IRONWOOD PHARMACEUTICALS INC 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ​ Forward-Looking Information The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” in Item 1A of this Annual Report on Form 10 K, our actual results may differ materially from those anticipated in these forward-looking statements. Discussion and analysis of our financial condition and results of operations for the fiscal year ended December 31, 2019 compared to the fiscal year ended December 31, 2018 is included in Part II, Item 7 –"Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the Securities and Exchange Commission on February 13, 2020. Overview We are a gastrointestinal, or GI, healthcare company dedicated to advancing the treatment of GI diseases and redefining the standard of care for GI patients. We are focused on the development and commercialization of innovative GI product opportunities in areas of significant unmet need, leveraging our demonstrated expertise and capabilities in GI diseases. ​ LINZESS ® (linaclotide), our commercial product, is the first product approved by the United States Food and Drug Administration, or U.S. FDA, in a class of GI medicines called guanylate cyclase type C agonists and is indicated for adult men and women suffering from irritable bowel syndrome with constipation, or IBS-C, or chronic idiopathic constipation, or CIC. LINZESS is available to adult men and women suffering from IBS-C or CIC in the United States, or the U.S., and Mexico and to adult men and women suffering from IBS-C in Japan and China. Linaclotide is available under the trademarked name CONSTELLA ® to adult men and women suffering from IBS-C or CIC in Canada, and to adult men and women suffering from IBS-C in certain European countries. ​ We have strategic partnerships with leading pharmaceutical companies to support the development and commercialization of linaclotide throughout the world, including with AbbVie Inc. (together with its affiliates), or AbbVie, (successor to Allergan plc (together with its affiliates), or Allergan), in the U.S. and all countries worldwide other than China (including Hong Kong and Macau) and Japan, AstraZeneca AB (together with its affiliates), or AstraZeneca, in China (including Hong Kong and Macau) and Astellas Pharma Inc., or Astellas, in Japan. We also aim to leverage our leading capabilities in GI to bring additional treatment options to GI patients; for example, we have a U.S. disease education and promotional agreement with Alnylam Pharmaceuticals, Inc. for Alnylam’s GIVLAARI® (givosiran) for the treatment of acute hepatic porphyria. ​ To date, we have dedicated a majority of our activities to the research, development and commercialization of linaclotide, as well as to the research and development of our other product candidates. Prior to the year ended December 31, 2019, when we recorded net income for the year of approximately $21.5 million, we incurred net losses in each year since our inception in 1998. For the year ended December 31, 2020, we recorded net income of approximately $106.2 million. As of December 31, 2020, we had an accumulated deficit of approximately $1.5 billion. We are unable to predict the extent of any future losses or guarantee that our company will be able to maintain positive cash flows. ​ We were incorporated in Delaware on January 5, 1998 as Microbia, Inc. On April 7, 2008, we changed our name to Ironwood Pharmaceuticals, Inc. We operate in one reportable business segment—human therapeutics. ​ Key 2020 Financial Highlights ​ ● During the year ended December 31, 2020, we recognized approximately $389.5 million in total revenues, compared to approximately $428.4 million during the year ended December 31, 2019. The decrease of 9% was primarily driven by a decrease in sale of active pharmaceutical ingredient, or API, in 2020 compared to 2019. An increase in collaborative arrangements revenue related to sales of LINZESS in the U.S. of approximately $43.2 million in 2020 compared to 2019 was offset by approximately $42.4 million in non- 53 Table of Contents recurring revenue recognized in 2019 in connection with amendments to our collaborative arrangements with AstraZeneca and Astellas. ​ ● During the year ended December 31, 2020, we recognized approximately $368.6 million in collaborative arrangements revenue related to sales of LINZESS in the U.S. compared to approximately $325.4 million during the year ended December 31, 2019. The increase of 13% was primarily driven by an increase in LINZESS prescription demand in the U.S. in 2020 compared to 2019. ​ ● Our operations resulted in net income of approximately $106.2 million during the year ended December 31, 2020 compared to net income of $21.5 million during the year ended December 31, 2019, primarily driven by increased revenue from sales of LINZESS in the U.S., as well as decreases in costs primarily associated with the discontinuation of MD-7246 and IW-3718 development programs. ● We generated $168.8 million in cash from operations during the year ended December 31, 2020, ending the year with $362.6 million in cash and cash equivalents. ● In connection with our decision to discontinue development of IW-3718, we reduced our workforce by approximately 100 full-time employees. We substantially completed the reduction in our workforce in the fourth quarter of 2020. We expect to realize annualized cost savings in total operating expenses from this workforce reduction, as well as cost savings related to external spend for IW-3718 previously expected through 2021. Financial Operations Overview Revenues. Our revenues are generated primarily through our collaborative arrangements and license agreements related to research and development and commercialization of linaclotide, as well as co-promotion arrangements in the U.S. ​ The majority of our revenues are generated from the sales of LINZESS in the U.S. We record our share of the net profits and losses from the sales of LINZESS in the U.S. on a net basis and present the settlement payments to and from AbbVie as collaboration expense or collaborative arrangements revenue, as applicable. Net profits or losses consist of net sales to third-party customers and sublicense income in the U.S. less the cost of goods sold as well as selling, general and administrative expenses. Although we expect net sales to increase over time, the settlement payments between AbbVie and us, resulting in collaborative arrangements revenue or collaboration expense, are subject to fluctuation based on the ratio of selling, general and administrative expenses incurred by each party. In addition, our collaborative arrangements revenue may fluctuate as a result of the timing and amount of license fees and clinical and commercial milestones received and recognized under our current and future strategic partnerships as well as timing and amount of royalties from the sales of linaclotide in the European, Canadian or Mexican markets or any other markets where linaclotide receives approval. ​ Product revenue consisted of sales of ZURAMPIC ® and DUZALLO ® , or the Lesinurad Products, in the U.S. through the date of the termination in January 2019 of our exclusive license to develop, manufacture, and commercialize in the U.S. products containing lesinurad as an active ingredient, or the Lesinurad License. Through December 31, 2020, we also generated revenues from the manufacture of linaclotide finished drug product, finished goods, API and development materials for certain of our partners. ​ Cost of Revenues . Cost of revenues primarily includes costs related to the sales of linaclotide API, finished drug product, and finished goods to our partners, which generally occurs upon shipment for sales of API, finished drug product and finished goods after the material has passed all quality testing required for acceptance by the partner to certain of our partners outside of the U.S. ​ Settlement on Non-cancelable Inventory and Commercial Supply Purchase Commitments. During the year ended December 31, 2019, we recorded settlements related to reversals of certain previously accrued non-cancelable purchase commitments. Research and Development Expense. The core of our research and development strategy is to leverage our demonstrated expertise and capabilities in GI diseases to bring multiple medicines to patients. Research and 54 Table of Contents development expense consists of expenses incurred in connection with the research into and development of product candidates. These expenses consist primarily of compensation, benefits and other employee-related expenses, research and development related facility costs, third-party contract costs relating to nonclinical study and clinical trial activities, development of manufacturing processes, regulatory registration of third-party manufacturing facilities, and licensing fees for our product candidates. We record all research and development expenses as incurred. ​ Research and development expenses include amounts owed to AbbVie on an ongoing basis, as well as AstraZeneca prior to September 2019 when we amended and restated our existing collaboration agreement with AstraZeneca, or the Amended AstraZeneca Agreement, under cost-sharing provisions in our respective collaboration agreements for linaclotide. Reimbursements received for research and development activities under these agreements were netted against research and development expenses. ​ Linaclotide . Our commercial product, linaclotide, is available to adult men and women suffering from IBS-C or CIC in certain countries around the world. LINZESS is commercially available in the U.S. for the treatment of IBS-C or CIC in adults. Linaclotide also is approved and commercially available in China, Japan, and in a number of E.U. and other countries. ​ We and AbbVie continue to explore ways to enhance the clinical profile of LINZESS by studying linaclotide in additional indications, populations and formulations to assess its potential to treat various conditions. In January 2017, the U.S. FDA approved a 72 mcg dose of LINZESS for adults with CIC, which became available in the U.S. in March 2017. In June 2019, we announced positive topline data from our Phase IIIb trial demonstrating the efficacy and safety of linaclotide 290 mcg on the overall abdominal symptoms of bloating, pain and discomfort in adult patients with IBS-C. In September 2020, based on the Phase IIIb data, the U.S. FDA