What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-05 · 82 added, 55 removed, 256 unchanged (35% of the section changed)

7 unchanged sentences

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.

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.

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

Pursuant to the terms of the settlement, we 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.

On November 3, 2021, we entered into a collaboration and license option agreement with COUR Pharmaceuticals Development Company, Inc., or Cour, pursuant to which the Company received, among other things, an option, or the Option, to acquire an exclusive license, or the License, to research, develop, manufacture and commercialize, in the U.S., products containing CNP-104 Particle, or CNP-104, a tolerizing immune modifying particle, for the treatment of primary biliary cholangitis.

Pursuant to the terms of the agreement, the Company will make an upfront, non-refundable payment of $6.0 million to Cour and will pay Cour additional payments of $4.0 million upon the commencement of a clinical study for CNP-104, evaluating the safety, tolerability, and pharmacodynamic effects and efficacy of CNP-104, or the Initial Study, $2.0 million upon receipt of U.S.

FDA Fast Track Designation for CNP-104, and approximately $7.5 million to perform the Initial Study.

After reviewing the data from the Initial Study, if the Company exercises the Option, the Company will pay Cour $35.0 million in exchange for the License.

Additionally, the Company will pay royalties to Cour in the high single digits to low double digits percentage of the aggregated annual net sales in the U.S.

of products containing CNP-104 and Cour will be eligible to receive commercial milestone payments of up to $440.0 million over the term of the agreement.

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, 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.

For the three and nine months ended September 30, 2021, we recorded net income of $55.8 million and $487.1 million, respectively.

As of September 30,

2021, we had an accumulated deficit of approximately $979.0 million.

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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Financial Operations Overview

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.

Our revenues are generated primarily through our collaborative arrangements and license agreements related to research and development and commercialization of linaclotide.

The majority of our revenues are generated from the profits of LINZESS in the U.S.

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

In August 2021, the U.S.

FDA approved a revised label for LINZESS based on clinical

safety data that has been generated thus far in pediatric studies.

The updated label modifies the boxed warning for risk of serious dehydration and contraindication against use in children to those less than two years of age.

The boxed warning and contraindication previously applied to all children less than 18 years of age and less than six years of age, respectively.

The safety and effectiveness of LINZESS in patients less than 18 years of age have not been established.

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

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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 and six months ended June 30, 2021 and 2020, respectively (in thousands).

The following table sets forth our research and development expenses related to our product pipeline for the three and nine months ended September 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.

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Linaclotide (1)

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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;

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.

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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 benefit for income taxes and the income tax provision

based on U.S.

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.

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

During the three and six months ended June 30, 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 nine months ended September 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

Nine Months Ended

September 30,

(in thousands)

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Interest and investment income

Loss on derivatives

Gain (loss) on derivatives

Other expense, net

Income before income taxes

Income tax benefit

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

Income tax (expense) benefit

Three and nine months ended September 30, 2021 compared to three and nine months ended September 30, 2020

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

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Collaborative Arrangements Revenue.

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.

Collaborative arrangements revenue for the three months ended September 30, 2021 was relatively consistent with collaborative arrangements revenue for the three months ended September 30, 2020.

The increase in revenue from collaborative arrangements of $28.5 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily related to a $28.8 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.

Sale of Active Pharmaceutical Ingredient.

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.

The decrease in sale of API of $4.7 million for the nine months ended September 30, 2021 compared to the nine months ended September 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

Nine Months Ended

September 30,

(dollars in thousands)

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Cost of Revenues.

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.

The decrease of $2.2 million for the nine months ended September 30, 2021 compared to the nine months ended September 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 $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.

The decrease in research and development expense of $10.8 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily related to a decrease of $9.4 million in external development costs related to IW-3718;

a decrease of $1.3 million in compensation, benefits, and other employee-related expenses;

and a decrease of $0.8 million in linaclotide costs.

These decreases were partially offset by a $1.0 million increase in external development costs related to IW-3300.

The decrease in research and development expense of $33.2 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily related to a decrease of $28.6 million in external development costs related to IW-3718;

a decrease of $3.4 million in compensation, benefits, and other employee-related expenses;

a decrease of $1.8 million in linaclotide costs;

and a $0.9 million decrease in professional fees for temporary support services.

These decreases were partially offset by a $2.6 million increase in external development costs related to IW-3300.

Selling, General and Administrative Expense.

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;

Selling, general and administrative expenses decreased by $7.2 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to a $3.3 million decrease in compensation, benefits, and other employee-related expenses;

a $2.2 million decrease in professional fees for legal, consulting and other services;

and a $0.7 million decrease in fleet vehicle expenses.

Selling, general and administrative expenses decreased by $23.6 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to a $13.9 million decrease in compensation, benefits, and other employee-related expenses;

a $5.1 million decrease in decrease in professional fees for legal, consulting and other services;

a $2.2 million decrease in sales and marketing activities;

and a $1.0 million decrease in travel.

and a $1.0 million decrease in fleet vehicle expenses.

Restructuring Expe nses.

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 .

Restructuring expenses for the three and nine months ended September 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

Nine Months Ended

September 30,

(dollars in thousands)

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Interest and investment income

Loss on derivatives

Gain (loss) on derivatives

Total other expense, net

Interest Expense.

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

Interest expense increased by $1.2 million during the nine months ended September 30, 2021 compared to the nine months ended September 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 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.

Interest and investment income decreased by an insignificant amount in the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

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

Gain (Loss) on Derivatives.

For the three months ended September 30, 2021, we recorded a gain on derivatives of $2.2 million resulting from a $3.4 million decrease in the fair value of the Convertible Note Hedges and a $5.6 million decrease in the fair value of the Note Hedge Warrants.

For the three months ended September 30, 2020, we recorded a loss on derivatives of $2.6 million resulting from a $7.9 million decrease in the fair value of the Convertible Note Hedges and a $5.3 million decrease in the fair value of the Note Hedge Warrants.

For the nine months ended September 30, 2021, we recorded a gain on derivatives of $1.4 million resulting from a $5.2 million decrease in the fair value of the Convertible Note Hedges and a $6.6 million decrease in the fair value of the Note Hedge Warrants.

For the nine months ended September 30, 2020, we recorded a loss on derivatives of $6.5 million resulting from a $23.1 million decrease in the fair value of the Convertible Note Hedges and a $16.6 million decrease in the fair value of the Note Hedge Warrants.

Other Income.

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.

For the nine months ended September 30, 2021 compared to the nine months ended September 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 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.

For the three and nine months ended September 30, 2021, we recorded income tax expense of $3.8 million and income tax benefit of $332.7 million, respectively.

The income tax benefit for the nine months ended September 30, 2021 primarily pertains to the non-cash discrete income tax benefit of $335.2 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 $ 1.3 million and $ 2.6 million during the three and nine months ended September 30, 2021, respectively, in certain states which have temporarily disallowed the use of net operating losses to offset taxable income.

For each of the three and nine months ended September 30, 2020, the Company recorded income tax expense of $1.4 million, primarily related to state income taxes i n 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.

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Liquidity and Capital Resources

As of June 30, 2021, we had $492.7 million of unrestricted cash and cash equivalents.

As of September 30, 2021, we had $574.3 million of unrestricted cash and cash equivalents.

Our cash equivalents include amounts held in money market funds.

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

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

During the nine months ended September 30, 2021, our balances of cash and cash equivalents increased by $211.2 million.

Net cash provided by operating activities totaled $197.3 million as a result of profitable operations driven primarily by the sales of LINZESS in the U.S.

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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 $1.0 billion as of June 30, 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 $979.0 million as of September 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 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.

As of September 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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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 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.

We believe that our cash on hand as of September 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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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.

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:

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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.

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 will continue to do so for the remainder of 2021.

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

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