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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑‑K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
For the transition period from to
Commission File Number 001‑‑34620
IRONWOOD PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
301 Binney Street
Cambridge, Massachusetts
(Address of Principal Executive Offices)
04‑‑3404176
(I.R.S. Employer
Identification Number)
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
Class A common stock, $0.001 par value
Securities registered pursuant to Section 12(g) of the Act: None
Name of each exchange on which registered
The Nasdaq Stock Market LLC
(Nasdaq Global Select Market)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
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 ☐ No ☒
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 1934 during 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 requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☒ No ☐
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 best of
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. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer ☒
Accelerated filer ☐
Non‑accelerated filer ☐
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) 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 ☐ No ☒
Aggregate market value of voting stock held by non‑affiliates of the Registrant as of June 30, 2018: $2,802,656,540
As of February 12, 2019, there were 154,645,260 shares of Class A common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement for our 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.
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NOTE 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 Financial Condition and Results of Operations,” contains forward‑looking statements. All statements
contained in this Annual Report on Form 10‑K other than statements of historical 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” and similar expressions may identify forward‑looking statements, but the
absence of these words does not necessarily mean that a statement is not forward‑looking. These forward‑looking statements
include, among other things, statements about:
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the demand and market potential for our products in the countries where they are 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.;
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the timing and execution of the launches and commercialization of CONSTELLA in Europe and LINZESS in
Japan;
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the timing, investment and associated activities involved in developing, obtaining regulatory approval for,
launching, and commercializing our products and product candidates by us and our partners worldwide;
our ability and the ability of our partners to secure and maintain adequate reimbursement for our products;
our ability and the ability of our partners and third parties to manufacture and distribute sufficient amounts of
linaclotide active pharmaceutical ingredient, drug product and finished goods, as applicable, on a commercial scale;
our expectations regarding U.S. and foreign regulatory requirements for our products and our product candidates,
including our post-approval development and regulatory requirements;
the ability of our product candidates to meet existing or future regulatory standards;
the safety profile and related adverse events of our products and our product candidates;
the therapeutic benefits and effectiveness of our products and our product candidates and the potential indications
and market opportunities therefor;
our and our partners’ ability to obtain and maintain intellectual property protection for our products and our product
candidates and the strength thereof, as well as Abbreviated New Drug Applications filed by generic drug
manufacturers and potential U.S. Food and Drug Administration approval thereof, and associated patent
infringement suits that we have filed or may file, or other action that we may take against such companies, and the
timing and resolution thereof;
our and our partners’ ability to perform our respective obligations under our collaboration, license and other
agreements, and our ability to achieve milestone 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 and results of pre-clinical and clinical studies;
the in-licensing or acquisition of externally discovered businesses, products or technologies, as well as partnering
arrangements, including expectations relating to the completion of, or the realization of the expected benefits from,
such transactions;
our expectations as to future financial performance, revenues, expense levels, payments, cash flows,
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profitability, tax obligations, capital raising and liquidity sources, real estate needs and concentration of voting
control, as well as the timing and drivers thereof, and internal control over financial reporting;
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 of the note hedge transactions described herein;
inventory levels and write downs, or asset impairments, 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 product candidates;
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;
the planned separation of the Company’s operations into two independent, publicly traded companies, including the
completion and timing of the separation, the business and operations of each company and any benefits or costs of
the separation, including the distribution of shares and tax treatment; and
other factors discussed elsewhere in this Annual Report on Form 10‑K.
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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 be affected 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 discussed in 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 by law, 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, after the date of this
Annual Report on Form 10‑K.
NOTE REGARDING TRADEMARKS
LINZESS and CONSTELLA are trademarks of Ironwood Pharmaceuticals, Inc. ZURAMPIC and DUZALLO are
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trademarks of AstraZeneca AB. Any other trademarks referred to in this Annual Report on Form 10‑K are the property of their
respective owners. All rights reserved.
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Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
TABLE OF CONTENTS
PART I
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
Signatures
Index to Consolidated Financial Statements
Item 16. Form 10-K Summary
PART IV
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Item 1. Business
Our Company
PART I
We are a commercial biotechnology company leveraging our proven development and commercial capabilities as we
seek to bring multiple medicines to patients. In May 2018, we announced our intent to separate into two independent, publicly
traded companies – Ironwood Pharmaceuticals, Inc, or Ironwood. and Cyclerion Therapeutics, Inc., or Cyclerion. Following the
completion of the planned separation, Ironwood will be a gastrointestinal, or GI, focused healthcare company leveraging our
proven development and commercial capabilities as we seek to bring multiple medicines to patients. We are advancing innovative
product opportunities in areas of large unmet need, capitalizing on our expertise in GI diseases. Cyclerion will be a clinical stage
biopharmaceutical company harnessing the power of sGC pharmacology to discover, develop and commercialize breakthrough
treatments for serious and orphan diseases.
Our commercial product, linaclotide, is available to adult men and women suffering from irritable bowel syndrome with
constipation, or IBS‑C, or chronic idiopathic constipation, or CIC, in certain countries around the world. Linaclotide is available
under the trademarked name LINZESS to adult men and women suffering from IBS‑C or CIC in the United States, or the U.S.,
and Mexico, and to adult men and women suffering from IBS-C or chronic constipation in Japan. Linaclotide is available under
the trademarked name CONSTELLA to adult men and women suffering from IBS-C or CIC in Canada, and to adult men and
women suffering from IBS-C in certain European countries.
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We and our U.S. linaclotide partner Allergan plc (together with its affiliates), or Allergan, are exploring ways to enhance
the clinical profile of LINZESS by studying linaclotide in additional indications, populations and formulations to assess its
potential to treat various conditions. In July 2018, we announced the initiation of a Phase IIIb trial evaluating the efficacy and
safety of linaclotide 290 mcg on multiple abdominal symptoms including pain, bloating and discomfort, in adult patients with
IBS-C.
We and Allergan are also seeking to expand the clinical utility of linaclotide by demonstrating the pain-relieving effect
of a delayed release formulation through the advancement of MD-7246 (linaclotide delayed release) in IBS with diarrhea, or IBS-
D.
We are advancing another GI development program, IW-3718, a gastric retentive formulation of a bile acid sequestrant
for the potential treatment of persistent gastroesophageal reflux disease, or persistent GERD. In June 2018, we initiated two
Phase III clinical trials evaluating the safety and efficacy of IW-3718 in patients with persistent GERD.
The following table presents the status of selected key development programs in our pipeline:
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The status of our development programs in the table above represents the ongoing phase of development and does not
correspond to the completion of a particular phase. Drug development involves a high degree of risk and investment, and the
status, timing and scope of our development programs are subject to change. Important factors that could adversely affect our
drug development efforts are discussed in the “Risk Factors” section of this Annual Report on Form 10‑K.
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 a majority of our activities to the research, development and
commercialization of linaclotide and the commercialization of lesinurad, as part of our uncontrolled gout program, which we are
in the process of discontinuing, as well as to the research and development of our other product candidates.
GI Programs
IBS‑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 many as 35 million adults suffer from CIC in the U.S. alone, according to our analysis of studies
including P Pare, et al. (published in 2001 in the American Journal of Gastroenterology ) and J.F. Johanson, et al. (published in
2007 in Alimentary Pharmacology and Therapeutics ) and American College of Gastroenterology Chronic Constipation Task
Force (2005), American Journal of Gastroenterology Vol. 100, No. S1, 2005. 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 (290mcg dose) or CIC (145mcg dose). We and Allergan began commercializing LINZESS in the U.S. in
December 2012. In January 2017, the FDA approved a 72 mcg dose of linaclotide for the treatment of adult men and women with
CIC. Linaclotide is the first product approved by the FDA in a class of GI medicines called guanylate cyclase type‑C, or GC‑C,
agonists. We and Allergan continue to explore ways to enhance the clinical profile of LINZESS by studying linaclotide in
additional indications, populations and formulations to assess its potential to treat various conditions.
Additional Abdominal Symptom Claims. We and Allergan have identified a development path with LINZESS intended
to obtain abdominal symptom claims including bloating and discomfort, two highly bothersome symptoms associated with IBS-
C, through a single Phase III trial. Greater than 65% of IBS-C patients suffer from bloating and/or discomfort at least one time per
week, according to the Lieberman GI Patient Landscape Survey performed in 2010. In July 2018, we and Allergan initiated a
Phase IIIb clinical trial evaluating the efficacy and safety of linaclotide 290 mcg on multiple abdominal symptoms in addition to
pain, including bloating and discomfort in adult patients with IBS-C.
Pediatrics. We and Allergan have established a nonclinical and clinical post‑marketing plan with the FDA to
understand the safety and efficacy of LINZESS in pediatric patients. We and Allergan are advancing clinical pediatric programs
in IBS‑C patients age seven to 17 and functional constipation patients age six to 17.
LINZESS is covered by a U.S. composition of matter patent that expires in 2026, including patent term extension, as
well as multiple additional patents covering the commercial formulation of LINZESS and methods of using this formulation to
treat patients with IBS C or CIC, the latest of which expire in the early 2030s. We and Allergan have received Paragraph IV
certification notice letters, or Notice Letters, regarding Abbreviated New Drug Applications, or ANDAs, submitted to the FDA by
generic drug manufacturers requesting approval to engage in commercial manufacture, use, sale and offer for sale of linaclotide
capsules (72 mcg, 145 mcg and 290 mcg), proposed generic versions of LINZESS. In 2018, we and Allergan entered into
settlement agreements with three generic drug manufacturers. For additional information relating to such ANDAs and any
resolution of related litigation, see Item 3, Legal Proceedings , elsewhere in this Annual Report on Form 10-K.
Linaclotide—Global. Allergan has rights to develop and commercialize linaclotide in all countries worldwide other
than China, Hong Kong, Macau and Japan. In November 2012, the European Commission granted marketing authorization to
CONSTELLA for the symptomatic treatment of moderate to severe IBS‑C in adults. CONSTELLA is
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the first, and to date, only drug approved in the European Union, or E.U., for IBS‑C. CONSTELLA first became commercially
available in certain European countries beginning in the second quarter of 2013. Allergan is commercializing CONSTELLA in a
number of European countries, 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 men and women suffering from IBS‑C or CIC. Allergan has exclusive rights to commercialize linaclotide in Canada as
CONSTELLA and in Mexico as LINZESS. In May 2014, CONSTELLA became commercially available in Canada and in June
2014, LINZESS became commercially available in Mexico.
Astellas Pharma Inc., or Astellas, has rights to develop and commercialize linaclotide in Japan. In December 2016, the
Japanese Ministry of Health, Labor and Welfare approved LINZESS for the treatment of adults with IBS-C in Japan. In March
2017, Astellas began commercializing LINZESS for the treatment of adults with IBS-C in Japan. In August 2018, the Japanese
Ministry of Health, Labor and Welfare approved LINZESS for the treatment of adults with chronic constipation in Japan. In
September 2018, Astellas began commercializing LINZESS for the treatment of adult patients with chronic constipation in Japan.
We and AstraZeneca are co‑developing linaclotide in China, Hong Kong and Macau, with AstraZeneca having primary
responsibility for the local operational execution. In January 2019, the National Medical Products Administration approved the
marketing application for LINZESS for adults with IBS-C in China.
CONSTELLA is covered by European composition of matter patents, which expire in 2024. LINZESS is covered by
Japanese composition of matter patents and commercial formulation patents which expire between 2024 and 2032. In addition,
we have Chinese composition of matter patents and commercial formulation patents which expire between 2024 and 2032.
Abdominal Pain associated with IBS
MD-7246. There are an estimated 16 million Americans who suffer from symptoms of IBS-D, according to Grundmann
and Yoon in Irritable Bowel Syndrome: epidemiology, diagnosis and treatment: an update for health-care practitioners (published
in the Journal of Gastroenterology and Hepatology in 2010) and the United States Census Bureau.
We and Allergan are initially exploring MD-7246 as an oral, intestinal, non-opioid, pain-relieving agent for patients
suffering from IBS with diarrhea.
Persistent GERD
IW‑‑3718. There are an estimated 10 million Americans who suffer regularly from symptoms of GERD, such as
heartburn and regurgitation, despite receiving treatment with the current standard of care, a proton pump inhibitor, to suppress
stomach acid, according to a study published in 2010 by H. El-Sarag in Alimentary Pharmacology & Therapeutics and 2015 U.S.
census data. Research suggests some persistent GERD patients may experience reflux of bile from the intestine into the stomach
and esophagus.
We are advancing IW‑3718, a gastric retentive formulation of a bile acid sequestrant, for the potential treatment of
persistent GERD. Our clinical research has demonstrated that reflux of bile from the intestine into the stomach and esophagus
plays a key role in the ongoing symptoms of persistent GERD. IW-3718 is a novel formulation of a bile acid sequestrant designed
to release in the stomach over an extended period of time, bind to bile that refluxes into the stomach, and potentially provide
symptomatic relief in patients with persistent GERD. In June 2018, we initiated two Phase III clinical trials evaluating the safety
and efficacy of IW-3718 in patients with persistent GERD.
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Uncontrolled Gout Programs
In June 2016, we closed a transaction with AstraZeneca, or the Lesinurad Transaction, pursuant to which we received an
exclusive license to develop, manufacture, and commercialize in the U.S. products containing lesinurad as an active ingredient, or
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the Lesinurad License, including ZURAMPIC and DUZALLO In January 2018, we commenced an initiative to evaluate the
optimal mix of investments for our lesinurad franchise for uncontrolled gout, including DUZALLO and ZURAMPIC. As part of
this effort, in 2018 we began re-allocating resources within our lesinurad franchise to systematically explore a more
comprehensive marketing mix in select test markets (with paired controls), while continuing to build market presence for the
lesinurad franchise across the country. In July 2018, we obtained and analyzed the results from the lesinurad franchise test
markets. Data from the test markets did not meet expectations. In connection with the results, our Board of Directors determined
on July 31, 2018 to terminate the lesinurad license agreement.
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Cyclerion Therapeutics, Inc.
Cyclerion, the company that is expected to spin out of Ironwood following the completion of the planned separation, is
expected to be a clinical stage biopharmaceutical company intended to harness the power of sGC pharmacology to discover,
develop and commercialize breakthrough treatments for serious and orphan diseases. The company plans to focus on enabling the
full therapeutic potential of next generation sGC stimulators. sGC stimulators are small molecules that act synergistically with
nitric oxide on sGC to boost production of cyclic guanosine monophosphate, or cGMP. cGMP is a key second messenger that,
when produced by sGC, regulates diverse and critical biological functions throughout the body including blood flow and vascular
dynamics, inflammatory and fibrotic processes, metabolism and neuronal function. Cyclerion believes that the key to unlocking
the full therapeutic potential of the nitric oxide cGMP pathway is to design differentiated next generation sGC stimulators that
preferentially modulate pathway signaling in tissues of greatest relevance to the diseases they are developed to treat. This targeted
approach is intended to maximize the potential benefits of nitric oxide cGMP pathway stimulation in disease relevant tissues.
Cyclerion’s portfolio is currently comprised of five sGC stimulators:
• olinciguat, currently in a Phase 2 trial as an oral, once-daily vascular sGC stimulator for patients suffering from
sickle cell disease;
• praliciguat, in two distinct Phase 2 trials as an oral, once daily systemic sGC stimulator for heart failure with
preserved ejection fraction, or HFpEF, and for diabetic nephropathy, respectively;
• IW 6463, a central nervous system penetrant oral sGC stimulator in clinical development for serious
neurodegenerative diseases; and
• two organ targeted programs to address serious diseases of the liver and lung, respectively.
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 to patients. We intend to play an active role in the development and commercialization of our
products in the U.S., either independently or with partners that have strong capabilities. We also intend to establish strong global
brands by out‑licensing development and commercialization rights to our products in other key territories to high‑performing
partners. We believe in the long‑term value of our drug candidates, so we seek collaborations that increase the value of our
programs by providing 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 our drugs. We intend to continue to expand our expertise in GI by accessing
innovative externally developed products through strategic transactions and to leverage our existing capabilities to develop and
commercialize these products in the U.S.
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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 ended December 31, 2018, 2017, and 2016.
Year Ended December 31,
U.S.
Japan
Rest of world
2016
2018
2017
79.0 % 89.0 % 83.1 %
20.1 % 10.0 % 16.2 %
1.0 %
0.9 %
0.7 %
100.0 % 100.0 % 100.0 %
Revenue attributable to our linaclotide partnerships comprised substantially all of our revenue for each of the years
indicated. Further, we currently derive a significant portion of our revenue from our LINZESS collaboration with Allergan 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 foreseeable future. In addition, our collaborative arrangements revenue and sale of API outside of the U.S. has fluctuated for
the years ended December 31, 2018, 2017, and 2016, and may continue to fluctuate as a result of the timing and amount of sales
of linaclotide API to certain of our partners, license fees and clinical and commercial milestones received and recognized under
our current and future strategic partnerships outside of the U.S., as well as the timing and amount of royalties from the sales of
linaclotide in the markets in which it is currently approved, or any other markets where linaclotide receives approval.
Linaclotide
We have pursued a partnering strategy for commercializing linaclotide that has enabled us to retain significant oversight
over linaclotide’s development and commercialization 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, 2018, licensing
fees, milestones, royalties and related equity investments from our linaclotide partners cumulatively totaled approximately
$415.6 million. In addition, we and Allergan jointly fund the development and commercialization of LINZESS in the U.S.,
sharing equally in any net profits or losses, and we and AstraZeneca jointly fund the development and commercialization of
linaclotide in China, Hong Kong and Macau, with AstraZeneca receiving 55% 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 shared equally thereafter. Such
reimbursements for our development and commercialization costs received from Allergan in the U.S. or AstraZeneca in China,
Hong Kong, and Macau are excluded from the amount above.
Collaboration Agreement for North America with Allergan
In September 2007, we 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 the collaboration agreement, we
and Allergan are jointly and equally funding the development and commercialization of LINZESS in the U.S., with equal share of
any profits or losses. Additionally, we granted Allergan exclusive rights to develop and commercialize linaclotide in Canada and
Mexico for which we receive royalties in the mid-teens percent on net sales in those countries. Allergan is solely 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 under the Allergan collaboration agreement for North America
could total up to $330.0 million, including the $205.0 million that Allergan has already paid to us in license fees and all six
development‑related milestones and the $25.0 million of our capital stock that Allergan has already purchased.
License Agreement with Allergan (All countries other than the countries and territories of North America, China, Hong Kong,
Macau, and Japan)
In April 2009, we entered into a license agreement with Almirall, or the European License Agreement, to develop and
commercialize linaclotide in Europe (including the Commonwealth of Independent States and Turkey) for the treatment of
IBS‑C, CIC and other GI conditions. In October 2015, Almirall transferred its exclusive license to develop and commercialize
linaclotide in Europe to Allergan. Additionally, in October 2015, we and Allergan separately entered into an amendment to the
European License Agreement relating to the development and commercialization of linaclotide in Europe. Pursuant to the terms
of the amendment, (i) certain sales‑based milestones payable to us under the
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European License Agreement were such that, when aggregated with the remaining commercial launch milestones, they could total
up to $42.5 million, (ii) the royalties payable to us 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 digit percent and escalate to the upper‑teens percent by
calendar year 2019, and (iii) Allergan assumed responsibility for the manufacturing of linaclotide API for Europe from us, as well
as the associated costs.
In January 2017, we and Allergan entered into an amendment to the European License Agreement. The European
License Agreement, as amended, extended the license to develop and commercialize linaclotide in all countries other than China,
Hong Kong, Macau, Japan, and the countries and territories of North America. On a country-by-country and product-by-product
basis in such additional territory, Allergan is obligated to pay us a royalty as a percentage of net sales of products containing
linaclotide as an active ingredient in the upper-single digits for five years following the first commercial sale of a linaclotide
product in a country, and in the low-double digits thereafter. The royalty rate for products in the expanded territory will decrease,
on a country-by-country basis, to the lower-single digits, or cease entirely, following the occurrence of certain events. Allergan is
also obligated to assume certain purchase commitments for quantities of linaclotide API under our agreements with third-party
API suppliers. The amendment to the European License Agreement did not modify any of the milestones or royalty terms related
to Europe.
License Agreement for Japan with Astellas
In November 2009, we entered into a license agreement with Astellas, as amended, to develop and commercialize
linaclotide for the treatment of IBS‑C, CIC and other GI conditions in Japan. Astellas is responsible for development, regulatory
approval and commercialization in Japan, as well as funding the associated costs. Astellas has paid us all licensing and milestone
payments under the license agreement totaling $75.0 million. These payments consisted of a $30.0 million up‑front licensing fee
and $45.0 million in development milestones. Astellas is obligated to pay us gross royalties which escalate based on sales volume
in the Astellas territory, beginning in the low‑twenties percent, less the transfer price paid by Astellas to us for the API included
in the product actually sold in Japan and other contractual deductions.
Collaboration Agreement for China, Hong Kong and Macau with AstraZeneca
In October 2012, we entered into a collaboration agreement with AstraZeneca to co‑develop and co‑commercialize
linaclotide in China, Hong Kong and Macau. In January 2019, the National Medical Products Administration approved the
marketing application for LINZESS for adults with IBS-C in China. Under the terms of the agreement, we and AstraZeneca are
jointly funding the development and commercialization of linaclotide in the AstraZeneca territory, with AstraZeneca receiving
55% 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 shared equally thereafter. If linaclotide is successfully developed and commercialized in the AstraZeneca
territory, total licensing and milestone payments to us under the collaboration agreement could total up to $150.0 million,
including the $25.0 million that AstraZeneca has already paid to us.
Co-Promotion and Other Commercial Agreements
Commercial Agreement with Allergan
In January 2017, we and Allergan entered into a commercial agreement under which the adjustments to our or
Allergan’s share of the net profits under the share adjustment provision of the collaboration agreement for linaclotide in North
America relating to the contractually required calls on physicians in each year are eliminated, in full, in 2018 and all subsequent
years. Pursuant to the commercial agreement, Allergan also appointed us, on a non-exclusive basis, to promote CANASA
approved for the treatment of ulcerative proctitis, and DELZICOL
, approved for the treatment of ulcerative colitis, in the U.S.
for approximately two years. The share adjustment relief will, in the case of Allergan’s termination for convenience and certain
other specified circumstances, survive termination of the commercial agreement.
®
,
®
In August 2015, we and Allergan entered into a non-exclusive agreement for the co-promotion of VIBERZI
®
(eluxadoline) in the U.S., Allergan’s treatment for adults suffering from IBS-D or the VIBERZI Co-Promotion Agreement, which
expired in December 2017. Under the terms of the VIBERZI Co-Promotion Agreement, our clinical sales specialists detailed
VIBERZI to the same health care practitioners to whom they detailed LINZESS. Allergan was responsible for all costs and
activities relating to the commercialization of VIBERZI outside of the co-promotion.
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In December 2017, we entered into an agreement with Allergan to continue to promote VIBERZI through December 31,
2018 and to discontinue promoting DELZICOL effective January 1, 2018. We perform certain third position details and offer
samples of CANASA to gastroenterology prescribers who are on the then-current call panel for LINZESS to which we provide
first or second position details, and we purchase samples of CANASA from Allergan at the actual manufacturing cost. Allergan
is obligated to pay us a royalty in the mid-teens on incremental sales of CANASA above a mutually agreed upon sales
baseline. We commenced the promotion activities for CANASA on February 27, 2017. In addition, our clinical sales specialists
detail VIBERZI to the same health care practitioners to whom they detail LINZESS. We have the potential to achieve milestone
payments of up to $7.5 million based on the net sales of VIBERZI, provided we perform a minimum number of VIBERZI calls
on physicians, and will also be compensated via reimbursements for medical education initiatives. In December 2018, we entered
into an agreement with Allergan to discontinue our promotion of CANASA effective December 31, 2018, and to extend our
promotion of VIBERZI through March 31, 2019, subject to our or Allergan’s rights of early termination.
Our Strategy
Our mission, following the planned separation, is to create a leading U.S. GI-focused healthcare company. To achieve
this mission we intend to capitalize on our expertise in developing and commercializing GI therapies to bring innovative
treatment options to patients. Key elements of our strategy include:
·
·
·
·
assembling a team with a singular passion and documented success in creating, developing and commercializing GI
medicines that can make a significant difference 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 studying linaclotide in
additional indications, populations and formulations to assess its potential to treat various conditions;
investing in our pipeline of novel product candidates IW-3718 and MD-7246;
· maximizing the commercial potential of our drugs and playing an active role in their development and
commercialization in the U.S. and collaborating with out-licensing partners who share our vision, values, culture,
and processes;
supporting global partners to develop and commercialize linaclotide outside of the U.S.;
leveraging our U.S.‑focused commercial capabilities in marketing, reimbursement, patient engagement and sales;
evaluating external candidates for in‑licensing or acquisition opportunities to strengthen our position as a leading
U.S. GI company; and
executing our strategy with our stockholders’ long‑term interests in mind by seeking to maximize long‑term per
share cash flows.
·
·
·
·
Competition
Linaclotide
Linaclotide competes globally with certain prescription therapies and over‑the‑counter, or OTC, products for the
treatment of IBS‑C and CIC, or their associated symptoms.
OTC and generic laxatives make up the majority of the IBS-C and CIC treatment market, according to the Lieberman GI
Patient Landscape Survey performed in 2010 and the 2018 U.S. Census. Polyethylene glycol (such as MiraLAX ) and lactulose
account for the majority of prescription laxative treatments, according to 2015 data from IQVIA Inc. National Prescription Audit.
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 of them are very satisfied with the
®
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ability of these OTC products to manage their symptoms. Two of the highest selling OTC laxatives in the U.S., based on 2017
. In November
U.S. sales volume data from IQVIA Inc. National Prescription Audit, are MiraLAX (PEG 3350) and Dulcolax
2018, the FDA withdrew approval for certain prescription products containing MiraLAX for occasional constipation. This change
had no effect on OTC products containing MiraLAX for occasional constipation.
®
®
Until the launch of LINZESS, the only available branded prescription therapy for IBS‑C and CIC in the U.S. was
AMITIZA (lubiprostone), which was approved for the treatment of CIC in 2006, for the treatment of IBS‑C in 2008, and for the
treatment of opioid‑induced constipation in 2013. AMITIZA is being commercialized in the U.S. by Takeda Pharmaceuticals
Limited. Synergy Pharmaceuticals, Inc., or Synergy, obtained approval of TRULANCE (plecanatide) in the U.S. for the
treatment of CIC in adults in January 2017 and for the treatment of IBS-C in adults in January 2018. In December 2018, Bausch
Health Companies agreed to acquire substantially all of Synergy’s assets, including all rights to TRULACE, dolcanatide and all
related intellectual property in the context of a Chapter 11 bankruptcy process. The sale is subject to a competitive process and the
Company’s receipt of higher and better offers. Shire plc obtained approval of Motegrity™ (prucalopride) in the U.S. for the
treatment of CIC in adults in December 2018. AMITIZA is being commercialized for the treatment of adults with CIC in certain
European countries, including the United Kingdom and Switzerland by Sucampo AG, and for the treatment of chronic
constipation in Japan by Mylan N.V.
®
Manufacturing and Supply
We currently manage our global supply and distribution of linaclotide through a combination of contract manufacturers
and collaboration partners. It is our objective to produce safe and effective medicine on a worldwide basis, with redundancy built
into critical steps of the supply chain. We believe that we have sufficient 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 and manufacture of finished goods. We and certain of our partners have entered into commercial
supply agreements with multiple third-party manufacturers for the production of linaclotide API. We believe our commercial
suppliers have the capabilities to produce linaclotide API in accordance with current good manufacturing practices, or GMP, on a
sufficient scale to meet our development and commercial needs. Our commercial suppliers are subject to routine inspections by
regulatory agencies worldwide and also undergo periodic audit and certification by our quality department.
Each of Allergan and Astellas is responsible for drug product and finished goods manufacturing for its respective
territories, and distribution of finished goods to their customers. We have an agreement with an independent third party to serve
as a source of drug product manufacturing of linaclotide for our partnered territories and we have worked with our partners to
achieve sufficient redundancy in this component of the linaclotide supply chain. Under our collaboration with AstraZeneca, we
are accountable for drug product and finished goods manufacturing for China, for drug product manufacturing for Hong Kong and
Macau, with AstraZeneca accountable for finished goods manufacturing for Hong Kong and 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 of capsules per year. Our efforts to date have led to a formulation that is both cost effective and
able to meet the stability requirements for commercial pharmaceutical products. Our work in this area has created an opportunity
to seek additional intellectual property protection around the linaclotide program. In conjunction with Allergan and Astellas, we
have filed patent applications in the U.S. and foreign jurisdictions and have been issued multiple U.S. patents to protect the
current commercial formulation of linaclotide as well as related formulations. These issued U.S. patents expire in the early 2030s.
If issued, the pending patent 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 term extensions 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 to commercialize our drugs in territories outside the U.S. In executing our strategy, our goal is to retain
oversight over the worldwide development and commercialization of our products by playing an active role in their
commercialization or finding partners who share our vision, values, culture and processes.
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We built our commercial capabilities, including marketing, reimbursement, patient engagement and sales, with the intent
to leverage these capabilities for future internally and externally developed products. To date, we have established a high‑quality
commercial organization dedicated to bringing innovative, highly‑valued healthcare solutions to our customers, including
patients, payers, and healthcare providers.
We are also coordinating efforts with our linaclotide partners to ensure that we launch and maintain an integrated, global
linaclotide brand. By leveraging the knowledge base and expertise of our experienced commercial team and the insights of each
of our linaclotide commercialization partners, we continually improve our collective 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 and compositions, their methods of use and the processes for their manufacture, as well as any
other relevant inventions and improvements that are commercially important 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 and improvements we consider important to our business; defend our patents; preserve the confidentiality
of our trade secrets; and operate without infringing the patents and proprietary rights of third parties.
Linaclotide Patent Portfolio
Our linaclotide patent portfolio is currently composed of ten U.S. patents listed in the FDA publication, “Approved Drug
Products with Therapeutic Equivalence Evaluations”, or the Orange Book, three granted European patents, all of which have been
validated in each of 31 European countries, nine granted Japanese patents, five granted Chinese patents, 38 issued patents in other
foreign jurisdictions, and numerous pending U.S., foreign and Patent Cooperation Treaty, or PCT, patent applications. We own or
jointly own all of the issued patents and pending applications.
The issued U.S. patents, which will expire between 2024 and 2033, 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 use thereof. The granted European patents, which will expire
between 2024 and 2027, some of which are 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 expire between 2024 and 2032, the granted Japanese patents, which will expire between 2024
and 2035, some of which are subject to potential patent term extension, and the granted patents in other foreign jurisdictions,
which will expire between 2024 and 2032, some of which may be subject to potential patent term extension, contain claims
directed to the linaclotide molecule, pharmaceutical compositions of linaclotide for use in treating GI disorders, and room
temperature stable formulations of linaclotide.
We have pending patent applications in certain countries worldwide that, if issued, will expire between 2024 and 2032
and which include claims covering the linaclotide molecule, methods of using linaclotide to treat GI disorders, the current
commercial formulation of linaclotide and uses thereof to treat GI disorders.
We have pending applications directed to linaclotide products, including MD-7246, that, if issued, will expire in 2037 or
later. We also have pending U.S., 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, will expire between 2024 and 2037.
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 compensation for 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 to an 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 years from the
date of product approval by the FDA. The United States Patent and Trademark
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Office, or USPTO, has issued a Certificate of Patent Term Extension for U.S. Patent 7,304,036, 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 date of
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 an approved drug. We have received patent term extensions in Japan for several of our linaclotide
patents. We have also received patent term extensions, called supplementary protection certificates, for certain linaclotide patents
from several national patent offices in Europe.
We and Allergan have received Notice Letters regarding ANDAs submitted to the FDA by generic drug manufacturers
requesting approval to engage in commercial manufacture, use, sale and offer for sale of linaclotide capsule (72 mcg, 145 mcg
and 290 mcg), proposed generic versions of LINZESS. In 2018, we and Allergan entered into settlement agreements with three
generic drug manufacturers. For additional information relating to such ANDAs and any resolution of related litigation, see Item
3. Legal Proceedings , elsewhere in this Annual Report on Form 10-K.
IW-3718
Our pipeline patent portfolio relating to our IW-3718 development program is currently composed of one issued U.S.
patent and eight issued patents in foreign jurisdictions; and numerous pending provisional, U.S. non-provisional, foreign and PCT
patent applications. We own all of the issued patents and pending applications. The issued U.S. patent expires in 2031. The
foreign issued patents expire in 2027. The pending patent applications, if issued, will expire between 2027 and 2038.
Additional Intellectual Property
In addition to the patents and patent applications related to linaclotide, and IW-3718, we currently have 11 issued U.S.
patents; 27 patents granted in foreign jurisdictions, including European and Eurasian patents that have each been validated in
several countries; and a number of pending U.S. foreign and PCT applications directed to other GC‑C agonist and sGC stimulator
molecules and uses thereof. We also have other issued patents and pending patent applications relating to our other research and
development programs.
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, the patent 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, which compensates a patentee for administrative delays by the U.S.
Patent and Trademark Office 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 extensions for some of our patents once issued, depending upon the length of
clinical trials and other factors involved in the submission of a New Drug Application, or NDA.
Cyclerion Intellectual Property
There are eight issued U.S. patents, 21 pending U.S. patents applications, 10 pending PCT applications, and numerous
foreign patents and pending patent applications covering the product candidates that Cyclerion expects to advance following
completion of the planned separation of Ironwood and Cyclerion. The olinciguat patent portfolio in the U.S. includes three U.S.
patents, four pending U.S. patent applications, three PCT applications and one provisional application. The praliciguat patent
portfolio in the U.S. includes three U.S. patents, six pending U.S. patent applications, three PCT applications and one provisional
application. The IW-6463 portfolio includes pending PCT, U.S. and foreign applications. The technology underlying the sGC
patents and pending patent applications has been developed by us and was not acquired from any in-licensing agreement. We own
all of the issued patents and pending applications.
Government Regulation
Our business is subject to government regulation in both the U.S. and in other countries. 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 state
statutes and regulations, as well as similar foreign regulations, govern, among other things, the research, development, testing,
manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-marketing requirements and
assessments, post‑approval monitoring and reporting, sampling, and import and export of pharmaceutical products. The FDA and
other regulatory authorities have very broad enforcement authority and failure to abide by applicable regulatory requirements can
result in administrative or judicial sanctions
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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 pending applications, 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 the FDA, 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, or
GLP, 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 effect before 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, are produced to assess compliance with current GMP requirements and to assure
that the facilities, methods and controls are adequate to preserve the product’s identity, strength, quality and purity;
inspections of other sources of data in the NDA, such as inspection of clinical trial sites to assess compliance with
good clinical practice, or GCP, requirements are also generally required; and
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 product candidate. The conduct of the nonclinical tests must comply with federal regulations and
requirements including GLP. We must submit the results of the nonclinical tests, together with manufacturing information,
analytical data and a proposed clinical trial protocol to the FDA as part of an Investigational New Drug Application, or IND,
which must 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 the FDA, unless the FDA raises concerns or questions before that time about 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. We cannot 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 the FDA to modify, suspend or terminate such trials. The study protocol and informed
consent information for patients in clinical trials must also be submitted to an institutional review board, or IRB, for approval. An
IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the
IRB requirements or if the trial has been associated with unexpected serious harm to subjects. An IRB may also impose other
conditions on the trial. For studies conducted outside of the U.S., similarly, we are subject to local regulations which may differ
from the U.S. and local regulations must be followed appropriately.
Clinical trials involve the administration of the product candidate to humans under the supervision of qualified
investigators, generally physicians not employed 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 and
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pharmacologic 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 patient population (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 to extensive regulation, including compliance with GCP regulations and guidance, and
regulations designed to protect the rights and safety of subjects involved in investigations.
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 is not being conducted in accordance with FDA requirements or presents an unacceptable risk to
the clinical trial patients. We may also suspend clinical trials at any time on various grounds.
The results of the nonclinical and clinical studies, together with other detailed information, including the manufacture
and composition of the product candidate, are submitted to the FDA in the form of an NDA requesting approval to market the
drug. The FDA approval of the NDA is required before marketing of the product 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 the submission, or submission of a risk evaluation and mitigation strategy. The FDA may refer an application to an
advisory committee for review, evaluation and recommendation as to whether the application should be approved. The FDA is
not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making
decisions. Before approving an NDA, the FDA will typically inspect the facilities at which the product candidate is manufactured
and will not approve the product candidate unless current GMP compliance is satisfactory. The FDA also typically inspects
facilities responsible for performing animal testing, as well as clinical investigators who participate in clinical trials. The FDA
may refuse to approve an NDA if applicable regulatory criteria 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 and surveillance to monitor the safety or
efficacy of a product. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not
maintained or problems are identified following initial marketing.
The testing and approval process requires substantial time, effort and financial resources, and our product candidates
may not be approved on a timely basis, if at all. The time and expense required to perform the clinical testing necessary to obtain
FDA approval for regulated products can frequently exceed the time and expense of the research and development initially
required to create the product. The results of nonclinical studies and initial clinical trials of our product candidates are not
necessarily predictive of the results from large‑scale clinical trials, and clinical trials may be subject to additional costs, delays or
modifications due to a number of factors, including difficulty in obtaining enough patients, investigators or product candidate
supply. Failure by us or our collaborators, licensors or licensees, including Allergan, Astellas and AstraZeneca, to obtain, or any
delay in obtaining, regulatory approvals or in complying with requirements could adversely 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 by submitting an ANDA with the FDA. The application for a generic drug is “abbreviated”
because it need not include nonclinical 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, is safe and effective. In order to obtain approval of an ANDA, an
applicant must, among other things, establish that its product is bioequivalent to an existing approved drug and that it has the
same active ingredient(s), strength, dosage form, and the same route of administration. A generic drug is considered bioequivalent
to 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 of absorption of the reference drug when administered under similar experimental conditions.
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The Hatch‑Waxman Act also provides incentives by awarding, in certain circumstances, certain legal protections from
generic competition. This protection comes 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 application for 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 been previously 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 approval of 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 discussion below regarding Paragraph
IV Certifications). The Hatch ‑
Waxman Act also provides three years of exclusivity for approved applications for drugs that are
not new chemical entities, if the application contains the results of new clinical investigations (other than bioavailability studies)
that were essential to approval of the application. Examples of such applications include applications for new indications, dosage
forms (including new drug delivery systems), strengths, or conditions of use for an already approved product. This three ‑
year
exclusivity period only protects against FDA approval of ANDAs and 505(b)(2) applications for generic drugs that include the
innovation that required new clinical investigations that were essential to approval; it does not prohibit the FDA from accepting or
approving ANDAs 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 claiming their drugs for listing in the Orange Book. When an ANDA 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 the
reference drug. A certification that a listed patent is invalid, unenforceable 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 the NDA 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 or not 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 of receiving 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 may approve the proposed product before the expiration of the 30 ‑
month stay only if a court finds the patent invalid
or not infringed, and the court may shorten or lengthen the 30-month stay under certain limited circumstances.
Patent Term Restoration. Under the Hatch ‑
Waxman Act, a portion of the patent term lost during product development
and FDA review of an NDA or 505(b)(2) application is restored if approval of the application is the first permitted commercial
marketing of a drug containing the active ingredient. The patent term 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 date of 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 be
extended 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 the patent 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 the application 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 in accordance with current GMP, maintain and provide to the FDA updated safety and
efficacy information, report adverse experiences with the product, keep certain records and submit periodic reports, obtain FDA
approval of certain manufacturing or labeling changes, and comply with FDA promotion and advertising requirements and
restrictions. Failure to meet these obligations can result in various adverse consequences, both voluntary and FDA‑imposed,
including product recalls, withdrawal of approval, restrictions on marketing, and the imposition of civil fines and criminal
penalties against the NDA holder. In addition, later discovery of previously unknown safety or efficacy issues may result in
restrictions on the product, manufacturer or NDA holder.
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We and any manufacturers of our products are required to comply with applicable FDA manufacturing requirements
contained in the FDA’s current GMP regulations. Current GMP regulations require, among other things, quality control and
quality assurance as well as the corresponding maintenance of records and documentation. The manufacturing facilities for our
products must meet current GMP requirements to the satisfaction of the FDA pursuant to a pre‑approval inspection before we can
use them to manufacture our products. We and any third‑party manufacturers are also subject to periodic inspections of facilities
by the FDA and other authorities, including procedures and operations used in the testing and manufacture of our products to
assess our compliance with applicable regulations.
With respect to post‑market product advertising and promotion, the FDA imposes a number of complex regulations on
entities that advertise and promote pharmaceuticals, which include, among others, standards for direct‑to‑consumer advertising,
prohibitions on promoting drugs for uses, conditions or diseases, or in patient populations that are not consistent with 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, warning or untitled
letters from the FDA, mandated corrective advertising or communications with doctors or patients, and civil or criminal penalties.
Although physicians may prescribe legally 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 indication typically requires clinical data similar in type and quality
to the clinical data supporting the original application for the original indication, and the FDA uses similar procedures 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‑marketing testing, known as Phase IV testing, risk evaluation and mitigation strategies, and surveillance to
monitor the effects of an approved product or to place conditions on an approval 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 regulatory authorities. The requirements governing the conduct of clinical trials, marketing
authorization, pricing and reimbursement vary widely from jurisdiction to jurisdiction. At present, foreign marketing
authorizations are applied for at a national level, although within the E.U. registration procedures are available to companies
wishing to market a product in more than one E.U. member state. We are subject to U.S. federal and foreign anti-corruption laws.
Those laws include the U.S. Foreign Corrupt Practices Act, or FCPA, which prohibits U.S. corporations and their representatives
from offering, promising, authorizing, or making payments to any foreign government official, government staff member,
political party or political candidate in an attempt to obtain or retain business abroad. The scope of the FCPA encompasses certain
healthcare professionals in many countries. We are also subject to similar laws of other countries that have enacted anti-
corruption laws and regulations.
Pricing and Reimbursement
Within the U.S., significant uncertainty exists regarding the coverage and reimbursement status of products approved by
the FDA. Sales of our products depend, in part, on the extent to which our products will be covered by third-party payors, such as
government health programs, commercial insurance and managed healthcare organizations. The process for determining whether
a third-party payor will provide coverage for a drug product typically is separate from the process for setting the price of a drug
product or for establishing the reimbursement rate that the payor will pay for the drug product once coverage is approved. Third-
party payors may limit coverage to specific drug products on an approved list, also known as a formulary, which might not
include all of the FDA-approved drugs for a particular indication. A decision by a third-party payor not to cover our products or
to restrict coverage of our products could reduce utilization of our products. Moreover, a third-party payor’s decision to provide
coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Adequate third-party
reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our
investment in product development. Additionally, coverage and reimbursement for drug products can differ significantly from
payor to payor. One third-party payor’s decision to cover a particular drug product or service does not ensure that other payors
will also provide coverage for the medical product or service, or will provide coverage at an adequate reimbursement rate.
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The containment of healthcare costs has become a priority of federal and state governments, and the prices of drugs have
been a focus in this effort. Federal and state governments have shown significant interest in implementing cost-containment
programs, including restrictions on reimbursement and requirements for substitution of generic products. Adoption of new or
enhanced cost-containment measures could limit our net revenue and results. Third party payors are increasingly challenging the
prices charged for medical products and services and examining the medical necessity and cost effectiveness of medical products
and services, in addition to their safety and efficacy. Restrictions in coverage or decreases in third-party reimbursement for our
products could have a material adverse effect on our sales, results of operations and financial condition. We expect that the
pharmaceutical industry will experience pricing pressures due to the increasing influence of managed care (and related
implementation of managed care strategies to control utilization), additional federal and state legislative and regulatory proposals
to regulate pricing of drugs, limit coverage of drugs or reduce reimbursement for drugs, and public scrutiny of drug
pricing. While we cannot predict what executive, legislative and regulatory proposals will be adopted or other actions will occur,
such events could have a material adverse effect on our business, financial condition and profitability. For additional information
relating to pricing and reimbursement, see Item 1A, Risk Factors, elsewhere in this Annual Report on Form 10-K.
Sales and Marketing
The marketing and sale of pharmaceutical products are subject to comprehensive governmental regulation both within
and outside the U.S.
Within the U.S., numerous federal, state and local authorities have jurisdiction over, or enforce laws related to, such
activities, including the FDA, U.S. Drug Enforcement Agency, Centers for Medicare & Medicaid Services, the U.S. Department
of Health and Human Services Office of Inspector General, the U.S. Department of Justice, state Attorneys General, state
departments of health and state pharmacy boards.
We are subject to the requirements of the FDC Act and accompanying regulations that prohibit pharmaceutical
companies from promoting a drug prior to approval from the FDA and from promoting an approved drug in a manner inconsistent
with the approved label.
We are also subject to various federal and state laws pertaining to health care “fraud and abuse,” including anti-kickback
laws and false claims laws, for activities related to sales of any of our products or product candidates that may in the future
receive marketing approval. Anti-kickback laws generally prohibit 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, for which payment may be made under federal healthcare programs such as Medicare and Medicaid. Although the
specific provisions of these laws vary, their scope is generally broad and there may not be regulations, guidance or court decisions
that apply the laws to particular industry practices. False claims laws 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. Violations of fraud and abuse laws may be punishable by criminal or civil sanctions,
including fines and civil monetary penalties, and/or exclusion from federal health care programs (including Medicare and
Medicaid).
Laws and regulations have been enacted by the federal government and various states to regulate the sales and marketing
practices of pharmaceutical manufacturers with marketed products. The laws and regulations generally limit financial
interactions between manufacturers and health care providers and/or require disclosure to the government and public of such
interactions. Many of these laws and regulations contain ambiguous requirements or require administrative guidance for
implementation.
Employees
As of December 31, 2018, we had 515 employees. Approximately 26 were scientists engaged in discovery research, 173
were in our drug development organization, 214 were in our sales and commercial team, and 102 were in general and
administrative functions. None of our employees are represented by a labor union, and we consider our employee relations to be
good.
During the year ended December 31, 2018, we commenced certain reductions in our workforce. In February 2019,
following further analysis of our strategy and core business needs, and in an effort to further strengthen the operational efficiency
of its organization, we commenced a reduction in our workforce by 35 employees, primarily based
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in the home office. Refer to Note 18, Workforce Reduction and Note 20, Subsequent Events , to our consolidated financial
statements appearing elsewhere in this Annual Report on Form 10-K for further details.
Certain Ironwood employees are expected to transition to Cyclerion upon the planned separation into two, independent
publicly traded companies.
Executive Officers of the Registrant
The following table sets forth the name, age and position of each of our executive officers as of February 25, 2019:
Name
Peter M. Hecht, Ph.D.
Gina Consylman, CPA
Mark G. Currie, Ph.D.
Halley E. Gilbert
William Huyett
Mark Mallon
Thomas A. McCourt
Age
Position
55 Chief Executive Officer, Director
46 Senior Vice President, Chief Financial Officer, and Treasurer
64 Senior Vice President, Chief Scientific Officer and President of R&D
49 Senior Vice President, Chief Legal Officer, and Secretary
63 Chief Operating Officer
56 Senior Executive Advisor
61 Senior Vice President, Marketing and Sales and Chief Commercial Officer
Peter M. Hecht has served as our chief executive officer and a director since co-founding the company in 1998, during
®
which he has built a highly respected leadership team and culture that worked together to discover, develop and commercialize
LINZESS
, a novel first-in-mechanism therapeutic that quickly became the branded prescription market leader in its class and
has been taken by millions of patients for irritable bowel syndrome with constipation and chronic idiopathic constipation.
Additionally, the team has pioneered new areas of science, produced a development portfolio with multiple innovative drug
candidates, and established a valuable network of global partnerships. Through a combination of private and public equity,
structured debt, and partnerships, Dr. Hecht and his team raised over one billion dollars to fund these efforts. Prior to founding
Ironwood, Dr. Hecht was a research fellow at Whitehead Institute for Biomedical Research. Dr. Hecht serves on the advisory
board of Ariadne Labs. He 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 of California at Berkeley. Dr. Hecht's experiences as one of our founders and his tenure as
our chief executive officer make him a valuable member of our board of directors.
Gina Consylman has served as our senior vice president, chief financial officer since November 2017. Ms. Consylman
previously served as our interim Chief Financial Officer from September 2017 to November 2017, and as our Vice President of
Finance and Chief Accounting Officer from August 2015 to November 2017. She also previously served as our Vice President,
Corporate Controller and Chief Accounting Officer from June 2014 to July 2015. Ms. Consylman currently serves on the Board
of Directors of Verastem Oncology. Prior to joining Ironwood, Ms. Consylman served as Vice President, Corporate Controller
and Principal Accounting Officer of Analogic Corporation (which was acquired by funds affiliated with Altaris Capital Partners,
LLC), a publicly held healthcare and security technology solutions company, from February 2012 to June 2014, where she
oversaw Analogic’s global accounting team. Prior to joining Analogic, Ms. Consylman served in various corporate accounting
roles at Biogen Inc., a publicly held global biotechnology company, from November 2009 to February 2012, culminating in her
service as Senior Director, Corporate Accounting where she was responsible for the accounting teams for the corporate and U.S.
commercial business units. Ms. Consylman has also served in various other finance and accounting roles, including Corporate
Controller at Varian Semiconductor Equipment Associates, Inc. (subsequently acquired by Applied Materials, Inc.). Ms.
Consylman, a Certified Public Accountant, began her career in public accounting at Ernst & Young LLP. She holds a B.S. in
accounting from Johnson & Wales University and a M.S. in taxation from Bentley University.
Mark G. Currie serves as our senior vice president, chief scientific officer and president of research and development,
and has led our research and development efforts since joining us in 2002. Prior to joining Ironwood, Dr. Currie directed
cardiovascular and central nervous system disease research as vice president of discovery research at Sepracor Inc. Previously,
Dr. Currie initiated, built and led discovery pharmacology and also served as director of arthritis and inflammation 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 the
Bowman‑Gray School of Medicine of Wake Forest University.
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Halley E. Gilbert joined Ironwood in 2008 as the founding member of our legal department, and also established our
company’s compliance function as Ironwood grew from a privately-held, research-based organization to a publicly-traded, fully-
integrated commercial biotechnology company. Ms. Gilbert has over twenty years of experience navigating biopharmaceutical
companies through transformational change, as well as expertise in corporate transactions, corporate governance, employment
law and legal and operational issues relevant to launching new medicines into specialty and primary care markets. Prior to joining
Ironwood, Ms. Gilbert was Vice President, Deputy General Counsel at Cubist Pharmaceuticals, Inc. from 2002 to 2008, where
she supported the launch of Cubist’s first acute care antibiotic, and she served as Corporate Counsel at Genzyme Corp. from 1999
to 2001. Ms. Gilbert began her career at Skadden, Arps, Slate, Meagher & Flom LLP, where she specialized in mergers and
acquisitions and securities law. She serves on the board of directors of Achaogen, Inc., a clinical-stage biopharmaceutical
company focused on the development of novel antibacterials, and holds a J.D. from Northwestern University School of Law and a
B.A. from Tufts University.
William Huyett serves as our chief operating officer. Prior to joining Ironwood in December 2017, Mr. Huyett spent 30
years with McKinsey and Company, Inc., in its Washington D.C., Zurich, and Boston offices. During his tenure at McKinsey, Mr.
Huyett served clients in the life sciences, industrial and other technology-intensive sectors. He has been a Senior Partner Emeritus
at McKinsey since December 2015, and was previously a Senior Partner from July 1998 to December 2015. As a Senior Partner,
Mr. Huyett was a leader in the firm’s pharmaceutical and medical products and its strategy and corporate finance practices. He
also served on McKinsey’s Shareholder’s Council (its board of directors), serving as chair of its Finance Committee. Prior to
joining McKinsey, Mr. Huyett held a variety of line management positions in the automation industry with Allen-Bradley (now
Rockwell Automation, Inc.). Mr. Huyett is the non-executive chair of the board of directors of the London Stock Exchange-listed
Georgia Healthcare Group PLC and an independent director of the London Stock Exchange-listed Georgia Capital. He serves on
several not-for-profit boards, including The Rockefeller University and the Marine Biological Laboratory in Woods Hole,
Massachusetts. He earned his B.S. in electronics engineering and his M.B.A. from the University of Virginia.
Mark Mallon serves as executive senior advisor to Ironwood. Prior to joining Ironwood in January 2019, Mr. Mallon
was a member of the senior executive team of AstraZeneca PLC and led its strategic functions, Global Product and Portfolio
Strategy, Global Medical Affairs, and Corporate Affairs. Mr. Mallon held a number of senior sales and marketing roles at
AstraZeneca, which he joined in 1994, including Executive Vice President, International from January 2013 to April 2017 and
Executive Vice President, Global Product and Portfolio Strategy from August 2016 to December 2018. Mr. Mallon started his
career in the biopharmaceutical industry in management consulting. He earned his B.S. in chemical engineering from the
University of Pennsylvania and his M.B.A. in marketing and finance from the Wharton School of Business.
Thomas A. McCourt has served as our senior vice president of marketing and sales and chief commercial officer since
joining Ironwood in 2009. Prior to joining 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 with Novartis 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 senior commercial roles, including
vice president of strategic marketing and operations. Mr. McCourt was also part of the founding team at Astra Merck Inc., leading
®
the development of the medical affairs and science liaison group and then serving as brand manager for Prilosec and NEXIUM
. Mr. McCourt serves on the board of directors of Acceleron Pharma Inc. and has a degree in pharmacy 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 to those reports, as soon as reasonably practicable after they are electronically filed or furnished to
the SEC, on the Investors section of our website at www.ironwoodpharma.com or by contacting our Investor Relations
department at (617) 374‑5082. The contents of our website are not incorporated by reference into 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 our business, financial condition, results of operations or prospects. The trading price of our common stock
may decline due to these risks.
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Risks Related to Our Business and Industry
We 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 attain profitability or positive cash flows.
We and our partner, Allergan plc (together with its affiliates), or Allergan, began selling LINZESS in the U.S. during
December 2012. Revenues from our LINZESS collaboration constitute a significant portion of our total revenue, and we believe
they will continue to do so for the foreseeable future. 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 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 treatment history to their physicians;
our ability to both secure and maintain adequate reimbursement for, and optimize patient access to, LINZESS and our
ability to demonstrate that LINZESS is safer, more efficacious and/or more cost-effective than alternative therapies;
the effectiveness of our partners’ distribution networks;
the occurrence of any side effects, adverse reactions or misuse, or any unfavorable publicity in these or other areas,
associated with linaclotide; 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, we may never generate sufficient revenues from LINZESS to reach or maintain profitability for
our company or to sustain our anticipated levels of operations.
Our products may cause undesirable side effects or have other properties that could limit their commercial potential.
The most commonly reported adverse reaction since linaclotide became commercially available, as well as in the clinical trials for
linaclotide in IBS-C and CIC, has been diarrhea. In the linaclotide Phase III IBS-C and CIC trials, severe diarrhea was reported in
2% or less of the linaclotide-treated patients and its incidence was similar between the IBS-C and CIC populations. Linaclotide
has been prescribed to millions of patients since its launch in the U.S. and other territories beginning in December 2012, and, as a
result, it has been used in wider populations and in less rigorously controlled environments than in the clinical studies supporting
its approval.
Further, as we and our partners conduct clinical trials, including in new or existing territories, indications, populations or
formulations, as well as explore potential combination products, the number of patients treated with our products within and
outside of such products’ currently approved indications and patient populations has grown and continues to do so.
As patient experience increases and expands, we and others may identify previously unknown side effects, known side effects
may be found to be more frequent or severe than in the past, and we and others may detect unexpected safety signals for our
products or any products perceived to be similar to our products. The foregoing, or the perception of the foregoing, may have the
following effects, among others:
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·
·
sales of our products may be impaired;
regulatory approvals for our products may be denied, restricted or withdrawn;
· we or our partners may decide to, or be required to, change the products’ label or send product warning letters or field
alerts to physicians, pharmacists and hospitals;
·
reformulation of the products, additional nonclinical or clinical studies, changes in labeling or changes to or re-approvals
of manufacturing facilities may be required;
· we or our partners may be precluded from pursuing approval of linaclotide in new territories or from studying additional
development opportunities to enhance our products’ clinical profiles, including within new or existing indications,
populations and formulations, as well as in potential combination products;
·
·
our or our products’ reputation in the marketplace may suffer; and
government investigations or lawsuits, including class action suits, may be brought against us or our partners.
Any of the above occurrences would harm or prevent sales of our products, increase expenses and impair our and our partners’
ability to successfully commercialize our products.