approved our Supplemental New Drug Application to include a more comprehensive description of the effects of LINZESS in its approved label. ​ In connection with the U.S. FDA approval of LINZESS, we were required to conduct certain nonclinical and clinical studies including those aimed at further understanding the safety profile of linaclotide. We and AbbVie completed such additional studies and determined that: (a) orally administered linaclotide was not detected in breast milk, (b) there is little or no evidence of any potential for antibodies to be developed to linaclotide, and (c) there were no signs or symptoms of an immunogenic response to linaclotide. The results observed do not alter the known safety profile for linaclotide based on the clinical studies and post-marketing experience to-date. In addition, we and AbbVie have established a nonclinical and clinical post-marketing plan with the U.S. FDA to understand the safety and efficacy of LINZESS in pediatric patients. Clinical pediatric programs in IBS-C and functional constipation are ongoing. ​ MD-7246 . We and AbbVie were developing MD-7246, a delayed release formulation of linaclotide. In May 2020, we and AbbVie announced top-line data from a Phase II trial evaluating MD-7246 in adult patients with abdominal pain associated with IBS-D. The Phase II trial did not meet its primary or key secondary endpoints. Based on these findings, we and AbbVie discontinued the development of MD-7246. ​ IW-3718 . We were developing IW-3718, a gastric retentive formulation of a bile acid sequestrant, for the potential treatment of refractory gastroesophageal reflux disease, or refractory GERD. In September 2020, we announced that one of our two identical Phase III trials evaluating IW-3718 in refractory GERD did not meet the pre-specified criteria associated with a planned early efficacy assessment. Following the assessment from an independent data monitoring committee, we unblinded the data and confirmed that IW-3718-302 did not meet the criteria, including the study’s primary endpoint of achieving a statistically significant improvement in heartburn severity. Based on these findings, we are discontinuing development of IW-3718. ​ Early research and development . Our early research and development efforts have been focused on supporting our development stage GI programs, including exploring strategic options for further development of certain of our internal programs. Included in early research and development are costs relating to the development of IW-3300, a GC-C agonist, which is in pre-clinical development for the potential treatment of visceral pain conditions, as well as certain other expenses associated with historical programs. ​ The following table sets forth our research and development expenses related to our product pipeline for the years ended December 31, 2020, 2019, and 2018. These expenses relate primarily to internal compensation, benefits and other employee-related expenses and external costs associated with nonclinical studies and clinical trial costs for our 55 Table of Contents 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2020 ​ 2019 ​ 2018 ​ ​ (in thousands) Linaclotide (1) $ 25,531 ​ $ 39,061 ​ $ 33,749 Lesinurad (2) ​ ​ — ​ ​ 524 ​ ​ 5,184 ​ IW-3718 ​ ​ 52,183 ​ ​ 65,771 ​ ​ 37,789 ​ Early research and development ​ 10,348 ​ ​ 9,688 ​ ​ 24,338 ​ Total research and development expenses ​ $ 88,062 ​ $ 115,044 ​ $ 101,060 ​ (1) Includes linaclotide in all indications, populations and formulations. (2) Includes lesinurad in all indications, populations and formulations. ​ Since 2004, the date we began tracking costs by program, we have incurred approximately $527.2 million of research and development expenses related to linaclotide. The expenses for linaclotide include both our portion of the research and development costs incurred by AbbVie for the U.S. and AstraZeneca for China (including Hong Kong and Macau) prior to the execution of the Amended AstraZeneca Agreement, and invoiced to us under the cost-sharing provisions of our collaboration agreements, as well as the unreimbursed portion of research and development costs incurred by us under such cost-sharing provisions. ​ The lengthy process of securing regulatory approvals for new drugs requires the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals would materially adversely affect our product development efforts and our business overall. ​ We and AbbVie are exploring development opportunities to enhance the clinical profile of LINZESS by studying linaclotide in additional indications, populations and formulations to assess its potential to treat various conditions. We cannot currently estimate with any degree of certainty the amount of time or money that we will be required to expend in the future on linaclotide for other geographic markets within IBS-C and CIC, or in additional indications, populations or formulations. ​ Given the inherent uncertainties that come with the development of pharmaceutical products, we cannot estimate with any degree of certainty how our programs will evolve, and therefore the amount of time or money that would be required to obtain regulatory approval to market them. ​ As a result of these uncertainties surrounding the timing and outcome of any approvals, we are currently unable to estimate precisely when, if ever, linaclotide’s utility will be expanded within its currently approved indications; if or when linaclotide will be developed outside of its current markets, indications, populations or formulations; or when, if ever, any of our other product candidates will generate revenues and cash flows. ​ We invest carefully in our pipeline, and the commitment of funding for each subsequent stage of our development programs is dependent upon the receipt of clear, supportive data. In addition, we intend to access externally discovered drug candidates that fit within our core strategy. In evaluating these potential assets, we apply the same investment criteria as those used for investments in internally discovered assets. ​ The successful development of our product candidates is highly uncertain and subject to a number of risks including, but not limited to: ​ ● The duration of clinical trials may vary substantially according to the type, complexity and novelty of the product candidate; ​ ● The U.S. FDA and comparable agencies in foreign countries impose substantial and varying requirements on the introduction of therapeutic pharmaceutical products, typically requiring lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures; ​ 56 Table of Contents ● Data obtained from nonclinical and clinical activities at any step in the testing process may be adverse and lead to discontinuation or redirection of development activity. Data obtained from these activities also are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval; ​ ● The duration and cost of early research and development, including nonclinical studies and clinical trials may vary significantly over the life of a product candidate and are difficult to predict; ​ ● The costs, timing and outcome of regulatory review of a product candidate may not be favorable, and, even if approved, a product may face post-approval development and regulatory requirements; ​ ● There may be substantial costs, delays and difficulties in successfully integrating externally developed product candidates into our business operations; and ​ ● The emergence of competing technologies and products and other adverse market developments may negatively impact us. ​ As a result of the factors discussed above, including the factors discussed under “Risk Factors” in Item 1A of this Annual Report on Form 10-K, we are unable to determine the duration and costs to complete current or future nonclinical and clinical stages of our product candidates or when, or to what extent, we will generate revenues from the commercialization and sale of our product candidates. Development timelines, probability of success and development costs vary widely. We anticipate that we will make determinations as to which additional programs to pursue and how much funding to direct to each program on an ongoing basis in response to the data of each product candidate, the competitive landscape and ongoing assessments of such product candidate’s commercial potential. ​ We expect to invest in our development programs for the foreseeable future. We will continue to invest in linaclotide, including the investigation of ways to enhance the clinical profile within its currently approved indications, and the exploration of its potential utility in other indications, populations and formulations. We will continue to invest in our GI-focused product candidates as we advance them through pre-clinical and clinical trials, in addition to funding research and development activities under our external collaboration and license agreements. ​ Selling, General and Administrative Expense. Selling, general and administrative expense consists primarily of compensation, benefits and other employee-related expenses for personnel in our administrative, finance, legal, information technology, business development, commercial, sales, marketing, communications and human resource functions. Other costs include legal costs of pursuing patent protection of our intellectual property, general and administrative related facility costs, insurance costs and professional fees for accounting, tax, consulting, legal and other services. As we continue to invest in the commercialization of LINZESS, we expect our selling, general and administrative expenses will be substantial for the foreseeable future. We record all selling, general and administrative expenses as incurred. ​ Prior to the execution of the Amended AstraZeneca Agreement, we were reimbursed for certain selling, general and administrative expenses and netted these reimbursements against selling, general and administrative expenses as incurred. AstraZeneca is responsible for all costs and expenses incurred under the Amended AstraZeneca Agreement. We include AbbVie’s selling, general and administrative cost-sharing payments in the calculation of the net profits and net losses from the sale of LINZESS in the U.S. and present the net payment to or from AbbVie as collaboration expense or collaborative arrangements revenue, respectively. ​ Gain on Lease Modification. During the year ended December 31, 2019, we recorded a gain on lease modification related to a modification of our prior headquarters lease in April 2019. For additional information relating to the gain, see Note 8, Leases , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. ​ Restructuring Expenses. Restructuring expenses pertain to workforce reduction and restructuring initiatives and are more fully described in Note 18, Workforce Reduction and Restructuring , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. We substantially completed a workforce reduction related to discontinuing development of IW-3718 in the fourth quarter of 2020 and incurred approximately $15.5 million of restructuring expenses, primarily for one-time cash employee severance and benefit costs. ​ 57 Table of Contents Interest Expense. Interest expense consists primarily of cash and non-cash interest costs related to the convertible senior notes. Non-cash interest expense consists of amortization of the debt discount and debt issuance costs associated with our convertible senior notes. ​ Interest and Investment Income. Interest and investment income consists of interest earned on our cash, cash equivalents and marketable securities as well as significant financing components of payments due from collaboration partners. ​ Gain (loss) on Derivatives. In June 2015, we issued 2.25% Convertible Senior Notes due June 15, 2022, or the 2022 Convertible Notes, and in August 2019, we issued 0.75% Convertible Senior Notes due 2024, or the 2024 Convertible Notes, and 1.50% Convertible Senior Notes due 2026, or the 2026 Convertible Notes (together with the 2022 Convertible Notes and the 2024 Convertible Notes, the Convertible Senior Notes). In connection with the issuance of our 2022 Convertible Notes, we entered into convertible note hedge transactions, or the Convertible Note Hedges, and separate note hedge warrant transactions, or the Note Hedge Warrants, with certain financial institutions. Gain (loss) on derivatives consists of the change in fair value of the Convertible Note Hedges and Note Hedge Warrants, which are recorded at fair value at each reporting period and changes in fair value are recorded in our consolidated statements of operations. The Convertible Note Hedges and Note Hedge Warrants are more fully described in Note 11 , Notes Payable , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. ​ Loss on Extinguishment of Debt. We recognized a loss on extinguishment of debt during the year ended December 31, 2019 related to the redemption of the 8.375% Notes due 2026, or the 2026 Notes, and the partial repurchase of the 2022 Convertible Notes. In connection with the partial repurchase of the 2022 Convertible Notes, we also terminated the respective portion of our existing Convertible Note Hedges and Note Hedge Warrants. These transactions are more fully described in Note 11, Notes Payable , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. ​ Income Taxes. We prepare our income tax provision based on our interpretation of the income tax accounting rules and each jurisdiction’s enacted tax laws and regulations and record our income tax provision by applying our estimated annual effective tax rate to pre-tax income. The difference between the recorded provision for income taxes and the income tax provision based on U.S. statutory tax rates was primarily attributable to the impact of a continued valuation allowance. ​ Discontinued Operations. On April 1, 2019, we completed the separation, or the Separation, of our soluble guanylate cyclase, or sGC, business, and certain other assets and liabilities, into a separate, independent publicly traded company, Cyclerion Therapeutics, Inc., or Cyclerion. The Separation was effected by means of a distribution of all the outstanding shares of common stock, with no par value, of Cyclerion, through a dividend of Cyclerion’s common stock to our stockholders of record as of the close of business on March 19, 2019. In connection with the Separation, we recast all historical expenses directly associated with our sGC business as discontinued operations for the years ended December 31, 2019 and 2018 in accordance with ASC Subtopic 250-20, Discontinued Operations . For additional information refer to Note 3, Cyclerion Separation , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. ​ Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities, the disclosure of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reported periods. We base our estimates on our historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from our estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known. ​ We believe that our application of the following accounting policies, each of which require significant judgments and estimates on the part of management, are the most critical to aid in fully understanding and evaluating our 58 Table of Contents reported financial results. Our significant accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. Leases ​ Effective January 1, 2019, we adopted ASC Topic 842, Leases, or ASC 842, using the optional transition method. The adoption of ASC 842 represents a change in accounting principle that aims to increase transparency and comparability among organizations by requiring the recognition of right-of-use, assets and lease liabilities on the balance sheet for both operating and finance leases. In addition, the standard requires enhanced disclosures that meet the objective of enabling financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases. ​ As part of the ASC 842 adoption, we elected certain practical expedients, which include: ​ ● A policy election to use the short-term lease exception by asset class; and ​ ● Election of the practical expedient package during transition, which includes: o An entity need not reassess whether any expired or existing contracts are or contain leases. o An entity need not reassess the classification for any expired or existing leases. As a result, all leases that were previously classified as operating leases in accordance with ASC Topic 840, Leases , or ASC 840, are classified as operating leases under ASC 842, and all leases that were classified as capital leases in accordance with ASC 840 are classified as finance leases under ASC 842. o An entity need not reassess initial direct costs for any existing leases. Subsequent to our adoption of ASC 842, we elected the post-transition practical expedient, by class of underlying asset, to account for lease components and non-lease components together as a single component for the asset class of operating lease right-of-use real estate assets. ​ Our lease portfolio for the year ended December 31, 2020 includes: a lease for our headquarters location, a data center colocation lease, vehicle leases for our salesforce representatives, and leases for computer and office equipment. We determine if an arrangement is a lease at the inception of the contract. The asset component of our operating leases is recorded as the operating lease right-of-use asset, and the liability component is recorded as the current portion of operating lease liabilities and operating lease liabilities, net of current portion in our consolidated balance sheet. As of December 31, 2020, we did not record any finance leases. ​ Right-of-use assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at the lease inception date. Existing leases in our lease portfolio as of the adoption date were valued as of January 1, 2019. We use an incremental borrowing rate based on the information available at lease inception in determining the present value of lease payments if an implicit rate of return is not provided with the lease contract. Operating lease right-of-use assets are adjusted for incentives expected to be received. ​ Right-of-use assets and operating lease liabilities are remeasured upon certain modifications to leases using the present value of remaining lease payments and estimated incremental borrowing rate upon lease modification. ​ Lease cost is recognized on a straight-line basis over the lease term, and includes amounts related to short-term leases. We recognize variable lease payments as operating expenses in the period in which the obligation for those payments is incurred. Variable lease payments primarily include common area maintenance, utilities, real estate taxes, insurance, and other operating costs that are passed on from the lessor in proportion to the space leased by us. ​ Derivative Assets and Liabilities In June 2015, in connection with the issuance of the 2022 Convertible Notes, we entered into the Convertible Note Hedges. Concurrently with entering into the Convertible Note Hedges, we also entered into certain warrant transactions in which we sold Note Hedge Warrants to the Convertible Note Hedge counterparties to acquire shares of 59 Table of Contents our Class A Common Stock, subject to customary anti-dilution adjustments. In connection with the partial repurchase of the 2022 Convertible Notes in August 2019, we terminated our Convertible Note Hedges and Note Hedge Warrants proportionately. These derivatives are recorded as assets or liabilities at fair value at the end of each reporting period and the fair value is determined using the Black-Scholes option-pricing model. The changes in fair value are recorded as a component of other (expense) income in the consolidated statements of operations. Significant inputs used to determine the fair value include the price per share of our Class A Common Stock on the date of valuation, expected term of the derivative instruments, the strike prices of the derivative instruments, the risk-free interest rate, and the expected volatility of our Class A Common Stock. Changes to these inputs could materially affect the valuation of the Convertible Note Hedges and Note Hedge Warrants in future periods. Revenue Recognition Upon executing a revenue generating arrangement, we assess whether it is probable we will collect consideration in exchange for the good or service it transfers to the customer and perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the performance obligations. We must develop assumptions that require significant judgment to determine the standalone selling price for each performance obligation identified in the contract. The assumptions that are used to determine the standalone selling price may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. Our revenues are generated