Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the notes to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” in Item 1A of this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We are a gastrointestinal, or GI, healthcare company dedicated to advancing the treatment of GI diseases and redefining the standard of care for 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), 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.
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 nine months ended September 30, 2021, we recorded net income of $55.8 million and $487.1 million, respectively. As of September 30,
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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.
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.
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.
The majority of our revenues are generated from the profits 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. less commercial expenses 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 and is commercialized.
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.
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 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 under cost-sharing provisions in our collaboration agreement for linaclotide. Reimbursements received for research and development activities under this agreement are netted against research and development expenses.
Linaclotide . Our commercial product, LINZESS, is commercially available in the U.S. for the treatment of IBS-C or CIC in adults. Linaclotide is also available to adult men and women suffering from IBS-C or CIC in certain countries of the world, including China, Japan, and in a number of E.U. 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. In August 2021, the U.S. FDA approved a revised label for LINZESS based on clinical
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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.
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 discontinued 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, as well as evaluating external development-stage GI 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, 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 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. 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
Nine Months Ended
September 30,
September 30,
2021
2020
2021
2020
Linaclotide (1)
$
4,922
$
5,581
$
15,471
$
19,730
IW-3718
339
13,490
7,643
46,012
Early research and development
5,646
2,621
15,440
6,053
Total research and development expenses
$
10,907
$
21,692
$
38,554
$
71,795
(1) Includes linaclotide in all indications, populations and formulations.
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 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
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when linaclotide will be developed outside of its current markets, indications, populations or formulations; or when, if ever, any of our other product candidates will generate revenues and cash flows.
We invest carefully in our pipeline, and the commitment of funding for each subsequent stage of our development programs is dependent upon the receipt of clear, supportive data. In addition, we intend to access externally discovered drug candidates that fit within our core strategy. In evaluating these potential assets, we apply the same investment criteria as those used for investments in internally discovered assets.
The successful development of our product candidates is highly uncertain and subject to a number of risks including, but not limited to:
● The duration of clinical trials may vary substantially according to the type, complexity and novelty of the product candidate;
● The U.S. FDA and comparable agencies in foreign countries impose substantial and varying requirements on the introduction of therapeutic pharmaceutical products, typically requiring lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures;
● Data obtained from nonclinical and clinical activities at any step in the testing process may be adverse and lead to discontinuation or redirection of development activity. Data obtained from these activities also are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval;
● The duration and cost of early research and development, including nonclinical studies and clinical trials may vary significantly over the life of a product candidate and are difficult to predict;
● The costs, timing and outcome of regulatory review of a product candidate may not be favorable, and, even if approved, a product may face post-approval development and regulatory requirements;
● There may be substantial costs, delays and difficulties in successfully integrating externally developed product candidates into our business operations; and
● The emergence of competing technologies and products and other adverse market developments may negatively impact us.
As a result of the factors discussed above, including the factors discussed under “Risk Factors” in Item 1A of this Quarterly Report on Form 10-Q, we are unable to determine the duration and costs to complete current or future nonclinical and clinical stages of our product candidates or when, or to what extent, we will generate revenues from the commercialization and sale of our product candidates. Development timelines, probability of success and development costs vary widely. We anticipate that we will make determinations as to which additional programs to pursue and how much funding to direct to each program on an ongoing basis in response to the data of each product candidate, the competitive landscape and ongoing assessments of such product candidate’s commercial potential.
We expect to invest in our development programs for the foreseeable future. We will continue to invest in linaclotide, including the investigation of ways to enhance the clinical profile within its currently approved indications, and the exploration of its potential utility in other indications, populations and formulations. We will 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.
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We include AbbVie’s selling, general and administrative cost-sharing payments in the calculation of the net profits and net losses from the sale of LINZESS in the U.S. and present the net payment to or from AbbVie as collaboration expense or collaborative arrangements revenue, respectively.
Restructuring Expenses. Restructuring expenses pertain to workforce reduction and restructuring initiatives and are more fully described in Note 13, Workforce Reduction and Restructuring , to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
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 and cash equivalents, 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 date and changes in fair value are recorded in our condensed consolidated statements of income. The Convertible Note Hedges and Note Hedge Warrants are more fully described in Note 8 , Notes Payable , to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
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 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. 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
Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of 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. Actual results may differ materially from our estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.
During the three and 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.
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Results of Operations
The following discussion summarizes the key factors our management believes are necessary for an understanding of our condensed consolidated financial statements.
Three Months Ended
Nine Months Ended
September 30,
September 30,
2021
2020
2021
2020
(in thousands)
(in thousands)
Revenues:
Collaborative arrangements revenue
$
103,747
$
103,468
$
295,798
$
267,336
Sale of active pharmaceutical ingredient
—
—
825
5,507
Total revenues
103,747
103,468
296,623
272,843
Cost and expenses:
Cost of revenues
—
—
—
2,239
Research and development
10,907
21,692
38,554
71,795
Selling, general and administrative
27,742
34,928
82,446
106,021
Restructuring expenses
(73)
1,232
(44)
1,232
Total cost and expenses
38,576
57,852
120,956
181,287
Income from operations
65,171
45,616
175,667
91,556
Other (expense) income:
Interest expense
(7,841)
(7,419)
(23,199)
(21,957)
Interest and investment income
178
231
546
1,284
Gain (loss) on derivatives
2,164
(2,616)
1,388
(6,549)
Other income
—
—
—
27
Other expense, net
(5,499)
(9,804)
(21,265)
(27,195)
Income before income taxes
59,672
35,812
154,402
64,361
Income tax (expense) benefit
(3,827)
(1,389)
332,672
(1,389)
Net income
$
55,845
$
34,423
$
487,074
$
62,972
Three and nine months ended September 30, 2021 compared to three and nine months ended September 30, 2020
Revenues
Three Months Ended
Nine Months Ended
September 30,
Change
September 30,
Change
2021
2020
$
%
2021
2020
$
%
(dollars in thousands)
(dollars in thousands)
Revenues:
Collaborative arrangements revenue
$
103,747
$
103,468
$
279
0.3
%
$
295,798
$
267,336
$
28,462
11
%
Sale of active pharmaceutical ingredient
—
—
—
—
%
825
5,507
(4,682)
(85)
%
Total revenues
$
103,747
$
103,468
$
279
0.3
%
$
296,623
$
272,843
$
23,780
9
%
Collaborative Arrangements Revenue. 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 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.
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Cost and Expenses
Three Months Ended
Nine Months Ended
September 30,
Change
September 30,
Change
2021
2020
$
%
2021
2020
$
%
(dollars in thousands)
(dollars in thousands)
Cost and expenses:
Cost of revenues
$
—
$
—
$
—
—
%
$
—
$
2,239
$
(2,239)
(100)
%
Research and development
10,907
21,692
(10,785)
(50)
%
38,554
71,795
(33,241)
(46)
%
Selling, general and administrative
27,742
34,928
(7,186)
(21)
%
82,446
106,021
(23,575)
(22)
%
Restructuring expenses
(73)
1,232
(1,305)
(106)
%
(44)
1,232
(1,276)
(104)
%
Total cost and expenses
$
38,576
$
57,852
$
(19,276)
(33)
%
$
120,956
$
181,287
$
(60,331)
(33)
%
Cost of Revenues. 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 $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 $7.2 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 fleet vehicle expenses.
Restructuring Expe nses. 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
Nine Months Ended
September 30,
Change
September 30,
Change
2021
2020
$
%
2021
2020
$
%
(dollars in thousands)
(dollars in thousands)
Other (expense) income:
Interest expense
$
(7,841)
$
(7,419)
$
(422)
6
%
$
(23,199)
$
(21,957)
$
(1,242)
6
%
Interest and investment income
178
231
(53)
(23)
%
546
1,284
(738)
(57)
%
Gain (loss) on derivatives
2,164
(2,616)
4,780
(183)
%
1,388
(6,549)
7,937
(121)
%
Other income
—
—
—
—
%
—
27
(27)
(100)
%
Total other expense, net
$
(5,499)
$
(9,804)
$
4,305
(44)
%
$
(21,265)
$
(27,195)
$
5,930
(22)
%
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Interest Expense. 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 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 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 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. 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 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.
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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. Additionally, cash provided by financing activities totaled $14.0 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, 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. Such repurchases, redemptions or exchanges, if any, of our debt or common stock will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material.
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 $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 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.
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 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. Our actual results could vary materially and negatively from these and other forward-looking statements as a result of a number of factors, including the factors discussed in the “Risk Factors” section of this Quarterly Report on Form 10-Q. We have based our estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.
Due to the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate precisely the amounts of capital outlays and operating expenditures
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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;
● 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
The disclosure of our contractual obligations and commitments was reported in our 2020 Annual Report on Form 10-K. There have not been any material changes from the contractual commitments and obligations previously disclosed in our 2020 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 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.
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Trends and Uncertainties
Impact of the COVID-19 Pandemic
The COVID-19 pandemic, including containment and mitigation measures, has impacted, and may continue to impact, our business and operations and financial results, particularly in our day-to-day operations and our collaboration agreement for North America with AbbVie.
Since the beginning of the pandemic, we have monitored the impact of the COVID-19 pandemic in the territories where our customer-facing employees are located. While our customer-facing employees have generally resumed in-person work practices, they may be limited in the number of in-person details and other activities they are able to conduct due to containment and mitigation measures related to the COVID-19 pandemic. Our headquarters has re-opened on a voluntary basis, but all headquarters employees have the option to work remotely through late 2021.
We and our partner, AbbVie, are focused on maintaining the availability of LINZESS for adult men and women suffering from IBS-C or CIC. As of the date of this Quarterly Report on Form 10-Q, the COVID-19 pandemic has not caused significant disruptions to manufacturing operations or supply of LINZESS in the U.S.
We include our and AbbVie’s collaboration-related selling, general, and administrative expenses, which have historically included expenses from in-person 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. 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. 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.
Given the uncertainties surrounding the extent and duration of the impact of the pandemic on our business and operations, we continue to evaluate the impact of the COVID-19 pandemic on our operating results and financial condition, and we may incur additional expenses in future periods as a result. Refer to “Risk Factors” in Item 1A of this Quarterly Report on Form 10-Q for additional information on risks associated with COVID-19 that could impact our operations and results.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.