In June 2016, we entered into a license agreement for exclusive rights to commercialize products containing lesinurad in the U.S.,
which license agreement we refer to as the Lesinurad License Agreement, and in August 2018, delivered to AstraZeneca a notice
of termination of the Lesinurad License Agreement, which termination was made
with respect to all products under the lesinurad license agreement. The most commonly reported adverse reactions in the clinical
trials for lesinurad (in combination with a xanthine oxidase inhibitor, or XOI) for the treatment of hyperuricemia associated with
uncontrolled gout were headache, influenza, increased blood creatinine and gastroesophageal reflux disease. ZURAMPIC and
DUZALLO were launched in October 2016 and October 2017, respectively. As a result, such products have been used in wider
populations and in less rigorously controlled environments than in the clinical studies supporting their approval. Additionally,
because such products are approved for use in combination with an XOI for the treatment of hyperuricemia associated with
uncontrolled gout, and DUZALLO is a fixed-dose combination treatment of lesinurad and allopurinol (an XOI), our patients may
experience side effects and adverse reactions associated with the use of XOIs. Notwithstanding ZURAMPIC’s U.S. Food and
Drug Administration, or FDA, -approved label, if ZURAMPIC is taken without an XOI, patients may experience new or
increased risk of adverse reactions, including the heightened risk of acute renal failure.
In addition, LINZESS, ZURAMPIC and DUZALLO each contain a boxed warning about their use. The FDA-approved label for
LINZESS contains a boxed warning about its use in pediatric patients. LINZESS is contraindicated in pediatric patients up to
six years of age based on nonclinical data from studies in neonatal mice approximately equivalent to human pediatric patients less
than two years of age. There is also a warning advising physicians to avoid the use of LINZESS in pediatric patients six to less
than 18 years of 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 and Allergan have established a nonclinical and clinical post-marketing plan with the
FDA to understand the safety and efficacy of LINZESS in pediatric patients, which is discussed below.
The FDA-approved label for DUZALLO contains a boxed warning about the risk of acute renal failure with DUZALLO, and the
FDA-approved label for ZURAMPIC contains a boxed warning about the risk of acute renal failure with ZURAMPIC, which is
more common when ZURAMPIC is used without an XOI. ZURAMPIC and DUZALLO are both contraindicated in patients with
severe renal impairment or end-stage renal diseases, kidney transplant recipients, patients on dialysis or patients with tumor lysis
syndrome or Lesch-Nyhan syndrome. In addition, DUZALLO is contraindicated in patients with a known hypersensitivity to
allopurinol. The FDA has required that a post-marketing clinical study be conducted to further evaluate the renal and
cardiovascular safety of lesinurad, which is discussed below.
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We rely entirely on contract manufacturers, our partners and other third parties to manufacture and distribute linaclotide. If
they are unable to comply with applicable regulatory requirements, unable to source sufficient raw materials, experience
manufacturing or distribution difficulties, or are otherwise unable to manufacture 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 manufacture active pharmaceutical ingredient, or API, and final drug product. We rely on our partners to store and
distribute linaclotide to third party purchasers. We and certain of our partners have commercial supply agreements with
independent third parties to manufacture the linaclotide API used to support all of our partnered territories. Each of Allergan and
Astellas is responsible for linaclotide drug product and finished goods manufacturing (including bottling and packaging) for its
respective territories, and distributing the finished goods to wholesalers. Under our collaboration with AstraZeneca, we are
accountable for drug product and finished goods manufacturing for China, for drug product manufacturing for Hong Kong and
Macau, with AstraZeneca accountable for finished goods manufacturing for Hong Kong and Macau. Neither we nor AstraZeneca
have experience manufacturing linaclotide on a commercial scale and we and AstraZeneca are working to achieve sufficient
redundancy in this component of the linaclotide supply chain.
Each of our API and drug product manufacturers must comply with current good manufacturing practices, or GMP, and other
stringent regulatory requirements enforced by the FDA and foreign regulatory authorities in other jurisdictions. These
requirements include, among other things, quality control, quality assurance and the maintenance of records and documentation,
which occur in addition to our own quality assurance releases. Manufacturers of our products may be unable to comply with these
GMP requirements and with other regulatory requirements. We have little control over our manufacturers’ or partners’
compliance with these regulations and standards.
Our manufacturers may experience problems with their respective manufacturing and distribution operations and processes,
including for example, quality issues, such as product specification and stability failures, procedural deviations, improper
equipment installation or operation, utility failures, contamination and natural disasters. In addition, the raw materials necessary
to make API for our products are acquired from a limited number of sources. Any delay or disruption in the availability of these
raw materials or a change in raw material suppliers could result in production disruptions, delays or higher costs with consequent
adverse effects on us.
The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of
advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties
in commercial production. These problems include difficulties with production costs and yields, quality control, including
stability of the product and quality assurance testing, and shortages of qualified personnel, as well as compliance with federal,
state and foreign regulations and the challenges associated with complex supply chain management. Even if our manufacturers or
partners do not experience problems and commercial manufacturing is achieved, their maximum or available manufacturing
capacities may be insufficient to meet commercial demand. Finding alternative manufacturers or adding additional manufacturers
requires a significant amount of time and involves significant expense. New manufacturers would need to develop and implement
the necessary production techniques and processes, which along with their facilities, would need to be inspected 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 the availability 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 and increased manufacturing costs. If we
experience any of these results, or if our manufacturers’ maximum or available capacities are insufficient to meet demand, we
may not be able to successfully commercialize our products.
The transition of lesinurad to AstraZeneca has been and continues to be a significant undertaking that could require
additional substantial financial and managerial resources, and we may not be successful.
We have encountered and may continue to encounter costs and delays related to transitioning lesinurad to AstraZeneca. We have
never undertaken the process of transitioning a marketed product to a third party, and we may encounter challenges and costs that
we do not currently anticipate. Our reputation with patients or physicians may be harmed as a result of transitioning lesinurad, and
unforeseen complications with the FDA or other regulatory agencies
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could arise. In addition, we are still in discussions with AstraZeneca regarding the costs involved in the termination and transition
process and have not reached an agreement. If we are unable to reach agreement with AstraZeneca, this could potentially lead to
costly administrative procedures or litigation, distract management from other business activities, and could have an adverse
impact on our financial condition. For additional information relating to our costs and expenses of exiting lesinurad, see Note 18,
Workforce Reduction , to our condensed consolidated financial statements appearing elsewhere in this Annual Report on Form
10-K.
If any of our linaclotide partners undergoes a change in control or in management, this may adversely affect our collaborative
relationship or the success of the commercialization of linaclotide in the U.S. or in the other countries where it is approved, or
the ability to achieve regulatory approval, launch and commercialize linaclotide in other territories.
We work jointly and collaboratively with each of our partners on many aspects of the development, manufacturing and
commercialization of linaclotide. In doing 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 collaborations is highly dependent
on the resources, efforts and skills of our partners and their key employees. As we and our partners commercialize linaclotide in
the U.S. and the other countries where it is approved, and develop, launch and commercialize linaclotide in other parts of the
world, the drug’s success becomes more dependent on us maintaining highly collaborative and well aligned partnerships. If any of
our linaclotide partners undergo a change of control or in management in the future, we would need to reestablish many
relationships and confirm continued alignment on our development and commercialization strategy for linaclotide. Further, in
connection with any change of control or in management, there is inherent uncertainty and disruption in operations, which could
result in distraction, inefficiencies, and misalignment of priorities. As a result, in the event of a change of control or in
management at one of our linaclotide partners, we cannot be sure that we will be able to successfully execute on our development
and commercialization strategy for linaclotide in an effective and efficient manner and without disruption or reduced
performance. Finally, any change 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 or other resources necessary to continue supporting its portion of the
development, manufacturing or commercialization of linaclotide.
If any of our linaclotide partners undergoes a change of control and the acquirer either (i) is unable to perform such partner’s
obligations under its collaboration or license agreement with us or (ii) does not comply with the divestiture or certain other
provisions of the applicable agreement, we have the right to terminate the collaboration or license agreement 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
establish the capability to develop, manufacture and commercialize linaclotide in that partnered territory on our own or we will
need to establish a relationship with a new partner. 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, gastrointestinal, or GI, therapy and who support the commercialization of
LINZESS 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 do so, we would need to enhance each of these functional aspects to replace the capabilities that
Allergan was previously providing to the collaboration. Any such transition might result in a period of reduced efficiency or
performance by our operations and commercialization teams, which could adversely affect our ability to commercialize
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 was subject 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 to do 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.
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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 commercial potential.
We are working closely with Allergan to execute our joint commercialization plan for LINZESS. The commercialization plan
includes an agreed upon marketing campaign that targets the physicians who see patients who could benefit from LINZESS
treatment. Our marketing campaign also targets the adult men and 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 of specific gastroenterologists and primary
care physicians on whom our and Allergan’s sales representatives call, and the frequency with which the representatives meet
with them.
In order to optimize the commercial potential of LINZESS, we and Allergan must execute upon this commercialization plan
effectively and efficiently. In addition, we and Allergan must continually assess and modify our commercialization plan in a
coordinated and integrated fashion in order to adapt to the promotional response. Further, we and Allergan must continue to focus
and refine our marketing campaign to ensure a clear and understandable physician-patient dialogue 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 highest
quality support, guidance and oversight in order for them to continue to effectively promote LINZESS to gastroenterologists and
primary care physicians. If we and Allergan 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 maximum commercial
potential and we may suffer financial harm. Our efforts to further target and engage adult patients with IBS-C or CIC may not
effectively increase appropriate 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 in the U.S. which, if not favorable for our
products, could hinder or prevent our products’ commercial success.
Our and our partner’s ability to commercialize our products successfully depend in part on the coverage and reimbursement levels
set by governmental authorities, private health insurers and other third-party payers. In determining whether to approve
reimbursement for our products and at what level, we expect that third-party payers will consider factors that include the efficacy,
cost effectiveness and safety of our products, as well as the availability of other treatments including generic prescription drugs
and over-the-counter alternatives. Further, in order to obtain and maintain acceptable reimbursement levels and access for patients
at copay levels that 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-party payers or other unfavorable pricing modifications. Obtaining and maintaining
favorable reimbursement can be a time consuming and expensive process, and there is no guarantee that we or Allergan will be
able to negotiate or continue to negotiate pricing terms with third-party payers at levels that are profitable to us, or at all. Certain
third-party payers also require prior authorization for, or even refuse to provide, reimbursement for our products, and others may
do so in the future. Our business would be materially adversely affected if we and our partners are not able to receive approval
for reimbursement of our products 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 satisfactory levels or
becomes subject to prior authorization. In addition, our business could be adversely affected if government healthcare programs,
private health insurers, including managed care organizations, or other reimbursing bodies or payers limit or reduce the
indications for or conditions under which our products may be reimbursed.
We expect to experience pricing pressures in connection with the sale of our current and future products due to the healthcare
reforms discussed below, as well as the trend toward programs aimed at reducing healthcare costs, the increasing influence of
managed care, the scrutiny of pharmaceutical pricing, the ongoing debates on reducing government spending and additional
legislative proposals. There have been several recent federal and state efforts to address drug costs, which generally have focused
on increasing transparency around drug costs or limiting drug prices or price increases. Healthcare reform efforts or any future
legislation or regulatory actions aimed at controlling and reducing healthcare costs, including through measures designed to limit
reimbursement, restrict access or impose unfavorable pricing modifications on pharmaceutical products, could impact our and our
partners’ ability to obtain or maintain reimbursement for our products at satisfactory levels, or at all, which could materially harm
our business and financial results.
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We and our linaclotide partners are subject to uncertainty relating to pricing and reimbursement policies outside the U.S., as
well as risks relating to the improper importation of linaclotide and sale of counterfeit versions of linaclotide. If such policies
are not favorable, or if linaclotide is improperly imported or is counterfeited, our business and financial results could be
adversely affected.
In some foreign countries, particularly Canada, the countries of Europe and Japan, the pricing and payment of prescription
pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can
take six to 12 months or longer after the receipt of regulatory approval and product launch. Reimbursement sources are different
in each country, and each country may include a combination of distinct potential payers, including private insurance and
governmental payers. Some countries may restrict the range of medicinal products for which their national health insurance
systems provide reimbursement and control the prices of medicinal products for human use. To obtain favorable reimbursement
for the indications sought or pricing approval in some countries, we and our partners may be required to conduct a clinical trial
that compares the cost and clinical effectiveness of linaclotide to other available therapies. In addition, in countries in which
linaclotide is the only approved therapy for a particular indication, such as CONSTELLA as the only prescription product
approved for the symptomatic treatment of moderate to severe IBS-C in adults in Europe and LINZESS as the only prescription
treatment approved for the treatment of adults with IBS-C in Japan, there may be disagreement as to what the most comparable
product is, or if there even is one. Further, several countries have implemented government measures to either freeze or reduce
pricing of pharmaceutical products. Many third-party payers and governmental authorities also consider the price for which the
same product is being sold in other countries to determine their own pricing and reimbursement strategy, so if linaclotide is priced
low or gets limited reimbursement in a particular country, this could result in similarly low pricing and reimbursement in other
countries. If reimbursement for linaclotide is unavailable in any country in which reimbursement is sought, limited in scope or
amount, or if pricing is set at or reduced to unsatisfactory levels, our and our partners’ 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 the commercial launch or continued sale of
linaclotide in that country.
CONSTELLA was first launched in certain European countries for the symptomatic treatment of moderate to severe IBS-C in
adults in the second quarter of 2013 and our partner Allergan is currently commercializing CONSTELLA in a number of
European countries, including the United Kingdom, Italy and Spain. LINZESS was first launched in Japan for the treatment of
IBS-C in adults in the first quarter of 2017, and for the treatment of chronic constipation in adults in the third quarter of 2018, and
our partner Astellas is currently commercializing LINZESS in Japan. The pricing and reimbursement strategy is a key component
of our partners’ commercialization plans for CONSTELLA in Europe and LINZESS in Japan. Our revenues may suffer if our
partners are unable to successfully and timely conclude reimbursement, price approval or funding processes and market
CONSTELLA in key member states of the E.U. or LINZESS in Japan, or if coverage and reimbursement for either CONSTELLA
or LINZESS is limited or reduced. If our partners are not able to obtain coverage, pricing or reimbursement on acceptable terms
or at all, or if such terms change in any countries in its territory, our partners may not be able to, or may decide not to, sell either
CONSTELLA or LINZESS in such countries.
We and our partners also face the risk that linaclotide is imported or reimported into markets with relatively higher prices from
markets with relatively lower prices, which would result in a decrease of sales and any payments we receive from the affected
market. Additionally, third parties may illegally produce, distribute and/or sell counterfeit or otherwise unfit or adulterated
versions of linaclotide. In either case, we and our partners may not be able to detect or, if detected, prevent or prohibit the sale of
such products, which could result in dangerous health consequences for patients, loss of confidence in us, our partners and our
products, and adverse regulatory or legal consequences. Any of the foregoing or other consequences could adversely impact our
reputation, financial results and business.
Because we work with partners to develop, manufacture and commercialize our products, we are dependent upon third parties,
and our relationships with those third parties, in our efforts to obtain regulatory approval for, and to commercialize, our
products, as well as to comply with regulatory and other obligations with respect to such products.
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 holds the new drug application, or NDA, for LINZESS. In addition, we are commercializing LINZESS in
the U.S. with Allergan. Allergan is also responsible for the development, regulatory approval and commercialization of
linaclotide in countries worldwide other than Japan, China, Hong Kong and Macau. Allergan is commercializing LINZESS in
Mexico and CONSTELLA in Canada, as well as commercializing
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CONSTELLA in certain countries in Europe. Astellas, our partner in Japan, is responsible for completing the clinical programs
and obtaining regulatory approval of linaclotide in its territory. Astellas is commercializing LINZESS in Japan. Further, we are
jointly overseeing the development, and will jointly oversee the commercialization, of linaclotide in China, Hong Kong and
Macau through our collaboration with AstraZeneca, with AstraZeneca having primary responsibility for the local operational
execution. Each of Astellas, AstraZeneca and Allergan is responsible for commercializing linaclotide in its respective territory, if
approved. Each of our partners is responsible for reporting adverse event information from its territory to us. Finally, each of our
partners, other than AstraZeneca, is responsible for drug product manufacturing of linaclotide and making it into finished goods
(including bottling and packaging) for its respective territory, and AstraZeneca is responsible for finished goods manufacturing
for China, Hong Kong and Macau. The integration of our efforts with our partners’ efforts is subject to the uncertainty of the
markets for pharmaceutical products in each partner’s respective 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
linaclotide partners, and vice versa. Our linaclotide partnering strategy imposes obligations, risks and operational requirements on
us as the central node in our global network of partners. If we do not effectively communicate 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. Further, 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 time and resources to linaclotide, or if its
performance is substandard, it will delay the potential submission or approval of regulatory applications for linaclotide, as well as
the manufacturing and commercialization of linaclotide in the particular territory. A material breach by any of our partners of our
collaboration or license agreement 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 in place with each of our linaclotide
partners, they may have competitive products or relationships with other commercial entities, some of which may compete with
us. If any of our partners competes with us or assists our competitors, it could harm our competitive position.
In addition, adverse event reporting requires significant coordination with our partners and third parties. We are the holder of the
global safety database for linaclotide responsible for coordinating the safety surveillance and adverse event reporting efforts
worldwide with respect to linaclotide, and an AstraZeneca partner is the holder of the global safety database for lesinurad
responsible for coordinating the safety surveillance and adverse event reporting efforts worldwide with respect to lesinurad. If we
or AstraZeneca’s partner fails to perform such activities and maintain each safety database or if such parties do not report adverse
events related to our products, or fail to do so in a timely manner, we may not receive the information that we are required to
report to the FDA regarding such products. Furthermore, we or such parties may fail to adequately monitor, identify or
investigate adverse events, or to report adverse events to the FDA or foreign regulatory authority accurately and within the
prescribed timeframe. If we or such parties are unsuccessful in any of the foregoing due to poor process, execution, systems,
oversight, communication, adjudication or otherwise, then we may suffer any number of consequences, including the imposition
of additional restrictions on the use of our products, removal of our products from the market, criminal prosecution, the
imposition of civil monetary penalties, seizure of our products, or delay in approval of future products.
Even though LINZESS is approved by the FDA, it faces post-approval development and regulatory requirements, which
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 to ongoing FDA requirements, including those governing the testing, manufacturing, labeling,
packaging, storage, advertising, promotion, sale, distribution, recordkeeping and submission of safety and other post-market
information.
LINZESS is contraindicated in pediatric patients up to six years of age based on nonclinical data from studies in neonatal mice
approximately equivalent to human pediatric patients less than two years of age. There is also a boxed warning advising
physicians to avoid the use of LINZESS in pediatric patients six to less than 18 years of 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 and Allergan have
established a nonclinical and clinical post-marketing plan with the FDA to understand the safety and efficacy of LINZESS in
pediatric patients, are advancing clinical pediatric programs in IBS-C patients age seven to 17 and functional constipation patients
age six to 17. Our ability to conduct clinical studies in
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younger pediatric patients will depend, in part, on the safety and efficacy data from our clinical programs in older pediatric
patients. Our ability to ever expand the indication or label information for LINZESS to pediatrics will depend on, among other
things, our successful completion of pediatric clinical programs. We and Allergan have also committed to certain nonclinical and
clinical studies aimed at understanding: (a) whether orally administered linaclotide can be detected in breast milk, (b) the
potential for antibodies to be developed to linaclotide, and if so, (c) whether antibodies specific for linaclotide could have any
therapeutic or safety implications. We expect to complete these studies over the next two to four years.
In addition, as the holder of the approved NDA for each of ZURAMPIC and DUZALLO, we are obligated to monitor and report
adverse events and any failure of such products to meet the specifications in the applicable NDA, to submit new or supplemental
applications and to obtain FDA approval for certain changes to such products, including changes to product labeling and
manufacturing processes. The FDA has required a post-marketing clinical study to further evaluate the renal and cardiovascular
safety of lesinurad, and has required that enrollment include patients with moderate renal impairment. In connection with the exit
of the lesinurad license, we are in the process of ending the post-marketing clinical study.
These post-approval requirements impose burdens and costs on us. Failure to effectively, appropriately and timely conduct and
complete the required studies relating to our products, monitor and report adverse events and meet our other post-approval
commitments would lead to negative regulatory action at the FDA, which could include withdrawal of regulatory approval of our
products for their currently approved indications and patient populations.
Manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other
regulatory authorities for compliance with GMP and other applicable regulations. If we or a regulatory agency discovers
previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with a
facility where the product is manufactured, a regulatory agency may impose restrictions on that product or the manufacturer,
including withdrawal of the product from the market or suspension of manufacturing. If we, our partners or the manufacturing
facilities for our products fail to comply with applicable regulatory requirements, a regulatory agency may take the following
actions, among others:
·
·
·
·
·
·
·
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 or our partners;
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. and in a number of other countries, we or our partners 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 currently approved, we or our partners must comply
with numerous and varying regulatory requirements of other jurisdictions regarding, among other things, safety and efficacy.
Approval procedures vary among jurisdictions and can involve product testing and administrative review periods different from,
and greater than, those in the U.S. and the other countries where linaclotide is approved. Potential risks include that the regulatory
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;
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· 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.
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 at all. Further, regulatory approval in one jurisdiction does not ensure regulatory approval in another, but a
failure or delay in obtaining regulatory approval in one jurisdiction 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 label requested, 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 defend ourselves against product liability claims, we could incur substantial liabilities. In addition, regardless
of merit or eventual outcome, product liability claims may result 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 lesinurad and for the clinical
trials of our product candidates which is subject to industry-standard terms, conditions and exclusions. Our insurance coverage
may not be sufficient to reimburse us for expenses or losses associated with claims. Moreover, insurance coverage is becoming
increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient
amounts to protect us against losses. On occasion, large judgments have been awarded in lawsuits based on drugs that had
unanticipated side effects. A successful product liability claim or series of claims could cause our stock price to decline and, if
judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.
We face competition and new products may emerge that provide different or better alternatives for treatment of the conditions
that our products are approved to treat.
The pharmaceutical industry and the markets in which we operate are intensely competitive. We compete in the marketing and
sale of our products, the development of new products and the acquisition of rights to new products with commercial
potential. Certain of our competitors have substantially greater financial, technical and human resources than us. Mergers and
acquisitions in the pharmaceutical industry may result in even more resources being concentrated in our competitors. Competition
may increase further as a result of advances made in the commercial applicability of technologies and greater availability of
capital for investment in these fields. Additionally, new developments, including
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the development of other drug technologies and methods of preventing the incidence of disease, occur in the pharmaceutical and
medical technology industries at a rapid pace. These developments may render our products obsolete or noncompetitive.
Our products compete with certain prescription therapies and over-the-counter products for the treatment of the indications for
which they are approved, or their associated symptoms, and in many cases with products that have attained significant levels of
market acceptance. The availability of prescription competitors and over-the-counter products for such conditions could limit the
demand, and the price we are able to charge, for our products unless we are able to achieve market acceptance among the medical
community and patients and differentiate our products on the basis of their cost and/or actual or perceived benefits. For example,
Takeda Pharmaceuticals Limited’s AMITIZA (lubiprostone) is approved by the FDA for sale in the U.S. for the treatment of IBS-
C, CIC and opioid-induced constipation, Synergy Pharmaceuticals, Inc.’s, or Synergy, TRULANCE (plecanatide) is approved by
the FDA for sale in the U.S. for the treatment of adults with IBS-C and CIC, and Shire plc’s MOTEGRITY (prucalopride) is
approved by the FDA for sale in the U.S. for the treatment of CIC in adults. Additionally, we believe other companies are
developing products which could compete with our products, should they be approved by the FDA or foreign regulatory
authorities. Currently, there are other compounds in late stage development and other potential competitors are in earlier stages of
development for the treatment of the indications for which our products are approved. If our current or potential competitors are
successful in completing drug development for their drug candidates and obtain approval from the FDA or foreign regulatory
authorities, they could limit the demand for our products.
We will incur significant liability if it is determined that we are promoting any “off-label” uses of our products.
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 those approved by the FDA or other applicable regulatory agencies. Such “off-label” uses are common across
medical specialties. Although the FDA and other regulatory agencies 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 any approved product that we develop,
license, commercialize, promote, co-promote or otherwise partner for any indication, population or use not described in such
product’s label. The FDA and other regulatory and enforcement authorities actively enforce laws and regulations prohibiting
promotion of off-label uses and the promotion of products for which marketing approval has not been obtained. A company that
is found to have promoted off-label uses will be subject to significant liability, including civil and administrative remedies as well
as criminal sanctions. Even if it is later determined that we were not in violation of these laws, we may be faced with negative
publicity, incur significant expenses defending our actions and have to divert significant management resources from other
matters.
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 with healthcare providers in compliance with all applicable laws, regulatory
guidance and industry best practices. Although we believe we have put in place a robust compliance 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 will
address 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 be adversely affected.
The products that we promote are marketed in the U.S. and/or covered by federal healthcare programs, and, as a result, certain
federal and state healthcare laws and regulations pertaining to product promotion and fraud and abuse are applicable to, and may
affect, our business. These laws and regulations include:
·
federal healthcare program anti-kickback laws, which prohibit, among other things, persons from offering, 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, for which payment may be made under federal healthcare
programs such as Medicare and Medicaid;
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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 for reasons 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 benefit program or making false statements relating to healthcare matters and which also imposes certain
requirements relating to the privacy, security and transmission of individually identifiable health information;
the Federal Food, Drug, and Cosmetic Act, which among other things, strictly regulates drug product and medical device
marketing, prohibits manufacturers from marketing such products prior to approval or for off-label use and regulates the
distribution of samples;
federal laws, including the Medicaid Drug Rebate Program, that require pharmaceutical manufacturers to report certain
calculated product prices to the government or provide certain discounts or rebates 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 financial interactions with physicians and teaching hospitals (and additional categories of health care practitioners
beginning with reports submitted in 2022) to the federal government for re-disclosure to the public; 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 any third-party payer, including commercial insurers, state transparency laws, state laws limiting
interactions between pharmaceutical manufacturers and members of the healthcare industry, and state laws governing the
privacy and security of health information in certain circumstances, many of which differ from each other in significant
ways and often are not preempted by federal laws, thus complicating compliance efforts.
Our global activities are subject to the U.S. Foreign Corrupt Practices Act which prohibits corporations and individuals from
paying, offering to pay, or authorizing the payment of anything of value to any foreign government official, government staff
member, political party, or political candidate in an attempt to obtain 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 in which we do business.
In addition, we may be subject to privacy and security laws in the various jurisdictions in which we operate, obtain or store
personally identifiable information. The legislative and regulatory landscape for privacy and data protection continues to evolve,
and there has been an increasing focus on privacy and data protection issues with the potential to affect our business. For
example, the processing of personal data in the European Economic Area, or the EEA, is subject to the General Data Protection
Regulation, or the GDPR, which took effect in May 2018. The GDPR increases obligations with respect to clinical trials
conducted in the EEA, such as in relation to the provision of fair processing notices, exercising data subject rights and reporting
certain data breaches to regulators and affected individuals, as well as how we document our relationships with third parties that
process GDPR-covered personal data on our behalf. The GDPR also increases the scrutiny applied to transfers of personal data
from the EEA (including from our clinical trial sites in the EEA) to countries that are considered by the European Commission to
lack an adequate level of data protection, such as the United States. The compliance obligations imposed by the GDPR have
required us to revise our operations. In addition, the GDPR imposes substantial fines and other regulatory penalties for breaches
of data protection requirements, and it confers a private right of action on data subjects and their representatives for breaches of
data protection requirements.
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 to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of
our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to
operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and
prosecution for violations of these laws, rules or regulations, we cannot be certain that our program will address all areas of
potential exposure and the risks in this area cannot be entirely
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eliminated, particularly because the requirements and government interpretations of the requirements in this space 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 to incur 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 products’ or product candidates’ commercial success.
The U.S. government and individual states have been aggressively pursuing healthcare reform designed to impact delivery of,
and/or payment for, healthcare, which include initiatives intended to reduce the cost of healthcare. For example, in March 2010,
the U.S. Congress enacted the Patient Protection and Affordable Care Act, as modified by the Health Care and Education
Reconciliation Act, or the ACA, which, among other things, expanded healthcare coverage through Medicaid expansion and the
implementation of the individual health insurance mandate; included changes to the coverage and reimbursement of drug products
under government healthcare programs; imposed an annual fee on manufacturers of branded drugs; and expanded government
enforcement authority. We face uncertainties because there have been, and may be additional, federal legislative and
administrative efforts to repeal, substantially modify or invalidate some or all of the provisions of the ACA. Such efforts may
lead to fewer Americans having more comprehensive health insurance compliant with the ACA, even in the absence of a
legislative repeal. For example, tax reform legislation was enacted at the end of 2017 that includes provisions to eliminate the tax
penalty for individuals who do not maintain sufficient health insurance coverage beginning in 2019. The ACA has also been
subject to judicial challenge. In December 2018, a federal district court judge, in a challenge brought by a number of state
attorneys general, found the ACA unconstitutional in its entirety. Pending appeals, which could take some time, the ACA is still
operational in all respects. Adoption of new healthcare reform legislation at the federal or state level could affect demand for, or
pricing of, our products or product candidates if approved for sale. However, we cannot predict the ultimate content, timing or
effect of any healthcare reform legislation or action, or its impact on us, and healthcare reform could increase compliance costs
and may adversely affect our future business and financial results.
In addition, other legislative changes have been adopted that could have an adverse effect upon, and could prevent, our products’
or product candidates’ commercial success. More broadly, the Budget Control Act of 2011, as amended, or the Budget Control
Act, includes provisions intended to reduce the federal deficit, including reductions in Medicare payments to providers through
2027. Any significant spending reductions affecting Medicare, Medicaid or other publicly funded or subsidized health programs,
or any significant taxes or fees imposed as part of any broader deficit reduction effort or legislative replacement to the Budget
Control Act, or otherwise, could have an adverse impact on our anticipated product revenues.
In addition to governmental efforts in the U.S., foreign jurisdictions as well as private health insurers and managed care plans are
likely to continue challenging manufacturers’ ability to obtain reimbursement, as well as the level of reimbursement, for
pharmaceuticals and other healthcare-related products and services. These cost-control initiatives could significantly decrease the
available coverage and the price we might establish for our products, 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 require post-marketing studies and clinical trials, labeling changes based on new safety information, and
compliance with risk evaluations and mitigation strategies approved by the FDA. We and Allergan have established a nonclinical
and clinical post-marketing plan with the FDA to understand the safety and efficacy of LINZESS in pediatrics and we are in the
process of ending the post-marketing clinical study for lesinurad, each of which is discussed above. The FDA’s exercise of this
authority has resulted (and is expected to continue to result) in increased development-related costs following the commercial
launch of our products, and could result in potential restrictions on the sale and/or distribution of our products, even in such
products’ approved indications and patient populations.
If we are unable to successfully partner with other companies to develop and commercialize our products and/or product
candidates, our ability to grow would be impaired and our business would be adversely affected.
As part of our business strategy, we may partner with pharmaceutical, biotechnology or other companies to develop and
commercialize our products or product candidates. Although we have entered into such arrangements with
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respect to the development and commercialization of linaclotide worldwide, there can be no assurance that we will be able to do
so in the future with respect to other products or product candidates or that we will be able to gain the interest of potential
partners; establish and maintain development, manufacturing, marketing, sales or distribution relationships on acceptable terms;
that such relationships, if established, will be successful or on favorable terms; or that we will gain market acceptance for such
products or product candidates. The process of proposing, negotiating and implementing a partnership arrangement is lengthy
and complex. If we enter into any partnering arrangements with third parties, any revenues we receive will depend upon the
efforts of such third parties. If we are unable to establish successful partnering arrangements, we may not gain access to the
financial resources and industry experience necessary to develop, commercialize or successfully market our products or product
candidates, may be forced to curtail, delay or stop a development program or one or more of our other development programs,
delay commercialization, reduce the scope of our planned sales or marketing activities or undertake development or
commercialization activities at our own expense, and therefore may be unable to generate revenue from our products or product
candidates or do so to their full potential.
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 we never receive the benefit. Our failure to successfully discover, acquire, develop and market
additional product candidates or approved products would impair our 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 opportunities to enhance the clinical profile of LINZESS by studying linaclotide in additional indications,
populations and formulations to assess its potential to treat various conditions. These development efforts may fail or may not
increase the revenues that we generate from LINZESS. Furthermore, they may result in adverse events, or perceived adverse
events, in certain patient populations that are then attributed to the currently approved patient population, which may result in
adverse regulatory action at the FDA or in other countries or harm linaclotide’s reputation in the marketplace, 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 or future internal product candidate, and failure may occur at any point. Our product candidates are in
various stages of development and must satisfy rigorous standards of safety and efficacy before they can be approved for sale by
the FDA. To satisfy these standards, we must allocate resources among our various development programs and we must engage in
costly and lengthy discovery and development efforts, which are subject to unanticipated delays and other significant
uncertainties. Despite our efforts, our product candidates may not offer therapeutic or other improvement over existing
competitive drugs, be proven safe and effective in clinical 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’s pipeline will depend in large part on the outcomes of these studies. Many companies in the
pharmaceutical industry have suffered significant setbacks in clinical trials even after achieving promising results in earlier
nonclinical or clinical trials. The findings from our completed nonclinical studies may not be replicated in later 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 possible limitation or cessation of development activities associated with a particular
product candidate or program. Furthermore, our analysis of data obtained from nonclinical and clinical activities is subject to
confirmation and interpretation by the FDA and other applicable regulatory authorities, which could delay, limit or prevent
regulatory approval. Satisfaction of FDA or other applicable regulatory requirements is costly, time-consuming, uncertain and
subject to unanticipated delays.
In addition, because our internal research capabilities are limited, we may be dependent upon pharmaceutical and biotechnology
companies, academic scientists 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 acquisition of a product candidate or approved
product is lengthy and complex. Other companies, including some with substantially greater financial, marketing and sales
resources, may compete with us for the license or acquisition of product candidates and approved products. We have limited
resources to identify and execute the acquisition or in-licensing of third-party products, businesses and technologies and integrate
them into our current infrastructure.
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Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may
fail to realize the anticipated benefits of such efforts. We may not be able to acquire the rights to additional products or product
candidates on terms that we find acceptable, or at all.
In addition, such 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.
Furthermore, we may have little or no insight or control over the development and commercialization of any product that we in-
license outside the licensed territory. If other licensees do not effectively develop or commercialize any such product outside the
licensed territory, our reputation or the reputation of any such product may be impacted. Also, any product candidate that we
acquire may require additional development efforts prior to commercial sale, including extensive clinical testing and approval by
the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of
pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe
and effective for approval by regulatory authorities.
The planned separation of our business into two independent, publicly traded companies is subject to various risks and
uncertainties and may not be completed on the terms or timeline currently contemplated, if at all, and will involve significant
time, effort and expense, which could harm our business, results of operations and financial condition.
In May 2018, we announced the intent to separate our soluble guanylate cyclase, or sGC, business from our commercial and GI
business, resulting in two independent, publicly traded companies, Ironwood and Cyclerion Therapeutics, Inc., or Cyclerion.
Following the separation, Ironwood is expected to focus on accelerating growth of LINZESS, and advance development programs
targeting treatments in GI diseases and abdominal pain. Cyclerion is expected to focus on the sGC pipeline development
programs for the treatment of serious and orphan diseases.
The separation is expected to be completed in the first half of 2019, subject to the satisfaction of certain conditions. Adverse
market conditions, tax considerations or delays or difficulties effecting the planned separation could delay or prevent, or
adversely impact the anticipated benefits from, the planned separation. Consummation of the separation also will require final
approval from our board of directors. We may not complete the separation on the terms or on the timeline that we announced, or
may, for any or no reason and at any time until the planned separation is complete, abandon the separation or modify or change its
terms. Any of the foregoing may result in our not achieving the operational, financial, strategic and other benefits we anticipate,
and in each case, our business, results of operations and financial condition could be adversely affected.
We have incurred and will continue to incur significant expenses in connection with the planned separation, and such costs and
expenses may be greater than we anticipate. In addition, completion of the separation will require a significant amount of
management time and effort which may disrupt our business or otherwise divert management’s attention from other aspects of our
business, including strategic initiatives, discovery, development and
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commercialization efforts and relationships with our partners and other third parties. Any of the foregoing could adversely affect
our business, results of operations and financial condition.
The planned separation may not achieve some or all of the anticipated benefits.
Even if the separation is completed, the anticipated operational, financial, strategic and other benefits of the separation may not be
achieved. The combined value of the common stock of the two publicly-traded companies may not be equal to or greater than
what the value of our common stock would have been had the separation not occurred. The combined value of the common stock
of the two companies could be lower than anticipated for a variety of reasons, including the failure of either company to operate
and compete effectively as an independent company. The common stock price of each company may experience periods of
extreme volatility. In addition, the two independent companies will be smaller and less diversified, with a narrower business
focus, and may be more vulnerable to changing market conditions. The separation also presents a number of significant risks to
our internal processes, including the failure to maintain an adequate control environment due to changes to our infrastructure
technology systems and financial reporting processes.
Ironwood continues to assess the U.S. federal income tax consequences of potential structures to separate our business into
two independent, publicly traded companies. If the separation is not generally tax-free for U.S. federal income tax purposes,
we and our stockholders could be subject to significant tax liabilities.
If not effected on a tax-free basis, the separation could result in both the use of Ironwood’s net operating losses and significant tax
liability to Ironwood. The separation could also give rise to a taxable dividend and, as such, may result in significant tax liability
for Ironwood’s stockholders.
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 be completed 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 subject to 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 for the 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 or personal 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, an institutional 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 of factors, 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
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·
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. Each protocol amendment would require institutional review board review and approval, which may
adversely impact the costs, timing or successful completion of the associated clinical trials. If we or our partners terminate or
experience delays in the completion of any clinical trials, the commercial prospects for our product candidates may 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
commencement or 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 key personnel.
We may not be able to attract or motivate qualified management and scientific, clinical, operations and commercial personnel in
the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses,
particularly in the greater-Boston area. If we are not able to attract and motivate necessary personnel to accomplish our business
objectives, we will experience constraints that will significantly impede the achievement 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 Mallon, currently our executive senior advisor
and expected to become our chief executive officer upon the completion of the planned separation; Gina Consylman, our senior
vice president, chief financial officer, and treasurer; Mark G. Currie, Ph.D., our senior vice president, chief scientific officer and
president of research and development; Halley E. Gilbert, our senior vice president, chief legal officer, and secretary; William
Huyett, our chief operating officer; and Thomas A. McCourt, our senior vice president, marketing and sales and chief commercial
officer. We currently anticipate that Dr. Hecht, Dr. Currie and Mr. Huyett will leave their positions at Ironwood to join the
management team of Cyclerion upon completion of the separation, along with other key employees in critical functions across our
organization. These and other transitions in our senior management team and other key employees, including other changes that
occur in connection with the planned separation of Ironwood and Cyclerion, may result in operational disruptions, and our
business may be harmed as a result. In addition to the competition for personnel, the Boston area in particular is characterized by
a high cost of living. We could have difficulty attracting experienced talent to our company and each of Ironwood and Cyclerion
during and following the planned separation and we may be required to expend significant financial resources in our recruitment
efforts, which may or may not be successful.
We also have scientific and clinical advisors who assist us in formulating our product development, clinical strategies and our
global supply chain plans, as well as sales and marketing advisors who have assisted us in our commercialization strategy and
brand plan for our products. These advisors are not our employees and may have commitments to, or consulting or advisory
contracts with, other entities that may limit their availability to us, or may have arrangements with other companies to assist in the
development and commercialization of products that may compete with ours.
Security breaches and other disruptions to our information technology structure could compromise our information, disrupt
our business and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business, we collect, process and store sensitive data, including intellectual property, our proprietary
business information and that of our suppliers and business partners, as well as personally identifiable information of our patients,
clinical trial participants and employees. We also rely to a large extent on information technology systems to operate our
business, including to deliver our products. We have outsourced elements of our confidential information processing and
information technology structure, and as a result, we are managing independent vendor relationships with third parties who may
or could have access to our confidential information. Similarly, our business partners and other third-party providers possess
certain of our sensitive data. The secure maintenance of this information is critical to our operations and business strategy.
Despite our security measures, our large and complex information technology and infrastructure (and those of our partners,
vendors and third-party providers) may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or
other disruptions. We, our partners, vendors and other third-party providers could be susceptible to third party attacks on our, and
their,
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information security systems, which attacks are of ever-increasing levels of sophistication and are made by groups and individuals
with a wide range of motives and expertise, including organized criminal groups, hacktivists, nation states and others. While we
have invested in information technology and security and the protection of confidential information, there can be no assurance
that our efforts will prevent service interruptions or security breaches. Any such interruptions or breach would substantially
impair our ability to operate our business and would 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 result in legal claims
or proceedings, liability under laws that protect the privacy of personal information, disrupt our operations, and damage our
reputation, any of which could adversely affect our business. While we maintain cyber liability insurance, this insurance may not
be sufficient to cover the losses that may result from an interruption or breach of our (or our partners’, vendors’ and third-party
providers’) systems.
Our business could be negatively affected as a result of a proxy contest or certain other stockholder actions.
Responding to certain stockholder actions can be costly, disruptive and time-consuming, and could also impact our ability to
attract, retain and motivate our employees. For example, a proxy contest for our annual meeting of stockholders relating to
stockholder proposals or director nominees would require significant time and could divert the attention of our management, other
employees and our board of directors. In addition, a proxy contest would require us to incur significant costs, including legal fees
and proxy solicitation expenses.
Our business involves the use of hazardous materials, and we must comply with environmental laws and regulations, which
can be expensive and restrict how we 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 regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. Although
we believe that the safety procedures we use for handling and disposing of these materials comply with the standards prescribed
by these laws and regulations, we cannot eliminate the risk of accidental contamination or injury 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 business
operations. We do not currently maintain hazardous materials insurance coverage.
Risks Related to Intellectual Property
Limitations on the patent rights relating to our products and 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 products and product candidates, preserve our
trade secrets, prevent third parties from infringing 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. and most other countries are confidential for a period of time until they are published, and
publication of discoveries in scientific or patent literature typically lags actual 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 pending patent 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
be granted, 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 use patent (U.S. Patent 7,304,036) expiring in 2026. Additional U.S. patents and pending applications
related to LINZESS include multiple patents relating to our commercial, room temperature stable formulation of linaclotide and
methods of using this formulation, the latest of which expire in the early 2030s, as well as other patents and pending patent
applications covering processes for making LINZESS, formulations and dosing regimens thereof, and molecules related to
LINZESS. Although none of these issued patents currently is subject to a patent reexamination or review, we cannot guarantee
that they will not be subject to reexamination or review by the U.S. Patent and Trademark Office, or the USPTO, in the future.
We believe in the strength of our linaclotide patent portfolio and that it gives us sufficient freedom to operate; however, if any of
our present or future patents is invalidated, this could have an adverse effect on our business and financial results. In March
2013, an opposition to one of our granted
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patents covering linaclotide was filed in Europe. In April 2015, the patent was upheld in its entirety by the European Patent
Office, affirming the strength of our intellectual property and our belief that the opposition was without merit. The associated
appeal was withdrawn by the opponent in January 2019.
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 permit third parties to challenge our patents more easily and create uncertainty with respect to the
interpretation and practice of U.S. patent law. Moreover, the U.S. Supreme Court has ruled on several patent cases in recent
years, narrowing the scope of patent protection available and weakening the rights of patent owners in certain circumstances.
Depending on the impact of these decisions and other actions by the U.S. Congress, the federal courts, the USPTO, and their
foreign counterparts, the laws and regulations governing patents may change, or their interpretation or implementation may
change, in unpredictable ways that could impact, potentially adversely, our ability to obtain new patents or to enforce and defend
patents that we have already obtained or that we might obtain in the future. For example, such changes may increase the costs
and complexity associated with obtaining, enforcing or defending our patents, including in abbreviated new drug application, or
ANDA, litigation.
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
partners and consultants. We also have agreements with our employees and selected consultants that obligate them to assign their
inventions to us. It is possible, however, that technology relevant to our business will be independently developed by a person that
is not a party to such an agreement. Furthermore, if the employees and consultants that are 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 through such
breaches or violations. Additionally, 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 may encounter 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 litigation could have a material adverse effect on our business.
Our commercial success depends on our ability, and the ability of our partners, to develop, manufacture, market and sell our
products and use our proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and
foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we and our
partners are developing products. As the biotechnology and pharmaceutical industry expands and 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 issued
patents of third parties of which we are currently unaware that may be infringed by linaclotide or our product candidates. Because
patent applications can take many 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 property rights. If linaclotide or one of our product candidates is found to infringe the intellectual property rights
of a third party, we or our partners could be enjoined by a court and required to pay damages and could be unable to develop or
commercialize linaclotide or the applicable product candidate unless we obtain a license to the intellectual 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 a
preliminary injunction or other equitable relief which could prohibit us from making, using or selling our products, pending a trial
on the merits, which may not occur 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 partners 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 our management’s attention from our core business;
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·
·
·
·
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’s rights, 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.
We have received notices of Paragraph IV certifications related to linaclotide in conjunction with ANDAs filed by generic
drug manufacturers, and we may receive additional notices from others in the future. We have, and may continue to, become
involved in legal proceedings to protect or enforce intellectual property rights relating to our products and our product
candidates, which could be expensive and time consuming, and unfavorable outcomes in such proceedings could have a
material adverse effect on our business.
Competitors may infringe the patents relating to our products and our product candidates or may assert that such patents are
invalid. To counter ongoing or potential infringement or unauthorized use, we may be required to file infringement claims, which
can be expensive and time-consuming. Litigation with generic manufacturers has become increasingly common in the
biotechnology and pharmaceutical industries. In addition, in an infringement or invalidity proceeding, a court or patent
administrative body may determine that a patent 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 cover the technology in question. Generic drug
manufacturers were first able to file ANDAs for generic versions of LINZESS in August 2016, but we may not become aware of
these filings for several months after any such submission due to procedures specified under applicable FDA regulations. When
filing an ANDA for one of our products, a generic drug manufacturer may choose to challenge one or more of the patents that
cover such product. As such, we have brought, and may bring in the future, legal proceedings against generic drug manufacturers.
We and Allergan have received Paragraph IV certification notice letters, or Notice Letters, regarding ANDAs submitted to the
FDA by generic drug manufacturers requesting approval to engage in commercial manufacture, use, sale and offer for sale of
linaclotide capsules (72 mcg, 145 mcg and 290 mcg), proposed generic versions of our FDA-approved drug LINZESS. For
additional information relating to such ANDAs, see Item 3, Legal Proceedings, elsewhere in this Annual Report on Form 10-
K. Frequently, innovators receive multiple ANDA filings. Consequently, we expect to receive additional notice letters regarding
ANDAs submitted to the FDA, and may receive amendments to the Notice Letters.
After evaluation, we have in the past filed, and may, in the future, file, patent infringement lawsuits or take other action against
companies making ANDA filings. If a patent infringement suit has been filed within 45 days of receipt of a notice letter, the FDA
is not permitted to approve any ANDA that is the subject of such lawsuit for 30 months from the date of the NDA holder’s and
patent owner’s receipt of the ANDA filer’s notice letter, or until a court decides that the relevant patents are invalid,
unenforceable and/or not infringed. In the case of suits filed before expiration of the new chemical entity, or NCE, exclusivity
period for a particular drug, the 30-month stay would be calculated from the end of the applicable NCE exclusivity period. In
addition to shortening the 30-month stay based on a decision that the relevant patents are invalid, unenforceable and/or not
infringed, a court can also shorten or lengthen the 30-month stay under certain limited circumstances. The NCE exclusivity
period for LINZESS expired on August 30, 2017, and the 30-month stay for each ANDA that is the subject of the current patent
infringement lawsuits filed by us before such expiration date ends on February 29, 2020 (absent any of the foregoing
adjustments). We have filed patent infringement lawsuits against the companies making such ANDA filings, and we have entered
into settlement agreements with three such companies. For additional information relating to such lawsuits and settlements, see
Item 3, Legal Proceedings, elsewhere in this Annual Report on Form 10-K.
Additionally, the validity of the patents relating to our products and our product candidates may be challenged by third parties
pursuant to administrative procedures introduced by the America Invents Act, specifically inter partes
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review, or IPR, and/or post grant review, or PGR, before the USPTO. Generic drug manufacturers may challenge our patents
through IPRs or PGRs instead of or in addition to ANDA legal proceedings.
Patent litigation (including any lawsuits that we file against generic drug manufacturers in connection with the receipt of a notice
letter), IPRs and PGRs involve complex legal and factual questions and we may need to devote significant resources to such legal
proceedings. We can provide no assurance concerning the duration or the outcome of any such patent-related lawsuits or
administrative proceedings, including any settlements or other resolutions thereof which could, in addition to other risks, result in
a shortening of exclusivity periods. An adverse result in any litigation or defense proceedings could put one or more of the patents
relating to our products and our product candidates at risk of being invalidated or interpreted narrowly, or could otherwise result
in a loss of patent protection for the product or product candidate at issue, and could put our patent applications at risk of not
issuing, which would materially harm our business. Upon any loss of patent protection for one of our products, or upon an “at-
risk” launch (despite pending patent infringement litigation, before any court decision or while an appeal of a lower court decision
is pending) by a manufacturer of a generic version of one of our patented products, our revenues for that product could be
significantly reduced in a short period of time, which would materially and adversely affect our business.
Interference or derivation proceedings brought by the USPTO may be necessary to determine the priority of inventions with
respect to the patents relating to our products and our product candidates and patent applications or those of our partners. An
unfavorable outcome could require us to cease using the technology or to attempt to license rights to it from the prevailing 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
interference proceedings may fail and, even if successful, may result in substantial costs and distraction of our management and
other employees. In addition, we may not be able to prevent, alone or with our partners, misappropriation of our proprietary
rights, particularly in countries where the laws may not protect those rights as fully 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 public announcements of the results of hearings, motions or other interim proceeding or developments, there is a
risk that some of our confidential information could be compromised by disclosure during this type of litigation.
Risks Related to Our Finances and Capital Requirements
We have incurred significant losses since our inception and cannot guarantee when, if ever, we will become profitable or
attain positive cash flows.
In recent years, we have focused primarily on developing, manufacturing and commercializing our products, 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 of LINZESS in the U.S. (which were redeemed, in full, in connection with the funding and issuance in January
2017 of our 8.375% Notes due 2026, or the 2026 Notes) 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 each year since our inception in 1998. We currently derive a
significant portion of our revenue from our LINZESS collaboration with Allergan for the U.S. We believe that the revenues from
the LINZESS collaboration will continue to constitute a significant portion of our total revenue for the foreseeable future. We
incurred net losses of approximately $282.4 million, approximately $116.9 million and approximately $81.7 million in the years
ended December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, we had an accumulated deficit of
approximately $1.6 billion. We cannot be certain that sales of our products, and the revenue from our other commercial activities
will not fall short of our projections or be delayed. Further, we expect to continue to incur substantial expenses in connection with
our efforts to commercialize linaclotide and research and develop our product candidates. Because of the numerous risks and
uncertainties associated with developing and commercializing pharmaceutical products, as well as those related to our
expectations for our products and our other activities, we are unable to predict the 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 cash flows, or
achieve either later than we anticipate, this will have an adverse effect on our stockholders’ equity and working capital.
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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 development programs or commercialization efforts.
In January 2017, in connection with the redemption of our PhaRMA Notes, we issued $150.0 million aggregate principal amount
of our 2026 Notes bearing an annual interest rate of 8.375%. In June 2015, we issued approximately $335.7 million aggregate
principal amount of our 2022 Notes and we have previously raised additional funds through other capital raising activities,
including the sale of shares of our common stock in public offerings and the issuance of our PhaRMA Notes in January 2013
(which were redeemed, in full, in connection with the issuance of our 2026 Notes). However, marketing and selling primary care
drugs, purchasing commercial quantities of pharmaceutical products, developing product candidates, conducting clinical trials and
accessing externally developed products are expensive and uncertain. Circumstances, our strategic imperatives, or opportunities
to create or acquire new programs, as well as maturities, redemptions or repurchases of our outstanding debt securities, could
require us to, or we may choose to, seek to raise additional funds. The amount and timing of our future funding requirements will
depend on many factors, including, but not limited to:
·
·
·
·
·
·
·
·
·
the level of underlying demand for our products by prescribers and patients in the countries in which they are approved;
the costs associated with commercializing our products in the U.S.;
the costs of establishing, maintaining and/or expanding sales, marketing, distribution, and market access capabilities for
our products;
the regulatory approval of linaclotide outside of the U.S. and the other countries where it is approved and the timing of
commercial launches in those countries, and the regulatory approval of linaclotide within new indications, populations
and formulations, 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 linaclotide product development
programs, including our post-approval nonclinical and clinical studies of linaclotide in pediatrics and our investment to
enhance the clinical profile of LINZESS within IBS-C and CIC, as well as to study linaclotide in additional indications,
populations and formulations to assess its potential to treat various conditions;
the costs and timing of in-licensing additional products or product candidates or acquiring other complementary
companies or assets;
the achievement and timing of milestone payments and royalties due or payable under our collaboration and license
agreements;
the status, terms and timing of any collaboration, licensing, co-commercialization or other arrangements;
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 common stock and whether
we are required to repurchase our 2022 Notes prior to maturity upon a fundamental change, as defined in the indenture
governing the 2022 Notes;
· 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; and
·
any delays or difficulties effecting the planned separation.
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 of our commercialization efforts, delay, reduce or eliminate one or more of our development programs
or delay or abandon potential strategic opportunities.
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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 our collaboration agreement for North America.
In January 2017, we issued, in connection with the redemption of our PhaRMA Notes, $150.0 million aggregate principal amount
of our 2026 Notes bearing an annual interest rate of 8.375% and in June 2015, we issued approximately $335.7 million aggregate
principal amount of our 2022 Notes bearing an annual interest rate of 2.25%. Semi-annual payments on our 2022 Notes
commenced on December 15, 2015. Quarterly interest payments on our 2026 Notes commenced on June 15, 2017 and, pursuant
to the associated indenture, beginning in March 2019 we are obligated to make quarterly payments on our 2026 Notes equal to the
greater of (i) 7.5% of net sales of linaclotide in the U.S. for the preceding quarter and (ii) the accrued and unpaid interest on the
2026 Notes. Principal on the 2026 Notes is to be repaid in an amount equal to the difference between (i) and (ii) above, when this
is a positive number, until the principal has been paid in full. We expect that for the next few years, at a minimum, the net
quarterly payments from Allergan will be a significant source of cash flow from operations. If the cash flows derived from the net
quarterly payments that we receive from Allergan under the collaboration agreement for North America are insufficient on any
particular payment date to fund the interest payment on our outstanding indebtedness, at a minimum, we will be obligated to pay
the 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 of a particular quarterly period is a function of the revenue generated by LINZESS in the U.S.
as well as the development, manufacturing and commercialization expenses incurred by each of us and Allergan under the
collaboration agreement for North America. Accordingly, since we cannot guarantee when, or if, our company 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 our outstanding 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 quarterly payment 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, in each 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, 2018, we had total indebtedness of approximately $485.7 million and available cash and cash equivalents of
approximately $173.2 million. We chose to issue our 2026 Notes (in connection with the redemption, in full, of our PhaRMA
Notes) and our 2022 Notes based on the additional strategic optionality that they create for us, and the limited restrictions that
these debt securities place on our ability to run our business compared to other potential available financing transactions.
However, our indebtedness, combined with our other financial 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, including product development, commercialization efforts, research and development activities,
strategic arrangements, acquisitions and refinancing of our outstanding debt;
requiring a substantial portion of our cash flow to be dedicated to debt service payments instead of other purposes,
thereby reducing the amount of cash 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, including payments 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 a fundamental 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 our indebtedness on or before the
maturity dates thereof, sell assets, reduce or delay currently planned activities or curtail operations, seek to raise additional capital
or take other actions. We may not be able to execute any of
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these actions on commercially reasonable terms or at all. This, together with any of the factors described above, 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 a default under the 2022 Notes, the noteholders or the trustee under the indenture governing the
2022 Notes may accelerate our payment obligations under the 2022 Notes, which could have a material adverse effect on our
business, financial condition and results of operations. We are also required to offer to repurchase the 2022 Notes upon the
occurrence of a fundamental change, which could include, among other things, any acquisition of our company (other than an
acquisition in which 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 to the 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 preventing an acquisition of our company that would
otherwise be beneficial to our security holders.
Further, although we are not as restricted under our 2026 Notes as we might have been under a more traditional secured credit
facility provided by a bank, the indenture governing our 2026 Notes contains a number of restrictive covenants that impose
restrictions on us and may limit our ability to engage in certain acts, 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;
and
incur certain liens.
Upon a breach of the covenants under our 2026 Notes indenture, or if certain other defaults thereunder occur, the holders of our
2026 Notes could elect to declare all amounts outstanding under our 2026 Notes to be immediately due and payable and we
cannot be certain that we will have sufficient assets to repay them. If we are unable to repay those amounts, the holders of our
2026 Notes could proceed against the collateral granted to them to secure the debt securities and we could be forced into
bankruptcy or liquidation. If we breach our covenants under our 2026 Notes indenture and seek a waiver, we may not be able to
obtain a waiver from the required noteholders. If this occurs, we would be in default under our 2026 Notes indenture and the
holders of our 2026 Notes could exercise their rights, as described above.
Each of our 2026 Notes and 2022 Notes also include cross-default features providing that a default under the indenture governing
either the 2026 Notes or the 2022 Notes would likely result in a default under the indenture governing the other indebtedness. In
the event of such default, the trustee or noteholders could elect to declare all amounts outstanding to be immediately due and
payable under the applicable indenture, which could have a material adverse effect 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
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 to make 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 common stock in secondary market transactions and
entered into various over-the-counter derivative transactions with respect to our common stock. These entities or their affiliates
are likely to modify their hedge positions from time to time prior to conversion or maturity of the 2022 Notes by purchasing and
selling shares of our common stock or other instruments they may wish to use in connection with such hedging. Any of these
activities could adversely affect the value of our common stock and, as a result, the number of shares and the value of the
common stock noteholders will receive upon conversion of the 2022 Notes. In addition, under certain circumstances the
counterparties have the right to terminate the Convertible Note Hedges and settle the Note Hedge Warrants at fair value (as
defined in the applicable confirmations), which may result
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in us not receiving all or any portion of the anticipated benefit of the Convertible Note Hedges. If the price of our common stock
increases such that the 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 or eliminate 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 our products in the countries in which they are approved;
· wholesalers’ buying patterns with respect to our products;
·
·
·
·
·
·
·
·
·
the costs associated with commercializing our products in the U.S.;
the achievement and timing of milestone payments and royalties due or payable under our collaboration and license
agreements;
our execution of any collaboration, partnership, licensing or other strategic arrangements, and the timing of payments we
may make or receive under these arrangements;
any excess or obsolete inventory or impairments of assets or goodwill, and associated write-downs;
any changes in the fair value of contingent consideration and the associated impact on our statement of operations;
any variations in the level of expenses related to our development programs;
addition or termination of clinical trials;
regulatory developments affecting our products and 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 for any of the foregoing reasons or
otherwise, the price of our 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 the Internal Revenue Code, and it is possible that our net operating loss and tax credit carryforwards
may expire before we generate sufficient taxable income to use such carryforwards, or that certain transactions or a
combination of certain transactions may result in material additional limitations on our ability to use our 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 to generate federal and state taxable losses, unused net operating loss and tax credit carryforwards will
carry forward to offset future taxable income, if any, until the date, if any, on which such unused carryforwards expire.
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, contain rules that limit the ability of a company that
undergoes 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 loss and tax credit carryforwards and certain built-in losses recognized in years after the
ownership change. These rules generally operate by focusing on ownership changes 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 of stock by the
company. Generally, if an ownership change occurs, the yearly taxable income limitation on the use of net operating loss and tax
credit carryforwards and 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 the ownership change.
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If we do not generate sufficient taxable income prior to the expiration, if any, of the applicable carryforwards or if the
carryforwards are subject to the limitations described 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 therefore would 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 as defined by
Section 382, or could result in a change in control in the future.
Risks Relating to Securities Markets and Investment in Our Stock
Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control which
could negatively impact the market price of our 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 the following:
· 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 one time. 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 or removal 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 possible for our board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to acquire us.
·
Stockholders must provide advance notice to nominate individuals for election to the board of directors or to propose
matters that can be acted upon at a stockholders’ meeting. Furthermore, stockholders may only remove a member of our
board of directors for cause. These provisions may discourage or deter a potential acquirer from conducting a solicitation
of proxies to elect such acquirer’s own slate of directors or otherwise attempting 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 take certain 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 board of directors. As a result, a holder, or holders, controlling a majority of our capital stock
are not able to call a special meeting.
· A super-majority (80%) of the 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 combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions
in our certificate of incorporation and our bylaws and in the Delaware General Corporation Law could make it more difficult for
stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-
current board of directors.
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 our ability to meet our reporting obligations could be negatively affected, each of which
could negatively affect the trading price of our 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 possibility that a material misstatement of our annual or interim financial statements will not be prevented or
detected on a timely basis. Accordingly, a material weakness increases the risk that the financial information we report contains
material errors.
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We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies. In
addition, we are required under the Sarbanes-Oxley Act of 2002 to report annually on our internal control over financial
reporting. Our system of internal controls, however well-designed and operated, is based in part on certain assumptions and
includes elements that rely on information from third parties, including our partners. Our system 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 could have an adverse effect on our business and financial results, and the price of our common stock
could be negatively affected.
Further, we are dependent on our partners for information related to our results of operations. Our net profit or net loss generated
from the sales of 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 modified in the future. We are highly dependent on our linaclotide partners for timely
and accurate information regarding any revenues realized from sales of linaclotide in their respective territories, and in the case of
Allergan for the U.S. and AstraZeneca for China, Hong Kong and Macau, the costs incurred in developing and commercializing it
in order to accurately report our results of operations. Our results of operations are also dependent on the timeliness and accuracy
of information from 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 timely and accurate information or if estimated activity levels associated with the
relevant collaboration or partnership at a given point in time are incorrect, whether the result of a material weakness or not, we
could be required to record adjustments in future periods. Such adjustments, if significant, could have an adverse effect on our
financial results, which could lead to a decline in our common stock price.
If we cannot conclude that we have effective internal control over our financial reporting, or if our independent registered public
accounting firm is unable to provide an unqualified opinion regarding the effectiveness of our internal control over financial
reporting, investors could lose confidence in the reliability of our financial statements, which could lead to a decline in our stock
price. Failure to comply with reporting requirements could also subject us to sanctions and/or investigations by the SEC, The
NASDAQ Stock Market or other regulatory authorities.
We expect that the price of our common stock will fluctuate substantially.
The market price of our common stock may be highly volatile due to many factors, including:
·
·
the commercial performance of our products in the countries in which they are approved, as well as the costs associated
with such activities;
any third-party coverage and reimbursement policies for our products;
· market conditions in the pharmaceutical and biotechnology sectors;
·
·
·
·
·
·
·
developments, litigation or public concern about the safety of our products 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;
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·
·
developments concerning current or future collaboration, partnership, licensing or other strategic arrangements, or with
respect to the planned separation; 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 common stock. In addition, class action litigation has often been instituted against companies whose securities
have experienced periods of volatility. Any such litigation brought against us could result in substantial costs and a diversion of
management attention, which could hurt our business, operating results and financial condition.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters and operations are located in Cambridge, Massachusetts, where, as of December 31, 2018,
we occupied approximately 223,000 square feet of office and laboratory space under our lease expiring in January 2025. We
believe that our facilities are suitable and adequate for our needs for the foreseeable future.
Item 3. Legal Proceedings
Actions in which we are the Plaintiff
LINZESS
We and Allergan have received Paragraph IV certification notice letters, or Notice Letters, regarding Abbreviated New
Drug Applications, or ANDAs, submitted to the FDA by generic drug manufacturers requesting approval to engage in
commercial manufacture, use, sale and offer for sale of (i) 145 mcg and 290 mcg linaclotide capsules, or the Potential Generic
Products, and/or (ii) 72 mcg linaclotide capsules, or the Potential 72mcg Generic Products, each proposed generic versions of our
FDA-approved drug LINZESS.
In October 2016, we received a Notice Letter relating to an ANDA that was submitted to the FDA by Teva
Pharmaceuticals USA, Inc., or Teva. Teva’s Notice Letter contends that United States patents for LINZESS (U.S. Patent Nos.
7,371,727, 7,704,947, 7,745,409, 8,080,526, and 8,110,553 (expiring 2024); 7,304,036 (expiring 2026); and 8,748,573, 8,802,628,
and 8,933,030 (expiring 2031), or the Challenged Patents) listed in the FDA’s list of Approved Drug Products with Therapeutic
Equivalence Evaluations, commonly referred to as the Orange Book, are invalid, unenforceable and/or would not be infringed by
Teva’s manufacture, use, sale or offer for sale of the Potential Generic Products. In September 2017, we received a second Notice
Letter relating to the ANDA submitted to the FDA by Teva contending that U.S. Patent No. 9,708,371 (expiring 2033) listed in
the Orange Book is invalid and/or would not be infringed by Teva’s manufacture, use, sale or offer for sale of the Potential
Generic Products. In December 2017, we received a Notice Letter relating to an ANDA that was submitted to the FDA by Teva,
contending that U.S. Patent Nos. 7,371,727, 7,704,947, 7,745,409, 8,080,526, and 8,110,553; 7,304,036; 8,933,030; and
9,708,371, or the 72mcg Challenged Patents, are invalid, unenforceable and/or would not be infringed by Teva’s manufacture,
use, sale or offer for sale of the Potential 72 mcg Generic Product.
In November 2016, we received a Notice Letter relating to an ANDA that was submitted to the FDA by Sandoz Inc., or
Sandoz, contending that all of the Challenged Patents are invalid, unenforceable and/or would not be infringed by Sandoz’s
manufacture, use, sale or offer for sale of the Potential Generic Products. In January 2018, we received a second Notice Letter
relating to the ANDA submitted to the FDA by Sandoz contending that U.S. Patent No. 9,708,371 is invalid and/or would not be
infringed by Sandoz’s manufacture, use, sale or offer for sale of the Potential Generic Products.
In November 2016, we received a Notice Letter relating to an ANDA that was submitted to the FDA by Mylan
Pharmaceuticals Inc., or Mylan, contending that all of the Challenged Patents are invalid, unenforceable and/or would not be
infringed by Mylan’s manufacture, use, sale or offer for sale of the Potential Generic Products. In October 2017,
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we received a second Notice Letter relating to the ANDA submitted to the FDA by Mylan contending that U.S. Patent No.
9,708,371 is invalid and/or would not be infringed by Mylan’s manufacture, use, sale or offer for sale of the Potential Generic
Products. In February 2018, we received a Notice Letter relating to an ANDA that was submitted to the FDA by Mylan,
contending that the 72mcg Challenged Patents, are invalid, unenforceable and/or would not be infringed by Mylan’s manufacture,
use, sale or offer for sale of the Potential 72 mcg Generic Product.
In response to the ANDAs for which we received Notice Letters in 2016, we and Allergan filed a lawsuit against the
generic drug manufacturers in Delaware District Court in November 2016. We asserted that the Challenged Patents are valid and
infringed by Teva, Sandoz and Mylan. In accordance with the Hatch-Waxman Act, the timely filing of the lawsuits against the
ANDA filers with respect to the Challenged Patents triggered an automatic stay of the FDA’s approval of the ANDAs until
February 29, 2020 (unless there is a final court decision adverse to us and Allergan sooner). In October 2017, November 2017,
and January 2018, we and Allergan filed lawsuits against Teva, Mylan, and Sandoz, respectively, each in Delaware District Court,
related to each of their respective second Notice Letters. We asserted that U.S. Patent No. 9,708,371 is valid and infringed by
each of Teva, Mylan and Sandoz. The lawsuits filed in October 2017, November 2017, and January 2018 against Teva, Mylan
and Sandoz, respectively, have been consolidated with the lawsuit filed in November 2016.
Mylan responded to our lawsuit in December 2016, asserting defenses of, among other things, lack of subject matter and
personal jurisdiction and improper venue. In January 2017, each of Teva and Sandoz filed an answer and counterclaims seeking
declaratory judgment of invalidity and non-infringement of the Challenged Patents. On July 13, 2017, Mylan filed a motion to
dismiss for improper venue. In November 2017, Teva filed an answer and counterclaims seeking declaratory judgment of
invalidity and non-infringement of U.S. Patent No. 9,708,371. In December 2017, Mylan filed an answer to the lawsuit that we
and Allergan filed in November 2017. In February 2018, Sandoz filed an answer and counterclaims seeking declaratory judgment
of invalidity and non-infringement of U.S. Patent No. 9,708,371. In February 2018 and March 2018, we and Allergan filed
lawsuits against Teva and Mylan, respectively, each in Delaware District Court asserting that the 72mcg Challenged Patents are
valid and infringed by Teva and Mylan. In August 2018, we and Allergan filed an amended complaint against Mylan asserting
that U.S. Patent No. 8,802,628 is valid and infringed by Mylan’s manufacture, use, sale or offer for sale of the Potential 72 mcg
Generic Product. These lawsuits were consolidated with the lawsuit filed in November 2016.
In May 2018 and August 2018, we, Allergan, Teva and Sandoz stipulated to dismiss without prejudice all claims,
counterclaims and defenses with respect to U.S. Patent Nos. 9,708,371 and 8,933,030, respectively. In August 2018, we, Allergan
and Mylan stipulated to dismiss without prejudice all claims, counterclaims and defenses with respect to U.S. Patent Nos.
8,933,030 and 9,708,371.
In December 2018, we, Allergan and Mylan stipulated to transfer Mylan’s case to the Northern District of West
Virginia. Subsequently, we and Allergan entered into a settlement agreement with Mylan, which is believed to be a first
applicant with respect to certain dosage strengths (145 mcg and 290 mcg). Pursuant to the terms of the settlement, we and
Allergan will grant Mylan a license to market a generic version of LINZESS 145 mcg and 290 mcg in the United States beginning
on February 5, 2030, and a generic version of LINZESS 72 mcg in the United States beginning on August 5, 2030 (both subject to
FDA approval), unless certain limited circumstances, customary for settlement agreements of this nature, occur. As a result of the
settlement, all Hatch-Waxman litigation between us, Allergan and Mylan regarding LINZESS patents, including Mylan’s motion
to dismiss for improper venue, has been dismissed.
We and Allergan previously entered into settlement agreements with Sun Pharma Global FZE and Aurobindo Pharma
Ltd. and an affiliate of Aurobindo.
Trial is scheduled in June 2019 for the action involving Teva and Sandoz.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equit y, 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 since February 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 Market for each quarter in the years ended December 31, 2018
and 2017:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Class A Common Stock
2018
2017
High Low High Low
$16.64 $12.89 $18.53 $13.43
$19.46 $13.83 $19.94 $14.93
$21.20 $16.65 $19.79 $14.16
$19.36 $ 9.07 $17.67 $14.14
As of February 12, 2019, there were 92 stockholders of record of our Class A common stock. The number 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 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 form of 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 to acquire Class A common 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 capital stock in the foreseeable future. We currently intend to retain all of our future earnings, if
any, to finance operations. Any future determination relating to our dividend 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,” is referenced under Item 12 of Part III of this Annual Report on Form 10‑K.
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 such information 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 we specifically 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 Nasdaq Pharmaceutical Benchmark TR Index (U.S.) from December 31, 2013 through December 31, 2018. The
comparison assumes $100 was invested after the market closed on December 31, 2013 in our Class A common stock and in each
of the presented indices, and it assumes reinvestment of dividends, if any.
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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.
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Item 6. Selected Financial Data
You should read the following selected financial data together with our consolidated financial statements and the related
notes appearing elsewhere in this Annual Report on Form 10‑K. We have derived the consolidated statements of operations data
for the years ended December 31, 2018, 2017 and 2016 and the consolidated balance sheet data as of December 31, 2018 and
2017 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, 2015 and 2014 and the consolidated balance sheet
data as of December 31, 2016, 2015, and 2014 from our audited financial statements 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 in any future period.
Consolidated Statement of Operations Data:
Revenues:
Collaborative arrangements revenue
Product revenue, net
Sale of active pharmaceutical ingredient
(1)
Total Revenues
Cost and expenses:
(2)
(3)
Cost of revenues
Write-down of commercial supply and inventory to net
realizable value and loss on non-cancellable purchase
commitments
Research and development
Selling, general and administrative
Amortization of acquired intangible asset
(Gain) loss on fair value remeasurement of contingent
consideration
Restructuring expenses
Impairment of intangible assets
(8)
(4)
(7)
(5)
(4)
(6)
Total cost and expenses
Loss from operations
Other (expense) income:
Interest expense
Interest and investment income
(Loss) gain on derivatives
Loss on extinguishment of debt
Other income
Other expense, net
Net loss
Net loss per share—basic and diluted
Weighted average number of common shares used in net loss
per share—basic and diluted:
(10)
(9)
2018
Year Ended December 31,
2016
(in thousands, except per share data)
2015
2017
2014
$ 272,839 $ 265,533 $263,923 $ 149,040 $ 68,915
—
7,521
76,436
—
515
149,555
3,445
70,355
346,639
3,061
29,682
298,276
109
9,925
273,957
32,751
19,097
1,868
12
5,291
247
166,503
241,291
8,111
309
148,228
233,123
6,214
374
139,492
173,281
981
17,638
108,746
125,247
—
20,292
101,890
118,333
—
(31,045)
15,879
151,794
585,531
(238,892)
(31,310)
—
—
375,661
(77,385)
9,831
—
—
325,827
(51,870)
—
—
—
251,643
(102,088)
—
—
—
245,806
(169,370)
(37,724)
2,991
(8,743)
—
—
(43,476)
(36,370)
2,111
(3,284)
(2,009)
—
(39,552)
(21,166)
(39,153)
257
1,169
—
8,146
—
—
661
—
(20,248)
(29,838)
$(282,368) $(116,937) $ (81,708) $(142,669) $(189,618)
(1.39)
$
(31,096)
443
(9,928)
—
—
(40,581)
(0.78) $
(1.00) $
(1.85) $
(0.56) $
152,634
148,993
144,928
142,155
136,811
(1) Collaborative arrangements revenue for the year ended December 31, 2018 included approximately $264.2 million related to
our share of sales of LINZESS in the U.S., which includes a $29.9 million adjustment related to a change in estimate of
gross-to-net sales reserves and allowances, primarily associated with governmental and contractual rebates.
Collaborative arrangements revenue for the year ended December 31, 2017 included approximately $256.2 million related to
our share of sales of LINZESS in the U.S.
Collaborative arrangements revenue for the year ended December 31, 2016 included approximately $217.7 million related
to our share of sales of LINZESS in the U.S. and $30.0 million related to the receipt of milestone payments
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under our license agreement with Astellas for the filing and approval of a new drug application for LINZESS with the
Japanese Ministry of Health, Labor and Welfare.
Collaborative arrangements revenue for the year ended December 31, 2014 includes approximately $10.2 million related to
the receipt of a milestone payment under our license agreement with Astellas for the enrollment of the first study subject in a
Phase III study for linaclotide in Japan, which was achieved in November 2014, and also includes approximately $1.9 million
in payments from Almirall related to the achievement of two commercial milestones under the license agreement with
Almirall.
(2) Cost of revenues for the year ended December 31, 2018 included approximately $31.6 million related to sales of API.
Cost of revenues for the year ended December 31, 2017 included approximately $2.6 million related to ZURAMPIC and
DUZALLO product sales.
(3) During the year ended December 31, 2018, we wrote down approximately $0.2 million of ZURAMPIC commercial supply
as a result of revised demand forecasts due to the exit of the Lesinurad License.
During the years ended December 31, 2017 and 2016, we wrote down approximately $0.3 million and approximately $0.4
million, respectively, of prepaid ZURAMPIC commercial supply primarily as a result of revised demand forecasts.
During the year ended December 31, 2015, we recorded expenses of approximately $17.6 million for the write‑down of
inventory and an accrual for excess non‑cancelable inventory purchase commitments related to linaclotide API. These
charges primarily related to a reduction in the near term demand forecast for CONSTELLA in the European territory by
Almirall, our former European partner; regulatory changes made by the China Food and Drug Administration to the
marketing approval process in China; and the amendment to the license agreement with Allergan pertaining to the
development and commercialization of linaclotide for Europe executed in October 2015. Pursuant to the terms of the
amendment, Allergan assumed responsibility for the manufacturing of linaclotide API for Europe, as well as the associated
costs, which resulted in accruing for a loss on non‑cancelable inventory purchase commitments under one of our API supply
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 net realizable value of approximately $5.0 million. This write‑down was primarily attributable to Almirall’s
reduced inventory demand forecasts for the European territory, mainly due to the suspension of commercialization of
CONSTELLA in Germany and a challenging commercial environment throughout Europe.
These charges are more fully described in Note 8, Inventory , to our consolidated financial statements appearing elsewhere in
this Annual Report on Form 10‑K.
(4) During the year ended December 31, 2014, we recorded approximately $4.2 million of costs related to a reduction in
workforce in the three months ended March 31, 2014, including employee severance, benefits and related costs and
adjustments. These costs are reflected in our consolidated statement of operations for the year ended December 31, 2014 as
approximately $3.0 million in research and development expenses and approximately $1.2 million in selling, general and
administrative expenses.
(5) Amortization of acquired intangible asset is based on the economic consumption of intangible assets. Our amortization was
related to the ZURAMPIC and DUZALLO intangible assets, which were amortized on a straight-line basis over the
estimated useful life. The increase in amortization expense in 2018 was driven by the developed technology – DUZALLO
intangible asset. We began commercializing DUZALLO in September 2017.
(6) Gain (loss) on fair value remeasurement of contingent consideration is related to our contingent consideration liability
pursuant to our exclusive license to develop, manufacture, and commercialize products containing lesinurad as an active
ingredient, including ZURAMPIC and DUZALLO, in the U.S. The contingent consideration liability is revalued at each
reporting period and changes in the fair value, other than changes due to payments, are recognized as a gain (loss) on fair
value remeasurement of contingent consideration in our statement of operations. Adjustments
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are recorded when there are changes in significant assumptions, including net sales projections, probability weighted net cash
outflow projections, the discount rate, passage of time, and the yield curve equivalent to our credit risk, which is based on the
estimated cost of debt for market participants.
During the year ended December 31, 2018, we decreased our projected revenue assumptions associated with the sales of
ZURAMPIC and DUZALLO due to the notice of termination of the Lesinurad License. As a result, a gain on fair value
remeasurement of contingent consideration of approximately $31.0 million was recorded during the year ended December
31, 2018.
During the year ended December 31, 2017, we decreased our ZURAMPIC and DUZALLO revenue projections.
Accordingly, the expected estimated future royalty and milestone payments to AstraZeneca decreased, resulting in an
approximately $31.3 million decrease to the contingent consideration liability.
(7) During the year ended December 31, 2018, we incurred approximately $15.9 million in restructuring expenses primarily due
to costs associated with the workforce reductions as a result of our evaluation of the optimal mix of investments for the
lesinurad franchise, our subsequent decision to terminate the Lesinurad License and the associated contract termination
costs, as well as our intention to separate into two independent publicly traded companies.
(8) During the year ended December 31, 2018, we recorded a charge of approximately $151.8 million due to the impairment of
the ZURAMPIC and DUZALLO intangible assets as a result of the revised net cash flow assumptions and the exit of the
Lesinurad License.
(9) Gain (loss) on derivatives consists of the change in fair value of our Convertible Note Hedges and Note Hedge Warrants,
which are recorded as derivative assets 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 are recorded in our consolidated statements of
operations. The Convertible Note Hedges and Note Hedge Warrants are more fully described in Note 7, Fair Value of
Financial Instruments , and Note 11, Notes Payable , to our consolidated financial statements appearing elsewhere in this
Annual Report on Form 10‑K.
(10) Loss on extinguishment of debt was due to the write-off of remaining unamortized debt issuance costs on the 11% PhaRMA
Notes due 2024, or the PhaRMA Notes, as part of the redemption in January 2017.
2018
2017
Year Ended December 31,
2016
(in thousands)
2015
2014
Consolidated Balance Sheet Data:
Cash, cash equivalents and available-for-sale securities
Working capital (excluding deferred revenue)
Total assets
Deferred revenue, including current portion
Debt financing and convertible notes, including current portion
(1)
Capital lease obligations, including current portion
Total liabilities
Total stockholders’ (deficit) equity
$ 173,172 $221,416 $305,216 $439,394 $248,334
234,957
329,322
16,180
146,911
332,050
—
245,569
605,674
—
289,050
709,821
—
430,931
619,121
8,989
413,692
231
528,421
(196,371)
396,091
4,077
595,826
9,848
366,492
6,309
643,105
66,716
378,548
2,937
523,996
95,125
169,405
3,723
240,770
88,552
(1) Debt financing and convertible notes, including current portion, as of December 31, 2016 includes approximately $132.2
relating to the PhaRMA Notes, which were redeemed, in full, in connection with the funding and issuance in January 2017 of
$150.0 million in aggregate principal amount of 8.375% notes due 2026, or the 2026 Notes, and approximately $234.2
relating to the convertible notes.
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Item 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 the notes to those financial statements appearing elsewhere in this Annual Report on
Form 10‑K. This discussion contains forward‑looking statements that involve significant 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, our actual results may
differ materially from those anticipated in these forward‑looking statements.
Overview
We are a gastrointestinal, or GI, focused healthcare company leveraging our proven development and commercial
capabilities as we seek to bring multiple medicines to patients. We are advancing innovative product opportunities in areas of
large unmet need, capitalizing on our expertise in GI diseases.
Our commercial product, linaclotide, is available to adult men and women suffering from irritable bowel syndrome with
constipation, or IBS-C, or chronic idiopathic constipation, or CIC, in certain countries around the world. Linaclotide is available
under the trademarked name LINZESS to adult men and women suffering from IBS-C or CIC in the United States, or the U.S.,
and Mexico, and to adult men and women suffering from IBS-C in Japan. Linaclotide is available under the trademarked name
CONSTELLA to adult men and women suffering from IBS-C or CIC in Canada, and to adult men and women suffering from
IBS-C in certain European countries.
®
®
We and our partner Allergan plc (together with its affiliates), or Allergan, 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. Allergan has an exclusive license from us to develop and commercialize linaclotide in the Allergan License Territory,
which is comprised of all countries other than China, Hong Kong, Macau, Japan, and the countries and territories of North
America. On a country-by-country and product-by-product basis in the Allergan License Territory, Allergan pays us royalties as
a percentage of net sales of products containing linaclotide as an active ingredient. In addition, Allergan has exclusive rights to
commercialize linaclotide in Canada as CONSTELLA and in Mexico as LINZESS.
Astellas Pharma Inc., or Astellas, our partner in Japan, has an exclusive license to develop and commercialize linaclotide
in Japan. In March 2017, Astellas began commercializing LINZESS for the treatment of adults with IBS-C in Japan, and in
September 2018, Astellas began commercializing LINZESS for the treatment of adult patients with chronic constipation in Japan.
In October 2012, we entered into a collaboration agreement with AstraZeneca AB (together with its affiliates), or 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 January 2019, the National Medical Products Administration approved the marketing
application for LINZESS for adults with IBS-C in China.
We and Allergan are exploring ways to enhance the clinical profile of LINZESS by studying linaclotide in additional indications,
populations and formulations to assess its potential to treat various conditions. In July 2018, we announced the initiation of a
Phase IIIb trial evaluating the efficacy and safety of linaclotide 290 mcg on multiple abdominal symptoms in addition to pain,
including bloating and discomfort, in adult patients with IBS-C.
We and Allergan are also seeking to expand the clinical utility of linaclotide by demonstrating the pain-relieving effect of a
delayed release formulation through the advancement of MD-7246 (linaclotide delayed release) in IBS with diarrhea (“IBS-D”).
We are also advancing another GI development program, IW-3718, a gastric retentive formulation of a bile acid
sequestrant, for the potential treatment of persistent gastroesophageal reflux disease, or persistent GERD. In June 2018, we
initiated two Phase III clinical trials evaluating the safety and efficacy of IW-3718 in patients with persistent GERD.
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 to patients. We intend to play an active role in the development and
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commercialization of our products in the U.S., and to establish a strong global brand by out-licensing commercialization rights in
other territories to high-performing partners.
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 adults suffering from IBS-D, which expired in December 2017. In January 2017, we and Allergan
entered into a commercial agreement under which the adjustments to our or Allergan’s share of the net profits under the share
adjustment provision of the collaboration agreement for linaclotide in North America are eliminated, in full, in 2018 and all
subsequent years. In addition, Allergan appointed us, on a non-exclusive basis, to promote CANASA (mesalamine), approved
for the treatment of ulcerative proctitis, and DELZICOL (mesalamine), approved for the treatment of ulcerative colitis, in the
U.S. for approximately two years. In December 2017, this agreement was amended to include the promotion of VIBERZI through
December 31, 2018 and to discontinue the promotion of DELZICOL effective January 1, 2018. In December 2018, we and
Allergan entered into an agreement to discontinue our promotion of CANASA effective December 31, 2018, and to extend our
promotion of VIBERZI through March 31, 2019. These agreements are more fully described in Note 5, Collaboration, License,
Co-Promotion and Other Commercial Agreements , to our consolidated financial statements appearing elsewhere in this Annual
Report on Form 10-K.
®
®
We were incorporated in Delaware on January 5, 1998 as Microbia, Inc. On April 7, 2008, we changed our name to
Ironwood Pharmaceuticals, Inc. We operate in one reportable business segment—human therapeutics.
To date, we have dedicated a majority of our activities to the research, development and commercialization of linaclotide
and the commercialization of lesinurad, as well as to the research and development of our other product candidates. We have
incurred significant operating losses since our inception in 1998. As of December 31, 2018, we had an accumulated deficit of
approximately $1.6 billion. We are unable to predict the extent of any future losses or guarantee when, or if, our company will
become cash flow positive.
In May 2018, we announced the intent to separate into two publicly traded companies, Ironwood and Cyclerion
Therapeutics, Inc., or Cyclerion. Cyclerion is expected to be a clinical-stage biopharmaceutical company harnessing the power of
soluble guanylate cyclase, or sGC, pharmacology to discover, develop and commercialize breakthrough treatments for serious and
orphan diseases. Upon separation, Cyclerion plans to focus on enabling the full therapeutic potential of next-generation sGC
stimulators. sGC stimulators are small molecules that act synergistically with nitric oxide on sGC to boost production of cyclic
guanosine monophosphate, or cGMP. cGMP is a key second messenger that, when produced by sGC, regulates diverse and
critical biological functions throughout the body including blood flow and vascular dynamics, inflammatory and fibrotic
processes, metabolism and neuronal function. Cyclerion believes that the key to unlocking the full therapeutic potential of the
nitric oxide-cGMP pathway is to design differentiated next-generation sGC stimulators that preferentially modulate pathway
signaling in tissues of greatest relevance to the diseases they are developed to treat. This targeted approach is intended to
maximize the potential benefits of nitric oxide-cGMP pathway stimulation in disease-relevant tissues.
Cyclerion’s portfolio is anticipated to be comprised of several sGC stimulators. Olinciguat is a vascular sGC stimulator
in Phase II development for the potential treatment of sickle cell disease. In June 2018, the FDA granted Orphan Drug
Designation to olinciguat for the treatment of patients with sickle cell disease. Praliciguat is a systemic sGC stimulator in Phase II
development for the potential treatment of heart failure with preserved ejection fraction, or HFpEF. In September 2018, the FDA
granted Fast Track Designation for praliciguat for the treatment of patients with HFpEF. Cyclerion is expected to advance
additional sGC stimulator development programs in pre-clinical and discovery phases.
In February 2019, following further analysis of our strategy and core business needs, and in an effort to further
strengthen the operational efficiency of our organization, we commenced a reduction in our workforce by 35 employees,
primarily based in the home office. Refer to Note 20, Subsequent Events , to our consolidated financial statements appearing
elsewhere in this Annual Report on Form 10-K.
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Key Performance Indicators
(dollars in thousands, per share amounts in dollars)
The following charts summarize key metrics of revenue, earnings (losses), and operating cash use:
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These metrics are more fully described in the Results of Operations and Liquidity and Capital Resources sections below.
Financial Overview
Revenues. Our revenues are generated primarily through our collaborative arrangements and license agreements related
to research and development and commercialization of linaclotide, as well as co-promotion arrangements in the U.S. and product
revenue related to the commercial sale of ZURAMPIC and DUZALLO in the U.S. Effective January 1, 2018, we adopted
Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, or ASC 606, using the
modified retrospective transition method. The adoption of ASC 606 represents a change in accounting principle that aims to more
closely align revenue recognition with the delivery of our services and will provide financial statement readers with enhanced
disclosures. In accordance with ASC 606, we recognize revenue when the customer obtains control of a promised good or service,
in an amount that reflects the consideration which we expect to receive in exchange for the good or service. The reported results
for the year ended December 31, 2018 reflect the application of ASC 606 guidance, while the reported results for the years ended
December 31, 2017 and 2016 were prepared in accordance with ASC 605, Revenue Recognition, or ASC 605. Upon adoption of
ASC 606, we concluded that no cumulative adjustment to the accumulated deficit as of January 1, 2018 was necessary. The
adoption of ASC 606 had no impact on our consolidated statement of operations, consolidated balance sheets, or consolidated
statement of cash flows.
The terms of the collaborative research and development, license and co-promotion agreements contain multiple
performance obligations which may include (i) licenses, (ii) research and development activities, (iii) the manufacture of finished
drug product, active pharmaceutical ingredient, or API, or development materials for a partner which are reimbursed at a
contractually determined rate, and (iv) co‑promotion activities by our clinical sales specialists. Payments to us 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 development materials, (iv) payments based upon the achievement of certain milestones, (v) payments for sales
detailing, promotional support services and medical education initiatives and (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. and China.
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 from Allergan as collaboration expense or collaborative arrangements revenue, as applicable. Net
profits or losses consist 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. Although we expect net sales to increase over time, the settlement payments
between Allergan and us, resulting in collaborative arrangements revenue or collaboration expense, are subject to fluctuation
based on the ratio of selling, general and administrative expenses incurred by each party. In addition, our collaborative
arrangements revenue may fluctuate as a result of the timing and amount of license fees and clinical and commercial milestones
received and recognized under our current and future strategic partnerships as well as timing and amount of royalties from the
sales of linaclotide in the European, Canadian or Mexican markets or any other markets where linaclotide receives approval.
Product revenue is recognized when the Distributor obtains control of our product, which occurs at a point in time,
typically upon shipment of ZURAMPIC and DUZALLO, or the Lesinurad Products, to the Distributor. When we perform
shipping and handling activities after the transfer of control to the Distributor (e.g., when control transfers prior to delivery), they
are considered as fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized. Taxes
collected from Customers relating to product sales and remitted to governmental authorities are excluded from revenues. We
expense incremental costs of obtaining contracts with Distributors as and when incurred if the expected amortization period of the
asset that we would have recognized is one year or less.
We evaluate the creditworthiness of each of our Distributors to ensure it is probable that a significant reversal in the
amount of the cumulative revenue recognized will not occur. We calculate our net product revenue based on the wholesale
acquisition cost that we charge our Distributors for the Lesinurad Products less variable consideration. The product revenue
variable consideration consists of estimates relating to (i) trade discounts and allowances, such as invoice discounts for prompt
payment and distributor fees, (ii) estimated government and private payor rebates, chargebacks and discounts, such as Medicaid
reimbursements, (iii) reserves for expected product returns and (iv)
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estimated costs of incentives offered to certain indirect customers including patients. These estimates could be adjusted based on
actual results in the period such variances become known.
Cost of Revenues. Cost of revenues includes cost of collaborative arrangements revenue related to the sales of
linaclotide API and drug product, as well as the cost of product revenue related to sales of the Lesinurad Products in the U.S. Cost
related to the sales of linaclotide API and drug product are recognized upon shipment of linaclotide API and drug product to
certain of our partners outside of the U.S. Our cost of collaborative arrangements revenue for linaclotide consists of the internal
and external costs of producing such API and drug product for certain of our partners outside of the U.S. Cost of product revenue
related to the sales of the Lesinurad Products in the U.S. includes the cost of producing finished goods that correspond with
product revenue for the reporting period, such as third-party supply and overhead costs, as well as certain period costs related to
freight, packaging, stability and quality testing, and customer acquisition.
Write‑down of Inventory to Net Realizable Value and Loss on Non‑cancelable Inventory and Commercial Supply
Purchase Commitments. During the year ended December 31, 2018, we wrote down approximately $0.3 million primarily related
to lesinurad inventory and commercial supply purchase commitments as a result of revised demand forecasts and the notice of
termination of the Lesinurad License. During the year ended December 31, 2018, we assigned to Allergan certain linaclotide
excess non-cancelable purchase commitments that we had previously accrued for. Accordingly, we relieved the previous accrual
of approximately $2.5 million.
During the year ended December 31, 2017, we wrote down approximately $0.3 million of lesinurad commercial supply
purchase commitments as a result of revised demand forecasts. During the year ended December 31, 2016, we wrote down
approximately $0.4 million in commercial supply purchase commitments.
These charges are more fully described in Note 8, Inventory, and Note 12, Commitments and Contingencies 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 development of our product candidates. These expenses consist primarily of compensation, benefits and
other employee‑related expenses, research and development related facility costs, third‑party contract costs relating to nonclinical
study and clinical trial activities, development of manufacturing processes, regulatory registration of third‑party manufacturing
facilities, as well as licensing fees for our product candidates. We charge all research and development expenses to operations as
incurred. Under our linaclotide collaboration agreements with Allergan for the U.S. and AstraZeneca for China, Hong Kong and
Macau, we are reimbursed for certain research and development expenses, and we net these reimbursements against our research
and development expenses as incurred. Amounts owed to Allergan or AstraZeneca for such linaclotide territories are recorded as
incremental research and development expense.
The core of our research and development strategy is to leverage our development capabilities, as well as our
pharmacologic expertise, to bring multiple medicines to patients. We are advancing innovative product opportunities in areas of
large unmet need, including IBS-C and CIC, abdominal pain associated with IBS and persistent GERD. In addition, prior to the
planned separation of the companies, we are also advancing innovative product opportunities in diabetic nephropathy, HFpEF and
serious and orphan diseases, such as sickle cell disease.
Linaclotide . Linaclotide is the first FDA‑approved guanylate cyclase type‑C, or GC‑C, agonist. Linaclotide is approved
and commercially available in the U.S., Japan and in a number of E.U. and other countries.
We and Allergan are exploring ways to enhance the clinical profile of LINZESS by studying linaclotide in additional
indications, populations and formulations to assess its potential to treat various conditions. In January 2017, the FDA approved a
72 mcg dose of LINZESS for adults with CIC, which became available in the U.S. in March 2017. In July 2018, we announced
the initiation of a Phase IIIb trial evaluating the efficacy and safety of linaclotide 290 mcg on multiple abdominal symptoms in
addition to pain, including bloating and discomfort, in adult patients with IBS-C.
We and Allergan are also seeking to advance the clinical utility of linaclotide by demonstrating the pain-relieving effect
of a delayed release formulation through the advancement of MD-7246 in IBS-D. We and Allergan have established a plan with
the FDA for clinical pediatric programs with linaclotide, as described below.
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IW-3718. We are advancing our persistent GERD program through the development of IW-3718, a gastric retentive
formulation of a bile acid sequestrant. IW-3718 is designed to release in the stomach over an extended period of time, bind to
bile that refluxes into the stomach, and potentially provide symptomatic relief in patients with persistent GERD. In June 2018, we
announced the initiation of two Phase III clinical trials evaluating the safety and efficacy of IW-3718 in patients with persistent
GERD.
We have additional assets in early development 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 expanding expertise in GI disorders and GC pathways through December 31, 2018.
The following table sets forth our research and development expenses related to our product pipeline for the years ended
December 31, 2018, 2017, and 2016. These expenses relate primarily to internal compensation, benefits and other employee-
related expenses and external costs associated with nonclinical studies and clinical trial costs for our product candidates. We
allocate costs related to facilities, depreciation, share‑based compensation, research and development support services, laboratory
supplies and certain other costs directly to programs.
(1)
Linaclotide
(2)
Lesinurad
Development candidates:
GI disorders (two compounds)
Vascular and fibrotic disorders (two compounds)
Central nervous system disorders (one compound)
(3)
(3)
(3)
Total development candidates
Discovery research
Total research and development expenses
2018
Year Ended December 31,
2017
(in thousands)
$ 33,749 $ 33,042 $ 40,130
18,413
17,764
5,184
2016
38,968
52,127
12,322
103,417
24,153
27,795
29,809
853
58,457
22,492
$ 166,503 $ 148,228 $ 139,492
16,876
50,826
8,290
75,992
21,430
Includes linaclotide in all indications, populations and formulations.
Includes lesinurad in all indications, populations and formulations.
(1)
(2)
(3) Number of compounds includes clinical-stage development candidates for the year ended December 31, 2018.
Since 2004, the date we began tracking costs by program, we have incurred approximately $462.5 million of research
and development expenses related to linaclotide. The expenses for linaclotide include both our portion of the research and
development costs incurred by Allergan for the U.S. and AstraZeneca for China, Hong Kong and Macau and invoiced to us under
the cost‑sharing provisions of our collaboration agreements, as well as the unreimbursed portion of research 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 delay in obtaining, regulatory approvals would materially adversely affect our product
development efforts and our business overall.
In connection with the FDA approval of LINZESS, we are required to conduct certain nonclinical and clinical studies,
including those aimed at understanding: (a) whether orally administered linaclotide can be detected in breast milk, (b) the
potential for antibodies to be developed to linaclotide, and if so, (c) whether antibodies specific for linaclotide could have any
therapeutic or safety implications. In addition, we and Allergan established a nonclinical and clinical post-marketing plan with the
FDA to understand the efficacy and safety of LINZESS in pediatric patients. We and Allergan are advancing clinical pediatric
programs in IBS-C patients age seven to 17 and functional constipation patients age six to 17. We and Allergan are also exploring
development opportunities to enhance the clinical profile of LINZESS by studying linaclotide in additional indications,
populations and formulations to assess its potential to treat various 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 AstraZeneca
having primary responsibility for the local operational execution. We cannot currently estimate with any degree of certainty the
amount of time or money that
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we will be required to expend in the future on linaclotide for other geographic markets within IBS-C and CIC, or in additional
indications, populations or formulations.
In December 2015, the FDA approved ZURAMPIC for use in conjunction with an XOI for the treatment of
hyperuricemia associated with uncontrolled gout. In connection with the FDA approval, the FDA has required a post-marketing
clinical study to further evaluate the renal and cardiovascular safety of lesinurad, and has required that enrollment include patients
with moderate renal impairment. In connection with the exit of the Lesinurad License, we are in the process of ending the post-
marketing clinical study. The FDA approved DUZALLO, the fixed-dose combination product containing lesinurad and
allopurinol, in August 2017 for the treatment of hyperuricemia associated with gout in patients who have not achieved goal serum
uric acid levels with a medically appropriate daily dose of allopurinol alone.
We are also advancing IW-3718 targeting persistent GERD. Prior to the planned separation of the companies, we are
also advancing praliciguat targeting diabetic nephropathy and HFpEF and olinciguat targeting sickle cell disease.
Given the inherent uncertainties that come with the development of pharmaceutical products, we cannot estimate with
any degree of certainty how our programs will evolve, and therefore the amount of time or money that would be required to
obtain regulatory approval to market them.
As a result of these uncertainties surrounding the timing and outcome of any approvals, we are currently unable to
estimate precisely when, if ever, linaclotide’s utility will be expanded within its currently approved indications; if or when
linaclotide will be developed outside of its current markets, indications, populations or formulations; or when, if ever, any of our
other product candidates will generate revenues and cash 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 of clear, 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 therapeutic pharmaceutical products, typically requiring lengthy and detailed laboratory and clinical
testing procedures, sampling activities and other costly and time-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 of development activity. Data obtained from these activities also are susceptible to
varying interpretations, which could delay, limit or prevent regulatory approval.
·
·
·
·
The duration and cost of discovery, nonclinical studies and clinical trials may vary significantly over the life of a
product candidate and are difficult to predict.
The costs, timing and outcome of regulatory review of a product candidate may not be favorable, and, even if
approved, a product may face post-approval development and regulatory requirements.
There may be substantial costs, delays and difficulties in successfully integrating externally developed product
candidates into our business operations.
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 to determine 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 generate revenues from the commercialization and sale of our product
candidates. Development timelines, probability of success and development
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costs vary widely. We anticipate 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 in response to the data of each product candidate, the competitive
landscape and ongoing assessments of such product candidate’s commercial potential.
We expect to invest in our research and development programs for the foreseeable future. We will continue to invest in
linaclotide, including the investigation of ways to enhance the clinical profile within its currently approved indications, and the
exploration of its potential utility in other indications, populations and formulations. We will also invest in our other product
candidates as we advance them through nonclinical studies and clinical trials, in addition to funding full-time equivalents 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, communications and human resource functions. Other costs
include the legal costs of pursuing patent protection of our intellectual property, general and administrative related facility costs,
insurance costs and professional fees for accounting and legal services. As we continue to invest in the commercialization of
LINZESS, we expect our selling, general and administrative expenses will be substantial for the foreseeable future. We record all
selling, general and administrative expenses as incurred.
Under our AstraZeneca collaboration agreement for linaclotide, we are reimbursed for certain selling, general and
administrative expenses and we net these reimbursements against our selling, general and administrative expenses as incurred.
We include Allergan’s selling, general and administrative cost‑sharing payments in the calculation 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 or
collaborative arrangements revenue, respectively.
Amortization of Acquired Intangible Assets. Amortization expense was based on the economic consumption of
intangible assets. Our amortization was related to the ZURAMPIC and DUZALLO intangible assets, which were amortized on a
straight-line basis over the estimated useful life of the assets. We believe that the straight-line method of amortization
represented the pattern in which the economic benefits of the intangible assets were consumed.
(Gain)/Loss on Fair Value Remeasurement of Contingent Consideration. Our contingent consideration obligation related
to the Lesinurad Transaction consisted of the fair value of estimated future milestone and royalty payments. This liability was
revalued at each reporting period. Changes in the fair value of our contingent consideration, other than changes due to payments,
were recognized as a (gain)/loss on fair value remeasurement of contingent consideration in our consolidated statement of
operations. Adjustments were recorded when there were changes in significant assumptions, including net sales projections,
probability weighted net cash outflow projections, the discount rate, passage of time, and the yield curve equivalent to our credit
risk, which was based on the estimated cost of debt for market participants.
Restructuring Expenses. We record costs and liabilities associated with exit and disposal activities in accordance with
ASC 420, Exit or Disposal Cost Obligations . Such costs are based on estimates of fair value in the period the liabilities are
incurred. We evaluate and adjusts these costs as appropriate for changes in circumstances as additional information becomes
available.
Impairment of Intangible Assets. We evaluate the finite-lived intangible assets for impairment whenever events or
changes in circumstances indicate the reduction in the fair value below their respective carrying amounts. In connection with
each impairment assessment in which indicators of impairment have been identified, we compare the fair value of the asset as of
the date of the assessment with the carrying value of the asset on our consolidated balance sheet. If an indicator of impairment
exists, we compare the carrying value of the intangible asset or asset group to the undiscounted cash flows expected from that
asset or asset group. If impairment is indicated by this test, the intangible asset is written down by the amount by which the
discounted cash flows expected from the intangible asset exceeds its carrying value.
Other (Expense) Income. Interest expense consists primarily of cash and non‑cash interest costs related to the 2022
Notes and the 2026 Notes. Non‑cash interest expense consists of amortization of the debt discount and associated debt issuance
costs associated with the 2022 Notes and 2026 Notes. We amortize these costs using the effective interest
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rate method over the life of the respective note agreements as interest expense in our consolidated statements of operations.
Interest income consists of interest earned on our cash, cash equivalents and marketable securities.
In September 2016, we closed a direct private placement, pursuant to which we issued $150.0 million in aggregate
principal amount of 8.375% notes due 2026 on January 5, 2017, or the Funding Date. The proceeds from the issuance of the 2026
Notes were used to redeem the outstanding principal balance of the PhaRMA Notes on the Funding Date. This transaction is more
fully described in Note 11, Notes Payable, to our consolidated financial statements appearing elsewhere in this Annual Report on
Form 10‑K.
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 accordance with U.S. generally accepted accounting principles. The preparation of these financial
statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the amounts of revenues and
expenses during the reported periods. Significant estimates and assumptions in our consolidated financial statements include those
related to revenue recognition, including returns, rebates, and other pricing adjustments; available-for-sale securities; inventory
valuation, and related reserves; impairment of long-lived assets, including its acquired intangible assets and goodwill; initial
valuation procedures for the issuance of convertible notes; fair value of derivatives; balance sheet classification of notes payable
and convertible notes; income taxes, including the valuation allowance for deferred tax assets; research and development
expenses; contingent consideration; 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 for making
judgments about the carrying values of assets and liabilities. Actual results may differ materially from our estimates under
different assumptions or conditions. 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, are the 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.
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 value hierarchy as described in the accounting standards for fair value measurements. In general,
fair values determined by Level 1 inputs utilize observable inputs such as 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 indirectly observable, such as
quoted prices for similar instruments in active markets, interest rates and yield curves. Fair values determined by Level 3 inputs
utilize unobservable data points in which there is little or no 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 other available information as applicable through processes such as benchmark yields,
benchmarking of like securities, sector groupings and matrix pricing to prepare valuations. In addition, model processes are used
to assess interest rate impact and develop prepayment scenarios. These models take into consideration relevant credit 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 from other pricing sources and analyzing pricing data in certain instances.
We classify our derivative financial instruments and contingent consideration as Level 3 under the fair value hierarchy.
The derivatives are not actively traded and are valued using the Black-Scholes option pricing model which requires the use of
subjective assumptions, primarily the expected stock price volatility assumption. The contingent consideration is not actively
traded and is valued using the Monte-Carlo simulation which requires the use of subjective
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assumptions, including probability weighted net cash outflow projections, discounted using a yield curve equivalent to our credit
risk, which was the estimated cost of debt financing for market participants. Adjustments are recorded when there are changes in
significant assumptions, including net sales projections, probability weighted net cash outflow projections, the discount rate,
passage of time, and the yield curve equivalent to our credit risk, which is based on the estimated cost of debt for market
participants.
Inventory Valuation
Inventory is stated at the lower of cost or net realizable value with cost determined under the first‑in, first‑out basis in
accordance with Accounting Standards Update, or ASU, No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of
Inventory.
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 a corresponding 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 any excess
non‑cancelable purchase commitments resulting from minimum supply agreements with our suppliers. We rely on data from
several sources to estimate the net realizable value of inventory and non‑cancelable purchase commitments, including partner
forecasts of projected inventory purchases that are received quarterly, our internal forecasts and related process, historical sales by
geographic region, and the status of and progress 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 a high likelihood of regulatory approval and the related costs are expected to be
recoverable through sales of the inventories. In determining whether or not to capitalize such inventories, we evaluate, among
other factors, information regarding the product candidate’s safety and efficacy, the status of regulatory submissions and
communications with regulatory authorities and the outlook for commercial sales, including the existence of current or anticipated
competitive drugs and the availability of reimbursement. In addition, we evaluate risks associated with manufacturing the product
candidate, including the ability of our 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 as incurred.
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.
Finite-Lived Intangible Assets
We record the fair value of purchased intangible assets with finite useful lives as of the transaction date of a business
combination. Purchased intangible assets with finite useful lives are amortized to their estimated residual values over their
estimated useful lives. We amortize intangible assets that have finite lives using either the straight-line method, or if reliably
determinable, based on the pattern in which the economic benefit of the asset is expected to be utilized. We evaluate the finite-
lived intangible assets for impairment whenever events or changes in circumstances indicate the reduction in the fair value below
their respective carrying amounts. In addition, the remaining estimated useful life of the finite-lived intangible asset would be
reassessed.
The value of our finite-lived intangible assets was based on the future expected net cash flows related to ZURAMPIC
and DUZALLO (the “Lesinurad Products”), which included significant assumptions around future net sales and the respective
investment to support these products.
We evaluate our finite-lived intangible assets for impairment whenever events or changes in circumstances indicate the
reduction in the fair value below their respective carrying amounts. In connection with each impairment assessment in which
indicators of impairment have been identified, we compare the fair value of the asset as of the date of the assessment with the
carrying value of the asset on our consolidated balance sheet. If an indicator of impairment exists, we compare the carrying value
of the intangible asset or asset group to the undiscounted cash flows expected from that asset or asset group. If impairment is
indicated by this test, the intangible asset is written down by the amount
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by which the discounted cash flows expected from the intangible asset exceeds its carrying value. To estimate the cash flows
expected for the assets, we use market participant assumptions pursuant to Accounting Standards Codification (“ASC”) 820 , Fair
Value . For the lesinurad finite-lived intangible assets, we made significant assumptions as part of this assessment including but
not limited to future net product sales, respective cost of product sales, and operating expenses. We believe that the following
factors, among others, could trigger an impairment review: significant underperformance relative to historical or projected future
operating results; significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
approval of competitive products; and significant negative industry or economic trends. If we determine that an impairment has
occurred, a write-down of the carrying value and an impairment charge to operating expenses in the period the determination is
made is recorded. During the year ended December 31, 2018, we recorded an impairment charge of approximately $151.8 million
related to its ZURAMPIC and DUZALLO intangible assets. For additional information relating to the impairment of these assets,
see Note 4, Goodwill and Intangible Assets , to the Company’s consolidated financial statements appearing elsewhere in this
Annual Report on Form 10-K.
Goodwill
Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and
intangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized, but is reviewed for
impairment. We test goodwill for impairment annually as of October 1st, or more frequently if events or changes in circumstances
indicate that would more likely than not reduce the fair value of the reporting unit below its carrying value. Impairment may
result from, among other things, deterioration in the performance of the acquired asset, adverse market conditions, adverse
changes in applicable laws or regulations and a variety of other circumstances. If we determine that an impairment has occurred, a
write-down of the carrying value and an impairment charge to operating expenses in the period the determination is made is
recorded. In evaluating the carrying value of goodwill, we must make assumptions regarding estimated future cash flows and
other factors. Changes in strategy or market conditions could significantly impact those judgments in the future and require an
adjustment to the recorded balances.
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 the Convertible Note Hedges, we also entered into certain warrant transactions in which we sold
Note Hedge Warrants to the Convertible Note Hedge counterparties to acquire 20,249,665 shares of our Class A common stock,
subject to customary anti‑dilution adjustments. These instruments are derivative financial instruments under 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‑pricing model. The changes in fair value are recorded as a component of other (expense) income
in the consolidated statements of operations. Significant inputs used to determine 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 strike prices 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 the valuation of the Convertible Note Hedges and Note Hedge Warrants in future periods.
Revenue Recognition
Effective January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and related
amendments (“ASU 2014-09”) using the modified retrospective transition method. The adoption of ASU 2014-09 represents a
change in accounting principle that aims to more closely align revenue recognition with the delivery of our products or services
and will provide financial statement readers with enhanced disclosures. ASU 2014-09 also includes Subtopic 340-40, Other
Assets and Deferred Costs—Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract
with a customer. In accordance with ASC 606, we recognize revenue when the customer obtains control of a promised good or
service, in an amount that reflects the consideration which we expect to receive in exchange for the good or service. The reported
results for the year ended December 30, 2018 reflect the application of ASC 606 guidance, while the reported results for prior
periods were prepared in accordance with ASC 605. Upon adoption of ASC 606, we concluded that no cumulative adjustment to
the accumulative deficit as of January 1, 2018 was necessary. There were no remaining or ongoing deliverables or unrecognized
consideration as of December
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31, 2017 that required an adjustment to the accumulated deficit. The adoption of ASC 606 had no impact on our consolidated
statement of operations, consolidated balance sheets, or consolidated statement of cash flows.
As part of the ASC 606 adoption, we have utilized certain practical expedients outlined in the guidance. These practical
expedients include:
·
·
·
Expensing as incurred incremental costs of obtaining a contract, such as sales commissions, if the amortization
period of the asset would be less than one year.
Recognizing revenue in the amount that we have the right to invoice, when consideration from the customer
corresponds directly with the value to the customer of our performance completed to date.
For contracts that were modified before the beginning of the earliest reporting period presented in accordance
with the pending content that links to this paragraph, an entity need not retrospectively restate the contract for
those contract modifications in accordance with paragraphs ASC 606-10-25-12 through 25-13. Instead, an
entity shall reflect the aggregate effect of all modifications that occur before the beginning of the earliest period
presented in accordance with the pending content that links to this paragraph when: a. Identifying the satisfied
and unsatisfied performance obligations b. Determining the transaction price and c. Allocating the transaction
price to the satisfied and unsatisfied performance obligations.
Prior to the adoption of ASC 606, we recognized revenue when there was persuasive evidence that an arrangement
existed, services had been rendered or delivery had occurred, the price was fixed or determinable, and collection was reasonably
assured.
Our revenues are generated primarily through collaborative arrangements and license agreements related to the research
and development and commercialization of linaclotide, as well as co-promotion arrangements in the U.S. and product revenue
related to the commercial sale of ZURAMPIC and DUZALLO in the U.S. The terms of the collaborative research and
development, license, co-promotion and other agreements contain multiple performance obligations which may include (i)
licenses, (ii) research and development activities, including participation on joint steering committees, (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 our clinical sales specialists. Non-refundable payments to us 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 development materials, (iv) payments based upon the achievement of 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 for China,
Hong Kong and Macau through our collaborations with Allergan and AstraZeneca, respectively. We have adopted a policy to
recognize revenue net of tax withholdings, as applicable.
Revenue recognition under ASC 606
Upon executing a revenue generating arrangement, we assess whether it is probable we will collect consideration in
exchange for the good or service it transfers to the customer. To determine revenue recognition for arrangements that we
determine are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii)
identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the
performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the performance obligations. We must
develop assumptions that require significant judgment to determine the stand-alone selling price for each performance obligation
identified in the contract. The assumptions that are used to determine the stand-alone selling price may include forecasted
revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and
regulatory success.