primarily through collaborative arrangements and license agreements related to the development and commercialization of linaclotide, as well as co-promotion arrangements in the U.S. The terms of the collaborative arrangements and other agreements contain multiple performance obligations which may include (i) licenses, (ii) research and development activities, including participation on joint steering committees, (iii) the manufacture of finished drug product, API, or development materials for a partner, which are reimbursed at a contractually determined rate, and (iv) education or co-promotion activities by our clinical sales specialists. Non-refundable payments to us under these agreements may include (i) up-front license fees, (ii) payments for research and development activities, (iii) payments for the manufacture of finished drug product, API, or development materials, (iv) payments based upon the achievement of certain milestones, (v) payments for sales detailing, promotional support services and medical education initiatives, and (vi) royalties on product sales. Additionally, we receive our share of the net profits or bear our share of the net losses from the sale of linaclotide in the U.S. We have adopted a policy to recognize revenue net of tax withholdings, as applicable. Collaboration, License, Co-Promotion and Other Commercial Agreements Upon licensing intellectual property, we determine if the license is distinct from the other performance obligations identified in the arrangement. We recognize revenues from the transaction price, including non-refundable, up-front fees allocated to the license when the license is transferred to the customer if the license has distinct benefit to the customer. For licenses that are combined with other promises, we assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. For performance obligations that are satisfied over time, we evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. Our license and collaboration agreements include milestone payments, such as development and other milestones. We evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method at the inception of the agreement. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative standalone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. We re-evaluate the probability of achievement of such milestones and any related constraint at each reporting period, and any adjustments are recorded on a cumulative catch-up basis. 60 Table of Contents Agreements that include the supply of API or drug product for either clinical development or commercial supply at the customer’s discretion are generally considered as options. We assess if these options provide a material right to our partner, and if so, they are accounted for as separate performance obligations. If we are entitled to additional payments when the customer exercises these options, any additional payments are recorded as revenue when the customer obtains control of the goods, which is typically upon shipment for sales of API and finished drug product. For agreements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue when the related sales occur. Net Profit or Net Loss Sharing In accordance with ASC 808 Topic, Collaborative Arrangements , or ASC 808, we considered the nature and contractual terms of the arrangement and the nature of our business operations to determine the classification of payments under our collaboration agreements. While ASC 808 provides guidance on classification, the standard is silent on matters of separation, initial measurement, and recognition. Therefore, we apply the separation, initial measurement, and recognition principles of ASC Topic 606, Revenue from Contracts with Customers , or ASC 606, to our collaboration agreements. Our collaborative arrangements revenue generated from sales of LINZESS in the U.S. are considered akin to sales-based royalties. We recognize our share of the pre-tax commercial net profit or net loss generated from the sales of LINZESS in the U.S. in the period the product sales are earned, as reported by AbbVie, and related cost of goods sold and selling, general and administrative expenses as incurred by us and our collaboration partner. These amounts are partially determined based on amounts provided by AbbVie and involve the use of estimates and judgments, such as product sales allowances and accruals related to prompt payment discounts, chargebacks, governmental and contractual rebates, wholesaler fees, product returns, and co-payment assistance costs, which could be adjusted based on actual results in the future. We are highly dependent on AbbVie for timely and accurate information regarding any net revenues realized from sales of LINZESS in the U.S. in accordance with ASC 808, and the related costs, in order to accurately report its results of operations. If we do not receive timely and accurate information or incorrectly estimate activity levels associated with the collaboration at a given point in time, we could be required to record adjustments in future periods. We record revenue transactions as net product revenue in our consolidated statements of operations if we were deemed the principal in the transaction, which includes being the primary obligor, retaining inventory risk, and control over pricing. Given that we are not the primary obligor and do not have the inventory risks in the collaboration agreement with AbbVie for North America, we record our share of the net profits or net losses from the sales of LINZESS in the U.S. on a net basis and present the settlement payments to and from AbbVie as collaboration expense or collaborative arrangements revenue, as applicable. We and AbbVie settle the cost sharing quarterly, such that our consolidated statements of operations reflect 50% of the pre-tax net profit or loss generated from sales of LINZESS in the U.S. Product Revenue, Net Product revenue consisted of sales of the Lesinurad Products in the U.S. through the date of the termination of the Lesinurad License in January 2019. We sold the Lesinurad Products principally to a limited number of national wholesalers and selected regional wholesalers, or the Distributors. The Distributors resold the Lesinurad Products to retail pharmacies and healthcare providers, who then sold to patients. Net product revenue was recognized when the Distributor obtained control of our product, which occurred at a point in time, typically upon shipment of Lesinurad Products to the Distributor. When we performed shipping and handling activities after the transfer of control to the Distributor (e.g., when control transferred prior to delivery), they were considered fulfillment activities, and accordingly, the costs were accrued for when the related revenue was recognized. We expensed incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized was one year or less. Product revenue was recorded net of the trade discounts, allowances, rebates, chargebacks, discounts, product returns, and other incentives. Certain of these adjustments were recorded as an accounts receivable reserve, while certain of these adjustments were recorded as accrued expenses. ​ 61 Table of Contents Sale of Active Pharmaceutical Ingredient During the years ended December 31, 2020, 2019, and 2018, we produced linaclotide API, finished drug product, finished goods, and/or development materials for certain of our partners. As of December 31, 2020, we are no longer responsible for the supply of linaclotide API, finished drug product, finished goods or development materials to our partners. As it relates to development materials and API produced for Astellas, we were reimbursed at a contracted rate. Such reimbursements were considered as part of revenue generated pursuant to the Astellas license agreement and are presented as collaborative arrangements revenue. Any linaclotide API, finished drug product, finished goods, and development materials AbbVie is responsible for producing for the U.S. are recognized in accordance with the cost-sharing provisions of the collaboration agreement for North America with AbbVie. Prior to the execution of the Amended AstraZeneca Agreement in September 2019, any linaclotide API, finished drug product, finished goods, and development materials produced for AstraZeneca for China (including Hong Kong and Macau) were recognized in accordance with the cost-sharing provisions of the AstraZeneca collaboration agreement. We recognize revenue on linaclotide API, finished drug product, finished goods, and development materials when control has transferred to the partner, which generally occurs upon shipment after the material has passed all quality testing required for acceptance by the partner. Other Our deferred revenue balance consists of advance billings and payments received from customers in excess of revenue recognized. Research and Development Expense We have committed significant resources into the research and development of our product candidates and intend to continue to do so for the foreseeable future. All research and development expenses are expensed as incurred. We capitalize nonrefundable advance payments we make for research and development activities and defer expense recognition until the related goods are received or the related services are performed. Research and development expenses are comprised of costs incurred in performing research and development activities, including salary, benefits, share-based compensation, and other employee-related expenses; laboratory supplies and other direct expenses; facilities expenses; overhead expenses; third-party contractual costs relating to nonclinical studies and clinical trial activities and related contract manufacturing expenses, development of manufacturing processes and regulatory registration of third-party manufacturing facilities; licensing fees for our product candidates; and other outside expenses. Clinical trial expenses include expenses associated with contract research organizations, or CROs. The invoicing from CROs for services rendered can lag several months. We accrue the cost of services rendered in connection with CRO activities based on our estimate of site management, monitoring costs, project management costs, and investigator fees. We maintain regular communication with our CRO vendors to gauge the reasonableness of our estimates. Differences between actual clinical trial expenses and estimated clinical