What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-05 compared with 2021-05-06 · 71 added, 55 removed, 240 unchanged (34% of the section changed)

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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.

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.

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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.

On May 26, 2021, the Company and AbbVie entered into a settlement agreement with a generic drug manufacturer, Teva Pharmaceuticals USA, Inc.

Pursuant to the terms of the settlement, the Company and AbbVie will grant Teva a license to market a generic version of 72 mcg LINZESS beginning March 31, 2029 (subject to FDA approval), unless certain limited circumstances, customary for settlement agreements of this nature, occur.

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 $21.5 million, we incurred net losses in each year since our inception in 1998.

For the three months ended March 31, 2021, we recorded net income of $39.9 million.

As of March 31, 2021, we had an accumulated deficit of approximately $1.4 billion.

Prior to the year ended December 31, 2019, we incurred net losses in each year since our inception in 1998.

For the three and six months ended June 30, 2021, we recorded net income of $391.3 million and $431.2 million, respectively.

As of June 30, 2021, we had an accumulated deficit of approximately $1.0 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.

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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, including interstitial cystitis/bladder pain syndrome and endometriosis, 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 three months ended March 31, 2021 and 2020, respectively (in thousands).

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.

The following table sets forth our research and development expenses related to our product pipeline for the three and six months ended June 30, 2021 and 2020, respectively (in thousands).

These expenses relate primarily to 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 and certain other costs directly to programs.

Three Months Ended

Six Months Ended

Linaclotide (1)

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(1) Includes linaclotide in all indications, populations and formulations.

Since 2004, the year we began tracking costs by program, we have incurred $532.6 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.

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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 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.

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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 year-to-date pre-tax income, plus adjustments for significant unusual or infrequently occurring items.

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.

The difference between the recorded benefit for income taxes and the income tax provision

based on U.S.

statutory tax rates was primarily attributable to the discrete income tax benefit related to the release of the valuation allowance on the majority of our tax attributes and other deferred tax assets.

Critical Accounting Policies and Estimates

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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 assets and liabilities at the date of the condensed consolidated financial statements, and the 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.

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 months ended March 31, 2021, 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, 2020, which was filed with the Securities and Exchange Commission on February 17, 2021, or the 2020 Annual Report on Form 10-K.

During the three and six months ended June 30, 2021, 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, 2020, which was filed with the Securities and Exchange Commission on February 17, 2021, or the 2020 Annual Report on Form 10-K.

Results of Operations

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Three Months Ended

Six Months Ended

(in thousands)

Collaborative arrangements revenue

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Interest and investment income

Gain (loss) on derivatives

Loss on derivatives

Other expense, net

Income before income taxes

Income tax expense

Three months ended March 31, 2021 compared to three months ended March 31, 2020

Income tax benefit

Three and six months ended June 30, 2021 compared to three and six months ended June 30, 2020

Three Months Ended

Six Months Ended

(dollars in thousands)

Collaborative arrangements revenue

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Collaborative Arrangements Revenue.

The increase in revenue from collaborative arrangements of $14.2 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily related to a $14.8 million increase in our share of the net profits from the sale of LINZESS in the U.S.

The increase in revenue from collaborative arrangements of $14.0 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily related to a $13.8 million increase in our share of the net profits from the sale of LINZESS in the U.S.

driven by increased prescription demand and inventory fluctuations, partially offset by decreased net price.

The increase in revenue from collaborative arrangements of $28.2 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily related to a $28.6 million increase in our share of the net profits from the sale of LINZESS in the U.S.

driven by increased prescription demand and inventory fluctuations, partially offset by decreased net price.

Sale of Active Pharmaceutical Ingredient.

The decrease in sale of API of $5.3 million for the three months ended March 31, 2021, compared to the three months ended March 31, 2020, was primarily due to a $5.5 million

decrease in sales of API, finished drug product, and finished goods to AstraZeneca in China in connection with the Amended AstraZeneca Agreement, under which commercial supply obligations transitioned to AstraZeneca in the second quarter of 2020.

The increase in sale of API of $0.6 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily due to sales of reference standard material to AstraZeneca in China in connection with the Amended AstraZeneca Agreement.

The decrease in sale of API of $4.7 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily due to a decrease in sales of API, finished drug product, and finished goods to

AstraZeneca in China in connection with the Amended AstraZeneca Agreement, under which commercial supply obligations transitioned to AstraZeneca in the second quarter of 2020.

Cost and Expenses

Three Months Ended

Six Months Ended

(dollars in thousands)

Cost and expenses:

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Cost of Revenues.

The decrease of $2.2 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was related to a decrease in sales of API, finished drug product, and finished goods to AstraZeneca in China in connection with the Amended AstraZeneca Agreement.

The decrease of $2.2 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was related to a decrease in sales of API, finished drug product, and finished goods to AstraZeneca in China in connection with the Amended AstraZeneca Agreement.

Research and Development Expense.

The decrease in research and development expense of $12.5 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily related to a decrease of $11.0 million in external development costs related to IW-3718;

a decrease of $0.8 million related to linaclotide development;

and a decrease of $0.7 million in compensation, benefits, and other employee-related expenses.

These decreases were partially offset by an increase of $0.7 million in costs related to our early research and development efforts.

The decrease in research and development expense of $9.9 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily related to a decrease of $8.2 million in external development costs related to IW-3718 and a decrease of $1.5 million in compensation, benefits, and other employee-related expenses.

The decrease in research and development expense of $22.5 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily related to a decrease of $19.2 million in external development costs related to IW-3718 and a decrease of $2.2 million in compensation, benefits, and other employee-related expenses.

Selling, General and Administrative Expense.

Selling, general and administrative expenses decreased by $8.8 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to a $5.3 million decrease in compensation, benefits, and other employee-related expenses;

Selling, general and administrative expenses decreased by $7.6 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily due to a $5.2 million decrease in compensation, benefits, and other employee-related expenses and a $2.6 million decrease in professional fees for legal, consulting and other services.

Selling, general and administrative expenses decreased by $16.4 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily due to a $10.6 million decrease in compensation, benefits, and other employee-related expenses;

a $2.9 million decrease in decrease in professional fees for legal, consulting and other services;

a $1.2 million decrease in sales and marketing activities;

and a $1.0 million decrease in travel costs.

and a $1.0 million decrease in travel.

Restructuring Expe nses.

Restructuring expenses of $0.3 million for the three months ended March 31, 2021 pertained to the workforce reduction related to the discontinuation of IW-3718 .

Restructuring expenses for the three and six months ended June 30, 2021, related to costs associated with the workforce reduction resulting from the discontinuation of IW-3718 .

Other (Expense) Income, Net

Three Months Ended

Six Months Ended

(dollars in thousands)

Other (expense) income:

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Interest and investment income

Gain (loss) on derivatives

Loss on derivatives

Total other expense, net

Interest Expense.

Interest expense increased by $0.4 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to an increase in non-cash interest expense associated with the Senior Convertible Notes.

Interest expense increased by $0.4 million during the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to an increase in non-cash interest expense associated with the Senior Convertible Notes.

Interest expense increased by $0.8 million during the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to an increase in non-cash interest expense associated with the Senior Convertible Notes.

Interest and Investment Income.

Interest and investment income decreased by $0.6 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020, resulting primarily from a decrease in investment interest rates.

Gain (Loss) on Derivatives.

For the three months ended March 31, 2021, we recorded a gain on derivatives of $2.4 million resulting from a $1.7 million decrease in the fair value of the Convertible Note Hedges and a $4.1 million decrease in the fair value of the Note Hedge Warrants.

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

Interest and investment income decreased by an insignificant amount in the three months ended June 30, 2021 compared to the three months ended June 30, 2020, resulting primarily from a decrease in investment interest rates.

Interest and investment income decreased by $0.7 million during the six months ended June 30, 2021 compared to the six months ended June 30, 2020, resulting primarily from a decrease in investment interest rates.

Loss on Derivatives.

For the three months ended June 30, 2021, we recorded a loss on derivatives of $3.2 million resulting from an insignificant decrease in the fair value of the Convertible Note Hedges and a $3.1 million increase in the fair value of the Note Hedge Warrants.

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

For the six months ended June 30, 2021, we recorded a loss on derivatives of $0.8 million resulting from a $1.8 million decrease in the fair value of the Convertible Note Hedges and a $1.0 million decrease in the fair value of the Note Hedge Warrants.

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

Other Income.

For the three months ended March 31, 2021 compared to the three months ended March 31, 2020, other income decreased by an insignificant amount, due to income related to a transition service agreement with Cyclerion that terminated on March 31, 2020.

For the six months ended June 30, 2021 compared to the six months ended June 30, 2020, other income decreased by an insignificant amount due to income related to a transition service agreement with Cyclerion that terminated on March 31, 2020.

Income Tax Expense.

For the three months ended March 31, 2021, we recorded income tax expense of $0.4 million primarily related to state income taxes in certain states which have temporarily disallowed the use of net operating losses to offset taxable income.

We did not record any income tax expense for the three months ended March 31, 2020.

For the three and six months ended June 30, 2021, we recorded an income tax benefit of $336.9 million and $336.5 million, respectively, resulting in a non-cash credit to net income.