Collaboration, License, Co-Promotion and Other Commercial Agreements
Upon licensing intellectual property, we determine if the license is distinct from the other performance obligations
identified in the arrangement. We recognize revenues from the transaction price, including non-refundable, up-front fees allocated
to the license when the license is transferred to the customer if the license has distinct benefit to
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the customer. For licenses that are combined with other promises, we assess the nature of the combined performance obligation to
determine whether the combined performance obligation is satisfied over time or at a point in time. For performance obligations
that are satisfied over time, we evaluate the measure of progress each reporting period and, if necessary, adjust the measure of
performance and related revenue recognition.
Our license and collaboration agreements include milestone payments, such as development and other milestones. We
evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the
transaction price using the most likely amount method at the inception of the agreement. If it is probable that a significant revenue
reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not
within our control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received.
The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which we
recognize revenue as or when the performance obligations under the contract are satisfied. We re-evaluate the probability of
achievement of such milestones and any related constraint at each reporting period, and any adjustments are recorded on a
cumulative catch-up basis.
Agreements that include the supply API or drug product for either clinical development or commercial supply at the
customer’s discretion are generally considered as options. We assess if these options provide a material right to its partner, and if
so, they are accounted for as separate performance obligations. If we are entitled to additional payments when the customer
exercises these options, any additional payments are recorded as revenue when the customer obtains control of the goods, which
is typically upon shipment for sales of API and upon delivery for sales of drug product.
For agreements that include sales-based royalties, including milestone payments based on the level of sales, and the
license is deemed to be the predominant item to which the royalties relate, we recognize revenue when the related sales occur in
accordance with the sales-based royalty exception under ASC 606-10-55-65.
Net Profit or Net Loss Sharing
In accordance with ASC 808 Topic, Collaborative Arrangements (“ASC 808”), we considered the nature and contractual
terms of the arrangement and the nature of our business operations to determine the classification of payments under our
collaboration agreements. While ASC 808 provides guidance on classification, the standard is silent on matters of separation,
initial measurement, and recognition. Therefore, we, consistent with our accounting policies prior to the adoption of ASC 606,
apply the separation, initial measurement, and recognition principles of ASC 606 to our collaboration agreements. We adopted
ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 (“ASU
2018-18”) during the three months ended December 31, 2018 and confirmed that, consistent with our initial conclusions, we will
continue to analogize to ASC 606 for further guidance on areas such as separation, initial measurement, and recognition for our
existing collaborative arrangements where applicable.
Our collaborative arrangements revenue generated from sales of LINZESS in the U.S. are considered akin to sales-based
royalties. In accordance with the sales-based royalty exception, 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 are earned, as reported by Allergan, and
related cost of goods sold and selling, general and administrative expenses are incurred by us and our collaboration
partner. These amounts are partially determined based on amounts provided by Allergan and involve the use of estimates and
judgments, such as product sales allowances and accruals related to prompt payment discounts, chargebacks, governmental and
contractual rebates, wholesaler fees, product returns, and co-payment assistance costs, which could be adjusted based on actual
results in the future. We are highly dependent on Allergan for timely and accurate information regarding any net revenues
realized from sales of LINZESS in the U.S. in accordance with both ASC 808 and ASC 606, and the costs incurred in selling it, in
order to accurately report its results of operations. If we do not receive timely and accurate information or incorrectly estimate
activity levels associated with the collaboration at a given point in time, we could be required to record adjustments in future
periods.
In accordance with ASC 606-10-55, Principal Agent Considerations , we record revenue transactions as net product
revenue in our consolidated statements of operations if it is deemed the principal in the transaction, which includes being the
primary obligor, retaining inventory risk, and control over pricing. Given that we are not the primary obligor and do not have the
inventory risks in the collaboration agreement with Allergan for North America, 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 presents the settlement payments to and from Allergan as
collaboration expense or collaborative arrangements revenue, as applicable. We and Allergan settle the cost sharing quarterly,
such that our statement of operations reflects 50% of the pre-tax net profit or loss generated from sales of LINZESS in the U.S.
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Product revenue, net
Net product revenue is derived from sales of the Lesinurad Products in the U.S. We sell the Lesinurad Products
principally to a limited number of national wholesalers and selected regional wholesalers (the “Distributors”). The Distributors
resell the Lesinurad Products to retail pharmacies and healthcare providers, who then sell to patients.
Net product revenue is recognized when the Distributor obtains control of our product, which occurs at a point in time,
typically upon shipment of Lesinurad Products to the Distributor. When we perform shipping and handling activities after the
transfer of control to the Distributor (e.g., when control transfers prior to delivery), they are considered as fulfillment activities,
and accordingly, the costs are accrued for when the related revenue is recognized. We expense incremental costs of obtaining a
contract as and when incurred if the expected amortization period of the asset that we would have recognized is one year or less.
We evaluate the creditworthiness of each of its Distributors to determine whether it is probable that a significant reversal
in the amount of the cumulative revenue recognized will not occur. We calculate our net product revenue based on the wholesale
acquisition cost that we charge our Distributors for the Lesinurad Products less variable consideration. The product revenue
variable consideration consists of estimates relating to (i) trade discounts and allowances, such as invoice discounts for prompt
payment and distributor fees, (ii) estimated government and private payor rebates, chargebacks and discounts, such as Medicaid
reimbursements, (iii) reserves for expected product returns and (iv) estimated costs of incentives offered to certain indirect
customers including patients. These estimates could be adjusted based on actual results in the period such variances become
known.
Trade Discounts and Allowances: We generally provide invoice discounts on sales of Lesinurad Products to our
Distributors for prompt payment and pay fees for distribution services and for certain data that Distributors provide to us.
Consistent with historical industry practice, we expect our Distributors to earn these discounts and fees, and accordingly deducts
the full amount of these discounts and fees from our gross product revenues at the time such revenues are recognized.
Rebates, Chargebacks and Discounts: We contract with Medicaid, other government agencies and various private
organizations ("Third-party Payors") to allow for eligible purchases of the Lesinurad Products at partial or full reimbursement
from such Third-party Payors. We estimate the rebates, chargebacks and discounts we will be obligated to provide to Third-party
Payors and deduct these estimated amounts from our gross product revenue at the time the revenue is recognized. Based upon (i)
our contracts with these Third-party Payors, (ii) the government-mandated discounts applicable to government-funded programs,
(iii) information obtained from our Distributors and third-parties regarding the payor mix for Lesinurad Products and (iv)
historical industry information regarding the payor mix for analog products, we estimate the rebates, chargebacks and discounts
that we will be obligated to provide to Third-party Payors.
Product Returns: We estimate the amount of Lesinurad Products that will be returned and deduct these estimated
amounts from our gross revenue at the time the revenue is recognized. Our Distributors have the right to return unopened,
unprescribed Lesinurad Products beginning six months prior to the labeled expiration date and ending twelve months after the
labeled expiration date. The expiration date for the Lesinurad Products is at least 24 months after it has been converted into tablet
form, which is the last step in the manufacturing process for Lesinurad Products and generally occurs within a few months before
Lesinurad Products are delivered to us. We currently estimate product returns based on data provided to us by our Distributors
and by other third parties, historical industry information regarding rates for similar pharmaceutical products, the estimated
remaining shelf life of the Lesinurad Products previously shipped and currently being shipped to Distributors, and contractual
agreements with our Distributors intended to limit the amount of inventory they maintain. Reporting from the Distributors
includes Distributor sales and inventory held by Distributors, which provides us with visibility into the distribution channel in
order to determine which products, if any, were eligible to be returned.
Other Incentives: Incentives that we offer include voluntary patient assistance programs, such as co-pay assistance
programs which are intended to provide financial assistance to qualified commercially insured patients with prescription drug co-
payments required by payors. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost
per claim that we expect to receive associated with product that has been recognized as revenue.
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Product revenue is recorded net of the trade discounts, allowances, rebates, chargebacks, discounts, product returns, and
other incentives. Certain of these adjustments are recorded as an accounts receivable reserve, while certain of these adjustments
are recorded as accrued expenses.
Other
We produce linaclotide finished drug product, API and development materials for certain of our partners.
We recognize revenue on linaclotide finished drug product, API and development materials when control has transferred
to the partner, which generally occurs upon shipment for sales of API and upon delivery for drug product, after the material has
passed all quality testing required for collaborator acceptance. As it relates to development materials and API produced for
Astellas, we are reimbursed at a contracted rate. Such reimbursements are considered as part of revenue generated pursuant to the
Astellas license agreement and are presented as collaborative arrangements revenue. Any linaclotide finished drug product, API
and development 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.
Revenue recognition prior to the adoption of ASC 606
Agreements Entered into Prior to January 1, 2011
For arrangements that include multiple deliverables and were entered into prior to January 1, 2011, we followed the
provisions of ASC Topic 605-25, Revenue Recognition—Multiple-Element Arrangements , or ASC 605-25, in accounting for
these agreements. Under ASC 605‑25, we were required to identify the deliverables included within the agreement and evaluate
which deliverables represent separate units of accounting. Collaborative research and development 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) was considered probable and substantially within our control.
We allocated arrangement consideration among the separate units of accounting either on the basis of each unit’s
respective fair value or using the residual method, and applied the applicable revenue recognition criteria to each of the separate
units. If the separation criteria were not met, revenue of the combined unit of accounting was recorded based on the method
appropriate for the last delivered item.
Agreements Entered into or Materially Modified on or after January 1, 2011 and prior to January 1, 2018
We evaluated revenue from multiple element agreements entered into on or after January 1, 2011 under ASU
No. 2009‑13, Multiple-Deliverable Revenue Arrangements (“ASU 2009‑13”), or ASC 605, until the adoption of ASC 606. We
also evaluated whether amendments to its multiple element arrangements were considered material modifications that were
subject to the application of ASU 2009‑13. This evaluation required management to assess all relevant facts and circumstances
and to make subjective determinations and judgments.
When evaluating multiple element arrangements under ASU 2009‑13, we considered whether the deliverables under the
arrangement represented separate units of accounting. This evaluation required subjective determinations and required
management to make judgments about the individual deliverables and whether such deliverables were separable from the other
aspects of the contractual relationship. In determining the units of accounting, management evaluated certain criteria, including
whether the deliverables had standalone value, based on the consideration of the relevant facts and circumstances for each
arrangement. Factors considered in this determination included the research, manufacturing and commercialization capabilities of
the partner and the availability of relevant research and manufacturing expertise in the general marketplace. In addition, we
considered whether the collaborator can use the license or other deliverables for
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their intended purpose without the receipt of the remaining elements, and whether the value of the deliverable was dependent on
the undelivered items and whether there were other vendors that could provide the undelivered items.
The consideration received was allocated among the separate units of accounting using the relative selling price method,
and the applicable revenue recognition criteria were applied to each of the separate units.
We determined 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 was not available, or best estimate of selling price
(“BESP”) if neither VSOE nor TPE was available.
Up‑Front License Fees prior to January 1, 2018
When management believed the license to its intellectual property had stand-alone value, we generally recognized
revenue attributed to the license upon delivery. When management believed the license to its intellectual property did not have
stand‑alone value from the other deliverables to be provided in the arrangement, it was combined with other deliverables and the
revenue of the combined unit of accounting was recorded based on the method appropriate for the last delivered item.
Milestones prior to January 1, 2018
At the inception of each arrangement that included pre-commercial milestone payments, we evaluated whether each pre-
commercial milestone was substantive, in accordance with ASU No. 2010-17, Revenue Recognition—Milestone Method (“ASU
2010-17”), prior to the adoption of ASC 606. This evaluation included an assessment of whether (a) the consideration was
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 a result of a specific outcome resulting from the entity’s performance to achieve the milestone, (b) the
consideration relates solely to past performance and (c) the consideration is reasonable relative to all of the deliverables and
payment terms within the arrangement. We evaluated 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 the
milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment.
At December 31, 2017, we had no pre-commercial milestones that were deemed substantive.
Commercial milestones were accounted for as royalties and are recorded as revenue upon achievement of the milestone,
assuming all other revenue recognition criteria are met.
Net Profit or Net Loss Sharing prior to January 1, 2018
In accordance with ASC 808, and ASC 605‑45, Principal Agent Considerations , we considered the nature and
contractual terms of the arrangement and the nature of our business operations to determine the classification of the transactions
under our collaboration agreements. We recorded revenue transactions gross in the consolidated statements of operations if it is
deemed the principal in the transaction, which includes being the primary obligor and having the risks and rewards of ownership.
We recognized 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 are reported by Allergan and related cost of goods sold and selling, general and administrative
expenses are incurred by us and our collaboration partner. These amounts were partially determined based on amounts provided
by Allergan and involve the use of estimates and judgments, such as product sales allowances and accruals related to prompt
payment discounts, chargebacks, governmental and contractual rebates, wholesaler fees, product returns, and co‑payment
assistance costs, which could be adjusted based on actual results. For the periods covered in the consolidated financial statements
presented, there have been no material changes to prior period estimates of revenues, cost of goods sold or selling, general and
administrative expenses associated with the sales of LINZESS in the U.S.
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 from Allergan as collaboration expense or collaborative arrangements revenue, as applicable, as we
are not the primary obligor and do not have the risks and rewards of ownership in the collaboration agreement with Allergan for
North America. We and Allergan settle the cost sharing quarterly, such that our
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consolidated statements of operations reflect 50% of the pre‑tax net profit or loss generated from sales of LINZESS in the U.S.
Royalties on Product Sales prior to January 1, 2018
We received royalty revenues under certain of the Company’s license or collaboration agreements. We recorded these
revenues as earned.
Product Revenue, Net prior to January 1, 2018
As noted above, net product revenue is derived from sales of the Lesinurad Products in the U.S.
We recognized net product revenue from sales of the Lesinurad Products in accordance with ASC 605, when persuasive
evidence of an arrangement existed, delivery had occurred and title of the product and associated risk of loss had passed to the
customer, the price was fixed or determinable, and collection from the customer was reasonably assured. ASC 605 required,
among other criteria, that future returns could be reasonably estimated in order to recognize revenue.
We began commercializing ZURAMPIC in October 2016 and DUZALLO in October 2017 in the U.S. Initially, upon the
product launch of each of the Lesinurad Products, we determined that it was not able to reliably make certain estimates, including
returns, necessary to recognize product revenue upon delivery to Distributors. As a result, through September 30, 2017, we
recorded net product revenue for the Lesinurad Products using a deferred revenue recognition model (sell-through). Under the
deferred revenue model, we did not recognize revenue until the respective product was prescribed to an end-user. Accordingly,
we recognized net product revenue when the Lesinurad Products were prescribed to the end-user, using estimated prescription
demand and pharmacy demand from third party sources and the Company’s analysis of third party market research data, as well
as other third-party information through September 30, 2017.
During the three months ended December 31, 2017, we concluded we had sufficient volume of historical activity and
visibility into the distribution channel, in order to reasonably make all estimates required under ASC 605 to recognize product
revenue upon delivery to the Distributor. During the three months and year ended December 31, 2017, product revenue was
recognized upon delivery of the Lesinurad Products to the Distributors. We evaluated the creditworthiness of each of its
Distributors to determine whether revenue could be recognized upon delivery, subject to satisfaction of the other requirements, or
whether recognition was required to be delayed until receipt of payment. In order to conclude that the price is fixed or
determinable, we must be able to (i) calculate our gross product revenue from the sales to Distributors and (ii) reasonably estimate
our net product revenue. We calculated gross product revenue based on the wholesale acquisition cost that the Company charged
its Distributors for ZURAMPIC and DUZALLO. We estimated its net product revenue by deducting from our gross product
revenue (i) trade discounts and allowances, such as invoice discounts for prompt payment and distributor fees, (ii) estimated
government and private payor rebates, chargebacks and discounts, such as Medicaid reimbursements, (iii) reserves for expected
product returns and (iv) estimated costs of incentives offered to certain indirect customers including patients. These estimates
could be adjusted based on actual results in the period such variances become known.
Other
We supply linaclotide finished drug product, API and development materials for certain of our partners.
We recognized revenue on linaclotide finished drug product, API and development materials when the material had
passed all quality testing required for collaborator acceptance, delivery had occurred, title and risk of loss had transferred to the
partner, the price was fixed or determinable, and collection was reasonably assured.
The agreements above are more fully described in Note 5, Collaboration, License, Co-promotion and Other Commercial
Agreements, in the accompanying notes to our consolidated financial statements appearing elsewhere in this Annual Report on
Form 10‑K.
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Research and Development Expense
All research and development expenses are expensed as incurred. We defer and capitalize nonrefundable advance
payments we make 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 other employee‑related expenses; share‑based compensation expense; laboratory supplies and other
direct expenses; facilities expenses; overhead expenses; third‑party contractual costs relating to nonclinical studies and clinical
trial activities and related contract manufacturing expenses, development of manufacturing processes and 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 lag several months. We accrue the cost of services rendered in connection with CRO activities
based on our estimate of site management, monitoring costs, project management costs, and investigator fees. We maintain
regular communication with our CRO vendors to gauge the reasonableness of our estimates. Differences between actual clinical
trial expenses and estimated clinical trial expenses recorded have not been material and are adjusted for in the period in which
they become known. However, if we incorrectly estimate activity levels associated with the CRO services at a given point in time,
we could be required to record material adjustments in future periods. Under our Allergan and AstraZeneca linaclotide
collaboration agreements for the U.S. and China, Hong Kong and Macau, respectively, we are reimbursed for certain research and
development expenses and we net these reimbursements against our research and development expenses as incurred. Amounts
owed to Allergan or AstraZeneca for such territories are recorded as incremental research and development expense.
Nonrefundable advance payments for research and development activities are capitalized and expensed over the related service
period or as goods are received. We have committed significant resources into the research and development of our product
candidates and intend to continue to do so for the foreseeable future.
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. We estimate 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 restricted stock 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 awards requires the use of highly
subjective assumptions, including expected term of the award and expected stock price volatility. For certain of these awards, we
determine the appropriate amount to expense based on the anticipated achievement of performance targets, which requires
judgment, including forecasting the achievement of future specified targets. Changes in these assumptions may lead to variability
with respect to the amount of expense we recognize in connection with share‑based payments.
We recognize compensation expense on a straight‑line basis over the requisite service period based upon stock options
that are ultimately expected to vest, and accordingly, such compensation expense is adjusted by the amount of estimated
forfeitures. We estimate forfeitures over the requisite service period when recognizing share‑based compensation expense based
on historical rates and forward‑looking factors; these estimates are adjusted to the extent that actual forfeitures 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 of performance‑based milestones specified in the grants. Share‑based compensation expense
associated with these time‑accelerated stock options is recognized over the 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 involve inherent 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.
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Contingent Consideration
In accordance with ASC 805, we recognize assets acquired and liabilities assumed in business combinations, including
contingent liabilities and non-controlling interest in the acquiree based on the fair value estimates as of the date of acquisition.
The consideration for our business acquisitions include future payments that are contingent upon the occurrence of a particular
event or events. The obligations for such contingent consideration payments are recorded at fair value on the acquisition date. The
contingent consideration obligations are then evaluated each reporting period. Changes in the fair value of contingent
consideration obligations, other than changes due to payments, are recognized as a (gain) loss on fair value remeasurement of
contingent consideration in our consolidated statements of operations. Adjustments are recorded when there are changes in
significant assumptions, including net sales projections, probability weighted net cash outflow projections, the discount rate,
passage of time, and the yield curve equivalent to our credit risk, which is based on the estimated cost of debt for market
participants. During the year ended December 31, 2018, we decreased certain of our net cash outflow projections associated with
the exit of the Lesinurad License, which resulted in an approximately $31.0 million decrease to the contingent consideration
liability. For further details related to contingent consideration, refer to Note 4, Goodwill and Intangible Assets and Note 6, Fair
Value of Financial Instruments to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
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Results of Operations
The following discussion summarizes the key factors our management believes are necessary for an understanding of
our consolidated financial statements.
2018
Year Ended December 31,
2017
(in thousands)
2016
Revenues:
Collaborative arrangements revenue
Product revenue, net
Sale of active pharmaceutical ingredient
Total revenues
Cost and expenses:
Cost of revenues, excluding amortization of acquired intangible assets
Write-down of commercial supply and inventory to net realizable value and loss on
non-cancellable purchase commitments
Research and development
Selling, general and administrative
Amortization of acquired intangible assets
(Gain) loss on fair value remeasurement of contingent consideration
Restructuring expenses
Impairment of intangible assets
Total cost and expenses
Loss from operations
Other (expense) income:
Interest expense
Interest and investment income
(Loss) gain on derivatives
Loss on extinguishment of debt
Other expense, net
Net loss
$ 272,839 $ 265,533 $ 263,923
109
9,925
273,957
3,445
70,355
346,639
3,061
29,682
298,276
32,751
19,097
1,868
247
166,503
241,291
8,111
(31,045)
15,879
151,794
585,531
(238,892)
309
148,228
233,123
6,214
(31,310)
—
—
375,661
(77,385)
374
139,492
173,281
981
9,831
—
—
325,827
(51,870)
(37,724)
2,991
(8,743)
—
(43,476)
(39,153)
1,169
8,146
—
(29,838)
$ (282,368) $ (116,937) $ (81,708)
(36,370)
2,111
(3,284)
(2,009)
(39,552)
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Revenues
Year Ended
December 31,
Change
2018
2017
$
(dollars in thousands)
%
Revenues:
Collaborative arrangements revenue
Product revenue, net
Sale of active pharmaceutical ingredient
Total revenues
$272,839 $265,533 $ 7,306
384
3,445
3,061
70,355
346,639
29,682
298,276
40,673
48,363
3 %
13 %
137 %
16 %
Collaborative Arrangements Revenue. The increase in revenue from collaborative arrangements of approximately $7.3
million for the year ended December 31, 2018 compared to the year ended December 31, 2017 was primarily related to an
approximately $36.2 million increase in our share of the net profits from the sale of LINZESS in the U.S. driven by increased
prescription demand; an approximately $1.5 million increase in revenue related to VIBERZI co-promotion activities; an
approximately $1.3 million increase due to the recognition of the VIBERZI sales-based milestone; and an approximately $1.0
million increase in revenue related to royalty payments received in relation to all partner activities. The increases were partially
offset by an adjustment to our share of the net profits from the sale of LINZESS in the U.S. of approximately $29.9 million
related to a change in estimate of gross-to-net sales reserves and allowances, primarily associated with governmental and
contractual rebates; and approximately $2.5 million decrease
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attributable to the decrease in revenue under the Cologuard Co-Promotion Agreement with Exact Sciences due to the end of the
royalty period.
Product revenue, net. The increase in net product revenue of approximately $0.4 million for the year ended December
31, 2018 compared to the year ended December 31, 2017 was primarily due to net product sales of DUZALLO in the U.S. in
2018. We began commercializing DUZALLO in September 2017.
Sale of active pharmaceutical ingredient. The increase in sale of API of approximately $40.7 million for the year ended
December 31, 2018 compared to the year ended December 31, 2017 was primarily due to increased shipments of linaclotide API
to Astellas for Japan. In March 2017, Astellas began commercializing LINZESS for the treatment of adults with IBS-C in Japan,
and in September 2018, Astellas began commercializing LINZESS for the treatment of adults with chronic constipation in Japan.
Cost and Expenses
Cost and expenses:
Cost of revenues, excluding amortization of acquired intangible assets
Write-down of commercial supply and inventory to net realizable value and loss on non-
cancellable purchase commitments
Research and development
Selling, general and administrative
Amortization of acquired intangible assets
Gain on fair value remeasurement of contingent consideration
Restructuring expenses
Impairment of intangible assets
Total cost and expenses
Year Ended
December 31,
2018
2017
$
(dollars in thousands)
Change
%
$
32,751 $
19,097 $
13,654
71 %
247
166,503
241,291
8,111
(31,045)
15,879
151,794
(62)
18,275
8,168
1,897
265
15,879
151,794
$ 585,531 $ 375,661 $ 209,870
309
148,228
233,123
6,214
(31,310)
—
—
(20)%
12 %
4 %
31 %
(1)%
100 %
100 %
56 %
Cost of Revenues, excluding amortization of acquired intangible assets. The increase of approximately $13.7 million for
the year ended December 31, 2018 compared to the year ended December 31, 2017 was primarily related to an increase of
approximately $15.2 million due to an increase in linaclotide API sales to Astellas in Japan, offset by approximately $1.5 million
of one-time period related costs incurred during the year ended December 31, 2017.
Write‑down of commercial supply and inventory to net realizable value and loss on non‑cancelable purchase
commitments. The insignificant decrease in write-down of lesinurad commercial supply and loss on non-cancelable purchase
commitments for the year ended December 31, 2018 compared to the year ended December 31, 2017 was driven by write-downs
of inventory, overhead, and purchase commitments of approximately $2.8 million primarily due to revisions to the lesinurad
commercial supply demand forecasts as a result of exiting the lesinurad franchise and additional insignificant adjustments related
to linaclotide inventory; offset by an approximately $2.5 million settlement related to linaclotide excess non-cancelable purchase
commitment accruals that were assigned to Allergan during the year ended December 31, 2018.
Research and Development Expense. The increase in research and development expense of approximately $18.3 million
for the year ended December 31, 2018 compared to the year ended December 31, 2017 was primarily related to an increase of
approximately $17.5 million in research costs related to our early-stage pipeline candidates; an increase of approximately $7.5
million in compensation, benefits and other employee-related expenses; and an increase of approximately $2.8 million in
operating costs, including facilities. These increases were partially offset by a decrease of $9.5 million in costs related to lesinurad
development and transition services agreement expenses with AstraZeneca, which ended in 2017.
Selling, General and Administrative Expense. Selling, general and administrative expenses increased approximately
$8.2 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily as a result of an
approximately $8.5 million increase in legal and consulting costs associated with the Company’s intent to separate into two
independent publicly traded companies; an approximately $5.9 million increase in costs associated with professional services
such as temporary support and separation-related costs; an approximately $3.8 million increase in legal and consulting costs
associated with the proxy statement; and an approximately $6.0 million increase in other legal costs. These increases were
partially offset by a decrease of an approximately $5.4 million
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in transitional support service costs which ended in 2017 associated with the Lesinurad Transaction; an approximately $4.2
million decrease in costs associated with product samples; an approximately $2.5 million decrease in costs related to facilities and
operating costs; an approximately $1.9 million decrease in cost as a result of gains recorded in association with the disposal of the
salesforce fleet vehicles; an approximately $0.9 million decrease in costs related to sales and marketing programs; and an
approximately $0.7 million decrease in compensation, benefits, and employee-related expenses.
Amortization of Acquired Intangible Assets. The increase in amortization of acquired intangible assets expense of
approximately $1.9 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 was primarily
due to the amortization of the DUZALLO intangible asset which began amortizing in August 2017 upon FDA approval. During
the year ended December 31, 2018, the ZURAMPIC and DUZALLO intangible assets were written down and considered fully
impaired.
Gain on Fair Value remeasurement of contingent consideration. Fair value remeasurement of contingent consideration
includes significant estimates related to probability weighted net cash outflow projections, discounted using a yield curve
equivalent to our credit risk which estimates the probability weighted analysis of expected future milestone and royalty payments
based on net sales to be made to AstraZeneca in connection with the Lesinurad Transaction. Changes to these inputs are re-
evaluated each reporting period. The decrease in the gain on fair value of the contingent consideration obligation of
approximately $0.3 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 was due to
revised projected revenue assumptions associated with the sales of ZURAMPIC and DUZALLO. During the three months ended
September 30, 2018, the Company reduced its projected revenue assumptions associated with the sales of ZURAMPIC and
DUZALLO and delivered to AstraZeneca a notice of termination of the Lesinurad License.
Restructuring Expenses. The increase in restructuring expenses of approximately $15.9 million for the year ended
December 31, 2018 compared to the year ended December 31, 2017 was due to approximately $8.3 million of workforce
reduction and contract termination costs incurred during the year ended December 31, 2018 associated with the exit of the
Lesinurad License; approximately $5.2 million of costs related to the workforce reduction in June 2018 associated with the
determination of the initial organizational designs of the two new businesses as a result of our intent to separate into two
independent, publicly traded companies; and approximately $2.4 million of costs incurred with the reduction in field-based
workforce in January 2018 associated with an initiative to evaluate the optimal mix of investments for the lesinurad franchise.
Impairment of Intangible Assets. The increase in the impairment of intangible assets of approximately $151.8 million for
the year ended December 31, 2018 compared to the year ended December 31, 2017 was due to the full asset impairment of the
ZURAMPIC and DUZALLO intangible assets as a result of revised net cash flow assumptions and the exit of the Lesinurad
License.
Other (Expense) Income, Net
Year Ended
December 31,
Change
2018
2017
$
%
(dollars in thousands)
Other (expense) income:
Interest expense
Interest and investment income
Loss on derivatives
Loss on extinguishment of debt
Total other expense, net
$(37,724) $(36,370) $(1,354)
880
(5,459)
2,009
$(43,476) $(39,552) $(3,924)
2,991
(8,743)
—
2,111
(3,284)
(2,009)
4 %
42 %
166 %
(100)%
10 %
Interest Expense. Interest expense increased by approximately $1.4 million during the year ended December 31, 2018
compared to the year ended December 31, 2017, mainly due to an increase of approximately $1.5 million in interest expense
associated with the 2022 Notes.
Interest and investment income. Interest and investment income increased approximately $0.9 million for the year ended
December 31, 2018 compared to the year ended December 31, 2017, mainly due to higher returns on investment securities in
2018, and partially offset by lower average investment balances in 2018 versus 2017.
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Loss on derivatives. For the year ended December 31, 2018 we recorded a loss on derivatives of approximately $8.7
million resulting from an approximately $67.1 million decrease in fair value of the Convertible Note Hedges and an
approximately $58.4 million increase in the fair value of the Note Hedge Warrants. For the year ended December 31, 2017 we
recorded a loss on derivatives of approximately $3.3 million resulting from an approximately $24.3 million decrease in fair value
of the Convertible Note Hedges and an approximately $21.0 million increase in the fair value of the Note Hedge Warrants.
Loss on extinguishment of debt. Loss on extinguishment of debt was approximately $2.0 million for the year ended
December 31, 2017 due to the write-off of the remaining unamortized debt issuance costs on the PhaRMA Notes as part of the
redemption in January 2017.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Revenue
Revenues:
Collaborative arrangements revenue
Product revenue, net
Sale of active pharmaceutical ingredient
Total revenues
Year Ended
December 31,
Change
2017
2016
$
%
(dollars in thousands)
$265,533 $263,923 $ 1,610
3,061
29,682
298,276
109
9,925
273,957
2,952
19,757
24,319
1 %
2,708 %
199 %
9 %
Collaborative Arrangements Revenue. The increase in revenue from collaborative arrangements of approximately
$1.6 million for the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily related to an
approximately $40.2 million increase in our share of the net profits from the sale of LINZESS in the U.S.; an approximately $1.8
million increase in royalty revenue based on sales of linaclotide in our partnered territories and other related royalties; and an
approximately $0.2 million increase in drug product sales related to our collaboration agreement with AstraZeneca. The increases
were partially offset by an approximately $39.0 million decrease attributable to the recognition of up-front payments and
development milestones achieved in 2016 under our agreement with Astellas; an approximately $1.0 million decrease in revenue
related to the Cologuard Co-Promotion Agreement which was terminated in 2017; an approximately $0.4 million decrease in
revenue related to our license and co-promotion collaboration agreement with AstraZeneca for linaclotide; and an approximately
$0.2 million decrease from our co-promotion agreement with Allergan for VIBERZI in the U.S.
Product revenue, net. The increase in net product revenue of approximately $3.0 million for the year ended December
31, 2017 compared to the year ended December 31, 2016 was primarily related to an approximately $2.4 million increase in net
product sales of ZURAMPIC in the U.S.; and an approximately $0.6 million increase from commercializing DUZALLO in the
U.S. in October 2017.
Sale of active pharmaceutical ingredient. The increase in revenue from sale of API of approximately $19.8 million for
the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily related to an increase of
approximately $24.2 million from shipments of linaclotide API to Astellas for Japan, and was partially offset by an approximately
$4.5 million decrease in shipments of linaclotide API to Allergan for ex-US territories compared to 2016.
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Cost and Expenses
Cost and expenses:
Cost of revenues, excluding amortization of acquired intangible assets
Write-down of commercial supply and inventory to net realizable value
and loss on non-cancellable purchase commitments
Research and development
Selling, general and administrative
Amortization of acquired intangible assets
(Gain) loss on fair value remeasurement of contingent consideration
Total cost and expenses
Year Ended
December 31,
Change
2017
2016
$
%
(dollars in thousands)
$ 19,097 $
1,868 $ 17,229
922 %
309
148,228
233,123
6,214
(31,310)
(65)
8,736
59,842
5,233
(41,141)
$ 375,661 $ 325,827 $ 49,834
374
139,492
173,281
981
9,831
(17)%
6 %
35 %
533 %
(418)%
15 %
Cost of Revenues, excluding amortization of acquired intangible assets. The increase in cost of revenue of
approximately $17.2 million for the year ended December 31, 2017 compared to the year ended December 31, 2016 was
primarily related to an increase of approximately $15.2 million due to higher sales of linaclotide API to our partners, and
approximately $2.0 million in costs associated with ZURAMPIC and DUZALLO product sales and lesinurad period costs related
to freight, packaging, stability and quality testing, and customer acquisition. In October 2016, we began commercializing
ZURAMPIC in the U.S. and in October 2017, we began commercializing DUZALLO in the U.S.
Write‑down of commercial supply and inventory to net realizable value and loss on non‑cancelable purchase
commitments. The insignificant decrease in write-down of commercial supply and inventory for the year ended December 31,
2017 compared to the year ended December 31, 2016, was related to the write-down of lesinurad commercial supply. For the year
ended December 31, 2016, we recorded a write-down of $0.4 million related to ZURAMPIC prepaid commercial supply as a
result of revised demand forecasts. For the year ended December 31, 2017, we recorded a write-down of $0.3 million related to
ZURAMPIC prepaid commercial supply and excess non-cancelable ZURAMPIC commercial supply purchase commitments as a
result of revised demand forecasts.
Research and Development Expense. The increase in research and development expense of approximately $8.7 million
for the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily related to an increase of
approximately $8.9 million in research costs related to our early stage pipeline candidates; an increase of approximately $6.0
million in compensation, benefits and other employee related expenses primarily associated with increased headcount; and an
increase of approximately $2.2 million in professional services, including consulting and search firm fees. The increases were
partially offset by a decrease of approximately $3.6 million in costs related to lesinurad development and transition services
agreement expenses with AstraZeneca; a decrease of approximately $2.6 million in external costs related to the development of
linaclotide, net of reimbursements, related to our linaclotide collaboration with Allergan for North America; and a decrease of
approximately $2.2 million in facility and operating costs, such as rent and amortization of leasehold improvements.
Selling, General and Administrative Expense. Selling, general and administrative expenses increased approximately
$59.8 million for the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily as a result of an
increase in our workforce and infrastructure expenses due to the launch and commercialization of the lesinurad products in the
U.S. This increase includes an approximately $25.8 million increase in compensation, benefits and other employee-related
expenses associated with the increased headcount primarily in our field sales force; an approximately $11.7 million increase in
costs associated with selling expenses and marketing programs; an approximately $9.6 million increase in external consulting and
contractor costs, legal services, and other professional service costs; an approximately $7.8 million increase in costs for post-
marketing requirements for lesinurad; an approximately $2.2 million increase in costs associated with transitional support services
related to the Lesinurad Transaction; an approximately $1.3 million increase in expenses related to the write-off of excess non-
cancelable lesinurad sample purchase commitments pursuant to our forecasts, as a result of a reduction in near-term forecasted
demand; an approximately $0.6 million increase related to a loss on disposal of assets; and an approximately $0.4 million increase
in expenses related to the write-off of excess prepaid lesinurad samples.
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Amortization of Acquired Intangible Assets. The increase in amortization of acquired intangible asset expense of
approximately $5.2 million for the year ended December 31, 2017 compared to the year ended December 31, 2016 was due to the
Lesinurad Transaction that closed in June 2016, in which we acquired an exclusive license in the U.S. to, among other things, the
approved product ZURAMPIC. In addition, the intangible asset related to DUZALLO began amortizing upon approval by the
FDA in August 2017.
(Gain) loss on Fair Value remeasurement of contingent consideration. The decrease in the fair value of the contingent
consideration liability of approximately $41.1 million for the year ended December 31, 2017 compared to the year ended
December 31, 2016 was due to a change in assumptions. Adjustments are recorded when there are changes in significant
assumptions, including net sales projections, probability weighted net cash outflow projections, the discount rate, passage of time,
and the yield curve equivalent to our credit risk, which is based on the estimated cost of debt for market participants. During the
year ended December 31, 2017, we decreased our ZURAMPIC and DUZALLO revenue projections. Accordingly, the expected
estimated future royalty and milestone payments to AstraZeneca decreased, resulting in an approximately $31.3 million decrease
to the contingent consideration liability. In addition, the remaining change in the contingent consideration liability decrease was
primarily due to the passage of time.
Other (Expense) Income, Net
Year Ended
December 31,
Change
2017
2016
$
%
(dollars in thousands)
Other (expense) income:
Interest expense
Interest and investment income
(Loss) gain on derivatives
Loss on extinguishment of debt
Total other expense, net
$(36,370) $(39,153) $ 2,783
942
(11,430)
(2,009)
$(39,552) $(29,838) $ (9,714)
2,111
(3,284)
(2,009)
1,169
8,146
—
(7)%
81 %
(140)%
(100)%
33 %
Interest Expense. Interest expense decreased approximately $2.8 million for the year ended December 31, 2017
compared to the year ended December 31, 2016, mainly driven by a decrease of approximately $17.7 million in interest expense
associated with the redemption of the PhaRMA Notes, partially offset by an increase of approximately $13.6 million and $1.3
million in interest expense associated with the 2026 Notes and 2022 Notes, respectively.
Interest and investment income. Interest and investment income increased approximately $0.9 million for the year ended
December 31, 2017 compared to the year ended December 31, 2016, mainly due to an increase in the higher yield return on
investment securities in 2017.
(Loss) gain on derivatives. For the year ended December 31, 2017 we recorded a loss on derivatives of approximately
$3.3 million resulting from an approximately $24.3 million decrease in fair value of the Convertible Note Hedges and an
approximately $21.0 million increase in the fair value of the Note Hedge Warrants. For the year ended December 31, 2016 we
recorded a gain on derivatives of approximately $8.1 million resulting from an approximately $46.1 million increase in fair value
of the Convertible Note Hedges and an approximately $38.0 million decrease in the fair value of the Note Hedge Warrants.
Loss on extinguishment of debt. Loss on extinguishment of debt was approximately $2.0 million for the year ended
December 31, 2017 due to the write-off of the remaining unamortized debt issuance costs on the PhaRMA Notes as part of the
redemption in January 2017.
Liquidity and Capital Resources
We have incurred losses since our inception in 1998 and, as of December 31, 2018, we had an accumulated deficit of
approximately $ 1.6 billion. We have financed 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 on public offerings; payments
received under our strategic collaborative arrangements, including up-front and milestone payments, royalties and our share of net
profits, as well as reimbursement of certain expenses; and debt financings, including approximately $11.2 million of net proceeds
from the private placement of our 2026 Notes,
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approximately $167.3 million of net proceeds from the private placement of our PhaRMA Notes in January 2013 (which we
redeemed, in full, in connection with the funding in January 2017 of the 2026 Notes), and approximately $324.0 million of net
proceeds from the private placement of our 2022 Notes in June 2015. At December 31, 2018, we had approximately $ 173.2
million of unrestricted cash and cash equivalents. Our cash equivalents include amounts held in money market funds and
repurchase agreements. We invest cash in excess of immediate requirements in accordance with our investment policy, which
limits the amounts we may invest in certain types of investments and requires all investments held by us to be at least A- rated,
with a remaining maturity when purchased of less than twenty-four months, so as to primarily achieve liquidity and capital
preservation.
During the year ended December 31, 2018, our balances of cash, cash equivalents and available-for-sale securities
decreased approximately $ 48.2 million. This decrease is primarily due to approximately $ 70.9 million of 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. We also invested approximately $ 8.6 million in capital expenditures and made payments of approximately
$1 .8 million on capital lease obligations. These cash outflows were partially offset by approximately $ 32.1 million in proceeds
from the exercise of stock options and the issuance of shares pursuant to our employee stock purchase plan.
Cash Flows From Operating Activities
Net cash used in operating activities totaled approximately $ 70.9 million for the year ended December 31, 2018. The
primary use of cash was our net loss of approximately $ 282.4 million, partially offset by non-cash items of approximately $203.9
million and changes in assets and liabilities of approximately $ 7.6 million, primarily resulting from an increase in accounts
receivable and related party accounts receivable, a decrease in prepaid expenses and other current assets, a decrease in inventory
and other assets, an increase in accounts payable and related party accounts payable and accrued expenses, an increase in accrued
research and development costs, and an increase in deferred rent. Non-cash items included approximately $ 151.8 million of
intangible asset impairment related to the termination of the lesinurad license agreement, approximately $ 44.0 million in share-
based compensation expense, approximately $ 17.6 million in non-cash interest expense, an approximate $ 8.7 million net
decrease due to the change in fair value of the Convertible Note Hedges and Note Hedge Warrants, approximately $ 8.1 million in
amortization of acquired intangible assets, and approximately $6.1 million in depreciation and amortization expense of property
and equipment; partially offset by an approximately $ 31.0 million due to the non-cash change in fair value of contingent
consideration, and approximately $ 1.9 million due to the gain on disposal of property and equipment.
Net cash used in operating activities totaled approximately $99.6 million for the year ended December 31, 2017. The
primary uses of cash were our net loss of approximately $116.9 million and changes in assets and liabilities of approximately
$21.8 million resulting primarily from an decrease in related party accounts receivable, an increase in restricted cash associated
with the release of the line of credit related to our lease amendment in 2017, a decrease in accounts payable, related party
accounts payable, and accrued expenses, an increase in prepaid expenses and other assets, an increase in inventory and other
assets, a decrease in deferred rent and an increase in accrued research and development costs. These uses of cash were primarily
offset by non-cash items of approximately $39.2 million, including approximately $33.8 million in share-based compensation
expense, approximately $16.1 million in non-cash interest expense, approximately $8.4 million in depreciation and amortization
expense of property and equipment, approximately $6.2 million in amortization of acquired intangible assets, an approximately
$3.3 million increase due to the change in fair value of the Convertible Note Hedges and Note Hedge Warrants, approximately
$2.0 million loss on extinguishment of debt, approximately $1.3 million in write-down of excess non-cancelable product sample
purchase commitment, and approximately $0.7 million in loss on disposal of property and equipment; partially offset by an
approximately $31.3 million due to the non-cash change in fair value of contingent consideration, and approximately $1.6 million
due to the gain on facility subleases.
Net cash used in operating activities totaled approximately $25.4 million for the year ended December 31, 2016. The
primary uses of cash were our net loss of approximately $81.7 million and changes in assets and liabilities of approximately $5.0
million resulting primarily from an increase in related party accounts receivable principally attributable to higher amounts due
from Allergan as a result of increased profits on the sale of LINZESS in the U.S., a decrease in restricted cash associated with our
salesforce vehicle fleet, an increase in accounts payable, related party accounts payable and accrued expenses, an increase in
prepaid expenses 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 cash were primarily
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offset by non‑cash items of approximately $61.3 million, including approximately $29.2 million in share‑based compensation
expense, approximately $14.8 million in non-cash interest expense, approximately $10.3 million in depreciation and amortization
expense of property and equipment, approximately $9.8 million due to the non-cash change in fair value of contingent
consideration, approximately $3.5 million due to the loss on facility subleases, approximately $1.0 million in amortization of
acquired assets, approximately $0.7 million in accretion of discounts and premiums on available-for-sale securities, and
approximately $0.4 million in write-down of prepaid inventory; partially offset by an approximately $8.1 million due to the
change in fair value of the Convertible Note Hedges and Note Hedge Warrants, and approximately $0.2 million in gain on
disposal of property and equipment.
Cash Flows From Investing Activities
Cash provided by investing activities for the year ended December 31, 2018 totaled approximately $ 88.9 million and
resulted primarily from maturities of approximately $ 99.2 million of available-for-sale securities, and approximately $1.6 million
in proceeds from the sale of property and equipment. This was partially offset by the purchase of approximately $ 8.6 million of
property and equipment, primarily laboratory equipment as well as hardware and software related to our information technology
infrastructure, and the purchase of approximately $ 3.2 million of available-for-sale securities.
Cash provided by investing activities for the year ended December 31, 2017 totaled approximately $151.5 million and
resulted primarily from the sales and maturities of approximately $346.9 million of available-for-sale securities, and an
insignificant amount of proceeds from the sale of property and equipment. This was partially offset by the purchase of
approximately $191.4 million of available-for-sale securities and the purchase of approximately $4.2 million of property and
equipment, primarily laboratory equipment as well as hardware and software related to our information technology infrastructure.
Cash used in investing activities for the year ended December 31, 2016 totaled approximately $177.7 million and
resulted primarily from the costs associated with the Lesinurad License consisting of an up-front payment of $100.0 million, the
purchase of approximately $311.1 million of available‑for‑sale securities and the purchase of approximately $4.2 million of
property and equipment, primarily laboratory equipment as well as hardware and software related to our information technology
infrastructure. This was partially offset by the sales and maturities of approximately $237.4 million of available‑for‑sale
securities, and approximately $0.2 million of proceeds from the sale of property and equipment.
Cash Flows From Financing Activities
Cash provided by financing activities for the year ended December 31, 2018 totaled approximately $ 30.1 million and
resulted primarily from approximately $ 32.1 million in cash provided by stock option exercises and the issuance of shares under
our employee stock purchase plan, partially offset by approximately $ 1.8 million in cash used for payments on our capital leases.
Cash provided by financing activities for the year ended December 31, 2017 totaled approximately $19.8 million and
resulted primarily from approximately $146.3 in proceeds from issuance of the 2026 Notes, and approximately $26.4 million in
cash provided by stock option exercises and the issuance of shares under our employee stock purchase plan, partially offset by
approximately $134.3 million in cash paid to redeem our outstanding PhaRMA Notes, approximately $15.1 million in cash used
for payments on contingent purchase consideration, including a milestone payment to AstraZeneca for the approval of
DUZALLO, approximately $3.2 million in cash used for payments on our capital leases, and approximately $0.2 million in costs
associated with the issuance of the 2026 Notes.
Cash used in financing activities for the year ended December 31, 2016 totaled approximately $4.2 million and resulted
primarily from approximately $26.9 million in cash used for principal payments on our outstanding PhaRMA Notes,
approximately $1.9 million in cash used for payments on our capital leases, and approximately $0.2 million in costs associated
with the issuance of the 2026 Notes, partially offset by approximately $24.8 million in cash provided by stock option exercises
and the issuance of shares under our employee stock purchase plan.
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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 substantially all of our revenue from this collaboration. We are also deploying significant resources to
advance product opportunities in IBS-C and CIC, abdominal pain associated with IBS and persistent GERD, as well as to fulfill
FDA requirements for linaclotide and lesinurad. In addition, prior to the planned separation, we are deploying significant
resources to advance product opportunities in diabetic nephropathy, HFpEF and serious and orphan diseases such as sickle cell
disease. Our goal is to become cash flow positive, driven by increased revenue generated through sales of LINZESS and
linaclotide API and financial discipline. However, we have not achieved positive 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 costs incurred by each party, and the resulting amount is shared equally between us and
Allergan. Additionally, we receive royalties from Allergan based on sales of linaclotide in its licensed territories outside of the
U.S. We believe revenues from our LINZESS partnership for the U.S. with Allergan will continue to constitute a significant
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 commercial activities, will enable us to become cash flow positive, or to do so in the timeframes we expect. We also
anticipate that we will continue to incur substantial expenses for the next several years as we further develop and commercialize
linaclotide in the U.S., China and other markets, develop and commercialize other products, and continue to invest in our pipeline
and potentially other external opportunities. We believe that our cash on hand as of December 31, 2018 will be sufficient to meet
our projected operating needs at least through the next twelve months from the issuance of these financial statements.
Our forecast of the period of time through which our financial resources will be adequate to support our operations,
including the underlying estimates regarding the costs to develop our product candidates and obtain regulatory approvals and the
costs to commercialize linaclotide in the U.S., China and other markets, and develop and commercialize other products, as well as
our goal to become cash flow positive, are forward-looking statements that involve risks and uncertainties. Our actual results
could vary materially 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 capital resources 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 estimate precisely the amounts of capital outlays and operating expenditures necessary to develop,
obtain regulatory approval for, and commercialize linaclotide and our other product candidates, in each case, for all of the
markets, indications, populations and formulations for which we believe each 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 other products;
the success of our third-party manufacturing activities;
the time and costs involved in developing, and obtaining regulatory approvals for, our product candidates, as well as
the timing and cost of any post-approval development and regulatory requirements;
the success of our research and development efforts;
the emergence of competing or complementary products;
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
the costs associated with the Company’s intent to separate into two independent, publicly traded companies;
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·
·
the terms and timing of any additional collaborative, licensing or other arrangements that we may establish,
including royalties or other payments due or payable under such agreements; and
the acquisition of businesses, products and technologies and the impact of other strategic transactions, as well as the
cost and timing of integrating any such assets into our business operations .
Financing Strategy
We may, from time to time, consider additional funding through a combination of new collaborative arrangements,
strategic alliances, and additional equity and 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 Obligations
Lease and Commercial Supply Obligations
The following table summarizes our lease and commercial supply obligations at December 31, 2018 (excluding interest,
except as otherwise noted):
Payments Due by Period
Less Than
More Than
1 ‑‑
3 ‑‑
Total
1 Year
3 Years
(in thousands)
5 Years
5 Years
(1)
Commercial supply obligations
Capital lease obligations
Operating lease obligations
Total contractual obligations
(3)
(2)
$ 20,540 $ 5,626 $ 8,722 $ 6,192 $
—
—
22,118
$138,003 $ 24,452 $45,981 $45,452 $ 22,118
251
117,212
90
18,736
77
39,183
84
37,175
(1) We have multiple commercial supply agreements with contract manufacturing organizations for the purchase of linaclotide
finished drug product and API. Two of our API supply agreements for supplying linaclotide API to our collaboration
partners outside of North America contain minimum purchase commitments, which are reflected in the table above. As of
December 31, 2018, approximately $5.1 million of the commitments included in the table above are recorded as an accrual
for excess purchases commitments in our consolidated balance sheet. Approximately $2.5 million of these purchase
commitments are short-term. These commitments are more fully described in Note 8, Inventory and Note 12, Commitments
and Contingencies , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. In
addition, we and Allergan are jointly obligated to make minimum purchases of linaclotide API for the territories covered by
our collaboration with Allergan for North America. Currently, Allergan fulfills all such minimum purchase commitments
and, as a result, they are excluded from the table above.
(2) Our commitments for capital lease obligations relate to 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 storage space in Boston, Massachusetts, as well as leases for certain vehicles within our fleet for our field-based sales
force and medical science liaisons.
Notes Payable
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 indenture between 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 of 2.25% 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, unless earlier 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 for
in the Indenture) per $1,000 principal amount of the 2022
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Notes, which is equal to an initial conversion price of approximately $16.58 per share. In addition, to minimize the impact of
potential dilution to our common stock upon conversion of the 2022 Notes, we entered into the Convertible Note Hedges covering
20,249,665 shares of our Class A common stock in connection with the 2022 Notes. Concurrently with entering into the
Convertible Note Hedges, we sold Note Hedge 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 following table summarizes our 2022 Notes obligations at December 31, 2018:
Payments Due by Period
Total
Less Than
1 Year
1 - 3 Years 3 - 5 Years 5 Years
More Than
2022 Notes (including interest)
362,135
7,553
(in thousands)
15,106
339,476
—
The 2022 Notes, Convertible Note Hedges and Note Hedge Warrants are more fully described in Note 11, Notes Payable , in the
accompanying notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
In September 2016, we closed a direct private placement, pursuant to which we subsequently issued $150.0 million in
aggregate principal amount of 8.375% notes due 2026 on the Funding Date, January 5, 2017. The proceeds from the issuance of
the 2026 Notes were used to redeem the outstanding principal balance of the PhaRMA Notes. The 2026 Notes bear an annual
interest rate of 8.375%, with interest payable March 15, June 15, September 15 and December 15 of each year, each an 8.375%
Payment Date, which began on June 15, 2017. Beginning March 15, 2019, we will began making quarterly payments on the 2026
Notes equal to the greater of (i) 7.5% of net sales of linaclotide in the U.S. for the preceding quarter, or the 8.375% Synthetic
Royalty Amount, and (ii) accrued and unpaid interest on the notes, or the 8.375% Required Interest Amount. Principal on the
2026 Notes will be repaid in an amount equal to the 8.375% Synthetic Royalty Amount minus the 8.375% Required Interest
Amount, when this is a positive number, until the principal has been paid in full. Given the principal payments on the 2026 Notes
are based on the net sales of linaclotide in the U.S., which will vary from quarter to quarter, the 2026 Notes may be repaid prior to
September 15, 2026, the final legal maturity date. Since we are unable to reliably estimate the 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 related commitments
are not included in the table above. This transaction is more fully described in Note 11, Notes Payable , to our consolidated
financial statements appearing elsewhere in this Annual Report on Form 10-K.
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 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 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 efforts with respect to
linaclotide, the content and timing of decisions made by the regulators, the reimbursement and competitive landscape around
linaclotide and our other product candidates, and other factors described under “Risk Factors” in Item 1A of this Annual Report
on Form 10‑K.
In addition, we have other collaboration and license agreements that are not individually significant to our business. The
Company may be required to pay up to $18.0 million for regulatory milestones, none of which had been paid as of December 31,
2018. Our license and collaboration agreements are more fully described in Note 5, Collaboration, License, Co-Promotion and
Other Commercial Agreements , in the accompanying notes to our consolidated 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 a reliable estimate of the period of cash settlement with the respective taxing authorities. As of
December 31, 2018, we have approximately $ 38.6 million of uncertain tax positions, and we cannot reasonably estimate the
potential adjustment to our net operating loss carryforward. These uncertain tax positions
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are more fully described in Note 15, Income Taxes , in the accompanying notes to our consolidated financial statements appearing
elsewhere in this Annual Report on Form 10‑K.
Other Funding Commitments
As of December 31, 2018, we have several ongoing studies in various clinical trial stages. Our most significant clinical
trial expenditures are to CROs. The contracts with CROs generally are cancellable, with notice, at our option and do not have any
significant cancellation penalties. These items are not included in the table 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 special purpose entities, that would have been established for the purpose of facilitating off‑balance sheet
arrangements (as that term is defined in Item 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 credit risk 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 our own 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 statements appearing 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 the U.S. government and its agencies and money market instruments. The goals of
our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary 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 our investments are in short‑term marketable securities. Due to the primarily short‑term
duration of our investment portfolio and the low risk profile of our investments, an immediate 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 operating results 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, cash equivalents and available‑for‑sale securities do not contain excessive risk, we cannot
provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition,
we maintain significant amounts of cash, cash equivalents and available‑for‑sale securities at one or more financial institutions
that are in excess of federally insured limits. Given the potential instability of financial institutions, we cannot provide assurance
that we will not experience losses on these deposits.
Our capital lease obligations, 2026 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 other circumstances change.
Equity Price Risk
2022 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 2022 Notes. 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 on the price and
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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 as provided for in 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. The 2022 Notes will mature on June 15, 2022 unless
earlier converted or repurchased. The 2022 Notes bear cash interest at an annual rate of 2.25%, payable on June 15 and
December 15 of each year, which began on December 15, 2015. As of December 31, 2018, the fair value of the 2022 Notes was
estimated by us to be $315.0 million. The 2022 Notes are more fully described in Note 6, Fair Value of Financial Instruments ,
and Note 11, Notes Payable , in the accompanying notes to our consolidated financial statements appearing elsewhere in this
Annual Report on Form 10‑K.
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. Concurrently with entering into the Convertible Note Hedges, we entered into warrant transactions
whereby we sold Note Hedge Warrants to acquire, subject to customary adjustments, 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 Convertible Note Hedges and Note
Hedge Warrants are more fully described in Note 11, Notes Payable , in the accompanying notes to our consolidated financial
statements appearing elsewhere in this Annual Report on Form 10‑K.
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, 2018, 2017 and 2016 had a
significant impact on our results of operations.
Item 8. 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‑63, of this Annual Report on Form 10‑K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 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, conducted an 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 controls and procedures. Based on that evaluation, our principal
executive officer and principal financial officer concluded that our disclosure controls and procedures are effective 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 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and
forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports we file under the Exchange Act is accumulated and communicated to our
management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.
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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 reporting is 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 Chief Financial Officer, and effected by our board of
directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting
and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles,
and includes those policies and procedures that:
(1)
(2)
(3)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures are
being made only in accordance with the authorizations of management and directors; and
provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or
disposition of assets that could have a material 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 an evaluation of the effectiveness of our internal control over financial reporting based on the
framework provided in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework). Based on this evaluation, our management concluded that our internal control over
financial reporting was effective as of December 31, 2018.
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by Ernst and
Young LLP, an independent registered 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, conducted an evaluation of the internal control over financial reporting to determine whether any
changes occurred during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. Based on that evaluation, our principal executive officer and principal
financial officer concluded no such changes during the quarter ended December 31, 2018 materially affected, or were reasonably
likely to materially affect, our internal control over financial reporting.
