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Item 7. Management’s Discussion and Analysis

2022-02-18 compared with 2021-02-17 · 167 added, 294 removed, 309 unchanged (60% 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, or GC-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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We have strategic partnerships with leading pharmaceutical companies to support the development and commercialization of linaclotide throughout the world, including with AbbVie Inc.

(together with its affiliates), or AbbVie, (successor to Allergan plc (together with its affiliates), or Allergan), in the U.S.

(together with its affiliates), or AbbVie, in the U.S.

and all countries worldwide other than China (including Hong Kong and Macau) and Japan, AstraZeneca AB (together with its affiliates), or AstraZeneca, in China (including Hong Kong and Macau) and Astellas Pharma Inc., or Astellas, in Japan.

We also aim to leverage our leading capabilities in GI to bring additional treatment options to GI patients;

for example, we have a U.S.

disease education and promotional agreement with Alnylam Pharmaceuticals, Inc.

for Alnylam’s GIVLAARI® (givosiran) for the treatment of acute hepatic porphyria.

for example, in November 2021, we entered into a collaboration and license option agreement, or the COUR Collaboration Agreement, with COUR Pharmaceutical Development Company, Inc., or COUR, which grants us an option to acquire an exclusive license, to research, develop, manufacture and commercialize, in the U.S., products containing CNP-104, a tolerizing immune modifying nanoparticle for the treatment of primary biliary cholangitis, or PBC.

We are also advancing IW-3300, a GC-C agonist, which is in Phase I development for the potential treatment of visceral pain conditions, such as interstitial cystitis / bladder pain syndrome, or IC/BPS, and endometriosis.

To date, we have dedicated a majority of our activities to the research, development and commercialization of linaclotide, as well as to the research and development of our other product candidates.

Prior to the year ended December 31, 2019, when we recorded net income for the year of approximately $21.5 million, we incurred net losses in each year since our inception in 1998.

For the year ended December 31, 2020, we recorded net income of approximately $106.2 million.

As of December 31, 2020, we had an accumulated deficit of approximately $1.5 billion.

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

For the years ended December 31, 2021, 2020 and 2019, we recorded net income of $528.4 million, $106.2 million, and $21.5 million, respectively.

As of December 31, 2021, we had an accumulated deficit of $937.6 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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Key 2021 Financial Highlights

● During the year ended December 31, 2020, we recognized approximately $389.5 million in total revenues, compared to approximately $428.4 million during the year ended December 31, 2019.

The decrease of 9% was primarily driven by a decrease in sale of active pharmaceutical ingredient, or API, in 2020 compared to 2019.

An increase in collaborative arrangements revenue related to sales of LINZESS in the U.S.

of approximately $43.2 million in 2020 compared to 2019 was offset by approximately $42.4 million in non-

recurring revenue recognized in 2019 in connection with amendments to our collaborative arrangements with AstraZeneca and Astellas.

● During the year ended December 31, 2020, we recognized approximately $368.6 million in collaborative arrangements revenue related to sales of LINZESS in the U.S.

compared to approximately $325.4 million during the year ended December 31, 2019.

The increase of 13% was primarily driven by an increase in LINZESS prescription demand in the U.S.

in 2020 compared to 2019.

● Our operations resulted in net income of approximately $106.2 million during the year ended December 31, 2020 compared to net income of $21.5 million during the year ended December 31, 2019, primarily driven by increased revenue from sales of LINZESS in the U.S., as well as decreases in costs primarily associated with the discontinuation of MD-7246 and IW-3718 development programs.

● We recognized $413.8 million in total revenues during the year ended December 31 2021, compared to $389.5 million during the year ended December 31, 2020.

The increase of 6% was primarily driven by an increase of $ 31.8 million in collaborative arrangements revenue related to sales of LINZESS in the U.S.,

partially offset by a decrease of $7.0 million in sales of active pharmaceutical ingredient, or API, to our collaboration partners as a result of the restructuring of our partnerships with AstraZeneca and Astellas in 2019.

● We recognized $400.4 million in collaborative arrangements revenue related to sales of LINZESS in the U.S.

during the year ended December 31, 2021, compared to $368.6 million during the year ended December 31, 2020.

The increase of 9% was primarily driven by an increase in LINZESS prescription demand in the U.S., partially offset by net price erosion.

● We generated income from operations of $200.7 million during the year ended December 31, 2021 compared to income from operations of $108.9 million during the year ended December 31, 2020.

The increase was primarily driven by increased revenue from sales of LINZESS in the U.S., as well as decreases in costs primarily associated with the discontinuation of MD-7246 and IW-3718 development programs.

● We recognized a non-recurring, non-cash income tax benefit of $333.3 million related to the release of the valuation allowance on the majority of our deferred tax assets during the year ended December 31, 2021.

● We generated $261.9 million in cash from operations during the year ended December 31, 2021, ending the year with $620.1 million in cash and cash equivalents.

● In connection with our decision to discontinue development of IW-3718, we reduced our workforce by approximately 100 full-time employees.

We substantially completed the reduction in our workforce in the fourth quarter of 2020.

We expect to realize annualized cost savings in total operating expenses from this workforce reduction, as well as cost savings related to external spend for IW-3718 previously expected through 2021.

● We repurchased 2.4 million shares of our Class A Common Stock at an aggregate purchase price of $27.1 million during the year ended December 31, 2021.

● We entered into the COUR Collaboration Agreement with COUR, a biotechnology company developing novel immune-modifying nanoparticles to treat autoimmune diseases.

This agreement grants us an option, or the Option, to acquire an exclusive license to research, develop, manufacture and commercialize, in the U.S., products containing CNP-104 for the treatment of PBC.

Under the terms of the COUR Collaboration Agreement, we agreed to pay COUR $19.5 million in upfront and near-term payments.

After reviewing the data from the CNP-104 clinical trial, we may exercise the Option at a cost of $35.0 million in exchange for the exclusive license.

If we exercise our Option, COUR will be eligible to receive up to an additional $440.0 million in commercial milestone payments, as well as royalties 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.

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 sales of LINZESS in the U.S.

We record our share of the net profits and losses from the sales of LINZESS in the U.S.

on a net basis and present the settlement payments to and from AbbVie as collaboration expense or collaborative arrangements revenue, as applicable.

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.

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Although we expect net sales to increase over time, the settlement payments between AbbVie and us, resulting in collaborative arrangements revenue or collaboration expense, are subject to fluctuation based on the ratio of selling, general and administrative expenses incurred by each party.

In addition, our collaborative arrangements revenue may fluctuate as a result of the timing and amount of license fees and clinical and commercial milestones received and recognized under our current and future strategic partnerships as well as timing and amount of royalties from the sales of linaclotide in the European, Canadian or Mexican markets or any other markets where linaclotide receives approval.

Product revenue consisted of sales of ZURAMPIC ® and DUZALLO ® , or the Lesinurad Products, in the U.S.

through the date of the termination in January 2019 of our exclusive license to develop, manufacture, and commercialize in the U.S.

products containing lesinurad as an active ingredient, or the Lesinurad License.

