What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-02-16 compared with 2022-02-18 · 87 added, 146 removed, 330 unchanged (41% of the section changed)

10 unchanged sentences

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.

LINZESS is available to adult men and women suffering from IBS-C or CIC in the United States, or the U.S., and Mexico, IBS-C or chronic constipation in Japan, and IBS-C in 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.

2 unchanged sentences

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, 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.

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

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, that 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, 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.

8 unchanged sentences

● We recognized $410.6 million in total revenues during the year ended December 31 2022, compared to $413.8 million during the year ended December 31, 2021.

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.

The slight decrease was primarily driven by a decrease of $ 1.6 million in collaborative arrangements revenue related to sales of LINZESS in the U.S.

● We recognized $398.8 million in collaborative arrangements revenue related to sales of LINZESS in the U.S.

during the year ended December 31, 2022, compared to $400.4 million during the year ended December 31, 2021.

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

The slight decrease was primarily driven by net price erosion and inventory channel fluctuations, partially offset by an increase in LINZESS prescription demand.

● We generated income from operations of $250.3 million during the year ended December 31, 2022 compared to income from operations of $232.3 million during the year ended December 31, 2021.

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.

The increase was driven primarily by the recognition of $19.5 million of research and development expense in 2021 for the up-front payment, non-contingent payment, and milestone payment obligations in connection with the COUR Collaboration Agreement.

● We generated $273.8 million in cash from operations during the year ended December 31, 2022, ending the year with $656.2 million in cash and cash equivalents.

● 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.

● We completed our $150 million stock repurchase program.

During the year ended December 31 2022, we repurchased 10.8 million shares of our Class A Common Stock at an aggregate purchase price of $123.4 million.

Financial Operations Overview

6 unchanged sentences

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.

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, Mexican, Japanese, or Chinese 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, 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 Commercial Supply Purchase Commitments.

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

Research and Development Expense.

The core of our research and development strategy is to leverage our demonstrated expertise and capabilities in GI diseases to bring multiple medicines to patients.

Research and 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 products and 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.

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 are netted against research and development expenses.

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 .

3 unchanged sentences

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 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 September 2020, based on the Phase IIIb data of linaclotide 290 mcg on the overall abdominal symptoms of bloating, pain and discomfort in adult patients with IBS-C, the U.S.

FDA approved our Supplemental New Drug Application, or sNDA, to include a more comprehensive description of the effects of LINZESS in its approved label.

In addition, we and AbbVie have established a nonclinical and clinical post-marketing plan with the U.S.

4 unchanged sentences

The boxed warning and contraindication previously applied to all children less than 18 years of age and less than 6 years of age, respectively.

In September 2022, we announced positive topline data from a Phase III clinical trial evaluating linaclotide 72 mcg in pediatric patients aged 6-17 with functional constipation, or FC.

The trial met its primary and secondary endpoints, demonstrating that linaclotide 72 mcg improved frequency of spontaneous bowel movements and stool consistency.

Linaclotide was generally well-tolerated, and the safety profile is consistent with previously reported studies with linaclotide in FC and irritable bowel syndrome in pediatric patients.

In December 2022, we and AbbVie submitted an sNDA to the U.S.

FDA seeking approval of a new indication of linaclotide for FC in that age group.

In February 2023, the U.S.

FDA granted priority review to our sNDA and assigned a Prescription Drug User Free Act, or PDUFA, date of June 14, 2023.

There are currently no U.S.

FDA approved prescription pediatric therapies for functional constipation.

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 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.

Based on these findings, we and AbbVie discontinued the development of MD-7246.

Additional clinical pediatric programs in IBS-C and FC are ongoing.

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 and, based on these findings, we discontinued 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.

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

We successfully completed Phase I studies to evaluate the safety and tolerability of IW-3300 in healthy volunteers and expect to begin patient dosing for the Phase II proof of concept study in IC/BPS in early 2023.

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.

In December 2021, the U.S.

FDA granted Fast Track Designation to CNP-104.

COUR is currently conducting a clinical study to evaluate the safety, tolerability, pharmacodynamic effects and efficacy of CNP-104 in PBC patients, with early data assessing T-cell response from patients enrolled in the clinical study expected in the second half of 2023.

We expect that such early data will inform timing of topline data readout.

Early research and development .

4 unchanged sentences

Year Ended December 31,

(in thousands)

Linaclotide (1)

Lesinurad (2)

Early research and development

1 unchanged sentence

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

(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.

28 unchanged sentences

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.

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

AstraZeneca is responsible for all costs and expenses incurred under the Amended AstraZeneca Agreement.

