
all
investments
held
by
the
Company
to
be
at
least
A+
rated,
therebyreducing
credit
risk
exposure.
Accounts
receivable,
including
related
party
accounts
receivable,
primarily
consist
of
amounts
due
under
the
linaclotide
collaboration
agreement
with
Allerganfor
North
America,
the
linaclotide
license
agreement
with
Astellas
for
Japan
and
the
co-promotion
agreement
with
Exact
Sciences
for
its
Cologuard
product(Note
4)
for
which
the
Company
does
not
obtain
collateral.
Accounts
receivable
or
payable
to
or
from
Allergan
and
Almirall
are
presented
as
related
partytransactions
on
the
consolidated
balance
sheets
as
both
entities
own
common
stock
of
the
Company.F-13 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)
The
percentages
of
revenue
recognized
from
significant
customers
of
the
Company
in
the
years
ended
December
31,
2015,
2014
and
2013
as
well
as
theaccount
receivable
balances,
net
of
any
payables
due,
at
December
31,
2015
and
2014
are
included
in
the
following
table:
For
the
years
ended
December
31,
2015,
2014
and
2013,
no
additional
customers
accounted
for
more
than
10%
of
the
Company's
revenue.Deferred
Financing
Costs
Deferred
financing
costs
include
costs
directly
attributable
to
the
Company's
offerings
of
its
equity
securities
and
its
debt
financings.
Costs
attributable
toequity
offerings
are
charged
against
the
proceeds
of
the
offering
once
the
offering
is
completed.
Costs
attributable
to
debt
financings
are
deferred
and
amortizedover
the
term
of
the
debt
using
the
effective
interest
rate
method.
A
portion
of
the
deferred
financing
cost
incurred
in
connection
with
the
2022
Notes
was
deemedto
relate
to
the
equity
component
and
was
allocated
to
additional
paid
in
capital.
In
April
2015,
the
Financial
Accounting
Standards
Board
("FASB")
issued
Accounting
Standards
Update
("ASU")
No.
2015-03,
Simplifying
the
Presentationof
Debt
Issuance
Costs
("ASU
2015-03").
ASU
2015-03
requires
debt
issuance
costs
to
be
presented
in
an
entity's
balance
sheet
as
a
direct
deduction
from
theassociated
debt
liability.
While
the
standard
is
retrospectively
effective
for
annual
reporting
periods
beginning
after
December
15,
2015,
early
adoption
is
permittedfor
any
annual
reporting
period
or
interim
period
for
which
the
entity's
financial
statements
have
not
yet
been
issued.
The
Company
elected
early
adoption
of
ASU
2015-03
in
the
three
months
ended
June
30,
2015,
which
resulted
in
a
balance
sheet
reclassification
of
issuancecosts
in
connection
with
the
11%
PhaRMA
Notes
due
2024
(the
"PhaRMA
Notes")
of
approximately
$1.4
million
recorded
in
prepaid
expenses
and
other
currentassets
and
approximately
$2.8
million
in
other
assets
to
a
reduction
in
PhaRMA
Notes
payable
as
of
December
31,
2014.
The
financing
costs
incurred
in
connectionwith
theF-14
Accounts
Receivable
Revenue
December
31,
Years
Ended
December
31,
2015
2014
2015
2014
2013
Collaborative
Partner:
Linaclotide
Agreements:
Allergan
(North
America)
95%
100%
90%
62%
13%Almirall
(Europe)
(1)
—%
—%
—%
10%
57%Astellas
(Japan)
2%
—%
5%
23%
25%AstraZeneca
(China,
Hong
Kong
and
Macau)
(2)
1%
—%
2%
5%
5%Co-promotion
Agreements:
Exact
Sciences
(Cologuard)
2%
—%
3%
—%
—%(1)In
October
2015,
Almirall
transferred
its
exclusive
license
to
develop
and
commercialize
linaclotide
in
Europe
to
Allergan.
There
were
noaccounts
receivable
due
from
Almirall
as
of
December
31,
2015.
(2)At
December
31,
2014,
the
Company
was
in
a
net
payable
position
with
AstraZeneca;
as
such,
there
was
no
accounts
receivable
due
fromAstraZeneca
as
of
December
31,
2014. Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)issuance
of
the
Company's
2022
Notes
were
recorded
as
a
reduction
in
the
carrying
value
of
such
debt
in
accordance
with
ASU
2015-03.
The
Company's
adoptionof
this
standard
did
not
have
a
significant
impact
on
its
results
of
operations
or
cash
flows
for
the
year
ended
December
31,
2015.
The
2022
Notes
and
PhaRMA
Notes
are
more
fully
described
in
Note
10,
Notes
Payable
,
to
these
consolidated
financial
statements.Derivative
Assets
and
Liabilities
In
June
2015,
in
connection
with
the
issuance
of
the
2022
Notes,
the
Company
entered
into
convertible
note
hedge
transactions
(the
"Convertible
NoteHedges").
Concurrently
with
entering
into
the
Convertible
Note
Hedges,
the
Company
also
entered
into
certain
warrant
transactions
in
which
it
sold
note
hedgewarrants
(the
"Note
Hedge
Warrants")
to
the
Convertible
Note
Hedge
counterparties
to
acquire
20,249,665
shares
of
the
Company's
Class
A
common
stock,
subjectto
customary
anti-dilution
adjustments
(Note
10).
These
instruments
are
derivative
financial
instruments
under
Accounting
Standards
Codification
("ASC")
Topic815,
Derivatives
and
Hedging
("ASC
815").
These
derivatives
are
recorded
as
assets
or
liabilities
at
fair
value
each
reporting
period
and
the
fair
value
is
determined
using
the
Black-Scholes
option-pricingmodel.
The
changes
in
fair
value
are
recorded
as
a
component
of
other
(expense)
income
in
the
consolidated
statements
of
operations.
Significant
inputs
used
todetermine
the
fair
value
include
the
price
per
share
of
the
Company's
Class
A
common
stock
on
the
date
of
valuation,
time
to
maturity
of
the
derivative
instruments,the
strike
prices
of
the
derivative
instruments,
the
risk-free
interest
rate,
and
the
volatility
of
the
Company's
Class
A
common
stock.
Changes
to
these
inputs
couldmaterially
affect
the
valuation
of
the
Convertible
Note
Hedges
and
Note
Hedge
Warrants
in
future
periods.Revenue
Recognition
The
Company's
revenue
is
generated
primarily
through
collaborative
research
and
development,
licensing
and
co-promotion
agreements.
The
terms
of
theseagreements
contain
multiple
deliverables
which
may
include
(i)
licenses,
(ii)
research
and
development
activities,
including
participation
on
joint
steeringcommittees,
(iii)
the
manufacture
of
finished
drug
product,
API,
or
development
materials
for
a
partner
which
are
reimbursed
at
a
contractually
determined
rate,and
(iv)
co-promotion
activities
by
the
Company's
clinical
sales
specialists.
Non-refundable
payments
to
the
Company
under
these
agreements
may
include
(i)
up-front
license
fees,
(ii)
payments
for
research
and
development
activities,
(iii)
payments
for
the
manufacture
of
finished
drug
product,
API,
or
developmentmaterials,
(iv)
payments
based
upon
the
achievement
of
certain
milestones,
(v)
payments
for
sales
detailing,
promotional
support
services
and
medical
educationinitiatives,
and
(vi)
royalties
on
product
sales.
Additionally,
the
Company
may
receive
its
share
of
the
net
profits
or
bear
its
share
of
the
net
losses
from
the
sale
oflinaclotide
in
the
U.S.
and
for
China,
Hong
Kong
and
Macau
through
its
collaborations
with
Allergan
and
AstraZeneca,
respectively.
At
December
31,
2015,
the
Company
had
collaboration
agreements
with
Allergan
(North
America)
and
AstraZeneca
(China,
Hong
Kong
and
Macau),
as
wellas
license
agreements
with
Allergan
(Europe)
and
Astellas
(Japan).
Additionally,
the
Company
had
co-promotion
agreements
with
Allergan
for
VIBERZI
andExact
Sciences
for
Cologuard
in
the
U.S.
(Note
4).F-15 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)
The
Company
recognizes
revenue
when
there
is
persuasive
evidence
that
an
arrangement
exists,
services
have
been
rendered
or
delivery
has
occurred,
theprice
is
fixed
or
determinable,
and
collection
is
reasonably
assured.
For
certain
of
the
Company's
arrangements,
particularly
the
license
agreement
with
Allergan
for
the
European
territory,
it
is
required
that
taxes
be
withheld
onpayments
to
the
Company.
The
Company
has
adopted
a
policy
to
recognize
revenue
net
of
these
tax
withholdings.Agreements
Entered
into
Prior
to
January
1,
2011
For
arrangements
that
include
multiple
deliverables
and
were
entered
into
prior
to
January
1,
2011,
the
Company
follows
the
provisions
of
ASC
Topic
605-25,Revenue
Recognition—Multiple-Element
Arrangements
("ASC
605-25"),
in
accounting
for
these
agreements.
Under
ASC
605-25,
the
Company
was
required
toidentify
the
deliverables
included
within
the
agreement
and
evaluate
which
deliverables
represent
separate
units
of
accounting.
Collaborative
research
anddevelopment
and
licensing
agreements
that
contained
multiple
deliverables
were
divided
into
separate
units
of
accounting
when
the
following
criteria
were
met:•Delivered
element(s)
had
value
to
the
collaborator
on
a
standalone
basis,
•There
was
objective
and
reliable
evidence
of
the
fair
value
of
the
undelivered
obligation(s),
and
•If
the
arrangement
included
a
general
right
of
return
relative
to
the
delivered
item(s),
delivery
or
performance
of
the
undelivered
item(s)
wasconsidered
probable
and
substantially
within
the
Company's
control.
The
Company
allocated
arrangement
consideration
among
the
separate
units
of
accounting
either
on
the
basis
of
each
unit's
respective
fair
value
or
using
theresidual
method,
and
applied
the
applicable
revenue
recognition
criteria
to
each
of
the
separate
units.
If
the
separation
criteria
were
not
met,
revenue
of
thecombined
unit
of
accounting
was
recorded
based
on
the
method
appropriate
for
the
last
delivered
item.Up-Front
License
Fees
The
Company
recognizes
revenue
from
nonrefundable,
up-front
license
fees
on
a
straight-line
basis
over
the
contracted
or
estimated
period
of
performance,which
is
typically
the
period
over
which
the
research
and
development
is
expected
to
occur
or
manufacturing
services
are
expected
to
be
provided.
Accordingly,
theCompany
is
required
to
make
estimates
regarding
the
drug
development
and
commercialization
timelines
for
drugs
and
drug
candidates
being
developed
pursuantto
any
applicable
agreement.
The
determination
of
the
length
of
the
period
over
which
to
recognize
the
revenue
is
subject
to
judgment
and
estimation
and
can
havean
impact
on
the
amount
of
revenue
recognized
in
a
given
period.
Quarterly,
the
Company
reassesses
its
period
of
substantial
involvement
over
which
the
Companyamortizes
its
up-front
license
fees
and
makes
adjustments
as
appropriate.
The
Company's
estimates
regarding
the
period
of
performance
under
its
collaborativeresearch
and
development
and
licensing
agreements
have
changed
in
the
past
and
may
change
in
the
future.
Any
change
in
the
Company's
estimates
could
result
insubstantial
changes
to
the
Company's
results
for
the
period
over
which
the
revenues
from
an
up-front
license
fee
are
recognized.
In
the
event
that
an
arrangementwere
to
be
terminated,
the
Company
would
recognize
as
revenue
any
portion
of
the
up-front
fee
that
had
not
previously
been
recorded
as
revenue,
but
wasclassified
as
deferred
revenue
at
the
date
of
suchF-16 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)termination.
At
December
31,
2015,
of
the
Company's
linaclotide
collaboration
and
license
arrangements,
only
a
portion
of
Astellas'
up-front
license
fee
remaineddeferred.
The
up-front
license
fees
under
the
Allergan
collaboration
for
North
America
and
the
Allergan
collaboration
for
Europe
(previously
with
Almirall)
werefully
amortized
at
December
31,
2015,
as
the
period
of
performance
under
those
arrangements
ended
in
the
three
months
ended
September
30,
2012.Agreements
Entered
into
or
Materially
Modified
on
or
after
January
1,
2011
The
Company
evaluates
revenue
from
new
multiple
element
agreements
entered
into
on
or
after
January
1,
2011
under
ASU
No.
2009-13,
Multiple-Deliverable
Revenue
Arrangements
("ASU
2009-13").
The
Company
also
evaluates
whether
amendments
to
its
multiple
element
arrangements
are
consideredmaterial
modifications
that
are
subject
to
the
application
of
ASU
2009-13.
This
evaluation
requires
management
to
assess
all
relevant
facts
and
circumstances
andto
make
subjective
determinations
and
judgments.
As
part
of
this
assessment,
the
Company
considers
whether
the
modification
results
in
a
material
change
to
thearrangement,
including
whether
there
is
a
change
in
total
arrangement
consideration
that
is
more
than
insignificant,
whether
there
are
changes
in
the
deliverablesincluded
in
the
arrangement,
whether
there
is
a
change
in
the
term
of
the
arrangement
and
whether
there
is
a
significant
modification
to
the
delivery
schedule
forcontracted
deliverables.
When
evaluating
multiple
element
arrangements
under
ASU
2009-13,
the
Company
considers
whether
the
deliverables
under
the
arrangement
representseparate
units
of
accounting.
This
evaluation
requires
subjective
determinations
and
requires
management
to
make
judgments
about
the
individual
deliverables
andwhether
such
deliverables
are
separable
from
the
other
aspects
of
the
contractual
relationship.
In
determining
the
units
of
accounting,
management
evaluates
certaincriteria,
including
whether
the
deliverables
have
standalone
value,
based
on
the
consideration
of
the
relevant
facts
and
circumstances
for
each
arrangement.
Factorsconsidered
in
this
determination
include
the
research,
manufacturing
and
commercialization
capabilities
of
the
partner
and
the
availability
of
peptide
research
andmanufacturing
expertise
in
the
general
marketplace.
In
addition,
the
Company
considers
whether
the
collaborator
can
use
the
license
or
other
deliverables
for
theirintended
purpose
without
the
receipt
of
the
remaining
elements,
and
whether
the
value
of
the
deliverable
is
dependent
on
the
undelivered
items
and
whether
thereare
other
vendors
that
can
provide
the
undelivered
items.
The
consideration
received
is
allocated
among
the
separate
units
of
accounting
using
the
relative
selling
price
method,
and
the
applicable
revenue
recognitioncriteria
are
applied
to
each
of
the
separate
units.
The
Company
determines
the
estimated
selling
price
for
deliverables
using
vendor-specific
objective
evidence
("VSOE")
of
selling
price,
if
available,
third-party
evidence
("TPE")
of
selling
price
if
VSOE
is
not
available,
or
best
estimate
of
selling
price
("BESP")
if
neither
VSOE
nor
TPE
is
available.
Determining
theBESP
for
a
deliverable
requires
significant
judgment.
The
Company
uses
BESP
to
estimate
the
selling
price
for
licenses
to
the
Company's
proprietary
technology,since
the
Company
often
does
not
have
VSOE
or
TPE
of
selling
price
for
these
deliverables.
In
those
circumstances
where
the
Company
utilizes
BESP
to
determinethe
estimated
selling
price
of
a
license
to
the
Company's
proprietary
technology,
the
Company
considers
market
conditions
as
well
as
entity-specific
factors,including
those
factors
contemplated
in
negotiating
the
agreements
as
well
as
internally
developed
models
that
include
assumptions
related
to
the
marketopportunity,
estimated
development
costs,
probability
of
success
and
the
time
needed
to
commercialize
a
product
candidate
pursuant
to
theF-17 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)license.
In
validating
the
Company's
BESP,
the
Company
evaluates
whether
changes
in
the
key
assumptions
used
to
determine
the
BESP
will
have
a
significanteffect
on
the
allocation
of
arrangement
consideration
between
multiple
deliverables.
At
December
31,
2015,
the
Company's
collaboration
agreement
with
AstraZeneca
for
linaclotide
and
co-promotion
agreements
with
Allergan
for
VIBERZIand
Exact
Sciences
for
Cologuard
in
the
U.S.
are
each
being
accounted
for
under
ASU
2009-13.Up-Front
License
Fees
When
management
believes
the
license
to
its
intellectual
property
has
stand-alone
value,
the
Company
generally
recognizes
revenue
attributed
to
the
licenseupon
delivery.
When
management
believes
the
license
to
its
intellectual
property
does
not
have
stand-alone
value
from
the
other
deliverables
to
be
provided
in
thearrangement,
it
is
combined
with
other
deliverables
and
the
revenue
of
the
combined
unit
of
accounting
is
recorded
based
on
the
method
appropriate
for
the
lastdelivered
item.Milestones
At
the
inception
of
each
arrangement
that
includes
pre-commercial
milestone
payments,
the
Company
evaluates
whether
each
pre-commercial
milestone
issubstantive,
in
accordance
with
ASU
No.
2010-17,
Revenue
Recognition—Milestone
Method
("ASU
2010-17"),
adopted
on
January
1,
2011.
This
evaluationincludes
an
assessment
of
whether
(a)
the
consideration
is
commensurate
with
either
(1)
the
entity's
performance
to
achieve
the
milestone,
or
(2)
the
enhancementof
the
value
of
the
delivered
item(s)
as
a
result
of
a
specific
outcome
resulting
from
the
entity's
performance
to
achieve
the
milestone,
(b)
the
consideration
relatessolely
to
past
performance
and
(c)
the
consideration
is
reasonable
relative
to
all
of
the
deliverables
and
payment
terms
within
the
arrangement.
The
Companyevaluates
factors
such
as
the
scientific,
clinical,
regulatory,
commercial
and
other
risks
that
must
be
overcome
to
achieve
the
respective
milestone,
the
level
ofeffort
and
investment
required
and
whether
the
milestone
consideration
is
reasonable
relative
to
all
deliverables
and
payment
terms
in
the
arrangement
in
makingthis
assessment.
At
December
31,
2015,
the
Company
had
no
pre-commercial
milestones
that
were
deemed
substantive.
If
a
substantive
pre-commercial
milestonewere
achieved
and
collection
of
the
related
receivable
was
reasonably
assured,
the
Company
would
recognize
revenue
related
to
the
milestone
in
its
entirety
in
theperiod
in
which
the
milestone
was
achieved.
If
the
Company
were
to
achieve
milestones
that
are
considered
substantive
under
any
of
the
Company's
collaborations,the
Company
may
experience
significant
fluctuations
in
collaborative
arrangements
revenue
from
quarter
to
quarter
and
year
to
year
depending
on
the
timing
ofachieving
such
substantive
milestones.
In
those
circumstances
where
a
pre-commercial
milestone
is
not
substantive,
the
Company
recognizes
as
revenue
on
the
datethe
milestone
is
achieved
an
amount
equal
to
the
applicable
percentage
of
the
performance
period
that
had
elapsed
as
of
the
date
the
milestone
was
achieved,
withthe
balance
being
deferred
and
recognized
over
the
remaining
period
of
performance.
Pre-commercial
milestone
payments
received
prior
to
the
adoption
of
ASU2010-17
continue
to
be
recognized
over
the
remaining
period
of
performance.
Commercial
milestones
are
accounted
for
as
royalties
and
are
recorded
as
revenue
upon
achievement
of
the
milestone,
assuming
all
other
revenue
recognitioncriteria
are
met.F-18 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)Net
Profit
or
Net
Loss
Sharing
In
accordance
with
ASC
808
Topic,
Collaborative
Arrangements
,
and
ASC
605-45,
Principal
Agent
Considerations
,
the
Company
considers
the
nature
andcontractual
terms
of
the
arrangement
and
the
nature
of
the
Company's
business
operations
to
determine
the
classification
of
the
transactions
under
the
Company'scollaboration
agreements.
The
Company
records
revenue
transactions
gross
in
the
consolidated
statements
of
operations
if
it
is
deemed
the
principal
in
thetransaction,
which
includes
being
the
primary
obligor
and
having
the
risks
and
rewards
of
ownership.
The
Company
recognizes
its
share
of
the
pre-tax
commercial
net
profit
or
net
loss
generated
from
the
sales
of
LINZESS
in
the
U.S.
in
the
period
the
productsales
are
reported
by
Allergan
and
related
cost
of
goods
sold
and
selling,
general
and
administrative
expenses
are
incurred
by
the
Company
and
its
collaborationpartner.
These
amounts
are
partially
determined
based
on
amounts
provided
by
Allergan
and
involve
the
use
of
estimates
and
judgments,
such
as
product
salesallowances
and
accruals
related
to
prompt
payment
discounts,
chargebacks,
governmental
and
contractual
rebates,
wholesaler
fees,
product
returns,
and
co-paymentassistance
costs,
which
could
be
adjusted
based
on
actual
results
in
the
future.
The
Company
is
highly
dependent
on
Allergan
for
timely
and
accurate
informationregarding
any
net
revenues
realized
from
sales
of
LINZESS
in
the
U.S.
and
the
costs
incurred
in
selling
it,
in
order
to
accurately
report
its
results
of
operations.
Forthe
periods
covered
in
the
consolidated
financial
statements
presented,
there
have
been
no
material
changes
to
prior
period
estimates
of
revenues,
cost
of
goods
soldor
selling,
general
and
administrative
expenses
associated
with
the
sales
of
LINZESS
in
the
U.S.
However,
if
the
Company
does
not
receive
timely
and
accurateinformation
or
incorrectly
estimates
activity
levels
associated
with
the
collaboration
at
a
given
point
in
time,
the
Company
could
be
required
to
record
adjustmentsin
future
periods.
The
Company
records
its
share
of
the
net
profits
or
net
losses
from
the
sales
of
LINZESS
in
the
U.S.
on
a
net
basis
and
presents
the
settlement
payments
toand
from
Allergan
as
collaboration
expense
or
collaborative
arrangements
revenue,
as
applicable,
as
the
Company
is
not
the
primary
obligor
and
does
not
have
therisks
and
rewards
of
ownership
in
the
collaboration
agreement
with
Allergan
for
North
America.
The
Company
and
Allergan
settle
the
cost
sharing
quarterly,
suchthat
the
Company's
statement
of
operations
reflects
50%
of
the
pre-tax
net
profit
or
loss
generated
from
sales
of
LINZESS
in
the
U.S.Royalties
on
Product
Sales
The
Company
receives
or
expects
to
receive
in
the
future
royalty
revenues
under
certain
of
the
Company's
license
or
collaboration
agreements.
If
theCompany
does
not
have
any
future
performance
obligations
under
these
license
or
collaborations
agreements,
the
Company
records
these
revenues
as
earned.
Tothe
extent
the
Company
does
not
have
access
to
the
royalty
reports
from
the
Company's
partners
or
the
ability
to
accurately
estimate
the
royalty
revenue
in
theperiod
earned,
the
Company
records
such
royalty
revenues
one
quarter
in
arrears.Other
The
Company
produces
finished
drug
product,
API
and
development
materials
for
certain
of
its
partners.F-19 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)
The
Company
recognizes
revenue
on
finished
drug
product,
API
and
development
materials
when
the
material
has
passed
all
quality
testing
required
forcollaborator
acceptance,
delivery
has
occurred,
title
and
risk
of
loss
have
transferred
to
the
collaborator,
the
price
is
fixed
or
determinable,
and
collection
isreasonably
assured.
As
it
relates
to
development
materials
and
API
produced
for
Astellas,
the
Company
is
reimbursed
at
a
contracted
rate.
Such
reimbursements
areconsidered
as
part
of
revenue
generated
pursuant
to
the
Astellas
license
agreement
and
are
presented
as
collaborative
arrangements
revenue.
Any
finished
drugproduct,
API
and
development
materials
currently
produced
for
Allergan
for
the
U.S.
or
AstraZeneca
for
China,
Hong
Kong
and
Macau
are
recognized
inaccordance
with
the
cost-sharing
provisions
of
the
Allergan
and
AstraZeneca
collaboration
agreements,
respectively.
In
October
2015,
Almirall
transferred
itsexclusive
license
to
develop
and
commercialize
linaclotide
in
Europe
to
Allergan,
and
the
Company
separately
entered
into
an
amendment
to
the
license
agreementwith
Allergan
relating
to
the
development
and
commercialization
of
linaclotide
in
Europe.
Pursuant
to
the
terms
of
the
amendment,
Allergan
assumed
responsibilityfor
the
manufacturing
of
linaclotide
API
for
Europe
from
the
Company,
as
well
as
the
associated
costs
(Note
4).Cost
of
Revenue
Cost
of
revenue
is
recognized
upon
shipment
of
linaclotide
API
to
certain
of
the
Company's
licensing
partners
outside
of
the
U.S.
and
consists
of
the
internaland
external
costs
of
producing
such
API.
During
the
year
ended
December
31,
2015,
the
Company
recorded
expenses
of
approximately
$17.6
million
for
the
write-down
of
inventory
and
an
accrual
forexcess
non-cancelable
inventory
purchase
commitments
related
to
linaclotide
API.
These
charges
primarily
related
to
a
reduction
in
the
near
term
demand
forecastfor
CONSTELLA
in
the
European
territory
by
Almirall,
the
Company's
former
European
partner;
recent
regulatory
changes
made
by
the
CFDA
to
the
marketingapproval
process
in
China;
and
the
amendment
to
the
license
agreement
with
Allergan
pertaining
to
the
development
and
commercialization
of
linaclotide
forEurope
executed
in
October
2015.
Pursuant
to
the
terms
of
the
amendment,
Allergan
assumed
responsibility
for
the
manufacturing
of
linaclotide
API
for
Europe,
aswell
as
the
associated
costs,
which
resulted
in
accruing
for
a
loss
on
non-cancelable
inventory
purchase
commitments
under
one
of
the
Company's
API
supplyagreements
covering
the
commercial
supply
of
linaclotide
API
for
the
European
market.
During
the
year
ended
December
31,
2014,
the
Company
wrote-down
approximately
$20.3
million
in
inventory
to
an
estimated
net
realizable
value
ofapproximately
$5.0
million.
This
write-down
was
primarily
attributable
to
Almirall's
reduced
inventory
demand
forecasts
for
the
European
territory,
mainly
due
tothe
suspension
of
commercialization
of
CONSTELLA
in
Germany
and
a
challenging
commercial
environment
throughout
Europe.
The
write-down
of
inventory
to
net
realizable
value
and
the
loss
on
non-cancelable
inventory
purchase
commitments
is
recorded
as
a
separate
line
item
in
theCompany's
Consolidated
Statement
of
Operations.
These
charges
are
more
fully
described
in
Note
7,
Inventory
,
to
these
consolidated
financial
statements.F-20 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)Research
and
Development
Costs
The
Company
expenses
research
and
development
costs
to
operations
as
incurred.
The
Company
defers
and
capitalizes
nonrefundable
advance
payments
madeby
the
Company
for
research
and
development
activities
until
the
related
goods
are
received
or
the
related
services
are
performed.
Research
and
development
expenses
are
comprised
of
costs
incurred
in
performing
research
and
development
activities,
including
salary,
benefits
and
otheremployee-related
expenses;
share-based
compensation
expense;
laboratory
supplies
and
other
direct
expenses;
facilities
expenses;
overhead
expenses;
third-partycontractual
costs
relating
to
nonclinical
studies
and
clinical
trial
activities
and
related
contract
manufacturing
expenses,
development
of
manufacturing
processesand
regulatory
registration
of
third-party
manufacturing
facilities;
licensing
fees
for
the
Company's
product
candidates;
and
other
outside
expenses.
The
Company
has
entered
into
collaboration
agreements
with
Allergan
for
the
U.S.
and
AstraZeneca
for
China,
Hong
Kong
and
Macau
pursuant
to
which
itshares
research
and
development
expenses
with
its
collaborators.
The
Company
records
expenses
incurred
under
the
collaboration
arrangements
for
such
work
asresearch
and
development
expense.
Because
the
collaboration
arrangements
are
cost-sharing
arrangements,
the
Company
concluded
that
when
there
is
a
periodduring
the
collaboration
arrangements
during
which
the
Company
receives
payments
from
Allergan
or
AstraZeneca
for
such
territories,
the
Company
records
thepayments
by
Allergan
or
AstraZeneca
for
their
share
of
the
development
effort
as
a
reduction
of
research
and
development
expense.
Payments
to
Allergan
orAstraZeneca
for
such
territories
are
recorded
as
incremental
research
and
development
expense.Selling,
General
and
Administrative
Expenses
The
Company
expenses
selling,
general
and
administrative
costs
to
operations
as
incurred.
Selling,
general
and
administrative
expense
consists
primarily
ofcompensation,
benefits
and
other
employee-related
expenses
for
personnel
in
the
Company's
administrative,
finance,
legal,
information
technology,
businessdevelopment,
commercial,
sales,
marketing,
communications
and
human
resource
functions.
Other
costs
include
the
legal
costs
of
pursuing
patent
protection
of
theCompany's
intellectual
property,
general
and
administrative
related
facility
costs,
insurance
costs
and
professional
fees
for
accounting
and
legal
services.
Under
the
collaboration
agreements
with
Allergan
for
the
U.S.
and
AstraZeneca
for
China,
Hong
Kong
and
Macau,
the
Company
is
reimbursed
for
certainselling,
general
and
administrative
expenses
and
it
nets
these
reimbursements
against
selling,
general
and
administrative
expenses
as
incurred.
Payments
toAllergan
or
AstraZeneca
for
such
territories
are
recorded
as
incremental
selling,
general
and
administrative
expense.Share-Based
Compensation
The
Company's
stock-based
compensation
programs
grant
awards
which
have
included
stock
awards,
restricted
stock,
restricted
stock
units
("RSUs"),
andstock
options.
Share-based
compensation
is
recognized
as
an
expense
in
the
financial
statements
based
on
the
grant
date
fair
value
over
the
requisite
service
period.For
awards
that
vest
based
on
service
conditions,
the
Company
uses
the
straight-line
method
to
allocate
compensation
expense
to
reporting
periods.
The
grant
datefair
value
ofF-21 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)options
granted
is
calculated
using
the
Black-Scholes
option-pricing
model,
which
requires
the
use
of
subjective
assumptions
including
volatility
and
expectedterm,
among
others.
The
fair
value
of
the
Company's
RSUs
is
based
on
the
market
value
of
the
Company's
Class
A
common
stock
on
the
date
of
grant.Compensation
expense
for
RSUs
is
recognized
on
a
straight-line
basis
over
the
applicable
service
period.
The
Company
records
the
expense
for
stock
option
grants
subject
to
performance-based
milestone
vesting
using
the
accelerated
attribution
method
over
theremaining
service
period
when
management
determines
that
achievement
of
the
milestone
is
probable.
Management
evaluates
when
the
achievement
of
aperformance-based
milestone
is
probable
based
on
the
relative
satisfaction
of
the
performance
conditions
as
of
the
reporting
date.
The
Company
records
the
expense
of
services
rendered
by
non-employees
based
on
the
estimated
fair
value
of
the
stock
option
using
the
Black-Scholesoption-pricing
model.
The
fair
value
of
unvested
non-employee
awards
is
remeasured
at
each
reporting
period
and
expensed
over
the
vesting
term
of
the
underlyingstock
options.Patent
Costs
The
Company
incurred
and
recorded
as
operating
expense
legal
and
other
fees
related
to
patents
of
approximately
$2.2
million,
approximately
$1.3
million,and
approximately
$3.2
million
for
the
years
ended
December
31,
2015,
2014
and
2013,
respectively.
These
costs
were
charged
to
selling,
general
andadministrative
expenses
as
incurred.Net
Income
(Loss)
Per
Share
The
Company
calculates
basic
net
income
(loss)
per
common
share
and
diluted
net
income
(loss)
per
common
share
by
dividing
the
net
income
(loss)
by
theweighted
average
number
of
common
shares
outstanding
during
the
period.
Diluted
net
income
(loss)
per
common
share
is
computed
by
dividing
net
income
(loss)by
the
diluted
number
of
shares
outstanding
during
the
period.
Except
where
the
result
would
be
antidilutive
to
net
income
(loss),
diluted
net
income
(loss)
percommon
share
is
computed
assuming
the
conversion
of
the
2022
Notes,
the
exercise
of
outstanding
common
stock
options
and
the
vesting
of
RSUs
and
restrictedstock
(using
the
treasury
stock
method),
as
well
as
their
related
income
tax
effects.