trial expenses recorded have not been material and are adjusted for in the period in which they become known. However, if we incorrectly estimate activity levels associated with the CRO services at a given point in time, we could be required to record material adjustments in future periods. Under our collaboration agreement with AbbVie for North America, we are reimbursed for certain research and development expenses and we net these reimbursements against our research and development expenses as incurred. Amounts owed to AbbVie under our collaboration agreement are recorded as incremental research and development expense. Nonrefundable advance payments for research and development activities are capitalized and expensed over the related service period or as goods are received. Share-Based Compensation Expense We grant awards under our share-based compensation programs, including stock awards, restricted stock awards, or RSAs, restricted stock units, or RSUs (including performance-based RSUs, or PSUs), stock options, and shares issued under our employee stock purchase plan, or ESPP. Share-based compensation is recognized as expense in 62 Table of Contents the consolidated statements of operations based on the grant date fair value over the requisite service period, net of estimated forfeitures. We estimate forfeitures over the requisite service period using historical forfeiture activity and record share-based compensation expense only for those awards that are expected to vest. We estimate the fair value of stock options on the date of grant using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility and expected term, among others. The fair value of stock awards, RSAs, and RSUs is based on the market value of our Class A Common Stock on the date of grant, with the exception of PSUs with market conditions, which are measured using the Monte Carlo simulation method. Discounted stock purchases under our ESPP are valued on the first date of the offering period using the Black-Scholes option-pricing model to compute the fair value of the lookback provision plus the purchase discount. For awards that vest based on service conditions and market conditions, we use the straight-line method to recognize compensation expense over the respective service period. For awards that contain performance conditions, we determine the appropriate amount to expense based on the anticipated achievement of performance targets, which requires judgment, including forecasting the achievement of future specified targets. At the date performance conditions are determined to be probable of achievement, we record a cumulative expense catch-up, with remaining expense amortized over the remaining service period. Throughout the performance period, we re-assess the estimated performance and update the number of performance-based awards that we believe will ultimately vest. Discounted stock purchases under our ESPP are recognized over the offering period. ​ Compensation expense related to modified awards is measured based on the fair value for the awards as of the modification date. Any incremental compensation expense arising from the excess of the fair value of the awards on the modification date compared to the fair value of the awards immediately before the modification date is recognized at the modification date or ratably over the requisite remaining service period, as appropriate. While the assumptions used to calculate and account for share-based compensation awards represent management’s best estimates, these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if revisions are made to our underlying assumptions and estimates, our share-based compensation expense could vary significantly from period to period. Income Taxes We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse. We provide a valuation allowance when it is more likely than not that deferred tax assets will not be realized. We maintain a valuation allowance on the majority of our net operating losses and other deferred tax assets. Accordingly, we have not reported any tax benefit relating to the remaining net operating loss carryforwards and income tax credit carryforwards that are available for utilization in future periods. Our U.S. federal net operating loss carryforwards totaled approximately $1.1 billion as of December 31, 2020. On a periodic basis, we reassess the valuation allowance on our deferred income tax assets, weighing positive and negative evidence to assess the recoverability of the deferred tax assets. In 2020, we reassessed the valuation allowance and considered negative evidence, including our cumulative losses in recent years and our plan to build our innovative GI pipeline through potential acquisition or in-licensing externally developed products, and positive evidence, including our income during the year ended December 31, 2020 and our projections of future income. After assessing both the negative evidence and the positive evidence, we concluded that we should continue to maintain the valuation allowance on net deferred tax assets as of December 31, 2020 given the significance of the weight of the negative evidence. Based on our recent financial performance and our future projections, we could record a reversal of all, or a portion of the valuation allowance associated with U.S. deferred tax assets in future periods. However, any such change is subject to actual performance and other considerations that may present positive or negative evidence at the time of the assessment. Our total deferred tax asset balance subject to the valuation allowance was approximately $395.0 million as of December 31, 2020. Significant judgment is required in making these assessments to maintain or reverse our valuation allowances and, to the extent our future expectations change we would have to assess the recoverability of these deferred tax assets at that time. If we determine that our net deferred tax assets are realizable in a future period, we would record material changes to income tax expense or benefit in that period. 63 Table of Contents We record uncertain tax positions on the basis of a two-step process. First, we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position. Second, for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the relevant tax authority. Significant judgment is required in evaluating whether our tax positions meet this two-step process. The nature of the uncertain tax positions is often very complex and subject to change, and the amounts at issue can be substantial. We re-evaluate these uncertain tax positions on a quarterly basis based on a number of factors including, but not limited to, changes in facts or circumstances, changes in tax law, and effectively settled issues under audit and new audit activity. Any change in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. Results of Operations The following discussion summarizes the key factors our management believes are necessary for an understanding of our consolidated financial statements. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ 2020 ​ 2019 ​ ​ ​ (in thousands) Revenues: ​ ​ ​ ​ ​ ​ ​ Collaborative arrangements revenue $ 381,545 $ 379,652 Sale of active pharmaceutical ingredient ​ ​ 7,978 ​ ​ 48,761 ​ Total revenues ​ ​ 389,523 ​ ​ 428,413 ​ Cost and expenses: ​ ​ ​ ​ ​ ​ ​ Cost of revenues ​ 3,136 ​ 23,875 ​ Settlement on non-cancellable purchase commitments ​ — ​ (3,530) ​ Research and development ​ 88,062 ​ 115,044 ​ Selling, general and administrative ​ 140,003 ​ 172,450 ​ Amortization of acquired intangible assets ​ ​ — ​ ​ — ​ Gain on fair value remeasurement of contingent consideration ​ ​ — ​ ​ — ​ Gain on lease modification ​ ​ — ​ ​ (3,169) ​ Restructuring expenses ​ ​ 15,382 ​ ​ 3,620 ​ Impairment of intangible assets ​ ​ — ​ ​ — ​ Total cost and expenses ​ 246,583 ​ 308,290 ​ Income from operations ​ 142,940 ​ 120,123 ​ Other (expense) income: ​ ​ ​ ​ ​ ​ ​ Interest expense ​ (29,478) ​ (36,602) ​ Interest and investment income ​ 1,504 ​ 2,862 ​ Gain (loss) on derivatives ​ (6,129) ​ 3,023 ​ Loss on extinguishment of debt ​ ​ — ​ ​ (30,977) ​ Other income ​ 24 ​ 514 ​ Other expense, net ​ (34,079) ​ (61,180) ​ Income from continuing operations, before income tax expense ​ ​ 108,861 ​ ​ 58,943 ​ Income tax expense ​ ​ 2,685 ​ ​ — ​ Income from continuing operations ​ ​ 106,176 ​ ​ 58,943 ​ Loss from discontinued operations, net of income taxes ​ ​ — ​ ​ (37,438) ​ Net income ​ $ 106,176 ​ $ 21,505 ​ ​ 64 Table of Contents Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 Revenues ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ ​ ​ ​ ​ ​ December 31, ​ Change ​ ​ 2020 ​ 2019 ​ $ ​ % ​ ​ (dollars in thousands) Revenues: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Collaborative arrangements revenue $ 381,545 $ 379,652 $ 1,893 0 % Sale of active pharmaceutical ingredient ​ ​ 7,978 ​ ​ 48,761 ​ ​ (40,783) ​ (84) % Total revenues ​ $ 389,523 ​ $ 428,413 ​ $ (38,890) ​ (9) % ​ Collaborative arrangements revenue. The increase in revenue from collaborative arrangements of approximately $1.9 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily related to an approximately $43.2 million increase in our share of the net profits from the sale of LINZESS in the U.S. driven by increased prescription demand and lower collaboration-related selling expenses due to the COVID-19 pandemic and an approximately $3.6 million increase in linaclotide royalty revenue. These increases were offset by an approximately $32.4 million decrease in revenue related to non-contingent payments pursuant to the Amended AstraZeneca Agreement and recognized in 2019; an approximately $10.0 million decrease in revenue recognized related to a one-time up-front payment received in 2019 in connection with the amendment and restatement of our license agreement with Astellas for linaclotide in Japan, or the Amended Astellas License Agreement; and an approximately $2.2 million decrease in co-promotion revenue. Sale of active pharmaceutical ingredient. The decrease in sale of API of approximately $40.8 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily related to a decrease of approximately $43.8 million in sales of API to Astellas in Japan, resulting from the transition of manufacturing responsibilities to Astellas in connection with the Amended Astellas License Agreement executed in August 2019. This decrease was partially offset by an approximately $2.6 million increase in sales of API, finished drug product, and finished goods to AstraZeneca in China. Substantively all sales of API, finished drug product, and finished goods to AstraZeneca in China occurred during the three months ended March 31, 2020 in connection with the transition of manufacturing responsibilities to AstraZeneca under the terms of the Amended AstraZeneca Agreement. Cost and Expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ ​ ​ ​ ​ ​ December 31, ​ Change ​ 2020 2019 $ % ​ ​ (dollars in thousands) Cost and expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of revenues ​ $ 3,136 ​ $ 23,875 ​ $ (20,739) ​ (87) % Settlement on non-cancellable purchase commitments ​ — ​ (3,530) ​ 3,530 ​ (100) % Research and development ​ 88,062 ​ 115,044 ​ (26,982) ​ (23) % Selling, general and administrative ​ 140,003 ​ 172,450 ​ (32,447) ​ (19) % Gain on lease modification ​ ​ — ​ ​ (3,169) ​ ​ 3,169 ​ (100) % Restructuring expenses ​ ​ 15,382 ​ ​ 3,620 ​ ​ 11,762 ​ 325 % Total cost and expenses ​ $ 246,583 ​ $ 308,290 ​ $ (61,707) ​ (20) % Cost of revenues. The decrease of approximately $20.7 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 was comprised of a decrease in cost of revenues of approximately $20.1 million related to the sale of API to Astellas in Japan and a decrease in cost of revenues of approximately $0.5 million related to the sale of API, finished drug product, and finished goods to AstraZeneca in China, concurrent with the decrease in revenue from the sale of API to Astellas and AstraZeneca, respectively. Settlement on non-cancellable purchase commitments. The settlement of certain commercial supply purchase commitments occurred during the year ended December 31, 2019, which resulted in an overall gain. In connection with the Amended AstraZeneca Agreement, certain of our previously written-down linaclotide excess purchase commitments were assumed by AstraZeneca and resulted in a settlement of approximately $2.5 million. Additionally, certain 65 Table of Contents previously written-down linaclotide purchase commitments were satisfied through API purchases at pricing terms favorable to the pricing estimates at the time of the write-down, resulting in a gain of approximately $0.7 million upon purchase. ​ Research and development. The decrease in research and development expense of approximately $27.0 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily related to a decrease of approximately $14.4 million in external development costs related to IW-3718; a decrease of approximately $6.1 million in operating expenses primarily related to facilities and other operating costs; a decrease of approximately $3.4 million in compensation, benefits, and other employee-related expenses; and a decrease of approximately $2.7 million related to linaclotide development. ​ Selling, general and administrative. Selling, general and administrative expenses decreased approximately $32.4 million for the year ended December 31, 2020 compared to the year ended December 31, 2019. The decrease in selling, general and administrative expense included an approximately $20.5 million decrease in costs associated with the Separation, which was completed on April 1, 2019, and an approximately $12.1 million decrease in non-Separation costs. The approximately $20.5 million decrease in Separation costs includes an approximately $9.7 million decrease in facilities costs primarily due to our change in headquarters location; an approximately $7.8 million decrease in compensation, benefits, and other employee-related expenses; an approximately $2.0 million decrease in consulting and investment banking costs; and an approximately $1.0 million decrease in legal costs. The approximately $12.1 million decrease in non-Separation costs includes an approximately $4.0 million decrease in legal costs; an approximately $3.3 million decrease in facilities costs primarily due to our change in headquarters location; an approximately $2.6 million decrease in travel costs as a result of the COVID-19 pandemic; an approximately $1.4 million decrease in post-marketing requirements for lesinurad as a result of our termination of the license agreement with AstraZeneca for the development, manufacture, and commercialization of products in the U.S. containing lesinurad as an active ingredient; an approximately $1.0 million decrease in collaboration costs pursuant to the Amended AstraZeneca Agreement; and an approximately $0.7 million decrease in compensation, benefits, and other employee-related expenses. These decreases in non-Separation costs were partially offset by an approximately $1.7 million increase in consulting costs. ​ Gain on lease modification . The gain on lease modification of approximately $3.2 million for the year ended December 31, 2019 was due to the modification of our prior headquarters lease in connection with the Separation. ​ Restructuring expenses . The increase in restructuring expenses of approximately $11.8 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 related to the workforce reduction substantially completed during the fourth quarter of 2020 in connection with our decision to discontinue IW-3718 development. The Company recorded restructuring expenses of approximately $15.4 during the year ended December 31, 2020 in connection with this workforce reduction. During the year ended December 31, 2019, the Company recorded approximately $3.6 million in connection with a workforce reduction that was substantially completed during the first quarter of 2019. ​ Other (Expense) Income, Net ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ ​ ​ ​ ​ ​ December 31, ​ Change ​ 2020 2019 $ % ​ ​ (dollars in thousands) Other (expense) income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest expense ​ $ (29,478) ​ $ (36,602) ​ $ 7,124 ​ (19) % Interest and investment income ​ 1,504 ​ 2,862 ​ (1,358) ​ (47) % Gain (loss) on derivatives ​ (6,129) ​ 3,023 ​ (9,152) ​ (303) % Loss on extinguishment of debt ​ ​ — ​ ​ (30,977) ​ ​ 30,977 ​ (100) % Other income ​ 24 ​ 514 ​ (490) ​ (95) % Total other expense, net ​ $ (34,079) ​ $ (61,180) ​ $ 27,101 ​ (44) % ​ Interest expense. Interest expense decreased by approximately $7.1 million during the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to a decrease of approximately $10.4 million in interest expense related to the 2022 Convertible Notes that were partially repurchased in August 2019 and a decrease of approximately $9.0 million in interest expense associated with the 2026 Notes that were fully redeemed in September 66 Table of Contents 2019, partially offset by an increase of approximately $6.2 million and $6.1 million in interest expense associated with the 2024 Convertible Notes and the 2026 Convertible Notes, respectively. ​ Interest and investment income. Interest and investment income decreased by approximately $1.4 million in the year ended December 31, 2020 compared to the year ended December 31, 2019, resulting primarily from a decrease in investment income of approximately $2.1 million due to lower investment interest rates, partially offset by an increase in interest income of approximately $0.8 million related to the significant financing component of long-term receivables. ​ Gain (loss) on derivatives. For the year ended December 31, 2020, we recorded a loss on derivatives of approximately $6.1 million resulting from an approximately $18.3 million decrease in the fair value of the Convertible Note Hedges and an approximately $12.2 million decrease in the fair value of the Note Hedge Warrants. For the year ended December 31, 2019, we recorded a gain on derivatives of approximately $3.0 million resulting from an approximately $29.2 million increase in the fair value of the Convertible Note Hedges and an approximately $22.6 million increase in the fair value of the Note Hedge Warrants, partially offset by an approximately $3.6 million loss recognized upon the partial termination of the Convertible Note Hedges and the Note Hedge Warrants associated with the partial repurchase of the 2022 Convertible Notes. ​ Loss on extinguishment of debt. The loss on extinguishment of debt was approximately $31.0 million during the year ended December 31, 2019 and pertained to the write-off of unamortized debt issuance costs and debt discount related to the partial repurchase of the 2022 Convertible Notes and the prepayment premium and write-off of the remaining unamortized debt issuance costs and debt discount on the 2026 Notes as part of the redemption of all of the outstanding principal amount of the 2026 Notes. Other income. For the year ended December 31, 2020 compared to the year ended December 31, 2019, other income decreased by approximately $0.5 million, primarily related to a transition service agreement with Cyclerion that terminated during the first quarter of 2020. ​ Income taxes. During the year ended December 31, 2020, we recorded income tax expense of approximately $2.7 million, which was primarily payable to California resulting from a change in California tax that temporarily disallows the use of net operating losses. We did not record any income tax expense for the year ended December 31, 2019. ​ Net loss from discontinued operations. There was approximately $37.4 million of net loss from discontinued operations for the year ended December 31, 2019. For additional information on discontinued operations, see Note 3, Cyclerion Separation , to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. ​ Liquidity and Capital Resources Until the year ended December 31, 2019, we had incurred losses since our inception in 1998 and we had an accumulated deficit of approximately $1.5 billion as of December 31, 2020. We have financed our operations to date primarily through both the private sale of our preferred stock and the public sale of our common stock, debt financings, and cash generated from our operations. As of December 31, 2020, our debt is comprised of approximately $520.7 million aggregate principal amount of convertible notes, due at various dates between 2022 and 2026. Refer to Note 11, Notes Payable, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for information related to our debt obligations. At December 31, 2020, we had approximately $362.6 million of unrestricted cash and cash equivalents. Our cash equivalents include amounts held in money market funds and repurchase agreements. We invest cash in excess of immediate requirements in accordance with our investment policy, which limits the amounts we may invest in certain types of investments and requires all investments held by us to be at least AA- rated, with a remaining maturity when purchased of less than twenty-four months, so as to primarily achieve liquidity and capital preservation. During the year ended December 31, 2020, our balances of cash and cash equivalents increased by approximately $185.5 million. Net cash provided by operating activities totaled approximately $168.8 million as a result of profitable operations driven primarily by the sales of LINZESS in the U.S. Additionally, cash provided by financing activities totaled approximately $18.5 million as a result of proceeds from the exercise of stock options and purchases pursuant to our ESPP. These cash inflows were partially offset by approximately $1.8 million in capital expenditures. 67 Table of Contents We may from time to time seek to retire, redeem or repurchase all or part of our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise. Such repurchases, redemptions or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material. The COVID-19 pandemic is disrupting the U.S. healthcare system, as well as global capital markets. There continues to be significant uncertainty surrounding the extent and duration of the impact of the COVID-19 pandemic on our business and operations. The COVID-19 pandemic could have a material adverse impact on our financial condition and results of operations in the future, including by impacting our ability to obtain financing. The impact of COVID-19 on our business and financial condition is more fully described below in Trends and Uncertainties. Cash Flows From Operating Activities Net cash provided by operating activities totaled approximately $168.8 million for the year ended December 31, 2020. The cash provided by operations primarily related to cash flows from our net income of approximately $106.2 million, net of non-cash items of approximately $63.6 million. The non-cash items are primarily comprised of approximately $31.2 million of share-based compensation expense, approximately $22.3 million of non-cash interest expense, approximately $6.1 million loss on derivatives, and approximately $3.6 million of depreciation and amortization of property and equipment. Net cash provided by operating activities totaled approximately $10.7 million for the year ended December 31, 2019, of which approximately $0.6 million related to cash used in continuing operations and approximately $11.3 million related to cash provided by discontinued operations. The use of approximately $0.6 million in cash for continuing operations primarily related to cash flows from our net income of approximately $21.5 million, net of non-cash items of approximately $77.8 million, partially offset by changes in assets and liabilities of approximately $100.0 million, primarily resulting from an increase in accounts receivable and related party accounts receivable of approximately $68.9 million and a decrease in accounts payable and related party accounts payable and accrued expenses of approximately $32.7 million. Non-cash items included approximately $31.3 million in share-based compensation expense, approximately $31.0 million of loss on extinguishment of debt, approximately $19.6 million in non-cash interest expense, approximately $5.6 million in depreciation and amortization expense of property and equipment, partially offset by approximately $3.5 million related to the settlement on non-cancellable purchase commitments, approximately $3.2 million gain on lease modification, and an approximate $3.0 million net increase due to the change in fair value of the Convertible Note Hedges and Note Hedge Warrants. Cash Flows From Investing Activities Cash used in investing activities for the year ended December 31, 2020 totaled approximately $1.8 million and pertained to the purchase of property and equipment. Cash used in investing activities for the year ended December 31, 2019 totaled approximately $11.1 million, of which approximately $6.9 million related to cash used in continuing operations and approximately $4.2 million related to cash used in discontinued operations. Cash used in investing activities pertained primarily to the purchase of approximately $7.2 million of property and equipment, primarily laboratory space and leasehold improvements on the second floor of our prior headquarters purchased prior to the Separation and transferred to Cyclerion, and leasehold improvements, equipment, and furniture at our current headquarters. Cash Flows From Financing Activities Cash provided by financing activities for the year ended December 31, 2020 totaled approximately $18.5 million and resulted from proceeds from the exercise of stock options and the issuance of shares under our ESPP. Cash used in financing activities for the year ended December 31, 2019 totaled approximately $1.2 million and resulted from approximately $227.3 million in payments to repurchase $215.0 million aggregate principal amount of the 2022 Convertible Notes. Financing activities also included principal and prepayment premium payments totaling $156.4 million to fully redeem the outstanding principal balance of the 2026 Notes. We also entered into capped call transactions for approximately $25.2 million in connection with the 2024 Convertible Notes and 2026 Convertible Notes, or the Capped Calls. These cash outflows were partially offset by approximately $391.0 million in net proceeds 68 Table of Contents from the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes, after deducting fees and expenses of approximately $9.0 million, approximately $13.6 million in proceeds from the exercise of stock options and the issuance of shares under our ESPP, and approximately $3.2 million in proceeds from the partial termination of the Convertible Notes Hedges and Note Hedge Warrants. Funding Requirements ​ We began commercializing LINZESS in the U.S. with our collaboration partner, AbbVie, in the fourth quarter of 2012, and we currently derive a significant portion of our revenue from this collaboration. In addition, we are deploying significant resources to fulfill U.S. FDA requirements for linaclotide. Our goal is to generate and maintain positive cash flows, driven by increased revenue generated through sales of LINZESS and other commercial activities and financial discipline. ​ Under our collaboration with AbbVie for North America, total net sales of LINZESS in the U.S., as recorded by AbbVie, are reduced by commercial costs incurred by each party, and the resulting amount is shared equally between us and AbbVie. Additionally, we receive royalties from AbbVie based on sales of linaclotide in its licensed territories outside of the U.S. We believe revenues from our LINZESS partnership for the U.S. with AbbVie will continue to constitute a significant portion of our total revenue for the foreseeable future and we cannot be certain that such revenues, as well as the revenues from our other commercial activities, will continue to enable us to generate positive cash flows, or to do so in the timeframes we expect. We also anticipate that we will continue to incur substantial expenses for the next several years as we further develop and commercialize linaclotide in the U.S., develop and commercialize other products, and invest in building our pipeline through internal or external opportunities. We believe that our cash on hand as of December 31, 2020 will be sufficient to meet our projected operating needs at least through the next twelve months from the issuance of these financial statements. ​ Our forecast of the period of time through which our financial resources will be adequate to support our operations, including the underlying estimates regarding the costs to develop, obtain regulatory approval for, and commercialize linaclotide in the U.S., as well as our expectations regarding revenue from Astellas for Japan and AstraZeneca for China (including Hong Kong and Macau), and our goal to generate and maintain positive cash flows, are forward-looking statements that involve risks and uncertainties. Our actual results could vary materially and negatively from these and other forward-looking statements as a result of a number of factors, including the factors discussed in the “Risk Factors” section of this Annual Report on Form 10-K. We have based our estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. ​ Due to the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate precisely the amounts of capital outlays and operating expenditures necessary to develop, obtain regulatory approval for, and commercialize linaclotide and our other product candidates, in each case, for all of the markets, indications, populations and formulations for which we believe each is suited. Our funding requirements will depend on many factors, including, but not limited to, the following: ​ ● the revenue generated by sales of LINZESS and CONSTELLA and from any other sources; ​ ● the rate of progress and cost of our commercialization activities, including the expense we incur in marketing and selling LINZESS in the U.S. and from any other sources; ​ ● the success of our third-party manufacturing activities; ​ ● the time and costs involved in developing, and obtaining regulatory approvals for, our product candidates, as well as the timing and cost of any post-approval development and regulatory requirements; ​ ● the success of our research and development efforts; ​ ● the emergence of competing or complementary products; ​ ● the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; ​ 69 Table of Contents ● the terms and timing of any additional collaborative, licensing or other arrangements that we may establish, including royalties or other payments due or payable under such agreements; and ​ ● the acquisition of businesses, products and technologies and the impact of other strategic transactions, as well as the cost and timing of evaluating, acquiring, and, if completed, integrating into our business operations any such assets. ​ Financing Strategy ​ We may, from time to time, consider additional funding through a combination of new collaborative arrangements, strategic alliances, and additional equity and debt financings or from other sources. We will continue to manage our capital structure and to consider all financing opportunities, whenever they may occur, that could strengthen our long-term liquidity profile. Any such capital transactions may or may not be similar to transactions in which we have engaged in the past. There can be no assurance that any such financing opportunities will also be available on acceptable terms, if at all. ​ Contractual Commitments and Obligations ​ Lease Obligations The following table summarizes our lease obligations at December 31, 2020 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Payments Due by Period ​ ​ ​ ​ ​ Less Than ​ ​ ​ ​ ​ ​ ​ More Than ​ Total 1 Year 1 ‑ 3 Years 3 ‑ 5 Years 5 Years ​ ​ ​ Operating lease obligations ​ $ 30,493 ​ $ 3,128 ​ $ 6,194 ​ $ 6,315 ​ $ 14,856 ​ ​ Our commitments for operating leases relate to our office space in Boston, Massachusetts and our data storage space in Boston, Massachusetts. Notes Payable In June 2015, we issued approximately $335.7 million in aggregate principal amount of the 2022 Convertible Notes. The 2022 Convertible Notes are governed by an indenture between us and U.S. Bank National Association, as trustee. The 2022 Convertible Notes are senior unsecured obligations and bear cash interest at a rate of 2.25% per year, payable on June 15 and December 15 of each year, which began on December 15, 2015. The 2022 Convertible Notes will mature on June 15, 2022, unless earlier converted or repurchased. To minimize the impact of potential dilution to our Class A common stockholders upon conversion of the 2022 Convertible Notes, we entered into the Convertible Note Hedges and Note Hedge Warrants. In August 2019, we repurchased $215.0 million aggregate principal amount of the 2022 Convertible Notes, and we partially terminated the proportionate portion of the Convertible Note Hedges and Note Hedge Warrants we entered into in connection with the issuance of the 2022 Convertible Notes. ​ In August 2019, we issued $200.0 million in aggregate principal amount of the 2024 Convertible Notes and $200.0 million in aggregate principal amount of the 2026 Convertible Notes. The 2024 Convertible Notes and 2026 Convertible Notes are governed by separate indentures between us and U.S. Bank National Association, as trustee. The 2024 Convertible Notes and the 2026 Convertible Notes are senior unsecured obligations. The 2024 Convertible Notes bear cash interest at the annual rate of 0.75% and the 2026 Convertible Notes bear cash interest at the annual rate of 1.50%, each payable on June 15 and December 15 of each year, which began on December 15, 2019. The 2024 Convertible Notes will mature on June 15, 2024 and the 2026 Convertible Notes will mature on June 15, 2026, unless earlier converted or repurchased. To minimize the impact of potential dilution to our Class A common stockholders upon conversion of the 2024 Convertible Notes and the 2026 Convertible Notes, we entered into separate Capped Calls in connection with the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes. We paid the counterparties approximately $25.2 million to enter into the Capped Calls. ​ 70 Table of Contents The following table summarizes our obligations under our convertible senior notes at December 31, 2020 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Payments Due by Period ​ ​ ​ ​ ​ Less Than ​ ​ ​ ​ ​ ​ ​ More Than ​ Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years ​ ​ ​ 2022 Convertible Notes (including interest) ​ 124,773 ​ ​ 2,716 ​ ​ 122,057 ​ ​ — ​ — ​ 2024 Convertible Notes (including interest) ​ 205,250 ​ ​ 1,500 ​ ​ 3,000 ​ ​ 200,750 ​ — ​ 2026 Convertible Notes (including interest) ​ 216,500 ​ ​ 3,000 ​ ​ 6,000 ​ ​ 6,000 ​ 201,500 ​ Total payments on convertible senior notes ​ $ 546,523 ​ $ 7,216 ​ $ 131,057 ​ $ 206,750 ​ $ 201,500 ​ ​ Our obligations under our convertible senior notes, as well as potential financial effects from the Convertible Note Hedges, Note Hedge Warrants and Capped Calls are more fully described in Note 11, Notes Payable , in the accompanying notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K. Tax-related Obligations We exclude liabilities or obligations pertaining to uncertain tax positions from our summary of contractual commitments and obligations as we cannot make a reliable estimate of the period of cash settlement with the respective taxing authorities. As of December 31, 2020, we have approximately $68.1 million of uncertain tax positions, and we cannot reasonably estimate the potential adjustment to our net operating loss and credit carryforwards. These uncertain tax positions are more fully described in Note 15, Income Taxes , in the accompanying notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. Off-Balance Sheet Arrangements We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships. We enter into guarantees in the ordinary course of business related to the guarantee of our own performance and the performance of our subsidiaries. New Accounting Pronouncements For a discussion of recent accounting pronouncements, refer to Note 2, Summary of Significant Accounting Policies , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. We did not otherwise adopt any new accounting pronouncements during the fiscal year ended December 31, 2020 that had a material effect on our consolidated financial statements included in this report. Trends and Uncertainties ​ Impact of the COVID-19 Pandemic ​ In December 2019, COVID-19 emerged in Wuhan, Hubei Province, China. On March 11, 2020, the World Health Organization declared a global pandemic and recommended containment and mitigation measures worldwide. On March 13, 2020, former U.S. President Donald Trump announced a national emergency relating to the pandemic. Government authorities in the U.S. have recommended or imposed various containment and mitigation measures on large portions of the population , and similar measures have also been taken in many other countries around the world. Both the outbreak of COVID-19 and the containment and mitigation efforts have had a serious adverse impact on the U.S. economy and the economies of other countries around the world, the severity and duration of which remain uncertain. ​ 71 Table of Contents The COVID-19 pandemic, including containment and mitigation measures has impacted, and is expected to continue to impact, our business and operations in a number of ways, including: ​ ● Day to Day Operations Most of our customer-facing employees have resumed in-person work practices; however, they are limited in the number of in-person details they are able to conduct due to containment and mitigation measures related to the COVID-19 pandemic. We monitor the impact of the COVID-19 pandemic in the territories where our customer-facing employees have resumed in-person work practices, and in some cases, we have paused the in-person work practices as a result of the impact of the COVID-19 pandemic in those territories. Customer-facing employees who are not providing in-person services continue to support their customers virtually through telephone and web-based technologies. Headquarters employees have the option to work remotely through mid-2021. ​ ● Collaboration Agreement for North America with AbbVie We and our partner, AbbVie, are focused on maintaining the availability of LINZESS for adult men and women suffering from IBS-C or CIC. We include our and AbbVie’s collaboration-related selling, general, and administrative expenses, including expenses from in-person and remote selling activities, in the calculation of net profits from the sale of LINZESS in the U.S. and present net payments to us as collaborative arrangements revenue. In the fourth quarter of 2020, we and AbbVie agreed to include costs incurred throughout 2020 associated with remote selling activities performed by our and AbbVie’s customer-facing employees in collaboration-related selling, general and administrative expenses in our calculation of net profits from the sale of LINZESS in the U.S. As such, we have experienced fluctuations in our settlement payments based on the ratio of selling, general and administrative expenses incurred by each party during the year ended December 31, 2020, and may continue to experience such fluctuations in the future. The COVID-19 pandemic may negatively impact future net sales of LINZESS in the U.S., including as a result of reduced and/or restricted in-person promotion or potential changes in patient access to healthcare (including due to unemployment or modifications in insurance coverage) and payor reimbursement levels. ​ ● Manufacturing and Supply Chain We and AbbVie continue to monitor the supply and availability of LINZESS for adult men and women suffering from IBS-C or CIC in the U.S. As of the date of this Annual Report on Form 10-K, the COVID-19 pandemic has not caused significant disruptions to manufacturing operations or supply of LINZESS in the U.S. or of clinical trial material for our ongoing trials. ​ ● Clinical Development of GI Pipeline The COVID-19 pandemic impacted the development of our pipeline during the year ended December 31, 2020. For example, prior to our decision to discontinue the development of IW-3718, the COVID-19 pandemic impacted enrollment in our Phase III clinical trials of IW-3718 for the treatment of refractory GERD, resulting in lower than expected research and development expenses relating to IW-3718 clinical trials during the year ended December 31, 2020. ​ The COVID-19 pandemic resulted in changes to our business and operations which impacted our financial condition and results of operations for the year ended December 31, 2020, including as described above. During the year ended December 31, 2020, we incurred a total of approximately $2.4 million of incremental expenses, primarily related to personal protective equipment for our field-based employees and external costs of strategy and operations analysis related to the impacts of the COVID-19 pandemic. ​ There continue to be significant uncertainties surrounding the extent and duration of the impact of the COVID-19 pandemic on our business and operations and we expect to incur additional expenses in future periods related to the impact of the COVID-19 pandemic on our business and operations. We continue to evaluate the impact of the COVID-19 pandemic on our operating results and financial condition. The COVID-19 pandemic may have a material adverse impact on our business and financial condition in the future. ​ 72 Table of Contents