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Ironwood Pharmaceuticals, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Ironwood Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2018, based on
criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Ironwood Pharmaceuticals, Inc. (the Company)
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the
COSO criteria .
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of Ironwood Pharmaceuticals, Inc. as of December 31, 2018 and 2017, 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, 2018, and the related notes of the Company and our report dated February 25, 2019 expressed
unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan 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 evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized 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 of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 25, 2019
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Item 9B. Other Information
None.
89
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Item 10. Directors, Executive Officers and Corporate Governance
PART III
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 available on our corporate website at http://www.ironwoodpharma.com. Any amendments to
the code of business conduct and ethics, and any waivers thereto involving our executive officers, also will be available on our
corporate website. A printed copy of these documents will be made available upon request. The content on our website 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 the Registrant.” The other information required by this item is incorporated by reference from our
proxy statement for our 2019 Annual Meeting of Stockholders.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from our proxy statement for our 2019 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 2019 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 2019 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 2019 Annual
Meeting of Stockholders.
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Item 15. Exhibits and Financial Statement Schedules
1.
List of documents filed as part of this report
PART IV
1.
2.
Consolidated Financial Statements listed under Part II, Item 8 and included herein by reference.
Consolidated Financial Statement Schedules
No schedules are submitted because they are not applicable, not required or because the information is
included in the Consolidated Financial Statements or Notes to Consolidated Financial Statements.
3.
Exhibits
Number
3.1
3.2
Description
Eleventh Amended and Restated Certificate
of Incorporation
Fifth Amended and Restated Bylaws
3.3
Certificate of Retirement
4.1
Specimen Class A common stock certificate
4.2
4.3
10.1#
10.2#
10.3#
10.3.1#
Indenture, dated as of June 15, 2015, by and
between Ironwood Pharmaceuticals, Inc. and
U. S. Bank National Association (including
the form of the 2.25% Convertible Senior
Note due 2022)
Indenture, dated as of September 23, 2016,
by and between Ironwood Pharmaceuticals,
Inc. and U.S. Bank National Association
(including the form of the 8.375% Notes due
2026)
Amended and Restated 2002 Stock Incentive
Plan and form agreements thereunder
Amended and Restated 2005 Stock Incentive
Plan and form agreements thereunder
Amended and Restated 2010 Employee,
Director and Consultant Equity Incentive
Plan
Form of Stock Option Agreement under the
Amended and Restated 2010 Employee,
Director and Consultant Equity Incentive
Plan
Incorporated by reference herein
Form
Annual Report on Form 10‑K (File
No. 001‑34620)
Annual Report on Form 10‑K (File
No. 001‑34620)
Registration Statement on Form 8-A/A
(File No. 001-34620)
Registration Statement on Form S‑1, as
amended (File No. 333‑163275)
Current Report on Form 8‑K (File
No. 001‑34620)
Date
March 30, 2010
March 30, 2010
January 3, 2019
January 20, 2010
June 15, 2015
Current Report on Form 8‑K (File
No. 001‑34620)
September 26, 2016
Registration Statement on Form S‑1, as
amended (File No. 333‑163275)
Registration Statement on Form S‑1, as
amended (File No. 333‑163275)
Registration Statement on Form S‑8, as
amended (File No. 333‑184396)
December 23, 2009
January 29, 2010
October 12, 2012
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
November 6, 2018
91
Table of Contents
Number
10.3.2#
10.3.3#
10.4#
10.5#
Description
Form of Non‑employee Director Restricted
Stock Agreement under the Amended and
Restated 2010 Employee, Director and
Consultant Equity Incentive Plan
Form of Restricted Stock Unit Agreement
under the Amended and Restated 2010
Employee, Director and Consultant Equity
Incentive Plan
Amended and Restated 2010 Employee
Stock Purchase Plan
Change of Control Severance Benefit Plan,
as amended and restated
10.6#* Form of Executive Severance Agreement
10.7#
10.8#
10.9#
10.10+
10.10.1
10.11+
10.12+
10.12.1+
Director Compensation Plan effective
January 1, 2014
Form of Indemnification Agreement with
Directors and Officers
O ffer Letter, dated January 3, 2019,
between Ironwood Pharmaceuticals, Inc. and
Mark Mallon
Collaboration Agreement, dated as of
September 12, 2007, as amended on
November 3, 2009, by and between Forest
Laboratories, Inc. and Ironwood
Pharmaceuticals, Inc.
Amendment No. 2 to the Collaboration
Agreement, dated as of January 8, 2013, by
and between Forest Laboratories, Inc. and
Ironwood Pharmaceuticals, Inc.
Commercial Agreement, dated as of January
31, 2017, by and among Allergan USA, Inc.,
Forest Laboratories LLC and Ironwood
Pharmaceuticals, Inc.
License Agreement, dated as of April 30,
2009, by and between Allergan
Pharmaceuticals International Ltd. (formerly
with Almirall, S.A.) and Ironwood
Pharmaceuticals, Inc.
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.
Incorporated by reference herein
Form
Date
February 18, 2015
Annual Report on Form 10‑K (File
No. 001‑34620)
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
November 6, 2018
Annual Report on Form 10‑K (File
No. 001‑34620)
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
Annual Report on Form 10‑K (File
No. 001‑34620)
Registration Statement on Form S‑1, as
amended (File No. 333‑163275)
Current Report on Form 8‑K (File
No. 001‑34620)
February 21, 2013
April 29, 2014
February 7, 2014
December 23, 2009
January 4, 2019
Registration Statement on Form S‑1, as
amended (File No. 333‑163275)
February 2, 2010
Annual Report on Form 10‑K (File
No. 001‑34620)
February 21, 2013
Quarterly Report on Form 10-Q (File No.
001 34620)
May 8, 2017
Registration Statement on Form S‑1, as
amended (File No. 333‑163275)
February 2, 2010
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 8, 2013
92
Table of Contents
Number
10.12.2+
10.12.3+
10.13+
10.14+
10.15+
10.16+
10.17+
10.18+
10.18.1+
Description
Amendment to the License Agreement, dated
as of October 26, 2015, by and between
Allergan Pharmaceuticals International Ltd.
and Ironwood Pharmaceuticals, Inc.
Amendment to the License Agreement dated
as of January 31, 2017, by and between
Allergan Pharmaceuticals International Ltd.
And Ironwood Pharmaceuticals, Inc.
Novation Agreement, dated as of October 26,
2015, by and among Almirall, S.A., Allergan
Pharmaceuticals International Ltd. and
Ironwood Pharmaceuticals, Inc.
License Agreement, dated as of
November 10, 2009, by and among Astellas
Pharma Inc. and Ironwood
Pharmaceuticals, Inc.
Collaboration Agreement, dated as of
October 23, 2012, by and between
AstraZeneca AB and Ironwood
Pharmaceuticals, Inc.
License Agreement, dated as of April 26,
2016, by and between Ardea
Biosciences, Inc. and Ironwood
Pharmaceuticals, Inc
Commercial Supply Agreement, dated as of
June 23, 2010, by and among PolyPeptide
Laboratories, Inc. and Polypeptide
Laboratories (SWEDEN) AB, Forest
Laboratories, Inc. and Ironwood
Pharmaceuticals, Inc.
Commercial Supply Agreement, dated as of
March 28, 2011, by and among Corden
Pharma Colorado, Inc. (f/k/a Roche
Colorado Corporation), Ironwood
Pharmaceuticals, Inc. and Forest
Laboratories, Inc.
Amendment No. 3 to Commercial Supply
Agreement, dated as of November 26, 2013,
by and between Corden Pharma
Colorado, Inc. (f/k/a Roche Colorado
Corporation), Ironwood
Pharmaceuticals, Inc. and Forest
Laboratories, Inc.
Incorporated by reference herein
Form
Date
February 19, 2016
Annual Report on Form 10‑K (File
No. 001‑34620)
Quarterly Report on Form 10-Q (File No.
001 34620)
May 8, 2017
Annual Report on Form 10‑K (File
No. 001‑34620)
February 19, 2016
Registration Statement on Form S‑1, as
amended (File No. 333‑163275)
February 2, 2010
Annual Report on Form 10‑K (File
No. 001‑34620)
February 21, 2013
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 8, 2016
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 10, 2010
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
May 13, 2011
Annual Report on Form 10‑K (File
No. 001‑34620)
February 7, 2014
93
Table of Contents
Number
10.19+
10.20
10.20.1
10.20.2
10.20.3
10.20.4
10.20.5
10.20.6
10.20.7
Description
Commercial Supply Agreement, dated as of
April 26, 2016, by and between AstraZeneca
Pharmaceuticals LP and Ironwood
Pharmaceuticals, Inc.
Lease for facilities at 301 Binney St.,
Cambridge, MA, dated as of January 12,
2007, as amended on April 9, 2009, by and
between Ironwood Pharmaceuticals, Inc. and
BMR‑Rogers Street LLC
Second Amendment to Lease for facilities at
301 Binney St., Cambridge, MA, dated as of
February 9, 2010, by and between Ironwood
Pharmaceuticals, Inc. and BMR-Rogers
Street LLC
Third Amendment to Lease for facilities at
301 Binney St., Cambridge, MA, dated as of
July 1, 2010, by and between Ironwood
Pharmaceuticals, Inc. and BMR‑Rogers
Street LLC
Fourth Amendment to Lease for facilities at
301 Binney St., Cambridge, MA, dated as of
February 3, 2011, by and between Ironwood
Pharmaceuticals, Inc. and BMR‑Rogers
Street LLC
Fifth Amendment to Lease for facilities at
301 Binney St., Cambridge, MA, dated as of
October 18, 2011, by and between Ironwood
Pharmaceuticals, Inc. and BMR‑Rogers
Street LLC
Sixth Amendment to Lease for facilities at
301 Binney St., Cambridge, MA, dated as of
July 19, 2012, by and between Ironwood
Pharmaceuticals, Inc. and BMR‑Rogers
Street LLC
Seventh Amendment to Lease for facilities at
301 Binney St., Cambridge, MA, dated as of
October 30, 2012, by and between Ironwood
Pharmaceuticals, Inc. and BMR‑Rogers
Street LLC
Eighth Amendment to Lease for facilities at
301 Binney St., Cambridge, MA, dated as of
July 8, 2014, by and between Ironwood
Pharmaceuticals, Inc. and BMR‑Rogers
Street LLC
Incorporated by reference herein
Form
Date
August 8, 2016
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
Registration Statement on Form S‑1, as
amended (File No. 333‑163275)
December 23, 2009
Annual Report on Form 10-K (File No.
001-34620)
March 30, 2010
Annual Report on Form 10‑K (File
No. 001‑34620)
March 30, 2011
Annual Report on Form 10‑K (File
No. 001‑34620)
March 30, 2011
Annual Report on Form 10‑K (File
No. 001‑34620)
February 29, 2012
Annual Report on Form 10‑K (File
No. 001‑34620)
February 21, 2013
Annual Report on Form 10‑K (File
No. 001‑34620)
February 21, 2013
Annual Report on Form 10‑K (File
No. 001‑34620)
February 18, 2015
94
Table of Contents
Number
10.20.8
10.20.9
10.20.10
10.20.11
10.21
10.22
10.23
10.24
10.25
Description
Ninth Amendment to Lease for facilities at
301 Binney St., Cambridge, MA, dated as of
October 27, 2014, by and between Ironwood
Pharmaceuticals, Inc. and BMR‑Rogers
Street LLC
Tenth Amendment to Lease for facilities at
301 Binney St., Cambridge, MA, dated as of
January 21, 2015, by and between Ironwood
Pharmaceuticals, Inc. and BMR‑Rogers
Street LLC
Eleventh Amendment to Lease for facilities
at 301 Binney St., Cambridge, MA, dated as
of June 30, 2016, by and between Ironwood
Pharmaceuticals, Inc. and BMR‑Rogers
Street LLC
Sublease, dated as of July 1, 2014, by and
between Biogen Idec MA Inc. and Ironwood
Pharmaceuticals, Inc. to Lease for facilities
at 301 Binney St., Cambridge, MA, as
amended, by and between Ironwood
Pharmaceuticals, Inc. and BMR‑Rogers
Street LLC
Base Call Option Transaction Confirmation,
dated as of June 10, 2015, between Ironwood
Pharmaceuticals, Inc. and JPMorgan Chase
Bank, National Association, London Branch
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
Base Warrants Confirmation, dated as of
June 10, 2015, between Ironwood
Pharmaceuticals, Inc. and JPMorgan Chase
Bank, National Association, London Branch
Base Warrants Confirmation, dated as of
June 10, 2015, between Ironwood
Pharmaceuticals, Inc. and Credit Suisse
Capital LLC, through its agent Credit Suisse
Securities (USA) LLC
Additional Call Option Transaction
Confirmation, dated as of June 22, 2015,
between Ironwood Pharmaceuticals, Inc. and
JPMorgan Chase Bank, National
Association, London Branch
Incorporated by reference herein
Form
Date
February 18, 2015
Annual Report on Form 10‑K (File
No. 001‑34620)
Annual Report on Form 10‑K (File
No. 001‑34620)
February 18, 2015
Annual Report on Form 10-K (File No.
001-34620)
February 22, 2017
Annual Report on Form 10‑K (File
No. 001‑34620)
February 18, 2015
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 7, 2015
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 7, 2015
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 7, 2015
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 7, 2015
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 7, 2015
95
Incorporated by reference herein
Form
Date
August 7, 2015
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 7, 2015
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 7, 2015
Table of Contents
Number
Description
23.1*
21.1*
10.26
10.27
10.28
Additional Call Option Transaction
Confirmation, dated as of June 22, 2015,
between Ironwood Pharmaceuticals, Inc.
and Credit Suisse Capital LLC, through its
agent Credit Suisse Securities (USA) LLC
Additional Warrants Confirmation, dated as
of June 22, 2015, between Ironwood
Pharmaceuticals, Inc. and JPMorgan Chase
Bank, National Association, London Branch
Additional Warrants Confirmation, dated as
of June 22, 2015, between Ironwood
Pharmaceuticals, Inc. and Credit Suisse
Capital LLC, through its agent Credit Suisse
Securities (USA) LLC
Subsidiaries of Ironwood
Pharmaceuticals, Inc.
Consent of Independent Registered Public
Accounting Firm
Certification of Chief Executive Officer
pursuant to Rules 13a‑14 or 15d‑14 of the
Exchange Act
Certification of Chief Financial Officer
pursuant to Rules 13a‑14 or 15d‑14 of the
Exchange Act
Certification of Chief Executive Officer
pursuant to Rules 13a‑14(b) or 15d‑14(b) of
the Exchange Act and 18 U.S.C.
Section 1350
Certification of Chief Financial Officer
pursuant to Rules 13a‑14(b) or 15d‑14(b) of
the Exchange Act and 18 U.S.C.
Section 1350
101.INS* XBRL Instance Document
101.SCH*
32.2‡
31.2*
32.1‡
31.1*
101.CAL*
101.LAB*
101.PRE*
101.DEF*
XBRL Taxonomy Extension Schema
Document
XBRL Taxonomy Extension Calculation
Linkbase Document
XBRL Taxonomy Extension Label Linkbase
Database
XBRL Taxonomy Extension Presentation
Linkbase Document
XBRL Taxonomy Extension Definition
Linkbase Document
* Filed herewith.
‡ Furnished herewith.
96
Table of Contents
+ Confidential treatment granted under 17 C.F.R. §§200.80(b)(4) and 230.406. The confidential portions of this exhibit have
been omitted and are marked accordingly. The confidential portions have been provided separately to the SEC pursuant to
the confidential treatment request.
# Management contract or compensatory plan, contract, or arrangement.
(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
Table of Contents
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 behalf by the undersigned, thereunto duly authorized, in the City of Cambridge,
Commonwealth of Massachusetts, on the 25 day of February 2019.
th
SIGNATURES
Ironwood Pharmaceuticals, Inc.
By:
/s/ Peter M. Hecht
Peter M. Hecht
Chief Executive Officer
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 on behalf of the registrant and in the capacities and on the date indicated.
Signature
/s/ Peter M. Hecht
Peter M. Hecht
/s/ gina consylman
Gina Consylman
/s/ Terrance G. McGuire
Terrance G. McGuire
/s/ Andrew Dreyfus
Andrew Dreyfus
/s/ Marsha H. Fanucci
Marsha H. Fanucci
/s/ Julie H. McHugh
Julie H. McHugh
/s/ Lawrence S. Olanoff
Lawrence S. Olanoff
/s/ Edward P. Owens
Edward P. Owens
/s/ Amy W. Schulman
Amy W. Schulman
/s/ Douglas E. Williams
Douglas E. Williams
Title
Date
Chief Executive Officer and Director (Principal Executive
Officer)
Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
Chairman of the Board
Director
Director
Director
Director
Director
Director
Director
98
February 25, 2019
February 25, 2019
February 25, 2019
February 25, 2019
February 25, 2019
February 25, 2019
February 25, 2019
February 25, 2019
February 25, 2019
February 25, 2019
Table of Contents
Index to Consolidated Financial Statements of
Ironwood Pharmaceuticals, Inc.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017, and 2016
Notes to Consolidated Financial Statements
Page
F‑2
F‑3
F‑4
F‑5
F‑6
F‑7
F‑8
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Ironwood Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Ironwood Pharmaceuticals, Inc. (the Company) as of
December 31, 2018 and 2017, 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, 2018, and the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects,
the consolidated financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2018, 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)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework), and our report dated February 25, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1998.
Boston, Massachusetts
February 25, 2019
F-2
Table of Contents
Ironwood Pharmaceuticals, Inc.
Consolidated Balance Sheet s
(In thousands, except share and per share amounts)
ASSETS
December 31,
2018
December 31,
2017
Current assets:
Cash and cash equivalents
Available-for-sale securities
Accounts receivable, net
Related party accounts receivable, net
Inventory, net
Prepaid expenses and other current assets
Restricted cash
Total current assets
Restricted cash, net of current portion
Property and equipment, net
Convertible note hedges
Intangible assets, net
Goodwill
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable
Accrued research and development costs
Accrued expenses and other current liabilities
Capital lease obligations
Current portion of deferred rent
Current portion of 2026 Notes
Current portion of contingent consideration
Total current liabilities
Capital lease obligations, net of current portion
Deferred rent, net of current portion
Contingent consideration, net of current portion
Note hedge warrants
Convertible senior notes
2026 Notes, net of current portion
Other liabilities
Commitments and contingencies
Stockholders’ (deficit) equity:
Preferred stock, $0.001 par value, 75,000,000 shares authorized, no shares issued and outstanding
Class A common stock, $0.001 par value, 500,000,000 shares authorized and 154,414,691 issued
and outstanding at December 31, 2018 and 500,000,000 shares authorized and 136,465,526 shares
issued and outstanding at December 31, 2017
Class B common stock, $0.001 par value, no shares authorized, issued or outstanding at
December 31, 2018 and 100,000,000 shares authorized and 13,983,762 shares issued outstanding at
December 31, 2017
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ (deficit) equity
Total liabilities and stockholders’ (deficit) equity
$
$
$
$
$
$
173,172
—
20,991
59,959
—
11,063
1,250
266,435
6,426
17,270
41,020
—
785
114
332,050
18,123
8,219
45,252
73
252
47,554
51
119,524
158
6,308
—
33,763
265,601
100,537
2,530
—
154
125,736
95,680
3,190
78,967
735
7,288
—
311,596
7,056
17,274
108,188
159,905
785
870
605,674
15,958
7,313
38,237
4,077
195
—
247
66,027
—
5,449
31,011
92,188
249,193
146,898
5,060
—
137
—
1,394,603
(1,591,128)
—
(196,371)
332,050 $
14
1,318,536
(1,308,760)
(79)
9,848
605,674
$
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
Ironwood Pharmaceuticals, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Revenues:
Collaborative arrangements revenue
Product revenue, net
Sale of active pharmaceutical ingredient
Total revenues
Cost and expenses:
Cost of revenues, excluding amortization of acquired intangible assets
Write-down of commercial supply and inventory to net realizable value and loss on
non-cancellable purchase commitments
Research and development
Selling, general and administrative
Amortization of acquired intangible assets
(Gain) loss on fair value remeasurement of contingent consideration
Restructuring expenses
Impairment of intangible assets
Total cost and expenses
Loss from operations
Other (expense) income:
Interest expense
Interest and investment income
(Loss) gain on derivatives
Loss on extinguishment of debt
Other expense, net
Net loss
Net loss per share—basic and diluted
Weighted average number of common shares used in net loss per share—basic
and diluted:
Years Ended December 31,
2017
2016
2018
$ 272,839 $ 265,533 $ 263,923
109
9,925
273,957
3,445
70,355
346,639
3,061
29,682
298,276
32,751
19,097
1,868
247
166,503
241,291
8,111
(31,045)
15,879
151,794
585,531
(238,892)
309
148,228
233,123
6,214
(31,310)
—
—
375,661
(77,385)
374
139,492
173,281
981
9,831
—
—
325,827
(51,870)
(36,370)
2,111
(3,284)
(2,009)
(39,552)
(37,724)
2,991
(8,743)
—
(43,476)
(39,153)
1,169
8,146
—
(29,838)
$ (282,368) $ (116,937) $ (81,708)
(0.56)
$
(1.85) $
(0.78) $
152,634
148,993
144,928
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
Ironwood Pharmaceuticals, Inc.
Consolidated Statements of Comprehensive Los s
(In thousands)
Net loss
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities
Total other comprehensive income (loss)
Comprehensive loss
Years Ended December 31,
2017
$ (282,368) $ (116,937) $ (81,708)
2016
2018
79
79
79
79
$ (282,289) $ (117,009) $ (81,629)
(72)
(72)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
Balance at December 31, 2015
Issuance of common stock upon exercise of stock
options and employee stock purchase plan
Issuance of common stock awards
Conversion of Class B common stock to Class A
common stock
Share-based compensation expense related to share-
based awards to non-employees
Share-based compensation expense related to share-
based awards to employees and employee stock
purchase plan
Unrealized gains on available-for-sale securities
Net loss
Balance at December 31, 2016
Issuance of common stock upon exercise of stock
options and employee stock purchase plan
Issuance of common stock awards
Conversion of Class B common stock to Class A
common stock
Share-based compensation expense related to share-
based awards to non-employees
Share-based compensation expense related to share-
based awards to employees and employee stock
purchase plan
Unrealized losses on available-for-sale securities
Net loss
Balance at December 31, 2017
Issuance of common stock upon exercise of stock
options and employee stock purchase plan
Issuance of common stock awards
Conversion of Class B common stock to Class A
common stock
Share-based compensation expense related to share-
based awards to employees and employee stock
purchase plan
Unrealized gains on available-for-sale securities
Net loss
Ironwood Pharmaceuticals, Inc.
Consolidated Statements of Stockholders’ Equit y
(In thousands, except share amounts)
Class A
common stock
Class B
common stock
Additional
Accumulated
other
Total
paid-in Accumulated comprehensive Stockholders’
Amount
Amount
Shares
127,371,478
1,813,018
193,501
Shares
15,870,356
1,867,111
—
127
3
—
deficit
(1,110,115)
income (loss)
3,253,390
3
(3,253,390)
—
—
—
—
—
—
132,631,387
2,156,152
135,625
—
—
—
133
3
—
—
—
—
14,484,077
1,042,047
—
1,542,362
1
(1,542,362)
—
—
—
—
—
—
136,465,526
3,070,139
130,903
—
—
—
137
3
—
—
—
—
13,983,762
764,361
—
16
2
—
(3)
—
—
—
—
15
—
—
(1)
—
—
—
—
14
—
—
capital
1,205,183
23,996
20
—
529
—
—
—
—
28,670
—
—
1,258,398
—
—
(81,708)
(1,191,823)
26,318
14
—
301
—
—
—
—
33,505
—
—
1,318,536
—
—
(116,937)
(1,308,760)
32,058
—
—
—
—
equity
(deficit)
95,125
24,001
20
—
529
28,670
79
(81,708)
66,716
26,321
14
—
301
33,505
(72)
(116,937)
9,848
32,061
—
—
44,009
79
(282,368)
(196,371)
(86)
—
—
—
—
—
79
—
(7)
—
—
—
—
—
(72)
—
(79)
—
—
—
—
79
—
— $
Balance at December 31, 2018
154,414,691 $
14,748,123
14
(14,748,123)
(14)
—
—
—
—
—
—
—
154
—
—
—
— $
—
—
—
— $1,394,603 $ (1,591,128) $
—
—
(282,368)
44,009
—
—
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
Ironwood Pharmaceuticals, Inc.
Consolidated Statements of Cash Flow s
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Amortization of acquired intangible assets
Impairment of intangible assets
(Gain) loss on disposal of property and equipment
Share-based compensation expense
Change in fair value of note hedge warrants
Change in fair value of convertible note hedges
Write-down of commercial supply and inventory to net realizable value and loss on non-cancellable purchase
commitments
Write-down of excess non-cancellable ZURAMPIC and DUZALLO sample purchase commitments
Gain on facility subleases
Accretion of discount/premium on investment securities
Non-cash interest expense
Non-cash change in fair value of contingent consideration
Loss on extinguishment of debt
Changes in assets and liabilities:
Accounts receivable and related party accounts receivable, net
Prepaid expenses and other current assets
Inventory, net
Other assets
Accounts payable, related party accounts payable and accrued expenses
Accrued research and development costs
Deferred revenue
Deferred rent
Net cash used in operating activities
Cash flows from investing activities:
Purchases of available-for-sale securities
Sales and maturities of available-for-sale securities
Purchases of property and equipment
Payment for acquisition of lesinurad license
Proceeds from sale of property and equipment
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from issuance of 2026 Notes, net of discount to lender
Costs associated with issuance of 2026 Notes
Proceeds from exercise of stock options and employee stock purchase plan
Payments on capital lease obligations
Principal payments on PhaRMA notes
Payments on contingent purchase price consideration
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents, and restricted cash
Supplemental cash flow disclosure:
Cash paid for interest
Non-cash investing and financing activities
Contingent consideration
Purchases under capital leases
Extinguishment of capital leases
Fixed asset purchases in accounts payable and accrued expenses
Year Ended December 31,
2017
2016
2018
$
(282,368)
$
(116,937)
$
(81,708)
6,112
8,111
151,794
(1,867)
43,977
(58,425)
67,168
219
390
—
(165)
17,601
(31,045)
—
1,207
(3,421)
(806)
757
8,057
906
—
916
(70,882)
(3,241)
99,165
(8,621)
—
1,563
88,866
—
—
32,061
(1,824)
—
(165)
30,072
48,056
132,792
180,848
173,172
7,676
180,848
18,235
—
664
2,687
439
$
$
$
$
$
$
$
$
8,403
6,214
—
694
33,820
(21,049)
24,333
309
1,313
(1,579)
(75)
16,080
(31,310)
2,009
(17,303)
1,384
346
115
(6,843)
376
—
(1,053)
(100,753)
(191,354)
346,890
(4,211)
—
135
151,460
146,250
(235)
26,370
(3,234)
(134,258)
(15,058)
19,835
70,542
62,250
132,792
125,736
7,056
132,792
20,388
—
1,151
149
1,136
$
$
$
$
$
$
$
$
10,279
981
—
(204)
29,219
37,909
(46,055)
374
—
3,480
667
14,812
9,831
—
(10,336)
(3,069)
—
1,643
19,683
2,692
(8,989)
(7,143)
(25,934)
(311,116)
237,423
(4,206)
(100,000)
225
(177,674)
—
(246)
24,841
(1,903)
(26,868)
—
(4,176)
(207,784)
270,034
62,250
54,004
8,246
62,250
24,473
67,885
6,277
1,001
353
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
1. Nature of Business
Ironwood Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
Ironwood Pharmaceuticals, Inc. (the “Company”) is a gastrointestinal (“GI”) focused healthcare company leveraging its
proven development and commercial capabilities as it seeks to bring multiple medicines to patients. The Company is advancing
innovative product opportunities in areas of large unmet need, capitalizing on its expertise in GI diseases.
The Company’s commercial product, linaclotide, is available to adult men and women suffering from irritable bowel
syndrome with constipation (“IBS-C”), or chronic idiopathic constipation (“CIC”), in certain countries around the world.
Linaclotide is available under the trademarked name LINZESS to adult men and women suffering from IBS-C or CIC in the
United States (the “U.S.”) and Mexico and to adult men and women suffering from IBS-C in Japan. Linaclotide is available,
under the trademarked name CONSTELLA
and women suffering from IBS-C in certain European countries.
to adult men and women suffering from IBS-C or CIC in Canada, and to adult men
®
®
The Company and its partner Allergan plc (together with its affiliates, “Allergan”), began commercializing LINZESS in
the U.S. in December 2012. Under the Company’s 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 the Company and Allergan. Allergan also has an exclusive license from the Company to develop and
commercialize linaclotide in all countries other than China, Hong Kong, Macau, Japan and the countries and territories of North
America (the “Allergan License Territory”). On a country-by-country and product-by-product basis in the Allergan License
Territory, Allergan pays the Company a royalty as a percentage of net sales of products containing linaclotide as an active
ingredient. In addition, Allergan has exclusive rights to commercialize linaclotide in Canada as CONSTELLA and in Mexico as
LINZESS.
Astellas Pharma Inc. (“Astellas”), the Company’s partner in Japan, has an exclusive license to develop and
commercialize linaclotide in Japan. In March 2017, Astellas began commercializing LINZESS for the treatment of adults with
IBS-C in Japan, and in September 2018, Astellas began commercializing LINZESS for the treatment of adults with chronic
constipation in Japan. The Company has a collaboration agreement with AstraZeneca AB (together with its affiliates,
“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 January 2019, the National Medical Products Administration
approved the marketing application for LINZESS for adults with IBS-C in China.
The Company and Allergan are exploring ways to enhance the clinical profile of LINZESS by studying linaclotide in
additional indications, populations and formulations to assess its potential to treat various conditions. In July 2018, the Company
announced the initiation of a Phase IIIb trial evaluating the efficacy and safety of linaclotide 290 mcg on multiple abdominal
symptoms in addition to pain, including bloating and discomfort, in adult patients with IBS-C.
The Company and Allergan are also seeking to expand the clinical utility of linaclotide by demonstrating the pain-
relieving effect of a delayed release formulation through the advancement of MD-7246 (linaclotide delayed release) in IBS with
diarrhea (“IBS-D”).
The Company is advancing another GI development program, IW-3718, a gastric retentive formulation of a bile acid
sequestrant, for the potential treatment of persistent gastroesophageal reflux disease (“GERD”). In June 2018, the Company
initiated two Phase III clinical trials evaluating the safety and efficacy of IW-3718 in patients with persistent GERD.
In May 2018, the Company announced its intent, as authorized by its Board of Directors, to separate its soluble
guanylate cyclase (“sGC “) business from its commercial and GI business, resulting in two independent, publicly traded
companies, Ironwood and Cyclerion Therapeutics, Inc. (“Cyclerion”). The Company expects the separation will be completed in
the first half of 2019. Cyclerion is expected to be a clinical-stage biopharmaceutical company harnessing the power of sGC
pharmacology to discover, develop, and commercialize breakthrough treatments for serious and orphan diseases. Upon
separation, Cyclerion is expected to focus on enabling the full therapeutic potential of next-
F-8
Table of Contents
generation sGC stimulators. sGC stimulators are small molecules that act synergistically with nitric oxide on sGC to boost
production of cyclic guanosine monophosphate (“cGMP”). cGMP is a key second messenger that, when produced by sGC,
regulates diverse and critical biological functions throughout the body including blood flow and vascular dynamics, inflammatory
and fibrotic diseases, metabolism and neuronal function. Cyclerion believes that the key to unlocking the full therapeutic potential
of the nitric oxide-cGMP pathway is to design differentiated next-generation sGC stimulators that preferentially modulate
pathway signaling in tissues of greatest relevance to the diseases they are developed to treat. This targeted approach is intended to
maximize the potential benefits of nitric oxide-cGMP pathway stimulation in disease-relevant tissues. Cyclerion’s portfolio is
anticipated to be comprised of several sGC stimulators. Olinciguat is a vascular sGC stimulator in Phase II development for the
potential treatment of sickle cell disease, and praliciguat is a systemic sGC stimulator in Phase II development for the potential
treatment of heart failure with preserved ejection fraction. Cyclerion is expected to advance additional sGC stimulator
development programs in pre-clinical and discovery phases.
The Company has periodically entered into co-promotion agreements to maximize its salesforce productivity. As part of
®
this strategy, 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 January 2017, the
Company and Allergan entered into a commercial agreement under which adjustments to the Company’s or Allergan’s share of
the net profits under the share adjustment provision of the collaboration agreement for linaclotide in North America are
eliminated, in full, in 2018 and all subsequent years. As part of this agreement, Allergan appointed the Company, on a non-
®
exclusive basis, to promote CANASA (mesalamine), approved for the treatment of ulcerative proctitis, and DELZICOL
(mesalamine), approved for the treatment of ulcerative colitis, in the U.S. for approximately two years. In December 2017, this
agreement was amended to include and extend the promotion of VIBERZI through December 31, 2018 and discontinue the
promotion of DELZICOL effective January 1, 2018. In December 2018, the Company and Allergan entered into an agreement to
discontinue the Company’s promotion of CANASA effective December 31, 2018, and to extend the Company’s promotion of
VIBERZI through March 31, 2019.
®
These agreements are more fully described in Note 4, Goodwill and Intangible Assets, and Note 5, Collaboration,
License, Co‑Promotion and Other Commercial Agreements, to these consolidated financial statements.
In September 2016, the Company closed a direct private placement, pursuant to which the Company subsequently issued
$150.0 million in aggregate principal amount of 8.375% notes due 2026 (the “2026 Notes”) on January 5, 2017 (the “Funding
Date”). The Company received net proceeds of approximately $11.2 million from the 2026 Notes, after redemption of the
PhaRMA Notes outstanding balance and accrued interest of approximately $135.1 million and deducting fees and expenses of
approximately $3.7 million. The proceeds from the issuance of the 2026 Notes were used to redeem the outstanding principal
balance of the 11% PhaRMA Notes due 2024 (the “PhaRMA Notes”), on the Funding Date. These transactions are more fully
described in Note 11, Notes Payable , to these consolidated financial statements.
The Company was incorporated in Delaware on January 5, 1998 as Microbia, Inc. On April 7, 2008, the Company
changed its name to Ironwood Pharmaceuticals, Inc. To date, the Company has dedicated a majority of its activities to the
research, development and commercialization of linaclotide and commercialization of lesinurad, as well as to the research and
development of its other product candidates. The Company has incurred significant operating losses since its inception in 1998.
As of December 31, 2018, the Company had an accumulated deficit of approximately $1.6 billion.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Ironwood Pharmaceuticals, Inc. and its
wholly owned subsidiaries, Cyclerion, Ironwood Pharmaceuticals Securities Corporation and Ironwood Pharmaceuticals GmbH.
All intercompany transactions and balances are eliminated in consolidation.
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Segment Information
Operating segments are components of an enterprise for which separate financial information is available and is
evaluated regularly by the Company’s chief operating 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 prior period financial statement items, such as Restricted Cash, have been reclassified to conform to current period
presentation.
Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles
requires the Company’s management to make estimates and judgments that may affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the amounts of
revenues and expenses during the reported periods. On an on-going basis, the Company’s management evaluates its estimates,
judgments and methodologies. Significant estimates and assumptions in the consolidated financial statements include those
related to revenue recognition, including returns, rebates, and other pricing adjustments; available-for-sale securities; inventory
valuation, and related reserves; impairment of long-lived assets including its acquired intangible assets and goodwill; initial
valuation procedures for the issuance of convertible notes; fair value of derivatives; balance sheet classification of notes payable
and convertible notes; income taxes, including the valuation allowance for deferred tax assets; research and development
expenses; contingent consideration; contingencies and share-based compensation. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making
judgments about the carrying values of assets and liabilities. Actual results may differ materially from these estimates under
different assumptions or conditions. Changes in estimates are reflected in reported 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, U.S.
government‑sponsored securities, and repurchase agreements. The carrying amount of cash equivalents approximates fair value.
The amount of cash equivalents included in cash and cash equivalents was approximately $173.1 million and approximately
$126.3 million at December 31, 2018 and 2017, 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 the amount of approximately $7.7 million and approximately $7.1 million as of December
31, 2018 and 2017, respectively, which the Company records as restricted cash to secure these letters of credit. The cash will be
restricted until the termination or modification of the lease arrangements. The amount of restricted cash in current assets and non-
current assets was approximately $1.3 million and $6.4 million at December 31, 2018, respectively.
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 debt securities are recorded at fair value, with the unrealized gains and losses
reported in other comprehensive income (loss). The amortized cost of debt securities in this category is adjusted for the
amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest and investment
income. Realized gains and losses, interest, dividends, and declines in value judged to be other than temporary on
available‑for‑sale securities are included in interest and investment income.
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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 whether evidence indicating the recoverability of the cost of the
investment outweighs evidence to the contrary. There were no other‑than‑temporary impairments for the years ended December
31, 2018, 2017 or 2016.
Inventory
Inventory is stated at the lower of cost or net realizable value with cost determined under the first‑in, first‑out basis in
accordance with Accounting Standards Update (“ASU”) No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of
Inventory (“ASU 2015-11”).
The Company evaluates 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 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. The Company
relies on data from several sources to estimate the net realizable value of inventory and non-cancelable purchase commitments,
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 considered to 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 not to capitalize such inventories, the Company evaluates,
among other factors, information regarding the product candidate’s safety and efficacy, the status of regulatory submissions and
communications with regulatory authorities and the outlook for commercial sales, including the existence of current or anticipated
competitive drugs and the availability of reimbursement. In addition, the Company evaluates risks associated with manufacturing
the product candidate, including the 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 as incurred.
Concentrations of Suppliers
The Company relies on third‑party manufacturers and its collaboration partners to manufacture the linaclotide active
pharmaceutical ingredient (“API”), linaclotide drug product and lesinurad finished goods through the termination of the exclusive
license with AstraZeneca to develop, manufacture, and commercialize in the U.S. products containing lesinurad as an active
ingredient (the “Lesinurad License”).
Currently, there are three third-party facilities actively producing linaclotide API. The Company also has an agreement
with another independent third party to serve as a redundant linaclotide API manufacturing capacity to support its partnered
territories. Each of Allergan and Astellas is responsible for drug product manufacturing of linaclotide into finished product for its
respective territory. Under the collaboration with AstraZeneca, the Company is accountable for drug product and finished goods
manufacturing for China and Macau and for drug product manufacturing for Hong Kong, with AstraZeneca accountable for
finished goods manufacturing for Hong Kong.
In connection with the Lesinurad License, the Company and AstraZeneca entered into a commercial supply agreement
(the “Lesinurad CSA”), pursuant to which the Company relied exclusively on AstraZeneca for the commercial manufacture and
supply of ZURAMPIC and DUZALLO. In August 2018, the Company delivered to AstraZeneca a notice of termination of the
Lesinurad License Agreement, which termination was made with respect to all products under the Lesinurad License Agreement.
If any of the Company’s suppliers were to limit or terminate production or otherwise fail to meet the quality or delivery
requirements needed to satisfy the supply commitments, the process of locating and qualifying alternate sources
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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 the Company’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 becomes doubtful. Provisions are made based upon a specific review of all significant outstanding
invoices and the overall quality and age of those invoices not specifically reviewed. The Company’s receivables relate to amounts
reimbursed under its collaboration, license and co-promotion agreements, as well as amounts due from product sales to
wholesalers. The Company believes that credit risks associated with these partners and wholesalers are not significant. To date,
the Company has not had any significant write-offs of bad debt, and the Company did not have an allowance for doubtful
accounts as of December 31, 2018.
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, and accounts receivable. The Company maintains its cash and cash equivalent balances with
high‑quality financial institutions and, consequently, the Company believes that such funds are subject to minimal credit risk. The
Company’s available‑for‑sale investments have primarily consisted of U.S. Treasury securities and certain U.S.
government‑sponsored securities and have potentially subjected the Company to concentrations of credit risk. The Company has
adopted an investment policy which limits the amounts the Company may invest in certain types of investments, and requires all
investments held by the Company to be at least A- rated, thereby reducing credit risk exposure.
Accounts receivable, including related party accounts receivable, primarily consist of amounts due under the linaclotide
collaboration agreement with Allergan for North America and the linaclotide license agreement with Astellas for Japan (Note 5),
and also from wholesalers. The Company does not obtain collateral for its accounts receivable. Accounts receivable or payable to
or from Allergan are presented as related party transactions on the consolidated balance sheets as Allergan owns common stock of
the Company.
The percentages of revenue recognized from significant customers of the Company in the years ended December 31,
2018, 2017 and 2016 as well as the account receivable balances, net of any payables due, at December 31, 2018 and 2017 are
included in the following table:
Collaborative Partner:
Allergan (North America and Europe)
Astellas (Japan)
Accounts
Receivable
December 31,
2018
2017
Revenue
Year Ended December 31,
2016
2017
2018
72 %
26 %
96 %
3 %
77 %
20 %
88 %
10 %
82 %
16 %
For the years ended December 31, 2018, 2017 and 2016, no additional customers accounted for more than 10% of the
Company’s revenue.
Property and Equipment
Property and equipment, including leasehold improvements, are recorded at cost, and are depreciated when placed into
service using the straight‑line method based on their estimated useful lives as follows:
Asset Description
Manufacturing equipment
Laboratory equipment
Computer and office equipment
Furniture and fixtures
Software
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Estimated
Useful Life
(In Years)
10
5
3
7
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Included in property and equipment are certain costs of software obtained for internal use. Costs incurred during the
preliminary project stage are expensed as incurred, while costs incurred during the application development stage are capitalized
and amortized over the estimated useful life of the software. The Company also capitalizes costs related to specific upgrades and
enhancements when it is probable the expenditures will result in additional functionality. Maintenance and training 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 the lease 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 be amortized 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 above guidelines once placed into service. Maintenance and repair costs are expensed as
incurred.
Finite Lived Intangible Assets
The Company records the fair value of purchased intangible assets with finite useful lives as of the transaction date of a
business combination. Purchased intangible assets with finite useful lives are amortized to their estimated residual values over
their estimated useful lives. The Company amortizes intangible assets that have finite lives using either the straight-line method,
or if reliably determinable, based on the pattern in which the economic benefit of the asset is expected to be utilized. The
Company evaluates the finite-lived intangible assets for impairment whenever events or changes in circumstances indicate the
reduction in the fair value below their respective carrying amounts. In addition, the remaining estimated useful life of the finite-
lived intangible asset would be reassessed.
The value of the Company’s finite-lived intangible assets was based on the future expected net cash flows related to
ZURAMPIC and DUZALLO (the “Lesinurad Products”), which included significant assumptions around future net sales and the
respective investment to support these products.
The Company evaluates its finite-lived intangible assets for impairment whenever events or changes in circumstances
indicate the reduction in the fair value below their respective carrying amounts. In connection with each impairment assessment
in which indicators of impairment have been identified, the Company compares the fair value of the asset as of the date of the
assessment with the carrying value of the asset on the Company’s consolidated balance sheet. If an indicator of impairment exists,
the Company compares the carrying value of the intangible asset or asset group to the undiscounted cash flows expected from that
asset or asset group. If impairment is indicated by this test, the intangible asset is written down by the amount by which the
discounted cash flows expected from the intangible asset exceeds its carrying value. To estimate the cash flows expected for the
assets, the Company uses market participant assumptions pursuant to Accounting Standards Codification (“ASC”) 820, Fair
Value . For the lesinurad finite-lived intangible assets, the Company made significant assumptions as part of this assessment
including but not limited to future net product sales, respective cost of product sales, and operating expenses. The Company
believes that the following factors, among others, could trigger an impairment review: significant underperformance relative to
historical or projected future operating results; significant changes in the manner of the Company’s use of the acquired assets or
the strategy for the Company’s overall business; approval of competitive products; and significant negative industry or economic
trends. If the Company determines that an impairment has occurred, a write-down of the carrying value and an impairment charge
to operating expenses in the period the determination is made is recorded. During the year ended December 31, 2018, the
Company recorded an impairment charge of approximately $151.8 million related to its ZURAMPIC and DUZALLO intangible
assets. For additional information relating to the impairment of these assets, see Note 4, Goodwill and Intangible Assets , to the
Company’s consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Goodwill
Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and
intangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized, but is reviewed for
impairment. The Company tests its goodwill for impairment annually as of October 1 , or more frequently if events or changes in
circumstances indicate that would more likely than not reduce the fair value of the reporting unit below its carrying value.
Impairment may result from, among other things, deterioration in the performance of the
st
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acquired asset, adverse market conditions, adverse changes in applicable laws or regulations and a variety of other circumstances.
If the Company determines that an impairment has occurred, a write-down of the carrying value and an impairment charge to
operating expenses in the period the determination is made is recorded. In evaluating the carrying value of goodwill, the
Company must make assumptions regarding estimated future cash flows and other factors. Changes in strategy or market
conditions could significantly impact those judgments in the future and require an adjustment to the recorded balances. There
were no impai rments of goodwill for the years ended December 31, 2018 or 2017.
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 warrant adjustments to carrying values or estimated useful lives. If indications of impairment exist,
projected future undiscounted cash flows associated with the asset are compared to the carrying amount to determine whether the
asset’s value is recoverable. If the carrying value of the asset exceeds such projected undiscounted cash flows, 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, 2018, 2017, or 2016.
Income Taxes
The Company provides for income taxes under the liability method. Deferred tax assets and liabilities are determined
based on differences between financial reporting 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 tax assets are reduced by a valuation allowance to reflect the
uncertainty associated with their ultimate realization.
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 taken in 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 be realized. 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 as consideration of the available facts and circumstances. The Company evaluates uncertain tax positions on a
quarterly basis and adjusts the level of the liability to reflect any subsequent changes in the relevant facts surrounding the
uncertain positions. Any changes to these estimates, based on the actual results obtained and/or a change in assumptions, could
impact the Company’s income tax provision in future periods. Interest and penalty charges, if any, related to unrecognized tax
benefits would be classified as a provision for income tax in the Company’s consolidated statement of operations.
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 to equity offerings are charged against the proceeds of the offering once the offering is
completed. Costs attributable to debt financings are deferred and amortized over 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 deemed to relate to the
equity component and was allocated to additional paid in capital. In accordance with ASU No. 2015-03, Simplifying the
Presentation of Debt Issuance Costs ("ASU 2015-03"), the Company presents debt issuance costs on the balance sheet as a direct
deduction from the associated debt liability. The 2026 Notes and 2022 Notes are more fully described in Note 11, 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 Note Hedges”). Concurrently with entering into the Convertible Note Hedges, the Company also
entered into certain warrant transactions in which it sold note hedge warrants (the “Note Hedge Warrants”) to the Convertible
Note Hedge counterparties to acquire 20,249,665 shares of the Company’s Class A common stock, subject to customary anti-
dilution adjustments (Note 12). These instruments are derivative financial instruments under ASC Topic 815, Derivatives and
Hedging (“ASC 815”).
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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-pricing model. The changes in fair value are recorded as a component of other (expense) income
in the consolidated statements of operations. Significant inputs used to determine 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 could materially affect the valuation of the Convertible Note Hedges and Note Hedge Warrants in future periods.
Revenue Recognition
Effective January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic
606) and related amendments (“ASU 2014-09”) using the modified retrospective transition method. The adoption of ASU 2014-
09 represents a change in accounting principle that aims to more closely align revenue recognition with the delivery of the
Company's products or services and will provide financial statement readers with enhanced disclosures. ASU 2014-09 also
includes Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers , which requires the deferral of
incremental costs of obtaining a contract with a customer. In accordance with ASC Topic 606, Revenue from Contracts with
Customers (“ASC 606”), the Company recognizes revenue when the customer obtains control of a promised good or service, in
an amount that reflects the consideration which the Company expects to receive in exchange for the good or service. The
reported results for the year ended December 31, 2018 reflect the application of ASC 606 guidance, while the reported results for
prior periods were prepared in accordance with ASC 605, Revenue Recognition (“ASC 605”). Upon adoption of ASC 606, the
Company concluded that no cumulative adjustment to the accumulated deficit as of January 1, 2018 was necessary. There were no
remaining or ongoing deliverables or unrecognized consideration as of December 31, 2017 that required an adjustment to the
accumulated deficit. The adoption of ASC 606 had no impact on the Company’s consolidated statement of operations, balance
sheets, or statement of cash flows.
As part of the ASC 606 adoption, the Company has utilized certain practical expedients outlined in the guidance. These
practical expedients include:
·
·
·
Expensing as incurred incremental costs of obtaining a contract, such as sales commissions, if the amortization
period of the asset would be less than one year.
Recognizing revenue in the amount that the Company has the right to invoice, when consideration from the
customer corresponds directly with the value to the customer of the Company’s performance completed to date.
For contracts that were modified before the beginning of the earliest reporting period presented in accordance
with the pending content that links to this paragraph, an entity need not retrospectively restate the contract for
those contract modifications in accordance with paragraphs ASC 606-10-25-12 through 25-13. Instead, an
entity shall reflect the aggregate effect of all modifications that occur before the beginning of the earliest period
presented in accordance with the pending content that links to this paragraph when: a. Identifying the satisfied
and unsatisfied performance obligations b. Determining the transaction price and c. Allocating the transaction
price to the satisfied and unsatisfied performance obligations.
Prior to the adoption of ASC 606, the Company recognized revenue when there was persuasive evidence that an
arrangement existed, services had been rendered or delivery had occurred, the price was fixed or determinable, and collection was
reasonably assured.
The Company’s revenues are generated primarily through collaborative arrangements and license agreements related to
the research and development and commercialization of linaclotide, as well as co-promotion arrangements in the U.S. The terms
of the collaborative research and development, license, co-promotion and other agreements contain multiple performance
obligations which may include (i) licenses, (ii) research and development activities, including participation on joint steering
committees, (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 development materials, (iv) payments
based upon the achievement of certain milestones, (v) payments
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for sales detailing, promotional support services and medical education initiatives, 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 of linaclotide in
the U.S. and for China, Hong Kong and Macau through its collaborations with Allergan and AstraZeneca, respectively. The
Company has adopted a policy to recognize revenue net of tax withholdings, as applicable.
Revenue recognition under ASC 606
Upon executing a revenue generating arrangement, the Company assesses whether it is probable the Company will
collect consideration in exchange for the good or service it transfers to the customer. To determine revenue recognition for
arrangements that the Company determines are within the scope of ASC 606, it performs the following five steps: (i) identify the
contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv)
allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company
satisfies the performance obligations. The Company must develop assumptions that require significant judgment to determine the
stand-alone selling price for each performance obligation identified in the contract. The assumptions that are used to determine
the stand-alone selling price may include forecasted revenues, development timelines, reimbursement rates for personnel costs,
discount rates and probabilities of technical and regulatory success.
Collaboration, License, Co-Promotion and Other Commercial Agreements
Upon licensing intellectual property to a customer, the Company determines if the license is distinct from the other
performance obligations identified in the arrangement. The Company recognizes revenues from the transaction price, including
non-refundable, up-front fees allocated to the license when the license is transferred to the customer if the license has distinct
benefit to the customer. For licenses that are combined with other promises, the Company assesses the nature of the combined
performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. For
performance obligations that are satisfied over time, the Company evaluates the measure of progress each reporting period and, if
necessary, adjusts the measure of performance and related revenue recognition.
The Company’s license and collaboration agreements include milestone payments, such as development and other
milestones. The Company evaluates whether the milestones are considered probable of being reached and estimates the amount to
be included in the transaction price using the most likely amount method at the inception of the agreement. If it is probable that a
significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone
payments that are not within the control of the Company, such as regulatory approvals, are not considered probable of being
achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative
stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the
contract are satisfied. The Company re-evaluates the probability of achievement of such milestones and any related constraint at
each reporting period, and any adjustments are recorded on a cumulative catch-up basis.
Agreements that include the supply API or drug product for either clinical development or commercial supply at the
customer’s discretion are generally considered as options. The Company assesses if these options provide a material right to its
partner, and if so, they are accounted for as separate performance obligations. If the Company is entitled to additional payments
when the customer exercises these options, any additional payments are recorded as revenue when the customer obtains control of
the goods, which is typically upon shipment for sales of API and upon delivery for sales of drug product.
For agreements that include sales-based royalties, including milestone payments based on the level of sales, and the
license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue when the related
sales occur in accordance with the sales-based royalty exception under ASC 606-10-55-65.
Net Profit or Net Loss Sharing
In accordance with ASC 808 Topic, Collaborative Arrangements (“ASC 808”), the Company considered the nature and
contractual terms of the arrangement and the nature of the Company’s business operations to determine the classification of
payments under the Company’s collaboration agreements. While ASC 808 provides guidance on classification, the standard is
silent on matters of separation, initial measurement, and recognition. Therefore, the
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Company, consistent with its accounting policies prior to the adoption of ASC 606, applies the separation, initial measurement,
and recognition principles of ASC 606 to its collaboration agreements. The Company adopted ASU No. 2018-18, Collaborative
Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 (“ASU 2018-18”) during the three
months ended December 31, 2018 and confirmed that, consistent with its initial conclusions, the Company will continue to
analogize to ASC 606 for further guidance on areas such as separation, initial measurement, and recognition for its existing
collaborative arrangements where applicable.
The Company’s collaborative arrangements revenues generated from sales of LINZESS in the U.S. are considered akin
to sales-based royalties. In accordance with the sales-based royalty exception, 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 product sales are earned, as
reported by Allergan, and related cost of goods sold and selling, general and administrative expenses are incurred by the
Company and its collaboration partner. These amounts are partially determined based on amounts provided by Allergan and
involve the use of estimates and judgments, such as product sales allowances and accruals related to prompt payment discounts,
chargebacks, governmental and contractual rebates, wholesaler fees, product returns, and co-payment assistance costs, which
could be adjusted based on actual results in the future. The Company is highly dependent on Allergan for timely and accurate
information regarding any net revenues realized from sales of LINZESS in the U.S. in accordance with both ASC 808 and ASC
606, and the costs incurred in selling it, in order to accurately report its results of operations. If the Company does not receive
timely and accurate information or incorrectly estimates activity levels associated with the collaboration at a given point in time,
the Company could be required to record adjustments in future periods.
In accordance with ASC 606-10-55, Principal Agent Considerations , the Company records revenue transactions as net
product revenue in its consolidated statements of operations if it is deemed the principal in the transaction, which includes being
the primary obligor, retaining inventory risk, and control over pricing. Given that the Company is not the primary obligor and
does not have the inventory risks in the collaboration agreement with Allergan for North America, it 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 to and from
Allergan as collaboration expense or collaborative arrangements revenue, as applicable. The Company and Allergan settle the
cost sharing quarterly, such that 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.
Product revenue, net
Net product revenue is derived from sales of the Lesinurad Products in the U.S. The Company sells the Lesinurad
Products principally to a limited number of national wholesalers and selected regional wholesalers (the “Distributors”). The
Distributors resell the Lesinurad Products to retail pharmacies and healthcare providers, who then sell to patients.
Net product revenue is recognized when the Distributor obtains control of the Company’s product, which occurs at a
point in time, typically upon shipment of Lesinurad Products to the Distributor. When the Company performs shipping and
handling activities after the transfer of control to the Distributor (e.g., when control transfers prior to delivery), they are
considered as fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized. The
Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset
that the Company would have recognized is one year or less.
The Company evaluates the creditworthiness of each of its Distributors to determine whether it is probable that a
significant reversal in the amount of the cumulative revenue recognized will not occur. The Company calculates its net product
revenue based on the wholesale acquisition cost that the Company charges its Distributors for the Lesinurad Products less variable
consideration. The product revenue variable consideration consists of estimates relating to (i) trade discounts and allowances,
such as invoice discounts for prompt payment and distributor fees, (ii) estimated government and private payor rebates,
chargebacks and discounts, such as Medicaid reimbursements, (iii) reserves for expected product returns and (iv) estimated costs
of incentives offered to certain indirect customers including patients. These estimates could be adjusted based on actual results in
the period such variances become known.
Trade Discounts and Allowances: The Company generally provides invoice discounts on sales of Lesinurad Products
to its Distributors for prompt payment and pays fees for distribution services and for certain data that Distributors provide to the
Company. Consistent with historical industry practice, the Company expects its Distributors
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to earn these discounts and fees, and accordingly deducts the full amount of these discounts and fees from its gross product
revenues at the time such revenues are recognized.
Rebates, Chargebacks and Discounts: The Company contracts with Medicaid, other government agencies and various
private organizations ("Third-party Payors") to allow for eligible purchases of the Lesinurad Products at partial or full
reimbursement from such Third-party Payors. The Company estimates the rebates, chargebacks and discounts it will be obligated
to provide to Third-party Payors and deducts these estimated amounts from its gross product revenue at the time the revenue is
recognized. Based upon (i) the Company's contracts with these Third-party Payors, (ii) the government-mandated discounts
applicable to government-funded programs, (iii) information obtained from the Company's Distributors and third-parties
regarding the payor mix for Lesinurad Products and (iv) historical industry information regarding the payor mix for analog
products, the Company estimates the rebates, chargebacks and discounts that it will be obligated to provide to Third-party Payors.
Product Returns: The Company estimates the amount of Lesinurad Products that will be returned and deducts these
estimated amounts from its gross revenue at the time the revenue is recognized. The Company's Distributors have the right to
return unopened, unprescribed Lesinurad Products beginning six months prior to the labeled expiration date and ending twelve
months after the labeled expiration date. The expiration date for the Lesinurad Products is at least 24 months after it has been
converted into tablet form, which is the last step in the manufacturing process for Lesinurad Products and generally occurs within
a few months before Lesinurad Products are delivered to the Company. The Company currently estimates product returns based
on data provided to the Company by its Distributors and by other third parties, historical industry information regarding rates for
similar pharmaceutical products, the estimated remaining shelf life of the Lesinurad Products previously shipped and currently
being shipped to Distributors, and contractual agreements with the Company's Distributors intended to limit the amount of
inventory they maintain. Reporting from the Distributors includes Distributor sales and inventory held by Distributors, which
provides the Company with visibility into the distribution channel in order to determine which products, if any, were eligible to be
returned.
Other Incentives: Incentives that the Company offers include voluntary patient assistance programs, such as co-pay
assistance programs which are intended to provide financial assistance to qualified commercially insured patients with
prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an estimate of
claims and the cost per claim that the Company expects to receive associated with product that has been recognized as revenue.
Product revenue is recorded net of the trade discounts, allowances, rebates, chargebacks, discounts, product returns, and
other incentives. Certain of these adjustments are recorded as an accounts receivable reserve, while certain of these adjustments
are recorded as accrued expenses.
Other
The Company produces linaclotide finished drug product, API and development materials for certain of its partners.
The Company recognizes revenue on linaclotide finished drug product, API and development materials when control
have transferred to the partner, which generally occurs upon shipment for sales of API and upon delivery for sales of drug
product, after the material has passed all quality testing required for collaborator acceptance. As it relates to development
materials and API produced for Astellas, the Company is reimbursed at a contracted rate. Such reimbursements are considered as
part of revenue generated pursuant to the Astellas license agreement and are presented as collaborative arrangements revenue.
Any linaclotide finished drug product, API and development 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.
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Revenue recognition prior to the adoption of ASC 606
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
followed 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 to identify the deliverables included within the
agreement and evaluate which deliverables represent separate units of accounting. Collaborative research and development 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) was considered 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 the residual method, and applied the applicable revenue recognition criteria to each of the
separate units. If the separation criteria were not met, revenue of the combined unit of accounting was recorded based on the
method appropriate for the last delivered item.
Agreements Entered into or Materially Modified on or after January 1, 2011 and prior to January 1, 2018
The Company evaluated revenue from multiple element agreements entered into on or after January 1, 2011 under ASU
No. 2009‑13, Multiple-Deliverable Revenue Arrangements (“ASU 2009‑13”), or ASC 605, until the adoption of ASC 606. The
Company also evaluated whether amendments to its multiple element arrangements were considered material modifications that
were subject to the application of ASU 2009‑13. This evaluation required management to assess all relevant facts and
circumstances and to make subjective determinations and judgments.
When evaluating multiple element arrangements under ASU 2009‑13, the Company considered whether the deliverables
under the arrangement represented separate units of accounting. This evaluation required subjective determinations and required
management to make judgments about the individual deliverables and whether such deliverables were separable from the other
aspects of the contractual relationship. In determining the units of accounting, management evaluated certain criteria, including
whether the deliverables had standalone value, based on the consideration of the relevant facts and circumstances for each
arrangement. Factors considered in this determination included the research, manufacturing and commercialization capabilities of
the partner and the availability of relevant research and manufacturing expertise in the general marketplace. In addition, the
Company considered whether the collaborator can use the license or other deliverables for their intended purpose without the
receipt of the remaining elements, and whether the value of the deliverable was dependent on the undelivered items and whether
there were other vendors that could provide the undelivered items.
The consideration received was allocated among the separate units of accounting using the relative selling price method,
and the applicable revenue recognition criteria were applied to each of the separate units.
The Company determined 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 was not available, or best estimate
of selling price (“BESP”) if neither VSOE nor TPE was available.
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Up‑Front License Fees prior to January 1, 2018
When management believed the license to its intellectual property had stand-alone value, the Company generally
recognized revenue attributed to the license upon delivery. When management believed the license to its intellectual property did
not have stand‑alone value from the other deliverables to be provided in the arrangement, it was combined with other deliverables
and the revenue of the combined unit of accounting was recorded based on the method appropriate for the last delivered item.
Milestones prior to January 1, 2018
At the inception of each arrangement that included pre-commercial milestone payments, the Company evaluated
whether each pre-commercial milestone was substantive, in accordance with ASU No. 2010-17, Revenue Recognition—Milestone
Method (“ASU 2010-17”), prior to the adoption of ASC 606. This evaluation included an assessment of whether (a) the
consideration was 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 a result of a specific outcome resulting from the entity’s performance to achieve the milestone,
(b) the consideration relates solely to past performance and (c) the consideration is reasonable relative to all of the deliverables
and payment terms within the arrangement. The Company evaluated 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 the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making
this assessment. At December 31, 2017, the Company had no pre-commercial milestones that were deemed substantive.
Commercial milestones were accounted for as royalties and are recorded as revenue upon achievement of the milestone,
assuming all other revenue recognition criteria are met.
Net Profit or Net Loss Sharing prior to January 1, 2018
In accordance with ASC 808, and ASC 605‑45, Principal Agent Considerations , the Company considered the nature
and contractual terms of the arrangement and the nature of the Company’s business operations to determine the classification of
the transactions under the Company’s collaboration agreements. The Company recorded revenue transactions gross in the
consolidated statements of operations if it is deemed the principal in the transaction, which includes being the primary obligor and
having the risks and rewards of ownership.
The Company recognized 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 product sales are reported by Allergan and related cost of goods sold and selling, general and
administrative expenses are incurred by the Company and its collaboration partner. These amounts were partially determined
based on amounts provided by Allergan and involve the use of estimates and judgments, such as product sales allowances and
accruals related to prompt payment discounts, chargebacks, governmental and contractual rebates, wholesaler fees, product
returns, and co‑payment assistance costs, which could be adjusted based on actual results. For the periods covered in the
consolidated financial statements presented, there have been no material changes to prior period estimates of revenues, cost of
goods sold or selling, general and administrative expenses associated with the sales of LINZESS in the U.S.
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 to and from Allergan as collaboration expense or collaborative arrangements revenue, as
applicable, as the Company is not the primary obligor and does not have the risks and rewards of ownership in the collaboration
agreement with Allergan for North America. The Company and Allergan settle the cost sharing quarterly, such that the
Company’s consolidated statements of operations reflect 50% of the pre‑tax net profit or loss generated from sales of LINZESS
in the U.S.
Royalties on Product Sales prior to January 1, 2018
The Company received royalty revenues under certain of the Company’s license or collaboration agreements. The
Company recorded these revenues as earned.
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Product Revenue, Net prior to January 1, 2018
As noted above, net product revenue is derived from sales of the Lesinurad Products in the U.S.
The Company recognized net product revenue from sales of the Lesinurad Products in accordance with ASC 605, when
persuasive evidence of an arrangement existed, delivery had occurred and title of the product and associated risk of loss had
passed to the customer, the price was fixed or determinable, and collection from the customer was reasonably assured. ASC 605
required, among other criteria, that future returns could be reasonably estimated in order to recognize revenue.
The Company began commercializing ZURAMPIC in October 2016 and DUZALLO in October 2017 in the U.S.
Initially, upon the product launch of each of the Lesinurad Products, the Company determined that it was not able to reliably
make certain estimates, including returns, necessary to recognize product revenue upon delivery to Distributors. As a result,
through September 30, 2017, the Company recorded net product revenue for the Lesinurad Products using a deferred revenue
recognition model (sell-through). Under the deferred revenue model, the Company did not recognize revenue until the respective
product was prescribed to an end-user. Accordingly, the Company recognized net product revenue when the Lesinurad Products
were prescribed to the end-user, using estimated prescription demand and pharmacy demand from third party sources and the
Company’s analysis of third party market research data, as well as other third-party information through September 30, 2017.
During the three months ended December 31, 2017, the Company concluded it had sufficient volume of historical
activity and visibility into the distribution channel, in order to reasonably make all estimates required under ASC 605 to recognize
product revenue upon delivery to the Distributor. During the three months and year ended December 31, 2017, product revenue
was recognized upon delivery of the Lesinurad Products to the Distributors. The Company evaluated the creditworthiness of each
of its Distributors to determine whether revenue could be recognized upon delivery, subject to satisfaction of the other
requirements, or whether recognition was required to be delayed until receipt of payment. In order to conclude that the price is
fixed or determinable, the Company must be able to (i) calculate its gross product revenue from the sales to Distributors and (ii)
reasonably estimate its net product revenue. The Company calculated gross product revenue based on the wholesale acquisition
cost that the Company charged its Distributors for ZURAMPIC and DUZALLO. The Company estimated its net product revenue
by deducting from its gross product revenue (i) trade discounts and allowances, such as invoice discounts for prompt payment and
distributor fees, (ii) estimated government and private payor rebates, chargebacks and discounts, such as Medicaid
reimbursements, (iii) reserves for expected product returns and (iv) estimated costs of incentives offered to certain indirect
customers including patients. These estimates could be adjusted based on actual results in the period such variances become
known.
Other
The Company supplies linaclotide finished drug product, API and development materials for certain of its partners.
The Company recognized revenue on linaclotide finished drug product, API and development materials when the
material had passed all quality testing required for collaborator acceptance, delivery had occurred, title and risk of loss had
transferred to the partner, the price was fixed or determinable, and collection was reasonably assured.
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Cost of Revenues
Cost of revenues includes cost related to the sales of linaclotide API and drug product, as well as the cost of product
revenue related to sales of the Lesinurad Products in the U.S. Cost related to the sales of linaclotide API and drug product are
recognized upon shipment of linaclotide API and drug product to certain of the Company’s partners outside of the U.S. The
Company’s cost of revenues for linaclotide consists of the internal and external costs of producing such API and drug product.
Cost of product revenue related to the sales of the Lesinurad Products in the U.S. includes the cost of producing finished goods
that correspond with product revenue for the reporting period, such as third-party supply and overhead costs, as well as certain
period costs related to freight, packaging, stability and quality testing, and customer acquisition.
Research and Development Costs
The Company generally expenses research and development costs to operations as incurred. The Company defers and
capitalizes nonrefundable advance payments made by 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 other employee-related expenses; share-based compensation expense; laboratory supplies and other
direct expenses; facilities expenses; overhead expenses; third-party contractual costs relating to nonclinical studies and clinical
trial activities and related contract manufacturing expenses, development of manufacturing processes and regulatory registration
of third-party manufacturing facilities; licensing fees for the Company’s product candidates; and other outside expenses.
The Company has collaboration agreements with Allergan for the U.S. and AstraZeneca for China, Hong Kong and
Macau pursuant to which it shares research and development expenses related to linaclotide. The Company records expenses
incurred under the linaclotide collaboration arrangements for such work as research and development expense. Because the
collaboration arrangements are cost sharing arrangements, the Company concluded that when there is a period during the
collaboration arrangements during which the Company is owed payment from Allergan or AstraZeneca for such territories, the
Company records the reimbursement by Allergan or AstraZeneca for their share of the development effort as a reduction of
research and development expense. Amounts owed to Allergan or AstraZeneca for such territories are recorded as incremental
research and development expense.
Restructuring Expenses
The Company records costs and liabilities associated with exit and disposal activities in accordance with ASC 420, Exit or
Disposal Cost Obligations . Such costs are based on estimates of fair value in the period liabilities are incurred. The Company
evaluates and adjusts these costs as appropriate for changes in circumstances as additional information becomes available.
Selling, General and Administrative Expenses
The Company expenses selling, general and administrative costs to operations as incurred. Selling, general and
administrative expense consists primarily of compensation, benefits and other employee-related expenses for personnel in the
Company’s administrative, finance, legal, information technology, business development, commercial, sales, marketing,
communications and human resource functions. Other costs include the legal costs of pursuing patent protection of the
Company’s intellectual property, general and administrative related facility costs, insurance costs and professional fees for
accounting and legal services.
Under the Company’s AstraZeneca collaboration agreement for linaclotide, the Company is reimbursed for certain
selling, general and administrative expenses and the Company nets these reimbursements against the Company’s selling, general
and administrative expenses as incurred. The Company includes Allergan’s selling, general and administrative cost-sharing
payments in the calculation 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 or collaborative arrangements revenue, respectively.
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Share-Based Compensation
The Company’s share-based compensation programs grant awards which have included stock awards, restricted stock
awards (“RSAs”), restricted stock units (“RSUs”), stock options, and shares issued under our employee stock purchase plan
(“ESPP”). Share-based compensation is recognized as an expense in the consolidated financial statements based on the grant date
fair value over the requisite service period, net of estimated forfeitures. For awards that vest based on service conditions, the
Company uses the straight-line method to allocate compensation expense to reporting periods. The grant date fair value of options
granted is calculated using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including
volatility and expected term, among others. The fair value of the Company’s stock awards, RSAs and RSUs is based on the
market value of the Company’s Class A common stock on the date of grant.
The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual
forfeitures differ from those estimates. The Company uses historical forfeiture activity to estimate pre-vesting forfeitures and
records share-based compensation expense only for those awards that are expected to vest.
Compensation expense related to modified awards is measured based on the fair value for the awards as of the
modification date. Any incremental compensation expense arising from the excess of the fair value of the awards on the
modification date compared to the fair value of the awards immediately before the modification date is recognized at the
modification date or ratably over the requisite remaining service period, as appropriate.
The Company records the expense for stock option grants subject to performance‑based milestone vesting using the
accelerated attribution method over the remaining service period when management determines that achievement of the milestone
is probable. Management evaluates when the achievement of a performance‑based milestone is probable based on the relative
satisfaction of the performance conditions as of the reporting date.
Compensation expense for discounted purchases under the ESPP is measured using the Black-Scholes model to compute
the fair value of the lookback provision plus the purchase discount and is recognized as compensation expense over the offering
period.
While the assumptions used to calculate and account for share-based compensation awards represent management’s best
estimates, these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if revisions
are made to the Company’s underlying assumptions and estimates, the Company’s share-based compensation expense could vary
significantly from period to period.
Patent Costs
The Company incurred and recorded as operating expense legal and other fees related to patents of approximately $6.0
million, approximately $4.2 million, and approximately $2.3 million for the years ended December 31, 2018, 2017 and 2016,
respectively. These costs were charged to selling, general and administrative expenses as incurred.
Contingent Consideration
In accordance with ASC 805, the Company recognizes assets acquired and liabilities assumed in business combinations,
including contingent liabilities and non-controlling interest in the acquiree based on the fair value estimates as of the date of
acquisition. The consideration for the Company’s business acquisitions includes future payments that are contingent upon the
occurrence of a particular event or events. Contingent consideration at December 31, 2018 and 2017 relates to future royalty and
milestone payments based on the estimated future sales of the Lesinurad Products. The obligations for such contingent
consideration payments are recorded at fair value on the acquisition date. The contingent consideration obligations are then
evaluated each reporting period. Changes in the fair value of contingent consideration obligations, other than changes due to
payments, are recognized as a (gain) loss on fair value remeasurement of contingent consideration in the consolidated statements
of operations. Adjustments are recorded when there are changes in significant assumptions, including net sales projections,
probability weighted net cash outflow projections, the discount rate, passage of time, and the yield curve equivalent to the
Company’s credit risk, which is based on the estimated cost of debt for market participants. During the year ended December 31,
2018, the Company
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delivered to AstraZeneca a notice of termination of the lesinurad license agreement which resulted in an approximately $ 31.0
million decrease to the contingent consideration liability. (Note 4 and Note 6).
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 the weighted 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) per common share is
computed assuming the conversion of the 2022 Notes, the exercise of outstanding common stock options and the vesting of RSUs
and RSAs (using the treasury stock method), as well as their related income tax effects.
As of December 31, 2018, there were no longer any Class B common shares outstanding as all Class B common shares
converted on a one-to-one basis to Class A common shares. Historically, the Company allocated undistributed earnings between
the classes of common stock on a one‑to‑one basis when computing net income (loss) per share. As a result, historically, basic
and diluted net income (loss) per Class A and Class B shares were equivalent.
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 circumstances from non‑owner sources and currently consists of net loss and changes in
unrealized gains and losses on available‑for‑sale debt securities.
Subsequent Events
The Company considers events or transactions that have occurred after the balance sheet date of December 31, 2018, but
prior to the filing of the financial statements with the Securities and Exchange Commission to provide additional evidence relative
to certain estimates or to identify matters that require additional recognition 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 the specified effective date. Except as set forth below, the Company did not adopt any new
accounting pronouncements during the year ended December 31, 2018 that had a material effect on its consolidated financial
statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers , which supersedes the
revenue recognition requirements in ASC 605, and most industry-specific guidance. The new standard requires that an entity
recognize revenue to depict the 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 for those goods or services. The update also requires additional disclosure
about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant
judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In April 2016, the
FASB issued ASU No. 2016-10 , Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
(“ASU 2016-10”), which clarifies certain aspects of identifying performance obligations and licensing implementation guidance.
In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and
Practical Expedients (“ASU 2016-12”), related to disclosures of remaining performance obligations, as well as other amendments
to guidance on collectability, non-cash consideration and the presentation of sales and other similar taxes collected from
customers. The Company adopted these ASUs using the modified retrospective transition approach effective January 1, 2018. The
adoption of these ASUs did not have a material impact on the Company’s financial position or results of operations; however,
adoption did result in significant changes to the Company’s financial statement disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which supersedes the lease accounting
requirements in ASC Topic 840, Leases, and most industry-specific guidance with ASC Topic 842, Leases .
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ASU 2016-02 requires the identification of arrangements that should be accounted for as leases by lessees. In general, for lease
arrangements exceeding a 12-month term, these arrangements must now be recognized as assets and liabilities on the balance
sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases, whether
operating or financing, while the income statement will reflect lease expense for operating leases and amortization and interest
expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption of ASU 2016-02 must
be calculated using the applicable incremental borrowing rate at the date of adoption. ASU 2016-02 is effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. In July 2018,
the FASB issued ASU No. 2018-10, Leases (Topic 842) (“ASU 2018-10”), Codification Improvements and ASU No. 2018-11,
Leases (Topic 842) (“ASU 2018-11”), to provide additional guidance for the adoption of Topic 842. ASU 2018-10 clarifies
certain provisions, and corrects unintended applications of the guidance, such as the rate implicit in a lease, impairment of the net
investment in a lease, lessee reassessment of lease classifications, lessor reassessment of lease term and purchase options, variable
payments that depend on an index or rate and certain transition adjustments. The amendments in ASU 2018-11 will allow for an
additional transition method, whereby at the adoption date the entity recognizes a cumulative-effect adjustment to the opening
balance of retained earnings in the period of adoption, while the comparative period disclosures continue recognition under ASC
Topic 840. Additionally, ASU 2018-11 includes a practical expedient for separating contract components for lessors. The
Company’s analysis includes, but is not limited to, reviewing existing leases, reviewing other service agreements for embedded
leases, establishing policies and procedures, assessing potential disclosures and evaluating the impact of adoption on the
Company’s consolidated financial statements. The Company anticipates adopting ASC Topic 842 using the additional transition
method outlined in ASU 2018-11 as of January 1, 2019. The Company expects the adoption of ASU 2016-02, ASU 2018-10, and
ASU 2018-11 to have a material impact on the Company’s financial position and the related footnote disclosures.
In October 2016, the FASB issued ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of
Assets Other than Inventory (“ASU 2016-16”). ASU 2016-16 eliminates the ability to defer the tax expense related to intra-entity
asset transfers other than Inventory. Under the new standard, entities should recognize the income tax consequences on an intra-
entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for fiscal periods beginning
after December 15, 2018. Early adoption is permitted. The Company continues to evaluate the potential impact that the adoption
of ASU 2016-16 will have on the Company’s financial position or results of operations. The Company does not expect the
adoption of ASU 2016-16 to have a material impact on the Company’s financial position or results of operations.
In October 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash (“ASU 2016-
18”), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and
restricted cash or restricted cash equivalents. Therefore, amounts described as restricted cash and restricted cash equivalents
should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts
shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim
periods within those years. The Company adopted this standard during the three months ended March 31, 2018. Adoption of this
standard did not have a material impact on the Company’s financial position or results of operations.
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As a result of adopting ASU 2016-18, the Company adjusted the consolidated statements of cash flows from previously
reported amounts as follows:
Year Ended
December 31, 2017
Year Ended
December 31, 2016
As
previously
reported Adjustments As adjusted
As previously
reported Adjustments
(1)
As adjusted
Cash flows from Operating Activities:
Net decrease (increase) in restricted cash
related to lease obligations
Net cash flows used in operating
activities
Net change in cash, cash equivalents, and
restricted cash
Cash, cash equivalents, and restricted cash,
beginning of period
Cash, cash equivalents, and restricted cash,
end of period
$
1,190 $
(1,190) $
— $
500 $
(500) $
—
(99,563)
(1,190)
(100,753)
(25,433)
(501)
(25,934)
71,732
(1,190)
70,542
(207,283)
(501)
(207,784)
54,004
8,246
62,250
261,287
8,747
270,034
$ 125,736 $
7,056 $ 132,792 $
54,004 $
8,246 $
62,250
(1) Numbers adjusted for rounding purposes.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a
Business (“ASU 2017-01”), to clarify the definition of a business by adding guidance to assist entities with evaluating whether
transactions should be accounted for as acquisitions or disposals of assets versus businesses. ASU 2017-01 is effective for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this standard
during the three months ended March 31, 2018. The adoption of this standard did not have a material impact on the Company’s
financial position or results of operations.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350) (“ASU 2017-04”)
to simplify the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. ASU 2017-04 is
effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the
potential impact that the adoption of ASU 2017-04 may have on the Company’s financial position and results of operations.
In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 708) Scope of
Modification Accounting (“ASU 2017-09”) which provides guidance that clarifies when changes to the terms or conditions of a
share-based payment award require an entity to apply modification accounting in Topic 718. Adoption of ASU 2017-09 is
required for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company
adopted this standard during the three months ended March 31, 2018. The adoption of this standard did not have a material impact
on the Company’s financial position and results of operations.
In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to
Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 simplifies the accounting for share-based
payments to nonemployees by aligning with the accounting for share-based payments to employees, with certain exceptions.
Measurement of equity-classified nonemployee awards issued in exchange for goods or services used or consumed in an entity’s
own operations will be fixed at the grant date, which may lower the cost and reduce the volatility in the income statement. Entities
also may use the expected term to measure nonemployee options or elect to use the contractual term as the expected term, on an
award-by-award basis. Adoption of ASU 2018-07 is required for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. Early adoption is permitted, but no earlier than an entity’s adoption of ASC 606. The
Company is currently evaluating the potential impact that the adoption of ASU 2018-07 may have on the Company’s financial
position and results of operations.
In July 2018, the FASB issued ASU 2018-09, Codification Improvements (“ASC 2018-09”). The amendments in ASU
2018-09 affect a wide variety of Topics in the FASB codification and apply to all reporting entities within the scope of the
affected accounting guidance. The Company has evaluated ASU 2018-09 in its entirety and determined that the amendments
related to Topic 718-740, Compensation—Stock Compensation—Income Taxes , are the only provisions
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that currently apply to the Company. The amendments in ASU 2018-09 related to Topic 718-740, Compensation—Stock
Compensation—Income Taxes , clarify that an entity should recognize excess tax benefits related to stock compensation
transactions in the period in which the amount of the deduction is determined. The amendments in ASU 2018-09 related to Topic
718-740 are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company does not
expect the adoption of ASU 2018-09 to have a material impact on the Company’s financial position or results of operations.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—
Changes to the Disclosure Requirement for Fair Value Measurement (“ASU 2018-13”) which amends the disclosure
requirements for fair value measurements. The amendments in ASU 2018-13 are effective for fiscal years beginning after
December 15, 2019, with early adoption permitted. The Company is currently evaluating the potential impact that the adoption of
ASU 2018-13 may have on the Company’s financial position and results of operations.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal Use Software
(Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a
Service Contract (a consensus of the FASB Emerging Issues Task Force) (“ASU 2018-15”) which provides additional guidance
on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract.
ASU 2015-18 requires a customer in a cloud computing arrangement that is a service contract to follow the new internal-use
software guidance to determine which implementation costs to capitalize as assets or expense as incurred. The new internal-use
software guidance requires that certain costs incurred during the application development stage be capitalized and other costs
incurred during the preliminary project and post-implementation stages be expensed as they are incurred. A customer’s
accounting for the hosting component of the arrangement is not affected by this guidance. The amendments in ASU 2018-15 are
effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating
the potential impact that the adoption of ASU 2018-15 may have on the Company’s financial position and results of operations.
In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related
Party Guidance for Variable Interest Entities (“ASU 2018-17”). The update is intended to improve general purpose financial
reporting by considering indirect interests held through related parties in common control arrangements on a proportional basis
for determining whether fees paid to decision makers and service providers are variable interests. The amendments in ASU 2018-
17 will be effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently
evaluating the potential impact that the adoption of ASU 2018-17 may have on the Company’s financial position and results of
operations.
In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the
Interaction between Topic 808 and Topic 606 , which clarifies that certain transactions between participants in a collaborative
arrangement should be accounted for under ASC 606 when the counterparty is a customer. In addition, ASU 2018-18 precludes
an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with
customers if the counterparty is not a customer for that transaction. The Company adopted ASU 2018-18 during the three months
ended December 31, 2018. The adoption of ASU 2018-18 did not have a material 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 by the FASB or other
standard-setting bodies and 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.
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3. Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per common share (in thousands, except per
share amounts):
Numerator:
Net Loss
Denominator:
Year Ended December 31,
2017
2018
2016
$ (282,368) $ (116,937) $ (81,708)
Weighted average number of common shares used in net loss per share — basic and
diluted
152,634
148,993
Net loss per share — basic and diluted
$
(1.85) $
(0.78) $
144,928
(0.56)
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 convertible note hedge transactions. The Convertible Note Hedges are generally expected to
reduce the potential dilution to the Company’s Class A common stockholders upon 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 Notes in 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 than the conversion price of the 2022 Notes (Note 11). The Convertible Note Hedges are not considered for
purposes of calculating the number of diluted weighted average shares outstanding, as their effect would be antidilutive.
Concurrently with entering into the Convertible Note Hedges, the Company also entered into certain warrant
transactions in which it sold note hedge warrants to the Convertible Note Hedge counterparties to acquire 20,249,665 shares of
the Company’s Class A common stock, subject to customary anti-dilution adjustments. The Note Hedge Warrants could have a
dilutive 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 strike price of such warrants (Note 11). The Note Hedge Warrants are not considered for purposes of
calculating the number of diluted weighted averages shares outstanding, as their effect would be antidilutive.
The following potentially dilutive securities have been excluded from the computation of diluted weighted average
shares outstanding as their effect would be anti‑dilutive (in thousands):
Options to purchase common stock
Shares subject to repurchase
Unvested shares from early option exercises
Restricted stock units
Note hedge warrants
2022 Notes
4. Goodwill and Intangible Assets
20,457
65
—
3,058
20,250
20,250
64,080
21,086
62
—
2,277
20,250
20,250
63,925
Year Ended December 31,
2018
2017
2016
20,455
94
300
1,299
20,250
20,250
62,648
The Company closed a transaction with AstraZeneca (the “Lesinurad Transaction”) on June 2, 2016 (the “Acquisition
Date”) with AstraZeneca pursuant to which the Company received an exclusive license to develop, manufacture and
commercialize in the U.S. products containing lesinurad as an active ingredient, including ZURAMPIC and DUZALLO. (the
“Lesinurad Products”). On August 2, 2018, the Company delivered to AstraZeneca a notice of termination of the lesinurad license
agreement, which termination is made with respect to all products under the lesinurad license agreement.
The value of the developed technology – ZURAMPIC and developed technology – DUZALLO intangible assets as of
the Acquisition Date was approximately $22.0 million and approximately $145.1 million, respectively. As of
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December 31, 2017, accumulated amortization for developed technology – ZURAMPIC and developed technology – DUZALLO
intangible assets was approximately $2.7 million and approximately $4.5 million, respectively. As of July 31, 2018, the
accumulate amortization for developed technology – ZURAMPIC and developed technology – DUZALLO intangible assets was
approximately $3.6 million and approximately $11.7 million, respectively.
In January 2018, the Company commenced an initiative to evaluate the optimal mix of investments for the lesinurad franchise for
uncontrolled gout, including DUZALLO and ZURAMPIC. As part of this effort, in 2018, the Company began re-allocating
resources within the lesinurad franchise to systematically explore a more comprehensive marketing mix in select test markets
(with paired controls), while continuing to build market presence for the lesinurad franchise across the country. In July 2018, the
Company obtained and analyzed the results from the lesinurad franchise test markets. Data from the test markets did not meet
expectations. As a result, during the year ended December 31, 2018, in connection with the Company’s revised forecast, the
Company reduced its projected revenue and net cash flow assumptions associated with the value of its developed technology –
ZURAMPIC and developed technology – DUZALLO intangible assets. Accordingly, the Company evaluated its developed
technology – ZURAMPIC and developed technology – DUZALLO intangible assets for impairment. As a result of this triggering
event requiring an impairment assessment, the Company recorded an approximately $151.8 million impairment charge during the
year ended December 31, 2018 related to the write-down of the developed technology – ZURAMPIC and developed technology –
DUZALLO intangible assets. The impairment assessment performed utilized the revised projected revenue and net cash flows
assumed through the termination of the Lesinurad License Agreement, resulting in an impairment of the full carrying value of the
intangible assets. The impairment charge was recorded as impairment of intangible assets in the Company’s consolidated
statement of operations.
The Company tests its goodwill for impairment annually as of October 1 , or more frequently if events or changes in
st
circumstances indicate an impairment may have occurred (Note 2). As of December 31, 2018, there was no impairment of
goodwill.
5. Collaboration, License, Co-Promotion and Other Commercial Agreements
For the year ended December 31, 2018, 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 Astellas for Japan and
with Allergan for the Allergan License Territory. The Company also had agreements with Allergan to co-promote VIBERZI in
the U.S. and to promote CANASA in the U.S. The following table provides
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amounts included in the Company’s consolidated statements of operations as collaborative arrangements revenue and sale of API
attributable to transactions from these arrangements (in thousands):
Collaborative Arrangements Revenue
Linaclotide Agreements:
Allergan (North America)
Allergan (Europe and other)
AstraZeneca (China, Hong Kong and Macau)
Astellas (Japan)
Co-Promotion and Other Agreements:
Exact Sciences (Cologuard)
Allergan (VIBERZI)
Other
(1)
Total collaborative arrangements revenue
Sale of API
Linaclotide Agreements:
Astellas (Japan)
Allergan (North America)
Allergan (Europe and other)
Other
(2)
Total sale of API
Year Ended December 31,
2017
2018
2016
$ 266,177 $ 260,210 $ 218,880
406
370
38,990
1,146
—
—
617
208
—
—
4,290
1,226
3,513
1,764
—
$ 272,839 $ 265,533 $ 263,923
2,544
1,535
419
$
$
69,599 $
—
—
756
70,355 $
29,682 $
—
—
—
29,682 $
5,440
4,482
3
—
9,925
(1)
In August 2016, the Company terminated the Exact Sciences Co-Promotion Agreement for Cologuard. Under the terms of
the agreement, the Company continued to receive royalty payments through July 2017.
(2) During the three months ended September 30, 2018, the Company recorded approximately $0.8 million in revenue related to
the sale of API to Allergan, separate from its existing revenue agreements.
Accounts receivable, net and related party accounts receivable, net totaled approximately $80.9 million related to
collaborative arrangements revenue and sale of API as of December 31, 2018, net of approximately $3.1 million related to related
party accounts payable.
As of December 31, 2018, there were no impairment indicators for the accounts receivable recorded. During the year ended
December 31, 2018, there was no significant unusual activity in accounts receivable.
Linaclotide Agreements
Collaboration 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 received a non-refundable, upfront licensing fee and shares equally with Allergan all development costs
as 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 sales in Canada and Mexico. Allergan is solely responsible for the further development, regulatory
approval and commercialization of linaclotide in those countries and funding any costs. The collaboration agreement for North
America also includes contingent milestone payments, as well as a contingent equity investment, based on the achievement of
specific development and commercial milestones. At December 31, 2018, $205.0 million in license fees and all six development
milestone payments had been received by the Company, as well as a $25.0 million equity investment in the Company’s capital
stock (Note 17). The Company can also achieve up to $100.0 million in a sales-related milestone if certain conditions are met,
which will be recognized as collaborative arrangements revenue when it is probable that a significant reversal of revenue would
not occur and the associated constraints have been lifted.
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As a result of the research and development cost‑sharing provisions of the linaclotide collaboration for North America,
the Company offset approximately $9.0 million and recognized approximately $0.6 million in incremental research and
development costs during the years ended December 31, 2018 and 2017, respectively, and offset approximately $7.3 million
during the year ended December 31, 2016, to reflect the obligations of each party under the collaboration to bear half of the
development costs incurred.
The Company and Allergan began commercializing LINZESS in the U.S. in December 2012. 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. Net profits or net losses
consist of net sales of LINZESS 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. LINZESS net sales are calculated and recorded by Allergan and may include gross
sales net of discounts, rebates, allowances, sales taxes, freight and insurance charges, and other applicable deductions. If either
party provided fewer calls on physicians in a particular year than it was contractually required to provide, such party’s share of
the net profits would be adjusted as set forth in the collaboration agreement for North America. During the years ended December
31, 2017 and 2016, these adjustments to the share of the net profits were reduced or eliminated in connection with the co-
promotion activities under the Company’s agreement with Allergan to co-promote VIBERZI in the U.S., as described below in
Agreement with Allergan for VIBERZI . Additionally, these adjustments to the share of the net profits are eliminated, in full, in
2018 and all subsequent years under the terms of the Company’s commercial agreement with Allergan entered into in January
2017 under which the Company promotes Allergan’s CANASA product and promoted its DELZICOL product as described
below in Commercial Agreement with Allergan .
The Company evaluated this collaboration arrangement under ASC 606 and concluded that all development-period
performance obligations had been satisfied as of September 2012. However, the Company has determined that there are three
remaining commercial-period performance obligations, which include the sales detailing of LINZESS, participation in the joint
commercialization committee, and approved additional trials. The consideration remaining includes cost reimbursements in the
U.S., as well as commercial sales-based milestones and net profit and loss sharing payments based on net sales in the U.S.
Additionally, the Company receives royalties in the mid-teens percent based on net sales in Canada and Mexico. Royalties,
commercial sales-based milestones, and net profit and loss sharing payments will be recorded as collaborative arrangements
revenue or expense in the period earned, in accordance with the sales-based royalty exception, as these payments relate
predominately to the license granted to Allergan. The Company records royalty revenue in the period earned based on royalty
reports from its partner, if available, or based on the projected sales and historical trends. The cost reimbursements received from
Allergan during the commercialization period will be recognized as billed in accordance with the right-to-invoice exemption, as
the Company’s right to consideration corresponds directly with the value of the services transferred during the commercialization
period.
Under the Company’s collaboration with Allergan for North America, LINZESS net sales are calculated and recorded by
Allergan and include gross sales net of discounts, rebates, allowances, sales taxes, freight and insurance charges, and other
applicable deductions, as noted above. These amounts include the use of estimates and judgments, which could be adjusted based
on actual results in the future. 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 less commercial expenses, and presents the settlement payments to and from Allergan as collaboration expense
or collaborative arrangements revenue, as applicable. This is in accordance with the Company’s policy, given that the Company is
not the primary obligor and does not have the inventory risks in the collaboration agreement with Allergan for North
America. The Company relies on Allergan to provide accurate and complete information related to net sales of LINZESS in
accordance with U.S. GAAP in order to calculate its settlement payments to and from Allergan and record collaboration expense
or collaborative arrangements revenue, as applicable.
From time to time, in accordance with the terms of the collaboration with Allergan for North America, the Company
engages an independent certified public accounting firm to review the accuracy of the financial reporting from Allergan to the
Company. In connection with the most recent of such reviews, during the three months ended September 30, 2018, Allergan
reported to the Company an approximately $59.3 million negative adjustment to LINZESS net sales. Such adjustment relates to
the cumulative difference between certain previously estimated LINZESS gross-to-net sales reserves and allowances made by
Allergan during the years ended December 31, 2015, 2016 and 2017, and actual subsequent payments made. This adjustment is
primarily associated with estimated governmental and contractual rebates, as reported by Allergan. Accordingly, upon receiving
this information from Allergan, the Company recorded a change in accounting estimate to reduce collaborative arrangements
revenue by approximately $29.7 million during the year ended December 31, 2018 related to the Company’s share of this
adjustment. In addition, during the three months
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ended December 31, 2018, Allergan reported to the Company a true-up of approximately $0.2 million related to the previously
reported adjustment for the cumulative difference between certain previously estimated LINZESS gross-to-net sales reserves and
allowances.
The Company recognized collaborative arrangements revenue from the Allergan collaboration agreement for North
America during the years ended December 31, 2018, 2017 and 2016 as follows (in thousands):
Collaborative arrangements revenue related to sales of LINZESS in the U.S.
Royalty revenue
(1)
Other
Total collaborative arrangements revenue
2018
Year Ended December 31,
2017
$ 264,243 $ 256,238 $ 217,726
1,154
—
$ 266,177 $ 260,210 $ 218,880
2,295
1,677
1,934
—
2016
(1)
Includes net profit share adjustments of approximately $1.7 million recorded during the year ended December 31, 2017
related to a change in estimated selling expenses previously recorded.
The collaborative arrangements revenue recognized in the years ended December 31, 2018, 2017 and 2016 primarily
represents the Company’s share of the net profits on the sale of LINZESS in the U.S.
During each of the years ended December 31, 2018 and 2017, the Company recorded no revenue related to the sale of
API to Allergan under the terms of the linaclotide collaboration for North America. During the year ended December 31, 2016,
the Company recorded approximately $4.5 million related to the sale of API to Allergan under the terms of the linaclotide
collaboration for North America.
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, 2018, 2017 and 2016 (in thousands):
Collaborative arrangements revenue related to sales of LINZESS in the U.S.
Selling, general and administrative costs incurred by the Company
The Company’s share of net profit
(1)
(1)(2)
2018
Year Ended December 31,
2017
$ 264,243 $ 256,238 $ 217,726
(42,435)
(35,197)
(41,252)
$ 221,808 $ 214,986 $ 182,529
2016
(1)
Includes only collaborative arrangement revenue or selling, general and administrative costs attributable to the cost‑sharing
arrangement with Allergan.
(2) Certain of the unfavorable adjustments to the Company’s share of the LINZESS net profits were reduced or eliminated in
connection with the co-promotion activities under the Company’s agreement with Allergan to co-promote VIBERZI in the
U.S., as described below in Co-Promotion Agreement with Allergan for VIBERZI .
In May 2014, CONSTELLA became commercially available in Canada and in June 2014, LINZESS became
commercially available in Mexico. The Company records royalties on sales of CONSTELLA in Canada and LINZESS in Mexico
in the period earned. The Company recognized approximately $1.9 million, approximately $2.3 million, and approximately $1.2
million in royalty revenues from Canada and Mexico during the years ended December 31, 2018, 2017 and 2016, respectively.
License Agreement with Allergan (All countries other than the countries and territories of North America, China, Hong Kong,
Macau, and Japan)
In April 2009, the Company entered into a license agreement with Almirall (the “European License Agreement”) to
develop and commercialize linaclotide in Europe (including the Commonwealth of Independent States and Turkey) for the
treatment of IBS-C, CIC and other GI conditions. In October 2015, Almirall transferred its exclusive license to develop and
commercialize linaclotide in Europe to Allergan. In accordance with the European License Agreement, the Company granted
Almirall a right to access its U.S. Phase III clinical trial data for the purposes of supporting European regulatory approval.
Additionally, the Company was required to participate on a joint development
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committee during linaclotide’s development period and is required to participate in a joint commercialization committee while
linaclotide is commercially available.
Additionally, in October 2015, the Company and Allergan separately entered into an amendment to the European
License Agreement relating to the development and commercialization of linaclotide in Europe. Pursuant to the terms of the
amendment, (i) certain sales-based milestones payable to the Company under the European License Agreement were modified to
increase the total milestone payments such that, when aggregated with certain commercial launch milestones, they could total up
to $42.5 million, (ii) the royalties payable to the Company 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 digit percent and escalate to the upper-teens
percent by calendar year 2019, and (iii) Allergan assumed responsibility for the manufacturing of linaclotide API for Europe from
the Company, as well as the associated costs. The Company concluded that the 2015 amendment to the European License
Agreement was not a modification to the linaclotide collaboration agreement with Allergan for North America.
In January 2017, concurrently with entering into the commercial agreement as described below in Commercial
Agreement with Allergan , the Company and Allergan entered into an amendment to the European License Agreement. The
European License Agreement, as amended (the “Allergan License Agreement”), extended the license to develop and
commercialize linaclotide in all countries other than China, Hong Kong, Macau, Japan, and the countries and territories of North
America. On a country-by-country and product-by-product basis in such additional territory, Allergan is obligated to pay the
Company a royalty as a percentage of net sales of products containing linaclotide as an active ingredient in the upper-single digits
for five years following the first commercial sale of a linaclotide product in a country, and in the low-double digits thereafter. The
royalty rate for products in the expanded territory will decrease, on a country-by-country basis, to the lower-single digits, or cease
entirely, following the occurrence of certain events. Allergan is also obligated to assume certain purchase commitments for
quantities of linaclotide API under the Company’s agreements with third-party API suppliers. The amendment to the European
License Agreement did not modify any of the milestones or royalty terms related to Europe.
The Company concluded that the 2017 amendment was a material modification to the European License Agreement;
however, this modification did not have a material impact on the Company's consolidated financial statements as there was no
deferred revenue associated with the European License Agreement. The Company also concluded that the 2017 amendment to the
European License Agreement was not a material modification to the linaclotide collaboration agreement with Allergan for North
America. The Company’s conclusions on deliverables under ASC Topic 605-25, Revenue Recognition—Multiple-Element
Arrangements (“ASC 605-25”) are described below in Commercial Agreement with Allergan .
The Company evaluated the European License Agreement under ASC 606. In evaluating the terms of the 2009 European
License Agreement under ASC 606, the Company determined that there are no remaining performance obligations as of
September 2012. However, the Company continues to be eligible to receive consideration in the form of commercial launch
milestones, sales-based milestones, and royalties.
The commercial launch milestones, sales-based milestones and royalties under the European License Agreement have
historically been recognized as revenue as earned. Under ASC 606, the Company will apply the sales-based royalty exception to
royalties and sales-based milestones, as these payments relate predominantly to the license granted to Allergan (formerly
Almirall). Accordingly, the royalties and sales-based milestones will be recorded as revenue in the period earned. The Company
records royalties on sales of CONSTELLA in Europe in the period earned based on royalty reports from its partner, if available,
or the projected sales and historical trends. The commercial launch milestones will be recognized as revenue when it is probable
that a significant reversal of revenue would not occur and the associated constraint has been lifted.
Additionally, the Company evaluated the terms of the January 2017 amendment under ASC 606 and determined that it
would be treated as a separate contract given that it adds a distinct good or service at an amount that reflects standalone selling
price. The Company determined that all performance obligations in this amendment were satisfied in January 2017 when the
license for the additional territory was transferred. The Company continues to receive royalties under this agreement, which are
recorded in the period earned pursuant to the sales-based royalty exception, as they related predominantly to the license granted to
Allergan.
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The Company recognized approximately $1.1 million, approximately $0.6 million and approximately $0.4 million of
royalty revenue during the years ended December 31, 2018, 2017 and 2016, respectively.
License Agreement for Japan with Astellas
In November 2009, the Company entered into a license agreement with Astellas, as amended, to develop and
commercialize linaclotide for the treatment of IBS‑C, CIC and other GI conditions in Japan. Astellas is responsible for all
activities relating to development, regulatory approval and commercialization in Japan as well as funding the associated costs and
the Company is required to participate on a joint development committee over linaclotide’s development period. During the year
ended December 31, 2017, the Company and Astellas entered into a commercial API supply agreement (the “Astellas
Commercial Supply Agreement”). Pursuant to the Astellas Commercial Supply Agreement, the Company sells linaclotide API
supply to Astellas at a contractually defined rate and recognizes related revenue as sale of API. Under the license agreement, the
Company receives royalties which escalate based on sales volume, beginning in the low-twenties percent, less the transfer price
paid for the API included in the product actually sold and other contractual deductions.
In 2009, Astellas paid the Company a non‑refundable, up‑front licensing fee of $30.0 million, which was recognized as
collaborative arrangements revenue on a straight‑line basis over the Company’s estimate of the period over which linaclotide was
developed under the license agreement in accordance with ASC 605. The development period was completed in December 2016
upon approval of LINZESS by the Japanese Ministry of Health, Labor and Welfare at which point all previously deferred revenue
under the agreement was recognized.
The agreement also includes three development milestone payments that totaled up to $45.0 million, all of which were
achieved and recognized as revenue through December 31, 2016 in accordance with ASC 605. 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 in
November 2014. The second milestone payment, consisting of $15.0 million upon filing of a New Drug Application (“NDA”) for
linaclotide with the Japanese Ministry of Health, Labor and Welfare, was achieved in February 2016. The third development
milestone payment consisting of $15.0 million upon approval of an NDA by the Japanese Ministry of Health, Labor and Welfare
to market linaclotide in Japan was achieved in December 2016.
The Company has evaluated the terms of the 2009 License Agreement with Astellas under ASC 606 and has determined
that there are no remaining performance obligations as of December 2016. However, there continues to be consideration in the
form of royalties on sales of LINZESS in Japan under the 2009 License Agreement. Upon adoption of ASC 606, the Company
concluded that the royalties on sales of LINZESS in Japan relate predominantly to the license granted to Astellas. Accordingly,
the Company applies the sales-based royalty exception and records royalties on sales of LINZESS in Japan in the period earned
based on royalty reports from its partner, if available, or the projected sales and historical trends.
Additionally, under the terms of the Astellas Commercial Supply Agreement, the Company continues to have an
ongoing performance obligation to supply API. Upon adoption of ASC 606, product revenue is recognized when the customer
obtains control of the Company’s product, which occurs at a point in time, typically upon shipment of the product to the
customer. This results in earlier revenue recognition than the Company’s historical accounting.
The royalty on sales of LINZESS in Japan during the year ended December 31, 2017 relating to the quarters in arrears
did not exceed the transfer price of API sold and other contractual deductions during the periods. During the years ended
December 31, 2018, 2017, and 2016, the Company recognized approximately $69.6 million, approximately $29.7 million, and
approximately $5.4 million, respectively, from the sale of API to Astellas under the license agreement and the Astellas
Commercial Supply Agreement. During the year ended December 31, 2016, the Company recognized approximately $39.0
million in collaborative arrangements revenue from the Astellas license agreement.
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 nontransferable license to exploit the underlying
technology in the License Territory. The parties share responsibility for continued development and
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commercialization of linaclotide under a joint development plan and a joint commercialization plan, respectively, with
AstraZeneca having primary responsibility for the local operational execution.
The parties agreed to an Initial Development Plan (“IDP”) which includes the planned development of linaclotide in
China, including the lead responsibility for 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 regulatory submission
process. The IDP indicates that the party specifically designated as being responsible for a particular development activity under
the IDP shall implement and conduct such activities. The activities are governed by a Joint Development Committee (“JDC”),
with equal representation from each party. The JDC is responsible for approving, by unanimous consent, the joint development
plan and development budget, as well as approving protocols for clinical studies, reviewing and commenting on regulatory
submissions, and providing 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 be terminated by AstraZeneca at any time upon 180 days’ prior written notice.
Under certain circumstances, either party may terminate the AstraZeneca Collaboration Agreement in the event of bankruptcy or
an uncured material breach of the other party. Upon certain change in control scenarios of AstraZeneca, the Company may elect
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 such product rights.
In connection with the AstraZeneca Collaboration Agreement, the Company and AstraZeneca also executed a co-
promotion agreement (the “Co-Promotion Agreement”), pursuant to which the Company utilized its existing sales force to co-
promote NEXIUM (esomeprazole magnesium), one of AstraZeneca’s products, 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
up-front payment upon execution. The Company is also eligible for $125.0 million in additional commercial milestone payments
contingent on the achievement of certain sales targets. The parties will also share in the net profits and losses associated with the
development and commercialization of linaclotide in the License Territory, with AstraZeneca receiving 55% 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
shared equally thereafter.
Activities under the AstraZeneca Agreements were evaluated in accordance with ASC 605-25, to determine if they
represented a multiple element revenue arrangement. The Company identified the following deliverables in the AstraZeneca
Agreements:
·
·
·
·
·
an exclusive license to develop and commercialize linaclotide in the License Territory (the “License Deliverable”)
(the deliverable was completed upon execution and all associated revenue was recognized as of December 31,
2016),
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 deliverable was completed
and all associated revenue was recognized as of December 31, 2013).
Under ASC 605, the License Deliverable is nontransferable and has certain sublicense restrictions. The Company
determined that the License Deliverable had standalone value as a result of AstraZeneca’s internal product development and
commercialization capabilities, which would enable it to use the License Deliverable for its intended
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purposes without the involvement of the Company. The remaining deliverables were deemed to have standalone value based on
their nature and all deliverables met the criteria to be accounted for as separate units of accounting under ASC 605‑25. Factors
considered in this determination included, among other things, whether any other 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 performs R&D services and JDC services and supplies clinical trial materials during the estimated
development period. All consideration allocated to such services was being recognized as a reduction of research and
development costs, using the proportional performance method, by which the amounts are recognized in proportion to the costs
incurred in accordance with ASC 605. At the inception of the arrangement, the Company identified the supply of linaclotide drug
product for commercial requirements and commercialization services as contingent deliverables under ASC 605 because these
services are contingent upon the receipt of regulatory approval to commercialize linaclotide in the License Territory, and there
were no binding commitments or firm purchase orders pending for commercial supply at the inception of the AstraZeneca
Collaboration Agreement.
In August 2014, the Company and AstraZeneca, through the JDC, modified the IDP and development budget to include
approximately $14.0 million in additional activities over the remaining development period, to be shared by the Company and
AstraZeneca under the terms of the AstraZeneca Collaboration Agreement. These additional activities serve to support the
continued development of linaclotide in the License Territory, including the Phase III Trial. Pursuant to the terms of the modified
IDP and development budget, certain of the Company’s deliverables were modified, specifically the R&D Services and the
obligation to 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 was approximately
$34.0 million (“Arrangement Consideration”) which includes the $25.0 million non‑refundable up-front payment and
approximately $9.0 million representing 55% of the costs for clinical trial material supply services and research, development and
regulatory activities allocated to the Company in the IDP or as approved by the JDC in subsequent periods.
The Company allocated the Arrangement Consideration to the non-contingent deliverables based on management’s best
estimated selling price (“BESP”) of each deliverable using the relative selling price method, as the Company did not have vendor-
specific objective evidence or third-party evidence of selling price for such deliverables. Of the total Arrangement Consideration,
approximately $29.7 million was allocated to the License Deliverable, approximately $1.8 million to the R&D Services,
approximately $0.1 million to the JDC services, approximately $0.3 million to the clinical trial material supply services, and
approximately $2.1 million to the Co-Promotion Deliverable in the relative selling price model.
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 in expense, in accordance with the Company’s policy, which is
consistent with the nature of the cost reimbursement. Development costs incurred by the Company that pertain to the joint
development plan and subsequent amendments to the joint development plan, as approved by the JDC, are recorded as research
and development expense as incurred. Payments to AstraZeneca are recorded as incremental research and development expense.
As a result of the cost‑sharing arrangements under the collaboration, the Company recognized approximately $0.3 million in
incremental research and development costs during the year ended December 31, 2017 and recognized an insignificant reduction
in incremental research and development costs during the year ended December 31, 2016.
In March 2017, the Company began providing supply of linaclotide drug product and certain commercialization-related
services pursuant to the AstraZeneca Collaboration Agreement. During the year ended December 31, 2017, the Company
recognized approximately $0.2 million as collaborative arrangements revenue related to linaclotide drug product, as this
deliverable was no longer contingent.
Upon the adoption of ASC 606, the Company reevaluated the AstraZeneca Agreements and, consistent with its
conclusions under ASC 605, identified six performance obligations including the license, R&D services, JDC services, supply of
clinical trial material, co-promotion services for NEXIUM, and the JCC services. The Company determined
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that the supply of linaclotide drug product for commercial requirements was an optional service at inception of the arrangement
and did not provide a material right to AstraZeneca.
At the ASC 606 adoption date, the Company had fully satisfied its obligation to transfer the license and NEXIUM co-
promotion services to AstraZeneca. The following remaining performance obligations are ongoing as of December 31, 2018:
·
·
·
·
research, development and regulatory services pursuant to the IDP, as modified from time to time (the R&D
Services),
JDC services, and
obligation to supply clinical trial material, and
JCC services
Under ASC 606, the Company applied the contract modification practical expedient to the August 2014 amendment,
which expanded the scope of the Company’s activities under the IDP and increased the development budget. This practical
expedient allows an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period
presented. The application of this practical expedient resulted in a total transaction price of approximately $34.0 million, which
was allocable to the Company’s performance obligations on a relative standalone selling price (“SSP”) basis.
Under ASC 606, amounts of consideration allocated to the license and NEXIUM co-promotion services would have
been recognized in full prior to adoption as these performance obligations were satisfied in October 2012 and December 2013,
respectively. Consideration allocated to the R&D Services will be recognized as such services are provided over the performance
period using an output method based on full-time employee hours incurred. Consideration allocated to the JDC services are
recognized ratably over the development period using a time-based, straight-line attribution model. Revenue from the supply of
clinical trial material is recognized as the clinical trial material is delivered to the customer. During the year ended December 31,
2018, the Company offset approximately $1.2 million related to R&D Services and JDC services.
Upon commercialization, the Company’s only remaining performance obligation will be JCC services. During
commercialization, the Company will be entitled to receive sales-based milestone payments from AstraZeneca. Additionally, the
parties will share in the net profits and losses associated with the development and commercialization of linaclotide in the License
Territory, with AstraZeneca receiving 55% of the net profits or incurring 55% of the net losses until a certain specified
commercial milestone is achieved; from that point, profits and losses will be shared equally thereafter. Commercial sales-based
milestones and net profit and loss sharing payments will be recorded as collaborative arrangements revenue or expense in the
period earned, in accordance with the sales-based royalty exception, as these payments related predominately to the license
granted to AstraZeneca. Any cost reimbursements received from AstraZeneca during the commercialization period will be
recognized as billed in accordance with the right-to-invoice exemption, as the Company’s right to consideration corresponds
directly with the value of the services transferred during the commercialization period. During the year ended December 31,
2018, the Company incurred approximately $0.9 million related to pre-launch commercial services and supply chain services.
Co-Promotion and Other Agreements
Co-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-approved noninvasive stool DNA screening test for colorectal cancer (the “Exact Sciences Co-Promotion
Agreement”). The Exact Sciences Co-Promotion Agreement was terminated by the parties in August 2016. Under the terms of the
non-exclusive Exact Sciences Co-Promotion Agreement, the Company’s sales team promoted and educated health care
practitioners regarding Cologuard through July 2016. Exact Sciences maintained responsibility for all other aspects of the
commercialization of Cologuard outside of the co-promotion. Under the terms of the Exact Sciences Co-Promotion Agreement,
the Company was compensated primarily via royalties earned on the
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net sales of Cologuard generated from the healthcare practitioners on whom the Company called with such royalties payable
through July 2017. There were no refund provisions in the Exact Sciences Co-Promotion Agreement.
During the years ended December 31, 2017 and 2016, the Company recognized approximately $2.5 million, and
approximately $3.5 million as collaborative arrangements revenue related to this arrangement in accordance with ASC 605-25.
The Company determined that the Exact Sciences Co-Promotion Agreement was completed prior to the adoption of
ASC 606 and accordingly did not reevaluate the terms of the agreement.
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 suffering from IBS-D (the “VIBERZI Co-Promotion Agreement”). Under the terms of the
VIBERZI Co-Promotion Agreement, the Company’s clinical sales specialists detailed VIBERZI to the same health care
practitioners to whom they detail LINZESS. Allergan was responsible for all costs and activities relating to the commercialization
of VIBERZI outside of the co-promotion. The Company’s promotional efforts under the non-exclusive co-promotion began
when VIBERZI became commercially available in December 2015. The VIBERZI Co-Promotion Agreement was effective
through December 31, 2017.
Under the terms of the VIBERZI Co-Promotion Agreement, the Company’s promotional efforts were compensated
based on the volume of calls delivered by the Company’s sales force, with the terms of the agreement reducing or eliminating
certain of the unfavorable adjustments to the Company’s share of net profits stipulated by the linaclotide collaboration agreement
with Allergan for North America, provided that the Company provided a minimum number of VIBERZI calls on physicians. The
Company provided the minimum number of VIBERZI calls on physicians pursuant to the VIBERZI Co-Promotion Agreement,
and was compensated with the elimination of certain of the unfavorable adjustments to the Company’s share of net profits
stipulated by the linaclotide collaboration agreement with Allergan for North America for the years ending December 31, 2015,
2016 and 2017.
In connection with these co-promotion activities, the net profit share adjustments payable to Allergan under the
linaclotide collaboration agreement for North America were reduced by approximately $11.0 million and approximately $5.3
million during the years ended December 31, 2017 and 2016, respectively. During the years ended December 31, 2017 and 2016,
the Company also recognized approximately $1.5 million and approximately $1.8 million in revenue related to the VIBERZI Co-
Promotion Agreement for the performance of medical education services.
In December 2017, the Company and Allergan entered into an amendment to the commercial agreement with Allergan
(the “VIBERZI Amendment”), as described below, to include the VIBERZI promotional activities through December 31,
2018. Under the terms of the VIBERZI Amendment, the Company’s clinical sales specialists will continue detailing VIBERZI in
the second position to the same health care practitioners to whom they detail LINZESS in the first position and provide certain
medical education services. The Company has the potential to achieve a milestone payment of up to $7.5 million based on the net
sales of VIBERZI during 2018, and will be compensated approximately $3.0 million over the term of the agreement for its
medical education initiatives. The Company evaluated the VIBERZI Amendment in accordance with ASC 606 and determined
that it would be treated as a separate contract because it adds a distinct good or service at an amount that reflects standalone
selling price. The following performance obligations under the VIBERZI Amendment were identified:
·
sales detailing of VIBERZI in either first or second position, and
· medical education services
The sales-based milestone payment will be recognized as collaborative arrangements revenue when it is probable that a
significant reversal of revenue would not occur and the associated constraint has been lifted. During the three months ended
December 31, 2018, the Company determined that the sales-based milestone was no longer constrained and recognized
approximately $1.3 million as collaborative arrangements revenue. The Company recognized approximately $3.0 million of
collaborative arrangements revenue related to VIBERZI for medical education events. In December 2018, the Company further
amended the VIBERZI Amendment to continue sales detailing activities in 2019.
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Commercial Agreement with Allergan
In January 2017, concurrently with entering into the amendment to the European License Agreement, the Company and Allergan
entered into an agreement under which the adjustments to the Company’s or Allergan’s share of the net profits under the share
adjustment provision of the collaboration agreement for linaclotide in North America relating to the contractually required calls
on physicians in each year are eliminated, in full, in 2018 and all subsequent years (the “Commercial Agreement”). Pursuant to
the Commercial Agreement, Allergan appointed the Company, on a non-exclusive basis, to promote CANASA, approved for the
treatment of ulcerative proctitis, and DELZICOL, approved for the treatment of ulcerative colitis, in the U.S. for approximately
two years through February 2019. Under the terms of the Commercial Agreement, the Company is obligated to perform third
position sales details and offer samples of such products to gastroenterology prescribers who are on the then-current call panel for
LINZESS to which the Company provides first or second position details. The Company purchases samples of CANASA and
DELZICOL from Allergan at the actual manufacturing cost. On a product-by-product basis, Allergan pays the Company a royalty
in the mid-teens on incremental sales of CANASA and DELZICOL above a mutually agreed upon sales baseline. Additionally,
the Company may incur a detailing shortfall penalty if it fails to meet the annual target product detail amount in any calendar
year.
In December 2017, the Company and Allergan entered into the VIBERZI Amendment to the Commercial Agreement,
as described above, to include and extend the VIBERZI promotional activities through December 31, 2018 and discontinue the
promotion of DELZICOL effective January 1, 2018. Accordingly, promotional activities for DELZICOL terminated on December
31, 2017 and, subject to the Company’s or Allergan’s rights of early termination, the promotional activities for CANASA will
terminate on February 26, 2019. The share adjustment relief will, in the case of Allergan’s termination for convenience and
certain other specified circumstances, survive termination of the commercial agreement. Under ASC 605, the Company
concluded that the commercial agreement with Allergan, as amended, was not a material modification to the linaclotide
collaboration agreement with Allergan for North America.
Activities under the Commercial Agreement with Allergan and the Allergan License Agreement were evaluated in accordance
with ASC 605-25 upon execution, as the agreements were entered into concurrently, to determine if they represented a multiple
element revenue arrangement.
The Company identified the following deliverables:
• an exclusive license to develop and commercialize linaclotide in the Allergan License Territory, and
• sales detailing services for CANASA and DELZICOL.
The exclusive license for the Allergan License Territory is nontransferable and has certain sublicense restrictions. The
Company determined that Allergan had the internal product development and commercialization capabilities that would enable
Allergan to use the license for its intended purposes without the involvement of the Company and, therefore, the license had
standalone value. The deliverable for the sales detailing services for CANASA and DELZICOL was deemed to have standalone
value based on the nature of the services, and all deliverables met the criteria to be accounted for as separate units of accounting
under ASC 605-25. There was no allocable arrangement consideration at the inception of the arrangement, as the consideration is
in the form of royalties and the elimination of a contingent liability. During the year ended December 31, 2017, the Company did
not recognize royalty revenue related to the Commercial Agreement with Allergan to promote CANASA and DELZICOL.
Upon adoption of ASC 606, the Company evaluated the commercial agreement and the amendment to the European
License Agreement under the contract combination and contract modification guidance in ASC 606. The Company determined
that the agreements should be accounted for as separate contracts because each agreement adds distinct goods or services at an
amount that reflects standalone selling price. The Company concluded that the CANASA and DELZICOL sales detailing
deliverable under ASC 605 was also considered a performance obligation in accordance with ASC 606. Accordingly, the
Company records royalties on sales of CANASA and any estimated detailing shortfall penalty over the period of performance for
the sales details; collaborative arrangements revenue is recognized when it is probable that a significant reversal of revenue would
not occur and the associated constraint has been lifted. The Company estimates sales detailing royalties based on royalty reports
from its partner, if available, or the projected sales and historical trends. At the inception of the arrangement, the consideration
associated with the agreement comprised of royalties and a sales detailing shortfall penalty are fully constrained. During the year
ended December 31, 2018, the
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Company did not recognize royalty revenue related to the Commercial Agreement with Allergan for sales of CANASA. As
discussed above, the Company’s obligation to perform sales detailing for DELZICOL was eliminated through the VIBERZI
Amendment to the Commercial Agreement with Allergan.
The VIBERZI Amendment was effective as of January 1, 2018 and evaluated in accordance with ASC 606 as described
above.
In December 2018, the Company and Allergan entered into an agreement to discontinue the Company’s promotion of
CANASA effective December 31, 2018, and to extend the Company’s promotion of VIBERZI through March 31, 2019.
Other Collaboration and License Agreements
The Company has other collaboration and license agreements that are not individually significant to its business.
Pursuant to the terms of one agreement, the Company was required to pay $7.5 million for development milestones, all of which
had been paid as of December 31, 2018. The Company may also be required to pay up to $18.0 million for regulatory milestones,
none of which had been paid as of December 31, 2018. The Company recorded approximately $5.0 million in research and
development expense associated with the Company’s other collaboration and license agreements during the year ended December
31, 2018. The Company did not record any research and development expense associated with the Company’s other collaboration
and license agreements during the years ended December 31, 2017 and 2016.
6. 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, 2018 and 2017 and indicate the fair value hierarchy of the valuation techniques the Company utilized to
determine such fair value. In general, fair values determined by Level 1 inputs utilize observable inputs such as 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 indirectly observable, such as quoted prices for similar instruments in active markets, interest rates and yield curves. Fair
values determined by Level 3 inputs utilize unobservable data points 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 fixed income securities that do not always trade on a daily basis. As a
result, the pricing services used by the Company apply other available information as applicable through processes such as
benchmark yields, benchmarking of like securities, sector groupings and matrix pricing to prepare valuations. In addition, model
processes are used to assess interest rate impact and develop prepayment scenarios. These models take into consideration relevant
credit 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. The Company validates the prices
provided by its third party pricing services by obtaining market values from other pricing sources and analyzing pricing data in
certain instances. The Company also invests in certain reverse repurchase agreements which are collateralized by deposits in the
form of Government Securities and Obligations for an amount not less than 102% of their principal amount. The Company does
not record an asset or liability for the collateral as the Company is not permitted to sell or re-pledge the collateral. The collateral
has at least the prevailing credit rating of U.S. Government Treasuries and Agencies. The Company utilizes a third party
custodian to manage the exchange of funds and ensure that collateral received is maintained at 102% of the reverse repurchase
agreements principal amount on a daily basis.
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The following tables present the assets and liabilities the Company has measured at fair value on a recurring basis (in
thousands):
Fair Value Measurements at Reporting Date Using
Assets:
Cash and cash equivalents:
Money market funds
Repurchase agreements
Convertible Note Hedges
Total assets measured at fair value
Liabilities:
Note Hedge Warrants
Contingent Consideration
Total liabilities measured at fair value
Assets:
Cash and cash equivalents:
Money market funds
U.S. Treasury securities
Repurchase agreements
Available-for-sale securities:
U.S. Treasury securities
U.S. government-sponsored securities
Convertible Note Hedges
Total assets measured at fair value
Liabilities:
Note Hedge Warrants
Contingent Consideration
Total liabilities measured at fair value
December 31,
2018
Quoted Prices in Significant Other Significant
Active Markets for
Identical Assets
(Level 1)
Observable
Inputs
(Level 2)
Inputs
(Level 3)
Unobservable
$
$
$
$
142,218 $
30,875
41,020
214,113 $
33,763 $
51
33,814 $
142,218 $
30,875
—
173,093 $
— $
—
— $
— $
—
—
— $
— $
—
— $
—
—
41,020
41,020
33,763
51
33,814
Fair Value Measurements at Reporting Date Using
December 31,
2017
Quoted Prices in Significant Other Significant
Active Markets for
Identical Assets
(Level 1)
Observable
Inputs
(Level 2)
Inputs
(Level 3)
Unobservable
$
$
$
$
44,311 $
11,991
70,000
64,343
31,336
108,188
330,169 $
92,188 $
31,258
123,446 $
44,311 $
11,991
70,000
64,343
—
—
190,645
$
— $
—
—
—
—
—
—
31,336
—
31,336 $
—
—
108,188
108,188
— $
—
— $
— $
—
— $
92,188
31,258
123,446
There were no transfers between fair value measurement levels during the years ended December 31, 2018 or 2017.
Cash equivalents, accounts receivable, related party accounts receivable, prepaid expenses and other current assets,
accounts payable, related party accounts payable, accrued expenses and the current portion of capital lease obligations at
December 31, 2018 and 2017 are carried at amounts that approximate fair value due to their short-term maturities.
Convertible Note Hedges and Note Hedge Warrants
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 the fair value hierarchy. These derivatives are not actively traded and are valued using the
Black-Scholes option-pricing model which requires the use of subjective assumptions. Significant inputs used to determine the
fair value as of December 31, 2018 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 A common stock. The Company has not paid and does not anticipate paying cash dividends on its shares of
common stock in the foreseeable future; therefore, the expected
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dividend yield is assumed to be zero. Changes to these inputs could materially affect the valuation of the Convertible Note
Hedges and Note Hedge Warrants.
The following inputs were used in the fair market valuation of the Convertible Note Hedges and Note Hedge Warrants
as of December 31, 2018 and 2017:
Year Ended
December 31,
2018
Year Ended
December 31,
2017
(1)
(2)
Risk-free interest rate
Time to maturity
Stock price
Strike price
Common stock volatility
Dividend yield
(3)
(4)
Convertible Note Hedge Convertible Note Hedge
Note Hedges Warrants Note Hedges Warrants
2.5 %
4.1
10.36 $
21.50 $
43.6 %
— %
2.5 %
3.5
$
10.36
16.58
$
43.8 %
— %
2.1 %
4.5
$
14.99
16.58
$
44.1 %
— %
2.2 %
5.0
14.99
21.50
44.1 %
— %
$
$
(1) Based on U.S. Treasury yield curve, with terms commensurate with the terms of the Convertible Note Hedges and the Note
Hedge Warrants
(2) The closing price of the Company’s Class A common stock on the last trading days of the years ended December 31, 2018
and 2017, respectively.
(3) As per the respective agreements for the Convertible Note Hedges and Note Hedge Warrants.
(4) Selected volatility based on historical volatility of the Company’s Class A common stock.
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 other expense, net within the Company's consolidated statements of operations. Gains and
losses for these derivative financial instruments are presented separately in the Company's consolidated statements of cash flows.
The following table reflects the change in the Company's Level 3 convertible note derivatives from December 31, 2016
through December 31, 2018 (in thousands):
Balance at December 31, 2016
Change in fair value, recorded as a component of gain (loss) on derivatives
Balance at December 31, 2017
Change in fair value, recorded as a component of gain (loss) on derivatives
Balance at December 31, 2018
Contingent Consideration
Convertible
Note Hedges
Note Hedge
Warrants
$
$
$
132,521 $ (113,237)
(24,333)
21,049
(92,188)
108,188 $
(67,168)
58,425
(33,763)
41,020 $
In connection with the Lesinurad Transaction, the Company recorded a liability of $67.9 million as of the Acquisition
Date. This valuation was based on a Monte-Carlo simulation, which includes significant estimates related to probability weighted
net cash outflow projections, primarily comprised of estimated future royalty and milestone payments to AstraZeneca, discounted
using a yield curve equivalent to the Company’s credit risk, which was the estimated cost of debt financing for market
participants. Adjustments are recorded when there are changes in significant assumptions, including net sales projections,
probability weighted net cash outflow projections, the discount rate, passage of time, and the yield curve equivalent to the
Company’s credit risk, which is based on the estimated cost of debt for market participants. This estimate represents the
probability weighted analysis of expected future milestone and royalty payments based on net sales to be made to AstraZeneca.
Changes to these inputs are re-evaluated each reporting period and could materially affect the valuation of the contingent
consideration. During the three months ended September 30, 2018, the Company reduced its projected revenue assumptions
associated with the sales of ZURAMPIC and DUZALLO and delivered to AstraZeneca a notice of termination of the Lesinurad
License. The Company recognized a loss on fair value remeasurement of contingent consideration of approximately $31.0 million
during the
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year ended December 31, 2018. The estimated fair value of contingent consideration was insignificant as of December 31, 2018.
The following table reflects the change in the Company’s Level 3 contingent consideration payable from December 31,
2016 through December 31, 2018 (in thousands):
Contingent
Fair Value at December 31, 2016
Changes in fair value
Payments/transfers to accrued expenses and other current liabilities
Fair Value at December 31, 2017
Changes in fair value
Payments/transfers to accrued expenses and other current liabilities
Fair value at December 31, 2018
2.25% Convertible Senior Notes
$
Consideration
77,660
(31,310)
(15,092)
31,258
(31,045)
(162)
51
$
In June 2015, the Company issued approximately $335.7 million of its 2022 Notes. The Company separately accounted
for the liability and equity components of the 2022 Notes by allocating the proceeds between the liability component and equity
component (Note 11). The fair value of the 2022 Notes, which differs from their 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 Notes observed in market
trading, which are Level 2 inputs. The estimated fair value of the 2022 Notes as of December 31, 2018 and 2017 was
approximately $315.0 million and approximately $392.8 million, respectively.
8.375% Notes Due 2026
In September 2016, the Company closed a direct private placement pursuant to which the Company issued $150.0
million in aggregate principal amount of the 2026 Notes in January 2017. The estimated fair value of the 2026 Notes was
approximately $148.2 million and approximately $152.5 million as of December 31, 2018 and 2017, respectively. This valuation
was calculated using a discounted cash flow estimate of expected interest and principal payments and was determined using Level
3 inputs, including significant estimates related to expected LINZESS sales and a discount rate equivalent to market participant
interest rates.
Nonrecurring fair value measurements – Intangible Assets
The Company’s acquired intangible assets are analyzed for impairment on a nonrecurring basis using fair value measurements
with unobservable inputs (Level 3). During the three months ended September 30, 2018, the Company recorded an approximately
$151.8 million impairment charge related to its acquired intangible assets. The impairment assessment performed utilized the
revised projected revenue and net cash flows assumed through the termination of the Lesinurad License Agreement, resulting in
an impairment of the full carrying value of the intangible assets (Note 4).
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7. Available‑‑for‑‑Sale Securities
The Company held no available-for-sale securities at December 31, 2018. The following table summarizes the
available‑for‑sale securities held at December 31, 2017 (in thousands):
December 31, 2017
U.S. Treasury securities
U.S. government-sponsored securities
Total
Gross
Gross
Amortized Unrealized Unrealized
Cost
Gains
Losses
Fair
Value
$ 64,378 $
31,384
$ 95,762 $
— $
—
— $
(35) $ 64,343
(47)
31,337
(82) $ 95,680
There were 29 available‑for‑sale debt securities in an unrealized loss position at December 31, 2017, none of which had
been in an unrealized loss position for more than twelve months. The aggregate fair value of these securities at December 31,
2017 was approximately $95.7 million. The Company reviews its investments for other-than-temporary impairment whenever the
fair value of an investment is less than amortized cost and evidence indicates that an investment’s carrying amount is not
recoverable within a reasonable period of time. To determine whether an impairment is other-than-temporary, the Company
considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence
indicating the cost of the investment is recoverable outweighs evidence to the contrary. The Company did not intend to sell the
investments and it was not more likely than not that the Company would be required to sell the investments before recovery of
their amortized cost bases, which may have been maturity. The Company did not hold any securities with other-than-temporary
impairment at December 31, 2018 or 2017.
There were no sales of available-for-sale securities during the years ended December 31, 2018, 2017 and 2016. Net
unrealized holding gains or losses for the period that have been included in accumulated other comprehensive income were not
material to the Company’s consolidated results of operations.
8. Inventory
Inventory consisted of the following (in thousands):
Finished Goods
December 31,
2018
2017
$
$
— $
— $
735
735
The Company’s inventory balances consist of linaclotide API and drug product and Lesinurad Products finished goods
available for commercial sale. The Company evaluates 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 a corresponding charge
to the statement of operations in the period that the impairment is first identified. No impairment of linaclotide API inventory was
recorded during the year ended December 31, 2018.
The Company has entered into multiple commercial supply agreements for the purchase of linaclotide API. Two of the
Company’s linaclotide API supply agreements for supplying API to its collaboration and license partners outside of North
America contain minimum purchase commitments (Note 12). The Company relied exclusively on AstraZeneca for the
commercial manufacture and supply of ZURAMPIC and DUZALLO under the Lesinurad CSA, through the termination of the
Lesinurad License Agreement. As part of the Company's net realizable value assessment of its inventory, the Company assesses
whether it has any excess non-cancelable purchase commitments resulting from its minimum supply agreements with its
suppliers.
The determination of the net realizable value of inventory and non-cancelable purchase commitments is based on
demand forecasts from the Company’s partners, that are received quarterly, to project future demand and the Company’s internal
forecast for projected demand in subsequent years. During the year ended December 31, 2015, the Company wrote down
approximately $10.1 million related to excess non-cancelable purchase commitments for
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linaclotide API. During the three months ended September 30, 2018, the Company assigned to Allergan certain of these
linaclotide excess non-cancelable purchase commitments that the Company had previously accrued for. Accordingly, the
Company relieved the previous accrual of approximately $2.5 million, which was recorded as write-down of commercial supply
and inventory to net realizable value and loss on non-cancelable purchase commitments on the Company’s consolidated statement
of operations. As of December 31, 2018 and 2017, the accrual for excess linaclotide purchase commitments was recorded as
approximately $2.5 million and approximately $3.4 million in accrued expenses and approximately $2.5 million and
approximately $5.1 in other liabilities, respectively, in the Company's consolidated balance sheet.
During the Lesinurad TSA period, title for ZURAMPIC commercial supply and samples did not pass to the Company.
Accordingly, the Company recorded purchases of ZURAMPIC commercial supply and samples from AstraZeneca as prepaid
assets until they were sold or used. Purchases of DUZALLO commercial supply and samples were not within the scope of the
Lesinurad TSA. As of October 1, 2017, in connection with the expiration of the Lesinurad TSA, the Company was no longer
operating under this agreement for the warehousing and distribution of commercial supply and samples of ZURAMPIC. During
the year ended December 31, 2017, the Company wrote down approximately $0.3 million of lesinurad commercial supply
purchase commitments as a result of revised demand forecasts. These write-downs were recorded in write-downs of commercial
supply and inventory to net realizable value and (settlement) loss on non-cancelable inventory purchase commitments in the
Company's consolidated statement of operations. Further, during the year ended December 31, 2017, the Company wrote-down
approximately $1.7 million of ZURAMPIC sample supply purchase commitments as a result of a reduction in near-term
forecasted demand. These write-downs were recorded in selling, general and administrative expenses in the Company's
consolidated statement of operations. During the year ended December 31, 2016, the Company wrote-down approximately $0.4
million in ZURAMPIC commercial supply commitments as a result of revised demand forecasts.
The Company wrote down approximately $2.5 million related to lesinurad inventory and commercial supply purchase
commitments during the year ended December 31, 2018, as a result of revised demand forecasts and the notice of termination of
the Lesinurad License. The adjustment was recorded as write-down of commercial supply and inventory to net realizable value
and loss on non-cancelable purchase commitments. Further, during the year ended December 31, 2018, the Company wrote-down
approximately $0.4 million of DUZALLO sample supply purchase commitments as a result of the notice of termination of the
Lesinurad License. These write-downs were recorded in selling, general and administrative expenses in the Company's
consolidated statement of operations.
As of December 31, 2018, the Company has evaluated all remaining minimum purchase commitments under its
linaclotide API and lesinurad supply agreements and concluded that the commitments are realizable based on the current forecasts
received from the Company’s partners in these territories and the Company’s internal forecasts (Note 12).
9. Property and Equipment
Property and equipment, net consisted of the following (in thousands):
December 31,
2018
2017
Manufacturing equipment
Laboratory equipment
Computer and office equipment
Furniture and fixtures
Software
Construction in process
Leased vehicles
Leasehold improvements
Less accumulated depreciation and amortization
$
3,748 $
17,856
3,514
2,478
13,477
1,384
—
40,041
82,498
(65,228)
3,748
17,088
2,835
2,318
13,872
678
7,871
38,084
86,494
(69,220)
$ 17,270 $ 17,274
As of December 31, 2018 and 2017, substantially all of the Company’s manufacturing equipment was located in the
United Kingdom at one of the Company’s contract manufacturers. All other property and equipment were located in the U.S. for
the periods presented.
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As of December 31, 2018 and 2017, the Company had approximately $0.2 million and $8.6 million of assets under
capital leases and recorded an insignificant amount and approximately $4.6 million of accumulated amortization, respectively.
Depreciation and amortization expense of property and equipment, including amounts recorded under capital leases, was
approximately $6.1 million, approximately $8.4 million, and approximately $10.3 million for the years ended December 31,
2018, 2017 and 2016, respectively. During the year ended December 31, 2017, the Company recorded an expense of
approximately $0.6 million related to a loss on disposal of assets.
10. Accrued Expenses and Other Current Liabilities
Accrued expenses consisted of the following (in thousands):
Salaries
Accrued vacation
Accrued incentive compensation
Other employee benefits
Professional fees
Accrued interest
Workforce reduction charges
Other
December 31,
2018
2017
4,566
3,627 $
4,672
4,100
13,403
16,013
1,305
2,154
1,261
2,770
873
873
—
3,303
12,412
12,157
45,252 $ 38,237
$
$
As of December 31, 2018, other accrued expenses of approximately $12.4 million includes approximately $2.5 million
related to linaclotide excess purchase commitments, approximately $2.4 million related to a portion of the activities associated
with the Company’s intent to separate into two independent publicly traded companies, and approximately $1.4 million related to
excess non-cancelable Lesinurad Products commercial supply and sample purchase commitments.
As of December 31, 2017, other accrued expenses of approximately $12.2 million included approximately $3.4 million
related to linaclotide excess purchase commitments, approximately $1.3 million related to excess non-cancelable ZURAMPIC
sample purchase commitments, and approximately $0.2 million related to ZURAMPIC finished goods inventory.
11. Notes Payable
8.375% Notes due 2026
On September 23, 2016, the Company closed a direct private placement, pursuant to which the Company issued $150.0
million in aggregate principal amount of 8.375% notes due 2026 on the Funding Date, January 5, 2017. The proceeds from the
issuance of the 2026 Notes were used to redeem the outstanding principal balance of the PhaRMA Notes at par on the January 5,
2017 (“the Funding Date”), resulting in a loss on extinguishment of debt related to the write-off of the remaining PhaRMA Notes
unamortized debt issuance costs of approximately $2.0 million. The Company capitalized approximately $0.5 million of debt
issuance costs, which were netted against the carrying value of the 2026 Notes.
The 2026 Notes bear an annual interest rate of 8.375%, with interest payable March 15, June 15, September 15 and
December 15 of each year (each an “8.375% Payment Date”) which began on June 15, 2017. Principal of the 2026 Notes will be
payable on the 8.375% Payment Dates beginning March 15, 2019. From March 15, 2019, the Company will make quarterly
payments on the 2026 Notes equal to the greater of (i) 7.5% of net sales of linaclotide in the U.S. for the preceding quarter (the
“8.375% Synthetic Royalty Amount”) and (ii) accrued and unpaid interest on the 2026 Notes (the “8.375% Required Interest
Amount”). Principal on the 2026 Notes will be repaid in an amount equal to the 8.375% Synthetic Royalty Amount minus the
8.375% Required Interest Amount, when this is a positive number, until the principal has been paid in full. Given the principal
payments on the 2026 Notes are based on the 8.375% Synthetic Royalty Amount, which will vary from quarter to quarter, the
2026 Notes may be repaid prior to September 15, 2026,
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the final legal maturity date. The Company expects to pay approximately $47.6 million of the principal within twelve months
following December 31, 2018.
The 2026 Notes are secured by a security interest in a segregated bank account established to receive the required quarterly
payments as well as certain limited accounts receivables, payment intangibles or other rights to payment or proceeds, in each
case, up to the 8.375% Synthetic Royalty Amount or estimated equivalent thereto, as applicable. Up to the amount of the
required quarterly payments under the 2026 Notes, Allergan deposits its quarterly profit (loss) sharing payments due to the
Company related to net sales of linaclotide in the U.S. pursuant to the collaboration agreement for North America, if any, into the
segregated bank account. If the funds deposited by Allergan into the segregated bank account are insufficient to make a required
payment of interest or principal on a particular 8.375% Payment Date, the Company is obligated to deposit such shortfall out of
the Company’s general funds into the segregated bank account.
The 2026 Notes may be redeemed at any time prior to maturity, in whole or in part, at the option of the Company. If
applicable, the Company will pay a redemption price equal to the percentage of outstanding principal balance of the 2026 Notes
being redeemed specified below for the period in which the redemption occurs (plus the accrued and unpaid interest to the
redemption date on the 2026 Notes being redeemed):
Payment Dates
From and including March 15, 2018 to and including March 14, 2019
From and including March 15, 2019 to and including March 14, 2020
From and including March 15, 2020 to and including March 14, 2021
From and including March 15, 2021 and thereafter
Redemption
Percentage
108.00 %
105.50 %
102.75 %
100.00 %
The 2026 Notes contain certain covenants related to the Company’s obligations with respect to the commercialization of
linaclotide and the related collaboration agreement with Allergan for North America, as well as certain customary covenants,
including covenants that limit or restrict the Company’s ability to incur certain liens, merge or consolidate or make dispositions of
assets. The 2026 Notes also specify a number of events of default (some of which are subject to applicable cure periods),
including, among other things, covenant defaults, other non-payment defaults, and bankruptcy and insolvency defaults. Upon the
occurrence of an event of default, subject to cure periods in certain circumstances, all amounts outstanding may become
immediately due and payable.
The accounting for the 2026 Notes requires the Company to make certain estimates and assumptions about the future net
sales of linaclotide in the U.S. Linaclotide has been marketed as LINZESS in the U.S. since December 2012 and the estimates of
the magnitude and timing of linaclotide net sales are subject to significant variability and uncertainty. These estimates and
assumptions are likely to change, which may result in future adjustments to the portion of the 2026 Notes that is classified as a
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 to the Company’s consolidated financial statements.
2.25% 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 of approximately $324.0 million from the sale of the 2022 Notes, after deducting fees and
expenses of approximately $11.7 million. The Company used approximately $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 partially offset 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 are senior 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 through payment 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 60.3209 shares 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 initial conversion 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 time prior
to the close of business on the business day
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immediately preceding December 15, 2021 in multiples of $1,000 principal amount, only under the following circumstances:
·
·
·
during any calendar quarter commencing after the calendar quarter ending on September 30, 2015 (and only during
such calendar quarter), if the last reported sale price of the Company's Class A common stock for at least 20 trading
days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of
the immediately preceding calendar quarter is greater than or equal to 130% of the conversion 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 defined in 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 of the 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 convert their 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-whole fundamental 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 Notes prior 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 retire the 2022 Notes.
Upon the occurrence of certain fundamental changes involving the Company, holders of the 2022 Notes may require the
Company to repurchase for cash all or part of their 2022 Notes at a repurchase price 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 make restricted payments in the event of a transaction that substantially increases the Company's level
of indebtedness. The Indenture provides for customary events of default. 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 will become 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 is continuing, 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 2022 Notes to be immediately due and payable. Notwithstanding the foregoing, the
Indenture provides that, upon the Company's election, and for up to 180 days, the sole remedy for an event of default relating to
certain failures by the Company to comply with certain reporting covenants in the Indenture consists exclusively of the 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 components of the 2022 Notes by allocating the proceeds between the liability component and the
embedded conversion option, or equity component, due to the Company's ability 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 carrying amount of the
liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible
feature. The allocation was performed in a manner that reflected the Company's non-convertible debt borrowing rate for similar
debt. The equity component of the 2022 Notes was 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 of the 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, is amortized 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 as it continues to meet the conditions for equity classification.
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The Company's outstanding Convertible Note balances as of December 31, 2018 and 2017 consisted of the following (in
thousands):
Liability component:
Principal
Less: unamortized debt discount
Less: unamortized debt issuance costs
Net carrying amount
Equity component
December 31,
2018
2017
(65,094)
(5,004)
$ 335,699 $ 335,699
(80,530)
(5,976)
$ 265,601 $ 249,193
$ 114,199 $ 114,199
In connection with the issuance of the 2022 Notes, the Company incurred approximately $11.7 million of debt issuance
costs, which primarily consisted of initial purchasers’ discounts and legal and other professional fees. The Company allocated
these costs to the liability and equity components based on the allocation of 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 were 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 the
expected 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 the 2022 Notes for the period from the date of issuance through December 31, 2018 was
9.34%. The following table sets forth total interest expense recognized related to the 2022 Notes during the years ended
December 31, 2018, 2017, and 2016, (in thousands):
Year Ended
December 31,
Contractual interest expense
Amortization of debt issuance costs
Amortization of debt discount
Total interest expense
$
$
2018
2017
7,553 $
806
2016
7,553
7,553 $
661
971
15,437
14,145 12,961
23,961 $ 22,504 $ 21,175
Future minimum payments under the 2022 Notes as of December 31, 2018, are as follows (in thousands):
2019
2020
2021
2022
Total future minimum payments under the 2022 Notes
Less: amounts representing interest
Less: unamortized debt discount
Less: unamortized debt issuance costs
Convertible senior notes balance
$
7,553
7,553
7,553
339,476
362,135
(26,436)
(65,094)
(5,004)
$ 265,601
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 into the 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. The Convertible Note Hedges have an exercise price of
approximately $16.58 per share and are exercisable when and if the 2022 Notes are converted. If upon conversion 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 are obligated 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 of the 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 stock related to the Convertible Note
Hedge being exercised.
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Concurrently with entering into the Convertible Note Hedges, the Company also sold Note Hedge Warrants to the
Convertible Note Hedge counterparties to acquire 20,249,665 shares of the Company's Class A common stock, subject to
customary anti-dilution adjustments. The strike price of the Note 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 A common 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 2022 Notes. Holders of the 2022 Notes and the Note Hedge Warrants do not have any rights with
respect to the Convertible Note Hedges. The Company paid approximately $91.9 million for the Convertible Note Hedges and
recorded this amount as a long-term asset on the consolidated balance sheet. The Company received 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 of
approximately $21.1 million. The Convertible Note Hedges and Note Hedge Warrants are accounted for as derivative assets and
liabilities, respectively, in accordance with ASC Topic 815, “Derivatives and Hedging” (Note 7).
12. Commitments and Contingencies
Lease Commitments
The Company rents office and laboratory space at its corporate headquarters at 301 Binney Street, Cambridge,
Massachusetts (the “Facility”) under a non-cancelable operating lease, entered into in January 2007, as amended (“2007 Lease
Agreement”).
In March 2017, the Company and BMR-Rogers Street LLC (the “Landlord”) entered into an additional amendment (the
“2017 Amendment”) to the 2007 Lease Agreement. The 2017 Amendment extends the term of the 2007 Lease Agreement
through January 31, 2025 for the approximately 223,000 square feet of the Facility that the Company currently occupies. The
2017 Amendment also provides that the Landlord resume possession of the approximately 93,000 square feet of additional space
in the Facility that the Company previously subleased to a third party in 2014. The 2007 Lease Agreement, as amended by the
2017 Amendment, contains various provisions including an option to extend the term of the lease for an additional five years at a
market base rental rate, a 3% annual rent escalation, and in certain cases, free rent periods. The rent expense, inclusive of the
escalating rent payments and free rent periods, is recognized on a straight line basis over the lease term through January 2025.
Additionally, the 2017 Amendment reduced the required letter of credit to secure the Company’s obligations under the lease
agreement to approximately $6.4 million, which is recorded as restricted cash.
During 2014, the Company entered into an agreement, with the Landlord’s consent, to sublease a portion of its corporate
headquarters that it did not intend to use for its operation. In connection with the sublease, as well as a rent escalation tied to the
Consumer Price Index and fair market rent pursuant to the terms of the 2007 Lease Agreement, the Company had previously
recorded losses related to its obligations to the Landlord associated with the sublet space, net of sublease income in accordance
with ASC Topic 420, “Exit or Disposal Cost Obligations”. Pursuant to the 2017 Amendment, the Landlord resumed possession of
the space that the Company previously subleased to a third party, and the Company is no longer obligated for the sublease
associated with this space. The provisions of the 2007 Lease Agreement governing the space which was previously subleased
were terminated and as such, the Company revised its accounting estimates associated with its rent expense and sublease income.
Upon the relief of these future liabilities, the Company recorded a gain on the extinguishment of sublease loss of approximately
$1.6 million during the three months ended March 31, 2017. The change in accounting estimate associated with rent expense was
recognized on a prospective, straight-line basis through May 2017. Rent expenses related to the 2007 Lease Agreement and the
2017 Amendment, net of sublease income, recorded during the years ended December 31, 2018, 2017, and 2016 were
approximately $18.1 million, approximately $14.7 million, and approximately $11.6 million, respectively.
During the year ended December 31, 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 expired at varying times through December 2018. During the six months ended June 30, 2018, the Company entered into
new 12-month operating leases (the “2018 Vehicle Leases”) for certain vehicles within its fleet for its field-based sales force and
medical science liaisons. In connection with entering into the 2018 Vehicle Leases, all of the 2015 Vehicle Leases were
terminated through December 31, 2018. The 2018 Vehicle Leases expire at
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varying times beginning in April 2019, with an automatic one-month renewal provision. In accordance with the terms of the 2018
Vehicle Leases, the Company maintains a letter of credit securing its obligation under the lease agreements of $1.3 million, which
is recorded as restricted cash. Rent expenses related to the 2018 Vehicle Leases were approximately $0.8 million for the year
ended December 31, 2018.
The Company has also entered into capital leases for certain computer and office equipment during the year. At
December 31, 2018, the weighted average interest rate on the outstanding capital lease obligations was approximately 3.4%. At
December 31, 2017, the weighted average interest rate on the outstanding capital lease obligations was approximately 14.5%. At
December 31, 2018, the Company had approximately $0.2 million in capital lease obligations.
At December 31, 2018, future minimum lease payments under all non‑cancelable lease arrangements were as follows (in
thousands):
2019
2020
2021
2022
2023
2024 and thereafter
Total future minimum lease payments
Commercial Supply Commitments
$
Operating
Lease
Payments
18,736
18,312
18,863
19,365
19,818
22,118
$ 117,212
The Company has entered into multiple supply agreements for the purchase of linaclotide finished drug product and API.
Two of the Company’s API supply agreements for supplying API to its collaboration partners outside of North America contain
minimum purchase commitments. The amended contracts include remaining total non-cancelable commercial supply purchase
obligations of approximately $20.5 million through 2023 as of December 31, 2018.
As of December 31, 2018, the Company had approximately $5.1 million related to the remaining obligations recorded as
other liabilities related to linaclotide API supply (Note 8). The remaining payments under the accrued excess purchase
commitments are approximately $2.5 million and approximately $2.5 million in the years 2019 and 2020, respectively. Such
payments are recorded as other liabilities in the Company’s consolidated balance sheet. As of December 31, 2018, the Company's
unrecognized minimum purchase requirements and other firm commitments related to the supply contracts associated with the
territories not covered by the partnerships with Allergan for North America were as follows (in thousands):
2019
2020
2021
2022
2023
Total unrecognized minimum purchase requirements
$
3,096
3,096
3,096
3,096
3,096
$ 15,480
In addition, the Company and Allergan are jointly obligated to make minimum purchases of linaclotide API for the
territories covered by the Company's collaboration with Allergan for North America. Currently, Allergan fulfills all such
minimum purchase commitments and, as a result, they are excluded from the amounts above. As of December 31, 2018, the
Company has evaluated all remaining minimum purchase commitments under its linaclotide API supply agreements and has
concluded that the remaining purchase commitments are realizable based on the current forecasts received from certain of the
Company’s partners and the Company’s internal forecasts.
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Commitments Related to the Collaboration and License Agreements
Under the collaboration agreements with Allergan for North America and AstraZeneca for China, Hong Kong and
Macau, respectively, the Company shares all development and commercialization costs related to linaclotide in the U.S. with
Allergan and for China, Hong Kong and Macau with AstraZeneca, 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, the reimbursement 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 collaboration arrangements. These milestones primarily relate to the initiation and results of clinical trials,
obtaining regulatory approval in various jurisdictions and the future commercial success of development programs, the outcome
and timing of which are difficult to predict and subject to significant uncertainty. In addition to the milestones discussed above,
the Company is obligated to pay royalties on future sales, which are contingent on generating levels of sales of future products
that have not been achieved and may never be achieved.
These agreements are more fully described in Note 5, Collaboration, License, Co-promotion and Other Commercial
Agreements , to these consolidated financial statements.
Other Funding Commitments
As of December 31, 2018, the Company has several on‑going studies in various clinical trial stages. The Company’s
most significant clinical trial expenditures are to contract research organizations. These contracts are generally cancellable, with
notice, at the Company’s option and do not have any significant cancellation penalties.
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 amounts paid.
The Company enters into certain agreements with other parties in the ordinary course of business that contain
indemnification provisions. These typically include agreements with directors and officers, business partners, contractors,
landlords, clinical sites and customers. Under these provisions, the Company generally 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 Company could be required to make under these indemnification provisions is unlimited. However, to date the
Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a
result, the estimated fair value of these obligations is minimal. Accordingly, the Company did not have any liabilities recorded for
these obligations as of December 31, 2018 and 2017.
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 of business. While the outcome of these other claims cannot be predicted with certainty,
management does not believe that the outcome of any of these ongoing legal matters, individually and in aggregate, will have a
material adverse effect on the Company’s consolidated financial statements.
The Company and Allergan have received Paragraph IV certification notice letters regarding Abbreviated New Drug
Applications (“ANDAs”), submitted to the FDA by generic drug manufacturers requesting approval to engage in commercial
manufacture, use, sale and offer for sale of linaclotide capsules (72 mcg, 145 mcg and 290 mcg), proposed generic versions of
LINZESS. In January 2018 and April 2018, the Company and Allergan entered into settlement agreements with two such generic
manufacturers, Sun Pharma Global FZE, together with its affiliates (“Sun”) and Aurobindo Pharma Ltd. (“Aurobindo”) and an
affiliate of Aurobindo. As a result of the settlement, all Hatch-Waxman
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litigation between the companies, Sun and Aurobindo regarding LINZESS patents has been dismissed. In December 2018, the
Company and Allergan entered into a settlement agreement with Mylan Pharmaceuticals, Inc. (“Mylan”). Pursuant to the terms of
the settlement, the Company and Allergan will grant Mylan a license to market a generic version of LINZESS 145 mcg and 290
mcg in the U.S. beginning February 5, 2030, and a generic version of LINZESS 72 mcg in the U.S. beginning August 5, 2030
(both subject to FDA approval), unless certain limited circumstances, customary for settlement agreements of this nature, occur.
Further, all ongoing Hatch-Waxman litigations between the companies and Mylan regarding LINZESS patents will be dismissed.
In connection with recent settlements, the Company agreed to pay an aggregate of $4.0 million in avoidance of litigation
fees and expenses.
The Company is unable to determine the outcome of its current litigation matters at this time. For additional information
relating to such ANDAs and any resolution of related litigation, see Item 3, Legal Proceedings , elsewhere in this Annual Report
on Form 10-K.
13. Stockholders’ Equity
Preferred 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 have such 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 voting powers, and such designations, preferences and relative
participating, optional or other special rights, and qualifications, limitation or restrictions thereof, including without limitation,
dividend rights, conversion rights, redemption privileges and liquidation preferences.
Common Stock
Prior to December 31, 2018, the Company had designated two series of common stock, Series A common stock (“Class
A Common Stock”) and Series B common stock (“Class B Common Stock”). The holders of Class A Common Stock and Class B
Common Stock voted together as a single class. Class A Common Stock is entitled to one vote per share. Class B Common Stock
was also entitled to one vote per share with the following exceptions: (1) after the completion of an initial public offering (“IPO”)
of the Company’s stock, the holders of the Class B Common Stock were entitled to ten votes per share if the matter was an
adoption of an agreement of merger or consolidation, an adoption of a resolution with respect to the sale, lease, or exchange of the
Company’s assets or an adoption of dissolution or liquidation of the Company, and (2) Class B common stockholders were
entitled to ten votes per share on any matter if any individual, entity, or group sought to obtain or had obtained beneficial
ownership of 30% or more of the Company’s outstanding shares of common stock. Class B Common Stock could be sold at any
time and irrevocably converted to Class A Common Stock, on a one‑for‑one basis, upon sale or transfer. The Class B Common
Stock was also entitled to a separate class vote for the issuance of additional shares of Class B Common Stock (except pursuant to
dividends, splits or convertible securities), or any amendment, alteration or repeal of any provision of the Company’s charter.
On December 31, 2018, all Class B Common Stock automatically converted into Class A Common Stock. The Company
had reserved such number of shares of Class A Common Stock as there were outstanding shares of Class B Common Stock solely
for the purpose of effecting the conversion of the Class B Common Stock. Upon conversion, 13,972,688 shares of Class B
Common Stock were converted to Class A Common Stock. There are no outstanding shares of Class B Common Stock remaining
after the conversion as of December 31, 2018.
The Company has reserved, out of its authorized but unissued shares of Class A Common Stock, sufficient shares to
effect the conversion of the 2022 Notes and the Note Hedge Warrants, pursuant to the terms thereof (Note 11).
The Company’s shareholders are entitled to dividends if and when declared by the board of directors.
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14. Stock Benefit Plans
The following table summarizes the expense recognized for share‑based compensation arrangements in the consolidated
statements of operations (in thousands):
Employee stock options
Restricted stock units
Restricted stock awards
Non-employee stock options
Employee stock purchase plan
Stock award
2016
2018
Year Ended December 31,
2017
$ 22,410 $ 21,261 $ 21,412
4,023
2,325
529
910
20
$ 44,533 $ 33,820 $ 29,219
18,680
2,329
—
1,097
17
8,631
2,441
301
1,172
14
Share‑based compensation is reflected in the consolidated statements of operations as follows for the years ended
December 31, 2018, 2017 and 2016 (in thousands):
Research and development
Selling, general and administrative
Restructuring expenses
2016
2018
Years Ended December 31,
2017
$ 14,849 $ 12,768 $ 11,344
27,442 21,052 17,875
—
$ 44,533 $ 33,820 $ 29,219
2,242
—
During the three months ended March 31, 2018, the Company reduced its field-based workforce by approximately 60
employees, primarily consisting of field-based sales representatives that promoted DUZALLO or ZURAMPIC in the first
position, resulting in a modification to certain share-based payment awards. As a result of the modification, the Company
recorded stock-based compensation expense of approximately $0.2 million to restructuring expenses during the year ended
December 31, 2018.
During the three months ended June 30, 2018, the Company initiated a reduction in headquarter-based workforce by
approximately 40 employees associated with the Company’s intent to separate. Certain share-based payment awards were
modified in connection with the reduction in workforce. As a result of the modifications, the Company recorded share-based
compensation expense of approximately $1.5 million to restructuring expenses during the year ended December 31, 2018.
During the three months ended September 30, 2018, the Company reduced its workforce by approximately 100
employees, primarily consisting of field-based sales representatives as a result of the termination of the Lesinurad License.
Certain share-based payment awards were modified in connection with the reduction in workforce. As a result of the
modifications, the Company recorded share-based compensation expense of approximately $0.6 million to restructuring expenses
during the year ended December 31, 2018.
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 one share‑based compensation
plans under which there are outstanding awards, but from which no further awards will be made: the Amended and Restated 2005
Stock Incentive Plan (“2005 Equity Plan”). At December 31, 2018, there were 20,896,991 shares available for future grant under
all such plans.
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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-based awards may be granted to employees, 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. The number 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 the number 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 are returned to the Company’s other equity plans as a result of their expiration,
cancellation, termination or repurchase are automatically made available for issuance under the 2010 Equity Plan. At
December 31, 2018, there were 16,712,852 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 at the 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 common stock initially reserved for issuance pursuant to the 2010
Purchase Plan. The number of shares available for future grant under the 2010 Purchase Plan may be increased 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 on the 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, 2018, there were 4,184,139 shares available for future grant under the 2010 Purchase Plan.
2005 Equity Plan
The 2005 Equity Plan provided for the granting of stock options, restricted stock awards, RSUs, and other share-based awards to
employees, officers, directors, consultants, or advisors of the Company. At December 31, 2018, there were no shares available for
future grant under the 2005 Equity Plan.
Restricted Stock Awards
In 2018, the Company granted an aggregate of 129,784 shares of Class A Common Stock to independent members of the
board of directors under restricted stock agreements in accordance with the terms of the 2010 Equity Plan and the Company’s
director compensation plan, effective in January 2014. These shares of restricted stock vest ratably over the period of service from
the Company’s 2018 annual meeting of stockholders through the Company’s 2019 annual meeting of stockholders, provided the
individual continues to serve on the Company’s board of directors through each vest date.
In 2017, the Company granted an aggregate of 134,793 shares of Class A Common Stock to independent members of the
board of directors under restricted stock agreements in accordance with the terms of the 2010 Equity Plan and the Company’s
director compensation plan, effective in January 2014. These shares of restricted stock vest ratably over the period of service from
the Company’s 2017 annual meeting of stockholders through the Company’s 2018 annual meeting of stockholders, provided the
individual continues to serve on the Company’s board of directors through each vest date.
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A summary of the unvested shares of restricted stock as of December 31, 2018 is presented below:
Unvested as of December 31, 2017
Granted
Vested
Forfeited
Unvested as of December 31, 2018
Restricted Stock Units
Weighted-
Average
Number of Grant Date
Fair Value
17.71
18.58
18.15
—
18.58
Shares
62,496 $
129,784 $
(127,384) $
— $
64,896 $
In 2015, the Company began utilizing RSUs, in addition to stock options as part of the equity compensation it provides
to its employees, each RSU representing 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 pursuant to 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 are
delivered 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 the Company's Class A Common Stock on the date of grant. Compensation expense, including the effect
of estimated forfeitures, is recognized over the applicable service period.
A summary of RSU activity for the year ended December 31, 2018 is as follows:
Unvested as of December 31, 2017
Granted
Vested
Forfeited
Unvested as of December 31, 2018
Stock Options
Weighted-
Average
Number
Grant Date
of Shares Fair Value
15.08
2,277,165 $
15.63
2,048,806 $
14.71
(751,437) $
15.14
(516,726) $
15.53
3,057,808 $
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 continues to 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 of the underlying common stock on the date of grant. The
estimated fair value of options, including the effect of estimated forfeitures, is recognized over the requisite service period, which
is typically the vesting period of each option.
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 the years ended December 31, 2018, 2017 and 2016:
Expected volatility
Expected term (in years)
Risk-free interest rate
Expected dividend yield
Year Ended
December 31,
2017
2018
43.7 %
6.03
2.7 %
— %
2016
45.8 %
6.00
2.0 %
— %
45.9 %
6.06
1.5 %
— %
Expected volatility is based on the historic volatility of the Company’s Class A common stock. 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
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Company has not paid and does not anticipate paying cash dividends 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, 2018,
2017 and 2016 was $6.81, $7.62, and $5.08, respectively.
The Company’s Class A Common Stock is issuable upon exercise of all options granted after the closing of the
Company’s IPO under the Company’s equity plans. At December 31, 2018, options exercisable into 20,457,537 shares of Class A
Common Stock were outstanding.
Subject to approval by the board of directors, option grantees under the 2005 Equity Plan may have the right to exercise
an option prior 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 the exercise price and is recorded as a liability. For each of the years ended December 31,
2018 and 2017, there were no option exercises prior to vesting, and as such, no liabilities were recorded.
The Company, from time to time, issues certain time‑accelerated stock options to certain employees. The vesting of
these options accelerates upon the achievement 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. During the year ended December 31, 2018, there were no
shares that vested as a result of milestone or service period achievements. At both December 31, 2018 and 2017, there were no
shares issuable under unvested time‑accelerated options, respectively. When achievement of the milestone is not deemed
probable, the Company recognizes compensation expense associated with time-accelerated stock options initially over the vesting
period of the respective stock option. When deemed probable of achievement, the Company expenses the remaining unrecognized
compensation over the implicit service period. The Company recorded no share-based compensation expense related to these
time-accelerated options during the year ended December 31, 2018, and recorded an insignificant amount in share‑based
compensation related to these time-accelerated options during each of the years ended December 31, 2017 and 2016.
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 years ended December 31, 2018 and 2017, there were no
shares and 351,500 shares, respectively, that vested as a result of performance milestone achievements. The Company recorded
no share-based compensation expense related to these performance-based options during each of the years ended December 31,
2018 and 2017, respectively. The Company recorded share‑based compensation related to these performance‑based options of
approximately $1.4 million during the year ended December 31, 2016.
The following table summarizes stock option activity under the Company’s share‑based compensation plans, including
performance‑based options:
Shares of
Common Weighted- Weighted-
Average
Average
Attributable Exercise Contractual
Stock
to Options
Price
Life
(in years)
Aggregate
Intrinsic
Value
(in thousands)
51,476
6.09 $
Outstanding at December 31, 2017
Granted
Exercised
Cancelled
Outstanding at December 31, 2018
Vested or expected to vest at December 31, 2018
Exercisable at December 31, 2018
(1)
21,086,298 $ 12.90
3,247,071 $ 14.92
(2,782,061) $ 10.30
(1,093,771) $ 14.86
20,457,537 $ 13.47
19,571,139 $ 13.41
15,051,200 $ 13.17
5.80 $
5.68 $
4.99 $
4,147
4,031
2,872
(1) All stock options granted under the 2005 Equity Plan contain provisions allowing for the early exercise of such options into
restricted stock. The exercisable shares disclosed above represent those that were vested as of December 31, 2018.
The total intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 was
approximately $20.1 million, approximately $16.0 million, and approximately $23.9 million, respectively. The intrinsic
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value was calculated as the difference between the fair value of the Company’s common stock and the exercise price of the option
issued.
The following table sets forth the Company's unrecognized share‑based compensation expense, net of estimated
forfeitures, as of December 31, 2018, by type of award and the weighted-average period over which that expense is expected to be
recognized:
Type of award:
Stock options with time-based vesting
Restricted stock awards
Restricted stock units
Performance-based options
(1)
Unrecognized Weighted-Average
Expense, Net
of Estimated
Forfeitures
(in thousands)
Remaining
Recognition
Period
(in years)
$
27,766
998
25,872
1,116
2.36
0.41
2.22
—
(1) The weighted-average remaining recognition period cannot be determined for performance-based or time-accelerated options
due to the nature of such awards, as detailed above.
The total unrecognized share‑based compensation cost will be adjusted for future changes in estimated forfeitures.
15. 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.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted. This law substantially amended the Internal Revenue
Code, including reducing the U.S. corporate tax rates. Upon enactment, the Company’s deferred tax asset and related valuation
allowance decreased by approximately $153.9 million. As the deferred tax asset is offset in full by valuation allowance, this
enacted legislation had no impact on the Company’s financial position or results of operations. The Company completed its
accounting for the tax effects of the Tax Cuts and Job Act as of December 31, 2018 and did not record any material adjustments
to its original estimate.
A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows (in
thousands):
Income tax benefit using U.S. federal statutory rate
Effect of U.S. tax reform
Permanent differences
State income taxes, net of federal benefit
Non-deductible share-based compensation
Excess tax benefits
Fair market valuation of Note Hedge Warrants and Convertible Note Hedges
Tax credits
Expiring net operating losses and tax credits
Effect of change in state tax rate on deferred tax assets and deferred tax liabilities
Change in the valuation allowance
Other
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2018
2016
Year Ended December 31,
2017
$ (59,297) $ (39,759) $ (27,780)
—
153,894
1,140
1,380
(4,606)
(6,117)
3,528
9
(5,453)
(2,626)
(3,160)
1,289
(3,014)
(12,290)
39
276
(3,564)
(232)
42,975
(95,824)
(105)
—
—
— $
—
1,221
(17,121)
(494)
(1,223)
2,367
(7,863)
250
1,476
80,684
—
— $
$
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Components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Tax credit carryforwards
Capitalized research and development
Contingent consideration
Share-based compensation
Basis difference on North America collaboration agreement
Accruals and reserves
Basis difference on 2022 Notes
Interest expense
Intangibles
Other
Total deferred tax assets
Deferred tax liabilities:
Intangibles
Total deferred tax liabilities
Net deferred tax asset
Valuation allowance
Net deferred tax asset
Year Ended December 31,
2018
2017
$ 259,450 $
60,115
12,113
14
23,242
36,423
10,867
7,220
5,104
25,928
18,867
459,343
—
—
459,343
(459,343)
$
— $
254,839
50,732
14,754
8,540
18,321
22,683
10,595
3,110
—
—
10,375
393,949
(15,252)
(15,252)
378,697
(378,697)
—
Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its
deferred tax assets. Management has considered the Company’s history of operating losses and concluded, in accordance with the
applicable accounting standards, that it is more likely than not that the Company will not realize the benefit of its deferred tax
assets. Accordingly, the deferred tax assets have been fully reserved at December 31, 2018 and 2017. Management reevaluates
the positive and negative evidence on a quarterly basis.
The valuation allowance increased approximately $80.7 million during the year ended December 31, 2018 primarily due
to the 2018 net operating loss and increase in tax credit carryforwards; the establishment of a deferred tax asset for temporarily
disallowed interest expense; an increase in the basis difference on the collaboration agreement for North America with Allergan;
and an increase in intangible deferred tax assets as a result of the impairment of the lesinurad franchise, partially offset by
adjustments to the contingent consideration obligation.
The valuation allowance decreased approximately $95.8 million during the year ended December 31, 2017 primarily due
to a decrease in net operating losses as a result of U.S. tax reform tax rate reduction, a decrease in contingent consideration, and
a decrease in capitalized research & development, partially offset by the 2017 net operating loss and increase in tax credit
carryforwards.
Subject to the limitations described below, at December 31, 2018 and 2017, the Company has federal net operating loss
carryforwards of approximately $1.2 billion and approximately $1.1 billion, respectively, to offset future federal taxable income,
which expire beginning in 2019 continuing through 2037. The 2018 net operating loss of $76 million has an indefinite life. As of
December 31, 2018 and 2017, the Company had state net operating loss carryforwards of approximately $ 877.1 million and
approximately $807.7 million, respectively, to offset future state taxable income, which will begin to expire in 2027 and will
continue to expire through 2038. The Company also had tax credit carryforwards of approximately $ 63.3 million and
approximately $53.6 million as of December 31, 2018 and 2017, respectively, to offset future federal and state income taxes,
which expire at various times through 2038.
Utilization of net operating loss carryforwards and research and development credit carryforwards may be subject to a
substantial annual limitation due to ownership change limitations that could occur in the future in accordance with Section 382 of
the Internal Revenue Code of 1986 (“IRC Section 382”) and with Section 383 of the Internal Revenue Code of 1986, as well as
similar state provisions. These ownership changes may limit the amount of net operating loss carryforwards 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 a corporation by more
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than 50 percentage points over a three-year period. The Company has completed several financings since its inception which may
result in a change 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 years ended
December 31, 2018, 2017 and 2016 (in thousands):
Balance at the beginning of the period
Increases based on tax positions related to the current period
Decreases for tax positions in prior periods
Balance at the end of the period
Year Ended December 31,
2017
26,393 $
24,078
(26,393)
24,078 $
2018
24,078 $
38,551
(24,078)
38,551 $
2016
17,614
26,393
(17,614)
26,393
$
$
The Company had gross unrecognized tax benefits of approximately $ 38.6 million, approximately $24.1 million, and
approximately $26.4 million as of December 31, 2018, 2017 and 2016 , respectively . Of the approximately $38.6 million of
total unrecognized tax benefits at December 31, 2018, none of the unrecognized tax 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, 2018, no interest or penalties have been accrued.
The statute of limitations for assessment by the Internal Revenue Service (“IRS”) and state tax authorities is open for tax
years ended December 31, 2018, 2017, and 2016, although carryforward attributes that were generated prior to tax year 2016 may
still be adjusted upon examination by the IRS or state tax authorities 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.
16. 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 all employees are eligible to participate upon employment. Subject to certain IRS limits, eligible
employees may elect to contribute from 1% to 100% of their compensation. Company contributions to the plan are at the sole
discretion of the Company’s board of directors. Currently, the Company provides a matching contribution of 75% of the
employee’s contributions, up to $6,000 annually. During the years ended December 31, 2018, 2017 and 2016, the Company
recorded approximately $3.7 million, approximately $3.9 million, and approximately $3.2 million of expense related to its 401(k)
company match, respectively.
17. 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. Amounts due to and due from Allergan are reflected as related party accounts payable
and related party accounts receivable, respectively. These balances are reported net of any balances due to or from the related
party. As of December 31, 2018 and 2017, the Company had approximately $60.0 million and approximately $79.0 million,
respectively, in related party accounts receivable, net of related party accounts payable, associated with Allergan.
The Company has and currently obtains health insurance services for its employees from an insurance provider whose
President and Chief Executive Officer became a member of the Company’s Board of Directors in April 2016. The Company paid
approximately $11.9 million, approximately $12.1 million, and approximately $8.5 million in insurance premiums to this
insurance provider during the years ended December 31, 2018, 2017, and 2016, respectively. At both December 31, 2018 and
2017, the Company had no accounts payable due to this related party.
F-60
Table of Contents
18. Workforce Reduction
On January 30, 2018, the Company commenced an initiative to evaluate the optimal mix of investments for the lesinurad
franchise. As part of this effort, the Company reduced its field-based workforce by approximately 60 employees, primarily
consisting of field-based sales representatives that promoted DUZALLO or ZURAMPIC in the first position.
During the three months ended March 31, 2018, the Company substantially completed the implementation of this
reduction in field-based workforce and, in accordance with ASC 420, Exit or Disposal Activities , recorded approximately $2.4
million of costs including employee severance, benefits and related costs. These costs are reflected in the consolidated statement
of operations as approximately $2.4 million in restructuring expenses.
On June 27, 2018, the Company determined the initial organizational designs of the two new businesses, including
employees’ roles and responsibilities, in connection with the Company’s intent to separate its sGC business from its commercial
and GI business. As part of this process, the Company has initiated a reduction in its headquarter-based workforce by
approximately 40 employees and substantially completed the reduction in its workforce during the year ending December 31,
2018. During the year ended December 31, 2018, the Company recorded approximately $5.2 million of costs, including
employee severance, benefits and related costs, in connection with the reduction in workforce associated with the Company’s
intent to separate in accordance with ASC 420, Exit and Disposal Activities . These costs are reflected in the consolidated
statement of operations as restructuring expenses.
On August 16, 2018, the Company initiated a reduction in its workforce by approximately 100 employees, primarily
consisting of field-based sales representatives in connection with the termination of the Lesinurad License and substantially
completed the reduction in its workforce and record associated costs during the year ended December 31, 2018. During the year
ended December 31, 2018, the Company recorded approximately $8.3 million of costs, including approximately $5.4 million of
severance, benefits and related costs and approximately $2.9 million of contract-related costs, including the write-down of certain
prepaid assets and deposits, in accordance with ASC 420, Exit and Disposal Activities . These costs are reflected in the
consolidated statement of operations as restructuring expenses.
The following table summarizes the accrued liabilities activity recorded in connection with the reduction in workforce
for the year ended December 31, 2018 (in thousands):
Employee severance, benefits and related costs
January 2018 Reduction
June 2018 Reduction
August 2018 Reduction
Total
Contract related costs
August 2018 Reduction
Total
Charges
Amount Paid Adjustments December 31, 2018
Amounts
Accrued at
$
$
$
$
2,228 $
4,009
5,383
11,620 $
(2,215) $
(2,776)
(3,522)
(8,513) $
(13) $
(119)
(105)
(237) $
1,265 $
1,265 $
(614) $
(614) $
(218) $
(218) $
—
1,114
1,756
2,870
433
433
During the year ended December 31, 2018, the Company recorded approximately $15.9 million in restructuring expenses.
19. Selected Quarterly Financial Data (Unaudited)
The following table contains quarterly financial information for the years ended December 31, 2018 and 2017. The
Company believes that the following information reflects all normal recurring adjustments necessary for a fair
F-61
Table of Contents
presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of
results for any future period.
(1)
2018
Total revenues
Total cost and expenses
Other expense, net
Net loss
Net loss per share--basic and diluted
(2)
(3)
First
Quarter
Second
Quarter
Third
Quarter
(in thousands, except per share data)
Fourth
Quarter
Total
Year
$
69,155 $
81,106 $
105,023
(7,276)
(43,144)
121,026
(9,460)
(49,380)
$
(0.29) $
(0.32) $
65,686 $ 130,692 $ 346,639
585,531
234,785
(43,476)
(5,252)
(282,368)
(174,351)
(1.85)
124,697
(21,488)
(15,493)
(0.10) $
(1.14) $
First
Quarter
Third
Second
Quarter
Quarter
(in thousands, except per share data)
Fourth
Quarter
Total
Year
(4)
2017
Total revenues
Total cost and expenses
Other expense, net
Net (loss) income
Net (loss) income per share--basic and diluted
(6)
(5)
$
65,077 $
52,166 $
91,871
(12,796)
(52,501)
106,088
(3,213)
(44,224)
$
(0.36) $
(0.30) $
106,259
(12,863)
(32,297)
86,825 $ 94,208 $ 298,276
375,661
(39,552)
(116,937)
(0.78)
71,443
(10,680)
12,085
(0.22) $
0.08 $
(1) Total revenues includes approximately $70.4 million of revenue from sales of linaclotide API to our linaclotide partners,
primarily driven by the commercialization of linaclotide in Japan for the year ended December 31, 2018.
(2) Total costs and expenses includes approximately $15.9 million in restructuring expenses for the year ended December 31,
2018, as well as approximately $151.8 million related to the impairment of intangible assets and approximately $31.0 million
related to a gain on remeasurement of contingent consideration incurred during the third quarter of 2018 in connection with
the exit of the Lesinurad License.
(3) Other expense, net includes approximately $8.7 million loss on fair value remeasurement of derivatives for the year ended
December 31, 2018.
(4) Total revenues includes approximately $29.7 million of revenue from sales of linaclotide API to our linaclotide partners,
primarily driven by the commercialization of linaclotide in Japan for the year ended December 31, 2017.
(5) Total costs and expenses includes approximately $39.3 million reduction in the fourth quarter of 2017 related to a gain on
remeasurement of contingent consideration pursuant to the Company’s exclusive license to develop, manufacture, and
commercialize products containing lesinurad as an active ingredient, including ZURAMPIC and DUZALLO, in the U.S. The
contingent consideration obligation is revalued at each reporting period and changes in the fair value, other than changes due
to payments, are recognized as a gain/(loss) on fair value remeasurement of contingent consideration in the Company’s
statement of operations. Adjustments are recorded when there are changes in significant assumptions, including net sales
projections, probability weighted net cash outflow projections, the discount rate, passage of time, and the yield curve
equivalent to the Company’s credit risk, which is based on the estimated cost of debt for market participants. During the year
ended December 31, 2017, the Company decreased its Lesinurad Products revenue projection. Accordingly, the expected
estimated future royalty and milestone payments to AstraZeneca decreased, resulting in an approximately $31.3 million
decrease to the contingent consideration liability.
(6) Other (expense) income, net includes an approximately $2.0 million loss on extinguishment of debt in the first quarter of
2017 related to the write-off of the remaining PhaRMA Notes unamortized debt issuance costs.
20. Subsequent Events
On January 4, 2019, the Company announced certain management changes in connection with, and, in certain instances,
contingent upon successful completion of, the planned separation. On January 3, 2019, the Company entered into an agreement
with Mark Mallon to become an Executive Senior Advisor to the Company. Mr. Mallon will be a full-time employee of the
Company, initially responsible for performing such executive level duties and responsibilities as the Chair of the Governance and
Nominating Committee of the Company’s board of directors may assign. In addition, the Company announced on January 4,
2019 that, upon successful completion of the separation, Peter M. Hecht, the Company’s current Chief Executive Officer, is
expected to resign from that position, as well as his position as a member of the board of directors, and become, subject to
approval by the board of directors of Cyclerion, Chief
F-62
Table of Contents
Executive Officer of Cyclerion and a member of its board of directors. The Ironwood board of directors has agreed, if and when
the separation is completed, to elevate Mr. Mallon to the position of Chief Executive Officer of the Company, subject to his
satisfactory performance of his role as Executive Senior Advisor. If Mr. Mallon becomes Chief Executive Officer of the
Company, he will serve as a member of the Ironwood board of directors, subject to the Ironwood board of directors’ approval.
On February 7, 2019, following further analysis of Company’s strategy and core business needs, and in an effort to
further strengthen the operational efficiency of its organization, the Company commenced a reduction in its workforce by 35
employees, primarily based in the home office. The Company’s field-based sales force and employees expected to go to
Cyclerion are excluded from the workforce reduction. The Company expects to substantially complete the reduction in its
workforce during the first quarter of 2019.
The Company estimates that, in connection with this reduction in its workforce, it will incur substantially all aggregate
charges in the first quarter of 2019 of approximately $3.0 million to approximately $4.0 million for one-time employee severance
and benefit costs. Of these charges, approximately 85% are expected to result in cash expenditures.
F-63
Table of Contents
Number
3.1
3.2
3.3
4.1
4.2
4.3
10.1#
10.2#
10.3#
10.3.1#
10.3.2#
10.3.3#
10.4#
10.5#
Description
Eleventh Amended and Restated
Certificate of Incorporation
Fifth Amended and Restated Bylaws
Certificate of Retirement
Specimen Class A common stock
certificate
Indenture, dated as of June 15, 2015, by
and between Ironwood
Pharmaceuticals, Inc. and U. S. Bank
National Association (including the form
of the 2.25% Convertible Senior Note
due 2022)
Indenture, dated as of September 23,
2016, by and between Ironwood
Pharmaceuticals, Inc. and U.S. Bank
National Association (including the form
of the 8.375% Notes due 2026)
Amended and Restated 2002 Stock
Incentive Plan and form agreements
thereunder
Amended and Restated 2005 Stock
Incentive Plan and form agreements
thereunder
Amended and Restated 2010 Employee,
Director and Consultant Equity Incentive
Plan
Form of Stock Option Agreement under
the Amended and Restated 2010
Employee, Director and Consultant
Equity Incentive Plan
Form of Non‑employee Director
Restricted Stock Agreement under the
Amended and Restated 2010 Employee,
Director and Consultant Equity Incentive
Plan
Form of Restricted Stock Unit
Agreement under the Amended and
Restated 2010 Employee, Director and
Consultant Equity Incentive Plan
Amended and Restated 2010 Employee
Stock Purchase Plan
Change of Control Severance Benefit
Plan, as amended and restated
Exhibit Index
Incorporated by reference herein
Form
Annual Report on Form 10‑K (File
No. 001‑34620)
Annual Report on Form 10‑K (File
No. 001‑34620)
Registration Statement on Form 8-A/A
(File No. 001-34620)
Registration Statement on Form S‑1, as
amended (File No. 333‑163275)
Current Report on Form 8‑K (File
No. 001‑34620)
Date
March 30, 2010
March 30, 2010
January 3, 2019
January 20, 2010
June 15, 2015
Current Report on Form 8‑K (File
No. 001‑34620)
September 26, 2016
Registration Statement on Form S‑1, as
amended (File No. 333‑163275)
December 23, 2009
Registration Statement on Form S‑1, as
amended (File No. 333‑163275)
January 29, 2010
Registration Statement on Form S‑8, as
amended (File No. 333‑184396)
October 12, 2012
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
November 6, 2018
Annual Report on Form 10‑K (File
No. 001‑34620)
February 18, 2015
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
November 6, 2018
Annual Report on Form 10‑K (File
No. 001‑34620)
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
February 21, 2013
April 29, 2014
F-64
Table of Contents
Number
10.6#*
10.7#
10.8#
10.9#
10.10+
10.10.1
10.11+
10.12+
10.12.1+
10.12.2+
10.12.3+
Description
Form of Executive Severance
Agreement
Director Compensation Plan effective
January 1, 2014
Form of Indemnification Agreement
with Directors and Officers
Offer Letter, dated January 3, 2019,
between Ironwood Pharmaceuticals, Inc.
and Mark Mallon
Collaboration Agreement, dated as of
September 12, 2007, as amended on
November 3, 2009, by and between
Forest Laboratories, Inc. and Ironwood
Pharmaceuticals, Inc.
Amendment No. 2 to the Collaboration
Agreement, dated as of January 8, 2013,
by and between Forest Laboratories, Inc.
and Ironwood Pharmaceuticals, Inc .
Commercial Agreement, dated as of
January 31, 2017, by and among
Allergan USA, Inc., Forest Laboratories,
LLC and Ironwood Pharmaceuticals,
Inc.
License Agreement, dated as of April 30,
2009, by and between Allergan
Pharmaceuticals International Ltd.
(formerly with Almirall, S.A.) and
Ironwood Pharmaceuticals, Inc.
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 .
Amendment to the License Agreement,
dated as of October 26, 2015, by and
between Allergan Pharmaceuticals
International Ltd. and Ironwood
Pharmaceuticals, Inc.
Amendment to the License Agreement
dated as of January 31, 2017, by and
between Allergan Pharmaceuticals
International Ltd., and Ironwood
Pharmaceuticals, Inc .
Incorporated by reference herein
Form
Date
Annual Report on Form 10‑K (File
No. 001‑34620)
Registration Statement on Form S‑1,
as amended (File No. 333‑163275)
Current Report on Form 8‑K (File
No. 001‑34620)
Registration Statement on Form S‑1,
as amended (File No. 333‑163275)
February 7, 2014
December 23, 2009
January 4, 2019
February 2, 2010
Annual Report on Form 10‑K (File
No. 001‑34620)
February 21, 2013
Quarterly Report on Form 10-Q (File
No. 001-34620)
May 8, 2017
Registration Statement on Form S‑1,
as amended (File No. 333‑163275)
February 2, 2010
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 8, 2013
Annual Report on Form 10‑K (File
No. 001‑34620)
February 19, 2016
Quarterly Report on Form 10-Q (File
No. 001-34620)
May 8, 2017
F-65
Table of Contents
Incorporated by reference herein
Description
Form
Annual Report on Form 10‑K (File
No. 001‑34620)
Date
February 19, 2016
Number
10.13+
10.14+
10.15+
10.16+
10.17+
10.18+
10.18.1+
10.19+
10.20
Novation Agreement, dated as of
October 26, 2015, by and among
Almirall, S.A., Allergan Pharmaceuticals
International Ltd. and Ironwood
Pharmaceuticals, Inc .
License Agreement, dated as of
November 10, 2009, by and among
Astellas Pharma Inc. and Ironwood
Pharmaceuticals, Inc .
Collaboration Agreement, dated as of
October 23, 2012, by and between
AstraZeneca AB and Ironwood
Pharmaceuticals, Inc .
License Agreement, dated as of April 26,
2016, by and between Ardea
Biosciences, Inc. and Ironwood
Pharmaceuticals, Inc .
Commercial Supply Agreement, dated as
of June 23, 2010, by and among
PolyPeptide Laboratories, Inc. and
Polypeptide Laboratories (SWEDEN)
AB, Forest Laboratories, Inc. and
Ironwood Pharmaceuticals, Inc .
Commercial Supply Agreement, dated as
of March 28, 2011, by and among
Corden Pharma Colorado, Inc. (f/k/a
Roche Colorado Corporation), Ironwood
Pharmaceuticals, Inc. and Forest
Laboratories, Inc .
Amendment No. 3 to Commercial
Supply Agreement, dated as of
November 26, 2013, by and between
Corden Pharma Colorado, Inc. (f/k/a
Roche Colorado Corporation), Ironwood
Pharmaceuticals, Inc. and Forest
Laboratories, Inc.
Commercial Supply Agreement, dated as
of April 26, 2016, by and between
AstraZeneca Pharmaceuticals LP and
Ironwood Pharmaceuticals, Inc .
Lease for facilities at 301 Binney St.,
Cambridge, MA, dated as of January 12,
2007, as amended on April 9, 2009, by
and between Ironwood
Pharmaceuticals, Inc. and BMR‑Rogers
Street LLC
Registration Statement on Form S‑1,
as amended (File No. 333‑163275)
February 2, 2010
Annual Report on Form 10‑K (File
No. 001‑34620)
February 21, 2013
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 8, 2016
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 10, 2010
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
May 13, 2011
Annual Report on Form 10‑K (File
No. 001‑34620)
February 7, 2014
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 8, 2016
Registration Statement on Form S‑1,
as amended (File No. 333‑163275)
December 23, 2009
F-66
Table of Contents
Number
10.20.1
10.20.2
10.20.3
10.20.4
10.20.5
10.20.6
10.20.7
10.20.8
Description
Second Amendment to Lease for
facilities at 301 Binney St., Cambridge,
MA, dated as of February 9, 2010, by
and between Ironwood Pharmaceuticals,
Inc. and BMR-Rogers Street LLC
Third Amendment to Lease for facilities
at 301 Binney St., Cambridge, MA, dated
as of July 1, 2010, by and between
Ironwood Pharmaceuticals, Inc. and
BMR‑Rogers Street LLC
Fourth Amendment to Lease for facilities
at 301 Binney St., Cambridge, MA, dated
as of February 3, 2011, by and between
Ironwood Pharmaceuticals, Inc. and
BMR‑Rogers Street LLC
Fifth Amendment to Lease for facilities
at 301 Binney St., Cambridge, MA, dated
as of October 18, 2011, by and between
Ironwood Pharmaceuticals, Inc. and
BMR‑Rogers Street LLC
Sixth Amendment to Lease for facilities
at 301 Binney St., Cambridge, MA, dated
as of July 19, 2012, by and between
Ironwood Pharmaceuticals, Inc. and
BMR‑Rogers Street LLC
Seventh Amendment to Lease for
facilities at 301 Binney St., Cambridge,
MA, dated as of October 30, 2012, by
and between Ironwood
Pharmaceuticals, Inc. and BMR‑Rogers
Street LLC
Eighth Amendment to Lease for facilities
at 301 Binney St., Cambridge, MA, dated
as of July 8, 2014, by and between
Ironwood Pharmaceuticals, Inc. and
BMR‑Rogers Street LLC
Ninth Amendment to Lease for facilities
at 301 Binney St., Cambridge, MA, dated
as of October 27, 2014, by and between
Ironwood Pharmaceuticals, Inc. and
BMR‑Rogers Street LLC
Incorporated by reference herein
Form
Annual Report on Form 10-K (File No.
001-34620)
Date
March 30, 2010
Annual Report on Form 10‑K (File
No. 001‑34620)
March 30, 2011
Annual Report on Form 10‑K (File
No. 001‑34620)
March 30, 2011
Annual Report on Form 10‑K (File
No. 001‑34620)
February 29, 2012
Annual Report on Form 10‑K (File
No. 001‑34620)
February 21, 2013
Annual Report on Form 10‑K (File
No. 001‑34620)
February 21, 2013
Annual Report on Form 10‑K (File
No. 001‑34620)
February 18, 2015
Annual Report on Form 10‑K (File
No. 001‑34620)
February 18, 2015
F-67
Table of Contents
Number
10.20.9
10.20.10
10.20.11
10.21
10.22
10.23
10.24
10.25
Description
Tenth Amendment to Lease for facilities
at 301 Binney St., Cambridge, MA,
dated as of January 21, 2015, by and
between Ironwood Pharmaceuticals, Inc.
and BMR‑Rogers Street LLC
Eleventh Amendment to Lease for
facilities at 301 Binney St., Cambridge,
MA, dated as of June 30, 2016, by and
between Ironwood Pharmaceuticals, Inc.
and BMR‑Rogers Street LLC
Sublease, dated as of July 1, 2014, by
and between Biogen Idec MA Inc. and
Ironwood Pharmaceuticals, Inc. to Lease
for facilities at 301 Binney St.,
Cambridge, MA, as amended, by and
between Ironwood Pharmaceuticals, Inc.
and BMR‑Rogers Street LLC
Base Call Option Transaction
Confirmation, dated as of June 10, 2015,
between Ironwood Pharmaceuticals, Inc.
and JPMorgan Chase Bank, National
Association, London Branch
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
Base Warrants Confirmation, dated as of
June 10, 2015, between Ironwood
Pharmaceuticals, Inc. and JPMorgan
Chase Bank, National Association,
London Branch
Base Warrants Confirmation, dated as of
June 10, 2015, between Ironwood
Pharmaceuticals, Inc. and Credit Suisse
Capital LLC, through its agent Credit
Suisse Securities (USA) LLC
Additional Call Option Transaction
Confirmation, dated as of June 22, 2015,
between Ironwood Pharmaceuticals, Inc.
and JPMorgan Chase Bank, National
Association, London Branch
Incorporated by reference herein
Form
Annual Report on Form 10‑K (File
No. 001‑34620)
Date
February 18, 2015
Annual Report on Form 10-K (File No.
001-34620)
February 22, 2017
Annual Report on Form 10‑K (File
No. 001‑34620)
February 18, 2015
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 7, 2015
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 7, 2015
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 7, 2015
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 7, 2015
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 7, 2015
F-68
Table of Contents
Number
10.26
10.27
10.28
21.1*
23.1*
31.1*
31.2*
32.1‡
32.2‡
101.INS*
101.SCH*
101.CAL*
101.LAB*
101.PRE*
101.DEF*
* Filed herewith.
Description
Additional Call Option Transaction
Confirmation, dated as of June 22, 2015,
between Ironwood Pharmaceuticals, Inc.
and Credit Suisse Capital LLC, through
its agent Credit Suisse Securities
(USA) LLC
Additional Warrants Confirmation,
dated as of June 22, 2015, between
Ironwood Pharmaceuticals, Inc. and
JPMorgan Chase Bank, National
Association, London Branch
Additional Warrants Confirmation,
dated as of June 22, 2015, between
Ironwood Pharmaceuticals, Inc. and
Credit Suisse Capital LLC, through its
agent Credit Suisse Securities
(USA) LLC
Subsidiaries of Ironwood
Pharmaceuticals, Inc.
Consent of Independent Registered
Public Accounting Firm
Certification of Chief Executive Officer
pursuant to Rules 13a‑14 or 15d‑14 of
the Exchange Act
Certification of Chief Financial Officer
pursuant to Rules 13a‑14 or 15d‑14 of
the Exchange Act
Certification of Chief Executive Officer
pursuant to Rules 13a‑14(b) or
15d‑14(b) of the Exchange Act and 18
U.S.C. Section 1350
Certification of Chief Financial Officer
pursuant to Rules 13a‑14(b) or
15d‑14(b) of the Exchange Act and 18
U.S.C. Section 1350
XBRL Instance Document
XBRL Taxonomy Extension Schema
Document
XBRL Taxonomy Extension Calculation
Linkbase Document
XBRL Taxonomy Extension Label
Linkbase Database
XBRL Taxonomy Extension
Presentation Linkbase Document
XBRL Taxonomy Extension Definition
Linkbase Document
Incorporated by reference herein
Form
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
Date
August 7, 2015
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 7, 2015
Quarterly Report on Form 10‑Q (File
No. 001‑34620)
August 7, 2015
F-69
Table of Contents
‡ 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 omitted and are marked accordingly. The confidential portions have been provided separately to the SEC pursuant to
the confidential treatment request.
# Management contract or compensatory plan, contract, or arrangement.
Item 16. Form 10-K Summary
None.
F-70
IRONWOOD PHARMACEUTICALS, INC.
[AMENDED & RESTATED]
EXECUTIVE SEVERANCE AGREEMENT
Exhibit 10.6
This [Amended & Restated] Executive Severance Agreement (this “ Agreement ”) is made as of the day of [ ]
,
(the “ Effective Date ”) by and between Ironwood Pharmaceuticals, Inc., a Delaware corporation (the “ Company ”),
and [ ] (the “ Executive ”).
1
WHEREAS the Executive currently serves as an employee of the Company;
[WHEREAS the Company previously provided for severance benefits for the Executive in specified
, by and between the Company
circumstances pursuant to an Executive Severance Agreement, effective as of [ ]
and the Executive (the “ Prior Agreement ”);] and
2
WHEREAS the Company and the Executive [now] desire to [amend and restate the Prior Agreement to]
provide for [additional] severance benefits for the Executive in specified circumstances that may arise on or after the
Effective Date;
NOW, THEREFORE, in consideration of the premises and the mutual promises hereinafter set forth, the
Company and the Executive agree as follows:
1.
Severance Benefits .
4
3
(a)
If the Executive’s employment terminates by reason of an Involuntary Termination or
Constructive Termination (in either case, other than a Change of Control Termination), (i) the Company will pay the
Executive an amount equal to [twelve (12)] months of his or her base salary, at the rate in effect as of the
Termination Date ([the “ Initial Salary Payment ”), plus an amount equal to a maximum of six (6) months of his or
her base salary for any period beginning as of the first anniversary of the Termination Date during which the
Executive has not secured new, reasonably similar full-time employment (the “ Additional Salary Payment ”, and
together with the Initial Salary Payment,]
the “ Salary Payment ”)[, provided that the Executive seeks to obtain
such new employment and keep the Company informed thereof, consistent with the terms of the Separation
Agreement (as such term is defined in Section 4 below)] , (ii) if the termination occurs prior to the payment of an
5
annual cash incentive award from the prior completed year, the Company will pay the Executive such unpaid award
to the extent the Executive would have received such award should he or she have been employed on the date such
awards are paid to the rest of the Company (the “ Prior Year Bonus Payment ”), (iii) the Company will pay the
Executive a pro rata amount of the Executive’s annual cash incentive award target for the current year (pro-rated
based on the percentage of the year worked prior to the termination) (the “ Current Year Bonus Payment ”), (iv) the
Company will pay the Executive an additional amount equal to the Executive’s full annual cash incentive award
target for the current year (the “ Additional Bonus Payment ”) (collectively, the Prior Year Bonus Payment, if any,
the Current Year Bonus Payment, and the Additional Bonus Payment are referred to as the “ Aggregate Bonus
Payment ”), (v) provided that the Executive timely elects continued medical coverage pursuant to Part 6 of Subtitle
B of Title I of the Employee Retirement Income Security Act of 1974, as amended, the Company will permit the
Executive to continue to participate in its group medical plan for [twelve (12)] months following the Termination
Date[ (the
7
6
1
4
3
Insert amendment and restatement date or effective date, as applicable.
2
Insert original effective date.
Revise to “eighteen (18)” for CEO agreement.
Delete for CEO agreement.
Delete for CEO agreement.
Add “, multiplied by 1.5” for CEO agreement.
Revise to “eighteen (18)” for CEO agreement.
5
6
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“ Initial COBRA Coverage ”), plus any additional period during which the Executive is not eligible to participate in
a group medical plan of another employer other than the Company’s group medical plan, for up to six (6) months
following the first anniversary of the Termination Date] , at the same rate that the Executive would be required to
8
contribute toward such coverage if he or she were actively employed ([the “ Additional COBRA Coverage ,” and
together with the Initial COBRA Coverage, ] the “ COBRA Coverage ”), and (vi) the Executive will be eligible for
outplacement assistance, consistent with industry standards for similarly situated executive officers in the
pharmaceutical industry, as determined by the Compensation Committee in its discretion (the “ Outplacement
Assistance ”, collectively with the Salary Payment, the Aggregate Bonus Payment, and the COBRA Coverage, the “
Cash Severance Benefits ”). [For the avoidance of doubt, the Additional Salary Payment and the Additional COBRA
Coverage will only be provided to the Executive if he or she has not secured new, reasonably similar full-time
employment following the Termination Date.]
10
9
11
(b)
If as of immediately prior to the time of the Involuntary Termination or Constructive
Termination, as applicable, the Executive has any outstanding unvested stock options, restricted stock, restricted
stock units or other equity awards granted by the Company and that are subject to vesting solely based on time (“
Time-Based Company Equity Awards ”) then, immediately prior to the Termination Date, with respect to each
Time-Based Company Equity Award, the Executive will vest in (i) the portion of the Time-Based Company Equity
Award that would otherwise have vested had the Executive remained employed with the Company through the date
that is [eighteen (18)] months following the Termination Date (the “ Extended Vesting Date ”) and (ii) an
additional portion of the Time-Based Company Equity Award equal to the portion that would have vested on the
next regular vesting date of such Time-Based Company Equity Award after the Extended Vesting Date (the “
Additional Awards ”) as if the Additional Awards vested on a daily basis from the last regular award vesting date
occurring prior to the Extended Vesting Date (or, if no prior vesting date has occurred, from the grant date of such
Additional Awards) through the Extended Vesting Date (rounded down to the nearest whole number of shares). Any
Time-Based Company Equity Awards that do not vest in accordance with the immediately preceding sentence of
this Section 1(b) shall remain outstanding following the Termination Date (but shall not continue to vest in
accordance with the terms of the applicable award agreement) and eligible to vest in accordance with Section 2(b)
below, with any such vesting to become effective on the date of the Change of Control. Any Time-Based Company
Equity Awards that do not vest pursuant to the first sentence of this Section 1(b) or pursuant to Section 2(b) shall
terminate with no consideration due to the Executive. Notwithstanding anything to the contrary in the plan or award
agreement under which the Company Equity Awards (as defined below) were issued, any outstanding vested stock
options held by the Executive as of the Termination Date (after taking into account the accelerated vesting provided
in this Section 1(b)), including any outstanding vested stock options held by the Executive that are granted in
connection with the Planned Separation in substitution for or replacement of vested stock options originally granted
by the Company, may be exercised by the Executive until the date that is the earlier of (1) [twenty-four (24)]
12
months after the Termination Date (or, in the event that a Public Announcement is made or a Definitive Agreement
is entered into during such [twenty-four (24)] month period, the later of (i) the expiration of such [twenty-four
(24)] month period or (ii) the first to occur of the date that is three (3) months following the Change of Control
and thirty (30) days following the date on which the Company announces that such Definitive Agreement has been
terminated or that the Company’s efforts to consummate the Change of Control contemplated by such Public
Announcement or such Definitive Agreement have been abandoned) and (2) the originally prescribed term of such
stock option (together with the accelerated vesting described above, the “ Equity Severance Benefits ” and together
with the Cash Severance Benefits, the “ Severance Benefits ”). To the extent any Time-Based Company Equity
Awards are subject to Section 409A of the Code (“ Section 409A ”), vesting will be accelerated only to the extent
the acceleration does not cause additional taxes or penalties under Section 409A. The acceleration, if any, of any
vesting of any outstanding unvested stock options, restricted stock, restricted stock units or other equity awards
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11
Delete for CEO agreement.
Delete for CEO agreement.
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Delete for CEO agreement.
Revise to “twenty-four (24)” for CEO agreement.
Revise to “thirty-six (36)” for CEO agreement.
Revise to “thirty-six (36)” for CEO agreement.
Revise to “thirty-six (36)” for CEO agreement.
13
14
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granted by the Company to the Executive subject to (a) both time- and performance-based vesting criteria or
(b) solely performance-based vesting criteria (clauses (a) and (b), collectively, “ Performance-Based Company
Equity Awards ”, and together with the Time-Based Company Equity Awards, “ Company Equity Awards ”) shall
be determined in accordance with the terms of the plan and award agreement under which the Performance-Based
Company Equity Award was issued.
th
15
(c)
Subject to Section 8 below, any [Initial] Salary Payment and Aggregate Bonus Payment to
which the Executive is entitled hereunder will be paid in a lump sum on the first regular payroll date of the
Company following the thirty-fifth (35th) calendar day following the Termination Date (except in the event of any
group termination to which a forty-five (45)-day release of claims consideration period is required under applicable
law, in which case such lump-sum payment will be made on the first regular payroll date of the Company following
the sixtieth (60 ) calendar day following the Termination Date)[, and any Additional Salary Payment to which the
Executive is entitled hereunder will be paid in the form of salary continuation in accordance with the Company’s
regular payroll practices, with the first payment being made on the first regular payroll date of the Company
following the date that is twelve (12) months following the Termination Date]
. In no event will any Outplacement
Assistance provided to the Executive hereunder extend beyond the December 31 of the second year following the
calendar year in which the Termination Date occurs, and any reimbursement by the Company of Outplacement
Assistance expenses paid by the Executive will be paid no later than December 31 of the third year following the
calendar year in which the Termination Date occurs.
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2.
Change of Control Severance Benefits .
17
(a)
If the Executive’s employment terminates by reason of a Change of Control Termination, in
lieu of any amounts payable pursuant to Section 1(a) above, (i) the Company will pay the Executive an amount
equal to [eighteen (18)] months of his or her base salary, at the rate in effect as of the Termination Date (the “
COC Salary Payment ”), (ii) if the termination occurs prior to the payment of an annual cash incentive award from
the prior completed year, the Company will pay the Executive the Prior Year Bonus Payment, (iii) the Company will
pay the Executive the Current Year Bonus Payment, (iv) the Company will pay the Executive [the Additional Bonus
Payment, multiplied by 1.5]
(the “ COC Additional Bonus Payment ”) (collectively, the Prior Year Bonus
Payment, if any, the Current Year Bonus Payment, and the COC Additional Bonus Payment are referred to as the “
COC Aggregate Bonus Payment ”), (v) provided that the Executive timely elects continued medical coverage
pursuant to Part 6 of Subtitle B of Title I of the Employee Retirement Income Security Act of 1974, as amended, the
Company will permit the Executive to continue to participate in its group medical plan for [eighteen (18)] months
following the Termination Date, at the same rate that the Executive would be required to contribute toward such
coverage if he or she were actively employed (the “ COC COBRA Coverage ”), and (vi) the Executive will be
eligible for Outplacement Assistance (collectively the Outplacement Assistance, the COC Salary Payment, the COC
Aggregate Bonus Payment and the COC COBRA Coverage are referred to as the “ COC Cash Severance Benefits
”).
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(b)
If as of immediately prior to the time of the Change of Control Termination, the Executive
has any Time-Based Company Equity Awards, then, as of the later of (i) the date of the Change of Control or (ii) the
Termination Date, all Time-Based Company Equity Awards shall have their vesting fully accelerated so as to be
100% vested and exercisable. Notwithstanding anything to the contrary in the plan or award agreement under which
the Company Equity Awards were issued, any outstanding vested stock options held by the Executive as of the
Termination Date (after taking into account the accelerated vesting provided in this Section 2(b)), including any
outstanding vested stock options held by the Executive that are granted in connection with the Planned Separation in
substitution for or replacement of vested stock options originally granted by the Company, may be exercised by the
Executive until the date that is the earlier of (1) [twenty-four (24)] months after the Termination Date (or, if
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17
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Delete for CEO agreement.
Delete for CEO agreement.
Revise to “twenty-four (24)” for CEO agreement.
Revise to “an additional amount equal to the Executive’s full annual cash incentive award target for the current year, multiplied by
2.0” for CEO agreement.
Revise to “twenty-four (24)” for CEO agreement.
Revise to “thirty-six (36)” for CEO agreement.
later, the date that is three (3) months following the Change of Control) and (2) the originally prescribed term of
such stock option (such extended exercise window, together with the accelerated vesting described above, the “ COC
Equity Severance Benefits ” and together with the COC Cash Severance Benefits, the “ COC Severance Benefits ”).
To the extent any Time-Based Company Equity Awards are subject to Section 409A, vesting will be accelerated
only to the extent the acceleration does not cause additional taxes or penalties under Section 409A. The acceleration,
if any, of any vesting of any Performance-Based Company Equity Awards shall be determined in accordance with
the terms of the plan and award agreement under which the Performance-Based Company Equity Award was issued.
(c)
Subject to Section 8 below, any COC Cash Severance Benefits that become payable will be
paid as set forth in this Section 2(c). An amount equal to the [Initial] Salary Payment and the Aggregate Bonus
Payment will be paid in accordance with the timing set forth in Section 1(c) above. Any severance amounts
determined with reference to the Executive’s base salary or annual cash incentive award to which the Executive is
entitled pursuant to Section 2(a) above in excess of the [Initial] Salary Payment and the Aggregate Bonus Payment
will be paid in a lump sum on the later of (i) the date of the Change of Control or (ii) within ten (10) calendar days
following the Executive’s Change of Control Termination. In no event will any Outplacement Assistance provided
to the Executive hereunder extend beyond the December 31 of the second year following the calendar year in which
the Termination Date occurs, and any reimbursement by the Company of Outplacement Assistance expenses paid by
the Executive will be paid no later than December 31 of the third year following the calendar year in which the
Termination Date occurs.
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(d)
For the avoidance of doubt, the Executive shall only be entitled to the COC Severance
Benefits in connection with a Change of Control occurring (i) within twenty-four (24) months prior to the
Termination Date or (ii) after the Termination Date as a result of a Public Announcement or a Definitive Agreement,
which such Public Announcement is made or Definitive Agreement is entered into no later than that date that is six
(6) months following the Termination Date. Upon the occurrence of a Change of Control Termination and a Change
of Control described in the preceding sentence, the COC Severance Benefits shall be the exclusive benefits to which
the Executive is entitled, and the Executive shall not be eligible to receive the Severance Benefits set forth in Section
1 hereof or any severance payments or benefits under the Company’s Change of Control Severance Benefit Plan, as
amended and restated on April 26, 2014, and as may be further amended from time to time (the “ Severance Plan
”). Further, upon the occurrence of an Involuntary Termination or Constructive Termination that does not qualify as
a Change of Control Termination, the Severance Benefits shall be the exclusive benefits to which the Executive is
entitled, and the Executive shall not be eligible to receive the COC Severance Benefits set forth in Section 2 hereof
or any severance payments or benefits under the Severance Plan.
3.
Tax Matters .
(a)
Withholding . All payments made by the Company hereunder shall be reduced by any tax or
other amounts required to be withheld by the Company under applicable law.
(b)
Section 105(h) . In the event that, in the determination of the Company, the Company’s
provision of the COBRA Coverage as described in Section 1(a)(v) above or the COC COBRA Coverage as
described in Section 2(a)(v) above could reasonably be expected to subject the Company to any tax or penalty under
the Patient Protection and Affordable Care Act (as amended from time to time, the “ ACA ”) or could reasonably be
expected to subject any highly compensated individual employed or formerly employed by the Company to adverse
tax consequences under Section 105(h) of the Code, or applicable regulations or guidance issued under the ACA or
Section 105(h) of the Code, the Company and the Executive will work together in good faith, consistent with the
requirements for compliance with, or exemption from, Section 409A, to restructure such benefit in a manner
intended to result in a benefit that is or remains exempt from Section 409A.
4.
Separation Agreement . Notwithstanding anything herein to the contrary, the Executive
acknowledges and agrees that any obligation of the Company to provide the Severance Benefits or the COC
Severance Benefits is conditioned on the Executive’s (i) continuing through the Termination Date to perform his or
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Delete for CEO agreement.
including without
limitation pursuant
her job duties satisfactorily and otherwise complying with the Company’s rules and policies, (ii) continuing to
comply with his or her obligations to the Company and its affiliates that survive termination of the Executive’s
employment,
to the Proprietary Information and Inventions and
Noncompetition Agreement between the Executive and the Company (the “ Restrictive Covenants Agreement ”),
and (iii) signing a separation agreement on terms and conditions satisfactory to the Company (the “ Separation
Agreement ”), which will (a) contain among other terms a general release of claims, an acknowledgement of the
Executive’s continuing obligations to the Company under the Restrictive Covenants Agreement, and, in the
Company’s sole discretion, a one-year post-employment noncompetition and nonsolicitation agreement, and (b)
provide that if the Executive breaches any of his or her continuing obligations to the Company under the Restrictive
Covenants Agreement or as set forth in the Separation Agreement, all payments of the Severance Benefits or the
COC Severance Benefits will cease, and the Executive will be required to disgorge any Severance Benefits or COC
Severance Benefits that he or she previously received. The Executive shall have seven (7) business days to revoke
the Separation Agreement after signing it. The Executive’s timely execution and non-revocation of the Separation
Agreement within sixty (60) days after the Termination Date (or such shorter period as set forth in the Separation
Agreement) is a condition precedent to the Executive’s right to receive the Severance Benefits or the COC
Severance Benefits. The Separation Agreement will create legally binding obligations on the part of the Executive,
and the Company therefore advises the Executive to seek the advice of an attorney before signing the Separation
Agreement. For the avoidance of doubt, in the event the Executive is entitled to any payments pursuant to the
Restrictive Covenants Agreement, the Severance Benefits or the COC Severance Benefits received in any calendar
year will be reduced by the amount the Executive is paid in the same such calendar year pursuant to the Restrictive
Covenants Agreement. In no event will the Executive receive duplicate benefits pursuant to the Restrictive
Covenants Agreement and this Agreement.
5.
Effect on Employment . Nothing contained herein limits the Company’s right to terminate the
Executive’s employment at any time.
6.
Governing Law . This Agreement shall be governed by, and construed and enforced in accordance
with, the laws of the Commonwealth of Massachusetts, without giving effect to the conflict of law principles
thereof. Any action brought by any party to this Agreement shall be brought and maintained in a court of competent
jurisdiction in Middlesex or Suffolk Counties in the Commonwealth of Massachusetts, and each party hereby
consents to the exclusive jurisdiction of such courts.
7.
Assignment . Neither the Company nor the Executive may make any assignment of this Agreement
or any interest herein, by operation of law or otherwise, without the prior written consent of the other; provided,
however, that (a) the Executive’s economic rights hereunder will automatically be assigned by the Executive to his
or her estate or beneficiaries upon the death of the Executive and (b) the Company will assign its rights and
obligations under this Agreement without the consent of the Executive in the event that the Company is a party to a
reorganization, consolidation, merger, or sale of all or substantially all of its stock, and (c) the Company will cause
an acquirer of all or substantially all of its assets to assume this Agreement. This Agreement shall inure to the
benefit of and be binding upon the Company and the Executive, and their respective successors, executors,
administrators, heirs and permitted assigns.
8.
Section 409A .
(a)
Notwithstanding anything to the contrary in this Agreement, if at the time of the termination
of the Executive’s employment, the Executive is a “specified employee,” as defined below, any and all amounts, if
any, payable under this Agreement on account of such termination of employment that constitute deferred
compensation and would (but for this provision) be payable within six (6) months following the date of termination,
shall instead be paid, without interest, on the next business day following the expiration of such six (6) month period
or, if earlier, upon the Executive’s death.
(b)
For purposes of this Agreement, all references to “termination of employment” and
correlative phrases shall be construed to require a “separation from service” (as defined in Section 1.409A-1(h) of
the Treasury regulations after giving effect to the presumptions contained therein), and the term “specified
employee”
means an individual determined by the Company to be a specified employee under Treasury regulation Section
1.409A-1(i).
(c)
Each payment made under this Agreement shall be treated as a separate payment and the
right to a series of installment payments, if any, under this Agreement is to be treated as a right to a series of
separate payments.
(d)
The parties agree that their intent is that payments and benefits under this Agreement be
exempt from Section 409A to the greatest extent applicable. This Agreement shall be interpreted accordingly to be
exempt from Section 409A, and all provisions of this Agreement shall be construed in a manner consistent with this
intention. In the event that any payments or benefits under this Agreement are subject to Section 409A, this
Agreement shall be construed in a manner consistent with the requirements for compliance with Section 409A and
for avoiding taxes or penalties under Section 409A. Notwithstanding the foregoing, neither the Executive nor any
beneficiary shall have any claim or right against the Company or any of its directors, officers, employees, advisers
or agents by reason of any failure or asserted failure of this Agreement, in form or as administered, to comply with
or qualify for exemption from Section 409A.
9.
Section 4999 . In the event it is determined that the Executive is entitled to payments and/or benefits
provided by this Agreement or any other amounts in the “nature of compensation” (whether pursuant to the terms of
this Agreement or any other plan, arrangement, or agreement with the Company or any affiliate, any person whose
actions result in a change of ownership or effective control of the Company covered by Section 280G(b)(2) of the
Code or any person affiliated with the Company or such person) as a result of such change of ownership or effective
control of the Company (“ Payments ”) would be subject to the excise tax imposed by Section 4999 of the Code (the
“ 280G Excise Tax ”), the Company shall cause to be determined, before any amounts of the Payments are paid to
the Executive, which of the following two alternative forms of payment would maximize the Executive’s after-tax
proceeds: (a) payment in full of the entire amount of the Payments, or (b) payment of only a part of the Payments so
that the Executive receives the largest payment possible without the imposition of the 280G Excise Tax (“ Reduced
Payments ”). If it is determined that Reduced Payments will maximize the Executive’s after-tax benefit, then (i) cash
compensation subject to Section 409A shall be reduced first, cash payments not subject to Section 409A shall be
reduced second, non-cash compensation subject to Section 409A shall be reduced third, and then non-cash
compensation not subject to Section 409A shall be reduced fourth, (ii) the Payments shall be paid only to the extent
permitted under the Reduced Payments alternative, and (iii) the Executive shall have no rights to any additional
payments and/or benefits constituting the Payments. Unless the Company and the Executive otherwise agree in
writing, any determination required under this Section 9 shall be made in writing by independent public accountants
agreed to by the Company and the Executive (the “ Accountants ”), whose determination shall be conclusive and
binding upon the Executive and the Company for all purposes. For purposes of making the calculations required by
this Section 9, the Accountants may rely on reasonable, good faith interpretations concerning the application of
Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to make the required
determinations. The Company shall bear all fees and expenses the Accountants may reasonably charge in connection
with the services contemplated by this Section 9. Notwithstanding the foregoing, the calculations and adjustments
set forth above shall not result in any delay in payment of benefits under this Agreement.
10.
Amendment . This Agreement may be amended, modified or supplemented, and any obligation
hereunder may be waived, only by a written instrument executed by the parties hereto; provided , that nothing herein
shall be construed as limiting the Company’s ability to amend the Severance Plan. The waiver by any party hereto of
a breach of any provision of this Agreement shall not operate as a waiver of any subsequent breach. No failure on
the part of any party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or remedy by such party preclude any other or
further exercise thereof or the exercise of any other right or remedy. All rights and remedies hereunder are
cumulative, and are in addition to all other rights and remedies provided by law, agreement or otherwise.
11.
Definitions .
(a)
“ Cause ” has the same definition as is set forth in the Company’s Amended and Restated
2010 Employee, Director and Consultant Equity Incentive Plan, as in effect at the time of the Executive’s
employment termination; if such plan is no longer in effect at the time of such termination, Cause shall have the
same definition as is set forth in the last version of such plan in effect prior to such termination.
(b)
“ Change of Control ” means:
(i)
any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), becomes the “Beneficial Owner” (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended), directly or indirectly, of securities of the Company representing more than
50% of the total voting power represented by the Company’s then outstanding voting securities (excluding for this
purpose any such voting securities held by the Company, or any affiliate, parent or subsidiary of the Company or
any employee benefit plan of the Company) pursuant to a transaction or a series of transactions which the
Company’s Board of Directors does not approve;
(ii)
a merger or consolidation of the Company, whether or not approved by the
Company’s Board of Directors, which results in the securities of the Company outstanding immediately prior thereto
failing to continue to represent (either by remaining outstanding or by being converted into securities of the
surviving entity) at least 50% of either (i) the combined voting power of the voting securities of the Company or
such surviving entity outstanding immediately after such merger or consolidation or (ii) the total fair market value of
the securities of the Company or such surviving entity outstanding immediately after such merger or consolidation;
the sale or disposition of all or substantially all of the Company’s assets (or
consummation of any transaction having similar effect) provided that the sale or disposition is of more than two-
thirds (2/3) of the assets of the Company; or
(iii)
(iv)
the date a majority of the members of the Company’s Board of Directors is
replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of
the members of the Company’s Board of Directors before the date of the appointment or election; provided,
however, that no individual initially appointed or elected to the Company’s Board of Directors as a result of an
actual or threatened election contest with respect to the Company’s Board of Directors or as a result of any other
actual or threatened solicitation of proxies by or on behalf of any person other than the Company’s Board of
Directors shall be deemed to be endorsed by a majority of the members of the Company’s Board of Directors.
In any case, a Change of Control under this Section 11(b) must also meet the requirements of a change in ownership
or effective control, or a sale of a substantial portion of the Company’s assets in accordance with Section 409A(a)(2)
(A)(v) of the Code and the applicable provisions of Treasury Regulation § 1.409A-3.
(c)
“ Change of Control Termination ” means an Involuntary Termination or Constructive
Termination, in either event during the period commencing six (6) months prior to the earlier of (i) the date that the
Company first publicly announces it is conducting negotiations leading to a Change of Control (a “ Public
Announcement ”), or (ii) the date that the Company enters into a definitive agreement that would result in a Change
of Control (even though still subject to approval by the Company’s stockholders and other conditions and
contingencies (a “ Definitive Agreement ”); and ending on the earlier of (x) the date on which the Company
announces that the Definitive Agreement described in clause (ii) above has been terminated or that the Company’s
efforts to consummate the Change of Control contemplated by the Public Announcement or the Definitive
Agreement have been abandoned or (y) the date which is twenty-four months after the Change of Control.
(d)
(e)
“ Code ” means the Internal Revenue Code of 1986, as amended.
“ Constructive Termination ” means a termination of employment by the Executive for
Good Reason; provided, that, “Constructive Termination” shall not include any termination of the employment of
the Executive (i) by the Company for Cause, (ii) as a result of the Permanent Disability of the Executive, (iii) as a
result of the death of the Executive or (iv) as a result of the voluntary termination of employment by the Executive
for reasons other than Good Reason. For the avoidance of doubt, (A) if the Executive is offered reasonably similar
employment by a current or former subsidiary of the Company or his or her employment is transferred to a current or
former subsidiary of the Company with the resulting role being reasonably similar to his or her role immediately
prior to such transfer, in either case, in connection with the Planned Separation, the termination of the Executive’s
employment with the Company in connection with such Planned Separation shall not constitute a Constructive
Termination, and (B) an offer of employment by, or the Executive’s transfer of employment to, a current or former
subsidiary of the Company in connection with the Planned Separation for a position similar to any position set forth
on Schedule A shall not constitute a Constructive Termination.
(f)
“ Good Reason ” means the occurrence of any of the following conditions without the
Executive’s express consent: (i) a material diminution in, or material interference with, the Executive’s authority,
duties or responsibilities, (ii) a material diminution in the Executive’s total target cash compensation unless such
material diminution is in connection with a proportional reduction in compensation for all or substantially all of the
Company’s executive officers, or (iii) the relocation of the Executive’s work place for the Company to a location
more than twenty-five (25) miles from the location of the work place prior to the Constructive Termination. The
Executive may terminate his or her employment hereunder for Good Reason by (A) providing notice to the
Company, specifying in reasonable detail the condition giving rise to the Good Reason, no later than the sixtieth
(60th) day following the date that the Executive knew or should have known (after reasonable inquiry) of the
occurrence of that condition, (B) providing the Company a period of sixty (60) days to remedy the condition so
specified in the notice, and (C) terminating his or her employment for Good Reason within thirty (30) days
following the expiration of the period to remedy if the Company fails to remedy the condition.
(g)
“ Involuntary Termination ” means a termination of the Executive’s employment by the
Company without Cause; provided, that, “Involuntary Termination” shall not include a termination of the
employment of the Executive (i) in connection with the sale of some or all of the assets of the Company, including
the sale of a facility, division, or subsidiary of the Company, pursuant to which the purchaser offers the Executive
substantially equivalent employment, the terms of which would not give rise to Good Reason, (ii) by the Company
for Cause, (iii) as a result of the Permanent Disability of the Executive, (iv) as a result of the death of the Executive
or (v) as a result of the voluntary termination of employment by the Executive for reasons other than Good
Reason. For the avoidance of doubt, (A) if the Executive is offered reasonably similar employment by a current or
former subsidiary of the Company or his or her employment is transferred to a current or former subsidiary of the
Company with the resulting role being reasonably similar to his or her role immediately prior to such transfer, in
either case, in connection with the Planned Separation, the Company’s termination of the Executive’s employment
with the Company in connection with such Planned Separation shall not constitute an Involuntary Termination, and
(B) an offer of employment by, or the Executive’s transfer of employment to, a current or former subsidiary of the
Company in connection with the Planned Separation for a position similar to any position set forth on Schedule A
shall not constitute an Involuntary Termination.
(h)
“ Permanent Disability ” means that (i) the Executive has been incapacitated by bodily
injury, illness or disease so as to be prevented thereby from engaging in the performance of his or her duties, (ii)
such total incapacity shall have continued for a period of six consecutive months and (iii) such incapacity will, in the
opinion of a qualified physician, be permanent and continuous during the remainder of the Executive’s life.
(i)
“ Planned Separation” means any separation of the Company’s soluble guanylate cyclase
business from the Company.
(j)
“ Termination Date ” means the date of the termination of the Executive’s employment by
reason of an Involuntary Termination, a Constructive Termination or a Change of Control Termination.
12.
Entire Agreement . This Agreement constitutes the entire agreement between the parties, and
terminates and supersedes any and all prior agreements and understandings (whether written or oral) between the
parties with respect to the subject matter of this Agreement, [including, without limitation, the Prior Agreement,
but] excluding the Restrictive Covenants Agreement, which shall continue in effect in accordance with its terms. The
Executive acknowledges and agrees that neither the Company nor anyone acting on its behalf has made, and in
executing this Agreement the Executive has not relied upon, any representations, promises or inducements except to
the extent the same is expressly set forth herein.
IRONWOOD PHARMACEUTICALS, INC.
By:
Title:
ACKNOWLEDGED AND ACCEPTED:
Signature:
[Name of Executive]
[_______]
Schedule A
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.
Cyclerion Therapeutics, Inc. incorporated in Massachusetts, a wholly owned subsidiary.
Exhibit 21.1
EXHIBIT 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, 333-199885,
and 333-221294 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, 333-206228, 333-213001, 333-213002, 333-219669, 333-219670, 333-
226612, and 333-226613) of our reports dated February 25, 2019, with respect to the consolidated financial statements of
Ironwood 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, 2018.
/s/ Ernst & Young LLP
EXHIBIT 23.1
Boston, Massachusetts
February 25, 2019
EXHIBIT 31.1
CERTIFICATION PURSUANT
TO RULE 13a‑‑14(a) UNDER
THE SECURITIES EXCHANGE ACT OF 1934
EXHIBIT 31.1
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 the statements 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 financial condition, 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 Exchange Act 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 the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, 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 our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes 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 effectiveness of 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 fiscal quarter (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 the registrant’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 reasonably likely 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 over financial reporting.
Date: February 25, 2019
/s/ Peter M. Hecht
Peter M. Hecht
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION PURSUANT
TO RULE 13a‑‑14(a) UNDER
THE SECURITIES EXCHANGE ACT OF 1934
EXHIBIT 31.2
I, Gina Consylman, 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 the statements 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 financial condition, 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 Exchange Act 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 the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, 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 our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes 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 effectiveness of 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 fiscal quarter (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 the registrant’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 reasonably likely 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 over financial reporting.
Date: February 25, 2019
/s/ GINA CONSYLMAN
Gina Consylman
Chief Financial Officer
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
EXHIBIT 32.1
In connection with the Annual Report of Ironwood Pharmaceuticals, Inc. (the “Company”) on Form 10‑K for the period
ended December 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Peter M.
Hecht, Chief Executive Officer of the Company, certify, pursuant to 18 U.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.
/s/ Peter M. Hecht
Peter M. Hecht
Chief Executive Officer
February 25, 2019
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 to the Securities and Exchange Commission or its staff upon request.
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
EXHIBIT 32.2
In connection with the Annual Report of Ironwood Pharmaceuticals, Inc. (the “Company”) on Form 10‑K for the period
ended December 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gina
Consylman, Chief Financial Officer of the Company, certify, pursuant to 18 U.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.
/s/ GINA CONSYLMAN
Gina Consylman
Chief Financial Officer
February 25, 2019
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 to the Securities and Exchange Commission or its staff upon request.