The
Company
allocates
undistributed
earnings
between
the
classes
of
commonstock
on
a
one-to-one
basis
when
computing
net
income
(loss)
per
share.
As
a
result,
basic
and
diluted
net
income
(loss)
per
Class
A
and
Class
B
shares
areequivalent.F-22 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)Property
and
Equipment
Property
and
equipment,
including
leasehold
improvements,
are
recorded
at
cost,
and
are
depreciated
when
placed
into
service
using
the
straight-line
methodbased
on
their
estimated
useful
lives
as
follows:
Included
in
property
and
equipment
are
certain
costs
of
software
obtained
for
internal
use.
Costs
incurred
during
the
preliminary
project
stage
are
expensed
asincurred,
while
costs
incurred
during
the
application
development
stage
are
capitalized
and
amortized
over
the
estimated
useful
life
of
the
software.
The
Companyalso
capitalizes
costs
related
to
specific
upgrades
and
enhancements
when
it
is
probable
the
expenditures
will
result
in
additional
functionality.
Maintenance
andtraining
costs
related
to
software
obtained
for
internal
use
are
expensed
as
incurred.
Leasehold
improvements
are
amortized
over
the
shorter
of
the
estimated
useful
life
of
the
asset
or
the
lease
term.
Capital
lease
assets
are
amortized
over
thelease
term.
However,
if
ownership
was
transferred
by
the
end
of
the
capital
lease,
or
there
was
a
bargain
purchase
option,
such
capital
lease
assets
would
beamortized
over
the
useful
life
that
would
be
assigned
if
such
assets
were
owned.
Costs
for
capital
assets
not
yet
placed
into
service
have
been
capitalized
as
construction
in
progress,
and
will
be
depreciated
in
accordance
with
the
aboveguidelines
once
placed
into
service.
Maintenance
and
repair
costs
are
expensed
as
incurred.Income
Taxes
The
Company
provides
for
income
taxes
under
the
liability
method.
Deferred
tax
assets
and
liabilities
are
determined
based
on
differences
between
financialreporting
and
tax
bases
of
assets
and
liabilities
and
are
measured
using
the
enacted
tax
rates
in
effect
when
the
differences
are
expected
to
reverse.
Deferred
taxassets
are
reduced
by
a
valuation
allowance
to
reflect
the
uncertainty
associated
with
their
ultimate
realization.
In
November
2015,
the
FASB
issued
ASU
No.
2015-17,
Balance
Sheet
Classification
of
Deferred
Taxes
("ASU
2015-17")
which
provides
guidance
forbalance
sheet
classification
of
deferred
taxes.
This
standard
requires
that
deferred
tax
assets
and
liabilities
be
classified
as
non-current
on
the
balance
sheet,
andeliminates
the
prior
guidance
which
required
an
entity
to
separate
deferred
tax
liabilities
and
assets
into
a
current
amount
and
a
noncurrent
amount
on
the
balancesheet.
ASU
2015-17
is
effective
for
fiscal
years,
and
interim
periods
within
those
years,
beginning
after
December
15,
2016.
Earlier
adoption
is
permitted
as
of
thebeginning
of
an
interim
or
annual
period.
The
amendments
in
ASU
2015-17
may
be
applied
either
prospectively
to
all
deferred
tax
liabilities
and
assets
orretrospectively
to
all
periods
presented.
The
Company
elected
early
adoption
in
the
year
ended
December
31,
2015,
and
elected
to
apply
the
amendments
on
aretrospective
basis.
The
Company'sF-23Asset
Description
Estimated
Useful
Life
(In
Years)
Manufacturing
equipment
10
Laboratory
equipment
5
Computer
and
office
equipment
3
Furniture
and
fixtures
7
Software
3
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)adoption
of
this
standard
did
not
have
a
significant
impact
on
its
consolidated
balance
sheet
for
the
years
ended
December
31,
2015
or
2014,
or
on
the
results
ofoperations
or
cash
flows
for
the
years
ended
December
31,
2015,
2014
or
2013.
The
Company
accounts
for
uncertain
tax
positions
recognized
in
the
consolidated
financial
statements
in
accordance
with
the
provisions
of
ASC
Topic
740,Income
Taxes
,
by
prescribing
a
more-likely-than-not
threshold
for
financial
statement
recognition
and
measurement
of
a
tax
position
taken
or
expected
to
be
takenin
a
tax
return.
When
uncertain
tax
positions
exist,
the
Company
recognizes
the
tax
benefit
of
tax
positions
to
the
extent
that
the
benefit
will
more
likely
than
not
berealized.
The
determination
as
to
whether
the
tax
benefit
will
more
likely
than
not
be
realized
is
based
upon
the
technical
merits
of
the
tax
position
as
well
asconsideration
of
the
available
facts
and
circumstances.
The
Company
evaluates
uncertain
tax
positions
on
a
quarterly
basis
and
adjusts
the
level
of
the
liability
toreflect
any
subsequent
changes
in
the
relevant
facts
surrounding
the
uncertain
positions.
Any
changes
to
these
estimates,
based
on
the
actual
results
obtained
and/ora
change
in
assumptions,
could
impact
the
Company's
income
tax
provision
in
future
periods.
Interest
and
penalty
charges,
if
any,
related
to
unrecognized
taxbenefits
would
be
classified
as
a
provision
for
income
tax
in
the
Company's
consolidated
statement
of
operations.Impairment
of
Long-Lived
Assets
The
Company
regularly
reviews
the
carrying
amount
of
its
long-lived
assets
to
determine
whether
indicators
of
impairment
may
exist,
which
warrantadjustments
to
carrying
values
or
estimated
useful
lives.
If
indications
of
impairment
exist,
projected
future
undiscounted
cash
flows
associated
with
the
asset
arecompared
to
the
carrying
amount
to
determine
whether
the
asset's
value
is
recoverable.
If
the
carrying
value
of
the
asset
exceeds
such
projected
undiscounted
cashflows,
the
asset
will
be
written
down
to
its
estimated
fair
value.
There
were
no
significant
impairments
of
long-lived
assets
for
the
years
ended
December
31,
2015,2014,
or
2013.Comprehensive
Income
(Loss)
Comprehensive
income
(loss)
is
defined
as
the
change
in
equity
of
a
business
enterprise
during
a
period
from
transactions,
and
other
events
and
circumstancesfrom
non-owner
sources
and
currently
consists
of
net
loss
and
changes
in
unrealized
gains
and
losses
on
available-for-sale
securities.Segment
Information
Operating
segments
are
components
of
an
enterprise
for
which
separate
financial
information
is
available
and
is
evaluated
regularly
by
the
Company's
chiefoperating
decision-maker
in
deciding
how
to
allocate
resources
and
in
assessing
performance.
The
Company
currently
operates
in
one
reportable
business
segment—human
therapeutics.Reclassifications
and
Revisions
to
Prior
Period
Financial
Statements
Certain
financial
statement
items
have
been
reclassified
to
conform
to
the
current
period
presentation.F-24 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)Subsequent
Events
The
Company
considers
events
or
transactions
that
have
occurred
after
the
balance
sheet
date
of
December
31,
2015,
but
prior
to
the
filing
of
the
financialstatements
with
the
Securities
and
Exchange
Commission
to
provide
additional
evidence
relative
to
certain
estimates
or
to
identify
matters
that
require
additionalrecognition
or
disclosure.
Subsequent
events
have
been
evaluated
through
the
filing
of
the
financial
statements
accompanying
this
Annual
Report
on
Form
10-K.New
Accounting
Pronouncements
From
time
to
time,
new
accounting
pronouncements
are
issued
by
the
FASB
or
other
standard
setting
bodies
that
are
adopted
by
the
Company
as
of
thespecified
effective
date.
Except
as
set
forth
below,
the
Company
did
not
adopt
any
new
accounting
pronouncements
during
the
year
ended
December
31,
2015
thathad
a
material
effect
on
its
consolidated
financial
statements.
In
May
2014,
the
FASB
issued
ASU
No.
2014-09,
Revenue
from
Contracts
with
Customers
("ASU
2014-09"),
which
supersedes
the
revenue
recognitionrequirements
in
ASC
Topic
605,
Revenue
Recognition
,
and
most
industry-specific
guidance.
The
new
standard
requires
that
an
entity
recognize
revenue
to
depictthe
transfer
of
promised
goods
or
services
to
customers
in
an
amount
that
reflects
the
consideration
to
which
the
company
expects
to
be
entitled
in
exchange
forthose
goods
or
services.
The
update
also
requires
additional
disclosure
about
the
nature,
amount,
timing
and
uncertainty
of
revenue
and
cash
flows
arising
fromcustomer
contracts,
including
significant
judgments
and
changes
in
judgments
and
assets
recognized
from
costs
incurred
to
obtain
or
fulfill
a
contract.
ASU
2014-09
is
effective
for
fiscal
years,
and
interim
periods
within
those
years,
beginning
after
December
15,
2017
and
should
be
applied
retrospectively
to
each
priorreporting
period
presented
or
retrospectively
with
the
cumulative
effect
of
initially
applying
this
update
recognized
at
the
date
of
initial
application.
Early
adoptionis
permitted
beginning
after
December
15,
2016,
including
interim
reporting
periods
within
those
years.
The
Company
is
currently
evaluating
the
potential
impactthat
ASU
2014-09
may
have
on
its
financial
position
and
results
of
operations.
In
August
2014,
the
FASB
issued
ASU
No.
2014-15,
Presentation
of
Financial
Statements—Going
Concern:
Disclosure
of
Uncertainties
about
an
Entity'sAbility
to
Continue
as
a
Going
Concern
("
ASU
2014-15").
ASU
2014-15
is
intended
to
define
management's
responsibility
to
evaluate
whether
there
is
substantialdoubt
about
an
organization's
ability
to
continue
as
a
going
concern
and
to
provide
related
footnote
disclosures,
if
required.
ASU
2014-15
is
effective
for
annualreporting
periods
ending
after
December
15,
2016,
and
applies
to
annual
and
interim
periods
thereafter.
The
Company
is
evaluating
the
impact
that
the
adoption
ofASU
2014-15
will
have
on
the
Company's
consolidated
financial
statements
and
related
disclosures,
but
does
not
expect
it
to
have
a
significant
impact
on
theCompany's
results
of
operations,
cash
flows
or
financial
position.
In
April
2015,
the
FASB
issued
ASU
No.
2015-05,
Customer's
Accounting
for
Fees
Paid
in
a
Cloud
Computing
Arrangement
,
which
amends
ASC
Topic
350,Intangibles—Goodwill
and
Other—Internal
Use
Software
.
Under
this
standard,
if
a
cloud
computing
arrangement
includes
a
software
license,
the
software
licenseelement
of
the
arrangement
should
be
accounted
for
consistent
with
the
acquisition
of
other
software
licenses.
If
a
cloud
computing
arrangement
does
not
include
asoftware
license,
the
arrangement
should
be
accounted
for
as
a
service
contract.
The
amendments
are
effective
for
fiscal
years,
and
interim
periods
within
thoseyears,
beginning
after
December
15,
2015
and
may
be
applied
on
either
a
prospective
or
retrospective
basis.
Early
adoption
is
not
permitted.
The
Company
does
notF-25 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)expect
adoption
of
this
standard
to
have
a
significant
impact
on
the
Company's
financial
position
or
results
of
operations.
In
July
2015,
the
FASB
issued
ASU
No.
2015-11,
Inventory
(Topic
330):
Simplifying
the
Measurement
of
Inventory
("ASU
2015-11").
ASU
2015-11
requiresthat
for
entities
that
measure
inventory
using
the
first-in,
first-out
method,
inventory
should
be
measured
at
the
lower
of
cost
and
net
realizable
value.
The
standarddefines
net
realizable
value
as
the
estimated
selling
prices
in
the
ordinary
course
of
business,
less
reasonably
predictable
costs
of
completion,
disposal
andtransportation.
The
standard
is
effective
for
fiscal
years,
and
interim
periods
within
those
years,
beginning
after
December
15,
2016.
Early
adoption
is
permitted.The
adoption
of
this
standard
is
not
expected
to
have
a
significant
impact
on
the
Company's
financial
position
or
results
of
operations.
No
other
accounting
standards
known
by
the
Company
to
be
applicable
to
it
that
have
been
issued
or
proposed
by
the
FASB
or
other
standard-setting
bodiesand
that
do
not
require
adoption
until
a
future
date
are
expected
to
have
a
material
impact
on
the
Company's
consolidated
financial
statements
upon
adoption.3.
Net
Loss
Per
Share
The
following
table
sets
forth
the
computation
of
basic
and
diluted
net
loss
per
share
(in
thousands,
except
per
share
amounts):
In
June
2015,
in
connection
with
the
issuance
of
approximately
$335.7
million
in
aggregate
principal
amount
of
the
2022
Notes,
the
Company
entered
into
theConvertible
Note
Hedges.
The
Convertible
Note
Hedges
are
generally
expected
to
reduce
the
potential
dilution
to
the
Company's
Class
A
common
stockholdersupon
a
conversion
of
the
2022
Notes
and/or
offset
any
cash
payments
the
Company
is
required
to
make
in
excess
of
the
principal
amount
of
converted
2022
Notesin
the
event
that
the
market
price
per
share
of
the
Company's
Class
A
common
stock,
as
measured
under
the
terms
of
the
Convertible
Note
Hedges,
is
greater
thanthe
conversion
price
of
the
2022
Notes
(Note
10).
The
Convertible
Note
Hedges
are
not
considered
for
purposes
of
calculating
the
number
of
diluted
weightedaverage
shares
outstanding,
as
their
effect
would
be
antidilutive.
Concurrently
with
entering
into
the
Convertible
Note
Hedges,
the
Company
also
issued
Note
Hedge
Warrants
to
the
Convertible
Note
Hedge
counterparties
toacquire
20,249,665
shares
of
the
Company's
Class
A
common
stock,
subject
to
customary
anti-dilution
adjustments.
The
Note
Hedge
Warrants
could
have
adilutive
effect
on
the
Company's
Class
A
common
stock
to
the
extent
that
the
market
price
per
share
of
the
Class
A
common
stock
exceeds
the
applicable
strikeprice
of
suchF-26
Year
Ended
December
31,
2015
2014
2013
Numerator:
Net
Loss
$(142,669)$(189,618)$(272,812)Denominator:
Weighted
average
number
of
common
shares
used
in
net
loss
per
share—basic
anddiluted
142,155
136,811
115,852
Net
loss
per
share—basic
and
diluted
$(1.00)$(1.39)$(2.35) Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)3.
Net
Loss
Per
Share
(Continued)warrants
(Note
10).
The
Note
Hedge
Warrants
are
not
considered
for
purposes
of
calculating
the
number
of
diluted
weighted
averages
shares
outstanding,
as
theireffect
would
be
antidilutive.
The
following
potentially
dilutive
securities
have
been
excluded
from
the
computation
of
diluted
weighted
average
shares
outstanding
as
they
would
be
anti-dilutive
(in
thousands):
An
insignificant
number
of
shares
issuable
under
the
Company's
employee
stock
purchase
plan
were
excluded
from
the
calculation
of
diluted
weightedaverage
shares
outstanding
because
their
effects
would
be
anti-dilutive.4.
Collaboration,
License
and
Co-promotion
Agreements
For
the
year
ended
December
31,
2015,
the
Company
had
linaclotide
collaboration
agreements
with
Allergan
for
North
America
and
AstraZeneca
for
China,Hong
Kong
and
Macau,
as
well
as
linaclotide
license
agreements
with
Allergan
for
the
European
territory
(formerly
with
Almirall)
and
Astellas
for
Japan.
TheCompany
also
had
a
co-promotion
agreement
with
Exact
Sciences
to
co-promote
Cologuard
in
the
U.S.
and
a
co-promotion
agreement
with
Allergan
to
co-promoteVIBERZI
in
the
U.S.
The
following
table
provides
amounts
included
in
the
Company's
consolidated
statements
of
operations
as
collaborative
arrangementsrevenue
attributable
to
transactions
from
these
arrangements
(in
thousands):F-27
Year
Ended
December
31,
2015
2014
2013
Options
to
purchase
common
stock
20,567
19,958
20,928
Shares
subject
to
repurchase
74
99
—
Unvested
restricted
stock
units
900
—
—
Note
hedge
warrants
20,250
—
—
2022
Notes
20,250
—
—
62,041
20,057
20,928
Collaborative
Arrangements
Revenue
Year
Ended
December
31,
2015
2014
2013
Linaclotide
Agreements:
Allergan
(North
America)
$134,335
$47,682
$2,957
AstraZeneca
(China,
Hong
Kong
and
Macau)
2,370
3,417
1,044
Almirall
(Europe)
(1)
540
7,587
13,103
Astellas
(Japan)
7,696
17,750
5,777
Co-promotion
Agreements:
Exact
Sciences
(Cologuard)
4,437
—
—
Allergan
(VIBERZI)
177
—
—
Total
collaborative
arrangements
revenue
$149,555
$76,436
$22,881
(1)In
October
2015,
Almirall
transferred
its
exclusive
license
to
develop
and
commercialize
linaclotide
in
Europe
to
Allergan. Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)4.
Collaboration,
License
and
Co-promotion
Agreements
(Continued)Linaclotide
AgreementsCollaboration Agreement for North America with Allergan
In
September
2007,
the
Company
entered
into
a
collaboration
agreement
with
Allergan
to
develop
and
commercialize
linaclotide
for
the
treatment
of
IBS-C,CIC
and
other
GI
conditions
in
North
America.
Under
the
terms
of
this
collaboration
agreement,
the
Company
shares
equally
with
Allergan
all
development
costsas
well
as
net
profits
or
losses
from
the
development
and
sale
of
linaclotide
in
the
U.S.
The
Company
receives
royalties
in
the
mid-teens
percent
based
on
net
salesin
Canada
and
Mexico.
Allergan
is
solely
responsible
for
the
further
development,
regulatory
approval
and
commercialization
of
linaclotide
in
those
countries
andfunding
any
costs.
In
September
2012,
Allergan
sublicensed
its
commercialization
rights
in
Mexico
to
Almirall.
In
October
2015,
Almirall
and
Allergan
terminatedthe
sublicense
arrangement
with
respect
to
Mexico,
returning
the
exclusive
rights
to
commercialize
CONSTELLA
in
Mexico
to
Allergan.
CONSTELLA
continuesto
be
available
to
adult
IBS-C
patients
in
Mexico.
Allergan
made
non-refundable,
up-front
payments
totaling
$70.0
million
to
the
Company
in
order
to
obtain
rightsto
linaclotide
in
North
America.
Because
the
license
to
jointly
develop
and
commercialize
linaclotide
did
not
have
a
standalone
value
without
research
anddevelopment
activities
provided
by
the
Company,
the
Company
recorded
the
up-front
license
fee
as
collaborative
arrangements
revenue
on
a
straight
line
basisthrough
September
30,
2012,
the
period
over
which
linaclotide
was
jointly
developed
under
the
collaboration.
The
Company
achieved
all
six
developmentmilestones
under
this
agreement
totaling
$135.0
million,
which
were
recognized
through
September
2012.
The
remaining
milestone
payment
that
could
be
receivedfrom
Allergan
upon
the
achievement
of
sales
targets
will
be
recognized
as
collaborative
arrangements
revenue
as
earned.
The
collaboration
agreement
for
NorthAmerica
also
includes
contingent
milestone
payments,
as
well
as
a
contingent
equity
investment,
based
on
the
achievement
of
specific
development
andcommercial
milestones.
At
December
31,
2015,
$205.0
million
in
license
fees
and
development
milestone
payments
had
been
received
by
the
Company,
as
well
asa
$25.0
million
equity
investment
in
the
Company's
capital
stock.
The
Company
can
also
achieve
up
to
$100.0
million
in
a
sales
related
milestone
if
certainconditions
are
met.
The
collaboration
agreement
for
North
America
included
a
contingent
equity
investment,
in
the
form
of
a
forward
purchase
contract,
which
required
Allerganto
purchase
shares
of
the
Company's
convertible
preferred
stock
upon
achievement
of
a
specific
development
milestone.
At
the
inception
of
the
arrangement,
theCompany
valued
the
contingent
equity
investment
and
recorded
an
approximately
$9.0
million
asset
and
incremental
deferred
revenue.
The
$9.0
million
ofincremental
deferred
revenue
was
recognized
as
collaborative
arrangements
revenue
on
a
straight-line
basis
over
the
period
of
the
Company's
continuinginvolvement
through
September
30,
2012.
In
July
2009,
the
Company
achieved
the
development
milestone
triggering
the
equity
investment
and
reclassified
theforward
purchase
contract
as
a
reduction
to
convertible
preferred
stock.
On
September
1,
2009,
the
Company
issued
2,083,333
shares
of
convertible
preferred
stockto
Allergan
(Note
16).
As
a
result
of
the
research
and
development
cost-sharing
provisions
of
the
collaboration
for
North
America,
the
Company
offset
approximately
$16.9
millionand
$4.3
million
against
research
and
development
costs
during
the
years
ended
December
31,
2015
and
2014,
respectively.
The
Company
recognizedapproximately
$2.2
million
in
incremental
research
and
development
costs
during
the
year
ended
December
31,
2013,
to
reflect
its
obligation
under
thecollaboration
to
bear
half
of
the
development
costs
incurred
by
both
parties.
In
addition,
in
March
2015,
the
Company
and
AllerganF-28 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)4.
Collaboration,
License
and
Co-promotion
Agreements
(Continued)agreed
to
share
certain
costs
relating
to
the
manufacturing
of
linaclotide
API
and
certain
other
manufacturing
activities.
This
arrangement
resulted
in
net
amountsreceived
from
Allergan
of
approximately
$4.3
million
for
costs
incurred
in
prior
periods,
which
were
recorded
by
the
Company
as
a
reduction
in
research
anddevelopment
expenses
during
the
year
ended
December
31,
2015.
The
Company
receives
50%
of
the
net
profits
and
bears
50%
of
the
net
losses
from
the
commercial
sale
of
LINZESS
in
the
U.S.;
provided,
however,
that
ifeither
party
provides
fewer
calls
on
physicians
in
a
particular
year
than
it
is
contractually
required
to
provide,
such
party's
share
of
the
net
profits
will
be
adjusted
asstipulated
by
the
collaboration
agreement
for
North
America.
Certain
of
these
adjustments
to
the
share
of
the
net
profits
may
be
reduced
or
eliminated
in
connectionwith
the
co-promotion
activities
under
the
Company's
agreement
with
Allergan
to
co-promote
VIBERZI
in
the
U.S.,
as
described
below.
Net
profits
or
net
lossesconsist
of
net
sales
to
third-party
customers
and
sublicense
income
in
the
U.S.
less
the
cost
of
goods
sold
as
well
as
selling,
general
and
administrative
expenses.Net
sales
are
calculated
and
recorded
by
Allergan
and
may
include
gross
sales
net
of
discounts,
rebates,
allowances,
sales
taxes,
freight
and
insurance
charges,
andother
applicable
deductions.
The
Company
records
its
share
of
the
net
profits
or
net
losses
from
the
sale
of
LINZESS
on
a
net
basis
and
presents
the
settlementpayments
to
and
from
Allergan
as
collaboration
expense
or
collaborative
arrangements
revenue,
as
applicable.
The
Company
and
Allergan
began
commercializingLINZESS
in
the
U.S.
in
December
2012.
The
Company
recognized
collaborative
arrangements
revenue
from
the
Allergan
collaboration
agreement
for
North
America
during
the
years
endedDecember
31,
2015,
2014
and
2013
as
follows
(in
thousands):
The
collaborative
arrangements
revenue
recognized
in
the
years
ended
December
31,
2015,
2014
and
2013
primarily
represents
the
Company's
share
of
the
netprofits
and
net
losses
on
the
sale
of
LINZESS
in
the
U.S.F-29
Year
Ended
December
31,
2015
2014
2013
Collaborative
arrangements
revenue
related
to
sales
of
LINZESS
in
theU.S.
(1)(2)
$133,425
$47,618
$2,914
Royalty
revenue
910
64
—
Sale
of
API
—
—
43
Total
collaborative
arrangements
revenue
$134,335
$47,682
$2,957
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)4.
Collaboration,
License
and
Co-promotion
Agreements
(Continued)
The
following
table
presents
the
amounts
recorded
by
the
Company
for
commercial
efforts
related
to
LINZESS
in
the
U.S.
in
the
years
ended
December
31,2015,
2014
and
2013
(in
thousands):
In
May
2014,
Allergan
began
commercializing
CONSTELLA
in
Canada
and
in
June
2014,
Almirall
began
commercializing
LINZESS
in
Mexico.
In
October2015,
Almirall
and
Allergan
terminated
the
sublicense
arrangement
with
respect
to
Mexico,
returning
the
exclusive
rights
to
commercialize
CONSTELLA
inMexico
to
Allergan.
CONSTELLA
continues
to
be
available
to
adult
IBS-C
patients
in
Mexico.
The
Company
records
royalties
on
sales
of
CONSTELLA
inCanada
and
LINZESS
in
Mexico
one
quarter
in
arrears
as
it
does
not
have
access
to
the
royalty
reports
from
its
partners
or
the
ability
to
estimate
the
royaltyrevenue
in
the
period
earned.
The
Company
recognized
approximately
$0.9
million
and
an
insignificant
amount
of
royalty
revenues
from
Canada
and
Mexicoduring
the
years
ended
December
31,
2015
and
2014,
respectively.License Agreement for the European Territory with Allergan (formerly with Almirall through October 2015)
In
April
2009,
the
Company
entered
into
a
license
agreement
with
Almirall
(the
"European
License
Agreement")
to
develop
and
commercialize
linaclotide
inEurope
(including
the
Commonwealth
of
Independent
States
and
Turkey)
for
the
treatment
of
IBS-C,
CIC
and
other
GI
conditions.
Under
the
terms
of
the
EuropeanLicense
Agreement,
Almirall
was
responsible
for
the
expenses
associated
with
the
development
and
commercialization
of
linaclotide
in
the
European
territory
andthe
Company
was
required
to
participate
on
a
joint
development
committee
over
linaclotide's
development
period
and
a
joint
commercialization
committee
whilethe
product
was
being
commercialized.F-30
Year
Ended
December
31,
2015
2014
2013
Collaborative
arrangements
revenue
related
to
sales
of
LINZESS
in
the
U.S.
(1)(2)
$133,425
$47,618
$2,914
Collaboration
expense
—
—
(42,074)Selling,
general
and
administrative
costs
incurred
by
the
Company
(1)
(32,028)
(31,646)
(33,839)The
Company's
share
of
net
profit
(loss)
$101,397
$15,972
$(72,999)(1)Includes
only
collaborative
arrangement
revenue
or
selling,
general
and
administrative
costs
attributable
to
the
cost-sharing
arrangementwith
Allergan.
(2)Includes
net
profit
share
adjustment
payable
to
Allergan
of
approximately
$2.4
million
recorded
during
the
year
ended
December
31,
2015.Certain
of
the
unfavorable
adjustments
to
the
Company's
share
of
the
LINZESS
net
profits
may
be
reduced
or
eliminated
in
connection
withthe
co-promotion
activities
under
the
Company's
agreement
with
Allergan
to
co-promote
VIBERZI
in
the
U.S.,
as
described
below.
Duringthe
year
ended
December
31,
2015,
in
connection
with
these
co-promotion
activities,
the
net
profit
share
adjustments
payable
to
Allerganunder
the
linaclotide
collaboration
agreement
for
North
America
were
reduced
by
approximately
$2.9
million
and
were
reflected
ascollaborative
arrangements
revenue
under
this
agreement.
Net
profit
share
adjustments
received
from
Allergan
of
approximately$1.7
million
were
recorded
during
the
year
ended
December
31,
2014. Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)4.
Collaboration,
License
and
Co-promotion
Agreements
(Continued)
In
May
2009,
the
Company
received
an
approximately
$38.0
million
payment
from
Almirall
representing
a
$40.0
million
non-refundable
up-front
payment
netof
foreign
withholding
taxes.
The
Company
elected
to
record
the
non-refundable
up-front
payment
net
of
taxes
withheld.
The
license
agreement
also
included
a$15.0
million
contingent
equity
investment,
in
the
form
of
a
forward
purchase
contract,
which
required
Almirall
to
purchase
shares
of
the
Company's
convertiblepreferred
stock
upon
achievement
of
a
specific
development
milestone.
At
the
inception
of
the
arrangement,
the
Company
valued
the
contingent
equity
investmentat
approximately
$6.0
million.
The
Company
recognized
the
up-front
license
fee
and
the
value
of
the
contingent
equity
investment
totaling
approximately$6.0
million
as
collaborative
arrangements
revenue
on
a
straight-line
basis
through
September
30,
2012,
the
period
over
which
linaclotide
was
developed
under
theEuropean
License
Agreement.
In
November
2009,
the
Company
achieved
the
development
milestone
triggering
the
equity
investment
and
on
November
13,
2009,the
Company
received
$15.0
million
from
Almirall
for
the
purchase
of
681,819
shares
of
convertible
preferred
stock
(Note
16).
The
original
European
License
Agreement
also
included
contingent
milestone
payments
that
could
total
up
to
$40.0
million
upon
achievement
of
specificdevelopment
and
commercial
launch
milestones.
In
November
2010,
the
Company
achieved
a
development
milestone,
which
resulted
in
an
approximately$19.0
million
payment,
representing
a
$20.0
million
milestone,
net
of
foreign
withholding
taxes.
This
development
milestone
was
recognized
as
collaborativearrangements
revenue
through
September
2012.
Commercial
milestone
payments
under
the
original
European
License
Agreement
consisted
of
$4.0
million
dueupon
the
first
commercial
launch
in
each
of
the
five
major
European
Union
("E.U.")
countries
set
forth
in
the
agreement.
In
June
2013
and
February
2014,
the
Company
and
Almirall
amended
the
original
European
License
Agreement.
Pursuant
to
the
terms
of
the
amendments,(i)
the
commercial
launch
milestones
were
reduced
to
$17.0
million;
(ii)
new
sales-based
milestone
payments
were
added
to
the
agreement;
and
(iii)
the
escalatingroyalties
based
on
sales
of
linaclotide
were
modified
such
that
they
began
in
the
low-twenties
percent
and
escalated
to
the
mid-forties
percent
through
April
2017,and
thereafter
began
in
the
mid-twenties
percent
and
escalated
to
the
mid-forties
percent
at
lower
sales
thresholds.
In
each
case,
these
royalty
payments
werereduced
by
the
transfer
price
paid
for
the
API
included
in
the
product
actually
sold
in
the
Almirall
territory
and
other
contractual
deductions.
The
Companyconcluded
that
these
amendments
were
a
modification
to
the
European
License
Agreement
under
ASU
No.
2009-13,
but
the
modification
did
not
have
a
materialimpact
on
the
Company's
consolidated
financial
statements.
During
the
second
quarter
of
2013,
the
Company
achieved
two
milestones
under
the
amended
European
License
Agreement,
which
resulted
in
payments
ofapproximately
$1.9
million
from
Almirall
to
the
Company
related
to
the
commercial
launches
in
two
of
the
five
major
E.U.
countries,
the
United
Kingdom
andGermany.
The
approximately
$1.9
million
payment
represented
the
two
$1.0
million
milestones,
net
of
foreign
tax
withholdings.
During
the
first
and
secondquarters
of
2014,
the
Company
achieved
two
additional
milestones
under
the
amended
European
License
Agreement
triggering
payments
of
approximately$1.0
million
each
related
to
the
commercial
launches
in
two
additional
major
E.U.
countries,
Italy
and
Spain.
Each
approximately
$1.0
million
payment
representsthe
$1.0
million
milestone,
net
of
foreign
tax
withholdings.
In
October
2015,
Almirall
transferred
its
exclusive
license
to
develop
and
commercialize
linaclotide
in
Europe
to
Allergan.
Additionally,
in
October
2015,
theCompany
and
Allergan
separately
enteredF-31 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)4.
Collaboration,
License
and
Co-promotion
Agreements
(Continued)into
an
amendment
to
the
European
License
Agreement
relating
to
the
development
and
commercialization
of
linaclotide
in
Europe.
Pursuant
to
the
terms
of
theamendment,
(i)
the
remaining
sales-based
milestones
payable
to
the
Company
under
the
European
License
Agreement
were
modified
to
increase
the
total
milestonepayments
such
that,
when
aggregated
with
the
remaining
commercial
launch
milestones,
they
could
total
up
to
$42.5
million,
(ii)
the
royalties
payable
to
theCompany
during
the
term
of
the
European
License
Agreement
were
modified
such
that
the
royalties
based
on
sales
volume
in
Europe
begin
in
the
mid-single
digitpercent
and
escalate
to
the
upper-teens
percent
by
calendar
year
2019,
and
(iii)
Allergan
assumed
responsibility
for
the
manufacturing
of
linaclotide
API
for
Europefrom
the
Company,
as
well
as
the
associated
costs.
Furthermore,
with
the
Company
no
longer
responsible
for
the
manufacturing
of
linaclotide
API
for
Europe,
theroyalties
under
the
license
agreement
will
no
longer
be
reduced
by
the
transfer
price
paid
for
the
API
included
in
the
product
actually
sold
by
Allergan
in
Europe
inany
given
period.
The
2015
amendment
to
the
European
License
Agreement
does
not
represent
a
material
modification
to
the
linaclotide
collaboration
agreement
with
Allerganfor
North
America
and
did
not
have
a
material
impact
on
the
Company's
consolidated
financial
statements.
The
commercial
launch
and
sales-based
milestonesunder
the
European
License
Agreement
are
recognized
as
revenue
as
earned.
The
Company
also
records
royalties
on
sales
of
CONSTELLA
one
quarter
in
arrearsas
it
does
not
have
access
to
the
royalty
reports
from
Allergan
or
the
ability
to
estimate
the
royalty
revenue
in
the
period
earned.
Concurrently
with
the
European
license
transfer,
Almirall
and
Allergan
terminated
the
sublicense
arrangement
with
respect
to
Mexico,
returning
the
exclusiverights
to
commercialize
CONSTELLA
in
Mexico
to
Allergan.
CONSTELLA
continues
to
be
available
to
adult
IBS-C
patients
in
Mexico.
The
Company
recognized
approximately
$0.5
million
of
collaborative
arrangements
revenue,
comprised
of
royalty
revenue,
from
the
European
LicenseAgreement
during
the
year
ended
December
31,
2015.
The
Company
recognized
approximately
$7.6
million
in
total
collaborative
arrangements
revenue
from
theEuropean
License
Agreement
during
the
year
ended
December
31,
2014,
including
approximately
$5.1
million
from
the
sale
of
API
to
Almirall,
approximately$1.9
million
in
commercial
launch
milestones,
and
approximately
$0.6
million
in
royalty
revenue.
The
Company
recognized
approximately
$13.1
million
in
totalcollaborative
arrangements
revenue
from
the
European
License
Agreement
during
the
year
ended
December
31,
2013,
including
approximately
$11.1
million
fromthe
sale
of
API
to
Almirall,
approximately
$0.2
million
in
royalty
revenue
and
approximately
$1.9
million
in
commercial
launch
milestones.License Agreement for Japan with Astellas
In
November
2009,
the
Company
entered
into
a
license
agreement
with
Astellas
to
develop
and
commercialize
linaclotide
for
the
treatment
of
IBS-C,
CIC
andother
GI
conditions
in
Japan,
South
Korea,
Taiwan,
Thailand,
the
Philippines
and
Indonesia.
As
a
result
of
an
amendment
executed
in
March
2013,
the
Companyregained
rights
to
linaclotide
in
South
Korea,
Taiwan,
Thailand,
the
Philippines
and
Indonesia.
The
Company
concluded
that
the
amendment
was
not
a
materialmodification
of
the
license
agreement.
Astellas
continues
to
be
responsible
for
all
activities
relating
to
development,
regulatory
approval
and
commercialization
inJapan
as
well
as
funding
any
costs
and
the
Company
is
required
to
participate
on
a
joint
development
committee
over
linaclotide's
development
period.F-32 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)4.
Collaboration,
License
and
Co-promotion
Agreements
(Continued)
In
2009,
Astellas
paid
the
Company
a
non-refundable,
up-front
licensing
fee
of
$30.0
million,
which
is
being
recognized
as
collaborative
arrangementsrevenue
on
a
straight-line
basis
over
the
Company's
estimate
of
the
period
over
which
linaclotide
will
be
developed
under
the
license
agreement.
In
March
2013,the
Company
revised
its
estimate
of
the
development
period
from
115
months
to
85
months
based
on
the
Company's
assessment
of
regulatory
approval
timelinesfor
Japan.
During
the
years
ended
December
31,
2015,
2014
and
2013,
the
Company
recognized
approximately
$5.1
million,
$5.1
million
and
$4.6
million
ofrevenue
related
to
the
up-front
licensing
fee,
respectively,
including
approximately
$1.9
million,
$1.9
million
and
$1.5
million
of
revenue
in
each
periodattributable
to
the
March
2013
revision
to
the
estimated
development
period.
At
December
31,
2015,
approximately
$6.3
million
of
the
up-front
license
feeremained
deferred.
The
agreement
also
includes
three
development
milestone
payments
that
could
total
up
to
$45.0
million,
none
of
which
the
Company
considers
substantive.The
first
milestone
payment,
consisting
of
$15.0
million
upon
enrollment
of
the
first
study
subject
in
a
Phase
III
study
for
linaclotide
in
Japan,
was
achieved
inNovember
2014,
and
approximately
$12.3
million
was
recognized
as
revenue
through
December
31,
2015,
including
approximately
$2.1
million
and
approximately$10.2
million
during
the
years
ended
December
31,
2015
and
2014,
respectively.
The
remaining
approximately
$2.6
million
of
this
milestone
payment
will
berecognized
over
the
remaining
development
period.
The
two
additional
milestone
payments
consist
of
$15.0
million
upon
filing
of
the
Japanese
equivalent
of
anNDA
with
the
relevant
regulatory
authority
in
Japan
and
$15.0
million
upon
approval
of
such
equivalent
by
the
relevant
regulatory
authority.
In
addition,
theCompany
will
receive
royalties
which
escalate
based
on
sales
volume,
beginning
in
the
low-twenties
percent,
less
the
transfer
price
paid
for
the
API
included
in
theproduct
actually
sold
and
other
contractual
deductions.
During
the
years
ended
December
31,
2015,
2014
and
2013,
the
Company
recognized
approximately
$7.7
million,
approximately
$17.7
million,
andapproximately
$5.8
million,
respectively,
in
collaborative
arrangements
revenue
from
the
Astellas
license
agreement,
including
approximately
$0.5
million,approximately
$2.4
million,
and
approximately
$1.2
million,
respectively,
from
the
sale
of
API
to
Astellas.Collaboration Agreement for China, Hong Kong and Macau with AstraZeneca
In
October
2012,
the
Company
entered
into
a
collaboration
agreement
with
AstraZeneca
(the
"AstraZeneca
Collaboration
Agreement")
to
co-develop
and
co-commercialize
linaclotide
in
China,
Hong
Kong
and
Macau
(the
"License
Territory").
The
collaboration
provides
AstraZeneca
with
an
exclusive
nontransferablelicense
to
exploit
the
underlying
technology
in
the
License
Territory.
The
parties
share
responsibility
for
continued
development
and
commercialization
oflinaclotide
under
a
joint
development
plan
and
a
joint
commercialization
plan,
respectively,
with
AstraZeneca
having
primary
responsibility
for
the
localoperational
execution.
The
parties
agreed
to
an
Initial
Development
Plan
("IDP")
which
includes
the
planned
development
of
linaclotide
in
China,
including
the
lead
responsibilityfor
each
activity
and
the
related
internal
and
external
costs.
The
IDP
indicates
that
AstraZeneca
is
responsible
for
a
multinational
Phase
III
clinical
trial
(the"Phase
III
Trial"),
the
Company
is
responsible
for
nonclinical
development
and
supplying
clinical
trial
material
and
both
parties
are
responsible
for
the
regulatorysubmission
process.
The
IDP
indicates
that
the
party
specifically
designated
as
being
responsible
for
a
particular
development
activity
under
the
IDP
shallimplement
and
conduct
such
activities.
The
activities
areF-33 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)4.
Collaboration,
License
and
Co-promotion
Agreements
(Continued)governed
by
a
Joint
Development
Committee
("JDC"),
with
equal
representation
from
each
party.
The
JDC
is
responsible
for
approving,
by
unanimous
consent,
thejoint
development
plan
and
development
budget,
as
well
as
approving
protocols
for
clinical
studies,
reviewing
and
commenting
on
regulatory
submissions,
andproviding
an
exchange
of
data
and
information.
The
AstraZeneca
Collaboration
Agreement
will
continue
until
there
is
no
longer
a
development
plan
or
commercialization
plan
in
place,
however,
it
can
beterminated
by
AstraZeneca
at
any
time
upon
180
days'
prior
written
notice.
Under
certain
circumstances,
either
party
may
terminate
the
AstraZeneca
CollaborationAgreement
in
the
event
of
bankruptcy
or
an
uncured
material
breach
of
the
other
party.
Upon
certain
change
in
control
scenarios
of
AstraZeneca,
the
Company
mayelect
to
terminate
the
AstraZeneca
Collaboration
Agreement
and
may
re-acquire
its
product
rights
in
a
lump
sum
payment
equal
to
the
fair
market
value
of
suchproduct
rights.
In
connection
with
the
AstraZeneca
Collaboration
Agreement,
the
Company
and
AstraZeneca
also
executed
a
co-promotion
agreement
(the
"Co-PromotionAgreement"),
pursuant
to
which
the
Company
utilized
its
existing
sales
force
to
co-promote
NEXIUM®
(esomeprazole
magnesium),
one
of
AstraZeneca'sproducts,
in
the
U.S.
The
Co-Promotion
Agreement
expired
in
May
2014.
There
are
no
refund
provisions
in
the
AstraZeneca
Collaboration
Agreement
and
the
Co-Promotion
Agreement
(together,
the
"AstraZeneca
Agreements").
Under
the
terms
of
the
AstraZeneca
Collaboration
Agreement,
the
Company
received
a
$25.0
million
non-refundable
upfront
payment
upon
execution.
TheCompany
is
also
eligible
for
$125.0
million
in
additional
commercial
milestone
payments
contingent
on
the
achievement
of
certain
sales
targets.
The
parties
willalso
share
in
the
net
profits
and
losses
associated
with
the
development
and
commercialization
of
linaclotide
in
the
License
Territory,
with
AstraZeneca
receiving55%
of
the
net
profits
or
incurring
55%
of
the
net
losses
until
a
certain
specified
commercial
milestone
is
achieved,
at
which
time
profits
and
losses
will
be
sharedequally
thereafter.
Activities
under
the
AstraZeneca
Agreements
were
evaluated
in
accordance
with
the
ASC
605-25,
Revenue
Recognition—Multiple-Element
Arrangements("ASC
605-25"),
to
determine
if
they
represented
a
multiple
element
revenue
arrangement.
The
Company
identified
the
following
deliverables
in
the
AstraZenecaAgreements:•an
exclusive
license
to
develop
and
commercialize
linaclotide
in
the
License
Territory
(the
"License
Deliverable"),
•research,
development
and
regulatory
services
pursuant
to
the
IDP,
as
modified
from
time
to
time
(the
"R&D
Services"),
•JDC
services,
•obligation
to
supply
clinical
trial
material,
and
•co-promotion
services
for
AstraZeneca's
product
(the
"Co-Promotion
Deliverable").
The
License
Deliverable
is
nontransferable
and
has
certain
sublicense
restrictions.
The
Company
determined
that
the
License
Deliverable
had
standalone
valueas
a
result
of
AstraZeneca's
internal
product
development
and
commercialization
capabilities,
which
would
enable
it
to
use
the
License
Deliverable
for
its
intendedpurposes
without
the
involvement
of
the
Company.
The
remaining
deliverables
were
deemed
to
have
standalone
value
based
on
their
nature
and
all
deliverablesmet
theF-34 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)4.
Collaboration,
License
and
Co-promotion
Agreements
(Continued)criteria
to
be
accounted
for
as
separate
units
of
accounting
under
ASC
605-25.
Factors
considered
in
this
determination
included,
among
other
things,
whether
anyother
vendors
sell
the
items
separately
and
if
the
customer
could
use
the
delivered
item
for
its
intended
purpose
without
the
receipt
of
the
remaining
deliverables.
The
Company
identified
the
supply
of
linaclotide
drug
product
for
commercial
requirements
and
commercialization
services
as
contingent
deliverablesbecause
these
services
are
contingent
upon
the
receipt
of
regulatory
approval
to
commercialize
linaclotide
in
the
License
Territory,
and
there
were
no
bindingcommitments
or
firm
purchase
orders
pending
for
commercial
supply.
As
these
deliverables
are
contingent,
and
are
not
at
an
incremental
discount,
they
are
notevaluated
as
deliverables
at
the
inception
of
the
arrangement.
These
contingent
deliverables
will
be
evaluated
and
accounted
for
separately
as
each
relatedcontingency
is
resolved.
As
of
December
31,
2015,
no
contingent
deliverables
were
provided
by
the
Company
under
the
AstraZeneca
Agreements.
In
August
2014,
the
Company
and
AstraZeneca,
through
the
JDC,
modified
the
IDP
and
development
budget
to
include
approximately
$14.0
million
inadditional
activities
over
the
remaining
development
period,
to
be
shared
by
the
Company
and
AstraZeneca
under
the
terms
of
the
AstraZeneca
CollaborationAgreement.
These
additional
activities
serve
to
support
the
continued
development
of
linaclotide
in
the
Licensed
Territory,
including
the
Phase
III
Trial.
Pursuantto
the
terms
of
the
modified
IDP
and
development
budget,
certain
of
the
Company's
deliverables
were
modified,
specifically
the
R&D
Services
and
the
obligationto
supply
clinical
trial
material.
The
modification
did
not,
however,
have
a
material
impact
on
the
Company's
consolidated
financial
statements.
The
total
amount
of
the
non-contingent
consideration
allocable
to
the
AstraZeneca
Agreements
of
approximately
$34.0
million
("Arrangement
Consideration")includes
the
$25.0
million
non-refundable
upfront
payment
and
55%
of
the
costs
for
clinical
trial
material
supply
services
and
research,
development
and
regulatoryactivities
allocated
to
the
Company
in
the
IDP
or
as
approved
by
the
JDC
in
subsequent
periods,
or
approximately
$9.0
million.
The
Company
allocated
the
Arrangement
Consideration
of
approximately
$34.0
million
to
the
non-contingent
deliverables
based
on
management's
BESP
ofeach
deliverable
using
the
relative
selling
price
method
as
the
Company
did
not
have
VSOE
or
TPE
of
selling
price
for
such
deliverables.
The
Company
estimatedthe
BESP
for
the
License
Deliverable
using
a
multi-period
excess-earnings
method
under
the
income
approach
which
utilized
cash
flow
projections,
the
keyassumptions
of
which
included
the
following
market
conditions
and
entity-specific
factors:
(a)
the
specific
rights
provided
under
the
license
to
develop
andcommercialize
linaclotide;
(b)
the
potential
indications
for
linaclotide
pursuant
to
the
license;
(c)
the
likelihood
linaclotide
will
be
developed
for
more
than
oneindication;
(d)
the
stage
of
development
of
linaclotide
for
IBS-C
and
CIC
and
the
projected
timeline
for
regulatory
approval;
(e)
the
development
risk
by
indication;(f)
the
market
size
by
indication;
(g)
the
expected
product
life
of
linaclotide
assuming
commercialization;
(h)
the
competitive
environment,
and
(i)
the
estimateddevelopment
and
commercialization
costs
of
linaclotide
in
the
License
Territory.
The
Company
utilized
a
discount
rate
of
11.5%
in
its
analysis,
representing
theweighted
average
cost
of
capital
derived
from
returns
on
equity
for
comparable
companies.
The
Company
determined
its
BESP
for
the
remaining
deliverablesbased
on
the
nature
of
the
services
to
be
performed
and
estimates
of
the
associated
effort
and
cost
of
the
services
adjusted
for
a
reasonable
profit
margin
such
thatthey
represented
estimated
market
rates
for
similar
services
sold
on
a
standalone
basis.
The
CompanyF-35 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)4.
Collaboration,
License
and
Co-promotion
Agreements
(Continued)concluded
that
a
change
in
key
assumptions
used
to
determine
BESP
for
each
deliverable
would
not
have
a
significant
effect
on
the
allocation
of
the
ArrangementConsideration,
as
the
estimated
selling
price
of
the
License
Deliverable
significantly
exceeds
the
other
deliverables.
Of
the
approximately
$34.0
million
of
Arrangement
Consideration,
consisting
of
the
$25.0
million
non-refundable
upfront
payment
and
55%
of
the
costs
forclinical
trial
material
supply
services
and
research,
development
and
regulatory
activities
allocated
to
the
Company,
approximately
$29.7
million
was
allocated
tothe
License
Deliverable,
approximately
$1.8
million
to
the
R&D
Services,
approximately
$0.1
million
to
the
JDC
services,
approximately
$0.3
million
to
theclinical
trial
material
supply
services,
and
approximately
$2.1
million
to
the
Co-Promotion
Deliverable
in
the
relative
selling
price
model,
at
the
time
of
the
materialmodification.
Because
the
Company
shares
development
costs
with
AstraZeneca,
payments
from
AstraZeneca
with
respect
to
both
research
and
development
and
selling,general
and
administrative
costs
incurred
by
the
Company
prior
to
the
commercialization
of
linaclotide
in
the
License
Territory
are
recorded
as
a
reduction
inexpense,
in
accordance
with
the
Company's
policy,
which
is
consistent
with
the
nature
of
the
cost
reimbursement.
Development
costs
incurred
by
the
Company
thatpertain
to
the
joint
development
plan
and
subsequent
amendments
to
the
joint
development
plan,
as
approved
by
the
JDC,
are
recorded
as
research
and
developmentexpense
as
incurred.
Payments
to
AstraZeneca
are
recorded
as
incremental
research
and
development
expense.
The
Company
completed
its
obligations
related
to
the
License
Deliverable
upon
execution
of
the
AstraZeneca
Agreements;
however,
the
revenue
recognizedin
the
statement
of
operations
was
limited
to
the
non-contingent
portion
of
the
License
Deliverable
consideration
in
accordance
with
ASC
605-25.
During
the
yearsended
December
31,
2015
and
2014,
the
Company
recognized
approximately
$2.2
million
and
approximately
$2.5
million,
respectively,
in
collaborativearrangements
revenue
related
to
the
License
Deliverable
in
connection
with
the
modification
to
the
IDP
and
development
budget
in
August
2014,
as
this
portion
ofthe
Arrangement
Consideration
was
no
longer
contingent.
During
the
year
ended
December
31,
2013,
the
Company
did
not
recognize
any
amounts
in
collaborativearrangements
revenue
related
to
the
License
Deliverable.
The
Company
also
performs
R&D
Services
and
JDC
services,
and
supplies
clinical
trial
materials
during
the
estimated
development
period.
All
ArrangementConsideration
allocated
to
such
services
is
being
recognized
as
a
reduction
of
research
and
development
costs,
using
the
proportional
performance
method,
bywhich
the
amounts
are
recognized
in
proportion
to
the
costs
incurred.
As
a
result
of
the
cost-sharing
arrangements
under
the
collaboration,
the
Company
recognizedapproximately
$0.7
million,
$2.4
million
and
$1.9
million
in
incremental
research
and
development
costs
during
the
years
ended
December
31,
2015,
2014
and2013,
respectively.
The
amount
allocated
to
the
Co-Promotion
Deliverable
was
recognized
as
collaborative
arrangements
revenue
using
the
proportionalperformance
method,
which
approximates
recognition
on
a
straight-line
basis
beginning
on
the
date
that
the
Company
began
to
co-promote
AstraZeneca's
productthrough
December
31,
2013
(the
earliest
cancellation
date).
As
of
December
31,
2013,
the
Company
completed
its
obligation
related
to
the
Co-PromotionDeliverable;
however,
the
revenue
recognized
in
the
statement
of
operations
was
limited
to
the
non-contingent
consideration
in
accordance
with
ASC
605-25.During
the
years
ended
December
31,
2015,
2014
and
2013,
the
Company
recognized
approximately
$0.2
million,
approximately
$0.9
million
and
approximately$1.0
million,
respectively,
as
collaborative
arrangements
revenue
related
to
this
deliverable,
as
such
portions
of
the
Arrangement
Consideration
were
no
longercontingent.F-36 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)4.
Collaboration,
License
and
Co-promotion
Agreements
(Continued)
The
Company
reassesses
the
periods
of
performance
for
each
deliverable
at
the
end
of
each
reporting
period.
Milestone
payments
received
from
AstraZeneca
upon
the
achievement
of
sales
targets
will
be
recognized
as
earned.Co-Promotion
AgreementsCo-promotion Agreement with Exact Sciences Corp. for Cologuard
In
March
2015,
the
Company
and
Exact
Sciences
entered
into
an
agreement
to
co-promote
Exact
Sciences'
Cologuard,
the
first
and
only
FDA-approvednoninvasive
stool
DNA
screening
test
for
colorectal
cancer
(the
"Exact
Sciences
Co-promotion
Agreement").
Under
the
terms
of
the
Exact
Sciences
Co-promotionAgreement,
the
Company's
sales
team
is
promoting
and
educating
health
care
practitioners
regarding
Cologuard,
with
LINZESS
remaining
the
Company's
first-position
product.
The
companies
are
also
collaborating
on
medical
education
initiatives
to
support
more
in-depth
understanding
of
Cologuard
and
the
importance
ofcolorectal
cancer
screening.
Exact
Sciences
maintains
responsibility
for
all
other
aspects
of
the
commercialization
of
Cologuard
outside
of
the
co-promotion.
Underthe
terms
of
the
Exact
Sciences
Co-promotion
Agreement,
the
Company
is
compensated
via
reimbursements
for
sales
detailing,
promotional
support
services
andmedical
education
initiatives.
During
the
initial
one-year
term
of
the
agreement,
the
Company
could
receive
up
to
a
maximum
reimbursement
of
approximately$4.8
million.
The
Company
also
earns
royalties
on
the
net
sales
of
Cologuard
generated
from
the
healthcare
practitioners
on
whom
the
Company
calls
less
the
salespromotion
reimbursement
to
the
Company,
such
royalties
being
payable
during
the
term
and
for
one
year
following
the
termination
of
the
Company's
co-promotionefforts.
There
are
no
refund
provisions
in
the
Exact
Sciences
Co-promotion
Agreement.
The
non-exclusive
Exact
Sciences
Co-promotion
Agreement
covers
an
initial
one-year
term,
and
renews
automatically
for
successive
one
month
periodsunless
and
until
terminated
by
either
party.
Either
party
may
terminate
the
agreement
in
the
event
of
an
uncured
material
breach
by
the
other
party,
withdrawal
ofCologuard
from
the
U.S.
market,
restriction
on
the
indications
for
Cologuard
by
the
FDA,
imposition
of
restrictive
federal
or
state
price
controls,
change
of
controlof
the
other
party,
or
bankruptcy
or
insolvency
of
the
other
party.
Activities
under
the
Exact
Sciences
Co-promotion
Agreement
were
evaluated
in
accordance
with
ASC
605-25,
to
determine
if
they
represented
a
multipleelement
revenue
arrangement.
The
Company
identified
the
following
deliverables
in
the
Exact
Sciences
Co-promotion
Agreement:
(i)
second
position
salesdetailing,
(ii)
promotional
support
services,
and
(iii)
medical
education
services.
Each
of
the
deliverables
was
deemed
to
have
standalone
value
based
on
theirnature
and
all
deliverables
met
the
criteria
to
be
accounted
for
as
separate
units
of
accounting
under
ASC
605-25.
The
Company
determined
that
the
BESP
for
eachof
the
three
deliverables
approximated
the
value
allocated
to
the
deliverables
under
the
agreement.
The
revenue
related
to
each
deliverable
is
recognized
ascollaborative
arrangements
revenue
in
the
Company's
consolidated
statement
of
operations,
in
accordance
with
ASC
605-25,
during
the
period
earned.
During
theyear
ended
December
31,
2015,
the
Company
recognized
approximately
$4.4
million
as
collaborative
arrangements
revenue
related
to
this
arrangement.F-37 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)4.
Collaboration,
License
and
Co-promotion
Agreements
(Continued)Co-promotion Agreement with Allergan for VIBERZI
In
August
2015,
the
Company
and
Allergan
entered
into
an
agreement
for
the
co-promotion
of
VIBERZI
in
the
U.S.,
Allergan's
treatment
for
adults
sufferingfrom
IBS-D
(the
"VIBERZI
Co-promotion
Agreement").
Under
the
terms
of
the
VIBERZI
Co-promotion
Agreement,
the
Company's
clinical
sales
specialists
aredetailing
VIBERZI
to
the
approximately
25,000
health
care
practitioners
to
whom
they
detail
LINZESS.
Allergan
is
responsible
for
all
costs
and
activities
relatingto
the
commercialization
of
VIBERZI
outside
of
the
co-promotion.
Under
the
terms
of
the
VIBERZI
Co-promotion
Agreement,
the
Company's
promotional
efforts
are
compensated
based
on
the
volume
of
calls
delivered
by
theCompany's
sales
force,
with
the
terms
of
the
agreement
reducing
or
eliminating
certain
of
the
unfavorable
adjustments
to
the
Company's
share
of
net
profitsstipulated
by
the
linaclotide
collaboration
agreement
with
Allergan
for
North
America,
provided
that
the
Company
provides
a
minimum
number
of
VIBERZI
callson
physicians.
The
Company
has
the
potential
to
achieve
milestone
payments
of
up
to
$10.0
million
based
on
the
net
sales
of
VIBERZI
in
each
of
2017
and
2018,and
is
also
compensated
via
reimbursements
for
medical
education
initiatives.
The
Company's
promotional
efforts
under
the
non-exclusive
co-promotion
began
when
VIBERZI
became
commercially
available
in
December
2015,
and
willcontinue
until
December
31,
2017,
unless
earlier
terminated
by
either
party
pursuant
to
the
provisions
of
the
VIBERZI
Co-promotion
Agreement.
Either
party
mayalso
terminate
the
VIBERZI
Co-promotion
Agreement
in
the
event
of
an
uncured
material
breach
by
the
other
party,
withdrawal
of
necessary
approvals
by
theFDA,
for
convenience,
or
bankruptcy
or
insolvency
of
the
other
party.
Allergan
may
terminate
the
VIBERZI
Co-promotion
Agreement
if
the
Company
does
notprovide
the
minimum
number
of
calls
on
physicians
for
VIBERZI.
Activities
under
the
VIBERZI
Co-promotion
Agreement
were
evaluated
in
accordance
with
ASC
605-25
to
determine
if
they
represented
a
multiple
elementrevenue
arrangement.
The
Company
concluded
that
the
VIBERZI
Co-promotion
Agreement
does
not
represent
a
material
modification
to
the
linaclotidecollaboration
agreement
with
Allergan
for
North
America,
as
it
is
not
material
to
the
total
arrangement
consideration
under
the
collaboration
agreement,
does
notsignificantly
modify
the
existing
deliverables,
and
does
not
significantly
change
the
term
of
the
agreement.
The
Company
identified
the
following
deliverables
inthe
VIBERZI
Co-promotion
Agreement:
(i)
second
position
sales
detailing
of
VIBERZI,
and
(ii)
medical
education
services.
Each
of
the
deliverables
was
deemedto
have
standalone
value
based
on
their
nature
and
both
deliverables
met
the
criteria
to
be
accounted
for
as
separate
units
of
accounting
under
ASC
605-25.
TheCompany
determined
the
BESP
for
each
of
the
deliverables
approximated
the
value
allocated
to
the
deliverables
under
the
agreement.
As
consideration
is
earnedover
the
term
of
the
agreement,
the
revenue
will
be
allocated
to
each
deliverable
based
on
the
relative
selling
price,
using
management's
BESP,
and
recognized
ascollaborative
arrangements
revenue
in
the
Company's
consolidated
statement
of
operations,
in
accordance
with
ASC
605-25,
during
the
quarter
earned.
During
theyear
ended
December
31,
2015,
in
connection
with
the
Company's
VIBERZI
co-promotion
activities,
the
net
profit
share
adjustments
payable
to
Allergan
under
thelinaclotide
collaboration
agreement
for
North
America
were
reduced
by
approximately
$2.9
million
and
were
reflected
as
collaborative
arrangements
revenue
underthis
agreement.
During
the
year
ended
December
31,
2015,
the
Company
also
recognized
approximatelyF-38 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)4.
Collaboration,
License
and
Co-promotion
Agreements
(Continued)$0.2
million
in
revenue
related
to
the
VIBERZI
Co-promotion
Agreement
for
the
performance
of
medical
education
services.Other
Collaboration
and
License
Agreements
The
Company
has
other
collaboration
and
license
agreements
that
are
not
individually
significant
to
its
business.
In
connection
with
entering
into
theseagreements,
the
Company
made
aggregate
up-front
payments
of
approximately
$5.8
million,
which
were
expensed
as
research
and
development
expense.
Pursuantto
the
terms
of
one
agreement,
the
Company
may
be
required
to
pay
$7.5
million
for
development
milestones,
of
which,
approximately
$2.5
million
had
been
paidas
of
December
31,
2015,
and
$18.0
million
for
regulatory
milestones,
none
of
which
had
been
paid
as
of
December
31,
2015.
In
addition,
pursuant
to
the
terms
ofanother
agreement,
the
contingent
milestones
could
total
up
to
$114.5
million
per
product
to
one
of
the
Company's
collaboration
partners,
including
$21.5
millionfor
development
milestones,
$58.0
million
for
regulatory
milestones
and
$35.0
million
for
sales-based
milestones.
Further,
under
such
agreements,
the
Company
isalso
required
to
fund
certain
research
activities
and,
if
any
product
related
to
these
collaborations
is
approved
for
marketing,
to
pay
significant
royalties
on
futuresales.
During
the
year
ended
December
31,
2015,
the
Company
incurred
an
insignificant
amount
in
research
and
development
expense
associated
with
theCompany's
other
collaboration
and
license
agreements.
During
the
years
ended
December
31,
2014
and
2013,
the
Company
incurred
approximately
$1.0
million,and
approximately
$3.6
million,
respectively,
in
research
and
development
expense
associated
with
the
Company's
other
collaboration
and
license
agreements.5.
Fair
Value
of
Financial
Instruments
The
tables
below
present
information
about
the
Company's
assets
that
are
measured
at
fair
value
on
a
recurring
basis
as
of
December
31,
2015
and
2014
andindicate
the
fair
value
hierarchy
of
the
valuation
techniques
the
Company
utilized
to
determine
such
fair
value.
In
general,
fair
values
determined
by
Level
1
inputsutilize
observable
inputs
such
as
quoted
prices
in
active
markets
for
identical
assets
or
liabilities.
Fair
values
determined
by
Level
2
inputs
utilize
data
points
thatare
either
directly
or
indirectly
observable,
such
as
quoted
prices,
interest
rates
and
yield
curves.
Fair
values
determined
by
Level
3
inputs
utilize
unobservable
datapoints
in
which
there
is
little
or
no
market
data,
which
require
the
Company
to
develop
its
own
assumptions
for
the
asset
or
liability.
The
Company's
investment
portfolio
includes
mainly
fixed
income
securities
that
do
not
always
trade
on
a
daily
basis.
As
a
result,
the
pricing
services
used
bythe
Company
apply
other
available
information
as
applicable
through
processes
such
as
benchmark
yields,
benchmarking
of
like
securities,
sector
groupings
andmatrix
pricing
to
prepare
valuations.
In
addition,
model
processes
are
used
to
assess
interest
rate
impact
and
develop
prepayment
scenarios.
These
models
take
intoconsideration
relevant
credit
information,
perceived
market
movements,
sector
news
and
economic
events.
The
inputs
into
these
models
may
include
benchmarkyields,
reported
trades,
broker-dealer
quotes,
issuer
spreads
and
other
relevant
data.
The
Company
validates
the
prices
provided
by
its
third
party
pricing
services
byobtaining
market
values
from
other
pricing
sources
and
analyzing
pricing
data
in
certain
instances.F-39 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)5.
Fair
Value
of
Financial
Instruments
(Continued)
The
following
tables
present
the
assets
and
liabilities
the
Company
has
measured
at
fair
value
on
a
recurring
basis
(in
thousands):
There
were
no
transfers
between
fair
value
measurement
levels
during
the
years
ended
December
31,
2015
or
2014.