We include AbbVie’s selling, general and administrative cost-sharing payments in the calculation of the net profits and net losses from the sale of LINZESS in the U.S.

and present the net payment to or from AbbVie as collaboration expense or collaborative arrangements revenue, respectively.

Gain on Lease Modification.

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

For additional information relating

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

Restructuring Expenses.

6 unchanged sentences

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 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 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 consolidated statements of income.

The Convertible Note Hedges terminated unexercised upon expiry in June 2022.

The Convertible Note Hedges and Note Hedge Warrants are more fully described in Note 9 , 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, 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.

1 unchanged sentence

For additional information refer to Note 13, Income Taxes, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Discontinued Operations.

On April 1, 2019, we completed the separation, or the Separation, of our soluble guanylate cyclase, or sGC, business, and certain other assets and liabilities, into a separate, independent publicly traded company, Cyclerion Therapeutics, Inc., or Cyclerion.

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

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

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

Critical Accounting Policies and Estimates

5 unchanged sentences

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

We believe that our application of the following accounting policies, each of which require significant judgments and estimates on the part of management, are the most critical to aid in fully understanding and evaluating our

reported financial results.

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

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 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.

Revenue Recognition

19 unchanged sentences

We evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method at the inception of the agreement.

If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price.

If it is probable

that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price.

Milestone payments that are not within our control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received.

6 unchanged sentences

Net Profit or Net Loss Sharing

In accordance with ASC 808 Topic, Collaborative Arrangements , or ASC 808, we considered the nature and contractual terms of the arrangement and the nature of our business operations to determine the classification of payments under our collaboration agreements.

In accordance with Accounting Standards Codification, or ASC, Topic 808, Collaborative Arrangements , or ASC 808, we considered the nature and contractual terms of the arrangement and the nature of our business operations to determine the classification of payments under our collaboration agreements.

While ASC 808 provides guidance on classification, the standard is silent on matters of separation, initial measurement, and recognition.

Therefore, we apply the separation, initial measurement, and recognition principles of ASC Topic 606, Revenue from Contracts with Customers , or ASC 606, to our collaboration agreements.

Therefore, we apply the separation, initial measurement, and recognition principles of ASC Topic 606, Revenue from Contracts with Customers , to our collaboration agreements.

Our collaborative arrangements revenue generated from sales of LINZESS in the U.S.

11 unchanged sentences

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.

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

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.

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.

19 unchanged sentences

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.

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.

10 unchanged sentences

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.

Compensation expense related to modified awards is measured based on the fair value for the awards as of the modification date.

Any incremental compensation expense arising from the excess of the fair value of the awards on the modification date compared to the fair value of the awards immediately before the modification date is recognized at the modification date or ratably over the requisite remaining service period, as appropriate.

While the assumptions used to calculate and account for share-based compensation awards represent management’s best estimates, these estimates involve inherent uncertainties and the application of management’s judgment.

8 unchanged sentences

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.

We will continue to maintain a valuation allowance for deferred tax assets that are unlikely to be realized, which are 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.

14 unchanged sentences

Total revenues

Cost and expenses:

Cost of revenues

Operating expenses:

Research and development

1 unchanged sentence

Restructuring expenses

Total cost and expenses

Total operating expenses

Income from operations

2 unchanged sentences

Interest and investment income

Loss on derivatives

Other expense, net

Income from operations, before income taxes

Gain (loss) on derivatives

Other (expense) income, net

Income before income taxes

Income tax (expense) benefit

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Year Ended December 31,

(dollars in thousands)

(in thousands)

Collaborative arrangements revenue

2 unchanged sentences

Collaborative arrangements 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.

The decrease in collaborative arrangements revenue of $2.2 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily related to a $1.6 million decrease in our share of net profits from the sale of LINZESS in the U.S., which was driven by net price erosion and inventory channel fluctuations, partially offset by an increase in prescription demand.

Sale of active pharmaceutical ingredient.

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)

The decrease in sale of API of $1.0 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily due to certain non-recurring, insignificant sales during the year ended December 31, 2021.

Cost and Expenses

Cost of revenues

(in thousands)

Operating expenses:

Research and development

1 unchanged sentence

Restructuring expenses

Total cost and expenses

Cost of revenues.

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.

Total operating expenses

Research and 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;

The decrease in research and development expense of $26.1 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily related to a decrease of $19.4 million of expenses recognized for up-front payment, non-contingent payment, and milestone payment obligations in connection with the COUR Collaboration Agreement;

a decrease of $5.4 million in external development costs related to IW-3718;

a decrease of $3.4 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.

and a decrease of $1.8 million in compensation, benefits, and other employee-related expenses.

These decreases in expenses were partially offset by a $3.0 million increase in external development costs related to IW-3300.

Selling, general and administrative.

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.

Selling, general and administrative expenses increased $4.9 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to a $3.4 million increase in sales and marketing activities and a $1.7 million increase in compensation, benefits, and other employee-related expenses.

Restructuring expenses .

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.

Restructuring expenses and adjustments related to the workforce reduction resulting from our decision to discontinue IW-3718 development were insignificant during the year ended December 31, 2021, as the workforce reduction was substantially completed during the fourth quarter of 2020.

Other (Expense) Income, Net

Year Ended December 31,

(dollars in thousands)

(in thousands)

Other (expense) income:

1 unchanged sentence

Interest and investment income

Loss on derivatives

Total other expense, net

Gain (loss) on derivatives

Total other (expense) income, net

Interest expense.

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 expense decreased by $23.6 million during the year ended December 31, 2022 compared to the year ended December 31, 2021 due to a $22.1 million decrease in non-cash interest expense associated with the Senior Convertible Notes following the adoption of ASU 2020-06 on January 1, 2022 and a $1.5 million decrease in coupon interest expense associated with the 2022 Convertible Notes, which were fully repaid upon maturity in June 2022.

Interest and investment income.

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.

Interest and investment income increased by $8.8 million in the year ended December 31, 2022 compared to the year ended December 31, 2021, resulting primarily from an increase in investment interest rates.

Gain (loss) on derivatives.

For the year ended December 31, 2022, we recorded a gain on derivatives of $0.2 million resulting from a $1.1 million decrease in the fair value of the Convertible Note Hedges, which terminated unexercised upon expiry in June 2022, and a $1.3 million decrease in the fair value of the Note Hedge Warrants.

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, 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, 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.

During the year ended December 31, 2022, we recorded income tax expense of $77.4 million, comprised of non-cash tax expense of $73.4 million and cash tax expense of $4.0 million for state income taxes in

certain states in which state taxable income exceeded available net operating losses.

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 which have temporarily disallowed or only partially allow the use of net operating losses to fully 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.

Thereafter, we have continued to utilize our net operating losses to offset federal taxable income and taxable income in many states but 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.

6 unchanged sentences

As of December 31, 2022, we had $656.2 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.

Our cash equivalents include amounts held in money market funds, repurchase agreements, commercial paper, and corporate bonds.

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 A- 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, 2022, our balances of cash and cash equivalents increased by $36.1 million.

Net cash provided by operating activities totaled $273.8 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 $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.

These cash flows were offset by financing activities totaling $237.6 million, primarily comprised of $126.4 million of share repurchases and repayment of the $120.7 million remaining aggregate principal of the 2022 Convertible Notes.

We anticipate our cash balance, which was $656.2 million as of December 31, 2022, 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.

3 unchanged sentences

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.

The program was completed in May 2022 and the repurchased shares were retired.

Additional information regarding the repurchase program is disclosed in Note 11, Stockholders’ Equity , to our financial statements included elsewhere in this Annual Report on Form 10-K.

Cash Flows From Operating Activities

Net cash provided by operating activities totaled $273.8 million for the year ended December 31, 2022.

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.

The cash provided by operations primarily related to cash flows from our net income of $175.1 million, net of non-cash items

of $95.9 million and net changes in operating assets and liabilities of $2.8 million.

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

6 unchanged sentences

Cash Flows From Financing Activities

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.

Cash used in financing activities for the year ended December 31, 2022 totaled $237.6 million and resulted from $126.4 million of share repurchases and repayment of the $120.7 million remaining aggregate principal on the 2022 Convertible Notes upon maturity in June 2022, partially offset by $9.5 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, 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.

Funding Requirements

9 unchanged sentences

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, including potential payments associated with exercising the Option under the COUR Collaboration Agreement.

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.

We believe that our cash on hand as of December 31, 2022 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 revenue expectations and estimates regarding the costs to develop, obtain regulatory approval for, and commercialize linaclotide in the U.S., as well as our expectations regarding revenue from Astellas for Japan and AstraZeneca for China (including Hong Kong and Macau), and our goal to generate and maintain positive cash flows, are forward-looking statements that involve risks and uncertainties.

Our actual results could vary materially and negatively from these and other forward-looking statements as a result of a number of factors, including the factors discussed in the “Risk Factors” section of this Annual Report on Form 10-K.

19 unchanged sentences

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.

6 unchanged sentences

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.

During 2022, in-person work practices for customer-facing employees returned to near pre-COVID 19 levels.

However, new strains or variants of the virus that cause outbreaks of COVID-19 may present in the future risks to successful execution of the commercial operating plan for LINZESS due in part to limitations on in-person work practices for our customer facing employees.

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 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.

We include our and AbbVie’s collaboration-related selling, general, and administrative expenses, which had previously 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.

5 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis