Item 2. Management’s Discussion and Analysis
Item 2. 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 condensed consolidated financial statements and the notes to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our 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 Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We are a gastrointestinal, or GI, healthcare company dedicated to advancing the treatment of GI diseases and redefining the standard of care for millions of GI patients. We are focused on the development and commercialization of innovative GI product opportunities in areas of large 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.
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
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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. On April 7, 2008, we changed our name to Ironwood Pharmaceuticals, Inc. We operate in one reportable business segment—human therapeutics.
To date, we have dedicated a majority of our activities to the research, development and commercialization of linaclotide, 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 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 o n 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.
In August 2019, we issued $200.0 million in 0.75% Convertible Senior Notes due 2024, or the 2024 Convertible Notes, and $200.0 million in 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 in August 2019 to pay approximately $25.2 million related to the associated capped call transactions, or the Capped Calls, and to repurchase $215.0 million aggregate principal amount of the existing 2.25% Convertible Senior Notes due 2022, or the 2022 Convertible Notes. The proceeds from the issuance of the 2024 Convertible Notes and 2026 Convertible Notes were also used to redeem the outstanding principal balance of the 8.375% Notes due 2026, or the 2026 Notes, in September 2019. We 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. During the year ended December 31, 2019, we recognized a loss on extinguishment of debt of approximately $31.0 million related to the redemption of 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 transactions, or the Convertible Note Hedges, and the respective portion of our existing warrants, or the Note Hedge Warrants, which we had entered into in June 2015 in connection with our issuance of the 2022 Convertible Notes. 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.
In December 2019, a novel strain of coronavirus, or 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, U.S. President Donald Trump announced a national emergency relating to the pandemic. 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.
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Financial Overview
Revenues. Our revenues are generated primarily through our collaborative arrangements and license agreements related to research and development and commercialization of linaclotide, as well as co-promotion arrangements in the U.S. We recognize revenue when the customer obtains control of a promised good or service, in an amount that reflects the consideration which we expect to receive in exchange for the good or service.
The terms of the collaborative research and development, license and co-promotion agreements contain multiple performance obligations which may include (i) licenses, (ii) research and development activities, (iii) the manufacture of finished drug product, active pharmaceutical ingredient, or API, or development materials for a partner which are reimbursed at a contractually determined rate, and (iv) education or co-promotion activities by our clinical sales specialists. Payments to us may include (i) up-front license fees, (ii) payments for research and development activities, (iii) payments for the manufacture of finished drug product, API or development materials, (iv) payments based upon the achievement of certain milestones, (v) payments for sales detailing, promotional support services and medical education initiatives and (vi) royalties on product sales. 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. Through September 16, 2019, the date of the amended and restated AstraZeneca Collaboration Agreement, or the Amended AstraZeneca Agreement, we received our share of the net profits or bore our share of the net losses from the development and sale of linaclotide in China.
We record our share of the net profits and losses from the sales of LINZESS in the U.S. on a net basis and present the settlement payments to and from 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.
Cost of Revenues . Cost of revenues primarily includes costs associated with linaclotide API and finished drug product related to collaborative arrangements revenue and sale of API. Cost related to the sales of linaclotide API and finished drug product are recognized upon shipment of linaclotide API and finished drug product to certain of our partners outside of the U.S. Our cost of collaborative arrangements revenue for linaclotide consists of the internal and external costs of producing such API and finished drug product for certain of our partners outside of the U.S.
Research and Development Expense. Research and 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, as well as licensing fees for our product candidates. We charge all research and development expenses to operations as incurred. Under our linaclotide collaboration agreements with 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 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, and refractory GERD.
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.
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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. We submitted a Supplemental New Drug Application to the U.S. FDA in November 2019 to seek a more comprehensive description of the effects of LINZESS on 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 currently ongoing.
IW-3718 . We are developing IW-3718, a gastric retentive formulation of a bile acid sequestrant, for the potential treatment of refractory GERD. Our clinical research has demonstrated that reflux of bile from the intestine into the stomach and esophagus plays a key role in the ongoing symptoms of refractory GERD. IW-3718 is a novel formulation of a bile acid sequestrant designed to release in the stomach over an extended period of time, bind to bile that refluxes into the stomach, and potentially provide symptomatic relief in patients with 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.
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. 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. 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.
MD-7246 . 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 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. We allocate costs related to facilities, depreciation, share-based compensation, research and development support services, laboratory supplies and certain other costs directly to programs.
X
Three Months Ended
Six Months Ended
June 30,
June 30,
2020
2019
2020
2019
(in thousands)
(in thousands)
Linaclotide (1)
$
6,362
$
8,284
$
14,149
$
18,147
Lesinurad (2)
—
155
—
371
IW-3718
13,629
18,562
32,522
35,464
Early research and development
2,085
1,757
3,432
6,974
Total research and development expenses
$
22,076
$
28,758
$
50,103
$
60,956
(1) Includes linaclotide in all indications, populations and formulations.
(2) Includes lesinurad in all indications, populations and formulations.
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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 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.
The lengthy process of securing regulatory approvals for new drugs requires the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals would materially adversely affect our product development efforts and our business overall.
In connection with the 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 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 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.
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;
● 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;
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● 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 Quarterly Report on Form 10-Q, 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 also continue to invest in our other GI-focused product candidates as we advance them through 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 in September 2019, we were reimbursed for certain selling, general and administrative expenses and we netted these reimbursements against our selling, general and administrative expenses as incurred. 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 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. We record costs and liabilities associated with exit and disposal activities in accordance with ASC Topic 420, Exit or Disposal Cost Obligations , or ASC 420. Such costs are based on estimates of fair value in the period the liabilities are incurred in accordance with ASC 420. We evaluate and adjust these liabilities as appropriate for changes in circumstances as additional information becomes available.
Other (Expense) Income . 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 the convertible senior notes. 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.
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(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. The Convertible Note Hedges and the Note Hedge Warrants are recorded at fair value at each reporting period and changes in fair value are recorded in our condensed consolidated statements of operations. 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.
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.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the amounts of revenues and expenses during the reported periods. Significant estimates and assumptions in our condensed 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 goodwill; valuation procedures for right-of-use assets and operating lease liabilities; valuation procedures for the issuance and repurchase of convertible notes; losses related to discontinued operations; fair value of derivatives; balance sheet classification of convertible notes; income taxes, including the valuation allowance for deferred tax assets; research and development expenses; contingencies and share-based compensation. We base our estimates on our historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis 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.
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.
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Results of Operations
The following discussion summarizes the key factors our management believes are necessary for an understanding of our condensed consolidated financial statements.
Three Months Ended
Six Months Ended
June 30,
June 30,
2020
2019
2020
2019
(in thousands)
(in thousands)
Revenues:
Collaborative arrangements revenue
$
89,423
$
77,322
$
163,868
$
143,474
Sale of active pharmaceutical ingredient
9
24,893
5,507
27,471
Total revenues
89,432
102,215
169,375
170,945
Cost and expenses:
Cost of revenues
—
11,313
2,239
12,356
Research and development
22,076
28,758
50,103
60,956
Selling, general and administrative
34,643
43,246
71,093
92,341
Gain on lease modification
—
(3,169)
—
(3,169)
Restructuring expenses
—
490
—
3,818
Total cost and expenses
56,719
80,638
123,435
166,302
Income from operations
32,713
21,577
45,940
4,643
Other (expense) income:
Interest expense
(7,318)
(9,430)
(14,538)
(19,022)
Interest and investment income
276
668
1,053
1,404
(Loss) gain on derivatives
(467)
(672)
(3,933)
3,272
Other income
—
140
27
140
Other expense, net
(7,509)
(9,294)
(17,391)
(14,206)
Net income (loss) from continuing operations
25,204
12,283
28,549
(9,563)
Net loss from discontinued operations
—
—
—
(37,438)
Net income (loss)
$
25,204
$
12,283
$
28,549
$
(47,001)
Three and six months ended June 30, 2020 compared to three and six months ended June 30, 2019
Revenues
Three Months Ended
Six Months Ended
June 30,
Change
June 30,
Change
2020
2019
$
%
2020
2019
$
%
(dollars in thousands)
(dollars in thousands)
Revenues:
Collaborative arrangements revenue
$
89,423
$
77,322
$
12,101
16
%
$
163,868
$
143,474
$
20,394
14
%
Sale of active pharmaceutical ingredient
9
24,893
(24,884)
(100)
%
5,507
27,471
(21,964)
(80)
%
Total revenues
$
89,432
102,215
(12,783)
(13)
%
169,375
170,945
(1,570)
(1)
%
Collaborative Arrangements 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.
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Sale of Active Pharmaceutical Ingredient. 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
June 30,
Change
June 30,
Change
2020
2019
$
%
2020
2019
$
%
(dollars in thousands)
(dollars in thousands)
Cost and expenses:
Cost of revenues
$
—
$
11,313
$
(11,313)
(100)
%
$
2,239
$
12,356
$
(10,117)
(82)
%
Research and development
22,076
28,758
(6,682)
(23)
%
50,103
60,956
(10,853)
(18)
%
Selling, general and administrative
34,643
43,246
(8,603)
(20)
%
71,093
92,341
(21,248)
(23)
%
Gain on lease modification
—
(3,169)
3,169
(100)
%
—
(3,169)
3,169
(100)
%
Restructuring expenses
—
490
(490)
(100)
%
—
3,818
(3,818)
(100)
%
Total cost and expenses
$
56,719
$
80,638
$
(23,919)
(30)
%
$
123,435
$
166,302
$
(42,867)
(26)
%
Cost of Revenue. 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 $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 $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. 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.
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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
June 30,
Change
June 30,
Change
2020
2019
$
%
2020
2019
$
%
(dollars in thousands)
(dollars in thousands)
Other (expense) income:
Interest expense
$
(7,318)
$
(9,430)
$
2,112
(22)
%
$
(14,538)
$
(19,022)
$
4,484
(24)
%
Interest and investment income
276
668
(392)
(59)
%
1,053
1,404
(351)
(25)
%
(Loss) gain on derivatives
(467)
(672)
205
(31)
%
(3,933)
3,272
(7,205)
(220)
%
Other income
—
140
(140)
(100)
%
27
140
(113)
(81)
%
Total other expense, net
$
(7,509)
$
(9,294)
$
1,785
(19)
%
$
(17,391)
$
(14,206)
$
(3,185)
22
%
Interest Expense. 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 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
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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 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
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 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 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. These cash inflows were partially offset by approximately $1.8 million in capital expenditures.
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 .
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Sources of Liquidity
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; 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.
Funding Requirements
We began commercializing LINZESS in the 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. We have also historically derived revenue from the sale of linaclotide API to Astellas for Japan; beginning in 2020, however, we will no longer be responsible for the supply of linaclotide API to Astellas. 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 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 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) 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. 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;
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● the time and costs involved in developing, and obtaining regulatory approvals for, our product candidates, as well as the timing and cost of any post-approval development and regulatory requirements;
● the success of our research and development efforts;
● the emergence of competing or complementary products;
● the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
● the terms and timing of any additional collaborative, licensing or other arrangements that we may establish, including royalties or other payments due or payable under such agreements; and
● the acquisition of businesses, products and technologies and the impact of other strategic transactions, as well as the cost and timing of integrating any such assets into our business operations.
Financing Strategy
We may, from time to time, consider additional funding through a combination of new collaborative arrangements, strategic alliances, and additional equity and debt financings or from other sources. We will continue to manage our capital structure and to consider all financing opportunities, whenever they may occur, that could strengthen our long-term liquidity profile. Any such capital transactions may or may not be similar to transactions in which we have engaged in the past. There can be no assurance that any such financing opportunities will also be available on acceptable terms, if at all.
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, 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.
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
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
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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 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.
● 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. 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. 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.
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
The disclosure of our contractual obligations and commitments was reported in our 2019 Annual Report on Form 10-K. There have not been any material changes from the contractual commitments and obligations previously disclosed in our 2019 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 (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships. We enter into guarantees in the ordinary course of business related to the guarantee of our own performance and the performance of our subsidiaries.
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New Accounting Pronouncements
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 and six months ended June 30, 2020 that had a material effect on our condensed consolidated financial statements included in this report.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.