Cash
equivalents,
accounts
receivable,
related
party
accounts
receivable,
prepaid
expenses
and
other
current
assets,
accounts
payable,
related
party
accountspayable,
accrued
expenses
and
the
current
portion
of
capital
lease
obligations
at
December
31,
2015
and
2014
are
carried
at
amounts
that
approximate
fair
valuedue
to
their
short-term
maturities.
The
non-current
portion
of
the
capital
lease
obligations
at
December
31,
2015
and
2014
approximates
fair
value
as
it
bears
interest
at
a
rate
approximating
amarket
interest
rate.F-40
Fair
Value
Measurements
at
Reporting
Date
Using
December
31,
2015
Quoted
Prices
in
Active
Markets
for
Identical
Assets
(Level
1)
Significant
Other
Observable
Inputs
(Level
2)
Significant
Unobservable
Inputs
(Level
3)
Assets:
Cash
and
cash
equivalents:
Money
market
funds
$254,903
$254,903
$—
$—
U.S.
government-sponsored
securities
3,340
—
3,340
—
Available-for-sale
securities:
U.S.
Treasury
securities
50,091
50,091
—
—
U.S.
government-sponsored
securities
128,016
—
128,016
—
Convertible
Note
Hedges
86,466
—
—
86,466
Total
assets
$522,816
$304,994
$131,356
$86,466
Liabilities:
Note
Hedge
Warrants
$75,328
$—
$—
$75,328
Total
liabilities
$75,328
$—
$—
$75,328
Fair
Value
Measurements
at
Reporting
Date
Using
December
31,2014
Quoted
Prices
in
Active
Markets
for
Identical
Assets
(Level
1)
Significant
Other
Observable
Inputs
(Level
2)
Significant
Unobservable
Inputs
(Level
3)
Assets:
Cash
and
cash
equivalents:
Money
market
funds
$60,966
$60,966
$—
$—
Available-for-sale
securities:
U.S.
Treasury
securities
24,005
24,005
—
—
U.S.
government-sponsored
securities
150,032
—
150,032
—
Total
assets
measured
at
fair
value
$235,003
$84,971
$150,032
$—
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)5.
Fair
Value
of
Financial
Instruments
(Continued)
The
Company's
Convertible
Note
Hedges
and
the
Note
Hedge
Warrants
are
recorded
as
derivative
assets
and
liabilities,
and
are
classified
as
Level
3
under
thefair
value
hierarchy.
These
derivatives
are
not
actively
traded
and
are
valued
using
the
Black-Scholes
option-pricing
model
which
requires
the
use
of
subjectiveassumptions.
Significant
inputs
used
to
determine
the
fair
value
as
of
December
31,
2015
included
the
price
per
share
of
the
Company's
Class
A
common
stock,time
to
maturity
of
the
derivative
instruments,
the
strike
prices
of
the
derivative
instruments,
the
risk-free
interest
rate,
and
the
volatility
of
the
Company's
Class
Acommon
stock.
The
Company
has
not
paid
and
does
not
anticipate
paying
cash
dividends
on
its
shares
of
common
stock
in
the
foreseeable
future;
therefore,
theexpected
dividend
yield
is
assumed
to
be
zero.
Changes
to
these
inputs
could
materially
affect
the
valuation
of
the
Convertible
Note
Hedges
and
Note
HedgeWarrants.
The
following
inputs
were
used
in
the
fair
market
valuation
of
the
Convertible
Note
Hedges
and
Note
Hedge
Warrants
as
of
December
31,
2015:
The
Convertible
Note
Hedges
and
the
Note
Hedge
Warrants
are
recorded
at
fair
value
at
each
reporting
period
and
changes
in
fair
value
are
recorded
in
otherexpense,
net
within
the
Company's
consolidated
statements
of
operations.
Gains
and
losses
for
these
derivative
financial
instruments
are
presented
separately
in
theCompany's
consolidated
statements
of
cash
flows.F-41
Convertible
Note
Hedges
Note
Hedge
Warrants
Risk-free
interest
rate
(1)
2.0%
2.1%Time
to
maturity
6.5
7.0
Stock
price
(2)
$11.59
$11.59
Strike
price
(3)
$16.58
$21.50
Common
stock
volatility
(4)
45.0%
45.0%Dividend
yield
—%
—%(1)Based
on
U.S.
Treasury
yield
curve,
with
terms
commensurate
with
the
terms
of
the
Convertible
Note
Hedges
and
the
Note
HedgeWarrants.
(2)The
closing
price
of
the
Company's
Class
A
common
stock
on
the
last
trading
day
of
the
year
ended
December
31,
2015.
(3)As
per
the
respective
agreements
for
the
Convertible
Note
Hedges
and
Note
Hedge
Warrants.
(4)Selected
volatility
based
on
historical
volatility
and
implied
volatility
of
the
Company's
Class
A
common
stock. Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)5.
Fair
Value
of
Financial
Instruments
(Continued)
The
following
table
reflects
the
change
in
the
Company's
Level
3
convertible
note
derivatives
from
their
initial
value
at
issuance
through
December
31,
2015(in
thousands):11%
PhaRMA
Notes
In
January
2013,
the
Company
closed
a
private
placement
of
$175.0
million
in
aggregate
principal
amount
of
the
PhaRMA
Notes
due
on
or
before
June
15,2024.
The
estimated
fair
value
of
the
PhaRMA
Notes
was
approximately
$166.8
million
and
approximately
$182.5
million
as
of
December
31,
2015
andDecember
31,
2014,
respectively,
and
was
determined
using
Level
3
inputs,
including
a
quoted
rate.2.25%
Convertible
Senior
Notes
In
June
2015,
the
Company
issued
approximately
$335.7
million
of
its
2022
Notes.
The
Company
separately
accounted
for
the
liability
and
equity
componentsof
the
2022
Notes
by
allocating
the
proceeds
between
the
liability
component
and
equity
component
(Note
10).
The
fair
value
of
the
2022
Notes,
which
differs
fromtheir
carrying
value,
is
influenced
by
interest
rates,
the
price
of
the
Company's
Class
A
common
stock
and
the
volatility
thereof,
and
the
prices
for
the
2022
Notesobserved
in
market
trading,
which
are
Level
2
inputs.
The
estimated
fair
value
of
the
2022
Notes
as
of
December
31,
2015
was
approximately
$311.6
million.6.
Available-for-Sale
Securities
The
following
tables
summarize
the
available-for-sale
securities
held
at
December
31,
2015
and
2014
(in
thousands):F-42
Convertible
Note
Hedges
Note
Hedge
Warrants
Balance
at
December
31,
2014
$—
$—
Issuance
of
Note
Hedge
Warrants
—
(70,849)Purchase
of
Convertible
Note
Hedges
91,915
—
Change
in
fair
value,
recorded
as
a
component
of
loss
on
derivatives
(5,449)
(4,479)Balance
at
December
31,
2015
$86,466
$(75,328)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
December
31,
2015
U.S.
Treasury
securities
$50,124
$—
$(33)$50,091
U.S.
government-sponsored
securities
128,069
2
(55)
128,016
Total
$178,193
$2
$(88)$178,107
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)6.
Available-for-Sale
Securities
(Continued)
The
contractual
maturities
of
all
securities
held
at
December
31,
2015
are
one
year
or
less.
There
were
32
and
27
available-for-sale
securities
in
an
unrealizedloss
position
at
December
31,
2015
and
2014,
respectively,
none
of
which
had
been
in
an
unrealized
loss
position
for
more
than
twelve
months.
The
aggregate
fairvalue
of
these
securities
at
December
31,
2015
and
2014
was
approximately
$167.6
million
and
approximately
$101.9
million,
respectively.
The
Company
reviewsits
investments
for
other-than-temporary
impairment
whenever
the
fair
value
of
an
investment
is
less
than
amortized
cost
and
evidence
indicates
that
aninvestment's
carrying
amount
is
not
recoverable
within
a
reasonable
period
of
time.
To
determine
whether
an
impairment
is
other-than-temporary,
the
Companyconsiders
whether
it
has
the
ability
and
intent
to
hold
the
investment
until
a
market
price
recovery
and
considers
whether
evidence
indicating
the
cost
of
theinvestment
is
recoverable
outweighs
evidence
to
the
contrary.
The
Company
does
not
intend
to
sell
the
investments
and
it
is
not
more
likely
than
not
that
theCompany
will
be
required
to
sell
the
investments
before
recovery
of
their
amortized
cost
bases,
which
may
be
maturity.
The
Company
did
not
hold
any
securitieswith
other-than-temporary
impairment
at
December
31,
2015.
There
were
no
sales
of
available-for-sale
securities
during
the
years
ended
December
31,
2015,
2014
and
2013.
Net
unrealized
holding
gains
or
losses
for
theperiod
that
have
been
included
in
accumulated
other
comprehensive
income
were
not
material
to
the
Company's
consolidated
results
of
operations.7.
Inventory
Inventory
consisted
of
the
following
(in
thousands):
Inventory
represents
linaclotide
API
that
is
available
for
commercial
sale.
The
Company
evaluates
inventory
levels
quarterly
and
any
inventory
that
has
a
costbasis
in
excess
of
its
expected
net
realizable
value,
inventory
that
becomes
obsolete,
inventory
in
excess
of
expected
sales
requirements,
inventory
that
fails
to
meetcommercial
sale
specifications
or
is
otherwise
impaired
is
written
down
with
a
corresponding
charge
to
the
statement
of
operations
in
the
period
that
theimpairment
is
first
identified.
The
Company
has
entered
into
multiple
commercial
supply
agreements
for
the
purchase
of
linaclotide
API.
Two
of
the
Company's
API
supply
agreements
forsupplying
API
to
its
collaboration
partners
outside
of
North
America
contain
minimum
purchase
commitments
(Note
11).
Prior
to
October
2015,
the
Company
wasalso
responsible
for
the
manufacturing
of
linaclotide
API
for
Europe.F-43
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
December
31,
2014
U.S.
Treasury
securities
$24,001
$4
$—
$24,005
U.S.
government-sponsored
securities
150,055
2
(25)
150,032
Total
$174,056
$6
$(25)$174,037
December
31,
2015
2014
Raw
materials
$—
$4,954
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)7.
Inventory
(Continued)As
part
of
the
Company's
net
realizable
value
assessment
of
its
inventory,
the
Company
assesses
whether
it
has
any
excess
non-cancelable
purchase
commitmentsresulting
from
its
minimum
supply
agreements
with
its
suppliers
of
linaclotide
API.
The
determination
of
the
net
realizable
value
of
inventory
and
non-cancelable
purchase
commitments
is
based
on
demand
forecasts
from
the
Company'spartners,
that
are
received
quarterly,
to
project
the
next
24
months
of
demand
and
the
Company's
internal
forecast
for
projected
demand
in
subsequent
years.
Duringthe
three
months
ended
June
30,
2015,
Almirall,
the
Company's
former
European
partner,
reduced
its
forecasted
purchases
of
linaclotide
API
for
its
territory
for
thesubsequent
18
months.
In
addition,
recent
regulatory
changes
made
by
the
CFDA
to
the
marketing
approval
process
in
China
resulted
in
a
potentially
lengthenedapproval
timeline
for
the
commercialization
of
linaclotide.
The
reduced
demand
from
Almirall
and
the
potential
extended
timeline
for
commercialization
oflinaclotide
in
China
resulted
in
lower
projected
sales
of
linaclotide
API
to
the
Company's
partners
in
Europe
and
China.
As
a
result,
during
the
three
months
endedJune
30,
2015,
the
Company
wrote-down
the
balance
of
its
inventory
of
approximately
$5.0
million
to
zero
and
accrued
approximately
$3.2
million
for
excess
non-cancelable
inventory
purchase
commitments.
In
October
2015,
Almirall
transferred
its
exclusive
license
to
develop
and
commercialize
linaclotide
in
Europe
to
Allergan,
and
the
Company
separatelyentered
into
an
amendment
to
the
license
agreement
with
Allergan
relating
to
the
development
and
commercialization
of
linaclotide
in
Europe.
Pursuant
to
theterms
of
the
amendment,
Allergan
assumed
responsibility
for
the
manufacturing
of
linaclotide
API
for
Europe,
as
well
as
the
associated
costs
(Note
4).
Upon
theexecution
of
the
amendment
to
the
license
agreement,
the
Company
recorded
an
incremental
loss
on
non-cancelable
API
purchase
commitments
of
approximately$6.9
million
related
to
one
of
the
Company's
API
supply
agreements
covering
the
commercial
supply
of
linaclotide
API
for
the
European
market.
During
the
threemonths
ended
September
30,
2015,
the
Company
also
recorded
an
incremental
loss
on
non-cancelable
API
purchase
commitments
related
to
in-process
APIbatches.
As
of
December
31,
2015,
the
Company
has
evaluated
all
remaining
minimum
purchase
commitments
under
its
linaclotide
API
supply
agreements
through2023
(Note
11)
and
concluded
that
the
approximately
$22.3
million
of
purchase
commitments
from
the
second
API
supply
agreement
covering
the
Japan,
China,Hong
Kong
and
Macau
markets
are
realizable
based
on
the
current
forecasts
received
from
the
Company's
partners
in
these
territories
and
the
Company's
internalforecasts.
During
the
year
ended
December
31,
2014,
the
Company
wrote-down
approximately
$20.3
million
in
inventory
to
an
estimated
net
realizable
value
ofapproximately
$5.0
million.
This
write-down
was
primarily
attributable
to
Almirall's
reduced
inventory
demand
forecasts
for
the
European
territory,
mainly
due
tothe
suspension
of
commercialization
of
CONSTELLA
in
Germany
and
a
challenging
commercial
environment
throughout
Europe.
The
write-downs
of
inventory
to
net
realizable
value
and
the
loss
on
non-cancelable
inventory
purchase
commitments
are
recorded
as
a
separate
line
item
inthe
Company's
consolidated
statement
of
operations.
As
of
December
31,
2015,
the
accrual
for
excess
purchase
commitments
is
recorded
as
approximately$10.1
million
in
other
liabilities
in
the
Company's
consolidated
balance
sheet.F-44 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)8.
Property
and
Equipment
Property
and
equipment,
net
consisted
of
the
following
(in
thousands):
As
of
December
31,
2015
and
2014,
substantially
all
of
the
Company's
manufacturing
equipment
was
located
in
the
United
Kingdom
at
one
of
the
Company'scontract
manufacturers.
All
other
property
and
equipment
were
located
in
the
U.S.
for
the
periods
presented.
The
Company
has
entered
into
capital
leases
for
certain
computers,
vehicles
and
office
equipment
(Note
11).
As
of
December
31,
2015
and
2014,
theCompany
had
approximately
$3.8
million
and
approximately
$5.5
million
of
assets
under
capital
leases
with
accumulated
amortization
balances
of
approximately$1.3
million
and
approximately
$2.0
million,
respectively.
Depreciation
and
amortization
expense
of
property
and
equipment,
including
amounts
recorded
under
capital
leases,
was
approximately
$11.6
million,approximately
$12.3
million
and
approximately
$11.7
million
for
the
years
ended
December
31,
2015,
2014
and
2013,
respectively.
In
addition,
the
Companywrote-down
approximately
$0.5
million
of
leasehold
improvement
assets
not
utilized
by
the
Company
under
the
terms
of
its
subleases
during
the
year
endedDecember
31,
2014.9.
Accrued
Expenses
Accrued
expenses
consisted
of
the
following
(in
thousands):F-45
December
31,
2015
2014
Manufacturing
equipment
$3,748
$3,623
Laboratory
equipment
13,681
15,126
Computer
and
office
equipment
3,596
5,185
Furniture
and
fixtures
2,062
2,093
Software
12,715
13,921
Construction
in
process
375
1,457
Leased
vehicles
3,039
4,472
Leasehold
improvements
38,465
36,928
77,681
82,805
Less
accumulated
depreciation
and
amortization
(56,606)
(52,979)
$21,075
$29,826
December
31,
2015
2014
Salaries
and
benefits
$19,582
$16,582
Professional
fees
507
574
Accrued
interest
1,103
850
Other
2,109
4,606
$23,301
$22,612
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)10.
Notes
Payable2.25%
Convertible
Senior
Notes
due
2022
In
June
2015,
the
Company
issued
approximately
$335.7
million
aggregate
principal
amount
of
the
2022
Notes.
The
Company
received
net
proceeds
ofapproximately
$324.0
million
from
the
sale
of
the
2022
Notes,
after
deducting
fees
and
expenses
of
approximately
$11.7
million.
The
Company
usedapproximately
$21.1
million
of
the
net
proceeds
from
the
sale
of
the
2022
Notes
to
pay
the
net
cost
of
the
Convertible
Note
Hedges
(after
such
cost
was
partiallyoffset
by
the
proceeds
to
the
Company
from
the
sale
of
the
Note
Hedge
Warrants),
as
described
below.
The
2022
Notes
are
governed
by
an
indenture
(the
"Indenture")
between
the
Company
and
U.S.
Bank
National
Association,
as
the
trustee.
The
2022
Notes
aresenior
unsecured
obligations
and
bear
cash
interest
at
the
annual
rate
of
2.25%,
payable
on
June
15
and
December
15
of
each
year,
which
began
on
December
15,2015.
The
2022
Notes
will
mature
on
June
15,
2022,
unless
earlier
converted
or
repurchased.
The
Company
may
settle
conversions
of
the
2022
Notes
throughpayment
or
delivery,
as
the
case
may
be,
of
cash,
shares
of
Class
A
common
stock
of
the
Company
or
a
combination
of
cash
and
shares
of
Class
A
common
stock,at
the
Company's
option
(subject
to,
and
in
accordance
with,
the
settlement
provisions
of
the
Indenture).
The
initial
conversion
rate
for
the
2022
Notes
is
60.3209shares
of
Class
A
common
stock
(subject
to
adjustment
as
provided
for
in
the
Indenture)
per
$1,000
principal
amount
of
the
2022
Notes,
which
is
equal
to
an
initialconversion
price
of
approximately
$16.58
per
share
and
20,249,665
shares.
Holders
of
the
2022
Notes
may
convert
their
2022
Notes
at
their
option
at
any
timeprior
to
the
close
of
business
on
the
business
day
immediately
preceding
December
15,
2021
in
multiples
of
$1,000
principal
amount,
only
under
the
followingcircumstances:•during
any
calendar
quarter
commencing
after
the
calendar
quarter
ending
on
September
30,
2015
(and
only
during
such
calendar
quarter),
if
the
lastreported
sale
price
of
the
Company's
Class
A
common
stock
for
at
least
20
trading
days
(whether
or
not
consecutive)
during
a
period
of
30consecutive
trading
days
ending
on
the
last
trading
day
of
the
immediately
preceding
calendar
quarter
is
greater
than
or
equal
to
130%
of
theconversion
price
for
the
2022
Notes
on
each
applicable
trading
day;
•during
the
five
business
day
period
after
any
five
consecutive
trading
day
period
(the
"measurement
period")
in
which
the
"trading
price"
(as
definedin
the
Indenture)
per
$1,000
principal
amount
of
the
2022
Notes
for
each
trading
day
of
the
measurement
period
was
less
than
98%
of
the
product
ofthe
last
reported
sale
price
of
the
Company's
Class
A
common
stock
and
the
conversion
rate
for
the
2022
Notes
on
each
such
trading
day;
or
•upon
the
occurrence
of
specified
corporate
events
described
in
the
Indenture.
On
or
after
December
15,
2021,
until
the
close
of
business
on
the
second
scheduled
trading
day
immediately
preceding
June
15,
2022,
holders
may
converttheir
2022
Notes,
in
multiples
of
$1,000
principal
amount,
at
the
option
of
the
holder
regardless
of
the
foregoing
circumstances.
If
a
make-whole
fundamental
change,
as
described
in
the
Indenture,
occurs
and
a
holder
elects
to
convert
its
2022
Notes
in
connection
with
such
make-wholefundamental
change,
such
holder
may
be
entitled
to
an
increase
in
the
conversion
rate
as
described
in
the
Indenture.
The
Company
may
not
redeem
the
2022
Notesprior
to
the
maturity
date
and
no
"sinking
fund"
is
provided
for
by
the
2022
Notes,
which
means
that
the
Company
is
not
required
to
periodically
redeem
or
retirethe
2022
Notes.
Upon
the
occurrence
of
certain
fundamental
changes
involving
the
Company,
holders
of
the
2022
Notes
may
require
the
Company
to
repurchasefor
cash
all
or
part
of
their
2022
Notes
at
a
repurchase
priceF-46 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)10.
Notes
Payable
(Continued)equal
to
100%
of
the
principal
amount
of
the
2022
Notes
to
be
repurchased,
plus
accrued
and
unpaid
interest.
The
Indenture
does
not
contain
any
financial
covenants
or
restrict
the
Company's
ability
to
repurchase
the
Company's
securities,
pay
dividends
or
makerestricted
payments
in
the
event
of
a
transaction
that
substantially
increases
the
Company's
level
of
indebtedness.
The
Indenture
provides
for
customary
events
ofdefault.
In
the
case
of
an
event
of
default
with
respect
to
the
2022
Notes
arising
from
specified
events
of
bankruptcy
or
insolvency,
all
outstanding
2022
Notes
willbecome
due
and
payable
immediately
without
further
action
or
notice.
If
any
other
event
of
default
with
respect
to
the
2022
Notes
under
the
Indenture
occurs
or
iscontinuing,
the
trustee
or
holders
of
at
least
25%
in
aggregate
principal
amount
of
the
then
outstanding
2022
Notes
may
declare
the
principal
amount
of
the
2022Notes
to
be
immediately
due
and
payable.
Notwithstanding
the
foregoing,
the
Indenture
provides
that,
upon
the
Company's
election,
and
for
up
to
180
days,
thesole
remedy
for
an
event
of
default
relating
to
certain
failures
by
the
Company
to
comply
with
certain
reporting
covenants
in
the
Indenture
consists
exclusively
ofthe
right
to
receive
additional
interest
on
the
2022
Notes.
In
accordance
with
accounting
guidance
for
debt
with
conversion
and
other
options,
the
Company
separately
accounted
for
the
liability
and
equity
componentsof
the
2022
Notes
by
allocating
the
proceeds
between
the
liability
component
and
the
embedded
conversion
option,
or
equity
component,
due
to
the
Company'sability
to
settle
the
2022
Notes
in
cash,
its
Class
A
common
stock,
or
a
combination
of
cash
and
Class
A
common
stock
at
the
option
of
the
Company.
The
carryingamount
of
the
liability
component
was
calculated
by
measuring
the
fair
value
of
a
similar
liability
that
does
not
have
an
associated
convertible
feature.
Theallocation
was
performed
in
a
manner
that
reflected
the
Company's
non-convertible
debt
borrowing
rate
for
similar
debt.
The
equity
component
of
the
2022
Noteswas
recognized
as
a
debt
discount
and
represents
the
difference
between
the
gross
proceeds
from
the
issuance
of
the
2022
Notes
and
the
fair
value
of
the
liability
ofthe
2022
Notes
on
their
respective
dates
of
issuance.
The
excess
of
the
principal
amount
of
the
liability
component
over
its
carrying
amount,
or
debt
discount,
isamortized
to
interest
expense
using
the
effective
interest
method
over
seven
years,
or
the
life
of
the
2022
Notes.
The
equity
component
is
not
remeasured
as
long
asit
continues
to
meet
the
conditions
for
equity
classification.
The
Company's
outstanding
Convertible
Note
balances
as
of
December
31,
2015
consisted
of
the
following
(in
thousands):
In
connection
with
the
issuance
of
the
2022
Notes,
the
Company
incurred
approximately
$11.7
million
of
debt
issuance
costs,
which
primarily
consisted
ofinitial
purchasers'
discounts
and
legal
and
other
professional
fees.
The
Company
allocated
these
costs
to
the
liability
and
equity
components
based
on
the
allocationof
the
proceeds.
The
portion
of
these
costs
allocated
to
the
equity
components
totaling
approximately
$4.0
million
were
recorded
as
a
reduction
to
additional
paid-in
capital.
The
portion
of
these
costs
allocated
to
the
liability
components
totaling
approximately
$7.7
million
wereF-47Principal
$335,699
Less:
unamortized
debt
discount
(107,636)Less:
unamortized
debt
issuance
costs
(7,443)Net
carrying
amount
$220,620
Equity
component
$114,199
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)10.
Notes
Payable
(Continued)recorded
as
a
reduction
in
the
carrying
value
of
the
debt
on
the
balance
sheet
and
are
amortized
to
interest
expense
using
the
effective
interest
method
over
theexpected
life
of
the
2022
Notes.
The
Company
determined
the
expected
life
of
the
2022
Notes
was
equal
to
their
seven-year
term.
The
effective
interest
rate
on
the
liability
components
of
the2022
Notes
for
the
period
from
the
date
of
issuance
through
December
31,
2015
was
9.34%.
The
following
table
sets
forth
total
interest
expense
recognized
relatedto
the
2022
Notes
during
the
year
ended
December
31,
2015
(in
thousands):
Future
minimum
payments
under
the
2022
Notes
as
of
December
31,
2015,
are
as
follows
(in
thousands):Convertible
Note
Hedge
and
Warrant
Transactions
with
Respect
to
2022
Notes
To
minimize
the
impact
of
potential
dilution
to
the
Company's
Class
A
common
stockholders
upon
conversion
of
the
2022
Notes,
the
Company
entered
intothe
Convertible
Note
Hedges
covering
20,249,665
shares
of
the
Company's
Class
A
common
stock
in
connection
with
the
issuance
of
the
2022
Notes.
TheConvertible
Note
Hedges
have
an
exercise
price
of
approximately
$16.58
per
share
and
are
exercisable
when
and
if
the
2022
Notes
are
converted.
If
uponconversion
of
the
2022
Notes,
the
price
of
the
Company's
Class
A
common
stock
is
above
the
exercise
price
of
the
Convertible
Note
Hedges,
the
counterparties
areobligated
to
deliver
shares
of
the
Company's
Class
A
common
stock
and/or
cash
with
an
aggregate
value
approximately
equal
to
the
difference
between
the
price
ofthe
Company's
Class
A
common
stock
at
the
conversion
date
and
the
exercise
price,
multiplied
by
the
number
of
shares
of
the
Company's
Class
A
common
stockrelated
to
the
Convertible
Note
Hedge
being
exercised.
Concurrently
with
entering
into
the
Convertible
Note
Hedges,
the
Company
also
sold
Note
Hedge
Warrants
to
the
Convertible
Note
Hedge
counterparties
toacquire
20,249,665
shares
of
the
Company's
Class
A
common
stock,
subject
to
customary
anti-dilution
adjustments.
The
strike
price
of
the
NoteF-48Contractual
interest
expense
$4,069
Amortization
of
debt
issuance
costs
305
Amortization
of
debt
discount
6,563
Total
interest
expense
$10,937
2016
$7,553
2017
7,553
2018
7,553
2019
7,553
2020
7,553
Thereafter
347,030
Total
future
minimum
payments
under
the
2022
Notes
384,795
Less:
amounts
representing
interest
(49,096)Less:
unamortized
debt
discount
(107,636)Less:
unamortized
debt
issuance
costs
(7,443)Convertible
senior
notes
balance
$220,620
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)10.
Notes
Payable
(Continued)Hedge
Warrants
is
initially
$21.50
per
share,
subject
to
adjustment,
and
such
warrants
are
exercisable
over
the
150
trading
day
period
beginning
on
September
15,2022.
The
Note
Hedge
Warrants
could
have
a
dilutive
effect
on
the
Class
A
common
stock
to
the
extent
that
the
market
price
per
share
of
the
Company's
Class
Acommon
stock
exceeds
the
applicable
strike
price
of
such
warrants.
The
Convertible
Note
Hedges
and
the
Note
Hedge
Warrants
are
separate
transactions
entered
into
by
the
Company
and
are
not
part
of
the
terms
of
the
2022Notes.
Holders
of
the
2022
Notes
and
the
Note
Hedge
Warrants
do
not
have
any
rights
with
respect
to
the
Convertible
Note
Hedges.
The
Company
paidapproximately
$91.9
million
for
the
Convertible
Note
Hedges
and
recorded
this
amount
as
a
long-term
asset
on
the
consolidated
balance
sheet.
The
Companyreceived
approximately
$70.8
million
for
the
Note
Hedge
Warrants
and
recorded
this
amount
as
a
long-term
liability,
resulting
in
a
net
cost
to
the
Company
ofapproximately
$21.1
million.
The
Convertible
Note
Hedges
and
Note
Hedge
Warrants
are
accounted
for
as
derivative
assets
and
liabilities,
respectively,
inaccordance
with
ASC
815
(Note
5).11%
PhaRMA
Notes
due
2024
In
January
2013,
the
Company
closed
a
private
placement
of
$175.0
million
in
aggregate
principal
amount
of
notes
due
on
or
before
June
15,
2024.
ThePhaRMA
Notes
bear
an
annual
interest
rate
of
11%,
with
interest
payable
March
15,
June
15,
September
15
and
December
15
of
each
year
(each
a
"Payment
Date")which
began
on
June
15,
2013.
On
March
15,
2014,
the
Company
began
making
quarterly
payments
on
the
PhaRMA
Notes
equal
to
the
greater
of
(i)
7.5%
of
netsales
of
LINZESS
in
the
U.S.
for
the
preceding
quarter
(the
"Synthetic
Royalty
Amount")
and
(ii)
accrued
and
unpaid
interest
on
the
PhaRMA
Notes
(the"Required
Interest
Amount").
Principal
on
the
PhaRMA
Notes
will
be
repaid
in
an
amount
equal
to
the
Synthetic
Royalty
Amount
minus
the
Required
InterestAmount,
when
this
is
a
positive
number,
until
the
principal
has
been
paid
in
full.
Given
the
principal
payments
on
the
PhaRMA
Notes
are
based
on
the
SyntheticRoyalty
Amount,
which
will
vary
from
quarter
to
quarter,
the
PhaRMA
Notes
may
be
repaid
prior
to
June
15,
2024,
the
final
legal
maturity
date.
The
Companymade
principal
payments
of
approximately
$13.9
million
through
December
31,
2015,
and
expects
to
pay
approximately
$25.0
million
of
the
principal
withintwelve
months
following
December
31,
2015.
The
PhaRMA
Notes
are
secured
solely
by
a
security
interest
in
a
segregated
bank
account
established
to
receive
the
required
quarterly
payments.
Up
to
theamount
of
the
required
quarterly
payments
under
the
PhaRMA
Notes,
Allergan
will
deposit
its
quarterly
profit
(loss)
sharing
payments
due
to
the
Company
underthe
collaboration
agreement
for
North
America,
if
any,
into
the
segregated
bank
account.
If
the
funds
deposited
by
Allergan
into
the
segregated
bank
account
areinsufficient
to
make
a
required
payment
of
interest
or
principal
on
a
particular
Payment
Date,
the
Company
is
obligated
to
deposit
such
shortfall
out
of
theCompany's
general
funds
into
the
segregated
bank
account.
The
PhaRMA
Notes
may
be
redeemed
at
any
time
prior
to
maturity,
in
whole
or
in
part,
at
the
option
of
the
Company.
The
Company
will
pay
a
redemptionprice
equal
to
the
percentage
of
outstanding
principal
balance
of
the
PhaRMA
Notes
being
redeemed
specified
below
for
the
period
inF-49 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)10.
Notes
Payable
(Continued)which
the
redemption
occurs
(plus
the
accrued
and
unpaid
interest
to
the
redemption
date
on
the
PhaRMA
Notes
being
redeemed):
The
PhaRMA
Notes
contain
certain
covenants
related
to
the
Company's
obligations
with
respect
to
the
commercialization
of
LINZESS
and
the
relatedcollaboration
agreement
with
Allergan
for
North
America,
as
well
as
certain
customary
covenants,
including
covenants
that
limit
or
restrict
the
Company's
abilityto
incur
certain
liens,
merge
or
consolidate
or
make
dispositions
of
assets.
The
PhaRMA
Notes
also
specify
a
number
of
events
of
default
(some
of
which
aresubject
to
applicable
cure
periods),
including,
among
other
things,
covenant
defaults,
other
non-payment
defaults,
and
bankruptcy
and
insolvency
defaults.
Uponthe
occurrence
of
an
event
of
default,
subject
to
cure
periods
in
certain
circumstances,
all
amounts
outstanding
may
become
immediately
due
and
payable.
The
upfront
cash
proceeds
of
$175.0
million,
less
a
discount
of
approximately
$0.4
million
for
payment
of
legal
fees
incurred
on
behalf
of
the
noteholders,were
recorded
as
notes
payable
at
issuance.
The
Company
also
capitalized
approximately
$7.3
million
of
debt
issuance
costs
in
connection
with
the
PhaRMANotes.
During
the
three
months
ended
June
30,
2015,
the
Company
early
adopted
ASU
2015-03,
which
requires
debt
issuance
costs
to
be
presented
in
an
entity'sbalance
sheet
as
a
direct
deduction
from
the
associated
debt
liability
(Note
2).
The
Company's
adoption
of
ASU
2015-03
resulted
in
a
balance
sheet
reclassificationof
issuance
costs
in
connection
with
the
PhaRMA
Notes
of
approximately
$1.4
million
of
prepaid
expenses
and
other
current
assets
and
approximately
$2.8
millionof
other
assets
to
a
reduction
in
PhaRMA
Notes
payable
as
of
December
31,
2014.
The
PhaRMA
Notes
issuance
costs
and
discount
are
being
amortized
over
theestimated
term
of
the
obligation
using
the
effective
interest
method.
The
repayment
provisions
represent
embedded
derivatives
that
are
clearly
and
closely
related
tothe
PhaRMA
Notes
and
as
such
do
not
require
separate
accounting
treatment.
The
accounting
for
the
PhaRMA
Notes
requires
the
Company
to
make
certain
estimates
and
assumptions
about
the
future
net
sales
of
LINZESS
in
the
U.S.LINZESS
has
been
marketed
since
December
2012
and
the
estimates
of
the
magnitude
and
timing
of
LINZESS
net
sales
are
subject
to
variability
and
significantuncertainty.
These
estimates
and
assumptions
are
likely
to
change,
which
may
result
in
future
adjustments
to
the
portion
of
the
PhaRMA
Notes
that
is
classified
asa
current
liability,
the
amortization
of
debt
issuance
costs
and
discounts
as
well
as
the
accretion
of
the
interest
expense.
Any
such
adjustments
could
be
material
tothe
Company's
consolidated
financial
statements.11.
Commitments
and
ContingenciesLease Commitments
The
Company
leases
its
facility,
offsite
data
storage
location,
vehicles
and
various
equipment
under
leases
that
expire
at
varying
dates
through
2018.
Certainof
these
leases
contain
renewal
options,
and
require
the
Company
to
pay
operating
costs,
including
property
taxes,
insurance,
maintenance
and
other
operatingexpenses.F-50Payment
Dates
Redemption
Percentage
From
and
including
January
1,
2015
to
and
including
December
31,
2015
105.50%From
and
including
January
1,
2016
to
and
including
December
31,
2016
102.75%From
and
including
January
1,
2017
and
thereafter
100.00% Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)11.
Commitments
and
Contingencies
(Continued)
As
of
December
31,
2015,
the
Company
rents
office
and
laboratory
space
at
its
corporate
headquarters
in
Cambridge,
Massachusetts
under
a
non-cancelableoperating
lease,
entered
into
in
January
2007,
as
amended
("2007
Lease
Agreement").
The
2007
Lease
Agreement
contains
various
provisions
for
renewal
at
theCompany's
option
and,
in
certain
cases,
free
rent
periods
and
rent
escalation
tied
to
the
Consumer
Price
Index.
The
rent
expense,
inclusive
of
the
escalating
rentpayments
and
free
rent
periods,
is
recognized
on
a
straight-line
basis
over
the
lease
term
through
January
2018.
The
Company
maintains
a
letter
of
credit
securingits
obligations
under
the
lease
agreement
of
approximately
$7.6
million,
which
is
recorded
as
restricted
cash.
In
addition
to
rents
due
under
this
lease,
the
Companyis
obligated
to
pay
facilities
charges,
including
utilities
and
taxes.
In
connection
with
the
2007
Lease
Agreement,
the
Company
was
provided
allowances
totalingapproximately
$22.9
million
as
reimbursement
for
financing
capital
improvements
to
the
facility.
The
reimbursement
amount
is
recorded
as
deferred
rent
on
theconsolidated
balance
sheets
and
is
being
amortized
as
a
reduction
to
rent
expense
over
the
lease
term,
as
applicable.
During
the
three
months
ended
September
30,
2014,
the
Company
entered
into
arrangements,
with
the
landlord's
consent,
to
sublease
a
portion
of
itsCambridge,
Massachusetts
corporate
headquarters
as
it
did
not
intend
to
use
the
space
for
its
operations.
Under
the
first
sublease,
the
Company's
operating
leaseobligations
through
2018
are
partially
offset
by
future
sublease
payments
to
it
of
approximately
$16.1
million
(of
which
approximately
$5.0
million
has
beenreceived
through
December
31,
2015)
and
under
the
second
sublease,
the
Company's
operating
lease
obligations
through
2016
are
partially
offset
by
future
subleasepayments
to
it
of
approximately
$1.9
million
(of
which
approximately
$1.1
million
has
been
received
through
December
31,
2015).
During
the
year
endedDecember
31,
2014,
the
Company
recorded
aggregate
charges
of
approximately
$2.6
million,
which
represent
its
obligations
to
the
landlord
associated
with
thesublet
space,
net
of
sublease
income
due
to
the
Company
under
the
subleases,
and
a
partial
write-down
of
leasehold
improvement
assets
not
utilized
by
theCompany
under
the
terms
of
the
subleases.
In
2013,
the
Company
entered
into
36-month
capital
leases
(the
"2013
Vehicle
Leases")
for
the
vehicle
fleet
for
its
field-based
sales
force
and
medical
scienceliaisons.
The
2013
Vehicle
Leases
expire
at
various
times
through
September
2016.
In
accordance
with
the
terms
of
2013
Vehicle
Leases,
the
Company
maintains
aletter
of
credit
securing
its
obligations
under
the
lease
agreements
of
$0.5
million,
which
is
recorded
as
restricted
cash.
In
November
2015,
the
Company
entered
into
12-month
capital
leases
(the
"2015
Vehicle
Leases")
for
certain
vehicles
within
its
vehicle
fleet
for
its
field-based
sales
force
and
medical
science
liaisons.
The
2015
Vehicle
Leases
expire
at
varying
times
beginning
in
November
2016.
In
accordance
with
the
terms
of
the2015
Vehicle
Leases,
the
Company
maintains
a
letter
of
credit
securing
its
obligations
under
the
lease
agreements
of
$0.6
million,
which
is
recorded
as
restrictedcash.
In
connection
with
entering
into
the
2015
Vehicle
Leases,
certain
of
the
2013
Vehicle
Leases
were
terminated
as
of
December
31,
2015.
At
December
31,2015,
the
weighted
average
interest
rate
on
the
outstanding
2015
Vehicle
Lease
obligations
was
approximately
3.3%
and
the
weighted
average
interest
rate
on
theoutstanding
2013
Vehicle
Lease
obligations
was
approximately
7.7%.
The
Company
has
also
entered
into
capital
leases
for
certain
computer
and
office
equipment.
These
capital
leases
expire
in
April
2018.
At
December
31,
2015,the
weighted
average
interest
rate
on
the
outstanding
capital
lease
obligations
was
approximately
14.5%.F-51 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)11.
Commitments
and
Contingencies
(Continued)
At
December
31,
2015,
future
minimum
lease
payments
under
all
non-cancelable
lease
arrangements
were
as
follows
(in
thousands):
Rental
expense,
net
of
sublease
income
of
approximately
$5.3
million
and
approximately
$2.6
million,
under
the
operating
leases
amounted
to
approximately$6.3
million
and
approximately
$10.2
million
for
the
years
ended
December
31,
2015
and
2014,
respectively.
Rental
expense
amounted
to
approximately$8.8
million
for
the
year
ended
December
31,
2013.Commercial Supply Commitments
The
Company
has
entered
into
multiple
commercial
supply
agreements
for
the
purchase
of
linaclotide
finished
drug
product
and
API.
Two
of
the
Company'sAPI
supply
agreements
for
supplying
API
to
its
collaboration
partners
outside
of
North
America
contain
minimum
purchase
commitments.
In
July
2015
and
August2015,
the
Company
entered
into
amendments
to
its
agreements
with
two
of
its
suppliers
of
linaclotide
API.
One
amendment
reduced
the
Company's
non-cancelablepurchase
commitments
and
the
other
increased
the
Company's
non-cancelable
purchase
commitments,
but
extended
the
timeframe
over
which
the
Company
mustpurchase
the
API.
The
amended
contracts
include
total
non-cancelable
commercial
supply
purchase
obligations
of
approximately
$34.9
million
through
2023.
During
the
year
ended
December
31,
2015,
the
Company
recognized
approximately
$10.1
million
as
an
accrual
for
excess
purchases
commitments
that
isrecorded
in
other
liabilities
in
the
Company's
consolidated
balance
sheet
(Note
7).
Payments
under
these
accrued
excess
purchase
commitments
begin
in
2017,
andare
approximately
$2.5
million
in
each
of
the
years
2017,
2018,
2019
and
2020.
As
of
December
31,
2015,
the
Company's
unrecognized
minimum
purchaserequirements
and
other
firmF-52
Operating
Lease
Payments
Lease
Payments
to
be
Received
from
Subleases
Net
Operating
Lease
Payments
Capital
Lease
Payments
2016
$15,617
$(5,740)$9,878
$2,756
2017
16,170
(5,665)
10,505
253
2018
635
(476)
159
85
Total
future
minimum
lease
payments
$32,422
$(11,881)$20,542
$3,094
Less:
amounts
representing
interest
(157)Capital
lease
obligations
at
December
31,
2015
2,937
Less:
current
portion
of
capital
lease
obligations
(2,631)Capital
lease
Obligations,
net
of
current
portion
$306
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)11.
Commitments
and
Contingencies
(Continued)commitments
related
to
the
supply
contracts
associated
with
the
territories
not
covered
by
the
partnerships
with
Allergan
for
North
America
were
as
follows
(inthousands):
In
addition,
the
Company
and
Allergan
are
jointly
obligated
to
make
minimum
purchases
of
linaclotide
API
for
the
territories
covered
by
the
Company'scollaboration
with
Allergan
for
North
America.
Currently,
Allergan
fulfills
all
such
minimum
purchase
commitments
and,
as
a
result,
they
are
excluded
from
theamounts
above.Commitments Related to the Collaboration and License Agreements
Under
the
collaborative
agreements
with
Allergan
for
North
America
and
AstraZeneca
for
China,
Hong
Kong
and
Macau,
respectively,
the
Company
shareswith
Allergan
and
AstraZeneca
all
development
and
commercialization
costs
related
to
linaclotide
in
the
U.S.
and
for
China,
Hong
Kong
and
Macau,
respectively.The
actual
amounts
that
the
Company
pays
its
partners
or
that
partners
pay
to
the
Company
will
depend
on
numerous
factors
outside
of
the
Company's
control,including
the
success
of
certain
clinical
development
efforts
with
respect
to
linaclotide,
the
content
and
timing
of
decisions
made
by
the
regulators,
thereimbursement
and
competitive
landscape
around
linaclotide
and
the
Company's
other
product
candidates,
and
other
factors.
In
addition,
the
Company
has
commitments
to
make
potential
future
milestone
payments
to
third
parties
under
certain
of
its
license
and
collaborationarrangements.
These
milestones
primarily
include
the
commencement
and
results
of
clinical
trials,
obtaining
regulatory
approval
in
various
jurisdictions
and
thefuture
commercial
success
of
development
programs,
the
outcome
and
timing
of
which
are
difficult
to
predict
and
subject
to
significant
uncertainty.
In
addition
tothe
milestones
discussed
above,
the
Company
is
obligated
to
pay
royalties
on
future
sales,
which
are
contingent
on
generating
levels
of
sales
of
future
products
thathave
not
been
achieved
and
may
never
be
achieved.
These
agreements
are
more
fully
described
in
Note
4,
Collaboration,
License
and
Co-promotion
Agreements
,
to
these
consolidated
financial
statements.Other Funding Commitments
As
of
December
31,
2015,
the
Company
has
several
on-going
studies
in
various
clinical
trial
stages.
The
Company's
most
significant
clinical
trial
expendituresare
to
contract
research
organizations
("CRO").
The
contracts
with
CROs
generally
are
cancellable,
with
notice,
at
the
Company's
option
and
do
not
have
anysignificant
cancellation
penalties.F-532016
$2,259
2017
2,259
2018
2,322
2019
3,096
2020
3,096
Thereafter
9,288
Total
unrecognized
minimum
purchase
requirements
$22,320
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)11.
Commitments
and
Contingencies
(Continued)Guarantees
As
permitted
under
Delaware
law,
the
Company
indemnifies
its
officers
and
directors
for
certain
events
or
occurrences
while
the
officer
or
director
is,
or
was,serving
at
the
Company's
request
in
such
capacity.
The
maximum
potential
amount
of
future
payments
the
Company
could
be
required
to
make
is
unlimited;however,
the
Company
has
directors'
and
officers'
insurance
coverage
that
is
intended
to
limit
its
exposure
and
enable
it
to
recover
a
portion
of
any
future
amountspaid.
The
Company
enters
into
certain
agreements
with
other
parties
in
the
ordinary
course
of
business
that
contain
indemnification
provisions.
These
typicallyinclude
agreements
with
directors
and
officers,
business
partners,
contractors,
landlords,
clinical
sites
and
customers.
Under
these
provisions,
the
Companygenerally
indemnifies
and
holds
harmless
the
indemnified
party
for
losses
suffered
or
incurred
by
the
indemnified
party
as
a
result
of
the
Company's
activities.These
indemnification
provisions
generally
survive
termination
of
the
underlying
agreements.
The
maximum
potential
amount
of
future
payments
the
Companycould
be
required
to
make
under
these
indemnification
provisions
is
unlimited.
However,
to
date
the
Company
has
not
incurred
material
costs
to
defend
lawsuits
orsettle
claims
related
to
these
indemnification
provisions.
As
a
result,
the
estimated
fair
value
of
these
obligations
is
minimal.
Accordingly,
the
Company
had
noliabilities
recorded
for
these
obligations
as
of
December
31,
2015
and
2014.Litigation
From
time
to
time,
the
Company
is
involved
in
various
legal
proceedings
and
claims,
either
asserted
or
unasserted,
which
arise
in
the
ordinary
course
ofbusiness.
While
the
outcome
of
these
other
claims
cannot
be
predicted
with
certainty,
management
does
not
believe
that
the
outcome
of
any
of
these
ongoing
legalmatters,
individually
and
in
aggregate,
will
have
a
material
adverse
effect
on
the
Company's
consolidated
financial
statements.12.
Stockholders'
EquityPreferred
Stock
The
Company's
preferred
stock
may
be
issued
from
time
to
time
in
one
or
more
series,
with
each
such
series
to
consist
of
such
number
of
shares
and
to
havesuch
terms
as
adopted
by
the
board
of
directors.
Authority
is
given
to
the
board
of
directors
to
determine
and
fix
such
voting
powers,
full
or
limited,
or
no
votingpowers,
and
such
designations,
preferences
and
relative
participating,
optional
or
other
special
rights,
and
qualifications,
limitation
or
restrictions
thereof,
includingwithout
limitation,
dividend
rights,
conversion
rights,
redemption
privileges
and
liquidation
preferences.Common
Stock
The
Company
has
designated
two
series
of
common
stock,
Series
A
common
stock
("Class
A
Common
Stock")
and
Series
B
common
stock
("Class
BCommon
Stock").
All
shares
of
common
stock
that
were
outstanding
immediately
prior
to
August
2008
were
converted
into
shares
of
Class
B
Common
Stock.
Theholders
of
Class
A
Common
Stock
and
Class
B
Common
Stock
vote
together
as
a
single
class.
Class
A
Common
Stock
is
entitled
to
one
vote
per
share.
Class
BCommon
Stock
is
also
entitled
to
one
vote
per
share
with
the
following
exceptions:
(1)
after
the
completion
of
an
initial
public
offering
("IPO")
of
the
Company'sstock,
the
holders
of
the
Class
B
Common
Stock
are
entitled
to
tenF-54 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)12.
Stockholders'
Equity
(Continued)votes
per
share
if
the
matter
is
an
adoption
of
an
agreement
of
merger
or
consolidation,
an
adoption
of
a
resolution
with
respect
to
the
sale,
lease,
or
exchange
of
theCompany's
assets
or
an
adoption
of
dissolution
or
liquidation
of
the
Company,
and
(2)
Class
B
common
stockholders
are
entitled
to
ten
votes
per
share
on
anymatter
if
any
individual,
entity,
or
group
seeks
to
obtain
or
has
obtained
beneficial
ownership
of
30%
or
more
of
the
Company's
outstanding
shares
of
commonstock.
Class
B
Common
Stock
can
be
sold
at
any
time
and
irrevocably
converts
to
Class
A
Common
Stock,
on
a
one-for-one
basis,
upon
sale
or
transfer.
TheClass
B
Common
Stock
is
also
entitled
to
a
separate
class
vote
for
the
issuance
of
additional
shares
of
Class
B
Common
Stock
(except
pursuant
to
dividends,
splitsor
convertible
securities),
or
any
amendment,
alteration
or
repeal
of
any
provision
of
the
Company's
charter.
All
Class
B
Common
Stock
will
automatically
convertinto
Class
A
Common
Stock
upon
the
earliest
of:•the
later
of
(1)
the
first
date
on
which
the
number
of
shares
of
Class
B
Common
Stock
then
outstanding
is
less
than
19,561,556
which
represents25%
of
the
number
of
shares
of
Class
B
Common
Stock
outstanding
immediately
following
the
completion
of
the
Company's
IPO
or(2)
December
31,
2018;
•December
31,
2038;
or
•a
date
agreed
to
in
writing
by
a
majority
of
the
holders
of
the
Class
B
Common
Stock.
The
Company
has
reserved
such
number
of
shares
of
Class
A
Common
Stock
as
there
are
outstanding
shares
of
Class
B
Common
Stock
solely
for
the
purposeof
effecting
the
conversion
of
the
Class
B
Common
Stock.
The
holders
of
shares
of
Class
A
Common
Stock
and
Class
B
Common
Stock
are
entitled
to
dividends
if
and
when
declared
by
the
board
of
directors.
In
theevent
that
dividends
are
paid
in
the
form
of
common
stock
or
rights
to
acquire
common
stock,
the
holders
of
shares
of
Class
A
Common
Stock
shall
receiveClass
A
Common
Stock
or
rights
to
acquire
Class
A
Common
Stock
and
the
holders
of
shares
of
Class
B
Common
Stock
shall
receive
Class
B
Common
Stock
orrights
to
acquire
Class
B
Common
Stock,
as
applicable.
In
the
event
of
a
voluntary
or
involuntary
liquidation,
dissolution,
distribution
of
assets,
or
winding
up
of
the
Company,
the
holders
of
shares
of
Class
ACommon
Stock
and
the
holders
of
shares
of
Class
B
Common
Stock
are
entitled
to
share
equally,
on
a
per
share
basis,
in
all
assets
of
the
Company
of
whateverkind
available
for
distribution
to
the
holders
of
common
stock.
The
Company
has
reserved,
out
of
its
authorized
but
unissued
shares
of
Class
A
Common
Stock,
sufficient
shares
to
affect
the
conversion
of
the
2022
Notesand
the
Note
Hedge
Warrants,
pursuant
to
the
terms
thereof
(Note
10).
During
the
second
quarter
of
2013,
the
Company
sold
11,204,948
shares
of
its
Class
A
Common
Stock
through
a
firm
commitment,
underwritten
publicoffering
at
a
price
to
the
public
of
$13.00
per
share.
As
a
result
of
this
offering,
the
Company
received
aggregate
net
proceeds,
after
underwriting
discounts
andcommissions
and
other
offering
expenses,
of
approximately
$137.8
million.
In
the
first
quarter
of
2014,
the
Company
sold
15,784,325
shares
of
its
Class
A
Common
Stock
through
a
firm
commitment,
underwritten
public
offering
at
aprice
to
the
public
of
$12.75
per
share.
As
a
result
of
this
offering,
the
Company
received
aggregate
net
proceeds,
after
underwriting
discounts
and
commissionsand
other
offering
expenses,
of
approximately
$190.4
million.F-55 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)13.
Stock
Benefit
Plans
The
following
table
summarizes
the
expense
recognized
for
share-based
compensation
arrangements
in
the
consolidated
statements
of
operations
(inthousands):
Share-based
compensation
is
reflected
in
the
consolidated
statements
of
operations
as
follows
for
the
years
ended
December
31,
2015,
2014
and
2013
(inthousands):
On
November
4,
2014,
the
Company
agreed
to
accelerate
the
vesting
of
all
of
a
former
executive
officer's
outstanding
unvested
stock
options
on
the
executiveofficer's
departure
date
of
December
31,
2014,
and
to
allow
the
exercise
of
vested
stock
options
for
up
to
two
years
subsequent
to
the
departure
date,
or
until
theirexpiration,
whichever
is
earlier.
These
equity
modifications
resulted
in
an
incremental
charge
of
approximately
$2.3
million,
which
was
recorded
within
selling,general
and
administrative
expenses
during
the
year
ended
December
31,
2014.Stock
Benefit
Plans
The
Company
has
two
share-based
compensation
plans
pursuant
to
which
awards
are
currently
being
made:
the
Amended
and
Restated
2010
Employee,Director
and
Consultant
Equity
Incentive
Plan
("2010
Equity
Plan")
and
the
Amended
and
Restated
2010
Employee
Stock
Purchase
Plan
("2010
Purchase
Plan").The
Company
also
has
two
share-based
compensation
plans
under
which
there
are
outstanding
awards,
but
from
which
no
further
awards
will
be
made:
theAmended
and
Restated
2005
Stock
Incentive
Plan
("2005
Equity
Plan")
and
the
Amended
and
Restated
2002
Stock
Incentive
Plan
("2002
Equity
Plan").
AtDecember
31,
2015,
there
were
13,486,020
shares
available
for
future
grant
under
all
such
plans.2010
Equity
Plan
During
2010,
the
Company's
stockholders
approved
the
2010
Equity
Plan
under
which
stock
options,
restricted
stock
awards,
RSUs,
and
other
stock-basedawards
may
be
granted
to
employees,F-56
Years
Ended
December
31,
2015
2014
2013
Employee
stock
options
$20,668
$19,373
$17,981
Restricted
stock
units
1,536
—
—
Restricted
stock
awards
2,408
2,671
552
Non-employee
stock
options
—
2,618
271
Employee
stock
purchase
plan
833
941
995
Workforce
reduction
—
551
—
Stock
award
24
30
30
$25,469
$26,184
$19,829
Years
Ended
December
31,
2015
2014
2013
Research
and
development
$10,065
$9,482
$9,178
Selling,
general
and
administrative
15,404
16,702
10,651
$25,469
$26,184
$19,829
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)13.
Stock
Benefit
Plans
(Continued)officers,
directors,
or
consultants
of
the
Company.
There
were
6,000,000
shares
of
common
stock
initially
reserved
for
issuance
under
the
2010
Equity
Plan.
Thenumber
of
shares
available
for
future
grant
may
be
increased
on
the
first
day
of
each
fiscal
year
by
an
amount
equal
to
the
lesser
of:
(i)
6,600,000;
(ii)
4%
of
thenumber
of
outstanding
shares
of
common
stock
on
the
first
day
of
each
fiscal
year;
and
(iii)
an
amount
determined
by
the
board
of
directors.
Awards
that
arereturned
to
the
Company's
other
equity
plans
as
a
result
of
their
expiration,
cancellation,
termination
or
repurchase
are
automatically
made
available
for
issuanceunder
the
2010
Equity
Plan.
At
December
31,
2015,
there
were
11,410,963
shares
available
for
future
grant
under
the
2010
Equity
Plan.2010
Purchase
Plan
During
2010,
the
Company's
stockholders
approved
the
2010
Purchase
Plan,
which
gives
eligible
employees
the
right
to
purchase
shares
of
common
stock
atthe
lower
of
85%
of
the
fair
market
value
on
the
first
or
last
day
of
an
offering
period.
Each
offering
period
is
six
months.
There
were
400,000
shares
of
commonstock
initially
reserved
for
issuance
pursuant
to
the
2010
Purchase
Plan.
The
number
of
shares
available
for
future
grant
under
the
2010
Purchase
Plan
may
beincreased
on
the
first
day
of
each
fiscal
year
by
an
amount
equal
to
the
lesser
of:
(i)
1,000,000
shares,
(ii)
1%
of
the
Class
A
shares
of
common
stock
outstanding
onthe
last
day
of
the
immediately
preceding
fiscal
year,
or
(iii)
such
lesser
number
of
shares
as
is
determined
by
the
board
of
directors.
At
December
31,
2015,
therewere
2,075,057
shares
available
for
future
grant
under
the
2010
Purchase
Plan.2005
Equity
Plan
and
2002
Equity
Plan
The
2005
Equity
Plan
and
2002
Equity
Plan
provided
for
the
granting
of
stock
options,
restricted
stock
awards,
RSUs,
and
other
share-based
awards
toemployees,
officers,
directors,
consultants,
or
advisors
of
the
Company.
At
December
31,
2015,
there
were
no
shares
available
for
future
grant
under
the
2005Equity
Plan
or
the
2002
Equity
Plan.Restricted
Stock
Awards
In
2015,
the
Company
granted
an
aggregate
of
151,604
shares
of
Class
A
Common
Stock
to
independent
members
of
the
board
of
directors
under
restrictedstock
agreements
in
accordance
with
the
terms
of
the
2010
Equity
Plan
and
the
Company's
director
compensation
plan,
effective
in
January
2014.
These
shares
ofrestricted
stock
vest
ratably
over
the
period
of
service
from
the
Company's
2015
annual
meeting
of
stockholders
through
the
Company's
2016
annual
meeting
ofstockholders,
provided
the
individual
continues
to
serve
on
the
Company's
board
of
directors
through
each
vest
date.
In
2014,
the
Company
granted
an
aggregate
of
288,606
shares
of
common
stock
to
independent
members
of
the
board
of
directors
under
restricted
stockagreements
in
accordance
with
the
terms
of
the
2010
Equity
Plan
and
the
Company's
director
compensation
plan,
effective
in
January
2014.
These
shares
ofrestricted
stock
vested
ratably
over
the
period
of
service
from
January
2014
through
the
Company's
2015
annual
meeting
of
stockholders,
provided
the
individualcontinued
to
serve
on
the
Company's
board
of
directors
through
each
vest
date.F-57 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)13.
Stock
Benefit
Plans
(Continued)
A
summary
of
the
unvested
shares
of
restricted
stock
as
of
December
31,
2015
is
presented
below:Restricted
Stock
Units
In
2015,
the
Company
began
utilizing
RSUs,
in
addition
to
stock
options
as
part
of
the
equity
compensation
it
provides
to
its
employees,
each
RSUrepresenting
the
right
to
receive
one
share
of
the
Company's
Class
A
Common
Stock
pursuant
to
the
terms
of
the
applicable
award
agreement
and
granted
pursuantto
the
terms
of
the
Company's
2010
Equity
Plan.
The
RSUs
generally
vest
25%
per
year
on
the
approximate
anniversary
of
the
date
of
grant
until
fully
vested,provided
the
employee
remains
continuously
employed
with
the
Company
through
each
vesting
date.
Shares
of
the
Company's
Class
A
Common
Stock
aredelivered
to
the
employee
upon
vesting,
subject
to
payment
of
applicable
withholding
taxes.
The
fair
value
of
all
RSUs
is
based
on
the
market
value
of
theCompany's
Class
A
Common
Stock
on
the
date
of
grant.
Compensation
expense,
including
the
effect
of
estimated
forfeitures,
is
recognized
over
the
applicableservice
period.
A
summary
of
RSU
activity
for
the
year
ended
December
31,
2015
is
as
follows:Stock
Options
Stock
options
granted
under
the
Company's
equity
plans
generally
have
a
ten-year
term
and
vest
over
a
period
of
four
years,
provided
the
individual
continuesto
serve
at
the
Company
through
the
vesting
dates.
Options
granted
under
all
equity
plans
are
exercisable
at
a
price
per
share
not
less
than
the
fair
market
value
ofthe
underlying
common
stock
on
the
date
of
grant.
The
estimated
fair
value
of
options,
including
the
effect
of
estimated
forfeitures,
is
recognized
over
the
requisiteservice
period,
which
is
typically
the
vesting
period
of
each
option.F-58
Number
of
Shares
Weighted-
Average
Grant
Date
Fair
Value
Unvested
as
of
December
31,
2014
98,890
$13.77
Granted
151,604
$14.16
Vested
(175,992)$13.95
Forfeited
—
$—
Unvested
as
of
December
31,
2015
74,502
$14.14
Number
of
Shares
Weighted-
Average
Grant
Date
Fair
Value
Unvested
as
of
December
31,
2014
—
$—
Granted
936,414
$13.44
Vested
—
$—
Forfeited
(36,363)$15.46
Unvested
as
of
December
31,
2015
900,051
$13.36
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)13.
Stock
Benefit
Plans
(Continued)
The
weighted
average
assumptions
used
to
estimate
the
fair
value
of
the
stock
options
using
the
Black-Scholes
option-pricing
model
were
as
follows
for
theyears
ended
December
31,
2015,
2014
and
2013:
Prior
to
February
3,
2010,
the
Company
was
not
publicly
traded
and
therefore
had
no
trading
history.
Therefore,
the
Company
has
been
using
a
blendedvolatility
rate
that
blends
its
own
historical
volatility
with
that
of
comparable
public
companies.
For
purposes
of
identifying
comparable
companies,
the
Companyselected
publicly-traded
companies
that
are
in
the
biopharmaceutical
industry,
have
products
or
product
candidates
in
similar
therapeutic
areas
and
stages
ofnonclinical
and
clinical
development,
have
sufficient
trading
history
to
derive
a
historic
volatility
rate
and
have
similar
vesting
terms
as
the
Company's
options.Beginning
in
2014,
the
Company
estimates
the
expected
term
using
historical
data.
The
risk-free
interest
rate
used
for
each
grant
is
based
on
a
zero-coupon
U.S.Treasury
instrument
with
a
remaining
term
similar
to
the
expected
term
of
the
share-based
award.
The
Company
has
not
paid
and
does
not
anticipate
paying
cashdividends
on
its
shares
of
common
stock
in
the
foreseeable
future;
therefore,
the
expected
dividend
yield
is
assumed
to
be
zero.
The
weighted-average
grant
date
fair
value
per
share
of
options
granted
during
the
years
ended
December
31,
2015,
2014
and
2013
was
$6.73,
$6.47
and$5.96,
respectively.
The
Company's
Class
B
Common
Stock
is
issuable
upon
exercise
of
options
granted
prior
to
the
closing
of
the
Company's
IPO
under
the
2002
Equity
Plan
andthe
2005
Equity
Plan,
and
its
Class
A
Common
Stock
is
issuable
upon
exercise
of
all
options
granted
after
the
closing
of
the
Company's
IPO
under
the
Company'sequity
plans.
At
December
31,
2015,
options
exercisable
into
4,554,128
shares
of
Class
B
Common
Stock
and
16,012,732
shares
of
Class
A
Common
Stock
wereoutstanding.
Subject
to
approval
by
the
board
of
directors,
option
grantees
under
the
2002
Equity
Plan
and
the
2005
Equity
Plan
may
have
the
right
to
exercise
an
optionprior
to
vesting.
The
exercise
of
these
shares
is
not
substantive
and
as
a
result,
the
cash
paid
for
the
exercise
prices
is
considered
a
deposit
or
prepayment
of
theexercise
price
and
is
recorded
as
a
liability.
Amounts
received
upon
the
exercise
of
these
shares
were
not
material
to
the
consolidated
financial
statements
atDecember
31,
2015
and
2014.
The
Company,
from
time
to
time,
issues
certain
time-accelerated
stock
options
to
certain
employees.
The
vesting
of
these
options
accelerates
upon
theachievement
of
certain
performance-based
milestones.
If
these
criteria
are
not
met,
such
options
will
vest
between
six
and
ten
years
after
the
date
of
grant.
Duringthe
year
ended
December
31,
2015,
no
shares
vested
as
a
result
of
milestone
or
service
period
achievements.
At
December
31,
2015
and
2014,
there
were
400,000shares
issuable
under
unvested
time-accelerated
options.
When
achievement
of
the
milestone
is
not
deemed
probable,
the
Company
recognizes
compensationexpense
associated
with
time-accelerated
stock
options
initially
over
the
vesting
period
of
the
respective
stock
option.
When
deemed
probable
of
achievement,
theCompany
expenses
the
remaining
unrecognized
compensation
over
the
implicit
service
period.
TheF-59
Years
Ended
December
31,
2015
2014
2013
Expected
volatility
46.1%
46.8%
46.3%Expected
term
(in
years)
6.04
6.10
6.50
Risk-free
interest
rate
1.7%
1.8%
1.6%Expected
dividend
yield
—%
—%
—% Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)13.
Stock
Benefit
Plans
(Continued)Company
recorded
share-based
compensation
related
to
these
time-accelerated
options
of
an
insignificant
amount,
$1.2
million,
and
an
insignificant
amount
duringthe
years
ended
December
31,
2015,
2014
and
2013,
respectively.
The
Company
also
grants
to
certain
employees
performance-based
options
to
purchase
shares
of
common
stock.
These
options
are
subject
to
performance-based
milestone
vesting.
During
the
year
ended
December
31,
2015,
no
shares
vested
as
a
result
of
performance
milestone
achievements.
The
Company
recordedshare-based
compensation
related
to
these
performance-based
options
of
approximately
$0.2
million,
approximately
$0.5
million,
and
an
insignificant
amount,respectively,
during
the
years
ended
December
31,
2015,
2014
and
2013.
The
following
table
summarizes
stock
option
activity
under
the
Company's
share-based
compensation
plans,
including
performance-based
options:
The
total
intrinsic
value
of
options
exercised
during
the
years
ended
December
31,
2015,
2014
and
2013
was
approximately
$17.7
million,
$26.9
million
andapproximately
$19.7
million,
respectively.
The
intrinsic
value
was
calculated
as
the
difference
between
the
fair
value
of
the
Company's
common
stock
and
theexercise
price
of
the
option
issued.F-60
Shares
of
Common
Stock
Attributable
to
Options
Weighted-
Average
Exercise
Price
Weighted-
Average
Contractual
Life
Aggregate
Intrinsic
Value
(in
years)
(in
thousands)
Outstanding
at
December
31,
2014
19,957,773
$10.07
6.00
$104,897
Granted
3,518,950
$14.69
Exercised
(2,005,330)$5.49
Cancelled
(904,533)$13.13
Outstanding
at
December
31,
2015
20,566,860
$11.18
5.90
$38,279
Vested
or
expected
to
vest
at
December
31,
2015
19,137,709
$11.11
5.78
$36,239
Exercisable
at
December
31,
2015
(1)
12,669,438
$10.35
4.82
$29,953
(1)All
stock
options
granted
under
the
2002
Equity
Plan
and
the
2005
Equity
Plan
contain
provisions
allowing
for
the
early
exercise
of
suchoptions
into
restricted
stock.
The
exercisable
shares
disclosed
above
represent
those
that
were
vested
as
of
December
31,
2015. Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)13.
Stock
Benefit
Plans
(Continued)
The
following
table
sets
forth
the
Company's
unrecognized
share-based
compensation
expense,
net
of
estimated
forfeitures,
as
of
December
31,
2015,
by
typeof
award
and
the
weighted-average
period
over
which
that
expense
is
expected
to
be
recognized:
The
total
unrecognized
share-based
compensation
cost
will
be
adjusted
for
future
changes
in
estimated
forfeitures.14.
Income
Taxes
In
general,
the
Company
has
not
recorded
a
provision
for
federal
or
state
income
taxes
as
it
has
had
cumulative
net
operating
losses
since
inception.
A
reconciliation
of
income
taxes
computed
using
the
U.S.
federal
statutory
rate
to
that
reflected
in
operations
follows
(in
thousands):F-61
Unrecognized
Expense,
Net
of
Estimated
Forfeitures
Weighted-Average
Remaining
Recognition
Period
(in
thousands)
(in
years)
Type
of
award:
Stock
options
with
time-based
vesting
$31,254
2.60
Restricted
stock
awards
892
0.42
Restricted
stock
units
7,768
3.46
Time-accelerated
stock
options
(1)
71
—
Performance-based
options
(1)
3,655
—
(1)The
weighted-average
remaining
recognition
period
cannot
be
determined
for
performance-based
or
time-accelerated
options
dueto
the
nature
of
such
awards,
as
detailed
above.
Years
Ended
December
31,
2015
2014
2013
Income
tax
benefit
using
U.S.
federal
statutory
rate
$(48,507)$(64,470)$(92,756)Permanent
differences
688
1,916
1,413
State
income
taxes,
net
of
federal
benefit
(4,826)
(5,632)
(13,684)Stock-based
compensation
3,824
3,584
3,830
Fair
market
valuation
of
Note
Hedge
Warrants
and
Convertible
Note
Hedges
3,711
—
—
Tax
credits
(1,987)
(2,652)
(5,089)Expiring
net
operating
losses
and
tax
credits
194
3,590
—
Effect
of
change
in
state
tax
rate
on
deferred
tax
assets
and
deferred
tax
liabilities
(627)
5,490
1,057
Change
in
the
valuation
allowance
47,587
58,185
105,186
Other
(57)
(11)
43
$—
$—
$—
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)14.
Income
Taxes
(Continued)
Components
of
the
Company's
deferred
tax
assets
and
liabilities
are
as
follows
(in
thousands):
Management
of
the
Company
has
evaluated
the
positive
and
negative
evidence
bearing
upon
the
realizability
of
its
deferred
tax
assets.
Management
hasconsidered
the
Company's
history
of
operating
losses
and
concluded,
in
accordance
with
the
applicable
accounting
standards,
that
it
is
more
likely
than
not
that
theCompany
may
not
realize
the
benefit
of
its
deferred
tax
assets.
Accordingly,
the
deferred
tax
assets
have
been
fully
reserved
at
December
31,
2015
and
2014.Management
reevaluates
the
positive
and
negative
evidence
on
a
quarterly
basis.
The
valuation
allowance
increased
approximately
$40.7
million
during
the
year
ended
December
31,
2015,
due
primarily
to
an
increase
in
the
Company's
taxcredit
carryforwards,
capitalized
research
and
development
expenses
and
share-based
compensation
expense.
Additionally,
the
change
in
valuation
allowance
notedin
the
table
above
reflects
the
impact
of
a
deferred
tax
liability
being
recorded
through
additional
paid-in
capital
of
approximately
$6.9
million
for
the
establishmentof
basis
differences
on
the
2022
Notes.
The
valuation
allowance
increased
approximately
$58.7
million
during
the
year
ended
December
31,
2014,
due
primarily
tothe
increase
in
the
net
operating
loss
carryforwards
and
tax
credits.
Subject
to
the
limitations
described
below,
at
December
31,
2015
and
2014,
the
Company
has
net
operating
loss
carryforwards
of
approximately$857.9
million
and
approximately
$745.6
million,
respectively,
to
offset
future
federal
taxable
income,
which
expire
beginning
in
2018
continuing
through
2035.The
federal
net
operating
loss
carryforwards
exclude
approximately
$61.6
million
of
deductions
related
to
the
exercise
of
stock
options.
This
amount
represents
anexcess
tax
benefit
and
has
not
been
included
in
the
gross
deferred
tax
asset
reflected
for
net
operating
losses.
This
amount
will
be
recorded
as
an
increase
inadditional
paid
in
capital
on
the
consolidated
balance
sheet
once
the
excess
benefits
are
"realized"
in
accordance
with
ASC
718,
Compensation—StockCompensation
("ASC
718").
As
of
December
31,
2015
and
2014,
the
Company
had
state
net
operating
loss
carryforwards
of
approximately
$566.7
million
andapproximately
$517.4
million,
respectively,
to
offset
future
state
taxable
income,
which
have
begun
to
expire
and
will
continue
to
expire
through
2035.
TheCompany
also
had
tax
creditF-62
Years
Ended
December
31,
2015
2014
Deferred
tax
assets:
Net
operating
loss
carryforwards
$280,191
$279,123
Tax
credit
carryforwards
33,996
32,186
Capitalized
research
and
development
30,064
6,826
Deferred
revenue
3,360
4,220
Other
66,450
45,135
Total
deferred
tax
assets
414,061
367,490
Deferred
tax
liabilities:
Basis
difference
on
2022
Notes
(5,877)
—
Total
deferred
tax
liabilities
(5,877)
—
Net
deferred
tax
asset
408,184
367,490
Valuation
allowance
(408,184)
(367,490)Net
deferred
tax
asset
$—
$—
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)14.
Income
Taxes
(Continued)carryforwards
of
approximately
$37.1
million
and
approximately
$35.1
million
as
of
December
31,
2015
and
2014,
respectively,
to
offset
future
federal
and
stateincome
taxes,
which
expire
at
various
times
through
2035.
Utilization
of
net
operating
loss
carryforwards
and
research
and
development
credit
carryforwards
may
be
subject
to
a
substantial
annual
limitation
due
toownership
change
limitations
that
could
occur
in
the
future
in
accordance
with
Section
382
of
the
Internal
Revenue
Code
of
1986
("IRC
Section
382")
and
withSection
383
of
the
Internal
Revenue
Code
of
1986,
as
well
as
similar
state
provisions.
These
ownership
changes
may
limit
the
amount
of
net
operating
losscarryforwards
and
research
and
development
credit
carryforwards
that
can
be
utilized
annually
to
offset
future
taxable
income
and
taxes,
respectively.
In
general,an
ownership
change,
as
defined
by
IRC
Section
382,
results
from
transactions
increasing
the
ownership
of
certain
stockholders
or
public
groups
in
the
stock
of
acorporation
by
more
than
50
percentage
points
over
a
three-year
period.
The
Company
has
completed
several
financings
since
its
inception
which
may
result
in
achange
in
control
as
defined
by
IRC
Section
382,
or
could
result
in
a
change
in
control
in
the
future.
The
following
table
summarizes
the
changes
in
the
Company's
unrecognized
income
tax
benefits
for
the
year
ended
December
31,
2015
(in
thousands):
The
Company
had
gross
unrecognized
tax
benefits
of
approximately
$17.6
million
as
of
December
31,
2015.
The
Company
did
not
have
any
unrecognized
taxbenefits
as
of
December
31,
2014
and
2013.
Of
the
approximately
$17.6
million
of
total
unrecognized
tax
benefits
at
December
31,
2015,
none
of
the
unrecognizedtax
positions
would,
if
recognized,
affect
the
Company's
effective
tax
rate,
as
this
item
only
impacts
the
Company's
deferred
tax
accounting.
The
Company
will
recognize
interest
and
penalties,
if
any,
related
to
uncertain
tax
positions
in
income
tax
expense.
As
of
December
31,
2015,
2014
and
2013,the
Company
had
no
accrued
interest
or
penalties
related
to
uncertain
tax
positions
and
no
amounts
have
been
recognized
in
the
Company's
consolidated
statementsof
operations.
The
statute
of
limitations
for
assessment
by
the
Internal
Revenue
Service
("IRS")
and
state
tax
authorities
is
open
for
tax
years
ended
December
31,
2014,2013,
and
2012,
although
carryforward
attributes
that
were
generated
prior
to
tax
year
2012
may
still
be
adjusted
upon
examination
by
the
IRS
or
state
taxauthorities
if
they
either
have
been,
or
will
be,
used
in
a
future
period.
There
are
currently
no
federal
or
state
income
tax
audits
in
progress.F-63Balance
at
January
1,
2015
$—
Increases
based
on
tax
positions
related
to
the
current
period
17,614
Increases
for
tax
positions
related
to
prior
periods
10,174
Decreases
for
tax
positions
in
prior
periods
(10,174)Decreases
for
statute
of
limitation
expiration
—
Decreases
for
settlement
of
tax
audits
—
Balance
at
December
31,
2015
$17,614
Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)15.
Defined
Contribution
Plan
The
Ironwood
Pharmaceuticals,
Inc.
401(k)
Savings
Plan
is
a
defined
contribution
plan
in
the
form
of
a
qualified
401(k)
plan
in
which
substantially
allemployees
are
eligible
to
participate
upon
employment.
Subject
to
certain
IRS
limits,
eligible
employees
may
elect
to
contribute
from
1%
to
100%
of
theircompensation.
Company
contributions
to
the
plan
are
at
the
sole
discretion
of
the
Company's
board
of
directors.
Currently,
the
Company
provides
a
matchingcontribution
of
75%
of
the
employee's
contributions,
up
to
$6,000
annually.
During
the
years
ended
December
31,
2015,
2014
and
2013,
the
Company
recordedapproximately
$2.5
million,
approximately
$2.6
million,
and
approximately
$2.8
million
of
expense
related
to
its
401(k)
company
match,
respectively.16.
Related
Party
Transactions
In
September
2009,
Allergan
became
a
related
party
when
the
Company
sold
to
Allergan
2,083,333
shares
of
the
Company's
convertible
preferred
stock.
InNovember
2009,
Almirall
became
a
related
party
when
the
Company
sold
to
Almirall
681,819
shares
of
the
Company's
convertible
preferred
stock
(Note
4).
Theseshares
of
preferred
stock
converted
to
the
Company's
Class
B
common
stock
on
a
1:1
basis
upon
the
completion
of
the
Company's
IPO
in
February
2010.
Amountsdue
to
and
due
from
Allergan
and
Almirall
are
reflected
as
related
party
accounts
payable
and
related
party
accounts
receivable,
respectively.
These
balances
arereported
net
of
any
balances
due
to
or
from
the
related
party.
At
December
31,
2015,
the
Company
did
not
have
any
related
party
accounts
receivable
associatedwith
Almirall,
and
approximately
$51.6
million
in
related
party
accounts
receivable,
net
of
related
party
accounts
payable,
associated
with
Allergan.
AtDecember
31,
2014,
the
Company
did
not
have
any
related
party
accounts
receivable
associated
with
Almirall
and
approximately
$25.8
million
in
related
partyaccounts
receivable,
net
of
related
party
accounts
payable,
associated
with
Allergan.17.
State
Grants
In
the
years
ended
December
31,
2012
and
2011,
the
Company
was
awarded
an
approximately
$1.7
million
and
approximately
$0.9
million
tax
incentive,respectively,
associated
with
the
Life
Sciences
Tax
Incentive
Program
from
the
Massachusetts
Life
Sciences
Center.
The
program
was
established
in
2008
in
orderto
incentivize
life
sciences
companies
to
create
new
sustained
jobs
in
Massachusetts.
Jobs
must
be
maintained
for
at
least
five
years,
during
which
time
the
grantproceeds
can
be
recovered
by
the
Massachusetts
Department
of
Revenue
("DOR")
if
the
Company
does
not
meet
and
maintain
its
job
creation
commitments.
Theaward
received
in
2011
was
recognized
as
other
income
in
the
consolidated
statement
of
operations
in
the
third
quarter
of
2011,
as
the
Company
believed
it
hadsatisfied
its
job
creation
commitments.
For
the
approximately
$1.7
million
in
funds
received
in
2012,
the
Company
believed
it
had
satisfied
its
job
creationcommitments
for
the
years
2012
and
2013
and
recognized
approximately
$0.7
million
as
other
income
in
the
consolidated
statement
of
operations
for
the
yearended
December
31,
2014.
The
remaining
approximately
$1.0
million
was
recorded
as
other
current
liabilities
at
December
31,
2014
and
was
returned
to
the
DORduring
the
year
ended
December
31,
2015,
as
the
Company
did
not
satisfy
the
job
creation
commitments
under
the
award.18.
Workforce
Reduction
On
January
8,
2014,
the
Company
announced
a
headcount
reduction
of
approximately
10%
to
align
its
workforce
with
its
strategy.
The
field-based
sales
forceand
medical
science
liaison
team
were
excluded
from
the
workforce
reduction.F-64 Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)18.
Workforce
Reduction
(Continued)
During
the
three
months
ended
March
31,
2014,
the
Company
substantially
completed
the
implementation
of
this
reduction
in
workforce
and,
in
accordancewith
ASC
420,
Exit
or
Disposal
Cost
Obligations,
recorded
approximately
$4.3
million
of
costs,
including
employee
severance,
benefits
and
related
costs.
Thesecosts
were
reflected
in
the
Consolidated
Statement
of
Operations
as
approximately
$3.0
million
in
research
and
development
expenses
and
approximately$1.2
million
in
selling,
general
and
administrative
expenses.
The
Company
did
not
record
any
additional
charges
associated
with
this
workforce
reduction
duringthe
years
ended
December
31,
2015
and
2014.
All
payments
related
to
this
reduction
in
workforce
were
made
by
the
end
of
2014.19.
Selected
Quarterly
Financial
Data
(Unaudited)
The
following
table
contains
quarterly
financial
information
for
the
years
ended
December
31,
2015
and
2014.
The
Company
believes
that
the
followinginformation
reflects
all
normal
recurring
adjustments
necessary
for
a
fair
presentation
of
the
information
for
the
periods
presented.
The
operating
results
for
anyquarter
are
not
necessarily
indicative
of
results
for
any
future
period.
F-65
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Year
(in
thousands,
except
per
share
data)
2015
Collaborative
arrangements
revenue
$28,932
$27,744
$39,572
$53,307
$149,555
Total
cost
and
expenses
(1)
56,999
69,753
65,757
59,134
251,643
Other
(expense)
income,
net
(2)
(5,155)
(6,011)
(21,205)
(8,210)
(40,581)Net
loss
(33,222)
(48,020)
(47,390)
(14,037)
(142,669)Net
loss
per
share—basic
and
diluted
$(0.24)$(0.34)$(0.33)$(0.09)$(1.00)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Year
(in
thousands,
except
per
share
data)
2014
Collaborative
arrangements
revenue
(3)
$14,605
$6,840
$16,918
$38,073
$76,436
Total
cost
and
expenses
(4)
58,992
61,959
53,657
71,198
245,806
Other
(expense)
income,
net
(5,239)
(5,238)
(5,249)
(4,522)
(20,248)Net
loss
(49,626)
(60,357)
(41,988)
(37,647)
(189,618)Net
loss
per
share—basic
and
diluted
$(0.38)$(0.44)$(0.30)$(0.27)$(1.39)(1)Total
costs
and
expenses
for
the
second
and
third
quarter
of
the
year
ended
December
31,
2015
includes
approximately
$8.2
million
and$9.4
million,
respectively,
related
to
a
write
down
of
inventory
to
net
realizable
value
and
accruals
for
excess
non-cancelable
inventorypurchase
commitments
(Note
7).
(2)Other
(expense)
income,
net
for
the
second
and
third
quarters
of
the
year
ended
December
31,
2015
includes
approximately
$0.2
millionand
$11.4
million,
respectively,
as
a
loss
on
derivatives.
Other
(expense)
income,
net
for
the
fourth
quarter
of
the
year
ended
December
31,2015
includes
approximately
$1.6
million,
as
a
gain
on
derivatives.
The
gain
(loss)
on
derivatives
consists
of
the
change
in
fair
value
of
theCompany's
Convertible
Note
Hedges
and
Note
Hedge
Warrants,
which
are
recorded
as
derivative
assets
and
liabilities.
The
ConvertibleNote
Hedges
and
the
Note
Hedge Table
of
ContentsIronwood
Pharmaceuticals,
Inc.Notes
to
Consolidated
Financial
Statements
(Continued)19.
Selected
Quarterly
Financial
Data
(Unaudited)
(Continued)F-66Warrants
are
recorded
at
fair
value
at
each
reporting
period
and
changes
in
fair
value
are
recorded
in
the
Company's
consolidatedstatements
of
operations
(Note
5).(3)Collaborative
arrangements
revenue
for
the
fourth
quarter
of
the
year
ended
December
31,
2014
includes
approximately
$10.2
millionrelated
to
the
receipt
of
a
milestone
payment
under
the
Company's
license
agreement
with
Astellas
for
the
enrollment
of
the
first
studysubject
in
a
Phase
III
study
for
linaclotide
in
Japan,
which
was
achieved
in
November
2014
(Note
4).
(4)Total
costs
and
expenses
for
the
second
and
fourth
quarter
of
the
year
ended
December
31,
2014
includes
approximately
$8.9
million
and$11.4
million,
respectively,
related
to
a
write
down
of
inventory
to
net
realizable
value
(Note
7). Table
of
ContentsExhibit
Index
Incorporated
by
reference
hereinNumber
Description
Form
Date
3.1
Eleventh
Amended
and
Restated
Certificate
of
Incorporation
Annual
Report
onForm
10-K
(FileNo.
001-34620)
March
30,2010
3.2
Fifth
Amended
and
Restated
Bylaws
Annual
Report
onForm
10-K
(FileNo.
001-34620)
March
30,2010
4.1
Specimen
Class
A
common
stock
certificate
RegistrationStatement
onForm
S-1,
asamended
(FileNo.
333-163275)
January
20,2010
4.2
Eighth
Amended
and
Restated
Investors'
Rights
Agreement,
dated
as
ofSeptember
1,
2009,
by
and
among
Ironwood
Pharmaceuticals,
Inc.,
theFounders
and
the
Investors
named
therein
RegistrationStatement
onForm
S-1,
asamended
(FileNo.
333-163275)
November
20,2009
4.3
Indenture,
dated
as
of
January
4,
2013,
by
and
between
IronwoodPharmaceuticals,
Inc.,
as
issuer
of
the
Notes,
and
U.S.
Bank
NationalAssociation,
as
initial
trustee
of
the
Notes
and
as
Operating
Bank(including
the
form
of
the
Linaclotide
PhaRMA
SM
11%
Notes
due
2024)
Form
8-K
(FileNo.
001-34620)
January
8,2013
4.4
Indenture,
dated
as
of
June
15,
2015,
by
and
between
IronwoodPharmaceuticals,
Inc.
and
U.S.
Bank
National
Association
(including
theform
of
the
2.25%
Convertible
Senior
Note
due
2022)
Form
8-K
(FileNo.
001-34620)
June
15,
2015
10.1#Amended
and
Restated
2002
Stock
Incentive
Plan
and
form
agreementsthereunder
RegistrationStatement
onForm
S-1,
asamended
(FileNo.
333-163275)
December
23,2009
10.2#Amended
and
Restated
2005
Stock
Incentive
Plan
and
form
agreementsthereunder
RegistrationStatement
onForm
S-1,
asamended
(FileNo.
333-163275)
January
29,2010
10.3#Amended
and
Restated
2010
Employee,
Director
and
Consultant
EquityIncentive
Plan
RegistrationStatement
onForm
S-8,
asamended
(FileNo.
333-184396)
October
12,2012
10.3.1#Form
of
Stock
Option
Agreement
under
the
Amended
and
Restated
2010Employee,
Director
and
Consultant
Equity
Incentive
Plan
Annual
Report
onForm
10-K
(FileNo.
001-34620)
February
18,2015
10.3.2#Form
of
Non-employee
Director
Restricted
Stock
Agreement
under
theAmended
and
Restated
2010
Employee,
Director
and
Consultant
EquityIncentive
Plan
Annual
Report
onForm
10-K
(FileNo.
001-34620)
February
18,2015
10.3.3#Form
of
Restricted
Stock
Unit
Agreement
under
the
Amended
andRestated
2010
Employee,
Director
and
Consultant
Equity
Incentive
Plan
Annual
Report
onForm
10-K
(FileNo.
001-34620)
February
18,2015
Table
of
Contents
Incorporated
by
reference
hereinNumber
Description
Form
Date
10.4#Amended
and
Restated
2010
Employee
Stock
Purchase
Plan
Annual
Report
onForm
10-K
(FileNo.
001-34620)
February
21,
2013
10.5#Change
of
Control
Severance
Benefit
Plan,
as
amended
andrestated
Quarterly
Report
onForm
10-Q
(FileNo.
001-34620)
April
29,
2014
10.6#Form
of
Executive
Severance
Agreement
Annual
Report
onForm
10-K
(FileNo.
001-34620)
February
18,
2015
10.7#Director
Compensation
Plan
effective
January
1,
2014
Annual
Report
onForm
10-K
(FileNo.
001-34620)
February
7,
2014
10.8#Form
of
Indemnification
Agreement
with
Directors
and
Officers
Registration
Statementon
Form
S-1,
asamended
(File
No.
333-163275)
December
23,
2009
10.9#Consulting
Agreement,
dated
as
of
December
16,
2014,
by
andbetween
Christopher
Walsh
and
Ironwood
Pharmaceuticals,
Inc.
Annual
Report
onForm
10-K
(FileNo.
001-34620)
February
18,
2015
10.10#Consulting
Agreement,
dated
December
3,
2014,
by
and
betweenLawrence
S.
Olanoff
and
Ironwood
Pharmaceuticals,
Inc.
Quarterly
Report
onForm
10-Q
(FileNo.
001-34620)
May
6,
2015
10.11+Collaboration
Agreement,
dated
as
of
September
12,
2007,
asamended
on
November
3,
2009,
by
and
between
ForestLaboratories,
Inc.
and
Ironwood
Pharmaceuticals,
Inc.
Registration
Statementon
Form
S-1,
asamended
(File
No.
333-163275)
February
2,
2010
10.11.1
Amendment
No.
2
to
the
Collaboration
Agreement,
dated
as
ofJanuary
8,
2013,
by
and
between
Forest
Laboratories,
Inc.
andIronwood
Pharmaceuticals,
Inc.
Annual
Report
onForm
10-K
(FileNo.
001-34620)
February
21,
2013
10.12+License
Agreement,
dated
as
of
April
30,
2009,
by
and
betweenAllergan
Pharmaceuticals
International
Ltd.
(formerly
withAlmirall,
S.A.)
and
Ironwood
Pharmaceuticals,
Inc.
Registration
Statementon
Form
S-1,
asamended
(File
No.
333-163275)
February
2,
2010
10.12.1+Amendment
No.
1
to
License
Agreement,
dated
as
of
June
11,2013,
by
and
between
Allergan
Pharmaceuticals
International
Ltd.(formerly
with
Almirall,
S.A.)
and
Ironwood
Pharmaceuticals,
Inc.
Quarterly
Report
onForm
10-Q
(FileNo.
001-34620)
August
8,
2013
10.12.2++*Amendment
to
the
License
Agreement,
dated
as
of
October
26,2015,
by
and
between
Allergan
Pharmaceuticals
International
Ltd.and
Ironwood
Pharmaceuticals,
Inc.
10.13++*Novation
Agreement,
dated
as
of
October
26,
2015,
by
and
amongAlmirall,
S.A.,
Allergan
Pharmaceuticals
International
Ltd.
andIronwood
Pharmaceuticals,
Inc.
Table
of
Contents
Incorporated
by
reference
hereinNumber
Description
Form
Date
10.14+License
Agreement,
dated
as
of
November
10,
2009,
by
and
amongAstellas
Pharma
Inc.
and
Ironwood
Pharmaceuticals,
Inc.
RegistrationStatement
onForm
S-1,
asamended
(FileNo.
333-163275)
February
2,
2010
10.15+Collaboration
Agreement,
dated
as
of
October
23,
2012,
by
andbetween
AstraZeneca
AB
and
Ironwood
Pharmaceuticals,
Inc.
Annual
Report
onForm
10-K
(FileNo.
001-34620)
February
21,
2013
10.16+Commercial
Supply
Agreement,
dated
as
of
June
23,
2010,
by
andamong
PolyPeptide
Laboratories,
Inc.
and
Polypeptide
Laboratories(SWEDEN)
AB,
Forest
Laboratories,
Inc.
and
IronwoodPharmaceuticals,
Inc.
Quarterly
Report
onForm
10-Q
(FileNo.
001-34620)
August
10,
2010
10.17+Commercial
Supply
Agreement,
dated
as
of
March
28,
2011,
by
andamong
Corden
Pharma
Colorado,
Inc.
(f/k/a
Roche
ColoradoCorporation),
Ironwood
Pharmaceuticals,
Inc.
and
ForestLaboratories,
Inc.
Quarterly
Report
onForm
10-Q
(FileNo.
001-34620)
May
13,
2011
10.17.1+Amendment
No.
3
to
Commercial
Supply
Agreement,
dated
as
ofNovember
26,
2013,
by
and
between
Corden
Pharma
Colorado,
Inc.(f/k/a
Roche
Colorado
Corporation),
Ironwood
Pharmaceuticals,
Inc.and
Forest
Laboratories,
Inc.
Annual
Report
onForm
10-K
(FileNo.
001-34620)
February
7,
2014
10.18
Lease
for
facilities
at
301
Binney
St.,
Cambridge,
MA,
dated
as
ofJanuary
12,
2007,
as
amended
on
April
9,
2009,
by
and
betweenIronwood
Pharmaceuticals,
Inc.
and
BMR-Rogers
Street
LLC
RegistrationStatement
onForm
S-1,
asamended
(FileNo.
333-163275)
December
23,
2009
10.18.1
Second
Amendment
to
Lease
for
facilities
at
301
Binney
St.,Cambridge,
MA,
dated
as
of
February
9,
2010,
by
and
betweenIronwood
Pharmaceuticals,
Inc.
and
BMR-Rogers
Street
LLC
Annual
Report
onForm
10-K
(FileNo.
001-34620)
March
30,
2010
10.18.2
Third
Amendment
to
Lease
for
facilities
at
301
Binney
St.,Cambridge,
MA,
dated
as
of
July
1,
2010,
by
and
between
IronwoodPharmaceuticals,
Inc.
and
BMR-Rogers
Street
LLC
Annual
Report
onForm
10-K
(FileNo.
001-34620)
March
30,
2011
10.18.3
Fourth
Amendment
to
Lease
for
facilities
at
301
Binney
St.,Cambridge,
MA,
dated
as
of
February
3,
2011,
by
and
betweenIronwood
Pharmaceuticals,
Inc.
and
BMR-Rogers
Street
LLC
Annual
Report
onForm
10-K
(FileNo.
001-34620)
March
30,
2011
10.18.4
Fifth
Amendment
to
Lease
for
facilities
at
301
Binney
St.,Cambridge,
MA,
dated
as
of
October
18,
2011,
by
and
betweenIronwood
Pharmaceuticals,
Inc.
and
BMR-Rogers
Street
LLC
Annual
Report
onForm
10-K
(FileNo.
001-34620)
February
29,
2012
Table
of
Contents
Incorporated
by
reference
hereinNumber
Description
Form
Date
10.18.5
Sixth
Amendment
to
Lease
for
facilities
at
301
Binney
St.,
Cambridge,MA,
dated
as
of
July
19,
2012,
by
and
between
IronwoodPharmaceuticals,
Inc.
and
BMR-Rogers
Street
LLC
Annual
Reporton
Form
10-K(File
No.
001-34620)
February
21,
2013
10.18.6
Seventh
Amendment
to
Lease
for
facilities
at
301
Binney
St.,
Cambridge,MA,
dated
as
of
October
30,
2012,
by
and
between
IronwoodPharmaceuticals,
Inc.
and
BMR-Rogers
Street
LLC
Annual
Reporton
Form
10-K(File
No.
001-34620)
February
21,
2013
10.18.7
Eighth
Amendment
to
Lease
for
facilities
at
301
Binney
St.,
Cambridge,MA,
dated
as
of
July
8,
2014,
by
and
between
IronwoodPharmaceuticals,
Inc.
and
BMR-Rogers
Street
LLC
Annual
Reporton
Form
10-K(File
No.
001-34620)
February
18,
2015
10.18.8
Ninth
Amendment
to
Lease
for
facilities
at
301
Binney
St.,
Cambridge,MA,
dated
as
of
October
27,
2014,
by
and
between
IronwoodPharmaceuticals,
Inc.
and
BMR-Rogers
Street
LLC
Annual
Reporton
Form
10-K(File
No.
001-34620)
February
18,
2015
10.18.9
Tenth
Amendment
to
Lease
for
facilities
at
301
Binney
St.,
Cambridge,MA,
dated
as
of
January
21,
2015,
by
and
between
IronwoodPharmaceuticals,
Inc.
and
BMR-Rogers
Street
LLC
Annual
Reporton
Form
10-K(File
No.
001-34620)
February
18,
2015
10.18.10
Sublease,
dated
as
of
July
1,
2014,
by
and
between
Biogen
Idec
MA
Inc.and
Ironwood
Pharmaceuticals,
Inc.
to
Lease
for
facilities
at
301
BinneySt.,
Cambridge,
MA,
as
amended,
by
and
between
IronwoodPharmaceuticals,
Inc.
and
BMR-Rogers
Street
LLC
Annual
Reporton
Form
10-K(File
No.
001-34620)
February
18,
2015
10.19
Base
Call
Option
Transaction
Confirmation,
dated
as
of
June
10,
2015,between
Ironwood
Pharmaceuticals,
Inc.
and
JPMorgan
Chase
Bank,National
Association,
London
Branch
QuarterlyReport
onForm
10-Q(File
No.
001-34620)
August
7,
2015
10.20
Base
Call
Option
Transaction
Confirmation,
dated
as
of
June
10,
2015,between
Ironwood
Pharmaceuticals,
Inc.
and
Credit
Suisse
Capital
LLC,through
its
agent
Credit
Suisse
Securities
(USA)
LLC
QuarterlyReport
onForm
10-Q(File
No.
001-34620)
August
7,
2015
10.21
Base
Warrants
Confirmation,
dated
as
of
June
10,
2015,
between
IronwoodPharmaceuticals,
Inc.
and
JPMorgan
Chase
Bank,
National
Association,London
Branch
QuarterlyReport
onForm
10-Q(File
No.
001-34620)
August
7,
2015
10.22
Base
Warrants
Confirmation,
dated
as
of
June
10,
2015,
between
IronwoodPharmaceuticals,
Inc.
and
Credit
Suisse
Capital
LLC,
through
its
agentCredit
Suisse
Securities
(USA)
LLC
QuarterlyReport
onForm
10-Q(File
No.
001-34620)
August
7,
2015
10.23
Additional
Call
Option
Transaction
Confirmation,
dated
as
of
June
22,2015,
between
Ironwood
Pharmaceuticals,
Inc.
and
JPMorgan
Chase
Bank,National
Association,
London
Branch
QuarterlyReport
onForm
10-Q(File
No.
001-34620)
August
7,
2015 Table
of
Contents
Incorporated
by
reference
hereinNumber
Description
Form
Date
10.24
Additional
Call
Option
Transaction
Confirmation,
dated
as
of
June
22,2015,
between
Ironwood
Pharmaceuticals,
Inc.
and
Credit
SuisseCapital
LLC,
through
its
agent
Credit
Suisse
Securities
(USA)
LLC
Quarterly
Reporton
Form
10-Q(File
No.
001-34620)
August
7,
2015
10.25
Additional
Warrants
Confirmation,
dated
as
of
June
22,
2015,
betweenIronwood
Pharmaceuticals,
Inc.
and
JPMorgan
Chase
Bank,
NationalAssociation,
London
Branch
Quarterly
Reporton
Form
10-Q(File
No.
001-34620)
August
7,
2015
10.26
Additional
Warrants
Confirmation,
dated
as
of
June
22,
2015,
betweenIronwood
Pharmaceuticals,
Inc.
and
Credit
Suisse
Capital
LLC,
throughits
agent
Credit
Suisse
Securities
(USA)
LLC
Quarterly
Reporton
Form
10-Q(File
No.
001-34620)
August
7,
2015
21.1*Subsidiaries
of
Ironwood
Pharmaceuticals,
Inc.
23.1*Consent
of
Independent
Registered
Public
Accounting
Firm
31.1*Certification
of
Chief
Executive
Officer
pursuant
to
Rules
13a-14
or15d-14
of
the
Exchange
Act
31.2*Certification
of
Chief
Financial
Officer
pursuant
to
Rules
13a-14
or15d-14
of
the
Exchange
Act
32.1‡Certification
of
Chief
Executive
Officer
pursuant
to
Rules
13a-14(b)
or15d-14(b)
of
the
Exchange
Act
and
18
U.S.C.
Section
1350
32.2‡Certification
of
Chief
Financial
Officer
pursuant
to
Rules
13a-14(b)
or15d-14(b)
of
the
Exchange
Act
and
18
U.S.C.
Section
1350
101.INS*XBRL
Instance
Document
101.SCH*XBRL
Taxonomy
Extension
Schema
Document
101.CAL*XBRL
Taxonomy
Extension
Calculation
Linkbase
Document
101.LAB*XBRL
Taxonomy
Extension
Label
Linkbase
Database
101.PRE*XBRL
Taxonomy
Extension
Presentation
Linkbase
Document
101.DEF*XBRL
Taxonomy
Extension
Definition
Linkbase
Document
*Filed
herewith.
‡Furnished
herewith.
+Confidential
treatment
granted
under
17
C.F.R.
§§200.80(b)(4)
and
230.406.
The
confidential
portions
of
this
exhibit
have
been
omittedand
are
marked
accordingly.
The
confidential
portions
have
been
provided
separately
to
the
SEC
pursuant
to
the
confidential
treatmentrequest.
++Confidential
treatment
requested
under
17
C.F.R.
§§200.80(b)(4)
and
Rule
24b-2.
The
confidential
portions
of
this
exhibit
have
beenomitted
and
are
marked
accordingly.
The
confidential
portions
have
been
provided
separately
to
the
SEC
pursuant
to
the
confidentialtreatment
request.
#Management
contract
or
compensatory
plan,
contract,
or
arrangement. Exhibit 10.12.2
CONFIDENTIALExecution
Version
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
AMENDMENT TO THE LICENSE AGREEMENT
This
Amendment
to
the
License
Agreement
(the
“
Amendment
”)
is
made
as
of
October
26,
2015
(the
“
Amendment
Effective
Date
”).
By
and
between,
IRONWOOD PHARMACEUTICALS, INC. ,
a
company
organized
and
existing
pursuant
to
the
Laws
of
Delaware,
and
having
its
principal
offices
at
301Binney
Street,
Cambridge,
MA
02142,
USA
(hereinafter,
referred
to
as
“
Ironwood
”)
and
ALLERGAN PHARMACEUTICALS INTERNATIONAL LTD. ,
a
company
registered
in
Ireland,
whose
registered
office
is
at
Clonshaugh
Business
&Technology
Park,
Coolock,
Dublin,
D17
E400,
Ireland
(the
“
Partner
”).
WITNESSETH
WHEREAS,
Partner
(as
transferee
from
Almirall,
S.A.,
formerly,
Laboratorios
Almirall,
S.A.
(“
Almirall
”))
and
Ironwood
are
parties
to
a
License
Agreement,dated
April
30,
2009,
as
amended
(hereinafter,
referred
to
as
the
“
Agreement
”),
related
to
the
Product
(as
defined
in
the
Agreement).
WHEREAS,
Almirall,
Ironwood
and
Partner
entered
into
that
certain
Novation
Agreement
as
of
the
date
hereof
(the
“
Novation
Agreement
”),
whereby
Partnerassumed
certain
of
Almirall’s
liabilities
and
obligations
and
was
assigned
certain
of
Almirall’s
rights
and
benefits
under
the
Agreement
in
place
of
and
to
theexclusion
of
Almirall,
in
each
case,
as
of
the
Effective
Time
(as
defined
in
the
Novation
Agreement)
and
on
the
terms
as
set
forth
in
the
Novation
Agreement.
WHEREAS,
the
Parties
have
agreed
to
further
amend
the
Agreement
as
set
forth
in
this
Amendment.
NOW,
THEREFORE,
the
Parties
hereby
agree
as
follows:
This
Amendment
shall
be
deemed
to
take
effect
immediately
following
the
Effective
Time
(as
defined
in
the
Novation
Agreement)
of
the
Novation
Agreement.
Unless
otherwise
stated
herein,
all
the
definitions
contained
in
the
Agreement
shall
remain
valid
and
applicable
to
this
Amendment.
Article 1 — Definitions
1.1.
Sections
1.26
(Direct
Costs),
1.37
(Fully
Absorbed
Cost),
1.47
(Indirect
Costs)
and
1.115
(Transfer
Price)
of
the
Agreement
are
hereby
deleted
in
theirentirety
and
1
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
replaced
with
“Reserved.”
1.2.
Section
1.54
(Ironwood
Know-How)
of
the
Agreement
is
hereby
deleted
in
its
entirety
and
replaced
with
the
following:
““
Ironwood
Know-How
”
means
(i)
Know-How
Ironwood
Controls
as
of
the
Effective
Date,
including
Know-How
that
has
arisen
or
arisesunder
the
Forest
Agreement,
or
that
comes
into
the
Control
of
Ironwood
during
the
Term
(other
than
Joint
Know-How)
to
the
extent
necessary
oruseful
in
the
Territory
to
Develop,
Manufacture
or
Commercialize
the
Licensed
Compound
or
Product,
including
without
limitation
any
methodof
making
the
Licensed
Compound
or
Product,
any
composition
or
formulation
of
the
Licensed
Compound
or
Product,
or
any
method
of
using
oradministering
the
Licensed
Compound
or
Product,
and
(ii)
Collaboration
Know-How
(other
than
Joint
Know-How)
that
is
invented,
conceived
ordeveloped
by
solely
employees
of
Ironwood
or
its
Affiliates,
or
Third
Parties
acting
on
behalf
of
Ironwood
or
its
Affiliates.”
1.3.
The
penultimate
sentence
of
Section
1.69
(Net
Sales)
of
the
Agreement
is
hereby
deleted
in
its
entirety
and
replaced
with
the
following:
“Net
Sales
will
be
determined
in
accordance
with
GAAP.”
Article 2 — Manufacturing and Supply
2.1.
Section
2.1
of
the
Agreement
is
hereby
deleted
in
its
entirety
and
replaced
with
the
following:
“
License
to
Partner
.
Subject
to
the
terms
and
conditions
of
this
Agreement,
Ironwood
hereby
grants
to
Partner,
on
the
Effective
Date,
anexclusive
license,
subject
only
to
the
rights
reserved
to
Ironwood
to
the
extent
necessary
to
perform
its
obligations
or
exercise
its
rightshereunder,
with
the
right
to
sublicense
as
expressly
provided
in
Section
2.5,
under
the
Ironwood
Technology
and
Ironwood’s
interest
in
the
JointTechnology
to
(i)
Develop
the
Product
pursuant
to
the
Development
Plan,
(ii)
Commercialize
the
Product
in
the
Field
in
the
Territory
and(iii)
Manufacture
(A)
Development
Materials,
(B)
Licensed
Compound
to
be
included
in
a
Product
for
Commercialization
in
the
Field
in
theTerritory
and
(C)
Product
for
Commercialization
in
the
Field
in
the
Territory.
Notwithstanding
the
foregoing,
Ironwood
reserves
the
right
underthe
Ironwood
Technology
to
develop
and
manufacture
the
Licensed
Compound
and
Product
inside
or
outside
of
the
Territory.”
2.2.
The
first
sentence
of
Section
2.4
of
the
Agreement
is
hereby
deleted
in
its
entirety
and
replaced
with
the
following:
“
Right
of
Reference
.
Ironwood
hereby
grants
to
Partner
a
“
Right
of
Reference,
”
as
that
term
is
defined
in
21
C.F.R.
§
314.3(b)
and
any
foreigncounterpart
to
such
regulation
in
the
Field
in
the
Territory
to
the
data
included
in
the
Collaboration
Technology
to
the
extent
necessary
or
usefulto
2
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
Manufacture,
Develop
or
Commercialize
the
Licensed
Compound
or
Product
solely
for
IBS-C
or
CC,
and
Partner
hereby
grants
to
Ironwood(and
Ironwood’s
partners)
such
a
Right
of
Reference
to
the
data
included
in
the
Collaboration
Technology
to
the
extent
necessary
or
useful
toManufacture,
Develop
or
Commercialize
the
Licensed
Compound
or
Product
in
the
Field
throughout
the
world
solely
for
IBS-C
or
CC,
in
eachcase
subject
to
the
terms
and
conditions
of
this
Agreement.”
2.3.
Section
3.3
of
the
Agreement
is
hereby
deleted
in
its
entirety
and
replaced
with
the
following:
“
Manufacture
of
Products
.
Partner
will
be
responsible,
at
its
sole
cost
and
expense,
for
(i)
Manufacture
of
Development
Materials
in
finishedform,
(ii)
API
Manufacturing
and
(iii)
the
Manufacture
of
Product
for
Commercialization
in
the
Territory;
provided,
however,
that
nothing
in
thisAgreement
will
prevent
Partner
from
contracting
with
the
Third
Parties
listed
or
described
on
Schedule
3.3
to
perform
any
such
Manufacturingactivities.
Partner
will
perform,
and
ensure
that
the
Third
Parties
listed
or
described
on
Schedule
3.3
perform,
all
Manufacturing
activities
inaccordance
with
GCP,
GLP
and
GMP.”
2.4.
The
attached
Schedule
3.3
is
hereby
appended
to
the
Agreement
as
a
new
Schedule
3.3.
Article 3 — Royalties and Other Payments
3.1.
Section
4.2
of
the
Agreement
is
hereby
amended
by
adding
the
following
immediately
following
Section
4.2.6
(and
before
the
last
four
paragraphs
of
suchSection):
“4.2.7
$[**]
upon
the
first
time
that
Net
Sales
achieved
in
the
Territory,
in
aggregate,
exceed
the
amount
of
€[**]
in
any
Year.”
3.2.
Section
4.3.1
of
the
Agreement
is
hereby
deleted
in
its
entirety
and
replaced
with
“Reserved.”
3.3.
Section
4.3.2
of
the
Agreement
is
hereby
deleted
in
its
entirety
and
replaced
with
the
following:
“
Royalty
.
Partner
will
pay
Ironwood
royalties
based
on
the
aggregate
annual
Net
Sales
of
Products
sold
in
each
Year
indicated
by
Partner
or
itsAffiliates
in
the
Field
in
the
Territory
at
the
rates
set
forth
in
the
table
below
for
such
Year:
Year Royalty Rate 2015-2017
[**]%
2018
[**]%
2019
and
thereafter
[**]%”
3
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
3.4.
For
clarity,
the
Year
2015
royalty
rate
set
forth
in
Section
3.3
hereof
shall
only
apply
to
aggregate
Net
Sales
of
Products
sold
by
Partner
or
its
Affiliates
inthe
Field
in
the
Territory
on
or
after
the
Amendment
Effective
Date
and
shall
not
apply
to
any
royalty
payment
obligations
accrued
under
the
Agreementprior
to
the
Amendment
Effective
Date.
Any
such
royalty
payment
obligations
accrued
under
the
Agreement
prior
to
the
Amendment
Effective
Date
shallbe
subject
to
the
royalty
rates
under
Section
4.3.2
of
the
Agreement
in
effect
immediately
prior
to
the
Amendment
Effective
Date.
3.5.
Section
4.3.4(a)
and
Section
4.3.4(b)
of
the
Agreement
are
hereby
deleted
in
their
entirety
and
replaced
with
“Reserved.”
3.6.
The
last
sentence
of
Section
4.3.4
of
the
Agreement
is
hereby
deleted
in
its
entirety
and
replaced
with
the
following:
“In
no
event
will
Ironwood
be
obligated
to
[**]
paid
pursuant
to
this
Agreement.”
3.7.
Section
4.3.5
of
the
Agreement
is
hereby
deleted
in
its
entirety
and
replaced
with
the
following:
“4.3.5
Calculation
of
Royalties
at
End
of
Year
.
At
the
end
of
each
Year,
promptly
after
the
royalty
calculation
of
the
royalty
owed
pursuant
toSection
4.3.2
for
the
fourth
Calendar
Quarter
of
the
preceding
Year,
the
royalties
owed
to
Ironwood
for
such
Year
(the
“
Annual
Royalties
”)
willbe
equal
to
(i)
[**]
(ii)
[**].
The
amount
of
royalties
paid
with
the
Quarterly
Report
provided
pursuant
to
Section
4.4
relating
to
the
fourthCalendar
Quarter
of
each
Year
will
be
equal
to
the
Annual
Royalties
for
such
Year
less
the
royalties
paid
for
the
first
three
Calendar
Quarters
ofsuch
Year.
In
no
event
will
Ironwood
be
obligated
to
[**]
paid
pursuant
to
this
Agreement.”
3.8.
The
first
sentence
of
Section
4.8
of
the
Agreement
is
hereby
deleted
in
its
entirety
and
replaced
with
the
following:
“All
amounts
payable
and
calculations
hereunder
will
be
in
United
States
dollars.”
Article 4 — Patent and Trademark Costs
4.1.
Section
7.4.1
of
the
Agreement
is
hereby
amended
by
appending
the
following
to
the
end
of
such
section:
“Irrespective
of
which
Party
is
responsible
for
preparation,
filing,
prosecuting
and
maintaining
Ironwood
Patent
Rights
and
Partner
Patent
Rightspursuant
to
this
Section
7.4.1,
[**]
the
costs
for
preparation,
filing,
prosecuting
and
maintaining
Ironwood
Patent
Rights
and
Partner
PatentRights
in
the
Territory.”
4
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
4.2.
Section
7.4.4
of
the
Agreement
is
hereby
amended
by
appending
the
following
to
the
end
of
such
section:
“Irrespective
of
which
Party
is
responsible
for
obtaining
any
Patent
Term
Extensions
or
undertaking
any
related
filings
or
other
activitiespursuant
to
this
Section
7.4.4,
[**]
the
costs
of
such
filings
and
other
activities
in
the
Territory.”
4.3.
Section
7.5.1
of
the
Agreement
is
hereby
amended
by
appending
the
following
to
the
end
of
such
section:
“Irrespective
of
which
Party
is
responsible
for
filing,
prosecuting
and
maintaining
Trademarks
pursuant
to
this
Section
7.5.1,
[**]
the
costs
forfiling,
prosecuting
and
maintaining
such
Trademarks
in
the
Territory.”
4.4.
Section
7.6.2
of
the
Agreement
is
hereby
deleted
in
its
entirety
and
replaced
with
the
following:
“Enforcement.
[**]
will
have
the
first
right
(but
not
the
obligation),
to
enforce
[**]
under
this
Agreement
against
such
Infringement;
provided,that
(i)
[**]
will
have
the
right
to
join
such
proceeding
at
any
time
at
its
own
expense
(subject
to
the
provisions
of
Section
7.6.3)
and
will
do
so
atany
time
if
it
is
deemed
to
be
a
necessary
party
by
the
tribunal
in
which
the
Infringement
is
being
prosecuted,
(ii)
[**]
will
not,
without
[**]’sprior
written
consent,
take
any
position
with
respect
to,
or
compromise
or
settle,
any
such
Infringement
in
a
way
that
is
reasonably
likely
toadversely
affect
the
scope,
validity
or
enforceability
of
the
applicable
Technology
and
(iii)
[**]
will
admit
the
invalidity
or
unenforceability
ofany
Collaboration
Technology
which
Collaboration
Technology
is
necessary
or
useful
in
the
Territory
to
Manufacture,
Develop
orCommercialize
the
Licensed
Compound
or
Product
or
other
Technology
owned
solely
by
or
jointly
with
[**]
without
[**]’s
prior
writtenconsent.
In
the
event
[**]
declines
to
prosecute
the
infringing
technology
or
to
defend
such
claim
within
[**]
(or
such
shorter
period
as
may
berequired
to
comply
with
legal
or
regulatory
deadlines
which
relate
to
such
infringement)
of
becoming
aware
thereof,
[**]
will
have
the
right
to
soenforce
or
defend.
Irrespective
of
which
Party
controls
an
action
pursuant
to
this
Section,
the
Parties
will
collaborate
in
the
choice
of
counselwith
respect
to
such
action
and
the
comments
of
the
other
Party
will
not
be
unreasonably
rejected
with
respect
to
strategic
decisions
and
theirimplementation
with
respect
to
such
action.
In
furtherance
of
the
foregoing,
the
Party
responsible
for
any
such
action
will
keep
the
other
Partyreasonably
informed,
in
person
or
by
telephone,
regarding
the
status
and
costs
of
such
action
or
proceeding
prior
to
and
during
any
suchenforcement.
Neither
Party
will
settle
any
such
action
without
the
written
consent
of
the
other
Party,
such
consent
not
to
be
unreasonablywithheld.
Neither
Party
will
incur
any
liability
to
the
other
as
a
consequence
of
such
litigation
or
any
unfavorable
decision
resulting
therefrom,including
any
decision
holding
any
of
the
Ironwood
Technology,
5
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
Partner
Technology,
or
Joint
Technology
invalid,
not
infringed,
not
misappropriated
or
unenforceable.”
Article 5 — Non-Compete
Section
5.2
of
the
Agreement
is
hereby
deleted
in
its
entirety
and
replaced
with
the
following:
“5.2
Restrictions.
5.2.1
During
[**],
without
the
prior
written
consent
of
the
other
Party,
neither
Party
nor
such
Party’s
Affiliates
will
[**].
Further,
during
[**],
neither[**]
will
[**].
5.2.2
During
[**],
without
the
prior
written
consent
of
[**],
neither
[**]
will
[**].
5.2.3
In
the
event
that
either
Party
or
any
of
its
Affiliates
[**].
5.2.4
After
[**],
and
subject
to
Sections
5.2.2
and
5.2.3,
if
either
Party
[**].
5.2.5
For
purposes
hereof,
(x)
[**],
and
(y)
[**].
Article 6 — Addresses
In
recognition
of
the
novation
of
the
Agreement
by
Almirall
to
Partner
pursuant
to
the
Novation
Agreement,
the
address
and
contact
information
for
service
ordelivery
of
notices
and
other
communications
to
Partner
under
the
Agreement,
set
forth
in
Section
10.5.2
of
the
Agreement,
shall
be
replaced
by
the
following:
“For
Partner:
Address:Allergan
Pharmaceuticals
International
Ltd.
Clonshaugh
Business
&
Technology
Park
Coolock
Dublin,
D17
E400
IrelandFax:(+1)
862-261-7922Attention:Managing
Director
With
a
copy
to:
Address:Allergan
plcMorris
Corporate
Center
III400
Interpace
ParkwayParsippany,
NJ
07054United
States
6
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
Fax:(+1)
862-261-7922Attention:Chief
Legal
Officer”
Article 7 — [**]
[**].
Article 8 — Extent of the Present Amendment
This
Amendment
constitutes
an
integral
part
of
the
Agreement.
It
is
expressly
understood
that
the
terms
and
conditions
of
the
Agreement
shall
remain
fullyenforceable
except
where
directly
and
expressly
modified
by
this
Amendment.
[Remainder
of
Page
Intentionally
Left
Blank]
7
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
IN
WITNESS
WHEREOF,
the
Parties
have
executed
this
Amendment
to
be
effective
as
of
the
Amendment
Effective
Date.
IRONWOOD
PHARMACEUTICALS,
INC.ALLERGAN
PHARMACEUTICALS
INTERNATIONAL
LTD.
By:/s/
Thomas
Graney
By:/s/
Alex
NesbittName:Thomas
GraneyName:Alex
NesbittTitle:CFOTitle:Director
[Signature
Page
to
the
Amendment
to
License
Agreement]
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
SCHEDULE 3.3
APPROVED
THIRD
PARTY
MANUFACTURERS
(i)
[**];
and(ii)
[**].
Exhibit 10.13 CONFIDENTIAL
Execution
Version
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
DATE: OCTOBER 26, 2015 NOVATION AGREEMENT
Among
ALMIRALL, S.A. ALLERGAN PHARMACEUTICALS INTERNATIONAL LTD. IRONWOOD PHARMACEUTICALS, INC.
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
THIS NOVATION AGREEMENT (the
“Agreement” )
is
made
on
the
26th
day
of
October
2015
BETWEEN :
(1)
ALMIRALL,
S.A.,
a
Spanish
company,
whose
registered
office
is
at
Ronda
General
Mitre,
151,
08022
Barcelona,
Spain
(the
“Transferor” );
(2)
IRONWOOD
PHARMACEUTICALS,
INC.,
a
Delaware
company,
whose
registered
office
is
at
301
Binney
Street,
Cambridge,
MA
02142
USA
(the“Licensor” );
and
(3)
ALLERGAN
PHARMACEUTICALS
INTERNATIONAL
LTD.,
a
company
registered
in
Ireland,
whose
registered
office
is
at
Clonshaugh
Business
&Technology
Park,
Coolock,
Dublin,
D17
E400,
Ireland
(the
“Transferee” )
(together
the
“Parties” and
each
a
“Party” ).
RECITALS
(A)
The
Transferor
and
the
Licensor
are
parties
to
the
Transferred
Contracts
(defined
below).
(B)
The
Transferor
and
the
Transferee
are
parties
to
the
Main
Agreement
(defined
below).
(C)
Each
of
the
Parties
is
willing
to
agree
that
the
Transferee
will
assume
certain
of
the
Transferor’s
liabilities
and
obligations,
and
enjoy
certain
of
theTransferor’s
rights
and
benefits,
under
the
Transferred
Contracts
in
place
of
and
to
the
exclusion
of
the
Transferor,
in
each
case,
as
of
the
Effective
Timeand
on
the
other
terms
set
forth
in
and
subject
to
this
Agreement.
IT IS AGREED as
follows:
1.
INTERPRETATION
1.1
Capitalized
terms
used
but
not
defined
in
this
Agreement
shall
have
the
meaning
given
to
them
in
the
License
Agreement.
In
this
Agreement,
includingthe
recitals,
the
following
words
and
expressions
shall
have
the
following
meanings:
“
Effective Time ”
means
the
date
of
this
Agreement
first
above
written.
“
Liabilities and Obligations ”
means
all
liabilities
and
obligations
(and
all
claims
arising
from
them)
whatsoever,
whenever
and
howsoever
arising
inconnection
with
the
performance
or
non-performance
of
a
Transferred
Contract
or
Retained
Contract,
as
applicable,
including
all
indemnificationobligations
pursuant
to
a
Transferred
Contract
or
Retained
Contract,
as
applicable
(in
each
case
whether
known
or
unknown,
performed
or
unperformed,discharged
or
undischarged,
actual,
accrued,
future,
contingent,
or
prospective,
and
whether
arising
in
contract,
tort
or
otherwise).
“
License Agreement ”
means
the
License
Agreement
dated
April
30,
2009
between
the
Transferor
and
the
Licensor
regarding
the
Product
and
LicensedCompound,
as
amended
or
supplemented
by
(a)
[**],
(b)
[**],
(c)
[**],
(d)
[**],
(e)
an
Amendment
dated
June
11,
2013
between
the
Transferor
and
theLicensor,
(f)
[**],
(g)
[**]
and
(h)
an
Amendment
dated
February
26,
2014
between
the
Transferor
and
the
Licensor.
1
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
“
Main Agreement ”
means
that
certain
Agreement
relating
to
Linaclotide
between
the
Transferor
and
the
Transferee
dated
as
of
October
26,
2015pursuant
to
which
Transferor
and
Transferee
have
agreed
to
transfer
substantially
all
rights
relating
to
Linaclotide
from
Transferor
to
Transferee,including
the
Transferred
Contracts
as
set
forth
in
this
Agreement.
“
Manufacturing and Supply Agreement ”
means
the
Manufacturing
and
Supply
Agreement
dated
April
13,
2010
between
the
Transferor
and
theLicensor,
as
amended
by
an
Amendment
dated
July
1,
2013
between
the
Transferor
and
the
Licensor.
“
Pharmacovigilance Agreement ”
means
the
Pharmacovigilance
Agreement
dated
September
30,
2010
between
the
Transferor
and
the
Licensor,
asamended
and
restated
by
the
Amended
and
Restated
Pharmacovigilance
Agreement
dated
June
11,
2014
between
the
Transferor
and
the
Licensor.
“
Quality Agreements ”
means
(a)
the
Quality
Agreement
dated
August
7,
2009
between
the
Transferor
and
the
Licensor,
and
(b)
the
QualityAgreement
dated
May
7,
2014
between
the
Transferor
and
the
Licensor.
“
Retained Contracts ”
means
[**].
“
Rights ”
means
all
rights
and
benefits
(and
all
claims
arising
from
them)
whatsoever,
whenever
and
howsoever
arising
in
connection
with
theperformance
or
non-performance
of
a
Transferred
Contract
or
Retained
Contract,
as
applicable,
including
all
indemnification
rights
pursuant
to
aTransferred
Contract
or
Retained
Contract,
as
applicable
(in
each
case
whether
known
or
unknown,
actual,
accrued,
future,
contingent
or
prospective,and
whether
arising
in
contract,
tort
or
otherwise).
“[**]
”
means
[**].
“
Transferred Contracts ”
means
each
of
(a)
the
License
Agreement
[**].
For
the
avoidance
of
doubt,
the
Transferred
Contracts
will
not
include
anyRetained
Contract.
1.2
Headings
are
used
in
this
Agreement
for
convenience
only
and
shall
not
affect
its
interpretation.
1.3
In
this
Agreement,
unless
otherwise
stated
or
the
context
otherwise
requires,
references
to
clauses,
sub-clauses
and
schedules
are,
respectively,
toclauses,
sub-clauses
and
schedules
in
or
to
this
Agreement.
1.4
Unless
the
context
otherwise
requires,
words
denoting
the
singular
shall
include
the
plural
and
vice
versa
and
references
to
any
gender
shall
include
allother
genders.
References
to
any
person
include
bodies
corporate,
unincorporated
associations,
partnerships,
governments,
governmental
agencies
anddepartments,
statutory
bodies
or
other
entities,
in
each
case
whether
or
not
having
a
separate
legal
personality.
1.5
In
this
Agreement,
unless
otherwise
stated
or
the
context
otherwise
requires,
references
to
the
word
“including”
will
be
construed
as
“including
withoutlimitation.”
2.
NOVATION OF TRANSFERRED CONTRACTS
2.1
With
effect
on
and
after
the
Effective
Time:
2
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
2.1.1
the
Licensor
shall
release
the
Transferor
from
the
observance,
performance
and
discharge
of
the
Liabilities
and
Obligations
arising
fromperformance
or
non-performance
of
the
Transferred
Contracts
by
or
on
behalf
of
Transferee
on
and
after
the
Effective
Time
(the
“
Post-Effective Time Liabilities and Obligations ”);
2.1.2
the
Transferee
shall
be
entitled
to
the
Rights
arising
from
the
Transferred
Contracts
on
and
after
the
Effective
Time
that
would
have
beenRights
of
Transferor
in
the
absence
of
this
Agreement
(the
“
Post-Effective Time Rights ”)
and
in
place
of
and
to
the
exclusion
of
theTransferor;
2.1.3
the
Transferee
undertakes
and
covenants
as
a
separate
obligation
with
each
of
the
Transferor
and
the
Licensor
to
assume,
observe,
perform,discharge
and
be
bound
by
the
Post-Effective
Time
Liabilities
and
Obligations
arising
from
the
performance
or
non-performance
of
theTransferred
Contracts
in
place
of
and
to
the
exclusion
of
the
Transferor;
2.1.4
each
of
the
Licensor
and
the
Transferor
accepts
the
observance,
performance
and
discharge
of
the
Post-Effective
Time
Liabilities
andObligations
arising
from
the
performance
or
non-performance
of
the
Transferred
Contracts
and
the
acceptance
of
the
Post-Effective
TimeRights
by
the
Transferee
in
place
of
and
to
the
exclusion
of
the
Transferor;
2.1.5
each
of
the
Licensor
and
Transferor
hereby
releases
the
Transferee
from
the
observance,
performance
and
discharge
of
the
Liabilities
andObligations
arising
from
performance
or
non-performance
of
the
Transferred
Contracts
by
or
on
behalf
of
Transferor
prior
to
the
EffectiveTime;
2.1.6
Transferor
hereby
releases
Licensor
from
the
observance,
performance
and
discharge
of
the
Liabilities
and
Obligations
arising
fromperformance
or
non-performance
of
the
Transferred
Contracts
by
or
on
behalf
of
Licensor
on
or
after
the
Effective
Time;
and
2.1.7
Transferee
hereby
releases
Licensor
from
the
observance,
performance
and
discharge
of
the
Liabilities
and
Obligations
arising
fromperformance
or
non-performance
of
the
Transferred
Contracts
by
or
on
behalf
of
Licensor
prior
to
the
Effective
Time;
and
the
Transferred
Contracts
shall
be
read
and
construed
accordingly.
As
of
and
following
the
Effective
Time,
the
term
“Partner,”
“Almirall,”
or
otherdefined
terms
referencing
the
Transferor
in
the
Transferred
Contracts
will
be
deemed
to
refer
to
the
Transferee.
For
clarity,
(a)
neither
the
Licensor
northe
Transferor
releases
the
other
Party
from
the
observance,
performance
or
discharge
of
the
Liabilities
and
Obligations
(i)
that
arise
from
performanceor
non-performance
of
the
Transferred
Contracts
by
or
on
behalf
of
the
other
Party
prior
to
the
Effective
Time,
and
(ii)
that
arise
from
performance
ornon-performance
of
the
Retained
Contracts
by
or
on
behalf
of
the
other
Party
at
any
time,
and
(b)
Licensor
and
Transferor
shall
continue
to
be
entitled
tothe
Rights
that
arise
from
(I)
the
Transferred
Contracts
prior
to
the
Effective
Time,
and
(II)
the
Retained
Contracts
at
any
time,
in
the
case
of
(I)
and
(II),to
the
exclusion
of
Transferee.
Further,
for
clarity,
Transferee
is
not
assuming
and
will
not
be
liable
for
any
Liabilities
and
Obligations
arising
fromperformance
or
3
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
non-performance
of
(x)
the
Transferred
Contracts
by
or
on
behalf
of
Transferor
prior
to
the
Effective
Time
or
(y)
the
Retained
Contracts
by
or
on
behalfof
the
Transferor
or
the
Licensor
at
any
time.
2.2
(a)
Each
of
the
Licensor
and
the
Transferee
severally
undertakes
and
covenants
with
the
Transferor
that
it
shall
release
the
Transferor
and
not
make
anyclaim,
counterclaim,
demand,
action
or
proceeding
(including
arbitration)
of
any
nature
whatsoever,
or
seek
to
enforce
any
right
or
interest,
against
theTransferor,
with
respect
to
the
Post-Effective
Time
Liabilities
and
Obligations,
and
(b)
the
Transferor
undertakes
and
covenants
with
the
Licensor
that
itshall
release
the
Licensor
and
not
make
any
claim,
counterclaim,
demand,
action
or
proceeding
(including
arbitration)
of
any
nature
whatsoever,
or
seekto
enforce
any
right
or
interest,
against
the
Licensor,
with
respect
to
the
Liabilities
and
Obligations
arising
from
performance
or
non-performance
of
theTransferred
Contracts
and/or
the
exploitation
of
any
Right
(including
to
Technology
or
other
intellectual
property)
under
the
Transferred
Contracts,
ineach
case,
on
or
after
the
Effective
Time.
Transferor
undertakes
and
covenants
with
the
Transferee
that
it
shall
release
the
Transferee
and
not
make
anyclaim,
counterclaim,
demand,
action
or
proceeding
(including
arbitration)
of
any
nature
whatsoever,
or
seek
to
enforce
any
right
or
interest,
against
theTransferee,
with
respect
to
the
Post-Effective
Time
Liabilities
and
Obligations.
2.3
As
of
the
Effective
Time,
each
of
the
Transferee
and
the
Licensor
makes
to
the
other
the
representations
and
warranties
set
forth
in
[**]
of
the
LicenseAgreement
(with
respect
to
this
Agreement
and
each
Transferred
Contract).
As
of
the
Effective
Time,
the
Transferee
makes
to
the
Licensor
therepresentations
and
warranties
in
[**]
of
the
License
Agreement,
and
the
Licensor
makes
to
the
Transferee
the
representations
and
warranties
in
[**]
ofthe
License
Agreement.
Each
of
the
Transferee
and
the
Licensor
additionally
hereby
represents,
warrants
and
covenants
to
the
other
that
it
will
complywith
Applicable
Law
in
connection
with
exercising
its
rights
and
complying
with
its
obligations
under
the
Transferred
Contracts
from
and
after
theEffective
Time.
2.4
The
Licensor
and
the
Transferor
each
represents
and
warrants
to
the
Transferee
that
the
documents
attached
hereto
as
Exhibit
A
are
true,
correct
andcomplete
copies
of
the
Transferred
Contracts.
2.5
Clauses
2.1
and
2.2
are
subject
in
all
respects
to
clause
3
below.
3.
SURVIVAL OF OBLIGATIONS
3.1
Notwithstanding
the
provisions
of
clause
2:
3.1.1
Subject
to
the
remainder
of
this
clause
3.1.1,
the
Transferor
undertakes
to
the
Licensor,
and
the
Licensor
undertakes
to
the
Transferor,
that
itshall
observe
and
perform
the
duties
of
confidentiality
and
non-disclosure
it
would
have
owed
to
the
other
under
the
Transferred
Contracts
onor
after
the
Effective
Time
in
the
absence
of
this
Agreement,
including
pursuant
to
Section
5.1
(Confidentiality)
of
the
License
Agreement.The
Transferor
and
the
Licensor
may
each
disclose
to
the
Transferee
information
in
its
possession
relating
to
the
subject
matter
of
theTransferred
Contracts
to
the
extent
it
is
reasonably
required
by
the
Transferee
in
order
to
exercise
the
Post-Effective
Time
Rights
or
dischargethe
Post-Effective
Time
Liabilities
and
Obligations
assumed
by
the
Transferee
under
clause
2.
Additionally,
unless
otherwise
agreed
to
inwriting,
the
Parties
4
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
agree
to
keep
confidential
the
existence
and
contents
of
this
Agreement;
provided
,
that
the
restrictions
of
this
clause
3.1.1
will
not
prohibit(a)
any
Party
from
making
any
disclosure
that
is
required
by
applicable
law,
rule
or
regulation,
or
the
requirements
of
a
national
securitiesexchange
or
another
similar
regulatory
body,
or
(b)
the
Licensor
or
Transferee
from
disclosing
the
existence
and
contents
of
this
Agreementto
any
Third
Party
supplier,
partner
or
licensee
of
the
Licensed
Compound
or
the
Product,
subject
to
the
restrictions
of
Section
5.7(Communications
with
other
Linaclotide
Partners)
of
the
License
Agreement
and
to
confidentiality
obligations
no
less
restrictive
than
thoseset
forth
in
Section
5.1
(Confidentiality)
of
the
License
Agreement.
3.1.2
[**]
of
the
License
Agreement
will
continue
to
apply
to
[**]
for
a
period
of
[**].
3.1.3
[**]
of
the
License
Agreement
will
continue
to
apply
to
[**]
for
a
period
of
[**].
3.1.4
[**]
of
the
License
Agreement
will
continue
to
apply
to
[**]
for
a
period
of
[**].
3.1.5
[**]
of
the
License
Agreement
will
continue
to
apply
to
[**]
so
long
as
the
License
Agreement
remains
in
effect,
and
thereafter
in
accordancewith
[**]
of
the
License
Agreement.
3.1.6
With
respect
to
any
Technology
or
other
intellectual
property
which
the
Transferor
licensed
rights
to
Licensor
prior
to
the
Effective
Timepursuant
to
any
Transferred
Contract,
the
license
of
such
rights
pursuant
to
such
Transferred
Contract
will
remain
in
effect
with
respect
to
theTransferor
until
ownership
of
such
Technology
or
other
intellectual
property
(including
all
rights,
title,
and
interests
therein)
is
transferred
tothe
Transferee.
Without
limiting
the
generality
of
the
foregoing,
[**]
of
the
License
Agreement
will
remain
in
effect
with
respect
to
[**]
until[**].
3.1.7
For
clarity,
payment
obligations
accrued
by
the
Transferor
under
any
Transferred
Contract
prior
to
the
Effective
Time
will
remain
theresponsibility
of
the
Transferor,
and
the
Transferor
will
make
such
payments
directly
to
the
Licensor
in
accordance
with
the
TransferredContracts.
The
Transferor
will
provide
to
the
Licensor
a
final
report
required
by
Section
4.4
of
the
License
Agreement
within
45
days
after
theend
of
the
Calendar
Quarter
during
which
the
Effective
Time
occurs.
For
the
avoidance
of
doubt,
the
Transferee
shall
also
have
an
obligationto
provide
a
report
with
respect
to
the
period
after
the
Effective
Time
pursuant
to
Section
4.4
of
the
License
Agreement
at
such
time.
Withoutlimiting
the
generality
of
the
foregoing,
[**]
of
the
License
Agreement
will
remain
binding
and
in
effect
between
the
Transferor
and
theLicensor
with
respect
to
Transferor’s
activities
and
obligations
prior
to
the
Effective
Time
until
[**],
and
in
the
case
of
[**]
of
the
LicenseAgreement,
[**]
following
the
Year
in
which
the
Effective
Time
occurs.
4.
GENERAL
4.1
Each
Party,
from
time
to
time
on
being
required
to
do
so
by
another
Party,
shall
[**]
do
or
procure
the
doing
of
all
such
acts
and/or
execute
or
procurethe
execution
of
all
such
documents
in
such
form
5
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
as
the
Party
which
has
required
it
may
reasonably
consider
necessary
for
giving
full
effect
to
this
Agreement
and
securing
to
that
Party
the
full
benefit
ofthe
rights,
powers
and
remedies
conferred
upon
that
Party
in
this
Agreement.
Without
limiting
the
generality
of
the
foregoing,
the
Transferor
will(a)
transfer
to
the
Transferee
ownership
of
all
Technology
and
other
intellectual
property
(including
all
rights,
title,
and
interests
therein)
with
respect
towhich
the
Transferor
licensed
rights
to
the
Licensor
prior
to
the
Effective
Time
pursuant
to
any
Transferred
Contract,
(b)
transfer
to
the
Transferee
allRegulatory
Submissions,
other
regulatory
filings
and
related
material
relating
to
the
Transferred
Contracts,
and
(c)
transfer
to
the
Transferee
ownershipof
any
other
asset,
record,
and
agreement
(including
all
rights,
title,
and
interests
therein)
held
by
the
Transferor
that
is
reasonably
required
for
theTransferee
to
assume,
observe,
perform,
discharge
and
be
bound
by
the
Post-Effective
Time
Liabilities
and
Obligations,
or
is
otherwise
primarily
relatedto
the
Transferred
Contracts.
4.2
In
accordance
with
Section
10.8
of
the
License
Agreement,
Licensor
hereby
gives
its
written
consent
to
Transferee
to
subcontract
(but,
for
clarity,
not
tosublicense)
to
Transferor
obligations
under
the
License
Agreement
pursuant
to
and
on
the
terms
set
forth
in
the
Transitional
Services
Agreementbetween
Transferee
and
Transferor
dated
October
26,
2015
(the
“
Transitional Services Agreement ”)
and
the
Transitional
Toll
ManufacturingAgreement
between
Transferee
and
Transferor
dated
October
26,
2015
(the
“
Transitional Toll Manufacturing Agreement ”),
true,
accurate
andcomplete
copies
of
which
(other
than
for
the
redaction
of
the
financial
terms)
have
been
provided
to
Licensor
prior
to
the
Effective
Time.
To
the
extentthat
the
Transferor
provides
goods
or
services
to,
or
conducts
work
on
behalf
of,
the
Transferee
pursuant
to
the
Transitional
Services
Agreement
orTransitional
Toll
Manufacturing
Agreement
on
or
after
the
Effective
Time,
and
subject
to
the
rights
and
obligations
of
Licensor
and
Transferee
under
theTransferred
Contracts
with
respect
thereto:
4.2.1
Transferee
shall
ensure
that
the
goods
or
services
provided,
or
the
performance
of
such
work,
by
Transferor
shall
be
consistent
with
theTransferred
Contracts;
4.2.2
Transferee
shall
promptly
notify
Licensor
of
(a)
any
claim
of
breach
under
the
Transitional
Services
Agreement
or
Transitional
TollManufacturing
Agreement,
(b)
the
execution
of
any
amendment
of
the
Transitional
Services
Agreement
or
Transitional
Toll
ManufacturingAgreement,
or
the
making
of
any
material
changes
to
the
services
provided
thereunder,
whether
by
amendment
or
other
means
(subject
to
therights
and
obligations
of
Licensor
and
Transferee
under
the
Transferred
Contracts
with
respect
thereto,
including,
for
clarity,
delegationspursuant
to
Section
10.8
of
the
License
Agreement),
or
(c)
any
notice
of
termination
of
the
Transitional
Services
Agreement
or
TransitionalToll
Manufacturing
Agreement
prior
to
the
expiration
thereof;
4.2.3
the
Transferee
(and
not
Licensor)
shall
be
responsible
for
all
of
the
financial
and
other
obligations
for
the
provision
of
such
goods
or
servicesor
the
performance
of
such
work
by
Transferor;
6 [**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
4.2.4
the
subcontracted
and
delegated
obligations
under
this
clause
4.2
may
not
be
further
subcontracted
or
delegated
to
any
third
party
withoutfurther
compliance
with
Section
10.8
of
the
License
Agreement
with
respect
to
such
subcontracting
or
delegating;
4.2.5
the
Transferee
shall
remain
fully
responsible
to
Licensor
for
the
performance
of
those
obligations
under
the
Transferred
Contracts
which
itdelegates
to
Transferor
(including
the
obligations
under
Section
3.2.1
and
Section
3.2.2
of
the
License
Agreement)
and
Licensor
may
proceeddirectly
against
Transferee
for
any
breach
of
Transferee’s
obligations
under
the
Transferred
Contracts
that
are
delegated
to
Transferor;
and
4.2.6
the
Transferor
will
promptly
disclose
to
the
Transferee
all
Technology
and
other
intellectual
property
conceived
or
reduced
to
practice
by
theTransferor
during
the
provision
of
such
goods
or
services
or
the
performance
of
such
work,
and
the
Transferor
will
and
hereby
does
assign
tothe
Transferee
all
rights,
title,
and
interests
in
and
to
all
such
Technology
and
other
intellectual
property.
4.3
Transferor
hereby
covenants
and
agrees
it
shall
not,
without
Licensor’s
prior
written
consent,
[**].
4.4
(a)
Notwithstanding
Section
12.5
of
the
[**],
the
[**]
shall
not,
as
of
the
Effective
Time,
[**],
and
(b)
[**]
shall
not,
as
of
the
Effective
Time,
[**].
Notwithstanding
Section
10.1
of
t
he
[**]
and
Section
15
of
each
of
the
[**],
Licensor
and
Transferor
hereby
agree
that
the
[**]
and
[**]
shall
terminateas
of
the
Effective
Time
with
no
further
force
and
effect;
provided
that
Section
10.2
of
the
[**]
shall
continue
to
apply.
4.5
This
Agreement
may
be
executed
in
any
number
of
counterparts
and
by
the
Parties
on
separate
counterparts.
Each
counterpart
shall
constitute
anoriginal
of
this
Agreement
but
all
the
counterparts
together
shall
constitute
one
and
the
same
Agreement
and
any
Party
may
execute
this
Agreement
bysigning
any
one
or
more
of
such
counterparts.
Signature
pages
of
this
Agreement
may
be
exchanged
by
email/pdf
or
other
electronic
means
withoutaffecting
the
validity
thereof.
4.6
No
variation
of
this
Agreement
shall
be
binding
on
any
Party
unless
and
to
the
extent
that
it
is
recorded
in
a
written
document
executed
by
that
Party.
4.7
Nothing
in
this
Agreement
is
intended
to
confer
on
any
third
party
any
right
to
enforce
any
term
of
this
Agreement.
4.8
This
Agreement,
and
any
non-contractual
rights
or
obligations
arising
out
of
or
in
connection
with
it
or
its
subject
matter,
shall
be
governed
by
andconstrued
in
accordance
with
the
laws
of
the
State
of
New
York,
without
reference
to
any
rules
of
conflict
of
laws,
and
the
Parties
irrevocably
agree
that any
dispute
which
may
arise
out
of
or
in
connection
with
this
Agreement
or
its
subject
matter
shall
be
resolved
through
arbitration
in
accordance
withSections
10.1.2
and
10.1.3
in
the
License
Agreement,
which
for
purposes
hereof
are
deemed
repeated
in
this
Agreement,
mutatis
mutandis.
4.9
A
notice
under
this
Agreement
shall
only
be
effective
if
it
is
in
writing
and
delivered
personally
or
sent
by
courier
(reputable
express
internationalcourier
if
overseas).
7
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
Notice
given
under
this
Agreement
shall
be
(a)
in
writing
and
in
English,
and
(b)
sent
to
the
relevant
Party
for
the
attention
of
the
contact
and
to
theaddress
specified
below,
or
such
other
address,
or
person
as
that
Party
may
notify
to
the
other
in
accordance
with
the
provisions
of
this
clause
4.9.
4.9.1
The
addresses
for
service
of
notices
and
communications
are:
(a)Transferor:Almirall,
S.A.
Ronda
General
Mitre,
151
08022
Barcelona
Spain
Attention:
Head
Legal
Department
(b)Transferee:Allergan
Pharmaceuticals
International
Ltd.
Clonshaugh
Business
&
Technology
Park
Coolock
Dublin,
D17
E400
Ireland
Attention:
Managing
Director
With
a
copy
to:Allergan
plc
Morris
Corporate
Center
III
400
Interpace
Parkway
Parsippany,
NJ
07054
United
States
Attention:
Chief
Legal
Officer
(c)Licensor:Ironwood
Pharmaceuticals,
Inc.
301
Binney
Street
Cambridge,
MA
02142
United
States
Attention:
Chief
Legal
Officer
With
a
copy
to:Ropes
&
Gray
LLP
800
Boylston
Street
Boston,
MA
02199
United
States
Attention:
Marc
A.
Rubenstein
A
Party
may
change
its
details
for
service
of
notices
as
specified
in
this
clause
4.9
by
giving
notice
in
writing
to
the
other
Parties
in
accordance
with
thisclause
4.9.
This
clause
4.9
does
not
apply
to
the
service
of
any
proceedings
or
other
documents
in
any
legal
action
or
proceedings.
4.10
Each
Party
shall
pay
its
own
costs
and
expenses
incurred
in
connection
with
the
negotiation,
preparation,
execution
and
implementation
of
thisAgreement.
8
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
4.11
This
Agreement
(together
with
the
Transferred
Contracts),
embodies
all
of
the
understandings
and
obligations
between
the
Parties
concerning
thesubject
matter
hereof,
and
supersedes,
replaces
and
cancels
any
and
all
prior
arrangements,
agreements
or
understandings,
whether
oral
or
written,between
the
Parties
with
respect
to
the
subject
matter
hereof.
For
clarity,
the
Retained
Contracts
shall
not
be
superseded,
replaced
or
canceled
by
theforegoing
sentenced.
[
Balance
of
Page
is
Intentionally
Blank
-
Signature
Page
Follows
]
9
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
IN
WITNESS
of
which
the
parties
have
executed
this
Agreement
on
the
dates
set
forth.
ALMIRALL,
S.A.ALLERGAN
PHARMACEUTICALS
INTERNATIONAL
LTD.
By:/s/
Eduardo
Sanchiz
By:/s/
Alex
NesbittName:Eduardo
SanchizName:Alex
NesbittTitle:Chief
Executive
OfficerTitle:DirectorDate:
Date:
IRONWOOD
PHARMACEUTICALS,
INC.
By:/s/
Thomas
Graney
Name:T.
Graney
Title:CFO
Date:
[
Novation
Agreement
Signature
Page
]
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
EXHIBIT A
Transferred
Contracts
(See
attached.)
[**]
=
Portions
of
this
exhibit
have
been
omitted
pursuant
to
a
confidential
treatment
request.
An
unredacted
version
of
this
exhibit
has
been
filed
separately
withthe
Commission.
EXHIBIT A
TRANSFERRED
CONTRACTS
License
Agreement:
1.
License
Agreement
dated
April
30,
2009
between
the
Transferor
and
the
Licensor
regarding
the
Product
and
Licensed
Compound
2.
[**]
3.
[**]
4.
[**]
5.
[**]
6.
[**]
7.
[**]
8.
Amendment
to
the
License
Agreement
dated
June
11,
2013
between
the
Transferor
and
the
Licensor
9.
[**]
10.
[**]
11.
Amendment
to
the
License
Agreement
dated
February
26,
2014
between
the
Transferor
and
the
Licensor
[**]
12.
[**]
13.
[**]
Exhibit 21.1 List of Registrant’s Subsidiaries
Ironwood
Pharmaceuticals
Securities
Corporation,
incorporated
in
Massachusetts,
a
wholly
owned
subsidiary.
Ironwood
Pharmaceuticals
GmbH,
incorporated
in
Switzerland,
a
wholly
owned
subsidiary.
QuickLinks
--
Click
here
to
rapidly
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through
this
documentEXHIBIT
23.1
CONSENT
OF
INDEPENDENT
REGISTERED
PUBLIC
ACCOUNTING
FIRM
We
consent
to
the
incorporation
by
reference
in
the
following
Registration
Statements
(Form
S-3
Nos.
333-179430
and
333-199885
and
Form
S-8
Nos.
333-165227,
333-165228,
333-165229,
333-165230,
333-165231,
333-184396,
333-189339,
333-189340,
333-197874,
333-197875,
333-206227,
and
333-206228)
ofIronwood
Pharmaceuticals,
Inc.
and
in
the
related
Prospectuses
of
our
reports
dated
February
19,
2016,
with
respect
to
the
consolidated
financial
statements
ofIronwood
Pharmaceuticals,
Inc.,
and
the
effectiveness
of
internal
control
over
financial
reporting
of
Ironwood
Pharmaceuticals,
Inc.,
included
in
this
Annual
Report(Form
10-K)
for
the
year
ended
December
31,
2015.Boston,
Massachusetts
February
19,
2016
/s/
Ernst
&
Young
LLP QuickLinks
EXHIBIT
23.1
CONSENT
OF
INDEPENDENT
REGISTERED
PUBLIC
ACCOUNTING
FIRM
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this
documentEXHIBIT
31.1
CERTIFICATION
PURSUANT
TO
RULE
13a-14(a)
UNDER
THE
SECURITIES
EXCHANGE
ACT
OF
1934
I,
Peter
M.
Hecht,
certify
that:1.I
have
reviewed
this
Annual
Report
on
Form
10-K
of
Ironwood
Pharmaceuticals,
Inc.
(the
"registrant");
2.Based
on
my
knowledge,
this
report
does
not
contain
any
untrue
statement
of
a
material
fact
or
omit
to
state
a
material
fact
necessary
to
make
thestatements
made,
in
light
of
the
circumstances
under
which
such
statements
were
made,
not
misleading
with
respect
to
the
period
covered
by
this
report;
3.Based
on
my
knowledge,
the
financial
statements,
and
other
financial
information
included
in
this
report,
fairly
present
in
all
material
respects
the
financialcondition,
results
of
operations
and
cash
flows
of
the
registrant
as
of,
and
for,
the
periods
presented
in
this
report;
4.The
registrant's
other
certifying
officer
and
I
are
responsible
for
establishing
and
maintaining
disclosure
controls
and
procedures
(as
defined
in
ExchangeAct
Rules
13a-15(e)
and
15d-15(e))
and
internal
control
over
financial
reporting
(as
defined
in
Exchange
Act
Rules
13a-15(f)
and
15d-15(f))
for
theregistrant
and
have:
a.Designed
such
disclosure
controls
and
procedures,
or
caused
such
disclosure
controls
and
procedures
to
be
designed
under
our
supervision,
toensure
that
material
information
relating
to
the
registrant,
including
its
consolidated
subsidiaries,
is
made
known
to
us
by
others
within
thoseentities,
particularly
during
the
period
in
which
this
report
is
being
prepared;
b.Designed
such
internal
control
over
financial
reporting,
or
caused
such
internal
control
over
financial
reporting
to
be
designed
under
oursupervision,
to
provide
reasonable
assurance
regarding
the
reliability
of
financial
reporting
and
the
preparation
of
financial
statements
for
externalpurposes
in
accordance
with
generally
accepted
accounting
principles;
c.Evaluated
the
effectiveness
of
the
registrant's
disclosure
controls
and
procedures
and
presented
in
this
report
our
conclusions
about
the
effectivenessof
the
disclosure
controls
and
procedures,
as
of
the
end
of
the
period
covered
by
this
report
based
on
such
evaluation;
and
d.Disclosed
in
this
report
any
change
in
the
registrant's
internal
control
over
financial
reporting
that
occurred
during
the
registrant's
most
recent
fiscalquarter
(the
registrant's
fourth
fiscal
quarter
in
the
case
of
an
annual
report)
that
has
materially
affected,
or
is
reasonably
likely
to
materially
affect,the
registrant's
internal
control
over
financial
reporting;
and
5.The
registrant's
other
certifying
officer
and
I
have
disclosed,
based
on
our
most
recent
evaluation
of
internal
control
over
financial
reporting,
to
theregistrant's
auditors
and
the
audit
committee
of
the
registrant's
board
of
directors
(or
persons
performing
the
equivalent
functions):
a.All
significant
deficiencies
and
material
weaknesses
in
the
design
or
operation
of
internal
control
over
financial
reporting
which
are
reasonablylikely
to
adversely
affect
the
registrant's
ability
to
record,
process,
summarize
and
report
financial
information;
and
b.Any
fraud,
whether
or
not
material,
that
involves
management
or
other
employees
who
have
a
significant
role
in
the
registrant's
internal
control
overfinancial
reporting.Date:
February
19,
2016/s/
PETER
M.
HECHT
Peter
M.
Hecht,
Ph.D.
Chief
Executive
Officer
QuickLinks
EXHIBIT
31.1
CERTIFICATION
PURSUANT
TO
RULE
13a-14(a)
UNDER
THE
SECURITIES
EXCHANGE
ACT
OF
1934
QuickLinks
--
Click
here
to
rapidly
navigate
through
this
documentEXHIBIT
31.2
CERTIFICATION
PURSUANT
TO
RULE
13a-14(a)
UNDER
THE
SECURITIES
EXCHANGE
ACT
OF
1934
I,
Thomas
Graney,
certify
that:1.I
have
reviewed
this
Annual
Report
on
Form
10-K
of
Ironwood
Pharmaceuticals,
Inc.
(the
"registrant");
2.Based
on
my
knowledge,
this
report
does
not
contain
any
untrue
statement
of
a
material
fact
or
omit
to
state
a
material
fact
necessary
to
make
thestatements
made,
in
light
of
the
circumstances
under
which
such
statements
were
made,
not
misleading
with
respect
to
the
period
covered
by
this
report;
3.Based
on
my
knowledge,
the
financial
statements,
and
other
financial
information
included
in
this
report,
fairly
present
in
all
material
respects
the
financialcondition,
results
of
operations
and
cash
flows
of
the
registrant
as
of,
and
for,
the
periods
presented
in
this
report;
4.The
registrant's
other
certifying
officer
and
I
are
responsible
for
establishing
and
maintaining
disclosure
controls
and
procedures
(as
defined
in
ExchangeAct
Rules
13a-15(e)
and
15d-15(e))
and
internal
control
over
financial
reporting
(as
defined
in
Exchange
Act
Rules
13a-15(f)
and
15d-15(f))
for
theregistrant
and
have:
a.Designed
such
disclosure
controls
and
procedures,
or
caused
such
disclosure
controls
and
procedures
to
be
designed
under
our
supervision,
toensure
that
material
information
relating
to
the
registrant,
including
its
consolidated
subsidiaries,
is
made
known
to
us
by
others
within
thoseentities,
particularly
during
the
period
in
which
this
report
is
being
prepared;
b.Designed
such
internal
control
over
financial
reporting,
or
caused
such
internal
control
over
financial
reporting
to
be
designed
under
oursupervision,
to
provide
reasonable
assurance
regarding
the
reliability
of
financial
reporting
and
the
preparation
of
financial
statements
for
externalpurposes
in
accordance
with
generally
accepted
accounting
principles;
c.Evaluated
the
effectiveness
of
the
registrant's
disclosure
controls
and
procedures
and
presented
in
this
report
our
conclusions
about
the
effectivenessof
the
disclosure
controls
and
procedures,
as
of
the
end
of
the
period
covered
by
this
report
based
on
such
evaluation;
and
d.Disclosed
in
this
report
any
change
in
the
registrant's
internal
control
over
financial
reporting
that
occurred
during
the
registrant's
most
recent
fiscalquarter
(the
registrant's
fourth
fiscal
quarter
in
the
case
of
an
annual
report)
that
has
materially
affected,
or
is
reasonably
likely
to
materially
affect,the
registrant's
internal
control
over
financial
reporting;
and
5.The
registrant's
other
certifying
officer
and
I
have
disclosed,
based
on
our
most
recent
evaluation
of
internal
control
over
financial
reporting,
to
theregistrant's
auditors
and
the
audit
committee
of
the
registrant's
board
of
directors
(or
persons
performing
the
equivalent
functions):
a.All
significant
deficiencies
and
material
weaknesses
in
the
design
or
operation
of
internal
control
over
financial
reporting
which
are
reasonablylikely
to
adversely
affect
the
registrant's
ability
to
record,
process,
summarize
and
report
financial
information;
and
b.Any
fraud,
whether
or
not
material,
that
involves
management
or
other
employees
who
have
a
significant
role
in
the
registrant's
internal
control
overfinancial
reporting.Date:
February
19,
2016/s/
THOMAS
GRANEY
Thomas
Graney
Chief
Financial
Officer
QuickLinks
EXHIBIT
31.2
CERTIFICATION
PURSUANT
TO
RULE
13a-14(a)
UNDER
THE
SECURITIES
EXCHANGE
ACT
OF
1934
QuickLinks
--
Click
here
to
rapidly
navigate
through
this
documentEXHIBIT
32.1
CERTIFICATION
PURSUANT
TO
18
U.S.C.
SECTION
1350,
AS
ADOPTED
PURSUANT
TO
SECTION
906
OF
THE
SARBANES-OXLEY
ACT
OF
2002
In
connection
with
the
Annual
Report
of
Ironwood
Pharmaceuticals,
Inc.
(the
"Company")
on
Form
10-K
for
the
period
ended
December
31,
2015
as
filedwith
the
Securities
and
Exchange
Commission
on
the
date
hereof
(the
"Report"),
I,
Peter
M.
Hecht,
Chief
Executive
Officer
of
the
Company,
certify,
pursuant
to
18U.S.C.
Section
1350,
as
adopted
pursuant
to
Section
906
of
the
Sarbanes-Oxley
Act
of
2002,
to
my
knowledge
that:(1)The
Report
fully
complies
with
the
requirements
of
Section
13(a)
or
15(d)
of
the
Securities
Exchange
Act
of
1934,
as
amended;
and
(2)The
information
contained
in
the
Report
fairly
presents,
in
all
material
respects,
the
financial
condition
and
results
of
operations
of
the
Company.
A
signed
original
of
this
written
statement
required
by
Section
906
has
been
provided
to
the
Company
and
will
be
retained
by
the
Company
and
furnished
tothe
Securities
and
Exchange
Commission
or
its
staff
upon
request./s/
PETER
M.
HECHT
Peter
M.
Hecht,
Ph.D.
Chief
Executive
Officer
February
19,
2016
QuickLinks
EXHIBIT
32.1
CERTIFICATION
PURSUANT
TO
18
U.S.C.
SECTION
1350,
AS
ADOPTED
PURSUANT
TO
SECTION
906
OF
THE
SARBANES-OXLEY
ACT
OF
2002
QuickLinks
--
Click
here
to
rapidly
navigate
through
this
documentEXHIBIT
32.2
CERTIFICATION
PURSUANT
TO
18
U.S.C.
SECTION
1350,
AS
ADOPTED
PURSUANT
TO
SECTION
906
OF
THE
SARBANES-OXLEY
ACT
OF
2002
In
connection
with
the
Annual
Report
of
Ironwood
Pharmaceuticals,
Inc.
(the
"Company")
on
Form
10-K
for
the
period
ended
December
31,
2015
as
filedwith
the
Securities
and
Exchange
Commission
on
the
date
hereof
(the
"Report"),
I,
Thomas
Graney,
Chief
Financial
Officer
of
the
Company,
certify,
pursuant
to
18U.S.C.
Section
1350,
as
adopted
pursuant
to
Section
906
of
the
Sarbanes-Oxley
Act
of
2002,
to
my
knowledge
that:(1)The
Report
fully
complies
with
the
requirements
of
Section
13(a)
or
15(d)
of
the
Securities
Exchange
Act
of
1934,
as
amended;
and
(2)The
information
contained
in
the
Report
fairly
presents,
in
all
material
respects,
the
financial
condition
and
results
of
operations
of
the
Company.
A
signed
original
of
this
written
statement
required
by
Section
906
has
been
provided
to
the
Company
and
will
be
retained
by
the
Company
and
furnished
tothe
Securities
and
Exchange
Commission
or
its
staff
upon
request./s/
THOMAS
GRANEY
Thomas
Graney
Chief
Financial
Officer
February
19,
2016
QuickLinks
EXHIBIT
32.2
CERTIFICATION
PURSUANT
TO
18
U.S.C.
SECTION
1350,
AS
ADOPTED
PURSUANT
TO
SECTION
906
OF
THE
SARBANES-OXLEY
ACT
OF
2002