Through December 31, 2020, we also generated revenues from the manufacture of linaclotide finished drug product, finished goods, API and development materials for certain of our partners.

Cost of Revenues .

Cost of revenues primarily includes costs related to the sales of linaclotide API, finished drug product, and finished goods to our partners, which generally occurs upon shipment for sales of API, finished drug product and finished goods after the material has passed all quality testing required for acceptance by the partner to certain of our partners outside of the U.S.

Settlement on Non-cancelable Inventory and Commercial Supply Purchase Commitments.

Settlement on Non-cancelable Commercial Supply Purchase Commitments.

During the year ended December 31, 2019, we recorded settlements related to reversals of certain previously accrued non-cancelable purchase commitments.

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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.

development expense consists of expenses incurred in connection with the research into and development of product candidates.

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, as well as AstraZeneca prior to September 2019 when we amended and restated our existing collaboration agreement with AstraZeneca, or the Amended AstraZeneca Agreement, under cost-sharing provisions in our respective collaboration agreements for linaclotide.

Reimbursements received for research and development activities under these agreements were netted against research and development expenses.

Reimbursements received for research and development activities under these agreements are netted against research and development expenses.

Linaclotide .

Our commercial product, linaclotide, is available to adult men and women suffering from IBS-C or CIC in certain countries around the world.

LINZESS is commercially available in the U.S.

Our commercial product, LINZESS, is commercially available in the U.S.

for the treatment of IBS-C or CIC in adults.

Linaclotide also is approved and commercially available in China, Japan, and in a number of E.U.

and other countries.

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.

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.

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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:

We and AbbVie completed 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.

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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 had been generated thus far in pediatric studies.

The updated label modified 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 6 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.

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.

In May 2020, we and AbbVie announced topline 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.

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We were developing IW-3718, a gastric retentive formulation of a bile acid sequestrant, for the potential treatment of refractory gastroesophageal reflux disease, or refractory GERD.

In September 2020, we announced that one of our two identical Phase III trials evaluating IW-3718 in refractory GERD did not meet the pre-specified criteria associated with a planned early efficacy assessment.

Following the assessment from an independent data monitoring committee, we unblinded the data and confirmed that IW-3718-302 did not meet the criteria, including the study’s primary endpoint of achieving a statistically significant improvement in heartburn severity.

Based on these findings, we are discontinuing development of IW-3718.

We are developing IW-3300, a GC-C agonist, for the potential treatment of visceral pain conditions, including interstitial cystitis / bladder pain syndrome and endometriosis.

In December 2021, the U.S.

FDA accepted our

Investigational New Drug Application and the Phase I clinical program for IC/BPS commenced in the first quarter of 2022.

Through the COUR Collaboration Agreement, we and COUR are developing CNP-104 for the treatment of PBC, a rare autoimmune disease targeting the liver.

In December 2021, COUR received U.S.

Fast Track Designation for CNP-104 and initiated a clinical study for CNP-104 to evaluate the safety, tolerability, pharmacodynamic effects and efficacy of CNP-104 in PBC patients.

Early research and development .

Our early research and development efforts have been focused on supporting our development stage GI programs, including exploring strategic options for further development of certain of our internal programs.

Included in early research and development are costs relating to the development of IW-3300, a GC-C agonist, which is in pre-clinical development for the potential treatment of visceral pain conditions, as well as certain other expenses associated with historical programs.

The following table sets forth our research and development expenses related to our product pipeline for the years ended December 31, 2020, 2019, and 2018.

These expenses relate primarily to internal compensation, benefits and other employee-related expenses and external costs associated with nonclinical studies and clinical trial costs for our

product candidates.

We allocate costs related to facilities, depreciation, share-based compensation, research and development support services, laboratory supplies and certain other costs directly to programs.

The following table sets forth our research and development expenses related to our product pipeline for the years ended December 31, 2021, 2020, and 2019, respectively.

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.

Year Ended December 31,

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

(2) Includes lesinurad in all indications, populations and formulations.

Since 2004, the date we began tracking costs by program, we have incurred approximately $527.2 million of research and development expenses related to linaclotide.

The expenses for linaclotide include both our portion of the research and development costs incurred by AbbVie for the U.S.

and AstraZeneca for China (including Hong Kong and Macau) prior to the execution of the Amended AstraZeneca Agreement, and invoiced to us under the cost-sharing provisions of our collaboration agreements, as well as the unreimbursed portion of research and development costs incurred by us under such cost-sharing provisions.

(2) Includes lesinurad in all indications, populations and formulations, which we stopped developing and commercializing in January 2019.

The lengthy process of securing regulatory approvals for new drugs requires the expenditure of substantial resources.

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We and AbbVie are exploring development opportunities to enhance the clinical profile of LINZESS by studying linaclotide in additional indications, populations and formulations to assess its potential to treat various conditions.

We cannot currently estimate with any degree of certainty the amount of time or money that we will be required to expend in the future on linaclotide for other geographic markets within IBS-C and CIC, or in additional indications, populations or formulations.

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.

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As we continue to invest in the commercialization of LINZESS, we expect our selling, general and administrative expenses will be substantial for the foreseeable future.

We record all selling, general and administrative expenses as incurred.

Prior to the execution of the Amended AstraZeneca Agreement, we were reimbursed for certain selling, general and administrative expenses and netted these reimbursements against selling, general and administrative expenses as incurred.

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During the year ended December 31, 2019, we recorded a gain on lease modification related to a modification of our prior headquarters lease in April 2019.

For additional information relating to the gain, see Note 8, Leases , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

For additional information relating

to the gain, see Note 7, Leases , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Restructuring Expenses.

Restructuring expenses pertain to workforce reduction and restructuring initiatives and are more fully described in Note 17, Workforce Reduction and Restructuring , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

We substantially completed a workforce reduction related to discontinuing development of IW-3718 in the fourth quarter of 2020 and incurred approximately $15.5 million of restructuring expenses, primarily for one-time cash employee severance and benefit costs.

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 expense consists primarily of cash and non-cash interest costs related to our convertible senior notes.

Non-cash interest expense consists of amortization of the debt discount and debt issuance costs.

Interest and Investment Income.

Interest and investment income consists of interest earned on our cash, cash equivalents and marketable securities as well as significant financing components of payments due from collaboration partners.

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.

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In connection with the issuance of our 2022 Convertible Notes, we entered into convertible note hedge transactions, or the Convertible Note Hedges, and separate note hedge warrant transactions, or the Note Hedge Warrants, with certain financial institutions.

Gain (loss) on derivatives consists of the change in fair value of the Convertible Note Hedges and Note Hedge Warrants, which are recorded at fair value at each reporting period and changes in fair value are recorded in our consolidated statements of operations.

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 consolidated statements of income.

The Convertible Note Hedges and Note Hedge Warrants are more fully described in Note 10 , Notes Payable , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Loss on Extinguishment of Debt.

We recognized a loss on extinguishment of debt during the year ended December 31, 2019 related to the redemption of the 8.375% Notes due 2026, or the 2026 Notes, and the partial repurchase of the 2022 Convertible Notes.

In connection with the partial repurchase of the 2022 Convertible Notes, we also terminated the respective portion of our existing Convertible Note Hedges and Note Hedge Warrants.

We recognized a loss on extinguishment of debt during the year ended December 31, 2019 related to the redemption of the 8.375% Notes due 2026, and the partial repurchase of the 2022 Convertible Notes.

These transactions are more fully described in Note 10, Notes Payable , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Income Taxes.

We prepare our income tax provision based on our interpretation of the income tax accounting rules and each jurisdiction’s enacted tax laws and regulations and record our income tax provision by applying our estimated annual effective tax rate to pre-tax income.

The difference between the recorded provision for income taxes and the income tax provision based on U.S.

statutory tax rates was primarily attributable to the impact of a continued valuation allowance.

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.

For additional information refer to Note 14, Income Taxes, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Discontinued Operations.

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The Separation was effected by means of a distribution of all the outstanding shares of common stock, with no par value, of Cyclerion, through a dividend of Cyclerion’s common stock to our stockholders of record as of the close of business on March 19, 2019.

In connection with the Separation, we recast all historical expenses directly associated with our sGC business as discontinued operations for the years ended December 31, 2019 and 2018 in accordance with ASC Subtopic 250-20, Discontinued Operations .

In connection with the Separation, we recast all historical expenses directly associated with our sGC business as discontinued operations in accordance with ASC Subtopic 250-20, Discontinued Operations .

For additional information refer to Note 3, Cyclerion Separation , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

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generally accepted accounting principles.

The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities, the disclosure of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reported periods.

The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities, the disclosure of assets and liabilities at the date of the consolidated financial statements, and the 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.

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Our significant accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Effective January 1, 2019, we adopted ASC Topic 842, Leases, or ASC 842, using the optional transition method.

The adoption of ASC 842 represents a change in accounting principle that aims to increase transparency and comparability among organizations by requiring the recognition of right-of-use, assets and lease liabilities on the balance sheet for both operating and finance leases.

In addition, the standard requires enhanced disclosures that meet the objective of enabling financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases.

As part of the ASC 842 adoption, we elected certain practical expedients, which include:

● A policy election to use the short-term lease exception by asset class;

● Election of the practical expedient package during transition, which includes:

o An entity need not reassess whether any expired or existing contracts are or contain leases.

o An entity need not reassess the classification for any expired or existing leases.

As a result, all leases that were previously classified as operating leases in accordance with ASC Topic 840, Leases , or ASC 840, are classified as operating leases under ASC 842, and all leases that were classified as capital leases in accordance with ASC 840 are classified as finance leases under ASC 842.

o An entity need not reassess initial direct costs for any existing leases.

Subsequent to our adoption of ASC 842, we elected the post-transition practical expedient, by class of underlying asset, to account for lease components and non-lease components together as a single component for the asset class of operating lease right-of-use real estate assets.

Our lease portfolio for the year ended December 31, 2020 includes:

a lease for our headquarters location, a data center colocation lease, vehicle leases for our salesforce representatives, and leases for computer and office equipment.

We determine if an arrangement is a lease at the inception of the contract.

The asset component of our operating leases is recorded as the operating lease right-of-use asset, and the liability component is recorded as the current portion of operating lease liabilities and operating lease liabilities, net of current portion in our consolidated balance sheet.

As of December 31, 2020, we did not record any finance leases.

Right-of-use assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at the lease inception date.

Existing leases in our lease portfolio as of the adoption date were valued as of January 1, 2019.

We use an incremental borrowing rate based on the information available at lease inception in determining the present value of lease payments if an implicit rate of return is not provided with the lease contract.

Operating lease right-of-use assets are adjusted for incentives expected to be received.

Right-of-use assets and operating lease liabilities are remeasured upon certain modifications to leases using the present value of remaining lease payments and estimated incremental borrowing rate upon lease modification.

Lease cost is recognized on a straight-line basis over the lease term, and includes amounts related to short-term leases.

We recognize variable lease payments as operating expenses in the period in which the obligation for those payments is incurred.

Variable lease payments primarily include common area maintenance, utilities, real estate taxes, insurance, and other operating costs that are passed on from the lessor in proportion to the space leased by us.

Derivative Assets and Liabilities

In June 2015, in connection with the issuance of the 2022 Convertible Notes, we entered into the Convertible Note Hedges.

Concurrently with entering into the Convertible Note Hedges, we also entered into certain warrant transactions in which we sold Note Hedge Warrants to the Convertible Note Hedge counterparties to acquire shares of

our Class A Common Stock, subject to customary anti-dilution adjustments.

In connection with the partial repurchase of the 2022 Convertible Notes in August 2019, we terminated our Convertible Note Hedges and Note Hedge Warrants proportionately.

These derivatives are recorded as assets or liabilities at fair value at the end of each reporting period and the fair value is determined using the Black-Scholes option-pricing model.

The changes in fair value are recorded as a component of other (expense) income in the consolidated statements of operations.

Significant inputs used to determine the fair value include the price per share of our Class A Common Stock on the date of valuation, expected term of the derivative instruments, the strike prices of the derivative instruments, the risk-free interest rate, and the expected volatility of our Class A Common Stock.

The changes in fair value are recorded as a component of other (expense) income in the consolidated statements of income.

Significant inputs used to determine the fair value as of December 31, 2021 included the price per share of our Class A Common Stock, expected terms of the derivative instruments, strike prices of the derivative instruments, risk-free interest rates, and expected volatility of our Class A Common Stock.

Changes to these inputs could materially affect the valuation of the Convertible Note Hedges and Note Hedge Warrants in future periods.

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The assumptions that are used to determine the standalone selling price may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.

Our revenues are generated primarily through collaborative arrangements and license agreements related to the development and commercialization of linaclotide, as well as co-promotion arrangements in the U.S.

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

The terms of the collaborative arrangements and other agreements contain multiple performance obligations which may include (i) licenses, (ii) research and development activities, including participation on joint steering committees, (iii) the manufacture of finished drug product, API, or development materials for a partner, which are reimbursed at a contractually determined rate, and (iv) education or co-promotion activities by our clinical sales specialists.

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We have adopted a policy to recognize revenue net of tax withholdings, as applicable.

Collaboration, License, Co-Promotion and Other Commercial Agreements

Collaboration, License, and Other Agreements

Upon licensing intellectual property, we determine if the license is distinct from the other performance obligations identified in the arrangement.

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If we do not receive timely and accurate information or incorrectly estimate activity levels associated with the collaboration at a given point in time, we could be required to record adjustments in future periods.

We record revenue transactions as net product revenue in our consolidated statements of operations if we were deemed the principal in the transaction, which includes being the primary obligor, retaining inventory risk, and control over pricing.

We record revenue transactions as net product revenue in our consolidated statements of income if we are deemed the principal in the transaction, which includes being the primary obligor, retaining inventory risk, and control over pricing.

Given that we are not the primary obligor and do not have the inventory risks in the collaboration agreement with AbbVie for North America, we record our share of the net profits or net losses from the sales of LINZESS in the U.S.

on a net basis and present the settlement payments to and from AbbVie as collaboration expense or collaborative arrangements revenue, as applicable.

We and AbbVie settle the cost sharing quarterly, such that our consolidated statements of operations reflect 50% of the pre-tax net profit or loss generated from sales of LINZESS in the U.S.

Product Revenue, Net

Product revenue consisted of sales of the Lesinurad Products in the U.S.

through the date of the termination of the Lesinurad License in January 2019.

We sold the Lesinurad Products principally to a limited number of national wholesalers and selected regional wholesalers, or the Distributors.

The Distributors resold the Lesinurad Products to retail pharmacies and healthcare providers, who then sold to patients.

Net product revenue was recognized when the Distributor obtained control of our product, which occurred at a point in time, typically upon shipment of Lesinurad Products to the Distributor.

When we performed shipping and handling activities after the transfer of control to the Distributor (e.g., when control transferred prior to delivery), they were considered fulfillment activities, and accordingly, the costs were accrued for when the related revenue was recognized.

We expensed incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized was one year or less.

Product revenue was recorded net of the trade discounts, allowances, rebates, chargebacks, discounts, product returns, and other incentives.

Certain of these adjustments were recorded as an accounts receivable reserve, while certain of these adjustments were recorded as accrued expenses.

We and AbbVie settle the cost sharing quarterly, such that our consolidated statements of income reflect 50% of the pre-tax net profit or loss generated from sales of LINZESS in the U.S.

Sale of Active Pharmaceutical Ingredient

During the years ended December 31, 2020, and 2019, we produced linaclotide API, finished drug product, finished goods, and/or development materials for certain of our partners.

As of December 31, 2020, we are no longer responsible for the supply of linaclotide API, finished drug product, finished goods or development materials to our partners.

As it relates to development materials and API produced for Astellas, we were reimbursed at a contracted rate.

Such reimbursements were considered as part of revenue generated pursuant to the Astellas license agreement and are presented as collaborative arrangements revenue.

Any linaclotide API, finished drug product, finished goods, and development materials AbbVie is responsible for producing for the U.S.

are recognized in accordance with the cost-sharing provisions of the collaboration agreement for North America with AbbVie.

Prior to the execution of the Amended AstraZeneca Agreement in September 2019, any linaclotide API, finished drug product, finished goods, and development materials produced for AstraZeneca for China (including Hong Kong and Macau) were recognized in accordance with the cost-sharing provisions of the AstraZeneca collaboration agreement.

As of December 31, 2020, we were no longer responsible for the supply of linaclotide API, finished drug product, finished goods or development materials to such partners.

After December 31, 2020, we have occasionally provided development materials from time to time to certain of our partners and we may continue to do so.

Sales of such development materials have been and are expected to continue to be immaterial.

We recognize revenue on linaclotide API, finished drug product, finished goods, and development materials when control has transferred to the partner, which generally occurs upon shipment after the material has passed all quality testing required for acceptance by the partner.

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We have committed significant resources into the research and development of our product candidates and intend to continue to do so for the foreseeable future.

All research and development expenses are expensed as incurred.

Research and development expenses are generally expensed as incurred.

We capitalize nonrefundable advance payments we make for research and development activities and defer expense recognition until the related goods are received or the related services are performed.

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Under our collaboration agreement with AbbVie for North America, we are reimbursed for certain research and development expenses and we net these reimbursements against our research and development expenses as incurred.

Amounts owed to AbbVie under our collaboration agreement are recorded as incremental research and development expense.

Nonrefundable advance payments for research and development activities are capitalized and expensed over the related service period or as goods are received.

Research and development expense also includes up-front payment, non-contingent payment, and milestone payment obligations under the COUR Collaboration Agreement.

Recognition of expense for such payments requires judgment with respect to when the obligation is probable.

Share-Based Compensation Expense

We grant awards under our share-based compensation programs, including stock awards, restricted stock awards, or RSAs, restricted stock units, or RSUs (including performance-based RSUs, or PSUs), stock options, and shares issued under our employee stock purchase plan, or ESPP.

Share-based compensation is recognized as expense in

the consolidated statements of operations based on the grant date fair value over the requisite service period, net of estimated forfeitures.

Share-based compensation is recognized as expense in the consolidated statements of income based on the grant date fair value over the requisite service period, net of estimated forfeitures.

We estimate forfeitures over the requisite service period using historical forfeiture activity and record share-based compensation expense only for those awards that are expected to vest.

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At the date performance conditions are determined to be probable of achievement, we record a cumulative expense catch-up, with remaining expense amortized over the remaining service period.

Throughout the performance period, we re-assess the estimated performance and update the number of performance-based awards that we believe will ultimately vest.

Throughout the performance period, we re-assess the estimated

performance and update the number of performance-based awards that we believe will ultimately vest.

Discounted stock purchases under our ESPP are recognized over the offering period.

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We provide a valuation allowance when it is more likely than not that deferred tax assets will not be realized.

We maintain a valuation allowance on the majority of our net operating losses and other deferred tax assets.

Accordingly, we have not reported any tax benefit relating to the remaining net operating loss carryforwards and income tax credit carryforwards that are available for utilization in future periods.

federal net operating loss carryforwards totaled approximately $1.1 billion as of December 31, 2020.

On a periodic basis, we reassess the valuation allowance on our deferred income tax assets, weighing positive and negative evidence to assess the recoverability of the deferred tax assets.

In 2020, we reassessed the valuation allowance and considered negative evidence, including our cumulative losses in recent years and our plan to build our innovative GI pipeline through potential acquisition or in-licensing externally developed products, and positive evidence, including our income during the year ended December 31, 2020 and our projections of future income.

After assessing both the negative evidence and the positive evidence, we concluded that we should continue to maintain the valuation allowance on net deferred tax assets as of December 31, 2020 given the significance of the weight of the negative evidence.

Based on our recent financial performance and our future projections, we could record a reversal of all, or a portion of the valuation allowance associated with U.S.

deferred tax assets in future periods.

However, any such change is subject to actual performance and other considerations that may present positive or negative evidence at the time of the assessment.

Our total deferred tax asset balance subject to the valuation allowance was approximately $395.0 million as of December 31, 2020.

Prior to 2021, we maintained a valuation allowance on the majority of our net operating losses and other deferred tax assets.

On a periodic basis, we reassess the valuation allowance on our deferred tax assets, weighing positive and negative evidence to assess the recoverability of the deferred tax assets.

During the year ended December 31, 2021, we reassessed the valuation allowance noting the shift of positive evidence outweighing negative evidence, including:

continued strong prescription demand growth of LINZESS, continued profitability of a GI-focused business since completing the tax-free spin-off of Cyclerion, and expectations regarding future profitability.

After assessing both the positive evidence and negative evidence, we determined it was more likely than not that we will realize the majority of our deferred tax assets and therefore released the majority of our valuation allowance for the deferred tax assets that are expected to be utilized in future years.

We will continue to maintain a valuation allowance for deferred tax assets that are unlikely to be realized, primarily certain tax credits that are expected to expire prior to utilization.

Significant judgment is required in making these assessments to maintain or reverse our valuation allowances and, to the extent our future expectations change we would have to assess the recoverability of these deferred tax assets at that time.

If we determine that our net deferred tax assets are realizable in a future period, we would record material changes to income tax expense or benefit in that period.

If we determine that our net deferred tax assets are not realizable in a future period, we would record material changes to income tax expense or benefit in that period.

We record uncertain tax positions on the basis of a two-step process.

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Cost of revenues

Settlement on non-cancellable purchase commitments

Research and development

Selling, general and administrative

Amortization of acquired intangible assets

Gain on fair value remeasurement of contingent consideration

Gain on lease modification

Restructuring expenses

Impairment of intangible assets

Total cost and expenses

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Interest and investment income

Gain (loss) on derivatives

Loss on extinguishment of debt

Loss on derivatives

Other expense, net

Income from continuing operations, before income tax expense

Income tax expense

Income from continuing operations

Loss from discontinued operations, net of income taxes

Income from operations, before income taxes

Income tax (expense) benefit

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Year Ended December 31,

(dollars in thousands)

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Collaborative arrangements revenue.

The increase in revenue from collaborative arrangements of approximately $1.9 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily related to an approximately $43.2 million increase in our share of the net profits from the sale of LINZESS in the U.S.

driven by increased prescription demand and lower collaboration-related selling expenses due to the COVID-19 pandemic and an approximately $3.6 million increase in linaclotide royalty revenue.

These increases were offset by an approximately $32.4 million decrease in revenue related to non-contingent payments pursuant to the Amended AstraZeneca Agreement and recognized in 2019;

an approximately $10.0 million decrease in revenue recognized related to a one-time up-front payment received in 2019 in connection with the amendment and restatement of our license agreement with Astellas for linaclotide in Japan, or the Amended Astellas License Agreement;

and an approximately $2.2 million decrease in co-promotion revenue.

The increase in collaborative arrangements revenue of $31.2 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily related to a $31.8 million increase in our share of net profits from the sale of LINZESS in the U.S., which was driven by increased prescription demand, partially offset by net price erosion.

Sale of active pharmaceutical ingredient.

The decrease in sale of API of approximately $40.8 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily related to a decrease of approximately $43.8 million in sales of API to Astellas in Japan, resulting from the transition of manufacturing responsibilities to Astellas in connection with the Amended Astellas License Agreement executed in August 2019.

This decrease was partially offset by an approximately $2.6 million increase in sales of API, finished drug product, and finished goods to AstraZeneca in China.

Substantively all sales of API, finished drug product, and finished goods to AstraZeneca in China occurred during the three months ended March 31, 2020 in connection with the transition of manufacturing responsibilities to AstraZeneca under the terms of the Amended AstraZeneca Agreement.

The decrease in sale of API of $7.0 million for the year ended December 31, 2021 compared to the year ended December 31, 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

Year Ended December 31,

(dollars in thousands)

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Cost of revenues

Settlement on non-cancellable purchase commitments

Research and development

Selling, general and administrative

Gain on lease modification

Restructuring expenses

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Cost of revenues.

The decrease of approximately $20.7 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 was comprised of a decrease in cost of revenues of approximately $20.1 million related to the sale of API to Astellas in Japan and a decrease in cost of revenues of approximately $0.5 million related to the sale of API, finished drug product, and finished goods to AstraZeneca in China, concurrent with the decrease in revenue from the sale of API to Astellas and AstraZeneca, respectively.

Settlement on non-cancellable purchase commitments.

The settlement of certain commercial supply purchase commitments occurred during the year ended December 31, 2019, which resulted in an overall gain.

In connection with the Amended AstraZeneca Agreement, certain of our previously written-down linaclotide excess purchase commitments were assumed by AstraZeneca and resulted in a settlement of approximately $2.5 million.

Additionally, certain

previously written-down linaclotide purchase commitments were satisfied through API purchases at pricing terms favorable to the pricing estimates at the time of the write-down, resulting in a gain of approximately $0.7 million upon purchase.

The decrease in cost of revenues of $3.1 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily 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.

The decrease in research and development expense of approximately $27.0 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily related to a decrease of approximately $14.4 million in external development costs related to IW-3718;

a decrease of approximately $6.1 million in operating expenses primarily related to facilities and other operating costs;

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

and a decrease of approximately $2.7 million related to linaclotide development.

The decrease in research and development expense of $17.7 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily related to a decrease of $32.3 million in external development costs related to IW-3718;

a decrease of $3.6 million in compensation, benefits, and other employee-related expenses;

a decrease of $2.4 million related to linaclotide development;

and a decrease of $1.0 million in temporary labor costs.

These decreases in expenses were partially offset by $19.5 million of expenses recognized for up-front payment, non-contingent payment, and milestone payment obligations in connection with the COUR Collaboration Agreement;

and a $3.2 million increase in external development costs related to IW-3300.

Selling, general and administrative.

Selling, general and administrative expenses decreased approximately $32.4 million for the year ended December 31, 2020 compared to the year ended December 31, 2019.

The decrease in selling, general and administrative expense included an approximately $20.5 million decrease in costs associated with the Separation, which was completed on April 1, 2019, and an approximately $12.1 million decrease in non-Separation costs.

The approximately $20.5 million decrease in Separation costs includes an approximately $9.7 million decrease in facilities costs primarily due to our change in headquarters location;

an approximately $7.8 million decrease in compensation, benefits, and other employee-related expenses;

an approximately $2.0 million decrease in consulting and investment banking costs;

and an approximately $1.0 million decrease in legal costs.

The approximately $12.1 million decrease in non-Separation costs includes an approximately $4.0 million decrease in legal costs;

an approximately $3.3 million decrease in facilities costs primarily due to our change in headquarters location;

an approximately $2.6 million decrease in travel costs as a result of the COVID-19 pandemic;

an approximately $1.4 million decrease in post-marketing requirements for lesinurad as a result of our termination of the license agreement with AstraZeneca for the development, manufacture, and commercialization of products in the U.S.

containing lesinurad as an active ingredient;

an approximately $1.0 million decrease in collaboration costs pursuant to the Amended AstraZeneca Agreement;

and an approximately $0.7 million decrease in compensation, benefits, and other employee-related expenses.

These decreases in non-Separation costs were partially offset by an approximately $1.7 million increase in consulting costs.

Gain on lease modification .

The gain on lease modification of approximately $3.2 million for the year ended December 31, 2019 was due to the modification of our prior headquarters lease in connection with the Separation.

Selling, general and administrative expenses decreased $28.9 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to a $18.1 million decrease in compensation, benefits, and other employee-related expenses;

a $3.4 million decrease in professional fees for consulting and other services;

a $2.2 million decrease in legal fees;

a $2.1 million decrease in sales and marketing activities;

and a $1.6 million decrease in fleet vehicle expenses.

Restructuring expenses .

The increase in restructuring expenses of approximately $11.8 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 related to the workforce reduction substantially completed during the fourth quarter of 2020 in connection with our decision to discontinue IW-3718 development.

The Company recorded restructuring expenses of approximately $15.4 during the year ended December 31, 2020 in connection with this workforce reduction.

During the year ended December 31, 2019, the Company recorded approximately $3.6 million in connection with a workforce reduction that was substantially completed during the first quarter of 2019.

Restructuring expenses related to the workforce reduction resulting from our decision to discontinue IW-3718 development were an insignificant amount and $15.4 million during the years ended December 31, 2021 and 2020, respectively, as the workforce reduction was substantially completed during the fourth quarter of 2020.

Other (Expense) Income, Net

Year Ended December 31,

(dollars in thousands)

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Interest and investment income

Gain (loss) on derivatives

Loss on extinguishment of debt

Loss on derivatives

Total other expense, net

Interest expense.

Interest expense decreased by approximately $7.1 million during the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to a decrease of approximately $10.4 million in interest expense related to the 2022 Convertible Notes that were partially repurchased in August 2019 and a decrease of approximately $9.0 million in interest expense associated with the 2026 Notes that were fully redeemed in September

2019, partially offset by an increase of approximately $6.2 million and $6.1 million in interest expense associated with the 2024 Convertible Notes and the 2026 Convertible Notes, respectively.

Interest expense increased by $1.7 million during the year ended December 31, 2021 compared to the year ended December 31, 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 approximately $1.4 million in the year ended December 31, 2020 compared to the year ended December 31, 2019, resulting primarily from a decrease in investment income of approximately $2.1 million due to lower investment interest rates, partially offset by an increase in interest income of approximately $0.8 million related to the significant financing component of long-term receivables.

Gain (loss) on derivatives.

For the year ended December 31, 2020, we recorded a loss on derivatives of approximately $6.1 million resulting from an approximately $18.3 million decrease in the fair value of the Convertible Note Hedges and an approximately $12.2 million decrease in the fair value of the Note Hedge Warrants.

For the year ended December 31, 2019, we recorded a gain on derivatives of approximately $3.0 million resulting from an approximately $29.2 million increase in the fair value of the Convertible Note Hedges and an approximately $22.6 million increase in the fair value of the Note Hedge Warrants, partially offset by an approximately $3.6 million loss recognized upon the partial termination of the Convertible Note Hedges and the Note Hedge Warrants associated with the partial repurchase of the 2022 Convertible Notes.

Loss on extinguishment of debt.

The loss on extinguishment of debt was approximately $31.0 million during the year ended December 31, 2019 and pertained to the write-off of unamortized debt issuance costs and debt discount related to the partial repurchase of the 2022 Convertible Notes and the prepayment premium and write-off of the remaining unamortized debt issuance costs and debt discount on the 2026 Notes as part of the redemption of all of the outstanding principal amount of the 2026 Notes.

Interest and investment income decreased by $0.8 million in the year ended December 31, 2021 compared to the year ended December 31, 2020, resulting primarily from a decrease in investment interest rates.

Loss on derivatives.

For the year ended December 31, 2021, we recorded a loss on derivatives of $1.2 million resulting from a $12.0 million decrease in the fair value of the Convertible Note Hedges and a $10.8 million decrease in the fair value of the Note Hedge Warrants.

For the year ended December 31, 2020, we recorded a loss on derivatives of

$6.1 million resulting from a $18.3 million decrease in the fair value of the Convertible Note Hedges and a $12.2 million decrease in the fair value of the Note Hedge Warrants.

Other income.

For the year ended December 31, 2020 compared to the year ended December 31, 2019, other income decreased by approximately $0.5 million, primarily related to a transition service agreement with Cyclerion that terminated during the first quarter of 2020.

For the year ended December 31, 2021 compared to the year ended December 31, 2020, other income decreased by an insignificant amount due to a transition service agreement with Cyclerion that terminated during the first quarter of 2020.

Income taxes.

During the year ended December 31, 2020, we recorded income tax expense of approximately $2.7 million, which was primarily payable to California resulting from a change in California tax that temporarily disallows the use of net operating losses.

We did not record any income tax expense for the year ended December 31, 2019.

Net loss from discontinued operations.

There was approximately $37.4 million of net loss from discontinued operations for the year ended December 31, 2019.

For additional information on discontinued operations, see Note 3, Cyclerion Separation , to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

During the year ended December 31, 2021, we recorded income tax benefit of $327.8 million, which primarily pertained to the non-cash income tax benefit of $333.3 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 $5.5 million in certain states in which we are unable to utilize net operating losses to fully offset taxable income.

During the year ended December 31, 2020, we recorded state income tax expense of $2.7 million in certain states which had temporarily disallowed or only partially allow 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.

Thereafter, we have continued 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 14, Income Taxes , in the accompanying notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K.

Liquidity and Capital Resources

Until the year ended December 31, 2019, we had incurred losses since our inception in 1998 and we had an accumulated deficit of approximately $1.5 billion as of December 31, 2020.

Until the year ended December 31, 2019, we had incurred losses since our inception in 1998 and had an accumulated deficit of $937.6 million as of December 31, 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 December 31, 2020, our debt is comprised of approximately $520.7 million aggregate principal amount of convertible notes, due at various dates between 2022 and 2026.

As of December 31, 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 10, Notes Payable, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for information related to our debt obligations.

At December 31, 2020, we had approximately $362.6 million of unrestricted cash and cash equivalents.

Our cash equivalents include amounts held in money market funds and repurchase agreements.

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

During the year ended December 31, 2020, our balances of cash and cash equivalents increased by approximately $185.5 million.

Net cash provided by operating activities totaled approximately $168.8 million as a result of profitable operations driven primarily by the sales of LINZESS in the U.S.

Additionally, cash provided by financing activities totaled approximately $18.5 million as a result of proceeds from the exercise of stock options and purchases pursuant to our ESPP.

These cash inflows were partially offset by approximately $1.8 million in capital expenditures.

As of December 31, 2021, we had $620.1 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 certain types of investments 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 year ended December 31, 2021, our balances of cash and cash equivalents increased by $257.1 million.

Net cash provided by operating activities totaled $261.9 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 $19.6 million in proceeds from the exercise of stock options and our employee stock purchase plan.

These cash inflows were partially offset by $24.1 million of share repurchases and $0.3 million in capital expenditures.

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

We anticipate our cash balance, which was $620.1 million as of December 31, 2021, and our expected net cash inflows from operations to allow us to meet our near-term and long-term cash obligations, which are reflected in our consolidated balance sheets.

Our most significant fixed obligations are debt obligations and lease commitments, for which annual payments are disclosed in Note 10, Notes Payable , and Note 7, Leases , respectively, to our financial statements included elsewhere in this Annual Report on Form 10-K.

We may from time to time seek to retire, redeem or repurchase all or part of our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise.

Such repurchases, redemptions or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material.

The COVID-19 pandemic is disrupting the U.S.

healthcare system, as well as global capital markets.

There continues to be significant uncertainty surrounding the extent and duration of the impact of the COVID-19 pandemic on our business and operations.

The COVID-19 pandemic could have a material adverse impact on our financial condition and results of operations in the future, including by impacting our ability to obtain financing.

The impact of COVID-19 on our business and financial condition is more fully described below in Trends and Uncertainties.

Such repurchases, redemptions or exchanges, if any, of our debt will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material.

In May 2021, our board of directors authorized a program to repurchase up to $150.0 million of our Class A Common Stock.

Unless it is terminated or suspended prior to its expiration, the stock repurchase program will remain in effect until December 31, 2022.

The timing and amount of any repurchases will be determined based on market conditions, stock price and other factors.

The stock repurchase program may be modified, suspended or discontinued at any time without notice.

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.

As of December 31, 2021, $122.9 million remained available for share repurchases under this stock repurchase program.

Cash Flows From Operating Activities

Net cash provided by operating activities totaled approximately $168.8 million for the year ended December 31, 2020.

The cash provided by operations primarily related to cash flows from our net income of approximately $106.2 million, net of non-cash items of approximately $63.6 million.

The non-cash items are primarily comprised of approximately $31.2 million of share-based compensation expense, approximately $22.3 million of non-cash interest expense, approximately $6.1 million loss on derivatives, and approximately $3.6 million of depreciation and amortization of property and equipment.

Net cash provided by operating activities totaled approximately $10.7 million for the year ended December 31, 2019, of which approximately $0.6 million related to cash used in continuing operations and approximately $11.3 million related to cash provided by discontinued operations.

The use of approximately $0.6 million in cash for continuing operations primarily related to cash flows from our net income of approximately $21.5 million, net of non-cash items of approximately $77.8 million, partially offset by changes in assets and liabilities of approximately $100.0 million, primarily resulting from an increase in accounts receivable and related party accounts receivable of approximately $68.9 million and a decrease in accounts payable and related party accounts payable and accrued expenses of approximately $32.7 million.

Non-cash items included approximately $31.3 million in share-based compensation expense, approximately $31.0 million of loss on extinguishment of debt, approximately $19.6 million in non-cash interest expense, approximately $5.6 million in depreciation and amortization expense of property and equipment, partially offset by approximately $3.5 million related to the settlement on non-cancellable purchase commitments, approximately $3.2 million gain on lease modification, and an approximate $3.0 million net increase due to the change in fair value of the Convertible Note Hedges and Note Hedge Warrants.

Net cash provided by operating activities totaled $261.9 million for the year ended December 31, 2021.

The cash provided by operations primarily related to cash flows from our net income of $528.4 million, net of non-cash items of $284.4 million and net changes in operating assets and liabilities of $17.7 million.

Net cash inflows are derived primarily from collaboration arrangements revenue related to sales of LINZESS in the U.S.

Net cash provided by operating activities totaled $168.8 million for the year ended December 31, 2020.

The cash provided by operations primarily related to cash flows from our net income of $106.2 million, net of non-cash items of $63.6 million and net changes in operating assets and liabilities of $0.9 million.

Net cash inflows are derived primarily from collaboration arrangements revenue related to sales of LINZESS in the U.S.

Cash Flows From Investing Activities

Cash used in investing activities for the year ended December 31, 2020 totaled approximately $1.8 million and pertained to the purchase of property and equipment.

Cash used in investing activities for the year ended December 31, 2019 totaled approximately $11.1 million, of which approximately $6.9 million related to cash used in continuing operations and approximately $4.2 million related to cash used in discontinued operations.

Cash used in investing activities pertained primarily to the purchase of approximately $7.2 million of property and equipment, primarily laboratory space and leasehold improvements on the second floor of our prior headquarters purchased prior to the Separation and transferred to Cyclerion, and leasehold improvements, equipment, and furniture at our current headquarters.

Cash used in investing activities for the year ended December 31, 2021 totaled $0.3 million and pertained to the purchase of property and equipment.

Cash used in investing activities for the year ended December 31, 2020 totaled $1.8 million and pertained to the purchase of property and equipment.

Cash Flows From Financing Activities

Cash provided by financing activities for the year ended December 31, 2020 totaled approximately $18.5 million and resulted from proceeds from the exercise of stock options and the issuance of shares under our ESPP.

Cash used in financing activities for the year ended December 31, 2019 totaled approximately $1.2 million and resulted from approximately $227.3 million in payments to repurchase $215.0 million aggregate principal amount of the 2022 Convertible Notes.

Financing activities also included principal and prepayment premium payments totaling $156.4 million to fully redeem the outstanding principal balance of the 2026 Notes.

We also entered into capped call transactions for approximately $25.2 million in connection with the 2024 Convertible Notes and 2026 Convertible Notes, or the Capped Calls.

These cash outflows were partially offset by approximately $391.0 million in net proceeds

from the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes, after deducting fees and expenses of approximately $9.0 million, approximately $13.6 million in proceeds from the exercise of stock options and the issuance of shares under our ESPP, and approximately $3.2 million in proceeds from the partial termination of the Convertible Notes Hedges and Note Hedge Warrants.

Cash used in financing activities for the year ended December 31, 2021 totaled $4.6 million and resulted from $24.1 million of share repurchases, partially offset by $19.6 million of proceeds from the exercise of stock options and the issuance of shares under our ESPP.

Cash provided by financing activities for the year ended December 31, 2020 totaled $18.5 million and resulted from proceeds from the exercise of stock options and the issuance of shares under our ESPP.

Funding Requirements

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with AbbVie will continue to constitute a significant portion of our total revenue for the foreseeable future and we cannot be certain that such revenues, as well as the revenues from our other commercial activities, will continue to enable us to generate positive cash flows, or to do so in the timeframes we expect.

We also anticipate that we will continue to incur substantial expenses for the next several years as we further develop and commercialize linaclotide in the U.S., develop and commercialize other products, and invest in building our pipeline through internal or external opportunities.

We believe that our cash on hand as of December 31, 2020 will be sufficient to meet our projected operating needs at least through the next twelve months from the issuance of these financial statements.

We believe that

our cash on hand as of December 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.

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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● 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;

● the terms and timing of any collaborative, licensing or other arrangements that we may establish, including milestones, royalties or other payments due or payable under such agreements;

● the settlement method used for our outstanding convertible notes;

● 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.

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There can be no assurance that any such financing opportunities will also be available on acceptable terms, if at all.

Contractual Commitments and Obligations

Lease Obligations

The following table summarizes our lease obligations at December 31, 2020 (in thousands):

Payments Due by Period

Operating lease obligations

Our commitments for operating leases relate to our office space in Boston, Massachusetts and our data storage space in Boston, Massachusetts.

Notes Payable

In June 2015, we issued approximately $335.7 million in aggregate principal amount of the 2022 Convertible Notes.

The 2022 Convertible Notes are governed by an indenture between us and U.S.

Bank National Association, as trustee.

The 2022 Convertible Notes are senior unsecured obligations and bear cash interest at a rate of 2.25% per year, payable on June 15 and December 15 of each year, which began on December 15, 2015.

The 2022 Convertible Notes will mature on June 15, 2022, unless earlier converted or repurchased.

To minimize the impact of potential dilution to our Class A common stockholders upon conversion of the 2022 Convertible Notes, we entered into the Convertible Note Hedges and Note Hedge Warrants.

In August 2019, we repurchased $215.0 million aggregate principal amount of the 2022 Convertible Notes, and we partially terminated the proportionate portion of the Convertible Note Hedges and Note Hedge Warrants we entered into in connection with the issuance of the 2022 Convertible Notes.

In August 2019, we issued $200.0 million in aggregate principal amount of the 2024 Convertible Notes and $200.0 million in aggregate principal amount of the 2026 Convertible Notes.

The 2024 Convertible Notes and 2026 Convertible Notes are governed by separate indentures between us and U.S.

Bank National Association, as trustee.

The 2024 Convertible Notes and the 2026 Convertible Notes are senior unsecured obligations.

The 2024 Convertible Notes bear cash interest at the annual rate of 0.75% and the 2026 Convertible Notes bear cash interest at the annual rate of 1.50%, each payable on June 15 and December 15 of each year, which began on December 15, 2019.

The 2024 Convertible Notes will mature on June 15, 2024 and the 2026 Convertible Notes will mature on June 15, 2026, unless earlier converted or repurchased.

To minimize the impact of potential dilution to our Class A common stockholders upon conversion of the 2024 Convertible Notes and the 2026 Convertible Notes, we entered into separate Capped Calls in connection with the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes.

We paid the counterparties approximately $25.2 million to enter into the Capped Calls.

The following table summarizes our obligations under our convertible senior notes at December 31, 2020 (in thousands):

Payments Due by Period

2022 Convertible Notes (including interest)

2024 Convertible Notes (including interest)

2026 Convertible Notes (including interest)

Total payments on convertible senior notes

Our obligations under our convertible senior notes, as well as potential financial effects from the Convertible Note Hedges, Note Hedge Warrants and Capped Calls are more fully described in Note 11, Notes Payable , in the accompanying notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K.

Tax-related Obligations

We exclude liabilities or obligations pertaining to uncertain tax positions from our summary of contractual commitments and obligations as we cannot make a reliable estimate of the period of cash settlement with the respective taxing authorities.

As of December 31, 2020, we have approximately $68.1 million of uncertain tax positions, and we cannot reasonably estimate the potential adjustment to our net operating loss and credit carryforwards.

These uncertain tax positions are more fully described in Note 15, Income Taxes , in the accompanying notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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.

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Impact of the COVID-19 Pandemic

In December 2019, COVID-19 emerged in Wuhan, Hubei Province, China.

On March 11, 2020, the World Health Organization declared a global pandemic and recommended containment and mitigation measures worldwide.

On March 13, 2020, former U.S.

President Donald Trump announced a national emergency relating to the pandemic.

Government authorities in the U.S.

have recommended or imposed various containment and mitigation measures on large portions of the population , and similar measures have also been taken in many other countries around the world.

Both the outbreak of COVID-19 and the containment and mitigation efforts have had a serious adverse impact on the U.S.

economy and the economies of other countries around the world, the severity and duration of which remain uncertain.

The COVID-19 pandemic, including containment and mitigation measures has impacted, and is expected to continue to impact, our business and operations in a number of ways, including:

● Day to Day Operations

Most of our customer-facing employees have resumed in-person work practices;

however, they are limited in the number of in-person details they are able to conduct due to containment and mitigation measures related to the COVID-19 pandemic.

We monitor the impact of the COVID-19 pandemic in the territories where our customer-facing employees have resumed in-person work practices, and in some cases, we have paused the in-person work practices as a result of the impact of the COVID-19 pandemic in those territories.

Customer-facing employees who are not providing in-person services continue to support their customers virtually through telephone and web-based technologies.

Headquarters employees have the option to work remotely through mid-2021.

● Collaboration Agreement for North America with AbbVie

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 have re-opened, but all headquarters employees have the option to work primarily remotely.

We and our partner, AbbVie, are focused on maintaining the availability of LINZESS for adult men and women suffering from IBS-C or CIC.

We include our and AbbVie’s collaboration-related selling, general, and administrative expenses, including expenses from in-person and remote selling activities, in the calculation of net profits from the sale of LINZESS in the U.S.

As of the date of this Annual Report on Form 10-K, the COVID-19 pandemic has not caused significant disruptions to manufacturing operations or supply of LINZESS in the U.S.

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.

As such, we have experienced fluctuations in our settlement payments based on the ratio of selling, general and administrative expenses incurred by each party during the year ended December 31, 2020, and may continue to experience such fluctuations in the future.

As a result of the COVID-19 pandemic, since 2020, we and AbbVie agreed to include certain costs 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.

In 2020, we experienced fluctuations in our settlement payments based on the ratio of selling, general and administrative expenses incurred by each party throughout 2020 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.

● Manufacturing and Supply Chain

We and AbbVie continue to monitor the supply and availability of LINZESS for adult men and women suffering from IBS-C or CIC in the U.S.

As of the date of this Annual Report on Form 10-K, the COVID-19 pandemic has not caused significant disruptions to manufacturing operations or supply of LINZESS in the U.S.

or of clinical trial material for our ongoing trials.

● Clinical Development of GI Pipeline

The COVID-19 pandemic impacted the development of our pipeline during the year ended December 31, 2020.

For example, prior to our decision to discontinue the development of IW-3718, the COVID-19 pandemic impacted enrollment in our Phase III clinical trials of IW-3718 for the treatment of refractory GERD, resulting in lower than expected research and development expenses relating to IW-3718 clinical trials during the year ended December 31, 2020.

The COVID-19 pandemic resulted in changes to our business and operations which impacted our financial condition and results of operations for the year ended December 31, 2020, including as described above.

During the year ended December 31, 2020, we incurred a total of approximately $2.4 million of incremental expenses, primarily related to personal protective equipment for our field-based employees and external costs of strategy and operations analysis related to the impacts of the COVID-19 pandemic.

There continue to be significant uncertainties surrounding the extent and duration of the impact of the COVID-19 pandemic on our business and operations and we expect to incur additional expenses in future periods related to the impact of the COVID-19 pandemic on our business and operations.

We continue to evaluate the impact of the COVID-19 pandemic on our operating results and financial condition.

The COVID-19 pandemic may have a material adverse impact on our business and financial condition in the future.

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 Annual Report on Form 10-K for additional information on risks associated with COVID-19 that could impact our operations and results.

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What changed 10-K

Item 7. Management’s Discussion and Analysis