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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, 2020
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)
100 Summer Street, Suite 2300
Boston, Massachusetts
(Address of Principal Executive Offices)
04-3404176
(I.R.S. Employer
Identification Number)
02110
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
(617) 621-7722
(Registrant’s telephone number, including area code)
Title of each class
Class A Common Stock, $0.001 par value
Trading Symbol(s)
IRWD
Name of each exchange on which registered
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ 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 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 the 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
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, 2020: $1,634,804,172
As of February 10, 2021, there were 160,962,175 shares of Class A Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement for our 2021 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,” “could,” “should,” “target,” “goal,” “potential” 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 AbbVie Inc. in
the U.S.;
the commercialization of CONSTELLA® in Europe and LINZESS in Japan and China, as well as our expectations
regarding revenue generated from our partners;
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, finished 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;
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our plans relating to discontinuing development of IW-3718;
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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, profitability,
tax obligations, capital raising and liquidity sources, and real estate needs, 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 and capped call transactions described herein;
asset impairments, and the drivers thereof, and 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, motivate and retain key personnel;
any benefits or costs of the separation of the Company’s operations into two independent, publicly traded
companies, including the tax treatment;
the financial and operational impacts of the COVID-19 pandemic on our business and results of operations,
including impacts on our day-to-day operations, collaborative arrangements revenue and marketing efforts,
manufacturing and supply chain and clinical development of our pipeline; and
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other factors discussed elsewhere in this Annual Report on Form 10-K.
Any or all of our forward-looking statements in this Annual Report on Form 10-K may turn out to be inaccurate. These
forward-looking statements may 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.
Summary of Risks Associated with our Business
Our business is subject to a number of risks, which are discussed more fully under the heading “Risk Factors” in this Annual
Report on Form 10-K. These risks include the following:
● We are highly dependent on the commercial success of LINZESS® (linaclotide) in the United States for the
foreseeable future; we cannot guarantee that we will generate sufficient revenues from LINZESS to cover our
expenses.
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● Our products may cause undesirable side effects or have other properties that could limit their commercial
potential.
● 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.
● We must work effectively and collaboratively with AbbVie to market and sell LINZESS in the U.S., and must
adapt our commercial model and market strategy to the evolving landscape, for LINZESS to achieve its
maximum commercial potential.
● 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.
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Even though LINZESS is approved by the U.S. Food and Drug Administration, or U.S. FDA, for use in adult
patients, post-approval development and regulatory requirements still remain, which present additional
challenges.
If we are unable to execute on our strategy to in-license or acquire externally developed products or product
candidates, or engage in other transactions with value creation potential, our business and prospects would be
materially adversely affected.
● Our failure to successfully develop and commercialize additional product candidates or approved products would
impair our ability to grow and/or adversely affect our business.
● Because we work with partners to develop, manufacture and commercialize linaclotide, we are dependent upon
third parties, and our and our partners’ relationships with those third parties, in our and our partners’ efforts to
obtain regulatory approval for, and to commercialize, linaclotide, as well as to comply with regulatory and other
obligations with respect to linaclotide.
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Limitations on our ability to obtain patent protection and/or the patent rights relating to our products and our
product candidates may limit our ability to prevent third parties from competing against us.
● Our indebtedness could adversely affect our financial condition or restrict our future operations.
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Public health emergencies, epidemics, or pandemics, such as the COVID-19 pandemic, impact our business.
NOTE REGARDING TRADEMARKS
LINZESS® and CONSTELLA® are trademarks of Ironwood Pharmaceuticals, Inc. ZURAMPIC® and DUZALLO® are
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.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 15. Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
Index to Consolidated Financial Statements
PART IV
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Item 1. Business
Our Company
PART I
We are a gastrointestinal, or GI, healthcare company dedicated to advancing the treatment of GI diseases and redefining
the standard of care for GI patients. We are focused on the development and commercialization of innovative GI product
opportunities in areas of significant unmet need, leveraging our demonstrated expertise and capabilities in GI diseases.
LINZESS® (linaclotide), our commercial product, is the first product approved by the United States Food and Drug
Administration, or U.S. FDA, in a class of GI medicines called guanylate cyclase type C agonists and is indicated for adult men
and women suffering from irritable bowel syndrome with constipation, or IBS-C, or chronic idiopathic constipation, or CIC.
LINZESS is available 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 and China. 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 have strategic partnerships with leading pharmaceutical companies to support the development and
commercialization of linaclotide throughout the world, including with AbbVie Inc. (together with its affiliates), or AbbVie,
(successor to Allergan plc (together with its affiliates), or Allergan) in the U.S. and all countries worldwide other than China
(including Hong Kong and Macau) and Japan, AstraZeneca AB (together with its affiliates, or AstraZeneca) in China (including
Hong Kong and Macau), and Astellas Pharma Inc., or Astellas, in Japan. We also aim to leverage our leading capabilities in GI to
bring additional treatment options to GI patients; for example, we have a U.S. disease education and promotional agreement with
Alnylam Pharmaceuticals, Inc., or Alnylam, for Alnylam’s GIVLAARI® (givosiran) for the treatment of acute hepatic porphyria,
or AHP.
On April 1, 2019, we completed a tax-free spin-off of our soluble guanylate cyclase, or sGC, business into a separate
publicly traded company, Cyclerion Therapeutics, Inc., or Cyclerion. In completing the separation of our sGC business into
Cyclerion, or the Separation, we advanced our strategy to drive growth as a GI-focused healthcare company, building on our
commercial success with LINZESS and advancing our GI development capabilities. In 2021, we refreshed our GI-focused
strategy following our decision to discontinue our IW-3718 and MD-7246 development programs and now are focused on three
core priorities: maximize LINZESS, build our innovative GI pipeline and deliver sustained profits and generate cash flow.
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, as well as to the research and development of our other product candidates.
Performance Against 2020 Core Priorities
1. Drive LINZESS Growth
● We recognized approximately $368.6 million in collaborative arrangements revenue related to sales of LINZESS in
the U.S. during the year ended December 31, 2020, a 13% increase compared to the year ended December 31,
2019. This increase was primarily driven by an increase in LINZESS prescription demand in the U.S. in 2020
compared to 2019.
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The U.S. FDA approved a supplemental New Drug Application, or NDA, for LINZESS, resulting in updated U.S.
prescribing information with data demonstrating that linaclotide improved the overall abdominal symptoms of
bloating, discomfort, and pain in adult patients with IBS-C compared to placebo.
● We and AbbVie entered into settlement agreements with the two remaining generic drug manufacturers resolving
all pending patent infringement litigation brought in response to abbreviated New Drug
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Applications seeking approval to market generic versions of LINZESS prior to the expiration of our and AbbVie’s
applicable patents.
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The United States Patent and Trademark Office granted patents covering the formulation of the 72 mcg dose of
LINZESS and methods of using the formulation. The patents are expected to expire in 2031.
2. Advance U.S. GI Development Portfolio
● MD-7246: We and AbbVie announced top-line data from a Phase II trial evaluating MD-7246, a delayed release
formulation of linaclotide, in adult patients with abdominal pain associated with irritable bowel syndrome with
diarrhea, or IBS-D. The Phase II trial did not meet its primary or key secondary endpoints. Based on these findings,
we and AbbVie discontinued the development of MD-7246.
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IW-3718: We announced that one of our two identical Phase III trials evaluating IW-3718, a gastric retentive
formulation of a bile acid sequestrant, in refractory gastroesophageal reflux disease, or refractory GERD, did not
meet the pre-specified criteria associated with a planned early efficacy assessment. Following the assessment from
an independent data monitoring committee, we unblinded the data and confirmed that the data from this Phase III
trial did not meet the criteria, including the study’s primary endpoint of achieving a statistically significant
improvement in heartburn severity. Based on these findings, we are discontinuing the development of IW-3718.
3. Deliver Sustainable Profits
● Delivered net income of $106.2 million during the year ended December 31, 2020, reflecting our second full year
of profitability.
● We generated $168.8 million in cash from operations during the year ended December 31, 2020, ending the year
with $362.6 million in cash and cash equivalents.
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In connection with our decision to discontinue IW-3718 development, we reduced our workforce by approximately
100 full-time employees. This workforce reduction affected both field-based and home-office employees, including
the relevant general and administrative support functions. We substantially completed the reduction in our
workforce in the fourth quarter of 2020.
Impact of the COVID-19 Pandemic on our Business
There continue to be significant uncertainties surrounding the extent and duration of the impact of the COVID-19
pandemic on our business and operations. The COVID-19 pandemic resulted in changes to our business and operations which
impacted our financial condition and results of operations for the year ended December 31, 2020 and the COVID-19 pandemic
may have a material adverse impact on our business and financial condition in the future. We took important actions in 2020
designed to mitigate the impacts of the COVID-19 pandemic on our business. We continue to evaluate the impact of the COVID-
19 pandemic on our operating results and financial condition. The impact of COVID-19 on our business and financial condition
is more fully described below in Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of —
Trends and Uncertainties.
GI Programs – IBS-C and CIC
IBS-C and CIC are chronic, functional GI disorders that afflict millions of sufferers worldwide. As many as 11.5 million
adults suffer from IBS-C and as many as 28.5 million adults suffer from CIC in the U.S., according to the Lieberman GI Patient
Landscape Survey performed in 2010, or the Lieberman Survey. Symptoms of IBS-C include abdominal pain, discomfort and/or
bloating and constipation symptoms (e.g., incomplete evacuation, infrequent bowel movements, hard/lumpy stools), while CIC is
primarily characterized by constipation symptoms. Greater than 65% of IBS-C patients suffer from bloating and/or discomfort at
least one time per week, according to the Lieberman Survey.
Linaclotide—U.S. In August 2012, the U.S. FDA approved LINZESS as a once-daily treatment for adult men and
women suffering from IBS-C (290 mcg dose) or CIC (145 mcg dose). We and AbbVie began commercializing
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LINZESS in the U.S. in December 2012. In January 2017, the U.S. FDA approved a 72 mcg dose of linaclotide for the treatment
of adult men and women with CIC.
We and AbbVie continue to explore ways to enhance the clinical profile of linaclotide by studying linaclotide in
additional indications, populations and formulations to assess its potential to treat various conditions. In September 2020, based
on Phase IIIb data demonstrating the efficacy and safety of LINZESS 290 mcg on the overall abdominal symptoms of bloating,
pain and discomfort, in adult patients with IBS-C, the U.S. FDA approved our Supplemental New Drug Application to include a
more comprehensive description of the effects of LINZESS in its approved label.
We and AbbVie have established a nonclinical and clinical post-marketing plan with the U.S. FDA to understand the
safety and efficacy of LINZESS in pediatric patients. Clinical pediatric programs in IBS-C and functional constipation are
ongoing.
Linaclotide—Global. AbbVie has rights to develop and commercialize linaclotide in all countries worldwide other than
China (including Hong Kong and 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 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. AbbVie 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. AbbVie 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 has rights to develop, manufacture 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.
AstraZeneca has rights to develop, manufacture and commercialize linaclotide in China (including Hong Kong and
Macau). In January 2019, the Chinese National Medical Products Administration approved the marketing application for
LINZESS for adults with IBS-C in China. AstraZeneca began commercializing LINZESS in China in November 2019.
IW-3300
We are also advancing IW-3300, a GC-C agonist, which is in pre-clinical development for the potential treatment of
visceral pain conditions, including Interstitial Cystitis / Bladder Pain Syndrome (IC / BPS) and Endometriosis. IC/BPS affects an
estimated four to 12 million Americans, according to the Interstitial Cystitis Association. An estimated four million reproductive-
age women in the U.S. have diagnosed endometriosis, according to a study published in Gynecologic and Obstetric Investigation
in 2017. Both diseases have a limited number of treatment options available.
Collaborations and Partnerships
As part of our GI-focused 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 plan to seek collaborations that increase the value of our products by providing
meaningful economics and incentives for us and any potential partner. We intend to continue to expand our expertise in GI by
accessing innovative externally developed products and to leverage our existing capabilities to develop and commercialize these
products in the U.S.
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We have pursued a partnering strategy for commercializing linaclotide that has allowed us to focus our
commercialization efforts in the U.S. and enabled partners with strong global capabilities to commercialize linaclotide in
territories outside of the U.S.
The following chart shows our revenue for the U.S. and territories outside of the U.S. as a percentage of our total
revenue for each of the years ended December 31, 2020, 2019, and 2018.
Year Ended December 31,
U.S.
Japan
Rest of world
2020
95.8 %
1.1 %
3.1 %
2018
79.0 %
20.1 %
0.9 %
100.0 % 100.0 % 100.0 %
2019
78.0 %
13.0 %
9.0 %
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 AbbVie 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. Our revenue from our LINZESS collaboration with AbbVie for the U.S. is highly dependent on the
responsiveness of patients to fill prescriptions and other factors such as wholesaler buying patterns. Our collaborative
arrangements revenue outside of the U.S. has fluctuated for the years ended December 31, 2020, 2019, and 2018 based on timing
of milestone and non-contingent payments. Our collaborative arrangements revenue may continue to fluctuate as a result of the
timing and amount of royalties from sales of linaclotide in the markets in which it is currently approved, or any other markets
where linaclotide receives approval, as well as clinical and commercial milestones received and recognized under our current and
future strategic partnerships outside of the U.S.
Collaboration Agreement for North America with AbbVie
In September 2007, we entered into a collaboration agreement with AbbVie 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 AbbVie 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 AbbVie 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. AbbVie is solely responsible for
the further development, regulatory approval and commercialization of linaclotide in those countries and funding any costs.
License Agreement with AbbVie (All countries other than the countries and territories of North America, China (including Hong
Kong and Macau), and Japan)
In April 2009, we entered into a license agreement with Almirall S.A., or 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 AbbVie. In January 2017, we and AbbVie 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 (including Hong Kong and Macau), Japan, and the countries and territories of North
America. We refer to the additional licensed countries as the Expanded Territory. Under the European License agreement,
AbbVie is obligated to pay us (i) certain commercial milestones totaling up to $42.5 million, (ii) royalties based on sales volume
in Europe, beginning in the mid-single digits percent and escalating to the upper-teens percent, and (iii) on a country-by-country
and product-by-product basis in the Expanded Territory, 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.
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License Agreement for Japan with Astellas
In November 2009, we entered into a license agreement with Astellas to develop and commercialize linaclotide for the
treatment of IBS-C, CIC and other GI conditions in Japan. Pursuant to this license agreement, as amended, we were responsible
for the supply of linaclotide active pharmaceutical ingredient, or API, to Astellas. On August 1, 2019, we and Astellas amended
and restated the license agreement. Under the terms of the amended and restated license agreement, we are no longer responsible
for the supply of linaclotide API to Astellas and Astellas is responsible for its own supply of linaclotide API in Japan. Astellas is
obligated to pay royalties to us at rates beginning in the mid-single-digits percent and escalating to low-double-digits percent,
based on aggregate annual net sales in Japan of products containing linaclotide API.
Collaboration Agreement for China (including 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 (including Hong Kong and Macau). In September 2019, we and AstraZeneca amended and restated the
collaboration agreement, under which AstraZeneca obtained the exclusive right to develop, manufacture and commercialize
products containing linaclotide in the territory. Under the terms of the amended and restated agreement, we transferred all
manufacturing responsibilities in China (including Hong Kong and Macau) to AstraZeneca, and we are entitled to receive non-
contingent payments totaling $35.0 million in three installments through 2024, of which $10.0 million was received in January
2021. In addition, AstraZeneca may be required to make milestone payments totaling up to $90.0 million contingent on the
achievement of certain sales targets and is required to pay tiered royalties to us at rates beginning in the mid-single-digits percent
and increasing up to twenty percent based on the aggregate annual net sales of products containing linaclotide in the territory.
Co-Promotion and Other Commercial Agreements
Disease Education and Promotional Agreement with Alnylam
In August 2019, we and Alnylam entered into a disease education and promotional agreement for Alnylam’s
GIVLAARI for the treatment of AHP and in December 2020, this agreement was amended. Under the agreement, we received
service fees totaling approximately $5.5 million for services rendered from the commencement of the agreement through
December 31, 2020 and are eligible to receive royalties based on a percentage of net sales of GIVLAARI that are directly
attributable to our promotional efforts over the term of the agreement, which is approximately three years.
Our Strategy
Our vision is to become the leading U.S. GI-focused healthcare company. To achieve this vision, we are dedicated to
leveraging our development and commercial expertise to advance the treatment of GI diseases and redefine the standard of care
for patients suffering from GI diseases. Our strategy is focused on three core priorities: maximize LINZESS, build our innovative
GI pipeline, and deliver sustained profits and generate cash flow. Key elements of our strategy include:
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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 AbbVie 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;
leveraging our U.S.-focused commercial capabilities in marketing, reimbursement, patient engagement and sales, as
well as advancing a hybrid (virtual and in-person) selling model and technologies such as telehealth, to expand the
commercial potential of LINZESS; collaborating with global partners who share our vision, values, culture, and
processes to develop and commercialize linaclotide outside of the U.S.;
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evaluating innovative, externally developed products for in-licensing or acquisition opportunities, prioritizing assets
that address serious, organic GI diseases, provide scientific innovation, sound mechanistic rational, a strong clinical
safety profile, a clear development path towards commercialization and in disease areas primarily managed by
gastroenterologists; and
executing our strategy with our stockholders’ long-term interests in mind by delivering sustainable profits and long-
term per share cash flows.
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Competition
Linaclotide competes globally with certain branded and generic prescription therapies and over the counter, or OTC,
products for the treatment of IBS-C and CIC, or their associated symptoms.
OTC laxatives make up the majority of the treatments in the U.S. for IBS-C and CIC, according to our internal research.
LINZESS accounts for the majority of prescriptions in the U.S. for adults with IBS-C and CIC, according to 2020 data from
IQVIA Inc. National Prescription Audit.
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. AMITIZA also 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., and
an authorized generic version of AMITIZA became available in the U.S. in January 2021 and is being commercialized by Endo
International plc. TRULANCE® (plecanatide) was approved 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 and is being commercialized in the U.S. by Bausch Health Companies. Shire
plc obtained approval of MOTEGRITY™ (prucalopride) in the U.S. for the treatment of CIC in adults in December 2018. In
April 2019, US WorldMeds, LLC received approval for the reintroduction of ZELNORM™ (tegaserod) in the U.S. for the
treatment of IBS-C in women under the age of 65. In September 2019, Ardelyx, Inc. received approval for ISBRELA™
(tenapanor) in the U.S. for the treatment of IBS-C in adults. ISBRELA is not currently commercially available.
Manufacturing and Supply
It is our objective that the supply of linaclotide be safe and effective, with redundancy built into critical steps of the
supply chain, and that each of our collaboration partners are in a position to manage the supply and distribution of linaclotide in
their respective territories through a combination of contract manufacturers and in-house manufacturing capabilities. Linaclotide
production consists of three phases—manufacture of the API (sometimes referred to as drug substance), manufacture of finished
drug product and manufacture of finished goods. We and/or our partners have commercial supply agreements with multiple third-
party manufacturers for the production of linaclotide API. We believe the current commercial suppliers have the capabilities to
produce linaclotide API in accordance with current good manufacturing practices, or GMP, on a sufficient scale to meet the
worldwide development and commercial needs for linaclotide. The commercial suppliers of linaclotide API are subject to routine
inspections by regulatory agencies worldwide and also undergo periodic audit and certification by our partners’ or our own
quality department.
Each of AbbVie, Astellas and AstraZeneca is responsible for linaclotide API, finished drug product and finished goods
manufacturing (including bottling and packaging) and distributing the finished goods to wholesalers in its respective territories.
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 formulations that are both cost effective
and able to meet the stability requirements for commercial pharmaceutical products.
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 develop and commercialize our drugs in territories outside the U.S. In executing our
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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.
To date, we have established a high-quality commercial organization dedicated to bringing innovative, highly-valued GI
healthcare solutions to our customers, including patients, payors, and healthcare providers. Our GI commercial capabilities,
including marketing, patient engagement and sales, are designed to support our existing product as well as potential future
internally and externally developed products.
We are also coordinating efforts with our linaclotide partners to 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, compositions, and formulations, 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.
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. We expect to
apply, and have applied, for patent term extension in countries where it is available.
Linaclotide Patent Portfolio
Our linaclotide patent portfolio is currently composed of 14 patents in the U.S., including 12 U.S. patents listed in the
U.S. FDA publication, “Approved Drug Products with Therapeutic Equivalence Evaluations”, or the Orange Book, seven granted
European patents, most of which have been validated in available European countries, ten granted Japanese patents, five granted
Chinese patents, 61 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 72 mcg, 145 mcg and 290 mcg LINZESS
doses are covered by various composition of matter patents in the U.S., the latest of which expires in 2026. In addition, the
commercial formulations of the 72 mcg, 145 mcg and 290 mcg LINZESS doses are covered by patents in the U.S. that expire in
the early 2030s. The granted European patents, which will expire between 2024 and 2036, some of which are subject to potential
patent term extension, contain claims directed to the linaclotide molecule, pharmaceutical compositions thereof, uses of
linaclotide to prepare medicaments for treating GI disorders, and room temperature stable formulations of linaclotide and their
use in treating IBS-C and chronic constipation. The granted Chinese patents, which will expire between 2024 and 2032, the
granted Japanese patents, which will expire between 2025 and 2036, some of which are subject to granted and potential patent
term extension, and the granted patents in other foreign jurisdictions, which will expire between 2024 and 2034, 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 2037
and which include claims covering the linaclotide molecule, methods of using linaclotide to treat GI disorders, the current
commercial formulations of linaclotide and uses thereof to treat GI disorders.
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The patent term of a patent that covers an U.S. FDA approved drug is also eligible for patent term extension, which
permits patent term extension as compensation for some of the patent term lost during the U.S. 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 U.S. FDA. The United States Patent and Trademark Office 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 U.S. 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 AbbVie received Notice Letters regarding ANDAs submitted to the U.S. FDA by five generic drug
manufacturers requesting approval to engage in commercial manufacture, use, sale and offer for sale of linaclotide capsules,
proposed generic versions of LINZESS. All five manufacturers requested approval for their 145 mcg and 290 mcg generic doses
of LINZESS and two requested additional approval for their 72 mcg generic doses of LINZESS. We and AbbVie have entered
into settlement agreements with all five of these generic drug manufacturers providing for licenses to market their 145 mcg and
290 mcg generic versions of LINZESS, beginning as early as March 2029 (subject to U.S. FDA Approval), unless certain limited
circumstances, customary for settlement agreements of this nature, occur. In addition, we and AbbVie entered into a settlement
agreement providing one generic drug manufacturer a license to market its 72 mcg generic version of LINZESS beginning in
August 2030 (subject to U.S. FDA Approval), unless certain limited circumstances, customary for settlement agreements of this
nature, occur.
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 U.S. 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 U.S. 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 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.
U.S. FDA Approval Process
No company may market a new drug in the U.S. until it has submitted an NDA to the U.S. FDA, and the U.S. FDA has
approved it. The steps required before the U.S. FDA may approve an NDA generally include:
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conducting nonclinical laboratory tests and animal tests in compliance with U.S. 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;
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the submission to the U.S. FDA of an NDA;
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satisfactory completion of one or more U.S. 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
● U.S. 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 U.S. FDA as part of an 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 U.S.
FDA, unless the U.S. FDA raises concerns or questions before that time about the conduct of the proposed trial. In such a case,
we must work with the U.S. 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 U.S. FDA allowing clinical trials to begin, or that, once begun, issues will not arise
that will cause us or the U.S. 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 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:
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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
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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 U.S. 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 U.S. 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 U.S. FDA in the form of an NDA requesting approval to market
the drug. The U.S. 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 U.S. FDA will “file” the application and begin review. The review process,
however, may be extended by U.S. 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 U.S.
FDA may refer an application to an advisory committee for review, evaluation and recommendation as to whether the application
should be approved. The U.S. FDA is not bound by the
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recommendations of an advisory committee, but it considers such recommendations carefully when making decisions. Before
approving an NDA, the U.S. 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 U.S. FDA also typically inspects facilities
responsible for performing animal testing, as well as clinical investigators who participate in clinical trials. The U.S. FDA may
refuse to approve an NDA if applicable regulatory criteria are not satisfied or may require additional testing or information. The
U.S. 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
U.S. 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 AbbVie, 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 U.S. 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 U.S.
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 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.
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 U.S. 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 U.S. FDA. This exclusivity provides that the U.S. 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) conducted or sponsored by the applicant that were essential to approval of the application.
Examples of applications that may require new clinical investigations essential to approval and receive three-year exclusivity
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 U.S. FDA approval of ANDAs and 505(b)
(2) applications for generic drugs for the conditions of approval (for example, indication or dosage form) that required new
clinical investigations that were essential to approval; it does not prohibit the U.S. FDA from accepting or approving ANDAs or
505(b)(2) NDAs for generic drugs that do not include such conditions of approval.
Paragraph IV Certifications. Under the Hatch‑Waxman Act, NDA applicants and NDA holders must provide
information about certain patents claiming their drugs, or methods of use of the drug that is the subject of the NDA, 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
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a listed patent is invalid, unenforceable or will not be infringed by the sale of the proposed product is called a “Paragraph IV”
certification. A certification that provides the date a listed patent will expire, but does not challenge the validity, enforceability or
infringement of the patent, is called a “Paragraph III” certification. FDA can approve the ANDA or 505(b)(2) application
containing the Paragraph III certification upon expiration of the patent.
Within 20 days of the acceptance by the U.S. 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, unenforceable, 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 U.S. FDA’s ability to approve the ANDA or 505(b)(2)
application is triggered. The U.S. 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 Extension. Under the Hatch‑Waxman Act, a portion of the patent term lost during product development
and U.S. FDA review of an NDA or 505(b)(2) application is extended if approval of the application is the first permitted
commercial marketing of a drug containing the active ingredient. The patent term extension 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 U.S. 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 U.S. FDA approval of the product. Only one unexpired patent
claiming the drug product, a method of using the product or a method of manufacturing the product is eligible for extension and
the patent holder must apply for extension within 60 days of approval. The U.S. Patent and Trademark Office, in consultation
with the U.S. FDA, reviews and approves the application for patent term extension.
Other Regulatory Requirements
After approval, finished drug products are subject to extensive continuing regulation by the U.S. FDA, which include
company obligations to manufacture products in accordance with current GMP, maintain and provide to the U.S. FDA updated
safety and efficacy information, report adverse experiences with the product, keep certain records and submit periodic reports,
obtain U.S. FDA approval of certain manufacturing or labeling changes, and comply with U.S. FDA promotion and advertising
requirements and restrictions. Failure to meet these obligations can result in various adverse consequences, both voluntary and
U.S. 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.
We and our partners and any third-party manufacturers we or our partners engage are required to comply with
applicable U.S. FDA manufacturing requirements contained in the U.S. 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 U.S. 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 U.S. 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 U.S. 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 U.S. FDA requirements can have negative consequences, including adverse publicity, warning
or untitled letters from the U.S. 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 U.S. FDA approval of a new NDA or NDA
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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 U.S. 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 U.S. FDA approval of an NDA. The
U.S. 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 U.S. 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 finished drug product typically is separate from the process for setting the
price of a finished drug product or for establishing the reimbursement rate that the payor will pay for the finished drug product
once coverage is approved. Third-party payors may limit coverage to specific finished drug products on an approved list, also
known as a formulary, which might not include all of the U.S. 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 finished 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 finished drug products can differ significantly from payor to payor. One third-party payor’s decision to cover a
particular finished 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.
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.
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Within the U.S., numerous federal, state and local authorities have jurisdiction over, or enforce laws related to, such
activities, including the U.S. 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 Federal Food, Drug, and Cosmetic Act and accompanying regulations that
prohibit pharmaceutical companies from promoting a drug prior to approval from the U.S. 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 payors 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.
Our Legacy Business
Separation
On April 1, 2019, we completed the Separation. At the time of the Separation, Cyclerion’s portfolio was comprised of
several sGC stimulators, including olinciguat, a vascular sGC stimulator in Phase II development, praliciguat, a systemic sGC
stimulator in Phase II development, and IW-6463, a central nervous system-penetrant sGC stimulator in Phase I development. In
connection with the Separation, certain assets and liabilities related to the sGC business were transferred to Cyclerion, including
various U.S. and foreign patents and Patent Cooperation Treaty patent applications. The Separation and related agreements are
more fully described in Note 3, Cyclerion Separation, to our consolidated financial statements appearing elsewhere in this
Annual Report on Form 10-K.
Uncontrolled Gout Programs
In June 2016, we closed a transaction with AstraZeneca pursuant to which we received an exclusive license to develop,
manufacture, and commercialize in the U.S. products containing lesinurad as an active ingredient, 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 ZURAMPIC and DUZALLO. 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, we determined on July 31, 2018 to terminate the lesinurad license agreement. In August 2018, we
delivered to AstraZeneca a notice of termination of the lesinurad license agreement. The post-marketing clinical study to further
evaluate the renal and cardiovascular safety of lesinurad was terminated following the termination of the lesinurad license
agreement. We requested that the U.S. FDA withdraw approval of the NDA for the Lesinurad Products, and in January 2021, the
NDA withdrawal for DUZALLO became effective.
Human Capital
As of January 1, 2021, Ironwood had 232 employees. Of these employees, 42 were on our drug development team, 128
were on our sales and commercial team, and 62 were in general and administrative functions. In connection with our decision to
discontinue development of IW-3718, we reduced our workforce by approximately 100 full-time
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employees, which reduction was substantially completed in the fourth quarter of 2020. For information regarding reductions in
our workforce during the years ended December 31, 2020, 2019 and 2018, refer to Note 18, Workforce Reduction and
Restructuring, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. We consider
our employee relations to be good.
Equity, Diversity, and Inclusion (EDI)
We believe that creating an equitable, diverse, and inclusive culture is critical to attracting, motivating and retaining the
talent necessary to deliver on our mission. Approximately 50% of our employees are women, and women represent
approximately 30% of our leadership team (vice president and above) and nearly 30% of our board of directors (including our
board and audit chairs). Additionally, approximately 20% of our employees are racially or ethnically diverse and, in 2020,
approximately 40% of our new hires were racially or ethnically diverse.
In 2020, we established an EDI workgroup dedicated to advancing key EDI initiatives. Ironwood’s leadership team and
board of directors champions these efforts. In October 2020, our management adopted a long-term EDI strategy and, in January
2021, our board of directors approved a specific corporate goal for 2021 aimed at fostering an environment where employees feel
included and empowered. Current EDI initiatives include empowering our employee resource groups, such as Ironwomen and
ISTAR (Ironwood Stands Together Against Racism), introducing new learning and development opportunities, strengthening our
talent acquisition strategies, and introducing new metrics and measurements on outreach to diverse candidate sources, retention,
career advancement, and employee survey feedback from diverse populations.
Compensation and Benefits
All our employees receive equity and are encouraged to think and act as owners of Ironwood. We strive to provide pay,
benefits, and services that are competitive to market and to create incentives to attract, motivate and retain our employees. We are
focused on pay equity and regularly monitor our pay practices among similar roles and responsibilities throughout our
organization.
Communication and Engagement
We strongly believe that Ironwood’s success depends on employees understanding how their work contributes to
Ironwood’s ability to execute on its vision, mission and strategy. Communication and engagement have been especially critical in
2020 in light of challenges brought on by macro events such as the COVID-19 pandemic and the racial injustice in the U.S., as
well as internal factors including the recent reduction in our workforce. To this end, we utilize a variety of channels to facilitate
open and direct communication, including frequent town hall meetings, Ironwood intranet, CEO blog, leadership engagement
opportunities, regular communications regarding business updates, and employee engagement surveys.
Health, Wellness and Safety in the Face of the COVID-19 Pandemic
The health and safety of all our employees is a top priority for us. In 2020, we augmented certain healthcare, childcare
and leave benefits in an effort to support our employees and their families in the face of the unique challenges brought on by the
COVID-19 pandemic. In addition, we established a working group focused on creating and keeping employees well informed
about the company’s latest plans and guidance around COVID-19. We also provided personal protective equipment and safety
trainings for field-based employees, a home supply stipend to create home office space, reallocated commuter benefits for home
office use, extended additional wellness benefits including backup childcare, and provided our employees with resilience
training, among other efforts.
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.
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Item 1A. Risk Factors
PART II OTHER INFORMATION
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
Class A Common Stock may decline due to these risks.
Risks Related to Commercializing LINZESS and Other Product Candidates
We are highly dependent on the commercial success of LINZESS (linaclotide) in the United States, or the U.S., for the
foreseeable future; we cannot guarantee that we will generate sufficient revenues from LINZESS to cover our expenses.
We and our partner, AbbVie Inc. (together with its affiliates), or AbbVie, (successor to Allergan plc (together with its
affiliates), or Allergan), began selling LINZESS in the U.S. in 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:
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the effectiveness of LINZESS as a treatment for adult patients with irritable bowel syndrome with constipation, or
IBS-C, or chronic idiopathic constipation, or CIC;
the size of the treatable patient population;
the effectiveness of the sales, managed markets and marketing efforts by us and AbbVie, including our ability to
adapt our commercial model and market strategy to the evolving landscape;
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 and other factors, and therefore may be
unpredictable from quarter-to-quarter. Revenues from LINZESS or other sources in any quarter may be insufficient to cover our
expenses.
Our products may cause undesirable side effects or have other properties that could limit their commercial potential.
Linaclotide has been prescribed to millions of patients since its launch in the U.S. and other territories beginning in
December 2012. 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.
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The number and type of patients treated with linaclotide could continue to grow if physicians prescribe linaclotide to
more patients and as we and our partners conduct clinical trials, including in new indications, populations or formulations, as well
as explore potential combination products, in existing and new territories. 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 and/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 delayed, 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;
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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;
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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 addition, the U.S. 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, at the time of approval, the lack of pediatric clinical safety and efficacy data. We and AbbVie have established a
nonclinical and clinical post-marketing plan with the U.S. FDA to understand the safety and efficacy of LINZESS in pediatric
patients. These and other restrictions could limit the commercial potential of 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 depends in part on the coverage and
reimbursement levels set by governmental authorities, private health insurers and other third-party payors. In determining
whether to approve reimbursement for our products and at what level, we expect that third-party payors 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 have offered, and expect to continue to face increasing
pressure to offer, discounts or rebates from list prices or discounts to third-party payors 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 AbbVie will be able to negotiate or continue to negotiate pricing terms with third-party payors at levels
that are profitable to us, or at all. Certain third-party payors 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 payors 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
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affected if government healthcare programs, private health insurers, including managed care organizations, or other reimbursing
bodies or payors limit or reduce the indications for or conditions under which our products may be reimbursed. Moreover, as
discussed further below, changes in insurance coverage or reimbursement levels by governmental authorities, private health
insurers and other third-party payors, or in the type of such coverage held by patients, as well as the impacts to healthcare access
or administration (including, for example, limitations on medications or procedures deemed “non-essential,” reduced interaction
between patients and physicians, and increased unemployment), due to the COVID-19 pandemic may materially harm our
business and commercialization efforts.
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 initiatives 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 has been significant scrutiny of pharmaceutical pricing and the resulting costs of
pharmaceutical products that could cause significant operational and reimbursement changes for the pharmaceutical industry.
There have been a number of federal and state efforts to address drug costs, which generally have focused on increasing
transparency around drug costs or limiting drug prices, price increases or other related costs. For example, the Bipartisan Budget
Act of 2018 contained various provisions that affect coverage and reimbursement of drugs, including an increase, which began in
2019, in the discount that manufacturers of Medicare Part D brand name drugs must provide to Medicare Part D beneficiaries
during the coverage gap from 50% to 70%.
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.
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, Japan and China, 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 payors, including private
insurance and governmental payors. 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 payors 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, AbbVie, 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. In addition, LINZESS was first launched in China for the
treatment of IBS-C in adults in November 2019, and
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our partner AstraZeneca is currently commercializing LINZESS in China (including Hong Kong and Macau). The pricing and
reimbursement strategy is a key component of our partners’ commercialization plans for CONSTELLA in Europe and LINZESS
in Japan and China. 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 China, or if
coverage and reimbursement for either CONSTELLA or LINZESS is limited or reduced. If our partners are not able to obtain or
maintain 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.
We must work effectively and collaboratively with AbbVie to market and sell LINZESS in the U.S., and must adapt our
commercial model and market strategy to the evolving landscape, for LINZESS to achieve its maximum commercial potential.
We are working closely with AbbVie 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 in an effort to optimize the education of specific gastroenterologists
and primary care physicians on whom our and AbbVie’s sales representatives call, and the frequency with which the
representatives meet with them. In addition, we are advancing a hybrid (virtual and in-person) selling model and access to
technologies such as telehealth in an effort to expand the commercial potential of LINZESS and our other product candidates in
the U.S.
In order to optimize the commercial potential of LINZESS, we and AbbVie must execute upon this commercialization
plan effectively and efficiently. In addition, we and AbbVie must continually assess, modify and adapt our commercialization
plan in a coordinated and integrated fashion, including evaluating and adjusting as necessary the level and mix of marketing and
promotion efforts, in response to changing business, market or other factors in order to advance the commercial potential of
LINZESS. For example, the increase in virtual customer support and limitations on customer access by our customer-facing
employees that was prompted by the COVID-19 pandemic contributed to our decision to make virtual promotion a more
permanent component of our overall selling model and may further change our commercial model or the market strategy in the
industry. Further, we and AbbVie 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
AbbVie must provide our sales forces with the highest quality support, guidance and oversight for them to continue to effectively
promote LINZESS to gastroenterologists and primary care physicians. If we and AbbVie fail to evolve with the changing
commercial landscape successfully and 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.
In addition, most of our customer-facing employees are engaged in in-person work practices; however, they are limited
in the number of in-person details they are able to conduct due to containment and mitigation measures related to the COVID-19
pandemic. We monitor the impact of the COVID-19 pandemic in the territories where our customer-facing employees are
engaged in in-person work practices, and in some cases, we have paused the in-person work practices as a result of the impact of
the COVID-19 pandemic in those territories, and may do so again in the future. Customer-facing employees who are not
providing in-person services continue to support their customers virtually through telephone and web-based technologies.
Headquarters employees are expected to have the option to work remotely through mid-2021. We may delay, stop or otherwise
limit in-person work in the future pending relevant health authority guidance and other safety considerations. The virtual support
we continue to provide to customers may not be
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as effective as in-person efforts, and our in-person efforts may be limited and/or limited in their effectiveness. If this were to
occur, or if we, AbbVie or any of our partners were unable to align on our strategy and development and commercial efforts as a
result of the COVID-19 pandemic or otherwise, we may not be able to maintain or increase the revenues that we generate or our
business may be otherwise materially harmed.
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
and enable them to compete more effectively. Competition may also 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 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.
Linaclotide competes with certain prescription therapies and over-the-counter products, including with products that
have attained significant levels of market acceptance. The availability of prescription competitors and over-the- counter products
could limit the demand, and the price we are able to charge, for LINZESS unless we are able to achieve and maintain market
acceptance among the medical community and patients and differentiate LINZESS on the basis of its cost and/or actual or
perceived benefits. For example, Takeda’s AMITIZA (lubiprostone) is approved by the U.S. FDA for sale in the U.S. for the
treatment of IBS-C, CIC and opioid-induced constipation, and an authorized generic version of AMITIZA became available in
the U.S. in January 2021 and is being commercialized by Endo International plc; Bausch Health’s TRULANCE (plecanatide) is
approved by the U.S. FDA for sale in the U.S. for the treatment of adults with IBS-C and CIC; Takeda’s MOTEGRITY
(prucalopride) is approved by the U.S. FDA for sale in the U.S. for the treatment of CIC in adults; and Alfasigma USA’s
ZELNORM (tegaserod) is approved for sale in the U.S. for treatment of IBS-C in women under the age of 65. Over-the-counter
laxatives such as MiraLAX® and DULCOLAX®, and lactulose, a prescription laxative treatment, are also available for the
treatment of constipation. Additionally, we believe other companies are developing products which could compete with
linaclotide, should they be approved by the U.S. FDA or foreign regulatory authorities and become commercially available. For
example, although not currently commercially available, the U.S. FDA approved Ardelyx, Inc.’s IBSRELA™ (tenapanor) for the
treatment of IBS-C in adults. In addition, there are other compounds in late-stage development and other potential competitors
that are in earlier stages of development that, if approved, may compete with linaclotide. If our current or potential competitors
are successful in completing drug development for their drug candidates and obtain approval from the U.S. FDA or foreign
regulatory authorities, they could limit the demand for linaclotide.
Even though LINZESS is approved by the U.S. FDA for use in adult patients, post-approval development and regulatory
requirements still remain, which present additional challenges.
In August 2012, the U.S. FDA approved LINZESS as a once-daily treatment for adult men and women suffering from
IBS-C or CIC. Although we and AbbVie completed additional nonclinical and clinical studies in adults that were required by the
U.S. FDA in connection with the approval of LINZESS, LINZESS remains subject to ongoing
U.S. 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, at the time of approval, the lack of pediatric clinical safety and efficacy data. We and AbbVie
have established a nonclinical and clinical post-marketing plan with the U.S. FDA to understand the safety and efficacy of
LINZESS in pediatric patients, and clinical pediatric programs in IBS-C and functional constipation are ongoing. Our ability to
expand the indication or label information for LINZESS to pediatrics will depend on, among other things, our successful
completion of pediatric clinical programs. In addition, as the holder of the approved NDA for ZURAMPIC, we are obligated to
monitor and report adverse events and any failure of
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ZURAMPIC to meet the specifications in the NDA, to submit new or supplemental applications and to obtain U.S. FDA approval
for certain changes, including changes to product labeling and manufacturing processes.
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 U.S. 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 U.S.
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:
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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;
● 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. Additionally, we cannot be certain of the duration or extent to which the COVID-19
pandemic may impact operations of regulatory authorities in jurisdictions around the world, and any reduction in resources
dedicated to review and approval of products in applicable jurisdictions could delay or otherwise impact approval or other
regulatory decisions or actions. 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
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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.
Risks Related to Our Growth Strategy
If we are unable to execute on our strategy to in-license or acquire externally developed products or product candidates, or
engage in other transactions with value creation potential, our business and prospects would be materially adversely affected.
Our future success is largely dependent on our ability to successfully execute on our growth strategy, which includes in-
licensing or otherwise acquiring the rights to externally developed gastrointestinal products or product candidates or engaging in
other transactions with value creation potential. The success of this strategy depends upon our ability to identify, select and
acquire promising assets, platforms or other opportunities. The process of proposing, negotiating and implementing a license or
acquisition is lengthy and complex. Pursuit of external opportunities is also a highly competitive area and a number of other
companies, including some with substantially greater financial, development, marketing and sales resources, may compete with
us for license or acquisition opportunities. We have limited resources to identify and execute the acquisition or in-licensing of
third-party products, product candidates, businesses or technologies and integrate them into our current infrastructure. Moreover,
we expect to incur a variety of costs and 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. If we are unable to successfully acquire the rights to
additional products or product candidates on terms that we find acceptable, or at all, or execute other value creating transactions,
we will remain smaller, less diversified and highly dependent on the commercial success of LINZESS, and our business and
prospects would be materially and adversely affected.
In addition, such in-licenses, acquisitions or other transactions may entail numerous operational and financial risks,
including:
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development, regulatory and commercialization challenges;
exposure to unknown liabilities;
disruption of our business and diversion of our management’s time and attention to develop acquired products,
product candidates, businesses 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.
The development of product candidates in particular is a highly uncertain process, as we discuss further below. Any
product candidate that we in-license or acquire may require additional development efforts prior to commercial sale, including
extensive clinical testing and approval by the U.S. 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 or competitors may develop alternatives that
render our potential product candidates obsolete or less attractive. It is possible that none of the product candidates we may in-
license or acquire will be approved for commercial sale or be otherwise commercially viable, which would impair our ability to
grow. 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
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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.
Our failure to successfully develop and commercialize additional product candidates or approved products would impair our
ability to grow and/or adversely affect our business.
As part of our growth strategy, we intend to explore further linaclotide development opportunities. We and AbbVie are
exploring development opportunities to enhance the clinical profile of LINZESS by studying linaclotide in new or existing
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 U.S. FDA or in other
countries or harm linaclotide’s reputation in the marketplace, each of which could materially harm our revenues from linaclotide.
The strength of our company’s pipeline will depend in large part on the outcomes of studies of assets in our pipeline.
We may spend several years and make significant investments in developing any current or future product candidate, and failure
may occur at any point. Our product candidates must satisfy rigorous standards of safety and efficacy before they can be
approved for sale by the U.S. FDA. To satisfy these standards, we must allocate resources among development programs and we
must engage in costly and lengthy research 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 develop will be approved for commercial sale, which would impair our ability to grow.
We have ongoing or planned nonclinical and clinical trials, including for linaclotide. Many companies in the
pharmaceutical industry have suffered significant setbacks in clinical trials even after achieving promising results in earlier
nonclinical or clinical trials. For example, in May 2020, we and AbbVie announced that our Phase II trial evaluating MD-7246, a
delayed release formulation of linaclotide in adult patients with abdominal pain associated with irritable bowel syndrome with
diarrhea, did not meet its primary or key secondary endpoints. Based on these findings, we and AbbVie have discontinued
development of MD-7246. In addition, in September 2020, we announced that one of our two identical Phase III trials evaluating
IW-3718 in refractory GERD did not meet the pre-specified criteria associated with a planned early efficacy assessment.
Following the assessment from an independent data monitoring committee, we unblinded the data and confirmed that IW-3718-
302 did not meet the criteria, including the study’s primary endpoint of achieving a statistically significant improvement in
heartburn severity. Based on these findings, we are discontinuing development of IW-3718.
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 U.S. FDA and other applicable regulatory authorities, which could delay, limit or prevent regulatory approval. The U.S. FDA
or other regulatory authorities also may require additional clinical trials, which may be costly or delay, limit, prevent or otherwise
impact regulatory submission or approval. Satisfaction of U.S. FDA or other applicable regulatory requirements is costly, time-
consuming, uncertain and subject to unanticipated delays.
If we are unable to successfully partner with other companies to develop and commercialize 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 products or product candidates. Although we have entered into such arrangements with 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 that we either develop internally or in- license 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,
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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 products or product candidates or do so to their full potential.
Delays in the completion of clinical testing of any of our products or 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:
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the ongoing COVID-19 pandemic, including restrictions on activities imposed by government authorities in
response;
obtaining regulatory approval to commence a clinical trial;
reaching agreement on acceptable terms with prospective 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;
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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.
The COVID-19 pandemic has impacted enrollment in our clinical trials and may impact clinical trial enrollment or
participation in the future, for example due to suspension of in-person procedures required for enrollment or lower or
discontinued patient participation compared to pre-COVID-19 pandemic levels. Specifically, prior to our decision to discontinue
development of IW-3718, the COVID-19 pandemic impacted enrollment in our Phase III clinical trials of IW-3718 for the
treatment of refractory GERD. Clinical trials may also be delayed or discontinued as a result of ambiguous or negative interim
results or assessments. 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 U.S. FDA, or other regulatory authorities due to a number of
factors, including:
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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 U.S. FDA or other regulatory authorities resulting in
the imposition of a clinical hold;
unforeseen safety issues; or
lack of adequate enrollment or funding to continue the clinical trial.
Additionally, changes in regulatory requirements and guidance may occur, and we may need or otherwise determine 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
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commercial prospects for our products or 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.
Risks Related to Our Dependence on Third Parties
Because we work with partners to develop, manufacture and commercialize linaclotide, we are dependent upon third parties,
and our and our partners’ relationships with those third parties, in our and our partners’ efforts to obtain regulatory approval
for, and to commercialize, linaclotide, as well as to comply with regulatory and other obligations with respect to linaclotide.
AbbVie played a significant role in the conduct of the clinical trials for linaclotide and in the subsequent collection and
analysis of data, and AbbVie holds the new drug application, or NDA, for LINZESS. In addition, we are commercializing
LINZESS in the U.S. with AbbVie. AbbVie is also responsible for the development, regulatory approval and commercialization
of linaclotide in countries worldwide other than Japan and China (including Hong Kong and Macau). AbbVie is commercializing
LINZESS in Mexico and CONSTELLA in Canada, as well as commercializing CONSTELLA in certain countries in Europe.
Astellas and AstraZeneca are responsible for development and commercialization of LINZESS in Japan and China (including
Hong Kong and Macau), respectively. Each of our partners for linaclotide also is responsible for active pharmaceutical
ingredient, or API, finished drug product and finished goods manufacturing (including bottling and packaging) for its respective
territories and distributing the finished goods to wholesalers. We and/or our partners have commercial supply agreements with
independent third parties to manufacture the linaclotide API.
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,
including those arising out of the COVID-19 pandemic, 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, particularly in light of the impact of the COVID-19 pandemic on our partners’ operations. If any of our partners fails
to devote sufficient time and resources to linaclotide, or if its performance is substandard or otherwise hindered, 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 each of Astellas, AstraZeneca and AbbVie is responsible for reporting
adverse event information from its territory to us. An AstraZeneca partner is the holder of the global safety database for lesinurad
and is 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 such products, or fail to do so in a timely manner, we may not receive the information that we
or our partners are required to report to the U.S. FDA or a foreign regulatory authority 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 U.S. 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 such products, removal of such
products from the market, criminal prosecution, the imposition of civil monetary penalties, seizure of such products, or delay in
approval of future products.
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We rely entirely on contract manufacturers, our partners and other third parties to manufacture linaclotide and our other
product candidates 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 development and 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 API, finished drug product and finished goods for linaclotide and our other
product candidates. Each of our partners for linaclotide is responsible for API, finished drug product and finished goods
manufacturing (including bottling and packaging) for its respective territories and distributing the finished goods to wholesalers.
Should we, or any of our partners or any third-party manufacturers we or our partners engage, experience setbacks or challenges
in our manufacturing efforts, including setbacks related to the COVID-19 pandemic described further below, our development
and commercialization efforts may be materially harmed. We and/or our partners have commercial supply agreements with
independent third parties to manufacture linaclotide API.
Each of our partners and the third-party manufacturers we or our partners engage must comply with current good
manufacturing practices, or GMP, and other stringent regulatory requirements enforced by the U.S. 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 and our partners’ 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 compliance with these regulations and standards by our partners and the third-party manufacturers we
or our partners engage.
Our partners and the third-party manufacturers we or our partners engage 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, natural
disasters and public health epidemics, including the COVID-19 pandemic. In addition, the raw materials necessary to make API
for our products and product candidates are acquired from a limited number of sources. Any delay or disruption in the availability
of 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 partners or the third-party manufacturers we or our partners engage 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 partners or the third-party manufacturers we or our partners engage 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 maximum or available manufacturing
capacities are insufficient to meet demand, our and our partners’ development or commercialization efforts may be materially
harmed.
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If any of our linaclotide partners undergoes a change of 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 partners on many aspects of the development, manufacturing and/or
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 develop and 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. In May 2020, AbbVie announced the completion of its acquisition of Allergan. Our collaboration, now with
AbbVie, for the development and commercialization of linaclotide in North America, and our license, now to AbbVie, to develop
and commercialize linaclotide in all countries worldwide other than China (including Hong Kong and Macau) and Japan, remain
in effect. In connection with this transaction, we continue to engage with AbbVie to reestablish relationships and confirm
alignment, including on our development and commercialization strategy for linaclotide. Any failure to do so could adversely
affect the development and commercialization of linaclotide. If any of our linaclotide partners undergoes a change of control or in
management, we would similarly need to reestablish many relationships and confirm alignment, including on our development
and commercialization strategy for linaclotide. Further, in connection with any change of control or change 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 that represents the functional areas necessary to
support the commercialization of LINZESS in the U.S. If AbbVie 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, as well as develop others, to replace the capabilities that AbbVie 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.
We do not have certain operational capabilities outside of the U.S. If AbbVie, Astellas Pharma, Inc., or Astellas, or
AstraZeneca AB (together with its affiliates), 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 development and commercialization of linaclotide could be negatively impacted.
Risks Related to Regulatory, Legal and Compliance Matters
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 our approved products, including the sale of
linaclotide and lesinurad, expose us to product liability claims. If we do not successfully defend ourselves against
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product liability claims, we could incur substantial liabilities. In addition, regardless of merit or eventual outcome, product
liability claims may result in:
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decreased demand for approved products;
impairment of our business reputation;
● withdrawal of clinical trial participants;
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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 our products 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 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 U.S. FDA or other applicable regulatory agencies. Such “off-label” uses are
common across medical specialties. Although the U.S. FDA and other regulatory agencies do not regulate a physician’s choice of
treatments, the U.S. FDA and other regulatory agencies do restrict manufacturer
communications on off-label use. Companies are not permitted to promote drugs or medical devices for off-label uses or to
promote unapproved drugs or medical devices. Accordingly, we do not permit promotion of any product that we develop, license,
commercialize, promote, co-promote or otherwise partner prior to approval or for any indication, population or use not described
in or consistent with such product’s label. The U.S. 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 U.S. 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.
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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, fraud and abuse, privacy and price
reporting and payment are applicable to, and may affect, our business. These laws and regulations include:
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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, 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;
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 payors
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 on certain types of entities, which include many healthcare providers with whom we interact and health
plans with which we may interact;
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 healthcare
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 payor, 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
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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 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 July 2020 invalidation of the EU-U.S. Privacy Shield framework also may lead to increased scrutiny on
data transfers from the EEA to the United States generally and increase our costs of compliance with data privacy legislation. In
addition, we are subject to the California Consumer Privacy Act, or CCPA, which became effective on January 1, 2020. The
CCPA gives California consumers (defined to include all California residents) certain rights, including the right to ask companies
to disclose the types of personal information collected, specific pieces of information collected by a company, the categories of
sources from which such information was collected, the business purpose for collecting or selling the consumer’s personal
information, and the categories of third parties with whom a company shares personal information. The CCPA also imposes
several obligations on companies to provide notice to California consumers regarding a company’s data processing activities.
Additionally, the CCPA gives California consumers the right to ask companies to delete a consumer’s personal information and it
places limitations on a company’s ability to sell personal information, including providing consumers a right to opt out of sales of
their personal information. The compliance obligations imposed by the GDPR and the CCPA have required us to revise our
operations. In addition, the GDPR and the CCPA impose substantial fines and other regulatory penalties for breaches of data
protection requirements, and they confer a private right of action on data subjects (in the case of the GDPR) and consumers (in
the case of the CCPA) and their representatives for breaches of certain 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 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 payor 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 eliminated 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. The case Texas v. Azar, which challenges the constitutionality of the ACA, including provisions
that are unrelated to healthcare reform but were enacted as part of the ACA, was argued before the Supreme Court in November
2020. Pending resolution of the litigation, all of the ACA but the individual mandate to buy health insurance remains in effect.
Additional healthcare reform efforts have sought to address certain issues related to the COVID-19 pandemic, including an
expansion of telehealth coverage under Medicare and accelerated or advanced Medicare payments to healthcare providers. In
addition, in 2020 and 2021, the U.S. Department of Health and Human Services issued various rules that affect pricing or
payment for prescription drug products. For example, effective in 2022, revisions to the federal anti-kickback statute would
remove protection for traditional Medicare Part D discounts offered by pharmaceutical manufacturers to pharmacy benefit
managers and health plans. Healthcare reform efforts have been and may continue to be subject to legal challenge. For example,
courts have temporarily enjoined a new “most favored nation” payment model for select drugs covered under Medicare Part B
that was to take effect on January 1, 2021 and would limit
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payment based on international drug price. 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. We cannot predict, however, 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 2030 (except May 1, 2020 to March 31, 2021). 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 U.S. 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 evaluation and mitigation strategies approved by the U.S. FDA. We and AbbVie have
established a nonclinical and clinical post-marketing plan with the U.S. FDA to understand the safety and efficacy of LINZESS
in pediatrics. The U.S. 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.
Risks Related to the Separation of Cyclerion
We may incur operational difficulties or be exposed to claims and liabilities as a result of the separation of Cyclerion.
On April 1, 2019, we distributed all of the outstanding shares of Cyclerion Therapeutics, Inc., or Cyclerion, common
stock to Ironwood stockholders in connection with the separation of our soluble guanylate cyclase business, or the Separation. In
connection with the distribution, we entered into a separation agreement and various other agreements (including a tax matters
agreement, an employee matters agreement, transition services agreements, an intellectual property license agreement and a
development agreement). These agreements govern the separation and distribution and the relationship between us and Cyclerion
going forward, including with respect to potential tax-related losses associated with the separation and distribution. In addition,
the development agreement provides for the performance of services by Cyclerion for our benefit for a period of time. If
Cyclerion is unable to satisfy its obligations under these agreements, we could incur losses or operational challenges or
difficulties and may not have sufficient resources available for such services. These arrangements could also lead to disputes over
rights to certain shared property and over the allocation of costs for products and operations.
The separation agreement provides for indemnification obligations designed to make Cyclerion financially responsible
for many liabilities that may exist relating to its business activities, whether incurred prior to or after the distribution, including
any pending or future litigation, but we cannot guarantee that Cyclerion will be able to satisfy its indemnification obligations. It is
also possible that a court would disregard the allocation agreed to between us and Cyclerion and require us to assume
responsibility for obligations allocated to Cyclerion. Third parties could also seek to hold us responsible for any of these
liabilities or obligations, and the indemnity rights we have under the separation agreement may not be sufficient to fully cover all
of these liabilities and obligations. Even if we are successful in obtaining indemnification, we may have to bear costs temporarily.
In addition, our indemnity obligations to Cyclerion, including those related to assets or liabilities allocated to us, may be
significant. These risks could negatively affect our business, financial condition or results of operations.
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If the distribution of the shares of Cyclerion common stock in connection with 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.
The distribution, together with certain related transactions, is intended to qualify for tax-free treatment to us and our
stockholders for U.S. federal income tax purposes. We received a favorable private letter ruling from the Internal Revenue
Service, or IRS, under the pilot program established in Revenue Procedure 2017-52 relating to the U.S. federal income tax
treatment of the distribution. Consistent with the guidelines set forth in Revenue Procedure 2017-52, the IRS private letter ruling
does not cover all of the issues that are relevant to determining whether the distribution is generally tax free for U.S. federal
income tax purposes. Accordingly, completion of the distribution was conditioned upon, among other things, our receipt of an
opinion from an outside tax advisor that the distribution will qualify as a transaction that is generally tax-free to both us and our
stockholders for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code. The
private letter ruling and opinion were based on and relied on, among other things, certain facts and assumptions, as well as certain
representations, statements and undertakings from us and Cyclerion (including those relating to the past and future conduct of us
and Cyclerion). If any of these facts, assumptions, representations, statements or undertakings is, or becomes, inaccurate or
incomplete, or if we or Cyclerion breach any of our respective covenants relating to the distribution, the IRS private letter ruling
and any tax opinion may be invalid. Moreover, the opinion is not binding on the IRS or any courts. Accordingly, notwithstanding
receipt of the IRS private letter ruling and the opinion, the IRS could determine that the distribution and certain related
transactions should be treated as taxable transactions for U.S. federal income tax purposes.
If the distribution, together with certain related transactions, fails to qualify as a transaction that is generally tax-free
under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code, in general, for U.S. federal income tax purposes, we would
recognize taxable gain with respect to Cyclerion’s distributed common stock and our stockholders who received shares of
Cyclerion common stock in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair
market value of such shares.
We may not achieve some or all of the anticipated benefits of the Separation, which may adversely affect our business.
We may not be able to achieve the full strategic, financial or other benefits expected to result from the Separation, or
such benefits may be delayed or not occur at all. If we fail to achieve some or all of the expected benefits of the Separation, or if
such benefits are delayed, our business, financial condition, results of operations and the value of our stock could be adversely
impacted. 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 Class A Common Stock would have been had the Separation not occurred. In addition, we are smaller and
less diversified, with a narrower business focus, than we were before the Separation and therefore may be more vulnerable to
changing market conditions.
Risks Related to Intellectual Property
Limitations on our ability to obtain patent protection and/or 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 sufficient 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 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 related to LINZESS include multiple
patents relating to our commercial, room temperature stable formulations of the 72 mcg, 145 mcg and 290 mcg
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doses of linaclotide and methods of using these formulations, the latest of which expires in the early 2030s, as well as other
patents covering processes for making LINZESS, formulations 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. In addition, we have several
pending patent applications in the U.S. We believe in the strength of our LINZESS patent portfolio and that we have sufficient
freedom to operate; however, if any of our present or future patents is challenged, narrowed, invalidated or circumvented, or our
pending patent applications are not granted, our ability to prevent third parties from competing with LINZESS could be limited
and our business and financial results may be materially harmed.
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 that narrow
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 LINZESS 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 LINZESS or our product candidates may infringe.
We may be exposed to, or threatened with, litigation by third parties alleging that LINZESS or our product candidates
infringe their intellectual property rights. If LINZESS 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 LINZESS 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 counterparty 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.
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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:
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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;
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 LINZESS 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 U.S. 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 and seek to commercialize generic versions of one or more LINZESS doses. As such, we have brought,
and may bring in the future, legal proceedings against generic drug manufacturers.
We and AbbVie have received Paragraph IV certification notice letters regarding ANDAs submitted to the U.S. 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 U.S. FDA-approved drug LINZESS. In the past, we
have filed patent infringement lawsuits against five companies making such ANDA filings, and we have entered into settlement
agreements dismissing the lawsuits with each company that has made ANDA filings. Frequently, innovators receive multiple
ANDA filings. Consequently, we expect to receive additional notice letters regarding ANDAs submitted to the U.S. FDA, and
may receive amendments to those 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 U.S. 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. 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 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.
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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 incurred significant losses from our inception in 1998 through the year ended December 31, 2018, and we may incur
losses in future periods.
In recent years, we have focused primarily on developing, manufacturing and commercializing linaclotide, as well as
developing our other product candidates. We have financed our business to date primarily through the issuance of equity, our
collaboration and license arrangements, and debt issuances, including our June 2015 issuance of our 2.25% Convertible Senior
Notes due June 15, 2022, or the 2022 Convertible Notes, and our August 2019 issuance of our 0.75% Convertible Senior Notes
due 2024, or the 2024 Convertible Notes, and our 1.50% Convertible Senior Notes due 2026, or the 2026 Convertible Notes
(together with the 2022 Convertible Notes and the 2024 Convertible Notes, the Convertible Senior Notes). We currently derive a
significant portion of our revenue from our LINZESS collaboration with AbbVie 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. Such
revenue is highly dependent on LINZESS demand and other factors such as wholesaler buying patterns. Our collaborative
arrangements revenue outside of the U.S. has and may continue to fluctuate as a result of the timing and amount of royalties from
sales of linaclotide in the markets in which it is currently approved, or any other markets where linaclotide receives approval, as
well as clinical and commercial milestones received and recognized under our current and future strategic partnerships outside of
the U.S.
Prior to the year ended December 31, 2019, we incurred net losses in each year since our inception in 1998. As of
December 31, 2020, we had an accumulated deficit of approximately $1.5 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, particularly in light of
the negative financial impact that the COVID-19 pandemic may have on our business in the future. 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. Failure to achieve sustainable net income and maintain positive cash flows would have an
adverse effect on 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 corporate or product development or commercialization efforts.
We have previously raised funds to finance our operations through capital raising activities, including the sale of shares
of our Class A Common Stock in public offerings and convertible and other debt issuances. 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:
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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 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 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 Convertible Senior Notes hold the notes to maturity without conversion into our Class A
Common Stock and whether we are required to repurchase any of our Convertible Senior Notes prior to maturity
upon a fundamental change, as defined in each of the indentures governing the Convertible Senior Notes; and
● whether we seek to redeem, repurchase or retire all or part of our outstanding debt through cash purchases and/or
exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise.
Additional funding may not be available on acceptable terms or at all. If adequate funds are not available, we may be
required to delay or reduce the scope of our commercialization efforts, delay, reduce or eliminate one or more of our
development programs or delay or abandon potential strategic opportunities.
Our ability to pay principal of and interest on our outstanding debt securities will depend in part on the receipt of payments
from AbbVie under our collaboration agreement for North America.
In June 2015, we issued approximately $335.7 million aggregate principal amount of our 2022 Convertible Notes
bearing an annual interest rate of 2.25%. In August 2019, we issued $200.0 million aggregate principal amount of our 2024
Convertible Notes bearing an annual interest rate of 0.75% and $200.0 million aggregate principal amount of
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our 2026 Convertible Notes bearing an annual interest rate of 1.50%, and we used a portion of the proceeds from this offering to
repurchase $215.0 million aggregate principal amount of the 2022 Convertible Notes. Semi-annual payments on our 2022
Convertible Notes began on December 15, 2015 and semi-annual payments on each of our 2024 Convertible Notes and 2026
Convertible Notes began on December 15, 2019. We expect that for the next few years, at a minimum, the net quarterly payments
from AbbVie will be a significant source of cash flows from operations. If the cash flows derived from the net quarterly
payments that we receive from AbbVie 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 AbbVie 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 AbbVie under the
collaboration agreement for North America. Accordingly, since we cannot guarantee that our company will maintain net income
or positive cash flows, 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
AbbVie, (ii) there will be a net quarterly payment from AbbVie at all or (iii) we will not also be required to make a true-up
payment to AbbVie 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, 2020, we had total indebtedness of approximately $520.7 million and available cash and cash
equivalents of approximately $362.6 million. Our indebtedness, combined with our other financial obligations and contractual
commitments, could have important consequences on our business, including:
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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 flows to be dedicated to debt service payments instead of other purposes,
thereby reducing the amount of cash flows 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
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increasing our cost of borrowing.
If we do not generate sufficient cash flows 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 Convertible Senior Notes, in connection with a transaction involving us that constitutes a fundamental change under the
indentures governing the Convertible Senior 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 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 none of the indentures governing our Convertible Senior Notes includes covenants restricting the
operation of our business except in certain limited circumstances, in the event of a default under any of the Convertible Senior
Notes, the applicable noteholders or the trustee under the indenture governing the applicable Convertible Senior Notes may
accelerate our payment obligations under such Convertible Senior 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 Convertible Senior 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
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Class A Common Stock listed on The Nasdaq Global or Global Select Market or The New York Stock Exchange), subject to the
terms of each of the indenture governing the Convertible Senior Notes. 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.
Each of the indentures governing our Convertible Senior Notes also includes cross-default features providing that
certain failures to pay for outstanding indebtedness would result in a default under the indentures governing our Convertible
Senior Notes. 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 Convertible Notes and capped call
transactions entered into in connection with our 2024 Convertible Notes and our 2026 Convertible Notes may affect the value
of our Class A Common Stock.
In connection with the issuance of our 2022 Convertible Notes, we entered into convertible note hedge transactions, or
the Convertible Note Hedges, and separate note hedge warrant transactions, or the Note Hedge Warrants, with certain financial
institutions. The Convertible Note Hedges and Note Hedge Warrants were partially terminated in connection with the repurchase
of $215.0 million aggregate principal amount of the 2022 Convertible Notes in August 2019. Additionally, in connection with the
issuance of our 2024 Convertible Notes and our 2026 Convertible Notes, we entered into capped call transactions, or the Capped
Calls, with certain financial institutions. These transactions are expected generally to reduce the potential dilution upon any
conversion of our 2022 Convertible Notes, our 2024 Convertible Notes or our 2026 Convertible Notes, as applicable, or offset
any cash payments we are required to make in excess of the principal amount of converted Convertible Senior Notes, as the case
may be.
In connection with these transactions, the financial institutions likely purchased our Class A Common Stock in
secondary market transactions and entered into various over-the-counter derivative transactions with respect to our Class A
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 Convertible Notes, the 2024 Convertible Notes and the 2026 Convertible Notes, as applicable, by
purchasing and selling shares of our Class A 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 Class A Common Stock and, as a result, the number of
shares and the value of the Class A Common Stock noteholders will receive upon conversion of the 2022 Convertible Notes, the
2024 Convertible Notes or the 2026 Convertible Notes, as applicable. In addition, under certain circumstances the counterparties
have the right to terminate the Convertible Note Hedges and Capped Calls and settle the Note Hedge Warrants on terms set forth
in the applicable confirmations, which may result in us not receiving all or any portion of the anticipated benefit of the
Convertible Note Hedges and Capped Calls. If the price of our Class A 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 and
Capped Calls, 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 income (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;
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●
●
●
●
●
●
any impairments of assets or goodwill, and associated write-downs;
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;
any material lawsuit in which we may become involved; and
the impact of the COVID-19 pandemic or other public health epidemics, including containment or mitigation
measures, or natural disasters.
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 Class A Common Stock could decline substantially. Furthermore, any quarterly or annual fluctuations
in our operating results may, in turn, cause the price of our stock to fluctuate substantially.
Our ability to use net operating loss and tax credit carryforwards and certain built-in losses to reduce future tax payments is
limited by provisions of 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.
Prior to the year ended December 31, 2019, we incurred significant net losses since our inception. To the extent that we
do not generate federal and state taxable income in the future, 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. Certain future equity offerings or strategic transactions, if any, could potentially result
in a 50% or greater change of control.
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.
General Risk Factors
Public health emergencies, epidemics, or pandemics, such as the COVID-19 pandemic, impact our business.
In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. On March
11, 2020, the World Health Organization declared a global pandemic and recommended containment and mitigation measures
worldwide. On March 13, 2020, former U.S. President Donald Trump announced a national emergency relating to the pandemic.
Government authorities in the U.S. have recommended or imposed various containment and mitigation measures on large
portions of the population, and similar measures have also been taken in many other countries around the world. Both the
outbreak of COVID-19 and the containment and mitigation efforts have a serious adverse impact on the U.S. economy and the
economies of other countries around the world, the severity and duration of which are uncertain. Government stabilization efforts
will only partially mitigate the consequences.
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The COVID-19 pandemic has impacted, and is expected to continue to impact, our business and operations in a number
of ways and there are significant uncertainties surrounding the extent and duration of such impacts. Factors that will influence the
impact on our business and operations include the duration and extent of the outbreak, the duration and extent of imposed or
recommended containment and mitigation measures, and the general economic consequences of the pandemic. Addressing the
impacts of the COVID-19 pandemic has, and likely will for an extended period, required significant time and has diverted the
attention of our management, other employees and our board of directors.
The increase in virtual customer support and limitations on customer access by our customer-facing employees that was
prompted by the COVID-19 pandemic contributed to our decision to make virtual promotion a more permanent component of our
overall selling model and may further change our commercial model or the market strategy in the industry. Should we be unable
to evolve with any changes in the commercial landscape, we may be unable to maintain or grow our revenues from the
commercialization of LINZESS or successfully commercialize future products. In addition, changes in insurance coverage or
reimbursement levels by governmental authorities, private health insurers and other third-party payors, or changes in the type of
such coverage held by patients (including changes from commercial insurance to Medicaid) or the loss of coverage by some
patients, due to the impacts of the COVID-19 pandemic (including the related increase in unemployment in the U.S.) may
negatively impact our revenue from LINZESS. Moreover, continuing impacts to healthcare access or administration (including,
for example, limitations on medications or procedures deemed “non-essential” and reduced interaction between patients and
physicians) due to the COVID-19 pandemic may impact demand for LINZESS and materially harm our business and
commercialization efforts.
Most of our customer-facing employees are engaged in in-person work practices; however, they are limited in the
number of in-person details they are able to conduct due to containment and mitigation measures related to the COVID-19
pandemic. We monitor the impact of the COVID-19 pandemic in the territories where our customer-facing employees are
engaged in in-person work practices, and in some cases, we have paused or delayed in-person work practices as a result of the
impact of the COVID-19 pandemic in those territories, and may do so again in the future. Customer-facing employees who are
not providing in-person services continue to support their customers virtually through telephone and web-based technologies.
Headquarters employees are expected to have the option to work remotely through mid-2021. We may delay, stop or otherwise
limit in-person work in the future pending relevant health authority guidance and additional safety or other considerations. If our
employees are unable to work from home effectively, or if the COVID-19 pandemic otherwise impacts employees’ ability to
work, for example due to containment and mitigation measures related to the COVID-19 pandemic, illness, lack of resources or
inadequate technology, or restrictions, closures or other limits on school and other childcare options, our business will be
materially harmed. Specifically, new or continuing limits on the ability of our customer-facing employees to meet with
physicians and patients to visit healthcare providers and pharmacists (including due to continued or future remote working
arrangements, containment and mitigation measures that limit access to customers or other restrictions related to the COVID-19
pandemic) may have an extended negative impact on LINZESS sales.
Revenue from LINZESS sales or the progression of our trials will be affected should the COVID-19 pandemic cause
significant disruptions to manufacturing operations or supply of LINZESS to the U.S. or API, finished drug product or finished
goods for linaclotide or our product candidates, for example due to impacts of the COVID-19 pandemic on personnel involved in
the manufacturing and supply chain, international travel and shipping restrictions, inability of vendors to provide services, closed
manufacturing sites, or any other disruptions in the international supply chain. In addition, the COVID-19 pandemic has impacted
enrollment in our clinical trials, and may impact clinical trial enrollment or participation in the future, for example due to
suspension of in-person procedures required for enrollment or lower or discontinued patient participation compared to pre-
COVID-19 pandemic levels. Specifically, prior to our decision to discontinue development of IW-3718, the COVID-19 pandemic
impacted enrollment in our Phase III clinical trials of IW-3718 for the treatment of refractory gastroesophageal reflex disease, or
refractory GERD. In addition, the progression of our pipeline could be impacted should any of our key vendors, including clinical
research organizations, or CROs, and other clinical vendors, be unable to provide timely or sufficient services due to the impact
of the COVID- 19 pandemic.
The spread of COVID-19 continues to disrupt the U.S. healthcare and healthcare regulatory system. Capital markets in
the U.S. and around the world have also been negatively impacted, which may harm our business, including our ability to obtain
future financing. The COVID-19 pandemic, including containment and mitigation measures, has impacted our business and
operations, and could have a material adverse impact on our financial condition and results of operations in the future, including
for an extended period of time.
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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, motivate and retain key personnel.
We may not be able to attract, motivate or retain qualified management and scientific, clinical, operations and
commercial personnel 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, motivate and retain 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 research, development, regulatory, commercial, financial and other expertise of
our management, particularly Mark Mallon, our chief executive officer; Gina Consylman, our senior vice president, chief
financial officer, and treasurer; Thomas A. McCourt, our president; Jason Rickard, our senior vice president and chief operating
officer and Michael Shetzline, our senior vice president, chief medical officer and head of drug development. On February 4,
2021, Mr. Mallon notified us that he is resigning his position as chief executive officer and a member of our company’s board of
directors, in each case effective March 12, 2021. Effective upon Mr. Mallon’s departure, Mr. McCourt will serve as our interim
chief executive officer while the Board conducts a candidate search for Mr. Mallon’s permanent successor. This and any
additional transitions in our senior management team or other key employees, or the unavailability of any such persons for any
reason (including due to the COVID-19 pandemic), can be inherently difficult to manage and may disrupt our operations or
business or otherwise harm our business, for example due to the diversion of our board and management’s time and attention and
a decline in employee morale. Further, if we are unable to attract a qualified candidate to become our permanent chief executive
officer in a timely manner, our business and prospects may be adversely affected. In addition to the competition for personnel, the
Boston area in particular is characterized by a high cost of living. As such, we could have difficulty attracting experienced
personnel to our company and may be required to expend significant financial resources in our employee 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, partner, vendor or third-
party 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, 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.
Further, while some or all of our workforce, and those of our partners, vendors and other third-party providers, work remotely as
a result of the COVID-19 pandemic or otherwise, we may have greater vulnerability to cyberattacks or other losses of
confidential information, as well as interruptions in information technology systems. Any such interruptions, losses or breaches
would substantially impair our ability to operate our business and would compromise our, or our partners, vendors and other
third-party providers, 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
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in legal claims or proceedings, liability under laws that protect the privacy of personal information, disrupt our operations,
negatively impact our financial condition 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 financial or other losses that may result from
an interruption or breach of our (or our partners’, vendors’ and third-party providers’) systems.
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 Class A Common Stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of
control. These provisions include the following:
● Our board of directors is currently divided into three classes serving staggered 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. At our 2019 annual meeting of stockholders, our stockholders approved an
amendment to our certificate of incorporation to declassify our board of directors to allow our stockholders to vote
on the election of the entire board of directors on an annual basis, rather than on a staggered basis. This
declassification is being phased in such that, once completed in 2022, stockholders will have the opportunity to
replace the entire board at a single stockholders’ meeting and at each annual stockholders’ meeting thereafter. As
required by Delaware law, the amendment to our certificate of incorporation also reflects that, once the board of
directors is declassified, stockholders may remove directors with or without cause.
● 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, as described above, until our board
of directors is declassified, 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 Class A 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.
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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 Class A Common Stock.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable 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.
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 Class A
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 AbbVie 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 AbbVie for the U.S., 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 could have an adverse effect on our financial results, which could lead to a decline in our Class A
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 Class A Common Stock will fluctuate substantially.
The market price of our Class A Common Stock may be highly volatile due to many factors, including:
●
the commercial performance of 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, including clinical trial results or timelines, or intellectual property
rights of us or others;
●
actual and anticipated fluctuations in our quarterly and annual operating results;
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●
●
●
●
●
●
deviations in our operating results from any guidance we may provide or the estimates of securities analysts;
sales of additional shares of our Class A Common Stock or sales of securities convertible into Class A Common
Stock or the perception that these sales might occur;
additions or departures of key personnel;
developments concerning current or future collaboration, partnership, licensing or other strategic arrangements;
discussion of us or our stock price in the financial or scientific press or in online investor communities; and
the impact of the COVID-19 pandemic or other public health epidemics, including containment or mitigation
measures, or natural disasters.
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. The realization of any of the risks described in these “Risk Factors” could have a
dramatic and material adverse impact on the market price of our Class A 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 Boston, Massachusetts, where, as of December 31, 2020, we
occupied approximately 39,000 square feet of office space under our lease expiring in June 2030. We believe that our facilities
are suitable and adequate for our needs for the foreseeable future.
Item 3. Legal Proceedings
None.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Shares of our Class A Common Stock are traded on the Nasdaq Global Select Market under the symbol “IRWD.” Our
shares have been publicly traded since February 3, 2010. As of February 10, 2021, there were 51 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.
On April 1, 2019, we completed the separation, or the Separation, of our soluble guanylate cyclase, or sGC, business,
and certain other assets and liabilities, into a separate, independent publicly traded company, Cyclerion Therapeutics, Inc., or
Cyclerion. The Separation was effected by means of a distribution of all the outstanding shares of common stock, with no par
value, of Cyclerion, through a dividend of Cyclerion’s common stock to our stockholders of record as of the close of business on
March 19, 2019.
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, 2015 through December 31, 2020. The
comparison assumes $100 was invested after the market closed on December 31, 2014 in our Class A Common Stock and in each
of the presented indices, and it assumes reinvestment of dividends, if any (other than any Cyclerion common stock distributed in
connection with the Separation). Total returns reflected in the following graph for periods prior to the date of the Separation have
been adjusted for the effect of the Separation to exclude the sGC business.
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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, 2020, 2019, and 2018 and the consolidated balance sheet data as of December 31, 2020 and
2019 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, 2017 and 2016 and the consolidated balance sheet
data as of December 31, 2018, 2017, and 2016 from our audited financial statements not included in this Annual Report on
Form 10-K. During the year ended December 31, 2019, we completed the separation of our soluble guanylate cyclase, or sGC,
business, or the Separation. Results of operations related to our sGC business have been reclassified to reflect discontinued
operations for all periods presented. 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(1)
Product revenue, net
Sale of active pharmaceutical ingredient
Total revenues
Cost and expenses:
Cost of revenues, excluding amortization of acquired intangible assets(2)
Write-down of commercial supply and inventory to net realizable value and
(settlement) loss on non-cancellable purchase commitments(3)
Research and development
Selling, general and administrative
Amortization of acquired intangible asset(4)
(Gain) loss on fair value remeasurement of contingent consideration(4)
Gain on lease modification(5)
Restructuring expenses(6)
Impairment of intangible assets(4)
Total cost and expenses
Income (loss) from operations
Other (expense) income:
Interest expense
Interest and investment income
Gain (loss) on derivatives(7)
Loss on extinguishment of debt (8)
Other income(9)
Other expense, net
Income (loss) from continuing operations
Income tax expense
Income from continuing operations
Loss from discontinued operations, net of income taxes
Net income (loss) and comprehensive income (loss)
Income per share from continuing operations, net of income taxes—basic
Income per share from continuing operations, net of income taxes— diluted
Loss per share from discontinued operations, net of income taxes—basic and
diluted
Net income (loss) per share—basic
Net income (loss) per share—diluted
Year Ended December 31,
2018
(in thousands, except per share data)
2019
2017
—
$ 379,652 $ 272,839 $ 265,533
3,061
29,682
298,276
—
48,761
428,413
3,445
70,355
346,639
2020
$ 381,545
7,978
389,523
3,136
23,875
32,751
19,097
1,868
247
101,060
219,676
8,111
(31,045)
—
14,715
151,794
497,309
(150,670)
(37,724)
2,991
(8,743)
—
—
309
88,145
231,184
6,214
(31,310)
—
—
—
313,639
(15,363)
(36,370)
2,111
(3,284)
(2,009)
(43,476)
(194,146)
—
(194,146)
(88,222)
$ (282,368)
(39,552)
(54,915)
—
(54,915)
(62,022)
$ (116,937)
—
—
88,062
140,003
—
—
—
15,382
—
246,583
142,940
(3,530)
115,044
172,450
—
—
(3,169)
3,620
—
308,290
120,123
(36,602)
2,862
3,023
(30,977)
514
(61,180)
58,943
—
58,943
(37,438)
$ 21,505
(29,478)
1,504
(6,129)
—
24
(34,079)
108,861
2,685
106,176
$ 106,176
$
0.67
0.66
—
0.67
0.66
—
$
0.38
0.38
$
(1.27)
(1.27)
$
(0.37)
(0.37)
$
(0.28)
(0.28)
(0.24)
0.14
0.14
(0.58)
(1.85)
(1.85)
(0.42)
(0.78)
(0.78)
(0.29)
(0.56)
(0.56)
2016
$ 263,923
109
9,925
273,957
374
101,903
169,169
981
9,831
—
—
—
284,126
(10,169)
(39,153)
1,169
8,146
—
—
(29,838)
(40,007)
—
(40,007)
(41,701)
$ (81,708)
Weighted average shares used in computing net income per share—basic:
Weighted average shares used in computing net income per share— diluted:
159,427
160,655
156,023
156,023
152,634
152,634
148,993
148,993
144,928
144,928
(1) Collaborative arrangements revenue for the year ended December 31, 2020 included approximately $368.6 million related to
our share of sales of LINZESS® (linaclotide) in the U.S.
Collaborative arrangements revenue for the year ended December 31, 2019 included approximately $325.4 million related to
our share of sales of LINZESS in the U.S., approximately $32.4 million in non-contingent payments from
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AstraZeneca AB (together with its affiliates), or AstraZeneca, and $10.0 million related to the upfront fee from Astellas
Pharma Inc.
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 included an approximately $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.
(2) Cost of revenues for the year ended December 31, 2020 included approximately $3.1 million related to sales of linaclotide
API and finished drug product.
Cost of revenues for the year ended December 31, 2019 included approximately $23.9 million related to sales of linaclotide
API and finished drug product.
Cost of revenues for the year ended December 31, 2018 included approximately $31.6 million related to sales of linaclotide
API and finished drug product.
Cost of revenues for the year ended December 31, 2017 included approximately $16.5 million related to sales of linaclotide
API and finished drug product.
(3) During the year ended December 31, 2019, we recorded settlements of approximately $3.5 million related to the reversal of
certain previously accrued non-cancelable purchase commitments.
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 termination of our exclusive license to develop, manufacture, and
commercialize in the U.S. products containing lesinurad as an active ingredient, or the Lesinurad License, including
ZURAMPIC and DUZALLO®.
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.
(4) Amortization of acquired intangible assets was based on the economic consumption of intangible assets. Our amortization
was related to the ZURAMPIC and DUZALLO intangible assets. (Gain) loss on fair value remeasurement of contingent
consideration was 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.
During the year ended December 31, 2018, we delivered to AstraZeneca a notice of termination of the lesinurad license
agreement. As a result, we recorded an impairment charge of approximately $151.8 million due to the impairment of the
ZURAMPIC and DUZALLO intangible assets. 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.
(5) During the year ended December 31, 2019, we recorded a gain on lease modification of approximately $3.2 million related
to the modification of our former headquarters lease.
(6) During the year ended December 31, 2020, we incurred approximately $15.4 million in restructuring expenses, primarily due
to severance, benefits, and related costs associated with the September 2020 workforce reduction.
During the year ended December 31, 2019, we incurred approximately $3.6 million in restructuring expenses, primarily due
to severance, benefits, and related costs associated with the February 2019 workforce reduction.
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During the year ended December 31, 2018, we incurred approximately $14.7 million in restructuring expenses, primarily due
to severance, benefits, and related costs associated with the June 2018 and August 2018 workforce reductions.
(7)
In June 2015, we issued 2.25% Convertible Senior Notes due June 15, 2022, or the 2022 Convertible Notes. In connection
with the issuance of our 2022 Convertible Notes, we entered into convertible note hedge transactions, or the Convertible
Note Hedges, and separate note hedge warrant transactions, or the Note Hedge Warrants, with certain financial institutions.
Gain (loss) on derivatives consists of the change in fair value of the Convertible Note Hedges and Note Hedge Warrants,
which are recorded at fair value at each reporting period and changes in fair value are recorded in our consolidated
statements of operations.
(8) For the year ended December 31, 2019, we recorded a loss on extinguishment of debt of approximately $31.0 million due to
the write-off of unamortized debt issuance costs and debt discount related to the partial repurchase of the 2022 Convertible
Notes in August 2019 and the prepayment premium and write-off of the remaining unamortized debt issuance costs and debt
discount on the 8.375% Notes due 2026 Notes, or the 2026 Notes, as part of the redemption of all of the outstanding
principal amount of the 2026 Notes in September 2019.
For the year ended December 31, 2017, we recorded a loss on extinguishment of debt of approximately $2.0 million due to
the write-off of remaining unamortized debt issuance costs on the 11% PhaRMA Notes due 2024 as part of the redemption in
January 2017.
(9) For the year ended December 31, 2019, we recorded other income of approximately $0.5 million related to a transition
services agreement with Cyclerion Therapeutics, Inc., or Cyclerion, in connection with the Separation.
2020
2019
As of Year Ended December 31,
2018
(in thousands)
2017
2016
Consolidated Balance Sheet Data:
Cash, cash equivalents and available-for-sale securities
Working capital (excluding deferred revenue)
Assets of discontinued operations, including current
portion(1)
Right-of-use assets(2)
Total assets
Current liabilities of discontinued operations(1)
Debt financing and convertible notes, including current
portion(3)
Capital lease obligations, including current portion
Operating lease obligations, including current portion
Total liabilities
Total stockholders’ equity (deficit)
$ 362,564
463,666
$ 177,023
266,798
$ 173,172
146,911
$ 221,416
245,569
305,216
289,050
—
16,576
559,238
—
—
17,743
402,748
—
10,490
—
332,050
15,739
430,256
407,994
—
—
23,446
496,598
62,640
23,228
495,999
(93,251)
413,692
231
—
528,421
(196,371)
7,256
—
605,674
9,997
396,091
4,077
—
595,826
9,848
6,097
—
709,821
6,618
366,492
6,309
—
643,105
66,716
(1) During the year ended December 31, 2019, we completed the Separation. Assets and liabilities related to Cyclerion have
been reclassified as assets and liabilities of discontinued operations for the periods presented.
(2) During the year ended December 31, 2019, we implemented Accounting Standards Codification Topic 842, Leases, or ASC
842. As a result, we recorded right-of-use assets and associated lease liabilities for operating leases on our consolidated
balance sheet.
(3)
In August 2019, we issued $200.0 million in aggregate principal amount of the 0.75% Convertible Senior Notes due 2024, or
the 2024 Convertible Notes, and $200.0 million in aggregate principal amount of the 1.50% Convertible Senior Notes due
2026, or the 2026 Convertible Notes. We received net proceeds of approximately $391.0 million from the sale of the 2024
Convertible Notes and the 2026 Convertible Notes, after deducting fees and expenses of approximately $9.0 million. The
proceeds from the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes were used to pay the cost of the
associated capped call transactions, redeem all of the outstanding principal balance of the 2026 Notes, and repurchase $215.0
million aggregate principal amount of the 2022 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.
Discussion and analysis of our financial condition and results of operations for the fiscal year ended December 31, 2019
compared to the fiscal year ended December 31, 2018 is included in Part II, Item 7 –"Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019
filed with the Securities and Exchange Commission on February 13, 2020.
Overview
We are a gastrointestinal, or GI, healthcare company dedicated to advancing the treatment of GI diseases and redefining
the standard of care for GI patients. We are focused on the development and commercialization of innovative GI product
opportunities in areas of significant unmet need, leveraging our demonstrated expertise and capabilities in GI diseases.
LINZESS® (linaclotide), our commercial product, is the first product approved by the United States Food and Drug
Administration, or U.S. FDA, in a class of GI medicines called guanylate cyclase type C agonists and is indicated for adult men
and women suffering from irritable bowel syndrome with constipation, or IBS-C, or chronic idiopathic constipation, or CIC.
LINZESS is available 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 and China. 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 have strategic partnerships with leading pharmaceutical companies to support the development and
commercialization of linaclotide throughout the world, including with AbbVie Inc. (together with its affiliates), or AbbVie,
(successor to Allergan plc (together with its affiliates), or Allergan), in the U.S. and all countries worldwide other than China
(including Hong Kong and Macau) and Japan, AstraZeneca AB (together with its affiliates), or AstraZeneca, in China (including
Hong Kong and Macau) and Astellas Pharma Inc., or Astellas, in Japan. We also aim to leverage our leading capabilities in GI to
bring additional treatment options to GI patients; for example, we have a U.S. disease education and promotional agreement with
Alnylam Pharmaceuticals, Inc. for Alnylam’s GIVLAARI® (givosiran) for the treatment of acute hepatic porphyria.
To date, we have dedicated a majority of our activities to the research, development and commercialization of
linaclotide, as well as to the research and development of our other product candidates. Prior to the year ended December 31,
2019, when we recorded net income for the year of approximately $21.5 million, we incurred net losses in each year since our
inception in 1998. For the year ended December 31, 2020, we recorded net income of approximately $106.2 million. As of
December 31, 2020, we had an accumulated deficit of approximately $1.5 billion. We are unable to predict the extent of any
future losses or guarantee that our company will be able to maintain positive cash flows.
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.
Key 2020 Financial Highlights
● During the year ended December 31, 2020, we recognized approximately $389.5 million in total revenues,
compared to approximately $428.4 million during the year ended December 31, 2019. The decrease of 9% was
primarily driven by a decrease in sale of active pharmaceutical ingredient, or API, in 2020 compared to 2019. An
increase in collaborative arrangements revenue related to sales of LINZESS in the U.S. of approximately $43.2
million in 2020 compared to 2019 was offset by approximately $42.4 million in non-
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recurring revenue recognized in 2019 in connection with amendments to our collaborative arrangements with
AstraZeneca and Astellas.
● During the year ended December 31, 2020, we recognized approximately $368.6 million in collaborative
arrangements revenue related to sales of LINZESS in the U.S. compared to approximately $325.4 million during
the year ended December 31, 2019. The increase of 13% was primarily driven by an increase in LINZESS
prescription demand in the U.S. in 2020 compared to 2019.
● Our operations resulted in net income of approximately $106.2 million during the year ended December 31, 2020
compared to net income of $21.5 million during the year ended December 31, 2019, primarily driven by increased
revenue from sales of LINZESS in the U.S., as well as decreases in costs primarily associated with the
discontinuation of MD-7246 and IW-3718 development programs.
● We generated $168.8 million in cash from operations during the year ended December 31, 2020, ending the year
with $362.6 million in cash and cash equivalents.
●
In connection with our decision to discontinue development of IW-3718, we reduced our workforce by
approximately 100 full-time employees. We substantially completed the reduction in our workforce in the fourth
quarter of 2020. We expect to realize annualized cost savings in total operating expenses from this workforce
reduction, as well as cost savings related to external spend for IW-3718 previously expected through 2021.
Financial Operations 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.
The majority of our revenues are generated from the sales of LINZESS in the U.S. 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 AbbVie 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 AbbVie 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 consisted of sales of ZURAMPIC ® and DUZALLO ®, or the Lesinurad Products, in the U.S. through
the date of the termination in January 2019 of our exclusive license to develop, manufacture, and commercialize in the U.S.
products containing lesinurad as an active ingredient, or the Lesinurad License. Through December 31, 2020, we also generated
revenues from the manufacture of linaclotide finished drug product, finished goods, API and development materials for certain of
our partners.
Cost of Revenues. Cost of revenues primarily includes costs related to the sales of linaclotide API, finished drug
product, and finished goods to our partners, which generally occurs upon shipment for sales of API, finished drug product and
finished goods after the material has passed all quality testing required for acceptance by the partner to certain of our partners
outside of the U.S.
Settlement on Non-cancelable Inventory and Commercial Supply Purchase Commitments. During the year ended
December 31, 2019, we recorded settlements related to reversals of certain previously accrued non-cancelable purchase
commitments.
Research and Development Expense. The core of our research and development strategy is to leverage our demonstrated
expertise and capabilities in GI diseases to bring multiple medicines to patients. Research and
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development expense consists of expenses incurred in connection with the research into and development of 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, and licensing fees for our product
candidates. We record all research and development expenses as incurred.
Research and development expenses include amounts owed to AbbVie on an ongoing basis, as well as AstraZeneca
prior to September 2019 when we amended and restated our existing collaboration agreement with AstraZeneca, or the Amended
AstraZeneca Agreement, under cost-sharing provisions in our respective collaboration agreements for linaclotide.
Reimbursements received for research and development activities under these agreements were netted against research and
development expenses.
Linaclotide. Our commercial product, linaclotide, is available to adult men and women suffering from IBS-C or CIC in
certain countries around the world. LINZESS is commercially available in the U.S. for the treatment of IBS-C or CIC in adults.
Linaclotide also is approved and commercially available in China, Japan, and in a number of E.U. and other countries.
We and AbbVie 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. In January 2017, the U.S.
FDA approved a 72 mcg dose of LINZESS for adults with CIC, which became available in the U.S. in March 2017. In June 2019,
we announced positive topline data from our Phase IIIb trial demonstrating the efficacy and safety of linaclotide 290 mcg on the
overall abdominal symptoms of bloating, pain and discomfort in adult patients with IBS-C. In September 2020, based on the
Phase IIIb data, the U.S. FDA approved our Supplemental New Drug Application to include a more comprehensive description of
the effects of LINZESS in its approved label.
In connection with the U.S. FDA approval of LINZESS, we were required to conduct certain nonclinical and clinical
studies including those aimed at further understanding the safety profile of linaclotide. We and AbbVie completed such
additional studies and determined that: (a) orally administered linaclotide was not detected in breast milk, (b) there is little or no
evidence of any potential for antibodies to be developed to linaclotide, and (c) there were no signs or symptoms of an
immunogenic response to linaclotide. The results observed do not alter the known safety profile for linaclotide based on the
clinical studies and post-marketing experience to-date. In addition, we and AbbVie have established a nonclinical and clinical
post-marketing plan with the U.S. FDA to understand the safety and efficacy of LINZESS in pediatric patients. Clinical pediatric
programs in IBS-C and functional constipation are ongoing.
MD-7246. We and AbbVie were developing MD-7246, a delayed release formulation of linaclotide. In May 2020, we
and AbbVie announced top-line data from a Phase II trial evaluating MD-7246 in adult patients with abdominal pain associated
with IBS-D. The Phase II trial did not meet its primary or key secondary endpoints. Based on these findings, we and AbbVie
discontinued the development of MD-7246.
IW-3718. We were developing IW-3718, a gastric retentive formulation of a bile acid sequestrant, for the potential
treatment of refractory gastroesophageal reflux disease, or refractory GERD. In September 2020, we announced that one of our
two identical Phase III trials evaluating IW-3718 in refractory GERD did not meet the pre-specified criteria associated with a
planned early efficacy assessment. Following the assessment from an independent data monitoring committee, we unblinded the
data and confirmed that IW-3718-302 did not meet the criteria, including the study’s primary endpoint of achieving a statistically
significant improvement in heartburn severity. Based on these findings, we are discontinuing development of IW-3718.
Early research and development. Our early research and development efforts have been focused on supporting our
development stage GI programs, including exploring strategic options for further development of certain of our internal
programs. Included in early research and development are costs relating to the development of IW-3300, a GC-C agonist, which
is in pre-clinical development for the potential treatment of visceral pain conditions, as well as certain other expenses associated
with historical programs.
The following table sets forth our research and development expenses related to our product pipeline for the years ended
December 31, 2020, 2019, and 2018. 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
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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.
Linaclotide(1)
Lesinurad(2)
IW-3718
Early research and development
Total research and development expenses
(1)
(2)
Includes linaclotide in all indications, populations and formulations.
Includes lesinurad in all indications, populations and formulations.
Year Ended December 31,
2020
2019
2018
$ 25,531
—
52,183
10,348
$ 88,062
(in thousands)
39,061
524
65,771
9,688
115,044
$
$
$
$
33,749
5,184
37,789
24,338
101,060
Since 2004, the date we began tracking costs by program, we have incurred approximately $527.2 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 AbbVie for the U.S. and AstraZeneca for China (including Hong Kong and Macau) prior to the
execution of the Amended AstraZeneca Agreement, 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.
We and AbbVie 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. We cannot
currently estimate with any degree of certainty the amount of time or money that 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.
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 U.S. 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;
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● 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 early research and development, including 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; and
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 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 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 continue to invest in our GI-focused product
candidates as we advance them through pre-clinical and clinical trials, in addition to funding 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 legal costs of pursuing patent protection of our intellectual property, general and administrative related facility costs,
insurance costs and professional fees for accounting, tax, consulting, legal and other 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.
Prior to the execution of the Amended AstraZeneca Agreement, we were reimbursed for certain selling, general and
administrative expenses and netted these reimbursements against selling, general and administrative expenses as incurred.
AstraZeneca is responsible for all costs and expenses incurred under the Amended AstraZeneca Agreement. We include
AbbVie’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 AbbVie as collaboration expense or collaborative
arrangements revenue, respectively.
Gain on Lease Modification. During the year ended December 31, 2019, we recorded a gain on lease modification
related to a modification of our prior headquarters lease in April 2019. For additional information relating to the gain, see Note 8,
Leases, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Restructuring Expenses. Restructuring expenses pertain to workforce reduction and restructuring initiatives and are
more fully described in Note 18, Workforce Reduction and Restructuring, to our consolidated financial statements appearing
elsewhere in this Annual Report on Form 10-K. We substantially completed a workforce reduction related to discontinuing
development of IW-3718 in the fourth quarter of 2020 and incurred approximately $15.5 million of restructuring expenses,
primarily for one-time cash employee severance and benefit costs.
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Interest Expense. Interest expense consists primarily of cash and non-cash interest costs related to the convertible senior
notes. Non-cash interest expense consists of amortization of the debt discount and debt issuance costs associated with our
convertible senior notes.
Interest and Investment Income. Interest and investment income consists of interest earned on our cash, cash equivalents
and marketable securities as well as significant financing components of payments due from collaboration partners.
Gain (loss) on Derivatives. In June 2015, we issued 2.25% Convertible Senior Notes due June 15, 2022, or the 2022
Convertible Notes, and in August 2019, we issued 0.75% Convertible Senior Notes due 2024, or the 2024 Convertible Notes, and
1.50% Convertible Senior Notes due 2026, or the 2026 Convertible Notes (together with the 2022 Convertible Notes and the
2024 Convertible Notes, the Convertible Senior Notes). In connection with the issuance of our 2022 Convertible Notes, we
entered into convertible note hedge transactions, or the Convertible Note Hedges, and separate note hedge warrant transactions,
or the Note Hedge Warrants, with certain financial institutions. Gain (loss) on derivatives consists of the change in fair value of
the Convertible Note Hedges and Note Hedge Warrants, which 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 11, Notes Payable, to our consolidated financial statements appearing elsewhere in this Annual
Report on Form 10-K.
Loss on Extinguishment of Debt. We recognized a loss on extinguishment of debt during the year ended December 31,
2019 related to the redemption of the 8.375% Notes due 2026, or the 2026 Notes, and the partial repurchase of the 2022
Convertible Notes. In connection with the partial repurchase of the 2022 Convertible Notes, we also terminated the respective
portion of our existing Convertible Note Hedges and Note Hedge Warrants. These transactions are more fully described in Note
11, Notes Payable, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Income Taxes. We prepare our income tax provision based on our interpretation of the income tax accounting rules and
each jurisdiction’s enacted tax laws and regulations and record our income tax provision by applying our estimated annual
effective tax rate to pre-tax income. The difference between the recorded provision for income taxes and the income tax provision
based on U.S. statutory tax rates was primarily attributable to the impact of a continued valuation allowance.
Discontinued Operations. On April 1, 2019, we completed the separation, or the Separation, of our soluble guanylate
cyclase, or sGC, business, and certain other assets and liabilities, into a separate, independent publicly traded company, Cyclerion
Therapeutics, Inc., or Cyclerion. The Separation was effected by means of a distribution of all the outstanding shares of common
stock, with no par value, of Cyclerion, through a dividend of Cyclerion’s common stock to our stockholders of record as of the
close of business on March 19, 2019. In connection with the Separation, we recast all historical expenses directly associated with
our sGC business as discontinued operations for the years ended December 31, 2019 and 2018 in accordance with ASC Subtopic
250-20, Discontinued Operations. For additional information refer to Note 3, Cyclerion Separation, 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,
the disclosure of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues
and expenses during the reported periods. 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
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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.
Leases
Effective January 1, 2019, we adopted ASC Topic 842, Leases, or ASC 842, using the optional transition method. The
adoption of ASC 842 represents a change in accounting principle that aims to increase transparency and comparability among
organizations by requiring the recognition of right-of-use, assets and lease liabilities on the balance sheet for both operating and
finance leases. In addition, the standard requires enhanced disclosures that meet the objective of enabling financial statement
users to assess the amount, timing, and uncertainty of cash flows arising from leases.
As part of the ASC 842 adoption, we elected certain practical expedients, which include:
● A policy election to use the short-term lease exception by asset class; and
●
Election of the practical expedient package during transition, which includes:
o An entity need not reassess whether any expired or existing contracts are or contain leases.
o An entity need not reassess the classification for any expired or existing leases. As a result, all leases that
were previously classified as operating leases in accordance with ASC Topic 840, Leases, or ASC 840, are
classified as operating leases under ASC 842, and all leases that were classified as capital leases in
accordance with ASC 840 are classified as finance leases under ASC 842.
o An entity need not reassess initial direct costs for any existing leases.
Subsequent to our adoption of ASC 842, we elected the post-transition practical expedient, by class of underlying asset,
to account for lease components and non-lease components together as a single component for the asset class of operating lease
right-of-use real estate assets.
Our lease portfolio for the year ended December 31, 2020 includes: a lease for our headquarters location, a data center
colocation lease, vehicle leases for our salesforce representatives, and leases for computer and office equipment. We determine if
an arrangement is a lease at the inception of the contract. The asset component of our operating leases is recorded as the operating
lease right-of-use asset, and the liability component is recorded as the current portion of operating lease liabilities and operating
lease liabilities, net of current portion in our consolidated balance sheet. As of December 31, 2020, we did not record any finance
leases.
Right-of-use assets and operating lease liabilities are recognized based on the present value of lease payments over the
lease term at the lease inception date. Existing leases in our lease portfolio as of the adoption date were valued as of January 1,
2019. We use an incremental borrowing rate based on the information available at lease inception in determining the present
value of lease payments if an implicit rate of return is not provided with the lease contract. Operating lease right-of-use assets are
adjusted for incentives expected to be received.
Right-of-use assets and operating lease liabilities are remeasured upon certain modifications to leases using the present
value of remaining lease payments and estimated incremental borrowing rate upon lease modification.
Lease cost is recognized on a straight-line basis over the lease term, and includes amounts related to short-term leases.
We recognize variable lease payments as operating expenses in the period in which the obligation for those payments is incurred.
Variable lease payments primarily include common area maintenance, utilities, real estate taxes, insurance, and other operating
costs that are passed on from the lessor in proportion to the space leased by us.
Derivative Assets and Liabilities
In June 2015, in connection with the issuance of the 2022 Convertible 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 shares of
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our Class A Common Stock, subject to customary anti-dilution adjustments. In connection with the partial repurchase of the 2022
Convertible Notes in August 2019, we terminated our Convertible Note Hedges and Note Hedge Warrants proportionately.
These derivatives are recorded as assets or liabilities at fair value at the end of 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, expected term of the derivative instruments, the strike
prices of the derivative instruments, the risk-free interest rate, and the expected 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
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 and 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 standalone selling
price for each performance obligation identified in the contract. The assumptions that are used to determine the standalone selling
price may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and
probabilities of technical and regulatory success.
Our revenues are generated primarily through collaborative arrangements and license agreements related to the
development and commercialization of linaclotide, as well as co-promotion arrangements in the U.S. The terms of the
collaborative arrangements 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) education
or 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
receive our share of the net profits or bear our share of the net losses from the sale of linaclotide in the U.S. We have adopted a
policy to recognize revenue net of tax withholdings, as applicable.
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 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 standalone 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.
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Agreements that include the supply of 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 our 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 finished 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.
Net Profit or Net Loss Sharing
In accordance with ASC 808 Topic, Collaborative Arrangements, or 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 apply the separation, initial measurement, and recognition principles of ASC
Topic 606, Revenue from Contracts with Customers, or ASC 606, to our collaboration agreements.
Our collaborative arrangements revenue generated from sales of LINZESS in the U.S. are considered akin to sales-based
royalties. 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 AbbVie, and related cost of goods sold and selling, general and
administrative expenses as incurred by us and our collaboration partner. These amounts are partially determined based on
amounts provided by AbbVie 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 AbbVie
for timely and accurate information regarding any net revenues realized from sales of LINZESS in the U.S. in accordance with
ASC 808, and the related costs, 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.
We record revenue transactions as net product revenue in our consolidated statements of operations if we were 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 AbbVie 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
present the settlement payments to and from AbbVie as collaboration expense or collaborative arrangements revenue, as
applicable. We and AbbVie settle the cost sharing quarterly, such that our consolidated statements of operations reflect 50% of
the pre-tax net profit or loss generated from sales of LINZESS in the U.S.
Product Revenue, Net
Product revenue consisted of sales of the Lesinurad Products in the U.S. through the date of the termination of the
Lesinurad License in January 2019. We sold the Lesinurad Products principally to a limited number of national wholesalers and
selected regional wholesalers, or the Distributors. The Distributors resold the Lesinurad Products to retail pharmacies and
healthcare providers, who then sold to patients.
Net product revenue was recognized when the Distributor obtained control of our product, which occurred at a point in
time, typically upon shipment of Lesinurad Products to the Distributor. When we performed shipping and handling activities after
the transfer of control to the Distributor (e.g., when control transferred prior to delivery), they were considered fulfillment
activities, and accordingly, the costs were accrued for when the related revenue was recognized. We expensed incremental costs
of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized was
one year or less.
Product revenue was recorded net of the trade discounts, allowances, rebates, chargebacks, discounts, product returns,
and other incentives. Certain of these adjustments were recorded as an accounts receivable reserve, while certain of these
adjustments were recorded as accrued expenses.
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Sale of Active Pharmaceutical Ingredient
During the years ended December 31, 2020, 2019, and 2018, we produced linaclotide API, finished drug product,
finished goods, and/or development materials for certain of our partners. As of December 31, 2020, we are no longer responsible
for the supply of linaclotide API, finished drug product, finished goods or development materials to our partners.
As it relates to development materials and API produced for Astellas, we were reimbursed at a contracted rate. Such
reimbursements were considered as part of revenue generated pursuant to the Astellas license agreement and are presented as
collaborative arrangements revenue. Any linaclotide API, finished drug product, finished goods, and development materials
AbbVie is responsible for producing for the U.S. are recognized in accordance with the cost-sharing provisions of the
collaboration agreement for North America with AbbVie. Prior to the execution of the Amended AstraZeneca Agreement in
September 2019, any linaclotide API, finished drug product, finished goods, and development materials produced for
AstraZeneca for China (including Hong Kong and Macau) were recognized in accordance with the cost-sharing provisions of the
AstraZeneca collaboration agreement.
We recognize revenue on linaclotide API, finished drug product, finished goods, and development materials when
control has transferred to the partner, which generally occurs upon shipment after the material has passed all quality testing
required for acceptance by the partner.
Other
Our deferred revenue balance consists of advance billings and payments received from customers in excess of revenue
recognized.
Research and Development Expense
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. All research and development expenses are expensed as incurred. We capitalize
nonrefundable advance payments we make for research and development activities and defer expense recognition 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, share-based compensation, and other employee-related expenses; 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 collaboration agreement with AbbVie for
North America, 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 AbbVie under our collaboration agreement 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.
Share-Based Compensation Expense
We grant awards under our share-based compensation programs, including stock awards, restricted stock awards, or
RSAs, restricted stock units, or RSUs (including performance-based RSUs, or PSUs), stock options, and shares issued under our
employee stock purchase plan, or ESPP. Share-based compensation is recognized as expense in
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the consolidated statements of operations based on the grant date fair value over the requisite service period, net of estimated
forfeitures. We estimate forfeitures over the requisite service period using historical forfeiture activity and record share-based
compensation expense only for those awards that are expected to vest.
We estimate the fair value of stock options on the date of grant 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 stock awards,
RSAs, and RSUs is based on the market value of our Class A Common Stock on the date of grant, with the exception of PSUs
with market conditions, which are measured using the Monte Carlo simulation method. Discounted stock purchases under our
ESPP are valued on the first date of the offering period using the Black-Scholes option-pricing model to compute the fair value of
the lookback provision plus the purchase discount.
For awards that vest based on service conditions and market conditions, we use the straight-line method to recognize
compensation expense over the respective service period. For awards that contain performance conditions, 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. At the date performance conditions are determined to be probable of
achievement, we record a cumulative expense catch-up, with remaining expense amortized over the remaining service period.
Throughout the performance period, we re-assess the estimated performance and update the number of performance-based
awards that we believe will ultimately vest. Discounted stock purchases under our ESPP are recognized over the offering period.
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.
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.
Income Taxes
We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of assets and
liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse. We provide a
valuation allowance when it is more likely than not that deferred tax assets will not be realized.
We maintain a valuation allowance on the majority of our net operating losses and other deferred tax assets.
Accordingly, we have not reported any tax benefit relating to the remaining net operating loss carryforwards and income tax
credit carryforwards that are available for utilization in future periods. Our U.S. federal net operating loss carryforwards totaled
approximately $1.1 billion as of December 31, 2020. On a periodic basis, we reassess the valuation allowance on our deferred
income tax assets, weighing positive and negative evidence to assess the recoverability of the deferred tax assets. In 2020, we
reassessed the valuation allowance and considered negative evidence, including our cumulative losses in recent years and our
plan to build our innovative GI pipeline through potential acquisition or in-licensing externally developed products, and positive
evidence, including our income during the year ended December 31, 2020 and our projections of future income. After assessing
both the negative evidence and the positive evidence, we concluded that we should continue to maintain the valuation allowance
on net deferred tax assets as of December 31, 2020 given the significance of the weight of the negative evidence. Based on our
recent financial performance and our future projections, we could record a reversal of all, or a portion of the valuation allowance
associated with U.S. deferred tax assets in future periods. However, any such change is subject to actual performance and other
considerations that may present positive or negative evidence at the time of the assessment. Our total deferred tax asset balance
subject to the valuation allowance was approximately $395.0 million as of December 31, 2020.
Significant judgment is required in making these assessments to maintain or reverse our valuation allowances and, to the
extent our future expectations change we would have to assess the recoverability of these deferred tax assets at that time. If we
determine that our net deferred tax assets are realizable in a future period, we would record material changes to income tax
expense or benefit in that period.
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We record uncertain tax positions on the basis of a two-step process. First, we determine whether it is more likely than
not that the tax positions will be sustained based on the technical merits of the position. Second, for those tax positions that meet
the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50 percent
likely to be realized upon ultimate settlement with the relevant tax authority. Significant judgment is required in evaluating
whether our tax positions meet this two-step process. The nature of the uncertain tax positions is often very complex and subject
to change, and the amounts at issue can be substantial. We re-evaluate these uncertain tax positions on a quarterly basis based on
a number of factors including, but not limited to, changes in facts or circumstances, changes in tax law, and effectively settled
issues under audit and new audit activity. Any change in these factors could result in the recognition of a tax benefit or an
additional charge to the tax provision.
Results of Operations
The following discussion summarizes the key factors our management believes are necessary for an understanding of
our consolidated financial statements.
Revenues:
Collaborative arrangements revenue
Sale of active pharmaceutical ingredient
Total revenues
Cost and expenses:
Cost of revenues
Settlement 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
Gain on lease modification
Restructuring expenses
Impairment of intangible assets
Total cost and expenses
Income from operations
Other (expense) income:
Interest expense
Interest and investment income
Gain (loss) on derivatives
Loss on extinguishment of debt
Other income
Other expense, net
Income from continuing operations, before income tax expense
Income tax expense
Income from continuing operations
Loss from discontinued operations, net of income taxes
Net income
64
Year Ended December 31,
2020
2019
(in thousands)
$
381,545 $ 379,652
7,978
389,523
48,761
428,413
3,136
—
88,062
140,003
—
—
—
15,382
—
246,583
142,940
(29,478)
1,504
(6,129)
—
24
(34,079)
108,861
2,685
106,176
—
106,176
$
$
23,875
(3,530)
115,044
172,450
—
—
(3,169)
3,620
—
308,290
120,123
(36,602)
2,862
3,023
(30,977)
514
(61,180)
58,943
—
58,943
(37,438)
21,505
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Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Revenues
Revenues:
Collaborative arrangements revenue
Sale of active pharmaceutical ingredient
Total revenues
$ 381,545 $ 379,652 $
1,893
7,978
$ 389,523
48,761
$ 428,413
(40,783)
$ (38,890)
Year Ended
December 31,
2020
Change
$
(dollars in thousands)
2019
%
0 %
(84)%
(9)%
Collaborative arrangements revenue. The increase in revenue from collaborative arrangements of approximately $1.9
million for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily related to an
approximately $43.2 million increase in our share of the net profits from the sale of LINZESS in the U.S. driven by increased
prescription demand and lower collaboration-related selling expenses due to the COVID-19 pandemic and an approximately $3.6
million increase in linaclotide royalty revenue. These increases were offset by an approximately $32.4 million decrease in
revenue related to non-contingent payments pursuant to the Amended AstraZeneca Agreement and recognized in 2019; an
approximately $10.0 million decrease in revenue recognized related to a one-time up-front payment received in 2019 in
connection with the amendment and restatement of our license agreement with Astellas for linaclotide in Japan, or the Amended
Astellas License Agreement; and an approximately $2.2 million decrease in co-promotion revenue.
Sale of active pharmaceutical ingredient. The decrease in sale of API of approximately $40.8 million for the year ended
December 31, 2020 compared to the year ended December 31, 2019 was primarily related to a decrease of approximately $43.8
million in sales of API to Astellas in Japan, resulting from the transition of manufacturing responsibilities to Astellas in
connection with the Amended Astellas License Agreement executed in August 2019. This decrease was partially offset by an
approximately $2.6 million increase in sales of API, finished drug product, and finished goods to AstraZeneca in China.
Substantively all sales of API, finished drug product, and finished goods to AstraZeneca in China occurred during the three
months ended March 31, 2020 in connection with the transition of manufacturing responsibilities to AstraZeneca under the terms
of the Amended AstraZeneca Agreement.
Cost and Expenses
Year Ended
December 31,
Change
2020
2019
$
%
(dollars in thousands)
Cost and expenses:
Cost of revenues
Settlement on non-cancellable purchase commitments
Research and development
Selling, general and administrative
Gain on lease modification
Restructuring expenses
Total cost and expenses
$
3,136
—
88,062
140,003
—
15,382
$ 246,583
$ 23,875
(3,530)
115,044
172,450
(3,169)
3,620
$ 308,290
$ (20,739)
3,530
(26,982)
(32,447)
3,169
11,762
$ (61,707)
(87)%
(100)%
(23)%
(19)%
(100)%
325 %
(20)%
Cost of revenues. The decrease of approximately $20.7 million for the year ended December 31, 2020 compared to the
year ended December 31, 2019 was comprised of a decrease in cost of revenues of approximately $20.1 million related to the sale
of API to Astellas in Japan and a decrease in cost of revenues of approximately $0.5 million related to the sale of API, finished
drug product, and finished goods to AstraZeneca in China, concurrent with the decrease in revenue from the sale of API to
Astellas and AstraZeneca, respectively.
Settlement on non-cancellable purchase commitments. The settlement of certain commercial supply purchase
commitments occurred during the year ended December 31, 2019, which resulted in an overall gain. In connection with the
Amended AstraZeneca Agreement, certain of our previously written-down linaclotide excess purchase commitments were
assumed by AstraZeneca and resulted in a settlement of approximately $2.5 million. Additionally, certain
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previously written-down linaclotide purchase commitments were satisfied through API purchases at pricing terms favorable to
the pricing estimates at the time of the write-down, resulting in a gain of approximately $0.7 million upon purchase.
Research and development. The decrease in research and development expense of approximately $27.0 million for the
year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily related to a decrease of
approximately $14.4 million in external development costs related to IW-3718; a decrease of approximately $6.1 million in
operating expenses primarily related to facilities and other operating costs; a decrease of approximately $3.4 million in
compensation, benefits, and other employee-related expenses; and a decrease of approximately $2.7 million related to linaclotide
development.
Selling, general and administrative. Selling, general and administrative expenses decreased approximately $32.4 million
for the year ended December 31, 2020 compared to the year ended December 31, 2019. The decrease in selling, general and
administrative expense included an approximately $20.5 million decrease in costs associated with the Separation, which was
completed on April 1, 2019, and an approximately $12.1 million decrease in non-Separation costs. The approximately $20.5
million decrease in Separation costs includes an approximately $9.7 million decrease in facilities costs primarily due to our
change in headquarters location; an approximately $7.8 million decrease in compensation, benefits, and other employee-related
expenses; an approximately $2.0 million decrease in consulting and investment banking costs; and an approximately $1.0 million
decrease in legal costs. The approximately $12.1 million decrease in non-Separation costs includes an approximately $4.0 million
decrease in legal costs; an approximately $3.3 million decrease in facilities costs primarily due to our change in headquarters
location; an approximately $2.6 million decrease in travel costs as a result of the COVID-19 pandemic; an approximately $1.4
million decrease in post-marketing requirements for lesinurad as a result of our termination of the license agreement with
AstraZeneca for the development, manufacture, and commercialization of products in the U.S. containing lesinurad as an active
ingredient; an approximately $1.0 million decrease in collaboration costs pursuant to the Amended AstraZeneca Agreement; and
an approximately $0.7 million decrease in compensation, benefits, and other employee-related expenses. These decreases in non-
Separation costs were partially offset by an approximately $1.7 million increase in consulting costs.
Gain on lease modification. The gain on lease modification of approximately $3.2 million for the year ended December
31, 2019 was due to the modification of our prior headquarters lease in connection with the Separation.
Restructuring expenses. The increase in restructuring expenses of approximately $11.8 million for the year ended
December 31, 2020 compared to the year ended December 31, 2019 related to the workforce reduction substantially completed
during the fourth quarter of 2020 in connection with our decision to discontinue IW-3718 development. The Company recorded
restructuring expenses of approximately $15.4 during the year ended December 31, 2020 in connection with this workforce
reduction. During the year ended December 31, 2019, the Company recorded approximately $3.6 million in connection with a
workforce reduction that was substantially completed during the first quarter of 2019.
Other (Expense) Income, Net
Other (expense) income:
Interest expense
Interest and investment income
Gain (loss) on derivatives
Loss on extinguishment of debt
Other income
Total other expense, net
Year Ended
December 31,
Change
2020
2019
$
(dollars in thousands)
%
1,504
(6,129)
$ (29,478) $ (36,602) $ 7,124
(1,358)
(9,152)
30,977
(490)
$ (34,079) $ (61,180) $ 27,101
2,862
3,023
— (30,977)
514
24
(19)%
(47)%
(303)%
(100)%
(95)%
(44)%
Interest expense. Interest expense decreased by approximately $7.1 million during the year ended December 31, 2020
compared to the year ended December 31, 2019, primarily due to a decrease of approximately $10.4 million in interest expense
related to the 2022 Convertible Notes that were partially repurchased in August 2019 and a decrease of approximately $9.0
million in interest expense associated with the 2026 Notes that were fully redeemed in September
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2019, partially offset by an increase of approximately $6.2 million and $6.1 million in interest expense associated with the 2024
Convertible Notes and the 2026 Convertible Notes, respectively.
Interest and investment income. Interest and investment income decreased by approximately $1.4 million in the year
ended December 31, 2020 compared to the year ended December 31, 2019, resulting primarily from a decrease in investment
income of approximately $2.1 million due to lower investment interest rates, partially offset by an increase in interest income of
approximately $0.8 million related to the significant financing component of long-term receivables.
Gain (loss) on derivatives. For the year ended December 31, 2020, we recorded a loss on derivatives of approximately
$6.1 million resulting from an approximately $18.3 million decrease in the fair value of the Convertible Note Hedges and an
approximately $12.2 million decrease in the fair value of the Note Hedge Warrants. For the year ended December 31, 2019, we
recorded a gain on derivatives of approximately $3.0 million resulting from an approximately $29.2 million increase in the fair
value of the Convertible Note Hedges and an approximately $22.6 million increase in the fair value of the Note Hedge Warrants,
partially offset by an approximately $3.6 million loss recognized upon the partial termination of the Convertible Note Hedges and
the Note Hedge Warrants associated with the partial repurchase of the 2022 Convertible Notes.
Loss on extinguishment of debt. The loss on extinguishment of debt was approximately $31.0 million during the year
ended December 31, 2019 and pertained to the write-off of unamortized debt issuance costs and debt discount related to the
partial repurchase of the 2022 Convertible Notes and the prepayment premium and write-off of the remaining unamortized debt
issuance costs and debt discount on the 2026 Notes as part of the redemption of all of the outstanding principal amount of the
2026 Notes.
Other income. For the year ended December 31, 2020 compared to the year ended December 31, 2019, other income
decreased by approximately $0.5 million, primarily related to a transition service agreement with Cyclerion that terminated
during the first quarter of 2020.
Income taxes. During the year ended December 31, 2020, we recorded income tax expense of approximately $2.7
million, which was primarily payable to California resulting from a change in California tax that temporarily disallows the use of
net operating losses. We did not record any income tax expense for the year ended December 31, 2019.
Net loss from discontinued operations. There was approximately $37.4 million of net loss from discontinued operations
for the year ended December 31, 2019. For additional information on discontinued operations, see Note 3, Cyclerion Separation,
to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Liquidity and Capital Resources
Until the year ended December 31, 2019, we had incurred losses since our inception in 1998 and we had an accumulated
deficit of approximately $1.5 billion as of December 31, 2020. 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, debt financings, and cash generated from our
operations. As of December 31, 2020, our debt is comprised of approximately $520.7 million aggregate principal amount of
convertible notes, due at various dates between 2022 and 2026. Refer to Note 11, Notes Payable, to our consolidated financial
statements included elsewhere in this Annual Report on Form 10-K, for information related to our debt obligations.
At December 31, 2020, we had approximately $362.6 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 AA- 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, 2020, our balances of cash and cash equivalents increased by approximately
$185.5 million. Net cash provided by operating activities totaled approximately $168.8 million as a result of profitable operations
driven primarily by the sales of LINZESS in the U.S. Additionally, cash provided by financing activities totaled approximately
$18.5 million as a result of proceeds from the exercise of stock options and purchases pursuant to our ESPP. These cash inflows
were partially offset by approximately $1.8 million in capital expenditures.
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We may from time to time seek to retire, 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. Such
repurchases, redemptions or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual
restrictions and other factors, and the amounts involved may be material.
The COVID-19 pandemic is disrupting the U.S. healthcare system, as well as global capital markets. There continues to
be significant uncertainty surrounding the extent and duration of the impact of the COVID-19 pandemic on our business and
operations. The COVID-19 pandemic could have a material adverse impact on our financial condition and results of operations in
the future, including by impacting our ability to obtain financing. The impact of COVID-19 on our business and financial
condition is more fully described below in Trends and Uncertainties.
Cash Flows From Operating Activities
Net cash provided by operating activities totaled approximately $168.8 million for the year ended December 31, 2020.
The cash provided by operations primarily related to cash flows from our net income of approximately $106.2 million, net of
non-cash items of approximately $63.6 million. The non-cash items are primarily comprised of approximately $31.2 million of
share-based compensation expense, approximately $22.3 million of non-cash interest expense, approximately $6.1 million loss on
derivatives, and approximately $3.6 million of depreciation and amortization of property and equipment.
Net cash provided by operating activities totaled approximately $10.7 million for the year ended December 31, 2019, of
which approximately $0.6 million related to cash used in continuing operations and approximately $11.3 million related to cash
provided by discontinued operations. The use of approximately $0.6 million in cash for continuing operations primarily related to
cash flows from our net income of approximately $21.5 million, net of non-cash items of approximately $77.8 million, partially
offset by changes in assets and liabilities of approximately $100.0 million, primarily resulting from an increase in accounts
receivable and related party accounts receivable of approximately $68.9 million and a decrease in accounts payable and related
party accounts payable and accrued expenses of approximately $32.7 million. Non-cash items included approximately $31.3
million in share-based compensation expense, approximately $31.0 million of loss on extinguishment of debt, approximately
$19.6 million in non-cash interest expense, approximately $5.6 million in depreciation and amortization expense of property and
equipment, partially offset by approximately $3.5 million related to the settlement on non-cancellable purchase commitments,
approximately $3.2 million gain on lease modification, and an approximate $3.0 million net increase due to the change in fair
value of the Convertible Note Hedges and Note Hedge Warrants.
Cash Flows From Investing Activities
Cash used in investing activities for the year ended December 31, 2020 totaled approximately $1.8 million and pertained
to the purchase of property and equipment.
Cash used in investing activities for the year ended December 31, 2019 totaled approximately $11.1 million, of which
approximately $6.9 million related to cash used in continuing operations and approximately $4.2 million related to cash used in
discontinued operations. Cash used in investing activities pertained primarily to the purchase of approximately $7.2 million of
property and equipment, primarily laboratory space and leasehold improvements on the second floor of our prior headquarters
purchased prior to the Separation and transferred to Cyclerion, and leasehold improvements, equipment, and furniture at our
current headquarters.
Cash Flows From Financing Activities
Cash provided by financing activities for the year ended December 31, 2020 totaled approximately $18.5 million and
resulted from proceeds from the exercise of stock options and the issuance of shares under our ESPP.
Cash used in financing activities for the year ended December 31, 2019 totaled approximately $1.2 million and resulted
from approximately $227.3 million in payments to repurchase $215.0 million aggregate principal amount of the 2022 Convertible
Notes. Financing activities also included principal and prepayment premium payments totaling $156.4 million to fully redeem the
outstanding principal balance of the 2026 Notes. We also entered into capped call transactions for approximately $25.2 million in
connection with the 2024 Convertible Notes and 2026 Convertible Notes, or the Capped Calls. These cash outflows were
partially offset by approximately $391.0 million in net proceeds
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from the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes, after deducting fees and expenses of
approximately $9.0 million, approximately $13.6 million in proceeds from the exercise of stock options and the issuance of
shares under our ESPP, and approximately $3.2 million in proceeds from the partial termination of the Convertible Notes Hedges
and Note Hedge Warrants.
Funding Requirements
We began commercializing LINZESS in the U.S. with our collaboration partner, AbbVie, in the fourth quarter of 2012,
and we currently derive a significant portion of our revenue from this collaboration. In addition, we are deploying significant
resources to fulfill U.S. FDA requirements for linaclotide. Our goal is to generate and maintain positive cash flows, driven by
increased revenue generated through sales of LINZESS and other commercial activities and financial discipline.
Under our collaboration with AbbVie for North America, total net sales of LINZESS in the U.S., as recorded by
AbbVie, are reduced by commercial costs incurred by each party, and the resulting amount is shared equally between us and
AbbVie. Additionally, we receive royalties from AbbVie 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 AbbVie 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 continue to enable us to generate positive cash flows, 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., develop and commercialize other products, and invest in building our pipeline through internal or external
opportunities. We believe that our cash on hand as of December 31, 2020 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, obtain regulatory approval for, and commercialize linaclotide
in the U.S., as well as our expectations regarding revenue from Astellas for Japan and AstraZeneca for China (including Hong
Kong and Macau), and our goal to generate and maintain positive cash flows, 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 and CONSTELLA and from any other sources;
the rate of progress and cost of our commercialization activities, including the expense we incur in marketing and
selling LINZESS in the U.S. and from any other sources;
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;
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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 evaluating, acquiring, and, if completed, integrating into our business operations any such assets.
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 Obligations
The following table summarizes our lease obligations at December 31, 2020 (in thousands):
Operating lease obligations
$ 30,493
$ 3,128
$ 6,194
$ 6,315
$ 14,856
Payments Due by Period
Less Than
More Than
Total
1 Year
1 ‑‑ 3 Years 3 ‑‑ 5 Years 5 Years
Our commitments for operating leases relate to our office space in Boston, Massachusetts and our data storage space in
Boston, Massachusetts.
Notes Payable
In June 2015, we issued approximately $335.7 million in aggregate principal amount of the 2022 Convertible Notes.
The 2022 Convertible Notes are governed by an indenture between us and U.S. Bank National Association, as trustee. The 2022
Convertible Notes are senior unsecured obligations and bear cash 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 Convertible Notes will mature on June 15, 2022,
unless earlier converted or repurchased. To minimize the impact of potential dilution to our Class A common stockholders upon
conversion of the 2022 Convertible Notes, we entered into the Convertible Note Hedges and Note Hedge Warrants. In August
2019, we repurchased $215.0 million aggregate principal amount of the 2022 Convertible Notes, and we partially terminated the
proportionate portion of the Convertible Note Hedges and Note Hedge Warrants we entered into in connection with the issuance
of the 2022 Convertible Notes.
In August 2019, we issued $200.0 million in aggregate principal amount of the 2024 Convertible Notes and $200.0
million in aggregate principal amount of the 2026 Convertible Notes. The 2024 Convertible Notes and 2026 Convertible Notes
are governed by separate indentures between us and U.S. Bank National Association, as trustee. The 2024 Convertible Notes and
the 2026 Convertible Notes are senior unsecured obligations. The 2024 Convertible Notes bear cash interest at the annual rate of
0.75% and the 2026 Convertible Notes bear cash interest at the annual rate of 1.50%, each payable on June 15 and December 15
of each year, which began on December 15, 2019. The 2024 Convertible Notes will mature on June 15, 2024 and the 2026
Convertible Notes will mature on June 15, 2026, unless earlier converted or repurchased. To minimize the impact of potential
dilution to our Class A common stockholders upon conversion of the 2024 Convertible Notes and the 2026 Convertible Notes,
we entered into separate Capped Calls in connection with the issuance of the 2024 Convertible Notes and the 2026 Convertible
Notes. We paid the counterparties approximately $25.2 million to enter into the Capped Calls.
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The following table summarizes our obligations under our convertible senior notes at December 31, 2020 (in
thousands):
Payments Due by Period
Less Than
Total
1 Year
1 - 3 Years 3 - 5 Years
More Than
5 Years
2022 Convertible Notes (including interest)
2024 Convertible Notes (including interest)
2026 Convertible Notes (including interest)
Total payments on convertible senior notes
124,773
205,250
216,500
$ 546,523
2,716
1,500
3,000
$ 7,216
122,057
3,000
6,000
$ 131,057
—
—
—
201,500
$ 201,500
200,750
6,000
$ 206,750
Our obligations under our convertible senior notes, as well as potential financial effects from the Convertible Note
Hedges, Note Hedge Warrants and Capped Calls are more fully described in Note 11, Notes Payable, in the accompanying notes
to our 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, 2020, we have approximately $68.1 million of uncertain tax positions, and we cannot reasonably
estimate the potential adjustment to our net operating loss and credit carryforwards. These uncertain tax positions 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.
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 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 recent 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. We did not otherwise adopt any
new accounting pronouncements during the fiscal year ended December 31, 2020 that had a material effect on our consolidated
financial statements included in this report.
Trends and Uncertainties
Impact of the COVID-19 Pandemic
In December 2019, COVID-19 emerged in Wuhan, Hubei Province, China. On March 11, 2020, the World Health
Organization declared a global pandemic and recommended containment and mitigation measures worldwide. On March 13,
2020, former U.S. President Donald Trump announced a national emergency relating to the pandemic. Government authorities in
the U.S. have recommended or imposed various containment and mitigation measures on large portions of the population, and
similar measures have also been taken in many other countries around the world. Both the outbreak of COVID-19 and the
containment and mitigation efforts have had a serious adverse impact on the U.S. economy and the economies of other countries
around the world, the severity and duration of which remain uncertain.
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The COVID-19 pandemic, including containment and mitigation measures has impacted, and is expected to continue to
impact, our business and operations in a number of ways, including:
● Day to Day Operations
Most of our customer-facing employees have resumed in-person work practices; however, they are limited in
the number of in-person details they are able to conduct due to containment and mitigation measures related to
the COVID-19 pandemic. We monitor the impact of the COVID-19 pandemic in the territories where our
customer-facing employees have resumed in-person work practices, and in some cases, we have paused the in-
person work practices as a result of the impact of the COVID-19 pandemic in those territories. Customer-
facing employees who are not providing in-person services continue to support their customers virtually
through telephone and web-based technologies. Headquarters employees have the option to work remotely
through mid-2021.
● Collaboration Agreement for North America with AbbVie
We and our partner, AbbVie, are focused on maintaining the availability of LINZESS for adult men and
women suffering from IBS-C or CIC. We include our and AbbVie’s collaboration-related selling, general, and
administrative expenses, including expenses from in-person and remote selling activities, in the calculation of
net profits from the sale of LINZESS in the U.S. and present net payments to us as collaborative arrangements
revenue. In the fourth quarter of 2020, we and AbbVie agreed to include costs incurred throughout 2020
associated with remote selling activities performed by our and AbbVie’s customer-facing employees in
collaboration-related selling, general and administrative expenses in our calculation of net profits from the sale
of LINZESS in the U.S. As such, we have experienced fluctuations in our settlement payments based on the
ratio of selling, general and administrative expenses incurred by each party during the year ended December
31, 2020, and may continue to experience such fluctuations in the future. The COVID-19 pandemic may
negatively impact future net sales of LINZESS in the U.S., including as a result of reduced and/or restricted in-
person promotion or potential changes in patient access to healthcare (including due to unemployment or
modifications in insurance coverage) and payor reimbursement levels.
● Manufacturing and Supply Chain
We and AbbVie continue to monitor the supply and availability of LINZESS for adult men and women
suffering from IBS-C or CIC in the U.S. As of the date of this Annual Report on Form 10-K, the COVID-19
pandemic has not caused significant disruptions to manufacturing operations or supply of LINZESS in the U.S.
or of clinical trial material for our ongoing trials.
● Clinical Development of GI Pipeline
The COVID-19 pandemic impacted the development of our pipeline during the year ended December 31,
2020. For example, prior to our decision to discontinue the development of IW-3718, the COVID-19 pandemic
impacted enrollment in our Phase III clinical trials of IW-3718 for the treatment of refractory GERD, resulting
in lower than expected research and development expenses relating to IW-3718 clinical trials during the year
ended December 31, 2020.
The COVID-19 pandemic resulted in changes to our business and operations which impacted our financial condition
and results of operations for the year ended December 31, 2020, including as described above. During the year ended December
31, 2020, we incurred a total of approximately $2.4 million of incremental expenses, primarily related to personal protective
equipment for our field-based employees and external costs of strategy and operations analysis related to the impacts of the
COVID-19 pandemic.
There continue to be significant uncertainties surrounding the extent and duration of the impact of the COVID-19
pandemic on our business and operations and we expect to incur additional expenses in future periods related to the impact of the
COVID-19 pandemic on our business and operations. We continue to evaluate the impact of the COVID-19 pandemic on our
operating results and financial condition. The COVID-19 pandemic may have a material adverse impact on our business and
financial condition in the future.
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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, collateralized reverse repurchase agreements,
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 and cash equivalents have significant risk of default or illiquidity. While we believe our cash
and cash equivalents 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 and cash equivalents 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 convertible senior 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
Our convertible notes include conversion and settlement provisions that are based on the price of our Class A Common
Stock at conversion or maturity of the notes. The amount of cash we may be required to pay is determined by the price of our
Class A Common Stock. The fair values of our convertible notes are dependent on the price and volatility of our Class A
Common Stock and will generally increase or decrease as the market price of our common stock changes.
To minimize the impact of potential dilution to our common stock upon conversion of the notes, we entered into the
Convertible Note Hedges and Note Hedge Warrants, with respect to the 2022 Convertible Notes, and the Capped Calls, with
respect to the 2024 Convertible Notes and 2026 Convertible Notes.
The convertible notes and derivatives 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 monetary assets or liabilities expected to be settled in foreign currencies 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, 2020, 2019, and 2018 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-57, of this Annual Report on Form 10-K.
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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 Securities Exchange Act of 1934, or 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.
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, 2020.
The effectiveness of our internal control over financial reporting as of December 31, 2020 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, 2020 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
Based on that evaluation, our principal executive officer and principal financial officer concluded no changes during the
quarter ended December 31, 2020 materially affected, or were reasonably likely to materially affect, our internal controls over
financial reporting.
74
Table of Contents
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, 2020, 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, 2020, 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 the Company as of December 31, 2020 and 2019, the related consolidated
statements of comprehensive income (loss), shareholders’ equity (deficit) and cash flows for each of the three years in the period
ended December 31, 2020, and the related notes and our report dated February 17, 2021 expressed an 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 Annual
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 17, 2021
75
Table of Contents
Item 9B. Other Information
None.
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.
The other information required by this item is incorporated by reference from our proxy statement for our 2021 Annual
Meeting of Stockholders.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from our proxy statement for our 2021 Annual
Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information relating to security ownership of certain beneficial owners of our common stock and information
relating to the security ownership of our management required by this item is incorporated by reference from our proxy statement
for our 2021 Annual Meeting of Stockholders.
The table below sets forth information with regard to securities authorized for issuance under our equity compensation
plans as of December 31, 2020. As of December 31, 2020, we had three active equity compensation plans, each of which was
approved by our stockholders:
● Amended and Restated 2010 Employee, Director and Consultant Equity Incentive Plan;
●
2019 Equity Incentive Plan; and
● Amended and Restated 2010 Employee Stock Purchase Plan.
Weighted-
average
exercise
price of
outstanding
options,
warrants,
and rights
(2)
(b)
$ 12.25
—
$ 12.25
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
(c)
9,651,783
—
9,651,783
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(1)
(a)
18,216,454
—
18,216,454
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
(1) Amount includes the number of shares subject to issuance upon exercise of 13,459,671 outstanding stock options and vesting
of 4,756,783 restricted stock units.
(2) Amount includes all outstanding stock options but does not include restricted stock units, which do not have an exercise price.
76
Table of Contents
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 2021 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 2021 Annual
Meeting of Stockholders.
77
Table of Contents
Item 15. Exhibits and Financial Statement Schedules
1. List of documents filed as part of this report
PART IV
1. Consolidated Financial Statements listed under Part II, Item 8 and included herein by reference.
2. 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
2.1
Description
Separation Agreement, dated as of March 30,
2019, by and between Ironwood
Pharmaceuticals, Inc. and Cyclerion
Therapeutics, Inc.
Incorporated by reference herein
Form
Date
April 4, 2019
Current Report on Form 8-K (File No.
001-34620)
3.1
Eleventh Amended and Restated Certificate of
Incorporation
Annual Report on Form 10-K (File
No. 001-34620)
March 30, 2010
3.2
Certificate of Retirement
3.3
Certificate of Amendment
Registration Statement on Form 8-A/A
(File No. 001-34620)
January 3, 2019
Current Report on Form 8-K (File No.
001-34620)
May 31, 2019
3.4
Fifth Amended and Restated Bylaws
Annual Report on Form 10-K (File
No. 001-34620)
March 30, 2010
4.1
Specimen Class A Common Stock certificate
Registration Statement on Form S-1, as
amended (File No. 333-163275)
January 20, 2010
4.2
4.2.1
4.2.2
4.3
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)
Supplemental Indenture dated as of April 5,
2019 by and between Ironwood
Pharmaceuticals, Inc. and U.S. Bank National
Association
Current Report on Form 8-K (File
No. 001-34620)
June 15, 2015
Current Report on Form 8-K (File
No. 001-34620)
April 8, 2019
Form of 2.25% Convertible Senior Note due
2022
Current Report on Form 8 K (File
No. 001 34620)
June 15, 2015
Indenture, dated as of August 12, 2019, by and
between Ironwood Pharmaceuticals, Inc. and
U.S. Bank National Association (including the
form of the 0.75% Convertible Senior Note due
2024)
Current Report on Form 8-K (File
No. 001-34620)
August 13, 2019
78
Table of Contents
4.3.1
4.4
4.4.1
4.5*
10.1#
10.1.1#
10.1.2#
Form of 0.75% Convertible Senior Note due
2024
Current Report on Form 8-K (File
No. 001-34620)
Indenture, dated as of August 12, 2019, by and
between Ironwood Pharmaceuticals, Inc. and
U.S. Bank National Association (including the
form of the 1.50% Convertible Senior Note due
2026)
Current Report on Form 8-K (File
No. 001-34620)
August 13, 2019
August 13, 2019
Form of 1.50% Convertible Senior Note due
2026
Current Report on Form 8-K (File
No. 001-34620)
August 13, 2019
Description of Securities of Ironwood
Pharmaceuticals, Inc.
Amended and Restated 2010 Employee, Director
and Consultant Equity Incentive Plan
Registration Statement on Form S-8, as
amended (File No. 333-184396)
October 12, 2012
Form of Stock Option 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
Quarterly Report on Form 10-Q (File
No. 001-34620)
November 6, 2018
Quarterly Report on Form 10-Q (File
No. 001-34620)
November 6, 2018
10.2#
2019 Equity Incentive Plan
Quarterly Report on Form 10-Q (File
No. 001-34620)
10.2.1#
Form of Non-statutory Stock Option Agreement
under the 2019 Equity Incentive Plan
Quarterly Report on Form 10-Q (File
No. 001-34620)
10.2.2#
Form of Restricted Stock Unit Agreement under
the 2019 Equity Incentive Plan
Quarterly Report on Form 10-Q (File
No. 001-34620)
10.2.3#
Form of Restricted Stock Agreement under the
2019 Equity Incentive Plan
Quarterly Report on Form 10-Q (File
No. 001-34620)
10.2.4#
Form of Performance-Based Restricted Stock
Unit Award Agreement under the 2019 Equity
Incentive Plan
Quarterly Report on Form 10-Q (File
No. 001-34620)
July 30, 2019
July 30, 2019
July 30, 2019
July 30, 2019
May 6, 2020
10.3#
10.4#
Amended and Restated 2010 Employee Stock
Purchase Plan
Annual Report on Form 10-K (File No.
001-34620)
February 13, 2020
Change of Control Severance Benefit Plan, as
amended and restated
Quarterly Report on Form 10-Q (File
No. 001-34620)
April 29, 2014
10.5#
Form of Executive Severance Agreement
Annual Report on Form 10-K (File
No. 001-34620)
February 25, 2019
79
Non-employee Director Compensation Policy,
effective May 20, 2019
Quarterly Report on Form 10-Q (File
No. 001-34620)
July 30, 2019
Form of Indemnification Agreement with
Directors and Officers
Registration Statement on Form S-1, as
amended (File No. 333-163275)
December 23, 2009
Table of Contents
10.6#
10.7#
10.8#
10.9+
10.9.1
10.10+
10.11+
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.
10.11.1+ Amendment No. 1 to License Agreement, dated
as of June 11, 2013, by and between Allergan
Pharmaceuticals International Ltd. (formerly
with Almirall, S.A.) and Ironwood
Pharmaceuticals, Inc.
10.11.2+ Amendment to the License Agreement, dated as
of October 26, 2015, by and between Allergan
Pharmaceuticals International Ltd. and Ironwood
Pharmaceuticals, Inc.
10.11.3+ Amendment to the License Agreement dated as
of January 31, 2017, by and between Allergan
Pharmaceuticals International Ltd., and
Ironwood Pharmaceuticals, Inc.
10.12+
Novation Agreement, dated as of October 26,
2015, by and among Almirall, S.A., Allergan
Pharmaceuticals International Ltd. and Ironwood
Pharmaceuticals, Inc.
Current Report on Form 8-K (File
No. 001-34620)
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
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
Annual Report on Form 10-K (File
No. 001-34620)
February 19, 2016
80
Table of Contents
10.13+
Amended and Restated License Agreement,
dated as of August 1, 2019, by and between
Ironwood Pharmaceuticals, Inc. and Astellas
Pharma Inc.
10.13.1* Amendment to the Amended and Restated
License Agreement, dated as of January 8, 2021,
by and between Ironwood Pharmaceuticals, Inc.
and Astellas Pharma Inc.
10.14+
10.15+
10.16+
Amended and Restated License and
Collaboration Agreement, dated as of September
16, 2019, by and between AstraZeneca AB 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.
10.16.1+ 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.
Lease Agreement for facilities at 100 Summer
Street, Boston, Massachusetts, dated as of June
11, 2019, by and between Ironwood
Pharmaceuticals, Inc. and MA-100 Summer
Street Owner, L.L.C.
Tax Matters Agreement, dated as of March 30,
2019, by and between Ironwood
Pharmaceuticals, Inc. and Cyclerion
Therapeutics, Inc.
Employee Matters Agreement, dated as of
March 30, 2019, by and between Ironwood
Pharmaceuticals, Inc. and Cyclerion
Therapeutics, Inc.
10.17
10.18
10.19
Current Report on Form 8-K (File
No. 001-34620
August 1, 2019
Current Report on Form 8-K (File
No. 001-34620)
September 18, 2019
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
Current Report on Form 8-K (File
No. 001-34620)
June 13, 2019
Current Report on Form 8-K (File
No. 001-34620)
April 4, 2019
Current Report on Form 8-K (File
No. 001-34620)
April 4, 2019
81
Table of Contents
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
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
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
Base Call Option Transaction Confirmation for
the 2024 Notes, dated as of August 7, 2019,
between Ironwood Pharmaceuticals, Inc. and
JPMorgan Chase Bank, National Association
Base Call Option Transaction Confirmation for
the 2026 Notes, dated as of August 7, 2019,
between Ironwood Pharmaceuticals, Inc. and
JPMorgan Chase Bank, National Association
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
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
Current Report on Form 8-K (File
No. 001-34620)
August 13, 2019
Current Report on Form 8-K (File
No. 001-34620)
August 13, 2019
82
Table of Contents
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
Base Call Option Transaction Confirmation for
the 2024 Notes, dated as of August 7, 2019,
between Ironwood Pharmaceuticals, Inc. and
Credit Suisse Capital LLC
Base Call Option Transaction Confirmation, for
the 2026 Notes, dated as of August 7, 2019,
between Ironwood Pharmaceuticals, Inc. and
Credit Suisse Capital LLC
Additional Call Option Transaction
Confirmation for the 2024 Notes, dated as of
August 12, 2019, between Ironwood
Pharmaceuticals, Inc. and JPMorgan Chase
Bank, National Association
Additional Call Option Transaction
Confirmation for the 2026 Notes, dated as of
August 12, 2019, between Ironwood
Pharmaceuticals, Inc. and JPMorgan Chase
Bank, National Association
Additional Call Option Transaction
Confirmation for the 2024 Notes, dated as of
August 12, 2019, between Ironwood
Pharmaceuticals, Inc. and Credit Suisse Capital
LLC
Additional Call Option Transaction
Confirmation for the 2026 Notes, dated as of
August 12, 2019, between Ironwood
Pharmaceuticals, Inc. and Credit Suisse Capital
LLC
Call Spread Unwind Agreement, dated as of
August 7, 2019, between Ironwood
Pharmaceuticals, Inc. and JPMorgan Chase
Bank, National Association
Call Spread Unwind Agreement, dated as of
August 7, 2019, between Ironwood
Pharmaceuticals, Inc. and Credit Suisse Capital
LLC
Current Report on Form 8-K (File
No. 001-34620)
August 13, 2019
Current Report on Form 8-K (File
No. 001-34620)
August 13, 2019
Current Report on Form 8-K (File
No. 001-34620)
August 13, 2019
Current Report on Form 8-K (File
No. 001-34620)
August 13, 2019
Current Report on Form 8-K (File
No. 001-34620)
August 13, 2019
Current Report on Form 8-K (File
No. 001-34620)
August 13, 2019
Annual Report on Form 10-K (File No.
001-34620)
February 13, 2020
Annual Report on Form 10-K (File No.
001-34620)
February 13, 2020
21.1
Subsidiaries of Ironwood Pharmaceuticals, Inc.
Annual Report on Form 10-K (File No.
001-34620)
February 13, 2020
23.1*
31.1*
Consent of Independent Registered Public
Accounting Firm
Certification of Chief Executive Officer
pursuant to Rules 13a-14 or 15d-14 of the
Exchange Act
83
Table of Contents
31.2*
32.1‡
32.2‡
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 – The Instance
Document does not appear in the Interactive
Data Files because its XBRL tags are embedded
within the Inline XBRL document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation
Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase
Database
101.PRE* XBRL Taxonomy ExtensionPresentation
Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition
Linkbase Document
104*
The cover page from this Annual Report on
Form 10-K, formatted in Inline XBRL
Filed herewith.
Furnished herewith.
*
‡
+ Confidential treatment granted under 17 C.F.R. §§200.80(b)(4) and 230.406. The confidential portions of this exhibit have
been omitted and are remeasured 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.
84
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 Boston, Commonwealth
of Massachusetts, on the 17th day of February 2021.
SIGNATURES
Ironwood Pharmaceuticals, Inc.
By:
/s/ MARK MALLON
Mark Mallon
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
Title
Date
/s/ MARK MALLON
Mark Mallon
Chief Executive Officer and Director (Principal Executive
Officer)
/s/ GINA CONSYLMAN
Gina Consylman
Senior Vice President, Chief Financial Officer (Principal
Financial Officer)
February 17, 2021
February 17, 2021
/s/ KELLY MACDONALD
Kelly MacDonald
Vice President, Finance and Chief Accounting Officer (Principal
Accounting Officer)
February 17, 2021
/s/ JULIE H. MCHUGH
Julie H. McHugh
/s/ MARK CURRIE
Mark Currie
Alexander Denner
/s/ ANDREW DREYFUS
Andrew Dreyfus
/s/ JON DUANE
Jon Duane
/s/ MARLA KESSLER
Marla Kessler
/s/ CATHERINE MOUKHEIBIR
Catherine Moukheibir
/s/ LAWRENCE S. OLANOFF
Lawrence S. Olanoff
Chair of the Board
Director
Director
Director
Director
Director
Director
Director
85
February 17, 2021
February 17, 2021
February 17, 2021
February 17, 2021
February 17, 2021
February 17, 2021
February 17, 2021
Table of Contents
/s/ EDWARD P. OWENS
Edward P. Owens
/s/ JAY P. SHEPARD
Jay P. Shepard
Director
Director
February 17, 2021
February 17, 2021
86
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, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020, 2019, and 2018
Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018
Notes to Consolidated Financial Statements
Page
F-2
F-4
F-5
F-6
F-7
F-9
F-11
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, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’
equity (deficit) and cash flows for each of the three years in the period ended December 31, 2020, 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 financial position of the Company at December 31, 2020 and 2019, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 17, 2021 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are
material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The
communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as
a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit
matter or on the accounts or disclosure to which it relates.
Collaboration Agreement for North America with AbbVie Inc.
Description of the
Matter
Revenue recognized from the Collaboration Agreement for North America with AbbVie Inc. (together
with its affiliates, or “AbbVie”) was $368.6 million for the sale of LINZESS in the U.S. for the year
ended December 31, 2020. As discussed in Note 6 to the consolidated financial statements, the Company
generates the majority of its revenue from a collaboration arrangement with AbbVie related to linaclotide
(LINZESS). The Company records its share of the net profits or net losses from the sales of LINZESS in
the U.S., less commercial expenses, and presents the settlement payments to and from AbbVie as
collaboration expense or collaborative arrangements revenue, as applicable.
F-2
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Auditing revenue recognition under the AbbVie collaboration is especially challenging and requires
significant auditor judgment because complete and accurate information regarding net profits realized
from sales of LINZESS in the U.S. and the costs incurred in selling it may not be available at the time the
financial statements are prepared.
How We Addressed
the Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of the
Company’s internal controls over its collaboration revenue process. The Company maintains and operates
a suite of controls over the Company’s evaluation of the completeness and accuracy of its quarterly
reporting from AbbVie.
Our audit procedures included, among others, reviewing the Company’s contract with AbbVie, reviewing
information provided by AbbVie, performing auditing procedures over gross sales and adjustments to
arrive at net sales, cost of goods sold, and selling and marketing costs contributing to Ironwood’s share of
net profits, and obtaining confirmation directly from AbbVie.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1998.
Boston, Massachusetts
February 17, 2021
F-3
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Ironwood Pharmaceuticals, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents
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
Accounts receivable, net of current portion
Property and equipment, net
Operating lease right-of-use assets
Convertible note hedges
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable
Related party accounts payable, net
Accrued research and development costs
Accrued expenses and other current liabilities
Current portion of operating lease liabilities
Deferred revenue
Total current liabilities
Note hedge warrants
Convertible senior notes
Operating lease obligations, net of current portion
Other liabilities
Commitments and contingencies
Stockholders’ equity (deficit):
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 160,616,675 shares
issued and outstanding at December 31, 2020 and 500,000,000 shares authorized and 157,535,962
shares issued and outstanding at December 31, 2019
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity (deficit)
Total liabilities and stockholders’ equity (deficit)
December 31,
2020
December 31,
2019
$
362,564
122,351
$
—
—
$
$
9,189
1,735
495,839
485
23,401
8,929
16,576
13,065
943
559,238
$
661
$
—
1,898
26,486
3,128
—
32,173
12,088
430,256
20,318
1,763
177,023
11,279
105,967
648
10,685
1,250
306,852
971
32,597
12,429
17,743
31,366
790
402,748
3,978
1,509
2,956
30,465
1,146
875
40,929
24,260
407,994
22,082
734
—
—
161
1,528,535
(1,466,056)
62,640
559,238
158
1,478,823
(1,572,232)
(93,251)
402,748
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
Ironwood Pharmaceuticals, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Years Ended December 31,
2019
2018
2020
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
(settlement) 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
Gain on lease modification
Restructuring expenses
Impairment of intangible assets
Total cost and expenses
Income (loss) from operations
Other (expense) income:
Interest expense
Interest and investment income
Gain (loss) on derivatives
Loss on extinguishment of debt
Other income
Other expense, net
Income (loss) from continuing operations, before income taxes
Income tax expense
Income (loss) from continuing operations
Loss from discontinued operations, net of income taxes
Net income (loss)
$ 381,545
—
7,978
389,523
$ 379,652
—
48,761
428,413
272,839
3,445
70,355
346,639
3,136
23,875
32,751
—
88,062
140,003
—
—
—
15,382
—
246,583
142,940
(29,478)
1,504
(6,129)
—
24
(34,079)
108,861
2,685
106,176
—
$ 106,176
(3,530)
115,044
172,450
—
—
(3,169)
3,620
—
308,290
120,123
247
101,060
219,676
8,111
(31,045)
—
14,715
151,794
497,309
(150,670)
(36,602)
2,862
3,023
(30,977)
514
(61,180)
58,943
—
58,943
(37,438)
21,505
(37,724)
2,991
(8,743)
—
—
(43,476)
(194,146)
—
(194,146)
(88,222)
$ (282,368)
$
Income (loss) per share from continuing operations, net of income taxes—basic
Income (loss) per share from continuing operations, net of income taxes—diluted
Loss per share from discontinued operations, net of income taxes—basic and diluted
Net income (loss) per share—basic
Net income (loss) per share—diluted
$
$
$
$
$
0.67
0.66
$
$
— $
$
$
0.67
0.66
$
0.38
$
0.38
(0.24) $
$
0.14
$
0.14
(1.27)
(1.27)
(0.58)
(1.85)
(1.85)
Weighted average shares used in computing net income per share—basic:
Weighted average shares used in computing net income per share—diluted:
159,427
160,655
156,023
156,023
152,634
152,634
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
Ironwood Pharmaceuticals, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Net income (loss)
Other comprehensive income:
Unrealized gains on available-for-sale securities
Total other comprehensive income
Comprehensive income (loss)
Years Ended December 31,
2019
$ 21,505
2018
$ (282,368)
2020
$ 106,176
—
—
—
—
79
79
$ (282,289)
$ 106,176
$ 21,505
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
Ironwood Pharmaceuticals, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
(In thousands, except share amounts)
Class A
Common Stock
Shares
Amount
136,465,526
137
Class B
Common Stock
Shares
13,983,762
14
Amount
Additional
paid-in
capital
1,318,536
Accumulated comprehensive
Accumulated
other
Total
Stockholders’
income (loss) equity (deficit)
(79)
9,848
deficit
(1,308,760)
3,201,042
3
764,361
—
32,058
—
—
32,061
14,748,123
—
14
—
(14,748,123)
—
(14)
—
—
—
—
—
—
—
—
—
Balance at December 31, 2017
Issuance of common stock related to share-based
awards and employee stock purchase plan
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
—
—
—
—
— —
44,009
—
—
—
—
—
— — 1,394,603
—
—
—
—
—
(282,368)
(1,591,128)
—
79
—
—
44,009
79
(282,368)
(196,371)
Balance at December 31, 2018
154,414,691
154
Issuance of common stock related to share-based
awards and employee stock purchase plan, net of
cancellations
Share-based compensation expense related to share-
based awards and employee stock purchase plan
Equity component of convertible senior notes
Equity component of issuance costs for convertible
senior notes
Purchase of capped calls
Equity component of partial repurchase of 2022
Convertible Notes
Dividend of SGC business
Net income
Balance at December 31, 2019
3,121,271
4
— —
13,597
—
—
13,601
—
—
—
—
—
—
—
157,535,962
$
—
—
—
—
—
—
—
158
—
—
—
—
—
—
—
—
32,331
92,502
(2,092)
(25,159)
—
—
—
—
(26,959)
—
—
—
—
—
— $ — $1,478,823
—
—
—
—
(2,609)
21,505
$ (1,572,232)
$
—
—
—
—
—
—
—
— $
32,331
92,502
(2,092)
(25,159)
(26,959)
(2,609)
21,505
(93,251)
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
Ironwood Pharmaceuticals, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
(In thousands, except share amounts)
Balance at December 31, 2019
Issuance of common stock related to share-based awards and employee stock purchase plan
Share-based compensation expense related to share-based awards and employee stock purchase
plan
Net income
Balance at December 31, 2020
Class A
Common Stock
Shares
Amount
157,535,962
3,080,713
158
3
Additional
paid-in
capital
1,478,823
18,537
Accumulated
deficit
(1,572,232)
—
Total
Stockholders’
equity (deficit)
(93,251)
18,540
—
—
160,616,675
—
31,175
—
—
161 $ 1,528,535
$
—
106,176
$ (1,466,056)
$
31,175
106,176
62,640
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Table of Contents
Ironwood Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization
Amortization of acquired intangible assets
Impairment of intangible assets
Loss (gain) on disposal of property and equipment
Share-based compensation expense
Gain on lease modification
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 (settlement) loss on non-cancellable
purchase commitments
Write-down of excess non-cancellable ZURAMPIC and DUZALLO sample purchase commitments
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
Inventory, net
Prepaid expenses and other current assets
Operating lease right-of-use assets
Other assets
Accounts payable, related party accounts payable and accrued expenses
Accrued research and development costs
Operating lease liabilities
Deferred revenue
Deferred rent
Other liabilities
Net cash provided by (used in) continuing operating activities
Net cash provided by discontinued operating activities
Net cash provided by (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
Proceeds from sale of property and equipment
Net cash (used in) provided by continuing investing activities
Net cash used in discontinued investing activities
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes
Purchase of capped calls
Proceeds from partial termination of convertible note hedges and note hedge warrants
Costs associated with issuance of convertible senior notes
Proceeds from exercise of stock options and employee stock purchase plan
Payments on capital lease obligations
Payments for partial repurchase of 2022 Convertible Notes
Payments on 8.375% Notes due 2026
Payments on contingent purchase price consideration
Net cash provided by (used in) continuing financing activities
Net cash used in discontinued financing activities
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
F-9
Year Ended December 31,
2019
2018
2020
$
106,176
$
21,505
$
(282,368)
3,564
—
—
470
31,175
—
(12,172)
18,301
—
—
—
22,263
—
—
4,091
648
1,515
1,167
(153)
(7,523)
(1,058)
218
(875)
—
1,029
168,836
—
168,836
—
—
(1,842)
—
(1,842)
—
(1,842)
—
—
—
—
18,546
—
—
—
—
18,546
—
18,546
185,540
179,244
364,784
$
5,580
—
—
146
31,278
(3,169)
16,232
(19,255)
(3,530)
—
—
19,590
—
30,977
(68,893)
—
(1,046)
14,141
159
(32,700)
(483)
(12,046)
875
—
—
(639)
11,364
10,725
—
—
(7,189)
268
(6,921)
(4,223)
(11,144)
400,000
(25,159)
3,174
(9,048)
13,595
—
(227,338)
(156,409)
—
(1,185)
—
(1,185)
(1,604)
180,848
179,244
$
3,859
8,111
151,794
(1,867)
40,526
—
(58,425)
67,168
219
390
(165)
17,601
(31,045)
—
1,207
(806)
(3,727)
—
702
2,678
542
—
—
916
—
(82,690)
11,808
(70,882)
(3,241)
99,165
(351)
1,563
97,136
(8,270)
88,866
—
—
—
—
32,061
(1,824)
—
—
(165)
30,072
—
30,072
48,056
132,792
180,848
$
Table of Contents
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents, and restricted cash
Supplemental cash flow disclosure:
Cash paid for interest
Cash paid for income taxes
Non-cash investing and financing activities
Purchases under capital leases
Extinguishment of capital leases
Recognition of asset retirement obligation
Fixed asset purchases in accounts payable and accrued expenses
$
$
$
$
$
$
$
$
362,564
2,220
364,784
7,216
1,848
$
$
$
$
177,023
2,221
179,244
$
$
173,172
7,676
180,848
17,584
$
— $
18,235
—
— $
— $
— $
— $
— $
— $
$
$
486
1,282
664
2,687
—
439
The accompanying notes are an integral part of these consolidated financial statements.
F-10
Table of Contents
1. Nature of Business
Ironwood Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
Ironwood Pharmaceuticals, Inc. (“Ironwood” or the “Company”) is a gastrointestinal (“GI”) healthcare company
dedicated to advancing the treatment of GI diseases and redefining the standard of care for GI patients. The Company is focused
on the development and commercialization of innovative GI product opportunities in areas of significant unmet need, leveraging
its demonstrated expertise and capabilities in GI diseases.
LINZESS® (linaclotide), the Company’s commercial product, is the first product approved by the United States Food
and Drug Administration (the “U.S. FDA”) in a class of GI medicines called guanylate cyclase type C agonists and is indicated
for adult men and women suffering from irritable bowel syndrome with constipation (“IBS-C”) or chronic idiopathic constipation
(“CIC”). LINZESS is available 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 and China. 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.
The Company has strategic partnerships with leading pharmaceutical companies to support the development and
commercialization of linaclotide throughout the world. The Company and its partner, AbbVie Inc. (together with its affiliates,
“AbbVie”) (successor to Allergan plc (together with its affiliates), “Allergan”), began commercializing LINZESS in the U.S. in
December 2012. Under the Company’s collaboration with AbbVie for North America, total net sales of LINZESS in the U.S., as
recorded by AbbVie, are reduced by commercial costs incurred by each party, and the resulting amount is shared equally between
the Company and AbbVie. AbbVie also has an exclusive license from the Company to develop and commercialize linaclotide in
all countries other than China (including Hong Kong and Macau), Japan and the countries and territories of North America (the
“AbbVie License Territory”). On a country-by-country and product-by-product basis in the AbbVie License Territory, AbbVie
pays the Company a royalty as a percentage of net sales of products containing linaclotide as an active ingredient. In addition,
AbbVie 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. In August 2019, the Company amended and restated its license agreement with Astellas. Effective in 2020,
Company is no longer responsible for the supply of linaclotide active pharmaceutical ingredient (“API”) to Astellas (Note 6).
In October 2012, the Company and AstraZeneca AB (together with its affiliates) (“AstraZeneca”) entered into a
collaboration agreement to co-develop and co-commercialize linaclotide in China (including Hong Kong and Macau) (the
“AstraZeneca License Territory”). In September 2019, the Company amended and restated its existing collaboration agreement
with AstraZeneca whereby AstraZeneca obtained the exclusive right to develop, manufacture, and commercialize products
containing linaclotide in the AstraZeneca License Territory (Note 6). In November 2019, AstraZeneca began commercializing
LINZESS for the treatment of adults with IBS-C in China.
The Company and AbbVie 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 September 2020, based
on the Phase IIIb data demonstrating efficacy and safety of LINZESS 290 mcg on the overall abdominal symptoms of bloating,
pain and discomfort in adult patients with IBS-C, the U.S. FDA approved the Company’s Supplemental New Drug Application to
include a more comprehensive description of the effects of LINZESS in its approved label. In June 2020 and July 2020, the
United States Patent and Trademark Office granted patents covering the formulation of the 72 mcg dose of LINZESS and
methods of using the formulation, respectively. The patents are expected to expire in 2031.
The Company and AbbVie were developing MD-7246, a delayed release formulation of linaclotide. In May 2020, the
Company and AbbVie announced top-line data from a Phase II trial evaluating MD-7246 in adult patients with
F-11
Table of Contents
abdominal pain associated with irritable bowel syndrome with diarrhea. The Phase II trial did not meet its primary or key
secondary endpoints. Based on these findings, the Company and AbbVie discontinued the development of MD-7246.
The Company was developing IW-3718, a gastric retentive formulation of a bile acid sequestrant, in a Phase III
program. In September 2020, the Company announced that one of its two identical Phase III trials for the potential treatment of
refractory gastroesophageal reflux disease (“refractory GERD”) did not meet the pre-specified criteria associated with a planned
early efficacy assessment. Based on these findings, the Company is discontinuing development of IW-3718. In connection with
this decision, the Company reduced its workforce by approximately 100 full-time employees. This workforce reduction affected
both field-based and home-office employees, including the relevant general and administrative support functions. The Company
substantially completed the reduction in its workforce in the fourth quarter of 2020 (Note 18).
Additionally, the Company periodically enters into co-promotion agreements to bolster its salesforce productivity. In
August 2019, the Company entered into a disease education and promotional agreement with Alnylam Pharmaceuticals, Inc.
(“Alnylam”) for Alnylam’s GIVLAARI® (givosiran) for the treatment of acute hepatic porphyria (“AHP”). Under the agreement,
the Company performs disease awareness activities related to AHP and sales detailing activities of GIVLAARI.
These and other agreements are more fully described in Note 6, Collaboration, License, Co-Promotion and Other
Commercial Agreements, to these consolidated financial statements.
On April 1, 2019, Ironwood completed the separation (the “Separation”) of its soluble guanylate cyclase (“sGC”)
business, and certain other assets and liabilities, into Cyclerion Therapeutics, Inc (“Cyclerion”). The Separation was effected by
means of a distribution of all of the outstanding shares of common stock, with no par value, of Cyclerion through a dividend of
all outstanding shares of Cyclerion’s common stock, to Ironwood’s stockholders of record as of the close of business on March
19, 2019 (Note 3).
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, as well as to the research and development of its other product
candidates. Prior to the year ended December 31, 2019, the Company incurred net losses in each year since its inception in 1998.
For the years ended December 31, 2020 and 2019, the Company recorded net income of approximately $106.2 million and
approximately $21.5 million, respectively. As of December 31, 2020, the Company had an accumulated deficit of approximately
$1.5 billion.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Ironwood and its wholly-owned
subsidiaries, as of December 31, 2020, Ironwood Pharmaceuticals Securities Corporation and Ironwood Pharmaceuticals GmbH.
Cyclerion was a wholly-owned subsidiary until it became an independent publicly-traded company on April 1, 2019. All
intercompany transactions and balances are eliminated in consolidation.
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.
F-12
Table of Contents
Reclassifications
Certain prior period financial statement items have been reclassified to conform to current period presentation.
Discontinued Operations
The Company determined that its sGC business, which was disposed on April 1, 2019, met the criteria for classification
as a discontinued operation in accordance with Accounting Standards Codification (“ASC”) Subtopic 205-20, Discontinued
Operations (“ASC 205-20”). Accordingly, the accompanying consolidated financial statements as of and for the year ended
December 31, 2019 and all prior periods present the balance sheet, operations, and cash flows associated with the sGC business
as discontinued operations. For additional information related to discontinued operations, refer to Note 3, Cyclerion Separation,
to these consolidated financial statements.
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 ongoing 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; accounts receivable; inventory valuation and related reserves; useful lives of long-lived assets,
impairment of long-lived assets, including its acquired intangible assets and goodwill; valuation procedures for right-of-use assets
and operating lease liabilities; valuation procedures for the issuance and repurchase of convertible notes; balance sheet
classification of convertible notes; valuation of assets and liabilities held for disposition and losses related to discontinued
operations; fair value of derivatives; income taxes, including the valuation allowance for deferred tax assets; research and
development expenses; 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 $349.0 million and approximately
$177.0 million at December 31, 2020 and 2019, respectively.
Restricted Cash
The Company is contingently liable under unused letters of credit with a bank, related to the Company’s facility lease
and vehicle lease agreements, in the amount of approximately $2.2 million as of December 31, 2020 and 2019. The Company
records as restricted cash the collateral used to secure these letters of credit. The amount of restricted cash included in current
assets and non-current assets was approximately $1.7 million and $0.5 million at December 31, 2020, respectively. The amount
of restricted cash in current assets and non-current assets was approximately $1.2 million and $1.0 million at December 31, 2019,
respectively.
Concentrations of Suppliers
The Company relies on its collaboration partners and their suppliers to manufacture linaclotide API, linaclotide finished
drug product, and finished goods.
If any of the Company’s collaboration partners and their 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 could require up to several months, during which time production could be
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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 credit
losses 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 primarily
to amounts reimbursed under its collaboration, license and co-promotion agreements. The Company believes that credit risks
associated with these partners are not significant. The Company reviews the need for an allowance for credit losses for its
receivables based on various factors including payment history and historical bad debt experience. The Company had no
allowance for credit losses as of December 31, 2020 or 2019.
Concentrations of Credit Risk
Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, restricted
cash, and accounts receivable. The Company maintains its cash and cash equivalent balances with high-quality financial
institutions and the Company believes that such funds are subject to minimal 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 AA- rated, thereby reducing credit risk exposure.
Accounts receivable primarily consist of amounts due under the linaclotide collaboration agreement with AbbVie for
North America (Note 6). The Company does not obtain collateral for its accounts receivable. The Company previously reflected
amounts due from Allergan, net of amounts payable to Allergan, prior to its acquisition by AbbVie as related party accounts
receivable, net. Following the acquisition of Allergan by AbbVie, the Company determined that AbbVie is not a related party to
the Company (Note 17).
The percentages of revenue recognized from significant collaborative partners of the Company in the years ended
December 31, 2020, 2019 and 2018 as well as the account receivable balances, net of any payables due, at December 31, 2020
and 2019 are included in the following table:
Accounts
Receivable
December 31,
2020
2019
Revenue
Year Ended December 31,
2020
2019
2018
Collaborative Partner:
AbbVie (North America and Europe)
Astellas (Japan)
76 % 90 %
8 %
1 %
96 %
1 %
78 %
13 %
77 %
20 %
For the years ended December 31, 2020, 2019 and 2018, 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
Laboratory equipment
Computer and office equipment
Furniture and fixtures
Software
Estimated Useful Life
(In Years)
5
3
7
3
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
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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.
Costs for capital assets not yet placed into service have been capitalized as construction in process, 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 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. During the year ended December 31, 2018, the Company
recorded an impairment charge of approximately $151.8 million to fully write-off its ZURAMPIC and DUZALLO intangible
assets.
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.
Income Taxes
The Company provides for income taxes under the asset and 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.
Financing Costs
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 as a reduction to stockholders’ equity against the proceeds of the
offering once the offering is completed. Costs attributable to debt financings are deferred and amortized to interest expense over
the term of the debt using the effective interest method. Costs incurred in connection with convertible debt securities are allocated
between the liability and equity components. In accordance with ASC 835, Interest, the Company presents debt issuance costs on
the balance sheet as a direct deduction from the associated debt liability.
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Leases
Effective January 1, 2019, the Company adopted ASC Topic 842, Leases (“ASC 842”), using the optional transition
method. The adoption of ASC 842 represented a change in accounting principle that aimed to increase transparency and
comparability among organizations by requiring the recognition of right-of-use assets and lease liabilities on the balance sheet for
both operating and finance leases. In addition, the standard required enhanced disclosures that meet the objective of enabling
financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases.
As part of the ASC 842 adoption, the Company elected certain practical expedients, which include:
● Accounting policy election to use the short-term lease exception by asset class; and
Election of the practical expedient package during transition, which includes:
●
o An entity need not reassess whether any expired or existing contracts are or contain leases.
o An entity need not reassess the classification for any expired or existing leases. As a result, all leases
that were classified as operating leases in accordance with ASC 840 are classified as operating leases
under ASC 842, and all leases that were classified as capital leases in accordance with ASC 840 are
classified as finance leases under ASC 842.
o An entity need not reassess initial direct costs for any existing leases.
Subsequent to the Company’s adoption of ASC 842, the Company elected the post-transition practical expedient, by
class of underlying asset, to account for lease components and non-lease components together as a single component for the asset
class of operating lease right-of-use real estate assets.
The Company’s lease portfolio for the year ended December 31, 2020 included: a lease for its headquarters location, a
data center colocation lease, vehicle leases for its salesforce representatives, and leases for computer and office equipment. The
Company determines if an arrangement is a lease at the inception of the contract. The asset component of the Company’s
operating leases is recorded as operating lease right-of-use assets, and the liability component is recorded as current portion of
operating lease liabilities and operating lease liabilities, net of current portion in the Company’s consolidated balance sheets. As
of December 31, 2020, the Company did not record any finance leases.
Right-of-use assets and operating lease liabilities are recognized based on the present value of lease payments over the
lease term at the lease inception date. Existing leases in the Company’s lease portfolio as of the adoption date were valued as of
January 1, 2019. The Company uses an incremental borrowing rate based on the information available at lease inception in
determining the present value of lease payments, if an implicit rate of return is not provided with the lease contract. Operating
lease right-of-use assets are adjusted for incentives expected to be received.
Right-of-use assets and operating lease liabilities are remeasured upon certain modifications to leases using the present
value of remaining lease payments and estimated incremental borrowing rate upon lease modification.
Lease cost is recognized on a straight-line basis over the lease term, and includes amounts related to short-term leases.
The Company recognizes variable lease payments as operating expenses in the period in which the obligation for those payments
is incurred. Variable lease payments primarily include common area maintenance, utilities, real estate taxes, insurance, and other
operating costs that are passed on from the lessor in proportion to the space leased by the Company.
Derivative Assets and Liabilities
In June 2015, the Company issued 2.25% Convertible Senior Notes due June 15, 2022 (the “2022 Convertible Notes”)
and in August 2019, the Company issued 0.75% Convertible Senior Notes due 2024 (the “2024 Convertible Notes”) and 1.50%
Convertible Senior Notes due 2026 (the “2026 Convertible Notes”) (together with the “2022 Convertible Notes” and the “2024
Convertible Notes”, the “Convertible Senior Notes”). In June 2015, in connection with the issuance of the 2022 Convertible
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
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Note Hedge counterparties to acquire shares of the Company’s Class A Common Stock, subject to customary anti-dilution
adjustments (Note 11). In connection with the partial repurchase of the 2022 Convertible Notes in August 2019, the Company
terminated its Convertible Note Hedges and Note Hedge Warrants proportionately. These instruments are derivative financial
instruments under ASC Topic 815, Derivatives and Hedging (“ASC 815”).
These derivatives are recorded as assets or liabilities at fair value each reporting date 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, expected term of the derivative instruments, strike prices of the
derivative instruments, risk-free interest rate, and expected 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.
In August 2019, in connection with the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes, the
Company entered into the Capped Calls. The Capped Calls cover the same number of shares of Class A Common Stock that
initially underlie the 2024 Convertible Notes and the 2026 Convertible Notes (subject to anti-dilution and certain other
adjustments). These instruments meet the conditions outlined in ASC 815 to be classified in stockholders’ equity (deficit) and are
not subsequently remeasured as long as the conditions for equity classification continue to be met.
Revenue Recognition
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) education or 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 for sales detailing, promotional support services and medical
education initiatives, and (vi) royalties on product sales. The Company receives its share of the net profits or bears its share of the
net losses from the sale of linaclotide in the U.S. through its collaboration agreement with AbbVie for North America. The
Company has adopted a policy to recognize revenue net of tax withholdings, as applicable.
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
standalone 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.
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Agreements that include the supply of 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 finished 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.
Net Profit or Net Loss Sharing
In accordance with ASC 808 Topic, Collaborative Arrangements (“ASC 808”), the Company considers 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 Company applies the separation, initial
measurement, and recognition principles of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), as
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 AbbVie, and related cost of goods sold and selling, general and administrative expenses as incurred by the Company
and AbbVie. These amounts are partially determined based on amounts provided by AbbVie 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 AbbVie for timely and accurate information regarding net revenues
from sales of LINZESS in the U.S. in accordance with both ASC 808 and ASC 606, and the related costs, 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 AbbVie 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
AbbVie as collaboration expense or collaborative arrangements revenue, as applicable. The Company and AbbVie settle the cost
sharing quarterly such that the Company’s statements of operations reflect 50% of the pre-tax net profit or loss generated from
sales of LINZESS in the U.S.
Product Revenue, Net
Product revenue consisted of sales of the Lesinurad Products, in the U.S. until the termination of the exclusive license to
develop, manufacture, and commercialize in the U.S. products containing lesinurad as an active ingredient (the “Lesinurad
License”) in January 2019. The Company sold the Lesinurad Products principally to a limited number of national wholesalers and
selected regional wholesalers (the “Distributors”). The Distributors resold the Lesinurad Products to retail pharmacies and
healthcare providers, who then sold to patients.
Net product revenue was recognized when the Distributor obtained control of the Company’s product, which occurred at
a point in time, typically upon shipment of Lesinurad Products to the Distributor. When the Company performed shipping and
handling activities after the transfer of control to the Distributor (e.g., when control transfers prior to delivery), they were
considered fulfillment activities, and accordingly, the costs were accrued for when the related revenue was recognized. The
Company expensed incremental costs of obtaining a contract as and when incurred if the expected amortization period of the
asset that the Company would have recognized was one year or less.
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The Company evaluated the creditworthiness of each of its Distributors to determine whether it was probable that a
significant reversal in the amount of the cumulative revenue recognized would not occur. The Company calculated its net product
revenue based on the wholesale acquisition cost that the Company charged its Distributors for the Lesinurad Products less
variable consideration. The product revenue variable consideration consisted 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 would be adjusted based on
actual results in the period such variances became known.
Product revenue was recorded net of the trade discounts, allowances, rebates, chargebacks, discounts, product returns,
and other incentives. Certain of these adjustments were recorded as an accounts receivable reserve, while certain of these
adjustments were recorded as accrued expenses.
Sale of Active Pharmaceutical Ingredient
During the years ended December 31, 2020, 2019, and 2018, the Company produced linaclotide API, finished drug
product, finished goods, and/or development materials for certain of its partners. As of December 31, 2020, the Company is no
longer responsible for the supply of linaclotide API, finished drug product, finished goods or development materials to its
partners.
As it relates to development materials and API produced for Astellas, the Company was reimbursed at a contracted rate.
Such reimbursements were considered as part of revenue generated pursuant to the Astellas license agreement and are presented
as collaborative arrangements revenue. Any linaclotide API, finished drug product, finished goods, and development materials
AbbVie is responsible for producing for the U.S. are recognized in accordance with the cost-sharing provisions of the
collaboration agreement with AbbVie for North America. Prior to the execution of the Amended AstraZeneca Agreement in
September 2019, any linaclotide API, finished drug product, and development materials produced for AstraZeneca for China
(including Hong Kong and Macau) were recognized in accordance with the cost-sharing provisions of the AstraZeneca
collaboration agreement.
The Company recognized revenue on linaclotide API, finished drug product, finished goods, and development materials
when control has transferred to the partner, which generally occurs upon shipment after the material passed all quality testing
required for acceptance by the partner.
Other
The Company’s deferred revenue balance consists of advance billings and payments received from customers in excess
of revenue recognized.
Cost of Revenues
Cost of revenues includes cost related to the sales of linaclotide API and finished 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, finished drug
product, and finished goods are generally recognized upon shipment 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 finished 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 capitalizes
nonrefundable advance payments made by the Company for research and development activities and defers expense recognition
until the related goods are received or the related services are performed.
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Research and development expenses are comprised of costs incurred in performing research and development activities,
including salary, benefits, share-based compensation, and other employee-related expenses; 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 certain collaboration agreements pursuant to which it shares or has shared research and development
expenses related to linaclotide. The Company records expenses incurred under such linaclotide collaboration arrangements as
research and development expense. Prior to the execution of the Amended AstraZeneca Agreement in September 2019, under the
Company’s collaboration agreement with AstraZeneca for China (including Hong Kong and Macau), the Company was
reimbursed for certain research and development expenses and it netted these reimbursements against its research and
development expenses as incurred. In connection with the execution of the Amended AstraZeneca Agreement, AstraZeneca is
fully responsible for all research and development costs incurred related to the development, manufacture, and commercialization
of linaclotide in China (including Hong Kong and Macau). Under the Company’s collaboration agreement with AbbVie for North
America, the Company is reimbursed for certain research and development expenses and nets these reimbursements against its
research and development expenses as incurred. Amounts owed to AbbVie or AstraZeneca under the Company’s respective
collaboration agreements were recorded as incremental research and development expense.
Restructuring Expenses
Restructuring expenses are comprised primarily of costs associated with exit and disposal activities in accordance with
ASC 420, Exit or Disposal Cost Obligations, and include one-time termination benefits and contract-related costs. Such costs are
based on estimates of fair value in the period liabilities are incurred. The Company evaluates and adjusts these costs 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 expenses consist 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, tax, consulting, legal and other services.
Prior to the execution of the Amended AstraZeneca Agreement, the Company was reimbursed for certain selling,
general and administrative expenses and the Company netted these reimbursements against the Company’s selling, general and
administrative expenses as incurred. In connection with the Amended AstraZeneca Agreement, effective in September 2019,
AstraZeneca will be fully responsible for all costs related to the development, manufacture, and commercialization of linaclotide
in China (including Hong Kong and Macau). The Company includes AbbVie’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 presents the net payment to
or from AbbVie as collaboration expense or collaborative arrangements revenue, respectively.
Share-Based Compensation Expense
The Company grants awards under its share-based compensation programs, including stock awards, restricted stock
awards (“RSAs”), restricted stock units (“RSUs”) (including both time-based and performance-based RSUs), stock options, and
shares issued under the Company’s employee stock purchase plan (“ESPP”). Share-based compensation is recognized as expense
in the consolidated statements of operations based on the grant date fair value over the requisite service period, net of estimated
forfeitures. The Company estimates forfeitures over the requisite service period using historical forfeiture activity and records
share-based compensation expense only for those awards that are expected to vest.
The Company estimates the fair value of stock options 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 stock
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awards, RSAs, and RSUs is based on the market value of the Company’s Class A Common Stock on the date of grant, with the
exception of performance-based RSUs with market conditions, which are measured using the Monte Carlo simulation method on
the date of grant (Note 14). Discounted stock purchases under the Company’s ESPP are valued on the first date of the offering
period using the Black-Scholes option-pricing model to compute the fair value of the lookback provision plus the purchase
discount.
For awards that vest based on service conditions and market conditions, the Company uses a straight-line method to
recognize compensation expense over the respective service period. For awards that contain performance conditions, the
Company determines the appropriate amount to expense at each reporting date based on the anticipated achievement of
performance targets, which requires judgement, including forecasting the achievement of future specified targets. At the date
performance conditions are determined to be probable of achievement, the Company records a cumulative expense catch-up, with
remaining expense amortized over the remaining service period. Throughout the performance period, the Company re-assesses
the estimated performance and updates the number of performance-based awards that it believes will ultimately vest. Discounted
stock purchases under the Company’s ESPP are recognized over the offering period.
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.
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 $2.3
million, approximately $7.8 million, and approximately $5.0 million for the years ended December 31, 2020, 2019 and 2018,
respectively. These costs were charged to selling, general and administrative expenses as incurred.
Net Income (Loss) Per Share
Basic net income (loss) per common share is computed 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 Convertible
Notes, the 2024 Convertible Notes and the 2026 Convertible 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.
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 consists of net income (loss) and changes in
unrealized gains and losses on available-for-sale debt securities in the periods presented in the Company’s consolidated
statements of comprehensive income (loss).
Subsequent Events
The Company considers events or transactions that have occurred after the balance sheet date of December 31, 2020, but
prior to the filing of the financial statements with the Securities and Exchange Commission (“SEC”) 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.
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New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (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, 2020 that had a
material effect on its consolidated financial statements.
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on
Financial Instruments (“ASU 2016-13”). ASU 2016-13 changed how companies account for credit losses for most financial
assets and certain other instruments. For trade receivables, loans and held-to-maturity debt securities, companies are required to
recognize an allowance for credit losses rather than reducing the carrying value of the asset. Subsequent to the issuance of ASU
2016-13, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses,
Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, ASU No. 2019-05, Financial Instruments—Credit
Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”), ASU No. 2019-10, Financial Instruments—Credit Losses
(Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Date, ASU No. 2019-11, Codification
Improvements to Topic 326, Financial Instruments—Credit Losses, ASU No. 2020-02, Financial Instruments—Credit Losses
(Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and
Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) to provide
additional guidance on the adoption of ASU 2016-13. Early adoption was permitted. The Company adopted these ASUs during
the three months ended March 31, 2020. The adoption of these ASUs did not have a material impact on the Company’s financial
position and 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 and to eliminate the
required quantitative analysis for reporting units with negative carrying value. ASU 2017-04 is effective for fiscal years
beginning after December 15, 2019. Early adoption was permitted. The Company adopted ASU 2017-04 during the three months
ended March 31, 2020. The adoption of ASU 2017-04 did not have a material impact on the Company’s financial position and
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 adopted ASU 2018-13 during the three months ended March
31, 2020. The adoption of ASU 2018-13 did not have a material impact on the Company’s financial statement disclosures.
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 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 internal-use software
guidance to determine which implementation costs to capitalize as assets or expense as incurred. The 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 adopted ASU 2018-15 using the
prospective transition method during the three months ended March 31, 2020. The adoption of ASU 2018-15 did not have a
material impact 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 adopted
ASU 2018-17 during the three months ended
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March 31, 2020. The adoption of ASU 2018-17 did not have a material impact on the Company’s financial position and results of
operations.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for
Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU
2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to
improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2020, with early adoption permitted. The Company is currently evaluating the potential impact that the
adoption of ASU 2019-12 may have on the Company’s financial position and results of operations.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20)
and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and
Contracts in an Entity’s Own Equity (“ASU 2020-06”). The amendments in ASU 2020-06 simplify the accounting for certain
financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s
own equity. Under ASU 2020-06, a convertible debt instrument will be accounted for as a single liability measured at its
amortized cost, as long as no other features require bifurcation and recognition as derivatives. These changes will reduce reported
interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated under
previously existing guidance. The new guidance also requires the if-converted method to be applied for all convertible
instruments. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the impact that the
adoption of ASU 2020-06 may have on the Company’s financial position and results of operation.
Other recent accounting pronouncements issued, but not yet effective, are not expected to be applicable to the Company
or have a material effect on the consolidated financial statements upon future adoption.
3. Cyclerion Separation
On April 1, 2019, Ironwood completed the separation of its sGC business, and certain other assets and liabilities, into
Cyclerion. The Separation was effected by means of a distribution of all of the outstanding shares of common stock, with no par
value, of Cyclerion through a dividend of Cyclerion’s common stock, to Ironwood’s stockholders of record as of the close of
business on March 19, 2019. Prior to the Separation on April 1, 2019, as described in Note 1, Nature of Business, Cyclerion was a
wholly owned subsidiary of the Company. On March 30, 2019, the Company entered into certain agreements with Cyclerion
relating to the Separation, including a separation agreement, a tax matters agreement, and an employee matters agreement.
Agreements with Cyclerion
The separation agreement with Cyclerion, dated as of March 30, 2019, sets forth, among other things, the Company’s
agreements with Cyclerion regarding the principal actions to be taken in connection with the Separation, including the dividend,
which was effective as of April 1, 2019. The separation agreement identifies assets transferred, liabilities assumed by and
contracts assigned to each of Cyclerion and Ironwood as part of the Separation, and provides for when and how these transfers,
assumptions and assignments occur. The purpose of the separation agreement was to provide Cyclerion and Ironwood with assets
to operate their respective businesses and retain or assume liabilities related to those assets.
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The transfer of assets and liabilities to Cyclerion was effected through a contribution in accordance with the separation
agreement as summarized below (in thousands):
Assets:
Prepaid expenses and other current assets
Property and equipment, net
Other assets
Liabilities:
Accrued research and development costs
Accrued expenses and other current liabilities
Net Assets Transferred to Cyclerion
As of April 1, 2019
$
$
$
$
$
1,169
10,241
21
11,431
5,673
3,149
8,822
2,609
In addition, the Company received approximately $1.3 million during the year ended December 31, 2019 associated
with tenant improvement reimbursement provisions related to the Cyclerion lease in accordance with the separation agreement.
The tax matters agreement, dated as of March 30, 2019, governs each party’s rights, responsibilities and obligations
with respect to taxes, including taxes, if any, incurred as a result of any failure of the Separation to qualify as tax-free. In general,
if the parties incur tax liabilities in the event that the Separation is not tax-free, each party is expected to be responsible for any
taxes imposed on Ironwood or Cyclerion that arise from the failure of the Separation to qualify as a transaction that is generally
tax-free for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) and certain other relevant provisions of the
Internal Revenue Code of 1986, as amended, to the extent that the failure to so qualify is attributable to an acquisition of stock or
assets of, or certain actions, omissions or failures to act of, such party. If both Ironwood and Cyclerion are responsible for such
failure, liability will be shared according to relative fault. U.S. tax otherwise resulting from the failure of the Separation to qualify
as a transaction that is tax-free generally will be the responsibility of Ironwood. Each party otherwise agreed to indemnify the
other party from and against any liability for taxes allocated to such party under the tax matters agreement and any taxes resulting
from breach of any such party’s covenants under the tax matters agreement, the separation agreement, or any ancillary agreement
entered into in connection with the Separation. Cyclerion agreed to certain covenants that contain restrictions intended to
preserve the tax-free status of the distribution and certain related transactions.
The employee matters agreement, dated as of March 30, 2019, allocates assets, liabilities and responsibilities relating to
the employment, compensation, and employee benefits of Ironwood and Cyclerion employees, and other related matters in
connection with the Separation, including the treatment of outstanding Ironwood incentive equity awards. Pursuant to the
employee matters agreement, the outstanding Ironwood equity awards held by Cyclerion and Ironwood employees were adjusted
in connection with the Separation, with the intent to maintain, immediately following the Separation, the economic value of the
awards. No incremental stock-based compensation expense related to the Separation-related adjustments was recognized during
the year ended December 31, 2019 (Note 14).
Additionally, the Company entered into two transition services agreements and a development agreement with
Cyclerion.
Pursuant to the transition service agreements, the Company was obligated to provide and was entitled to receive certain
transition services related to corporate functions, such as finance, procurement, facilities and development. As of December 31,
2020, both transition service agreements had terminated. Amounts received for services provided to Cyclerion were recorded as
other income and amounts paid for services provided by Cyclerion were recorded as selling, general and administrative expense
and research and development expense, as applicable. During the years ended December 31, 2020 and 2019, the Company
recorded an insignificant amount and approximately $0.3 million, respectively, as other income for services provided to
Cyclerion. During each of the years ended December 31, 2020 and 2019, the Company recorded an insignificant amount in both
selling, general and administrative expense and research and development expense for services provided by Cyclerion,
respectively.
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Pursuant to the development agreement, Cyclerion is obligated to provide the Company with certain research and
development services with respect to certain of Ironwood’s products and product candidates for an initial period of two years,
unless earlier terminated or extended. Such research and development activities are governed by a joint steering committee
comprised of representatives from both Cyclerion and Ironwood. Services received are paid at a mutually agreed upon rate. The
Company recorded approximately $2.3 million and $4.5 million in research and development expenses under the development
agreement during the years ended December 31, 2020 and 2019, respectively. The Company had an insignificant amount and
approximately $1.5 million of accounts payable due to Cyclerion as of December 31, 2020 and 2019, respectively.
Discontinued Operations
Upon the Separation, the Company determined its sGC business qualified for discontinued operations accounting
treatment in accordance with ASC 205-20. There were no discontinued operations during year ended December 31, 2020. The
following is a summary of expenses of Cyclerion classified as discontinued operations for years ended December 31, 2019 and
2018 (in thousands):
Costs and expenses:
Research and development
Selling, general and administrative
Restructuring expenses
Net loss from discontinued operations
Year Ended December 31,
2019
2018
$
$
21,792
15,646
—
37,438
$
$
65,443
21,615
1,164
88,222
There were no assets or liabilities related to discontinued operations as of either December 31, 2020 or December 31,
2019, as all balances were transferred to Cyclerion upon Separation.
4. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income (loss) per common share (in thousands,
except per share amounts):
Numerator:
Net income (loss)
Denominator:
Year Ended December 31,
2019
2018
2020
$ 106,176
$ 21,505
$ (282,368)
Weighted average number of common shares outstanding used in net income (loss)
per share — basic
159,427
156,023
152,634
Effect of dilutive securities:
Stock options
Time-based restricted stock units
Performance-based restricted stock units
Restricted stock
Dilutive potential common shares
Weighted average number of common shares outstanding used in net income (loss)
per share — diluted
Net income (loss) per share — basic
Net income (loss) per share — diluted
367
766
1
94
—
—
—
—
—
—
—
—
160,655
0.67
0.66
$
156,023
0.14
0.14
$
152,634
(1.85)
(1.85)
$
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The outstanding securities have been excluded from the computation of diluted weighted average shares outstanding, as
applicable, as their effect would be anti-dilutive (in thousands):
Stock options
Restricted stock awards
Time-based restricted stock units
Performance-based restricted stock units
Note Hedge Warrants
2022 Convertible Notes
2024 Convertible Notes
2026 Convertible Notes
Year Ended December 31,
2019
17,194
182
2020
11,746
2
209
93
8,318
8,318
14,934
14,934
58,554
3,207
—
8,318
8,318
14,934
14,934
67,087
2018
20,457
65
3,058
—
20,250
20,250
—
—
64,080
The potentially dilutive impact of the 2022 Convertible Notes, 2024 Convertible Notes and 2026 Convertible notes
(together, the “Convertible Senior Notes”) (Note 11) is determined using the treasury stock method. Under this method, no
numerator or denominator adjustments arise from the principal and interest components of the Convertible Senior Notes because
the Company has the intent and ability to settle the Convertible Senior Notes’ principal and interest in cash. Instead, the
Company is required to increase the diluted net income (loss) per share denominator by the variable number of shares that would
be issued upon conversion if it settled the conversion spread obligation with shares. For diluted net income (loss) per share
purposes, the conversion spread obligation is calculated based on whether the average market price of the Company’s Class A
Common Stock during the reporting period is in excess of the conversion price of the Convertible Senior Notes. There was no
calculated spread added to the denominator for the years ended December 31, 2020, 2019, or 2018.
5. Goodwill and Intangible Assets
The Company closed a transaction with AstraZeneca (the “Lesinurad Transaction”) on June 2, 2016 (the “Acquisition
Date”) pursuant to which the Company received an exclusive license to develop, manufacture and commercialize the Lesinurad
Products in the U.S. 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.
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 July 31, 2018, the
accumulated amortization for developed technology – ZURAMPIC and developed technology – DUZALLO intangible assets
was approximately $3.6 million and approximately $11.7 million, respectively.
During the year ended December 31, 2018, the Company completed its initiative to evaluate the optimal mix of
investments for the lesinurad franchise for uncontrolled gout using a comprehensive marketing mix in select test markets (with
paired controls). Data from the test markets did not meet expectations. As a result, during the year ended December 31, 2018, 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 and recorded an
approximately $151.8 million impairment charge during the year ended December 31, 2018. 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 1st, or more frequently if events or changes in
circumstances indicate an impairment may have occurred (Note 2). There were no impairments of goodwill during the years
ended December 31, 2020, 2019, and 2018.
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6. Collaboration, License, Co-Promotion and Other Commercial Agreements
For the year ended December 31, 2020, the Company had linaclotide collaboration agreements with AbbVie for North
America and AstraZeneca for China (including Hong Kong and Macau), as well as linaclotide license agreements with Astellas
for Japan and with AbbVie for the AbbVie License Territory. The Company also had an agreement with Alnylam to perform
disease awareness activities for AHP and sales detailing activities for GIVLAARI. The following table provides amounts
included in the Company’s consolidated statements of operations as collaborative arrangements revenue and sale of API
primarily attributable to transactions from these arrangements (in thousands):
Collaborative Arrangements Revenue
Linaclotide Collaboration and License Agreements:
AbbVie (North America)
AbbVie (Europe and other)
AstraZeneca (China, including Hong Kong and Macau)
Astellas (Japan)
Co-Promotion and Other Agreements:
AbbVie (VIBERZI)(1)
Alnylam (GIVLAARI)
Other
Total collaborative arrangements revenue
Sale of API
Linaclotide Agreements:
Astellas (Japan)
AstraZeneca (China, including Hong Kong and Macau)
Other
Total sale of API
$
$
$
$
Year Ended December 31,
2019
2020
2018
2,196
370,902 $ 327,591 $ 266,177
1,146
—
—
1,718
32,628
10,147
682
2,128
—
4,302
1,335
381,545
3,723
2,000
1,845
$ 379,652
4,290
—
1,226
$ 272,839
2,017
5,540
421
7,978
$
$
45,788
2,973
—
48,761
$ 69,599
—
756
$ 70,355
(1) The Company had an agreement with AbbVie to perform sales detailing activities for VIBERZI® (eluxadoline) which
terminated as of December 31, 2019.
Accounts receivable, net, included approximately $145.8 million primarily related to collaborative arrangements revenue and
sale of API, collectively, as of December 31, 2020, including approximately $110.9 million of accounts receivable, net, which
includes approximately $4.3 million of accounts payable from the Company’s partner, AbbVie. Accounts receivable, net,
included approximately $43.9 million related to collaborative arrangements revenue and sale of API, collectively, as of December
31, 2019.
The Company previously reflected amounts due from Allergan prior to its acquisition by AbbVie in May 2020 as related
party accounts receivable. As of December 31, 2019, related party accounts receivable, net, included approximately $110.1
million related to collaborative arrangements revenue, net of approximately $4.1 million of related party accounts payable.
Following acquisition of Allergan by AbbVie, the Company determined that AbbVie is not a related party to the Company (Note
17).
At December 31, 2019, deferred revenue was approximately $0.9 million related to the disease education and promotional
agreement with Alnylam. At December 31, 2020, no deferred revenue was recorded.
The Company routinely assesses the creditworthiness of its license and collaboration partners. The Company has not
experienced any material losses related to receivables from its license or collaboration partners during the years ended December
31, 2020, 2019, or 2018.
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Linaclotide Agreements
Collaboration Agreement for North America with AbbVie
In September 2007, the Company entered into a collaboration agreement with AbbVie 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 AbbVie 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. AbbVie 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, 2019, $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. The Company can also achieve up to $80.0 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.
During the years ended December 31, 2020, 2019 and 2018, the Company incurred approximately $20.1 million,
approximately $37.6 million, and approximately $39.2 million in total research and development expenses under the linaclotide
collaboration for North America. As a result of the research and development cost-sharing provisions of the linaclotide
collaboration for North America, the Company incurred approximately $5.6 million during the year ended December 31, 2020,
and offset approximately $7.2 million and approximately $9.0 million in research and development costs during the years ended
December 31, 2019 and 2018, respectively, to reflect the obligations of each party under the collaboration to bear 50% of the
development costs incurred.
The Company and AbbVie 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 AbbVie and may include gross
sales net of discounts, rebates, allowances, sales taxes, freight and insurance charges, and other applicable deductions.
The Company evaluated its collaboration arrangement for North America with AbbVie 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, as these payments relate predominately to the license granted to AbbVie.
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 AbbVie during the commercialization period will be
recognized as earned in accordance with the right-to-invoice practical expedient, 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 agreement with AbbVie for North America, LINZESS net sales are calculated and
recorded by AbbVie 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 AbbVie as collaboration
expense or collaborative arrangements revenue, as applicable. This treatment is in accordance with the Company’s revenue
recognition policy, given that the Company is not the primary obligor and does not have the inventory risks in the collaboration
agreement with AbbVie for North America. The Company relies on AbbVie to provide accurate and complete information
related to net sales of LINZESS
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in accordance with U.S. generally accepted accounting principles in order to calculate its settlement payments to and from
AbbVie and record collaboration expense or collaborative arrangements revenue, as applicable.
From time to time, in accordance with the terms of the collaboration with AbbVie for North America, the Company
engages an independent certified public accounting firm to review the accuracy of the financial reporting from AbbVie to the
Company. In connection with such a review during the three months ended September 30, 2018, AbbVie reported to the
Company an approximately $59.3 million negative adjustment to LINZESS net sales. The adjustment related to the cumulative
difference between certain previously estimated LINZESS gross-to-net sales reserves and allowances made by AbbVie during the
years ended December 31, 2015, 2016 and 2017, and subsequent actual payments made. This adjustment was primarily
associated with estimated governmental and contractual rebates, as reported by AbbVie. Upon receiving this information from
AbbVie, the Company recorded a change in accounting estimate to reduce collaborative arrangements revenue by approximately
$29.7 million during the three months ended September 30, 2018 related to the Company’s share of this adjustment. In addition,
during the three months ended December 31, 2018, AbbVie 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 AbbVie collaboration agreement for North
America during the years ended December 31, 2020, 2019, and 2018 as follows (in thousands):
Collaborative arrangements revenue related to sales of LINZESS in the U.S.
Royalty revenue
Total collaborative arrangements revenue
2020
$ 368,603
Year Ended December 31,
2019
$ 325,429
2,299
2,162
$ 370,902
$ 327,591
2018
$ 264,243
1,934
$ 266,177
The collaborative arrangements revenue recognized in the years ended December 31, 2020, 2019, and 2018 primarily
represents the Company’s share of the net profits and net losses on the sale of LINZESS in the U.S.
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, 2020, 2019, and 2018 (in thousands):
Ironwood's collaborative arrangement revenue
Selling, general and administrative costs incurred by the Company(1)
Ironwood's share of net profits(2)
Year Ended December 31,
2019
$ 325,429
(38,123)
$ 287,306
2020
$ 368,603
(39,312)
$ 329,291
2018
$ 264,243
(42,435)
$ 221,808
(1)
Includes Ironwood’s selling, general and administrative expenses attributable to the cost-sharing arrangement with AbbVie.
Excludes approximately $0.6 million, approximately $2.4 million, and approximately $2.2 million for the years ended
December 31, 2020, 2019, and 2018 respectively, related to patent prosecution and patent litigation costs recognized in
connection with the collaboration agreement with AbbVie.
(2)
Ironwood has recalculated its share of net profit on sales of LINZESS in the U.S. to conform with AbbVie’s recast of
historically reported LINZESS U.S. net sales (previously reported by Allergan).
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 $2.3 million, approximately $2.2 million, and approximately $1.9
million of combined royalty revenues from Canada and Mexico during the years ended December 31, 2020, 2019, and 2018,
respectively.
License Agreement with AbbVie (All countries other than the countries and territories of North America, China (including
Hong Kong and Macau), and Japan)
In April 2009, the Company entered into a license agreement with Almirall, S.A. (“Almirall”) to develop and
commercialize linaclotide in Europe (including the Commonwealth of Independent States and Turkey) for the treatment
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of IBS-C, CIC and other GI conditions (the “European License Agreement”). 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. In October 2015, Almirall transferred its exclusive license to develop and commercialize
linaclotide in Europe to AbbVie.
Additionally, in October 2015, the Company and AbbVie 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) AbbVie 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 AbbVie for North America.
In January 2017, the Company and AbbVie entered into an amendment to the European License Agreement (the “2017
Amendment”). The 2017 Amendment extended the license to develop and commercialize linaclotide in all countries other than
China (including Hong Kong and Macau), Japan, and the countries and territories of North America. On a country-by-country
and product-by-product basis in such additional territory, AbbVie 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. The 2017 Amendment did not modify any of the milestones or royalty terms related to Europe.
In evaluating the terms of the European License Agreement, as amended, 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 and the
2017 Amendment relate predominantly to the license granted to AbbVie. 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 under the sales-based royalty exception. The commercial launch milestones are recognized as revenue when it is
probable that a significant reversal of revenue would not occur and the associated constraint has been lifted.
The Company recognized approximately $2.2 million, approximately $1.7 million and approximately $1.1 million of
royalty revenue from the Amended European License Agreement during the years ended December 31, 2020, 2019, and 2018,
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 (the “2009 License Agreement with
Astellas”). 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 was 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 2009 License Agreement with Astellas, the Company received royalties which escalated based on sales
volume, beginning in the low-twenties percent, less the transfer price paid for the API included in the product sold and other
contractual deductions.
Under the 2009 License Agreement with Astellas, the Company received an up-front licensing fee of $30.0 million and
three development milestone payments that totaled $45.0 million, which were recognized as revenue prior to the adoption of ASC
606 on January 1, 2018.
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The Company evaluated the terms of the 2009 License Agreement with Astellas and determined that there were no
remaining performance obligations as of the adoption of ASC 606. Additionally, under the terms of the Astellas Commercial
Supply Agreement, the Company determined it had an ongoing performance obligation to supply API.
During the years ended December 31, 2019 and 2018, the Company recognized revenue of approximately $27.5 million
and approximately $69.6 million, respectively, from the sale of API to Astellas under the 2009 License Agreement with Astellas
and the Astellas Commercial Supply Agreement. The royalties on sales of LINZESS in Japan did not exceed the transfer price of
API sold and other contractual deductions during each of the periods presented.
In August 2019, the Company and Astellas amended and restated the 2009 License Agreement with Astellas (the
“Amended Astellas License Agreement”). This amendment to the 2009 License Agreement with Astellas was accounted for as a
separate contract. Under the terms of the Amended Astellas License Agreement, the Company is no longer responsible for the
supply of linaclotide API to Astellas, and Astellas assumed responsibility for its own supply of linaclotide API in Japan in 2020.
In connection with the execution of the Amended Astellas License Agreement, Astellas paid the Company a non-
refundable, upfront payment of $10.0 million in August 2019. Further, Astellas, in lieu of the royalty payment terms set forth in
the 2009 License Agreement with Astellas, pays royalties to the Company at rates beginning in the mid-single digit percent and
escalating to low-double-digit percent, based on aggregate annual net sales in Japan of products containing linaclotide API. These
royalty payments are subject to reduction following the expiration of certain licensed patents and the occurrence of generic
competition in Japan. The Company continued to supply linaclotide API for Japan during 2019 and 2020 at a contractually
defined rate. Additionally, Astellas reimbursed the Company for the Company’s performance of adverse event reporting services
at a fixed monthly rate until such services were terminated in February 2020.
The Company identified the following performance obligations under the Amended Astellas License Agreement:
●
●
●
delivery of the expanded license of intellectual property, including the applicable manufacturing know-how;
obligation to supply linaclotide API for 2019; and
adverse event reporting services.
The Company allocated the $10.0 million upfront payment to the delivery of the expanded license of intellectual
property and recognized it as collaborative arrangements revenue at contract inception. The Company allocated the
approximately $20.4 million in remaining purchase orders for API to the obligation to supply linaclotide API to Astellas for
2019. Consideration for the supply of linaclotide API is recognized over the performance period as linaclotide API is shipped to
Astellas. Consideration allocated to the adverse event reporting services is recognized as such services are provided over the
performance period based on the amount to which the Company has a right to invoice.
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.
The Company recognized $10.0 million in collaborative arrangements revenue during the year ended December 31,
2019 related to the upfront fee associated with the execution of the Amended Astellas License Agreement. The Company
recognized approximately $2.0 million and approximately $18.3 million from the sale of API to Astellas under the Amended
License Agreement during the years ended December 31, 2020 and 2019, respectively. The Company recognized approximately
$2.1 million of royalty revenue during the year ended December 31, 2020. The Company recognized an insignificant amount of
collaborative arrangements revenue related to adverse event reporting services in each of the years ended December 31, 2020 and
2019.
Collaboration Agreement for China (including Hong Kong and Macau) with AstraZeneca
In October 2012, the Company entered into a collaboration agreement with AstraZeneca to co-develop and co-
commercialize linaclotide in the AstraZeneca License Territory (the “AstraZeneca Collaboration Agreement”). The
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collaboration provided AstraZeneca with an exclusive nontransferable license to exploit the underlying technology in the
AstraZeneca License Territory. The parties shared responsibility for continued development and commercialization of linaclotide
under a joint development plan and a joint commercialization plan, respectively, with AstraZeneca having primary responsibility
for the local operational execution.
In September 2019, the Company and AstraZeneca entered into an amendment and restatement of the AstraZeneca
Collaboration Agreement (the “Amended AstraZeneca Agreement”) under which AstraZeneca obtained the exclusive right to
develop, manufacture and commercialize products containing linaclotide in the AstraZeneca License Territory (the “AstraZeneca
License”).
Prior to the execution of the Amended AstraZeneca Agreement, the Company identified the following performance
obligations under the AstraZeneca Collaboration Agreement:
●
●
●
●
research, development and regulatory services pursuant to the development plan (“R&D Services”);
Joint Development Committee (“JDC”) services;
obligation to supply clinical trial material; and
Joint Commercialization Committee services.
Under the original AstraZeneca Collaboration Agreement, the Company shared development costs with AstraZeneca,
with AstraZeneca incurring 55% of the net losses from the development and commercialization of linaclotide in the AstraZeneca
License Territory. 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 AstraZeneca License Territory
were recorded as a reduction in expense. Development costs incurred by the Company that pertained to the joint development
plan and subsequent amendments to the joint development plan, as approved by the JDC, were recorded as research and
development expense as incurred. Payments to AstraZeneca were recorded as incremental research and development expense.
During the years ended December 31, 2019 and 2018, the Company incurred approximately $1.2 million and approximately $0.9
million, respectively, related to pre-launch commercial services and supply chain services.
Under the Amended AstraZeneca Agreement, the Company is entitled to receive non-contingent payments totaling
$35.0 million in three installments through 2024, of which $10.0 million was received in January 2021. In addition, AstraZeneca
may be required to make milestone payments totaling up to $90.0 million contingent on the achievement of certain sales targets
and will be required to pay tiered royalties to the Company at rates beginning in the mid-single-digit percent and increasing up to
twenty percent based on the aggregate annual net sales of products containing linaclotide in the AstraZeneca License Territory. In
connection with the Amended AstraZeneca Agreement, the Company and AstraZeneca entered into a transition services
agreement (“AstraZeneca TSA”) and an amended commercial supply agreement (“AstraZeneca CSA”). Under the terms of the
AstraZeneca TSA, the Company will provide certain regulatory and administrative services for a term of approximately two
years from the date of execution, unless earlier terminated or extended. Services performed are paid at a mutually agreed upon
rate. Amounts for AstraZeneca TSA services are recorded as collaborative arrangements revenue. Under the terms of the
AstraZeneca CSA, the Company supplied linaclotide API, finished drug product and finished goods for the Licensed Territory
through March 31, 2020 at predetermined rates.
The Company evaluated the Amended AstraZeneca Agreement and determined that it would be accounted for 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 Amended AstraZeneca Agreement were identified:
●
delivery of the expanded AstraZeneca License;
● AstraZeneca TSA services; and
●
supply of linaclotide API, finished drug product and finished goods under the AstraZeneca CSA.
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The Company determined that the non-contingent payments should be allocated to the delivery of the expanded
AstraZeneca License. The Company determined that the performance obligation related to the transfer of the AstraZeneca
License was satisfied as of the execution date of the Amended AstraZeneca Agreement. As a portion of the payments relating to
the transfer of the AstraZeneca License are due significantly after the performance obligation was satisfied, the Company
adjusted its transaction price for the significant financing component of approximately $2.6 million. Accordingly, the Company
recognized approximately $32.4 million relating to the delivery of the AstraZeneca License as collaborative arrangements
revenue at contract inception and will recognize the approximately $2.6 million relating to the significant financing component as
interest income through 2024 using the effective interest method. Consideration allocated to the AstraZeneca TSA services will
be recognized as collaborative arrangements revenue as such services are provided over the performance period based on the
amount to which the Company has a right to invoice. Consideration for the supply of linaclotide API, finished drug product and
finished goods under the AstraZeneca CSA was recognized over the performance period as linaclotide API, finished drug product
and finished goods were shipped to AstraZeneca.
During the year ended December 31, 2020, the Company recognized approximately $0.7 million in collaborative
arrangements revenue related to the Amended AstraZeneca License, of which approximately $0.6 million related to the
AstraZeneca TSA services and approximately $0.1 million related to royalties. During the year ended December 31, 2020, the
Company recognized approximately $5.5 million of sale of API on its consolidated statement of operations relating to the supply
of linaclotide finished drug product and finished goods under the AstraZeneca CSA. During the year ended December 31, 2019,
the Company recognized approximately $32.6 million in collaborative arrangements revenue related to the Amended
AstraZeneca License, of which approximately $32.4 million related to the delivery of the AstraZeneca License and
approximately $0.2 million related to the AstraZeneca TSA services. During the year ended December 31, 2019, the Company
recognized approximately $3.0 million of sale of API on its consolidated statement of operations relating to the supply of
linaclotide finished drug product and finished goods under the AstraZeneca CSA.
Co-Promotion and Other Agreements
Disease Education and Promotional Agreement with Alnylam
In August 2019, the Company and Alnylam entered into a disease education and promotional agreement for Alnylam’s
GIVLAARI, and this agreement was subsequently amended in December 2020 (the “Alnylam Agreement”). GIVLAARI was
approved by the U.S. FDA in November 2019 for the treatment of adult patients with AHP. Under the terms of the Alnylam
Agreement, the Company’s sales force is performing disease awareness activities and sales detailing activities for GIVLAARI to
gastroenterologists and health care practitioners to whom they detail LINZESS in the first position over the term of the
agreement, which is approximately three years.
Under the Alnylam Agreement, the Company received service fees, totaling approximately $5.5 million for services
rendered through December 31, 2020. The Company also is eligible to receive royalties based on a percentage of net sales of
GIVLAARI that are directly attributable to the Company’s promotional efforts over the term of the agreement. The Company
identified the following performance obligation under the Alnylam Agreement:
●
performance of disease education activities for AHP and performance of sales details for GIVLAARI (together
“Givosiran Education and Promotion Activities”).
The Company allocated the service fees to the performance of Givosiran Education and Promotion Activities and
recognized collaborative arrangements revenue through December 31, 2020 as the services were performed based on the amount
to which the Company had a right to invoice. Royalties are recognized as collaborative arrangements revenue for Givosiran
Education and Promotion Activities based on the amount to which the Company has a right to invoice when the associated
constraints have been lifted.
During the years ended December 31, 2020 and 2019, the Company recognized approximately $3.5 million and
approximately $2.0 million, respectively, in collaborative arrangements revenue related to the service fees. During the year ended
December 31, 2020, the Company recognized approximately $0.8 million in royalty revenue related to the Alnylam Agreement.
The Company did not recognize any royalty revenue related to the Alnylam Agreement during the year ended December 31,
2019. As of December 31, 2019, the Company had a deferred revenue balance of
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approximately $0.9 million related to advance billings of service fees. As of December 31, 2020, the Company had no deferred
revenue.
7. 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, 2020 and 2019 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 may include 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 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 the collateral received is maintained at 102% of the reverse repurchase agreements principal
amount on a daily basis.
The following tables present the assets and liabilities the Company has measured at fair value on a recurring basis (in
thousands):
Assets:
Cash and cash equivalents:
Money market funds
Restricted cash:
Money market funds
Convertible note hedges
Total assets measured at fair value
Liabilities:
Note hedge warrants
Total liabilities measured at fair value
Fair Value Measurements at Reporting Date Using
Quoted Prices in Significant Other Significant
December 31,
2020
Active Markets for
Identical Assets
(Level 1)
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
$
349,014 $
349,014
$
— $
—
2,221
13,065
364,300 $
12,088 $
12,088 $
$
$
$
2,221
—
351,235
$
— $
— $
—
—
— $
—
13,065
13,065
— $
— $
12,088
12,088
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Assets:
Cash and cash equivalents:
Money market funds
Repurchase agreements
Restricted cash:
Money market funds
Convertible note hedges
Total assets measured at fair value
Liabilities:
Note hedge warrants
Total liabilities measured at fair value
Fair Value Measurements at Reporting Date Using
Quoted Prices in Significant Other Significant
December 31,
2019
Active Markets for
Identical Assets
(Level 1)
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
$
$
$
$
139,190 $
37,800
139,190
37,800
$
2,221
31,366
210,577
$
2,221
—
179,211
$
— $
—
—
—
—
—
— $
—
31,366
31,366
24,260 $
24,260 $
— $
— $
— $
— $
24,260
24,260
There were no transfers between fair value measurement levels during each of the years ended December 31, 2020 or
2019.
Cash equivalents, accounts receivable, related party accounts receivable, prepaid expenses and other current assets,
accounts payable, related party accounts payable, accrued research and development costs, accrued expenses and other current
liabilities, current portion of operating lease obligations, and deferred revenue at December 31, 2020 and 2019 are carried at
amounts that approximate fair value due to their short-term maturities.
Convertible Note Hedges and Note Hedge Warrants with Respect to 2022 Convertible Notes
The Company’s Convertible Note Hedges and the Note Hedge Warrants are recorded as derivative assets and liabilities,
respectively, and are classified as Level 3 measurements 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, 2020 included the price per share of the Company’s Class A Common
Stock, expected terms of the derivative instruments, strike prices of the derivative instruments, risk-free interest rates, and
expected 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.
The following inputs were used in the fair market valuation of the Convertible Note Hedges and Note Hedge Warrants
as of December 31, 2020 and 2019:
Risk-free interest rate (1)
Expected term
Stock price (2)
Strike price (3)
Common stock volatility (4)
Dividend yield (5)
December 31,
2020
December 31,
2019
Convertible Note Hedge Convertible Note Hedge
Warrants
Warrants Note Hedges
Note Hedges
$
$
0.1 %
1.5
$
$
11.39
14.51
46.7 %
— %
0.1 %
2.0
11.39
18.82
50.3 %
— %
$
$
1.6 %
2.5
13.31
14.51
$
$
49.1 %
— %
1.6 %
3.0
13.31
18.82
46.5 %
— %
(1) Based on U.S. Treasury yield curve, with terms commensurate with the expected 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, 2020
and 2019, respectively.
(3) As per the respective agreements for the Convertible Note Hedges and Note Hedge Warrants.
(4) Expected volatility based on historical volatility of the Company’s Class A Common Stock.
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(5) 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 dividend yield is assumed to be zero.
The Convertible Note Hedges and the Note Hedge Warrants are recorded at fair value at each reporting date and
changes in fair value are recorded in other (expense) income, net within the Company's consolidated statements of operations.
The following table reflects the change in the Company's Level 3 Convertible Note Hedges and Note Hedge Warrants
from December 31, 2018 through December 31, 2020 (in thousands):
Balance at December 31, 2018
Cash settlement (received) paid upon early termination of derivatives (Note 11)
Change in fair value, recorded as a component of gain (loss) on derivatives
Balance at December 31, 2019
Change in fair value, recorded as a component of (loss) gain on derivatives
Balance at December 31, 2020
Convertible Senior Notes
Convertible
Note Hedges
41,020
(28,909)
19,255
31,366
(18,301)
13,065
$
$
$
Note Hedge
Warrants
(33,763)
25,735
(16,232)
(24,260)
12,172
(12,088)
$
$
$
In June 2015, the Company issued approximately $335.7 million aggregate principal amount of its 2022 Convertible
Notes. In August 2019, the Company issued $200.0 million aggregate principal amount of its 2024 Convertible Notes and $200.0
million aggregate principal amount of its 2026 Convertible Notes, and used a portion of the proceeds from such issuances to
repurchase $215.0 million aggregate principal amount of its 2022 Convertible Notes. The Company separately accounted for the
liability and equity components of each of the 2022 Convertible Notes, 2024 Convertible Notes, and 2026 Convertible Notes, by
allocating the proceeds between the liability component and equity component (Note 11). The fair value of the respective
convertible senior 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 respective convertible senior notes observed in market trading,
which are Level 2 inputs.
The estimated fair value of the 2022 Convertible Notes as of December 31, 2020 and 2019 was approximately $130.2
million and $141.3 million, respectively. The estimated fair value of the 2024 Convertible Notes as of December 31, 2020 and
2019 was approximately $222.3 million and $235.7 million, respectively. The estimated fair value of the 2026 Convertible Notes
as of December 31, 2020 and 2019 was approximately $224.1 million and $240.1 million, respectively.
Capped Calls with Respect to 2024 Convertible Notes and 2026 Convertible Notes
In connection with the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes, the Company entered
into the Capped Calls with certain financial institutions. The Capped Calls cover 29,867,480 shares of Class A Common Stock
(subject to anti-dilution and certain other adjustments), which is the same number of shares of Class A Common Stock that
initially underlie the 2024 Convertible Notes and the 2026 Convertible Notes. The Capped Calls have an initial strike price of
approximately $13.39 per share, which corresponds to the initial conversion price of the 2024 Convertible Notes and the 2026
Convertible Notes, and have a cap price of approximately $17.05 per share (Note 11). The strike price and cap price are subject to
anti-dilution adjustments generally similar to those applicable to the 2024 Convertible Notes and the 2026 Convertible Notes.
These instruments meet the conditions outlined in ASC 815 to be classified in stockholders’ equity (deficit) and are not
subsequently remeasured as long as the conditions for equity classification continue to be met (Note 11).
8. Leases
Effective January 1, 2019, the Company adopted ASC 842 using the optional transition method. The Company’s lease
portfolio for the year ended December 31, 2020 includes: a lease for its current headquarters location, a data center colocation
lease, vehicle leases for its salesforce representatives, and leases for computer and office equipment.
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Lease cost is recognized on a straight-line basis over the lease term. The components of lease cost for the year ended
December 31, 2020 and 2019 are as follows (in thousands):
Operating lease cost during period, net(1)
Variable lease payments
Short-term lease cost
Total lease cost
Year Ended December 31,
2020
2019
$
$
2,530
—
1,420
3,950
$
$
16,452
1,526
1,512
19,490
(1) Operating lease cost is presented net of approximately $0.3 million of sublease income for the year ended December 31, 2019
related to a sublease agreement between Ironwood and Cyclerion executed upon Separation. The sublease agreement
terminated in May 2019.
Supplemental cash flow information related to leases for the periods reported is as follows:
Right-of-use assets obtained in exchange for new operating lease upon adoption of ASC
842 (in thousands)
Adjustment to right-of-use assets as a result of the lease modification upon Separation (in
thousands)
Adjustment to right-of-use assets as a result of the termination of the Binney Street Lease
(in thousands)
Right-of-use assets obtained in exchange for new operating lease liabilities upon execution
of Summer Street Lease (in thousands)
Cash paid for amounts included in the measurement of lease liabilities (in thousands)
Weighted-average remaining lease term of operating leases (in years)
Weighted-average discount rate of operating leases
$
Year Ended December 31,
2020
2019
—
—
—
—
1,146
9.3
5.8 %
$
88,299
(40,427)
(34,440)
18,452
18,598
10.2
5.8 %
Future minimum lease payments under non-cancelable operating leases as of December 31, 2020 are as follows (in
thousands):
2021
2022
2023
2024
2025
2026 and thereafter
Total future minimum lease payments
Less: present value adjustment
Operating lease liabilities at December 31, 2020
Less: current portion of operating lease liabilities
Operating lease liabilities, net of current portion
Summer Street Lease (current headquarters)
Operating
Lease
Payments
3,128
3,129
3,065
3,126
3,189
14,856
30,493
(7,047)
23,446
(3,128)
20,318
$
$
In June 2019, the Company entered into a non-cancelable operating lease (the “Summer Street Lease”) for
approximately 39,000 square feet of office space on the 23rd floor of 100 Summer Street, Boston, Massachusetts, which began
serving as the Company’s headquarters in October 2019, replacing its prior headquarters at 301 Binney Street in Cambridge,
Massachusetts. The Summer Street Lease terminates on June 11, 2030 and includes a 2% annual rent escalation, free rent periods,
a tenant improvement allowance, and an option to extend the term of the lease for an
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additional five years at a market base rental rate. The rent expense, inclusive of the escalating rent payments and lease incentives,
is recognized on a straight-line basis over the lease term. Additionally, the Summer Street Lease requires a letter of credit to
secure the Company’s obligations under the lease agreement of approximately $1.0 million, which is collateralized by a money
market account recorded as restricted cash on the Company’s consolidated balance sheet as of December 31, 2020.
At lease inception, the Company recorded a right-of-use asset and a lease liability associated with the Summer Street
Lease using an incremental borrowing rate of approximately 5.8%. At December 31, 2020, the balances of the right-of-use asset
and operating lease liability were approximately $16.6 million and approximately $23.2 million, respectively. At December 31,
2019, the balances of the right-of-use asset and operating lease liability were approximately $17.7 million and approximately
$22.8 million, respectively.
Lease costs related to the Summer Street Lease recorded during the years ended December 31, 2020 and 2019 were
approximately $2.5 million and approximately $1.5 million, respectively.
Binney Street Lease (prior headquarters)
The Company rented office space at 301 Binney Street, Cambridge, Massachusetts under a non-cancelable operating
lease entered into in January 2007, as amended (“Binney Street Lease”) through October 2019.
On April 1, 2019, the Company modified the Binney Street Lease to reduce its leased premises to approximately
108,000 rentable square feet of office space on the first and third floors. The surrendered portion of approximately 114,000
rentable square feet on the first and second floor of the building was subsequently occupied by Cyclerion under a direct lease
between Cyclerion and the Binney Street landlord. As a result of the modification, the Company adjusted the value of its right-of-
use asset and operating lease liability using an incremental borrowing rate of approximately 5.1%, and recognized a gain of
approximately $3.2 million, which was recorded as a reduction to operating expenses on its consolidated statement of operations.
The Company elected to determine the proportionate reduction in the right-of-use asset based on the reduction to the lease
liability.
As of January 1, 2019, in conjunction with the adoption of ASC 842, the Company recorded a right-of-use asset of
approximately $87.7 million and a lease liability of approximately $94.3 million associated with the Binney Street Lease.
On June 11, 2019, the Company entered into a lease termination agreement (the “Lease Termination”) with the Binney
Street landlord to terminate the Company’s lease for approximately 108,000 square feet of office space. The Lease Termination
was effective during the fourth quarter of 2019 in exchange for an approximately $9.0 million payment. The Lease Termination
was accounted for as a lease modification that reduces the term of the existing lease and the Company adjusted the value of its
right-of-use asset and operating lease liability using an incremental borrowing rate of approximately 4.0%.
Lease cost related to the Binney Street Lease recorded during the year ended December 31, 2019 was approximately
$16.3 million, net of sublease income of approximately $0.3 million. Under ASC 840, rent expense related to the Binney Street
Lease recorded during the year ended December 31, 2018 was approximately $10.0 million.
Vehicle fleet leases
During April 2018, the Company entered into a master services agreement containing 12-month leases (the “2018
Vehicle Leases”) for vehicles within its fleet for its field-based sales force and medical science liaisons. These leases are
classified as short-term in accordance with the practical expedient in ASC 842. The 2018 Vehicle Leases expire at varying times,
with a monthly 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 collateralized by a money market account
recorded as restricted cash on the Company’s consolidated balance sheets as of December 31, 2020 and 2019.
Lease cost related to the 2018 Vehicle Leases was approximately $1.4 million and approximately $1.5 million,
respectively, for the years ended December 31, 2020 and 2019. Under ASC 840, lease cost related to the 2018 Vehicle Leases
was approximately $0.8 million for the year ended December 31, 2018.
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9. Property and Equipment
Property and equipment, net consisted of the following (in thousands):
Software
Leasehold improvements
Laboratory equipment
Furniture and fixtures
Computer and office equipment
Construction in process
Less accumulated depreciation and amortization
December 31,
$
$
2020
8,615
7,407
1,898
1,517
1,297
—
20,734
(11,805)
8,929
$
$
2019
9,568
7,318
2,193
1,508
1,293
631
22,511
(10,082)
12,429
Depreciation expense of property and equipment was approximately $2.3 million and $5.6 million for the years ended
December 31, 2020 and 2019, respectively. Depreciation and amortization expense of property and equipment, including
amounts recorded under capital leases under ASC 840, was approximately $3.9 million for the year ended December 31, 2018.
During the year ended December 31, 2020, the Company recorded approximately $1.2 million in restructuring expenses
in its consolidated statement of operations related to the impairment of certain fixed assets as a result of its decision to
discontinue IW-3718 development.
10. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
Accrued incentive compensation
Accrued vacation
Professional fees
Salaries
Other employee benefits
Restructuring liabilities
Other
December 31,
2020
8,719
2,625
530
627
1,442
10,510
2,033
26,486
$
$
2019
$ 11,760
2,540
1,421
2,973
1,260
179
10,332
$ 30,465
As of December 31, 2020, other accrued expenses of approximately $2.0 million included approximately $1.6 million of
uninvoiced vendor liabilities and approximately $0.3 million of accrued interest.
As of December 31, 2019, other accrued expenses of approximately $10.3 million included approximately $4.1 million
related to API batches uninvoiced, approximately $0.9 million related to activities associated with the Company’s move to the
100 Summer Street headquarters, approximately $0.6 million related to unbilled inventory, approximately $0.3 million of accrued
interest, and approximately $0.2 million related to equipment for clinical studies.
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 (the “2026 Notes”) and received net proceeds of approximately
$11.2 million. The Company capitalized approximately $0.5 million of debt issuance costs, which were netted against the
carrying value of the 2026 Notes. Proceeds from the issuance of the 2024 Convertible Notes and the
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2026 Convertible Notes were used, in part, to redeem the outstanding principal balance of the 2026 Notes in September 2019.
The Company retired the 2026 Notes, which had an outstanding aggregate principal balance of approximately $116.5 million, for
a redemption price of approximately $123.0 million. The redemption of the 2026 Notes resulted in a loss on extinguishment of
debt of approximately $7.6 million related to the prepayment premium and write-off of the unamortized debt issuance costs and
unamortized debt discount.
The 2026 Notes had 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”). Principal of the 2026 Notes was payable on the 8.375% Payment
Dates beginning March 15, 2019. From March 15, 2019, the Company made 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 was
due to be repaid in an amount equal to the 8.375% Synthetic Royalty Amount minus the 8.375% Required Interest Amount, when
this was a positive number, until the principal had been paid in full.
Convertible Senior Notes
2.25% Convertible Senior Notes due 2022
In June 2015, the Company issued approximately $335.7 million aggregate principal amount of the 2022 Convertible
Notes. The Company received net proceeds of approximately $324.0 million from the sale of the 2022 Convertible 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 Convertible 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 Convertible Notes are governed by an indenture (the “2022 Indenture”) between the Company and U.S. Bank
National Association, as trustee (the “Trustee”). The 2022 Convertible 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. The 2022 Convertible Notes will mature
on June 15, 2022, unless earlier converted or repurchased. The Company may settle conversions of the 2022 Convertible Notes
through payment or delivery, as the case may be, of cash, shares of the Company’s Class A Common Stock 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 2022 Indenture). The initial conversion rate for the 2022 Convertible Notes was 60.3209 shares of Class A
Common Stock (subject to adjustment as provided for in the 2022 Indenture) per $1,000 principal amount of the 2022
Convertible Notes, which was equal to an initial conversion price of approximately $16.58 per share and 20,249,665 shares.
In connection with the Separation, in April 2019, the conversion rate under the 2022 Indenture was adjusted to equal
68.9172 shares of Class A Common Stock per $1,000 principal amount of the 2022 Convertible Notes, which is equal to an
adjusted conversion price of approximately $14.51 per share and 23,135,435 shares.
Holders of the 2022 Convertible Notes may convert their 2022 Convertible Notes at their option at any time prior to the
close of business on the business day 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 Convertible 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 2022 Indenture) per $1,000 principal amount of the 2022 Convertible
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 Convertible Notes on each
such trading day; or
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●
upon the occurrence of specified corporate events described in the 2022 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 Convertible Notes, in multiples of $1,000 principal amount, at the option of the
holder regardless of the foregoing circumstances.
The Company may not redeem the 2022 Convertible Notes prior to the maturity date and no “sinking fund” is provided
for by the 2022 Convertible Notes, which means that the Company is not required to periodically redeem or retire the 2022
Convertible Notes. Upon the occurrence of certain fundamental changes involving the Company, holders of the 2022 Convertible
Notes may require the Company to repurchase for cash all or part of their 2022 Convertible Notes at a repurchase price equal to
100% of the principal amount of the 2022 Convertible Notes to be repurchased, plus accrued and unpaid interest. If a make-
whole fundamental change, as described in the 2022 Indenture, occurs and a holder elects to convert its 2022 Convertible 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 2022 Indenture.
The 2022 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 2022 Indenture provides for customary events of default. In the case of an event of default
with respect to the 2022 Convertible Notes arising from specified events of bankruptcy or insolvency, all outstanding 2022
Convertible Notes will become due and payable immediately without further action or notice. If any other event of default with
respect to the 2022 Convertible Notes under the 2022 Indenture occurs or is continuing, the Trustee or holders of at least 25% in
aggregate principal amount of the then outstanding 2022 Convertible Notes may declare the principal amount of the 2022
Convertible Notes to be immediately due and payable. Notwithstanding the foregoing, the 2022 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 2022 Indenture consists exclusively of the right to receive additional interest on
the 2022 Convertible 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 Convertible 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 Convertible 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 conversion feature. The equity component of the 2022 Convertible Notes was recognized as a debt discount and
represents the difference between the gross proceeds from the issuance of the 2022 Convertible Notes and the fair value of the
liability component of the 2022 Convertible Notes on their respective dates of issuance. The debt discount is amortized to interest
expense using the effective interest method over seven years, or the expected life of the 2022 Convertible Notes. The equity
component is not remeasured as long as it continues to meet the conditions for equity classification.
In connection with the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes in August 2019, the
Company repurchased $215.0 million aggregate principal amount of the 2022 Convertible Notes. The 2022 Convertible Notes
were repurchased at a premium totaling approximately $227.3 million. The Company recognized a loss on extinguishment of
debt of approximately $23.4 million during the year ended December 31, 2019 related to the prepayment premium and
proportional write-off of the 2022 Convertible Notes unamortized debt issuance costs and unamortized debt discount.
Additionally, the repurchase resulted in a reduction to additional paid-in capital of approximately $27.0 million during the year
ended December 31, 2019 related to the equity component of the 2022 Convertible Notes.
0.75% Convertible Senior Notes due 2024 and 1.50% Convertible Senior Notes due 2026
In August 2019, the Company issued $200.0 million aggregate principal amount of the 2024 Convertible Notes and
$200.0 million aggregate principal amount of the 2026 Convertible Notes. The Company received net proceeds of approximately
$391.0 million from the sale of the 2024 Convertible Notes and 2026 Convertible Notes, after deducting fees and expenses of
approximately $9.0 million. The Company used approximately $25.2 million of the net proceeds from the sale of the 2024
Convertible Notes and 2026 Convertible Notes to pay the cost of the Capped Calls, as
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described below. For purposes of this section, “Notes” refer to the 2024 Convertible Notes and the 2026 Convertible Notes,
collectively.
The 2024 Convertible Notes and 2026 Convertible Notes were issued by the Company on August 12, 2019, pursuant to
separate Indentures, each dated as of such date (each an “Indenture” and together the “Indentures”), between the Company and
the Trustee. The 2024 Convertible Notes bear cash interest at the annual rate of 0.75% and the 2026 Convertible Notes bear cash
interest at the annual rate of 1.50%, each payable on June 15 and December 15 of each year. The 2024 Convertible Notes will
mature on June 15, 2024 and the 2026 Convertible Notes will mature on June 15, 2026, unless earlier converted or repurchased.
The Company will settle conversions of the 2024 Convertible Notes and 2026 Convertible Notes through payment or delivery, as
the case may be, of cash, shares of the Company’s Class A Common Stock 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 applicable
Indenture). The initial conversion rate for each of the 2024 Convertible Notes and the 2026 Convertible Notes is 74.6687 shares
of Class A Common Stock (subject to adjustment as provided for in the applicable Indenture) per $1,000 principal amount of the
2024 Convertible Notes and 2026 Convertible Notes, which is equal to an initial conversion price of approximately $13.39 per
share.
Holders of the 2024 Convertible Notes and 2026 Convertible Notes may convert their Notes at their option at any time
prior to the close of business on the business day immediately preceding December 15, 2023, with respect to the 2024
Convertible Notes, and December 15, 2025, with respect to the 2026 Convertible Notes, in multiples of $1,000 principal amount,
only under the following circumstances:
●
●
during any calendar quarter commencing after the calendar quarter ending on December 31, 2019 (and only during
such calendar quarter), if the last reported sale price of 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 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 each Indenture) per $1,000 principal amount of Notes for each trading day
of the measurement period was less than 98% of the product of the last reported sale price of Class A Common
Stock and the conversion rate for the Notes on each such trading day; or
●
upon the occurrence of specified corporate events described in each Indenture.
On or after December 15, 2023, with respect to the 2024 Convertible Notes, and December 15, 2025, with respect to the
2026 Convertible Notes, until the close of business on the second scheduled trading day immediately preceding the applicable
maturity date, the holders of the Notes may convert their Notes, in multiples of $1,000 principal amount, regardless of the
foregoing conditions.
If the Company experiences a fundamental change, as described in the Indentures, prior to the maturity date of the
respective Notes, holders of such Notes will, subject to specified conditions, have the right, at their option, to require the
Company to repurchase for cash all or a portion of their Notes at a repurchase price equal to 100% of the principal amount of the
Notes to be repurchased, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date.
If a make-whole fundamental change, as described in the Indentures, occurs and a holder elects to convert its 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
Indentures.
The Indentures do 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 Indentures provide for customary events of default. In the case of an event of default with respect to a
series of Notes arising from specified events of bankruptcy or insolvency, all outstanding Notes of such series will become due
and payable immediately without further action or notice. If any other event of default with respect to a series of Notes under the
relevant Indenture occurs or is continuing, the Trustee or holders of at least 25% in aggregate principal amount of the then
outstanding Notes of such series may declare the principal amount of such Notes to be immediately due and payable.
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In accordance with accounting guidance for debt with conversion and other options, the Company separately accounted
for the liability and equity components of the 2024 Convertible Notes and the 2026 Convertible Notes by allocating the proceeds
between the liability components and the embedded conversion options, or equity components, due to the Company’s ability to
settle the 2024 Convertible Notes and the 2026 Convertible 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 respective liability components were
calculated by measuring the fair value of a similar liability that does not have an associated conversion feature. The respective
equity components of the 2024 Convertible Notes and the 2026 Convertible Notes were recognized as a debt discount and
represent the difference between the gross proceeds from the issuance of the 2024 Convertible Notes and 2026 Convertible Notes
and the fair value of the liability of the 2024 Convertible Notes and 2026 Convertible Notes on their respective dates of issuance.
The debt discount is amortized to interest expense using the effective interest method over approximately five and seven years, or
the expected life of the 2024 Convertible Notes and the 2026 Convertible Notes, respectively. The respective equity components
are not remeasured as long as they continue to meet the conditions for equity classification.
The Company’s outstanding balances for the convertible senior notes as of December 31, 2020 and 2019 consisted of
the following (in thousands):
Liability component:
Principal:
2022 Convertible Notes
2024 Convertible Notes
2026 Convertible Notes
Less: unamortized debt discount
Less: unamortized debt issuance costs
Net carrying amount
Equity component:
2022 Convertible Notes
2024 Convertible Notes
2026 Convertible Notes
Total equity component
December 31,
2020
2019
$ 120,699
200,000
200,000
(83,900)
(6,543)
$ 430,256
19,807
41,152
51,350
$ 112,309
$
$
$
120,699
200,000
200,000
(104,700)
(8,005)
407,994
19,807
41,152
51,350
112,309
In connection with the issuance of the 2022 Convertible 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 upon issuance. 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 consolidated balance sheet and are amortized to interest
expense using the effective interest method over the expected life of the 2022 Convertible Notes. In connection with the partial
repurchase of the 2022 Convertible Notes, the Company recorded a loss on extinguishment of debt of approximately $23.4
million, of which approximately $2.8 million related to the initial debt issuance costs, during the year ended December 31, 2019.
The Company determined the expected life of the 2022 Convertible Notes was equal to their seven-year term. The
effective interest rate on the liability components of the 2022 Convertible Notes for the period from the date of issuance through
June 30, 2019 was 9.34%. From the date of the partial repurchase of the 2022 Convertible Notes in August 2019 through
December 31, 2020, the effective interest rate on the liability component of the 2022 Convertible Notes was 9.7%.
In connection with the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes, the Company incurred
approximately $9.0 million of debt issuance costs, which primarily consisted of initial purchaser’s 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 $2.1 million were recorded as a
reduction to additional paid-in capital. The portion of these costs allocated to the liability components totaling approximately
$6.9 million were recorded as a reduction in the carrying value of the debt on the
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consolidated balance sheet and are amortized to interest expense using the effective interest method over the expected lives of the
2024 Convertible Notes and the 2026 Convertible Notes.
The Company determined the expected life of the 2024 Convertible Notes and the 2026 Convertible Notes was equal to
their approximately five and seven-year terms, respectively. The effective interest rates on the liability components of the 2024
Convertible Notes and the 2026 Convertible Notes for the period from the date of issuance through December 31, 2020 was 6.3%
and 6.6%, respectively.
The following table sets forth total interest expense recognized related to convertible senior notes during the years ended
December 31, 2020, 2019, and 2018 (in thousands):
Contractual interest expense
Amortization of debt issuance costs
Amortization of debt discount
Total interest expense
Year Ended December 31,
2020
7,216
1,462
20,800
29,478
2019
$ 7,361 $
1,190
17,683
2018
7,553
971
15,437
$ 26,234 $ 23,961
$
$
Future minimum payments under the convertible senior notes as of December 31, 2020, are as follows (in thousands):
2021
2022
2023
2024
2025
2026
Total future minimum payments under the convertible senior notes
Less: amounts representing interest
Less: unamortized debt discount
Less: unamortized debt issuance costs
Convertible senior notes balance
$
7,216
126,557
4,500
203,750
3,000
201,500
546,523
(25,824)
(83,900)
(6,543)
$ 430,256
Convertible Note Hedge and Note Hedge Warrant Transactions with Respect to 2022 Convertible Notes
To minimize the impact of potential dilution to the Company's Class A common stockholders upon conversion of the
2022 Convertible 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 Convertible Notes. The Convertible Note Hedges had an
initial exercise price of $16.58 per share, subject to adjustment upon the occurrence of certain corporate events or transactions,
and are exercisable if the 2022 Convertible Notes are converted. In connection with the adjustment to the conversion rate of the
2022 Convertible Notes related to the Separation in April 2019, the exercise price of the Convertible Note Hedges was adjusted
to $14.51 per share and the number of shares underlying the Convertible Note Hedges was increased to 23,135,435 shares. If
upon conversion of the 2022 Convertible 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.
Concurrently with entering into the Convertible Note Hedges, the Company 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 was initially $21.50 per share, subject to
adjustment, and such warrants are exercisable over the 150 trading day period beginning on September 15, 2022. In connection
with the Separation in April 2019, the exercise price was adjusted to $18.82 per share and the number of shares underlying the
Note Hedge Warrants was increased to 23,135,435 shares. The Note Hedge Warrants
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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 Convertible Notes. Holders of the Convertible Note Hedges and the Note Hedge Warrants do
not have any rights with respect to the 2022 Convertible Notes. The Company paid approximately $91.9 million for the
Convertible Note Hedges and received approximately $70.8 million for the Note Hedge Warrants, resulting in a net cost to the
Company of approximately $21.1 million.
In August 2019, concurrently with the repurchase of $215.0 million aggregate principal amount of the 2022 Convertible
Notes, the Company terminated the respective portion of the Convertible Note Hedges and Note Hedge Warrants. The Company
received approximately $3.2 million of termination payments from the counterparties of the Convertible Note Hedges and Note
Hedge Warrants.
The Convertible Note Hedges and Note Hedge Warrants are accounted for as derivative assets and liabilities,
respectively, in accordance with ASC 815, and are remeasured to fair value at each reporting date (Note 7).
Capped Calls with Respect to 2024 Convertible Notes and 2026 Convertible Notes
To minimize the impact of potential dilution to the Company’s Class A common stockholders upon conversion of the
2024 Convertible Notes and the 2026 Convertible Notes, the Company entered into separate Capped Calls in connection with the
issuance of the 2024 Convertible Notes and the 2026 Convertible Notes. The Company paid the counterparties approximately
$25.2 million to enter into the Capped Calls.
The Capped Calls have an initial strike price of approximately $13.39 per share, which corresponds to the initial
conversion price of the 2024 Convertible Notes and the 2026 Convertible Notes and is subject to anti-dilution adjustments
generally similar to those applicable to the 2024 Convertible Notes and the 2026 Convertible Notes. The Capped Calls have a cap
price of approximately $17.05 per share, subject to certain adjustments. The Capped Calls cover 29,867,480 shares of Class A
Common Stock (subject to anti-dilution and certain other adjustments), which is the same number of shares of Class A Common
Stock that initially underlie the 2024 Convertible Notes and the 2026 Convertible Notes.
The Capped Calls are expected generally to reduce the potential dilution to the Class A Common Stock upon conversion
of the 2024 Convertible Notes and the 2026 Convertible Notes in the event that the market price per share of Class A Common
Stock is greater than the strike price of the Capped Calls as adjusted pursuant to the anti-dilution adjustments. If, however, the
market price per share of Class A Common Stock exceeds the cap price of the Capped Calls, there would nevertheless be dilution
upon conversion of the 2024 Convertible Notes and the 2026 Convertible Notes to the extent that such market price exceeds the
cap price of the Capped Calls.
The Capped Calls are separate transactions entered into by and between the Company and the Capped Calls
counterparties and are not part of the terms of the 2024 Convertible Notes or the 2026 Convertible Notes. Holders of the 2024
Convertible Notes and the 2026 Convertible Notes do not have any rights with respect to the Capped Calls. The Company
recorded a reduction to additional paid-in capital of approximately $25.0 million during the year ended December 31, 2019
related to the premium payments for the Capped Calls. Additionally, the Company recorded an approximately $0.2 million
reduction to equity related to transaction costs incurred in connection with the Capped Calls during the year ended December 31,
2019. These instruments meet the conditions outlined in ASC 815 to be classified in stockholders’ equity (deficit) and are not
subsequently remeasured as long as the conditions for equity classification continue to be met.
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12. Commitments and Contingencies
Commitments with AbbVie
The Company and AbbVie are jointly obligated to make minimum purchases of linaclotide API for the territories
covered by the Company’s collaboration with AbbVie for North America. Currently, AbbVie fulfills all such minimum purchase
commitments.
Under the collaboration agreement with AbbVie for North America, the Company shares all development and
commercialization costs related to linaclotide in the U.S. with AbbVie. The actual amounts that the Company pays to AbbVie or
that AbbVie pays 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.
Other Funding Commitments
As of December 31, 2020, the Company has on-going studies in various pre-clinical and 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 directors and certain of its officers for certain events or
occurrences while such director or officer 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 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,
2020 and 2019.
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.
In January 2020, the Company and AbbVie entered into settlement agreements with Sandoz Inc. and Teva
Pharmaceuticals, USA resolving patent litigation brought in response to the last outstanding abbreviated new drug applications
seeking approval to market generic versions of LINZESS prior to the expiration of the Company’s and AbbVie’s applicable
patents.
In connection with litigation settlements the Company entered into in 2018, the Company agreed to pay an aggregate of
$4.0 million in avoidance of litigation fees and expenses during the year ended December 31, 2018.
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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
The Company has one class of common stock (“Class A Common Stock”). Class A Common Stock is entitled to one
vote per share. The Company has reserved, out of its authorized but unissued shares of Class A Common Stock, sufficient shares
to effect the conversion of the convertible senior 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.
14. Employee Stock Benefit Plans
The Company has several share-based compensation plans under which stock options, RSAs, RSUs, and other share-
based awards are available for grant to employees, officers, directors and consultants of the Company.
The following table summarizes share-based compensation expense by award type (in thousands):
Stock options
Time-based restricted stock units
Performance-based restricted stock units
Restricted stock awards
Employee stock purchase plan
Stock awards
Year Ended December 31,
2019
$ 12,526
15,488
—
$
2020
7,680
18,624
2,190
1,886
722
73
$ 31,175
2,095
1,115
54
$ 31,278
2018
$ 20,478
17,160
—
2,330
1,097
17
$ 41,082
The following table summarizes the share-based compensation expense reflected in the consolidated statements of
operations (in thousands):
Research and development
Selling, general and administrative
Restructuring expenses
Years Ended December 31,
2019
$
6,343
24,281
654
$ 31,278
2018
$ 11,500
27,440
2,142
$ 41,082
2020
$
5,569
23,825
1,781
$ 31,175
Restructuring expenses include modifications to share-based awards held by employees impacted by the various
workforce reductions (Note 18).
In April 2019, in connection with the Separation, all outstanding share-based payment awards were modified in
accordance with the equity conversion-related provisions of the employee matters agreement with Cyclerion. No share-based
compensation expense was recognized in connection with these modifications. Additionally, modifications with respect to the
Company’s ESPP were made due to the change in share price as a result of the Separation. As a result of the modification to the
ESPP, the Company recorded approximately $0.3 million of share-based compensation expense for the year ended December 31,
2019.
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In connection with certain other modifications of share-based payment awards for the years ended December 31, 2020
and 2019, the Company recognized an insignificant amount and approximately $3.0 million in share-based compensation
expense, respectively.
Stock Benefit Plans
As of December 31, 2020, the Company has the following active stock benefit plans pursuant to which awards are
currently outstanding: the 2019 Equity Incentive Plan (the “2019 Equity Plan”), the Amended and Restated 2010 Employee Stock
Purchase Plan (the “2010 Purchase Plan”) and the Amended and Restated 2010 Employee, Director, and Consultant Equity
Incentive Plan (the “2010 Equity Plan”). At December 31, 2020, there were 14,357,176 shares available for future grant under the
2019 Equity Plan and the 2010 Purchase Plan.
2019 Equity Plan
During 2019, the Company’s stockholders approved the 2019 Equity Plan under which stock options, RSAs, RSUs, and
other stock-based awards may be granted to employees, officers, directors, or consultants of the Company. Under the 2019
Equity Plan, 10,000,000 shares of Class A Common Stock were initially reserved for issuance. Awards that are returned to the
2010 Equity Plan as a result of their expiration, cancellation, termination or repurchase are automatically made available for
issuance under the 2019 Equity Plan. Awards that expire, cancel, terminate, or are repurchased under the 2019 Equity Plan will
no longer be available for future grant. As of December 31, 2020, 9,651,783 shares were available for future grant under the 2019
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. As of December 31, 2020, there were 4,705,393 shares available for future grant under the 2010 Purchase
Plan.
2010 Equity Plan
The 2010 Equity Plan provided for the granting of stock options, RSAs, RSUs, and other share-based awards to
employees, officers, directors, consultants, or advisors of the Company. At December 31, 2020, there were no shares available for
future grant under the 2010 Equity Plan.
Restricted Stock Awards
RSAs are granted to non-employee members of the board of directors under restricted stock agreements in accordance
with the terms of the 2019 Equity Plan and the Company’s non-employee director compensation policy, effective May 2019.
Annual restricted stock grants to each non-employee member of the board of directors vest ratably over the period of service
from the grant date through the Company’s 2021 annual meeting of stockholders, provided the individual continues to serve on
the Company’s board of directors through each vest date. Initial restricted stock grants to new non-employee members of the
board of directors vest annually over a three-year period from the date of grant provided the individual continues to serve on the
Company’s board of directors through each vest date.
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A summary of restricted stock activity for the year ended December 31, 2020 is presented below:
Unvested as of December 31, 2019
Granted
Vested
Forfeited
Unvested as of December 31, 2020
Weighted-
Average
Grant Date
Fair Value
10.76
10.16
10.46
—
10.38
$
$
Number of
Shares
181,648
246,500
(181,648)
—
246,500
The weighted-average grant date fair value per share of restricted stock awards granted during the years ended
December 31, 2020, 2019, and 2018 was $10.16, $10.96, and $18.58, respectively. Amounts relating to restricted stock awards
granted prior to the Separation have not been adjusted to reflect the effect of the Separation on the Company’s stock price.
Restricted Stock Units
RSUs granted under the Company’s equity plans represent the right to receive one share of the Company’s Class A
Common Stock pursuant to the terms of the applicable award agreement. Shares of the Company’s Class A Common Stock are
delivered to the employee upon vesting, subject to payment of applicable withholding taxes.
Time-based RSUs
Time-based RSUs generally vest over a two-to-four-year period on the approximate anniversary of the date of grant
until fully vested, provided the individual remains in continuous service with the Company through each vesting date. The fair
value of all time-based 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 time-based RSU activity for the year ended December 31, 2020 is as follows:
Outstanding as of December 31, 2019
Granted
Vested and released
Forfeited
Outstanding as of December 31, 2020
Weighted-
Average
Grant Date
Fair Value
$
$
12.33
11.59
12.37
11.96
11.90
Number
of RSUs
3,207,089
2,708,200
(965,625)
(779,038)
4,170,626
The weighted-average grant date fair value per share of time-based RSUs granted during the years ended December 31,
2020, 2019, and 2018 was $11.59, $12.11, and $15.63, respectively. Amounts relating to time-based RSUs granted prior to the
Separation have not been adjusted to reflect the effect of the Separation on the Company’s stock price.
Performance-based RSUs
Performance-based RSUs (“PSUs”) were granted to certain executives in 2020. PSUs vest upon the achievement of
specified performance criteria over a two to three-year performance period, generally subject to the executive remaining in
continuous service with the Company through the applicable vesting dates. The performance criteria applicable to the PSUs were
(i) gaining the U.S. FDA’s acceptance of one or more additional New Drug Applications through internal development or
acquisition of development-stage or commercial-stage programs (“Pipeline PSUs”), (ii) achieving certain profitability metrics
(“Profitability PSUs”) and (iii) realizing relative total shareholder return goals (the “Relative TSR PSUs”).
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The fair value of Pipeline PSUs and Profitability PSUs is based on the market value of the Company's Class A Common
Stock on the date of grant. The Relative TSR PSUs are valued using the Monte Carlo simulation method on the date of grant. The
weighted average assumptions used to estimate the fair value of Relative TSR PSUs were as follows for the year ended
December 31, 2020:
Fair value of common stock
Expected volatility
Expected term (in years)
Risk-free interest rate
Expected dividend yield
A summary of PSU activity for the year ended December 31, 2020 is as follows:
Outstanding as of December 31, 2019
Granted
Vested and released
Forfeited
Outstanding as of December 31, 2020
No PSUs were granted prior to the year ended December 31, 2020.
Stock Options
Year Ended December 31,
2020
$ 11.78
53.3 %
2.8
1.0 %
— %
Weighted-
Average
Grant Date
Fair Value(1)
Number
of RSUs
— $
586,157
—
—
586,157
$
—
12.48
—
—
12.48
Stock options granted under the Company’s equity plans represent the right to purchase one share of the Company’s
Class A Common Stock pursuant to the terms of the applicable award agreement. Shares of the Company's Class A Common
Stock are delivered to the employee upon exercise, subject to payment of applicable withholding taxes.
As of April 2020, the Company no longer grants stock options. Stock options previously 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, 2020, 2019, and 2018:
Expected volatility
Expected term (in years)
Risk-free interest rate
Expected dividend yield
2018
Years Ended December 31,
2020
2019
43.7 %
46.6 % 46.3 %
6.0
6.1
6.1
1.5 %
2.7 %
2.5 %
— % — % — %
Expected volatility is based on the historical 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, 2020,
2019, and 2018 was $5.89, $6.10, and $6.81, respectively. Amounts relating to stock options granted prior to the Separation have
not been adjusted to reflect the effect of the Separation on the Company’s stock price.
The Company historically granted 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, 2020 and 2019,
there were no shares 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, 2020, 2019, and
2018.
The following table summarizes stock option activity under the Company’s share-based compensation plans, including
performance-based options:
Outstanding at December 31, 2019
Granted
Exercised
Cancelled
Outstanding at December 31, 2020
Vested or expected to vest at December 31, 2020
Exercisable at December 31, 2020
Number of
Stock
Options
17,194,239
55,000
(1,735,081)
(2,054,487)
13,459,671
13,280,456
11,963,812
Weighted- Weighted-
Average
Average
Contractual
Exercise
Price(1)
Life
(in years)
5.11
—
—
—
4.27
4.23
3.90
$ 12.13
12.84
10.21
13.00
12.25
12.26
12.26
Aggregate
Intrinsic
Value
(in thousands)
$
25,226
—
—
—
5,613
5,575
5,371
(1) Exercise prices relating to stock options granted prior to the Separation have not been adjusted to reflect the effect of the
Separation on the stock options.
The total intrinsic value of options exercised during the years ended December 31, 2020, 2019, and 2018 was
approximately $3.5 million, approximately $5.1 million, and approximately $20.1 million, respectively. The intrinsic value was
calculated as the difference between the fair value of the Company’s Class A 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, 2020, 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
Time-based restricted stock units
Performance-based restricted stock units
Stock options with time-based and performance-based vesting (1)
Unrecognized Weighted-Average
Expense, Net
of Estimated
Forfeitures
(in thousands)
Remaining
Recognition
Period
(in years)
$
6,557
1,473
26,934
3,291
88
1.84
0.92
2.22
1.70
—
(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.
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The total unrecognized share-based compensation cost will be adjusted for future changes in estimated forfeitures.
15. Income Taxes
During the year ended December 31, 2020, the Company recorded approximately $2.7 million in income tax expense
related to state income tax, which primarily resulted from a change in California tax which temporarily disallows the use of net
operating losses to offset taxable income. The Company did not record a provision for federal income taxes for the period ended
December 31, 2020, as it offset taxable income with federal net operating losses and continues to record a full valuation
allowance against net deferred tax assets. The Company did not record a provision for federal, state, or foreign income taxes for
the period ended December 31, 2019 and 2018, respectively, because the Company incurred a tax loss during these years and
offset the benefit of these tax losses with valuation allowance. The Company has not recorded a foreign tax provision as it has
had cumulative net operating losses outside of the United States since inception.
On March 27, 2020. the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted and signed into
law. The Company benefitted from certain provisions of the CARES Act, specifically, the increase in allowable business interest
deduction from 30% of adjusted taxable income to 50% of adjusted taxable income, which allowed the Company to take
additional interest deductions for the period ended December 31, 2020. Additionally, the Company was able to claim 100%
bonus depreciation on leasehold improvements incurred in the period ended December 31, 2019 and 2020.
A reconciliation of income taxes computed using the U.S. federal statutory rate of 21% to that reflected in the
consolidated statements of operations are as follows (in thousands):
Year Ended December 31,
Income tax benefit using U.S. federal statutory rate
Permanent differences
State income taxes, net of federal benefit
Disallowed Separation related costs
Executive compensation - Section 162(m)
Meals and entertainment
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
Income tax expense
2020
22,861
74
7,565
—
1,718
395
(144)
5,132
1,680
(3,149)
1,991
(208)
(35,230)
2,685
$
$
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2019
$ 4,517
65
(1,902)
4,658
662
495
(1,202)
3,324
(290)
(4,374)
3,764
(2,563)
(7,154)
2018
$ (59,297)
218
(17,121)
—
8
995
(494)
(1,223)
2,367
(7,863)
250
1,476
80,684
—
$
— $
Table of Contents
Deferred tax assets and liabilities were determined based on the difference between financial statement and tax bases
using enacted tax rates in effect for the year in which the differences are expected to reverse. The 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
Share-based compensation
Basis difference on collaboration agreement for North America with AbbVie
Accruals and reserves
Basis difference on 2022 Convertible Notes
Interest expense
Operating lease liability
Other
Total deferred tax assets
Deferred tax liabilities:
Basis difference on 2024 Convertible Notes
Basis difference on 2026 Convertible Notes
Operating lease right-of-use assets
Total deferred tax liabilities
Net deferred tax asset
Valuation allowance
Net deferred tax asset
December 31,
2020
2019
$ 234,772
60,607
7,498
21,848
62,629
6,114
6,183
3,386
6,504
5,049
414,590
$ 265,494
59,892
9,952
24,401
48,594
6,415
4,322
22,020
6,421
5,295
452,806
(5,951)
(9,022)
(4,603)
(19,576)
395,014
(395,014)
$
— $
(7,381)
(10,276)
(4,905)
(22,562)
430,244
(430,244)
—
On a periodic basis, the Company reassesses the valuation allowance on its deferred income tax assets weighing positive
and negative evidence to assess the recoverability of the deferred tax assets. Management evaluated the positive evidence,
including income during the year ended December 31, 2020, and negative evidence, including its cumulative losses in recent
years and its plan to build its innovative GI pipeline through potential acquisition or in-licensing externally development
products, and concluded that it is more likely than not that the Company will not realize the benefit of its deferred tax assets for
the year ended December 31, 2020. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance as of
December 31, 2020 and 2019. Management re-evaluates the positive and negative evidence on a quarterly basis. Based on the
Company’s financial performance and its future projections, it may record a reversal of all, or a portion of the valuation
allowance associated with its deferred tax assets in future periods. However, any such change is subject to actual performance
and other considerations that may present positive or negative evidence at the time of the assessment. The Company’s total
deferred tax asset balance subject to a valuation allowance was $395.0 million and approximately $430.2 million as of December
31, 2020 and 2019, respectively.
The valuation allowance decreased approximately $35.2 million during the year ended December 31, 2020 primarily
due to the Company’s offsetting taxable income with previously disallowed interest expense and net operating losses, partially
offset by an increase in deferred tax asset for the basis difference of the collaboration agreement for North America with AbbVie.
The valuation allowance decreased approximately $29.1 million during the year ended December 31, 2019 primarily
due to establishment of a deferred tax liability for a basis difference in the 2024 Convertible Notes and 2026 Convertible Notes,
partially offset by an increase in the deferred tax asset for temporarily disallowed interest expense.
Subject to the limitations described below, at December 31, 2020, the Company had federal net operating loss
carryforwards of approximately $1.1 billion of which approximately $1.0 billion is subject to an expiration between 2021 and
2037 and $0.1 billion may be carried forward indefinitely. As of December 31, 2020, the Company had state net operating loss
carryforwards of approximately $0.9 billion to offset future state taxable income, which is subject to expiration between 2021 and
2039. The Company also had tax credit carryforwards of approximately $65.3 million as of December 31, 2020 to offset future
federal and state income taxes, which is subject to expiration at various times through 2040.
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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 than 50 percentage points over a three-year period.
The following table summarizes the changes in the Company’s unrecognized income tax benefits for the years ended
December 31, 2020, 2019, and 2018 (in thousands):
Balance at the beginning of the period
Increases based on tax positions related to the current period
Increases for tax positions related to prior periods
Decreases for tax positions in prior periods
Balance at the end of the period
$
$
$
Year Ended December 31,
2019
38,551
51,699
1,400
(38,551)
53,099
2020
53,099
66,687
—
(51,699)
68,087
$
$
$
2018
24,078
38,551
—
(24,078)
38,551
The Company had gross unrecognized tax benefits of approximately $68.1 million, approximately $53.1 million, and
approximately $38.6 million as of December 31, 2020, 2019 and 2018, respectively. Of the approximately $68.1 million of total
unrecognized tax benefits at December 31, 2020, approximately $0.8 million would, if recognized, affect the Company’s
effective tax rate, and the remaining amount would not affect the Company’s effective tax rate due to a valuation allowance
against the Company’s net deferred tax assets. A reserve for uncertain tax positions of approximately $0.8 million is recorded in
other liabilities on the Company’s consolidated balance sheet as of December 31, 2020.
The Company will recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. As
of December 31, 2020, 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, 2017 through the present, although net operating losses generated from years prior to 2017 could be
subject to examination and adjustments to the extent utilized in future years. 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, 2020, 2019, and 2018, the Company
recorded approximately $1.8 million, approximately $2.2 million, and approximately $3.2 million of expense related to its 401(k)
company match, respectively.
17. Related Party Transactions
The Company previously reflected amounts due to and due from Allergan prior to its acquisition by AbbVie as related
party accounts payable and related party accounts receivable, respectively. Following the acquisition of Allergan by AbbVie, the
Company determined that AbbVie is not a related party to the Company. As such, only historical amounts paid to and received
from Allergan (prior to its acquisition by AbbVie) are considered related party accounts payable and related party accounts
receivable, respectively. Balances of related party accounts payable and related party accounts receivable, respectively, were
reported net of any balances due to or from the related party.
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In connection with the Separation, the Company executed certain contracts with Cyclerion, whose President and Chief
Scientific Officer at the time of the Separation became a member of the Company’s Board of Directors in April 2019 (Note 3).
As of December 31, 2020, Cyclerion was no longer considered a related party.
18. Workforce Reductions and Restructuring
During the years ended December 31, 2020, 2019, and 2018 the Company recorded approximately $15.4 million,
approximately $3.6 million, and approximately $14.7 million in restructuring expenses, respectively, in its consolidated statement
of operations.
In January 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 this reduction in field-based workforce and recorded
approximately $2.4 million of severance, benefits and related costs as restructuring expenses during the year ended December 31,
2018 related to this reduction in workforce.
In June 2018, the Company determined the initial organizational designs of the two new businesses, including
employees’ roles and responsibilities, in connection with the Separation. As part of this process, the Company initiated a
reduction in its headquarters-based workforce by approximately 40 employees and substantially completed the reduction in its
workforce during the year ended December 31, 2018. During the year ended December 31, 2018, the Company recorded
approximately $4.0 million of severance, benefits and related costs as restructuring expenses related to this reduction in
workforce.
In August 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 recorded associated costs during the year ended December 31, 2018. During the
years ended December 31, 2020 and 2019, the Company recorded an insignificant amount of adjustments to restructuring costs
related to this workforce reduction. During the year ended December 31, 2018, the Company recorded approximately $8.3
million of restructuring expenses, 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
connection with this reduction in workforce.
In February 2019, following further analysis of the Company’s strategy and core business needs, and in an effort to
further strengthen the operational efficiency of the organization, the Company commenced a reduction in workforce by
approximately 35 employees, primarily based in the home office and substantially completed the reduction in its workforce and
recorded associated costs during the year ended December 31, 2019. During the year ended December 31, 2019, the Company
recorded approximately $3.7 million of severance, benefits and related costs as restructuring expenses related to this reduction in
workforce.
In September 2020, the Company announced that one of its two identical Phase III trials evaluating IW-3718 in
refractory GERD did not meet certain criteria, including the study’s primary endpoint of achieving a statistically significant
improvement in heartburn severity. Based on these findings, the Company is discontinuing development of IW-3718. In
connection with this decision, the Company reduced its workforce by approximately 100 full-time employees. This workforce
reduction affected both field-based and home-office employees, including the relevant general and administrative support
functions. The Company substantially completed the reduction in its workforce in the fourth quarter of 2020. The Company
incurred approximately $15.5 million during the year ended December 31, 2020 in restructuring expenses, primarily for
severance, benefits and related costs related to this reduction in force. Restructuring expenses during the year ended December
31, 2020 also included approximately $1.2 million related to the impairment of certain fixed assets as a result of the Company’s
decision to discontinue IW-3718 development.
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The following table summarizes the accrued liabilities activity recorded in connection with the reductions in workforce
and related restructuring activities during the year ended December 31, 2020 (in thousands):
Amounts
Accrued at
December 31, 2019
Charges
Amount Paid
Adjustments December 31, 2020
Amounts
Accrued at
Employee severance, benefits and related
costs
February 2019 Reduction
September 2020 Reduction
Total
Contract related costs
August 2018 Reduction
September 2020 Reduction
Total
$
$
$
75
—
75 $
—
11,563
11,563 $
(75)
(661)
(736) $
—
—
— $
—
10,902
10,902
104 $
—
104 $
— $
108
108 $
— $
(103)
(103) $
(104) $
—
(104) $
—
5
5
The following table summarizes the accrued liabilities activity recorded in connection with the reductions in workforce
and related restructuring activities during the year ended December 31, 2019 (in thousands):
Amounts
Accrued at
December 31, 2018
Charges
Amount Paid
Adjustments December 31, 2019
Amounts
Accrued at
Employee severance, benefits and related
costs
June 2018 Reduction
August 2018 Reduction
February 2019 Reduction
Total
Contract related costs
August 2018 Reduction
Total
$
$
$
$
19. Selected Quarterly Financial Data (Unaudited)
696 $
1,756
—
2,452 $
16 $
—
3,182
3,198 $
(689) $
(1,708)
(2,968)
(5,365) $
(23) $
(48)
(139)
(210) $
433 $
433 $
— $
— $
(287) $
(287) $
(42) $
(42) $
—
—
75
75
104
104
The following table contains quarterly financial information for the years ended December 31, 2020 and 2019. The
Company believes that the following information reflects all normal recurring adjustments necessary for a fair presentation of the
information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future
period.
First
Quarter
Second
Quarter
Fourth
Quarter
(in thousands, except per share data)
Third
Quarter
Total
Year
2020
Total revenues (1)
Total cost and expenses (2)
Other expense, net (3)
Net income and comprehensive income
Net income per share—basic
Net income per share—diluted
$ 79,943
66,716
(9,882)
3,345
0.02
0.02
$ 89,432
56,719
(7,509)
25,204
0.16
0.16
$ 103,468
57,852
(9,804)
34,423
0.22
0.21
$ 116,680
65,296
(6,884)
43,204
0.27
0.27
$ 389,523
246,583
(34,079)
106,176
0.67
0.66
F-56
Table of Contents
2019
Total revenues (4)
Total cost and expenses (5)
Other expense, net (6)
Net (loss) income from continuing operations
Net loss from discontinued operations(7)
Net income (loss) and comprehensive income (loss)
Income per share from continuing operations, net of
income taxes—basic
Income per share from continuing operations, net of
income taxes—diluted
Net loss per share from discontinued operations—basic
and diluted
Net income (loss) per share—basic
Net income (loss) per share—diluted
First
Quarter
Second
Quarter
Fourth
Third
Quarter
Quarter
(in thousands, except per share data)
Total
Year
$ 68,730
85,663
(4,912)
(21,846)
(37,438)
(59,284)
$ 102,215
80,638
(9,294)
12,283
—
12,283
$ 131,167
65,280
(45,239)
20,648
—
20,648
$ 126,301
76,709
(1,735)
47,858
—
47,858
$ 428,413
308,290
(61,180)
58,943
(37,438)
21,505
$
(0.14)
$
0.08
$
0.13
$
0.31
$
0.38
(0.14)
(0.24)
(0.38)
(0.38)
0.08
—
0.08
0.08
0.13
—
0.13
0.13
0.30
—
0.31
0.30
0.38
(0.24)
0.14
0.14
(1) Total revenues includes approximately $8.0 million of revenue from sales of linaclotide API to the Company’s linaclotide
partners for the year ended December 31, 2020.
(2) Total costs and expenses includes approximately $15.4 million in restructuring expenses for the year ended December 31,
2020.
(3) Other expense, net includes approximately $6.1 million loss on fair value remeasurement of derivatives for the year ended
December 31, 2020.
(4) Total revenues includes approximately $48.8 million of revenue from sales of linaclotide API to the Company’s linaclotide
partners, primarily driven by the commercialization of linaclotide in Japan for the year ended December 31, 2019, as well as
approximately $32.4 million related to the non-contingent payments from the Amended AstraZeneca Agreement and a $10.0
million upfront fee from the Amended Astellas License Agreement, both executed during the third quarter of 2019.
(5) Total costs and expenses includes approximately $3.6 million in restructuring expenses for the year ended December 31,
2019, as well as approximately $3.2 million related to the gain on lease modification in April 2019.
(6) Other expense, net includes approximately $31.0 million in loss on extinguishment of debt related to the partial repurchase
of the 2022 Convertible Notes and the redemption of the 2026 Notes, and approximately $3.0 million gain on fair value
remeasurement of derivatives for the year ended December 31, 2019.
(7) During the year ended December 31, 2019, the Company completed the Separation. Certain amounts related to Cyclerion
have been reclassified as discontinued operations for the year ended December 31, 2019.
20. Subsequent Events
On February 4, 2021, Mark Mallon notified the Company that he is resigning from his position as Chief Executive
Officer of the Company and a member of the Company’s board of directors, in each case effective March 12, 2021 (the
“Transition Date”). Upon the Transition Date, Thomas McCourt, who is the President of the Company, also will become the
Company’s interim Chief Executive Officer. Mr. Mallon’s resignation is not due to any disagreement with the Company on any
matter relating to the Company’s operations, policies, or practices.
F-57
DESCRIPTION OF THE REGISTRANT’S SECURITIES REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
Unless the context otherwise requires, all references to the “Company,” “we,” “us” and “our” in this Exhibit 4.5
Exhibit 4.5
refer to Ironwood Pharmaceuticals, Inc.
General
The following is a summary of the material rights of our capital stock and related provisions of our eleventh
amended and restated certificate of incorporation (as modified by the certificate of retirement with respect to our Class B
common stock, effective December 31, 2018, and the certificate of amendment to our eleventh amended and restated
certificate of incorporation, effective May 30, 2019, or certificate of amendment), or certificate of incorporation, and fifth
amended and restated bylaws, or bylaws. The following description of our capital stock does not purport to be complete and
is subject to, and qualified in its entirety by, our certificate of incorporation and bylaws, all of which are included or
incorporated by reference as exhibits to the Company’s Annual Report on Form 10-K.
Our certificate of incorporation provides that we have one series of common stock, Class A common stock. Our
authorized capital stock consists of 675,000,000 shares, each with a par value of $0.001 per share, of which 600,000,000
shares are designated common stock, including 500,000,000 shares of Class A common stock and 100,000,000 shares that
not designated to a series, and 75,000,000 shares of preferred stock. The rights, preferences and privileges of the preferred
stock may be designated from time to time by our board of directors.
Common Stock
Voting Rights
Each share of common stock has one vote per share on all matters submitted to a vote of stockholders.
We have not provided for cumulative voting for the election of directors in our certificate of incorporation. Because
our certificate of incorporation does provide for plurality voting for the election of directors, a director may be elected even
if less than a majority of the votes cast are in favor of such election.
Dividends
Subject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of
common stock will be 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 common stock will receive common stock, or rights to acquire 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.
Liquidation Rights
Upon our liquidation, dissolution, distribution of assets or winding-up, the holders of common stock will be entitled
to share equally all assets remaining after the payment of any liabilities and the liquidation preferences on any outstanding
preferred stock.
Conversion
Our common stock is not convertible into any other shares of our capital stock.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is currently Computershare Trust Company, N.A. Its
address is 250 Royall Street, Canton, MA 02021.
Listing
Our common stock is listed on The Nasdaq Global Select Market under the symbol “IRWD.”
Preferred Stock
No shares of our preferred stock are outstanding. Our board of directors has the authority, without approval by the
stockholders, to issue up to a total of 75,000,000 shares of preferred stock, par value $0.001 per share, all of which is
undesignated, in one or more series.
Our board of directors may establish the number of shares to be included in each such series and may fix the
designations, preferences, powers and other rights of the shares of a series of preferred stock. Our board could authorize the
issuance of preferred stock with voting or conversion rights that could dilute the voting power or rights of the holders of
common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control
of the Company and might harm the market price of our common stock. Our board of directors will make the determination
to issue such shares based on its judgment as to our best interests and the best interests of our stockholders.
Anti-Takeover Effects of our Certificate of Incorporation and Bylaws and Delaware Law
Certain provisions of Delaware law, our certificate of incorporation and our bylaws could have the effect of
delaying, deferring or discouraging another party from acquiring control of us. These provisions, which are summarized
below, encourage persons seeking to acquire control of us to first negotiate with our board of directors and the holders of our
capital stock.
Undesignated Preferred Stock
The ability to authorize undesignated 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. These and other
provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of our company.
Limits on Ability of Stockholders to Act by Written Consent
We have provided in our certificate of incorporation that our stockholders may not act by written consent. In
addition, our certificate of incorporation also requires that special meetings of stockholders be called only by our board of
directors, our chairman, our chief executive officer or our president if there is no chief executive officer. This limit on the
ability of our stockholders to act by written consent or to call a special meeting may lengthen the amount of time required to
take stockholder actions. As a result, a holder controlling a majority of our capital stock would not be able to amend our
bylaws or remove directors without holding a stockholders meeting.
Requirements for Advance Notification of Stockholder Nominations and Proposals
Our bylaws establish advance notice procedures with respect to stockholder proposals and the nomination of
candidates for election as directors, other than nominations made by or at the direction of the board of directors or a
committee of the board of directors. The bylaws do not give the board of directors the power to approve or
disapprove stockholder nominations of candidates or proposals regarding business to be conducted at a special or annual
meeting of the stockholders. However, our bylaws may have the effect of precluding the conduct of certain business at a
meeting if the proper procedures are not followed. These provisions may also discourage or deter a potential acquirer from
conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of
our company.
Board of Directors
Eleven individuals currently serve on our board of directors. Our board of directors is currently divided into three
classes serving staggered 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. The certificate of
amendment provides for the declassification of the board of directors, to allow our stockholders to vote on the election of the
entire board of directors on an annual basis, rather than on a staggered basis. This declassification is being phased in such
that, once completed as of the 2022 annual meeting of stockholders and at each annual meeting of stockholders thereafter, all
directors will stand for election for one-year terms.
Our certificate of incorporation authorizes our board of directors, by a resolution of the majority of our board of
directors, to fix the number of directors from time to time and to appoint new directors to fill any vacancies. For so long as
our board of directors is classified, directors may be removed by our stockholders only for cause and any additional
directorships resulting from an increase in the number of directors will be distributed among the three classes. These
provisions may prevent a stockholder from removing incumbent directors and simultaneously gaining control of the board of
directors by filling the resulting vacancies with its own nominees. Consequently, the existence of these provisions may have
the effect of deterring hostile takeovers, which could depress the market price of our common stock. As required by
Delaware law, once the board of directors is declassified, stockholders may remove directors with or without cause.
Delaware Anti-Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law. This statute regulating corporate
takeovers prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for
three years following the date that the stockholder became an interested stockholder, unless:
●
●
●
prior to the date of the transaction, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an interested stockholder;
upon completion of the transaction that resulted in the interested stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of determining the number of
shares outstanding (a) shares owned by persons who are directors and also officers, and (b) shares owned
by employee stock plans in which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange offer; or
on or subsequent to the date of the transaction, the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder.
Generally, a business combination includes a merger, asset or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. An interested stockholder is any person who, together with such person’s affiliates and
associates (i) owns 15% or more of a corporation’s voting securities or (ii) is an affiliate or associate of a corporation and
was the owner of 15% or more of the corporation’s voting securities at any time within the three year period immediately
preceding a business combination of the corporation governed by Section 203. We expect the existence of this provision to
have an anti-takeover effect with respect to transactions our board
of directors does not approve in advance. We also anticipate that Section 203 may discourage takeover attempts that might
result in a premium over the market price for the shares of common stock held by our stockholders.
AMENDMENT
TO
THE AMENDED AND RESTATED LICENSE AGREEMENT
Exhibit 10.13.1
THIS AMENDMENT TO THE AMENDED AND RESTATED LICENSE AGREEMENT (this
“Amendment”) is made on January 8, 2021 by and between Ironwood Pharmaceuticals, Inc. (“Ironwood”)
and Astellas Pharma Inc. (“Astellas”) with reference to that certain AMENDED AND RESTATED
LICENSE AGREEMENT entered into as of August 1, 2019 by and between Ironwood and Astellas (the
“Agreement”). The Parties hereto desire to amend the Agreement as follows:
1. Capitalized terms used in this Amendment and not otherwise defined herein shall have the same
meanings set forth in the Agreement.
2. The Parties agree that Section 4.4 of the Agreement shall be hereby amended as follows, with any
added or changed language indicated by double underlining:
4.4 Quarterly Reports. Within 30 days after the beginning of each Calendar Quarter beginning
with the Calendar Quarter in which the First Commercial Sale following receipt of Regulatory
Approval occurred, Astellas will deliver to Ironwood a report setting forth for the previous Calendar
Quarter the following information on a Product-by-Product basis: (a) the gross sales and Net Sales of
each Product in the Territory, (b) the number of units sold by Astellas, its Affiliates or Sublicensees
and provided as samples without charge to any Third Party, (c) the basis for any adjustments to the
royalty payable for the sale of each Product, (d) the royalty due hereunder for the sales of each
Product, and (e) the applicable exchange rate as determined in accordance with this Agreement (the
“Quarterly Report”). In addition, Astellas will also use commercially reasonable efforts to provide
Ironwood with a preliminary report with Astellas’ good faith estimate of items (a)-(e) listed in the
foregoing sentence no later than the 6th Business Day following the end of a Calendar Quarter.
Notwithstanding the foregoing, Astellas has no obligation to provide such preliminary report, provided
that Astellas provides the Quarterly Report within the 6th Business Day following the end of the
Calendar Quarter. The total royalty due for the sale of Products during such Calendar Quarter will be
remitted within 30 days after the end of such Calendar Quarter.
3. Save as herein provided all other terms and conditions of the Agreement shall remain in full force
and effect. To the extent that there are any inconsistencies or conflicts between the terms of this
Amendment and the Agreement, the terms of this Amendment shall prevail.
4. This Amendment shall become valid and binding upon its signing and shall continue to be in effect
during the Term of the Agreement.
5. This Amendment may be executed in any number of counterparts, each of which will be deemed an
original and all of which taken together will be deemed to constitute one and the same instrument. An
executed signature page of this Amendment delivered by facsimile or other electronic transmission
will be as effective as an original executed signature.
[The remainder of this page intentionally left blank.]
IN WITNESS WHEREOF, the Parties hereto have caused this Amendment to be executed by signature
in duplicate and keep one original each.
Ironwood Pharmaceuticals, Inc.
/s/ Gina Consylman
Name: Gina Consylman
Title: Senior Vice President, Chief Financial Officer
Astellas Pharma Inc.
/s/ Ken Kubota
Name: Ken Kubota
[Signature Page to Amendment to A&R License Agreement re: Quarterly Reports]
Title: SVP Business Development
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statements (Form S-3 Nos. 333-179430, 333-199885, 333-221294, and 333-249896);
(2) Registration Statement (Form S-8 No. 333-231887) pertaining to the 2019 Equity Incentive Plan of Ironwood
Pharmaceuticals, Inc.;
(3) Registration Statements (Form S-8 Nos. 333-189340, 333-197875, 333-206228, 333-213001, 333-219670, 333-226613,
and 333-231890) pertaining to the Amended and Restated 2010 Employee Stock Purchase Plan of Ironwood
Pharmaceuticals, Inc.;
(4) Registration Statements (Form S-8 Nos. 333-184396, 333-189339, 333-197874, 333-206227, 333-213002, 333-219669,
and 333-226612) pertaining to the Amended and Restated 2010 Employee, Director and Consultant Equity Incentive
Plan of Ironwood Pharmaceuticals, Inc.;
(5) Registration Statement (Form S-8 No. 333-165230) pertaining to the 2010 Employee Stock Purchase Plan of Ironwood
Pharmaceuticals, Inc.;
(6) Registration Statement (Form S-8 No. 333-165231) pertaining to the 2010 Employee, Director and Consultant Equity
Incentive Plan of Ironwood Pharmaceuticals, Inc.;
(7) Registration Statement (Form S-8 No. 333-165228) pertaining to the Amended and Restated 2005 Stock Incentive Plan
of Ironwood Pharmaceuticals, Inc.;
(8) Registration Statement (Form S-8 No. 333-165229) pertaining to the Amended and Restated 2002 Stock Incentive Plan
of Ironwood Pharmaceuticals, Inc.; and
(9) Registration Statement (Form S-8 No. 333-165227) pertaining to the 1998 Amended and Restated Stock Option Plan of
Ironwood Pharmaceuticals, Inc.;
of our reports dated February 17, 2021, 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) of Ironwood Pharmaceuticals, Inc. for the year ended December 31, 2020.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 17, 2021
CERTIFICATION PURSUANT
TO RULE 13a-14(a) UNDER
THE SECURITIES EXCHANGE ACT OF 1934
EXHIBIT 31.1
I, Mark Mallon, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Ironwood Pharmaceuticals, Inc. (the “registrant”);
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;
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;
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.
b.
c.
d.
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;
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;
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
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.
b.
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
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 17, 2021
/s/ MARK MALLON
Mark Mallon
Chief Executive Officer
CERTIFICATION PURSUANT
TO RULE 13a-14(a) UNDER
THE SECURITIES EXCHANGE ACT OF 1934
EXHIBIT 31.2
I, Gina Consylman, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Ironwood Pharmaceuticals, Inc. (the “registrant”);
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;
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;
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.
b.
c.
d.
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;
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;
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
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.
b.
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
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 17, 2021
/s/ GINA CONSYLMAN
Gina Consylman
Chief Financial Officer
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, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark
Mallon, 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)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ MARK MALLON
Mark Mallon
Chief Executive Officer
February 17, 2021
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.
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, 2020 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)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
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 17, 2021
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.