The income tax benefit primarily pertains to the discrete income tax benefit of $337.8 million related to the release of the valuation allowance on the majority of our tax attributes and other deferred tax assets, partially offset by state income taxes of $0.9 million and $1.3 million during the three and six months ended June 30, 2021, respectively, in certain states which have temporarily disallowed the use of net operating losses to offset taxable income.

Until the second quarter of 2021, we maintained a valuation allowance on our net operating losses and other deferred tax assets.

Due to this valuation allowance, we did not record any income tax expense for the three and six months ended June 30, 2020.

In 2021, we expect to continue to utilize our net operating losses to offset federal taxable income and taxable income in most states.

In future periods, we expect to continue to utilize our net operating losses to offset federal taxable income and taxable income in most states but will begin to record a significant portion of income taxes reflecting the utilization of the deferred tax assets.

The majority of this provision for income taxes will be a non-cash expense until our net operating losses are fully utilized.

Further information on the release of the valuation allowance and significant judgments related to its release can be found below in Note 11, Income Taxes , in the accompanying notes to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

Liquidity and Capital Resources

As of March 31, 2021, we had $438.5 million of unrestricted cash and cash equivalents.

As of June 30, 2021, we had $492.7 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 primarily achieve liquidity and capital preservation objectives.

During the three months ended March 31, 2021, our balances of cash and cash equivalents increased by $75.9 million.

During the six months ended June 30, 2021, our balances of cash and cash equivalents increased by $130.1 million.

Net cash provided by operating activities totaled $122.3 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 $2.2 million in proceeds from the exercise of stock options.

Additionally, cash provided by financing activities totaled $7.9 million in proceeds from the exercise of stock options and our employee stock purchase plan.

We expect to pay $120.7 million in aggregate principal amount of our 2022 Convertible Notes within the next 12 months.

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.

Additionally, on May 4, 2021, our board of directors authorized a stock repurchase program pursuant to which we may use up to $150.0 million to repurchase shares of our common stock through December 31, 2022, unless it is terminated or suspended prior to its expiration .

Additionally, in May 2021, our board of directors authorized a stock repurchase program pursuant to which we may use up to $150.0 million to repurchase shares of our common stock through December 31, 2022, unless it is terminated or suspended prior to its expiration.

Repurchases may be made through a variety of methods, including open market purchases, privately negotiated transactions, block trades, exchange transactions, accelerated share repurchase transactions or any combination of such methods.

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Sources of Liquidity

Until the year ended December 31, 2019, we had incurred losses since our inception in 1998 and we had an accumulated deficit of approximately $1.4 billion as of March 31, 2021.

Until the year ended December 31, 2019, we had incurred losses since our inception in 1998 and we had an accumulated deficit of approximately $1.0 billion as of June 30, 2021.

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 March 31, 2021, our debt is comprised of $520.7 million aggregate principal amount of convertible notes, due at various dates between 2022 and 2026.

As of June 30, 2021, our debt is comprised of $520.7 million aggregate principal amount of convertible notes, due at various dates between 2022 and 2026.

Refer to Note 8, Notes Payable, to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, for information related to our debt obligations.

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Our goal is to generate and maintain positive cash flows, driven by increased revenue generated through sales of LINZESS and other commercial activities and financial discipline.

Under our collaboration with 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

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

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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 March 31, 2021 will be sufficient to meet our projected operating needs at least through the next twelve months from the issuance of these financial statements.

We believe that our cash on hand as of June 30, 2021 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.

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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 2020 Annual Report on Form 10-K and Note 2, Summary of Significant Accounting Policies , appearing elsewhere in this Quarterly Report on Form 10-Q.

We did not otherwise adopt any new accounting pronouncements during the three months ended March 31, 2021 that had a material effect on our condensed consolidated financial statements included in this report.

For a discussion of recent accounting pronouncements, refer to Note 2, Summary of Significant Accounting Policies , to our 2020 Annual Report on Form 10-K and Note 2, Summary of Significant Accounting Policies , appearing elsewhere in this Quarterly Report on Form 10-Q.

Trends and Uncertainties

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We and AbbVie also agreed to include such costs incurred in the first half of 2021 in our calculation of net profits from the sale of LINZESS in the U.S.

and may continue to do so for the remainder of 2021.

and will continue to do so for the remainder of 2021.

We have also experienced fluctuations in our settlement payments based on the ratio of selling, general and administrative expenses incurred by each party over the past several quarters and may continue to experience such fluctuations in the future as a result of the reimbursement of costs associated with remote selling activities and potential limitations in the number of in-person details we or AbbVie may be able to conduct due to containment and mitigation measures related to the COVID-19 pandemic.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis