What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-06 · 173 added, 119 removed, 275 unchanged (51% of the section changed)

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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 Allergan plc (together with its affiliates), or Allergan, in the U.S., AstraZeneca AB (together with its affiliates), or AstraZeneca, in China (including Hong Kong and Macau) and Astellas Pharma Inc., or Astellas, in Japan.

In November 2019, AstraZeneca began commercializing LINZESS for the treatment of adults with IBS-C in China

We and Allergan are also advancing MD-7246, a delayed release formulation of linaclotide, as an oral, intestinal, non-opioid, pain-relieving agent for patients with abdominal pain associated with certain GI diseases.

MD-7246 is designed to have the pain-relieving effect of linaclotide with minimal impact on bowel function.

In May 2019, we and Allergan announced the initiation of a Phase II clinical trial evaluating the safety and efficacy of MD-7246 in adult patients with abdominal pain associated with IBS with diarrhea, or IBS-D.

In March 2020, the Company announced that patient dosing in the IBS-D Phase II clinical trial was complete.

We are developing another GI development program, IW-3718, a gastric retentive formulation of a bile acid sequestrant for the potential treatment of refractory gastroesophageal reflux disease, or refractory GERD.

In May 2020, AbbVie Inc.

(together with its affiliates), or AbbVie, (successor to Allergan plc (together with its affiliates), or Allergan) 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.

We have strategic partnerships with leading pharmaceutical companies to support the development and commercialization of linaclotide throughout the world, including with AbbVie in the U.S., AstraZeneca AB (together with its affiliates), or AstraZeneca, in China (including Hong Kong and Macau) and Astellas Pharma Inc., or Astellas, in Japan.

We are also 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 June 2018, we initiated two Phase III clinical trials evaluating the safety and efficacy of IW-3718 in patients with refractory GERD.

In line with new U.S.

FDA guidance on statistical considerations for trials impacted by COVID-19, we stopped enrollment of study subjects into one of our two Phase III clinical trials for IW-3718 to conduct an early efficacy assessment.

We are continuing to enroll patients in the other Phase III clinical trial for IW-3718.

We and AbbVie were developing MD-7246, a delayed release formulation of linaclotide, as an oral, intestinal, non-opioid, pain-relieving agent for patients with abdominal pain associated with certain GI diseases.

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 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 are discontinuing the development of MD-7246.

We are also leveraging our leading capabilities in GI to bring additional treatment options to GI patients.

This includes our U.S.

disease education and promotional agreement with Alnylam Pharmaceuticals, Inc., or Alnylam, for Alnylam’s GIVLAARI™ (givosiran), an RNAi therapeutic targeting aminolevulinic acid synthase 1, for the treatment of acute hepatic porphyria, or AHP.

In January 2020, we and Allergan entered into settlement agreements with Sandoz Inc., or Sandoz, and Teva Pharmaceuticals, USA, or Teva, 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 our and Allergan’s

applicable patents.

For additional information relating to the resolution of such litigation, see Item 1, Legal Proceedings , elsewhere in this Quarterly Report on Form 10-Q.

disease education and promotional agreement with Alnylam Pharmaceuticals, Inc., or Alnylam, for

Alnylam’s GIVLAARI™ (givosiran), an RNAi therapeutic targeting aminolevulinic acid synthase 1, for the treatment of acute hepatic porphyria.

In January 2020, we 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 our and AbbVie ’s applicable patents.

We were incorporated in Delaware on January 5, 1998 as Microbia, Inc.

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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 three months ended March 31, 2020, we recorded net income of approximately $3.3 million.

As of March 31, 2020, we had an accumulated deficit of approximately $1.6 billion.

For the three and six months ended June 30, 2020, we recorded net income of approximately $25.2 million and approximately $28.5 million, respectively.

As of June 30, 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.

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 of 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 Separation is more fully described in Note 2, Cyclerion Separation , to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

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President Donald Trump announced a national emergency relating to the pandemic.

There are significant uncertainties surrounding the extent and duration of the impact of the COVID-19 pandemic on our business and operations.

Although the COVID-19 pandemic did not materially impact our results of operations during the three months ended March 31, 2020, it could have a material adverse impact on our financial condition and results of operations in the future.

The impact of COVID-19 pandemic on our business and financial condition is more fully described below in Trends and Uncertainties.

There continues to be significant uncertainty surrounding the extent and duration of the impact of the COVID-19 pandemic on our business and operations.

During the three and six months ended June 30, 2020, the COVID-19 pandemic resulted in changes to our business and operations which impacted our financial condition and results of operations, as more fully described below in Trends and Uncertainties .

The COVID-19 pandemic may have a material adverse impact on our business and our financial condition in the future.

Financial Overview

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We record our share of the net profits and losses from the sales of LINZESS in the U.S.

on a net basis and present the settlement payments to and from Allergan as collaboration expense or collaborative arrangements revenue, as applicable.

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 Allergan and us, resulting in collaborative arrangements revenue or collaboration expense, are subject to fluctuation based on the ratio of selling, general and administrative expenses incurred by each party.

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.

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We charge all research and development expenses to operations as incurred.

Under our linaclotide collaboration agreements with Allergan for the U.S.

Under our linaclotide collaboration agreements with AbbVie for the U.S.

and, prior to the execution of the Amended AstraZeneca Agreement in September 2019, AstraZeneca for China (including Hong Kong and Macau), we were reimbursed for certain research and development activities and we netted these reimbursements against our research and development expenses as incurred.

Amounts owed to Allergan on an ongoing basis, or AstraZeneca prior to the execution of the Amended AstraZeneca Agreement, under our respective collaboration agreements were recorded as incremental research and development expense.

Amounts owed to AbbVie on an ongoing basis, or AstraZeneca prior to the execution of the Amended AstraZeneca Agreement, under our respective collaboration agreements were recorded as incremental 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.

We are developing innovative product opportunities in areas of large unmet need, including IBS-C and CIC, abdominal pain associated with lower GI disorders, and refractory GERD.

We are developing innovative product opportunities in areas of large unmet need, including IBS-C and CIC, and refractory GERD.

Linaclotide .

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for the treatment of IBS-C or CIC in adults.

Linaclotide also is approved and commercially available in Japan and in a number of E.U.

Linaclotide also is approved and commercially available in China, Japan and in a number of E.U.

and other countries.

In January 2019, the Chinese National Medical Products Administration approved the marketing application for LINZESS for adults with IBS-C in China.

AstraZeneca launched LINZESS in China in November 2019.

We and Allergan continue to explore ways to enhance the clinical profile of LINZESS by studying linaclotide in additional indications, populations and formulations to assess its potential to treat various conditions.

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.

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FDA in November 2019 to seek a more comprehensive description of the effects of LINZESS on its approved label.

We and Allergan have established a nonclinical and clinical post-marketing plan with the U.S.

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 currently ongoing.

MD-7246 is a delayed-release formulation of linaclotide being evaluated as an oral, intestinal, non-opioid, pain-relieving agent for patients suffering from abdominal pain associated with certain GI diseases.

MD-7246 is designed to provide targeted delivery of linaclotide to the colon, where the majority of the abdominal pain is believed to originate, and to limit additional fluid secretion in the small intestine resulting in minimal impact on bowel function.

We and Allergan are initially exploring MD-7246 in a Phase II clinical trial evaluating the safety and efficacy of MD-7246 in adult patients with abdominal pain associated with IBS-D.

In March 2020, we announced that patient dosing in the IBS-D Phase II clinical trial was complete.

We are developing IW-3718, a gastric retentive formulation of a bile acid sequestrant, for the potential treatment of refractory GERD.

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In June 2018, we initiated two Phase III clinical trials evaluating the safety and efficacy of IW-3718 in patients with refractory GERD.

The COVID-19 pandemic has impacted, and is expected to continue to impact, enrollment of new patients into the Phase III clinical trials with IW-3718.

As of the date of this Form 10-Q, most of the clinical trial sites have suspended screening new patients.

Most of the patients already enrolled are continuing in the IW-3718 clinical trials.

The COVID-19 pandemic has impacted enrollment of new patients into the Phase III clinical trials with IW-3718.

Most of the clinical trial sites were not screening new patients during the second quarter due to the suspension of in-person procedures required to enroll patients and lower patient participation compared to pre-COVID levels.

In line with new U.S.

Many clinical sites have now resumed screening new patients in our ongoing clinical trial for IW-3718;

however, enrollment continues to be slower than prior to the COVID-19 pandemic.

The impact of COVID-19 on our clinical trials with IW-3718 is more fully described below in Trends and Uncertainties.

We and AbbVie were developing MD-7246, a delayed release formulation of linaclotide.

MD-7246 was designed to have the pain-relieving effect of linaclotide with minimal impact on bowel function.

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 are discontinuing the development of MD-7246.

Early research and development.

After the Separation, 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, as well as evaluating potential external development stage GI programs.

The following table sets forth our research and development expenses related to our product pipeline for the three months ended March 31, 2020 and 2019.

The following table sets forth our research and development expenses related to our product pipeline for the three and six months ended June 30, 2020 and 2019.

These expenses relate primarily to internal compensation, benefits and other employee-related expenses and external costs associated with nonclinical studies and clinical trial costs for our product candidates.

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Three Months Ended

Six Months Ended

(in thousands)

Linaclotide (1)

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Since 2004, the date we began tracking costs by program, we have incurred approximately $515.8 million of research and development expenses related to linaclotide.

The expenses for linaclotide include both our portion of the research and development costs incurred by Allergan for the U.S.

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 in August 2019, 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.

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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 Allergan completed such additional studies and determined that:

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 Allergan established a nonclinical and clinical post-marketing plan with the U.S.

In addition, we and AbbVie established a nonclinical and clinical post-marketing plan with the U.S.

FDA to understand the efficacy and safety of LINZESS in pediatric patients.

Clinical pediatric programs in IBS-C and functional constipation are currently ongoing.

We and Allergan are also exploring development opportunities to enhance the clinical profile of LINZESS by studying linaclotide in additional indications, populations and formulations to assess its potential to treat various conditions.

We and AbbVie are also exploring development opportunities to enhance the clinical profile of LINZESS by studying linaclotide in additional indications, populations and formulations to assess its potential to treat various conditions.

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.

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AstraZeneca is responsible for all costs and expenses incurred to develop, manufacture and commercialize products containing linaclotide in territories pursuant to the Amended AstraZeneca Agreement.

We include Allergan’s selling, general and administrative cost-sharing payments in the calculation of the net profits and net losses from the sale of LINZESS in the U.S.

and present the net payment to or from Allergan as collaboration expense or collaborative arrangements revenue, respectively.

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.

Restructuring Expenses.

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We amortize these costs using the effective interest rate method over the expected life of the respective note agreements as interest expense in our condensed consolidated statements of operations.

Interest and investment income consists of interest earned on our cash and cash equivalents as well as significant financing components identified under ASC Topic 606, Revenue from Contracts with Customers , or ASC 606.

(Loss) gain on derivatives consists of the change in fair value of the Convertible Note Hedges and Note Hedge Warrants, which are recorded as derivative assets and liabilities.

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The Convertible Note Hedges and Note Hedge Warrants are more fully described in Note 8, Notes Payable , to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

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.

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 redeem all of the outstanding principal balance of the 2026 Notes, repurchase $215.0 million aggregate principal amount of the 2022 Convertible Notes and pay approximately $25.2 million for the purchase of the Capped Calls.

These transactions are more fully described in Note 8, Notes Payable , to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

Interest income consists of interest earned on our cash, cash equivalents and marketable securities as well as significant financing components identified under ASC Topic 606, Revenue from Contracts with Customers , or ASC 606.

Discontinued Operations.

We have recast all historical expenses for the three months ended March 31, 2019 directly associated with our sGC business as discontinued operations in accordance with ASC Subtopic 250-20, Discontinued Operations .

We have recast all 2019 historical expenses directly associated with our sGC business as discontinued operations in accordance with ASC Subtopic 250-20, Discontinued Operations .

For additional information refer to Note 2, Cyclerion Separation , to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

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useful lives of long-lived assets;

impairment of long-lived assets, including our acquired intangible assets and goodwill;

impairment of long-lived assets, including goodwill;

valuation procedures for right-of-use assets and operating lease liabilities;

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Changes in estimates are reflected in reported results in the period in which they become known.

During the three months ended March 31, 2020, there were no material changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission on February 13, 2020, or the 2019 Annual Report on Form 10-K.

During the three and six months ended June 30, 2020, there were no material changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission on February 13, 2020, or the 2019 Annual Report on Form 10-K.

Results of Operations

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Three Months Ended

Six Months Ended

(in thousands)

Collaborative arrangements revenue

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Selling, general and administrative

Gain on lease modification

Restructuring expenses

Total cost and expenses

Income (loss) from operations

Income from operations

Other (expense) income:

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Net income (loss)

Three months ended March 31, 2020 compared to three months ended March 31, 2019

Three and six months ended June 30, 2020 compared to three and six months ended June 30, 2019

Three Months Ended

Six Months Ended

(dollars in thousands)

Collaborative arrangements revenue

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Collaborative Arrangements Revenue.

The increase in revenue from collaborative arrangements of approximately $8.3 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily related to an approximately $6.8 million increase in our share of the net profits from the sale of LINZESS in the U.S.

driven by increased prescription demand;

an approximately $0.9 million increase in co-promotion revenue;

and an approximately $0.8 million increase in royalty revenue.

The increase in revenue from collaborative arrangements of approximately $12.1 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily related to an approximately $11.5 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 $0.8 million increase in royalty revenue.

These increases were partially offset by an approximately $0.4 million decrease in co-promotion revenue.

The increase in revenue from collaborative arrangements of approximately $20.4 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily related to an approximately $18.4 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;

an approximately $1.6 million increase in royalty revenue;

and an approximately $0.5 million increase in co-promotion revenue.

These increases were partially offset by a $0.5 million decrease in upfront payments received in connection with a license agreement executed in the first half of 2019.

Sale of Active Pharmaceutical Ingredient.

The increase in sale of API of approximately $2.9 million for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, was primarily due to an approximately $5.5 million increase in sales of API to AstraZeneca, offset by an approximately $2.6 million decrease in sales of API to Astellas during the three months ended March 31, 2020 pursuant to the Amended Astellas License Agreement.

The decrease in sale of API of approximately $24.9 million for the three months ended June 30, 2020, compared to the three months ended June 30, 2019, was primarily due to an approximately $24.9 million decrease in sales of API to Astellas in Japan.

The decrease in sale of API of approximately $22.0 million for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, respectively, was primarily due to an approximately $27.5 million decrease in sales of API to Astellas in Japan, offset by an approximately $5.5 million increase in sales of API, drug product, and finished goods to AstraZeneca in China.

Cost and Expenses

Three Months Ended

Six Months Ended

(dollars in thousands)

Cost and expenses:

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Selling, general and administrative

Gain on lease modification

Restructuring expenses

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Cost of Revenue.

The increase of approximately $1.2 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily related to approximately $2.2 million in costs associated with the sale of API, finished drug product, and finished goods incurred under the Amended AstraZeneca Agreement during the three months ended March 31, 2020, compared to, three months ended March 31, 2019, during which cost of revenue was comprised of approximately $1.0 million in costs associated with the sale of API to Astellas.

The decrease of approximately $11.3 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was related to a decrease in cost of revenues as a result of a decrease in linaclotide API sales to Astellas in Japan.

The decrease of approximately $10.1 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily related to an approximately $12.3 million decrease in cost of revenues as a result of a decrease in linaclotide API sales to Astellas in Japan, offset by an approximately $2.2 million increase in cost of revenues related to sales of API, drug product, and finished goods to AstraZeneca in China.

Research and Development Expense.

The decrease in research and development expense of approximately $4.2 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily related to a decrease of approximately $4.1 million in compensation, benefits, and other employee-related expenses;

and a decrease of approximately $2.4 million in operating expenses, including facilities and IT-related costs.

These decreases were partially offset by an increase of approximately $1.3 million related to linaclotide development and an increase of approximately $1.1 million in external development costs related to IW-3718.

The decrease in research and development expense of approximately $6.7 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily related to a decrease of approximately $6.0 million in external development costs related to IW-3718;

a decrease of approximately $0.9 million in operating expenses, including facilities and IT-related costs;

and a decrease of approximately $0.7 million in research costs related to our early research and development efforts.

These decreases were partially offset by an increase of approximately $1.2 million in compensation, benefits and other employee-related expenses.

The decrease in research and development expense of approximately $10.9 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily related to a decrease of approximately $4.9 million in external development costs related to IW-3718;

a decrease of $2.5 million in facilities and operating costs due to change in headquarters location;

a decrease of approximately $2.3 million in compensation, benefits and other employee-related expenses;

a decrease of approximately $1.1 million in research costs related to our early research and development efforts;

and a decrease of approximately $0.8 million in IT-related costs.

These decreases were partially offset by an increase of approximately $1.1 million related to linaclotide development.

Selling, General and Administrative Expense .

Selling, general and administrative expenses decreased approximately $12.6 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

The approximately $12.6 million decrease in selling, general and administrative expense included an approximately $8.2 million decrease in non-Separation costs and an approximately $4.4 million decrease in costs associated with the Separation which was completed on April 1, 2019.

The approximately $8.2 million decrease in non-Separation costs includes an approximately $4.9 million decrease in compensation, benefits, and employee-related expenses as a result of a decrease in headcount related to the reduction in workforce in February 2019 and certain costs related to employees that transferred upon the Separation that were not directly attributable to Cyclerion;

an approximately $1.9 million decrease in facilities expense primarily due to the change in headquarters location;

an approximately $1.3 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;

Selling, general and administrative expenses decreased approximately $8.6 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

The approximately $8.6 million decrease in selling, general and administrative expense included an approximately $5.6 million decrease in costs associated with the Separation which was completed on April 1, 2019, and an approximately $3.0 million decrease in non-Separation costs.

The approximately $5.6 million decrease in Separation costs includes an approximately $2.1 million decrease in compensation, benefits, and employee-related expenses;

an approximately $1.4 million decrease in facilities costs primarily due to our change in headquarters location;

an approximately $1.2 million decrease in consulting and investment banking costs;

and an approximately $0.9 million decrease in legal costs.

These decreases were partially offset by an approximately $0.7 million increase in other operating and administration costs.

The approximately $4.4 million decrease in costs associated with the Separation includes an approximately $3.9 million decrease in compensation, benefits, and employee-related expenses and an approximately $0.5 million decrease in facilities expense.

Restructuring Expenses.

The decrease in restructuring expenses of approximately $3.3 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was due to costs associated with the workforce reduction that occurred in February 2019.

The approximately $3.0 million decrease in non-Separation costs includes an approximately $1.9 million decrease in legal costs;

an approximately $1.8 million decrease in sales and marketing programs;

and an approximately $1.6 million decrease in facilities costs.

These decreases in non-Separation costs were partially offset by an approximately $1.7 million increase in compensation, benefits and employee-related expenses and an approximately $0.9 million increase in consulting costs.

Selling, general and administrative expenses decreased approximately $21.2 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

The decrease of approximately $21.2 million was primarily due to decreases in non-Separation costs of approximately $11.2 million and an approximately $10.0 million decrease in costs associated with the Separation.

The approximately $11.2 million decrease in non-Separation costs includes an approximately $3.2 million decrease in other compensation, benefits and employee-related expenses;

an approximately $2.8 million decrease in facilities and other operating costs primarily due to our change in headquarters location;

an approximately $2.8 million decrease in legal costs;

and approximately $1.7 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 a an active ingredient;

and an approximately $1.2 million decrease in sales and marketing programs.

The approximately $10.0 million decrease in costs associated with the Separation includes an approximately $6.0 million decrease in compensation, benefits, and employee-related expenses;

an approximately $1.9 million decrease in facilities costs;

an approximately $1.2 million decrease in consulting and investment banking costs;

and an approximately $0.9 million decrease in legal costs.

Gain on Lease Modification.

The gain on lease modification of approximately $3.2 million for each of the three and six months ended June 30, 2019 was due to the modification of the Binney Street Lease in 2019 in connection with the Separation.

Restructuring Expe nses.

The decrease in restructuring expenses of approximately $0.5 million and approximately $3.8 million, respectively, for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 was due to costs associated with the workforce reduction that occurred in February 2019.

Other (Expense) Income, Net

Three Months Ended

Six Months Ended

(dollars in thousands)

Other (expense) income:

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Interest Expense.

Interest expense decreased by approximately $2.4 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, due to a decrease of approximately $3.8 million in interest expense related to the 2022 Convertible Notes and a decrease of approximately $3.4 million in interest expense associated with the 2026 Notes that were fully redeemed in September 2019, partially offset by an increase of approximately $2.4 million in interest expense associated with the 2024 Convertible Notes and an increase of approximately $2.4 million in interest expense associated with the 2026 Convertible Notes.

Interest expense decreased by approximately $2.1 million during the three months ended June 30, 2020 compared to the three months ended June 30, 2019, due to a decrease of approximately $3.9 million in interest expense related to the 2022 Convertible Notes and a decrease of approximately $3.1 million in interest expense associated with the 2026 Notes that were fully redeemed in September 2019, partially offset by an increase of approximately $2.5 million in interest expense associated with the 2024 Convertible Notes and an increase of approximately $2.4 million in interest expense associated with the 2026 Convertible Notes.

For the six months ended June 30, 2020 compared to the six months ended June 30, 2019 interest expense decreased by approximately $4.5 million due to a decrease of approximately $7.7 million in interest expense related to the 2022 Convertible Notes and a decrease of approximately $6.5 million in interest expense associated with the 2026 Notes that were fully redeemed in September 2019, partially offset by an increase of approximately $4.9 million in interest expense associated with the 2024 Convertible Notes and an increase of approximately $4.8 million in interest expense associated with the 2026 Convertible Notes.

Interest and Investment Income.

Interest and investment income increased by an insignificant amount during the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

Interest and investment income decreased by approximately $0.4 million in the three months ended June 30, 2020 compared to the three months ended June 30, 2019, resulting primarily from a decrease in investment income of approximately $0.6 million due to lower investment interest rates, partially offset by an increase in interest income of $0.2 million related to the significant financing component of long-term receivables.

For the six months ended June 30, 2020 compared to the six months ended June 30, 2019, interest and investment income decreased by approximately $0.4 million resulting primarily from a decrease in investment income of

approximately $0.8 million due to lower investment interest rates, partially offset by an increase in interest income of approximately $0.4 million due to the significant financing component of long-term receivables.

(Loss) Gain on Derivatives.

For the three months ended March 31, 2020, we recorded a loss on derivatives of approximately $3.5 million resulting from an approximately $15.5 million decrease in the fair value of the Convertible Note Hedges and an approximately $12.0 million decrease in the fair value of the Note Hedge Warrants.

For the three months ended March 31, 2019, we recorded a gain on derivatives of approximately $3.9 million resulting from an approximately $9.5 million increase in the fair value of the Convertible Note Hedges and an approximately $5.6 million increase in the fair value of the Note Hedge Warrants.

For the three months ended June 30, 2020, we recorded a loss on derivatives of approximately $0.5 million resulting from an approximately $0.3 million increase in the fair value of the Convertible Note Hedges and an approximately $0.8 million increase in the fair value of the Note Hedge Warrants.

For the three months ended June 30, 2019, we recorded a loss on derivatives of approximately $0.7 million resulting from an approximately $10.1 million increase in the fair value of the Convertible Note Hedges and an approximately $10.8 million increase in the fair value of the Note Hedge Warrants.

For the six months ended June 30, 2020, we recorded a loss on derivatives of approximately $3.9 million resulting from an approximately $15.2 million decrease in the fair value of the Convertible Note Hedges and an approximately $11.3 million decrease in the fair value of the Note Hedge Warrants.

For the six months ended June 30, 2019, we recorded a gain on derivatives of approximately $3.3 million resulting from an approximately $19.7 million increase in the fair value of the Convertible Note Hedges and an approximately $16.4 million increase in the fair value of the Note Hedge Warrants.

Other Income.

Other income decreased by an insignificant amount during each of the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 due to income related to a transition service agreement with Cyclerion.

Net Loss from Discontinued Operations

Net loss from discontinued operations was approximately $37.4 million for the three months ended March 31, 2019.

There was no net loss from discontinued operations for the three months ended March 31, 2020 as the Separation was completed on April 1, 2019.

There was no net loss from discontinued operations for each of the three and six months ended June 30, 2020.

There was no net loss from discontinued operations for the three months ended June 30, 2019, and net loss from discontinued operations was approximately $37.4 million for the six months ended June 30, 2019.

For additional information on discontinued operations, see Note 2, Cyclerion Separation , to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Liquidity and Capital Resources

As of March 31, 2020, we had approximately $231.1 million of unrestricted cash and cash equivalents.

As of June 30, 2020, we had approximately $253.3 million of unrestricted cash and cash equivalents.

Our cash equivalents include amounts held in money market funds.

We invest cash in excess of immediate requirements in accordance with our investment policy, which limits the amounts we may invest in any one type of investment and requires all investments held by us to be at least AA- rated, with a remaining final maturity when purchased of less than twenty-four months, so as to achieve liquidity and capital preservation objectives.

During the three months ended March 31, 2020, our balances of cash and cash equivalents increased by approximately $54.1 million.

Net cash provided by operating activities totaled approximately $43.6 million.

The increase in cash provided by operating activities is mainly due to a decrease in accounts receivable of approximately $35.9 million.

During the six months ended June 30, 2020, our balances of cash and cash equivalents increased by approximately $76.2 million.

Net cash provided by operating activities totaled approximately $63.7 million as a result of decreases in the cash required to operate our business, including payments related to, among other things, research and development, and selling, general and administrative expenses.

Additionally, cash provided by financing activities totaled approximately $14.4 million in proceeds from the exercise of stock options.

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healthcare system, as well as global capital markets.

There are significant uncertainties 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 our ability to obtain financing.

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 .

Sources of Liquidity

Until the year ended December 31, 2019, we had incurred losses since our inception in 1998 and, as of March 31, 2020, we had an accumulated deficit of approximately $1.6 billion.

Until the year ended December 31, 2019, we had incurred losses since our inception in 1998 and, as of June 30, 2020, we had an accumulated deficit of approximately $1.5 billion.

We have financed our operations to date primarily through both the private sale of our preferred stock and the public sale of our common stock, including approximately $203.2 million of net proceeds from our initial public offering, in February 2010, and approximately $413.4 million of net proceeds from our follow-on public offerings;

payments received under our strategic collaborative

arrangements, including up-front and milestone payments, royalties and our share of net profits, as well as reimbursement of certain expenses;

payments received under our strategic collaborative arrangements, including up-front and milestone payments, royalties and our share of net profits, as well as reimbursement of certain expenses;

and debt financings, including approximately $324.0 million of net proceeds from the private placement of our 2022 Convertible Notes in June 2015, and approximately $391.0 million of net proceeds from the private placement of our 2024 Convertible Notes and 2026 Convertible Notes in August 2019.

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We began commercializing LINZESS in the U.S.

with our collaboration partner, Allergan, 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 advance product opportunities in IBS-C and CIC, abdominal pain associated with IBS and refractory GERD, as well as to fulfill U.S.

with our collaboration partner, AbbVie , in December 2012, and we currently derive a significant portion of our revenue from this collaboration.

In addition, we are deploying significant resources to advance product opportunities in IBS-C and CIC and refractory GERD, as well as to fulfill U.S.

FDA requirements for linaclotide.

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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 Allergan for North America, total net sales of LINZESS in the U.S., as recorded by Allergan, are reduced by commercial costs incurred by each party, and the resulting amount is shared equally between us and Allergan.

Additionally, we receive royalties from Allergan based on sales of linaclotide in its licensed territories outside of the U.S.

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 Allergan will continue to constitute a significant portion of our total revenue for the foreseeable future and we cannot be certain that such revenues, as well as the revenues from our other commercial activities, will enable us to generate positive cash flows, or to do so in the timeframes we expect.

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 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.

and other markets, develop and commercialize other products, and invest in our pipeline and potentially other external opportunities.

We believe that our cash on hand as of March 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.

We believe that our cash on hand as of June 30, 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.

and other markets, as well as our expectations regarding revenue from Astellas for Japan and AstraZeneca for China (including Hong Kong and Macau), as well as our goal to generate and maintain positive cash flows, are forward-looking statements that involve risks and uncertainties.

and other markets, 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 Quarterly Report on Form 10-Q.

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Government authorities in the U.S.

have recommended or imposed various social distancing, quarantine, and isolation measures on large portions of the population, and similar measures have also been taken in many other countries around the world.

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 are uncertain.

During the three months ended March 31, 2020, we incurred an insignificant amount of incremental administrative costs related to the COVID-19 pandemic.

Additionally, we made a donation of approximately $0.3 million to the Life Science Cares’ COVID-19 Response Fund.

The COVID-19 pandemic, including containment and mitigation measures;

however, has impacted, and is expected to continue to impact, our business and operations in a number of ways, including:

economy and the economies of other countries around the world, the severity and duration of which remain uncertain.

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

Since March 16, 2020, our employees, including customer-facing employees, have been working remotely.

The duration and extent of these restrictions are uncertain.

We have developed plans to resume in-person work practices as we determine it to be safe to do so and pending relevant health authority guidance.

We expect to incur additional expenses in 2020 related to the impact of the COVID-19 pandemic on our operations, including procurement of personal protective equipment for our employees and maintenance of our facilities to align with safety protocols.

● Collaboration Agreement for North America with Allergan

We and our partner, Allergan, are focused on maintaining the availability of LINZESS for adult men and women suffering from IBS-C or CIC.

The COVID-19 pandemic may negatively impact future net sales of LINZESS in the U.S., including as a result of reduced in-person promotion or potential changes in patient access to healthcare (including due to unemployment or modifications in insurance coverage) and payor reimbursement levels.

Additionally, the remote selling activities by our and Allergan’s customer-facing employees are excluded from the collaboration-related selling, general, and administrative expenses.

The duration and amount of the full impact on net sales of LINZESS in the U.S., as well as the impact on

collaborative arrangements revenue associated with sales of LINZESS in the U.S., remains uncertain.

As of the date of this Quarterly Report on Form 10-Q, many 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.

The majority of our headquarters employees continue to work remotely.

We have developed plans to resume in-person work practices for all employees as we determine it to be safe to do so and pending relevant health authority guidance.

● 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 details, 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.

Costs we and AbbVie have incurred associated with the remote selling activities performed by our and AbbVie ’s customer-facing employees have been excluded from the collaboration-related selling, general, and administrative expenses.

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 three and six months ended June 30, 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 Allergan continue to monitor the supply and availability of LINZESS for adult men and women suffering from IBS-C or CIC in the U.S.

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 Form 10-Q, 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, and no significant additional costs have been incurred.

● Clinical Development of GI Pipeline Candidates.

The COVID-19 pandemic has not impacted the anticipated timing of top-line data for our Phase II clinical trial with MD-7246 for the treatment of abdominal pain associated with IBS-D because that trial completed patient dosing prior to widespread impacts of the pandemic in North America.

The COVID-19 pandemic has impacted, and is expected to continue impacting, enrollment of new patients into the Phase III clinical trials with IW-3718 for the treatment of refractory GERD.

Research and development expenses related to IW-3718 clinical trials are expected to be delayed during the year ended December 31, 2020.

The impact of the COVID-19 pandemic on the IW-3718 clinical trials is uncertain;

or of clinical trial material for our ongoing trials.

● Clinical Development of GI Pipeline

The COVID-19 pandemic has impacted, and is expected to continue impacting, the development of our pipeline;

specifically, the COVID-19 pandemic has impacted enrollment of new patients into our Phase III clinical trials with IW-3718 for the treatment of refractory GERD.

In line with new U.S.

FDA guidance on statistical considerations for trials impacted by COVID-19, we have stopped enrollment of study subjects into one of our two Phase III clinical trials for IW-3718 to conduct an early efficacy assessment.

Many clinical sites have now resumed screening new patients in our ongoing clinical trial for IW-3718;

however, enrollment continues to be slower than prior to the COVID-19 pandemic.

Certain research and development expenses related to IW-3718 clinical trials have been and are expected to continue to be delayed during the year ended December 31, 2020;

however, aggregate clinical trial expenses over the duration of these trials is expected to increase.

There are 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 three and six months ended June 30, 2020 as described above.

During the three and six months ended June 30, 2020, we incurred a total of approximately $0.3 million and approximately $0.6 million, respectively, of incremental facilities, administrative, and selling costs related to the COVID-19 pandemic, including a donation of approximately $0.3 million to the Life Science Cares’ COVID-19 Response Fund.

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 2020 related to the impact of the COVID-19 pandemic on our 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.

Contractual Commitments and Obligations

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For a discussion of recent accounting pronouncements, please refer to Note 2, Summary of Significant Accounting Policies , to our 2019 Annual Report on Form 10-K and Note 1, Nature of Business , appearing elsewhere in this Quarterly Report on Form 10-Q.

We did not otherwise adopt any new accounting pronouncements during the three months ended March 31, 2020 that had a material effect on our condensed consolidated financial statements included in this report.

We did not otherwise adopt any new accounting pronouncements during the three and six months ended June 30, 2020 that had a material effect on our condensed consolidated financial statements included in this report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis